2 The cost of the Renewables Obligation
to consumers
9. The cost of the Renewables Obligation is passed
on by electricity suppliers to consumers through higher prices.
The cost rises in real terms each year in line with increases
in the size of the Obligation placed on suppliers and the overall
demand for electricity, rather than the actual level of renewable
generation. By 2010, the cost of the Renewables Obligation, which
does not appear on electricity bills and is not explained to consumers,
is expected to reach £1 billion per annum (at 2002 prices).[20]
10. The Renewables Obligation is the most expensive
of the Government's instruments to reduce carbon dioxide under
the cross-cutting Climate Change Programme (Figure 3).
The Department justifies the cost by reference to:
· the
Renewables Obligation's subsidiary objectives. The Regulatory
Impact Assessment for the scheme estimated the number of jobs
that could be created but it did not quantify the benefits of
increased renewable generation for improving the UK's energy supply.
· the
importance of renewables to achieving longer term reductions in
carbon dioxide emissions. The Department argues that there are
practical limits to the use of cheaper measures, such as energy
efficiency, to reduce carbon dioxide. It expects current public
investment in renewables to help industry reduce future generating
costs, thus making renewable generation a more cost effective
way of reducing carbon dioxide. But the Department does not have
measures against which it can monitor progress over time.[21]
Figure 3:
Cost of selected Government policies for reducing carbon dioxide
emissions
| Policy Instrument
| Policy Objectives
| Cost (£/tCO2)
|
| Renewables Obligation (1)
| · Climate change
Subsidiary:
· Energy security
· New technologies
· United Kingdom industry
· Rural economy
| 70-140
|
| Energy Efficiency Commitment
| · Climate change
· Improve energy efficiency
· Alleviate fuel poverty
| Negative - 16
|
| Climate Change Levy
| · Improve energy efficiency
· Climate change
| 5-11 |
| United Kingdom Emissions Trading Scheme
| · Climate change
· First mover advantage for United Kingdom firms
· London as trading centre
| 18 |
| European Union Emissions Trading Scheme (2)
| · Climate change
· Improve energy efficiency
| 3-21 |
Source: Ofgem (2004)
Notes:
1) Lower limit based on the Obligation being met
in full, with the upper limit based on 50% of the Obligation being
met.
2) This range depends on the price of carbon dioxide
allowances under the Scheme. The high end of the range assumes
that the Scheme leads to large scale replacement of coal-fired
power stations with gas-fired stations.
11. Over the 25 years of the Renewables Obligation,
about two thirds of the support for generators will go towards
meeting the higher costs of generating renewable electricity.
The remaining third will exceed generators' needs because the
Obligation provides the same level of support to all technologies
regardless of their relative profitability. The scheme therefore
encourages the development of the most economic renewable projects
first. But it also means that sites using the cheaper renewable
technologies - in particular, landfill gas and onshore wind -
receive substantially more support than they require. For example,
a generator commissioning a well located onshore wind site in
2004-05 could, over the life of the project, expect to receive
twice the level of support it needed to meet the costs of developing
and operating the site.[22]
The Department's current review of the operation of the Obligation
will look at whether the scheme provides the necessary incentives
to meet the 2010 target whilst ensuring that the profits earned
by developers are not excessive. It has employed consultants to
examine the economics of lower cost technologies and if necessary,
or appropriate, it will consider amending the Obligation. Amendments
might include a tapering of support.[23]
20 C&AG's Report, para 1.12 Back
21
ibid, paras 3.4-3.6; Q 114 Back
22
C&AG's Report, paras 3.19-3.20 Back
23
Qq 86, 100, 116 Back
| 
