3 Reflecting the interests of consumers
12. In setting its 2010 target, the Government stated
that the cost of renewable energy should be acceptable to consumers.[24]
In 2001, the Department estimated that by 2010 the Renewables
Obligation would have increased electricity prices by an average
of 5.7% across all electricity consumers.[25]
This price increase will cost the typical domestic consumer about
£10 to £12 per annum (at 2002 prices). When the Department
implemented the Renewables Obligation there had been a fall in
electricity prices, partly as a result of the introduction of
new electricity trading arrangements in 2001.[26]
The electricity market has since changed and other market forces
have resulted in domestic consumers paying over 10% more for their
electricity in the year to March 2005.[27]
These rises will make it more difficult, and potentially more
expensive, for the Department and its partner, the Department
for Environment, Food and Rural Affairs, to achieve their shared
Public Service Agreement target to eradicate fuel poverty in vulnerable
households in England by 2010.
13. Part of the cost of the Renewables Obligation
arises because the Department included under its terms renewable
sites, such as wind farms and landfill gas sites, that were still
being assisted under the Non-Fossil Fuel Obligation. The Department
worked with the Non-Fossil Purchasing Agency - the body which
manages the Non-Fossil Fuel Obligation contracts - to put in place
arrangements to ensure that the income received by the generators
was unaffected by the introduction of the Renewables Obligation.
These arrangements have a number of consequences.
· The
generators continue to operate under the conditions of their original
contracts with Non-Fossil Purchasing Agency. These contracts,
which run until at least 2014, provide generators with fixed prices
for their output. These prices have to date been above the wholesale
price of electricity.
· The
Non-Fossil Fuel Purchasing Agency sells the output from the Non-Fossil
Fuel Obligation sites to electricity suppliers. Since the introduction
of the Renewables Obligation, electricity suppliers having been
willing to pay more for this output as it is now sold with the
associated Renewables Obligation Certificates. Suppliers pass
these additional costs on to consumers.
· The
revenue collected by the Non-Fossil Purchasing Agency from electricity
suppliers each year now exceeds the amount it pays the contractors
and results in annual surpluses. The Department estimate that
the surpluses are likely to accumulate to between £550 million
to £1 billion by 2010.
· The
Government has earmarked £60 million of the surpluses to
promote the use of renewable energy. The remainder are likely
to be paid into the Consolidated Fund and will benefit the Exchequer.[28]
14. The inclusion of these Non-Fossil Fuel Obligation
sites helped create a market for Renewable Obligation Certificates
by increasing the supply of Certificates available to electricity
suppliers. Their inclusion has however come at a cost to the consumer,
as their electricity bills have increased to meet the additional
cost of the surpluses generated and transferred to the Exchequer.
If the Department had excluded the NonFossil Fuel Obligation
sites from the Renewables Obligation, and made corresponding reductions
in the size of the annual Obligations placed on electricity suppliers,
it could have prevented the generation of the surpluses and reduced
the costs imposed on consumers. Such action would not have affected
the incentives on Non-Fossil Fuel Obligation contractors to generate
electricity.[29]
15. To bolster industry confidence in the Government's
commitment to renewable energy, and increase the probability of
meeting the 2010 target, the Department proposed an expansion
of the Renewables Obligation in December 2001, 21 months after
the scheme started. The expansion, which was approved by Parliament
in 2005, will increase the cost of the scheme to consumers from
2011. By 2015, these additional costs will have risen by at least
£0.5 billion per annum, which will add 4% to the electricity
bills of industrial consumers and 2% to the bills of domestic
consumers. The price rise will result in the typical domestic
electricity consumer paying a further £5 to £6 per annum
(at 2002 prices) by 2015 in addition to the £10 to £12
in paragraph 12 above.[30]
16. The Department set out the cost implications
of the Renewables Obligation in its 2001 public consultation on
the scheme and in 2004, when it consulted on its proposals to
expand the scheme. Despite the reference to consumers' interests
in the wording of the Government's 2010 target, however, the Department
has not consulted consumers, or their representative groups, about
their willingness to contribute to the cost of renewable energy.
The Department acknowledges that there is likely to be a level
at which the price of supporting renewables would become unacceptable
to the consumer. It has not yet tested, or decided, what that
level would be.[31]
17. There is no annual parliamentary approval of
the cost to consumers of supporting the renewables industry through
the Renewables Obligation. Parliament reviewed the Renewables
Obligation when it was first established, and then expanded in
2005. But Parliament does not consider the subsidy to the renewable
industry as part of the annual supply procedure. The subsidy is
therefore not subject to the same degree of parliamentary control
as business support directly provided by the Department from its
own resources.[32]
24 Q 48 Back
25
Q 14 Back
26
Q 119 Back
27
Retail Price Index, Consumer Price Indices (April 2005), Office
for National Statistics, May 2005 Back
28
C&AG's Report, para 3.12 Back
29
ibid, para 3.13 Back
30
The Renewables Obligation Order 2005, Statutory Consultation,
Department of Trade and Industry, September 2004, Appendix
B, Draft Regulatory Impact Assessment Back
31
Qq 48-51 Back
32
Q 17 Back
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