Select Committee on Innovation, Universities, Science and Skills Written Evidence

Memorandum 64

Submission from Carbon Trust

  The Carbon Trust welcomes this opportunity to contribute to the Committee's inquiry into renewable electricity generation technologies. We are an independent company funded by Government to help accelerate the move to a low carbon economy. We do this by working with business and the public sector to reduce carbon emissions, and to capture the commercial opportunities associated with developing low carbon technologies. Since we were set up in 2001, we have developed our expertise in renewable energy technologies and low carbon technology innovation right across the innovation spectrum from research, demonstration through to early stage venture capital investments. Importantly, we have developed good insights into the nature of low carbon innovation, the various challenges faced by low carbon technologies and businesses, and the options for policy instruments to overcome them and accelerate deployment. For example, on our Research and Technology Accelerators, the NAO's recent report on the Carbon Trust said:

    "The Carbon Trust's Research and Technology Accelerators appear to be particularly well designed to fill what could otherwise be a barrier in the development of commercially viable low carbon technologies. Our consultants noted that the Carbon Trust's coordination of businesses and researchers to collaborate on these accelerator projects appeared to be unique ..."

  We therefore regard ourselves as being well placed to contribute to the Committee's inquiry.

  However, before setting out our responses to the Committee's questions, we suggest it would be worth putting the main focus of the Committee's inquiry, renewable electricity-generation technologies, into the wider context—in particular, the EU's target that renewables should contribute 20% towards all energy consumed by 2020. We agree that it is important to develop and deploy renewable electricity technologies in order to reduce carbon emissions and help meet our security of supply objectives. We also think it is equally important to pay much more attention to decarbonising heat and transport fuels in addition to the existing focus in the UK on electricity. The challenge of decarbonising our heat and transport energy use is, some argue, even more demanding that the challenge of decarbonising our electricity supplies.

  Our response to the questions posed by the Committee's inquiry is as follows:

The current state of UK research and development in, and the deployment of, renewable electricity-generation technologies

  Support for renewable electricity generation technologies innovation, whilst improving, is still neither at the scale required nor is it as strategically well organised as it needs to be to make effective use of resources and accelerate their development and deployment. Deployment of renewable energy technologies generally is poor, compared with many other EU Member States.

  On the basis of its analysis of and active participation in renewable energy technologies innovation and deployment, the Carbon Trust considers the following points are significant:

    (i)  the multiplicity of funders in the R&D segment of the innovation space;

    (ii)  the persistent historic under-funding of the demonstration and field trials phases of innovation;

    (iii)  the weak market for investment in renewable energy technologies deployment;

    (iv)  the planning process, which limits the rate of deployment not just of the generating technologies but also the grid infrastructure.

  On the multiplicity of funders, this is not necessarily a "bad thing" provided there are good communications between them, and that mechanisms exist to ensure publicly supported work is complementary and not unknowingly duplicated. In the Carbon Trust's view, diversity of support for innovation, coupled with a diversity of experience of particular renewable energy technologies, can become a strategic asset, especially at this relatively early stage of technology development. Renewable energy technologies are still new and emerging compared with conventional fossil fuel based power generation technologies which have a pedigree stretching back 150 years or more. We simply don't know, with any certainty, what the power generation mix will be in the decades ahead. We don't know what percentage different renewable energy technologies will in the future contribute to our energy needs. And, we don't know what the long run cost/kWh will be for renewable energy delivered to end users. Against that background of uncertainty, it is sensible to maintain a diversity of approach to ensure a diverse portfolio of high potential renewable technology options are brought forward to point that their long term potential can be more fully evaluated. Once they evaluation is complete, decisions about larger scale funding for major demonstration can be made on the back of an appropriate fact base.

  The recent report from the Pew Centre entitled: "Technology and Innovation Policies: Lessons for Climate Change", whilst focusing on US public support for low carbon innovation, provides some insights which we think are relevant more broadly. In particular it concluded:

    "Just as competition in markets helps resolve uncertainties and improves economic performance, competition within government can improve performance in fostering innovation. The messy and often duplicative structure of [R&D support] and related policies creates diversity and pluralism, fostering innovation by encouraging the exploration of many technological alternatives".

  On the under-funding of the demonstration and field trials, whilst several agencies support R&D, few support demonstration and field trials. Demonstration etc projects are an essential step to finding out how technology performs in real life situations—sharing the risk of technology innovation with the private sector. The scale of public resources historically is not commensurate with the scale of the challenge and the pace at which we need to develop renewable energy technologies to help reduce the carbon intensity of power generation sustainably. The limited support for demonstration projects in particular (the "valley of death" as it was referred to in the former DTI's Renewables Innovation Review of 2003) is still hampering progress from development to deployment.

  The Carbon Trust's Technology Accelerators go some way to bridging this gap—eg for micro-CHP technologies—see figure 1 below. However, resources limit both the scale and how many Technology Accelerator projects we can take forward. Additional funding, and wider use of this innovation instrument, would in our view help to address the technical, commercial and market barriers to take-up and provide the all-important confidence to investors, technology developers and technology end user to invest in these emerging low carbon technologies.

Figure 1

  The Micro-CHP project report can be found at:

  On the weak investment market for renewables and their deployment, the UK's record is disappointingly poor so far. Figure 2 below, taken from the EU website (, shows the UK as ranking amongst the poorest performers in Europe. Other Member States have managed to achieve much faster growth rates from similar starting positions.

Figure 2


  The data on renewable electricity is given in Figure 3 below.

Figure 3


  It is important to recognise that these figures include large hydro-power, which is a significant per centage of the total renewable electricity capacity in the UK.

  The banded Renewables Obligation Certificates should help stimulate investment, but may not be sufficient to do so at the volume and pace required. We suggest the efficacy of this policy instrument be kept under review. Our collaborative initiative on offshore wind with the Energy Technologies Institute is a targeted intervention which is complementary to Renewables Obligation Certificates. It seeks to overcome other barriers to investment, for example technological risk.

  On the planning regime, past experience has shown that seeking planning permission for new generation and the essential network capacity can take years. Whether the Government's proposed reforms to the planning system can make planning risk a thing of the past remains to be seen.

International collaboration

  International collaboration can have a number of distinct advantages, for example:

    (a)  working with international partners on innovation projects. Provided the quality of project management is good, partnership working can be an effective way of conducting and financing large scale, complex projects where funding requirements and the span of expertise required extend beyond what a single country can provide; and

    (b)  ensuring that those innovation technologies we choose to develop "at home" are well designed and take into account developments overseas. Making sure we are aware what others are already doing is essential to avoid duplication. For example, when we devised our next generation solar photovoltaics Research Accelerator last year, we consulted widely across the EU, the US and Japan to inform the development of our project specification. Similarly, for our offshore wind Technology Accelerator: we interviewed industry and government players across Europe, the US as well as the UK; we joined the European Wind Energy Technology Platform; and we are engaging with the IEA Wind Energy Implementing Agreement group. For our marine energy technology innovation, we invited international interest from Sweden, Denmark and the US. Currently, as part of our work to scope a sustainable bio-energy Research Accelerator, we have engaged with leading international researchers including the US New and Renewable Energy Laboratory, Cornell University and the International Energy Agency.

Public funding, and other support, for the development of renewable electricity-generation technologies and incentives for technology transfer

  The role of public funding and, more importantly, public policy in the development and deployment of renewable energy technologies has been—and still is—a voyage of discovery not just for the UK but for all countries with aspirations to develop and deploy a new generation of sustainable energy technologies. Though some countries have achieved, and spent, more than the UK, no country has yet devised an effective set of policy instruments to provide sufficient incentives for the market to invest in renewable energy technologies innovation at the scale and pace required. The UK has, however, developed and tried a number of policy instruments which have been innovative in their own right. Monitoring the effectiveness of these instruments would help inform the development of policy to decarbonise electricity supplies.

  The development and deployment of renewable energy technologies is central to making the transition to a low carbon economy. However, the market alone will only choose to invest in those projects which deliver highest return at lowest risk. Unaided, the market will not invest to develop bulk scale renewable energy technologies. Public funds are insufficient to take on the full burden of renewable energy technologies development. The challenge we face, therefore, is to devise a policy framework and support mechanisms which will harness the investment and commercial power of the market to this end at lowest public cost. Thus, for example, risk sharing at the R&D stage, is a well established way of leveraging private funds and know how. Our own Applied Research support is just one example of public-private partnership in low carbon innovation. Another mechanism, not used as much as it should be, is to use public funds to co-invest on commercial terms at the early, higher risk stage of technology and company development. Our portfolio of clean energy venture capital investments shows how public funds can be used in different ways to stimulate and gear up private sector capital investment in renewable energy technologies. Compared with 50-50 grant funding for R&D, venture capital has 10 to 1 leverage of private capital versus public into renewable energy technologies ventures. This approach has the potential to be highly effective—as demonstrated by the investment leverage and returns of the venture capital investment made by the Carbon Trust.

  The fact is that the market does not (yet) value sustainable, low/zero carbon energy sufficiently to justify taking the risks associated with renewable energy technology innovation. Low investment return, generally risk averse, utility companies are not the natural developers\investors in early stage, high risk, low carbon technology development. Arguably, with sufficient conventional generation technology available on the open market, privately owned utility companies might justifiably ask whether it is actually their job to put shareholders' money into low carbon innovation. Coherent, consistent and committed public policy intervention is therefore required to create incentives for private sector engagement and in so doing share the risk (and potentially the reward) associated with the development and deployment of new and emerging energy technologies.

The establishment and role of the Energy Technologies Institute

  The Energy Technologies Institute (ETI) officially came in to being in December 2007, with the agreement by its public- and private-sector partners to form a Limited Liability Partnership. The Carbon Trust welcomes the funding and expertise that the Energy Technologies Institute brings to the low carbon innovation challenge. We look forward to developing a close and productive relationship with ETI and its members. Our first joint activity, on offshore wind energy technology, has already been announced.

  In collaboration with the ETI, we announced last month a major new £40M research, development and demonstration initiative in Offshore Wind Energy, which we developed together in consultation with representatives from the offshore wind industry. Details of this initiative are given in Figure 4 below.

Figure 4

  This collaborative Offshore Wind Energy initiative illustrates how we think we can work with the ETI to accelerate the development and deployment of emerging low carbon technologies. The Carbon Trust/Energy Technologies Institute's joint announcement on offshore wind energy is the first of what we hope will be a number of strategic engagements with the ETI. We are working with ETI colleagues on marine energy and distributed generation, the two areas which the ETI has prioritised alongside offshore wind for its initial programmes. We are also sharing our insights on the low carbon technology landscape, the status of technologies and markets more generally.

  However, we also recognise the distinctive features of our respective approaches and the funding mechanisms we deploy. For example, we do not fund projects 100%; and we prefer that intellectual property arising is owned and driven by the organisation leading the development of renewable energy technologies. As we understand it, ETI can, if it wishes, procure R&D and pay for it 100% (subject to State Aids rules); and ETI's preferred approach is to own the intellectual property arising.

  In addition to the formation of the ETI, there are two other entities which, potentially, are relevant to renewable energy technologies: the Environmental Transformation Fund and the Technology Strategy Board. It is important that there is good, strategic coordination between them and the existing innovation funding agencies. The Carbon Trust, the Energy Technologies Institute and the Technology Strategy Board are working together to explore mechanisms to this end so that the sum of total effort delivers greater benefit than would be derived from the individual parts. We are also closely involved in the development and delivery of the Environmental Transformation Fund.

Commercialising renewable technologies

  The UK has some world class research capabilities in a number of renewable energy technologies. However, commercialising them has not been our forte. The reasons for this are complex. A deeply rooted, cultural preference for research; a risk averse approach to early stage investment; and an R&D community ill-equipped to take on the challenges of renewable energy technologies' commercialisation are three reasons well worth debating.

  Many students of low carbon innovation have looked at this space and have their own views about the UK's record at commercialising renewable energy technologies. The Carbon Trust has also looked closely at the low carbon innovation space and has concluded that low carbon energy innovation faces particular challenges:

    (i)  the energy supply space is capital intensive and investment returns are lower than in other higher value sectors;

    (ii)  deployment lead times are long and planning uncertainties make investment in renewable electricity technologies riskier;

    (iii)  incumbent, large capacity plant are the generation technologies of choice for the major energy companies; and

    (iv)  the various innovation support instruments are not well coordinated—though there are signs that this could improve going forward.

  Private investment alone is insufficient to increase deployment of renewable electricity technologies. That is why policy instruments the Government devises and deploys are so crucial. Our aspirations are high but our performance has been uninspiring. Compare the achievements of the UK's renewables innovation endeavours with those of Denmark, where public support for onshore wind technology development helped underpin a world-leading industry, and Japan, where a similar approach has created a world-leading solar photovoltaics industry.

  On the basis of our analysis, the Carbon Trust considers that the UK is in a good competitive position to exploit offshore wind, next generation photovoltaics, marine energy and niche fuel cells.

  The Carbon Trust considers that innovation support for renewable electricity technologies (and low carbon technologies more generally) should be considered more as an investment in new wealth creating sectors. It should be adequately supported, over time, and should span the entire spectrum from early-stage, fundamental science/engineering to industry-led, large-scale demonstration and on to business support and investment.

  On innovation specifically, we are developing a low carbon innovation model comprising four inter-laced, complementary "journeys":

    —  the technology journey—how a technology moves from being just a concept to a commercial product;

    —  the company journey—how a start-up company or development division of a existing firm moves successfully into the commercial phase;

    —  the market journey—how consumers (individual, public sector and corporate) are persuaded to buy technologies—either as early adopters, higher risk takers or as mainstream consumers ready to purchase only when the products have been proven commercially and they are being deployed at scale; and

    —  the regulation journey—how the market journey is supported by public policy instruments (eg regulation) to meet government policy objectives.

  These are outlined in Figure 5 below.

Figure 5


  The model outlined above is very much "work in progress". Nevertheless the Carbon Trust hopes it will be of value to the Committee in its inquiry. One key insight we have learnt from our work on marine energy, advanced metering and Micro-CHP is that a way should be found whereby the lessons learnt from supporting innovation on the ground can inform policy making.

Intermittency of supply and connection with the national grid

  We refer the Committee to our network impacts study published in April 2004 and also to the UKERC's study "The Costs and Impacts of Intermittency" published in March 2006. The reports can be found at:; and

  Our study highlighted the importance of: building and sustaining investor confidence; and the need to speed up the planning regime and investment in relation to grid network infrastructure upgrades. Importantly, both studies dispel the myth, sadly still alive in some quarters, that the intermittent nature of some renewable energy technologies (eg wind) militated against their use. For renewable capacities up to around 20%, both studies make clear that the intermittent nature of the resource is not a factor which should discourage take-up in the UK. (Virtually all intermittency studies limit considerations to capacities of around 20% and therefore it is not clear whether or not a higher percentage capacity could be accommodated on the electricity system without detriment to system reliability, supply etc). The Committee may also wish to be aware of the following studies which broadly come to the same conclusions: Renewable Electricity Generation published by the Renewables Advisory Board; the Wind Power and the UK Wind Resource study by ECI, Oxford; and the academic paper "Total cost estimates for large-scale wind scenarios in UK" by Dale, Milborrow, Slark & Strbac. In addition, National Grid's submission to the House of Lords Science and Technology Committee report "Renewables: Practicalities" is also relevant.

Government policy towards enabling existing technologies to meet targets

  No one should be in any doubt what a challenge the various renewable energy technology and carbon emissions reductions target are—especially the UK's target that by 2020, 20% of our electricity should be generated from renewable sources; and the EU's target that by 2020, across the EU on average, 20% of all energy supplied should be from renewable sources. It is hard to see how, at past rates of capacity building and technology development, these targets can be achieved. We would need to increase the scale of activity significantly to stand a chance of doing so. The Carbon Trust has commissioned and published studies into ways in which this could be achieved—ie: "Building Options for UK Renewable Energy" in 2003 and "Policy Framework for Renewables" in 2006. The reports can be found at:; and

  The former made the case for public intervention in renewable energy technologies innovation and concluded that to maximise the economic return to the UK, public support should be targeted at technologies where the UK has competitive strengths. Our assessments indicate that offshore wind, marine energy technologies and next generation photovoltaics fall into that category. The latter report concluded whilst the Renewables Obligation (RO) provided market "pull" for onshore wind, the most mature renewable electricity generation technology to date, it was ineffective as an instrument to drive innovation in other earlier stage technologies. We outlined how feed-in tariffs, with different levels of revenue subsidy for different technologies, have been effective in other countries; and in the UK would deliver more capacity at a lower cost to the tax payer. The Government's banded Renewable Obligation Certificates are an improvement—though whether that will be sufficient to stimulate investment at the scale required in for example, offshore wind, remains to be seen. The Carbon Trust's view is that the UK could get significantly closer to achieving its renewable and carbon reduction targets, and do so at a lower cost per unit of generated renewable electricity, by replacing the RO with a Renewable Development Premium (a fixed tariff on top of the wholesale electricity price to each technology depending on their state of development).

  There is a view that a robust carbon price would be a good way of stimulating investment in renewable energy technology innovation. Whilst it is plausible that carbon prices could rise to levels which would drive investment in existing energy efficiency and low carbon technologies, it remains to be seen if they will rise sufficiently, and remain high, to stimulate investment in low carbon innovation. The carbon market has shown itself to be capable of wide swings in carbon price. It is maturing but it is not mature enough yet to underpin a firm, robust and stable price for carbon sufficient to stimulate investment in low carbon innovation.

  Important non-financial factors which need to be addressed in parallel are: speeding up the planning process and receiving timely planning consents; ensuring adequate investment in grid infrastructure upgrades; and investment in the supply chain to ensure component orders are met on the required timescale to maintain momentum of deployment.

Whether the UK has the skills base to underpin the development of renewable technology

  Although the Carbon Trust has not carried out studies into this question, it is aware of strong anecdotal evidence that there are skills and volume gaps right across the spectrum from high level graduate and post-graduate science and engineering through to installers of renewable energy technologies. This skills gap has a variety of origins one of which lies "upstream" in our schools. For example, the Institute of Physics has reported a decline in the number of physics teachers in secondary schools which is impacting on the "pipeline" of students able and willing to pursue a course of higher education in physics.

  Through its membership of the joint Government and industry Energy Research Partnership, the Carbon Trust contributed ideas to the Partnership's Investigation into high-level skills shortages in the energy sector, published in April 2007. Key findings include: skills shortages are causing recruitment problems in the energy sector; it is specifically technical skills that are in short supply; it is the a shrinking pool of graduates which is at issue rather than any concern that their quality is degrading; and the problem is only at its early stages—without intervention this situation is anticipated to worsen to a severe shortage, particularly when the extent of energy innovation and infrastructure is replacement that are required are taken into account.

  The Carbon Trust considers that skills shortages are a serious factor which, if left unaddressed, will limit the pace of and exacerbate the risk associated with making the transition to a low carbon economy. These shortages are not only at the "high level" but also across the spectrum including, in particular, the building industry where we face one of the biggest challenges. Buildings represent about 45% of the UK's energy consumption and carbon footprint. Failure to address skills shortages in this sector will slow down the pace of deployment and, more importantly some might say, compromise the quality of installations—with all that that entails for consumer confidence.

January 2008

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