The Economics of Renewable Energy - Economic Affairs Committee - Contents



The British economy will increasingly feel the impact of the Government's commitment to reducing carbon emissions, including targets for greater use of energy from renewable sources. The Government describes its targets for renewables as challenging; others have suggested they are unachievable. In any event, the effort to meet them will come at a cost and, if not properly managed, risks distracting attention from other means of reducing emissions.

It seems timely, therefore, to examine the economics of renewable energy. We take as a given the Government's wish to reduce carbon emissions; we do not address how far such reductions are justified as a contribution to a world-wide effort. We note the following main points:

—EU targets have focussed the spotlight on renewables rather than other means of reducing emissions such as energy efficiency or greater use of nuclear power.

—The EU is committed to a binding target that 20% of its energy consumption should be from renewable sources by 2020. Individual states' contributions to the overall target are still only proposals and some remain a matter of dispute. The Government seems ready to accept the Commission's proposal that the UK target should be 15% of energy from renewables by 2020.

—The expected UK target implies a dash from 1.8% renewable energy now to a near-tenfold increase in 12 years.

—Most of the increase in renewable energy in Britain is expected to come from electricity generation—although electricity represents only a fifth of the country's energy consumption—with an anticipated rise from 5-6% renewables now to 30-40% in 2020.

—Most of the extra renewable generation is expected from wind turbines, which offer the most readily available short-term enhancement of renewable electricity at a relatively cheap base cost; but they produce electricity only intermittently and the scope in the UK for increases in more dependable supply from other renewable sources—particularly hydro-electric, domestic biomass and solar—is limited, while tidal barrage and wave are still at an early stage of development in Britain.

—To make up for its intermittency, a significantly greater capacity of wind than of conventional or nuclear plant is needed for any given output of electricity; furthermore, in the absence of technological advances in electricity storage and of greater interconnection of the British and Continental transmission networks, back-up conventional plant will be essential to guarantee supply when required, to compensate for wind's very low capacity credit (probable output of power at the time of need).

—Wind generation should be viewed largely as additional capacity to that which will need to be provided, in any event, by more reliable means; and the evidence suggests that its full costs, although declining over time, remain significantly higher than those of conventional or nuclear generation.

—The dash for intermittent renewable generation will coincide with, and be in addition to, the programme to replace substantial amounts of old coal and nuclear plant and to meet increases in demand—amounting to about a quarter of current capacity.

—In short, the pursuit of a 15% renewables target will roughly double the requirement for new capacity for power generation that would otherwise be due in the UK between now and 2020; the scale and urgency of such investment is formidable. It is also subject to planning consents.

—The extra cost of electricity generation and transmission in Britain in 2020 with 34% renewables is likely to be £6.8billion a year, an extra 38%. Most of this would be met by the consumer; about £80 a year (at current prices) for the average household.

—There would be little investment in renewable electricity generation without Government support.

—Heating and transport each represent some two-fifths of the country's energy consumption but have received relatively little Government support or attention by comparison with electricity generation.

The UK has a poor record in meeting targets in this area and it must be doubtful whether a 15% EU target can be met under current policies. If it were met, it would mark a step change in the use of renewable energy but take Britain into a degree of dependence on intermittent renewables unprecedented elsewhere in Europe, with the attendant risks. Determination to meet the target may lead to over-emphasis on short term options, simply because they are available, rather than because they offer the most effective and economical means of reducing carbon dioxide emissions over the longer term.

The Government rightly aims to ensure reliable and affordable energy supplies and is right to say that a portfolio of policies is needed if we are also to reduce carbon emissions. But, in pursuing its renewable energy target, to guard against the risk of power shortages it should look beyond the generation of electricity by intermittent means and encourage other economic and effective ways of reducing carbon emissions across all sectors, so that investment in them is not diverted by incentives for intermittent sources of supply. Specifically, the Government should:

—Give a firm lead and maintain a stable investment framework for large-scale, low carbon alternatives to renewable power generation. Nuclear is not intermittent; neither is fossil fuel generation with carbon capture and storage, if and when that becomes available.

—Emphasise and promote the opportunities for renewable heat as strongly as for renewable electricity generation.

—Look afresh at the UK's research effort into renewables and consider how to promote more, and more focussed, research leading to new, effective and economical ways to reduce carbon emissions; it should also consider offering a substantial annual prize for the best technological contribution.

—In particular, encourage research into energy storage technologies with a view to mitigating the disadvantage of intermittency in the types of renewable generation likely to prevail in the UK.

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