The Economics of Renewable Energy - Economic Affairs Committee - Contents


174.  This chapter considers a range of policy issues relevant to renewable energy. We cover the role of renewable energy in UK energy policy, the justification for supporting it, and the best means of doing so. We also comment on micro generation, the impact on consumers' bills, support for technology development and the planning system. Finally, we ask whether the proposed 15% target for UK renewable energy by 2020 is achievable, and if so, at what cost.

The role of renewable energy in UK energy policy

175.  In July the Government published its consultation on a UK Renewable Energy Strategy. The Secretary of State for Business, Energy and the Regions (BERR) wrote that "Renewable energy is key to our low-carbon energy future" The UK already has a legal commitment to the EU's target that 20% of Europe's energy should come from renewable sources by 2020, within which the proposed UK target is a renewable energy share of 15%. The (then) Minister of State for Energy told us that "decisions on renewable energy cannot be made merely on the basis of cost in the short term; it is about tackling climate change and securing energy supplies for the future. The Stern Review into the economics of climate change was absolutely clear that we need to invest now or pay a higher price later" (Q 472).

176.  The then Minister said we needed a suite of policies. Diversity in our energy sources was important. The more energy the UK produced for itself, the better for security of energy supply. Civil nuclear power should play a role, although public spending would not subsidise it. The earliest a nuclear power station could be built was 2017-2020 (QQ 476, 477, 479, 480). Fossil fuel generation was also important, for diversity and for operation of the network, and because it could come on stream faster than nuclear power; development of carbon capture and storage (CCS) would be important to reduce emissions. It was hoped that a Government-funded CCS demonstration project would be operating by 2014.

177.  It is clear that, although the cost of the technology for carbon capture and storage (if and when it becomes a practical possibility) is inevitably highly speculative, it will always be more expensive than large-scale carbon-based energy without CCS. Retrofitting the technology to stations not designed for it might be particularly expensive, but would be necessary to have a significant impact on the very large volume of emissions from existing plant.

178.  We note that the Government has announced arrangements to charge a fixed unit price for disposal of some nuclear waste and spent fuel, and some respondents to a recent consultation on this issue expressed the view that this might provide a potential subsidy to nuclear power.[54] While the Government rejects this view, and we would not argue for a nuclear subsidy, we are conscious of the anomaly that the Government publicly supports a subsidy for renewable energy but not for the other main source of low-carbon energy.

179.  Other witnesses had a range of views on the place of renewables in the Government's energy policy. Professor Paul Ekins told us that renewables could contribute to the objectives of carbon reduction and energy security. He believed that the government was currently "giving most attention to the reduction of carbon emissions, but energy security is coming up fast on the inside track and may indeed overtake it at some point" (Q 3). Malcolm Keay of the Oxford Institute for Energy Studies argued that renewables had had very little impact on the UK's carbon emissions so far and were unlikely to make a significant impact by 2020. Much of the reduction in emissions in Britain had come from replacing coal with gas-fired plants in the 1990s. Countries with very low carbon electricity systems had a combination of nuclear and hydroelectric generation (Q 82). Mr Keay saw a danger that uncertainty over Government policy on renewable energy might deter needed investment in new conventional generating capacity, with some risk of power shortages, or, more likely, increased carbon emissions from running on old plant. If the capacity was then replaced in haste with new gas-fired plant, the renewables policy might increase the risks to the UK's energy security (Q 88).

180.  Professor Gordon MacKerron saw a potential trade-off between objectives: policies designed to counteract climate change were nearly always good for security,[55] while policies designed to be good for security, such as more use of coal, were not always good for climate change. Renewables added diversity to the UK's energy portfolio, and reduced pressure on world fossil fuel markets. The real difficulty for the Government would be to retain public support for difficult choices in meeting emissions targets (Q 248).

181.  The Renewable Energy Foundation told us that renewable generation had to fit in with the rest of the system, where new conventional plant would contribute to emissions reduction through better thermal efficiency. If renewable investment did not support conventional generation, the money would be "wasted". Renewable energy policy should also devote more attention to the heat sector, where solar thermal and ground source heat pumps could make a big contribution (Q 114).

Government intervention in the energy market

182.  Cost comparisons between renewable and conventional electricity generation are complex and depend on many variables. But witnesses generally agreed that renewables are more expensive.

183.  It seems clear there would be little investment in renewable energy without substantial Government support and that a 15% target would not be met without it.

184.  Professor David Newbery told us that the context for renewable policy was a world in which some countries were tackling carbon emissions through the most obvious and direct way of pricing them, but some countries were not going to be part of the carbon pricing system. Support for renewable energy therefore helped to develop low-carbon technologies to the point where they might be commercially viable and adopted abroad (Q 184)

185.  The then Minister of State for Energy told us that in Phase III of the EU Emissions Trading Scheme, people were projecting a carbon price of about €35 per tonne of CO2 (£28 per tonne at current exchange rates), whereas a price of somewhere between €100 and €200 per tonne would be required to develop renewables through that mechanism alone. The Minister did not think that this gap reflected a weakness in the trading mechanism, and agreed that it indicated that renewables were a high cost means of achieving reductions in CO2 emissions. Over time, he expected costs of renewables to come down (QQ 473-475).

186.  Many companies told us that even if the present level of carbon and fossil fuel prices were enough to cover the cost of onshore wind power, there was no guarantee these prices would continue, so that there was no sound basis for investment without additional support.

Support mechanisms and their costs

187.  The most direct mechanism used by the British Government is Renewables Obligation Certificates (ROCs), which replaced a Non-Fossil Fuel Obligation. ROCs require electricity suppliers to deliver a set proportion of power from renewable sources. Generators receive one ROC for every 1,000 kWh of renewable electricity generated, and can sell these to suppliers. A supplier unable to surrender ROCs equal to the set percentage must pay for each missing certificate into a buy-out fund which is then redistributed amongst the suppliers who surrendered ROCs. The market price of ROCs rises above the buy-out price if a shortfall is expected, for each ROC allows the holder not only to avoid paying the buy-out price, but also to share in the money paid in by those with a shortfall. The design of the Renewables Obligation effectively means that the total payment to renewable generators, over and above the market price they receive for their power, should be fixed. A fuller description of the Renewables Obligation is at Appendix 9. The equivalent mechanism in use in Germany is the feed in tariff, which guarantees a price to the producer. In both cases, the extra cost is passed on to the consumer.

188.  Witnesses expressed a range of views on the relative merits of the schemes. Some saw the RO rewarding the least capital intensive technology (Renewable Energy Foundation Q 123).The overall cost in Britain was seen as less but the feed-in tariff in Germany has produced more renewable energy at lower unit cost (Ekins Q 11). There is some convergence between the two systems as the UK introduces banding of the RO, which will give some technologies more than one ROC per 1,000 kWh, while some countries are changing feed in tariffs from a fixed total payment to a fixed supplement to the market price (IEA Q 399). Power companies valued a stable investment framework and generally preferred to retain the RO in the British market (Scottish and Southern Energy, Centrica Q 241; E.ON p 108). A number of witnesses however supported the adoption of a feed-in tariff for small scale generation (Friends of the Earth Q 60; Keay Q 96).

189.  We note the evidence that the cost per kWh of renewable electricity supported by the Renewables Obligation has been significantly higher than the amounts paid via feed-in tariffs abroad, and that much of the excess has been due to other differences in the environment for renewable generation, particularly in the planning system. The renewables support mechanisms have already gone through a number of changes including the banding of the Renewables Obligation to give different levels of support to different forms of electricity generation. Introducing feed-in tariffs at this stage for large-scale generation[56] would create more uncertainty and risk deterring investment in the sector. Given investors' need for a predictable framework, it seems right to retain the Renewables Obligation, if it is desired to continue increasing generation of electricity from renewable sources.

190.  The EU Emissions Trading Scheme (ETS) also supports renewables by putting an additional cost on emitting carbon. Every EU Member State has allocated allowances to electricity generators and companies in some industrial sectors, and each allowance gives the holder the right to emit one tonne of carbon dioxide. Should individual generators or companies need to emit more than this, they can buy extra permits from groups who did not use up all their carbon allowances. So far, most permits have been allocated without payment, but because every tonne of carbon dioxide either requires the generator to buy a permit or to forgo the opportunity of selling a spare permit, the scheme raises the marginal cost of generating power from fossil fuels. This raises the price of power, creating an incentive to invest in low carbon or renewable forms of energy by tagging a cost on to carbon emissions.

191.  The Government has also operated a separate UK-only emissions trading scheme for large companies and public sector organisations that are not heavy emitters of carbon. The UK Emissions Trading Scheme was launched in 2002 and operated in a similar way to its EU counterpart. The scheme ended in 2006 and a replacement, the Carbon Reduction Commitment is being developed. The new scheme will place an emissions cap on up to 5,000 large business and public sector organisations.[57]

192.  The Climate Change Levy is a tax on the use of energy in industry, commerce and the public sector, with offsetting cuts in employers' national insurance contributions and additional support for energy efficiency schemes and renewable sources of energy. The aim is to encourage users to improve energy efficiency and reduce emissions of greenhouse gases through greater use of renewables. Fuels used by the domestic and transport sectors and to generate electricity are exempt from the levy, as is energy used by charities or very small firms. Climate Change Agreements allow energy intensive businesses to receive an 80% discount from the levy, in return for meeting energy efficiency or carbon saving targets.

193.  The Carbon Emissions Reduction Target (CERT)[58] requires gas and electricity suppliers, each with over 50,000 household customers, to achieve targets for a reduction in carbon emissions generated by the domestic sector. Ofgem, which administers the CERT, checks whether suppliers' schemes will result in an improvement in energy efficiency and therefore a reduction in carbon emissions.

194.  Finally, the Renewable Transport Fuels Obligation introduced in April requires 2.5% of the petrol and diesel sold in forecourts comes from renewable sources or biofuels. The obligation will rise to 5% by 2010. If petrol companies do not meet the renewable obligation they have to buy out the balance of their obligation at a price set by the Government. This has been set at 15p per litre until 2010. Biofuels also pay 20 pence a litre less tax than petrol or diesel.

195.  Table 6 gives estimates of the current annual cost of these various support schemes. These costs are likely to rise significantly as the level of renewable energy increases in future. Most are borne by energy consumers, rather than by taxpayers. Renewable generators receive around £1¼ billion a year from increased electricity prices caused by the Renewables Obligation, Emissions Trading Scheme and Climate Change Levy, mostly from consumers. Taxpayers fund the Research Councils, £30 million a year on renewable energy research, and the Environmental Transformation Fund, about £130 million a year on grants to renewable generators and farmers growing energy crops. The amount that the Energy Technologies Institute (part-funded by taxpayers) will spend on renewable energy has not yet been announced; nor the proportion of the Carbon Emissions Reduction Target that will be spent on microgeneration. The total support for renewable generation, from taxpayers and from energy consumers, is now of the order of £1.4 billion a year.

196.  We can only estimate the cost of support for renewable transport fuels. In 2007, the duty rebate on biofuels cost the taxpayer £100 million, but these comprised only about 1% of road transport fuel. In the first three months of the obligation, biofuels provided 2.6% of road transport fuels, and the annualised cost would have been correspondingly higher. Since fuel suppliers have chosen to meet the target for biofuels, this must imply that the cost of doing so (net of the rebate) is less than the buy-out price of 15 pence per litre. The change in the cost (and hence price) of fuel will be between zero and £200 million in 2008/9.

Support for renewable energy
Scheme DescriptionCost Paid by
Renewables Obligation Electricity suppliers must buy a proportion of their sales from renewable generators, or pay a buy-out charge £874 million in 2007/8 a Electricity consumers
EU Emissions Trading Scheme Renewable generators indirectly benefit from the increase in electricity prices as other companies pass the cost of emissions permits into the price of power Perhaps £300 million in 2008, given current permit prices b Electricity consumers
Carbon Emissions Reduction Target Energy companies must install low-carbon items in homes, which could include microgeneration from 2008 Total cost will be £1.5 billion over 3 years—most spent on energy efficiency Gas and electricity consumers
Renewable Transport Fuel Obligation Fuel suppliers must supply a proportion of biofuels or pay a buy-out charge No more than £200 million in 2008/9 c Consumers
Climate Change Levy Electricity suppliers need not pay this tax (passed on to non-domestic consumers) on electricity from renewable generators £68 million to UK generators;

£30 million to generators abroad in 2007/8

Taxpayers, via reduced revenues
Lower fuel duty for biofuels The rate of fuel duty is 20 pence per litre below that for petrol and diesel £100 million in 2007 Taxpayers, via reduced revenues
Environmental Transformation Fund Grants for technology development and deployment, including subsidies for installing renewable generation, planting energy crops and developing biomass infrastructure. £400 million over three years from 2008/9 Taxpayers
Research CouncilsGrants for basic science research £30 million in 2007/8 Taxpayers
Energy Technologies Institute Grants to accelerate development (after the basic science is known) of renewables and other energy technologies Allocation (and eventual size) of budget not yet announced. Taxpayers and sponsoring companies

a This is the buy-out price multiplied by the size of the obligation. Source: Ofgem
b Permit prices are currently about £19/tonne CO2, and coal-fired generators are normally setting the electricity price, passing 0.9 kg per kWh through to consumers
c This upper limit is set by the buy-out price of 15p per litre—if the extra cost of biofuels (net of the fuel duty rebate) is more than this, companies will opt for the buy-out instead.

Micro generation

197.  Witnesses' views on micro generation of energy by households and businesses varied. For micro-generated electricity, the Renewable Energy Foundation said: "We see the costs as astonishingly high and the gains as very modest." As a result the organisation felt that any policies requiring a certain amount of micro-generated electricity would "only drive in sub-optimal technologies at enormous expense" (Renewable Energy Foundation p 45).

198.  The Government supports micro-generation for reasons other than economics. Former energy minister Malcolm Wicks said: "If we were just focusing on the economics, we probably would not want to look seriously at micro-generation [but] many concerned citizens are asking how they can personally make a difference" (Q 503). We are not persuaded that the wish of concerned citizens to make their own contribution to emissions reduction is an adequate justification for a public subsidy to micro-generation.

199.  Energywatch accepted that micro-generation had "a high cost for a modest contribution to fuel saving and emissions reduction" (p 294), but supports the introduction of a feed-in tariff for small scale renewables as it could attract new investment, change the balance between consumers and energy companies, stimulate energy-reducing behavioural changes and alleviate fuel poverty. This last benefit was contingent on mechanisms such as installation subsidies to ensure that low-income consumers could benefit from the technologies, particularly in hard-to-treat properties (pp 294-297).

200.  While Professor MacKerron described micro-wind generation for individual urban households as a "dead duck" he argued there was potential for the micro-generation of electricity for blocks of flats. He called for improvements to the grid and distribution system to enable the sale of micro-generated electricity. The grid was originally designed to carry electricity from large power plants to homes and businesses. But the system needs to be adjusted to be able to take more easily micro-generated power from households and businesses as well, said Professor MacKerron (QQ 254-255).

201.  When people approach the power suppliers they find themselves "bogged down in a set of tariffs [that]require a PhD and an awful lot of time to work out which of the suppliers is offering you the best deal", according to Stephen Smith, managing director of networks at Ofgem. The regulator is working with the industry to simplify the arrangements for micro generation. It argued micro generators needed a one-stop shop to provide advice and suggested that the Government should fund an existing price comparison web site to do this (Ofgem QQ 448-449).

202.  While the economics of micro-generated electricity appear dubious, especially at the individual household level, the potential for the micro-generation of heat is much greater. Much of the technology for generating renewable heat is at the household level. As was shown in Chapter 5, the cost of renewably generated heat is relatively cheap compared to electricity, and it avoids the problems of intermittency.

203.  The Renewable Energy Foundation—which was very sceptical about micro-generated electricity—argued in favour of measures to boost micro-generated heat. While they argued that the sector would not need much help Campbell Dunford, chief executive, said: "We believe that measures to encourage the take-up of heat saving and heat generation measures within the household are fundamentally good" (p 52, Q 133).

204.  The returns from micro-generated electricity look too small and uneconomic for the Government to support. But the gains from households using micro-generated heat look much more promising. Government policy should focus instead on households generating renewable heat and on schemes that use renewable heat on a larger scale, such as those covering a housing development, or group of public buildings.

Fuel bills

205.  The Committee are very conscious of the high cost of energy—driven mainly by the record oil prices reached this year—and its impact on the heat and electricity bills of households and businesses. Support for renewable energy increases costs further. Alistair Buchanan, chief executive of Ofgem, said: "One of the features of the renewables strategy is that of a £1,000 bill currently for the average household, £80 is environmental connected" (Q 413).

206.  Energywatch estimate that the current Renewables Obligation—which is only one of the support mechanisms for renewables—will cost households an extra £33 a year by 2020. But this is based on the scheme only delivering 20% of electricity from renewables. If the EU targets are to be met, with relatively small contributions from heat and transport, many expect 30-40% of electricity to have to come from renewables with greater costs to consumers.[59] With this in mind, Energywatch called for measures to help low-income households deal with the likely extra costs (Energywatch p 290).

207.  The Church of England's House of Bishops Europe Panel were concerned that higher energy prices arising from renewable energy would lead to more people facing fuel poverty[60] (p 349). Alistair Buchanan, chief executive of Ofgem, told us that for every 1% increase in power prices 40,000 people were added to the fuel poor lists (Q 413). Given that he had calculated that environmental measures were raising prices by 8%, this would place an extra 320,000 people in fuel poverty.

208.  On the evidence submitted to us, renewable electricity is clearly more expensive than fossil fuel-fired and nuclear generation and leads to higher energy bills for consumers and businesses. We estimate that a household which consumes the average amount of electricity will have to pay in 2020 about £80 extra a year. The Government will need to take this on board in framing its policies towards fuel poverty, noting the high correlation between fuel poverty and poorly-insulated homes.

Support for the development of renewable energy technology

209.  The then Minister told us that the Government believed renewable energy could create thousands of business and employment opportunities, and that the Government was committed to ensuring that many of these jobs were created in the UK (Q 472).

210.  The IEA told us that the costs of Danish wind power were amongst the lowest they had looked at, because learning by doing had brought the cost down. Denmark's strategic decision 20 years ago to develop wind energy meant that their wind turbine manufacturing industry was now a world leader (QQ 394-398). China was by far the leading country in thermal solar heating for domestic water, developing a huge industry and a low-cost technology with millions of installed systems (Q 408).

211.  The ETI saw an opportunity to use the UK to demonstrate technological and engineering developments and sell capability worldwide (Q 326). The UK also had the potential to develop a renewable power industry: Vestas Wind Turbines, on the Isle of Wight, sells every turbine blade it produces to the United States (Q 330).

212.  It would help the UK meet the EU renewable target if the supply chain for renewable energy were to be developed. But this is unlikely to lead to an overall increase in employment, as the number of jobs in the UK depends on conditions in the economy as a whole. People who might gain jobs in renewable energy would normally have been able to work in a different sector, possibly more productively,[61] had renewable energy not been expanded.

213.  The Committee heard that a much greater research and development effort is needed on renewables and other measures to cut carbon emissions. Professor Paul Ekins of King's College London argued for the equivalent of twin Manhattan projects—the scientific research programme which developed the atomic bomb. One would enhance energy efficiency, the other promote energy supply technologies including renewables. In his view, countries need to work together on this research. He said: "It is terribly important that we get globally the biggest bang for our buck and have properly coordinated basic scientific research." (Q 16). We draw attention (Paragraph 117) to the need for a greater research effort on electricity storage. We heard of research in areas ranging from floating marine turbines to solar thermal arrays in deserts. A substantial annual prize for research for the best technological contribution to renewable energy development, as recommended in paragraph 93, would symbolise the importance of applied research in the field. We call on the Government to look afresh at the UK's research effort into renewables and to consider what more might be done, in a global context, to promote more, and more focussed, research across a range of technologies leading to new, effective and economical ways to reduce carbon emissions.

Renewable energy in the Planning system

214.  Many generators complain about delays in obtaining planning approval, leading to delays in the deployment of renewable generators. A lower level of capacity than expected means that the payments via the Renewables Obligation are spread across a lower level of generation, increasing the support cost per kWh.

215.  Scottish and Southern described the planning system as "not fit for purpose" (p 88). A new onshore wind farm could require around 2-3 years of preparatory work, and the planning process could take up to 5 years, followed by a further 1-2 years of construction. Building new transmission infrastructure could in parallel take 3-4 years preparation, plus 2-4 years to construct, and again up to 5 years in planning. Centrica added that around 8 GW of renewable developments are held up in the planning system—the equivalent of 10% of total existing generation capacity (p 97).

216.  National Grid saw planning delays as the most significant obstacle to the timely connection of projects and the development of network capacity. Of contracted wind projects in Scotland, only 17% have planning consents. Across Great Britain, only 23% have consents. National Grid supports reform of the planning regime and in particular the Government's proposals to provide for greater certainty in reaching decisions. Scottish and Southern Energy told us that they did not expect every planning decision to be a yes, but they wanted "quick 'yeses' and quick 'nos'". The Renewable Energy Systems said of the planning system: "It is time-consuming and unpredictable, making it a lottery for developers large and small" (Scottish and Southern Energy p 88, Q 229, National Grid p 129, Renewable Energy Systems p 433).

217.  But many individuals and community groups felt their views were being ignored, as outlined in Chapter 3. They argued that the planning process did not take account of the effect of wind farm developments on surrounding properties, the landscape and the effects on quality of life through constant low level noise (Two Moors Campaign p 491, John Muir Trust p 382, Barker p 230, Hadden p 325).

218.  The Government meanwhile aims to streamline planning processes for major infrastructure projects including energy, establishing a new Infrastructure Planning Commission (IPC). Its remit would cover only onshore wind farms generating more than 50 MW, in England and Wales, so that, in the view of Renewable Energy Systems (p 434) "only 300MW out of the 8000MW of capacity currently in the planning system is affected and not until after 2010".

219.  Law firm Lawrence Graham argued that too many obstacles were being put in the way of smaller offshore renewable energy projects, which will be not be handled by the IPC but, amongst others, the proposed Marine Management Organisation "The MMO will have wide-ranging responsibilities, not just in relation to licensing but also nature conservation, spatial planning and enforcement, and concerns have already been expressed as to whether it will also have the resources necessary to handle applications for the more complex developments in any sector. Any perception that as a result the operators of smaller offshore projects may be subject to a less favourable consenting process is likely to make it harder for them to raise capital and may well discourage innovation and more experimental developments offshore" (Lawrence Graham p 397).

220.  We recognise that power companies need a streamlined planning system to approve or reject projects more quickly. Otherwise the Government's targets for renewable (or, indeed, conventional) energy will be more difficult to meet. But local and national concerns about environmental degradation must also be addressed and we have received much evidence that this may not be the case at present. It is important to ensure that the planning system adequately assesses the costs to local communities and the balance between national priorities and local decision-making. The Government should also examine how far local communities share in the economic benefits created by wind farm deployment and other renewable projects.

The 15% target

221.  The former Minister of State told us the Government was committed to achieving the 15% target and the resultant ten-fold increase in renewable energy use. It would however be hugely challenging, a view shared by most other witnesses. The Government favoured some trading within the EU if it would bring down the cost to consumers. In particular, the former Minister told us that the last percentage point of renewable energy, needed to raise its share in the UK from 14% to 15% "would probably be the most expensive point to achieve." But in the former Minister's view the target could still be achieved without trading (Q 492). Much may depend on the outcome of negotiations in the EU; there was substantial disagreement over individual national targets at the October European Council.

222.  Professor MacKerron thought it was possible but unlikely the target would be achieved, If it were met, it would be at high cost as we would have to build renewable generators at less and less favourable locations (Q 265). Dr David Clarke of the ETI cited the Renewables Advisory Board which believes it is nearly achievable (Q 333).

223.  BP saw a risk that because the time scale for the targets was short, investment would be skewed to technologies that worked today as opposed to those which might be right for the longer term (Q 360) Malcolm Keay suggested the pressure to meet the EU target led to too much emphasis now on increasing the quantity of renewable projects at the expense of all other factors and interests involved. He said: "the problem with renewables now is that it is based very much on just getting a certain quantity of renewables built rather than thinking about the ultimate objectives which include reducing carbon emissions but also include preserving local landscapes, amenities and many other things" (Q 101). He thought that "an approach more focused on actual technology development rather than just building arbitrary quantities of renewables might be more effective" (Q 104).

224.  A number of witnesses thought the target was impossible to achieve. Mr Keay pointed out that "every single renewables target ever in the UK has been missed and by quite a long way" (Q 82). Professor Helm's view is that "we should have a credible [renewables target] that there is a reasonable prospect that we can achieve" (Q 184). He believed that the government had a policy of providing leadership, and had set a policy of reducing carbon dioxide emissions by 20% between 1990 and 2010. The intention was to demonstrate that, through renewable energy and energy efficiency, this could be done at an extremely low cost, so that other countries would be willing to sign up to Kyoto. In practice, he believed that we had demonstrated that we were unable to achieve the objective, that what we have achieved has been at extremely high cost, and this has not been persuasive. Professor Helm agreed that "we should show leadership and … adopt a tight set of carbon targets, but what I think is most important is that we do not go around wishfully promising that we are going to achieve this renewables target or that particular CO2 target in a way that is just not credible" (Q 183).

225.  We endorse the Government's objective of ensuring a secure, reliable and affordable supply of energy.

226.  The Government is right in stating that a portfolio of policies is needed to achieve this objective, if we are also to bring about reduced carbon emissions. Renewable energy has a part to play, as does nuclear power, the only other currently existing source of low-carbon energy. Investment in conventional power (preferably equipped with CCS, if and when it becomes available) will also be needed, together with improvements in energy efficiency. Against a background of developing technologies and uncertain costs, the Government will need to give a firm lead, with clear priorities and realistic objectives, while maintaining the stable framework needed by investors in the context of the long lead times needed by many energy projects.

227.  The main plank of Government policy on renewables is the proposed target of a 15% share of total energy by 2020, most of which is expected to be met by increasing to 30-40% the share of renewables in electricity generation, with most of that coming from wind power, onshore and later offshore. Witnesses' views of the target ranged from challenging to unattainable. The Government is however committed to achieving it and estimates that £100bn of private investment will be needed by 2020. Most, if not all of the cost is to be passed on to the consumer.

228.  We recognise that the Government has committed the UK to contribute to the EU target of 20% renewable energy by 2020 and that a target of 15% for this country is envisaged. But the bulk of the evidence presented to us casts doubt whether, under current policies and with current resources, it will be feasible to increase the share of renewable energy so much in the UK over the time available. This is especially so, as most of the growth is expected to occur in power generation, which represents only a fifth of the UK's energy use, and that this growth will be largely in addition to the substantial replacement programme of old conventional and nuclear plant that has to take place over the same time period. The UK has a track record of missing its targets in this area and, although meeting this one would mark a step change in the use of renewable energy, failure to meet it would negate the effect of setting and achieving realistic targets and reduce the UK's credibility still further.

229.  We are also concerned that determination to meet the target may lead to an over-emphasis on promoting 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. For example, as we have mentioned earlier in this Report (Chapter 5) the Government should lay at least as much emphasis on the opportunities for renewable heat as on power generation.

230.  We have a particular concern over the prospective role of wind generated and other intermittent sources of electricity in the UK, in the absence of a break-through in electricity storage technology or the integration of the UK grid with that of continental Europe. Wind generation offers the most readily available short-term enhancement in renewable electricity and its base cost is relatively cheap. Yet the evidence presented to us implies that the full costs of wind generation (allowing for intermittency, back-up conventional plant and grid connection), although declining over time, remain significantly higher than those of conventional or nuclear generation (even before allowing for support costs and the environmental impacts of wind farms). Furthermore, the evidence suggests that the capacity credit of wind power (its probable power output at the time of need) is very low; so it cannot be relied upon to meet peak demand. Thus wind generation needs to be viewed largely as additional capacity to that which will need to be provided, in any event, by more reliable means.

231.  We consider that the Government, if it pursues a renewable energy target in addition to its targets for reducing carbon dioxide emissions across the board, should prioritise the development and promotion of the other effective and economic options, both to bring down carbon dioxide emissions and to achieve security of electricity supply. In that regard it will be important to ensure that incentives to promote those renewables which offer only intermittent supply do not divert attention from, and deter investment in, other low-carbon generation options and thereby risk power shortages. So far as reliability is concerned, the best options among renewable sources of generation are tidal barrage and biomass, which are problematic for other reasons, and hydro-power, which is not, but is already near the limit of its potential in the UK. The most reliable low-carbon alternative to renewables is nuclear power (together with conventional fossil fuel generation with carbon capture and storage, if and when that becomes available).

54   BERR (2008) The Government Response to the Consultation on Funded Decommissioning Programme Guidance for New Nuclear Power Stations, September 2008, para 4.3. Back

55   We infer that he was talking of energy security in the medium-term sense of being able to rely on adequate supplies of fuel, since large amounts of intermittent renewable generation can make it harder to maintain the minute-by-minute availability of electricity. Back

56   On 16 October the Secretary of State for Energy and Climate Change announced his intention to introduce feed-in tariffs for small-scale generation, complementing the Renewables Obligation. Back

57   House of Commons, Written Ministerial Statement by Hilary Benn, Secretary of State for Environment, Food and Rural Affairs: Update on the Carbon Reduction Commitment-16 July 2008 Back

58   This follows on from the Energy Efficiency Commitment which was run in a similar way to the CERT. Back

59   We set out the additional costs of renewable electricity in Chapter 4. The Renewables Obligation exists so that renewable generators can recover the difference between their base costs and prices in the electricity wholesale market. In Appendix 9, we estimate that the Renewables Obligation, or equivalent schemes, will cost an average household £50-£60 a year in 2020. Higher charges from National Grid for transmission and system operation, to cover the cost of integrating renewable generators, will cost an average household £30 a year. This does not include the benefits renewable generators get from not having to buy carbon permits. Renewable generation will have little impact on the amount by which emissions trading raises the price of power, since this works by changing the prices charged by coal- and gas-fired generators. As long as the number of permits available is adjusted to reflect the amount of renewable output, renewable generation will not affect these prices. Electricity bills also cover the existing distribution and retailers' costs-these would be hardly affected by the growth of renewable generation. For an average household electricity bill of £400 an extra £80 represents a 20% increase-smaller than the 38% increase in the cost of producing the electricity.  Back

60   Fuel poverty is defined at the household level as needing to spend more than ten per cent of income (after tax and benefits) on heating and lighting to achieve an acceptable standard of comfort. Back

61   Prima facie, subsidised employment will be less productive than unsubsidised. Back

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