Memorandum by the Renewable Energy Association
1. INTRODUCTION
1.1 The important question is not how much
renewable energy costs, but how we achieve renewable energy targets
at least cost. If cost is a factor in deciding the level of achievement,
it should be asked before a target was set, rather than afterwards.
1.2 There are two ways of achieving renewable
energy targets at least cost; one is to encourage—as far
as possible—the very cheapest renewable sources. The other
is to have the most lowest cost policy measures. This generally
means the bankable, low-risk mechanisms. There are factors which
must be taken into account with both approaches.
1.3 Aiming to rely on only the very cheapest
technologies has many dangers. The cheapest electricity generating
technology is co-firing imported biomass with coal, but over-reliance
on this would be undesirable for several reasons. It is also more
cost effective to use biomass for heat production, rather than
power. It is least cost-effective to use it for transport. However,
using biomass (defined as all grown material) is the only
lower-carbon fuel substitution solution available for the transport
sector in the short to medium term—unless we convert to
renewably-charged electric vehicle transport, which brings serious
considerations of availability of renewable electricity.
1.4 Leaving aside landfill and sewage gas,
both of which are limited in terms of resource, the next cheapest
technology is onshore wind. However relying exclusively on this
would entail us being required to meet some 60% of the UK's electricity
demand. Not only would accommodating this amount of intermittency
have cost implications—but there would undoubtedly be significant
planning difficulties. It is clear we need to have a diversity
of renewable sources and scales of project, and cannot rely on
simply exploiting the very cheapest forms of renewable energy.
1.5 There are fewer downsides to relying
on the lowest cost support mechanisms—but there is one very
important factor—that of maintaining investor confidence.
Any firm, bankable policy, be it Feed in Tariffs or fixed price
contracts are likely to be cheaper than market-based mechanisms
which carry a risk premium. This is not an argument to convert
to a Feed in Tariff in the UK—a question we come back to
later in this evidence. A shift at this stage would create a major
hiatus and undermine investor confidence. There is also the question
of how well the policy would fit into the wider picture, discussed
below.
1.6 We do not address all the questions
in the call for evidence, but have grouped our response into several
themes.
2. POLICY COMPARISONS
AND GRID
ISSUES
2.1 The Select Committee asks how renewables
fit into Britain's overall energy policy. This section tackles
this question from the perspective of power generation, as there
is no heat policy in the UK and renewables transport policy is
considered separately below.
2.2 The Renewables Obligation (RO) results
in a premium being paid for each MW of renewable electricity produce.
Beyond this there is no special treatment for renewable generators,
nor the power they produce. The same rules apply for connection
to the grid for renewable generators and non-renewables as well
as for dispatch and the regulatory and commercial arrangements
for transmission and distribution.
2.3 This is, to a large degree, desirable.
However, where it comes to connection, the rules are inappropriate,
as they favour incumbent generators over newcomers. The incumbents
are primarily fossil fuel generators whilst the newcomers are
almost exclusively renewable.
2.4 The current EU Renewables Directive
includes provisions to allow priority access to the electricity
network for renewable generation. It states that Member States
"may also provide for priority access to the grid system
of electricity produced from renewable energy sources". The
new draft EU Renewable Energy Directive strengthens the provisions,
saying Member States "shall also provide for priority access
to the grid system of electricity produced from renewable energy
sources". (Emphasis added.)
2.5 UK policy is not decided in this area.
We are in the process of a review of the transmission arrangements
and it would have made much sense for the UK to have decided its
position prior to the review. There is a risk that work may have
to be re-done if the outcome is in conflict with the policy decision.
At the very least the process would have involved less work had
the decision been taken beforehand.
2.6 With the exception of the rules on connection,
such equitable treatment is a good way for renewables to fit into
energy (electricity) policy. It better prepares them for the eventual
time when external costs of carbon emissions are fully internalised—at
which point they should need no additional support or special
treatment.
2.7 In countries with feed in tariffs (FITs)
the policy often goes beyond the scope of the tariff payments
themselves, dealing with dispatch, transmission and distribution
aspects. It is often very favourable elements, such as that electricity
utilities have to pay for the costs of connection that have contributed
to the successful deployment of renewables. The premium payment
is, of cruse, important too, but it must be noted that the price
of the premium is not always higher for feed in tariffs than for
tradable certificate policies. Indeed it is often the reverse.
It is the bankability of the FIT as opposed to the higher risk
tradable mechanisms that means the price can be lower, yet still
more attractive.
2.8 There is a specific question on the
comparisons of FITs within question 4—"what are the
relative merits of FITs versus the RO?" The inherent
simplicity of a tariff based system is a key advantage with respect
to encouraging on-site generation. We use the terms "merchant"
power for power stations built for the export of power to the
grid. Examples of merchant plant includes wind farms, biomass
power stations, hydropower schemes etc. We thus distinguish these
types of project from "on-site" generation, where the
objective is to produce power to meet the users own energy needs.
2.9 Onsite generation will mostly comprise
developments initiated by companies which are not specialist renewable
energy project developers. The latter will be well-versed with
the Renewables Obligation, whereas for companies for whom energy
is not their core business, this legislation is dauntingly complex.
2.10 These include entities whose main line
of business is not energy, eg community wind turbines and units
serving industrial estates, water treatment works, out of town
shopping areas etc. The RO is less effective at stimulating these
kinds of developments, due to its inherent complexity and risk
characteristics. A more straightforward tariff arrangement is
required here to engage the wider set of owners we need to reach
out to. We need to bring such sites into the fold if the 15% target
is to be reached.
2.11 The Renewables Obligation (RO) is complex
and the administrative arrangements onerous for onsite renewable
electricity generators. At present the very smallest generators
(ie micro-renewables under 50kW capacity) provide only 0.2% of
the renewable electricity generated, yet occupy around 70% of
the RO administrator's time. The RO was never designed with small
scale generation in mind. It was targeted at merchant power and
is effective in that role.
2.12 Feed in tariffs also have merits for
early stage technologies such as wave and tidal energy, which
are expected to see significant price reductions over the next
decade. These technologies are at an early stage, and project
developers have to manage a significant degree of technology risk.
It would be preferable for all other risks to be removed. Simply
knowing exactly what prices will be paid for each MWh of wave
or tidal stream power generated is far better than the current
situation, where there will be such worries as will the conditions
for a top up grant be satisfied?—to what degree is the top-up
grant additional to ROCs under a banded obligation?—how
might the price of ROCs change over time?—what banding levels
will be set for wave and tidal stream energy?—how will the
grandfathering arrangements work when the banding level is reduced?—how
will the Scottish RO and the rest of the RO interact?
2.13 These are complications and risks a
project developer with a significant degree of technology risk,
could well do without.
2.14 The FIT proposed within the Energy
Bill does not cater for this—however, although previous
proposals the RO has put forward do cater for bankable wave and
tidal power purchase agreements.
3. ENDURING QUESTIONS
3.1 A number of the questions in the call
for evidence have been around since the development of renewables
(wind in particular) first started. Many studies on intermittency
have been published and we do not propose to comment further.
3.2 Question 6 asks if the planning system
is striking the right balance between all the different considerations.
It is well known that the planning (along with grid connection)
is one of the main barriers to the deployment of renewable energy.
3.3 The Planning Bill aims to insulate the
larger projects from political interference, by giving the decision
making to an independent committee. For renewable energy projects,
this means that projects previously determined by the secretary
of state under Section 36 provisions are now dealt by this committee.
For these projects it is legitimate to have a political aspect,
as it is Government policy to increase renewables deployment,
and meet ambitious targets.
3.4 It is, unfortunately, the projects that
are dealt with by local government decision makers that are more
prone to unhelpful political interference—albeit local politics
as opposed to national politics. The planning bill will do little
to help under 50MW projects, which comprise 75% of renewable generation
capacity accredited under the Renewables Obligation.
4. RENEWABLE
ENERGY AND
THE UK TRANSPORT
SECTOR
4.1 The transport sector accounts for about
25% of the UK's carbon emissions and this is predicted to continue
to rise, in contrast to most sectors of the economy which are
reducing emissions. Given that reducing carbon emissions is the
major driver for the Government's renewable energy policies, it
is important that the transport sector makes its contribution.
Currently, the use of biofuels, as noted in the overall "Introduction"
to this submission, is the only lower carbon fuel substitution
solution available in the short to medium term. Biofuels, provided
they are produced sustainably (see Paras 5.5 and 6.1), can be
a valuable and valid use of renewable biomass.
5. THE EFFECTIVENESS
OF GOVERNMENT
POLICIES
5.1 Question 4 asks about the cost-effectiveness
of different forms of Government support.
Transport sector support mechanisms
5.2 Support for the development of a UK
biofuels industry began with the introduction of a 20 pence per
litre fuel duty rebate for biodiesel (2002) and bioethanol (2005).
This policy proved largely ineffective in stimulating more than
just a niche biofuels industry based on used cooking oil. Given
that the EU Directive on the promotion of biofuels (2003/30/EU)
set an indicative target for biofuel use of 5.75% by energy by
2010, reliance on fuel duty rebates alone could also have proved
costly to the Exchequer in duty foregone. The Government therefore
consulted widely on alternative forms of support and decided in
2005 to introduce a Renewable Transport Fuel Obligation (RTFO)
from April 2008.
5.3 It was the consensus view of the stakeholder
community that the RTFO was the most effective way to support
an emerging biofuels industry. The potential UK producers of biofuels
also felt that the fuel duty rebate should remain a part of the
policy mix until the RTFO was tested and understood by the investing
community. However, in Budget 2008, the Government announced that
the fuel duty rebates would be abolished from 2010. Support will
continue through the RTFO, which will rely on the Buy-Out Price
mechanism for its effectiveness. At present, the combined value
of the duty rebates and buy-out price is 35 pence per litre. When
the duty rebates are removed in 2010, the only support will be
the buy-out mechanism—which will be set at 30 pence per
litre. The REA remains concerned that this level of Buy-Out Price
will be insufficient to ensure that obligated suppliers supply
biofuels, rather than buying out of their obligation. Furthermore,
the way in which the Buy-Out Price is set is not transparent.
Given the changes in both commodity prices and the crude oil price
recently, the industry would like to see a more transparent mechanism
for setting the Buy-Out Price.
5.4 The key policy mechanism under the RTFO
is the establishment of targets for the sale of biofuels. The
RTFO came into effect in April this year with a target of 2.5%,
rising to 5% by volume by 2010. While the industry has accepted
these targets, they are conservative—95% of fuel use will
remain fossil based. In order to encourage and justify investment
and to ensure that sustainable biofuels can make a meaningful
contribution to greenhouse gas emission reduction, targets should
rise in the future to reach the proposed mandatory EU biofuels
target of 10% by energy by 2020. This mandatory 10% target was
agreed by EU Heads of Government in March 2007. If this target
is either reduced or made indicative, this will put a correspondingly
bigger, and more challenging, burden on the other sectors of the
economy to reach the 15% UK target. It would not be right for
transport to be allowed to duck its responsibilities in this way.
The longevity of policy
5.5 The introduction of policy mechanisms
to encourage the use of low carbon biofuels aims to correct market
failure, by creating a market where none might otherwise exist.
However, policy has to be long term if investors are to have confidence
in the new market. Unfortunately, UK Government policy on biofuels
has wavered and the longevity of the RTFO looks more shaky than
was the case a year ago. When the RTFO was announced in December
2005, investors responded and in early 2006 investment plans for
the production of some 4.5 million tonnes of biofuels were announced.
Since then, about two million tonnes worth of investment in the
UK has been abandoned, with corresponding employment potential
destroyed. The REA believes that the Government should have confidence
in its own biofuels policy, which is underpinned by a world-leading
set of sustainability standards set out in the Technical Guidance
on Carbon and Sustainability Reporting as part of the RTFO, and
set mandatory targets out to 2020.
6. PRINCIPLES
OF THE
UK'S BIOFUEL
POLICY
6.1 The main driver for the UK biofuels
policy is the reduction in greenhouse gas emissions. Government
has also been determined that robust sustainability standards
for the production of biofuels should be in place. More recently,
the Government has announced a study into the indirect impacts
of biofuel production, fearing that UK and EU biofuels policy
would encourage unsustainable practices elsewhere in the world.
The REA has been at the forefront of support for the Government's
principles for a biofuels policy both in the UK and the EU and
supports all efforts to ensure that biofuels are produced sustainably
across the world. However, the UK industry can only ensure that
its own biofuels are produced to the standards set out in the
RTFO. It is for Government to ensure that all imports of finished
biofuels are produced to the same standards.
7. FUTURE TECHNOLOGIES
7.1 Question 3 asks about technological
advances in relation to cheaper renewable energy. In the transport
sector, consideration has to be given not only to cheaper sources
of renewable energy, but, more importantly, to sustainable sources.
The question of the contribution, if any, that the production
of biofuels makes to rising world commodity prices is not a debate
for this enquiry. Nevertheless, there is no doubt that future
developments in the production of biofuels should move to the
greater use of sustainable feedstocks that do not compete with
feedstocks primarily used for food, for example biomass wastes
and residues, as well as non-food crops such as jatropha. A great
deal of research is still required to develop new technologies
and to bring these to market. However, investment in such research
requires a working market and a reasonable promise of a return.
The market must start, as it is doing currently, with the use
of sustainably produced conventional feedstock. It will then be
able to transit towards the commercial deployment of alternative
feedstocks and technologies. It is wholly unrealistic, and a recipe
for doing nothing in the transport sector, to call for the development
of new technologies before policies and targets are in place.
Calls for a moratorium on the use of biofuels in this context
are na-with-diaeresisve at best and irresponsible at worst. Government
should be supporting technological advances in the transport sector
in parallel to giving the market confidence in the future.
7.2 Question 11 asks about the costs and
benefits of the present generation of biofuels as against so-called
"second generation". The REA finds the terms "second
generation" or "advanced" biofuels somewhat misleading.
As has been stated, the key principle underpinning the UK biofuels
policy is the reduction of greenhouse gas emissions. It is against
this principle, as well as that of sustainability, that biofuels
should be judged. Many current generation biofuels produced in
the UK can deliver significant greenhouse gas savings entirely
sustainably. For example, British Sugar has announced that its
sugar beet-to-ethanol plant in Norfolk delivers a 71% saving against
fossil petrol, and Argent Energy delivers an 83% saving against
fossil diesel at its tallow-to-biodiesel plant in Motherwell.
Other biofuels, such as sugar cane- to-ethanol can deliver high
levels of greenhouse gas savings, but safeguards to protect against
indirect impacts on rainforest or other valuable carbon- or biodiversity-rich
environments must be taken into account. To the extent that the
technologies to use other non-food feedstocks—including
wastes and residues—can be developed at a commercial level
in the future, they are likely to deliver good levels of greenhouse
gas savings.
7.3 The key to UK Biofuels policy must be:
— Mandatory targets at the EU level,
providing a working market, to ensure investor confidence and
the commercial delivery of new generation biofuels.
— Robust sustainability standards at
UK, EU and eventually at the global level.
— The achievement of good levels of
greenhouse gas emissions reductions. The REA supports the UK Government's
target for 50% by 2010.
June 2008
| 
