Select Committee on European Union Twenty-Seventh Report


Chapter 4: Barriers and incentives

Grid access

88.  Article 14 of the proposed renewables Directive states that priority access to the transmission grid should be given to renewable energy. This is a proposal that the Government reject but they recognise that there are access problems for renewable generators (Malcolm Wicks Q 288).

GRID CONNECTION REQUIREMENTS

89.  The technical aspects of grid connection are governed by the UK Security and Quality of Supply Standards (SQSS). They require the grid to have the capacity to handle the full potential generation of any plant connected to it. It is argued that these standards do not take into account the differences between conventional generation and renewables (Ofgem p 72).

90.  Conventional generation and renewable generation operate with different load factors. The load factor is the fraction of the annual output that a power station produces relative to the output it would produce if it could be operated at maximum output 100% of the time. Conventional generators might operate for most of the time at or around their maximum output (load factors of perhaps 80%). However, many renewable stations operate over a wider range, and often considerably below peak output, since power generated is a product of wind speed or other environmental factors. For example, E.ON's Scroby Sands wind farm has a maximum generating capacity of 60MW but an average load factor of around 30%.

91.  Furthermore, renewables are a replacement for power generated by conventional means. When a renewable generator is achieving a high load factor it should mean that a conventional power station can lower its output (Professor Catherine Mitchell, University of Exeter Q 135).

92.  These two factors mean that there are few, if any, circumstances when any stretch of grid needs the capacity to handle the full output of all the conventional and renewable generation connected to it. Therefore, the SQSS theoretically requires far more grid capacity to be built than is needed (Q 144).

93.  The criticisms of the SQSS are recognised in the UK Renewable Energy Strategy consultation. The Government suggest reviewing them to allow the connection of more generation.

94.  The solution to this problem proposed by witnesses was a system of "connect and manage". This would mean a generator could be connected to the grid despite the SQSS ideal grid capacity not being present, on the understanding that at certain times its output may need to be reduced. Steve Smith of Ofgem compared it to selling airline seats. More seats may be sold than exist on an aeroplane because the operator is certain that not all passengers will use their tickets. Similarly, grid can be over-connected because the grid operator can be sure that not all of the potential power will ever be generated (Q 191).

95.  However, BERR warned that "connect and manage" would mean higher energy prices for consumers because it would increase the difficulty and cost of balancing the grid. These higher balancing costs would eventually trickle down to the consumer (Q 30). According to EDF, generators ordered to reduce their output would need compensation. This would also affect the consumer. In their view the cost of "connect and manage" was "unacceptable" (p 198).

96.  The SQSS will lead to a surfeit of grid being built and the cost of this will be passed on to the consumer. We believe that "connect and manage" offers a more efficient use of grid and should be adopted. It is important to note, however, that either system will require additional investment because to meet the 15% target additional grid will need to be built. The cost of this will to be passed on to the consumer (see paragraph 158).

GRID UPGRADES AND NEW GRID INVESTMENT

97.  The SQSS affect both conventional and renewable generation but their impact on renewables is particularly acute. Conventional power generators can choose to build close to demand or where grid capacity is already good. Suitable renewable generation sites are dictated by generating capacity and weather conditions. These are frequently places where grid capacity is limited. This means that meeting the 15% target is not only a matter of increasing generation but also of significantly increasing grid capacity (Lord Oxburgh Q 106). The Government have commissioned studies to determine the grid network necessary to handle the increase in renewables (see paragraph 103).

98.  BERR and Ofgem denied that funding was a barrier to greater grid investment. They both identified connection requirements as the principal problem (Q 30 and Q 190).

99.  Other witnesses identified the connection regulations as a barrier. Currently the transmission operators (the owners of the electricity grid) are required by Ofgem to use a system termed "finance and connect" whereby renewable developers must be fully financed before grid connection work can begin. Professor Mitchell of Exeter University argued that this created a "chicken and egg situation" where issues of finance, planning and grid connection are all interlinked and rely on one another (Q 135).

100.  E.ON stated that the current system means that grid development was always "behind the curve", waiting for renewables projects (Q 271). They suggested that other Member States allow transmission operators to "more proactively forecast grid needs" (npower p 112). Centrica, National Grid, E.ON and npower all supported allowing transmission operators to anticipate likely sites for renewables and invest accordingly rather than waiting for renewable developers to be fully financed and ready for connection before grid investment occurs.

101.  This ability to invest ahead of need may become more important as the use of offshore wind farms increases. Ofgem raised the idea of laying a sub-sea grid to connect offshore wind farms, rather than each project needing to cable to shore and connect to the transmission grid there (Q 192).

102.  However, allowing investment ahead of generation development could result in grid being built that is then not used. Ofgem referred to this as "asset stranding" (p 72). Centrica pointed out that National Grid could not currently carry out such investments as they are "not rewarded for taking riskier investments like that" (Q 266). As a result, National Grid said that the transmission operators would be more exposed to asset stranding, and that risk would need to be offset through higher connection charges to energy suppliers. Eventually these costs would be met by the consumer (Q 160). As Ofgem's primary duty is to protect the consumer, this has not been its favoured solution.

103.  In the UK Renewable Energy Strategy consultation the Government state that transmission operators have been asked to carry out studies into investment possibilities to help meet the 2020 target. The Transmission Access Review report[28], published by BERR and Ofgem alongside the consultation, states that once transmission operators have presented their investment proposals Ofgem will allow strategic grid investment ahead of developer signals.

104.  We believe that transmission operators will need to build in advance of firm commitments from developers if sufficient grid is to be built in time for 2020. We welcome the move away from "finance and connect" proposed in the Transmission Access Review. Ofgem will need to monitor this work closely to minimise the risk of asset stranding. Parliament should be informed annually of grid investments planned under this system and Government should report to Parliament on the use of such grid.

GRID QUEUE

105.  As a result of the delays in the grid connection system a grid connection queue exists. According to National Grid there are now around 16GW of renewable generation waiting for connection (Q 156). This queue is handled on a first come, first served basis, regardless of how far along the planning or financing process developers are when they apply for connection. As connection work will not actually begin until financing problems have been solved, this means that would-be generators with no planning and finance problems may have their connection delayed by other developers who have yet to resolve problems in these areas but applied for connection earlier and whose applications can be considered to be slowing up the process (Ofgem p 72). Both BERR and National Grid recognised this as a problem (Q 25 and Q 156). In the UK Renewable Energy Strategy consultation the Government suggest allowing a limited period of "connect and manage" to help clear the grid queue.

106.  We agree that the grid queue is a problem. The first come, first served method is creating an unnecessary and easily removable barrier to increased renewables deployment. If transmission operators were able to adopt a system of "connect and manage" permanently, grid connection could be made more predictable and timely. We strongly support the Government's proposal to use "connect and manage" to reduce the grid queue and believe that this system should be adopted immediately and permanently.

"USE OF SYSTEM" CHARGES

107.  Transmission operators charge energy generators for connection to their electricity grids. These are called "use of system" charges. In the UK, transmission operators charge different amounts for "use of system" depending on generators' distance from energy demand. This is termed "locational pricing". Energy generators in the South East of England where demand is concentrated and existing infrastructure is strong pay less for "use of system" than generators further away from centres of demand.

108.  Scottish Power contended that "use of system" charges were a barrier to renewables development. In Scottish Power's view such charges had a disproportionate impact on renewables because renewables plant will often need to be built further away from demand than conventional power stations (see paragraph 97). They estimated that a 100MW renewables installation in Scotland would pay £2.2 million per annum for grid connection while a similar installation near London would pay £0.6 million (p 244).

109.  A number of other witnesses argued that locational pricing is not the most significant obstacle to renewable generation development. BERR (Q 28), Ofgem (Q 194) and the Renewable Energy Association (p 226) pointed to the connection queue in Scotland of 10-14GW as evidence that "use of system" charges are not a barrier.

110.  Although we accept that locational pricing may affect some generators more than others, we believe that other grid access barriers are of greater significance. If the problems with grid access outlined above are eased the effects of locational pricing may become more important. We call on Ofgem and the Government to keep this issue under review.

Planning

111.  Many witnesses identified planning reform as "absolutely critical" (National Grid Q 150) as it will affect the building of both new generation facilities and electricity grid. Ecotricity told us that there was a system of "planning by appeal" as around 95% of applications were initially rejected by planning committees (Q 75). According to Phil Baker of Exeter University the upgrade to the transmission grid in North Yorkshire took 12 or 13 years to develop, 8-9 years of which was due to the planning system (Q 135). Similarly, Scottish and Southern estimated that a new onshore wind farm would take 10 years to develop and build, with half of that time spent in planning (pp 237-238).

112.  The UK Renewable Energy Strategy consultation recognises the problems of planning. It stated that if projects currently held up in the planning system, as well as those under construction and those awaiting construction, were completed, 10GW of renewable electricity capacity would be added to the network. This would constitute a third of what the Government estimate would be needed to meet the 2020 target.

113.  Ecotricity argued that one reason the planning system was too slow was that developments like onshore wind farms were subject to the same procedure as a home extension, and that the process involved the same people. The planning committees involved did not have the requisite skills to handle such planning applications. Ecotricity argued that as a matter of national strategic importance renewable energy deployment should be treated differently (Q 75).

114.  National Grid also identified planning as a problem as electricity grid will often cross the boundaries of planning authorities. Nicola Pitts of National Grid explained that although BERR gave planning permission for overhead lines, the necessary substations were approved by local planning authorities. This fragmentation means that "it is like being given permission to build a motorway but you do not have any on and off ramps" (Q 154) and that as a result grid construction was delayed.

115.  The Planning Bill currently before Parliament is intended to improve the planning process. The Bill proposes the creation of an Infrastructure Planning Commission (IPC) which would be the planning authority for certain types of projects. In the energy sector it would be responsible for onshore proposals over 50MW and offshore proposals over 100MW. The Bill would also establish a national framework of strategic planning based on national policy statements on issues such as the need for increased renewable generation.

116.  Some witnesses (Scottish and Southern p 238, Energy Networks Association p 210, E.ON p 109 and National Grid Q 154) welcomed the Bill and saw it as having the potential drastically to "increase the deployment rate of renewable technologies" (npower p 112). Michael Lewis of E.ON regarded the emphasis on national policy statements as useful as they meant that the need for new renewables should no longer be addressed at every planning inquiry; rather the question would already have been addressed in Parliament (Q 276).

117.  Other witnesses, however, did not consider that the Planning Bill provided for sufficient reforms to the planning system. Maria McCaffery of the British Wind Energy Association (BWEA), which represents wind, wave and tidal energy companies, stated the Planning Bill "is not going to make the slightest bit of difference" to onshore wind generation (Q 252). This is because they estimated that most new onshore wind developments will be below the 50MW threshold.

118.  Kevin McCullough of npower argued that even if the Planning Bill did sufficiently streamline the planning system, the new rules would take some time to become established and effective and therefore may not help to meet the target (Q 275).

119.  Lord Dixon-Smith, former shadow Environment Minister, even saw the Planning Bill proposals as introducing new hurdles to renewables development. The Bill would not exempt any applications from planning regulations but would allow them to be assessed by a single body, the IPC. In Lord Dixon-Smith's view this meant that proposals would not be able to evolve as they passed through the planning system but would have to be presented perfectly formed from the outset. This would create new problems for developers (Q 205).

120.  The UK Renewable Energy Strategy consultation recognises that the Planning Bill will not be sufficient to encourage the growth of renewable energy generation and meet the needs of the 2020 target. It suggests giving local authorities targets for renewable generation. This was similar to a suggestion offered by E.ON representatives at Scroby Sands who argued that local authorities should have targets for renewables in the same way they have targets for recycling (see appendix 5).

121.  The consultation proposes easing the planning constraints on refitting existing wind farms with new turbines. Juliet Davenport of Good Energy referred to this as "repowering" and argued that if a wind farm already exists it should not require new planning permission to upgrade its equipment (Q 94).

122.  The consultation also proposes the creation of a renewables advisory service to planning authorities, to provide the necessary skills and information that Ecotricity believed were lacking and extending Permitted Development Rights so that householders would have automatic planning permission for some micro-generation installations.

123.  Ecotricity proposed another possible reform. According to Ecotricity, "wind energy is the only major generating source which requires planning approval from District Councils" (p 193). Non-renewable generating stations over 50MW , such as coal- or gas-fired and nuclear power stations, are consented under section 36 of the Electricity Act 1989 by the Secretary of State. Ecotricity argued that the 50MW threshold was included at a time when wind power, and renewable energy generally, was less developed. They argued that the purpose of the law was "to take all but the very small conventional generators out of the hands of local councils and into the hands of the government". They concluded that these provisions should be amended, and the threshold lowered to 20MW, so that renewable energy is treated in the same way as other types of energy generation (p 193).

124.  We received evidence that planning was not only an issue for renewable generation but for the UK's power generation generally. In 2006, 18% of the UK's electricity generation was from nuclear sources[29]. National Grid stated that due to the requirements of the Large Combustion Plant Directive[30] much of the current conventional plant in the UK will need to come offline by 2020. Similarly, much of the current nuclear plant will need to be replaced by 2020 (p 56). This means that reforms of the planning system will impact on new nuclear build as well as renewables.

125.  Without an effective planning system we do not believe that the UK will be able to meet its 15% target. It is fundamental that appropriate procedures are put in place to ensure that new generation plant and grid infrastructure can be increased, subject to local considerations. This means that developers must be able to have confidence in the reliability and consistency of the planning system.

126.  We are concerned that consulting on how to improve planning measures still before Parliament does not create the stable and predictable planning environment needed to encourage investment in renewable energy. The policies resulting from the UK Renewable Energy Strategy consultation must be as comprehensive and definitive as possible.

127.  We believe that strong measures are needed to improve the energy planning system. We support the proposals described in the UK Renewable Energy Strategy consultation document but believe that further measures will be needed. The Government should apply the provisions of the Electricity Act 1989 to all renewable generation capacity above 20MW.

Supply chain bottlenecks

128.  During our visit to Scroby Sands we were informed that a further barrier to meeting the target was the industrial supply chain (see appendix 5). We were told that suitable specialist vessels available for hire in Europe to build and maintain offshore wind farms are in short supply, that the market for turbine manufacture is limited and that the prices of copper and steel were making new offshore wind farms more expensive. This view was echoed by Ecotricity during the Committee's visit to Avonmouth docks (see appendix 6). E.ON estimated that these factors had contributed to a significant rise in the cost of building a wind farm. The Scroby Sands site cost around £1.2m per MW of capacity. Developments in the near future were likely to cost around £2.4m per MW.

129.  BERR argued that by agreeing to the 2020 target a clear policy signal would be sent to investors and this would not only stimulate energy suppliers but also the necessary supply chain (Q 16 and Q 301). This was a view shared by BWEA, provided that a "strong message is sustained about the UK being open for business for renewable energy" (Q 235).

130.  Greenpeace cited the examples of other Member States, such as Spain and Germany, where a clear, strong and stable policy environment had helped to create an appropriate industrial supply chain (Q 330). The UK Renewable Energy Strategy consultation states that the Government will "be working with the Regional Development Agencies, UK Trade and Investment and other relevant bodies to develop a co-ordinated strategy to address these supply chain barriers".

131.  Simon Roberts of the Centre for Sustainable Energy was less optimistic that the target alone would "pull industrial development through" (Q 227). He argued that a more proactive approach was needed. He cited the Spanish example of making investment in local industries a requirement for renewable developers. This had helped to create the necessary industrial supply capacity (Q 227).

132.  The supply chain issues are not limited to the renewables sector. Lord Oxburgh stated that there was also a waiting time of ten to 12 years for nuclear reactor vessels (Q 110). This may be a significant problem for UK energy supplies given that much of the UK's existing nuclear capacity will need to be taken offline by 2020 (see paragraph 124), and that Malcolm Wicks stated that new nuclear power stations may not be built by 2020 (Q 302).

133.  As part of the UK Renewable Energy Strategy consultation exercise the Government commissioned a report on the supply chain[31]. This report identifies a number of supply chain problems. For offshore wind, for example, these include turbine supply, installation vessels and port capacity (p 19). The report also identifies problems common to all renewable technologies such as skills shortages and inflated material costs. The report proposes some actions such as increasing grants for port redevelopment and encouraging the transfer of skills.

134.  The Government has also published a strategy paper, Manufacturing: New Challenges New Opportunities, outlining the Government's approach to manufacturing[32]. This includes a commitment to establish an Office for Renewable Energy Deployment aimed at addressing the barriers to renewable energy generation, including the supply chain.

135.  We agree that with a sufficiently strong commitment to renewables some investment will be stimulated. However, the current condition of the supply chain means that there is simply not the industrial capacity to increase the UK's renewable generation fast enough, regardless of the wishes of energy suppliers. Given the short timeframe involved, we urge the Government to use the analysis already carried out and build on their general manufacturing strategy and to come forward with proposals specific to overcoming the problems of the supply chain in the renewables industry. We look forward to reviewing such proposals.

136.  We recommend that the Government share details of plans for renewable energy proposals widely so that market information is available to all parts of the supply chain.

Regulation

137.  Some witnesses called for changes to Ofgem's statutory obligations to shift the focus of the regulatory objectives towards sustainability as well as the consumer interest. They argued that the political objective of increasing the proportion of energy generated by renewables (which will increase energy prices, see paragraph 158) was in conflict with Ofgem's primary duty to protect consumer interests (Professor Mitchell Q 132 and Centre for Sustainable Energy Q 220). Professor Helm argued that this conflict had exacerbated the barriers to increasing the use of renewables (p 213). Other evidence also stressed the importance of better co-ordinated policies between Government and the regulators (Ecotricity Q 69 and Good Energy Q 89).

138.  Ofgem disagreed that its primary duty led it into conflict with the promotion of renewables. Steve Smith of Ofgem argued that it is "focussing on issues relating to removing the queue from transmission, changing the current arrangements to get more renewables on and that is driven by existing duties" (Q 176).

139.  Malcolm Wicks argued that it was the Government's role to identify political objectives such as sustainability and that it was useful for the affordability of such objectives to be monitored by the regulator (Q 306). The UK Renewable Energy Strategy consultation proposes changing the guidance given by Government to Ofgem but leaving its duties as they are.

140.  Witnesses considered that it was also important to take account of the regulatory regime in other Member States. BERR suggested that co-operation between European regulators may become increasingly important if the UK and the continent's electricity grids become more interconnected. We have previously heard evidence that this might be likely if European energy markets are liberalised[33]. Centrica warned that the UK's regulation must not become too complicated or create uncertainty for investors as this would encourage investment in other Member States, undermining the UK's efforts to meet its target (p 119).

141.  It is important that all the stakeholders involved receive clear and consistent policy signals. Ofgem must encourage renewables development whilst also protecting consumers' interests.

Renewables Obligation and feed-in tariffs

142.  As renewable energy is currently more expensive than conventional power not only do barriers to its development need removing but policies designed to encourage its growth are also necessary.

143.  The Renewables Obligation (RO) is the UK's system to provide financial support to renewable generators so that their output can compete with power from conventional sources (see box 1 for details of the RO). Opinion about the RO was divided.

BOX 1

Renewables Obligation

The Renewables Obligation (RO) is Britain's[34] main mechanism for providing financial support to renewable electricity generators. The RO requires electricity retailers (called suppliers) to source a proportion of their electricity from renewable sources. This target is set by legislation. It started at 3% in 2002 and is increased each year. The target for 2008/9 is 9.1% rising to 15.4% in 2015. The Energy Bill before parliament will raise this to 20% by 2020 (see paragraph 145).

The RO is a 'certificate trading' scheme. Renewable energy generators are awarded Renewables Obligation Certificates (ROCs) for their output, which they can sell to suppliers. At present one ROC represents 1 MWh of renewable energy. Suppliers require ROCs to prove compliance with the target, which they do through presenting ROCs each one year period to the electricity regulator, Ofgem. The demand for ROCs from suppliers means that there is a value attached to ROCs in addition to the wholesale value of the electricity renewable generators produce. In the period since 2002 ROCs have typically traded at a price of between £45 and £50 per MWh on top of wholesale electricity prices which represents a significant premium for renewable energy[35] (in the same period wholesale power prices were typically around £40/MWh and are currently around £70/MWh[36]).

The market for ROCs is flexible. ROCs can be traded independently from the electricity renewable generators produce or sold together with it. Generators can enter into bilateral contracts with suppliers for ROC purchase or sell them through an open auction process, equivalent to a spot market. Auctions are run online by the Non Fossil Fuel Purchasing Agency several times a year and allow a transparent wholesale price to emerge for ROCs. As well as buying ROCs from independent renewable generators either directly or at auction, suppliers can become renewable generators themselves, build their own renewable energy schemes and generate their own ROCs.

If suppliers end each year without sufficient ROCs to cover their obligation, they must make a payment into a buy-out fund. The buy-out price is fixed per MWh of shortfall and is adjusted with inflation each year. The proceeds of the buy-out fund are paid back to suppliers in proportion to how many ROCs they have presented. This is called the recycling mechanism. The combination of the buy-out fund and the recycling mechanism means that suppliers are encouraged to continue to buy ROCs even when they are more expensive than the buy-out price. However, it also places an upper limit on the price of ROCs because at some point it will become cheaper for suppliers to pay the buy-out price than to purchase ROCs. The cost of the RO is effectively paid by all electricity consumers, since electricity suppliers pass the cost of compliance on as a small increase in the tariff for the electricity they sell.

The main advantage claimed for the RO (compared to fixed price schemes, see box 2) is that the market for ROCs creates an incentive to find the most cost-effective way to generate renewable electricity. The main disadvantages are that it creates uncertainty for investors, since future ROC prices are uncertain. It is also unable to differentiate between renewable sources; ROCs are awarded per MWh regardless of the method of generation. Because of this the RO effectively favours mature and more cost effective generation technologies like landfill gas over less mature technologies like offshore wind and wave power that are currently more expensive. The Energy Bill contains proposals to 'band' the RO by technology. Mature options will get less than one ROC per MWh and early stage technologies more than one ROC per MWh.

At present the UK is behind its RO target; the RO for 2007 was 6.7% and renewable generation was 4.96%. In part, this shortfall is due to the barriers to renewable generation discussed in this report. Seven EU countries (Belgium, Italy, Latvia, Poland, Romania, Sweden, and the UK) operate schemes similar to the Renewables Obligation.

144.  The Government confirmed their continuing belief that the RO is the right mechanism to encourage renewables growth. Since the introduction of the RO in 2002 renewable electricity generation has risen from around 2.87%[37] of generation to 4.96%[38] and BERR expected it to continue rising at a similar rate on current measures. They accepted that this would not be enough to meet the 2020 target (Q 22), but argued that with modification the RO would be the right mechanism to achieve the 30-40% of electricity generation necessary (Q 34).

145.  However, the Energy Bill sets the RO level at 20% by 2020. Lord Oxburgh told us that the RO was effectively a cap setting the highest possible amount of renewable power the market would provide and, therefore, the Obligation level would need to be set higher than the 40% of electricity needed to meet the target (Q 106 and Q 120). The Government recognise this problem in their UK Renewable Energy Strategy consultation. They estimate that the RO target set out in the Energy Bill would only achieve 14% of electricity from renewable sources by 2020.

146.  Some witnesses were much more critical of the RO and claimed that it has been ineffective at encouraging renewables and was "unfit for purpose" (Energy Policy Group, University of Exeter p 37). Simon Roberts of the Centre for Sustainable Energy characterised BERR's position as holding on to "the idea that it has the most pure and perfect support mechanisms in spite of the fact that it is not capturing industrial benefits, it is not achieving that scale" (Q 218).

147.  One criticism of the RO is that it cannot provide enough support to emerging technologies. Matt Thomas of Ecotricity gave the example of marine technology (Q 87). The Energy Bill will band the RO scheme (see box 1). Supporters of the RO argued that this will improve its effectiveness (Centrica p 120).

148.  Critics of the RO recommended replacing it with a feed-in tariff (see box 2). Professor Mitchell argued that whereas the RO was a risky mechanism for generators and therefore discouraged smaller suppliers from entering the market, feed-in tariffs provided certainty for investors. She argued that this was one of the principal reasons why countries with feed-in tariffs, such as Germany and Spain, have achieved higher levels of renewables deployment (Q 131 and Q 141).

149.  Some witnesses argued that "mega-projects" like the Severn Barrage should not be included in the RO scheme (E.ON p 106 and Centrica p 120). Centrica's concern was that the generating capacity of the Severn Barrage could be so large that it would undermine the RO scheme by flooding the market with ROCs (p 120).

150.  Ofgem claimed, however, that had it not been for grid and planning problems the RO would have been viewed as a "marvellous scheme" (Q 193). Dr Gordon Edge of BWEA argued that "to blame the Renewables Obligation for the failure of both the planning and the grid system is perverse" (Q 250).

151.  A number of witnesses thought that it was now too late to change from the RO. Sarwjit Sambhi of npower told the Committee that if the Government were to change support schemes there would be a three-year hiatus in investment which would seriously delay the growth of renewables (Q 281). BERR also warned that changing the system could be "hugely disruptive" (Q 34 and Q 297).

152.  This is not, however, a concern shared by the Centre for Sustainable Energy. They maintained that in recent years the Government had been sufficiently committed to renewables that a move from the RO to a feed-in tariff could be made without investors feeling that the Government was about to "pull the plug" on them (Q 221).

153.  A compromise between the RO and feed-in tariffs was suggested by some witnesses. The Government should "experiment with a range of feed-in tariff scenarios" (Energywatch Q 187) alongside the RO. The Renewable Energy Association's submission supported the introduction of a feed-in tariff for micro-generation, renewable heat and biogas (p 227). The Government recognised the arguments against the RO and stated that there may be a role for feed-in tariffs for micro-generation (Q 297).

154.  We are not convinced that the RO is the ideal incentive mechanism but we accept the argument that as it has now been in place for some time, it would not be appropriate to replace it entirely. We agree that investors need stable policy signals. Replacing the RO completely with a feed-in tariff would undermine confidence and create a delay in renewable deployment.

BOX 2

Feed-in tariffs

Feed-in tariffs (FiTs) and Premium Payments Schemes are alternatives to the Renewables Obligation. Like the RO, they provide renewable electricity with a premium payment. Feed-in tariff schemes set a total fixed price per unit of electricity. Premium Payment schemes set a premium to be paid to the producer on top of the market price for electricity. Typically, the tariff or premium is set for 10 to 20 years although this varies by country and technology. After this period the price returns to market rates. Such schemes do not involve any form of certificate trading and do not set a target or quota for renewables.

Eighteen EU states have FiTs, premium payment schemes or hybrids of the two. Similar schemes exist elsewhere, for example in California and Australia. Details of the schemes differ but the German FiT model (Erneuerbare-Energien-Gesetz, or EEG) is a good example. It provides renewable generators with a technology specific fixed premium per unit for a fixed period of time. More expensive options such as photovoltaics receive a higher premium than cheaper options such as wind power. Each year the premium given to new developments is reduced to reflect technological improvements. Payments to existing developments are fixed and protected and are assured for 20 years.

The way most FiTs work is that regional or national electricity utilities are obliged to buy electricity from renewable generators (subject to technical and safety constraints) at premium rates set by the government. FiTs have been associated with a large growth in wind power in Spain, Germany and Denmark. Wind provides these countries with 9%, 5% and 20% of their electricity respectively. They have also been associated with rapid uptake of household scale solar photovoltaics in Germany and Spain.

One advantage of FiTs over certificate trading schemes is that the fixed price provides investors with greater security of income, which allows them to finance their developments at lower cost. The second benefit is that differentiation by technology allows countries to target support according to the technological maturity of each technology and adjust support as technologies improve. For example, Germany and Spain have generous support for solar PV, and Portugal has a dedicated tariff for wave power. Feed-in tariffs are also simpler in operation then RO type schemes. These factors may explain the substantial involvement of small investors in renewable energy in countries such as Denmark and Germany.

Recent analysis by the EU Commission[39] finds that FiTs often score highly in terms of effectiveness when compared to trading schemes like the RO. The Commission also finds that in the case of onshore wind the premium paid over and above estimates of cost of generation is lower under Feed-in tariffs than under RO type schemes. However, the German EEG has attracted domestic criticism for over-paying renewable generators.

155.  However, we believe that feed-in tariffs have the potential to stimulate generation in some sectors of the renewable market. Although the evidence we received in favour of feed-in tariffs anticipated that micro-generators would benefit most from such a system, we do not believe that the benefit of feed-in tariffs would be limited only to small-scale generation. Single site operators, community developments, affordable housing schemes and farmers will often want generation capacity above the micro-generation level. They are, however, unlikely to want to trade in the ROCs market with large energy companies. Such generators are likely to favour the certainty of a medium term feed-in tariff structure over the uncertainty of the RO. Therefore, we see potential for the RO and a feed-in tariff to work in parallel with generators choosing the most appropriate support scheme for their own needs. We recommend that a system of feed-in tariffs be created to work alongside the RO.

156.  We are concerned that the provisions of the Energy Bill before Parliament appear already to have been superseded by the UK Renewable Energy Strategy consultation. This does not constitute clear and stable policy signals. We recommend the Government amend the Energy Bill now and increase the RO target from 20% to 40% by 2020.

157.  We urge the Government to act quickly following their consultation so that energy companies have a clear policy environment in which to make investment decisions.

Cost to the consumer

158.  Meeting the 15% target will result in increased costs to the consumer. Overcoming the barriers to increased renewable generation, providing the correct incentives for its development and managing its integration into the energy mix through strategic grid investment, "connect and manage" and grid balancing polices all have cost implications. BERR has produced estimates of the cost to consumers of generating 37% of electricity from renewable sources to meet the 15% target (table 2). These cost estimates describe the potential range of relative cost increases compared to the status quo in four year periods. They range from 2010 to 2030 as the cost of increasing generation and infrastructure is likely to be spread across a number of years.

159.  Whilst significant, it is important that these projected increases in costs to consumers are put into context. Increasing the share of energy from renewables is likely to increase consumers' bills but it will also help to shield consumers from fluctuations in global energy prices. These can be extremely significant and occur over short timescales.

160.  For example, the average domestic consumer paid £45 more for the annual electricity bill in 2007 than in 2006, and £78 more for gas[40]. This followed increases in 2006 of £53 per year and £88 per year for domestic electricity and gas bills respectively[41].

161.  Rapid increases like this can be accompanied by longer run trends in prices. Electricity and gas prices decreased steadily during the 1990s but this trend sharply reversed at the start of this decade and consumer bills have increased most years since 2001. In real terms, in the period from 2001 domestic gas prices have increased by over 60%, and electricity prices by nearly 30%[42].

TABLE 2

Cost to the domestic consumer of generating 37% of electricity from renewable sources
37% renewable electricity Price increases with oil prices at $70 per barrel Price increases with oil prices at $150 per barrel
2010-2014
1 to 4 %

(£4 to £15)
1 to 2 %

(£6 to £11)
2015-2019
3 to 6%

(£12 to £22)
0 to 1%

(£1 to £6)
2020-2024
9 to 12%

(£34 to £44)
5 to 6%

(£24 to £29)
2025-2029
17 to 20%

(£57 to £67)
2 to 3%

(£7 to £12)

Figures from appendix 7[43]

162.  Allan Asher, Chief Executive of the consumer organisation Energywatch, said that consumers "might become actively hostile to the sorts of measures that push up costs" (Q 179). He argued that the Government would need to include the consumer in the country's effort to meet the target. He suggested that use of technology such as smart meters—which provide the householder with up-to-date information on their energy use—could help increase energy efficiency and so help to meet the target (Q 183).

163.  We believe that although an increased use of renewables will cushion consumers from fluctuations in gas and oil prices, meeting the UK's 15% target will result in consumers paying more for their energy. This underlines the need for a commitment to an effective energy efficiency strategy (see paragraphs 50-57).


28   This was a review into access to the transmission grid launched by BERR and Ofgem in July 2007. Back

29   Digest of United Kingdom Energy Statistics, 2007 Back

30   On the limitation of emissions of certain pollutants into the air from large combustion plants, 2001/80/EC, OJ L 309 (27 November .2001) pp 1-21 Back

31   Supply Chain Constraints on the Deployment of Renewable Electricity Technologies, Douglas Westwood, June 2008 Back

32   Manufacturing: New Challenges New Opportunities, BERR, September 2008 http://www.berr.gov.uk/files/file47660.pdf Back

33   European Union Committee, 5th Report (2007-08): The Single Market: Wallflower or Dancing partner? (HL 36) Back

34   The England and Wales RO were created in 2002, as was Scotland's. Northern Ireland's RO started in 2005. All three schemes are linked in that ROCs can be traded between them.  Back

35   http://www.e-roc.co.uk/trackrecord.htm Back

36   UK Renewable Energy Strategy consultation, p 95 Back

37   HC WA22, 19 May 2008 Back

38   UK Energy In Brief July 2008, BERR, http://www.berr.gov.uk/files/file46983.pdf Back

39   http://register.consilium.europa.eu/pdf/en/08/st05/st05421-ad01.en08.pdf Back

40   Based on data from the June 2008 edition of the government's Quarterly Energy Prices report http://www.berr.gov.uk/files/file46669.pdf Back

41   Quarterly price report, June 2007 http://www.berr.gov.uk/files/file40157.pdf Back

42   Quarterly prices report June 2008 Back

43   BERR's analysis of the costs to consumers was carried out using assumptions of 32% of electricity coming from renewable sources and of 37%. The estimates for oil price increases at both $70 per barrel and $150 per barrel were only carried out for 37%. For further discussion of the cost to consumer see the forthcoming Economic Affairs Select Committee report on the renewable energy target. Back


 
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