Memorandum by Professor Dieter Helm
1. The EU climate change package, published
in January 2008, proposes a set of overlapping targets—for
overall carbon emissions, for energy efficiency and for renewables.
This memorandum focuses on the 20% target for renewables—its
rationale, costs and benefits, and the practical implications
of achieving it—and provides a series of recommendations
for the radical overhaul of renewables policy that would be necessary
to achieve the new targets. It comments, too, on the various suggested
strategies for "watering down" the national targets.
THE RATIONALE
2. Surprising though it may seem, there
is no clarity as to what the objective is that the renewables
target is supposed to achieve—what the question is that
it is supposed to answer. This target is independent of the overall
20% carbon target, independent of the EU ETS, and has no clear
relationship with global warming. It is variously claimed that:
it will provide a basis for creating a new industry (the infant
industry argument); it will show world leadership (ahead of Copenhagen
and post-Kyoto negotiations); it will increase security of supply;
it is an efficient way of reducing emissions; and it will help
solve climate change.
3. All of these rationales are open to challenge.
First, since much of the target will be met through wind power,
which is a mature and well-understood international technology,
it is hard to see why it needs infant industry support. Second,
leadership has two characteristics: demonstrating that the target
can indeed be met; and persuading others to change their policies
in response. On the former, targets have widely to date been missed
in the EU (especially in Britain) and there is little evidence
that the roll-out of wind has had a marked effect at the Bali
Conference or in the subsequent build-up to Copenhagen.
4. Third, the relationship between renewables
and security of supply is complex: externally it depends on what
the back-up technology comprises (typically gas in the EU, and
increasingly so going forward); internally it depends upon grid
design, and stability. There are concerns in Germany that as wind
generation moves towards 20%, grid stability may be endangered.
5. Fourth, there is no evidence to suggest,
except at the periphery of electricity networks (small islands,
remoter locations) that renewables are the cheapest way of reducing
emissions. Indeed, evidence suggests they are expensive relative
to a range of other options, from improving thermal efficiencies
in existing coal plants, switching from coal to gas, and even
nuclear power. Finally, the impact of even 20% renewables (plus
the thermal plant back-up) will in itself make virtually no difference
to climate change. By way of illustration, wind farms in the Outer
Hebrides are comparatively trivial when compared with the 1,000GW
of new coal plant to be built in China by 2030, contributing to
the 50% projected increase in global CO2 over the same
period.
6. There are many reasons why renewables
should be supported as part of an energy policy, but the most
plausible explanation of the 20% target is that it is the same
number as targeted for aggregate CO2 and energy efficiency—in
other words, that it makes a good political slogan: 20-20-20.
If, however, the aim is good policy, then it is recommended that
the EU (and the British Government) spell out precisely what the
rationale of the renewables programme is, and to which objectives
it is expected to contribute, and precisely how these are to be
achieved. This would greatly enhance the credibility of the target
and associated policy instruments.
THE SCALE
OF THE
CHALLENGE
The costs and failures of current British renewables
policy
7. If, notwithstanding the above criticisms
of the rationale, the programme goes ahead, then there will need
to be radical changes in renewables policy in the UK.
8. The current renewables programme in the
UK is among the most expensive in the developed world. (Some argue
that Italy is worse). The domestic renewables policy is built
around a target of 10% renewables by 2010, to be delivered through
a combination of the Renewables Obligation (RO), Renewables Obligation
Certificates (ROCs), the contribution of grid and distribution
network investment, and a host of ancillary subsidies, exemptions
and indirect support.
9. The reasons why the renewables policy
in the UK has both failed to deliver the investment to meet the
domestic 2010 target, and been so expensive are multiple. They
include: the basic design of the RO and the ROCs; the (lack of)
coordination with network regulation; planning; and the political
lobbying by the wind and other specific technology-vested interests.
There is nothing "joined up" about the British renewables
policy.
10. The RO rewards investors twice: once
from the wholesale electricity price, and once for the extent
to which the market fails to meet the target. In other words,
investors get the benefit of the way the NETA wholesale market
works, and on the basis not of their own costs, but how difficult
it is for others to invest. The result has been high returns typically
well in excess of the cost of capital. (NETA itself is poorly
designed to meet the objectives of energy supply and in particular
in respect of investment and security of supply.)
11. The regulation of networks is the job
of Ofgem, which has primary duties to customers, not to the overarching
energy and climate change policies. Not surprisingly, Ofgem has
been vigilant in pointing out the costs of the renewables programme,
and has not been noticeably encouraging in pushing renewables-related
network investment. Ofgem's secondary duties and guidance are
just that—secondary. Regulation is, as a result, poorly
joined up with renewables policy.
12. Planning is the bête noire
of many energy projects, and there have been many planning problems
for the renewables programme. However, the simplistic argument
that this is the fault of the planning regime is not well founded:
the main difficulties lie in the lack of clear government policies
for the offshore and onshore developments.
13. Political lobbying has been a notable
feature of British renewables policy. There are very powerful
lobby groups who have, not surprisingly, presented wind and other
technologies in the best light. Cost estimates have encouraged
a false sense of economic rationale—typically the full cost
of renewables, including networks and back-up generation is excluded,
and network pricing does not fully confront remoter generation
sites with the full cost of extended power lines. The result is
that many widely quoted estimates of the costs of renewables are
misleading. These lobbies have been remarkably successful, making
renewables the political conventional wisdom, and not surprisingly
the lobbies have not pushed for other low-carbon technologies
(like nuclear and carbon capture and storage, CCS) to be put on
a similar playing field.
Meeting the new targets
14. The national targets emerging from the
EU-wide 20% target are of an order of magnitude more demanding
than experienced in Britain to date. The costs are likely to be
correspondingly higher, exacerbated by the demand for wind turbines
across Europe as all Member States increase their orders.
15. If Britain undertakes to meet the targets
from domestic sources, and on a narrow basis for the definition
of renewables (see below for alternative approaches), then there
will need to be a large-scale coordinated plan, which will need
to be implemented by an appropriate delivery and regulatory agency.
With only 12 years in which to deliver the 2020 target, and given
the timescale for network investment, the current process of five-year
periodic reviews for transmission and distribution, and the excess
costs of the RO, there will need to be rapid reforms of the policy
instruments and institutions.
16. The RO will need to be replaced by a
mechanism which provides a reasonable rate of return. The RO was
supposed to provide efficiency incentives (and hence uncapped
returns). However, in the balance between, on the one hand, the
overriding importance of the cost of capital, and, on the other,
the efficiency in capital and operating expenditures, the sheer
simplicity of wind, combined with the tight market for the turbines,
these incentives issues, though important, become strictly second-order.
A competitive tendering requirement would take care of much of
the efficiency concerns. The widely advocated feed-in tariff approach
could be suitably adapted, but the details of the mechanism design
matter greatly.
17. In terms of the institutional coordination
of the network investment, Ofgem's design in the 1990s is best
suited for the asset-sweating priorities of that period, rather
than the present. There are many arguments for subsuming it—and
the Carbon Trust and the Energy Saving Trust, and some of the
functions in Defra and BERR concerned with delivery (rather than
policy formation)—into a single Energy Agency. These have
been set out in Helm (2004 and 2006).[11]
If the government really wants to achieve the renewables target,
then such an agency will be required to coordinate and deliver
the investment programme. The existing institutional structure
is not sufficient to the task and may in practice form an obstacle.
Getting round the new targets
18. The scale of the task, the lack of a
willingness to grasp the problems with the RO and the institutional
reform issues, and concerns about the costs have led some in the
government to seek ways of diluting the renewables commitment.
Such approaches may break with the spirit of the EU climate change
package, and the government should be open and transparent about
its negotiating tactics. These dilution strategies are basically
threefold: to broaden the domain; to lengthen the time; and to
enlarge the technologies included.
19. Broadening the domain means in practice
buying in renewables projects from outside the EU. This has advantages:
they may be cheaper; and they may show a willingness to help developing
countries make their own contribution to mitigating climate change.
But they have drawbacks too: it shows less leadership if the EU
off-shores its carbon-reduction efforts; and the projects may
not be credibly monitored and regulated.
20. Lengthening the time period is already
envisaged in the draft EU Renewables Directive. Large-scale hydro
projects (implicitly the Severn Barrage and a major Portuguese
dam) may be allowed back into the pre-2020 targets if they are
completed soon after 2020. But there could be other "delays"
incorporated in the targets, and it is hard to see the EU taking
enforcement action in 2020 if member countries are behind the
targets but promising to deliver soon afterwards. The Renewables
Directive lacks credible sanction for non-compliance.
21. Enlarging the technology base builds
on the fact that the term "renewables" has no definitive
meaning. So it may be argued that other low-carbon technologies
might be taken into account—explicitly or implicitly. Explicitly,
CCS has been suggested by British ministers as one possibility,
though little of this would be available by 2020. Implicitly,
those member countries with larger nuclear programmes might argue
for lower national targets.
CONCLUSIONS AND
RECOMMENDATIONS
22. The main conclusions and recommendations
are as follows:
— The European Commission and the British
Government should set out the rationale for the 20% renewables
target.
— The RO and the ROCs' support policy
has been extremely expensive, and should be replaced by a more
cost-related support scheme as soon as possible.
— Clarity should be brought to the
numerous renewables support (explicit and implicit) schemes, and
the full costs of these technologies should be examined by the
National Audit Office, building on its earlier work (or some other
independent body).
— The options for watering down the
renewables targets should be openly analysed and debated, and
related back to the rationale of the policy.
— Of the three options for watering
down the target, the most efficient is to broaden the renewables
targets to a de facto low-carbon obligation, so as to minimise
the scope for lobbying and "picking winners" which is
inherent in the current scheme.
— Meeting the EU target will require
a radical step change in policy instruments and the institutions.
— The current institutional arrangements
have been largely designed with the problems of the 1990s in mind
(excess supply and low fossil-fuel prices, together with a weak
CO2 constraint). They now need to be simplified and
brought together within a single Energy Agency, which would not
only reduce bureaucratic costs and institutional conflicts, but
also provide a more robust barrier to lobbying by vested interests,
and introduce a significant level of coordination.
23. Muddling on as at present would be the
worst approach. It will create considerable additional costs,
and deliver little—mirroring, on a much larger scale, what
has happened so far under the RO/ROCs scheme and Ofgem's regulation
of the networks.
24 April 2008
11 Helm, D (2004), Energy, the State and the Market:
British Energy Policy since 1979, Revised Edition, Oxford University
Press. Helm, D (2006), "From Review to Reality: The search
for a credible energy policy", Social Market Foundation,
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