House of Lords - European Union - Minutes of Evidence

Select Committee on European Union Minutes of Evidence

Memorandum by the Energy Policy Group, Department of Geography, University of Exeter

INTRODUCTION AND CONTEXT

It is with great pleasure that we submit our written evidence to the Inquiry. We have answered a number of questions below which were set out in the Inquiry Call for Evidence. However, there are a number of other points which we would also like to highlight.

The EU 20% renewable energy target relates to energy consumption in 2020. Because of this and the wide range of projections for energy use at that time, it is difficult to be exact about what amount of renewable energy will be required to meet the UK's 15% target. In very general terms, BERR's Updated Energy Projections estimate 2020 demand at 137 mtoe. This excludes international aviation. If the demand reduction targets of the EU Directive are included, the 137mtoe falls to around 110 mtoe. The 15% renewable energy target would therefore be around 15 mtoe. There are two key points:

— if energy demand falls, the required renewable energy component will also fall. In this way, instituting successful demand reduction and renewable energy policies is vital, are firmly linked and are of equal importance as energy supply policies; and

— the UK has delivered around 1.5 mtoe (according to Eurostats set out in Table 1) between 1994 and 2005. Germany has delivered about 10 mtoe in that time. The UK therefore has to do ten times as well as it has done over the last ten years and even better than the Germans.

FUNDAMENTAL REQUIREMENTS TO ACHIEVE THE 15% TARGET

The UK's record of delivering renewable energy is very poor. Eurostat figures in Table 1 and Figure 1 highlights the UK against the best performers in Europe (Germany and Spain). It could be argued that this is an unfair comparison since the UK is ranked 8th in the world (and 5th in Europe) in terms of adding new wind capacity in 2006,[1] although it doesn't make it into the top 10 for any other technologies. However, it clearly is a dismal record in terms of absolute amounts of renewable energy, coming 12th in Europe according to Energy Trends in terms of consumption of renewable energy; and 26th out of 28 countries in terms of percentage share of final energy consumption from renewable sources.

This poor record occurs despite the UK having a wonderful set of renewable energy resources. This is a direct result of the UK's renewable energy policy, which in turn is part of the UK's innovation policy. We are convinced that more renewable energy can be delivered more quickly, and with additional benefits, if the renewable energy policy in the UK is changed.

This renewable energy policy requirements are taken to comprise four areas:

— a new direct support policy (ie a move from the renewables obligation to a feed-in tariff combined with other mechanisms such as capital grants);

— changes to the rules and incentives within the economic regulatory arena to improve grid access for renewable energy and to implement a strategic plan for infrastructure development;

— making the planning process more streamlined and efficient; and

— implementing a supply side strategy, to include an effort to improve our manufacturing ability of renewable energy.

The key to successful renewable energy delivery is to "make it easy", thereby attracting as wide a number of investors (of any size) as possible. "Making it easy" requires unravelling the inter-linking hurdles and constraints at play in the UK for renewable energy deployment while at the same time doing this quickly enough to make a difference to meeting the challenges of climate change.

There are disagreements about why renewable energy deployment is so poor in the UK. However, it is clear that policy; planning; infrastructure and access; and skills development all have to change, improve and work together. No one area is to be blamed and no one area can overcome all the difficulties. However, some policies reduce the difficulties of the other areas. It is in this way that the UK has been so poor. Despite evidence since 1990 of what policies have been successful in terms of deployment (or not), the UK has so far (including the recent 2007 EWP) only taken limited steps to try and incorporate those factors.

THE RENEWABLES OBLIGATION

We were asked in our oral evidence session to clarify why it is that the RO has been as unsuccessful as it has been. This section is therefore rather longer than the other sections. We argue for a sensitive change from the renewable obligation to a feed-in tariff as the main mechanism of support for renewable energy which is sold or re-enters a grid in the UK.[2] We argue that a move to a feed-in mechanism will reduce difficulties in the three other key areas set out (planning; infrastructure and supply side). These areas still need to be worked on and these issues are discussed in the various answers to Inquiry questions below.

It is our view that the RO is a poor mechanism which is unfit for purpose. This has been written widely about elsewhere[3] but in brief this is because:

— it is an inflexible mechanism which places all the risk of development on developers; it cannot be used as the basis for obtaining finance, which minimises new entrants; and

— it benefits the incumbent suppliers by placing them in a powerful market and political position as the executors of UK renewable energy policy.

The RO is inflexible because of the incentives created by the RO rules, but in particular relating to the recycling payment. The obligation is placed on energy suppliers. They can meet their obligation either by buying renewable electricity directly from a renewable energy generator; by buying a renewable obligation certificate from someone else; or by "buying out" out of their obligation. The "buy out" payments go into a fund which is re-distributed to the energy suppliers in proportion to the percentage that each energy supplier has met the annual obligation. So if an energy supplier has met 5% of the annual obligation, they will receive 5% of the buy-out fund. The energy suppliers effectively count this payment as part of the payment they expect to receive for their investment in renewables. This incentivises companies to keep a close track of new renewable energy deployment in order to know what percentage of the annual RO will be met; what the recycle payment will be; and hence what the ROC value will be in future. Any change to any rule or incentive within the RO alters the percentage of the RO which will be met; in turn this alters the ROC value as well as the revenues of all parties involved. This establishes a preference for no change, which is far greater than the normal business preference for certainty.

The RO is a risky mechanism because, unlike any other of the 40 or so obligations that exist in the world,[4] the only requirement of the RO is the obligation on suppliers to purchase a certain percentage of their previous years total energy supply to their customers. There is no requirement on the suppliers to buy the renewable electricity at a minimum price or to provide a minimum contract length and so on. Suppliers tend to buy from their subsidiaries; or from large competitors. Suppliers are in a position of market power with respect to new entrants or small companies. Not only is the RO contract unsuitable for raising finance but it has the knock on effect that there have been very few new entrants entering into the renewable energy industry in the UK. It is exclusive in its mode of operation: and it is hard to become part of it. The suppliers are in a very strong political position with respect to the Government, since they are the primary executors of not only the renewable energy policy, but also other sustainable energy policies, such as the Energy Eficiency Commitment (EEC) and now Carbon Emission Reduction Target (CERT). The companies are able to develop renewables at the pace which suits their wider energy portfolio.

However, for those companies which are involved in the RO, it is an acceptable mechanism. The renewable energy projects tend to be developed by corporate finance on the basis of corporate assets. The suppliers are able to work out in a reasonably risk free manner what profit they will receive after having bought and sold their electricity; and new entrants—potential competitors—find it hard to enter. The energy suppliers are able to "buy out" if they wish, hence their ability to deliver the renewable energy at their preferred pace at no extra cost to themselves. It is customers who finally picks up the bill.

It is not an innovatory mechanism because, in general, it is new entrants that can be expected to provide innovation. Large energy companies are providing energy to very large numbers of customers. In a perfect world, those large companies will not only provide their millions of customers with secure energy but incorporate new technologies which improve the efficiency of their supply and de-carbonise the energy system while at the same time increasingly connecting individuals to their energy use, thereby encouraging those individuals to be more responsible about their sustainability footprints. Not only would these energy providers incorporate those technologies but they would do so quickly, in tune with the planetary needs of the environment.

However, in general, innovation or change tends to occur through niches or by new, nimble, usually small, companies. Those companies may develop into large companies or, as is often the way, the large companies in that field buy them out and roll out the new innovation. This is the more "typical" way for large companies to innovate. However, because the RO does not encourage new entrants, this type of innovation is blocked, or at the very least undermined (and this can be argued for energy efficiency and energy network as well). This is extremely serious at a time when we, as the UK, needs to rapidly change our energy system to meet the challenges of climate change.

The RO is complex, and it is getting more complex as it incorporates banding. So far, the RO has not supported diversity—whether of technologies, size of plants, types of investors, new entrants to the energy industry; or use of geographical resource. Banding has been introduced to overcome this accepted fault. Banding is when the generation from different technologies is assigned a different ROC value. In theory, if the value of the different ROCs is set at the right level, it will incentivise the suppliers to buy electricity from a greater diversity of renewable energy technologies. Even if this works, and that is not certain, the other problems of the RO being an exclusive mechanism remain.

The RO is also expensive to administrate. Moreover, while the UK spends considerably less in total than countries like Germany on renewable energy[5], the RO pays more per kWh of wind electricity than the German equivalent, the feed-in tariff.

The Government has to make it easy to invest in renewable energy

The EU target is a huge challenge. If there is any hope of getting anywhere near meeting it, the Government has to make it easy for all investors to become involved—in other words, it has to reduce the risk for investors by taking that risk themselves. The renewable energy policy has to become inclusive, as opposed to the exclusive nature of the RO; it has to be straightforward to be involved with; and it has to by-pass areas which enable delay to creep in. We argued it has to do this in 4 key areas:

1. Policy. We support a move to feed-in tariff, in conjunction with capital grants for micro-generation. Evidence shows that its inclusivity attracts investors from all walks of society; all sizes of developments; all technologies and all geographical resources.

2. Infrastructure Access. A feed-in tariff by-passes the access difficulties related to grid and infrastructure, enabling the economic regulatory arena to continue to work through the access issues. Arguably, this will lead to a quicker delivery of a network suitable for a sustainable energy future. Both Denmark and Germany are now discussing system change to a sustainable future because so much renewable energy has been deployed. We, in the UK, are still talking about to regulate our electricity system in the most efficient way for this sustainable future, without having moved forward in any meaningful way to the wider energy system.

3. Planning. A feed-in mechanism helps with obtaining planning permission because:

— there is more local involvement by investors;

— it involves more people and more companies it creates a tier of mentors for renewable energy. These mentors are a powerful support for renewables and begin to be able to counteract the inbuilt momentum of the conventional energy system;

— it enables more diversification and therefore a wider geographical resource is used, thereby minimising pressure on the better resource sites; and

— it broadens the incentive to go to the best resource sites. The incentive is still to go to the best resource sites since the payment is per kWh and the best resource sites maximise those kWhs. However, if a developer does not go to the best resource site, they still know they will receive a payment, whereas they may not be able to obtain a contract within the RO if their costs are too high.

4. Skills. Finally, diversifying renewable energy deployment will promote more jobs and skills both in, and across, the UK, thereby reducing the supply side problems. The extent to which we maximise those jobs and skills will depend on the extent to which we develop a domestic market. Denmark, while having an almost complete decline in their domestic market since 2000, are still successful in the global market on the back of their domestic successes in the 1980's and 1990's. Germany and China are increasingly dominant in the global market because of the great strides with their domestic markets in the 1990's and 2000's.

There are also three other areas which the Government has to be mindful of if it is to be easy to invest in renewable energy:

— Establishing a long-term, low-risk strategic plan to deliver a sustainable economy, of which energy is just one part.

— Make sure that their policies enable, rather than constrain or channel, all developing technologies necessary for the sustainable economy.

— Be mindful of the big, long term picture when assessing the costs of moving to a sustainable energy economy.

A strategic approach: renewable energy has to be linked in with grid and infrastructure needs, planning, waste resource policy, food policy and wider sustainable development criteria

Long-life equipment such as infrastructure clearly requires a strategic approach. However, the broad move to a sustainable future has to be part of a much more integrated and strategic approach. The UK had a White Paper in May 2007, which hardly mentioned the EU Directive which it had signed up to in the previous March. The UK then had a Nuclear White Paper in January 2008, and then immediately (at the end of the month) announced a Consultation on the Renewable Obligation, including the place of renewable heat. A Renewable Energy Strategy Consultation is expected at the end of June 2008. However, there are now suggestions that there will be a Consultation on Energy Efficiency and Heat in the Autumn of 2008, with the output of both being published in 2009. None of this gives any confidence that a long term strategic energy policy capable of meeting the challenges of climate change is evolving.

The importance of enabling rather than channelling or constraining technology development

The transition to a sustainable future is made more difficult by a combination of inter-locking constraints which arise from such issues as regulation not keeping up with technical developments; technological immaturity; not understanding why individuals consume and behave as they do; poor economics of certain renewable energy technologies; and so on. As the UK attempts to remove those constraints, it may be easier for some technologies to develop rather than other ones. For example, the RO was put in place to enable renewable energy technologies to develop but it has effectively enabled onshore wind technology. This is an example of a policy enabling and channelling a technology while constraining others. Any future policy must enable all technologies. It therefore has to be an inclusive mechanism which does not pick winners but enables them, as much as any other technology and leaves it up to investors to choose which they prefer to invest in. Feed-in tariffs, in practise, allow more choice because only those investors who wish to be involved have to be.

The cost of moving to a sustainable energy future

There have been a great many estimates of the costs of the renewable energy policy. We would argue that the central points to keep in mind is the planetary environmental imperative of moving to a sustainable energy future, and the cost of not doing so. This was thoroughly set out in the Stern Review. The Review argued that the cost of not taking action was about five times greater now, and for every future year and possibly as much as 20 times higher. Moreover, Sir Nicholas Stern recently gave a lecture at the University of Exeter where he said that he thought that the Review was, if anything, conservative about the costs of inaction.

INQUIRY INTO THE EU'S 20% RENEWABLE ENERGY TARGET

GENERAL

1. How achievable are both the EU's general 20% and the UK's national 15% renewable energies target? Will other EU energy policies facilitate the EU achieving its target?

This is a very challenging target. The UK (meaning the mechanisms in England and Wales, Scotland and Northern Ireland) has been trying to promote renewables since 1990. In that time, the UK has added slightly under 3% of electricity and about 1% of energy. The UK Energy Research Centre has submitted evidence to the Inquiry which shows that the UK's 15% target can be translated roughly into 40% of electricity demand provided by renewables; as well as 10% of both heat and transport demand being provided by renewables.

The percentages from electricity, heat and transport can be argued about but the key point is that the target is challenging and will need a significant increase in renewable energy support policies, which are both stragetic and directed in order to make them more cost effective in terms of speed, and success, of delivery. These policies will have to reduce risk significantly to attract investment and bring in new entrants into the industry. As discussed above, the RO is not capable of this. There is no hope of the UK meeting it's EU target unless changes its primary mechanism of support.

Table 1 and Figure 1 at the end of this evidence uses Eurostat figures to compare UK renewable energy deployment against Spain and Germany in millions of tonnes of oil equivalent. As discussed above, the 15% renewable energy target is the equivalent of at least 15 mtoe by 2020. Germany has added about 10mtoe since 1994. The UK has added about 1.5 mtoe in the last 10 years. Thus, the UK has to do better than that of Germany in about the same length of time.

The UK Government should not be looking for "quick fixes" but should be putting in place a set of low risk, long term mechanisms which are inclusive (thereby bringing in as many people or companies as possible as investors or new entrants), which stimulate innovation within companies and the energy system, and which change the relationship of individuals to energy so that they take more personal responsibility. This has been called positioning themselves as a country on the right side of the innovation fault-line[6].

The discussion of the how to make the move to a feed-in tariff as the primary means of supporting renewable energy has been dealt with above and in Question 8.

2. How important do you believe micro-generation will be in meeting the targets? What additional measures should be considered to support small scale technologies such as PV, small wind and renewable heat?

Micro-generation could be very important for meeting the UK's renewables target but also in the move to a sustainable energy system. The Energy Saving Trust study (2005) indicates that micro generation (including heat and power from fossil micro-generation) could make a significant contribution in reducing UK CO2 emissions (up to 7%) and meeting electrical energy requirements (up to 14%) by 2030. By 2050, micro-generation may provide about 25% of UK domestic electrical demand, thereby reducing carbon emissions from the domestic sector by around 30%.

The EST report highlighted that different policy mechanisms had very different outcomes. The most successful policy they had found was net-metering (where the value of the electricity per kWh exported to the grid from the micro-generator was the same as that paid for each kWh imported to the house). Net metering is a more complex version of the feed-in tariff discussed below.

The Government's 2006 Microgeneration Strategy[7] also points out that "microgeneration" has a wider contribution to make in helping to win the battle for hearts and minds that is crucial in terms of encouraging people to change their behaviour and move towards reducing their overall consumption of energy. They cite a recent Sustainable Development Commission publication in support of this.

The barriers to micro-generation set out by the EST and DTI publications are those related to the high cost of available technologies and the need for support measures to allow economies of scale to reduce costs, planning consents, technical standards for grid connection and commercial issues around export reward, metering and interfacing with the energy markets.

In terms of technical standards, the DTI Microgeneration Strategy sets out a need to consider extending the principles set out in Engineering Recommendation G83/1, which applies to devices with an output of less than 16A/ph, to larger installations, in order to reduce the cost and complexity of connection.

Commercial issues are related to the modest output of micro generation technologies and the difficulties of interfacing with an electricity market designed to accommodate big players and high-volume supply. The low level of revenue produced by micro generation make the costs of metering and supplier-involvement difficult to support. Means need to be found of supporting deployment or by improving the economics of micro generation.

We support a combination of capital grants and either net metering (which would recognise the value of producing energy at the point of demand) or, our preference, a feed-in tariff. In the short term and at a small scale, net metering may be the easiest way forward. Ofgem has reviewed the payments made to domestic generators for the electricity they inject back in the grid. This has shown a huge diversity.

However, our preference, while more complicated in terms of administration, is a feed-in tariff for all injected electricity and capital grants. This is because a feed-in mechanism enables the cost to be socialised, thereby reducing supplier concerns that they will be competitively disadvantaged if micro-generation is particularly successful in their areas. It also allows a more formal mechanism which is not at the whim of the private companies and which reduces the risk for investors. Again, encouraging innovation in this area and the development of new entrants will be central to the opportunities and skills available to carry it out.

The current micro-generation policy reflects the glacial pace at which Government policy proceeds. As importantly, Government policy is in the process of "channelling" renewable energy development because Government primarily supports large scale, currently cheaper, technologies via the RO, although there have been recent moves to make it more accessible to smaller generators. Arguably, micro-generation has as great potential as nuclear power. It has the additional value of involving individuals with their energy and sustainability decisions. Individuals are responsible for about 42% of carbon emissions which result from their choices if transport, food and energy consumption. Involving individuals may be a key tool in enabling the move to a sustainable energy system. Micro-generation appears to be one step in stimulating a new connection with energy.

Not only does the UK not support micro-generation sufficiently but it does so in a stop and start manner, which further aggravates the difficulties.[8] In early 2007, the £0.5 million grants from the Low Carbon Building Programme for March ran out after the first half an hour, showing the level of demand. BERR has recently extended the end-date (it was end 2008) to June 2010 or until funds run out, but have reduced the maximum payment. Those funds sum from various pots of Government money to around £85 million. The UK needs to build on this by increasing the amount of grants available, ensuring they are big enough to be meaningful, and ensuring their continuity. These grants should be given in combination with a feed-in tariff.

3. Is intermittency likely to be a significant issue if the EU achieves its renewable energy target? What measures will need to be taken at an EU and national level to ensure reliability of supply?

Intermittency will clearly be an issue with the deployment of technologies such as wind, particularly for GB, which has limited interconnection with mainland Europe. However, the costs seen by the electricity customer of providing additional spare capacity to deal intermittency and ensure that standards of security are maintained are likely to be relatively modest. For example, having reviewed available evidence UKERC conclude that the intermittency and additional reserve costs seen by consumers of accommodating around 20GW of wind generation in the UK would be around 0.1 to 0.15p/kW, some 1-2% of retail energy prices. Although low, these estimates could be considered higher than may actually occur as other non-intermittant renewable technologies are likely to make a significant contribution to the achievement of EU and GB targets.

On a European scale there is an increased opportunity to take account of geographic diversity to mitigate the impacts of intermittency and, for example, to use hydro storage capacity in Scandinavia to smooth variations in supply and demand. However, this would require adequate interconnection between national systems, market arrangements that allowed trading close to real-time and enhanced operational coordination between national electricity networks.

4. Concerns have been expressed recently in some quarters about "supply chain" bottlenecks. For example, the availability of appropriate offshore engineering facilities. The EU target will increase demand further and could lead to competition for resources and capabilities. How should the Government and Commission seek to address these issues?

We highlighted in our introduction to this written evidence that supply side issues is one of the four areas that Government has to work on to enable a rapid increase in renewable energy delivery. We would argue that the Government has the wrong "direct" policy; is trying to do things on planning, although not enough; has at least recognised that grid access is a problem, although again is not doing enough nor is going down the right path; but seems to be doing very little at all on the supply side.

Although, there is little hard data around, from our own experience we can say that the UK used to produce the majority of things needed in the UK- turbines, cables, switchgear etc. However, now the UK has to import the majority of inputs to exploit our huge renewable resources. For example, wind blades are manufactured in the UK, but the "high-tech" content of a wind turbine such as generators, gearboxes, convertor-rectifier units etc, are sourced abroad. The UK is generally restricted to competing in areas such as steel, construction, offshore expertise and so on.

At the end of the 1980s and early 1990s, the UK was competitive in the early stages of wind development, certainly in no worse a position than Germany. The Non Fossil Fuel Obligation (NFFO), the UK's first renewable energy mechanism, allowed other countries, such as Germany to overtake us.[9] In the case of electrical equipment, most manufacturers had a hard time in the 1990s, but the effects of the economic regulation of our energy industry as a result of privatisation in the UK were very undermining of our domestic industry. The overseas manufacturers who survived those years, ie ABB, Seimens, Areva, are now doing very well because investment in infrastructure is now strong but it is not primarily UK companies which are benefiting.

We would support a policy intended to increase UK's capability within renewable energy technologies. While companies like Rolls Royce might be "obvious" targets for such a capability, at root, an important parallel policy is the strength of the domestic renewable energy market. If that domestic market is strong, then domestic companies are more likely to succeed. It is no surprise that the UK has fared so badly in terms of supply issues given both its poor deployment record and the competitive basis of the NFFO[10] and RO.

GRID ACCESS

5. To what extent does grid access remain a significant barrier to increased consumption of renewable energies in the UK and across the EU? How can access be improved?

Grid access clearly presents a significant barrier to increasing output from renewable sources in the UK, as evidenced the connection dates out to 2020 being offered in congested parts of the system (ie Scotland). We have been asked to answer a number of inter-related questions: grid access arrangements; locational pricing; and reinforcement planning. These are addressed in the following three answers but are all related to the need for a strategic policy for renewable energy—whether in terms of direct policy (such as feed-in tariff); planning rules; strategic market and infrastructure development; and supply issues.

We also highlight that in our view network and market development have to occur along two parallel and connected lines. Firstly, we support a feed-in tariff and this is described in more detail below. However, this works by ensuirng connection and priority access to the grid and, in the short-term, avoids to some degree the difficulties for renewables within our economic regulatory framework. However, in parallel that economic regulatory framework has to evolve to be complementary to renewable energy generation (and heat). Our answers reflect these two parallel concerns.

Article 7 of the existing EU Directive on Renewable Energy does allow priority to be given to renewable generation in gaining access to the grid. It is notable that member states, such as Germany, which give priority to the connection of renewable projects, have connected much higher levels of renewable generation than has the UK. It is also noted that the draft EU Renewable Directive proposes that priority access should be mandatory, rather than optional.

Article 14.2 says "Without prejudice to the maintenance of the reliability and safety of the grid, Member States shall ensure that transmission system operators and distribution system operators in their territory guarantee transmission and distribution of electricity produced from renewable energy sources. They shall also provide for priority access to the grid system of electricity produced from renewable energy sources. When dispatching electricity generating installations, transmission system operators shall give priority to generating installations using renewable energy sources insofar as the security of the national electricity system permits".

In parallel, access to the grid could be improved by moving away from current access arrangements, where access is permitted only when any necessary grid reinforcements have been completed, to an arrangement whereby any renewable generation project could connect prior to reinforcements being in place, with the cost of any consequent constraint cost being either socialised or targeted on the connecting generators.

All the proposals that are currently being considered in terms of access reform, ie connect & manage, trading access rights, auctions, would allow earlier access to some extent. These possibilities within the regulation of access to networks are generically known as "early access". Early access to the grid should be affordable—ie attractive to developers—however their costs could be very high to renewable energy developers. It is likely that the non-locational element of Transmission Network Use of System (TNUoS) charges will be paid by those obtaining early access plus any local TNUoS (to cover the cost of local connections). In addition, it is likely that some or all of the resulting operational costs will be targeted on generation connecting early, unless that generation is able to purchase access rights from incumbents. In either case this is likely to be expensive. Operational costs as calculated by the British Electricity Trading and Transmission Arrangements (Betta) are arguably higher than necessary and this will be reflected in the value of purchased rights. This could all add up to early connection being a very costly option, which might deter renewable investment.

It should be noted that connecting generation ahead of reinforcements being completed will have no impact on security of the energy system, it will just mean National Grid having to constrain plant more often. However, if the constrained plant is conventional, then that is what we are trying to achieve. If, on the other hand, allowing more renewables to connect just results in other renewables being constrained, then there is not much point.

6. Is there a tension between the aim of encouraging renewable energy generation and locational pricing?

In GB, locational pricing principles are applied to charging for use of the transmission system. This results in high charges for renewable generation connecting in Scotland (circa £20/kW) but lower or even negative charges for renewable generation connecting elsewhere. The fact that there is currently a queue of some 12GW of renewable generation wanting to connect in Scotland suggests that locational pricing can be accommodated within the economics of most renewable projects. However, it may well be a significant issue for projects sited on the Scottish islands, due to the particular costs of reinforcing or establishing connections to those islands. We understand that the Government is considering whether a scheme to adjust transmission charges in those areas should be made under section 185 of the 2004 Energy Act.

It should also be remembered that locational use of transmission pricing helps many renewable projects in E&W and that the principle should ensure that those projects that have the best economics overall, are progressed first.

7. What impact do the various systems of reinforcement planning and work have on encouraging renewable generation? Should the UK adopt a "connect and manage" approach?

The GB electricity energy market assumes a "commercially infinite" transmission system, in other words energy is traded without any regard to the physical capability of the system. To be able to trade in the energy market however, a generator must have transmission access rights (TEC), which are only awarded once reinforcement has taken place and the transmission system is compliant with industry planning standards (the Security and Quality of Supply Standards or SQSS). The operational costs that arise from the need to reconcile the generation schedule delivered by the energy market with the finite capability of the transmission system in real time are "socialised" and ultimately borne by electricity customers.

Due to the time required to gain consents for, and construct, transmission infrastructure, the current arrangements can lead to lengthy delays in connecting new generation project, as evidenced by the connection queue in Scotland. One idea put forward is to have a "connect & manage" approach to access which would allow earlier connection of renewable and other generation projects and would give clearer signals to the GB System Operator (SO) and Transmission Operators (TOs) in terms of the need for transmission investment. However, it would give rise to the higher operational costs referred to above, as generation would have the opportunity to connect before transmission reinforcement was completed. Ofgem and others argue that continuing to "socialise" these costs would amount to a cross-subsidy and that there is a case for targeting all or some of the incremental operational costs on the generation that gives rise to those costs.

There is also the issue of whether a "connect & manage" approach should apply to all generation, or just renewables—recognising the particular replacement role that renewable generation has with fossil fuels. Applying "connect & manage" to renewables alone goes some way towards a feed-in tariff but not completely. The basic feed-in tariff design discussed below has three parts to it: the grid operator guarantees to take all the electricity (ie the electricity has priority access) for a pre-determined length of time (usually between 10-20 years depending on country); the grid operator pays a certain pre-determined price for the renewable electricity (which is then sociaised across all customers with the exception of major users who are exempted); and there are clear rules for connection. In this way, the investor/generator knows that their electricity will be bought at a certain price; that they can sell their output; and that there are clear rules for immediate connection.

"Connect and manage" would give priority in terms of connection access to the grid, but the project would still have to trade energy in the market and might be exposed to the high short run costs of access entry. In this sense, connect and manage is a very poor relation of a feed-in tariff.

In terms of reinforcement planning there is also the issue of whether National Grid's current arrangements adequately reflect the characteristics and role of emerging generating technologies. The replacement role of renewable generation and the variable nature of energy produced by renewable technologies such as wind, tidal etc, suggest that these technologies should "share" transmission capacity with conventional generating technologies. This issue has been recognised by National Grid who are conducting a review of their security standards in relation to intermittent generation. However, there is concern that National Grid will conclude that their existing arrangements are essentially appropriate and will not introduce necessary changes. The implications of not adequately recognising that different generating technologies place different demands on the transmission system and the need to share transmission capacity, will lead to unnecessary transmission being developed and unnecessary cost and delay in connecting renewable generation.

There is a need for a more strategic approach to delivering infrastructure. The Government has attempted this to some degree with the White Paper Planning for a Sustainable Future.[11] It includes a section on Nationally Significant Energy Infrastructure. However, its legislative base is the Electricity Act. As such, it only deals with renewable energy projects over 50MW.

Despite this, electricity infrastructure developments can take time to deliver, ie around 12 years for the 2nd Yorkshire transmission line and the continuing delays over the Beauly—Denny transmission line in Scotland. Ofgem believe that customer commitment should be obtained before expenditure is allowed to avoid the risk of stranded assets which would be picked up by end users. This is a problem for wind (particularly small) developers who are unable to commit meaningful sums to development until they have consents (including planning) and financial closure. However, when faced with the timescales associated with delivering major electrical infrastructure, wind developers can not seek planning consents as these consents, once granted, are for a limited period. This is a catch 22 situation and could result in infrastructure not being available in time to meet our 2020 targets.

An alternate approach would be allow National Grid to commit expenditure on new infrastructure on the basis of renewable resource in a particular area, local targets or expressions of interest. Take mid-Wales as an example. Renewable targets have been announced via TAN8 but, because individual developers do not know whether they will be successful in terms of planning permission, they can not commit to the infrastructure, so the infrastructure may not get built and the renewable projects are delayed.

There have been discussions about a strategic approach to infrastructure development but there has been no obvious movement forward. This is despite other infrastructure projects, such as road and airports, being built on the basis of estimated demand.

SUPPORT SCHEMES

8. Can the existing Renewables Obligation deliver the level of expansion of renewable electricity that the target for the UK implies? Should the UK consider other mechanisms, such as Feed in Tariffs?

No, the RO will not deliver the level of expansion required by the EU. Yes, the UK should transfer, sensitively and over time, to a Feed-in Tariff. This was discussed earlier on. It should be used in conjunction with various other research, development and demonstration mechanisms, including capital grants for micro-generation.

The basic feed-in tariff design has three parts to it: the grid operator guarantees to take all the electricity (ie the electricity has priority access) for a pre-determined length of time (usually between 10-20 years depending on country); the grid operator pays a certain pre-determined price for the renewable electricity (which is then socialised across all customers with the exception of major users who are exempted); and there are clear rules for connection. In this way, the investor/generator knows that their electricity will be bought at a certain price; that they can sell their output; and that there are clear rules for immediate connection.

It is the coherence of the feed-in which makes the whole thing "easy" which is why its so successful and attracts in such a broad amount of investment—whether from large companies or small, domestic investors.

However, a feed-in tariff is only as good as its coherence. If any of the three parts are not included in a renewable energy policy, then it will undermine if not destroy its success. Moreover, if the feed-in payment is too low it will not stimulated the required investment. Thus, a feed-in tariff is, in our view, the appropriate tool for increasing the rate of deployment of renewable energy. However, the details of that feed-in tariff are also very important.

9. Should the EU be involved in harmonising or regulating support schemes offered by Member States to encourage renewable energy generation?

No, the EU should not attempt to harmonise support mechanisms. However, it should concentrate on:

— ensuring that each member state deploys a certain amount of renewable energy; and

— ensuring that there are minimum payments for renewable energy and that priority access, in the sense it is intended within the various EU Directives, is in place.

	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005
Solar
Germany	36	41	57	70	83	78	96	150	184	241	269	365
Spain	24	25	26	23	26	29	33	38	43	48	66	68
United Kingdom	6	6	6	6	7	7	11	13	16	20	25	30
Biomass and wastes
Germany	4,427	4,447	4,619	5,880	6,362	6,384	6,830	7,300	7,929	8,719	9,564	12,186
Spain	3,545	3,563	3,608	3,660	3,806	3,894	4,049	4,149	4,328	4,736	5,055	5,129
United Kingdom	1,396	1,494	1,553	1,652	1,763	1,897	2,069	2,070	2,247	2,462	2,538	2,691
Geothermal
Germany	9	9	10	10	10	10	10	124	128	132	134	138
Spain	7	3	3	4	4	5	8	8	8	8	8	8
United Kingdom	1	1	1	1	1	1	1	1	1	1	1	1
Hydro
Germany	1,714	1,873	1,888	1,492	1,480	1,689	1,869	1,955	1,988	1,656	1,812	1,684
Spain	2,408	1,987	3,393	2,989	2,924	1,966	2,534	3,527	1,981	3,530	2,713	1,681
United Kingdom	438	416	289	355	450	461	437	349	412	277	424	427
Wind
Germany	123	147	179	261	395	475	804	899	1,363	1,622	2,193	2,341
Spain	15	23	29	62	116	236	406	599	748	1,038	1,341	1,825
United Kingdom	30	34	42	57	75	73	81	83	108	110	166	250
Total renewables production	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005
Germany	6,309	6,517	6,753	7,713	8,330	8,636	9,609	10,428	11,592	12,370	13,972	16,714
Spain	5,999	5,601	7,059	6,738	6,876	6,130	7,030	8,321	7,108	9,360	9,183	8,711
United Kingdom	1,871	1,951	1,891	2,071	2,296	2,439	2,599	2,516	2,784	2,870	3,154	3,399
Final energy consumption	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005
Germany	217,285	222,374	231,214	225,641	224,004	219,564	218,177	224,059	219,228	222,749	221,826 (p)	217,925 (p)
Spain	62,279	63,536	65,259	679,86	716,83	74,271	79,422 (p)	83,286 (p)	85,405 (p)	90,437 (p)	94,311 (p)	97,169 (p)
United Kingdom	142,334	142,429	149,925	147,427	148,431	151,022	151,665	152,949	148,371	150,422	151,979	151,580