Renewables strategy in need of further work

The government must link renewables support to the price of electricity if it is to implement its renewable energy strategy cost-effectively, says Ofgem.

The government’s support mechanism for renewable electricity needs significant alterations if the UK is to meet its EU renewable energy targets cost-effectively, according to the energy regulator Ofgem.

Under the proposed EU renewable energy Directive, the UK must obtain 15% of its energy from renewables by 2020 (ENDS Report 397, pp 48-50 ), which is a sharp increase from the 2007 figure of 1.8%.

The Business Department (BERR) consulted on a renewable energy strategy to meet the target in June (ENDS Report 402, pp 38-39 ). Its main proposal is to "raise and extend" the Renewables Obligation (RO) to require electricity suppliers to obtain at least 35% of their electricity from renewables by 2020.

Ofgem has urged the government to scrap the RO several times over the past two years arguing it is inefficient and allows renewables developers to earn "super-normal" profits (ENDS Report 385, p 42 ).

Under the RO, developers are awarded a renewables obligation certificate (ROC) for each megawatt-hour of electricity generated which can be sold to electricity suppliers. Because suppliers are not meeting their obligations, the price of ROCs is high. The cost of carbon savings under the RO has been £65-140 per tonne, according to Ofgem, which compares with the government’s own carbon price of just £26.

Ofgem’s consultation response does not reiterate its call to scrap the RO. But it does say the mechanism needs reform to stop it loading significant costs onto consumers and exacerbating already rising energy costs.

BERR’s own estimate says the RO will lead to a 13% rise in electricity bills and 37% rise in gas bills by 2020.

Ofgem’s solution is to index the RO’s buyout price to the wholesale price of electricity. "Greater predictability for… developers and better value for money for consumers could be achieved through indexing the subsidy to vary inversely with the wholesale price," it says. "A gradual digression" of the number of ROCs awarded to renewables is also needed.

Ofgem’s proposal is supported by the Carbon Trust, which issued a report in October on how the renewable energy target could be achieved.1 "The RO was not designed for this paradigm of high electricity prices," the report says. "[It needs] to be significantly modified, for instance by being indexed to reduce when electricity prices rise."

Not surprisingly the industry disagrees. "We are wary of the suggestion that support should be linked to wholesale prices," the Renewable Energy Association says in its response, but does not explain its reasons. Similarly, energy generator Eon objects to Ofgem’s proposals as they "would introduce additional complexity [into the RO]."

The REA’s response does call for several major changes to the support mechanisms for renewables. A set of "renewable energy tariffs" is needed for microrenewables and all non-merchant plant, it says. Non-merchant plants are those built by businesses to provide electricity and heat for use on-site.

These tariffs would be similar to the feed-in tariffs operating across Europe, but they "would apply to the full amount of energy produced… not just that part fed into the electricity grid". The tariffs would not be available to utilities or specialist developers.

The REA has been campaigning for such tariffs to be added to the Energy Bill, currently making its way through the House of Lords. In October, Energy and Climate Secretary Ed Miliband announced the government would introduce an amendment to the Bill to establish a feed-in tariff for "small-scale renewables" (see p 4 ). However, it is not clear whether this will include non-merchant plant.

There is little disagreement with BERR’s analysis of what renewables are required to meet the target in the consultation responses seen by ENDS. BERR said some 14 gigawatts of both onshore and offshore wind would be needed.

However, the Carbon Trust’s offshore wind report differs wildly in its assessment. It estimates that 40% of the UK’s electricity will need to come from renewables in 2020 and that only 11GW of onshore wind will be built due to planning constraints. As a result, a massive 29GW of offshore wind will be needed.

It is possible to achieve that level but it would require "immense investment of up to £75 billion", the trust says. This is mainly due to the environmental and navigational constraints on where offshore wind farms can be located. The Crown Estate’s proposals for a third round of offshore wind farms (ENDS Report 401, p 44 ) limit developments to deep waters at least 70 miles from the coast, the trust notes.

If constraints are relaxed to allow wind farms to be built 20 miles further inshore the cost would drop by £16 billion. If the government increased R&D spending on offshore wind, technology development could lower the total cost by a further £14 billion.

Many of the consultation responses focus on how to improve the planning regime for renewables. Eon says local authorities should have to pay all costs for planning applications they reject if their decision if overturned on appeal. The British Wind Energy Association says there needs to be timelines for judicial reviews as many planning applications are now ending up in the courts

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