Select Committee on Environmental Audit Memoranda


Memorandum from Mr D J Milborrow

  I am a consultant who is active in the energy field—especially renewable energy. I have been involved with these issues for 23 years and acted as Specialist Adviser to the House of Lords Inquiry on "Electricity from Renewables" which reported in 1999.

  This submission briefly addresses four issues:

    —  The carbon savings to be realised from the renewables programme;

    —  The acceleration in renewable energy deployment needed to meet the government targets;

    —  The cost of the programme; and

    —  The impact of the New Electricity Trading Arrangements.


  The issue of the level of carbon savings achieved by the renewables programme is extremely important. The value used affects the perceived cost of the renewables programme in terms of expenditure per tonne of carbon saved. It has equally important implications for the valuation of carbon credits.

  In its fourth report of 1997-98 the Environmental Audit Committee noted that there appeared to be some confusion over the carbon savings from the various measures which form part of the overall Climate Change Strategy. This confusion arises, in part, from the way different departments link carbon savings with reductions in electricity output. For example, energy efficiency measures which secure exemption from the Climate Change Levy are assumed to achieve carbon savings based on the year-round mix of fuels in UK electricity output. Until quite recently, the DTI position was that savings were based on the actual fuel displaced, i.e. coal for most of the time. Their position changed dramatically during 1999-2000 and now appears to be that renewable electricity will save the emissions associated with gas-fired generation—which are much lower than those from coal. When this change of heart was queried by a House of Lords Select Committee, the Government did not seek to justify the new figures on carbon savings, but simply argued "it is a complex subject in which there are no definitive answers[1]"

  In practice, the issue is not a complex one. On a day-to-day basis, the introduction of renewable electricity on to the UK network will almost invariably displace coal-fired generation. In the longer term, new renewable plant will force the closure of old coal-fired plant—new gas-fired generation does exactly the same—as the DTI itself observes[2]. Either way, the emissions savings are those associated with coal-fired generation. If the UK is out of step with the rest of the world on this issue, our carbon credits are liable to be over-priced, possibly not tradable.

  In view of the confusion introduced by the various changes in estimates of carbon savings, it is explored further in an Annex. It may be noted that further confusion has arisen since recent figures for carbon savings from the renewables programme are based on the "additional" savings, "above those from existing measures". This last caveat is not always clear. This raises the question as to what happens if the existing measures do not deliver the 5 per cent renewables target by 2003, as the Government expects. What matters, in terms of Kyoto commitments, is savings relative to 1990 and it is not clear why an artificial baseline is used.


  Although the government expects the contribution from renewables to electricity supplies to reach 5 per cent by 2003, and 10 per cent by 2010, this will require a substantial acceleration of recent growth rates. They have published a possible profile, showing how the Renewable Energy Obligation may build up towards 10 per cent of electricity generation by 2010[3]. Generation from all renewable energy sources is expected to build towards 38 TWh by that date. This is shown in Figure 1.

  At first sight, the target appears to be achievable, based on the growth in total renewable electricity output since 1996. However, much of this increase has been due to increased output from the hydro stations. Output from "new renewables" ("New RE" on the graph) is growing more slowly and may be derived by subtracting the actual hydro output from the total renewable output. The required output from new renewables up to 2010 may be estimated by subtracting average hydro output (as the large hydro capacity is fixed) from the total, and this is the basis of the lower curve. The statistical trend in output from new renewable energy sources, between 1993 and 1999, suggests a yearly increase 533GWh. If this rate of progress is not accelerated, output from new renewables in 2010 will only be around 10,000 GWh (about 23,000 GWh short of the target), as shown in the Figure. The increase in installation rates required to achieve the 10 per cent target is a little under five. The DETR noted that many respondents to their consultation on the draft Climate Change Programme "were concerned that the 10 per cent renewables target would not be met"[4]

  The DETR therefore needs to assure the Committee that this acceleration can be accommodated by the planning process.


  In its first consultation document[5], the DTI suggested that the peak cost of a 10 per cent renewables obligation would lie between £35 and £455 million, with the most realistic estimate being £175 million. The latest estimate is £630 million (ref 4). This, 3.7 per cent on electricity bills, is inevitably bad publicity for the renewable energy sources. On closer inspection, the increased cost is simply due to the deficiencies of the chosen mechanism, not to any under-estimate of the cost of the renewable energy sources. The higher prices reflect higher financing costs—due to the higher risks—and shorter contract periods.

  The thinking behind the DTI strategy is presumably that high payments will encourage development. However, the UK strategy lacks features which are driving successful European programmes, including:

    —  Guaranteed payments for a fixed number of years.

    —  Priority access to the grid—this was a feature of NFFO contracts, but no longer applies.

    —  No artificial penalties—which intermittent renewable generators will incur under NETA.

    —  Access to funds from state-backed banks, such as the Deutsche Ausgleichs Bank in Germany. These provide finance for sums below the threshold for conventional project financing.

    —  A framework which encourages community participation, which appears to ease many of the planning difficulties now being encountered in the UK.

  The UK consumer now appears to have the worst of both worlds. Assuming that all prices rise to the buy-out level (as the DTI assumes), energy payments for wind, for example, will be higher than those paid to German developers under their new scheme. As German wind speeds are significantly lower than ours, this makes no sense. Moreover, the complexity of the new market arrangements and high cost of finance is likely to deter the small developers who have been the backbone of many European renewable energy programmes. These problems urgently need to be addressed and it must be made clear that any extra costs associated with renewables are small in relation to the "external costs" of fossil generation—particularly global warming.


  The New Electricity Trading Arrangements seem likely to penalise intermittent renewable generators by exposure to "imbalance" charges. This tends to reinforce the fallacy that introducing wind into a network causes problems. However numerous utility studies, worldwide, have shown that modest amounts of wind do not cause significant additions to the uncertainties in balancing supply and demand. The "penalties" are artificial and arise from the nature of the trading arrangements, rather than any real technical issue.

  The New Electricity Trading Arrangements muddy the waters as the contracts at the heart of the system are generally based on matching the needs of electricity suppliers with the capabilities of generators. Supply and demand are both disaggregated, to a degree. This puts the intermittent renewables at a disadvantage, despite a rather ambiguous statement from the regulator: "The new trading arrangements will ensure that all forms of generation are treated equitably and this will have different effects on different market participants, including individual CHP and renewables schemes"[6]. There is concern that the New Arrangements (NETA) will unfairly penalise the intermittent renewable energy sources by undervaluing their contribution[7]. "Penalties" in the region 0.3-0.5 p/kWh have been quoted[8]

  It is important, therefore, to draw a distinction between technical reality and accounting convenience. Market forces do not necessarily deliver optimised systems, particularly if the industry is fragmented. The Government, for example, concluded that some of the early gas-fired power stations, constructed during the "dash for gas" may not have been economic, raising consumer prices as a result[9]. Again, the overall level of profit in the electricity supply industry 10 years ago was 5 per cent ; in 1998/99 it was 25 per cent . Similarly, there is scant evidence, as yet, that the new arrangements will improve the overall technical efficiency of the system. In fact there are indications that the New Arrangements may result in higher provisions of spinning reserve and standby plant and, consequently, higher costs[10].

  Wind energy, in particular, benefits from aggregation; it means that system operators simply cannot detect the loss of generation from windfarm of, say, 20 MW, as there are innumerable other changes in system demand which occur all the time. From the standpoint of the system as a whole, it seems a fundamental anomaly that wind seems likely to be penalised for variability at levels which are out of all proportion to its actual impact on an integrated system.

1   House of Lords: Select Committee on the European Communities. Electricity from Renewables: further documents. HL Paper 18, December 19. Back

2   DTI, 2000. Energy projections for the UK. Energy Paper 68. Back

3   DTI, 2000. The Renewables Obligation Preliminary Consultation. Back

4   A summary of responses to the draft climate change programme, DETR, November 2000. Back

5   DTI, March 1999. New and Renewable Energy: Prospects for the 21st Century. Back

6   Ofgem, 1999. The new electricity trading arrangements. Back

7   Milborrow, D, 2000. Trading rules trap wind in the balance. Windpower Monthly, 16,5. Back

8   Moore, A, 2000. The prospects for wind energy. Renewable Energy Policy Seminar, The Confederation of Renewable Energy Associations, London, 17 February. Back

9   Department of Trade and Industry, 1998. Conclusions of the review of energy sources for power generation. Cm 4071. The Stationery Office. Back

10   Ofgem, 2000. Initial Proposals for NGC's System Operator Incentive Scheme under NETA. A Consultation Document and Proposed Licence Modifications. Back

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