Select Committee on Environmental Audit Memoranda


APPENDIX 10

Memorandum from the Royal Society for the Protection of Birds

1.  INTRODUCTION

  The RSPB welcomes the opportunity to contribute to the Environmental Audit Committee's inquiry into renewable energy. The RSPB is Europe's largest wildlife charity with over one million members. We manage one of the largest conservation estates in the UK—with more than 150 nature reserves covering more than 275,000 acres.

  We are very concerned that unless there are significant cuts in greenhouse gas emissions then birds, other wildlife and their habitats will be catastrophically affected by climate change. One of the main ways of cutting emissions is to bring on stream more electricity generated by renewable sources of energy. The RSPB thus welcomes the Government's clear intent to do so.

  However, whilst we support the main thrust of the UK Government's Climate Change Programme, including the sections dealing with renewable energy generation, we consider that many aspects of energy policy could be better.

  We have been heavily involved in UK energy policy, for instance working on improving the Utilities Act as it made its way through Parliament, and responding to many DETR and DTI consultations. Overall we have been promoting policies to create a more sustainable UK energy policy.

SUMMARY

  This submission outlines where we think that government's renewable energy policy is deficient and how it might be improved. Before going into specific policies, we briefly examine two overarching factors that have inhibited the development of renewable generation, and an environmentally friendly energy policy in general, under successive governments. These factors are:

    (a)  an undue bias towards low energy prices at the expense of all other considerations, and

    (b)  a tendency to implement ever more complex policy instruments without giving due regard to the rules governing their effectiveness.

  These two issues underlie much that is wrong with current renewable energy policy, and may well continue to be wrong with if conventional thinking remains unchanged. They run like twin threads through almost all of our concerns.

  The remainder of our submission makes the following main points:

    —  Given the low level of existing renewable generation, the governments targets of 5 per cent by 2003 and 10 per cent are probably realistic, if environmentally inadequate.

    —  However, even to achieve these targets, transitional arrangements for Non Fossil Fuel Obligation and Scottish Renewables Obligation will need to be made that allow the site specificity of the Orders to be changed.

    —  Longer term targets for renewables are needed. Up to about 2050, a target increase in renewable electricity supplied of 1.5 per cent per annum would be appropriate.

    —  The Renewables Obligation should be technology banded, with the buy-out price also being banded accordingly.

    —  The Obligation should not be placed annually. If the Obligation is placed annually, the profile should be different favouring an increase in renewables development over time.

    —  The proposals for banking and borrowing under the Obligation should be changed, eliminating borrowing.

    —  The proposed capital grants for offshore wind and energy crops would be unnecessary if a banded Obligation were used, but if it is not then the grants should be significantly greater.

    —  The New Electricity Trading Arrangements (NETA) will have an adverse effect on the development of renewable energy.

2.  BACKGROUND TO UK RENEWABLE ENERGY POLICY

2.1.  The role of prices and the consumer in energy policy

  Successive governments have made cost the main consideration in renewables development. The old Non-Fossil Fuel Obligation (NFFO) and Scottish Renewables Order (SRO) drove the development of the lowest cost renewables. Whilst the current Government has decided to scrap NFFO and place greater emphasis on promoting renewables, it has retained the pre-eminence of price in energy policy. The overarching theme of the 2000 Utilities Act is to reduce electricity prices to the consumer and, unless revamped since the last consultation, the Renewables Obligation will drive the development of lowest cost renewables.[33]

  Largely as a consequence of prioritising prices over the environment, and even over security and diversity of fuel supply, the UK has the cheapest renewably generated electricity in the EU but very little of it—and about half of what it does have comes from old hydroelectricity generation plants constructed half a century ago.[34]

  Moreover, as a result of past and present policy, electricity prices have been falling for some time and are likely to fall further. Lower prices will tend to lead to increased consumption. Given that the vast bulk of the UK's electricity will still be generated from fossil fuels this will lead to increased greenhouse gas emissions. The resulting greater global warming is unlikely to benefit anyone, especially poorer people.[35]

  Whilst the price of electricity to consumers, and especially to those on low incomes is important, a better balance between the immediate and longer term benefits to consumers is needed. Short term cost-savings should not necessarily dominate. Achieving longer term environmental and cost benefits can well require higher initial costs, until economies of scale are realised. These long term benefits are also in the consumer's interest.

  Perversely, whilst overall energy prices are likely to continue to fall, and whilst legislation associated with the renewables is likely to continue to drive the development of the lowest cost technologies, the price of renewable electricity to the consumer will almost certainly rise. This is because renewable sources of energy are likely to be in short supply but are selectively favoured financially by both the Climate Change Levy (CCL) and the Renewables Obligation: the Levy will not be charged on renewable generation and the "penalty" imposed on electricity suppliers if they do not meet their Renewables Obligation will be about 3p per unit (ie the proposed buy-out price).

  In a situation where renewables are in short supply, there will be a strong tendency for generators to sell to their renewable electricity to suppliers, and thence on to business, at a price just under that of "normal" electricity plus the Climate Change Levy. There will be an equally strong tendency for generators to sell renewable electricity to suppliers at a price just under the buy-out price set under the Renewables Obligation. The price of renewably generated electricity may thus nearly double, compared to the price of "ordinary" electricity.

  This is not what the Government had in mind when introducing legislation on renewables. It illustrates one of the problems associated with using complex policy instruments, as is discussed further in the next section.

2.2.  The increasing complexity of policy instruments

  All governments like to implement policies and measures that can be "tweaked" or that can be run in parallel with other policy goals covering other issue areas. The present government, for example, aims to reduce greenhouse gas emissions whilst also eliminating fuel poverty. It therefore seeks policy instruments that either achieve both ends at the same time or, at least, instruments that do not conflict with each other.

  Historically, this has not been a severe problem. The policy instruments that governments have had to hand have tended to be either quite simple or limited in scope or, more often, both. Modifying them, or running them in tandem, has done little to harm their effectiveness.

  However, in an age of increasing policy sophistication, policy instruments are becoming more complex and much more care needs to be taken in their selection and application. Many of the new instruments can be very effective but only if applied according to specific, sometimes complex rules. Also, some are most effective if implemented broadly and in isolation from other instruments. They are easily distorted and rendered ineffective by other instruments if used in the same, or overlapping, areas.

  An example of this type of instrument is provided by the new, highly fashionable emissions trading regimes—more properly called "cap and trade" regimes. These combine straightforward regulation, in the form of an obligatory emissions cap (ie a target) imposed on the participants, together with a flexible, market-based means of attaining the cap—by trading parts of it between the participants.

  Cap and trade schemes are potentially highly effective but only work well, in both environmental and economic terms, if a quite complicated set of rules is adhered to.[36] Also, they usually work best if broadly applied, yet they are sensitive to the application of other instruments in the same areas. Taxes, for example, can distort the trading markets unless applied equally to all participants. In short, cap and trade schemes need to be well thought out, in conjunction with other instruments, and applied with care.

  In the last year or so, government has begun to set up three trading schemes associated with climate change policy: the CBI/ACBE scheme under the Climate Change Levy (CCL), the green certificates scheme under the Renewables Obligation, and trading in Energy Efficiency Standards of Performance.

  Of these, the nearest to completion is the CCL-based scheme. It was originally envisaged as being capped by the negotiated exemptions to the CCL, and therefore open only to those firms with negotiated exemptions and, even then, only to those which had committed to absolute emission reductions. At the outset, however, the DETR and CBI correctly realised that the scheme was rather limited in scope and should ideally be more broadly based, so they began to modify it.

  However, in doing so they also began to break, or at least bend, the rules for cap and trade schemes. For example, a financial incentive is to be given to firms that voluntarily take on a cap—breaking two of the golden rule of cap and trade regimes which are that a) the sole incentive should be the cap and b) that it should be externally imposed—not voluntary. As a result, it is questionable whether the scheme will work well.

  Similarly, having established a limited, but quite promising, cap and trade regime under the Renewables Obligation, government has decided to support by direct grants the development of technologies that are not currently near-market in terms of cost, specifically offshore wind and energy crops. Yet one of the beauties of having a cap and trade scheme is that if it is well-constructed one does not need to use direct grants but can, more effectively, allow the markets that they create to drive technology development. The Utilities Act explicitly allows for a cap to be placed so as to encourage specific technologies. Failing to use this provision partially defeats the point of establishing the cap and trade scheme in the first place, especially as the levels of grant proposed so far are inadequate.

  Government needs to exercise more care when selecting and implementing policy instruments. It would be very unfortunate if the Government's basically praiseworthy policy on climate change mitigation were undermined by insufficient attention to detailed implementation.

3.  THE GOVERNMENT'S RENEWABLE GENERATION TARGETS

3.1.  The level of the targets and the chances of achieving them

  Given the low renewable generation base from which they are to be developed, the Government's targets are probably achievable. Higher targets would be preferable from an environmental standpoint but might well be difficult to reach.

  Indeed, the RSPB is concerned that the first Renewables Obligation will not begin until 1 October 2001, leaving only two years in which to attain the 5 per cent target. To do this, the outstanding NFFO and SRO plant scheduled for 2001 to 2003 will have to come on stream without delay, which is unlikely unless special provisions are made to speed up the planning consents process.

  Because of the bidding process for NFFO and SRO was based largely on the lowest cost bid, proposals were often made which stood little chance of acceptance in the planning process. For example, the low cost consideration made wind power profitable mainly in sites where there were strong and steady winds—which are often also wild areas of importance in terms of either biodiversity or landscape. Local groups and bodies such as the RSPB therefore often objected to them.

  The new Renewables Obligation should largely circumvent this type of problem but to meet the renewables target it will be essential for the bulk of existing NFFO and SROs to go ahead. Yet some of the developments are still planned for highly sensitive sites where the RSPB has concerns about wildlife impacts. Often, we would have no concerns if the developments could be relocated a short distance away.

  It would assist both the renewables industry and the RSPB (and other environmental groups) if the site-specificity of NFFO and SRO were lifted in the transitional arrangements made for them. We could then enter into constructive dialogue with industry over where the best sites might be, rather than fighting lengthy and costly battles in public hearings.

3.2.  The pace of renewables development

  The RSPB is concerned about the pace at which renewables are being developed. At the planned rate of development to 2010, the UK will not have sufficient renewables coming on stream by the middle of the century to yield the cuts in emissions that both the Intergovernmental Panel on Climate Change and the UK Climate Change Programme say are necessary. Given the low renewables base, a slow start to the deployment is inevitable but it could increase over time. Longer term targets should thus be set.

3.3.  Longer term targets

  Government targets are set for 2010, but not beyond, other than a commitment in the latest consultation on renewables that the Renewables Obligation will continue to be placed until March 2026.

  What is needed is a target that makes clear how renewables are to develop beyond 2010. Whilst any long term targets should be flexible to some degree, fairly firm guidance is needed to allow industry to plan ahead. The simplest way of doing this would be to place a yearly target, as Denmark has done. A growth target of 1.5 per cent per annum would be appropriate in light of the need to cut emissions by more than 60 per cent by the middle of the century.

4.  EXPECTATIONS OF THE PROPOSED RENEWABLES OBLIGATION

  The RSPB advocated, and continues to support, the Renewables Obligation. However, we consider that some of the ways in which the Government intend to implement it will make it much less effective than it might be. In summary, our main recommendations are that:

    —  the Obligation should be technology banded, with the buy-out price also being banded accordingly;

    —  the Obligation should not be placed annually;

    —  if the Obligation is placed annually, the profile should be different;

    —  the proposals for banking and borrowing should be changed, eliminating borrowing; and

    —  the proposed capital grants for offshore wind and energy crops would be unnecessary if a banded Obligation were used, but if it is not they should be significantly greater.

  The single band Obligation proposed by the DTI will have some potentially severe adverse effects on renewables development. As mentioned earlier, it will drive the development of the lowest cost renewables at the highest price (ie probably just under the price of "normal" electricity plus the buy-out price of 3p per unit). Moreover, it will not bring on those technologies that are not currently near-market in terms of cost, such as offshore wind and energy crops. Also, by driving up the price of renewables it will tend to make many of the new domestic renewable schemes uneconomic.

  A technology banded Obligation together with a banded buy-out, which is enabled by the Utilities Act 2000, would largely eliminate these problems and, indeed, the need for capital grants in support of offshore wind and energy crops. We consider that it is illogical to set up a market-based instrument such as the Obligation, and then use direct grants to subsidise some types of renewables.

  An annually placed Obligation creates a host of problems. Perhaps the most important of these is that an annual Obligation will be very hard to meet precisely. Firms with the very best of intentions may well undershoot their Obligation. To cope with this, at least partially, the DTI proposes to allow firms to bank and borrow parts of their Obligation from other Obligation periods. This complexity is completely unnecessary and has a number of potentially adverse effects. (For example, in a situation where both banking and borrowing are allowed, the enforcement of compliance is likely to be more complex.) It would be far simpler just to make Obligation periods longer, minimising the chance that firms will miss their targets and eliminating the need for borrowing and probably banking too.

5.  IMPACT OF GOVERNMENT REFORMS ON RENEWABLES CAPACITY

  In addition to the Renewables Obligation and the Climate Change Levy (CCL), a number of other current energy-related policies will affect renewable generation. In particular, the New Electricity Trading Arrangements (NETA) will have an adverse effect, as OFGEM's own environmental appraisal acknowledges.

  NETA will penalise most of the more benign forms of renewable electricity generation. By requiring generators to predict their supply well in advance of it being delivered, the so-called balancing and settlement mechanisms in NETA will work against fluctuating or intermittent forms of generation. This will penalise renewables such as wind, solar, wave and small hydro—and some forms of combined heat and power (CHP) generation too.[37]

  It can be argued that placing an obligation on suppliers to supply a given percentage of electricity from renewable sources will negate the adverse effects of NETA. However, although this is generally true for all renewables, NETA will still encourage generation by sources that can predict their output, such as waste and biomass burning, at the expense of solar, wind, wave and small hydro.

  Government could, as mentioned above, partially get around this problem by targeting specific forms of renewable, by banding the Obligation. However, the targeting provisions should be used to bring on less mature technologies, not to rectify the deficiencies of the trading arrangements, and trying to use them for both is likely to be counterproductive. Onshore windpower is, for example, increasingly cost-effective and, without NETA, it might not need special treatment for long, whereas solar power probably will. Support under the obligation for solar might thus be sacrificed for support for wind when there is no real need, other than to counteract NETA.

  To compound its adverse effects, both Government and OFGEM predict that NETA will bring down electricity prices, thereby encouraging people to use more electricity and hence emit more greenhouse gases. Not surprisingly therefore, OFGEM's own environmental assessment of NETA comes to the conclusion that its environmental impacts will be negative.

January 2001


33   For the detailed reasons for this effect, see the RSPB's response to the DTI consultation on the Renewables Obligation. Back

34   Ensuring security and diversity of energy supply has always been the basis of energy policy. Most renewable sources of energy rely are almost indefinitely sustainable and locally available. They are also available in many different forms. Taken together they therefore represent the most secure and diverse sources of supply. Back

35   There are, anyway, better ways of assisting the fuel poor than reducing electricity prices by a few percent. Back

36   They should include as large a number of players as possible, have a challenging cap (target) which is externally imposed, possess a rigorous compliance and enforcement regime, and so on. Back

37   CHP does not do well under new energy policy, in spite of the fact that the Government is, in principle, keen to promote it and has set significant targets for its development. In particular, although it is nominally exempt from the CCL, much electricity generated by CHP will attract the Levy because electricity sold to licensed supplier (ie normal electricity companies) is not exempt, many CHP plants, especially those outside big cities, will have little choice but to sell to licensed suppliers. Back


 
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