Select Committee on Environmental Audit Fifth Report


What contribution can renewables make?

Potential scope for renewables in the UK

12. The UK is well-placed to exploit renewable energy. It is one of the windiest countries in Europe, and its island status and position offers the scope to harness potentially huge amounts of wave and tidal energy. The UK's theoretical potential for generating renewable energy is therefore well in excess of the entire electricity consumption. Recent research has included a Scottish Executive study of the potential renewable resource available in Scotland showed that up to 60 GW of power would be availableover 75 per cent of the total electricity requirements of the UK.[25] The majority of this would be derived from wave.

13. The most recent assessment of the potential scope for renewables within the UK is contained within a PIU working paper.[26] This in itself was based on DTI work originally carried out in 1994 and updated in 1998, though the PIU took into account more recent academic research in some areas. The PIU concluded that potential renewable generation capacities which we might realistically expect to achieve over the next half century were as follows:

Renewable resource
TerraWatt hours (TWh) a year[27]
Wave and tidal power
700
Photovoltaics
200
Offshore wind
100

Total electricity generating capacity from these three sources alone could therefore amount to 1,000 TWh a yearalmost three times the total electricity currently generated in the UK.

14. The potential contribution of other forms of renewable energy is less clear. The PIU reviewed research in this area and concluded that the capacity for biomass and on­shore wind—the two other major renewable sources of energy ­ is considerably more limited.[28] There is also little scope for any new major hydro­electric schemes, though some small­scale hydro may be developed. In view of the amount of capital funding now available for biomass, we were surprised that DEFRA had not carried out for itself, or in conjunction with the DTI, any assessment of its potential contribution by 2050.[29]

15. Such estimates do not take full account of the costs of developing and utilising the resource, or of the technical constraints faced. In particular, the potential for electricity generation from wave power may be huge, but the practical problems of designing equipment to withstand a hostile marine environment are formidable. The DTI study identified a technical potential for wave of in excess of 600 TWh a year, but a practical potential of only 50 TWh a year.[30] The difference between both figures is primarily due to the technical difficulties of exploiting wave power.

16. In the longer term, there is little doubt that renewable technologies will be able to supply more than the total electricity needs of the UK. But we noted the comments in the PIU working paper that some of these technologies will need continuing Government support if the costs of generation are to fall.[31] Costs and capital funding are discussed further below.

What are other European states doing to promote renewables?

17. The 1997 EU White Paper on renewable energy set out a programme to double renewable generation by 2010.[32] This has recently been reinforced by the 2001 EU Renewables Directive which includes indicative targets for each member state.[33] The following graph sets out, on the basis of EU data for 1999, renewable energy as a percentage of total electricity generated, together with the 2010 indicative targets for each member state.

Figure 3

Share of electricity consumption met by renewable energy sources (1999)[34]


Source: European Environment Agency and Eurostat.

18. The overall EU target is far more demanding than the UK indicative target ­ 22.1 per cent by 2010 as against 10 per cent for the UK—reflecting the fact that many other EU countries are considerably more advanced than the UK in terms of the percentage of renewable energy generated. Indeed, in terms of 1999 data, only Luxembourg and Belgium produced less renewable energy than the UK as a percentage of total consumption. The UK also ranks near the bottom in terms of the 2010 EU indicative targets.

19. Conventional, large­scale hydroelectric power dominates current production in many countries, and accounts for the particularly high levels of renewables in Austria and Sweden, where the potential for this form of generation is very large. Biomass also features prominentlyparticularly in Scandinavian countries where material from forests can be harvested on a regular basis in a manner particularly suited to dispersed rural communities. Other forms of renewables, mainly wind, are significant in Denmark, Germany and Spain. In absolute terms, by the end of 2001 Germany had an installed capacity of over 8700 MW of wind powersome 18 times that of the UKas the following figure shows.

Figure 4

Wind power: installed capacity by EU member state (2001)


Source: European Wind Energy Association

  

20. The far higher deployment of renewables in most other EU states largely reflects consistent national government support over a long period of time. Denmark, for example, has promoted wind energy for over twenty years, and Danish wind energy companies now dominate world markets while providing employment for more than 15,000.[35]

21. During our visit to Germany, we were able to identify a number of reasons for their greater success:

  • The implementation of a 'feed­in' law since 1990 has provided a powerful, flexible and direct way of promoting a variety of different renewable technologies, including wind and photovoltaics. Supply companies are obligated to purchase the output of renewable generators, and pay them a range of different tariffs dependent on the form of generation. There was no Government financial support for this policy measure.

  • The federal government has put in place a number of well­funded initiatives to complement the 'feed­in' law and promote specific objectives. It has also adopted a dynamic approach to achieving objectives and addressing difficulties encountered. For example, it instituted a 1000 solar roof (PV) programme in 1991 (achieved in 1997), and a six year 100,000 solar roof programme in 1999. Some _650 million funding is available for the latter, and progress has been so successful that the date for achieving the target has been brought forward to 2003. Similarly, when market conditions were beginning to affect adversely investment in CHP, the federal government immediately took action by implementing in 2000 a temporary support scheme (now replaced by further legislation).

  • Awareness of potential world markets and export opportunities was a significant driver for government support for renewable technologies at both federal and regional levels. The extent of support had also created a positive environment for inward investment, and it was clear that in many areasfor example, photovoltaicsGermany was becoming the location of choice for renewable energy companies such as Shell Solar.

  • The successful deployment of wind power on a large scale largely reflected the extent of public support for environmental objectives and greater local involvement in planning and ownership. By the end of 2001, Germany had 11,000 wind turbines and an installed capacity of 8,750 GW. And there were ambitious plans for wind to provide 25 per cent of total electricity production by 2025.

  • Germany was easily on course to meet its 21 per cent Kyoto target and its own domestic target of a 25 per cent cut in CO2 by 2005. The debate now centred around whether to set a much more challenging target to cut carbon dioxide emissions by 40 per cent by 2020.

22. The EU has set two targets for renewable energya 12 per cent target for renewable energy as a percentage of total energy consumption, and a 22.1 per cent target for renewable electricity as a percentage of total electricity consumption.[36] The target date for both is 2010. A recent European Environment Agency (EEA) report on Energy and the Environment found that renewable energy output in the EU grew by an average 2.8 per cent per year between 1990 and 1999 but its share of total energy consumption grew only slightly, from 5.0 per cent to 5.9 per cent, because total consumption also rose. It concluded that the annual rate of growth in renewable energy needed to more than double, from 2.8 per cent to 7 per cent, if the EU is to meet its energy targets. The EEA also argues that there is a need for more vigorous support by governments to support the achievement of renewable energy and energy efficiency objectives.[37]

23. Our overall conclusion is that the UK is starting from a very low base in terms of renewable generation by comparison with other European countries, and we note that Government ministers have themselves acknowledged this.[38] It is sometimes argued that success of other states such as Germany and Denmark has been bought at a price and that there are question marks over the value for money this represents. However, the consistent and active government support for renewables has placed these states in an advantageous position for exploiting the market opportunities that these new technologies offer. The UK Government is recognising this potential benefit only late in the day.

The cost of renewables

24. The costs of renewable generation range widely at present from 2.5 to 3p per kWh for wind on the best on­shore sites to in excess of 20p per kWh for photovoltaics. Some types of renewables are not even commercially available (eg. wave and tidal power) or only available in small­scale demonstration projects. However, development and implementation of renewable technologies on a large scale is likely to lead to very considerable cost reductions over the next 20 years.

25. A working paper supporting the PIU report contains the most recent analysis of future potential and costs of renewables to 2020.[39] We were surprised to find that this work was based on an analysis conducted for the DTI by the Energy Technology Support Unit (ETSU) in 1994 and updated in 1998, though the PIU team did utilise more recent academic research where relevant. The PIU team also commented that "the terms of reference of the DTI study did not require an in­depth analysis of cost reduction trends and potential, even to 2020, and certainly not beyond".[40] Given the priority accorded to the promotion of renewables, we find it extraordinary that the DTI has not carried out a more recent and thorough analysis of economic and cost potentials. We recommend that it should do so as a matter of urgency, and subsequently update it on a regular basis.

Resource
2020 cost (p/kWh)
Comments
Onshore wind
1.5 ­ 2.5
Low cost wind sites are able to offer an average cost of electricity that is lower than current CCGT costs by around 2008.
Learning curve extrapolations suggest that low cost wind sites are able to deliver electricity at an average cost as low as 1 p/kWh by 2020. However some caution is required in interpreting this figure as engineering assessments tend to be less optimistic, hence.
A cost range of 1.5p ­ 2.5p/kWh is reasonable for 2020.
Offshore wind
2 ­ 3
Offshore wind costs will tend to converge with those for onshore wind.
Developments offshore could extend learning and market growth for on and offshore wind, accelerating cost reductions in all wind applications.
Photo­ Voltaic (PV)
6
In the UK, PV will not become competitive with end user electricity tariffs until between 2020 and 2025. Depending on a range of assumptions about balance of systems costs and efficiency and discount rates a cost range of 10 ­ 16 p/kWh for 2020 appears reasonable.
This neglects the potential for offset costs for building cladding, which may be significant and in appropriate buildings has the potential to dramatically improve the economics of BIPV. BIPV is already close to being commercially viable in some circumstances.
Economies of scale and market growth rates could be higher than projected, and costs could fall to a range of 6 ­ 10p/kWh in the UK by 2025. Sustained development with a view to the long term is of particular importance for PV.
Costs in many regions of the world are likely to be much lower ­ around 4 p/kWh by 2020, and 2p/kWh by 2025.
Wave and tidal
4 ­ 8
Costs of 4.5 to 6p/kWh are likely in the short term (3 ­ 4 years) for early commercial devices.
Modest market growth (25 per cent pa), with a learning rate of 15 per cent would be expected to deliver cost reductions of around 15 per cent in the subsequent 3 to 4 years. Hence, policy support sufficient to deliver market growth of 25 per cent per annum in the period to 2008 ­ 2010 should deliver cost reductions equivalent to costs of around 4 to 5p/kWh within this time frame for early commercial designs. This provides a 'target cost' by which success in wave developments may be judged, and continued policy support assessed.
Some designs offer larger technical potential, but are much further from commercial exploitation. Therefore, longer term devices also need continued support, perhaps geared towards an expectation of early commercial deployment by 2020.
Biomass
2.5 ­ 4
Application of learning curves to energy crop technologies is more complex than for wind and PV. Uncertainties over market growth rates, and constraints in the separate cost strands of conversion technology and crop production may make a continuation of the historic learning rate for biomass electricity inapplicable.
A range of plausible scenarios for the development of energy crop fuel costs and BIGCC capital costs suggest that costs in 2020 are likely to lie in the range 2.5 ­ 4.0 p/kWh.
These cost reduction projections are less robust than for wind and PV.

Source: PIU Energy Review and PIU working paper on renewable potentials and cost reductions to 2020.

26. Bearing in mind that the current wholesale price of electricity is about 2p/kWh and the retail price is between 6 and 7p/kWh, a number of points arise from the above analysis:

  • Onshore wind on good sites is likely to become the cheapest form of electricity generation by 2008. Offshore wind is also likely to become highly competitive.

  • The potential of PV is very large indeed. It is already cost­effective even in the UK in some integrated applications (eg as a substitute for expensive cladding or roofing materials for larger buildings), and will become competitive with domestic retail prices by 2025. Moreover, in terms of world markets, it is already the cheapest way of delivering electricity to isolated villages in many under­developed countries, and it is likely to become one of the cheapest sources of electricity in many parts of the world by 2020.

  • The cost of electricity from wave and tidal sources could fall to 4 ­ 5 p/kWh by 2008­2010 for early commercial devices.

  • Intermittent sources of power such as wind do impose some costs on network systems. However, these costs are very small (0.1p/kWh for 10 per cent of electricity from intermittents, rising to 0.3p/kWh or more for 45 per cent penetration[41]).

27. We also noted that the costs to the consumer of meeting renewables targets are relatively limited. The DTI has estimated that the cost of the Renewables Obligation in terms of increased bills for domestic consumers will be a maximum of £870 million over the period to 2010, an increase of less than 5 per cent.[42] While the PIU calculated that the costs of meeting a 2020 target of 20 per cent might be in the order of a 5 per cent to 6 per cent increase in domestic prices.[43] The actual amount will depend on the extent to which the costs of renewables fall through economies of scale; and, if renewables do indeed become among the cheapest forms of energy by 2020, such costs would cease. Moreover, it is worth noting that the economic cost of meeting a long­term 60 per cent carbon reduction target by 2050 is likely to be only 0.02 per cent of GDP per annum.[44] This is equivalent to a reduction of 1 per cent in GDP over half a century—a very small price to pay for the environmental benefits it would bring.

The costs of other forms of generation

28. The above analysis shows that renewable sources of energy are likely to become extremely competitive over the next 20 yearseven by comparison to present day energy costs. And this takes no account of possible increases in the costs of non­renewable forms of generation. At present, the wholesale cost of energy (2p/kWh) in the UK is very low. This may have been due in part to UK isolation from European markets together with oversupply: electricity generating capacity still exceeds demand by 30 per cent. Gas prices are likely to rise as the UK becomes more dependent on imports and more exposed to the operation of long­term contracts which are such a feature of European markets. There is also the possibility that gas supplies may ultimately be controlled by an OPEC style body, or subject to monopolistic control by a few pan­European energy companies.[45]

29. Similarly, the costs of other forms of generation are likely to increase. At present, coal is one of the cheapest sources of electricity. But costs are likely to rise as a result of increasingly stringent environmental requirements, such as the fitting of flue­gas desulphurisation to combat acid rain.[46] Carbon sequestration would make it still more expensive. There is, however, a danger that governments might find it economically attractive to relax environmental requirements for coal generation, as indeed has happened in the US, with the attendant impacts this would have on emissions.[47]

30. With regard to nuclear, the cost of electricity from Sizewell B, Britain's newest reactor, has been estimated at 6p/kWh.[48] The nuclear industry suggests that a new generation of reactors could supply electricity for as low as 2.2p/kWh. But there is considerable scepticism about how realistic such estimates are, given the history of the industry to date. The PIU itself suggested that a central range of 3 to 4p/kWh is likely to be more realistic, though costs could rise to as much as 5p/kWh in some circumstances.[49] But even these estimates may not represent the full internalisation of the costs of energy from a new generation of nuclear power stations.

31. We have a number of concerns about nuclear costs. Insurance liabilities for nuclear are capped at £140 million, with the Government itself underwriting risks in excess of this.[50] If the nuclear industry were obliged to bear such risks itself, it is unclear how far the price of nuclear power would have to rise in order to meet increased insurance premiums - or indeed whether such risks would be insurable at all. Furthermore, the costs of dealing with nuclear waste are unknown. The Government's latest White Paper, Managing the Nuclear Legacy, suggests a figure of £48 billion but acknowledges that "better definition of the problem will almost certainly mean that liabilities estimates will rise".[51] Nuclear waste, admittedly, is largely a historical problem and the volume of waste from a new generation of power stations will be relatively small.[52] But it is at least questionable whether new nuclear power should benefit through the treatment of its waste and decommissioning costs on a marginal basis. We are also concerned about the proposed manner of funding the eventual treatment of waste and decommissioning. This relies on the nuclear industry setting aside each year in an investment fund a sum of money which will accumulate over time. Such an approach raises many wider issues relating to the adequacy of the fund, its independence, future investment performance, the continuity of business entities, and the overall political and economic development of the UK.[53]

32. While it is very difficult to forecast future price movements, there seems widespread agreement at present that UK energy prices are currently at an unsustainably low level. Increases in the costs of non­renewable generation appear likely, making renewable energy increasingly competitive.

The role of nuclear

33. The primary focus of our report is on renewable power. While nuclear might provide a reliable source of low­carbon power, it is not a source of renewable power. There is widespread concern amongst the public about pollution, safety and security, and no consensus on the treatment of radioactive waste. In view of the complexity of the issues involved, we have not investigated them in depth. We are nevertheless concerned about the wider role of nuclear in a future energy strategy.

34. In his evidence to us, the Energy Minister stated "nobody has satisfactorily explained to me how we are going to meet our environmental aspirations while at the same time wishing away the contribution from nuclear".[54] Yet the main thesis of the PIU Energy Review is that the development of renewables, together with major gains in energy efficiency, would enable the UK to do so. If we were, for example, to achieve 20 per cent renewables by 2020—the target suggested by the PIU Reviewthis would replace the contribution previously supplied by nuclear. Major developments in energy efficiencythe other main recommendation of the PIU—would then provide additional large reductions in carbon emissions. There may, however, be a need for the UK to meet more stringent targets, and we recommend that the DTI and DEFRA should review as a matter of urgency its emissions forecasts in the light of these strategic choices for the power generation sector. This needs to be done now in order to feed into the consultation process and the Government's White Paper.

35. Some forms of renewables already represent a cost­effective approach to replacing existing generation sources, while others will become increasingly competitive over the next two decades. We have pointed out above that the costs of the new generation of power stations proposed by the nuclear industry are likely to be at least as great as, or indeed greater than, various forms of renewable generation by 2020. In addition, there is no likelihood that liberalised energy markets will provide the huge capital investment required to support a new programme. This might remain the case even if a carbon tax or more comprehensive emissions trading system were introduced, from which nuclear were exempt. Further financial support and commitment from the Government would therefore be required for any nuclear build. We are concerned that any form of further support for nuclear will reduce both the amount of funding for, and commitment to, the development of renewables on an adequate scale.

36. We therefore see renewables, together with the need for radical improvements in energy efficiency, as being the primary tool to fulfil the UK's climate change commitments. The Government must provide commitment and leadership here, and should not allow itself to drift into a position in which nuclear appears to be the only alternative—as a result of a failure to maximise the potential which renewables have to offer.



25   Scottish Executive study, Scottish Renewable Resource 2001, Garrad Hassan, December 2001. Back

26   PIU Energy Review, working paper h, Technical and economic potential of renewable energy generating technologies: Potentials and cost reductions to 2020Back

27   PIU Energy Review, para 6.31. Back

28   PIU working paper h, p29. The DTI analysis suggested that biomass might contribute about 33 TWh of electricity a year, though this might be substantially increased if assumptions about land availability are relaxed. With regard to on-shore wind, the DTI 1998 study considered the economic potential to be 58 TWh a year, and the practical potential - somewhat counter-intuitively-to be only 8 TWh a year. Back

29   Ev 181. Back

30   PIU working paper h. Back

31   PIU working paper h, p27. Back

32   European Commission, Energy for the Future: Renewable Sources of Energy, COM(97)599 final, 26 November 1997 Back

33   Directive 2001/77/EC, On the promotion of electricity produced from renewable energy sources in the internal electricity market, 27 September 2001. Back

34   We are grateful to the European Environment Agency and to Eurostat for making available the data. Back

35   Ev 25. Back

36   Directive 2001/77/EC, article 3 para 4. Back

37   European Environment Agency, Energy and the Environment in the EU, May 2002. Back

38   QQ403, 405. Back

39   PIU working paper h. Back

40   PIU working paper h, p6. Back

41   PIU Energy Review, para 6.36. Back

42   DTI, The Renewables Obligation Statutory Consultation, Annex A, para 25. Back

43   PIU Energy Review, para 7.55. Back

44   Inter-departmental Analysts Group (IAG), Long Term Reduction in Greenhouse Gas Emissions in the UK., February 2002Back

45   Ev 227. See also Dr Helm's comments in The Utilities Journal, March 2002, and Power UK, April 2002, p10. Back

46   PIU Energy Review, para 4.23. Back

47   See, for example, comment at www.recordonline.com/archive/2002/07/09/09myview.htm . Back

48   PIU working paper h, p6. Even this cost estimate excludes certain "first of a kind" costs. Back

49   Ibid. p14. Back

50   Ibid. p11. This limit is expected to rise under the Paris and Brussels Conventions to _700 million. Back

51   Para 2.7, Managing the Nuclear Legacy, Cm 5552, DTI, July 2002. Back

52   PIU Energy Review, working paper i. Back

53   See the Guardian article on BNFL, Sellafield: a nuclear black hole, Friday 14 June 2002. Back

54   Q441. Back


 
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