Select Committee on Environmental Audit Appendices to the Minutes of Evidence

Annex A

  This follows the sections and headings set out in the Environmental Audit Committee's Press Notice of 22 January 2002.[43]


  Renewable technologies have a critical role in meeting environmental and other energy policy goals over the short to medium term, and they will form an essential ingredient in a low carbon future. We welcome and support the concept of a significantly expanded role for renewable sources of energy under the Renewables Obligation (RO) as now provided for under the relevant statutory instruments. We also agree with the broad positions as more recently advocated by the Performance and Innovation Unit (PIU) in its energy policy review and by the Trade and Industry Select Committee in its February 2002 report on security of supply.

  The RO is clearly central to meeting Government objectives and attainment of environmental targets. It is essential that the review of the workings of the RO set for 2006 should be focused on operational enhancements to the arrangement, not alternatives to it, if there is to be stability and continuity in investment. The review should also specifically address how established targets can be rolled forward beyond 2010 in a manner that recognises technological, institutional and practical limits.

  Looking beyond the present targets at the period 2010-20, a number of the renewables technologies are likely to have very favourable carbon abatement costs[44] if they can be brought to commercial fruition. The various actions proposed in the review report are essential if these goals are to be achieved. However, for the reasons described below, we believe that any further targets set at this stage should be indicative, until there is a proven track record of development and operation under the existing RO.


  A two-pronged approach is necessary, based on direct support, as well as the RO, and should stimulate higher levels of market penetration by emerging technologies. There is little consensus on the prospects for penetration by individual emerging technologies and cost estimates can vary widely. The findings from the PIU review should provide an important input to decisions on how future funding should be allocated but this is an area that will need to be kept under review in the light of technological and market developments.

  More generally we agree with the PIU on the need for increased R&D, into both renewables and emerging technologies, in an effective low carbon strategy. Bringing new technologies to commercial fruition is essential if already onerous obligations on suppliers are not to impose unnecessarily high costs on customers. As the Chief Scientific Advisor's Energy Research Review Group report demonstrates[45], UK funding in this area is well below that of many other EU member states, and expenditure should be raised, to bring it more into line with that of the UK's nearest EU competitors.

  An important issue identified by the PIU is the growing realisation that achievement of targets at the level proposed could involve costs to the consumer in addition to those previously identified. The PIU estimates that the existing 10 per cent target could be achieved with a price increase of about 4.5 per cent (compared with current prices) and a 20 per cent target delivered by 2020 with price increases of no greater than 5 to 6 per cent. These price increase estimates could well prove optimistic, especially if lower levels of deployment of renewable technologies under development occur, and the cost impacts clearly need to be examined more closely and better understood, especially in the determination of how R&D and capital grants would best be earmarked. However, fuel poverty programmes will need to be sustained and carefully targeted if such cost increases are not to impact on vulnerable groups and London Electricity will continue to follow through its high level of commitment to tackling fuel poverty in this area.

  It should also be remembered that energy efficiency programmes can also come at a significant cost. The existing energy efficiency commitment (EEC) imposed on suppliers assumes a cost of delivery of £7.20/customer per annum for targets set to 2005. This cost represents a significant increase over the cost of previous targets, and in our view probably underestimates the costs of achieving savings of the order envisaged under the EEC. Furthermore, the overall sectoral targets now proposed for energy efficiency by the PIU anticipate significantly greater reductions in energy use beyond that time, especially in the domestic sector, where gains are hardest. It is essential that targets are set that are cost effective and offer the prospect of greater benefits relative to other investment options, if costs to consumers are not to be artificially inflated.

  Taking these points together, an effective low carbon strategy will draw on a range of policy mechanisms but renewables will be a central and significant component of it. There are obvious trade offs between renewable and EEC obligations which will become greater as the level of separate obligations increases, and its is essential that increased Government support is available for a range of low carbon technologies (including both renewable and energy efficiency technologies) if a balanced strategy is to be achieved.


  LE Group remains strongly sceptical about the feasibility of achieving the annual targets now enshrined in the RO. It is unrealistic to expect any significant increase in renewable generating capacity before the year 2005 at the earliest. The PIU also warns that the 10 per cent target for 2010 "is by no means guaranteed". Even if the PIU's recommendations in this area are accepted, and we believe they should be, planning issues will take some time to resolve in a way that achieves the desired outcomes. As a minimum, we believe that:

    —  the Government must be active in enabling the energy industry and renewable developers to meet the challenging targets, and the urgent and speedy removal of obstacles in the planning regime, local as well as national, should be a Government priority;

    —  in particular, PPG 22 should be reviewed as a matter of urgency, and we would note that this issue is not being picked up presently by the Department of Transport, London and the Regions (DTLR) in its green paper on planning; and

    —  a Government-funded public education programme is necessary to help to remove local opposition to widespread renewables development.

  As we have already noted, we concur with the PIU that a 20 per cent contribution from renewables is a suitable longer term goal. However, to date, there has been little consideration of practical aspects of how renewable technologies can continue to expand beyond 2010. We have commented above that the practical lessons that arise from experience under the RO also need to be factored into targets set from 2010 to 2020, and care should be taken in translating an objective or target into binding obligations. Additional costs should be estimated and shown to be acceptable.

  We also have a real concern about the ability of different suppliers to meet common targets against the background of a "skewed" market. There remain barriers to supply competition north of the border, which will mean that local suppliers will continue to enjoy the benefits of this market. They will also have an inherent advantage in accessing development opportunities due to their prominent position. These benefits will be greater if, as we expect, the market is likely to be short of RO certificates over the foreseeable future and because of the distortionary effects of recycling revenues under two separately administered obligations.


  Overall we are committed to the principles and structure of NETA. We consider that NETA is generally working well, and it has been one of the important factors behind the sustained reduction in wholesale electricity prices witnessed over the past 12 months. There are some external factors, not related to NETA, that are significantly impacting on smaller generators, mainly CHP operators, but also including renewables operators, in particular the relative movement of the gas and electricity markets. LE has actively participated in the Governmental and regulatory consultations that have considered the small generator issues, and have argued robustly that trading mechanisms should not be modified to favour particular types of party which will directly impede the longer term development of NETA and energy markets. In reality, many renewables operators are insulated from NETA by their size, though the prices they can negotiate are directly impacted by the balancing risk they can impose on the purchasers of their power.

  LE welcomes recent decisions to bring forward rule changes to support consolidation services and overcome artificial barriers inherent in the BSC market rules. We believe there are a number of reasons why such optional services have been slow to develop in a radically new market environment that has been operating for less than a year. Uncertainty around expectations of imbalance prices have also created obvious difficulties in valuing such services. Over time, we believe these difficulties should ease.

  There are also features of the detailed pricing rules that may be resulting in inappropriate loading of costs and unnecessary complexity, both of which can penalise unpredictable generation, including some renewable technologies, and these can and should be addressed. However, we believe that any move away from the principle of dual cashout prices under NETA would reduce the incentives to contract ahead and to submit accurate physical notifications, which will inevitably weaken active resource management.


  The Government has introduced a range of progressive schemes and targets in the energy arena since 1997, but some of these operate in isolation. Consequently we welcomed the decision in June last year signalled by the energy policy review to provide a root and branch review of policies and their interaction.

  At this stage, of course, the PIU report is a review to, not of, Government. It remains to be seen the extent to which Government endorses the report's findings. There are also a number of parallel reviews on different aspects of energy policy that have been recently concluded (TISC report on security of supply; House of Lords report on European Union energy security) or will shortly be concluded (including the Environmental Audit Committee's own report). However, the PIU's review is to be welcomed as it attempts to bring sustainability closer to the focus of policy within a coherent single framework.

  In our view, on the assumption that its main conclusions are adopted, the PIU's recommendations would represent a credible workplan for moving towards environmental targets and for securing a low carbon future, in which renewable energy technologies play a key role. Two elements of the PIU's thinking are particularly important in this context, and should be endorsed and developed by Government, as these will increase the coherence of its strategy.

  First, LE supports the proposal to consolidate policy responsibility within Government and establish a Sustainable Energy Policy Unit (SEPU) that embraces policy ownership currently exercised separately by DTI and DEFRA. We hope that early progress is made in this area.

  Second, we support the use of market-based instruments backed up by a uniform system of carbon valuation, in preference to a carbon tax. In practical terms, this approach means development of a more ambitious permit trading arrangement. The complexities inherent in developing a uniform means of valuation require early resolution by the Treasury, with the assistance of the new SEPU, if the UK is to remain at the forefront of international development work in this area. Over time, this direction points to replacement of fragmented obligations and programmes with some form of consolidated programme that enables participants to operate within defined thresholds but which enable each to pursue the commercial and development options best suited to it. Careful thought is also required if the Government is to identify a suitable migration path to enable as seamless a transition as possible to new arrangements without undermining market confidence in current support mechanisms.


  Ofgem recently consulted on guidelines on green supply offerings[46], and we believe that the RO should not result in the creation of artificial barriers in this area. In particular we disagree with the principle proposed by Ofgem that energy purchased by a supplier as part of their RO (or the RO Scotland) should not be included in a supplier's green supply offering. We believe the proposed approach will dilute the incentives available to both suppliers and customers. A copy of our response to Ofgem is attached.

  We are awaiting the detailed design proposals from Ofgem for the RO registry which are now expected after Easter 2002. The Registry is a key element of the RO mechanism to provide market confidence in the value of the RO certificate. Ofgem have stated that they intend having this in place before the first issue of RO certificates in July 2002. We are concerned that the introduction of such a key element of the RO mechanism may be rushed and not deliver the most efficient outcome.

43   See www.parliament.UK/commons/selcom/eapnt09.htm. Back

44   See Table 6.1 in section 6 of the PIU report. Back

45   Recommendations to Inform the Performance and Innovation Unit's Energy Policy Review, Chief Scientific Advisor's Research Review Group (February 2002). Back

46   Guidelines on Green Supply Offerings-Consultation Document, Ofgem (December 2001). Back

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