Royal Commission on Environmental Pollution

The Royal Commission's report Energy - the Changing Climate (published in June) argued that the threat posed by climate change has immense long-term implications for the way energy is obtained and used. This is likely to entail fundamental changes to the energy industries, and action to bring about such changes needs to start soon.

The government's target for renewable energy sources to supply 10% of the UK's electricity by 2010 is a vital first step on the road to a more sustainable energy system. The 10% target needs to be underpinned by longer-term targets for expanding the contribution from renewable energy sources well beyond this level. Longer-term targets would provide a strong and continued push for research and development to bring forward renewable technologies (such as wave power, tidal streams and photovoltaics) which are unprofitable in current circumstances but which have significant long-term potential.

Future targets should focus on increasing the proportion of primary energy demand supplied by renewable energy sources. For too long, heat has been the Cinderella of energy policy, including renewable energy policy. The Royal Commission is disappointed that the proposed framework will do little to encourage use of the heat produced by combustion of renewable sources such as energy crops, waste and landfill gas, or of currently available technologies such as solar water heating.

The Royal Commission has several concerns over the details of the proposed renewables obligation. These concerns are compounded by the ongoing difficulties in winning planning permission for wind farms and energy-from-waste plants - suggesting that the 10% target may be missed by a significant margin.

Eligible sources of renewable energy
It is reasonable in principle to exclude some renewable energy sources from the renewables obligation, on the grounds that they will make a contribution to the 10% target without government support. However, the decision to exclude energy-from-waste plants is open to question. The consultation paper argues that this technology is already commercially viable and well established in the market, and that it is likely to come forward in any event because of developments in waste policy. However, such arguments could also be applied to landfill gas - a technology which qualifies under the obligation. It cannot be assumed that the output from energy-from-waste plants will be debarred from support under the terms of the EC Renewables Directive now being prepared.

The Royal Commission cannot comment in detail on the economic case for excluding energy from waste. But it would be undesirable that the exclusion of energy-from-waste plants from the renewables obligation should jeopardise delivery of the 10% target. The profile of the renewables obligation (table D) shows the electrical output from non-eligible renewables more than doubling by 2010 (see below). Given that new large-scale hydro schemes (the other main technology excluded) are unlikely, this implies that large numbers of energy-from-waste plants - perhaps as many as 40-60 - will have to be commissioned over the next decade. The current difficulties in winning planning permission for such plants cast doubts on the realism of this assumption. The lack of financial support under the renewables obligation will further reduce the likelihood of such a large programme of new incinerators. Indeed, without support under the obligation developers are unlikely to bring forward more costly options - such as smaller incinerators or novel technologies such as waste gasification, pyrolysis or anaerobic digestion - which could have a greater chance of winning planning permission.

Energy-from-waste plants could play an important role in a sustainable energy system, provided that the driver is the heat output rather than the electrical output. The government should encourage the development of combined heat and power plants fired by waste and/or biomass: this will probably require capital grants to promote both the plants and the heat distribution systems. The electrical output from such plants is flexible, and can be varied in order to back up intermittent renewable energy sources such as wind power.

It should also be recognised that several 'eligible' technologies are in reality excluded by the buyout price. In some cases, such as offshore wind power, the proposed system of capital grants could bring down costs sufficiently for the technology to become competitive with the buyout option. Other technologies, notably energy crops, will need continued support if they are to prosper (see below).

The profile of the obligation
The rate of construction of renewable capacity will need to increase to at least three times that achieved under the last three rounds of the non-fossil fuel obligation. As noted above, the proposed profile of the obligation is based on the optimistic assumption that a large number of energy-from-waste plants will be commissioned without support under the obligation. There is a real prospect that the 10% target will be missed even if all suppliers meet the proposed obligation for 2010 because there is little or no margin for error. The Royal Commission believes that, if energy from waste is to be excluded from the obligation, the contribution from eligible renewables should be increased to a more realistic level. This may require an increase in the buy-out price or further contributions from capital grants.

The increase in renewables capacity envisaged will require the existing problems with planning to be resolved rapidly. It remains to be seen whether the proposed regional planning framework for renewables will break the current logjam.

The level of the buyout price
As explained below, the Commission is concerned that a single-tier obligation and single buyout price may not adequately reflect the complexities of the renewable energy industry. Nevertheless, the decision to increase the buyout price from 2p/kWh to 3p/kWh is welcome and will bring clear benefits. For example, it is likely that the higher buyout price will make it economic to develop onshore wind farms in less exposed or windy locations: this should reduce concerns over visual impact and may allow more wind farms to win planning permission.

Capital grants and the case for a banded obligation
The renewables obligation as proposed is an elegant mechanism, and the government's concerns over segmenting or distorting the marketplace and the need to ensure cost-effectiveness are understandable. Nevertheless, the mechanism fails to take full account of the different levels of development and economic pressures affecting individual renewable technologies. Given that there is likely to be a shortfall in supply against the obligation in any given year, the market price for electricity from renewable energy sources is likely to be fairly uniform regardless of technology. Cheaper technologies may benefit from a large windfall - while other technologies with much greater long-term potential may be frozen out.

The proposed system of capital grants for offshore wind and energy crops offers a partial solution. The Royal Commission welcomes the funds that have been made available for this purpose from the climate change levy and the New Opportunities Fund. The capital grant approach is likely to be successful in bringing forward offshore wind developments, and could help to reduce costs so that this technology can stand on its own under the renewables obligation.

Capital grants are less suited to energy crops because of the costs and complexities involved in persuading farmers to make the long-term investment required to grow the fuel over a significant period. Farmers must be given confidence that a growing and sustainable demand exists for the fuel. It is doubtful that the capital grant approach will bring down the cost of electricity from new biomass plants sufficiently to allow the technology to compete with the proposed buyout price.

The government has in effect introduced banding into the obligation in the form of a band excluding energy-from-waste plants from support. It is therefore disappointing that the government has rejected the case for a further element of banding to bring forward the development of energy crops. Unless other renewable technologies enjoy considerably more success in winning planning permission than at present, energy crops will be needed on a significant scale if the 10% target is to be met. More importantly, it may be necessary to develop them on a very large scale in the years after 2010 if the UK is to shift to a low-carbon, sustainable energy system. Given the scale of this task, and the timelags involved in establishing a new energy technology, the Commission urges the government to give sustained and significant support to energy crops. A banded obligation would probably be the most effective mechanism. If this is unacceptable, then it should be recognised that a continued and long-term programme of capital grants and measures to promote the growing of energy crops will be necessary.

Renewables Obligation Certificates
The Royal Commission broadly supports the proposals for trading in renewable obligation certificates (ROCs). It is an inevitable consequence of the liberalisation of the EU electricity market that such certificates will be traded across the EU. This has the potential to deliver a more cost-effective growth in renewable energy capacity. However, there is no indication that the implications of trading across national boundaries have received sufficient consideration.

The 10% target has been set nationally by the UK, and until recently the general understanding was that it would be met from renewable sources within the UK. That will no longer necessarily be the case.

The liberalisation of the EU electricity market needs to be complemented by a coherent regime for renewable energy extending across the EU and incorporating common procedures for the accreditation of generators. Without such a regime, there is a danger that, as a result of international trading in ROCs, the renewables obligation might fail to achieve its objectives of creating additional generating capacity in the UK, so helping to build a strong domestic renewables industry, and would merely result in the repackaging of existing renewables elsewhere in Europe. The government should therefore take the lead in pressing for rapid progress towards a satisfactory Renewables Directive.

The role of green tariffs
The consultation paper suggests that electricity sold under domestic green tariffs may be counted towards a supplier's obligation. The Royal Commission is concerned that this will allow suppliers to pass on costs to green-minded consumers without bringing any new capacity on stream. Green tariffs should be permitted only if they are underpinned by renewable generating capacity over and above that which counts towards fulfilment of the renewables obligation. The economic regulator must certify that green tariffs achieve additionality and do not represent double counting.

The balance between environmental benefits and cost
to the consumer
The Royal Commission is very aware of the need to reduce and eliminate the problem of fuel poverty, but believes that this should be achieved by measures other than avoiding increases in consumer prices.

The consultation paper suggests that the renewables obligation could lead to a peak additional cost to consumers of some £600 million in 2010. This represents a 3.7% increase on 1998 electricity prices, or £2.50 a quarter for a typical household. Such an increase is not significant for most households: domestic energy prices are at a historically low level, and further price reductions are expected to flow from the new electricity trading arrangements. Concerns over the impact on the fuel poor and low-income households should not therefore over-ride the need to place the UK on the path to a sustainable energy future.

Steel House, Westminster

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