Renew On Line (UK) 57

Extracts from NATTA's journal
Renew, issue 157 Sept-Oct 2005

8. REFIT beats RO

The UK’s Renewable Obligation (RO), with its emphasis on  competitive prices, is not only poor at stimulating the installation of new generation capacity, it also costs more per kilowatt installed than the fixed price ‘REFIT’ Renewable Energy Feed In Tariff approach adopted in Germany and elsewhere in europe. That is the conclusion that has emerged in various guises from several studies- see Renew 153 for Dave Tokes analysis and Renew 155 for the University of Cambridge’s analysis. 

The latest version is relayed in the EREF’s excellent new journal New Energy (www.neueenergie.net) issue 2 of which (April 2005) includes two articles reviewing this issue. The first, ‘Europe banks on fixed tariffs’ (Bechberger & Reiche), indicates that, out of the 25 EU nations, 17 now use REFIT-type schemes, most recently France and Denmark used to, but its conservative government has been trying to establish a quota/trading type scheme on the lines of the RO. 5 EU countries use RO-type quota/trading schemes- the UK, Sweden, Poland, Italy and (except for PV) Belgium- the rest have other systems. Ireland has just decided to adopt the RO.

The attraction of the RO is of course that it links in with the new EU wide Emission Trading Scheme, which the EU sees as the market orientated way ahead for stimulating the expansion of renewables. Certainly, in the UK prices are now low, but much of that is due to the much higher wind speeds here.  However, in terms of capacity building, this approach does not seems to work very well, as the second article in New Energy reports. This shows that REFIT type fixed price schemes have led to up to ten times more capacity being installed (notably in Germany) than the quota/trading type schemes like the RO. In fact its more  e.g. 16,000MW of wind capacity so far in Germany, versus only 800 MW on the UK- with some of the latter actually having been the result of capital grants for offshore wind projects provided in addition to RO support.

The point is that the guaranteed prices offered under the REFIT approach, or its replacement in German the EEG, create a much more favourable investment climate- so more projects go ahead. The higher wind speeds in the UK evidently do not compensate for the uncertainty about future prices in the RO- that advantage seems to have been undermined by the backlash against wind, caused in part by the need, because of the competitive system, to use the windiest sites.  It may be true that initially some of the prices offered under REFIT were higher than those now provided by the RO, but there is no guarantee as to what RO prices will be in future, whereas the REFIT scheme prices are fixed years ahead via a ‘digression’ mechanism that gradually reduces them in a transparent and predictable way to reflect the maturing of the technology and the market. In addition, different price levels are offered for each technology- e.g. more initially for PV and biomass.  So there is a planned convergence on lower prices for each technology.   By contrast, in the RO, all technologies compete in the same market and the price support offered by the system is unpredictable- the value of tradable Renewables Obligation Certificates is set by market competition. The bottom line is that, as noted in the second New Energy article ‘Fixed prices work better’ (Grotz &  Fouquet), the cost per kWh for wind projects under the RO is significantly higher than that under the 7 REFIT schemes it looks at. The same was true for another country using the quota/trading approach- Italy.  See below.

Euro cents /kWh for wind capacity installed in 2003

Source: BWE/ Grotz & Fouquet

The DTI has been reviewing the RO, but has insisted that only minor adjustments can be made- otherwise the system will be disrupted.  But maybe it should be? After all, to get offshore wind, wave and tidal power going, the DTI has had to resort to capital grants and revenue support- REFIT in all but name. In its report on the RO, the NAO (see Reviews) did admit that it was expensive, but its consultants, OXERA, claimed that the internal rates of return for UK wind projects were similar to those elsewhere. Well yes, you’d expect that-  wind speeds are much higher in the UK