Extracts from NATTA's journal
Renew, issue 159 Jan-Feb 2006

7. PAC slams‘£12.5 bn’ RO costs

The House of Commons Public Accounts Committee (PAC) has raised  serious doubts about the cost of the  government’s plans to promote renewable energy- and whether they will succeed at meeting the ‘10% of electricity by 2010’ target. In a report published last Sept., it noted that the Renewables Obligation (RO) will cost consumers £1bn per year by 2010, implying a total cumulative cost by then of ‘at least’ £5bn, with a further £1.5-2bn for grid development by 2010. The Committee noted that the 2010 target required the costs to be acceptable to consumers, but “the department has no means of informing its judgement on this issue”. On current plans the support would rise to £1.5bn p.a. by 2015 (to meet the 15% target), implying a total cost to consumers by then of £12.5 bn.  Committee chair Edward Leigh said that “Consumers are providing a massive subsidy to the renewables industry. But, unlike public expenditure, this subsidy does not receive annual scrutiny by parliament. This is unacceptable.”

The PAC accepted that the DTI ‘hopes that funding investment in renewables now will reduce future generating costs and thus the cost of each tonne of carbon dioxide saved’ but says that ‘it has not established measures or targets to track the industry’s progress in reducing costs,’ so that ‘consumers will not necessarily benefit if generating costs do fall’.

In any case, the PAC was not even sure this level of support would be enough. ‘Even if support for renewable energy achieves its planned contribution to reducing carbon dioxide emissions, the department will need to encourage investment in other zero or low carbon generating capacity, or energy efficiency measures, if it is to meet its overall emissions target.’ And it added “The renewables programme will provide value for money only if it helps industry to lower the cost of renewable energy to levels which approach the combined financial and carbon dioxide costs of other forms of generation”.

Clearly it didn’t think the RO was the right way to achieve this. Echoing the report last year from the National Audit Office (NAO), it noted that the RO was four times more expensive than other means of reducing carbon dioxide, including the Climate Change Levy and the emissions trading scheme, which it preferred. It was not just that renewables were expensive, the RO suffered from  poor targeting- ‘around a third of the funds exceed the support needed by generators’ (actually though, as we noted in Renew 155, the NAO said this would be the situation by 2026-7, unless policies changed).   The PAC report suggests that support for lower-cost renewable technologies, such as landfill gas, should be reduced or curtailed.  It also argued that on land wind farms were controversial and suggested that offshore wind be prioritised since they were less environmentally intrusive, and that should be factored in when considering the relative costs and benefits of onshore and offshore wind power, and the level of financial support provided to each. 

Reactions

In response to the PAC’s claims, the DTI said: “The costs of the Renewables Obligation have to be seen in the context of the overall cost of electricity to consumers. The National Audit Office estimates that the Renewables Obligation will result in a price increase of 5.7 per cent by 2010.... We believe that this is a price worth paying for a key step towards reducing emissions.”

Energy Minister Malcolm Wicks insisted, on the Today programme, that while the cost of renewables was very important, it was “just one dimension” of the argument. “Our major focus is on global warming or climate change and the fact of the matter is that by definition when you compare renewable sources of energy, the wind turbine or solar power, this is clean energy by definition compared with when we burn coal, gas or oil. We want ten per cent of Britain’s energy coming from these renewable sources- it will be mainly wind farms but some other technologies- by 2010 and it does need some subsidy. We have to require the supplier energy companies to use renewables.”

Responding to the PAC’s complaint that a third of the money was going to companies that could manage without it, he said the government was “revising this renewables obligation. But what I would say to the public accounts committee is that one way or another we need to tackle climate change. There’s no one silver bullet. Energy efficiency is crucial, as the committee says, and also are renewables; it’s not one thing or the other.”

The PAC report is at: http://www.parliament.uk/parliamentary_committees/committee_of_public_accounts/
committee_of_public_accounts_reports_and_publications.cfm

What the PAC wants 

Technology

PAC Chair, Edward Leigh, argued that government must act to target subsidies at technologies which need it in order to have a “genuine prospect of becoming commercially viable”.  And the Committee argued that the DTI ‘needs to set out the expected rate of reduction in the cost of generating energy from each of the main renewable sources and actively monitor progress’.  In parallel, to avoid excess RO payments, it could, ‘taper or phase out support for lower cost renewable technologies which have limited growth potential, such as landfill gas, or limit the number of years individual generating sites can benefit from the scheme’.  Clearly it felt that landfill gas had been supported enough (we didn’t want more landfill sites so the resource was in any case limited) but it backed offshore wind and felt that ‘biomass can provide a secure, stable and sustainable energy source’ but needed ‘more effective’ support. And nuclear should be reconsidered.

Accountability

The PAC noted that ‘The Renewables Obligation has the effect of transferring substantial sums from consumers to the renewables industry- over £400m in 2004-05, rising to £1bn by 2010- amounting to some £5bn over the whole period. But this subsidy to renewables is not authorised under the annual supply procedure and so, unlike public expenditure, is not subject to regular Parliamentary scrutiny. Requiring users to source supplies from uneconomic providers has the same affect as taxing users to subsidise the providers, but is not as transparent or amenable to parliamentary control. The government should make arrangements for annual Parliamentary scrutiny, and the amounts involved should be reported annually to this Committee.’  It also noted that in order to assess whether the costs were acceptable to consumers, the DTI ‘should consider surveying consumers or consulting consumer bodies, such as energywatch’.

However, it claimed that  in fact: ‘A carbon tax would be a less complex way of reducing carbon emissions. The Department and the Department for Environment, Food and Rural Affairs should manage the range of policy instruments operating under the Climate Change Programme so that public resources are applied cost-effectively,’

NFFO surplus

The PAC was worried that ‘by including sites within the RO from the previous support scheme the Department has raised unexpected revenue for the Exchequer from electricity consumers, worth between £550m and £1bn by 2010. Prices paid to generators who agreed contracts under the Dept’s previous support scheme were not affected by the introduction of the RO, but the prices paid by electricity suppliers and passed on to consumers have increased. So the revenue arising from the output of these sites now exceeds the payments made to generators, and the resulting surpluses accrue to the agency which runs the scheme and are transferred to the Exchequer.’

See below for the details of the sums involved & Renew 157 for the PAC’s hearings on this issue. Basically they’d like it back!

All go for renewables

The PAC may be worried about where the money is going, but the DTI seems confident  that its having a good impact.  The DTI say that the UK’s renewable energy market, at present worth £280m, will grow to more than £19 bn by 2020. And a report by the Carbon Trust noted that the value of UK annual investment in clean technologies has increased by 3% a year between 2000-2004. Over this period, £1bn has been injected into the sector, excluding grants and loans, but £6bn more needs to be invested by 2010 to meet government targets. Venture capital into the sector increased by 250% between 2000-2005, while it fell in other sectors.

R&D Funding    On Sept. 12th, in answer to a Parliamentary Question,  the Energy Minister Malcolm Wicks gave details of past & current R&D funding for renewables and other energy technologies.

The data indicates that, under the DTI’s New and Renewable energy programme, between 1990/91-2004/5 £162m was allocated to renewables (including fuel cells and embedded generation), while the DTI’s clean coal programme received £68m and DEFRA’s CHP programme £18.6m.  Nuclear fission got £245m.  Within the DTI’s renewable programme, wind got £45m, solar £1m, biomass £23.5m, tidal £13m, geothermal £6.8m and wave £5.5m. Fuel cells got £18.4m, generic embedded generation studies £9.3m.

In addition, over the same period, the research councils  have funded around £46m worth of R&D on renewables, and around £32m worth of work on CHP, fuel cells, hydrogen, energy storage, networks, & carbon sequestration, plus £6.4m on conventional energy techs. They have also provided £1.2m for work on nuclear fission & £124.m on fusion, dwarfing the £14.5m they spent on energy efficiency.

A quick sum indicates that,  overall, since 1990-01, total government allocations to renewables R&D (including research council projects but leaving out fuel cells & embedded generation) was about £180m while nuclear fission & fusion got about £370- more than double.

Moving on past R&D to capital grants for market uptake, the DTI has so far allocated £30m- £1.9m for biomass projects, £15m for offshore wind, £3.8m for the Clear Skies community renewables programme, £39.3m for the Major PV demonstration programme.

The full figures broken down by year are at:

http://www.publications.parliament.uk/pa/cm200506/cmhansrd/cm050912/text/50912w12
.htm#50912w12.html_sbhd3

NFFO income

Wicks also commented on the surpluses generated from the Non-Fossil Fuel Obligation: ‘When the Renewables Obligation (RO) was introduced in 2002 projects under the Non-Fossil Fuel Obligation (NFFO), the previous support mechanism, were included to ensure that from the outset there was liquidity in the ROC market. ROCs allocated to NFFO projects and the electricity they generate are auctioned by the NFPA and the resulting funds are used to pay the electricity prices guaranteed to the projects and their NFFO contracts. The income received from suppliers for the electricity and ROCs generated by NFFO projects currently exceeds payments made to the NFFO generators. This generates a surplus.’  He noted that he size of the fund administered by Ofgem, resulting from surplus revenue collected by the Non Fossil Fuel Purchasing Agency (NFPA), for year ending March 2001 was £63.8m, £28.6m for 2002, £87.1m for 2003, £146.5m for 2004 and £169.1m for 2005.  He reported that the NFPA estimated that the fund was expected to be in the region of £270 for 2006, £380m for 2007 and £500m for 2008, although noted that these were ‘very broad estimates’.   Even so, as the PAC concluded (see p.7) it will be over £1.5bn- and instead of disappearing into the Exchequer, some at least ought to be ringfenced and reinvested in new renewables.