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United Kingdom

United Kingdom

Renewables obligation effective but costly -- Report says consumers paying one-third more than necessary

The United Kingdom is on track to meet its renewable energy target for 2010 -- thanks to growth in wind power development -- but at an annual cost of over £1 billion, according to the National Audit Office (NAO) in a report that draws heavily on research by economic consultants Oxera. The report is long on explanations and analysis of public support to renewable energy, but short on recommendations of how to lessen the cost of the government's main support tool -- the Renewables Obligation (RO). The NAO operates independently of government.

Despite the NAO's reluctance to delve into economic details and the weaknesses of the RO's structure, its report provides one of the most upbeat assessments in recent years of the amount of green energy likely to be in place by 2010. It says that renewables will reach 9.9% of UK electricity -- close to the government's 10% target. In 2003 Oxera predicted renewables would reach 8.2% by 2010. It explains its more optimistic projection today on the recent rise in electricity prices, which are set to remain high for the next few years.

More growth in onshore and offshore wind is bringing the UK closer to its target, says the report, with 3% of UK renewables supply coming from onshore wind, and 4.5% from offshore. But progress depends on five key factors: a functioning site permitting system, reinforcement of the grid, wholesale electricity prices, stability of government RO policy, and additional support for less commercial technologies, including offshore wind.

At a high cost

Success in deploying renewables comes at a cost, warns the NAO. Support, mainly through the RO, will cost consumers some £1 billion a year -- equivalent to a 5.7% increase in the price of electricity. The cost of upgrading the transmission and distribution networks is another expense consumers must bear: one-off costs of reinforcements are expected to be between £1 billion and £1.3 billion.

The RO is an expensive means of reducing carbon dioxide, costing between £70 and £140 per tonne of CO2 saved, says the NAO. "The Department [of Trade and Industry] needs to keep a firm grip of the obligation's cost relative to other instruments for reducing carbon dioxide." But it adds that the government's policy on renewable energy also has the aim of encouraging diversity and security of supply, and creating more jobs through a new industry.

The government needs to consider how to move technologies from support under the RO to commercial operation, advises the NAO. It claims that onshore wind energy and landfill gas are receiving more support through the RO than they need. This is because the "buy-out" price is set higher than needed for technologies which are closer to the market, it says. The "buy-out" is paid by electricity retailers who fall short of their obligations by failing to purchase enough renewables obligation certificates (ROCs). This effectively determines the price of ROCs.

Oxera calculates that a buy-out price of £15 per megawatt hour would be enough to bring forward most onshore wind projects. "It is, however, clear from our consultants' work that, at the current buy-out price of £30, the level of support provided by consumers is in excess of that needed by many onshore wind schemes," states the report. Oxera estimates that around one-third of total public support for renewables could be surplus to that needed by generators. The report, however, does not indicate who the "excess support" benefits -- the renewable generators or the retailers.

Review opportunity

The impending review of the RO could provide an opportunity for the government to deal with the excess cost of supporting renewables, says the report. "Options include time-limiting the period during which support would be available for projects or technologies, or moving to a banded support structure, where the less profitable technologies receive a greater share of support."

The NAO also turns its sights on the fund of money accumulated from auctions of ROCs from projects once supported under the obsolete Non-Fossil Fuel Obligation (NFFO). Operators of NFFO projects only receive the prices awarded under their original contract. But the sale of ROCs from the projects has resulted in a surplus that will rise to between £550 million and £1 billion up to 2010. The Department of Trade and Industry (DTI) has earmarked £60 million to promote renewables, but the rest will merely go to swell the government's coffers -- all paid for by the consumer.

Many in the renewables industry have called for this money to be put to use to assist government renewables policy. The electricity regulatory office, Ofgem, warns that it would be difficult to extract the money from the Treasury and return it to consumerr. The NAO calls on the Department of Trade and Industry and Treasury to explain to parliament "the origin of these funds and how they will be treated."

Head of the NAO Sir John Bourn says: "The Renewables Obligation is increasing the level of renewable generation, and thus helping reduce carbon dioxide emissions, though at a price to the electricity consumer. The department needs to keep track of the scheme's progress in improving the commercial viability of renewable generation and ensure that consumers benefit from reductions in generation costs. The British Wind Energy Association welcomes the report as "thorough and insightful." It agrees with the findings that the RO is effective in supporting near-commercial technologies like onshore wind, but that additional short term support is needed for offshore wind, wave, tidal and bioenergy.

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