United Kingdom

United Kingdom

Not value for money

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Not even its most ardent supporters -- if there are any -- could argue that Britain's Renewables Obligation (RO) offers best value for money to the electricity consumer. It has been successful in stimulating renewable energy development: some 2000 MW of consented wind is awaiting construction, with a further 7800 MW in the permitting pipeline; and if build rates are slow, factors other than the RO are to blame. But where the legislation is far from successful is in stimulating the most renewables for the least money.

A peculiar anomaly of the RO is that in the government's eagerness to control its cost, ministry officials have created a system where the overall cost to society remains unchanged no matter if a large volume of renewables is built, or just a small volume. Consumers face the same extra cost on their bills for zero green power, or for the 15% the government is aiming at by 2015.

The nub of the problem is the system of fines and rewards, known as the "buy-out" mechanism, for meeting or not meeting pre-set targets. The buy-out distorts the market by severely interfering with the forces of supply and demand. And it adds layers of uncertainty. Uncertainty comes at a price. In a risky market where players are relying on rewards from a pot of buy-out money -- and where nobody knows how big that future pot will be -- projects are expensive to finance. More uncertainty is added by creating artificial caps in the form of targets. The fear is that prices will plummet when the target is reached, which may be before the industry is robust enough to compete on the open market.

There are plenty of ideas around for fixing the RO's failing. Some of them are interesting solutions that could bear closer scrutiny. They need thorough examination and a solution needs to be promoted with authority. With the backlash against the cost of the RO already being felt, the wind industry should not expect that government will throw yet more consumers' money at a flawed system.

For now though, windfalls are being enjoyed, primarily by the electricity retailers who come closest to meeting their obligation. But whether retailers meet the obligation or not, they pass on costs to customers, through buying green power or paying fines not to buy it. Put simply, the consumer is paying for capacity that isn't there. Value for money it ain't.

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