United Kingdom

United Kingdom

High cost fallacy spreads fear

One of the most controversial aspects of the findings of the UK energy review (main story) are its estimates for the cost of increased electricity from renewables. Meeting a 20% target for renewables by 2020 could push up domestic electricity prices by around 5-6%, it claims. Energy consultant David Milborrow accuses the report of sending out mixed messages. While it makes much of the perceived extra costs of renewables, it suggests wind by 2020 will be cheaper than gas. "As wind is likely to form the bulk of renewables capacity, the need for a 5-6% increase by that time does not seem logical," he says.

Milborrow argues that the high costs attributed to the Renewables Obligation all seem to stem from a set of assumptions that are unfavourable to renewables -- that future gas costs will be low, that the trading penalties on wind will not be removed, and that suppliers will not give generators the full value of Renewable Obligation Certificates.

Furthermore, the report admits "the target is by no means in the bag," says Milborrow, referring to the aim of 10% renewables by 2010. "If the targets are not met, then the overall cost will be less than predicted," he points out. "Alternatively, if planning permit problems are overcome and there is plenty of wind capacity around, then this is likely to push prices down. So in this case, also, the cost of the obligation is likely to be lower. Although a higher renewables target is welcome, the downbeat assessment of their costs is not. At least it should have quoted likely cost ranges, for 2010 and 2020."

By alleging higher costs the government invited instant criticism of the review. The questionable calculation was seized upon by several press and news reports. Business organisations also highlighted the issue as a cause for concern. "If the cost base to industry increases as a result of a shift towards green power, that will damage Britain's global competitiveness," says Ruth Lea from the Institute of Directors, according to Reuters. "It is a worry that Britain, but not the US, will be taking on board environmental costs," she says. "If it is the case renewables will be undercutting fossil fuels in years to come, that will be great. But if it is higher it will be industry and the consumer who pays."

The Confederation of British Industry is more positive. It welcomes the energy review for promoting a market based approach to energy policy. But it urges the government not to repeat "past mistakes" by imposing damaging costs on business -- referring to the Climate Change Levy.

The Renewable Power Association (RPA) rejects the argument that meeting the 20% target will be expensive for the consumer. It says that on a lifecycle basis, renewable energy has environmental and social benefits which current pricing mechanisms do not take into account. "People need to understand where pollution goes and at what cost," says the RPA's David Byers. "Who prices acid rain damage to York Minster in their energy bills? And who informs taxpayers about the true terminal liabilities of fossil or nuclear fuels? Society needs to be informed so that it can make affordable choices for our grandchildren."

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