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Chapter 13: UK Renewable Energy Policy since Privatization


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Chapter 13: UK Renewable Energy Policy since Privatization

  1. 1. 13 UK Renewable Energy Policy since Privatization Michael G. Pollitt T his chapter reviews the progress with increas- ing renewable energy supply in the United Kingdom since 1990, with a particular focus on nisms for resolving social conflict than with eco- nomic incentive arrangements. Radical changes to current policy are required, but policymakers recent developments. This country is regarded as must be careful that they are institutionally appro- one where the considerable potential for renew- priate to the United Kingdom. Calls to “just do able energy,1 relative to other major European it” with respect to delivery of larger quantities of countries, has failed to be realized. It is also fre- renewables are economically irresponsible and quently suggested that the United Kingdom highly likely to backfire in terms of achievement needs to change its policies to renewables to look of ultimate policy goals such as decarbonization more like those in Germany or Spain (e.g., and energy security. Mitchell 2007). UK renewable energy policy exists in a wider The aim of this chapter is to look at the energy policy context. The country’s stated United Kingdom’s renewable energy policy in the energy policy can be summed up as aiming to context of its overall decarbonization (i.e. carbon achieve “secure, affordable and low-carbon emissions reduction) and energy policies. The energy” (see DECC n.d.b). It therefore has three chapter explores the precise nature of the failure identifiable priorities: addressing climate change, of UK renewables policy and suggests policy providing energy security, and keeping energy changes that might be appropriate in light of the bills down. These policy objectives are naturally in country’s institutional and resource endowments. tension. The first two are expensive, whereas tack- The focus is on the electricity sector in terms of ling the third entails keeping prices down, if not both renewable generation and, to a lesser extent, for everyone, then for a significant minority of the facilitating role of electricity distribution and poor consumers. Between 1990 and 2003, resi- transmission networks. The interactions among dential electricity prices fell significantly in real the UK’s electricity, heat, and transport sectors terms in the United Kingdom, by around 30% per within the overall decarbonization policy context unit, but have risen by around 40% from 2003 to are also examined. 2008 (QEP 2009). The number of households The discussion suggests that the precise nature defined as being in energy (or fuel) poverty, of the failure of UK policy is rather more to do spending 10% or more of total expenditure on with societal preferences and the available mecha- heating and power, has risen from a low of 2 mil-
  2. 2. 254 Michael G. Pollitt lion in 2003 to 3.5 million in 2006 (BIS 2008), duty to introduce policies that support achieve- out of a total of around 25 million households ment of the targets. The committee’s first report (ONS 2007). This has put a strain on the ability of (CCC 2008) was published in December 2008. richer consumers to simultaneously finance poor This gave indicative budgets for the periods 2008– consumers, via bill payments to company support 2012, 2013–2017 and 2018–2022. The budget for schemes (see Ofgem 2009b),2 and expensive poli- any period beyond this must be set at least 12 cies arising from climate change and energy secu- years ahead. rity objectives. European Union (EU) directives The report was then followed up by a signifi- have also provided significant shape to UK energy cant discussion in the HM Treasury budget for policy, providing the basis for targets to 2020 for 2009 of policy measures aimed at supporting the CO2 reduction and renewable electricity genera- achievement of the decarbonization targets in the tion share. light of the report (see HM Treasury 2009).4 The The chapter begins by reviewing the United announced measures included support for green Kingdom’s overall decarbonization policy and manufacturing, improvements to the renewable potential for renewables, then its policy toward support for offshore wind, increased funding for renewables since 1990, with a particular focus on combined heat and power, and a support mecha- recent developments. This is followed by an nism for up to four carbon capture and storage examination of the evidence on the performance (CCS) plants. The intention of the legislation is of UK policy compared with that of other coun- that if the government were to fail to enact appro- tries. Next, a new institutional economics per- priate policies to keep the United Kingdom on spective is used to discuss what sorts of policies track to achieve its targets, this could result in legal might be right for the United Kingdom in the action against ministers by third parties, though it light of the evidence. Finally, the chapter exam- remains to be seen on what grounds any action ines the issue of overall policy toward decarbon- would be likely to be successful, given the less ization and the place of renewables within this. than direct link between specific government policy and impact on a national GHG target. For reference, in 2008, UK GHG emissions were 623.8 metric tons of CO2e (CO2 equivalent Decarbonization Policy and the units), which is 20% below the 1990 baseline of 779.9 tons (Defra 2008). This means the United Potential for Renewable Energy Kingdom is the only major European country to in the United Kingdom have already met and exceeded its 2012 Kyoto target for emissions reduction target, which was An important context for the United Kingdom’s 12.5% (see EEA 2006, Table 1). It is, however, renewable energy policy is its overall decarboniza- worth pointing out that the UK target is the result tion policy. The country has one of the most of negotiations within the EU to share out the ambitious decarbonization policies in the world, Kyoto-negotiated EU-wide target, and that the as embodied in the 2008 Climate Change Act baseline date of 1990 is very favorable to the (OPSI 2008a).3 This policy consists of a commit- United Kingdom. This is because it coincides ment to reducing net greenhouse gas (GHG) with the privatization of the UK power industry, emissions by 80% by 2050 (from 1990 levels), leading to a “dash for gas,” which resulted in an with an intermediate target reduction of 26% by unintended environmental windfall as dirtier 2020. This target is supported by five-year carbon coal-fired plants were displaced from the system budgets, the first period being 2008–2012 inclu- (see Newbery and Pollitt 1997). This favorable sive. These budgets are formulated in the Office of starting place in which the United Kingdom finds Climate Change and supported by a report from itself is certainly a major factor in its relative the independent Committee on Climate Change enthusiasm for decarbonization.5 The 2009 EU (CCC). Government ministers have a statutory Renewables Directive further commits the
  3. 3. UK Renewable Energy Policy since Privatization 255 United Kingdom to a 15% target for renewables Given the ambitious targets for decarboniza- contribution to total final energy consumption in tion and renewable energy in the United King- 2020 as part of the EU’s overall 20% renewables dom, it seems highly likely that nationally these by 2020 target. This further target is acknowl- targets will be missed, certainly on renewables. In edged and accepted in the CCC report. The these circumstances, serious consideration will be United Kingdom also has a specific annual target given to meeting the targets via net purchases of for the percentage of electricity from renewables CO2 or green energy certificates from abroad out to 2015 as part of its Renewables Obligation (e.g., funding CCS in China). Indeed, if Certificate scheme, discussed later in this chapter. additionality could be clearly established, this The report suggests that by 2020, the share of would seem to be a very sensible option given that renewables could be as much as 30% in total elec- at the margin, such purchases would be much tricity generation (CCC 2008, 208). It also dis- cheaper than domestic alternatives. cusses the potential for the direct reduction of A defining feature of the United Kingdom is emissions from buildings rather than via large- the considerable potential it has for renewable scale grid-connected electricity. This involves a energy relative to its demand. The country has combination of renewable heat and micro- some of the best wind, tidal, and wave resources generation. For residential buildings, it identifies a in Europe, as well as affording opportunities for potential contribution of 14% reduction in heat biomass and solar. The technical potential of each emissions via a combination of biomass, solar hot of these resources is very great, but the estimated water, heat pumps, and biogas by 2020. In addi- economic potentials are given in Table 13.1. UK tion, small contributions may be made by PV and electricity supplied in 2008 was 380 terawatt- other sources for microgeneration of electricity. hours (TWh) (DECC 2009b, Table 5.5). Recently, the newly created responsible gov- In addition, it is worth mentioning that the ernment ministry, the Department for Energy and United Kingdom has up to 1,000 years’ worth of Climate Change published its UK Renewable storage capacity of CO2 in the North Sea and Energy Strategy (DECC 2009f). In line with the currently generates around 13% of its electricity CCC report, this suggested that more than 30% of Table 13.1. Estimates of the likely economic electricity should be generated from renewables potentials for different renewable technologies in the by 2020, as well as 12% of heat and 10% of trans- United Kingdom port energy, in order to meet EU targets. The United Kingdom’s commitment to Technology Technology Annual decarbonization is likely to lead to a relatively category detail potential tight domestic policy with strong pressure for Wind power Onshore 50 TWh purchasing of renewable electricity and CO2 per- Offshore 100 TWh mits from abroad. In 2007, the country was a net Bioenergy Biomass 41 TWh purchaser of CO2 permits to the tune of 26 tons, Geothermal Ground source 8 TWh or 3% of its 1990 GHG level (Defra 2009). It also heat pumps purchased energy via the interconnector with Hydro Large scale 5 TWh France (3% of total electricity delivered), which Small scale 10 TWh may have displaced higher-carbon energy in the PV Retrofitted and > 1 TWh United Kingdom, and was one of the largest net building inte- importers of internationally traded bioenergy, grated mainly for cofiring in coal-fired power plants and Marine Wave energy 33 TWh for blending in gasoline (DECC 2009b; Junginger Tidal barrage 50 TWh et al. 2008; Perry and Rosillo-Calle 2008). All of Tidal stream 18 TWh these have some scope for expansion in terms of Total ~316 TWh achieving the net decarbonization of the UK economy. Source: Jamasb et al. 2008b, 81–82
  4. 4. 256 Michael G. Pollitt from nuclear power (DECC 2009b). The United Table 13.2. Examples of estimated costs of Kingdom has endowments of coal, oil, and gas technologies for the United Kingdom in 2005 (though all three are depleting). Thus carbon cap- ture and storage and nuclear power are likely to Technology Technology p/kWh compete with renewables to play a part in decar- detail bonization of the electricity sector. The country is Nuclear Generation III 3.04–4.37 already committed to an auction for one demon- Gas CCGTa with CCS 3.65–6.78 stration CCS plant and is reviewing designs for a Coal IGCCb with CCS 3.5–5.67 new generation of nuclear power plants, with an Wind Onshore 4.68–8.89 announcement in November 2009 on its pre- Offshore 5.62–13.3 ferred sites for new building (see DECC 2009c). Source: Jamasb 2008b, 75. Electricity demand growth is increasing slowly, at Notes: The spread of estimates reflects ranges in the discount around 1% a year, and energy efficiency rate, capital cost, fuel and carbon prices, and other sensitivities; p/kWh = pence per kilowatt-hour, given in 2005 values; 1 pence measures—such as the elimination of filament = 1.5 cents (U.S.) as of this writing. lightbulbs starting in 2011 (DECC 2009e) and the a CCGT = combined cycle gas turbine b IGCC = integrated gasification combined cycle introduction of smart metering for all electricity customers by 2020—seem likely to moderate demand growth. MacKay (2008, 109) predicts the likely con- Among the renewable technologies in the United tribution of renewables to UK decarbonization in Kingdom, onshore wind, biomass, and offshore the context of delivering the current level of wind are lowest-cost at scale to 2020. Table 13.2 energy consumption of 125 kilowatt-hours per shows some cost sensitivities for 2005. day per person. He suggests that renewables con- The table illustrates large uncertainty in the tribution is likely to be only 18.3 kWh/day/ costs of building new plants, even with established person, made up of the following: hydro, 0.3; technologies. For wind, this reflects the impor- tidal, 3; offshore wind, 4; biomass, 4; solar PV, 2 tance of exact location, which determines both (+ 2 from solar hot water); and onshore wind, 3. building costs and the available wind.The range of Thus renewable energy would contribute around costs illustrates substantial overlap under favorable 15% toward total decarbonization. MacKay’s versus unfavorable circumstances for any pair of analysis is helpful in that it illustrates that a big technologies. However, it is important to point contribution toward current electricity provision out that this uncertainty over actual costs for cur- comes in the context of electricity being the rent new building does call into question projec- source of only about one-third of current emis- tions of costs to 2020. For instance, Dale et al. sions of GHGs. (2004) assume onshore and offshore new building The exact mix of different renewable tech- costs of £650 and £1,000 ($975 and $1,500) per nologies, CCS fitted to coal- or gas-fired plants, kW, respectively, in scenarios with 25% energy nuclear, and demand reduction in the UK energy from wind. The most recent (albeit prerecession) mix will depend on the relative costs of the differ- wind parks are currently costing nearer to £1,000 ent technologies. Kannan (2009) shows the and £2,500 ($1,500 and $3,750) per kW (see impacts of different assumptions on the signifi- Blanco 2009; and Snyder and Kaiser 2009). This is cance of CCS in UK decarbonization and hence somewhat concerning, given a return to the implications for other sources of decarboniza- macroeconomic growth, for the likely projected tion. Demand reduction technologies are the costs of renewable scenarios to 2020, especially cheapest GHG abatement technology at the given that the costs of electricity (which will moment (see CCC 2008, 221), though demand include cumulative subsidy commitments to reduction measures suffer from well-known insti- renewables) in 2020 will still likely reflect, to tutional barriers to adoption (Grubb and Wilde some extent, the cumulative cost of all wind 2008). Nuclear is probably the next cheapest. capacity installed since 2005.
  5. 5. UK Renewable Energy Policy since Privatization 257 Table 13.3. Costs of electricity sector decarbonization to 2020 (2008 prices) Renewables scenarios Conventional Lower Middle Higher New generation capacity (£ billion) Renewable capacity 2.3 50.1 60.2 77.4 Nonrenewable capacity 14.9 12.6 12.3 12.0 Total 17.2 62.7 72.5 89.4 Network (£ billion) Offshore wind connection 0.0 8.4 10.6 14.1 Onshore wind connection 0.1 1.0 1.2 1.4 Other reinforcement 0.8 0.8 0.8 0.8 Total 0.9 10.2 12.6 16.3 Total grid investment costs 18.1 72.9 85.1 105.7 (generation + network, £ billion) Marginal generation cost (£/MWh) 35.9 25.0 22.6 18.9 Cost per MWh produced (£/MWh) Generation costs (fixed and variable) 46.8 51.9 52.6 54.5 Balancing and intermittency 1.7 6.3 7.2 8.7 Grid expansion for renewables 0.1 3.5 4.1 5.2 Total cost including network (£/MWh) 48.6 61.7 63.9 68.4 Source: SKM 2008, 8 Note: £1 = $1.50 as of this writing As Jamasb et al. (2008b) note, a key determinant 2020. Under their estimates, renewables provide of the relative attractiveness of different technolo- 34%, 41%, and 50% of electricity supply under gies will be the degree of learning in costs, and the lower, middle, and higher renewables sce- this depends on their current stage of develop- narios. Table 13.3 shows that renewables could ment. Foxon et al. (2005) note that the various impose significant total costs on the electricity renewable technologies available to the United system. The capital costs of connecting offshore Kingdom are at different stages of development. wind in particular could involve up to £15 billion Wind costs can be expected to fall as capacity ($22.5 billion) of expenditure, more than the total increases significantly around the world; however, cost of generation under a conventional scenario. the prospects for learning in hydro and tidal bar- The cost of balancing and intermittency could rages are low, limiting their ultimate scope for rise by up to £7 ($10.50) per megawatt-hour expansion. The additional costs of fitting CCS are (MWh), or 10% of total system costs. The United difficult to estimate because of a lack of informa- Kingdom may have the wind resources, but they tion, while the scope for learning may be con- will have significant cost implications for the sys- strained by the maturity of the different elements tem, raising average electricity costs by up to 40% of the CCS process (see Odenberger et al. 2008). against baseline. This is in addition to the difficulty of reconciling all the interested parties (Drake 2009). PV, tidal stream, and other marine technologies offer the greatest potential for decreases from the current Policies toward Renewables in costs, given low current levels of output and the the United Kingdom implied scope for cost reduction.6 SKM (2008) provides estimates of the possible This section provides an overview of UK cost of decarbonization of the electricity sector to renewables policy since the privatization of the
  6. 6. 258 Michael G. Pollitt country’s electricity supply industry beginning in ing Agency (NFPA).8 In order to avoid this being 1990. Summarizing UK policy is not a straight- seen as a discriminatory subsidy to the nuclear forward task because of the large range of govern- industry, it was recast as a way of supporting non- ment initiatives toward renewable energy and the fossil-fuel generation more generally, and a por- great number of policy changes that have been tion was allocated to support renewable energy announced in recent years, some of which have (Mitchell and Connor 2004). The portion was yet to be implemented fully.7 Discovering the small, but it provided a relatively significant exact cost of renewable energy support is not easy, amount of money to the industry at a time when as evidenced by the fact that the best sources of government expenditure on new technologies information are answers to parliamentary ques- was falling to a very low level, and the then tions rather than published annual statistics. This is Department of Energy was closing. The money particularly true of the expenditure on individual was allocated to new renewable projects via a technologies. The heroic efforts of Mitchell and series of bidding rounds whereby renewable Connor (2004), who reviewed UK renewables energy projects bid for an (inflation-indexed) per- policy from 1990 to 2003, provided the inspira- kilowatt-hour price for initially 8 and later 15 tion for some of the presentation here. years. Winning bids were selected by cost within In broad outline, there have been two main each technology category. support mechanisms for renewable electricity and The result was a significant number of bids in heat generation since privatization in the United each of the auction rounds and falling bid costs in Kingdom: the Non-Fossil Fuel Obligation each successive round.9 Connor (2003, 76) (NFFO), which ran from 1990 to 2002, and the reports that in the five rounds of NFFO in Eng- Renewables Obligation (RO) scheme, which land and Wales, onshore wind costs fell from 10 began in 2002. During their period of operation, pence (15.0 cents) per kWh in 1990 to 2.88 pence these have been the most significant forms of (4.3 cents) per kWh in 1998, with substantial falls renewable energy support in the United Kingdom for the other technology bands. Although NFFO and were designed to work in parallel with liber- was successful in soliciting a large number of alized electricity and gas markets. competitive bids and in ensuring that any funded The assessment of renewable support policies projects were cost-effective for electricity custom- is complicated because there are two obvious ers, it failed rather spectacularly in one key metrics of success: the amount of renewables real- respect: delivery of actual investment by the win- ized relative to potential (quantity); and the total ning bidders. cost of renewable energy support policy relative to Across the United Kingdom, between 1990 the amount of generation actually supported and 1999, out of 302 awarded wind projects cov- (suitably discounted). These two trade off, mean- ering 2,659 MW, only 75 projects were built, ing that success in one is likely to be associated rated at 391 MW (Wong 2005). Spectacularly, not with less success in the other. one of the 33 large wind projects awarded in the fifth round of NFFO in England and Wales was The Non-Fossil Fuel Obligation ever contracted. By contrast, out of 308 landfill gas projects awarded, 208 were operational in The Non-Fossil Fuel Obligation (NFFO) was 2008, with 458 MW of capacity out of 660 MW originally designed as a way of financing the extra contracted. For all the rounds of NFFO, out of costs of nuclear power that became clear in the 933 awarded contracts, 477 were built, represent- run-up to privatization. A non-fossil-fuel levy was ing 1,202 out of 3,639 MW (DECC 2009b, Table introduced on final electricity prices to pay for 7.1.2). The primary cause for the failure was that nuclear decommissioning liabilities, and electri- bidders were overoptimistic in their estimates of city suppliers were forced to buy nuclear power at the actual delivery costs of the projects, often higher-than-market prices in auctions for non- because the nature of the least-cost auction—with fossil-fuel power run by the Non-Fossil Purchas- no assessment of likelihood of delivery—
  7. 7. UK Renewable Energy Policy since Privatization 259 incentivized minimization of expenditure on pre- development.” Institutional barriers emerged paring realistic bids (Mitchell and Connor 2004). early on as a critical factor in successful project In reviewing the failure of the NFFO policy, implementation (McGowan 1991). it is important to remember the context in which In particular, it became clear that projects had it operated. Renewables were then a very low a problem with gaining the necessary consents priority for UK government policy, and it was a required to start building, known as “planning period of a rapid switch from coal- to gas-fired permission” in the United Kingdom, and that a power. Prices and pollution, in terms of quantities lack of attention was given to proper environmen- of CO2, SOx, and NOx, fell substantially. The tal impact assessments (Coles and Taylor 1993). focus on market-driven investments was good for Hull (1995) noted that in the early years, less than energy and carbon-efficient combined heat and half of all councils, the local government bodies power (CHP) investment in the industrial and responsible for consents, had planning guidance commercial sectors (Bonilla 2006; Harvey 1994; for renewable energy projects, and more impor- Marshall 1993), which had struggled prior to pri- tant, there was a lack of learning among councils. vatization (Jarvis 1986). UK privatization was a Calls came for clearer guidelines for the planning significant policy success in economic terms, process to facilitate wind power (Roberts and especially when the benefits to the environment Weightman 1994). Early industry views of the are considered (Newbery and Pollitt 1997). scheme were positive, recognizing that it did con- The privatization and market liberalization stitute a significant increase in expenditure over policies ensured that the United Kingdom would previous levels (Porter and Steen 1996). However, easily meet its Kyoto targets for 2012 without any the successive rounds of auctions were thought further action, which was not the case for other not to provide assurance of continuity of support leading European countries. The mood at the for renewables generally (Elliott 1994; Mitchell time was nicely summarized by a government 1995), and some worried that although they sup- minister for energy in 1988, Michael Spicer, who ported near-market technologies, declines in wrote that “privatisation of the electricity supply R&D expenditure were bad for less advanced industry should boost the commercial prospects technologies such as marine (Elliott 1994). for these [green] technologies as a free market is The final years of NFFO, 1999–2001, coin- established” (Elliott 1992, 266). Indeed, Friends cided with a sharp decline in wholesale electricity of the Earth was optimistic that the opening up of prices as significant amounts of new gas-fired the residential energy market to competition in capacity came into the market and competition 1998–1999 would give rise to demand for green increased within the initially duopolistic genera- tariffs and stimulate the production of green tion sector (Evans and Green 2003). NFFO gen- energy (Stanford 1998). It was only as the EU erators had made overoptimistic bids, and their moved toward substantial targets for renewables situation was exacerbated by the end of the com- that it became clear that the United Kingdom pulsory wholesale power pool, which had guaran- needed a policy that delivered large quantities of teed the pool price to all generators, in March renewables.10 Nevertheless, significant lessons can 2001. It was replaced with a contract market and a be learned from the NFFO experience. balancing market. Imbalance between supply and Somewhat surprisingly, little quantitative demand for an individual generator was now analysis has been done on the bids that were suc- more likely to result in a financial penalty. Inter- cessful under NFFO and the factors in their suc- mittent renewable generators were more likely to cess and failure. Elliott (1992, 267) criticized the need to participate in the balancing market to bal- NFFO scheme as a “somewhat half-hearted ance their physical and contractual positions; hybrid market/interventionist system” that because of the exogenous effects of weather, wind “would still leave short-term price and market generators have less capacity to match supply and factors to shape important long term strategic demand than fossil-fuel generators, who can choice concerning patterns of technological adjust their spinning reserve. This is not necessar-
  8. 8. 260 Michael G. Pollitt ily inefficient, however, as generators should be excluded). This share is steadily increasing from incentivized to solve the imbalance problem. The 2002 to 2015 (see Table 13.4). Under the RO impact of this effect seems to have subsided after scheme, electricity suppliers must acquire these one year of operation of the new arrangements, certificates in the prescribed target share of partly as a result of the arrival of a more generous renewable generation for each annual period. subsidy regime when Ofgem (the independent They can do this by buying or earning ROCs, UK agency responsible for electricity and gas which are created when renewable generators regulation) found little evidence of negative generate electricity. This essentially splits the mar- impact from the change to the trading system on ket into two parts, renewable and nonrenewable, renewable generators (see Ofgem 2002). with renewable generators getting a price for the ROCs they create plus the wholesale price of The Renewables Obligation Scheme power.11 The Renewables Obligation (RO) scheme, which The UK scheme has two important features replaced NFFO in 2002, uses a form of tradable introduced at its inception, however. One is a green certificates (TGCs), known in the UK as buyout price (i.e., a penalty price) for ROCs if Renewables Obligation Certificates (ROCs). not enough are created by renewable generation. Under this plan, the government set a minimum This price is specified for each trading period and share of electricity to be acquired by electricity effectively caps the price that creators of ROCs suppliers from renewable sources (larger hydro- can receive. The other is recycling of the revenue electric schemes in operation before 2002 are collected from the buyout sales of ROCs. This Table 13.4. RO targets and delivery against targets Target renewable % delivery in UK Nominal Total costb share in GBa buyout price (£ million) (£/MWh) 2002–2003 3.0 59% 30 282 2003–2004 4.3 56% 30.51 415.8 2004–2005 4.9 69% 31.59 497.9 2005–2006 5.5 76% 32.33 583 2006–2007 6.7 68% 33.24 719 2007–2008 7.9 64% 34.3 876.4 2008–2009 9.1 65% 35.36 1,024.6 2009–2010 9.7 37.19 2010–2011 10.4 + inflation thereafter 2011–2012 11.4 2012–2013 12.4 2013–2014 13.4 2014–2015 14.4 2015–2016 15.4 Estimated: ~1,733 (2008–2009 prices) assuming no demand growth Sources: OPSI, 2009; and Renewables Obligation annual reports from Ofgem various dates. Notes: From 2016, the share was fixed at 15.4% until 2027, now extended to 2037 for new projects; RO scheme cost is total cost including revenue recycling; £1 = $1.50 as of this writing a Target share lower in Northern Ireland, but NI ROCs are tradable throughout UK. There is also a nominal distinction between Scottish ROCs (SROCs) and English and Welsh ROCs (ROCs), but these are tradable, and both are included in the GB target share. b We report costs based on multiplying the buyout price by the actual ROC requirement. There appear to be small discrepancies in the actual reported payments and this figure in Renewables Obligation annual reports from Ofgem.
  9. 9. UK Renewable Energy Policy since Privatization 261 takes the form of allocating the revenue back to The scheme is further complicated by the the creators of ROCs in proportion to the introduction of “banding” starting on April 1, number they created. 2009 (see Table 13.5). This changes the exchange The renewable energy industry was very posi- rate to ROCs of some renewable generation: tive about the new incentive mechanism (Hill and established technologies will get less than 1 ROC Hay 2004). So they should have been, because the per MWh, newer more. This change breaks the scheme is very generous. Thus for example in link between the total number of ROCs and the 2007–2008, the buyout (penalty) price was share of renewable energy generation and will £34.30 ($51.45) per MWh, and only 64% of the presumably result in a reduced amount of elec- required ROCs were created by generators, tricity being produced from renewables if the meaning the buyout price was binding in the cer- scheme is fully successful (if the share of high- exchange-rate technologies were to take off, as it tificate market. The total payment by suppliers might with offshore wind). The Carbon Trust was the target quantity of renewables multiplied by £34.30 ($51.45) per MWh. This meant that Table 13.5. Banding of ROCs from April 1, 2009 36% of the total ROC payment made by suppliers was available to be recycled and was divided pro- Generation type ROCs per MWh portionally among the generators who created Landfill gas 0.25 actual ROCs. Accordingly, for each ROC actually Sewage gas presented, the renewable generators received 0.5 Cofiring of biomass £34.30 plus £18.65 ($27.98) (i.e., an additional Onshore wind 36/64 times £34.30 less costs of the scheme) This Hydro sum is in addition to the wholesale cost of power. Cofiring of energy crops As the total cost to suppliers of the ROC scheme Energy from waste with CHP was £876 million ($1,314 million), this implies Cofiring of biomass with 1.0 that consumers overpaid, relative to what was CHP necessary to secure the renewable generation Geopressure actually supplied, by at least the value of the Standard gasification buyout revenue of around £315 million (36% of Standard pyrolysis Offshore wind £876 million [$1,314 million], or 1% of the total Biomass electricity expenditure of £30.7 billion [$46 bil- 1.5 Cofiring of energy crops lion] in 2008) (DUKES 2009).12 Interestingly, the with CHP government collects the associated ROC pay- Wave ments on the generation contracted under NFFO Tidal stream via the NFFO fund, which creates a surplus above Advanced gasification the payments to generators under that program; Advanced pyrolysis this surplus is estimated to be around £200 mil- Anaerobic digestion lion ($300 million) per year (Tickell 2008). Energy crops The RO scheme is curious for two reasons. Biomass with CHP First, it relies on underdelivery to trigger the 2.0 Energy crops with CHP maximum subsidy amount. If the target number Solar photovoltaic of ROCs (or more) were presented, then the Geothermal price would drop to zero. Second, in the case of Tidal impoundment—tidal underdelivery, the maximum amount of subsidy is barrage paid to those actually creating ROCs. Thus the Tidal impoundment—tidal scheme assumes failure to meet the target and lagoon ensures that a fixed total subsidy is paid, given this, regardless of how few ROCs are created. Source: DECC 2009d
  10. 10. 262 Michael G. Pollitt (2006) recommended the move to banding to Table 13.6. Financial support (£ million) for recognize the different stages of development that renewables in the United Kingdom (nominal) the technologies had reached, and hence the higher learning benefits associated with increased R&D RO NFFO funding to earlier-stage technologies. Oxera 1990–1991 14.7 6.1 (2005) points out the cost implications of allowing 1991–1992 17.1 11.7 NFFO plants to earn ROCs once their NFFO 1992–1993 16.1 28.9 contracts expired (around £620 million [$930 1993–1994 15.2 68.1 million]), giving those projects unexpected addi- 1994–1995 9.1 96.4 tional subsidy. Oxera calculated that as much as 1995–1996 9.1 94.5 half the payment via ROCs was in excess of that 1996–1997 6.2 112.8 required to ensure that the funded projects went 1997–1998 4.3 126.5 ahead, and that existing landfill gas projects did 1998–1999 3.3 127 not require any ROCs to be economically viable. 1999–2000 4.6 56.4 The scheme, as shown in the table, implies that the subsidy to offshore wind could be 2000–2001 4.4 64.9 increased by £26.47 ($39.71) per MWh (50% of 2001–2002 6.1 54.7 the 2007–2008 ROC revenue) and to tidal by 2002–2003 10.5 282.0 - £52.95 ($79.43) per MWh (100% of the 2007– 2003–2004 11.6 415.8 - 2008 ROC revenue). In the 2009 budget, off- 2004–2005 19.7 497.9 - shore wind was subject to an emergency 2005–2007 36.6 583.0 - rebanding provision, which saw the offshore wind 2006–2007 49.5 719.0 - ROC band go to 2 for 2009–2010 and 1.75 for 2007–2008 41.6 876.4 - 2010–2011, now increased back to 2 from 2010– Sources: UK government renewable R&D budget data from IEA 2014. 2009; Mitchell and Connor 2004, 1943 Policy Costs and Delivery port is up 47% in real terms from the figure esti- under NFFO and RO mated by Wordsworth and Grubb (2003) of £1.3 billion ($1.95 million) in 2002–2003.13 Table 13.6 summarizes the financial commitments As the above discussion of the progress with made under the NFFO and RO schemes, as well the RO scheme has made clear, the development as a reference amount for the amount of public of electricity from renewables has been disap- R&D expenditure reported to the International pointing in terms of overall cost relative to deliv- Energy Agency (IEA). The increased significance ery, given the United Kingdom’s resource poten- of the RO scheme is evident. tial and ambitious targets. Table 13.8 gives the fig- While the RO scheme is the most significant ures in terms of total electricity generation. A element of the United Kingdom’s expenditure on number of features stand out. First of all, electri- renewables, it is not the only element. Table 13.7 city from biomass in 2008 is larger than that from is a summary offered in a ministerial answer to a wind. Hydro remains significant within the UK parliamentary select committee question. It is renewable portfolio. Connor (2003) reported esti- noteworthy that significant additional amounts are mates from 2002 that suggested the United King- still being spent by the taxpayer on supporting dom would meet only two-thirds of its target level earlier-stage technologies outside the CO2 price by 2010. This still seems likely. However, the and RO support mechanisms. However, the order striking thing about the 2002 estimates is that for of magnitude of energy customer support for biomass, offshore wind, and hydro, they seem renewables is of the order of £1.8 billion ($2.7 likely to be met or exceeded, though not by billion) in 2008, in addition to £400 million onshore wind. The United Kingdom is failing to ($600 million) by the taxpayer. This level of sup- meet its projections for renewables as predicted,
  11. 11. UK Renewable Energy Policy since Privatization 263 Table 13.7. Support for renewable energy in 2007–2009 Scheme Description Cost Paid by Renewables Obligation Electricity suppliers must buy a proportion of £874 million in 2007– Electricity Certificates their sales from renewable generators or pay a 2008 consumers buyout charge EU Emissions Trading Renewable generators indirectly benefit from the Perhaps £300 million in Electricity Scheme increase in electricity prices as other companies 2008, given current per- consumers pass the cost of emissions permits into the price mit prices of power Carbon Emissions Energy companies must install low-carbon items Total cost will be £1.5 Gas and electricity Reduction Target in homes, which could include microgeneration billion over 3 years, consumers from 2008 mostly spent on energy efficiency Renewable Transport Fuel suppliers must supply a proportion of No more than £200 mil- Consumers Fuel Obligation biofuels or pay a buyout charge lion in 2008–2009 Climate Change Levy Electricity suppliers need not pay this tax (passed £68 million to UK genera- Taxpayers, via on to non-residential consumers) on electricity tors, £30 million to gen- reduced revenues from renewable generators erators abroad in 2007– 2008 Lower fuel duty for The rate of fuel duty is 20 pence (30 cents) per £100 million in 2007 Taxpayers, via biofuels liter below that for petrol and diesel reduced revenues Environmental Transfor- Grants for technology development and deploy- £400 million over 3 years Taxpayers mation Fund ment, including subsidies for installing renewable starting in 2008–2009 generation, planting energy crops, and develop- ing biomass infrastructure. Research councils Grants for basic science research £30 million in 2007–2008 Taxpayers Energy Technologies Grants to accelerate development (after the basic Allocation and eventual Taxpayers and spon- Institute science is known) of renewables and other size of budget not yet soring companies energy technologies announced Source: House of Lords 2008, Table 6 Note: £1 = $1.50 as of this writing but this is largely due to the failure to deliver the had some success, with a steady increase in hydro long-expected increase in generation from generation from these schemes. These projects use onshore wind. established technology and have benefited from Both NFFO and RO have stimulated electri- market-based support mechanisms. Paish (2002) city from landfill gas and cofiring of biomass and highlights around 400 MW of further potential municipal waste (with fossil fuels). These tech- for small-scale hydro in the United Kingdom. nologies were near market in the early 1990s and There also have been promising developments had good prospects at that time. Brown and with offshore wind in the United Kingdom, Maunder (1994) discuss the United Kingdom’s assuming the actual delivered costs can be kept potential for exploiting landfill gas, and Jamasb et down. As of August 2009, offshore wind capacity al. (2008a) explore the prospects for waste to is currently 598 MW, but an additional 1,246 energy, noting it has significant further potential, MW are under construction, and a further 3,613 especially if CHP is involved. The use of biomass MW have been consented. This contrasts with for cofiring in coal-fired plants continues to be 3,730 MW of onshore wind capacity, with only one of the most sensible uses of biomass, as it is 930 MW under construction and 3,275MW con- well proven that mixes of up to 10% biomass sented (BWEA n.d.). require little adjustment to existing plants It seems likely, given the continuance of high (Thornley 2006). Small hydro projects have also levels of support via banded ROCs, that offshore
  12. 12. 264 Michael G. Pollitt Table 13.8. Renewable electricity generation (GWh) in the United Kingdom, 1990–2008 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 Wind Onshore wind 9 945 960 1,251 1,276 1,736 2,501 3,574 4,491 5,792 Offshore wind 0 1 5 5 10 199 403 651 783 1,305 Solar photovoltaics 0 1 2 3 3 4 8 11 14 17 Hydro: Small scale 91 214 210 204 150 283 444 478 534 568 Large scale 5,080 4,871 3,845 4,584 2,987 4,561 4,478 4,115 4,554 4,600 Biofuels: Landfill gas 139 2,188 2,507 2,679 3,276 4,004 4,290 4,424 4,677 4,757 Sewage sludge 316 367 363 368 394 440 470 456 496 564 digestion Municipal solid waste combus- 221 840 880 907 965 971 964 1,083 1,177 1,226 tion Cofiring with 286 602 1,022 2,533 2,528 1,956 1,613 fossil fuels Biomass 0 410 743 807 947 927 850 797 964 1,155 Total Biofuels and wastes 676 3,796 4,493 5,047 6,174 7,364 9,107 9,288 9,270 9,315 Total Renewables 5,857 9,828 9,516 11,093 10,600 14,147 16,940 18,136 19,646 21,597 Total Generation 319,701 377,069 384,778 387,506 398,209 393,867 398,313 398,823 397,044 389,649 % Total Renewables 1.83% 2.61% 2.47% 2.86% 2.66% 3.59% 4.25% 4.55% 4.95% 5.54% Wind 0.00% 0.25% 0.25% 0.32% 0.32% 0.49% 0.73% 1.06% 1.33% 1.82% Hydro 1.62% 1.35% 1.05% 1.24% 0.79% 1.23% 1.24% 1.15% 1.28% 1.33% Biofuels 0.21% 1.01% 1.17% 1.30% 1.55% 1.87% 2.29% 2.33% 2.33% 2.39% Source: Digest of UK Energy Statistics, various issues wind will overtake onshore wind generation, (see Mueller and Wallace 2008). The first 1.2 MW albeit on the back of very disappointing delivery tidal stream plant was installed in 2008 (Riddell of onshore wind projects. 2008), and the industry is well placed internation- Looking at the success of the NFFO and RO ally to exploit this and related marine technolo- schemes, NFFO did well on cost of the policy but gies (Elliot 2009). The UK government is cur- not as well on quantity of renewables delivered, rently conducting another feasibility study of the whereas RO did better on quantity delivered but 8.5 GW Severn Barrage, which could generate much less well on cost of the policy. 5% of the country’s current electricity demand. This is the biggest of the United Kingdom’s Other Renewables Policies potential tidal projects (Conway 1986), but cost While the main support mechanisms have favored and environmental issues remain to be addressed wind and biomass, direct government funding has (see DECC 2009f). However, a trial with a also helped the marine industry. A resurgence in smaller scheme first, such as a barrage across the research and demonstration funding in the last 10 Mersey, would seem sensible for learning that years has resulted in some positive developments might benefit the much larger Severn project.
  13. 13. UK Renewable Energy Policy since Privatization 265 PV has relied on direct government support for installation programs that have involved only a An Assessment of Renewables small number of installations, mainly funded via Policies the government’s Industry Department (DTI, then BERR) under the Low Carbon Buildings A 20-year view of UK renewables policy suggests Fund. This funding has installed only a few hun- a failure to translate the country’s early resource- dred PV systems. The degree of satisfaction with based promise into actual delivery of renewable the technology among the recipients of funding energy. It would be wrong to suggest widespread has been positive (Faiers and Neame 2006), but a policy failure, however. The United Kingdom is lack of significant sums of money and proper making progress on decarbonization and has assessment of the learning from the policy has strong and increasingly comprehensive policies in been noted (Keirstead 2007). This is in spite of a place, covering electricity, heat, and transport (via well-regarded R&D plan for solar being put in policies toward electric vehicles and biofuels). place in the 1990s (Stainforth et al. 1996) and Two points are worth making at this stage. work showing that significant community instal- First, renewable energy policy remains an expen- lations of solar would not pose any local grid sive gamble for all countries. Second, it is unclear problems (Thomson and Infield 2007). The gov- what part particular renewable technologies ernment has made two very recent changes to its should play in decarbonization to 2050. renewables policy, which are relevant to any As Helm (2002) has pointed out, a sensibly assessment of the need for reform of the current high and stable price of carbon is the starting arrangements (allowed for in primary legislation point for all economically feasible decarboniza- (OPSI 2008b)). tion policies. In the absence of this, it is virtually First, a feed-in tariff (FIT) for small-scale low- impossible to establish proper signals for mature carbon generation commences in April 2010 (see technologies and near-market technologies, This will be for renewable whose response to the proper price signal deter- electricity generation up to 5 MW and fossil-fuel mines how fast the country needs to accelerate CHP up to 50 kW. Meant to encourage PV, less developed technologies. This is particularly small-scale wind (including microwind), true for nuclear, CCS, and demand reduction microhydro, and micro-CHP, this policy responds investments, many of which are being delayed by to industry concerns about the lack of ambition in low, volatile, and uncertain prices for carbon. The microgeneration policy (Lupton 2008). United Kingdom, with its diversified energy sys- The second policy is a Renewable Heat tem, exposure to world energy markets, and Incentive (RHI) (see openness to both nuclear and CCS, has keenly felt This has the potential to be a significant policy the lack of a proper carbon price signal. covering all scales of production: household, As Nelson (2008) discusses, the failure to set a community, and industrial. It is intended to drive sufficiently tight cap on CO2 at the EU level the share of renewable heat to 14% (though this is makes UK renewables policy meaningless as a not a firm target) up from 0.6%. It could cover air policy for decarbonization. More renewable elec- source heat pumps, anaerobic digestion to pro- tricity generation within the EU Emissions Trad- duce biogas for heat production, biomass heat ing System (ETS) simply causes fuel switching in generation and CHP, ground source heat pumps, the fossil plants from gas to coal, not to mention liquid biofuels (but only when replacing oil-fired delaying nonrenewable low-carbon investments heating systems) and solar thermal heat and hot in CCS and nuclear. In this context, UK water. renewables policy has been somewhat conserva- The scheme is not finalized at the time of tive with respect to funding levels under NFFO writing and is due to commence in April 2011. and to renewable energy targets under the RO and, until recently, unwilling to pick winners. As Eikeland and Sæverud (2007) point out, however,
  14. 14. 266 Michael G. Pollitt the ending of the United Kingdom’s status as an an impact assessment to the relevant local govern- energy exporter in 2003 and the associated rapid ment authority. The application is initially assessed decline in oil and gas reserves have led to a by a local planning officer, who makes recom- reawakening of energy security concern as a mendations on the plans to the relevant group of major driver of UK energy policy. This is likely to elected local councilors for the area, who in turn explain substantially increased interest in deliver- vote on the proposal. Plans would be available for ing more domestic renewable capacity. public consultation, and objections could be Failure to deliver large quantities of raised during the review period. Planning applica- renewables so far is not a particular issue, in that tions can be granted subject to conditions and delay will probably mean lower costs of exploita- obligations. This process might result in a number tion (resulting from learning by doing elsewhere of iterations in the plans. Should permission be and learning by research) when they are finally refused, the applicant can appeal the decision, in exploited. The unfortunate aspect of the RO sys- which case a costly public inquiry would ensue. tem is its failure to deliver cost-effectively the The relevant central government department also renewables that it has delivered. This has been a has the right to disallow a locally approved plan- serious design flaw, and the inability of the UK ning application so objectors can appeal to the government to learn and correct the flaw does not relevant government minister. At the national bode well for any other long-term mechanism put level, plans need to be submitted to the relevant in place to support renewables. Nevertheless, government department for referral to the secre- given the targets for delivery that exist within the tary of state for final decision. Objections can be scheme, it is clearly important to consider why raised to these plans according to the planning the scheme has not delivered the quantity of guidelines. This national-level process is being renewables intended. The failure of the scheme to streamlined, as below.15 deliver overall lies squarely with one particular The average time for local and national plan- technology: the failure to deliver sufficient quan- ning decisions on onshore wind in 2007 was 24 tities of onshore wind. months, with approval rates of 62% (Chamberlain 2008, 21). For large projects, the Ministry of Onshore Wind and the Planning Problem Defence, National Air Traffic Control, and civil airports were major objectors. Attempts have been The standard reason given for the delivery failure made since 2007 to obligate local councils to set is difficulties in getting new wind farms through target levels of energy from renewables for new local planning processes. Whereas conventional developments. The 2008 Planning Act (see OPSI power plants can easily be built on existing sites 2008c) allows for setting up an Infrastructure and require national-level planning consents, Planning Commission to decide on large onshore wind farms are often small in terms of MW wind farms (greater than 50 MW) as well as large capacity and require local planning permission if offshore projects (greater than 100 MW) (see less than 50 MW, which covers most onshore NAO 2008, 40–41, for a discussion). installations.14 Evidence has consistently shown The literature has dug more deeply into the that gaining planning permission is a serious planning problem. Hedger (1995) highlights that obstacle to the development of wind farms or, wind power development involves a clash of plan- more precisely, that the costs of obtaining permis- ning cultures: land use versus energy supply. The sion are often prohibitive in terms of imposed first is fundamentally local, participatory, and con- delays, negotiation costs, and planning restrictions cerned with preserving rural landscapes; the sec- on the precise nature of the final investment. ond is fundamentally national, top-down, and In the United Kingdom, local planning deci- concerned with delivering technological solutions sions typically involve an applicant, such as a wind to national energy supply requirements. These project developer, making a planning application. cultures were bound to clash in onshore wind This includes the submission of detailed plans and power development.
  15. 15. UK Renewable Energy Policy since Privatization 267 Mitchell and Connor (2004) stress that the many people’s fears not being realized. It is also emphasis on cost minimization, combined with true that in general, majority support exists for the tying of subsidies to particular locations and new wind farms, but there are a significant plans, meant that many successful NFFO bids number of both local and nonlocal objectors to failed to get through the planning process. This given schemes (Warren et al. 2005). This suggests was because the bidders were not able to invest in a social gap or democratic deficit at the local level local engagement or respond to the outcome of that needs to be overcome (Bell et al. 2005) in the engagement process by modifying their pro- order to connect national policy delivery with posals. Indeed, the competitive nature of NFFO legitimate local concerns. meant that often the bidders had to keep prospec- Rather surprisingly, little systematic study has tive locations secret and did not engage in local been done of success rates in individual local consultations prior to bidding. Toke (2005b) authority areas or by individual developers or found that for the projects he examined from the ownership type. Only Toke (2005b) has attempted third through fifth NFFO rounds in England and a regression analysis, looking at planning permis- Wales, 47 were granted planning permission, 47 sion acceptance and refusal for wind projects refused planning permission, and 96 did not make based on a sample of 51 proposals. Among his or complete an application.16 findings is that if the local planning officers (who The main reasons given for planning objec- process applications and make recommendations tions were visual amenity impairment and worries to the local councilors who vote on the applica- about noise (Eltham et al. 2008). These gave rise tion) object, then projects are almost always to concerns about economic effects on house refused, whereas if they accept a project, it is likely prices and tourism. The United Kingdom is a to go through on appeal. Toke also finds that if the densely populated island, with many areas of Campaign to Protect Rural England, which cam- lower population and high ground located in paigns “for the beauty, tranquillity and diversity of national parks or other places that attract tourists. the countryside” (CPRE n.d.), objects to a Increasing numbers of residents or second-home project, it is likely to be opposed by the local buyers have been moving to such areas for their parish council. One developer, Wind Prospect visual amenities rather than employment reasons (2008), which has a joint venture with EDF, a (see Strachan and Lal 2004 for a discussion of the major energy company, to develop onshore wind debate around tourism). The decline of employ- farms in the United Kingdom, has invested heav- ment in farming and rural industries has reduced ily in local consultation and seems to have been the scope for arguments based on the small more successful in gaining planning permission number of permanent jobs that might be created (see Toke 2005b). Active community involvement in the energy sector, because increasing percent- has led to successful development in some cases, ages of people living in the countryside work in particularly when the community owns shares in nearby conurbations and are not looking for the wind farm, but these are small in capacity employment in local industries. terms.17 However, under both NFFO and RO, Rural environmental protection and local there has been an unwillingness to actively involve community action groups thus had strong incen- communities in co-ownership of onshore wind tives to organize opposition to individual wind developments, possibly because of the dominance farm projects, although in some cases tourism of large power companies within the UK wind actually increased after wind turbines were power sector and the high transaction costs of installed, and the noise from a modern turbine such engagement. that is 500 meters away is no more than in a quiet Overall, it is difficult to tell whether the full bedroom (Strachan and Lal 2004). A number of cost of developing wind power onshore is actually studies (e.g., Eltham et al. 2008; Warren et al. much higher than it would appear, given the 2005) have shown that attitudes to wind farms social value of the UK countryside, or whether a consistently improve after construction, with feasible redistribution of the current benefits
  16. 16. 268 Michael G. Pollitt toward potential local objectors would be enough anti-wind lobbies. The wind developers were to solve the planning problem. Bergmann et al. unhappy that many proposed schemes lay outside (2008) use willingness-to-pay modeling of a sam- the designated areas, and anti-wind groups were ple of rural and urban dwellers in Scotland. While unhappy with where some of the boundaries of both groups value reduced environmental impact the acceptable areas were drawn. from power generation highly, the authors find that urban dwellers are willing to pay more for an offshore wind farm than for an equivalent large onshore wind farm and value the rural employ- Biomass ment opportunities less than do rural people. The Biomass is likely to be the second-largest renew- actual construction costs of wind farms in the able energy source out to 2020 in the United United Kingdom are difficult to come by, but the Kingdom. Biomass is frequently cited as a signifi- information that is available suggests that cant, albeit finite contribution to UK decarbon- simulations of the likely penetration of new ization (of the order of up to 5%) (see Taylor 2008 projects are still based on optimistic assumptions for a review). Biomass policy toward waste has that wind costs will be much cheaper than they been largely successful because of the near-market currently are.18 High actual costs may therefore be nature of the technology and its responsiveness to a factor delaying investment. The achieved load both NFFO and RO subsidies. The direct burn- factors for the whole UK wind portfolio in 2008 ing of biocrops has also been successful, given the were 27% for onshore and 30.4% for offshore emerging global market in tradable biomass from (DECC, 2009b, 206) in contrast to higher countries such as Brazil, Canada, and the United assumptions in some calculations (e.g., Dale et al. States (Junginger et al. 2008). 2004, who assume 35% for both onshore and off- Government support for local biocrop plants shore wind). has proved problematic, however, given the tech- No doubt smaller, more local developments nological, planning, and economic constraints. A would facilitate reduced planning objections, but high-profile project involving local biomass and they would come with their own higher costs. new technology failed as a result of financing con- The move to FITs for such smaller developments cerns (Piterou et al. 2008), and it is difficult to should help increase the number of such projects. justify the use of local biocrops for anything other However, in examining scenario rankings from than direct burning in existing coal-fired power different wind actors in northwest England, stations in direct competition with internationally Mander (2008) finds that expansion of offshore traded biomass, which is usually produced more wind was the only part of a wind strategy that efficiently abroad. Nevertheless, some focus both pro-wind and pro-countryside lobbies could group studies have suggested that there is public agree on, even if onshore wind became more support for the use of local biomass in small CHP community-driven. Attempts to streamline the plants and skepticism about the overall GHG planning process have been made, with significant impact of the use of internationally traded reforms to the appeals process in 2003 (Toke biomass (see Upham et al. 2007). 2003), giving more power at the national level; It is not environmentally sensible to use local nevertheless, there is clearly still an issue of getting biocrops to produce biofuel in the United King- permission. Attempts in 2005 to streamline the dom. Local biocrops produce more GHG impact planning process in Wales (under a devolved when directly burned to produce power and heat administration) have had mixed success (Cowell (Hammond et al. 2008). Indeed, in the longer 2007). The Welsh Assembly designated “strategic run, the current use of biofuels to blend with search areas,” which were assessed to be more petrol and diesel may be phased out as the vehicle suitable for large wind farm developments and fleet is electrified (for current use, see Bomb et al. hence more likely to be approved on appeal. 2007). The difficulty of making a sensible indus- These proved controversial, with both pro- and trial policy argument for a local crop-dedicated
  17. 17. UK Renewable Energy Policy since Privatization 269 biomass power plant within a viable long-run tem.19 This excess cost is significant and rising. decarbonization strategy is helpfully discussed by Nevertheless, it remains small compared with the van der Horst (2005). Indeed, Slade et al. (2009) high cost of the renewable deployment strategies criticize UK bioenergy policy as being character- of some other countries, such as Germany and ized by lots of initiatives but with a lack of clarity Spain, which have not allowed them to meet their as to precise objectives to be delivered. If the GHG reduction targets. country were to rely on internationally traded It is fashionable to suggest that the root cause biomass as its key input, this would require better of the problem of underdelivery of onshore wind certification as to the source of the biomass (van is the use of a tradable green certificate (TGC) Dam et al. 2008). scheme rather than a FIT, as used in Germany and Bioenergy, with its complicated supply chain, Spain (see, e.g., Butler and Neuhoff 2008; displacement impacts, and total production cycle Jacobsson et al. 2009; Lipp 2007; Meyer 2003; sustainability impacts, requires proper pricing of Toke 2005a; Toke and Lauber 2007). A more bal- all its environmental effects, including GHGs and anced assessment by the International Energy local pollutants, in order to calculate whether it is Agency (IEA 2006) of the UK renewable energy worthwhile (Elghali et al. 2007). The life cycle GHG impact of biocrops (i.e., the impact on the policy points out that TGCs have worked well (at amount of carbon stored in the stock of growing least to the date of the IEA’s assessment) in a crops) is further complicated by the carbon stor- number of jurisdictions, such as Texas, Sweden, age impacts of increasing the area set aside for Australia, and New Zealand. It is only in the growing them (Cannell 2003). United Kingdom where they seem to have mani- festly failed to deliver the intended capacity. Two common theoretical arguments have been made for the superiority of FITs over TGCs. UK Performance versus That of One is that by offering a fixed price per kWh to developers, this allows new renewables to be Other Countries financed more easily. The other is that FITs attract The discussion so far indicates that comparative large quantities of renewables because these are assessment of UK policy on renewable energy not limited to the most attractive sites. would not be straightforward. It is clear that the The first argument is well put by Mitchell et United Kingdom has pursued a successful decar- al. (2006), who maintain that the UK RO scheme bonization strategy to date and that relative suc- exposes renewables to price, volume, and balan- cess has been achieved in several areas, both in cing risks, rather than just volume risks as under a responding to price signals and in developing new FIT. Although this clearly does impose costs, it is technologies for deployment in the country. The not clear that it is suboptimal or that it explains one area of failure is in deployment of onshore nondelivery against the United Kingdom’s wind at least cost. The net environmental impact renewables targets. Higher risk is relevant to non- of this failure is currently zero, given that the delivery where development is small-scale and the United Kingdom is on course to meet its GHG developers have little or no credit history; here reduction targets. Still, this environmental per- there may well be a significant market failure in formance could have been delivered at lower cost. the market for external finance. However, it is The excess costs of the current set of policies are rather a weak argument when the ultimate devel- hard to estimate, given the diversity of support opers are mostly large multinational companies instruments. However, a lower-end estimate making portfolio investments, and when most would be the amount of revenue recycling within ROC credits are bought by the six multinational the RO mechanism, as this overpayment seems supply companies who dominate the UK market, largely unnecessary to deliver the observed quan- each with generation interests and the option to tity of renewables connected to the electricity sys- invest directly in renewable capacity.
  18. 18. 270 Michael G. Pollitt Table 13.9. Differences among leading wind countries in Europe 1,000 mi2 land % onshore wind owned % owned by % owned by Wind cap- per million by utilities/ farmers cooperatives acity (MW), population, corporations end 2008 2009–2010 United 1.5 98 1 0.5 3,288 Kingdom Germany 1.7 55 35 10 23,903 Spain 4.3 > 99 < 0.5 0 16,740 Denmark 2.9 12 63 25 3,160 Sources: Wikipedia, List of Countries and Dependencies by Population Density (accessed 26 March 2010); Wind Power 2009; Toke 2005a The second argument makes less theoretical Local ownership, which is very high in Den- sense, because it is not clear why developing the mark and also notable in Germany, is a determi- most attractive sites first is not desirable in any nant of successful strategic deployment in these case. The quantity of renewables forthcoming is countries (Szarka and Bluhdorn 2006; Toke clearly accelerated by offering initially high 2007). This is important because these two coun- returns, but offering a margin for renewables to tries face similar land use constraints to the United attract investors is a function not of whether the Kingdom. The development in Spain, however, subsidy regime is a FIT or TGC, but of how large has occurred with similar ownership of wind a quantity of renewables is required under either assets by multinational companies, but in the con- scheme. TGCs can set ambitious targets, as in the text of very little land use constraint (Toke and United Kingdom, and can deliver attractive Strachan 2006). Thus it seems clear that these prices. Low prices for renewables are not a prob- countries have different institutional and physical lem with the ambitious RO targets. starting points than the United Kingdom. In the end, the question becomes whether the Econometric modeling by Soderholm and United Kingdom would have delivered more Klaassen (2007) of diffusion rates of wind power onshore wind capacity had there been a FIT for across Europe confirms that the United Kingdom wind energy. For community schemes, the answer has lower diffusion (penetration) relative to other is quite possibly yes, because the uncertainty of countries, and that FITs do tend to be more suc- individual project cash flows may well have been cessful in encouraging diffusion, but that a given an issue for funders. However, for larger schemes FIT would likely have less of an impact here than chiefly owned by multinational energy compa- in Germany. nies, it is hard to say. The problem has clearly been What is clear is that the financial cost of wind related to planning permission, and it is not obvi- power delivered onshore is unnecessarily high in ous how changing the funding regime improves the United Kingdom. Butler and Neuhoff (2008, the prospects for gaining planning permission 1856) show that while the NFFO schemes did unless it is more generous and offers scope for result in much lower support prices for wind in providing attractive payments to the local com- the United Kingdom than in Germany, they were munity. not that much lower once adjusted for the quality The literature seems to suggest that two more of the underlying wind resources. Under the RO, fundamental dimensions are of interest to explain renewable support costs are estimated to have the differences in delivery of onshore wind among been twice as high in 2006 as they would have the United Kingdom, Germany, Spain, and Den- been under a German support tariff applied to mark: land use constraints and local involvement UK wind resources (which would have been in ownership, such as via local cooperatives or lower than the actual tariff in Germany). Toke farmers (see Table 13.9). (2005a) shows that the RO scheme with revenue
  19. 19. UK Renewable Energy Policy since Privatization 271 recycling was more expensive per kWh than the the GB Queue are, and Ofgem has identified only German FIT following reductions in the size of around 450 MW of wind capacity that needs to the FIT in Germany. be prioritized via accelerating transmission invest- Looking at Spain, where large utilities have ment (see Ofgem 2009a). It is also the case that dominated in ownership of wind generation simi- new renewable connections should face the true larly to the situation in the United Kingdom, costs of connection to the grid and capacity, and Stenzel and Frenzel (2008) note the positive reac- they should come onstream when it is at least tion of incumbent Spanish companies to wind system cost, rather than only least generation cost. power development in Spain in contrast with that Nodal pricing would seem to be a more appropri- in Germany. They highlight the importance of ate way of signaling this, rather than the “connect corporate self-interest in promoting wind power and manage” approach under FITs in Germany development. Wind power in Germany devel- (see Pollitt and Bialek 2008). oped in spite of opposition from German utilities, The correct pricing for transmission capacity which were forced to accommodate renewables also points to the need for the United Kingdom and bear the costs of connection to the grid. In to look closely at the efficiency of utilization of Spain, this has led the corporate generators to transmission assets and their operational criteria. support investment in better prediction of wind The GB transmission system in general operates speeds at individual wind farm sites in order to under an N-2 safety standard, wherein the system better manage the grid. In Germany, however, must be operated in such a way that if a major link significant costs have been imposed on the trans- fails, it must be capable of handling another mission system that are not reflected in the con- similar-size failure. This gives rise to lower rates of nection incentives of wind developers. This has utilization of transmission grid assets than in led to grid management issues in Germany, which countries with an N-1 safety standard and gives will become more costly to deal with as wind rise to less use of automatic voltage control equip- capacity increases (Klessmann et al. 2008). It is ment. This suggests that there is scope for operat- even possible to suggest that the continuation of ing the assets much more smartly in the presence the grip of incumbents on the German power of large-scale renewables. For instance, the nomi- market is in significant part because of the unwill- nal rating of Scotland–England interconnectors is ingness of the German government to liberalize around 7 GW, whereas the declared capacity is 2.2 the market fully, for fear of undermining the abil- GW; this suggests that transmission constraints ity of the incumbents to finance the significant could be made less in practice than they might be reinforcement costs associated with renewables on paper. Ofgem’s recent LENS scenario expansion. modeling (Ault et al. 2008) of the electricity In 2008, the United Kingdom had around transmission and distribution networks suggests 13.2 GW in 195 projects that were in Great Brit- that a range of network sizes and capabilities are ain’s “GB Queue” (see Ofgem 2007a). These were possible by 2050, depending on how and where projects that wished to connect to the power grid, new generation capacity, including renewables, but for which no firm connection right could be was connected. offered, unlike under the German FIT, where Looking to other countries with TGC renewable capacity must be connected and paid schemes, it is quite clear that Sweden, Australia, for generated power (see Swider et al. 2008). The and New Zealand have avoided the problems of UK government has suggested that this is one of overpayment that characterize the UK RO the barriers to the rollout of renewables (DECC scheme, and these jurisdictions have significantly 2009e). This may explain some of the slow deliv- fewer land use constraints. Kelly (2007) discusses ery of renewable wind connection in the United the UK scheme in contrast to those of Australia Kingdom, but it certainly does not explain the and New Zealand. The Australian scheme, com- most significant part of it. It is impossible to tell plemented by an Office of the Renewable Energy how economically viable many of the projects in Regulator (see ORER n.d.), has much less ambi-
  20. 20. 272 Michael G. Pollitt tious targets than the UK scheme but does not have any revenue recycling. The New Zealand What Might Be Right for the scheme has higher targets than Australia’s but is United Kingdom voluntary. The Swedish scheme also does not have revenue recycling and is combined with carbon If a problem exists with the delivery of onshore taxes throughout the economy (see Swedish renewable capacity in the United Kingdom, what Energy Agency n.d.). The United Kingdom should be done about it? Answering this question would do well to examine the overall carbon requires attention to the institutional context of reduction incentives in Sweden. the United Kingdom (following Rodrik 2008). Szarka (2006) raises an important issue about The country’s policy context is a liberalized mar- policy comparison across countries in the case of ket for a relatively small island with concerns renewables, suggesting that policy should be about fuel poverty, global warming, and energy aimed at paradigm change, not just installed security. It is clear that what is needed is a policy capacity. Clearly what matters is where the coun- consistent with a liberalized energy market and try ends up in terms of decarbonization, and what with environmental targets. By contrast, Germany is required is radical change to the UK energy is much less committed to liberalized energy mar- system. He maintains that the real success of Ger- kets. It also has much more of a focus on a green man policy has been to engage large numbers of industrial policy aimed at promoting the manu- individuals in taking action on climate change, as facture of wind turbines for export. Although the investors in local wind farms. This is an important United Kingdom has paid lip service to this sort perspective, because it suggests that the real failure of objective, the reality is that only 4,000 jobs in of UK policy is not gaining practical support for the country depend on the wind production the sorts of changes to the energy system that are industry; even in Germany, the figure is only required. Failure to focus on this aspect of the 38,000 (EWEA 2009). It is quite clear that for an problem has led to an ineffective policy on industry requiring around £1 billion ($1.5 bil- renewables deployment, which will be more lion) of subsidy per year, this is not a cost-effective expensive than it need have been, due to a com- bination of underdelivery and overpayment. job creation scheme. Another issue is the stability of policy through The focus should rather be on least-cost time. A concern of UK policymakers in setting up achievement of environmental targets, which will the RO scheme was to introduce stability in the be much more important for the competitiveness subsidy regime over a long period, in contrast to of the UK economy and for incomes and employ- the stop-start nature of NFFO. However, ment. The current RO scheme is clearly far too although stability is a desirable goal in itself, this generous to existing onshore wind, and it does has been an excuse for not facing up to the serious not guarantee cost-effectiveness for offshore wind deficiencies of the RO scheme. Little evidence is and marine energy. It is also important that the available to indicate that the United Kingdom has aim of long-run cost reduction for technologies had a less stable policy toward renewables than that are currently not cost-effective be main- countries with high penetration rates of tained, and that these technologies compete with renewables, such as Denmark, Germany, and nuclear and CCS projects in a reasonable time Spain, where responses to incentives were rapid frame. An important starting point for this is the and significant changes have occurred to support creation of a single high and stable carbon price policy over time. throughout the economy. This would immedi- ately give clear signals to nuclear and CCS and provide the backstop technologies against which continuing subsidies can be measured. It would also provide the right incentives to biomass in terms of cofiring, landfill gas, and waste.