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Sir John Bourn, head of the National Audit Office, reported today that the Government is on course to achieve a significant increase in the level of electricity generated from renewable sources – as part of its response to global warming – but a number of challenges remain to achieving its 10 per cent target for renewable energy by 2010. Pursuit of the target will result in costs for the consumer and taxpayer exceeding £1 billion a year by the end of the decade, which will increase the price of electricity by around 5 per cent.

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To tackle climate change the Government is looking to reduce carbon dioxide emissions by some 60 per cent from current levels by 2050. Given the scale of the reduction it is implementing a variety of policy tools of which promoting renewable energy is only one. The Department of Trade and Industry has put in place a package of policies to encourage the development of different types of renewable energy, many of which would not be commercially viable without financial support. The core of the policy is the innovative Renewables Obligation, introduced in April 2002. This is a scheme designed to encourage greater electricity production from renewable sources by increasing the income renewable generators receive above and beyond the market price of electricity.

The Department has also made available capital grants to support offshore wind farms, and bioenergy power stations which generate electricity from fuel sources such as energy crops. It also provides research and development grants for those technologies which are not yet commercially viable, such as wave and tidal schemes.

The NAO’s main findings are:

  • Two years after the introduction of the Renewables Obligation, the level of electricity supplied from eligible renewable sources was 2.4 per cent against a quota of 4.3 per cent.
  • Despite shortfalls in the early years, the Department is on track to meet the 10 per cent target by the end of 2010 provided wholesale electricity prices remain at or around recent increased levels, and its responses to a series of challenges prove effective.
  • The cost of reducing carbon dioxide emissions through the Renewables Obligation is currently significantly higher than other policy mechanisms which primarily incentivise energy efficiency. The Government has identified the need for a range of measures to reduce carbon dioxide emissions including renewable energy and it is unlikely that other policy tools such as a carbon dioxide tax would yield the targeted level of renewable generation in the timescale required.
  • The Renewables Obligation is a system which provides the same level of financial support for all eligible renewable projects. The Department adopted this approach to ensure that the most economic renewable energy projects are developed first, while minimising Government intervention in the market. A consequence is that some projects using the cheapest technologies (onshore wind and landfill gas) at the best sites receive more support from the Renewables Obligation than necessary to see them developed. The Department is looking at this issue for new sites in its current review of the Renewables Obligation.
  • To aid the introduction of the Renewables Obligation, sites that still receive funding through the Department’s previous scheme to support renewables, were also included in the new scheme. An indirect consequence of their inclusion is the generation of income for the Exchequer, paid by the consumer through slightly higher electricity prices, which will accumulate to between £500 million and £1 billion by 2010.

Stability is needed to maintain investor confidence in the renewables sector which is a crucial factor in determining the effectiveness of the scheme. This has limited the Department’s ability to modify the scheme in the short term. The Department nevertheless needs to watch the balance between industry and consumer interests, and to consider factors, such as any reduction in the unit costs of renewable generation, which will influence the best way to reduce carbon dioxide emissions.

"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."

Sir John Bourn

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