Renewable Energy in the UK: Government Role

Renewable Energy in the UK: Government Role UK Renewable Energy: Electricity Generation and the governments role in driving CO2 reductions. Business Management EXECUTIVE SUMMARY This dissertation will mainly concentrate on UKs efforts to increase renewables contribution to electricity generation in the UK, which are part of a broader range of government strategies to reduce CO2 to meet global concerns and international obligations. It will also examine the forces driving the development of renewable energy market in the UK, as well as the overview of the governments role in driving CO2 reductions. The governments strategy on renewables includes several different elements, each attacking the problem from a different angle: mandatory regulation, information and education, technology RD support, and establishment of market-based mechanisms. The main findings presented will be based mainly on the literature review, expert opinions and future forecasts. A review of recent literature on this topic highlights the risk of failure due to failure of coordination among the many initiatives and government bodies involved, and the dangers of insufficient data in measuring progress. Also, they reveal the practical limitations of reliance on renewable to fulfill future electricity generation needs. The first part of the main analysis will provide an overview of the renewable energy market in the UK; it will include a summary of the current renewable energy policy and the main instruments which act as a driving forces for the development of renewables in the UK, as well as electricity market overview; second part would specifically concentrate on evaluation of whether the policies and targets set by government are efficient and achievable, the conclusion will summarize the findings and elaborate on future prospects for the renewable energy market in the UK. The available data indicates that the UK is already falling behind on its original plans for the uptake of renewable. However, government policy suggests growing awareness of the limitations of most renewables; and a consequent shift in focus away from renewables towards easier ‘bigger solutions such as nuclear power and carbon sequestration for coal-fired power stations. CHAPTER 1 1.1 INTRODUCTION A sustainable energy future is possible, but only if we act urgently and decisively to promote, develop and deploy a full mix of energy technologies We have the means, now we need the will†¦Ã¢â‚¬  Claude Mandil, International Energy Agency (IEA) In the 21st century, there has been a significant increase in energy demand due to factors such as population growth and changes in our lifestyle. According to the International Energy Agency (IEA) today 86.5 % of total worldwide energy consumption is generated from fossil fuels such as natural gas, oil and coal; which are said to be non-renewable, and are the main cause for increase in green house gases and carbon dioxide emitted into the atmosphere. According to the Intergovernmental Panel on Climate Change (IPCC), 2007, rising carbon dioxide (CO2) levels are the primary cause of global warming since 1950, and are expected to rise due to ongoing burning of fossil fuels and land-use change. As the worlds fossil fuels continue to diminish at an alarming rate, and global energy demand is forecasted to increase by 60% over the next 25 years (G8 Summit, 2005), alternative forms of energy must be developed that are economically cost effective, environmentally friendly, and easily harness ed. The development of renewable energy sources as a solution to these problems is expected to play a major role in the future energy supply and has developed a considerable interest within national government policies, environmental groups and the private sector. The term ‘renewable energy can be defined as â€Å"energy that is derived from natural processes that are replenished constantly† (Energy Statistics, 2004). The renewable energy sources are also covered by Europes climate change and energy policy. In March 2007, the European Council set a target of 20 percent of the total EU energy consumption to be generated from renewables by 2020. The policy also commits the EU Member States to reduce greenhouse gas emissions by 20 percent by 2020 and by 30 percent globally (The EC White Paper, 2007 (BERR)). According to BERR renewable energy is an integral part of the UK Governments longer-term aim of reducing CO2 emissions by 60% by 2050. The Government has set targets of reducing CO2 emissions by 20% by 2010 and 10% of electricity supply from renewable energy by 2010 (Digest of UK Energy Statistics, 2007). This raises the main questions addressed in this dissertation: Can the UK expect to meet and exceed the existing targets? What measure will be required to realize this potential and to encourage further investment in renewables? Despite the fact that renewables are seen by many policy-makers as a solution for improving energy security and saving the environment, there is still some uncertainty whether renewables could compete with conventional energy sources. Supportive policies and heavy investments are still needed to promote further development and deployment of renewables in energy markets. The establishment of new renewable energy technologies and their efficiency will depend on the costs and effectiveness. As a result, in order to promote renewable energy technology into the market there is a strong need to identify and analyse the policies which have a direct effect on technology and market development. 1.2 Renewable energy in the UK The United Kingdom is one of the worlds most globalized countries with the second largest economy in Europe and a population of 60 million. The UK currently contributes about 2 percent to global emissions, which, according to the Intergovernmental Panel on Climate Change, were estimated to be 38 billion tones carbon dioxide in 2004. UK energy industries are the main contributors to UK greenhouse gas emissions; according to statistics CO2 accounted for about 85 per cent of the UKs greenhouse gas emissions in 2006. In order to reduce emissions, the 2007 UK Energy White Paper sets out an objective to cut the UKs carbon emissions by 60% by 2050, with real progress by 2020. One way of achieving those targets would be by generating our energy from sources that produce very low or zero levels of greenhouse gases such as renewable energy sources. Renewable energy is â€Å"an integral part of the Governments strategy for reducing carbon emissions as renewable energy resources produce very li ttle carbon or other greenhouse gases†. (Commission, 2006) In 2006, about 75 percent of UK electricity was generated from fossil fuels, about 19 percent from nuclear power, and the remaining 4 percent from other renewables (Digest of UK Energy Statistics (DUKES), 2007). The UK has one of the most suitable markets for the development of renewable sources of energy due to its geographic location; especially in wind, wave and tidal energy. However, the UK is also rich in fossil fuels and until the climate change issue became evident the successive governments have neglected renewable energy as an alternative source of our main energy supply. The UK Government initially started to show support for development of renewable energy sources in 1990, when renewables became a part of the so-called non-fossil fuel obligation (NFFO), originally set up to protect nuclear power. The issue of climate change and high levels of greenhouse gases has given a new drive to the development of renewable energy in the UK. As part of the Climate Change Programme, in June 2000 the UK government replaced NFFO by the Renewables Obligation (RO) in England and Wales with the main aims to encourage further the development of the UK renewable energy industry and to achieve a 10 percent share of renewables in electricity generation by 2010 (Environmental Policy Integration). Overall the renewable energy contribution is increasing. Total electricity generation from renewables in 2006 amounted to 18,133 GWh, an increase of 1,263 GWh (+7 ½ per cent) on 2005. The main contributors to this substantial increase were 1,072 GWh from onshore wind (+43 per cent), 248 GWh (+62 per cent) from offshore wind 134 GWh (+3 per cent) from landfill gas and 119 GWh (+12 per cent) from municipal solid waste combustion (UK Electricity Statistics,2007). One of the other main drivers for the development of alternative energy sources in the UK aside from climate change issues is the security of energy supply. The UK continues to heavily rely on the diminishing sources of fossil fuels, such as coal, gas and oil, which are increasingly sourced in geopolitically unreliable areas, such as Venezuela, Nigeria and Russia. According to the UK Energy Statistics 12 percent of the UKs gas supply came from gas imports (Digest of UK Energy Statistics (DUKES), 2007). Therefore further development of alternative energy sources in the UK will reduce the amount of imported fossil fuels, as well as have a key role in resolving the climate change issue. In order to maintain the UKs energy supply and to achieve the carbon dioxide targets set in the Kyoto Protocol under which the UK has committed itself to the reduction of greenhouse gas emissions by 12.5 percent by 2012 (Sustainable Development Indicators in Your Pocket, 2007), as well as longer term goal set out in Energy White Paper to reduce carbon dioxide emissions by 60 percent by 2050, it is vital to sustain further development of energy sources that produce low or zero levels of greenhouse gases, such as renewable energy. Figure 1, shows the Kyoto target and CO2 emissions, 1990 to 2012. Figure 1: Defra, BERR, â€Å"Sustainable Development Indicators in Your Pocket†, 2007 The Governments policies together with the White Paper made proposals to help increase the sources of renewable energy in the UK. The initial proposals set out in the Energy White Paper 2007, concentrate on three main areas: Electricity generation, by strengthening and modifying the Renewables Obligation, by reforming the planning system and by removing barriers to the growth of decentralised electricity generation; heat, by publishing a Biomass Strategy which identifies opportunities for increasing the use of renewables in energy production and by announcing further work to develop a more strategic approach to heat; and Transport, by requiring through The Renewable Transport Fuel Obligation Programme (RTFO) that an increasing proportion of our transport fuel should come from renewable sources. (Energy White Paper , 2007) According to the recent study undertaken by the Poyry Energy (Oxford) LTD, by 2020, renewable energy supply is expected to account for around 12 percent of EU total energy demand, where 59 percent of this volume will come from electricity generation, 32 percent from renewable heat and 9 percent from transport (Compliance costs for meeting the 20% renewable energy target in 2020., 2008) This paper will mainly concentrate on electricity generation through renewable energy sources, as consistency of electricity supply is fundamental to a robust UK economy, and renewables appear to be a suitable solution to improve security of electricity supply in the UK. The UK Government has set a target in order to promote the generation of electricity from renewable sources, by 2010, 10% of UK electricity should come from renewable sources (BERR, UK). The costs of electricity production from renewable energy sources presented in the figure below demonstrate that generation costs depend on the resource conditions in different countries or regions, particularly the EU Member States (Compliance costs for meeting the 20% renewable energy target in 2020, 2008). Therefore, in order to establish and sustain the competitiveness of renewable energy sources it is essential to analyse whether renewable energy technologies can compete with conventional sources. Figure 2: Electricity generation cost of renewable energy technologies (EU Commission 2005: 24, Support of electricity from RE sources). To support the new energy strategy there was a significant development to the UK Renewables Policy, the government has established key elements such as Renewables Obligation, which is driving force for the investment and consumer interest in renewables and it does so by obliging electricity suppliers to source a certain percentage of electricity from renewable sources. It has also launched strategies which allow UK to identify its main strengths and to develop world-leading capabilities in renewable energy sector. The main drivers of UK Renewable Energy Policy include: Renewable Obligation (RO) The RO is the main support scheme for renewable electricity projects in the UK. It places an obligation on UK suppliers of electricity to source an increasing proportion of their electricity from renewable sources. Suppliers are required to produce evidence of their compliance with this obligation to the Office of Gas and Electricity Markets (Ofgem). Evidence can be via certificates, referred to as Renewable Obligations Certificates (Renewable Obligation, 2008). UK renewable electricity has increased considerably since the introduction of RO. In 2006 electricity supplied from RO eligible sources stood at around 4% of the UKs total electricity, up from 1.8% in 2002 (Energy White Paper , 2007). Climate Change Levy (CCL) Exemption The Climate Change Levy (CCL) is â€Å"an environmental tax levied on the supply of certain taxable commodities, for example electricity, gas and coal, and charged by energy suppliers to final business consumers. Domestic, and most charitable, consumers do not pay CCL (Microgeneration and the Climate Change Levy, 2007). In order to support further development of renewables and to encourage consumers to use environmentally friendly sources of energy, renewable electricity supplied to non-domestic consumers is exempt from CCL. Research Development Programme The Government has constantly introduced programmes for renewable energy sources to remove obstacles which stood in the way of the development of renewables by furthering research and gathering information as well as assist industrial activities in the UK. Such programmes support the Renewable Obligation and the exempt renewable from Climate Change Levy. The programmes will also require cooperation with in the industry between the government and environmental organisations to maintain a steady approach to the growth of the renewable energy sources in the market. The programmes also set out plans to address the key issues together, with the concentration divided between technology development as well as non-technological issues, such as raising finance and obtaining planning permission. Each technology is set to be tested though several stages, which include assessment, RD, demonstration and market entry, full-scale industrialization and competition (Challenges Ahead for UK Renewable Energy Program, 2007). Strategies for individual technology programmes also include this operation at the different stages of technology development. An exit strategy will also contribute to the competitiveness of the industry without creating a subsidy. Green trading can play a major part in electricity generation strategy to move to a system of renewables which operates strictly in the commercial market. The Government will carry out several actions together with the industry in order to encourage the development of renewable technologies in the UK, such actions include technological and environmental assessment in addition to resource assessment ;demonstration; the industrialisation of the market; removing legal and administrative obstacles; dealing with planning and development control issues; promoting research and marketing and education. The set priorities for the development of renewable technologies depend on their cost effectiveness and the amount of greenhouse gas emissions that can be reduced on different timescales. The priorities for the development of the renewable energy sources are set in time scales and include: Near Term includes most competitive renewable technologies in the UK. (Geothermal (heating and cooling),waste and some biomass residues, landfill gas, onshore wind, hydro, passive solar) Medium Term (by the year 2010) includes renewables that show maximum contribution by 2010, as well as assist to achieve the target of 10 percent.(Some biomass residues, energy crops, offshore wind) Longer Term (after 2010) includes renewable technologies that show longer term potential under the RD programme. (Fuel cells, photovoltaics, wave) Very Long Term (after 2050) includes renewable technologies which at this stage are only worth pursuing through the basic research. (Tidal barrage, hydrogen, ocean thermal currents) (UK Renewable Eneegy Policy , 2007) The Department of Trade and Industry will divide the budget allocated for the development of renewables according to the priorities table set above, particularly between the short, medium and longer term periods. The renewable technologies which are included in short and medium term will benefit from the market simulation under the Renewable Obligation. 1.3 main aim: The mixture of the issues introduced briefly in the first Chapter leads to the overall aim of investigating the governments role in achieving the targets set and through analyzing the market and the economic forecasts concluding whether these targets are achievable. Following chapter will review the existing literature that has investigated UK Renewable Market and Policies, critically evaluated the UK performance in renewables sector and consist of relevant data in order to set out the specific objectives for this study. United Kingdom has one of the most suitable potential markets for the development of renewable energy sources and could act as a leading example for the rest of the world, but the main question remains whether the UK will adopt the right approach to support the new technologies or is it just an ambitious set of targets based on wrong evaluations? CHAPTER 2 LITERATURE REVIEW 2.1 Global Perspective Today, the rising issue of climate change can be identified as â€Å"the biggest challenge facing humanity† (International Socialist Group, 2006). The UK Prime Minister has said climate change is â€Å"probably, long-term the single most important issue we face as a global community†. The Intergovernmental Panel on Climate Change (IPCC) has concluded that â€Å"global carbon dioxide (CO2) emissions must be reduced at least 70 percent over the next 100 years to stabilize atmospheric CO2 concentrations† Considerable technical change will be needed to maintain growth in economy combined with large CO2 emission reductions at a cost as low as possible (Grubb, 1997), however the timeframe is not clear as many ways lead to certain CO2 stabilization levels which correspond to fixed increasing amounts of CO2 that can be released during the target year. Furthermore, economic arguments were raised favoring deferred emission abatement pathways (Wigley, 1996). There is a possibility that unexpected political objectives may trigger the need of short-term investments in long life capital stock, this leads to high costs due to the early retirement of long life capital stock units. Additionally, there is a high risk of only focusing on short-term emission reduction targets while creating technical change policies in relation to climate change which may result in a framework unable to achieve long-term future targets (Sande ´n, 2005). The increasing concerns of climate change has played one of the key roles in supporting the development of renewable energy sources, which are environmentally friendly and impose low or zero carbon emissions released into the atmosphere. In order to sustain the development of renewables it is essential to meet the stabilization scenario for carbon dioxide reduction and show that they can be competitive in cost with energy from other sources (Houghton, 2004, p.306). Houghton also stated that â€Å"under some circumstances renewable energy sources are already competitive in cost (e.g. local sources of energy), however where there is a direct competition with fossil fuel energy from oil and gas, many renewable energies at present compete only marginally†. Conversely, fossil fuels such as oil, coal and gas have limited resources and â€Å"at some time between 2010-2020 the worlds supply of oil and gas will fall below the level required to meet international supply† (Oil and gas running out much faster than expected, 2003). As the result the costs of fossil fuels will increase which will unveil the opportunity for renewable energy sources to compete more easily (Houghton, 2004, p.306). A recent report from the UN environment programme said â€Å"investment in renewables such as wind, solar and biomass jumped 43% last year and may be about to increase by much more substantial amounts†. It also predicted that renewable energy sources could supply approximately a quarter of the worlds electricity by 2030. This fast development of renewable energy sources occurred as a result of rising demand for energy, security of energy supplies and the environmental and the dangers associated with the burning of fossil fuels (Sawin, 2004, p.5). The additional drivers for the rapid expansion of renewables incorporate the political support for renewable energy around the world, dramatic cost reductions and significant technology advances (Sawin, 2004, p.5). However, Karl Mallon in his book â€Å"Renewable Energy Policy and Politics: A Handbook for Decision-Making† has set out several challenges which can affect the development of renewable energy sources. Mallon mentioned that renewable projects usually have a long lifetime (20 years or more), but the investment and the main industrial activity occurs at the beginning. Therefore in order for investors to get a return on their investment, the developers on their end will try to make the projects as long as possible and try to establish capacity as early as possible in the scheme to yield the maximum return time (Mallon, 2007). As a result, generation schemes with targets that run less than 20 years will create a market with increasing activity and a massive industry growth for the first few years, and once a capacity meeting the long term target is in place downturn of activity will take place (Mallon, 2007). Mallon also stated that a â€Å"boom-bust† activity cycle is terr ibly inefficient form of industry development; if targets are used they must be dynamic to provide a constant but steady pull on industry. Another challenge which faces the development of renewables is the governments concentration on the economic side, namely where â€Å"the desire for economic certainty overrides the objectives of industry development or climate mitigation† (Mallon, 2007). Furthermore, according to Mallon, effective climate mitigation will require not less than 50-100 years transition to zero-emissions, therefore the schemes with deadlines ending 2010-2015 will make no contribution to solve in the climate change problem. Such schemes only provide economic certainty and tell investors that this is only a short term engagement rather than a long term, ignoring the fact that the prices of renewables and conventional energy change all the time. Finally, Mallon emphasized on the fact that â€Å"it is important to recognize that renewable energy policy consists not just of a driver but rather comprises a complete framework, ignoring or overlooking parts of that framework will undermine the entire vision†. 2.2 UK Perspective The energy policy of the United Kingdom fully supports targets for carbon dioxide emissions and is committed to achieve mandatory 60 percent cut in the UKs carbon emissions by 2050 (Carbon Abatement Technology for Fossil Fuels, 2005). The current interest in renewable energy in the UK reflects the global view in relation to the shortage of the existing energy sources and the necessity of finding alternative energy supplies to meet the future energy demand. The need for securing energy sources as an alternative to the current energy sources, mainly fossil fuels, lies in the uncertainty of such fuels which is diminishing over the years. This is particularly pertinent to the UK as it is estimated that by 2020 the UK could be importing 90% of its gas (which currently produces 41% of energy consumed) (DTI 2006). Additionally, the rising concerns over global warming and climate change also played a major role in ‘shedding the light on renewable energy sources. By 2050, global energy demand could double as populations rise and developing countries expand their economies (World Energy Organization, 2008). The UK Government started to tackle such concerns in 1999 when it introduces its first strategy â€Å"to help deliver a better quality of life through sustainable development† (Tony Blair, The UK Government Sustainable Development Strategy, March 2005). The Governments 2003 Energy White Paper sets a direction towards achieving low carbon economy, by attempting to resolve the issue on domestic basis first and to influence the major players in the global community to follow the same footsteps. The UK Government has committed itself to cut down greenhouse gas emissions, as mentioned above the government; according to its 2003 Energy White Paper, declared that its mission is to move to a low carbon economy and set out its target that by the year 2050 carbon dioxide emissions will be reduced by 60 percent in addition to the Kyoto Protocol target of reducing greenhouse gas emissions by 12.5 percent by the year 2012, and the ambitious national goal of reducing carbon dioxide emissions by 20 percent below the 1990 levels by the year 2010 (The UK Government Sustainable Development Strategy, 2005). However, the UKs CO2 emissions rose in the period 2002-04 (levels in 2004 showing a 1.5% increase over 2003) (DTI 2005a). These issues are arising at a time when large numbers of the UKs coal and nuclear-fired power stations are also reaching decommissioning age. This presents the UK with an opportunity to re-structure the fuels in its energy mix. According to the British Wind Energy (BWEA) the UK could face some challenges in meeting the renewable energy target of 20 percent by 2020 if it increases the amount of electricity generated under its Renewable Obligation, but puts on hold â€Å"financial penalties for utilities that help fund the program at 2015 levels† (Challenges Ahead for UK Renewable Energy Program, 2007). The BWEA Chief Executive Maria McCaffery has commented on reform proposal: The RO has been highly successful in bringing forward the cheapest renewables: onshore wind, landfill gas and biomass co-firing. The Governments plan to band the RO could allow more technologies to share in this success, particularly offshore wind but this cannot be at the expense of onshore winds current strong growth. Accommodating the more expensive technologies whilst trying to get to a 20% target in 2020 using the same amount of money as a 15% goal is like trying to extract a quart from a pint pot. It just doesnt add up. E ssentially, said BWEA, â€Å"the government is attempting to get a third more renewable power with a mix that includes significant quantities of technologies that are not economic under the current system for the same amount of money† (Challenges Ahead for UK Renewable Energy Program, 2007). John Loughhead, the Executive Director of the  UK Energy Research Centre  (UKERC)  said: Achieving these targets will be challenging, since the UK currently obtains less that 2% of its energy from renewable sources. It is probable that electricity production will have to bear a disproportionate share and initial estimates from the European Commission and others suggest it may need to produce about 40% of all electricity from renewable sources by 2020 if the overall targets are to be met. Additionally, the recent study â€Å"Renewable electricity generation technologies†, January 2008, issued by Institute of Physics (IOP) has outlined further barriers to the development of renewable energy sources. According to the study, one of the main challenges facing the renewables is â€Å"the liberalisation of the UK energy market, the current price of electricity is so low that it is not economically viable to develop and introduce new generating technologies to the market, unless they can be developed at a low cost and can provide electricity predictably at competitive wholesale prices† (Renewable electricity generation technologies, 2008) 2.3 UK Renewable Policy Targets Karl Mannon regards the renewable energy policy as a framework rather a single driver and emphasized that all the parts forming this framework must operate jointly in order for us to achieve the highest benefit of this policy (Mannon, 2007). As to the influence such policies may have on the market, Mannon added that there are unknown factors in these policies which can affect the size of the market, the prices paid for renewable energy or the duration of the scheme. Some of the factors which control the growth of the market include: the level of support, the duration of support eligibility, the duration of support schemes and the quantity of renewables required under the scheme. (Mannon, 2007, p.37) However, Adrian Smith in his report â€Å"Multi-level governance: Towards an analysis of renewable energy governance in the English regions†, December 2006, has identified challenges for governance in promotion of renewable energy systems. Smith, 2006, has outlined that â€Å"governments policy objective of transforming existing energy systems into ones with greater renewable energy content requires coordinated efforts and changes amongst many different actors, institutions and artifacts. Renewable energy systems are complex, and their construction is far from straightforward. It is consequently difficult to direct them into being exclusively through hierarchical government measures like planning† (Smith, 2006). John Sauven, the Executive Director of Greenpeace UK, in his article â€Å"Its rip-off Britain, even when it comes to climate change†, October 2007, has stated that the targets set by Renewable Obligation which were set for electricity suppliers have all been missed and â€Å"the governments own projections show that the final target of just 15 percent in 2015 will also be missed†. Additionally, Dave Toke, in his academic paper, has concluded that â€Å"RO is relatively inflexible in that it effectively sets a single level of payments for all renewable-energy generators, which is relatively generous for onshore wind power, barely sufficient (even with capital grant supplements) for offshore wind power, and not enough for much else. The target of supplying 10% of UK electricity from renewables by 2010 is not likely to be achieved some 7% is a more likely level† (Toke, 2005). Toke, D., also noted that â€Å"the more ambitious the targets are, the more expensive w ill be the incentives (or penalties) needed to ensure compliance with these targets†. The analysis of renewable energy policy carried out by the Carbon Trust, â€Å"Policy Framework for renewables†, July 2006, states that â€Å"overall, the existing renewable energy policy suffers from inefficiencies, resulting in a unit cost of renewable energy to consumers that is higher than necessary given the current technology cost†, as well as â€Å"given the renewable and carbon reduction targets and the 2015 gap, diversity of investment in renewable energy is needed†. The UK policies are not created to determine what a sustainable energy system i