Renewable Electricity and Government’s Role in Driving CO2 Reductions

EXECUTIVE SUMMARY

This dissertation will mainly concentrate on UK’s 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 government’s role in driving CO₂ reductions. The government’s strategy on renewables includes several different elements, each attacking the problem from a different angle: mandatory regulation, information and education, technology R&D 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…”

Claude Mandil, International Energy Agency (IEA)

In the 21^st 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 world’s 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 harnessed. 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 “energy that is derived from natural processes that are replenished constantly” (Energy Statistics, 2004).

The renewable energy sources are also covered by Europe’s 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 State’s 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 Government’s 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 world’s 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 UK’s greenhouse gas emissions in 2006. In order to reduce emissions, the 2007 UK Energy White Paper sets out an objective to cut the UK’s 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 “an integral part of the Government’s strategy for reducing carbon emissions as renewable energy resources produce very little 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 (+7½ 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 UK’s 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 UK’s 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, “Sustainable Development Indicators in Your Pocket”, 2007

The Government’s 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 UK’s total electricity, up from 1.8% in 2002 (Energy White Paper , 2007).

Climate Change Levy (CCL) Exemption

The Climate Change Levy (CCL) is “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, R&D, 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 R&D programme. (Fuel cells, photovoltaic’s, 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 government’s 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 “the biggest challenge facing humanity” (International Socialist Group, 2006). The UK Prime Minister has said climate change is “probably, long-term the single most important issue we face as a global community”. The Intergovernmental Panel on Climate Change (IPCC) has concluded that “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 “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 “at some time between 2010-2020 the world’s 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 “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 world’s 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 “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 “boom-bust” activity cycle is terribly 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 government’s concentration on the economic side, namely where “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 “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 UK’s 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 “to help deliver a better quality of life through sustainable development” (Tony Blair, The UK Government Sustainable

Development Strategy, March 2005). The Government’s 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 UK’s 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 UK’s 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 “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 Government’s 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 wind’s 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 doesn’t add up”. Essentially, said BWEA, “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 “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 “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 “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 “government’s 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 “It’s 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 “the government’s 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 “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 “the more ambitious the targets are, the more expensive will be the incentives (or penalties) needed to ensure compliance with these targets”. The analysis of renewable energy policy carried out by the Carbon Trust, “Policy Framework for renewables”, July 2006, states that “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 “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 is; the purpose of such policies is to achieve the goal of 60 percent CO2 emission by the year 2050 (The Royal Commission on Environmental Pollution (RCEP)).

According to the RCEP 22^nd report, there are four scenarios to meet long term stabilization in levels of CO2 emissions in the atmosphere at nearly twice the pre-industrial levels. This is equivalent to a CO2 reduction with in the UK up to 60 percent in relation to CO2 levels in 1997 by the year 2050 (RCEP, 2000). The UK Government has also adopted the above goal recommended by the RCEP to establish 60 percent CO2 emission reduction, this goal is set out in the government's Energy White Paper.

In order to achieve the above mentioned 60 percent CO2 reduction goals major transformation in the generation side together with increased efficiency on demand side are required.

According to the UK Renewable Policy report, published by the Department of Trade and Industry in 2006, in order to achieve the sustainable development of renewables under the governmental framework the market stimulation is required. The main instruments for market stimulation outlined in the report include:

• A new and long term renewable obligation on electricity suppliers as well as transferring the existing NFFO contracts into the existing market to achieve sustainable market which can attract investment.
• Exemption for the renewable electricity and heat suppliers from the climate change levy in order to allow renewables compete with the conventional sources.
• Promotion of new renewable technologies, particularly in transport and heat industries.

CHAPTER 4: Findings / Analysis

In order for us to analyze whether the UK will achieve the targets set and best available solution for reducing CO2 emissions, we will need to examine and evaluate: the current energy situation in the UK; the effects of the policies; energy supply; CO2 emission levels; the effect of environmental issues and objectives on the policies.

This analysis will outline the sources of energy and the levels of energy consumption the methods of energy supply in the UK and the current policies adopted by the government together with the prospective plans for the next 20 years. It will include a summary of energy supply methods and the levels of consumption over the recent years. The paper will also discuss the main features and goals of UK energy policies together with environmental regulation.

4.1 The UK current energy situation

Energy consumption has increased substantially with in the different sectors since 1980

(Figure 3), in the transport sector energy consumption has increased by 68 percent; the domestic sector increased its consumption by 14 percent and the service sector by 6 percent, while the industry sector has decreased its energy consumption by 33 percent (UK Energy in Brief, 2007).

Figure 3

In the year 2006, total primary energy demand was lower by 1.5 percent than in the previous year 2005 (this corresponds to 244.0 million tones of oil) (Digest of UK Energy Statistics (DUKES), 2007). In 2006, overall primary fuel consumption was not met by indigenous production; this continues the trend since 2004 when the UK became a net importer of fuel (Dukes, 2007).

Figure 4

Final energy consumption 2006

By user

By fuel

Data Source: Digest of UK Energy Statistics, 2007

There are several energy sources in the UK, approximately 95 percent comes from fossil fuels, and approximately 3.5 percent comes from nuclear, while a very small percentage of energy comes from renewable sources.

There have been significant changes in the main energy sources due to a set of complex factors which include the policies set by the government, which have been most influenced by the prices of fossil fuels. Price changes have been mainly affected by external factors arising from outside the UK. New reserves were discovered, and technological advancement which allowed the extraction of oil and gas from very difficult locations, increased supply and maintained low prices. However, the Organization of Petroleum Exporting Countries (OPEC) has had a monopoly power and managed to limit oil supplies and increase prices.

Oil has always had a wide market and has been traded in large quantities and has had an influence on the energy market, as large variations in its price affected the prices of the other energy sources, oil dominates the transport sector for example, and forms 35 percent of the total UK energy (Digest of UK Energy Statistics (DUKES), 2007).

Approximately one third of the total energy consumed in the UK goes to electricity generation (Digest of UK Energy Statistics (DUKES), 2007). As the main concentration of this paper electricity generation, the changes in the fuels mix used for electricity generation will be discussed below. The average rate of main energy use in the UK is around 244.0 million tonnes of oil equivalent, in comparison with the final consumption of 169.6 million tonnes of oil equivalent (Dukes, 2007). This difference shows the losses incurred within the energy system. With the largest lost being from electricity generation, this in one sense can be related to the lack of development institutional and commercial frameworks. In 2006, the demand for electricity generation in the UK has amounted to 405,764 GWh (gigawatt hours of electricity), most of the electricity was generated from fossil fuels and non-renewable sources (Dukes, 2007, chart 5.2)

In 2004, the UK electricity demand was almost 402,000 gigawatt hours of electricity, the majority of which came from fossil fuel and non-renewable sources.

4.2 Renewable Energy Policy in the UK

The establishment of new efficient renewable energy technologies 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 analyze the policies which have direct effects on the technology and the market development.

4.2.1 Policy goals

The policies for the renewable energy in the UK were primarily presented in “Prospects for the 21st Century: Conclusions in Response to the Public Consultation”, February 2000, and set out the key aims for renewables:

• To support the UK in achieving national and international targets for the reduction emissions, including greenhouse emissions;
• To help provide secure, diverse, sustainable and competitive energy supplies;
• To stimulate the development of new technologies necessary to provide the basis for continuing growth of the contribution from renewables into the longer term;
• To assist the UK renewables industry to become competitive in home and export markets and, in doing so, provide employment;
• To make a contribution to rural development; (Department of Trade and Industry (DTI), 2000)

The above set of elements can be divided into three main categories:

• Environment (increasing concerns on issues of climate change): renewable energy sources such as wave, wind and solar energy do not result in producing any emissions, with the exception of biomass or waste, where limited emissions exist similar to conventional energy sources (e.g. fossil fuels, waste disposal).
• Security of supply (concerns about diminishing fossil fuel supplies): The UK is highly dependent on fossil fuels and imports of fossil fuels are high, due to high energy consumption. By exploiting the renewable energy sources in the UK its dependency on imports will decrease while stability and security of the renewable energy market will increase.

As a result, the UK market will be less affected by price changes of fossil fuels. The need for security of supply has arisen due to the fact that most of the fuel supply comes from politically unstable areas.

• Economic (innovation and improvement of demand/supply relationship); Economic optimisation of the energy supplies a major rationale for taking renewable energy options into consideration. Especially in relation to energy supply in areas with difficult access, renewable energy sources are often cheaper than the connection to a power network. Additionally, many forms of renewable energy can be positioned for decentralised energy supply, which can decrease the need for extension of the network capacity and thus save capital.

It is necessary to ensure that all the principles and values of renewable energy are fully observed and applied, in order to preserve continuous renewable energy support. As indicated above, the security of energy supply has gained great significance over the years. It is therefore essential to identify the steps which should be taken through renewable technologies to achieve a higher level of security of energy supply, we will need to determine the costs involved in this process and the role of each of the renewable energy sources, and the circumstances under which it operates. Furthermore, the renewable energy policy must be integrated into other fields such as the environmental and economical fields as well as planning and employment. This will expand the foundation for support for renewable energy.

4.2.2 Regulations and Targets

The Government made proposals which included a strategy to assist in achieving the above goals. Such proposals would require international cooperation and would work alongside with the European policy set out in the EC White Paper on Energy and Renewable Sources of Energy. The strategy will consist of several factors which include giving incentives for market sectors and forming a national planning and development structure, a strategy will also include a research, control and dissemination programmes and aims towards removing unnecessary legal and administrative hurdles.

The Government proposals also included establishment a set of targets especially in the electricity sector in order to stimulate industry and monitor its progress. A slight increase of costs to consumers may result from reaching high renewable targets which require full consideration as to the acceptability of such higher costs. The Government's initial plan is to generate 10 percent of the UK electricity consumption by the end of 2010 (the Energy White Paper, 2007).

The requirements set out in the policy regulation and procedures play a major role in classifying energy projects during the preparation and the operation periods. The energy market is governed by the regulations from the framework where the renewable projects operate. This framework is geared towards large production with less focus on the renewable energy aspects. However, such regulations are necessary for the implementation of renewable policies, and back the creation of short to medium term market for renewable energy. This regulatory framework includes permits, which are generally regarded as one of the main barriers which face the full implementation renewable energy. At a national level the renewable energy policy in the UK is set by the Department of Trade and Industry. However, some responsibility for the particular aspects of renewable policy is divided between several bodies. For example, the Scottish Parliament has responsibility for the environment, climate change. In additional local planning permission is required from the local Planning Authority for implementing renewable energy sources.

The main incentives which included in the renewable energy policy in order to support the development of renewable energy sources are: The Renewable Energy Obligation, The Climate Change Levy and Research and Development programme. As main aim of this dissertation is to evaluate the support of renewable energy sources in electricity generation market, the Renewable Obligation and the Climate Change Levy will be discussed more in detail in following sections as those two incentives promote the most support for the renewable electricity generation and put a number of obligations on the electricity suppliers to generate a set amount of electricity from renewable energy sources.

4.2.3 Renewable obligation

The Renewable Obligation sets a target of 10 percent electricity to be generated from renewable energy sources by the year 2010. It also extends the obligation to the year 2027, providing long term security for the renewable energy market. The Renewable Obligation (RO) was originally implemented to encourage the support for electricity generation from the renewable sources. It was introduced as a replacement of the Non-Fossil Fuels Obligation (NFFO), with the main aim to increase the proportion of electricity sourced from renewable sources by placing the obligation on the electricity suppliers in the UK. According to the UK Energy Statistics, in 2007, it reached 6.7 percent in the United Kingdom, and 2.6 percent in Northern Ireland. The figure was origginally set at 3 percent for the years 2002/03, however under current political obligation the figure is set to rise to 10.2 percent by the year 2012, and by 1 percent anually for the following five years. (Digest of UK Energy Statistics (DUKES), 2007).

Licenced electricity suppliers in the UK achieve their obligations by showing the Renewable Obligation Certificate (ROCs), in case where the suppliers have insuficient ROCs to meet their obligation, the payment into the buy-out fund is required in order to cover the shortfall. The ROC is the green certificate issued by Ofgem to licenced renewable suppliers, the ROCs are granted for eligable renewable electricity generated and supplied to the consumers in the UK. Eligible renewable sources of energy include biomass, tidal, wave, hydro and wind power, ladfill and sewage gas. However, not all eligable renewable technologies will be supported due to the economic capability. The duration of the obligation is one year, which starts on 1^st of April and ends on 31^st of March, the deadline for electricity suppliers to hand in appropriate ROCs or provide evidence of the payment to the buy-put fund to satisfy their obligation is on the 31^st of the following September.

In fact, electricity consumers bear the cost of the ROCs as the licensed electricity suppliers include this cost by making an increase in the price of their services. The Government is currently reviewing the shape of the obligation in the future. The consultation period presented an amended form of the Renewable Obligation, which will award different renewable technologies a different number of ROCs; however this has not yet been formally implemented as policy.

In early 2007, calls for the Renewable Obligation to be substituted were raised by Ofgem. According to Ofgem the obligation was not a cost effective way to promote renewable electricity generation. The main concerns are that the electricity consumers will bear the costs for the renewables projects even where they can not be completed due to the failure to obtain the necessary building permissions or where the electricity price or the renewables price under the European Union Emissions Trading Scheme can not be linked to the financial support under the Renewable Obligation. However, there are still claims that a part of the costs resulted from Ofgem's failure to meet priorities on the National Grid to allow more capacity for renewable energy. More discussions concentrated on maintaining a stable marketplace in order to attract investors and gain their trust.

Climate Change Levy Exemption

In order to claim the exemption from the Climate Change Levy in respect of electricity supplied the suppliers are required to go through the similar process as presented under the Renewable Obligation. However, under the Climate Change Levy there has to be “a physical trade in the power from the generator to the supplier and its non-domestic customer claiming exemption from the Climate Change Levy” (UK Renewable Eneegy Policy , 2007)

Electricity suppliers required to produce their green certificates equal to the proportion of their sales to consumers by the set date in order to fulfil the obligation. The demand for the green certificates by the electricity suppliers will create a market where the suppliers will be able to trade with each other; the prices on the market will vary according to the supply and demand. The trade in green certificates market will be separated from the electricity trade, the electricity trade would be the same as the current electricity market from conventional sources. As the electricity generation from renewable energy sources appear to be more costly than electricity generated from fossil fuels combined with the value of the Climate Change Levy exemption, this factor will support a positive price for the green certificate market. The increase in price and the production cost of renewables will result in increase in green certificates prices. Therefore is the prices of renewables decrease and become equally competitive as conventional sources the green certificates prices will fall significantly.

4.2.4 The Climate Change Levy

The Climate Change Levy was originally presented by the UK Government to battle the climate change and assist in achieving the EU obligations set under the Kyoto Protocol. The main aim of the protocol is the reduction of the greenhouse gas emissions by at least 5 percent below 1990 level by the year 2012. The European Union Members have signed an agreement to ensure the reduction in greenhouse gas emissions by 8 percent by the year 2012. As part of the agreement the UK has committed to the reduction of 12.5 percent.

The Climate Change Levy is the main renewable policy initiative with the main aim to control the energy use. The recommendations presented by Lord Marshall in his report, Economic Instruments and Business Use of Energy, included the introduction of the Climate Change Levy with the major Government's consultation on the supporting issues for the development of the levy, as well as announcement of the changes which will promote the environmental efficiency of the levy and secure the competitiveness.

The main aim of the government is to provide the exemption for the suppliers of the electricity generated from the renewable energy sources. In order to qualify for the exemption, a supplier will have to present a contract with the eligible renewable energy generators for the purchase and supply of the renewable electricity, as well as the agreement from both parties to be reviewed by authorities. The Climate Change Levy will provide a significant inducement for the development of electricity generated from renewable energy sources and will play an important role in strengthening the renewable energy policy.

4.3 Achieving environmental and economical goals

It is possible to summarize from the above mentioned aspects that the main concern of the UK Government is the achievement of environmental goals, especially in relation to energy consumption and finding alternative energy sources to replace fossil fuels as well as transforming energy system with the main goal to achieve carbon dioxide reduction within the next 50 years. According to the latest data the electricity generation in the UK accounts for approximately 30 percent of CO2 emissions. Due to the failures many coal and nuclear stations will be terminated and the UK will become highly depended on imported fossil fuels. The following section will include the analysis of the UK electricity industry in order to examine the operation of the market, and whether the establishment of the alternative sources of electricity generation can be a suitable solution for securing energy supply and emission reductions.

4.3.1 UK Electricity Industry

Around thirty organizations in the UK can be regarded as the ‘main power producers', with the primary objective of electricity generation and be accounted for approximately 94 percent electricity generated (UK Energy in Brief, 2007). As a whole the electricity market can be divided into three sub-sections:

• Generation, which controlled by the large power stations. In 2006, the majority of the UK's electricity was generated by gas, coal and nuclear stations. Overall, gas has produced 39 percent of electricity, and is the main source for generating heat for 70 percent of homes. Coal-fired stations produced one-third of the total electricity in the UK which is less than its supply of two thirds in 1990, most of these stations will be shut down by 2015 to comply with EC law in order to prevent sulphur dioxide emissions. Nuclear stations produced fifth of the electricity supply, however nuclear plants will be closed within the next 10 years. Renewable energy generates 4.2 percent of electricity supply which is growing. Combined Heat and Power (CHP) is also a method which gained a lot of interest where the heat resulting from electricity generation is used.
• Transmission (also referred as Grid) transmits the electricity across the UK from power stations (via 25.000 km of ‘high-voltage' overhead lines).
• Distribution - the overhead lines and underground cables used to deliver power from Grid supply to the final consumers.

Source: Parliamentary Office of Science and Technology, Electricity in the UK, February 2007

The UK's electricity market was privatized in 1990, as the result there are many stakeholders, suppliers, network companies which all regulated by the Ofgem. There are five major companies which dominate 73 percent of the total UK market. The National Grid Co Plc is the main transmission network owner in England and Wales and was also used to control the Electricity Pool which is used by generators and supplies to trade electricity. The Electricity Pool was heavily regulated by generating companies as well as the other members of the board; it was mainly established in order to prohibit the major generators of exploiting their opportunities within the market power to maintain the wholesale prices up. In March 2001, the Energy Pool was replaced by the New Electricity Trading Arrangements (NETA), which resulted in changes of the means in electricity trading. The NETA was created primarily to increase efficiency and to open up more opportunities for consumers, traders and suppliers (Dukes, 2007, p.122). The main stream of electricity supply in the UK is provided by the 12 regional electricity companies and the two Scottish companies, the rest 26 companies hold the special licenses to provide electricity and usually regarded as ‘second tier suppliers'. The domestic consumers of electricity in the UK have been given the right to choose their supplier since 1999. As mentioned above, the distribution network in the UK is owned and operated by the national electricity suppliers. As a result, they are required to control the competition development on the market and must differentiate distribution network from the supply sector. This particular factor would be the reason for the origination of the ‘second tier suppliers', as the original national electricity suppliers would prefer to sell their supply business and retain their full concentration on their distribution sector. At the end of 2006, there were 30 main power producers in the UK (Dukes, 1997, p. 111).

4.3.1 Issues concerning the UK electricity industry

The above section demonstrated the ways the UK electricity industry operates, and outlined the key players and regulators of the market. However, there are several challenges which face the electricity market in the UK. The next section will address the issues which affect the electricity generation in the UK; an issue which was also included in the analysis in order to determine the path for future development of electricity generation. At present, there are two key challenges which affect the industry; renewal (most of the Grid infrastructure was built in 1950-60's, and would reach its end cycle by the year 2030); the second issue is reconfiguration (current network needs to adapt to low-carbon generation). The main drivers influencing the change include:

• The high gas prices have increased the domestic electricity bills by 45 percent since 2003;
• Under the new EU Emissions Trading the companies have been given an opportunity to benefit financially from the CO2 emissions reduction;
• The government's targets for emissions reduction, in particular 10 percent of electricity has to be generated from renewable energy sources by the year 2010; and 60 percent in CO2 emissions reduction by the year 2050. (Electricity in the UK, 2007)

In the recent review from Price Control, Ofgem has approved capital expenditure on transmission and distribution networks, with £3.7 billion was allocated on transmission and £5.7 billion on distribution network for the period of 5 years (Electricity in the UK, 2007)

New proposed generation for electricity in the UK

• According to the recent projections, new generation will be sourced from gas-fired plants, wind, coal gasification, waste incineration, biomass and hydroelectric power (Figure 5).

Figure 5: Source: Parliamentary Office of Science and Technology, Electricity in the UK, February 2007

• The key electricity suppliers like, E.On, EDF, and British Energy over the next 15 years are likely to shift their concentration on building new coal and nuclear stations. Other companies also shifting their generation and suggest using renewable sources (wind, tidal, wave). In 2006, one of the major players in the industry E.On requested permission to build the first coal plant in the UK after 20 years (UK Energy, 2007)

Distribution Network Issues

Additionally, there are challenges facing the distribution network, which mostly affect the distributed generation, also known as smaller plants which connect directly to the electricity distribution network. This distributed generation includes:

• Medium scale gas fired generation;
• Industrial scale schemes;
• Wind and small-scale hydro power;
• Landfill, biomass and waste generation.

(UK Energy Footer, 2007)

Despite the fact that more than half of total distributed generation uses fossil fuels, according to Dukes, 2007, there has been an increase in electricity generation from alternative sources like wind, biomass and waste. The increase in such electricity generators could result in emissions reduction and a larger competition.

In April 2005, Ofgem created incentives to eliminate barriers to uptake of distributed generation, including:

• Lower connection charges for distributed generation;
• Other financial incentives.

According to the Energy Networks Association, such incentives may attract investment in infrastructure only for certain distributive generation schemes and will not sponsor “deeper reinforcement”. It adds that further “incentives are required to take a holistic view of likely network requirements in the medium to long term” (Energy Networks Association, 2006). Micro-generators: small community, business or domestic projects are only responsible for a minute fraction of all electricity generated.

The Government has taken measures to promote uptake, including:

• Grants of up to 30% of total capital costs;
• Legislation (2006) requiring a “fair reward” for surplus electricity sold back to the network.

At present, it cannot be determined whether this will be enough to motivate a mass-market in micro-generation technologies. An inquiry on “Local Energy” by the House of Commons Trade and Industry Select Committee which concentrated on generation by individuals, businesses or communities for their own consumption, concluded that as long as there were no big technical challenges to energy generation, it was not a short tem solution, and that replacing conventional generating capacity and grid upgrades was still a necessity (Trade and Industry Select Committee, 2007).

Summary

• Larger investment is expected in network renewal and connection of new generation within the next 10 years.
• The delays in obtaining necessary connections in Scotland and offshore may hinder the connection of renewables.
• The government plans to enhance planning law to update major electricity projects
• The level of effectiveness of the incentives will affect the extent to which distribution networks are adapted to accept more small scale generation.

The impact of the environmental policies and objectives

Realizing the environmental goals should not be obstructed by the liberalization and privatization of the industries in the energy sector. Liberal markets have introduced environmental benefits. Gas generates 40% less CO2 than coal and produces significantly less sulphur dioxide. Although there have been increasing concerns regarding the coal industry in the UK, this did not affect the growth of the “Gas-fired” generation, CO2 and sulphur dioxide emissions levels decreased.

Environmental problems arising from energy generation need to be dealt with by the government through creating a statutory framework to regulate the energy sector and ensure the application of the policies. The government's intervention to resolve environmental issues should include imposing taxes on fuels to reflect the level of damages caused to the environment by such fuels, which would promote amongst customers the use of fuels which are more environmental friendly, and would lead to higher efficiency in energy use.

Notwithstanding the fact that the generation of energy, regardless of the source, will have adverse effects on the environment, there are many regulations to govern the energy sector designed to protect the lives of humans and animals from the implications of energy use. Furthermore, several energy policies which have been introduced were designed on environmental basis. I will examine the relevant features of such policies while the main concentration shall remain on the reduction and use of fossil fuels, however, this research is not concerned with the regulations governing the extraction of such fuels.

Renewable energy sources

Since the oil crisis in 1970, the Government introduced plans for the development of the renewable energy sources. The plans were primarily related to research and funding, and the government also introduced in England and Wales, a non-fossil fuel obligation (NFFO) together with a non fossil fuel levy, as part of the privatization process of the electricity sector.

The main objective was to secure a solid market for electricity generated by nuclear power stations, nevertheless, a renewable energy technologies market was formed with a view to create a competitive atmosphere within the market with the other existing technologies. Furthermore, guidelines were introduced in England, Scotland and Wales, under which the national policy to develop renewable energy was incorporated. The guidelines emphasized on the importance of planning and stressed that planning authorities must observe the prescribed guidelines while setting the plans for development.

The new renewable energy projects developed with the backing of the non- fossil fuel obligation mainly involved burning agricultural waste and landfill gas, while previous projects involved high level inland water power schemes.

The above sources were responsible between 1990 and 1998 for over 90% of the increase in production from renewable energy sources. The NFFO waste projects (municipal and industrial) reported for 41% of the electrical capacity employed for, while large wind farms accounted for 29% and landfill gas for 27% (Dukes, 1999). The success rates of these leading sources varied in relation to obtaining planning permission and being actually implemented. This was evident in 1998 when 95% of landfill gas projects approved during early rounds have been implemented, while 25% of the waste projects and 39% of the wind farm projects was gained actual implementation.

Renewable energy production is expected to increase significantly during the next 20 years. The government's proposals containing targets in relation to electricity requirements in the UK, according to these targets, electricity generated from renewable sources were to be increased to 5% by end of 2003, and 10% by end of 2010, with a view that a degree of cost will be born by the consumer (Dukes, 2007)

In order for the government to achieve these targets, a new framework of support must be developed and legal obligations need to be imposed on the generation and supply of electricity.

Further, it is worth mentioning that there has been a constant debate over the years casting doubts on whether these short- term targets will be accomplished

6 Energy efficiency promotion

4.7 Measures for reducing energy consumption

Taxation - the climate change levy

Negotiated agreements between government and industry

Regulation - the IPPC Directive

Carbon dioxide emissions - the UK Climate Change Program