HOUSE OF LORDS

Select Committee on Economic Affairs

4th Report of Session 2007–08

The Economics of Renewable Energy

Volume II: Evidence

Ordered to be printed 12 November 2008 and published 25 November 2008

Published by the Authority of the House of Lords

London : The Stationery Office Limited £price

HL Paper 195–II CONTENTS

Page

Oral Evidence Professor Paul Ekins and Dr Neil Strachan, King’s College London Oral Evidence, 6 May 2008 1

Professor AbuBakr Bahaj, Southampton University, Professor Tony Bridgwater, Aston University and Dr Simon Watson, Loughborough University Oral Evidence, 6 May 2008 8

Mr Benet Northcote, Chief Policy Adviser, Greenpeace, Dr Tim Jenkins, Economics Campaigner, Mr Dave Timms, and Ms Robin Webster, Senior Energy and Climate Campaigner, Friends of the Earth Oral Evidence, 13 May 2008 17

Mr Malcolm Keay, Senior Research Fellow, Oxford Institute for Energy Studies Oral Evidence, 13 May 2008 26

Mr Campbell Dunford, Chief Executive and Dr John Constable, Policy and Research Director, Renewable Energy Foundation Oral Evidence, 3 June 2008 36 Supplementary Written Evidence 45

Mr Philip Wolfe, Chief Executive, Renewable Energy Association; Ms Maria McCaffery, Chief Executive, British Wind Energy Association; and Mr William Heller, Chief Executive, Falck Renewables Limited Written Evidence (British Wind Energy Association) 55 Oral Evidence, 10 June 2008 63

Professor David Newbery, Cambridge University, and Professor Dieter Helm, Oxford University Written Evidence (Professor David Newbery) 71 Oral Evidence, 10 June 2008 74

Dr Keith MacLean, Head of Policy and Public Affairs, Scottish and Southern Energy plc, Mr Sarwjit Sambhi, Director, Power Business Unit, Centrica and Mr Bob Taylor, Managing Director, Generation, E.ON UK Written Evidence (Scottish and Southern Energy plc) 85 Written Evidence (Centrica) 95 Written Evidence (E.ON UK) 104 Oral Evidence, 17 June 2008 110 Supplementary Written Evidence (E.ON) 118

Professor Gordon MacKerron, Sussex University Oral Evidence, 17 June 2008 120

Mr Chris Bennett, Future Transmission Networks Manager, and Ms Nicola Pitts, Head of UK and EU Public Affairs, National Grid Written Evidence 127 Oral Evidence, 24 June 2008 137 Supplementary Written Evidence 144

Dr David Clarke, Chief Executive Officer, Energy Technologies Institute Written Evidence 146 Oral Evidence, 24 June 2008 149

Ms Vivienne Cox, Executive Vice President and CEO of Alternative Energy, BP; and Mr James Smith, Chairman, Shell UK Oral Evidence, 1 July 2008 156

Mr Neil Hirst, Director for Energy Technology and R&D, International Energy Agency Oral Evidence, 1 July 2008 165

Mr Alistair Buchanan, Chief Executive, and Mr Stephen Smith, Managing Director, Networks, Ofgem Written Evidence 171 Oral Evidence, 8 July 2008 178 Supplementary Written Evidence 188

Mr Steve Read, Investment Manager, Ms Coralie Laurencin, Associate, Climate Change Capital, and Dr Karsten Neuhoff, University of Cambridge Written Evidence (Dr Karsten Neuhoff) 191 Oral Evidence, 8 July 2008 198 Supplementary Written Evidence (Dr Karsten Neuhoff) 208

Malcolm Wicks, a Member of the House of Commons, Minister of State for Energy, Mr Simon Virley, Head of the Renewable Energy and Innovation Unit, and Ms Tera Allas, Chief Economist Energy Group, Department for Business Enterprise and Regulatory Reform (BERR) Written Evidence 210 Oral Evidence, 15 July 2008 217

Written Evidence Professor Andrew Bain 227 Ms Carolyn Barker 230 Mr Derek Birkett 231 Bishopton Village Hall Management Committee 233 Mr Philip Bratby 233 British Energy 237 British Hydropower Association 246 Campaign for Responsible Energy and Development in Tynedale (CREDIT) 248 Campaign to Protect Rural England, Devon 251 Campaign to Protect Rural England, Durham 253 Carbon Capture and Storage Association (CCSA) 255 Peter and Maureen Caswell 258 Christofferson Robb & Company 261 Jane and Julian Davis 265 EDF Energy 271 EEF 282 Energy Networks Association 285 Energy Technology for Sustainable Development Group 288 Energywatch 290 Environmental Defense Fund 297 Environmental Industries Commission 300 Environmental Research Institute 303 Dr John Etherington 306 Mrs Barbara J Frey 307 Genersys plc 311 Mr Colin Gibson 313 Christiane Golling and Marco Nicolosi, Institute of Energy Economics, Cologne 316 Grünhaus Project, Liverpool 319 Mr Peter Hadden 324 J.H.R. Hampson 335 Highlands Against Wind Farms 339 Highlands Before Pylons 339 Rear Admiral Robin Hogg and Professor Leslie Bradbury 342 Mr Robert Horler 347 House of Bishops’ Europe Panel, Church of England 348 W.J. Hyde 350 Institute of Physics 355 Institution of Engineering and Technology (IET) 361 Institution of Mechanical Engineers 372 Mrs Delia Jack 374 Professor Michael Jefferson 375 Professor Nick Jelley 378 John Muir Trust 380 Mr Neil Kermode 383 Professor Michael Laughton 387 Lawrence Graham LLP 393 Dr and Mrs J Lyne 398 Dr Rayner Mayer and Dr Roger Bentley 399 Sir Donald Miller 405 Mynydd Llansadwrn Action Group 410 Natural England 415 Mr Michael Negus 418 Mrs N Penk, Mr C Penk and Mr DPC Penk, Pitfield Farm 419 Mr Richard Phillips 420 Renewable Energy Association 424 Renewable Energy Finance-Policy Project, Chatham House 428 Renewable Energy Systems UK and Ireland Ltd 432 Research Councils UK 438 Royal Academy of Engineering 445 Royal Society of Edinburgh 453 Scientists for Global Responsibility 459 Scottish Power Limited 464 Scottish Sustainable Energy Foundation 472 Mr Alan L. Shaw 475 Professor Peter F Smith 476 Mr Paul Spare 480 Town and Country Planning Association 484 Two Moors Campaign 491 Wavegen 493 Revd. John Wylam 494

NOTE: The Report of the Committee is published in Volume I, HL Paper No. 195-I The Evidence of the Committee is published in Volume II, HL Paper No 195-II Processed: 17-11-2008 19:07:46 Page Layout: LOENEW[ex 1] PPSysB Job: 408616 Unit: PAG1

Minutes of Evidence

TAKEN BEFORE THE SELECT COMMITTEE ON ECONOMIC AFFAIRS TUESDAY 6 MAY 2008

Present Best, L Macdonald of Tradeston, L Griffiths of Fforestfach, L MacGregor of Pulham Market, L Kingsdown, L Paul, L Lawson of Blaby, L Vallance of Tummel, (Chairman) Layard, L

Examination of Witnesses Witnesses: Professor Paul Ekins and Dr Neil Strachan, King’s College London, examined.

Q1 Chairman: Good afternoon and welcome to you interpret that particular third objective), and both. Many thanks for giving up some of your time to something to do with aVordability which might or be with us this afternoon. Welcome back to Professor might not be expressed in terms of fuel poverty. The Ekins; you were a witness last time round. Welcome balance to be accorded to those four objectives is of for the first time to Dr Strachan. I do not know if you course a political matter. My reading of the situation had in mind saying anything by way of introduction; at the moment is that the Government is giving most if you do not we will go straight into questions. attention to the reduction of carbon emissions, but Professor Ekins: Perhaps I could just say one thing energy security is coming up fast on the inside track which is to do with the results that come out of and may indeed overtake it at some point. I think that models. Some of the questions you addressed to me the concern about competitive markets and talk about forecasts. We are experienced in two competitiveness is always with us, so to speak, and models, one of them is a UK macro-economic model some commentators think that the objective of fuel with a sub-model of the energy system which is run poverty—specifically its eVective abolition by 2016— and operated by Cambridge Econometrics to whom has lost ground somewhat against the other I have been a senior consultant. That is the one to objectives. That is how I would characterise the which the forecast figures in the questions refer. objectives. Where do renewables fit into this? Through our work on the UK Energy Research Renewables have a role to play obviously as a low Centre we—mainly Neil—have been responsible for carbon energy source. It is conventional to say that building a MARKAL model of the UK energy the UK is one of the best endowed countries in system which gives much more detail about costs and Europe with regard to our resource of renewable so when you come to your questions about costs I will energy so we clearly could develop that and that refer you to him or you might like to refer the would reduce carbon emissions. It also has a role to questions to him because that is where those numbers play in energy security because most of these broadly come from. renewables are indigenous and were they to be developed to a significant degree they would give us Q2 Chairman: I think you acquainted us with the a stream of more or less secure energy for the lifetime MARKAL last time round. of the installations. They are relatively more Professor Ekins: Indeed. expensive than fossil fuel comparators, although if the oil price continues to go up and to drag other Q3 Chairman: May I start oV with a general prices with it that may become less true than it has question? What do you think are the key been in the past so in terms of competitiveness issues considerations for UK energy policy? How do and they perhaps do not score quite so well and because should renewables fit into that energy policy? Is their they are expensive, depending on the financing role likely to change between the medium term—by mechanisms for them, they can push up the price of which I mean to 2020—and the long term, to 2050 electricity and other fuels, and that of course makes and beyond? the fuels less aVordable. That is broadly what Professor Ekins: The key considerations for UK renewables can do. I think Neil has some figures oV energy policy I think were outlined in both the White the top of his head about the potential for renewables Papers which the Government has produced over the so I will pass over to him. last five or so years: the reduction in carbon Dr Strachan: If I was talking about the potential for emissions, energy security, competitive markets and/ renewables theoretically you could quite easily meet or competitiveness (depending on how you want to a 100 per cent of the UK’s energy needs through Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG1

2 the economics of renewable energy: evidence

6 May 2008 Professor Paul Ekins and Dr Neil Strachan renewable sources alone. I will quote some numbers including the costs therefore of system integration to you. In terms of the UK’s primary energy, before which you referred to and the costs of backup in the converting it to electricity or to heat or to refined case of intermittent sources of energy. What are the fuels, I will use the units of petajoules—although you true figures of the costs of these various sources? I can use other energy units—it is roughly around know they are big questions and if you would like to 8,000 petajoules. By 2050 if we were meeting carbon follow them up with a written reply that would be targets, we would expect people to reduce that fine, but initially what is your oral reply? demand as prices went up and our model says that Professor Ekins: I am sure we would like to follow it demand might go down to around 7,000 petajoules up with a written reply and, if we may, I think we will by 2050 for the whole UK economy. In terms of what probably be submitting something which the UK the UK has, in terms of things like tidal and wave, Energy Research Centre as a whole will then consider there is around 640 petajoules. These are very and submit to you as a response from the UK Energy conservative estimates and there is a lot of Research Centre. In line with my original remarks uncertainty about them; I am just trying to give out perhaps I could pass straight over to Neil and if he some medium estimates, so that is about 10 per cent. does not cover all the points you have raised as I Onshore wind is probably another 600 or so, that is would have covered them then I may make a few another ten per cent or so. Hydro is a little bit less, supplementaries. Neil is the cost expert around here. maybe only five per cent. There is an awful lot of Dr Strachan: Let me break down that question into onshore and oVshore wind, something like 16,000. In what they would cost now and what they may cost in terms of biomass, our domestic biomass and waste the future for electricity generation. When you look resource may be around 1,200 or 20 per cent. Our at what are called levelized costs of power imports of biomass—we could import it from other production—trying to put in capital and available places—is a very uncertain quantity but it depends costs and fuel costs—typically coal, gas and nuclear who is going to sell it and what are the environmental are within plus or minus five per cent of each other, consequences of developing countries giving a lot of they are very close. Marketed renewables such as biomass. Certainly measures of sustainable biomass wind tend to be more expensive, 15 or 20 per cent imports could be up to another 20 per cent of UK more expensive in current terms. In terms of the energy supplies. Then if you are looking at some of future, particularly looking at 2020–50, you are the intermittent renewable resources focussed on expecting to have very large amounts of electricity and some of the non-intermittent resources technological change and technological development both for transport and buildings, theoretically you particularly as current niche technologies become could easily meet a 100 per cent. Fundamentally it is a mainstream technologies and companies should get question of cost and a question of system integration. much better at making economies of scale. In our modelling the uncertainties between nuclear, coal (with carbon sequestration) or large scale renewables (largely wind) are so great that we cannot say with Q4 Lord Lawson: I would like to follow up that any robustness which of these three technology question of cost and system integration. I was very classes have the lowest cost. What we can say is what interested, Professor Ekins, in your saying that you happens if you start taking out some of these think that energy security is coming to the forefront; technology classes or if some of these technology I think you are probably right. If one is concerned classes do not work. For example, if you were trying about energy security then the obvious answer, as far to meet long term carbon targets and coal carbon as electricity generation is concerned, is clearly coal capture did not work, then you would have to rely on of which we have abundant indigenous supplies and nuclear and large scale wind and your annual costs which is very much cheaper than renewables at the might go up by £500 million. If you did not have CCS present time and for the foreseeable future. Leaving or nuclear—if you took both of those technology that aside, focusing on the question of costs I would classes out of the equation and were relying on be grateful if you could answer this question which electricity from large scale renewables—your costs lies really very much at the heart of our inquiry which might go up by £5 billion. If you took all three we are just launching. How do the costs of generating technology classes out and you were looking at electricity from renewables compare to the cost of making your carbon savings primarily in other doing so from fossil fuels and from nuclear power? sectors or through biomass in the power generation Similarly how do the costs of powering transport sector, your costs go up by £14 billion annually. So from renewables compare with the costs of doing it you can see if you only take out one of these through fossil fuels? This comes to the question of technology classes and you can rely on some of the system integration. What we are talking about now is other technology classes you are fine; once you start not the cost of an individual wind turbine but the cost taking out a large number of the options then the of a system based on these diVerent sources of energy, costs go up and they go up quite significantly. Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG1

the economics of renewable energy: evidence 3

6 May 2008 Professor Paul Ekins and Dr Neil Strachan

Q5 Lord Lawson: You have talked about generating scope of learning is relatively faster in those sectors. electricity but, as Profession Ekins points out in his An imperfect analogy would be improvements in PCs very interesting paper in the Cambridge and computers and mobile phones. These are smaller Econometrics study, there is a big growth area which units that turn over much faster and have much is going to be as much as one third, I think you say, larger production quantities. of UK CO2 emissions and that is transport. You have not really answered my question in terms of transport at all, you just talked about electricity generation. Q7 Lord MacGregor of Pulham Market: As this is Dr Strachan: When we do our modelling of long the beginning of the inquiry perhaps I could declare term, large scale carbon cuts in the UK economy, an interest, as in the Register, in relation to the what our modelling tends to find is that biomass pension funds of British Energy and one other resources are heavily utilised in the transport sector. interest associated with British Foods. I no longer If you are going to de-carbonise your transport sector have an interest in biofuels; that ends at the end of the you either use less transport or you switch to biofuels year. I am also involved in some lobbying about wind or you switch to hydrogen (if you switch to hydrogen turbines in East Anglia. Professor Ekins, can I come you must make hydrogen from some low carbon back to the Cambridge Econometrics press release resources). That generally seems to be the pattern; that Lord Lawson referred to. In that, only a short transport tends to be the hardest sector to de- while ago, you forecast that Britain would derive carbonise and within transport aviation is the hardest only five per cent of its energy consumption from sub-sector to de-carbonise. Again the costs of de- renewable sources in 2020, which is far below the 15 carbonising the transportation sector have the same per cent target. Do you think the target is realistic? uncertainty levels as you are projecting out to 2050 as What measures would be required to get much nearer does electricity. to it? Professor Ekins: Perhaps just for the record I can make a clear distinction between something that I am Q6 Lord Lawson: You mentioned just now biofuels. sure is familiar to everyone here, but which Recent research and studies done by the OECD and sometimes fools other people, and that is the so on show that biofuels use up more or less the same distinction between electricity and targets for, for amount—maybe a little bit less—of energy to example, renewable electricity which the produce as they do to generate. They also need about Government has through its renewables obligation; five gallons of water to produce one gallon of biofuel final energy demand which consists broadly of and when there is a water shortage in the world that electricity plus road fuels plus heating fuels, that is is not very clever. Of course they are also driving up what the 15 per cent refers to in the European Union the price of food, so I would like to leave biofuels to target; and primary energy demand which accounts one side. I was interested, however, in what you said in addition for all the energy that essentially is lost in about technological developments bringing down the making electricity, so you convert your electricity costs of renewables in the future. Presumably which is produced by other sources into a primary technological developments also occur in other fields energy demand. I think it is important to get those so, for example, they may well bring down the cost of percentages clear. Indeed our forecast suggests that nuclear or they may well bring down the cost of under current policies we will only get five per cent of conventional power sources. Do you take that into final energy demand from renewables by 2020. The account as well or do you just look at technological way the Cambridge Econometrics forecasts are done developments in the case of renewables and ignore is only to put in them what we regard as firm the possibility in other fields in the calculations you government policies, that is policies which, if they make? require legislation, the legislation has gone through; Dr Strachan: You are absolutely right that all these if they require regulations of some sort the technologies are competing in a race and if new regulations have indeed been promulgated. In other technologies are improving then incumbent words, we do not include stuV which is floated in technologies are also improving. Our work tends to white papers and consultation documents and the find that new technologies are improving faster. One like. At the moment there are very few measures to reason for that is that the older technologies have increase renewables for either transport fuels—in fact already had a lot of R&D applied to them. Another we have just had the Renewable Transport Fuels reason, particularly with these newer, smaller Obligation about which there is quite a lot of technologies, the number of units you have are much discussion now and the Cambridge Econometrics larger, for example the UK only needs 10, 20, 30 forecast does include that, but that only applies to a nuclear power stations or large coal power stations relatively small proportion of road fuels, while which last for a very long time. If you compare that transport fuels as a whole are only about 25 per cent to needing many thousands of small solar or wind of final energy demand, and we currently have no technologies that have a faster turnover, then the measures at all for renewable heat which is about 50 Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG1

4 the economics of renewable energy: evidence

6 May 2008 Professor Paul Ekins and Dr Neil Strachan per cent of final energy demand. The predominant enable us to convert woody biomass to biofuels in a measures in that forecast are related to renewable fuel eYcient way—there are some big “ifs” there— electricity and that is why the five per cent appears then it is possible that biofuels could make a quite small although that is 20 per cent of electricity contribution to carbon emissions reductions, which is a much higher proportion of electricity. The probably not by 2010 it has to be said. I rather think Government is currently consulting on the subject of that the contribution to fuels that is going to come by renewable heat and has called for evidence et cetera 2010 is much more likely to come from the kind of about mechanisms for support of it and were it to fuels sourced from abroad that have been in the news introduce such a mechanism—either a feed in tariV or quite a bit recently about which there are legitimate a renewable heat obligation or a system of substantial concerns as to whether they are genuinely low carbon capital grants—from experience in other countries fuels or not. that might be suYcient to pull quite a lot of renewables through into renewable heat and that Q9 Lord Best: If there is not really much to be said could get us towards the 15 per cent overall target for the use of biofuels under your heading of the given that heat is a much larger proportion of final objective of reducing CO2, is the Government then energy demand than electricity is. Were we to do that setting these quite ambitious targets under one of the with real conviction—given that the experience of other grounds, that of the energy security (although other countries, for example Austria now has 14 per I would not have thought so), or is it aVordability? cent of its primary energy demand coming from Why press for this one when there are so many biomass largely in the form of renewable heat—then question marks over its CO2 advantages? I think it is possible that if we were to develop a Professor Ekins: My own interpretation of that is that renewable resource and develop a renewable heat it is diVerent for diVerent countries. I think in the resource that we could approach the 15 per cent EU United States, for example, the rush towards renewables target, although I do not think anyone biofuels—one can only describe it as that—has been would deny it is going to be challenging. motivated largely by energy security considerations; they have a lot of land, they can produce a lot of crops Q8 Lord Best: You have covered the point that and they can make a lot of biofuels. In this country although we are not going to make the five per cent that is not really the case. Conceivably it is more target we might do much better under the heading of secure to import biofuels than it is to import oil, but electricity on its own. Can I go on from there to the that is a relative judgment depending on the source of costs and benefits of the requirement that biofuels the importation. My judgment about the whole make up 2.5 per cent of petrol and diesel in the biofuels policy, both at the UK and at the EU level, forecourts with plans to increase this to five per cent is that it was hasty and ill-considered and that it had within two years. How much of an impact on carbon not done the work that it should have done really to emissions in particular will the use of biofuels on the bottom-out the lifecycle carbon emissions issues and forecourts have? indeed the other environment issues which arise when Professor Ekins: It depends on what the lifecycle you are converting large quantities of biomass into carbon emissions of the particular source of biofuels fuel for vehicles. I rather hope that policy makers will is and there is very considerable uncertainty about think again about both the EU biofuels directive and that. For some biofuels produced in some countries indeed the Renewable Transport Fuel Obligation the suggestion is that their lifecycle carbon emissions until we can be sure that we are getting both low are actually more than fossil fuels because they take carbon benefits and other environment benefits from fossil fuels to grow them if they are a food crop and that policy. then they take fossil fuels to process them into biofuels, then they take fossil fuels to transport them Q10 Lord Paul: In view of the suggestion made out wherever they happen to be going (they might be about the question of biofuels being produced at the coming from quite long distances away) and then we cost of food and that is causing a food shortage, how finally burn them. Of course they give out carbon long will biofuels remain an option? emissions when they are burned and of course they Professor Ekins: For as long as biofuels come from will have absorbed those carbon emissions when they first generation technologies, in other words you are were growing. You have to account for the full converting food crops directly into biofuel, that is not lifecycle in order to do the sums properly. If we were an option which, with six billion people moving to concentrate on biofuels that were sourced from the towards nine billion people all wanting to be fed, is UK (to build on the biodiesel from waste vegetable going to make a great contribution to energy supply oils that is already a rather small part of the market) without eating in substantially to food supplies. If the to use the waste wood resource that is already second generation biofuel technologies come on available and if second generation biofuel stream which can convert woody matter into technologies were to come on stream that would biofuels, then of course the potential fuel source is Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG1

the economics of renewable energy: evidence 5

6 May 2008 Professor Paul Ekins and Dr Neil Strachan much greater, the areas of land on which that can be less electricity so that the pence per kilowatt hour of grown are much greater and it will compete much less the cost of our renewables has been substantially in directly for food and if you use a food crop then at excess of that in Germany and Spain. On cost least you will be using the whole plant instead of only eVectiveness, if it is per kilowatt hour of renewable using the food part of the plant. I think quite a lot electricity you are talking about, then the renewables hangs on the potential development of this second obligation has been less eVective than the feed-in generation technology. tariVs. If you are concerned about limiting the overall cost of renewables support then the renewables obligation has done that because it has worked out Q11 Lord Kingsdown: Could you outline for us the much more cheaply than the continental means. various forms of support which are provided to renewable energy? Are there some methods which are more cost eVective than others? Q12 Lord Kingsdown: It sounds to me like quite a Professor Ekins: I think there are basically three large wide range of subsidies of some sort or another are scale forms of support. There is a lot of tinkering at needed to produce this form of fuel. Is that going to the edges, but I will concentrate on three. We have the be economically tolerable in the longer and middle obligation mechanism such as we have in this country term? whereby energy suppliers are required to produce a Professor Ekins: They are subsidies, yes. Whether they certain proportion of renewables and they are given are tolerable depends on two things, firstly our degree a subsidy for so doing, and under our system the of desire to reduce carbon emissions—which is what subsidy is paid by electricity consumers. It only they are all about, obviously—and if it is perceived applies to electricity at the moment although, as I that we need to reduce carbon emissions more and said, there will be consultations and papers more then they will be perceived to be tolerable or commissioned about getting some similar kind of might be, if that is the political sentiment. Secondly, mechanism for heat. So that is the obligation method. to come back to the issue that Neil raised earlier, The feed-in tariV method is the main competitor to these are costs of very immature technologies. They that. It operates in several European countries and it have not been around a long time; they have not been essentially guarantees a price; instead of demanding widely delivered especially in the UK context by UK V a particular proportion it guarantees a price to the industries, especially o shore which is where most of producer for producing a certain kind of renewable our wind resource is expected to come from. It is and the price typically varies across diVerent widely hoped—I will not say expected—that their technologies. The third method is simple old capital costs will come down as they are implemented and grants: recognising that a lot of these technologies are delivered. more expensive at the capital level than their competing technologies you give a grant up front. We Q13 Lord GriYths of Fforestfach: I would like to have done that, for example—not terribly come back to something you said in relation to Lord successfully, but nevertheless we have done it—with Lawson’s question. Could you tell us what the range oVshore wind and I am quite sure that if we are to get of estimates of the cost of electricity from various much more oVshore wind we will have to continue forms of renewable generation, whether from oYcial with a capital grant programme. There is also a bio- estimates or independent estimates, really are? As I energy capital grant scheme, again a fairly small one listen to you, against a background of what I see as that has not produced an enormous amount, but it enormous uncertainty, for example the concept of the gives the flavour of what can be done. In terms of BRIC—Brazil, Russia, India and China—is eVectiveness I think it depends what you mean by probably not ten years old and you yourself talked cost-eVectiveness. How much renewables you get for about second generation technology and immature your money depends, not surprisingly, on how much technologies. We have seen in the past 18 months or money you are prepared to put on the table. so the price of oil double and the price of steel go Historically people who have introduced feed-in through the roof. If I was to play the devil’s advocate tariVs have been prepared to spend quite a lot of I think I might say, do you have any idea at all what money and they have ended up spending quite a lot these costs might be by 2050? of money in absolute terms—I am talking about the Professor Ekins: I have an idea but it would almost Germans and the Spanish for example—but in terms certainly be wrong. I am going to ask Neil to give the of pence per kilowatt hour of delivered electricity the best estimate in this configuration of great cost has been much cheaper than in the UK case. We uncertainty which you quite rightly allude to just so have not been prepared to spend so much money so that he can say what we think a reasonable range the buy-out price for the obligation has been set well might be. below the kind of rate that they pay on the continent Dr Strachan: I would make a distinction between in feed-in tariVs. In absolute terms we have spent what we call a levelized cost versus a total cost. A much less money but we have delivered much, much levelized cost would be if you were to do a Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG1

6 the economics of renewable energy: evidence

6 May 2008 Professor Paul Ekins and Dr Neil Strachan calculation based on the capital costs, the I would point out is that if you are supporting a operational costs and the fuel costs of a plant. portfolio of new technologies some of those are not Added to that are site specific factors (some sites are going to succeed and no-one likes to subsidise a cheaper than others), public benefits and losing technology, but any large company, any externalities and this crucial aspect of system pharmaceutical company will have a portfolio of integration, and who pays for that and how much products and some of them will win and some of it costs. If you were looking at a reasonable range them will not. That calls for a broad-based, near- for some of the major competing technologies as of term support until you see which technologies are now, then as I said before coal, gas and nuclear are improving and which technologies are oVering you probably in levelized terms within five per cent of cost and other advantages that other technologies each other and wind is probably 15 per cent above are not. that. As you say, prices change very rapidly and to a large extent, but £35 to £45 per megawatt hour is the current range for a levelized cost. In the future Q15 Lord Macdonald of Tradeston: At the start of you would expect the learning of new the inquiry I would like to declare what is recorded technologies—solar technologies, wind, tidal, in the House of Lords Register of Interests that I wave—to drive them down close to equal or even have advisory roles with both Scottish Power and better than current technologies. Exactly which Macquarie Capital, each company having energy technology wins and when that technology wins in interests, including renewables. I was wondering this technology race is almost impossible for us to what estimates you would have for the potential say. As academics we would not say that because costs and benefits of using carbon capture and that is false security. The only other thing I would storage with fossil fuel generation. Given that say is that a lot of these inputs are changing—as you carbon capture and storage are yet to be introduced, pointed out, the price of steel—and sometimes that how reliable can these estimates be? How do the does not impact the relative costs of technologies so estimates compare to the expected costs of much. We need steel for a lot of technologies; if the renewables? How do you rank the probability of an Y price of wages goes up, you need wages for a lot of e cient, viable, carbon capture and storage diVerent technologies. Even though the technology technology emerging in the medium term? It has prices will go up and down, the relative positioning been talked about for a long time and is still not of those technologies, although they will change, there. will also go up and down. Dr Strachan: To take your last point first, you are absolutely right that this technology has never been demonstrated in its entirety, but the component Q14 Lord Paul: We have been talking about the parts of the technology have been demonstrated. We costs but how do the costs of generating electricity do strip out hydrogen from fossil fuels; we do from renewables compare to fossil fuel and nuclear transport hydrogen over very long distances, over generation? Are these relative costs likely to change 200 kilometres in the US and Canada; we do use in the future? How robust are the estimates? hydrogen in the chemical industry and we do have Dr Strachan: We would certainly say that the experience of sequestering carbon in reservoirs (the relative costs are likely to change in the future. If Sleipner Project in Norway). So it is not a case of you look at short term changes in fuel price, coal is developing this new technology, it is a case of fitting now in a better shape compared to natural gas all these pieces together. There are uncertainties in because the price of natural gas has gone up to a doing that; there are huge uncertainties in scaling up larger extent than coal. Nuclear is looking better a production from demonstration to larger plants. than both of those fuels at the moment. That can I would argue that these uncertainties are less than clearly change; the costs of all these technologies are making the technology work; they are less than very, very uncertain indeed. All I can do is to making nuclear fusion work, for example, which is reiterate the point made that we cannot choose a technology that also has long term potential but between the future costs of these competing does not yet work at all. Perhaps that is a little bit technologies. In our model when we run diVerent too blunt, but I am trying to show the relative runs and sensitivity cases and those types of things, diVerence. I would argue that CCS is a nearer term, we try to think about where the diVerent large scale, low carbon technology than some of its technologies will succeed and where the diVerent competitors. To answer your second question about technologies will improve better than others. Paul the relative costs—when I was trying to answer made the point that you support technologies Lord Lawson’s comment earlier I think I already because you think that the current subsidy for these mentioned this—I can perhaps put it in percentage expensive technologies will be outweighed by the terms to make it clear. In electricity you have three future cost savings as these technologies improve. I main areas: nuclear, carbon capture and large scale would support that wholeheartedly. The other thing renewable sources. For our modeling to meet a long Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG1

the economics of renewable energy: evidence 7

6 May 2008 Professor Paul Ekins and Dr Neil Strachan

term 60 per cent reduction in CO2 that is going to could say something about the role of basic science cost, by 2050, between one and two per cent of and how you think, if it is important, it would have GDP, maybe a little lower. If you take out one of to be organised and financed. these key technologies prices will go up by 0.02 per Professor Ekins: No, I do not think it is quite wrong; cent of GDP, relatively small; if you take out two I think it is quite a reasonable way of looking at of these technologies then prices will up by 0.2 per that. I would emphasise something, though, that has cent of GDP; if you take out all three of these not come up yet which is that in all these percentage technologies in the mix then prices will go up by 0.5 targets there is denominator as well as a numerator, per cent of GDP. My argument is that as long as and the denominator is the total quantity of energy two of them work well—certainly as long as one of that you need. Therefore the less energy we need in them works well—then that is a much better basis order to go about our business and power our than going forward if none of them work well, then economies, the less we have to supply in the the costs of de-carbonisation will be quite high. numerator in order to reach the target. If you are Professor Ekins: Perhaps I could just add something going to think of it in terms of a Manhattan project on the Sleipner Project. This is something that I did I think we need a twin Manhattan project, one not know until very recently and was quite surprised focussing on the energy demand side to make more about it. This is a project in the North Sea in the eYcient appliances, to make more eYcient vehicles, Norwegian sector and it is owned by Statoil, the and indeed find out ways of increasing the thermal Norwegian oil company. They have already eYciency of the building stock which, as all sequestered ten million tons of CO2 under that estimates suggest, is one of the cheapest ways of project. Over the last seven or eight years there is reducing carbon emissions but nevertheless it is no evidence that the CO2 is going anywhere; there rather diYcult technically and technologically. That is no evidence of leakage. Ten million tons of CO2 is the demand side. Then of course there is a whole is nothing like what we would need to make a range of technologies on the supply side which one significant impact on this problem, but nevertheless might like to focus on. The diYculty is, as we have ten million tons of CO2 is not absolutely nothing. been saying, it looks as if there are at least three There is beginning to be evidence that this is a viable possible contenders for the Manhattan project on technology and this is something that is going on at the supply side: large scale renewables (which would the moment. I think what Neil said about the obviously include your solar example), carbon component bits of actually being able to separate capture and storage from fossil fuels, and nuclear. the CO2, being able to get it into pipelines and being Each one of those could be quite expensive if you able to pump it into rocks under ground—which is were to focus on it. If, as our advice to policy what the Sleipner Project does—at the moment that makers is, we do not know yet which of those is looks feasible at the scale they are doing it. going to come through so you probably have to do all three, you can see that there is a veritable Q16 Lord Layard: I wanted to ask you a question proliferation of Manhattan projects into these V about basic science. Obviously we would not have di erent technological areas, and we have not even a nuclear industry if we had not spent a lot of public started on something like hydrogen which some money on basic science. I would like to know people regard as being very promising for the longer whether you think we actually can, as a world, term future, or something like fusion (which already achieve reasonable levels of CO2 emissions by the absorbs a very large part of the basic science budget middle of the century without a major scientific of the Engineering and Physical Science Research eVort. When we had our last inquiry we were told Council). I think there is the scope to spend very that the International Energy Agency had made large sums of money in all these areas. I think for some estimate—which I am sure could be eYciency it ought to be financed globally in a questioned—that to get competitive non-carbon globally cooperative eVort. We know that some energy within a reasonable timescale would require countries are much more willing to spend large sums and could be achieved by something like 300 billion of money on technology than others and I think the expenditure on basic science over, say, a 25 year United States, for example, is already spending period. Is it completely wrong to think of this considerable sums in a lot of these areas. I think it problem as a problem like producing an atom bomb is terribly important that we get globally the biggest or putting a man on the moon, like JeVrey Sykes bang for our buck and have properly coordinated was saying this morning on the Today programme? basic scientific research. However, I have to say that I am thinking in particular of the immense energy I am also pleased, both in principle and because I of the sun which is the main source of energy on am a direct beneficiary, that the UK’s own scientific this planet and the harnessing of that by scientific eVort in this field has become much enhanced over methods. Is it quite wrong to think of that as a the last few years. The UK Energy Research Centre central aspect of solving this problem? Perhaps you was set up five years ago and I think has made Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG1

8 the economics of renewable energy: evidence

6 May 2008 Professor Paul Ekins and Dr Neil Strachan significant progress with energy research in this global interest in reducing carbon once you have an country. The EPSRC’s energy programme, the eVective renewables industry for the domestic various SUPERGEN consortia that have been market you tend also to win exports. The wind initiated are focussing on a very wide range of the industries of both Denmark and Germany are now diVerent energy technologies that may come substantial export earners. I read the other day that through. It is a large spectrum and the quantity of the wind exports of Denmark have now surpassed resource that you could spend would be very large those of their fabled agricultural sector; Danish indeed. I think there are diYcult decisions to be bacon is no longer the kind of quintessential Danish made about what to spend; I think it is very product, one might say Danish wind turbines have important that there are real eYciency criteria so exceeded that. It certainly can happen that if you that we do not waste money in this area and these make eVective interventions in your own industrial programmes are coordinated internationally so that system and there is demand in other countries—at we can learn from each other. the moment I think it is very likely that there will be demand for low carbon technologies from other Q17 Chairman: Before I ask you what will be the countries—then I think there are very good last question, I should mention that my entry in the prospects of building up exports and of course with list of Members’ interests includes membership of exports come employment and one of the things that the supervisory board of Siemens AG which has the German renewables industry is always very keen interests in power generation of various types, to say is that they do employ now hundreds of including renewables, transmission and indeed thousands of people in their renewables industry for transport. Has your work examined the wider both the domestic and the export markets. While I impacts of renewables, for instance through have not studied that in detail and clearly at the establishing a UK manufacturing sector or the moment it is a subsidised industry apart from the impacts on rural areas, employment, tourism and exports—assuming that the importing countries pay so forth? the full costs—there is I think an argument for Professor Ekins: Not in any detail, to be frank. There including industrial policy considerations with other are probably other witnesses you will want to call considerations of supporting renewables at this who are better qualified to comment on that than I time. am. The Cambridge Econometrics model does look Chairman: Thank you very much indeed, both of at the whole UK economy and, not surprisingly, if you, for spending time with us and answering our you invest large sums of money in renewables you questions so clearly. We look forward to your note will get a UK renewables industry. If you look into in due course and if you feel that there are any other countries that have invested large sums of questions you expected us ask but did not, feel free money into renewables you find that because of the to answer them in your note.

Examination of Witnesses Witnesses: Professor AbuBakr Bahaj, Southampton University, Professor Tony Bridgwater, Aston University and Dr Simon Watson, Loughborough University, examined.

Q18 Chairman: Good afternoon, welcome to you into some sort of perspective, that is enough to supply all. Thank you for coming to talk to us this afternoon something in the order of 1,600 households. and for giving up your time. I do not know if you want to say anything by way of an introduction. If you do, then speak now; if not we will go straight into Q19 Lord Lawson: You were at the back for the last questions. Let me ask the first question which is, witnesses. On carbon capture and storage I recall that taking wind power first could you comment on how Mr Alistair Darling, the present Chancellor of the much electricity a typical wind turbine in Britain Exchequer, a year ago was the minister responsible would generate? for energy. He said that in his view—presumably he had been briefed by his oYcials—that this technology Dr Watson: I guess at the present time the sort of wind might never become commercially viable. Do you turbines that are being installed, particularly onshore think he is right or not? but also oVshore, are around about two megawatts of Professor Bahaj: In my view the question was rated power output. Typically you can expect that the answered earlier on. Quite a lot of the technology is average power that one would produce if you looked now being researched on. There is the issue of over the period of, say, a year, would be around coupling this technology together. We do not have a about 600 kilowatts, so it is about 30 per cent large scale experimental programme to actually say capacity factor. That would give you around about whether it is going to succeed or whether it is not 5,000 to 5,200 megawatt hours per year. To put that going to succeed, whether it is economic or not Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG1

the economics of renewable energy: evidence 9

6 May 2008 Professor AbuBakr Bahaj, Professor Tony Bridgwater and Dr Simon Watson economic. The jury is out on this technology. We Another way is to make sure your system is well- need to have enough experience with it to allow us to interconnected so, for example, the UK is connected have confidence in giving you figures. to France. If those interconnections were increased that would allow greater movement of power between the UK and the European systems so that if Q20 Lord MacGregor of Pulham Market: Going you had an excess of wind power generation you back to wind power, given that the turbines only turn could export; if you had a shortfall then you could when it is windy, to what extend do wind farms have import power from other countries. So, spreading to be backed up by regular fossil fuel or nuclear out the wind farms and greater interconnection of generation? Are there any potential technical power systems are ways of managing the variability. solutions to that particular problem? Could you also comment in that regard as to the relative merits and V Q21 Chairman: If there is an anticyclone hovering costs of o shore and onshore? over the UK and there is no wind, what happens Dr Watson: There is something called the then? intermittency of wind power and I think we prefer to Dr Watson: You could argue that might happen, in call it the variability rather than the intermittency. In fact studies are being done to look at how frequently terms of variability of wind power, if you take it in peak demand correlates with an anticyclone and no perspective in terms of a power system, the way a wind. In actual fact, that is a relatively rare event. power system is run conventionally you have a large Again, to put it into perspective, a power plant may number of sources of demand and those sources of go oV instantaneously and you might lose 1,300 demand are very variable. However, if you aggregate megawatts if it is a large power plant, for one of the those sources of demand over a large area then the interconnectors to France that is 1,000 megawatts overall variability goes down quite significantly. The and those interconnections do go down at least once system is quite capable of coping with fairly large or twice per month so you will lose large amounts of changes in demand and typically the power system, generation anyway, even for conventional power certainly in the UK and any other power system, generation. The event you are talking about is a would carry suYcient online reserve to cope for the relatively rare event. outage of a large power station which typically might be in the UK of the order of about 1,300 megawatts. Q22 Lord MacGregor of Pulham Market: Insofar as In terms of variability of wind power you would we have any experience, does the variability diVer never expect that you would lose 1,300 megawatts, between oVshore and onshore? say, of wind power in the period of seconds which Dr Watson: Obviously at the present time our you might do in terms of a large power station. The understanding of that is more theoretical because the best way of trying to cope with variability of wind amount of oVshore capacity is small at present, power is to spread the wind turbines over a fairly however you would expect that the variability would large geographical area. You tend to find that be less oVshore than onshore for a number of weather systems move across the UK. The wind will reasons. The oVshore environment is much more change slowly across the UK so the aggregated open—you do not have buildings around—so that change in the power output of a number of wind reduces the amount of variability due to turbulence farms is fairly gentle; the rate is quite slow. In terms that you might get with buildings around. Secondly, of variability the impact on a system, particularly at the surface is much smoother so the winds you get are the levels we are at the moment, is quite small and is not aVected by grass or trees or objects that again can no more diVerent than the variability in the demand. create variability. In general there is less variability If we move towards a system where we have, say, 20 oVshore. If we are moving to a large number of wind per cent of electricity produced from renewables and turbines built oVshore compared with onshore I let us say about three-quarters of that came from think we would expect less variability in the long run. wind power, then we might reach a situation where we would have to have a little more generation on the Q23 Lord Lawson: You have limited your figure to system which was capable of providing fairly rapid 20 per cent whereas in fact in the Government’s backup for changes in the wind power output. The Climate Change Bill there is some question in the air studies that have been done and certainly the work I as to whether this is going to be 60 per cent have done, at the 20 per cent level the extra cost of decarbonisation or 80 per cent decarbonisation, it is electricity is something in the order of 0.2 pence per likely that the Committee will recommend 80 per kilowatt hour which is fairly modest I would say. You cent, but even if it were 60 per cent 20 per cent is not were asking me about how to mitigate the eVects of going to make a great contribution to that, so we are variability. One way, as I said is to try to spread out talking about something more at which point the your wind farms over a fairly large area to try to backup that Lord Vallance was talking about mitigate the changes in the wind that you get. becomes even more important. My supplementary is Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG1

10 the economics of renewable energy: evidence

6 May 2008 Professor AbuBakr Bahaj, Professor Tony Bridgwater and Dr Simon Watson this, given that you are going to have to have this Q27 Lord Best: At the macro level, leaving aside the backup, is it not the case—if it is not then tell me— economics, what is the technical potential for the that in fact using nuclear as the backup would be proportion of Britain’s electricity that could be hopelessly uneconomic so in fact you would be generated by wind power compared with other bound to be using conventional power stations as countries? Am I right in thinking that we are quite a backup? windy country? Dr Watson: It is true to say that nuclear is a fairly Dr Watson: Certainly if you compare us with the rest inflexible form of generation so you would not tend of Europe we have the best wind resource potentially to use nuclear as a form of backup, you would tend available. In terms of the amount of electricity that to use plant which is more flexible which includes coal we could realistically generate from a technical view fired power stations, it includes open cycle gas point (perhaps not from an economic view point), turbine power stations and pumped storage so you you could envisage a situation where you could would not tend to use nuclear as the form of backup produce maybe 70 per cent of electricity from wind in such cases. but that would obviously require a large number of wind turbines. Q24 Lord Lawson: If your concern is to minimise the carbon dioxide emissions in the generation of Q28 Lord Best: You say we are windier than the rest electricity then nuclear is more eVective in doing that of Europe, is this by a large factor? Is this a significant V than wind power, given that wind power needs the di erence? coal fired power stations or whatever as backup. Dr Watson: The trouble is of course you get very large Dr Watson: You could turn that on its head and say variations from one location to another. The average that wind is a more variable form of power than wind speed across the UK is probably something of nuclear, but nuclear is quite inflexible. Nuclear is the order of 5.7 metres a second, something like that. typically run at base load so you are going to have That hides very large variations; there are upland some form of balancing generation to manage that. areas where the wind speeds are higher than that and clearly the oVshore areas where the wind speeds are higher. The average is a diYcult measure to use, but Q25 Lord Lawson: We will have to find that out in if you look at it in terms of capacity onshore and our inquiries because there are plenty of people who oVshore it is significantly higher than most of the say that the new generation of nuclear power stations European countries in terms of our overall potential is much more flexible. I do not know where the truth if we were to exploit it fully. lies. They claim the new generation has much greater flexibility Q29 Lord GriYths of Fforestfach: Instead of having Dr Watson: I cannot comment on the new generation. these large areas of wind farms and so on, is there any advance in technology to make them micro? Q26 Lord Best: At the level of the individual home, Dr Watson: Do you mean in terms of visibility? particularly in urban areas rather than out in the countryside, would I be right in thinking that the Q30 Lord GriYths of Fforestfach: Yes. amount that can be contributed to electricity supply Dr Watson: No. The problem is that if you go to the from home grown, on the home turbines, is smaller scale, because of the way the physics works, absolutely infinitesimally small and hardly worth us the aerodynamics work, they inherently become less giving any consideration to at all? eYcient. One of the measures that is used in terms of Dr Watson: I think in general I would agree with that. the eYciency of a wind turbine rotor is something I have done studies myself looking at the expected called the CP co-eYcient and the maximum that can output of a small micro turbine of the order of one be, if you look at the amount of energy in the wind kilowatt and you get a capacity factor of about one and the amount of energy that a wind turbine can or two per cent compared with 30 per cent for a large extract, is something in the order of about 59 per cent wind turbine. For most people in an urban area it and some of the larger wind turbines are approaching would not be an economic proposition. that eYciency. If you go to a smaller wind turbine, Professor Bahaj: I think the issue in urban areas is the say the sort of turbine you would put on your house, shadow eVect of buildings. Wind turbines really work the eYciency drops down to maybe 25 to 30 per cent. as a function of the speed of the wind; the power is So from an eYciency point of view it is not a sensible related to the cube of the wind speed so any reduction thing to make the turbines smaller. in the wind speed reduces the power output. I think Professor Bahaj: There is the issue of civil in buildings because of the winds between buildings infrastructure. If you have smaller turbines the cost and so forth it is very diYcult to actually have micro will be greater because you have to have foundations, generation wind giving you the optimum eYciency of you have to have other plants and so forth, so that is conversion. another issue which relates to costs. Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG1

the economics of renewable energy: evidence 11

6 May 2008 Professor AbuBakr Bahaj, Professor Tony Bridgwater and Dr Simon Watson

Q31 Lord Kingsdown: Could you clarify what is some biomass and you can contribute significantly at meant by biomass and bio-energy? What proportion the lowest possible cost to meeting UK’s carbon comes from agricultural by-products and waste, and reduction targets. Another way is a dedicated what proportion comes from crops and forests grown biomass fired power station. There is one at specifically to generate energy? Are these proportions Lockerbie, 45 megawatt; there is one in StaVordshire, likely to change in the future? How is the use of two megawatt. The Lockerbie one uses forest biomass split between electricity generation, heating residues and the StaVordshire one uses purpose and transport? Is this likely to change? grown miscanthus. So you have co-firing for Professor Bridgwater: That is a very big question. combustion and you have also got dedicated biomass Biomass of course are plants that grow ranging from combustion in dedicated power stations using only trees and forests to the food we all eat. That is biomass. You then have the more advanced V biomass; it is material that grows and in growing it technologies for processing which o er the potential Y fixes carbon from the carbon dioxide in the or the promise of greater e ciency using gasification atmosphere and grows itself. It is the only renewable or pyrolysis. These will deliver systems that have a Y source of carbon. Carbon is a source of hydrocarbon greater potential for increasing the e ciency of in fuels as well as for food. The amount of biomass power production over and above what you can get by combustion either at power stations or dedicated that is grown for energy only in the UK is quite small, plant. Bio-energy can be used for power; it can be tens of thousands of hectares only, mostly for wood used for heat; there is a growing market in wood chip for use in co-firing applications, particularly up in and wood pellets supplied to small companies, Yorkshire. There is a lot of agricultural residues like industrial estates and so on so there is a combustion straw; the UK produces one of the largest amount of opportunity for processed wood (chips, pellets and so straw in Europe and the straw is used to fire three on). Then you have the transport fuel sector which is power stations, for example, in East Anglia. Straw currently of enormous interest. It is currently being has a use for animal bedding, it has a use for energy satisfied by what Paul Ekins has been describing as and there are many other sources of agricultural first generation biofuels. The problem with first waste or residue that can be used for energy. So we generation biofuels is that they are competing with have waste residue by-products for energy and we food. Sugar, for example, to make alcohol or could also grow crops. The two favourite ones in the ethanol—as is produced in Brazil—is competing with UK are willow (which is known as a coppice crop, so sugar for food. In the USA it is made from corn or you grow it in three to five years, chop it down and it maize: the corn can be used as a food stuV or it can be grows again) and a grass called miscanthus which is a used to make alcohol. In the UK there is both a sugar very thick grass and grows about two to three metres process for making alcohol and a wheat based high. The UK is land-limited so the amount of land process; wheat of course is a food stuV as well. The we have is finite. There is a view that the maximum concern with first generation food stuVs is that there amount of biomass that can be grown is 100 million is competition with food and secondly the rates of tons per year. We can grow woody crops which are yield or the productivity of these crops on land is interesting because they are relatively clean, low in quite low. Rape for bio-diesel is probably one ton per contaminates, burn cleanly and can be processed hectare and sugar and corn for bio-retinol in the UK cleanly. The other main crop considered being and northern Europe is probably two tons per suitable for energy is something called miscanthus, a hectare. If we go to the second generation crops like grassy crop which is quite well adapted to UK ethanol from wood or hydro-carbon transport fuels conditions, but you can get yields of nearly double by using processes like growing bio-ethanol we can that you can get from willow. Bearing in mind that get yields of up to five tons per hectare. The status of the land is limited in how much there is, the more the technology and how advanced it is is very crops you can grow per unit area of land, the more important in the UK because we are land limited, we V interesting the crops are. That is one of the downsides therefore need to use land as e ectively as possible to of first generation biofuels like rape for rape methyl make as much of our energy needs as possible. The question of the competition between transport fuels ester or bio-diesel. You only get about one ton per and heat and power is also interesting because you hectare per year whereas willow is typically around make heat and power from nuclear, from wind, from ten and miscanthus can be up to 20. In a land-limited photovoltaics, from wind, from waves and from environment like the UK it is very important to use tidal. Biomass is the only source of renewable carbon, the land as productively as possible. That has carbon for hydro-carbons in gas and in diesel and answered one of your questions I hope. The second carbon for the range of chemicals we use daily. I think one was what forms bio-energy. You can produce it is important to recognise the unique attributes of electricity usually by either burning the biomass and biomass and what it can be used for. a very eVective way of doing this is co-firing in coal fired power stations because you can use all the Q32 Lord MacGregor of Pulham Market: How capital investment and all the gas cleaning by adding much miscanthus are we growing in this country? Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG1

12 the economics of renewable energy: evidence

6 May 2008 Professor AbuBakr Bahaj, Professor Tony Bridgwater and Dr Simon Watson

Looking at the economics, are there any benefits new roads that can handle all the trucks and maybe currently in growing miscanthus from the growers’ new rail heads. So there is an environmental cost of point of view? directly and indirectly building large scale plants. I Professor Bridgwater: You get much higher yields think my view is that the future is in a diversity of than any other crop, up to 20 tons per hectare. The options and in de-centralising opportunities. total amount of the cultivation is of the order of thousands of hectares; it is relatively limited. There Q34 Lord Paul: For transport, which forms of bio- V are about a thousand in Sta ordshire to supply the energy have the best prospects? Which crops can be Eccleshall power plant and there are some big grown in the UK, and which need to be imported? plantations in southwest England, but it is relatively Professor Bridgwater: The problem is not, I think, small. One of the problems is that the support for which are the best crops, it is the total quantity growing miscanthus was withdrawn last summer and available. If we are going to go up to 20 per cent this has caused a lot of concern. The investment substitution by 2020 there is problem of whether we grants for planting it were significant and made it a grow enough in the UK and, if we cannot grow viable crop, but without that there has been, as I enough, even by importing all our food the view is understand it, no more new planting. that we can get maybe 20 to 30 per cent. We need to produce some food ourselves so we are going to have Q33 Lord GriYths of Fforestfach: I should declare to import biomass. We then become dependent of an interest which I did not last time, and that is my course on where we source it from and the source of association with Goldman Sachs which has a that biomass is going to want to add as much value principal interest in this area as well as its role an as possible and probably want to process it locally advisory and training business. I have two questions. into as high a value a product as possible to export. The first is, what are the pros and cons of burning Brazil, for example, would rather export ethanol than biomass together with coal? Secondly, do biomass wood chips. It does export wood chips and it does plants have to be relatively small because of the costs export ethanol but from a national point of view they of moving them over distance? would much rather export the highest value product Professor Bridgwater: The advantage of co-firing is because of the earnings they will get for the that you have a complete infrastructure for handling employment prospects and for the investment. In the solids, for processing solids; you have all the UK the two crops that are considered most widely as economies of scale that go with that and you have all energy crops are willow as wood and miscanthus as a the gas treatment, all the gas processing and grass. Miscanthus is what is called a C4 crop and it is emissions control. Adding up to five per cent biomass more tolerant to drought, less demanding on water is not going to significantly change the performance and also on nutrients, so it is an easier crop to grow or operational costs of the power plant but there is a and you get very high yields. The other interest is in contribution of five per cent (five per cent firing on an algae. There are two types of algae, one is micro algae energy basis). It is really an economic argument. I and there are some quite optimistic claims of getting believe that virtually all coal fired power stations in yields of up to 90 or 100 dry tons per hectare from the UK are now licensed to buy biomass and the costs micro algae, but the cost of this is that it has an and modification to handle the biomass is quite intensive reaction process, very high capital costs and small, roughly £1 million I understand to a power high running costs of providing access to sunlight plant that cost hundreds of millions to build in the and all the nutrients and the liquid handling. Micro- first place. So there are considerable cost benefits and algae comes round every 15 or 20 years; it has a lot of advantages to coal firing. The problem with small interest at the moment both because of the yield and scale, dedicated biomass, the reason they are limited because of the oil products you can derive from it. in size is firstly the availability of biomass, the The other algae that is interesting, which means we concentration within an area that you can collect it are less land-limited than we are now—is to go V over. You have to transport the biomass from the o shore and look at seaweed, which is called macro- forest or the field to a central place usually by road algae. There is a study at the moment included in the for the Lockerbie power station, for example, but SUPERGEN bio-energy activity looking at the once you get up to hundreds of megawatts you have opportunity and the potential and methods for the to go much further afield, you have to consider either handling and harvesting of seaweed. I think the rail, sea or river transport to bring the biomass interesting new crops to be investigated with most together and the handling and transport costs get interest currently are and willow and miscanthus. significantly more. The studies that we have done indicate that transport cost is not a major factor in Q35 Lord Macdonald of Tradeston: What is the the total cost but there are environmental costs of technical potential for the amount of Britain’s energy having lots of trucks going past your house, through that could come from biomass and what impact villages to deliver to the site. There is also the cost of might that have in terms carbon emissions? Also, just Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG1

the economics of renewable energy: evidence 13

6 May 2008 Professor AbuBakr Bahaj, Professor Tony Bridgwater and Dr Simon Watson going back if I may to the withdrawal of support for There has to be some give somewhere in the system. miscanthus, it sounds very promising and I wondered It is a case, I think, of optimising the combination of if there were arguments against that encouraged the food and fuel. The 100 million tons is an estimate and Government to withdraw the support and what they it does consider the diVerent types of land might be. What do you think the potential for rural productivity, the non-availability of land due to employment might be in biomass? cities, roads, mountains and so on. I can try to obtain Professor Bridgwater: Clearly the farming community that information and also work out what it equates to has not had an easy time over the last ten or 15 years in power and transport fuel supplies. and they are not very happy about growing crops they have to wait five years to harvest. Something like Q37 Lord Lawson: What about Lord Macdonald’s miscanthus which they can plant and harvest miscanthus question? annually like a normal crop they are much more in Professor Bridgwater: I am sorry; can you remind me favour of than short rotation wood where they only of it? harvest every three or five years. It is a major investment, a major risk and unfortunately some of Q38 Lord Macdonald of Tradeston: What are the the experiences in the UK do not support the risks criticisms of it that encouraged the Government to involved in farms growing woody crops. There is a withdraw its support? need I think to provide some guarantees or some Professor Bridgwater: I think it was a European support to farmers who do grow woody crops that directive, not a national issue. I believe the they are not going to have the contract cancelled or Commission required that the incentives for are left with hundreds of hectares of wood which supporting growing miscanthus and similar crops nobody wants. It is a question, I think, of dealing was in fact withdrawn. As I understand it, it is not with the farmers’ concerns of how they deal with the something the Government wanted to do but they uncertainty of growing bio-energy crops. I think it is did not have a choice. Again if you would like to important to know that as biomass and bio-energy know more on that I can find out. become more established and become more widely traded then the risks will go down and farmers will be much happier to grow them, to handle them, to Q39 Lord Layard: Could you briefly explain the V market them and the price also will drop as time goes di erent technologies and the pros of cons of the V by. At the moment it is getting better but there is still di erent types of marine energy? How predictable uncertainty over what happens if . . .? What happens and how intermittent would the energy supply be if the plant down the road that wants to buy it goes from a large scale deployment of marine energy? bankrupt—as happened in one case—and so on? It is Professor Bahaj: The two technologies that we will a fairly rapidly changing situation and as the bio- talk about in terms of marine energy are wave as well V energy industry grows I think we will see a greater as tidal stream. Tidal stream is di erent from tidal interest in growing the crops, greater interest in barrage which is really just a fence using hydropower establishing standards for marketing them, using to generate electricity. I will talk about tidal stream them and trading them both within the UK and and wave power. There are three competing abroad as well. I cannot remember the first point of technologies in wave power. There are others as well your question. but the three competing ones are the oscillating water column in which a wave comes into a chamber, it compresses air and goes through a turbine. As the air Q36 Lord Macdonald of Tradeston: I was asking for goes through the turbine it generates electricity by the technical potential for the amount of Britain’s turning the turbine. As the wave recedes it also turns energy that would come from biomass and what the the turbine in the same direction. That is an impact of biomass might be in terms of carbon oscillating water column. The other one is like a emissions. sausage where you have articulated cylinders and Professor Bridgwater: The impact of the amount of between them you have a power take oV system biomass has been considered that you could produce where it compresses air which drives turbines. The in the UK, forgetting food, is about 100 million tons last one is what is called a power point absorber a year which I think equates to the order of between which oscillates in the sea and either compresses air 60 to 80 per cent of the energy. I would need to or drives an electrical generator. These are the main confirm that, if I may, but it is of that order. We have three diVerent competing technologies for wave the potential to produce a large proportion of our power. In terms of tidal power, the majority of current energy but that would mean we would have technologies are related to horizontal axis turbines, to import all our food so you get back to the food except one which is the vertical axis turbine. Many of versus fuel debate—how much food do you want to the technologies are based on the horizontal axis produce and how much energy do you want?— turbine based on wind turbines. There is a lot to learn because you cannot produce everything you want. from that technology. That actually reviews the Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG1

14 the economics of renewable energy: evidence

6 May 2008 Professor AbuBakr Bahaj, Professor Tony Bridgwater and Dr Simon Watson technology in two minutes. Wave power is driven by the most important, and to a lesser in India, about the wind so it is intermittent. Tidal power is driven by the growing of miscanthus or equivalent renewables? lunar cycle and therefore you can predict within half Professor Bridgwater: The opportunities in China are an hour the energy you get from any given site. In considerable. terms of large deployment the majority of developers, at the moment, are at the prototype stage. In wave energy the first developer is Pelamis Wave Power Q42 Lord Lawson: What is actually happening? Limited in Edinburgh and the first array is going to Professor Bridgwater: They are increasingly co-firing be launched in Portugal in the next few weeks. Other straw—both wheat straw and rice straw—in power devices that are in the sea are the one in Lynmouth stations. There is a mission currently looking at what which has been there for about two years, a they need and the opportunities from the European horizontal axis turbine by IT Power and now Marine point of view of exporting technology and helping Current Turbines Limited. Lunar Energy also have a them implement that. There is a growing interest in device which is the shrouded turbine. The shroud small scale dedicated biomass combustion systems itself enhances the velocity that it goes into the again for power generation. The amount of biomass turbine and you get an enhancement of energy there is only about ten times what it is in the UK and production. Large deployment is still on hold so if you compare that to the number of people in the because the majority of the developers are waiting for UK it is never going to be a major contribution investment in order for them to deploy at the to their needs. However, there is a recognition by the government of their responsibilities and a prototype stage. There are four technologies that are V being supported by BERR (or the DTI before them) recognition by the di erent states of the and that is the horizontal axis turbine, the shrouded opportunities for getting rid of your waste and turbine and another two technologies which are a generating useful power and taking advantage of a small incentive for green power. China is doing what variant of the two. Those technologies are still not in it can but it does not have the resource and there large scale in the sea. The resource is between two and seems to be little interest in growing biomass for seven gigawatt average annually. That is four to power or for heat or for transport fuels. I believe they seventeen gigawatt installed capacity. This is roughly are opening a major new gigawatt power station at fifteen percent of UK requirement of electricity. the rate of probably one a week or something like Dr Watson: One of the other devices that has been that. They are certainly utilising their coal. There is proposed for wave energy is something called a little attempt, I understand, to clean it up certainly to tapered channel device, a tapchan. It forces the waves Western European standards, so there is a lot of into a constricted channel and the waves then build pollution and a lot of emissions. My belief is that that up and overtop into some sort of storage chamber. is going to far outweigh any contribution we make. There is a device called a wave dragon which makes India is in a diVerent position, I understand. Their use of that. The chamber builds up a head of water electricity production is only currently 60 per cent of and that water can then fall through a turbine and what they need and there is an enormous need for generate power. In terms of a comment on the infrastructure development to provide power. I was variability of some of these, it is true to say that tidal surprised when I went there recently to find how few power is very predictable. It is quite variable in that incentives for investment there are to help villages it can go from full output to zero output in a matter and towns supply their own power by using biomass. of six hours. I met only one person with a small interest in building gas suppliers and engines for a decentralised power Q40 Chairman: Leaving aside the economics and production at the one megawatt scale or smaller, looking at your crystal ball, what do you think is the providing power for the village. Bearing in mind how technical potential for the proportion of Britain’s low a capacity they have and how much the demands electricity that could come from marine energy? are, I would have thought there would be great Professor Bahaj: In terms of wave power, the figure incentive for communities to have access to a fairly that I have from an ETSU report 1999 is about 60 low-tech solution to providing power. The other terawatt hours a year from wave power. activity in India is growing a plant called jatropha from which you get vegetable oil which you can convert into bio-diesel. The attraction of the plant is Q41 Lord Lawson: We have been talking basically in that it is very stable in low rainfall arid conditions. It the context of the UK but of course if the concern is grows quite well and gives a reasonable yield of seed to reduce carbon dioxide emissions—which I assume which yield an oil to make bio-diesel. The problem it is because otherwise none of this would make however is that it is toxic to some animals and I think sense—the UK is neither here nor there. We account the trade-oV with growing plants that are toxic but for slightly less than two per cent of global emissions delivering a plant suited to southern Indian and declining. What is happening in China, which is conditions is quite interesting. There is an interest Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG1

the economics of renewable energy: evidence 15

6 May 2008 Professor AbuBakr Bahaj, Professor Tony Bridgwater and Dr Simon Watson there but little incentive or encouragement factor for photovoltaic is about 11 per cent; it is very, unfortunately. With almost as many people as China, very small. The resource, as you go further up in given the need they have and the growth in resources, latitude actually decreases. I think there is again potential to significantly increase CO2 against which we can contribute little. Q46 Lord MacGregor of Pulham Market: The Q43 Lord Lawson: You have been talking about technologies? biomass in terms of crops all the time but in fact dung Professor Bahaj: You have two types of technologies in many parts of the world is a very important form with the photovoltaics, the first one is what is called of biomass. It is highly polluting but it is used. monocrystallised silicon which is the highest Y Professor Bridgwater: There is little activity in the UK. e ciency technology which is made of an ingot of silicon, a high purity crystal. This technology is about 20 per cent eYcient at the moment. Then you have Q44 Lord Lawson: I am not talking about the UK. various categories of thin-film technologies where Professor Bridgwater: There is little research or active eYciency varies between five to about eight or ten per practice. Animal wastes are an excellent way of digesting it to make biomass which is 50 per cent cent. The cost at the moment is almost the same in methane. You can drive engines oV that and you can terms of dollar per watt. In terms of where to install cook on that. There are quite a few of these in China. this technology, if you think in terms of limited areas Y The problem is that the people in China see natural in the home one will need very e cient technology in gas as being much more socially enhancing whereas there because it is a limited area. If you think in terms having a pit at the bottom of your garden that you of large scale production where space is no problem throw all your waste into is not very good to have. you will think of the cheapest technology to have, for People by and large do not like bio-gas generators example, the Sahara is a larger area and you would and do not want to be seen using them. The go for the cheapest technology to produce whatever perception of the population finding acceptability of you want. technology is quite important if they are going to be Dr Watson: In terms of electricity demand, as has introduced. The other interesting thing is that in been said, it is probably limited in the UK, probably Sweden they are building small scale bio-gas about five per cent of demand, something in that generators and converting gas into hydrocarbon order I would think. The advantage of it is that if you transport fuels at quite a small scale, tons per day and are looking at producing it in urban areas there is a not the tens of thousands we are told about. There is lot of roof space available potentially to put in solar a lot of opportunity. I think you are right, the bio-gas panels. In terms of the technologies, some of them are industry—processing of waste like that—is advanced forms of solar cells, looking at important. Municipal solid waste and commercial photochemical cells, desensitised cells and also what solid waste amounts to about 60 million tons a year are called third generation which is actually using in the UK, compare that with the biomass potential nano particles or quantum dots, the idea being that of 100 million tons. The problem with that is that it if you look at a solar cell the energy you can extract so contaminated and for most advanced processes it depends on what is called a band gap. That means needs extensive pre-processing before you can you can extract a certain amount of the sun’s energy generate heat and power. With the usual waste you from the solar spectrum and if you can engineer it to incinerate it and recover heat and power but for other have lots of these little quantum dots or nano processing it needs extensive pre-processing that adds particles which can extract diVerent parts of the sun’s to the cost of the overall process. Waste, as we all spectrum eVectively these things can become very know it, is an interesting resource but there will need eYcient. The challenges are producing these things in to be some diVerent types of incentives to encourage large quantities, but potentially you could produce more use to be made of it. these as reel to reel technology which could be applied to roofs and windows so that the surface area Q45 Lord MacGregor of Pulham Market: Turning to available if you could do that would be quite large. solar power now, what potential does that have in the The potential in the UK perhaps is somewhat limited. UK and which technologies are the most promising? Professor Bahaj: Solar power in terms of photovoltaic—which is generating electricity—we Q47 Lord Layard: Looking to the longer term what have very limited resource. We are not a sunny is the potential for importing energy that is generated climate so each kilowatt that you have would through photovoltaic methods in the Arizona Desert produce about 800 kilowatt hours of electricity. If or in the Sahara? Obviously there is the transmission you think of a home, that would require about 3,000 problem either by line or by turning it into hydrogen kilowatt hours a year of electricity and then you need or something like that. Do you see these as major about three to four kilowatts stored. The capacity possibilities in the longer term? Processed: 17-11-2008 19:07:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG1

16 the economics of renewable energy: evidence

6 May 2008 Professor AbuBakr Bahaj, Professor Tony Bridgwater and Dr Simon Watson

Professor Bahaj: Currently the bottleneck is really the the important part; we need to get something less cost of these technologies. In spite of the fact that we than one US dollar per watt to actually compete with are thinking in terms of nanotechnology to give us the current technology. cheaper options, the production cost of these cells is really huge. To have this cell which captures sunlight Q49 Lord Best: Would most of the renewable energy or the sun radiation—the whole spectrum of that— be generated in remote areas far away from areas of you would have to have maybe eight layers of high electricity demand and therefore would an awful material to deposit. We need a jump in the lot be lost in transporting the electricity to where it technology in terms of eYciency and cost to allow us is needed? to go to perhaps use the Sahara and produce large Professor Bridgwater: You are right so far as bio- scale power and transmit it around the world. If the energy is concerned; it tends to grow where people technology is cheap enough it is feasible to actually tend not to live. So you either move the biomass or connect it to a grid in Spain and back to the UK. you convert it locally and move the product by power lines. I do not now what the cost of transmission is. Q48 Lord Layard: Throughout this discussion there Professor Bahaj: With regard to wind and marine has been a lot of reference to eYciency, meaning what energy obviously all the resources are in really remote proportion of the energy is used, but that is not really areas. About two hours ago I went to a presentation the main issue for us. The main issue for is the actual by the National Grid at the Institute of Civil cost. It does not matter if you are using all the energy Engineering. They have some innovative ways of at all provided the cost is relatively low. actually connecting these remote power stations to Professor Bahaj: I think you are right about the cost. the current grid, otherwise you would have so many My colleague Simon mentioned third generation cables coming from each wind turbine farm. We do technology which is something that all academics are need to have infrastructure as part of the whole aspiring to produce, which is to produce a cell which scheme. is about 50 cents a watt which is cheaper than the Chairman: Thank you very much indeed for your current 3.5 US dollars per watt. That technology, if time and for your helpful answers to our questions. I we achieve it, would result in energy costs think the fact that we kept you for so long is a comparable to that of the current grid system. That is testament to how interesting we found it. Thank you. Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [SO] PPSysB Job: 408616 Unit: PAG2

the economics of renewable energy: evidence 17

TUESDAY 13 MAY 2008

Present Griffiths of Fforestfach, L MacGregor of Pulham Market, L Lamont of Lerwick, L Moonie, L Lawson of Blaby, L Vallance of Tummel, L (Chairman) Macdonald of Tradeston, L

Examination of Witnesses Witnesses: Mr Benet Northcote, Chief Policy Adviser, Greenpeace, Dr Tim Jenkins, Economics Campaigner, Mr Dave Timms, Economics Campaigner and Ms Robin Webster, Senior Energy and Climate Campaigner, Friends of the Earth, examined

Q50 Chairman: Welcome to our witnesses from have one energy eYciency now and then look at the Friends of the Earth and Greenpeace and thank you next one for a few years down the line things will be for giving up some of your time this afternoon to too late and it will be too expensive to deliver what answer our questions, we very much appreciate that. needs to happen for the economy. If I could look at I do not know whether you want to say anything by renewables first, as to why that is important in the way of an opening statement; if you do not we will go mix, if you look at the context of its costs there is straight into questions. obviously a huge potential for renewable energy and Mr Northcote: We are happy to go straight into there is obviously a lot happening right now both in questions. terms of deployment with growth rates in other sorts of energy and a great deal of investment, both public but also private investment, certainly in other Q51 Chairman: Perhaps I could start and ask you, countries, both mainstream financial institutions and how do the costs of generating electricity from venture capital getting involved, with large renewables compare with fossil fuel or nuclear companies buying into those sectors. The costs of generation, what are the current estimates of the costs renewable energy are obviously coming down, it is a of “greener” fossil fuel generation with carbon diVerent option to the other two that you mentioned, capture and storage, and how do those costs compare to incumbent dominant technologies at the moment to renewable generation? that you mentioned. Those costs are coming down Dr Jenkins: The first thing is to look at those costs in and—again the evidence is quite clear—in terms of what the challenge is for the economy and comparison with how costs will change over time for why we are actually considering these options. The these diVerent methods of reducing CO2 emissions threat of climate change is obviously a big challenge the reason that renewable energy costs are likely to V for the economy and we are looking at the di erent come down over the longer term, although there may options, and there are a number of things when we be blips in that as energy prices change, is that look at the cost of them that have to be taken into research shows there is a far greater potential for account. Those options have to be able to deliver cuts learning eVects which will bring the cost down. Those in emissions now seeing as cumulative emissions of are largely around the fact that these are much newer CO2 are vitally important for how expensive and how technologies and if you look at the curve of bringing risky solutions will be in future, and they certainly the price down the incumbent dominant technologies have to be options that have to take into account that are further along it and so there is less for them to be although we have targets now we are likely to get able to achieve. greater targets going through this century as well, so there needs to be longevity but they also need to be able to deliver now, and those need to be taken into Q52 Chairman: Do you include carbon account when looking at the costs. Certainly, as I say, sequestration in that? the risks will be greater and the costs higher the Dr Jenkins: Yes, I do, largely because it is a piece of longer it is left until emissions start to be cut. The end-of-pipe kit. other thing to say, looking at the diVerent costs, is the Stern Review made very clear that it is a portfolio Q53 Chairman: Or before pipe. approach that is going to be required to deliver the Dr Jenkins: Yes, the collection and then removing it level of cuts and the urgency with which those cuts out. There is a piece of work quoted in the Stern are needed, so we will need a number of technologies Review showing the cost reduction curves that are and we will need a portfolio of policies. Certainly, likely and it does look at carbon capture and storage those cannot be sequential either: that is another and it has a much flatter curve, largely because many thing that has become clear in the research, that if we of the learning benefits have happened with that Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG2

18 the economics of renewable energy: evidence

13 May 2008 Mr Benet Northcote, Dr Tim Jenkins, Mr Dave Timms and Ms Robin Webster technology, it is a very established technology. Q55 Chairman: When you are looking at costs do Renewable energy has the potential for extremely you also look at the knock-on eVect on the large learning eVects, and that is also to do with the transmission network where intermittent forms of fact that they are smaller technologies and there is a renewables potentially have greater costs than others wider variety of them. which have a more predictable load? Ms Webster: I believe when you are looking at the question of intermittency what we need is a little bit Q54 Chairman: Can I just pick you up on the of flexible thinking here because intermittency is established technology in that there are parts of that often used as something to bash renewables. If you technology which are established but can you direct think about the diVerent methodologies that can be the Committee to any full-scale carbon sequestration used to reduce to problem of intermittency with generation? renewables there are quite a lot of diVerent Mr Northcote: If I could come in on CCS, the point possibilities and we are talking about quite a wide about CCS is that of course there are very many diversity of supply with diVerent technologies. If you unknowns about it, as you alluded to, and there is not are looking at a wide geographic spread of wind actually a full-scale demonstration plant end-to-end farms you are smoothing out that variability. If you happening anywhere in the world right now. It is like are looking at the supergrid interconnector between V a kit of parts, there are all the di erent bits and in countries we have already got one between France theory we should be able to bolt it all together, but as and the UK, there is one planned for the Netherlands I have pointed out essentially that is a technology and a third to Belgium is under consideration. This is that has not been invented yet and the estimates of the kind of flexible thinking that is going to be needed cost for it vary from adding anything from 25 per cent to deal with these kinds of problems and you need to up to 75 per cent to the operating costs of a coal-fired think about demand management and you need to power station. I used to work in business and if I think about energy storage. The question of turned up at my backers with a business plan that intermittency is not necessarily a question which is said my operating costs might have that kind of going to be solved by having huge back-up supplies variability on them, I am not sure that I would have of coal. got any money or any backing. It is a very, very untried and untested technology so in terms of any estimates of costs that exist at the moment, given the Q56 Lord Moonie: How much scope is there for past history, the safe thing to do is to bet on the upper renewable electricity generation to reduce carbon end of that. The comparator is renewables whereby emissions compared to other sources of energy? We onshore wind, for example, is a mature technology I have talked a little bit about intermittency but how would argue and if you look at the scale of it, it is does intermittency potentially aVect the scope for growing around the world. OVshore wind is reducing carbon emissions? expensive now but it is a far more proven concept in Mr Northcote: On the issue of renewables versus terms of our experience, especially in the UK with the others—because it is convenient in a way to put North Sea installations and the ability to put these renewables in one box over here and then nuclear and things in the sea, maintain them and look after them. coal in another box over there—first of all if you look There is a huge amount of potential there and so it is at the potential for wave and tidal and reiterate what much more reasonable to assume the costs of that will Robin said, actually an awful lot of this is very come down over time. If I can just address the second predictable, you can look at weather forecasts and be part about nuclear which was alluded to in your pretty certain how much wind is blowing in the UK in question, again with costs of nuclear there are many pretty much an average way. What both nuclear and cost curves and the Energy White Paper had various renewables are competing for is not so much the cost curves with nuclear sitting virtually in the intermittency versus baseload, to my mind, it is about middle. The bottom line with nuclear is that we have the fixed generating peaks, for them to be economic no idea what the costs for dealing with waste will be when they are generating you need to be selling the so, frankly, any cost that can be ascribed to it right electricity, you cannot have a nuclear power station now is as good as pie in the sky because there is no that is not selling its electricity at any stage or else solution to waste and there is absolutely no country what economics there are potentially collapse, and in the world that has yet managed to really crack the the same is true for many renewables, so actually they waste issue; even in America they are having massive are both competing for the same space in terms of funding problems with their plans for long term fixed sales at that point. It is easy to put these things nuclear disposal, thinking of Yucca Mountain. Any side by side and look at it as an either or situation, but concerns about the costs of nuclear, again all the I do not think it does need to be an either or. The evidence is that the costs will be way higher than point about renewables is that they are predictable anybody ever suspected and are likely to keep going and in terms of the potential for them to reduce up. carbon emissions, we have in the UK the best wind, Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG2

the economics of renewable energy: evidence 19

13 May 2008 Mr Benet Northcote, Dr Tim Jenkins, Mr Dave Timms and Ms Robin Webster tidal and solar resources of any country in Europe. Mr Northcote: We are talking billions over the time it Estimates suggest that we could power our electricity needs to happen—the figure is £6 billion, it is that sort system 14 times over by our renewable energy of order of magnitude that will need to get spent over potential right now, so I do not think there is any time anyway on the grid were we to meet our nuclear shortage of renewable potential in order to meet our ambitions—that is going to require substantial commitments, which are huge, as we know; we have upgrades to the grid in terms of the lines out of heard, EU targets aside, that we are going to need a SuVolk and so forth in terms of trying to meet that large amount of clean, renewable electricity and we commitment. The question is not so much how much have the potential to reach that. money we need to spend on it, because we will have Dr Jenkins: If I could give one example of an area of to spend money, it is in which direction do we choose renewable energy and its potential, the Energy to go and how do we choose to spend that money? Do Savings Trust recently looked at the potential for we choose to have a grid where, for example, a friend using renewable energy on a small scale in the of mine who is a property developer runs a trading domestic sector and small industry, and was basically estate and he was looking at putting in a renewable saying that 30 to 40 per cent of electricity for those heat and electricity plant for his tenants, everybody two areas could be provided by renewables by 2050. signed up, thought it was great, there were no planning issues because it was a trading estate; he tried to talk to his network operator to connect to the Q57 Lord Macdonald of Tradeston: Are the current grid and there was a completely unfeasible charge for transmission and distribution systems capable of him to connect to the grid and the economics of his managing a large share of intermittent renewable very good project fell to bits. We need therefore to electricity generation and, if not, should they be enable a decentralised, more entrepreneurial changed? Are the rules about how capacity is approach to this as opposed to a large centrally connected to the grid supportive of renewables? planned approach. Mr Northcote: It is clear that the grid needs a lot of Dr Jenkins: If I could just add one thing on the costs, money spent on it now and the grid is built around the figures that have been put forward, one thing that servicing small, very rare, very occasional peaks in is quite important to remember is to look at the demand on a centralised generation basis. I think benefits as well to the economy of that level of there does need to be significant change although, investment. There is quite a bit of research, some of that said, National Grid estimate that 20 per cent of which is quoted in the Stern Review and there are electricity could come from wind without any other pieces of work that have come out more massive structural changes to the grid, although recently, which is saying that one thing that obviously there would be point locations that would renewable energy in tandem with a large step change need to be met for that. We really need to think in in energy eYciency has is spill over benefits for the terms of where does the grid need to go, and it is one economy more generally that goes beyond of those things where we would not start from here, incremental and even radical innovation, it can would we? We have started on a system which was actually change the whole technological system, and largely a function of post-war planning where it was this is where the energy supply system comes into it. a case of if we can plan for war let us plan for peace, You might have a wave of growth and creativity in let us have a centralised grid, let us set up a big, the economy was the phrase that Stern used—and it centralised network where we will have big power was the business leaders group on climate change that stations providing the electricity to consumers. We agreed with him and they wanted to see policies put do need a significant change in the grid and we need in place to make sure that British industry was able to to think of it much more in terms of a decentralised ride that wave and bring in those benefits. You only grid where instead of seeing the big centralised have to look at other European countries who are generation as your primary source of energy you actually seeing the fact that money is going to have to might be seeing them in fact as your back-up and you be spent to be able to combat climate change and it is need to be thinking of much more decentralised, vital for our economy that we do so as soon as smaller scale renewables, as Tim has alluded to, of possible. They are saying this is an opportunity and decentralised heat parts, combined heat and power— they are looking at it almost as an instrument of I am sure you have heard about combined heat and industrial policy; if you look at Germany, Denmark, power in your evidence sessions and the potential even Portugal recently has been talking about their there is absolutely huge and we can talk about some comprehensive plan to bring renewable energy of the statistics around that. forward for Portugal which already has created 2,000 jobs in manufacturing sectors that were in decline around their coastal regions, and that is actually Q58 Lord Macdonald of Tradeston: Could you put a pushing forwards to become a lever in that area. cost on that change? Wave technology was one area where, certainly in the Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG2

20 the economics of renewable energy: evidence

13 May 2008 Mr Benet Northcote, Dr Tim Jenkins, Mr Dave Timms and Ms Robin Webster invention level, at the early stages of innovation, the which favours the introduction of a feed-in tariV. UK had a lead and one of the main companies What a feed-in tariV does is oVer a long term developing that has actually gone to Portugal where certainty to investors. The problem with the they are investing in scale-up kit, where they have a Renewables Obligation essentially is that you are feed-in tariV that allows for investors to get involved punished because of the risk that is involved. rather than it having to be equity financed by the Renewables Obligations Certificates, the price of large companies which is the case within the UK. which are not known in advance, mean that there is They are actually seeing it, therefore, as a positive; a risk premium attached to the investment and it this money is not all public money, this is private means, as my colleague Tim said, that it is very investment going in. They are actually saying it is an diYcult to finance renewable developments through opportunity, we have to embrace it and engage with project finance, it means you are dependent on the it because it actually provides in the longer term a far, equity of large energy companies and, consequently, far better future for the economy. Interestingly, it is investment in renewables in the UK is dominated by important when you are looking at the costs of the big six energy companies—I believe 82 per cent of established technologies against ones where the cost the investment in the UK in renewables has come curve is coming down to actually look over the types from those six companies, whereas if you look at of level of emission cuts and in what period of time Germany over 90 per cent has come from companies those need to be brought forward. The cheapest and investors outside the traditional energy market. options are often going to be those that provide for You are therefore able to build a renewables industry innovation benefits and the lowering of the cost curve which is technologically diverse, which is diverse in far quicker. terms of the scale that you have renewables at and is diverse in terms of the part of the economy that is investing in it. We mentioned the success of Germany Q59 Lord Lamont of Lerwick: Why do Friends of the and to just finish this introduction to the feed-in tariV V Earth and Greenpeace favour a feed-in tari which, I think it is worth looking at the figures for Germany: as I understand it, guarantees a higher price for the Germany now generates over 14 per cent of its electricity from renewables in the longer run, and do electricity from renewables, it supports a renewables you think that this should operate alongside or be in industry which employs 250,000 people and which substitution for the present obligation to buy a given turned over in 2007 ƒ24.6 billion. That is against a proportion of electricity from renewables? British renewables industry employing 7,000 people Dr Jenkins: Our colleague Dave Timms from Friends and turning over £390 million and supporting just V of the Earth has led on the feed-in tari work that we five per cent of renewable electricity. have been doing. Mr Timms: Thank you very much for letting me interject on this matter. What repeated studies have Q60 Lord Lamont of Lerwick: What about the shown in is that a feed-in tariV has proved the most second part of the question, about replacing the cost-eVective policy instrument available to countries existing obligation to buy renewables? Does it replace to bring forward large amounts of renewable energy. that or operate alongside it? I do not think I could put it better than a group of Mr Timms: We have to divide this into two. The first eight very senior energy academics who wrote to the is: what is the immediate opportunity in front of us in FT just over a week ago who said that, “both the Energy Bill, which obviously comes to the House academic studies and the practical experience of of Lords on 21 May. In that connection there is a those countries that have adopted it show that a feed- large body of opinion around introducing an in tariV supports the development of a greater amendment to say that we should run a smaller scale volume of renewable energy at lower cost than the feed-in tariV in tandem with the Renewables UK’s renewables obligation policy”. Directly, yes, Obligation for larger scale projects, so what we would both Greenpeace and Friends of the Earth support do is give the Government a duty to introduce a feed- the introduction of a feed-in tariV; however, we are in tariV, subsequent to a consultation which would far from alone in that request. You may have noticed discuss what the thresholds between these that a feed-in tariV was debated as part of the Energy mechanisms should be. EVectively, the Renewables Bill in the Commons and 38 Labour MP rebels voted Obligation fails especially strongly for smaller scale against their Party on this matter, 276 MPs have technologies, it fails for the domestic level and for signed an Early Day Motion, it is Conservative Party small businesses and is not bringing forward policy, it is Liberal Democrat Party policy, I can investment in those sectors. It is, however, bringing think of three House of Commons select committees forward investment, at a more costly price, for large that have called for it, the TUC, the Country Land scale renewables. So what we immediately want to do and Business Association—I could go on and on. is bring in a feed-in tariV for smaller scale renewables, There is a massive body of opinion, both academic we think that it can be done very easily both through and in industry and among all of the green NGOs, legislation and in terms of the logistics, and would Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG2

the economics of renewable energy: evidence 21

13 May 2008 Mr Benet Northcote, Dr Tim Jenkins, Mr Dave Timms and Ms Robin Webster work very well. Then there is the Government’s reduce the payback time for small-scale generators renewable energy strategy which is going to be enormously. If you are giving a generator or micro- coming forward this summer, and there there is a generator with solar panels a 35p per kilowatt hour debate about what should happen at the larger scale payback on their solar panels, you are bringing and how we take the UK forward to meeting its 2020 payback times down to about ten years whereas EU target. The alliance for a smaller scale feed-in currently they are something like 40 years. Also, the tariV includes organisations that support replacing Renewables Obligation Certificate system—and the the RO, organisations that oppose replacing the Government has admitted this—is incredibly hard to Renewables Obligation, organisations that do not understand and for domestic householders it is really care and organisations that have not made up their not an option in terms of getting that process and the minds yet. So there are two separate questions there. same is true for small businesses. Basically, the Government will set a tariV, they will set the technologies that it would apply to, energy Q61 Lord MacGregor of Pulham Market: I wonder companies would be obliged to connect small-scale if I could follow that up because I have not had a renewables to the grid, they would be obliged to pay chance to look at all the Commons material yet, but that tariV and the Government would set very long I see among the papers that you have given us that term contracts, something like 20 years for the feed- you put the emphasis on some of the smaller scale in tariV. That would give people the certainty under renewable electricity producers such as households which they can raise finance and the payback times which you have just mentioned. You also say it is will allow them to have confidence to invest in these easier to administer and you refer to wind turbines systems. and solar panels in that connection. Can you explain Chairman: Could I ask you, please, to be as concise as V to me how a feed-in tari works and what you can in the answers you give because we are under contribution on that small scale do you think it a time constraint. We will move on to Lord GriYths. actually makes? Mr Timms: In terms of the contribution it does Y depend where you draw the thresholds. Obviously, as Q62 Lord Gri ths of Fforestfach: If we take the we have said, we are saying that a feed-in tariV should larger generating companies, they have at present stop at a certain scale of generation and the RO investment plans to expand renewable electricity should take over—that is up for consultation, so how generation which they have made as part of the V much the energy can be generated by a feed-in tariV obligation. If now we introduce this feed-in tari , very much depends on how the Government set the what is the impact that it is going to have on those tariV, what technologies are included in it and where plans? How disruptive is that going to be of their V you draw the thresholds. However, as my colleague plans, how is it going to a ect the returns and so on Tim pointed out, the Energy Saving Trust says that and what can be done to mitigate that? up to 30 or 40 per cent of our electricity could come Mr Northcote: I will talk about large-scale. If you talk from smaller scale generation. In the domestic sector to investors about this as opposed to the managers of I think it is very clear that we will not be able to make energy companies—and I would draw a very large the necessary carbon emission reductions without a distinction between those two groups— very large and increasing level of micro-generation. Dr Brenda Boardman from Oxford University in a Q63 Lord GriYths of Fforestfach: Do you mean the study for ourselves and the Co-Op Bank said that you investors holding shares in those companies? will not be able 80 per cent cuts without large-scale Mr Northcote: I mean City investors, talking to City micro-generation; the Department for Communities investors. They want stability for their renewable and Local Government have said that you will not investments, of course they do, we entirely even be able to get a 60 per cent reduction in the understand that, but what do they mean by stability? domestic stock without a large-scale rollout of micro- They mean that when they are making their generation. That is simply not going to happen under investment decision is that regime going to stay in existing policies. The Low Carbon Buildings place for the duration of that investment decision? If Programme has been an embarrassing farce for the on the next day they choose to make an investment Government and is actually probably unique in being decision and there is a diVerent regime in place, the a policy that is supposed to support industry and has question is is that regime going to stay in place for the led to industry shedding jobs in some sectors. Other duration of their investment decision? As long as any tax breaks such as the tax break which says you do transition period to our mind, at Greenpeace, is not have to pay income tax on income from micro clearly stated so that for anybody’s existing renewables is not forecast by the Treasury to make investment or anybody’s planned investment in the any carbon savings. Those policies therefore will not intervening period that regime will stay stable, then make any diVerence but a feed-in tariV would work the City investors that I have spoken to have very well at this level. What it would do is basically absolutely no problem with that whatsoever. The Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG2

22 the economics of renewable energy: evidence

13 May 2008 Mr Benet Northcote, Dr Tim Jenkins, Mr Dave Timms and Ms Robin Webster energy companies have a diVerent view, but if you of the portfolio then it is fine, but I am not sure if I am look at some of the profits that these guys are running one of these companies and then investing in making, then one can understand some of their one of these plans I am investing in overall profits. It motivations. is not obvious to me; maybe you could say something to us in a note as to how this would work out. Q64 Lord GriYths of Fforestfach: What about Mr Northcote: I am very happy to expand on that in small-scale? a note to you. Mr Timms: Looking at the immediate prospects within the Energy Bill there will be no problem in Q67 Lord MacGregor of Pulham Market: What are running the feed-in tariV alongside the Renewables V your views on the Merton Rule which requires a Obligation. What the feed-in tari would do is bring developer to provide a certain proportion, maybe 10 into the renewable energy sector the actors that have to 20 per cent, of the energy needs of a new traditionally been outside it, so you would have development from renewable energy sources on that groups of farmers coming together to invest in site? Is there a danger that this could lead to the anaerobic digesters, you would have logistic installation of too much renewable energy equipment companies and businesses who may choose to invest in inappropriate places or raising costs or perhaps in solar panels for their roofs, householders who may discrediting the technology? invest in small-scale renewables. These are groups Ms Webster: There is some misunderstanding here that are not really involved in any sense in the current that the Merton Rule is currently a requirement on market, so what we would be doing is bringing Local Authorities. It is not actually a requirement as additional actors and additional investment into the such at the moment although it has been adopted market not replacing it. voluntarily by diVerent local authorities because they have seen it as something to really grab hold of. I Q65 Lord GriYths of Fforestfach: If I can ask a think the thing to understand about the Merton Rule supplementary, if I buy a shareholding in these large is that it has become totemic for local authorities companies how can I distinguish between the point because it is clear, it is comprehensive, you can look that you made, Benet, of the first and second? You at it and say “I understand that is a rule we can attach said if I invest today and I know that regime is going to our planning regime and it makes some sense.” to stand and if I invest tomorrow and there is a There is actually more flexibility for the developer diVerent regime, how if I just buy an equity share can than is commonly understood. If, for example, a I make that decision? developer was to look at a district CHP system in that Mr Northcote: I think that is probably right but I am area or more renewables oVsite there is actually room not sure that all of the financing is raised through within the Merton Rule for that to take place. What equity, a lot of these companies have very large the Merton Rule has provided is clarity—a colleague balance sheets and they just do it oV their balance of mine called it an “anchor in a confused policy sheets for a lot of the investment decisions that they world” and that is the reason it has become totemic. make. Certainly, if you talk to EON and EDF, their We do support the Merton Rule but our concern is view is that they have got vast balance sheets and they really that it does not go far enough. We support any can aVord to just roll it oV their balance sheets. It is measure that is going to push Local Authorities into a question of how you access capital markets and getting more renewable energy but they need more access money and for billion pound investments it is things in their toolkit. They need to be pushed to get not just a question of issuing shares. For smaller energy eYciency to Code Level 6 for new homes, players it may well be issuing shares but then it is a what measures you can take on transport, whether question of within their business plan does their you should have a clear policy framework for business plan stack up? If their business plan is based approving medium and large-scale renewable energy; on a regime that is going to be in operation on this is the kind of thing that is going to push Local Monday then they are happy, and if their business Authorities into moving. The Merton Rule has been plan is based on a regime that will be in place on very eVective in pushing the micro-generation Tuesday then it is a decision on which you make your industry and it has provided a really big fillip to make investment choice when you buy your shares. The that happen, and it has driven up energy eYciency managers do not want it because their business plans because if you are looking at this question of 10 to 20 are predicated on, frankly, very large windfall profits per cent from renewable sources more energy based on ROCs right now which they do jolly well eYeciency makes it easier. It is easier to do that on a out of, thank you very much. national level at the moment with the Government responding to the Renewables Directive and there Q66 Lord GriYths of Fforestfach: I must say I have they are starting to put into place an energy eYciency a slight problem with that. If I had a portfolio of plan as well because it is a logical response. diVerent plans and I was investing in diVerent parts Something which is quite clear, like the Merton Rule, Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG2

the economics of renewable energy: evidence 23

13 May 2008 Mr Benet Northcote, Dr Tim Jenkins, Mr Dave Timms and Ms Robin Webster can actually start to really drive changes, and that has anything up to 100 or 150 years. I do not know about been its benefit. Its disbenefit is that there needs to be you but I looked up what Gladstone was paid as something a lot more powerful, it is just the first step prime minister just to try and get an understanding in many steps that need to be taken. for it, and it was £5,000. That equates today to anything between £300,000 and £5 million, Q68 Lord Lawson of Blaby: You are of course depending on which particular measure you choose; representatives of environmental campaigning we therefore have absolutely no idea in economic organisations and propagandists, which is a perfectly terms what these things are going to actually cost for legitimate occupation. the whole lifecycle. Mr Northcote: I have had many occupations. Q70 Lord Lawson of Blaby: If I may say, that is totally untrue. I studied this very carefully when I was Q69 Lord Lawson of Blaby: Of course, we know Secretary of State for Energy a little more than a where you are coming from and therefore you will quarter of a century ago and indeed I was responsible forgive me if I do not follow what I would call the for setting up the Sizewell B inquiry which was the flights of fancy to which you have treated us, because last nuclear power station to be built, so I have our remit is to look at the economics and to look at looked at all these things very carefully. There is the evidence. I would therefore like to come back to absolutely no problem whatever with regard to safe the question which was originally posed by My Lord storage of nuclear waste at a perfectly reasonable Chairman about the relativity between nuclear and cost, a perfectly acceptable cost. The fact that the renewables. If it is your objective—which I Government has so far not taken a decision about the understand it is—to reduce carbon emissions these storage of nuclear waste is simply because it wanted are two ways in which you could do it; there may be to defer a decision about nuclear power generally; so others but these are two ways. The Government’s that, I am afraid, will not fly. own consultation paper shows that nuclear energy is Mr Northcote: They have nowhere to put it. considerably cheaper then renewables and, indeed, we have had evidence which suggests that probably nuclear can deliver carbon reductions at a cost of Q71 Lord Lawson of Blaby: We could have a lot of around one-tenth of that of renewable energy. Why debate about nuclear; would you agree, if you are so do you have this extraordinary prejudice against keen to have reductions in carbon emissions—and nuclear? bearing in mind that for example the French get some Mr Northcote: The point about nuclear power is that 80 per cent of their electricity from nuclear—that we one has to understand where we are currently with should have the biggest nuclear programme that we nuclear power and what the plans for replacing can? nuclear power are. The statistics, I am sure, will not Mr Northcote: No. be new to you: that currently of our total energy consumption a little under four per cent comes from Q72 Lord Lawson of Blaby: I know you have this nuclear power. The plans outlined in the inbuilt prejudice against nuclear but what I am trying Government’s consultation and the Energy Bill going to tease out is what on earth is the reason for it? through Parliament in their wildest dreams would Mr Northcote: I disagree with you. Clearly we hope to possibly get one nuclear power station up in disagree on the long term economics of it, clearly we 2018, but that is looking more unlikely every day, disagree on the safe storage of nuclear waste; the more like 2020 for the first and then on after that. reason the Government have not come up with a Even if we managed to replace our entire fleet of repository is because there is nowhere to put it in the power stations the contribution to the share of the UK. They have not managed to find a geological total energy mix is tiny, it is miniscule, it is not going repository, they have not managed to find a host to deliver the scale of carbon reductions that we need community that will take the repository, so it is not and the SDC’s figures show this as well in terms of the there. I refer again to Yucca Mountain—we are actual carbon savings by 2050 for nuclear, so the going to disagree on it, I am not expecting a issue is there. On the other side of that, as I said in my resolution on it, but Yucca Mountain in the States, answer to the opening question, the Government put supposedly this wonderful site, is absolutely forward their figures but we legitimately question haemorrhaging cash. The current problem is that those, I think, by saying “Yes, but what are you going they have had to just lay oV a whole load of engineers to do with the waste?” Let us just understand the because the funding has been pulled from Congress timetable on the waste here for a second. We are and the current problem is to do with testing the heat talking about this stuV that might go in the ground in load because of course the waste that goes in, what—if a nuclear power station starts operating in although it is smaller in volume, is very much more 2020, it shuts down in, say, 2060, it then has to sit radioactive. It is a vastly dangerous and expensive around on sub-surface storage probably on-site for technology and for the benefits in terms of its share, Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG2

24 the economics of renewable energy: evidence

13 May 2008 Mr Benet Northcote, Dr Tim Jenkins, Mr Dave Timms and Ms Robin Webster were we to have this massive project, frankly the risks disbenefits and landscape concerns and this is the of the highly radioactive waste and some of the nuts and bolts of what planning has been about for intergenerational ethical issues that are associated years. The issue that we are struggling with now with with that are, to my mind, not an acceptable planning in this country is that renewables are compromise when you have alternatives that exist actually rather a new issue to the planning system and right now, which are available, which are completely climate change is a new issue to the planning system. implementable and can be put forward straightaway. The planning system has created a very clear policy I do not agree with you on the economics that it is framework on housing and if you are working within cheaper and I do not agree that we have not got other a Local Authority it is clearly understood that there things that we can do that are better. is a presumption in favour of housing developments Chairman: We could spend all afternoon on this one in your area and you have quite a clear understanding and I do not think we would get a resolution. of that, or for example telephone masts, you pretty much understand what the Government thinks about Q73 Lord Lawson of Blaby: May I come to one other that. Take, for example, the local council who part of it. Certainly your answer, you will not be advised in favour of Kingsnorth; they had a very surprised, has not satisfied me, but one other part of clear understanding, obviously, of the Government’s the chain that we have mentioned is carbon capture position on coal. If you are a Local Authority which and storage and I think you admitted that it is a fact is looking at development of renewables it is that the technology for commercial carbon capture extremely hard to balance because the policy and storage does not exist. Are you aware that the framework is not clear and it has not filtered down to present Chancellor of the Exchequer when he was the the Local Authority level; in the strategic policy minister responsible for energy policy, almost exactly framework the presumption is not there in favour of a year ago today told the House of Commons that renewables. For example, what we are seeing is a “the technologies required for commercial carbon planning system where renewables developments are capture and storage might never become available.” getting stuck and in a recent publication the CBI Would you agree with him? identified 56 wind farms with a collective of 46 Mr Northcote: There are very large questions about gigawatts of energy, stuck in the planning system for the economics of carbon capture and storage as well two years. This is the kind of thing where people start but I do not think it has the same issues about it. I do coming out saying the planning system is the not have an in principle objection to carbon capture problem; it is not actually the planning system that is and storage. a problem, it is that the planning system is not working eVectively. Quite recently, as you may know, Q74 Lord Lawson of Blaby: But you do have an the climate change supplement to PPS1 was objection in principle to nuclear? published which does create more of a presumption Mr Northcote: Greenpeace oYcially does not have an in favour of renewable energy developments in in principle objection to it. looking at the context of climate change, but so far there is no prescriptive policy framework for Local Q75 Chairman: Do you want to say something Authorities in this area, there is no technical support, about carbon capture and storage? there is no skill. I have a friend, for example, who is Mr Northcote: No, I was going back one question. working as a climate change oYcer within one Local Authority and she said to me “There is one of me and Q76 Chairman: We will skip that because that is not about 25 of the archaeology team”, there is such an going to be resolved this afternoon. Can I just take imbalance there in terms of making these decisions. you back to renewables and the external costs of Actually, if you want these decisions to be made renewables such as the concerns in many rural areas intelligently, of course we have quite a strong that wind farms, extra pylons spoil areas of natural understanding of landscape designations so if you beauty. How should those external costs be measured want to put a renewable development in A or B you and brought into the equation and do you think the need to be able to balance that under a national plan. planning system is striking the right balance between We are extremely in favour and very happy that the all the diVerent considerations, or do you think the Government is talking about putting in place a planning system is unnecessarily holding back the renewables consultation, leading to a renewables spread of renewables? strategy, leading to a national policy statement on Ms Webster: Responding to that, there is an renewables so that local authorities have a much assumption in this question that this is entirely an clearer understanding of the framework within which economic question, but clearly it is not entirely an they are operating and this is when you are going to economic question. The planning system in this start to see the wheels start to turn. For example, the country has developed to balance the questions of new Independent Planning Commission being landscape, social benefits, local benefits and created under the Planning Bill at the moment has no Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG2

the economics of renewable energy: evidence 25

13 May 2008 Mr Benet Northcote, Dr Tim Jenkins, Mr Dave Timms and Ms Robin Webster duty to consider climate change, so when you are anything less than 40 per cent in terms of what we considering balancing what are the benefits and need to do on renewable electricity. disbenefits of a fossil fuel development or a renewables development, you cannot look at it just in economic terms because you are talking about Q78 Lord Lawson of Blaby: I take it from your balancing the impacts of climate change. What are remark about biofuels that you would agree with the the landscape impacts on the south-east of England if call made a few days ago by the United Nations the temperature in the UK goes up by 4) centigrade? special rapporteur on the right to food that there These are the things that actually going to come into should be a worldwide five-year moratorium on the that kind of thinking, and that is why there needs to production of biofuels? be a very clear policy framework in favour of Ms Webster: We would support that moratorium, renewables in order for this understanding to develop yes. and in order for this to go down to the Local Authority level. This is where you are going to see the Q79 Lord Lamont of Lerwick: How would changes V planning system being e ective. in the cost of carbon under the emissions trading Chairman: You are assuming that the new planning scheme aVect the relative costs between renewables framework would actually celebrate the introduction and energy and is there a way in which a more of renewables, but we will have to wait and see eYcient carbon emissions trading scheme would do whether that is the case. Lord Macdonald. away with the need for special support for renewable energy? Q77 Lord Macdonald of Tradeston: On what Mr Northcote: At the risk of coming back to nuclear, grounds do Friends of the Earth argue that if the UK it is important to note the comments of Vincent de is to meet its EU target of 15 per cent of energy Rivaz, the chairman of EDF, who said recently that coming from renewables, 40 per cent of electricity of course if you did have a strong carbon price and generation will have to come from renewable did foster an increase in renewables then that would sources? Why is there less emphasis on using crowd out nuclear, so they very much saw it as a renewables in heating and in transport? threat to their industry in that sense. That is the first Mr Timms: If I can just answer that one, the 40 per point, but there is no question that it is not just about cent figure initially started to appear in leaked the question of emissions but it is the price which is Government documents from the DTI and was the important and of course a good carbon price is going Government’s projection of where the likely eVort to make a lot of these technologies much more cost would fall under a 15 or 20 per cent renewable energy eVective and has to be a good thing in those terms. It target. It is not essentially that we have chosen that is also about looking at the amount of subsidies that figure as being the figure that we would see desirable; already go on traditional fossil fuels compared to it would be great to see the Government have a much renewables, so if you actually looking at the grants stronger understanding of the potential of heat and out of the EU in terms of the subsidies that go to solid think that while renewable electricity has been fuel, gas and oil, they are something in the order of 75 neglected, renewable heat has been entirely ignored per cent of subsidies currently in terms of energy go until very recently. While there is, therefore, a lot on existing fossil fuels across the EU. The ETS price more that could be done in terms of heat, it would be is part of it, therefore, that is essential, but it is also unwise to expect that the UK should plan to do about getting a more sensible approach to subsidy. anything less than 40 per cent of renewable Dr Jenkins: Just on that point, the first thing is to echo electricity. Partly this is because due to the problems the point that whilst price is very important it is very of biofuels it is going to be very diYcult for the clear to everybody that you will always need a transport sector to make much of a contribution, and collection of policies to overcome market failures either you are going to be asking the heat sector to that are beyond price in the renewables sector, and we bear more of the burden, or you are going to be have already gone into some of the things about looking at decarbonising the transport sector by concentration and the infrastructure problems that moving onto electric vehicles, which would add to the are involved in it. Part of your question was to say need to generate more renewable electricity. Yes, we how could you improve the emissions trading scheme would absolutely agree that the Government needs to and I think part of that is that at the moment its target think about how heat can play a much stronger is not related to the science. We are about to have a role—and there are many ideas as to how the carbon budget that is related to the science and which Government could do that—but because of the will be far tougher than the current EU ETS so that problems with biofuels which Friends of the Earth needs to be resolved. Two other things that need to be have been pointing out particularly strongly, we resolved are around the level at which we are think that really you should not be looking at importing credits and therefore exporting some of the Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG2

26 the economics of renewable energy: evidence

13 May 2008 Mr Benet Northcote, Dr Tim Jenkins, Mr Dave Timms and Ms Robin Webster opportunities that we have to embrace renewable Chairman: Thank you very much indeed for your technologies, for example through importing them time in answering questions. If there is anything that from other countries, and I think that for Phase 3 of you feel you would have wanted to say but did not the ETS that is going to be a very crucial say, then by all means a brief note to the clerk would battleground. be fine. Thank you very much.

Examination of Witness Witness: Mr Malcolm Keay, Senior Research Fellow, Oxford Institute for Energy Studies, examined.

Q80 Chairman: Thank you very much indeed for the Government’s figures are a bit optimistic. I would coming along to answer our questions this afternoon. say that while nuclear is probably going to be less Is there anything you would like to say by way of expensive than renewables it is likely to be more introduction? expensive probably than fossil fuels without any Mr Keay: Could I just say that I am speaking in a carbon pricing attached. In terms of carbon capture purely personal capacity, not on behalf of my and storage, as has been said earlier, the costs are institute, which has no views on anything, nor on even more diYcult to calculate because there is no behalf of any previous employers that I have had. single package which brings them all together. There Chairman: Very well. Lord GriYths, would you like is quite a good study by the Intergovernmental Panel to start? on Climate Change which looked in detail at the costs, and that comes up with a set of costs which is roughly comparable to those I have indicated for Y Q81 Lord Gri ths of Fforestfach: Could you say renewables, that is you are talking about maybe two- something about the relative costs of generating thirds to 100 per cent increase in the price compared electricity from (1) renewables, (2) fossil fuels and (3) with that of fossil fuels, so it is broadly speaking nuclear? Secondly, what are the current estimates for comparable. The costs, as indeed is true of the costs of greener fossil fuel through carbon capture renewables, are expected to come down and the and storage and how do these compare to renewable International Energy Agency has said that for carbon generation? capture and storage by the year 2020 the costs could Mr Keay: I am afraid I am going to have to start with be around $50 a tonne, which is relatively cheap a few qualifications. It is almost impossible to compared with the current prices, but of course that generalise about renewables, firstly because of course is uncertain. For carbon capture and storage it is V there is a huge number of di erent sorts of important to compare the cost of carbon mitigation V renewables, all at di erent stages of development and rather than simply the cost of generation because, of V all with di erent costs. Secondly, and equally course, although it is described here as green rather important but sometimes neglected, because nearly than fully green, as you know, it only stops all renewables are very site-dependent—they depend something like 80 to 90 per cent of carbon being on natural forces—on good sites they may be cheap emitted, so there is quite a large quantity of carbon but on bad sites they will not be. Thirdly, of course, emitted. The cost of generation, therefore, might be a prices are moving up and down all over the place just little bit lower, but there would still be some carbon. now for fossil fuels and indeed, in fact, for renewables so I cannot really give an absolute answer. What I think I can say is that if you want to look at the cost Q82 Lord MacGregor of Pulham Market: How of generating from renewables compared to fossil much impact do you believe the expansion of fuels, I would say that the best indicator is the renewable energy will have on Britain’s carbon amount you have to pay—that is through the support emissions? I know you indicated in a paper last schemes in the UK or in Germany which have October that you believe that, in order to meet its broadly similar costs and you are paying something carbon targets, the Government should support the like 80 to 100 per cent above the cost of fossil fuels, nuclear industry and we have seen what has so it is a significant mark-up for generation from happened since then. Could you just elaborate a bit renewables compared with fossil fuels. Nuclear is more on that and on what form you think such much more diYcult because there has not really been support should take? any nuclear built in Europe for a long time. There is Mr Keay: On the first half of it I think that so far the one plant, as you know, under construction in expansion of renewables has had very little impact Finland which is behind schedule and behind budget indeed on the UK’s carbon emissions and it is but we do not really know the cost. Although some arguable that it has had no positive impact at all. numbers were referred to earlier from the Certainly the impact has been very small; I think the Government, most people, including E.ON maximum impact that one would see so far might be themselves as one of the potential builders, think that up to perhaps five million tonnes of carbon dioxide Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG2

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13 May 2008 Mr Malcolm Keay and if you compare that, for instance, with a fall of 50 lower level than, the form of support for renewables. million tonnes in CO2 emissions from power A feed-in tariV is one possibility as a guaranteed generation brought about by a switch from coal to price. An obligation as part of an overall non-carbon gas in the 1990s you can see that essentially it is noise obligation is something rather similar to the non- on the system, and that indeed is what we can see fossil fuel obligation—there are various options. If from year to year as the UK CO2 emissions go up and the Government really believes that nuclear is in the down depending essentially on whether they are national interest it cannot then just say: but we are switching between gas and coal, not on the progress indiVerent as to whether it is built or not; that cannot of the renewables. It will take a very long time, and I be right. do not think it will be by 2020, for renewables to have a significant impact. If you look at the countries Q83 Lord MacGregor of Pulham Market: From the which are always being compared with us like, say, second part of your answer you are actually in Denmark and Germany, they have much larger support of support for the nuclear industry for penetration of renewables but it has not really reducing carbon emissions, you are not just posing aVected their carbon emissions in any significant the question you are actually indicating where you way. They have higher carbon emissions per head stand. than the UK, they have a less good record of reducing Mr Keay: Yes, in general any government or any carbon emissions than the UK, they have more country is entitled to say it wants or does not want carbon intensive energy than the UK, so it is a long nuclear because nuclear does entail problems which, time before renewables have a significant impact. If as we have heard eloquently earlier, some people do you want to look at countries which have genuine low not want to take, but if you are going to object to carbon emissions, it is countries like Sweden and nuclear then you have to take the consequences France, and perhaps Norway and Brazil, other which are very expensive in terms of the other countries which are comparable with us, which have options. It is a legitimate policy decision to say we are electricity systems which are more or less zero carbon prepared to pay that because we are rejecting nuclear. and in both cases have a combination of nuclear and But the Government has not said we are rejecting large-scale hydro, so you have to have a very large nuclear, so it seems to me that the only other penetration of renewables, perhaps in combination conclusion is therefore it should take advantage of with other low carbon sources, to have this sort of the opportunities which that position gives it. impact. The one thing that UK experience shows us Lord Lawson of Blaby: You have had the benefit of quite clearly so far is that every single renewables hearing the evidence given to us earlier this afternoon target ever in the UK has been missed and by quite a by the previous witnesses; is there anything that you long way. As far as nuclear is concerned, the second heard there with which you disagree or have you any part of your question, I did not exactly mean to say comments that you would like to make on the what you described me as saying, what I meant to say evidence you heard? This would be very helpful to us was that if the Government is committed to its because we have to make the best assessment that carbon targets and if it thinks that nuclear is a route we can. towards those carbon targets, then it should be much more unequivocal about its support for nuclear. At Q84 Chairman: You have two minutes. the moment it is having it both ways. It is saying on Mr Keay: There were certainly one or two things I the one hand nuclear is necessary in the national would not necessarily agree with and one or two interest, on the other hand it is up to the market to things I would phrase diVerently, and I am not decide if any gets built or not, which seems to me to entirely sure where you want to start. Can I approach be a basically incorrect attitude to this and this slightly indirectly to say that when it came to the completely diVerent from the attitude they have question of intermittency and connections there towards renewables. If the Government does believe, seemed to me a bit of cross-purposes there because as it says, that nuclear is in the national interest and the answer was all in terms of network reinforcement, that it will be a cheaper method of carbon mitigation which is an issue, but that issue is not primarily or and one with more potential than renewables then it solely because of intermittency, it is because of the should make it clear that it will do what is necessary location problem I mentioned earlier, renewables are to ensure that some nuclear plant is built in the UK. where they are. As you know, most of the renewables I was really making a hypothetical set of statements are in Scotland or in the west of the UK or oVshore that if this is the Government’s position it should not and that requires a huge cost in terms of stop in a halfway house, it should introduce support transmission. That is an incremental cost, it is not of some sort for the nuclear industry if that is part of the normal development of the system, so necessary to get it built, which I believe it will be firstly when you look at the issue of integration of because of the risks involved. The form that support renewables into the system there are two sets of costs, should take might well be comparable with, but at a one arising from intermittency and one arising from Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG2

28 the economics of renewable energy: evidence

13 May 2008 Mr Malcolm Keay location. Secondly, I thought that the emphasis on going to be very important in the approach to deal decentralised power was hugely overstated. While with it. there may be some scope for decentralised power, it is extraordinarily unlikely that it would ever have any Q86 Lord Lawson of Blaby: Tell me if this summary significant impact and again you can see that by is wrong: there is no technical problem as far as you looking at European comparisons in countries with are aware. decentralised power; there is no impact on their CO2 Mr Keay: I am not a technical expert but as far as I emissions. It is unlikely that any cost-eVective know there is no technical problem. renewables programme will be primarily decentralised. As I say, we are looking at sources like Q87 Lord Lawson of Blaby: As far as you are aware the Severn Barrage or wind power in Scotland, which there is no economic problem in the sense of the cost are quite the reverse, they are a long way away from being so great that it makes nuclear more expensive, load. Loads are in cities like this one and if you want say, than renewables. to decide where to site a wind farm the middle of Mr Keay: Any estimate of the costs is quite a small London is not a very good place; if you want solar part of the total. power the UK in general is not a particularly good place. Decentralised power in general is not really very consistent with a policy of supporting Q88 Chairman: Can I take you back to your October renewables. The UK grid will have enough problems paper where you said that the Government’s coping with all these disparate renewables without renewable energy policy might increase the risks to having to restructure itself to cope with decentralised Britain’s energy security. Why would that be and is power introduced on I cannot for the moment see this a risk that could be avoided? what particular economic or environmental basis. Mr Keay: Funnily enough, to a certain extent for a reason that was being discussed in the earlier session, it is because the renewables policy firstly creates an Q85 Lord Lawson of Blaby: Another statement that awful lot of uncertainty. As I said, every renewables we heard—perhaps you could comment on that— target from the past has been missed and, at the same was that nuclear power, if I understand what they time, the Government is ratcheting up its renewables were saying, is fatally flawed because there is no targets and changing the ways in which it supports satisfactory solution to the problem of the storage renewables and this creates a huge amount of and disposal of nuclear waste. Would you agree or uncertainty in the electricity market. In so far as the disagree and for what reasons? Government’s policy is successful, especially if we are Mr Keay: That comes into the category of questions talking about a 40 per cent figure, which is a where I said it is possibly legitimate for countries to conceivable one, that obviously squeezes the room make their own minds up on this because I see that as for other plant and makes it very much less attractive primarily an ethical question. At a technical level I do for anyone else to build a plant. In a study I did on not see that there is any specific problem, but there is this, I said that even if it was a 20 per cent figure, if however arguably an ethical problem of leaving this you are building a new fossil plant, which you will to future generations, in the same way that one might have to have to complement the renewables, it will argue that there is an ethical problem in leaving operate less than 40 per cent of the time because it will buried carbon in the form of carbon capture and be squeezed out by wind power and other renewables storage to future generations. There is also, possibly, the rest of the time. People do not like to build a new a social problem if one looks however many years plant which will be out of use for more than half the down the line: whatever the technical robustness of a time unless they are very confident about the market solution who knows what future society will be like, conditions. So the likely response to the renewables what solutions there might be. I do not myself think programme, that is the combination of the that any of these problems are great because the Government’s ever-increasing enthusiasm and volume of nuclear waste is quite small and there have increasing the level of support and distorting the been massive amounts of discussion as to how to deal market in favour of renewables, the combination of with it, and the sort of solutions that have been that and the continuing failure to achieve these looked at—deep underground disposal—would be results, is that people will be responding to the on most scenarios very secure. But I would not be uncertainty by holding oV investment in other plant absolute about that and say that therefore nobody as long as they can because they want to know if they could possibly raise any questions about it, as I say, are going to get 40 per cent of the system for at a primarily ethical level. One of the main factors renewables and maybe modern nuclear which the that is apparent to everyone about climate change is Government has supported, will there be room for that it is an issue to do with long term uncertainty, my gas or coal plant if I build one; does the and therefore one’s ethical position and one’s Government indeed support coal? Although it was attitude to future costs and benefits is, in the end, said earlier that the Government supported Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG2

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13 May 2008 Mr Malcolm Keay

Kingsnorth, I read in the paper today that E.ON say how the whole approach to liberalisation is going have withdrawn their proposal on the basis that they to be integrated with this policy because, at the are not sure what the Government’s position is. moment, it seems to be pulling in two diVerent There is an awful lot of uncertainty about all other directions, on the one hand saying its environmental investment, so the likely response is for people to targets are paramount and on the other hand saying hold back on investment in other plant, even but we want to have liberalisation. I am not sure that although it will be necessary in very large quantities at the moment it has got the policy instruments to because of the forthcoming retirement of most of our ensure the two can be compatible. existing coal plant and most of our existing nuclear plant by 2020. If the other investors hold oV, a lot of Q92 Lord Macdonald of Tradeston: A few years back plant has to retire because it is coming to the end of the power failures in California were blamed partly its life and so you potentially have quite a gap—this on market liberalisation; do you think that liberalised is where the security problem arises. At the extreme electricity markets provide the right incentives for there could be a shortage of capacity. That is investment into nuclear needs? If not, how can the probably unlikely but a more likely scenario is that appropriate level of investment be encouraged when this gap is seen as imminent, either the perhaps through better targeted regulation? Government will have to allow for the clapped-out Mr Keay: Most people blamed the problems in old power stations to continue in operation, which California not exactly on deregulation but on will be intrinsically less reliable and intrinsically more botched deregulation. The State Government made a polluting, or people will have to build what they can mess of it and indeed the governor lost his position as build quickly, which is lots more gas-fired power a result, so the blame was fairly clearly seen to lie with stations with the consequent increase—unintended him. I do not think that liberalised markets but still happening—in the dependence on gas. I see, necessarily in themselves and of themselves raise any therefore, quite a serious risk that the way in which security problems; the problem comes when you have the renewables programme progresses is going to liberalised markets in which governments start lead to quite serious distortions in the electricity intervening on an unpredictable and ad hoc basis. industry. That is what you had in California and that is what you have just now in relation to environmental Q89 Lord Lawson of Blaby: And a higher price for objectives in the UK. You have a supposedly electricity because there will be a scarcity of it and so liberalised market but one from which the the price will go up. Government is trying to secure a set of very specific Mr Keay: It will go up anyway because the outcomes. That is not the way markets work, they do renewables cost more and for that reason also. not say the purpose of this market is to achieve some government objective, and when the governments try Q90 Lord Lawson of Blaby: For the reason you are to impose a set of objectives and often an inconsistent saying it will increase the capacity. set of objectives on a supposedly liberalised market, Mr Keay: Possibly. If you keep the old, clapped-out it just leads to chaos and uncertainty. plant going it might be quite cheap but it will have an environmental cost. It depends on what the Q93 Lord Macdonald of Tradeston: You could have response is. a policy of cutting costs and pushing profits up in the short term without the investment required for the Q91 Chairman: To avoid that risk which is longer term and it is possible to have a model that will associated with the policy uncertainty what do you work for one company and not work for society need? longer term. Mr Keay: This is where I am actually agreeing with Mr Keay: You could do. I would not say that has Greenpeace. I think you need much greater policy happened in the UK. As I mentioned, the fastest fall certainty, you need a much clearer policy and a policy in CO2 emissions and the fastest investment in that gives much more certainty to investors about the electricity generation was in the early 1990s in risks they will face when they invest in plant, so you response to liberalisation. do need much more clarity. One example which I gave earlier was on nuclear. I simply do not think it Q94 Lord Macdonald of Tradeston: What role do is credible for the Government to say nuclear is you see for economic regulation then? necessary in the national interest but we will stand Mr Keay: The Government has to try much harder to back and see whether anyone happens to want to reconcile economic and environmental regulation. build some, so no one knows what to believe. At the moment it is pursuing the two of them on Similarly with coal, does the Government support parallel but not meeting tracks. On the one hand, it coal or not? Who knows? I think the Government has can go on with economic regulation on the to have a much clearer policy on all these things and traditional basis of a fully liberalised market; on the Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG2

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13 May 2008 Mr Malcolm Keay other hand, on the environmental front it has be more eVective than other approaches in bringing objectives which it can only achieve through the renewables on-stream but I would disagree as to electricity industry and through securing specific whether they are more cost-eVective. They are more outcomes from the electricity industry. It has to make eVective because they provide the certainty I have these compatible in some way and one way of doing mentioned. That is, what you get from a feed-in tariV this might be giving an independent regulator is basically, once you have built your plant you get a responsibility for both, that is for securing particular guaranteed price for a certain number of years into outcomes in terms of low cost CO2 mitigation from the future, so your risk is taken away. The problem— the electricity industry. But the key objective as I have and this is one reason why they are not particularly said before, is to have some certainty about the way cost-eVective—is that, as I have said, all renewables, forward and clarity about the way forward which is a even diVerent sorts of renewables, have a range of basis for forward investment because it does embrace diVerent costs, so if you set the price at a certain level both. No policy is going to be credible if it is not it will be correct for some plant but it will be way over shown to be compatible with the environmental the top for other plant. What this means is that what objectives. economists call rent, some people will gain a lot of rent—in Germany the rent has gone to landowners Q95 Lord Lamont of Lerwick: Could you tell us how, and farmers and I was not surprised to hear that the in your opinion, the costs of connecting renewables Country Landowners Association likes the idea; if it capacity to the grid compares with the connectivity happened in the UK there would be a lot of rent costs of oil and gas, say. going to organisations like that. If you set a single V Mr Keay: Well, it is immensely higher, of course, tari some suppliers will make a lot of money or else because going back to the case in point, renewables you will not get very much renewables because the are where you find them and you have to build the ones whose costs are too high will not be encouraged V renewables plant where there is a renewable resource, by the tari . In principle, therefore, the UK approach which is often very distant. We are talking about does have advantages but, as I have said, it has the billions of pounds altogether for the whole system, disadvantage of not providing enough certainty and and another way of putting it is that the cost of as far as smaller plants are concerned I can see the V connecting oVshore wind, say, amounts to perhaps logic of having a feed-in tari if the Government around £250 per kilowatt and when you are decides it wants to encourage small-scale plant. It is connecting onshore wind it is something like £100 to however quite expensive because, firstly, you are £150 per kilowatt, so that is quite a considerable cost paying twice as much, say, as the normal price for in addition to the cost of the plant. For fossil-fired electricity and, secondly, you are paying some people power and nuclear power you really do not have any more than they actually need, so they are making lots comparable costs in the immediate future; most of money out of it, but as long as you do not mind nuclear plants quite clearly will be built on existing that you can get some renewables. sites to replace existing plant, so most of the infrastructure will be there. With fossil fuel plants of Q97 Lord GriYths of Fforestfach: Could you say other sorts you can locate them where it is best for the something about the costs and benefits of electricity system and actually reduce system costs. For generation from renewables compared to renewables instance, a recent gas project at Langage in the South in other forms of energy use such as in transport West has been located specifically to reduce and heating? transmission costs because it is an area where there is Mr Keay: Again, I agree to a large extent with what not very much electricity supply. So these costs really Greenpeace said in that electricity is one of the best do not apply to most fossil plant. In some cases they outlets for renewables and certainly when it comes to will but for most fossil plant there are very small costs transport there is a big problem with any form of involved whereas for most renewable plant either the biofuels, firstly in the energy inputs into making the costs of connection are likely to be very big or the biofuels and transporting the biofuels, but also in the renewables are likely to be decentralised ones and are possible competition for other uses of land because likely to be intrinsically uneconomic themselves. biofuels, even the ones that are not food crops, are still really rather land-intensive, so I see a potential Q96 Lord Lamont of Lerwick: If I can just follow problem with biofuels in transport and I believe that that up with another question, you were here during in the long run low carbon transport is probably the last session; what did you think about what was going to be based on electricity. In terms of heating, said about feed-in tariVs? on the other hand, there are lots of opportunities for Mr Keay: I sort of agree again with Greenpeace that renewables but they have simply not been paid there might be a case for feed-in tariVs for smaller enough attention to in the UK. If you look at the UK scale renewables if the Government wants to support Government’s Digest of UK Energy Statistics and them. I would agree that feed-in tariVs are proven to you look at the section on heating via biofuels in Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG2

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13 May 2008 Mr Malcolm Keay industry and the home, what it says is that basically put earlier at about 20 per cent before you start we do not know, we do not know anything. We do getting into serious diYculties, that indicates that we not know if it is going up or down and we simply have cannot just look at wind power if the sorts of no figures on it, and I think that is why no one pays numbers that were being discussed earlier like, say, 40 any attention to it. Most of this is unrecorded, it is a per cent of electricity renewables are going to be bit like biomass in Third World countries, it happens, serious. We have to start looking at some of these but no one measures it and no one knows how other things like tidal power and wave power, which significant it is. There could be considerable scope for are even more expensive at the moment, so there is a expanding the use of biomass and perhaps other big problem. renewables in heating. Other countries do a lot more of it; particularly if you are using waste products of Q99 Chairman: Can I just take you back. What I various sorts such as straw and waste from forestry understand you are saying is that the achievement of V activities and so on, it can be quite e ective in a firm policy framework for the Government is going environmental terms and the Government should be to be very hard because you have touched on things taking this more seriously. The problems are really that may happen in the future and, quite clearly, if practical: since they do not really know anything there was a major step change in the storage of Y about the market or whatever, it is very di cult for electricity or some surrogate storage of heat instead them to say, how do we improve it, how do we of the power itself, combined with an intelligent increase it, but I think that should be a more serious network rather than the passive network that you part of the strategy. have at the moment, you could have a radically diVerent approach and a lot of the problems with Q98 Lord MacGregor of Pulham Market: I would renewables would cease to be problems, is that like to quote one sentence from a note that we have correct? just had from the Parliamentary OYce of Science and Mr Keay: In principle, yes, but it is not close enough Technology on electricity storage. That sentence is to see that as a realistic possibility in the timescales we “Balancing supply and demand in a network are talking about; we are talking about what would containing large quantities of both inflexible base be nice if it happened. load nuclear power and variable wind power would be extremely challenging.” We have touched on this Q100 Chairman: This is a problem though that a bit this afternoon but I wondered if you could aVects almost any high-tech business or industry, respond directly to that. which generation do you invest in? Do you invest Mr Keay: It is certainly true. If you look at a country heavily into generation that is present and here today with a lot of wind power like Denmark and Germany, or what chance do you take that there is going to be the reason they can do it is because they have got a lot a major step change in technology in the future? of coal-fired plant which is flexible. If you want to Mr Keay: We cannot take that chance. I am afraid it mix nuclear and renewables the best renewables does involve spending quite a lot of money but it does mixture is hydroelectric power, and France and involve diversifying the risk. To me it says very Sweden are two countries where a lot of renewables strongly you do not just go for renewables because are hydro. The combination of wind and nuclear is you might run up against some of these problems about as bad as you can get, it is very diYcult. with renewables. People are optimistic about the Clearly, if there was some advance in electricity costs possibly falling but then 18 or 20 years ago they storage technology that would solve an awful lot of were also very optimistic and I recall in the early these problems, but there has not been and it is not 1990s people saying that the non-fossil fuel clear there is going to be. I think this is a case where obligation had been so successful that by the end of you have to say that the views about the possible the 1990s wind power would not need any support penetration of wind really do get quite strong; there from the Government, yet it needs more than ever. must be a limit which you can reasonably see the Because of the uncertainty you have to take the growth of wind power reaching in the UK short of normal response to that uncertainty and try to major changes in electricity storage technology on diversify your options, so you have to, to my mind, the one hand or some very major expansion of pursue both nuclear and carbon capture and storage interconnection, and even that might be diYcult to see if it is going to work, and renewables, and keep because if you are inter connecting, say, with the active programmes to do with energy eYciency and French system which is nuclear and hydro-based you various others because you have to be pursuing may not be able to provide the flexibility there. It is seriously all these areas at the same time in the hope quite diYcult indeed to see what other systems you that over time you will get better information which could connect to in an economic sense. So probably will enable you to make better decisions. One thing this is going to set a limit on the penetration of wind which I think is going to be a problem with the power and if you see that limit as the figure that was present support for renewables is that too much is Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG2

32 the economics of renewable energy: evidence

13 May 2008 Mr Malcolm Keay based on actually getting renewable plant built and Q101 Lord Lawson of Blaby: Particularly the Welsh into the system. As I said, this has had virtually no countryside, Lord GriYths, you are absolutely right. impact on CO2 emissions and it is not particularly The environmental question is not by any means a cost-eVective; it is much more expensive than other simple question, it is a very complex one which cuts ways of reducing emissions. A far larger proportion both ways. of the available resource should be put into research Mr Keay: I agree, and that is what I was trying to say and development for the longer term to see if some of in my last response, that the problem with renewables these problems can be overcome. The problem, of now is that it is based very much on just getting a course, is you do not know; but until you try you have certain quantity of renewables built rather than no chance of knowing. There are some technologies thinking about the ultimate objectives which include on which it has been said the UK might have a special reducing carbon emissions but also include position, like wave and wind power, because of its preserving local landscapes, amenities and many geographical position. There are some clear needs other things. The two are not very well brought and gaps that have been identified like storage and together and that is why I suggest that a lot more of there may well be innovative approaches to this, such the emphasis on renewables should be on the longer as oVering prizes for more targeted research, and term because it is only in the longer term that development on matters which are international in renewables are likely to make a substantial scope, a big international programme. Much more diVerence. emphasis should be put on that in the renewables area in particular and less on some of these rather Q102 Lord Lawson of Blaby: My question then is expensive and not particularly eVective attempts to again referring to the evidence heard earlier this actually cover the landscape with wind farms, some afternoon. As I understood what they were saying at of which are probably very good but some of which, one point on the economics of wind power it was that frankly, are blots on the landscape that people will it is not the case that you need to have a conventional regret for many years and we will get little from. A power back-up system because of the intermittency, much more discriminating approach is needed with if there are enough windmills you do not need that much more focus on the longer term perspective in back-up, whereas from what you have written in the terms of the technologies and, in the shorter term, on past, which I have read with great interest, I get the actually reducing emissions and the things which impression that you do not agree with that and, actually reduce emissions, on which there are a indeed, you have even written—correct me if I am number of options. wrong—that the need for conventional back-up for a Lord Lawson of Blaby: Talking about storage wind power system that is substantially necessary reminded me that in 1981 when I was energy with wind power would generate so much in the way secretary the Trawsfynydd pumped storage was very of carbon dioxide emissions that the net eVect on exciting and it was not economic then. There has been carbon dioxide emissions from what is substantially a great deal of research since then and quite a lot of a wind power centre might be very small indeed. How done, but I am not aware that there has been any do we reconcile these two things? serious advance in electricity storage technology Mr Keay: Certainly one can overdo the problem of since then, so I do think that if we assume that this is intermittency but I would stand by what I said, that going to solve our problems would be a triumph of your total need for power generation capacity is very hope over experience. Can I ask you two questions or much greater in a system which has a large wind put one point to you which I would like you to component. The example I looked at was the comment on and then a straightforward question. year 2020 and I was using figures from the The first point is that you talked about it as though Sustainable Development Commission, which is an the economic issues and the energy security issues go environmental organisation, and the total system together in a sense but on the other hand there is would need to be 20 per cent bigger, that is 20 the environmental question. Of course, the gigawatts of fossil generation needed, essentially environmental issues are not the same issues at all because of the presence of wind. The reason we get and when you talk about the environmental issue I dissenting views is a semantic one, whether that fossil assume you have in mind the question of carbon generation is acting as a back-up to wind. Perhaps it dioxide emissions, but there are probably more is because it is generation we would not need but for people in this country who feel that destroying the the fact that we have that large wind component. English and Scottish countryside with massive wind Sometimes there is a little bit of misunderstanding or turbine farms is much more of an environmental double thinking because when people hear that wind outrage than the environmental considerations of power has a capacity factor of, say, 30 per cent, they reducing emissions. think that means it runs at full capacity for 30 per Lord GriYths of Fforestfach: And the Welsh cent of the time and is oV for 70 per cent of the time, countryside. but that is not the case. What it means is if you take Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG2

the economics of renewable energy: evidence 33

13 May 2008 Mr Malcolm Keay the rated capacity, so many gigawatts, it produces smaller programme in renewables but maybe a about 30 per cent of that. There is a frequency somewhat more eVective one. distribution and what you find is that for maybe about two or three per cent of the time it is producing Q104 Lord Macdonald of Tradeston: I was nothing, for less than one per cent of the time wondering if you think that Government support has probably it is producing at full capacity and for the been eVective in leading to more renewable energy. rest of the time it is producing at anywhere in What has been the most cost-eVective form of between. If you look at the distribution you find that support in the UK and in other countries and what about half the time it is producing less than 30 per should be the balance between subsidies, guaranteed cent of capacity, so what this means is that you need prices, quotas, carbon taxes and other forms of some other plant to produce at that time. Whether support? you call that back-up or not is, as I say, a semantic Mr Keay: I covered some of this in previous answers. point, but you do need that other plant, either here or The feed-in tariV is probably more eVective, the possibly in France or Germany, or wherever, but I Government’s obligation system is probably more am not sure for the reasons I have given that that cost-eVective and it depends what you are aiming at, really solves the problem because the French nuclear simple quantity or keeping the cost down. My own system is not that well set up to provide back-up for preference would be to move away from either of ours. That need for more plant is really undeniable these to more support for research and development but how much it adds to emissions compared with for the longer term to get the costs down. That would what they would otherwise be depends very much on include research into particular technologies of what that other plant is, but what I am saying is interest to the UK and international collaboration. because it is much less attractive to build a plant for In addition, it has been discussed as a possibility that that you are likely to have more older and less one might be able to support renewables in other eYcient plant performing that function. That is countries, and I would see that as actually being actually what we have got in Germany, they have old potentially part of it. You should not worry so much coal plant backing up new wind plant and, as I said, about plastering our hills with wind farms if we could the outcome is not particularly successful in terms of get better results from building renewables CO2 emissions; they have high carbon intensity of somewhere else which would have the same carbon energy, it is not a route to low carbon intensity. The impacts. In so far as the interest is in reducing carbon problem has been, as I was saying earlier, substituting emissions, I think a more international approach a target or just thinking that lots of renewables must would be better, and in so far as the interest is in be good, for what you are really aiming at, which is developing renewables technology, I think an something else which is low carbon emissions. approach more focused on actual technology development rather than just building arbitrary quantities of renewables might be more eVective. Q103 Chairman: Can I move you on to the cost of carbon. If there were a really eVective carbon Q105 Lord MacGregor of Pulham Market: How emissions trading scheme would that remove the quickly do you think there will be technological need for any special support for renewable energy? advances that would make renewable energy cheaper Mr Keay: It depends whether you still have that and viable without Government support in the renewables target. You would need a very much future, or in view of your emphasis on research do higher price of carbon than you do just now to make you think there should be more Government grants people build renewables plant. The implicit cost of and financing to promote this technology? carbon as measured by Ofgem or the National Audit Mr Keay: I think it will need Government grants Y O ce under the renewables programme is ƒ200 per because otherwise I doubt if the technologies will be tonne—more possibly—and the price of carbon developed. That said, I do not think one can promise which the Government says is necessary—and it any specific level of reductions. Clearly, the costs, as might be an under-estimate—to encourage nuclear is has been said earlier, of some renewable technologies about ƒ25 per tonne. The current price is not far oV are coming down, but it does not follow that they will that level, so we are talking about an order of go on going down forever. At the same time, as I have magnitude higher in terms of carbon price to have the mentioned, because the costs of generation are site- same impact on the building of renewables as the dependent you have a problem going the other present systems of support. What I was arguing away—that is that the best sites, the cheapest sites, earlier was that maybe you should not worry too are used first so you get into more and more expensive much if rather less got built in the way of renewables sites. This is exactly what we have seen in the UK today as long as you were continuing the wind programme, as I mentioned earlier. If you go development of better renewables for tomorrow. A back to the 1990s the costs came down very rapidly more eVective carbon price would therefore lead to a during the 1990s and now they are going up again. Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG2

34 the economics of renewable energy: evidence

13 May 2008 Mr Malcolm Keay

The costs are going up only to a small extent because forecast on this. You can, however, point to very of the technology; it is because we are moving successful nuclear programmes in France. And it is increasingly to more distant sites with higher not just France; it includes Sweden, for instance, connection costs, to oVshore, which of course is more which has got a lot of nuclear plant and did not find expensive. The same applies to basically every it very expensive. History suggests that this would be renewable technology. Hydroelectric power, for at least possible with nuclear but whether it will instance, is intrinsically quite cheap technology but happen is not necessarily the same thing. you soon run out of suitable sites and then either it would cause great environmental damage if you are building on new sites or you are going to have much Q107 Lord Lawson of Blaby: The only safe thing to higher costs. Similarly with biofuels, we have seen do and the only economic form of power generation that once you start to expand the biofuels is conventional, carbon-based generation programme both the cash costs and the Mr Keay: If the Government is committed, as most environmental damage tend to increase, so I do not governments are, to carbon reduction, it cannot think one can be 100 per cent certain about any future simply rest with that; it has to pursue all options of extrapolation of costs. We have these two tendencies low carbon generation and that is why I am moving in opposite directions; on the one hand suggesting, since we do not know which one it will be, development costs will come down, but on the other it has to pursue all of them. hand because of the siting problem the costs of actual generation will go up. I see, therefore, no absolute Q108 Chairman: We have a good idea of the way reason for one to be sure that costs of renewables are you are approaching power generation, but before going to go in any particular direction in relation to you leave is there anything you would like to say the costs of other forms of generation because, of about either heating or transport? One tends to focus course, they will see technical advances too. I am sure on power generation because it is more tractable and the next generation of nuclear power will be more you can get your arms around it, but the other two Y e cient and produce less waste and so on. So I do not are equally important. think one can see in advance which will win this race, Mr Keay: On transport I would say something very which is why I am suggesting you have to pursue all comparable, that there is a pressing need for more these at the same time and try to make decisions on research and development. I personally am which course to adopt once you have got better something of a sceptic about hydrogen in transport, knowledge of the costs. I cannot see why there should be any particular advantage in developing a new energy carrier and Q106 Lord Lawson of Blaby: I am sure that you are having to overcome at least three major technological right that it is impossible to say how technology is and social problems, one of which is developing fuel going to develop. We cannot know and those who cells cheap enough to use in a car, the second of which engage in wishful thinking are not providing a sound is setting up hydrogen transmission lines, and the basis for important policy judgments. Having said third of which is hydrogen storage, both on the that, it seems to me, having just listened to what you vehicle and more generally. We already have a have said, that probably the better bet if one had to perfectly eVective electricity system which carries choose might be that the costs of nuclear power will electricity around the country very eVectively. If we reduce more than the costs of renewables or even are interested in low carbon transport, I think the biofuels because one of the problems with pressing need in terms of research and development renewables, as you have said, is the area which has to should be on electric vehicles and better battery be covered. To some extent that is also true with technology. I agree that a lot remains to be done there biofuels, whereas that is not the case with nuclear. but there is only one technological breakthrough to Mr Keay: I am going to maintain a self-denying be made there as compared with three on hydrogen, ordinance. I cannot be sure about the relative so that would be where I would focus the research movements of any of these. It is true that the costs of eVort. For the reasons we discussed earlier, I think nuclear might come down faster, but it is also true biofuels may have a small role in the short term but that the nuclear industry has been the subject of not very much, so the Government has to go for a excessive appraisal optimism, as they call it, many, multi-pronged approach which is not just many times in the past. Recently, for instance, E.ON technological in the short term, so we are talking in the UK have said that the Government’s estimates about things like congestion charging and better of nuclear costs were too low and in the US, where public transport and so on. I think transport they are pursuing nuclear very aggressively, the latest therefore has to evolve a much wider ranging multi- estimates of costs have more or less doubled in the modal approach in the short term while trying to past couple of years as people actually get closer to develop technological options for the long term. On building a plant, so I simply would not care to heating, as I said before, this has not had enough Processed: 17-11-2008 19:08:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG2

the economics of renewable energy: evidence 35

13 May 2008 Mr Malcolm Keay attention. I cannot give you precise answers except Q109 Lord Lawson of Blaby: Presumably research is that many other countries do use a lot more biomass going on overseas that we can learn from. for heating than we do and it ought to be possible in Mr Keay: Yes, but as far as I can see no one in this the UK. I suspect one of the reasons is just an country has been trying to learn from that because no organisational one; nobody in Government is one really has it on their desk as an issue to look at. I thinking about it, there is not a minister for wood or think that area needs to receive more attention a department for wood. There is not much attention because there is potential there, as other countries given to it and, as I said, the key element to that is that show, and we do not seem to be making any the Government has no idea whether it is increasing, headway. decreasing or what. No one is paying any attention to Chairman: If there are no other questions, thank you it, no one is getting people like the Forestry very much indeed for spending time with us, it has Commission or boiler manufacturers to do research. been very helpful. Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [SE] PPSysB Job: 408616 Unit: PAG3

36 the economics of renewable energy: evidence

TUESDAY 3 JUNE 2008

Present Griffiths of Fforestfach, L Paul, L Lawson of Blaby, L Turner of Ecchinswell, L Layard, L Vallance of Tummel, L (Chairman) Moonie, L

Examination of Witnesses Witnesses: Mr Campbell Dunford, Chief Executive and Dr John Constable, Policy and Research Director, Renewable Energy Foundation (REF), examined.

Q110 Chairman: Welcome Mr Dunford and Dr and integration costs, such as integrating a particular Constable and thank you very much indeed for form of generation into the grid so that it is actually coming to the Committee and spending some time of some value, balancing costs and therefore, the with us. Before we go on to questions, is there overall impact on the system. From a consumer’s anything that you would like to say by way of perspective or indeed from the UK’s as an economy, introductory remarks or shall we go straight into it is really the overall system cost that matters to questions? people and that really varies considerably according Mr Dunford: Only My Lord Chairman if there are to the renewable technology you are looking at and any questions as to who we are, who we represent; what you are comparing it with. Generally, and right sometimes people are confused. across the spectrum, it is true that renewables are more expensive than their conventional Q111 Chairman: By all means do so, if you wish. counterparts. We have a lot of data to leave with you Mr Dunford: Quite simply, the Renewable Energy on that. There are studies which have been done for Foundation is a charity. It is funded entirely by BERR, for example, which show the diVerent costs in private donation. It has no corporate aYliations or pence and pounds per kilowatt hour for all of the corporate funding whatsoever; indeed, we have been renewables and also we have had work done for us by at pains to ensure that that should be the case. There IPA Energy which compares conventional power and are so many vested interests in the renewables field goes up from the lowest, which would be gas, that we have tried to remain truly as impartial a voice combined cycle gas turbines, up through the winds to as possible. Our purpose has always been to the highest, which was the point of this particular commission and publish independent and empirical study that we were doing which was the Severn research in this field. barrage costs. Against the capital cost of the renewable generators, you have to balance the fact that some of them have very low or zero fuel costs Q112 Chairman: Thank you very much. Perhaps I and that is a very real merit and an important might start by asking you a catch-all series of consideration. However, to a significant degree, that questions. How do the costs of generating electricity benefit is counter-balanced by load factors for some from renewables compare to fossil fuel and nuclear of these technologies that are very low indeed generation? What are the current estimates for fuel generation with carbon capture and storage? How do compared to conventional sources of generation. The those costs compare with renewables? Finally, what load factor for onshore wind, for example, is V impact do these various forms of electricity generally less than 30 per cent and even o shore generation have on carbon emissions? A very simple wind, which is something that we have championed, set of questions. is only 35 to 40 per cent. However, when you look at Mr Dunford: Thank you. We have prepared some everything in the round and you take all of the detailed written responses which we would like to estimates together, which we have, renewables are leave with you, if we may, because we are dealing with currently more expensive on a pence per kilowatt an extremely complex matter and there are no quick hour basis than conventional generators and there is and easy answers to this. If you are looking at the cost no getting away from that, and we have provided of energy from a generator in all terms, you are charts for this. There is also a balancing cost which looking firstly at the capital expenditure required, the must be taken into account and this has been cost of that capital itself and that will, of course, be estimated by the UK Energy Research Centre at governed by market perception of the risks, the cost anything between £5 and £8 per MWh for, say, wind of the fuel input, the load factor which is achievable, energy at a 20 per cent penetration. We would tend the operation and maintenance costs, the de- to feel that that is probably a bit low, but that is the commissioning costs, which are often overlooked, number which has to be brought in. With regard to Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG3

the economics of renewable energy: evidence 37

3 June 2008 Mr Campbell Dunford and Dr John Constable overall system impact, there is quite a lot of but it may be dearly bought, and that is one of our confusion. It is generally assumed, at a public level, concerns. Think of it this way, if you add 52 gigawatts that one unit of renewable energy will automatically of wind to the portfolio, you still have to have enough replace one unit of conventional power. That is sadly conventional despatchable generation equivalent to not the case. It could possibly be the case, say, for the peak load plus an acceptable capacity margin, biomass, because biomass is despatchable power, probably 10 per cent, a little bit more, and that would you know when you are going to get it, so one MWh give you 70 gigawatts. As the Committee will be of biomass power could replace one MWh of coal or aware, the UK is currently faced with the necessity of gas, but that is not the case for every other renewable rebuilding something like 30 gigawatts of its fleet, that we are aware of. The Severn barrage, for about 40 per cent of the total fleet, by 2020. That in example, would have a capacity credit of only 17 per itself is a very large capital burden, somewhere in the cent of its installed capacity, so if you had, technically region of £15 to £25 billion depending on the mixture this value of 8.6 GW installed, the capacity credit to of technologies. The overall fleet therefore would be the system would only be 1.5 GW, so much less than closer to 120 gigawatts in total. You would move what you think you are getting. We would like to from a situation as it is today, where you have about refer the Committee to the experience in Europe, in 70 gigawatts of plant, to a total grid capacity of about Germany and Denmark, for example, where there is 120 gigawatts, in other words a very large installed extensive renewables penetration and they are often capacity, but the gigawatt-hours market remains the cited as examples. The Danish head of their same. So you have lots of generators chasing the equivalent of our National Grid has said quite clearly same size market and their load factor will drop. By that from a planning perspective, for example, wind adding a very large quantity of renewables with a low there achieves a capacity credit of zero for planning capacity credit, what you are doing is reducing the purposes. This actually matters because quite a lot of load factor of the still indispensable conventional the work that has been done here, by National Grid generators and therefore driving up the costs of those for example, assumes that you can take roughly the conventional generators and it could rise very square root of the installed capacity as firm capacity significantly, between one pence per kilowatt hour for the grid, so that from 25 GW of installed capacity and two pence per kilowatt hour, which would you get five GW of power. That is not the case. There represent an ongoing cost burden of somewhere is nothing particularly unusual about British wind as around about £5 billion a year. Our point here is opposed to German or Danish wind and the work really that the cost of renewable generators is that we have done, with a very important bit of work complicated. It is probably much higher than is coming out shortly, shows the capacity credit for superficially apparent and we conclude from this that wind in the UK would be very little diVerent from there are thresholds beyond which the UK should not that in Europe, extremely low, about five per cent go. Not that there should be no renewables at all, of we think. course not, but the key is the fuel saving. You must Dr Constable: I will take up the story of the capacity not drive in more capacity than is justified by the fuel credit issue. The capacity credit for renewables is saved. That limit may rise as the value of the fuel critical in the sense that it aVects the cost of running saving rises, if the price of fossil fuel rises, but other generators alongside them and what you are ensuring that you get the right quantity to take the doing is asking renewables to produce a lot of benefit of fuel saving without driving up system costs megawatt hours but you are denying that production beyond the value of fuel saving is critical. It is not an to conventional capacity. However, you nevertheless easy problem to solve and, as far as we are aware, need to retain that conventional capacity, because the very little attention has been paid to it. capacity credit of the renewables is low and in the case of wind, practically zero. To take a concrete Q113 Chairman: I asked you the blockbuster example, there is much discussion at the moment of question so you gave me the blockbuster answer, but producing about 45 per cent of our electricity from if you are going to answer all the questions we are renewables, and let us say that some 35 percentage points of those 45 points come from wind, that would going to go for, we will need to be a bit briefer. Dr Constable: be something like 135 TWh of energy. To generate Certainly, but that is a very critical that from wind, you would need something like 52 reply from us. gigawatts installed capacity, assuming a load factor Chairman: It is extremely critical and we very much of about 30 per cent. That is a very large installed look forward to your written submission on this as capacity indeed, a high capital cost, somewhere in the well. region of £30 to £80 billion depending on the mix of onshore and oVshore. Nevertheless, it supplies Q114 Lord Moonie: In 2006, you wrote that the almost nothing towards the firm capacity Government “has not yet recognised the acute need requirements of the UK, so its value, its counter- for security of supply of imported fossil fuels” and factual cost, is the fuel saved, and that is a real value that it was “naively sanguine about future fossil fuel Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG3

38 the economics of renewable energy: evidence

3 June 2008 Mr Campbell Dunford and Dr John Constable prices and availability”. What are the implications of fruit is being missed. Renewables can make an this for renewable energy policy? How do, and immediate contribution, if encouraged, on the should, renewables fit into our overall energy policy? heating sector and on the domestic sector. Mr Dunford: The background to that of course is that Dr Constable: Particularly because the UK has our existing fleet is in decline and a whole chunk of it become so gas-dependent for its domestic heating. is being closed, so we have that investment to make. Renewables will have a role to play and indeed rising Q116 Lord Moonie: Following on from what you fossil fuel prices and rising electricity rises generally said about cars, you talked about electric power, are will encourage renewables to come in, that goes you talking about batteries particularly or some sort without saying. We have to make a considerable of hydrogen system? eVort in improvement in our thermal eYciencies. We Dr Constable: The market will decide on that. can do that quite well in this country because our stations are so old; just putting a new kit in is going to make things a great deal better. Renewable Q117 Lord Moonie: What is your hunch? generation can only be helpful to that if it is a team Dr Constable: My hunch is batteries. player, if it fits in with the rest. If it is supplementary Mr Dunford: Yes, battery technology will crack it, in to and sits alongside but does not support the the fullness of time. conventional generator, then it is frankly wasted money and wasted eVort, and not getting the benefit down to the consumers. We believe that it is very Q118 Lord Layard: I would like to go back to what important to go for things where the renewable you said about wind and the zero number that you generators can make a contribution. The big unsung mentioned for Germany. Is it not the case that if you area is in heat where a third of our energy goes and look at the thing on a national basis, a system-wide V where existing renewable technologies can more of basis, you get a di erent line of thought from if you less immediately be applied at a domestic level and at try to imagine a bit of wind power and the associated a commercial level; you can use solar thermal, you backup capacity and diesel? How do you actually can use ground source heat pumps and do that sort of look at the thing? What conclusion do you come to thing. You can make a material contribution to the when you look at the thing on a system-wide basis? third of all our energy needs that is used in heating, Mr Dunford: We have done this work. for example. Transport? Much more diYcult. Dr Constable: The German and Danish wind carpets Without getting into the whole thing about biofuels, are reasonably distributed so that their experience is we believe that the existing penetration should be relevant, although I agree that they are relatively really rather local where there is reasonable concentrated. The UK is a small geographical area manufacture of, say, biodiesels or what have you. and weather systems are very large. It is therefore For transport the long term future is going to be interesting to try to model the impact and indeed we Y electric vehicles of some sort, however that is fuelled. have done this; we have obtained the Met O ce wind Dr Constable: I should like to say something quickly speed database and we have asked consultants, about ground source heat pumps. Our view is that Oswald Consultantcy, who have done quite a lot of ground source heat could play a very significant part work for us, to construct a power flow model in a gas depletion policy and we believe the UK needs assuming 25 gigawatts of wind distributed in eight a gas depletion policy very badly. Here are locations, eight regions over the UK to test the technologies which have a potential for cutting gas smoothing hypothesis. That work is now demand, which is desirable in itself, and also reducing forthcoming in the journal Energy Policy.Weare household expenditure; they deliver immediate very happy to provide a preprint of that study for returns and it is a very desirable thing to do. It is a you. What the study shows is that, yes, you do get pity that more is not happening, although with rising smoothing, a not insignificant smoothing but, fossil fuel prices, they are becoming spontaneously nevertheless, during the course of a typical January, attractive. the wind output will vary between very close to zero, a couple of percent of its theoretical maximum output, and nearly 100 per cent. So the capacity Q115 Chairman: Do you think that in the UK we are credit is low. Smoothing aVects the rates of ramp and spending too much time thinking about electricity decline, yes, but the capacity credit is low. generation and not enough on heat? Mr Dunford: It is important to say that we took the Mr Dunford: Yes; absolutely. data right across the entire UK, from the very north Dr Constable: Yes; certainly in the renewables sector. of the islands of Scotland, from Shetland right the Mr Dunford: In the renewables sector everybody is way down to Cornwall and extrapolated that out and fixated with the holy grail of generating electricity at used the actual numbers that the companies a micro and a macro level, and it is a considerable themselves and the units were reporting back and waste of resource and attention and the low-hanging even so, you get very, very alarming rises and drops Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG3

the economics of renewable energy: evidence 39

3 June 2008 Mr Campbell Dunford and Dr John Constable in power in a very short period, which the grid has to because it will result, as it is actually already cope with or cannot. resulting, in the adoption of sub-optimal technology. Dr Constable: They would be manageable but it might Much of the material that we are putting before you be costly to manage them. From the point of view of today is concerned with economic costs, but this is a providing firm capacity to meet peak load, the very significant opportunity cost. Renewables are experience would be almost identical to that in very good things and we will need them in the future, Germany and Denmark. There is no reason to but driving them in and driving in the adoption of suppose that smoothing would deliver a significantly sub-optimal technology may well present a very higher degree of capacity credit. That is the outcome significant opportunity cost for the UK; we will be of this study which I am very happy to provide you. damaging the prospects for this industry. Chairman: If you could, that would be very useful. Mr Dunford: To put a number to that, we think that the UK could probably stand about 10 gigawatts of renewable power. Y Q119 Lord Gri ths of Fforestfach: Your manifesto Dr Constable: Ten gigawatts of wind probably; it may of 2005 went on record as saying that the be a little bit more, it is very hard to say. Government are asking “more of renewables than can be reasonably delivered and is thus condemning the sector to failure“. Is this still the case and, if so, Q120 Lord Lawson of Blaby: May I ask you a why and how much renewable energy can “be question in a number of parts? The Germans do reasonably delivered”? generate much more of their electricity from Dr Constable: It is not only still the case but the renewables in general and wind power in particular problem has, if anything, intensified. The EU than we do, so they are ahead of us. What would you renewables targets is proposing that some 20 per cent say is the main lesson that we can take from the of Europe’s final energy consumption should come German experience? I have the impression that they from renewables, with at least 10 per cent from are slightly less enthusiastic about it now than they transport fuels. This is an extraordinary target; for were. Is that correct? the UK it has been rendered as a target of 15 per cent Mr Dunford: The German experience of renewables of final energy consumption by 2020. That would has caused them some technical diYculties as well as probably entail an enormous burden on the considerable cost, of course. They have, for example, electricity sector. Even if we assume the 10 per cent of the largest wind carpet in Europe. They have major transport fuels can be met and the current climate balancing diYculties and they have to export quite a suggests that there will be little political will for lot of power under duress to neighbouring countries. biofuels so the burden on electricity will be still This has caused complaint, for example, from some greater—45 per cent of electrical energy from of the surrounding economies. renewable sources, 50 per cent—you are looking at Dr Constable: Poland and Holland specifically. an extraordinary wind fleet to achieve that, Mr Dunford: So yes, that is a problem for them. It has somewhere between 50 and 70 gigawatts, vast, not been an entirely happy experience. They are also resulting in a grid, the total capacity of which is 100 having to construct an additional high voltage grid in to 120, in excess of 120, and nobody has any idea how order to cope with the fluctuations created by this to run such a grid, it has never been tried anywhere, large wind carpet and we understand that Germany nobody has the faintest idea. It is particularly critical is building five new coal stations, which it does not because if you have that much fluctuating output, otherwise need, purely to provide covering power for there will be times during the year, perhaps very the fluctuations from their wind carpet, so they are frequently, when the output from that combined driving up their cost quite a lot. The other thing that wind fleet exceeds demand, you cannot store the they have done, which comes up a lot, is that they electrical energy and the wind will have to be have a feed-in tariV to encourage the spread of curtailed, in which case you have less energy than you renewables at a local and domestic level. This is thought you were going to have and you will miss certainly a way of encouraging domestic renewables your targets. Curtailment is little discussed, and most but it again introduces, in addition to the cost, a great of the models assume unconstrained output from the deal of uncertainty into the management of your wind fleet. It is quite clear from this that the targets power base. I am not sure that it has been a great are, practically speaking as things stand, success for them. unobtainable and nobody in the electricity industry Dr Constable: The German experience is extremely would privately tell you anything diVerent. However, instructive and we should all study it very carefully there is a real risk that governments throughout indeed. The principal diYculties they have had are Europe will succumb to panic and introduce very ones of cost. There are areas in which the German strong mandates to attempt or to show willingness to experience is not relevant and they found it much meet these targets, and from the perspective of the easier to solve their balancing problems because they renewables industry, that would be disastrous are so richly interconnected with their neighbours. As Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG3

40 the economics of renewable energy: evidence

3 June 2008 Mr Campbell Dunford and Dr John Constable

Mr Campbell has just said, the neighbours have not new nuclear technology and I wondered whether always welcomed these overflows and I know at there was some development in the technology of present that the German grid operators are nuclear power which would enable it to be used in recommending that connections with Denmark this way. should actually be reduced to protect stability in the Mr Dunford: If I might take the emissions question Danish grid which is highly important. In a positive first, because that is the easy one, the truth is that in way, there are areas in which Germany’s experience, both Denmark and Germany, emissions have risen, for example of ground source heat pumps, has been not quite in line with the penetration of wind, but very beneficial. It has not been all bad for the their carbon dioxide emissions have risen and Germans. Certainly at the utility scale, the costs have continue to rise. They are higher than they were when been extremely high. I would wonder whether it was they started. The inference has to be, we are told, we unduly cynical to suggest that German enthusiasm have not researched the subject ourselves, that this is for the 2020 renewables targets was an attempt to because they have had to resort to backup. The ensure an equality of economic burden across experience of providing backup to date has always Europe, so at competition, at least within Europe, been that the engineers need to respond very quickly, was levelled oV for them, whatever it did therefore they have used those generating internationally. technologies which are capable of being ramped up Mr Dunford: It is also true that in Germany and and down quickly without causing damage and that Austria there has been a considerable take-up of therefore has tended to be either oil, coal or open biogas for example. Virtually every farm or village cycle gas. Regarding nuclear, John, do you have a has a biogas unit available to generate electricity view? locally and put wealth into the local community. Dr Constable: Certainly it is true that the older That simply has not happened here because of the generation nuclear stations were relatively inflexible, way our system is set up and it really should do. technically inflexible, whereas with the latest Again, it is a low-hanging fruit. generation, I understand, it will actually be required in the licences that they have the ability to follow load, and there is no particular reason why a PWR Q121 Lord Lawson of Blaby: I absolutely take your should not be able to do so. However, it is not our point about the low-hanging fruit. Nevertheless, the field of expertise; I know that simply as incidental present policy of the Government is to focus very knowledge. You would have to ask a nuclear reactor heavily on wind power. I would like to ask you one or design operator. Economically I would suspect they two further questions about that. You mentioned the would prefer to run at full load, but if you are asking fluctuations in the intermittency and the need for them to flex, then I am sure they would do so and backup. That produces two consequences. First of charge appropriately. all, it adds to the cost obviously and presumably the Mr Dunford: The only comment I would add, if I bigger the proportion of your total electricity supply may, is that when you are talking of a large wind which comes from wind power, the bigger the extra carpet and the wind suddenly blows like a hooligan, cost you have, the more important the backup is. It you have a lot of power already in the system. You do would be helpful if we could have some indication not have a great deal of time to react, to crank things from you—maybe it is in the paper you said you are V up and down. It is not that controllable. I have to say o ering us—about how much this costs extra. Also, I personally would be worried about nuclear plant you mentioned that in Germany they are building being turned up and down. new coal-fired power stations to provide this backup, to deal with this intermittency problem. This obviously means that the amount of carbon dioxide Q122 Lord Lawson of Blaby: On the question of emissions which wind power is meant to cut out is cost, how much is the intermittency factor and the diminished by the amount that is generated by the consequent need for backup, as you were saying, the backup systems. So what is the net eVect there? Is it bigger the proportion of your electricity supply which possible to get away from that by having your backup is produced in this way, the bigger that problem is, not coal fired or gas fired, not a conventional power what does this do to the cost of electricity? station, but nuclear as your back-up? When I was Dr Constable: There are two senses of backup here, Secretary of State for Energy, it was certainly often confused, and it is very important to keep them believed in the department and it was certainly the separate. One is the need for rapid response reserve case then, because that was a long, long time ago, 25 and the cost of that is estimated at somewhere years ago, that really nuclear was only remotely between £5 and £8 per megawatt hour of wind energy economic if you had it as a base load. You could not in the UK. That may be a little low, we are not sure, have these kinds of fluctuations which you would but it will do. The other cost, which is the most need, switching on and oV when the wind was not interesting cost in some ways, is the cost of running blowing or whatever. I am not up to speed with the the rest of your conventional fleet at lower load Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG3

the economics of renewable energy: evidence 41

3 June 2008 Mr Campbell Dunford and Dr John Constable factor. That is another sense of backup. The analysing this material. So the RO has created Germans call it “shadow capacity”. We refer to it permanent subsidy clients, and this is critical because sometimes as “support capacity”. That is relatively there is a limited capacity for wind in the UK grid. easy to work out. You can produce a cost curve for We have incentivised the construction of wind which load factors, so you can see the cost for the is saturating that limited capacity with sub-optimal conventional generator rising as the load factor plant. It is very unfortunate indeed. Wind has a role declines. I have not included such a chart in the in the UK’s grid but at the moment we have sub- document I have with me today, but I am very happy optimal deployment. I would find it very diYcult to to direct you to an industry standard chart of that say anything positive about the Renewables kind and you can read more. It is not a linear eVect; Obligation, except that the Government doubtless it is quite a steep curve, so there is eVectively a meant well in introducing it. It was a very complex threshold eVect, that you reach a point where it instrument and it has had unforeseen and very becomes significantly more expensive quite suddenly. unfortunate consequences. We welcome the current proposals to band the obligation. Last year, we judged that such revision should be seen as a step Q123 Chairman: Dr Constable, last year you said towards abolition. At present I am prepared to come that the UK regime of renewables obligations further forward and say that with rapidly rising fossil certificates has been a disaster for the renewables fuel prices, the RO is needless and it should simply be sector. Why do you think that is so? What do you abolished. think of the Government’s proposed changes to the scheme and are there other changes to that scheme Q124 Lord Moonie: When you talk about the that you would like to see? availability from a renewable source, do you count Dr Constable: Yes, I have said many things which are the extra transmission losses into that? critical of the renewables obligation. It is an Dr Constable: The load factor. extraordinary system; it provides 60 per cent of the income for a renewable generator. It is a very blunt instrument. It produces high profit for the least Q125 Lord Moonie: Yes, capital intensive ticket to the subsidy stream. In some Dr Constable: No, it is usually calculated at the edge cases internal rates of return for onshore wind of the site. projects exceed 25 per cent. This is remarkable, to say the least. What it has done to the sector is reward, Q126 Lord Moonie: Is that significant? serially, the least capital intensive technology. Dr Constable: The voltages in the network are very Initially, that was landfill gas which is a very good high and the transmission losses are not very large; I technology but hardly in need of subsidy, and its would not say that they were. In the distribution benefits were very dearly bought. Latterly it has been network they are rather higher and that is interesting. wind, a technology which, in our view, is limited in It is very little studied and it is very diYcult to get scale of deployment and, if correctly sited, at present data about losses in the distribution sector. The does not really require subsidy. So what the RO has distribution network operators frequently do not done for the sector is narrow development focus on keep this data and are not even capable of to one or two technologies which in fact least require analysing it. support, the least capital intensive ones, and it has depleted resources available to other technologies Q127 Lord Moonie: How much investment in which are either in need of technical development or Britain’s transmission and distribution networks will are more capital intensive. We know that because we diVerent renewable energy sources require compared have innovators and technologists coming to see us with other forms of generation? Are the current all the time, desperate to find capital support and transmission and distribution systems capable of finding it almost impossible. We do our best to help managing a large share of intermittent renewable them but it is very diYcult. In the wind sector it also energy generation and, if not, how should they be created a perverse incentive for wind developers to changed and are the rules on connecting capacity install plant in locations where there is fundamentally supportive of renewables? very little wind. For many years the industry has Dr Constable: In a document we are leaving with you, premised its output on a 30 per cent load factor and we have given some detailed numbers, some of the that is routinely used but in fact, if you look at data estimates. The grid expansion would be very large, if which we publish, the load factor for all 900 the wind carpet were very large itself. You are really renewable generators, not just the wind, you can see looking for grid in order to allow power flows around in fact 80 per cent of onshore wind farms failed to the country, so you want a very extensive grid. In achieve that sort of load factor. I believe you will be Germany for example, and this is an aspect of receiving submission from Professor JeVerson of German experience which is highly relevant, they are London Metropolitan Business School who has been looking at about 1,200 miles of new extra high Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG3

42 the economics of renewable energy: evidence

3 June 2008 Mr Campbell Dunford and Dr John Constable voltage grid by 2020, at a cost of some £2 billion, and place? For example, would you like to support feed- that is not counting the expansion and reinforcement in tariVs and, if so, what do you think the impact in the medium voltage grid. It is very significant and would be on the investment of the generators? we know it is going to be needed; it is not a theoretical Mr Dunford: We debate that constantly and six matter, it is real. Even more modest levels of months ago we would have argued for a refinement of renewables would require significant grid expansion. the renewables obligation and probably a very, very National Grid estimated in 2004 that it would be finite life to it. Now, however, electricity prices have something like £250,000 per megawatt installed. That risen and are continuing to rise and everything that is a very significant number and even if we took a we see shows that they are just going to carry on lower figure, also used by National Grid, about going that way. We honestly believe that most £125,000, 50 gigawatts would require about £6 billion technologies should now be able to survive without of grid. Now that is investment which has to be ongoing subsidy at the very generous level that the recouped, so you have eVectively a standing charge RO provides. Let us remember that it is 60 per cent on the customer. We have not done work on this of the income for the average wind turbine now, for ourselves, but Professor Laughton, one of my example. That said, we do believe that some of the advisers, has presented an analysis to me which technologies which we see every week need help to suggests that for every billion pounds of grid, come to market. We do not think that a subsidy is the electricity prices would have to rise by about £3 per right way to do it because that is taking an infant megawatt/hour. For £6 billion, well you can do the technology and guaranteeing that it never grows up, sums yourselves. It is a significant overhead and not you just keep it in swaddling clothes. We do believe to be ignored. Are the current transmission and that it would be prudent for the UK to look at distribution systems capable of managing a large increasing its level of R&D support and early-stage share of intermittent renewable? No, they would have support. We are way, way down below competing to be expanded to handle the capacities currently economies on the amount we spend on R&D in the considered. We would suggest that perhaps those renewables and energy sector, so we would like to see capacities are rather too high and that therefore it that going forward. In terms of encouraging should be reduced to the point where the economic penetration into the marketplace, we would probably burden becomes tolerable and indeed, returning to seek to argue, particularly at a domestic level, for a the fuel saving point, where it does not wipe out any mechanism of capital grants to help technologies to value from the fuel saving. Are the rules on come forward. Simple straightforward subsidy has connecting capacity to the grid supportive of skewed the market and we see no reason why it renewables? I will hand that over. should not continue to skew the market, if it is left as Mr Dunford: The last speculative number that came it is. out of National Grid as to what they would like to have to strengthen the grid was actually, and I stress that it was a speculative number, £9 billion. There is Q129 Lord Layard: You have argued in favour of pressure at the moment for those who are proposing carbon capture and storage for coal-fired plants. to create renewable generating assets to have it made What would you like the Government to do about mandatory that they be connected to the grid and, if this? they are not connected to the grid, that they should be Dr Constable: If you are interested in reducing paid a fee as though they were connected to the grid, emissions from the electricity sector, both here in the which I find an extraordinary way of looking at life, UK and by example elsewhere in the world, carbon but there you go. The grid connection rules at the capture and storage (CCS) is absolutely essential. A moment provide that connection will take place as consistent theme in the material that we present you the grid judges the value of the power to the overall with today is that renewables are not a particularly V system. Any changes would inevitably mean that the e ective method of reducing emissions; they are V grid itself was being asked to accept power and cost valuable as a fuel saver, which is a di erent matter. If which was not necessarily contributing to the value of you actually wish to reduce your emissions, you are the grid. Frankly, it is a complex matter but it should going to have to clean up the conventional sector, not not be changed lightly because we do not know what least because it is a matter of fact that the world’s the consequences should be. We do know that the fossil fuels are going to be used. China will use its costs will be very, very great and we do not know fossil fuels. The IEA, the International Energy what benefit might accrue. Agency in Paris, is estimating that in the next eight years China and India combined will build 800 gigawatts of new power stations, 98 per cent of it coal Q128 Chairman: Let me just take you back to the fired. This is a very significant fact. If we care about renewables obligation and something I should have emissions, CCS seems to be absolutely unavoidable, picked up when you said that you wanted to see it but it will be expensive and it is something abolished. Would you want to see anything else in its governments have to be open to the public about and Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG3

the economics of renewable energy: evidence 43

3 June 2008 Mr Campbell Dunford and Dr John Constable say that if they want to reduce emissions, they are recognition that there is money going to be tied up going to have to pay to do it, but there is no reason and there is going to be a commitment. So, once why that should not happen. Legislation requires again, we think that a capital grant mechanism or that sulphur dioxide be removed from power station possibly a tax mechanism, a rebate mechanism, outputs and the market was left to find the most rather than a subsidy would be the way forward. I eVective way of doing it, and it has been very think that answers your question. successful. It could happen with carbon capture and Dr Constable: It seems to me that the Shell decision is storage but adoption in my view is absolutely quite an interesting example of the way that conditional on continued commitment to reduce international market interventions have distorted the emissions on a global scale and if there is no UK market. I would say the Obligation in the UK has coordinated global policy, the UK would be better probably put the brakes on oVshore wind, it has not oV spending its money on adaptation domestically helped, and taking it away would help oVshore wind, and on funding and granting overseas aid for but a major market intervention in the States has adaptation responses internationally. It is critical convinced Shell that they could get better margins V that CCS has to take o globally, if we are going to elsewhere. Probably, yes, we would support oVshore do it. There is no point in us undertaking that extra wind capital grants, which they did receive once, V cost unless it is a truly international e ort. though I have a hunch that with rising fossil fuel prices, large energy companies would invest in Q130 Lord GriYths of Fforestfach: You have argued oVshore wind at a high wind site as a way of that there has not been enough support for oVshore diversifying their portfolio and hedging against wind. Do you think that Shell’s decision to withdraw increasing fossil fuel prices. It would be interesting to from the London oVshore wind farm is influenced by test that hypothesis. the lack of support? If you feel more support is needed, then how much and what kind of policies would give rise to that? Mr Dunford: We were disappointed. We have long Q132 Lord Lawson of Blaby: As I understand it, argued that the place for wind development is what you were saying a moment ago was that you do oVshore where the wind is more constant, it is not see really any case for wind power in terms of stronger and where you can position your investment achieving a stabilisation of carbon dioxide close to the centres of load and demand. concentration in the atmosphere; you see other Economically, it makes much more sense than arguments for wind power, providing it is wind V scattering the things willy-nilly across the power which is o shore rather than onshore. If we countryside. So we were disappointed. do, however, focus on the issue of stabilising carbon dioxide emissions in the atmosphere which is what Y V the Government’s Climate Change Bill is all about Q131 Lord Gri ths of Fforestfach: How far o shore and what the climate change committee is all about, would the windmills be? you made a point, with which many people would Dr Constable: The London Array? I cannot agree, that that only makes sense if you could have a remember. The Greater Gabbard oVshore wind is global agreement and a global agreement requires 18 miles. inevitably there to be carbon capture and storage Mr Dunford: We are not privy to Shell’s decision installed globally. Whether that is technologically making, but, as you will have seen from Exxon’s chief executive only this morning, the oil majors are, in possible nobody knows, and even if it is current market circumstances, concentrating their technologically possible, nobody knows what the eVorts and their capital expenditure on making sure cost would be of that. However, getting everybody that there is enough oil and dealing with increasingly else on board is clearly important and Lord Stern has tight geology for that oil. I suppose we should be very recently produced a paper under the aegis of the grateful for that. Shell faced significantly rising costs London School of Economics, which I am sure that in Europe and in America where it is also active in you have seen, about how to get a global agreement. wind. Funnily enough, against all predictions, the What he says is that the developed countries have got American subsidy system at the moment is extremely to go ahead first; the developing countries would attractive for all forms of renewable investment and come in in 2020 and meanwhile the developed I should think that Shell is quite simply switching its countries should commit to reducing their carbon resources there. What would we like to see the dioxide emissions or carbon dioxide equivalent of Government do? Well, we have argued against emissions by between 80 and 90 per cent by 2050 over subsidy, we continue to argue against subsidy 1990 base line, which means at least 90 per cent because we do not think in the long term that is going compared with where we are now. Do you believe to be healthy, but to enable these very significant that that is realistic and if it could be achieved, how investments to get oV the ground there has to be some could it be achieved and at what cost? Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG3

44 the economics of renewable energy: evidence

3 June 2008 Mr Campbell Dunford and Dr John Constable

Dr Constable: I am a lapsed academic and in my should be doing to support renewables in the heat previous life I worked in Japan for a number of years, and transport sectors? had many Chinese students and I have some feeling Mr Dunford: Certainly we believe that there has been for the way the Chinese see the world; these were very a vast over-emphasis upon electricity generation in able people. They taught me that the characters for renewables which has not served the interests of other China, a box with a stroke through it and another areas at all well. Heat is the obvious area to go for, box with a king inside it, are often translated by not least because it is within our technical grasp to do western Sinologists such as Joseph Rock, as “Middle something; it will save fuel and imports for the Kingdom” which makes it sound rather country, but it will also make a material diVerence to Tolkeinesque and Hobbity and huggable. They told individual households which some of the stuV we me that it means very literally “country at the have been talking about is rather remote from. We centre”. They have a very strong sense of national believe that measures to encourage the take-up of destiny and it became very clear to me that the only heat saving and heat generation measures within the argument that really would aVect China was household are fundamentally good. Again, we would economic and it seems to me that is true for emissions argue for a very simple system of capital support reduction. I cannot imagine the Chinese Government grants or taxation, not subsidies, not targets and, or its people paying any attention to an emissions above all, if we may put in a plea, let us not focus on strategy which was not an economically compelling microgeneration of electricity; we believe that is a example. If they look this way and see that we have very false canard. Would you like to talk about this spent a great deal of money on emissions reduction, week’s report on that matter? they will congratulate themselves and proceed on Dr Constable: On Monday a large study into the their own way regardless. So I would be very uptake of microgeneration was published. REF was doubtful about the geopolitical likelihood of securing co-funder with BERR and the main regional international agreement unless it were economically development agencies on this. One of the conclusions compelling, and at the moment I would be pessimistic of that study was, yes, you can drive in a lot of about finding a way to produce an economically microgeneration, but the cost is very high, but with compelling example. It would be very diYcult; rising fossil fuel prices you will get quite a lot of perhaps impossible. spontaneous uptake. There is a general principle here Mr Dunford: I happen to have in my bag a statement which we would extend to other parts of the industry from Vsevolod Gavrilov, the oYcial in charge of where doing less is more and where if the Russia’s Kyoto obligations. If I may, I quote “Energy Government did less more will actually happen. must not be a barrier to our comfort, our emerging Targets are probably not necessary to drive in middle class demands lots of energy and it is our job microgeneration. Let people make up their own to ensure comfortable supply. We do not plan to limit minds about it. We are very sceptical of the idea that the use of fuel for our industries; we do not think this such complex decisions can be made eVectively by would be right”. This is the oYcial in charge of their civil servants, politicians, however gifted; it means as Kyoto obligations. The Russians have no intention many brains working on a complex scheme as of doing anything that does not suit Russia. I would possible. Therefore doing something simple, like be surprised if the Chinese, who are quite bright, further reducing VAT on microgeneration would imitate us if we were to do something which technologies, might actually be very helpful. At the was not economically compelling. There is no reason moment it is five per cent, but why not knock it down for them so to do, they all have emerging middle a few more points and take it oV eVectively classes, they all have coal, if we do not come up with altogether? Doing less may well mean doing more. technologies that make it attractive, they are going to burn that coal anyway. I am not a politician, God knows, but I really do not see how the UK, or indeed Q134 Lord Moonie: Proposed European emissions Europe, disadvantaging itself is somehow going to trading scheme, cost of carbon, how are they going to V persuade other countries to change who are desperate a ect relative costs of renewables and other sources Y to raise their living standards, which means energy. I of energy? If we had a more e cient carbon trading really do not understand how that could be. scheme, would it remove the need for special support of renewable energy? Mr Dunford: We would like to argue that yes, it Q133 Chairman: May I bring us back from the would; we would like to believe that it would and it is Middle Kingdom to the United Kingdom just for a certainly preferable in terms of market development moment? We touched on heat and transport earlier than any form of artificial subsidy. Yes, we do think on and you said that heat was something which could it would be preferable. You focus on the ends rather do with a good deal more emphasis than it has had so than the means; you let the market do things for itself far. Are there other things that the Government so the market will choose the most eVective route to Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG3

the economics of renewable energy: evidence 45

3 June 2008 Mr Campbell Dunford and Dr John Constable reduced emissions. A tax could be fine tuned, it has brought in by least-cost means. This conflict between that advantage as well and—this probably does not these policies has been noted and it was revealed in go down terribly well—the tax could also be removed leaked BERR documents last year but it is getting if no longer needed. I am not sure that ever happens insuYcient attention within the EU itself and more but it is possible. Yes, we prefer carbon trading to people ought to be paying attention to it. We would support. certainly back a carbon tax or the ETS over direct Dr Constable: And we would note the peculiar income support mechanisms. Of the two, I would incoherence in EU policy on this matter. On the one prefer a carbon tax since it can be fine tuned very hand we have commitment to the EUETS, which is a readily, and you have certainty about the cost, if not least-cost mechanism, and then on the other hand about the emissions saving that is achieved. you have these extraordinarily ambitious renewables Chairman: Well thank you again for your time, thank targets. If you believe that renewables are a very you for answering our questions and we look forward eVective way of reducing emissions, then they would to seeing your written submissions. Thank you very be incentivised by the ETS and they would be much indeed.

Supplementary memorandum by the Renewable Energy Foundation (REF) This document provides the textual underpinning of the oral responses of The Renewable Energy Foundation to the possible line of questioning provided in advance of the delivery of oral evidence to the House of Lords Select Committee on Economic AVairs. Draft questions are in bold type.

1. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage, and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions?

We will deal with each of the sub-questions in turn.

How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation?

The cost of energy from a generator is determined by the capital expenditure required for the plant, the cost of capital (which will be determined by the market’s perception of risks associated with a particular technology), the cost of its fuel input, the achievable load factor, operation and maintenance costs, decomissioning costs, and integration costs such as grid expansion, balancing costs, and overall system impact costs. From the consumer’s perspective, or that of the United Kingdom as an economy, it is the overall system cost that is of focal interest, but determining the factor for the introduction of a particular generation type is no simple matter, and in the case of renewables is both complicated and variable from technology to technology. At a superficial level, and generally speaking, renewables are more capital intensive in comparison with most conventional generators. We would refer the Committee to the recent detailed and valuable study by Pyry for the Department of Business, Enterprise and Regulatory Reform, Compliance Costs for Meeting the 20% Renewable Energy Target in 2020, in particular the CAPEX cost estimates given in the Annex (p 23), part of which we reproduce here, converting the cost to sterling for convenience:

Technology Cost: £/kW

Onshore wind 1,239 OVshore wind 1,755 Biomass 2,048 Biowaste 4,269 Biogas 2,732 Solar PV 4,717 Solar Thermal 2,452 Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG3

46 the economics of renewable energy: evidence

Technology Cost: £/kW Large Hydro 1,258 Small Hydro 1,557 Geothermal 1,278 Wave 3,130 Tidal Stream 3,414

These can be compared with CAPEX costs for conventional generation as noted below in a chart reproduced from work undertaken for REF by IPA Energy intended to compare the costs of the Severn Barrage with those for the currently prominent renewable technologies, namely wind oV- and onshore, and conventional generators.1 Note that the estimates for the cost of oVshore and onshore wind here are somewhat lower than those presented by Po¨yry.

Range of Capex for Different Technologies 3,500

3,000

2,500

2,000

£/kW 1,500

1,000

500

0 Gas Coal PF Onshore Coal Coal PF Offshore Nuclear Severn CCGT wind IGCC with CCS Wind Barrage

However, while renewable generators are generally speaking more capital intensive, several have very low or no fuel input costs, for example wind power, and this is a real merit. Nevertheless, to a significant degree this benefit is for most renewable technologies counterbalanced by load factors that are low even if a market is guaranteed for all energy that may be generated. The load factor for onshore wind, for example, is generally less than 30%, while even oVshore wind will only be in the region of 35-40%. The exception is biomass, which is theoretically capable of load factors comparable with conventional generators, though this of course has a fuel input cost. There is some uncertainty as to operation and maintenance costs, particularly for the less well-developed renewable generators such as wave and tidal, though the Committee could again be referred to the Po¨yry study on this matter. However, when all the matters are combined most estimates of cost show that renewables are currently more expensive on a p/kWh basis than conventional generators. The following data has been provided to one of our advisors, Professor Laughton, by PB Power, and represents their estimate of the costs of electricity generation in May 2008.2

Energy Source Cost of Electricity: p/kWh Wave 21.8 Tidal 12.6 Wind-oVshore 10 BFBC 7 Open Cycle Gas Turbines 7 1 IPA Energy ! Water Consulting, Severn Barrage Costing Exercise (March 2008). 2 Communication, PB Power—Costs include capital expenditure, fuel, operation & maintenance, general overheads and carbon emissions. Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG3

the economics of renewable energy: evidence 47

Energy Source Cost of Electricity: p/kWh Integrated Gasification Combined Cycle (IGCC) 6.4 Wind-onshore 5.6 CFBC 4.6 CCGT 4.2 Coal Plant 4.2 Nuclear 3.8

Precise estimates vary, and for comparison we provide the following chart illustrating another range of estimates (including a carbon price of 20/tCO2), again from a study prepared for REF by IPA Energy.

Figure 4: Levelised Costs Range of Costs of Energy Production 8% Discount Rate, Carbon Price €20/tCO2 Based on data from PBPower, DTI & VCG PowerTech 12

10

8

6 p/kWh 4

2

0 Gas Coal PF Onshore Coal Coal PF Offshore Nuclear Severn CCGT wind IGCC with CCS Wind Barrage

In spite of minor variations we note that estimates are generally in agreement. However, in relation to some renewables there is a great deal more to say, particularly in regard to balancing and overall system impact, the costs of which are contentious and hard to grasp. With regard to balancing the Committee will be aware of the United Kingdom Energy Research Centre literature review on this matter which reports a range of £5- £8/MWh of wind energy at a 20% level of penetration, and the recent Pyry study for BERR, which is more optimistic and based on the older Quantifying the System Costs of Additional Renewables in 2020 (2002), reckons on £1.2/MWh below 20% penetration (by MWhs), and £2.85/MWh above 20% penetration (by MWhs). The cost is clearly significant, rises with increased levels of renewables on the network, and should be borne in mind, but is not overwhelming. However, in relation to overall system impact there is confusion, and uncertainty, and we are particularly concerned about this. A good starting point here is the Pyry study method of calculating the cost of a renewable technology as being the cost of the renewable, broadly calculated, minus the cost of the conventional technology displaced (the “counterfactual” cost). We have already seen that this would in probably all cases result in a postive cost, but we are concerned that some methods are too generous. The Po¨yry study, for example, certainly seems to assume that if n GWhs of renewable energy are generated, then the counterfactual is the cost of the GWs of conventional generation that would be required to produce n GWhs at a notional load factor. Now for some technologies that would be correct. 1 GW of biomass generation would indeed obviate the need to construct approximately 1 GW of gas, say. Biomass is a fully despatchable technology, and has the potential for high load factor; its capacity credit is high. But for most other renewables technologies the capacity credit will be low. The Severn Barrage, for example, although predictable, would have a capacity credit of approximately 17% of its installed capacity, giving 1.5 GW from 8.6 GW installed. In other instances, notably wind, the capacity credit is very much lower. We know that European experience, in Germany and Denmark, is that wind power provides little capacity. Indeed, one of Europe’s leading energy analysts, Mr Paul-Frederik Bach, until recently the Deputy Director of Eltra, now Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG3

48 the economics of renewable energy: evidence

Energinet, the Danish Grid Operator, has said quite plainly that from a planning perspective wind should be attributed a capacity credit of zero. This matters since both National Grid and the UK government assume that roughly the square root of the installed capacity can be regarded as firm, with 25 GW giving 5 GW firm. Mr Sinden’s statistical work on wind speeds has been often taken as confirming this point, and showing that there is something rather special about British wind. REF obtained the same Met OYce data set used by Mr Sinden, and commissioned a major study modelling the power flow from 25 GW of wind power spread over the United Kingdom. This work, which is forthcoming in the journal Energy Policy, shows conclusively that the capacity credit of wind in the UK will in fact be little diVerent from that in Europe, ie extremely low, around 5%, and for very high penetrations much lower. This has a very significant eVect on the counterfactual cost calculation. Let us say that we aim to provide some 45% of our electricity from renewables, with some 35% points of that from wind power, some 135 TWhs. We would require some 52 GW of wind, assuming a load factor of 30%. That is a very large installed capacity, with a high capital cost, somewhere in the region of £30bn to £80bn, depending on the mix of onshore and oVshore. However, if it supplies little or nothing towards the firm capacity requirements of the UK its value, its counterfactual cost is simply the fuel saved. That saving could be real, but it may be dearly bought. If we were to add 52 GW of wind to the portfolio, we would still require a conventional, despatchable portfolio equivalent to the peak load plus an acceptable capacity margin, say upwards of 10%, which would give us about 70 GW. As the Committee will be aware the UK is currently faced with the necessity of rebuilding much of its conventional fleet, probably as much as 30 GW by 2020, some 40% of the fleet. That is in itself a large capital burden, just under £15 billion assuming the use of the least capital intensive technology, Combined Cycle Gas Turbines, and approaching £25 billion assuming a mixture of gas, coal, and nuclear. Furthermore, the total grid generation portfolio would comes to over 120 GWs, but its GWh market would remain unchanged. Consequently, the still indispensable conventional plant now has a greatly reduced market, which is uncertain from year to year, in other words it will operate at a much reduced Load Factor, and hence the cost of that conventional generation, the p/kWh it must charge, will rise, and it may rise very significantly, roughly between 1p/kWh and 2p/kWh, which represents an ongoing cost burden for the UK of upwards of £5 billion pounds per year. Furthermore, the sketch above assumes that this very large wind carpet will have unfettered access to the market, but it is clear that 52 GW will fairly often be generating at levels exceeding total UK load. Even if every other generator were curtailed, and this isn’t feasible for technical reasons, then the wind output would still need to be curtailed, reducing its load factor. In such a situation wind would either have to be rewarded for curtailment, or its generation fixed costs would increase. One might add that curtailment would also result in missed targets if their satisfaction had been premised on unfettered output. Our point here is that the cost of renewable generators is complicated, and much higher than might be superficially apparent. What we conclude from the analysis is that there are thresholds beyond which the UK should not go, and that these thresholds may be rather lower than is currently envisaged in various UK and EU targets. Getting the best from renewables, on this view, involves obtaining the fuel saving without increasing system costs beyond the value of that fuel saving. This is not an easy problem to solve.

What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage, and how do these costs compare to renewable generation?

The costs of CCS without Enhanced Oil Recovery are high (CAPEX may be, as per the chart above, between £1,250 and £1,500 per MW installed), and on a par with the superficial costs of renewables, but the resulting plant will have a high capacity credit, and their overall system impact costs will be very much lower. Given this, and other considerations, it is clear that the potential for application at scale is greater than that for renewables. If there is continuing political will at a global level to reduce emissions on a very large scale CCS is unavoidable. China and India combined will, according to the IEA, build 800 GW of new power stations in the next eight years, 98% of those power stations being coal-fired. We can be fairly certain that in spite of rising prices the world’s fossil fuels will continue to be fully exploited for the foreseeable future, and only CCS will be able to render this use almost free of emissions. We emphasise, however, that renewables will not be redundant in such a system, but combining broad deployment of CCS with a correctly proportioned renewables portfolio to save fuel and reduce overall system costs is an interesting problem, and deserves study. Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG3

the economics of renewable energy: evidence 49

What impact do these various forms of electricity generation have on carbon emissions?

While it is tempting to concentrate on the fact that a generator is carbon-free or nearly so at the point of generation it is important to recognise that just as costs should be seen from the system perspective, so emission levels need to be approached as a quality of the overall system, not of individual components. As has been pointed by Malcolm Keay of the Oxford Institute for Energy Studies in his 2006 book, The Dynamics of Power, the addition of large quantities of renewable generation may well have a causal influence on the technologies chosen by investors for the conventional portfolio, and it is conceivable, and perhaps probable, that the result would be a system that was less clean than it would have been if no renewables or a smaller or diVerently structured renewable component had been introduced. Get the renewables right, and the savings of both fuel and emissions could be welcome; get it wrong, and we may be worse oV than if we had done nothing. For example, at present, we would argue that the combination of the NETA/BETTA system and the Renewables Obligation has so distorted investment that the UK is plunging headlong into a second dash for gas (there is 20 GW in planning and pre-planning) exactly coinciding with fierce international competition for this fuel, resulting in high and volatile prices. We predict that the UK will probably, force majeure, be obliged, if at all possible (and there are doubts about the feasibility of this), to run obsolete coal plant with low thermal eYciencies and consequently high emissions per MWh. That said, there is a not entirely theoretical interest in taking the point of generation perspective, and asking how much carbon-dioxide would be saved when 1 MWh of renewable electricity from wind, or biomass, or tidal energy is accepted by the grid. Putting aside the question of the carbon-footprint of the generation plant itself, which will vary enormously from site to site, there is real uncertainty as to what the emissions of the displaced MWh of conventional generation would be, partly because there must be uncertainty as to what generator is displaced at a particular instant, and partly because you don’t know what generators will comprise the future portfolio. If the generator is controllable, as biomass is, then it could in theory be paired to displace emissions from the dirtiest remaining generation sets on the network, say low thermal eYciency coal at 0.9 tonnes per MWh. If the generators are uncontrollable, then you have a radical uncertainty. You don’t know when it’s coming on to the grid, and you don’t what the future portfolio will look like. Government currently recommends using a current grid average emissions factor when calculating the savings of renewables, at point of generation, which is about 0.43 tonnes per MWh, about half the emissions of coal. But in the future it seems probable that uncontrollable renewables will run in tandem with gas plant, possibly very high eYciency gas plant, with emissions at around 0.3 tonnes per MWh. A point of generation calculation of this kind is useful only insofar as it provides a rough grasp of the cost per tonne of emissions abatement under any subsidy support mechanism or fiscal instrument such as a carbon tax. The answer to the question, then, is that the emissions savings from renewable technologies are to a surprising degree uncertain, whether examined at the point of generation, or, more appropriately at the overall system level. It is partly for this reason, and partly because of limitations on the scale of deployment, that we have for some time being developing the view that renewables should not be seen as the royal road to emissions saving, but rather as fuel savers. This is a subtle point, but one which has considerable importance for the design of policies to reduce emissions and facilitate renewables adoption. Simply put, they should be kept rigorously separate.

2. In 2006 the REF wrote that the Government “has not yet recognised the acute need for security of supply of imported fossil fuels” and that it “is naively sanguine about future fossil fuel prices and availability”. What are the implications of this for renewable energy policy? How do, and should, renewables fit into Britain’s overall energy policy?

Rising fossil fuel prices, and growing intensity of competition for these resources at any price, make the saving of fuel an extremely important activity in all sectors. The most important response to this need in the electricity industry will be the introduction of improvements in thermal eYciency, which will be a straightforward matter for the UK since we have some oldest and least eYcient coal stations in Europe, and in the diversification of the conventional portfolio with nuclear generation. However, renewable generation will support this strategy if correctly applied. But for this they must be team players, and the levels of deployment must not exceed certain thresholds determined by 1. technical sophistication, or lack of it, and 2. economic matters. That is to say, although we will get better at integrating variable renewables, perhaps through improvements in the storage of electrical energy, we mustn’t run before we can walk; and that while rises in fossil fuel prices make increased levels of renewables attractive it is important to avoid the costs associated with excessive adoption. Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG3

50 the economics of renewable energy: evidence

Domestic technologies such as Ground Source Heat pumps and Solar Thermal for hot water, have a very significant potential for cutting gas demand and reducing household expenditure, and might function as part of a gas depletion policy, a policy which in our view is badly needed. Transport is more diYcult. Realistically, biofuels are likely to remain a niche activity, extremely valuable where they are economically attractive, say in rural areas near the point of production, but the overall future of transport seems much more likely to be electric. To summarise, renewables fit into the UK’s energy strategy as fuel savers, and will be increasingly attractive if the price of conventional energy continues to rise.

3. The REF manifesto of 2005 stated that Government policy “asks more of renewables than can be reasonably delivered and is thus condemning the sector to failure”. Is this still the case and, if so, why? How much renewable energy can “be reasonably delivered”? It is not only still the case, but the problem has if anything intensified. The EU renewables targets propose that some 20% of Europe’s Final Energy Consumption (FEC) should come from renewable sources by 2020, with at least 10% of transport fuels being from renewable sources. For the UK this is rendered as a target of 15% of FEC by 2020. That would probably entail an enormous burden on the electricity sector, which might be required to produce as much as 45% (some analysts think more) of electrical energy (MWhs) from renewable sources. This would require extraordinary levels of renewables capacity, resulting in the 120 GW grid discussed in an earlier response, but since no one has any idea how to integrate such a vast fleet of uncontrollable generators even if this capacity is built much of its energy will be curtailed because the instantaneous output exceeds demand. If this occurs, the targets will be missed. Furthermore, to succumb to panic and require such a level by mandate will simply result in the adoption of sub-optimal technology, a very significant opportunity cost. While it is easy enough to see that the current proposed levels exceed our understanding and are unreasonable, it is much harder to determine what a reasonable level might be, partly because this will change over time as technologies improve, partly because the nature of the conventional portfolio into which renewables have to fit is hard to predict. This matter, amongst many others, leads us to suppose that it would be better to leave the correct level to emerge from the free action of market participants.

4. Last year Dr Constable said the present set-up of the renewables obligation—which requires electricity suppliers to supply a specific proportion of their power from renewable sources—“has been a disaster for the renewables sector”. Why is this and what do you think of the Government’s proposed changes to the scheme? Are there other changes to the scheme that you would like to see? The RO, which at present provides some 60% of the income of a renewable generator, is a blunt instrument providing hyper-profit for the least capital intensive ticket to the subsidy stream. Initially this was land-fill gas, a good technology and hardly in need of subsidy, and latterly it has been wind, and mostly onshore wind, a technology which is limited in scale of deployment, and if correctly sited doesn’t require subsidy. The RO then has narrowed development focus on to those technologies which least require support, and thus depleted the resources available for other technologies which are either in need of technical development, for example tidal stream, or are more capital intensive such as biomass. It has also created a perverse incentive for wind developers to install plant in locations where there is fundamentally little wind resource. For many years the wind industry has premised its output on a 30% load factor onshore, and this is routinely used in planning when stating benefits. But in fact over 80% of onshore windfarms fail to achieve this load factor (Professor JeVerson of the Metropolitan Business School will be presenting data to you on this point). The RO, then, has created permanent subsidy clients, and, this is critical, has encouraged the saturation of the available space for wind on the UK grid with underperforming plant. It’s diYcult to find anything positive to say about the RO except that the Government doubtless meant well in introducing it. We therefore welcome the current proposals to band the obligation, which will improve it, but we judged last year that such revisions should be seen as a step towards abolition. At present, with rapidly rising fossil fuel prices it seems to us that the RO may simply be needless and should be dispensed with immediately so that the renewable sector can respond freely to market incentive with innovation and broad- based experimentation. Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG3

the economics of renewable energy: evidence 51

5. You have argued that the Government should eventually abolish the renewables obligation. What should replace it? Do you support a feed-in tariff guaranteeing a higher price for electricity generated from renewable sources? How would such changes affect the investment plans of electricity generators, which are presumably based on the existing renewables obligation? As noted in response to the previous question, we are currently sceptical of the need for any long-term income support mechanism for renewables. If these infant technologies are not to be permanently infantilised they must be exposed to tempering fires of competition, and rising fossil fuel prices will provide the demand to draw technologies forward to prove themselves. With regard to the investment plans of electricity generators: while it would be embarrassing for Government to have to cancel the RO it would also prevent the waste of nearly £1 billion pounds a year, and the probable waste of some £30 billion by 2027. The government has a duty to the electricity consumer, a duty which over- rides any other considerations, and in any case the failure to correct a manifestly flawed system brings government into disrepute. Clearly, investment behaviour would change without the RO, but these changes are desirable and would in fact be beneficial for the consumer and for the long term future of the renewables sector. We enthusiastically endorse public expenditure to support energy research, particularly in the universities. R&D in the energy sector has been declining relative to other R&D for many years (50% in the last two decades, according to the International Energy Agency), and it is in the public interest to reverse this trend. We accept that there may be a case for the provision of capital grants to built projects. Since this has the merit of encouraging development without leaving the consumer or taxpayer with a long-term ongoing cost. Similarly, if government is determined to provide income support to renewables then this support must be strictly time limited, and for short periods, say five years. It must be clear to investors that the crutches will be kicked away, and that only projects that can stand up independently in the near term should be adopted. 6. How much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules on connecting capacity to the grid supportive of renewables? Very significant expansion of the UK network would be required to accommodate the levels of uncontrollable generation described above (50 GW of wind, for example). We know for example that Germany is currently looking at some 1,200 miles of new Extra High Voltage grid by 2020 to accommodate wind, at a cost of some £2 billion, with additional expansion and reinforcement in the medium voltage grids at an additional cost. More modest levels of renewables adoption would still entail significant grid expansion, and National Grid estimated in 2004 that this could be estimated at approximately £250,000 per MW in Scotland, some £50,000 to £100,000 per MW in England and Wales, with overall expansion costs in the region of £65,000 to £125,000 per MW installed. Ofgem in 2005 evidence to the Environmental Audit Committee referred to a cost of £300/ kW. National Grid’s 2004 estimate referred to a total cost of some £3.7 billion as being required for anticipated levels of wind 2020 (ca. 25 GW).3 Assuming £125,000 per MW installed, we can estimate that 50 GW of wind would require some £6.25 billion of investment. Estimating the eVect on electricity prices of such expenditure is a little uncertain, and it is not an area in which we have special knowledge, but one estimate of which we are aware suggests that for every £1 billion pounds of grid investment, electricity prices must rise by £3/MWh, so for £6 billion pounds of investment there would be an implicit standing charge of £18/MWh, which is a significant overhead.4

7. The REF has argued in favour of carbon capture and storage for coal-fired power plants. What measures, if any, would you like the Government to take in this area?

The processes required to capture and sequester CO2 are in themselves expensive, and they furthermore entail a thermal eYciency penalty on the power station (more fuel is needed to produce a unit of electricity). While the use of captured CO2 has an economic value when employed for Enhanced Oil Recovery, such uses will be necessarily limited. Storage in saline aquifers has no economic value. 3 Lewis Dale (National Grid), System Costs of Wind Generation, presentation to Ofgem discussion day, 24 May 2004. 4 We are grateful to Professor Michael Laughton for the following reasoning: Taking the recent cost estimates of the Beauly to Denny transmission line as an example the expenditure required is £190m, where the return on capital with depreciation, running costs and maintenance added, required a net annual charge to the consumer of £22.32 million pa. (“Overview of the Proposed 400kV Overhead Transmission Line near Beauly, Scotland”, Report by ICF Consulting, 3 August 2004). By this measure every £1 billion required for new transmission facilities is matched by an implicit standing charge of 0.3p/kWh. Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG3

52 the economics of renewable energy: evidence

Therefore, other things being equal, a power station equipped with CCS is a more expensive means of generating electricity than a similar power station without CCS. Unless there is legislation to compel or reward the adoption of CCS the market will not move towards its adoption. However, there is no reason why such legislation should not be successful. The emissions of Sulphur dioxide (SO2) have, for example, been successfully reduced by legislation requiring the reduction of this pollutant, which resulted in the adoption of costly equipment that also reduces the eYciency of the power station. Nevertheless, economic obstacles are highly sigificant, and would increase the cost of European electricity and thus degrade European industrial competitiveness unless other economies also adopted CCS. Thus while we support CCS as a means of reducing emissions (indeed it is unavoidable if global emissions are to be held in check) adoption is absolutely conditional on continued commitment to reduce emissions of greenhouse gases on a global scale. If there is no such co-ordinated global policy the UK would be better advised to spend the money on adaptation responses domestically and in granting overseas aid for such responses.

8. You have argued that the lack of support for offshore wind has been regrettable because this sort of renewable generation produces electricity close to centres of high demand such as London. In your view, was this lack of support likely to have been a factor in Shell’s recent decision to withdraw from the London Array offshore wind farm? Does Shell’s withdrawal call into question the economics of offshore wind farms? How much more support, from what kinds of alternative policies, would offshore wind require? We have no special knowledge of the factors underlying Shell’s decision in this case, but generally speaking we conclude that the Renewables Obligation has probably put the brakes on oVshore wind development in the UK. That said, the direct cause of Shell’s reassessment is probably subsidy intervention in the United States. Left to itself, domestically and internationally, the market would have invested in high wind sites, that is to say sites with expected Load Factor of greater than 35%, as a hedge against increasing fossil fuel prices. The precise quantity that would be wise for the UK is hard to determine, but might be somewhere around 10 GW, less than half the minimum load of 25 GW. At 35% load factor this would produce about 30 TWhs, about 8% of UK electrical energy generation. As noted above, we would not now support long term income support for such projects, but government could assist in many other ways, for example by taking steps to ensure that such developments do not come into conflict with national security considerations at sea.

9. How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? Should the Government be doing more to support the development of renewables in heating and transport? A gas depletion policy is badly needed, and renewables for heat could be particularly significant, both through biomass and ground source heat pumps. Indeed, they have that field pretty much to themselves, and would dovetail perfectly with other aspects such enhanced insulation. That said, we should recognise that GSHP would transfer some load from the gas grid to the electricity system. This doesn’t constitute an argument against GSHP, but it does serve as a reminder that is very hard to do only one thing, and we should be ready for these other consequences. Renewable heat development is particularly attractive in that it buVers the UK against rising gas prices at the point of consumption, at the level of the individual consumer, where savings can be passed on instantaneously. Renewables in the utility scale electricity sector, if correctly applied, could save fuel and mitigate against rising prices, but these savings would not necessarily be passed on quickly or directly to consumers, or indeed at all. If there is a question of prioritisation, then, yes, renewable heat is more attractive than utility scale renewable electricity. With regard to microgeneration of electricity, I’m afraid that we are sceptics. REF was a co-funder of the study launched yesterday by BERR and other partners, but we draw pessimistic conclusions from the results. Far from leading to the conclusion that mandatory targets for microgeneration would be wise, we see the costs as astonishingly high and the gains as very modest. Uptake of microgeneration of heat will be self-motivated, and needs little government help (0% VAT might help, however), but to mandate the microgeneration of electricity in the domestic environment will only drive in sub-optimal technologies at enormous expense. Renewable transport fuels are certainly interesting, but the scale of their application is modest (even 10% of final consumption seems economically stretching at present). Again, a government mandate seems unwise. Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG3

the economics of renewable energy: evidence 53

A consistent thread through our answers today has been that government shouldn’t be attempting to design renewables uptake. Our best chance of realising the benefits from renewables at reasonable cost is allow individuals, businesses, and corporates the liberty to select those renewables that seem likely to be beneficial for their own purposes. Government is not in a position to be able to judge this with any degree of accuracy.

10. How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? Emissions trading or a carbon tax would undoubtedly be preferable to the current income support mechanisms for renewables, for the simple reason that it would focus on the ends rather than means and would allow the market to choose the most eVective route to reduced emissions. A tax could also be fine-tuned from year to year, and removed if no longer needed.

System Load Factor and Generation Fixed Costs A Note 3 July 2008

John Constable,Renewable Energy Foundation It seems probable that in order to meet the EU 2020 target of 15% of Final Energy Consumption from renewables some a very heavy burden will fall on the electricity system. I estimate that this will be as high as 45%. If this quantity of of UK MWhs are generated from renewables, this is 45% of the market that is denied to conventional generators. However, the presence of a very large fleet of renewables delivers little firm capacity, with the result that the conventional portfolio is reduced by a modest degree only. Consequently, while it is necessary to maintain a quantity of despatchable generators, mostly conventional, equivalent to peak load plus a reasonable margin, these conventional generators will now be operating at low load factor, thus increasing their costs. The eVect of low load factor on generation fixed costs can be seen from the following chart produced for me by Professor Michael Laughton.

Chart 1

GENERATION FIXED COSTS (P/KWH) AND PLANT LOAD FACTOR

Generation Fixed Costs 14

12

10

8

p/kWh 6

4

2

0 0 0.2 0.4 0.6 0.8 1

Load Factor

At present the system load factor for the UK is approximately 0.6, entailing, as the chart indicates, a generation fixed cost of 2p/kWh. To deliver 45% renewable electricity would require a very large overall system, perhaps as large as 140 GW, consisting of about 71 GW conventional and 69 GW renewable, then Processed: 17-11-2008 19:09:09 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG3

54 the economics of renewable energy: evidence the portfolio we calculate that conventional load factor would fall to just under 0.43, with a generation fixed cost of approximately 3p/kWh, an increase of 50%. July 2008 Processed: 17-11-2008 19:10:15 Page Layout: LOENEW [SO] PPSysB Job: 408616 Unit: PAG4

the economics of renewable energy: evidence 55

TUESDAY 10 JUNE 2008

Present Lamont of Lerwick, L Moonie, L Lawson of Blaby, L Paul, L Macdonald of Tradeston, L Vallance of Tummel, L (Chairman) MacGregor of Pulham Market, L

Memorandum by the British Wind Energy Association 1. The British Wind Energy Association (BWEA) is the leading UK trade association in the field of renewable energy, with over 380 corporate members representing the large majority of the wind energy business in this country. Wind energy is the fastest-growing renewable technology in the UK, and it will make an increasingly significant contribution to our electricity supplies over the next decade and beyond. BWEA also represents the interests of the emerging wave and tidal stream energy sector, building on its experience in the development of oVshore wind. We therefore welcome the opportunity to submit evidence to the Committee on the subject of the economics of renewable energy.

2. How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries?

3. Renewable energy is already a key part of Britain’s overall energy policy, contributing especially to Government’s objectives for sustainable and secure energy supplies. We argue below that wind power in particular also strengthens the UK economy through providing energy at stable prices and by driving industrial development and employment. Renewable sources of generation, primarily wind power, are the only technologies capable of delivering large quantities of power in the next decade, a period that will see approximately one-third of our current generating fleet retire. Renewable energy is thus essential. 4. The binding EU target for 20% of the Union’s total energy to come from renewables, and the proposed UK share of 15% under this target, is also driving the sector up the priority list within Government. In the UK, 41% of our energy is used for heat, 37% for transport and 22% in the form of electricity. We are starting from a very low base of renewable energy use: the current UK share of 2% is mostly in the form of electricity generation, where 5% of our supplies are renewable, while renewable heating and transport fuels only make very small contributions to their sectors. Not only are contributions from biofuels and renewable heating small, the policy agenda to drive their implementation is much less advanced than for power, and so their growth will be slower than is possible in the electricity generation sector. From bases of well under 1% in both cases, the most that can be expected from each is 3–4% of UK energy supplies. Renewable electricity will therefore have to be contributing half of the target, perhaps 7.5%; given that power is only 20% of overall energy, renewable power will have to make up at least 35% of UK electricity supplies in 2020 if we are to meet our target, possibly more. 5. Government must therefore place renewables at the heart of energy policy, and we are starting to see evidence of this: we look forward to contributing strongly to the consultation on the Renewable Energy Strategy due shortly. However, Government must not repeat the experience following the Energy White Paper of 2003, where renewables and energy eYciency were given pride of place, but this was not followed by strong and consistent action to ensure the objectives were reached. 6. The experience in the UK and other countries underlines the importance of consistent and stable policy in the renewable sector. For instance, in the US, the key renewable Production Tax Credit (PTC) was switched on and oV in the early years of this decade, leading to a “yo-yo” market; in the last three years, the PTC has been consistently in place, leading to last year’s record installation of over 5,000MW of wind power, the largest amount ever installed in one country in one year. The experience from other EU states shows that stability of policy results not only in generating capacity but also manufacturing industry. The lack of consistent and predictable planning decisions, and timely grid connections, has masked the benefit of the Renewables Obligation, which has provided a clear market signal to developers. Consequently, the UK has not developed a thriving manufacturing sector in the renewable industry. Processed: 17-11-2008 19:10:15 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

56 the economics of renewable energy: evidence

7. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? 8. The main barriers to the deployment of wind energy are the planning system both on- and oVshore, and the grid system, both in terms of access and operational arrangements, and the strategic extension of the network to the areas of high potential. There is some question over the ability of the supply chain to deliver the necessary equipment, highlighted by the current mismatch between the global supply and demand for wind turbines, which is currently driving up prices for this equipment. However, a suYciently stable policy environment should result in manufacturers investing to meet demand, as has happened in other EU countries. 9. The main technical limit that is often believed to apply to variable sources of renewable electricity generation such as wind power is the grid’s ability to absorb large amounts of this power whilst maintaining reliability of supplies. However, the issue here is not technical but economic. To quote National Grid’s most recent Seven Year Statement: 10. “[T]he expected intermittency of the national wind portfolio would not appear to pose a technical ceiling on the amount of wind generation that may be accommodated and adequately managed. However, increasing levels of such renewable generation on the system would increase the costs of balancing the system and managing system frequency”.1 11. The UK Energy Research Centre has studied this issue in depth,2 and concluded that in order to maintain power quality, additional balancing plant with capacity equal to 5–10% of the wind generation capacity would be needed. Additional costs are attributable to the relatively low “capacity credit” that wind power has: this factor reflects how much wind power can be expected to contribute when demand for electricity is at its peak, and this is 20–30% of the nameplate capacity of the wind generators. Altogether, these factors add £5–8/MWh to the price of wind generated power. 12. The UKERC work applies to a wind penetration of up to 20%: beyond this is to an extent uncharted waters, but there are some studies which go further. The All-Ireland Grid Study,3 conducted by the Republic’s Department of Communications, Energy and Natural Resources and Northern Ireland’s Department of Enterprise, Trade and Investment, concluded that it was possible for renewables, primarily wind, to provide up to 42% of Ireland’s power without compromising reliability. Given the need for 30% or more of our power to come from wind in order to meet the EU target, then such studies need to be repeated for the UK situation to ensure that the required investment in balancing plant and grids can be identified and put in place in a timely manner. Since a high proportion of this wind power will be oVshore, there is the opportunity to combine the developments with high-capacity interconnectors with mainland Europe, which will greatly enhance our ability to absorb variable wind power, since we could export power when the wind is high, and draw on their capacity when it is low. 13. Onshore, there is a potential social limit for wind power in the capacity for our landscapes to accept large numbers of wind turbines in close proximity. This is necessarily a subjective judgment and it is not clear where such lines may be drawn. Developers will need clear guidance here if there is not to be unnecessary conflict.

14. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 15. It is important to start such a discussion by noting that when renewables become cost competitive depends on the costs of the alternatives. Were oil and gas prices, with carbon prices added, to dependably remain at current levels, then this point would be much easier to reach. Also, much of the current gap is not due to lack of technological advancement. For example, if the cost of capital were to be lower, then renewables would be more competitive as their cost structure is capital-heavy. Increases in scale of production would also help to bring down unit costs, though with the wind industry now delivering over 15GW per year globally, this eVect may be smaller in the future for this sector than for other renewable technologies that are earlier in their industrial development. 16. However, having said all this, it is clear that further innovation will certainly help bring down the cost of renewables. As R&D budgets, both public and private, start to match what has been ploughed into fossil and nuclear technologies, then breakthroughs are inevitable. So long as Government policies both in the UK and abroad are clear that renewables will be a significant and growing part of the energy mix, then this increase in 1 http://www.nationalgrid.com/uk/sys%5F08/ default.asp?action%mnch4 19.htm&Node%SYS&Snode%4 19&Exp%Y

the economics of renewable energy: evidence 57 expenditure is highly likely to follow. The question then really becomes how to introduce innovations eVectively into the marketplace: entry barriers are high, especially for relatively large-scale technologies such wind turbines or wave and tidal stream generators. Mechanisms must be in place to support early generations of new technology, which are almost inevitably higher cost than the well-tested plant in service. This is particularly apparent in the area of the marine renewable technologies of wave and tidal stream: lack of a suYciently generous long-term mechanism to bring these technologies into the market is holding back their development in the UK when we should be building world-beating industries in this sector. 17. Has Government support been eVective in leading to more renewable energy? What have been the most cost- eVective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariVs versus the UK’s present Renewables Obligation Certificate (ROC) scheme? 18. The primary economic support mechanism for renewable energy in the UK, the Renewables Obligation (RO), has been highly successful in incentivising development of new generation capacity, with over 15,000MW of onshore wind projects alone entering the planning system since its introduction in 2002. The reason this has not been translated into more than the current 2,000MW of onshore wind in service has been the slow and unpredictable planning system, and the diYculty in getting a timely grid connection. In such an environment, it is not helpful to compare the cost-eVectiveness of the RO with systems elsewhere, since whichever support mechanism the UK had chosen would not have resulted in the levels of build seen in Germany or Spain, since the other elements required for such growth were not in place. It is fair to say that with a feed-in tariV, less might have been spent overall since the fixed tariV would only have been paid to generators that managed to negotiate the obstacles. However, Government took a view when designing the RO that it wished to contain the cost through the buy-out and recycle system: certainly the result is that the system costs no more than a set amount, although it also means that it costs no less, however much or little renewable electricity is actually generated. 19. The RO as originally designed gave equal amounts to each unit of electricity generated, regardless of which technology was used. The new banding system, due to be implemented in April 2009, will give diVering amounts depending on the technology, reflecting the fact that they have diVerent costs; BWEA welcomes this move as it will encourage diversity in the sector and reduce the “deadweight” in the system at present. The reform package also includes regular reviews of the banding arrangements so that the ROC multipliers applied are appropriate given underlying power prices and cost changes for each technology. This will allow multiples to be adjusted down for new capacity over time, particularly as the rising price of carbon translates into higher wholesale power prices. In this way the RO may eventually be replaced by a single carbon mechanism, but it should be noted that this process will take decades. 20. Much comment is made about the relative merits of the RO and feed-in tariVs, with negative comparisons made between the UK and countries with feed-in systems. As noted above, however, the diVerences in deployment are not the fault of the RO, and if it were to be replaced by a feed-in tariV these other issues would continue to impede development while at the same time introducing large uncertainty into the UK market. This would result in a significant hiatus to build just when we need to accelerate deployment to meet our EU commitments, and it would have major impacts on investor confidence, thus having long-term repercussions on mobile international capital’s view of the UK as an investment destination. The UK is already seen as a diYcult market, and further policy change would heighten the sense of this country as “more trouble than it’s worth”. For these reasons, both BWEA and the Renewable Energy Association have unequivocally stated that it is vital to retain the RO, and indeed extend it beyond 2027 so that it can become the instrument to deliver the renewable electricity required to meet the EU target. 21. However, we need to maximise delivery of renewables at all scales, and the RO is not ideal for smaller, distributed generators, owned by individuals or companies for whom power generation is not their primary concern. It is also the case that current policy in this area has not been successful in encouraging investment in this kind of capacity, and thus new initiatives would be welcome. For these reasons BWEA supports the introduction of a feed-in tariV for small generators, though we acknowledge that this move requires careful consideration. This should not be used as an excuse to delay the introduction of such a policy unduly.

22. On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables? Processed: 17-11-2008 19:10:15 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

58 the economics of renewable energy: evidence

23. It is diYcult to be definitive about the amount of investment in the grid that will be required to accommodate high levels of renewable generation as it is not wholly clear how much of each technology will finally be required, and as importantly, exactly where it will be. The amount will be substantial, reckoned in billions of pounds, since we can be sure that much of the new capacity will be in areas with no or weak grids, especially in Scotland and oVshore. It is important to note, however, that the alternatives are not spend nothing on the existing grid or spend large amounts to connect renewables: as much as 60% of our aging infrastructure must be replaced in the next 5–10 years, and so the choice is large spending to give us a grid that looks like the one we already have, or a similar amount to give us a grid fit for the 21st century, that is, one that will accept large amounts of renewables. 24. While new lines will inevitably be required, much can be done with existing networks as long as the rules of operation are modified to reflect the characteristics of renewables, which can have very diVerent demands on grid capacity. Such changes can result in more generation capacity able to be connected without having to provide new transmission lines. Modifications to the technical codes that could implement appropriate rules are being considered, but more leadership is needed to ensure that these are incorporated into the system in a timely manner. 25. As well as grid management, the connection rules are not supportive, and consequently BWEA has championed the “connect and manage” approach for some years. In contrast to the “invest then connect” model currently in force, which requires the grid to be expanded to take all a generator’s output before it can be connected, under our model generators would be allowed to connect earlier on condition that they would be constrained if the grid became congested. These constraints would result in payments from the network operator to the generator, incentivising the grid company to make the grid capacity investments required to eliminate such payments. The Transmission Access Review (TAR) being run by BERR and Ofgem appears supportive of this approach, though it has been proposed before, without success so far. We are hopeful that the TAR will be diVerent, but it has yet to be proved that it will be so.

26. How do the external costs of renewable generation of electricity—such as concerns in the many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations? 27. Projects that have been undertaken to measure the external costs of energy production and use, such as the European Extern-E work,4 have generally concluded that such costs for renewables are very low, certainly lower than for all forms of fossil fuel use, and of the same order of magnitude or lower than for nuclear power. The dominance of climate change impacts ensures this result, which is only reinforced by the analysis in the Stern Review.5 These eVorts have not generally addressed diVerences in visual impact due to the extreme diYculty in putting a monetary value on such a subjective impact: while some would say that the visual impact of a wind farm was negative, others would place a positive value on it. In general, this issue is dealt with through severely restricting development in National Parks and Areas of Outstanding Natural Beauty, and rigorous assessment elsewhere. 28. However, we perceive that the planning system is not striking the right balance when appraising these impacts. If one accepts that mitigating climate change is urgent and imperative, then it should be given much more weight in assessing renewable projects than happens now: if it was given suYcient weight, wind developers in particular would see faster and more predictable outcomes to their applications. This is not to say that climate change trumps all other considerations, but it cannot be right that so many projects are delayed or refused on these grounds.

29. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the cost of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? 30. It is diYcult to comment on relative costs when fuel prices are as volatile as they are now, and when capital costs for all technologies are rising due to commodity price rises and production and skill bottlenecks. The capital costs of wind power, both onshore and particularly oVshore, have risen quite dramatically in the last three years, but this is also true for all other technologies. Cambridge Energy Research Associates produce an 4 externe.jrc.es 5 www.hm-treasury.gov.uk/independent reviews/stern review economics climate change/sternreview index.cfm Processed: 17-11-2008 19:10:15 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

the economics of renewable energy: evidence 59 index of power plant capital costs,6 which has risen by 130% since 2000, and 69% since 2005. While wind power has doubled in cost since 2000, nuclear capital costs have nearly tripled. Manufacturers in the wind business are investing to ramp up capacity and thus end the current excess of demand over supply; whether firms in the nuclear supply chain can do the same has yet to be fully established. Also, with interest rates likely to be diYcult to predict for some time to come, costs for capital intensive technologies such as wind will also vary. For such an untried technology as carbon capture and storage, costs can only be stated in quite a wide range: this is outside of BWEA’s competence. We note, however, that while the carbon cost would be mitigated through CCS, generators would still be exposed to the market price of coal, whilst also suVering a severe eYciency penalty in order to capture and store the CO2.

31. Having taken all these factors into account, a useful reference for the costs of renewable power generation is the work that Ernst & Young performed for BERR as part of the Energy White Paper process.7 This work is now over a year old, and since the factors aVecting costs are dynamic, the results may need to be adjusted in the light of this. The majority of the work is still valid, however. In addition, BWEA has commissioned respected analyst David Milborrow to summarise the current state of play regarding comparative generation costs: these are set out in the appendix to this submission.

32. There are some more subtle benefits that renewables, and wind in particular, bring to the economics of energy systems, and which are usually ignored. As a highly capital-intensive form of power generation, the “fuel” for which is free and thus having very low marginal costs, the cost of wind generation is essentially fixed at the point of installation, and is therefore highly dependable throughout the life of the plant. This forms a hedge against volatility in the fuel prices for other forms of generation, and consequently wind power should attract a premium over the expected levelised cost of coal or gas-fired power generation. This eVect was investigated in most depth by the late Shimon Awerbuch.8 In general, this “portfolio eVect” would justify paying in the order of 10% more for wind power than for other, more volatile forms of power production.

33. Yet more value can be ascribed to wind due to the “merit order eVect”. This occurs due to the fact that as an essentially zero marginal cost form of generation, if wind power is available to a network, it will be run in preference to any form requiring fuel. In the “merit order” that system operators use to dictate who generates, wind is thus at the top of the list. When it runs, it pushes out the capacity at the bottom of the merit order, ie the most expensive; the clearing price for the system is thus reduced and everyone pays less for power at that point. Spot prices have been observed to fall in Denmark and Germany when wind generation is highest on their systems, and research by German academics has estimated that this eVect results in savings to consumers of the same order of magnitude as the net cost of the feed-in tariV system in that country.9 Work needs to be done to calculate the impact of high levels of wind power on prices in the UK electricity market, but it will be significant.

34. The technologies of wind, wave and tidal stream have minimal associated CO2 emissions at the point of generation, and the embodied carbon costs resulting from manufacture and installation are recovered swiftly, within a year. Use of fossil-fired plant to balance the system when variable supplies of renewables are used does add to the emission of carbon, but as the UKERC work referred to above makes clear, this eVect is small.

35. How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of electricity consumption—transport and heating?

36. The main diVerence between renewable electricity and renewable forms of heat and liquid transport fuels is the diversity of power technologies as against the other sectors. This allows a wide variety of resources to be exploited, each with diVerent costs and benefits. Also, in order to get the best benefit from renewables, it is wise to match the resource to the use: biomass, since it is combusted, is best used in heat-only or combined heat and power applications, while the “kinetic” sources (wind, wave, etc) are suited to power generation. Renewable electricity can be used for transport in electric trains and cars, and also in heating, through heat pumps or even simple resistance heating when used as a top-up for highly-insulated houses. The comparison thus begs questions of which technology and which use, and it is diYcult to make generalised comparisons. 6 www.pressreleasepoint.com/construction-costs-new-power-plants-continue-escalate-ihs-cera-power-capital-costs-index 7 Impact of banding the renewables obligation: costs of electricity production, www.berr.gov.uk/files/file39038.pdf 8 Much of his work can be found on the website www.awerbuch.com. 9 See, for instance, The Merit-order eVect: A detailed analysis of the price eVect of renewable electricity generation on spot market prices in Germany, Frank Sensfuß, Mario Ragwitz, and Massimo Genoese, Fraunhofer Institute Working Paper S7/2007, www.isi.fraunhofer.de/e/working%20papers/merit-order-eVect.pdf Processed: 17-11-2008 19:10:15 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

60 the economics of renewable energy: evidence

37. If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? 38. The discussion in paragraph 4 above details why we believe renewable electricity generation will provide the bulk of the energy to meet the EU target, and wind power will be the main provider of that power. 39. BWEA believes that flexibility is essential if the EU target is to be met at reasonable cost, especially as the targets set for each member state were calculated by the Commission in relation to the GDP per capita of each country and not their renewable resources. The mechanism set out by the Commission in the draft directive, using “Guarantees of Origin” (GoOs) as “currency”, may be flawed, however, and BWEA is engaging with the UK Government and MEPs, in partnership with the European Wind Energy Association, in order to ensure that the flexibility mechanisms in the final draft are fit for purpose. 40. It is important that these flexibility mechanisms do not negatively impact national support mechanisms such as the RO, since it is clear that the large majority of the target will be met by local supplies of renewable energy. No-one should be under the illusion that any country in the EU can buy its way out of the renewables target by paying other states to do the job for it, since the target is so ambitious there will be few countries with “spare” renewables to trade with other countries, and the amounts over their own targets will be relatively small. To import large amounts of “virtual” renewables would also deny the UK the ancillary benefits of increased security of supply, stable prices and opportunities for industrial development and jobs. 41. We do see a key opportunity for voluntary “cluster” markets, where member states opt to open their borders, share their targets and harmonise their support mechanisms. We stress, however, that this should be voluntary. 42. We agree with the Commission’s proposals for imports of renewable energy from outside the EU counting towards targets only when it is associated with the physical import of the power, and that the exporting country also takes on a target of its own and sets up a GoO system. We are strong opposed to virtual import of certificates only, of any kind, from outside the EU.

43. How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? 44. A higher cost of carbon under the EU ETS would feed through into higher wholesale prices for power and thus a lower requirement for additional support from a renewables-only incentive scheme. As noted in paragraph 19 above, the RO as reformed under the current Energy Bill would have the flexibility to respond to increases in the carbon price, and slowly phase out over time. Eventually, a strong carbon price could result in there being no need for additional support, but it should be noted that support for renewable energy is not just for its carbon emission reduction benefits. The uplift provided by systems such as the RO also rewards the additional benefits of security of supply, new technology introduction, industrial development and rural economic regeneration that renewables bring. These are not reflected in the price of carbon.

45. What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? 46. BWEA is not qualified to comment on this question.

APPENDIX

WIND ENERGY: CURRENT GENERATION COSTS—COMPARISONS WITH THERMAL SOURCES 1. It must be emphasised that all fuel and commodity prices are rising steadily, so future prices are diYcult to predict. 2. Onshore Wind energy prices fell steadily until around 2004 and then rising commodity prices, plus a shortage of wind turbines, lifted prices. By the end of 2007 average wind turbine prices were just under £800/ kW and the average installed cost of wind farms was about £1,050/kW. (Milborrow, 2008). Recent contract prices for wind turbines are slightly higher, probably reflecting higher commodity prices. Ernst and Young (2007) suggested £1,089/kW was a realistic mid-range price for complete wind farms and this still appears valid. Processed: 17-11-2008 19:10:15 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

the economics of renewable energy: evidence 61

3. Operation and maintenance costs vary widely, but this is partly due to the fact that transmission costs, plus local taxes are sometimes included in published data, sometimes not. The total cost has been set at £41/kW, again following Ernst and Young. 4. Indications are starting to appear that the recent steep increases in commodity prices will also feed through to installed costs of gas and coal plant. Power UK (2008) reports that installed costs for CCGT in the UK may now be approaching £700/kW, and for supercritical coal plant with flue gas desulphurisation are now around £1,500/kW. 5. In 2007, the average price paid by UK electricity generators for coal was £41/tonne. Since January 2008 world prices have moved upwards. For example, the price of Central Appalachian Coal futures has almost doubled (to $100/ton) and power station coal for Canada is now reported “to be hovering around $120 to $125/tonne”.10 As coal prices are on a rising trajectory, a near-term price of £50/tonne—in the light of this recent American, Canadian and other data—seems realistic. 6. In 2007, the average price paid by UK electricity generators for gas was about 58p/therm. (BERR). Gas price futures are very volatile, but 1 year ahead, are in the range 60–72p therm on both sides of the Atlantic. 60p/therm is a conservative estimate. 7. The capital costs of nuclear have risen due to increased commodity prices. There is a range of figures on the World Nuclear Association website and £3,000/kW (including interest during construction) is an approximate median figure. This is roughly 50% higher than the figures quoted at the time of the Energy Review, and is based on hearings currently in progress in the United States. It is assumed that these will be reflected in European costs. 8. Table 1 summarises generation cost estimates based on the figures quoted above. Additional data have been drawn from the supporting documentation to the Energy Review and the Energy White Paper. A 20 year economic life has been assumed in all cases, together with a 10% cost of capital. The table also includes the “cost of carbon”, assuming a carbon dioxide price of ƒ27/tonne.

Table 1

COMPARATIVE GENERATION COSTS, ALL IN £/MWh

Technology Net cost Cost with CO2 Comments Gas 55 63 Based on 60p/therm; may be conservative Coal 50 68 Nuclear 60 60 Uncertainty range is wide Wind 62 62

9. These are all “mid range” costs and both higher and lower estimates can be found. In the case of the wind, higher construction costs are often linked with high wind speed sites, and so the variations in generation cost are perhaps lower than might be expected. 10. At present, therefore, it appears that mid-range wind energy generation costs are roughly on a par with those of gas, coal and nuclear. However, that does not provide an argument for the abolition of the Renewables Obligation, simply because fuel and carbon costs into the future are uncertain and so it would be diYcult to assemble a “bankable” contract on the basis of these fossil generation costs. It should also be noted that the construction of wind farms on a broad range of sites (some with low wind speeds and therefore higher generation costs) is also facilitated by the Obligation. 11. The additional costs of carbon capture and storage have not been included in the analysis, as they are somewhat uncertain. Inspection of the data in the DTI 2006 Energy Review suggests that the generation costs from gas and coal would increase by at least £12–15/MWh. 12. It should be noted that the recent rises in commodity and fuel prices mean that these prices have, of necessity, been synthesised—with the exception of wind. It may be noted that Hydro-Quebec has recently accepted 15 bids for a total of 2,000MW with an average price of about £54/MWh, and the installed costs are fairly similar to those in the UK. The prices probably reflect that developers in Canada are oVered a fixed price and so a discount rate lower than the 10% used by BERR is probably appropriate. 10 www.thespec.com, 21 April 2008. “Canadian coal prices will impact consumers”. Processed: 17-11-2008 19:10:15 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

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13. This exercise highlights the diYculties in making comparisons between technologies. Prices for wind, which has short construction times, are virtually fixed once the plant is being built, as the technology is capital intensive. The same does not apply to coal or gas, or even to nuclear. The latter is also capital intensive but will the prices currently being quoted still hold 10 years from now, given that the prices of steel, copper and other commodities are rising rapidly? To level the playing field, one can project the price of wind, say, 10 years hence, but then the same problem arises. For this reason, the Association feels that future projections could be misleading and would simply note that there is a range of projections for wind energy generation costs in the future, some of which suggest they will stay level, while others suggest they will fall. Commodity price rises apart, there is further scope for cost reduction as manufacturers are continuing to improve their productivity and the development of larger wind farms realises useful economies of scale. 14. Variability. National Grid produced estimates for the costs of additional balancing services required for wind energy some time ago, and suggested these were about £2.4/MWh of wind at 10% (energy) penetration level, rising to £2.8/MWh at 20% wind energy. It is understood that National Grid now updating these figures. Since they were produced, the prices reserve services have risen—in line with wholesale prices—by about 100% and so a similar increase in the “costs of variability” may be anticipated. As the wind energy penetration level rises, no additional thermal plant needs to be built—contrary to popular opinion. However, the amount of thermal plant displaced by the wind becomes progressively less. Using NGT data again, 8,000MW of wind will displace around 3,000MW of plant and 26,000MW of wind will displace around 5,000MW of plant. However, 26,000MW of wind will displace the energy corresponding to about 8,000MW of plant and so the load factor of the remaining thermal plant is reduced. This is where, at high wind energy penetration levels, some additional costs are introduced. 15. To deal with this issue and derive estimates of the total extra costs of introducing wind energy into the UK electricity network, an analysis was completed in 2003 that took all the relevant factors into account (Dale, Milborrow, Slark and Strbac, 2003)—referred to subsequently as the “Power UK” study. A system with 20% wind was compared with an all-gas system. This suggested that the extra cost to electricity prices with 20% wind would be around £3/MWh. 16. Since the Power UK analysis was published, the price of wind turbines—which had been falling steadily for about 20 years—started to rise, largely due to increased prices of steel, copper and other commodities. The estimates in the paper for 2020 prices are now out of date but so, also, is the corresponding price of gas, which has increased by a factor of about three, but the principles behind the analysis are still valid. 17. Nuclear intermittency. Although attention tends to be focused on the variability of wind energy, it should be noted that the need to safeguard the system against the possibility of a “trip” at Sizewell B. power station (the largest single unit on the system) often has a strong influence on the amount of reserves that are held by the System Operator. If the size of the new nuclear power stations under discussion means that larger units are commissioned, then additional reserve holding costs will be incurred by the System Operator. NGT has estimated that these additional costs could be up to £150 million, depending on the size of the units. (Power UK, 2007). In this case the additional holdings—and costs—of reserve for wind might be lower than the figures quoted above. June 2008

References Dale, L, Milborrow, D, Slark, R and Strbac, G, 2003. “A shift to wind is not unfeasible”, Power UK, issue 109 (March 2003). Ernst and Young, 2007. Impact of banding the Renewables Obligation—costs of electricity production. Supporting documentation for the Energy White Paper. Milborrow, D, 2008. Generation costs rise across the board. Wind Power Monthly, V24, No 1. (January 2008). Power UK, issue 165 (November 2007). “National grid warns of cost of new nuclear build”. Platts. Processed: 17-11-2008 19:10:15 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

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Examination of Witnesses Witnesses: Mr Philip Wolfe, Chief Executive, Renewable Energy Association; Ms Maria McCaffery, Chief Executive, British Wind Energy Association; and Mr William Heller, Chief Executive, Falck Renewables Limited, examined.

Q135 Chairman: Welcome to Mr Wolfe, Ms external costs do not apply to renewables. Therefore, McCaVery and Mr Heller. Thank you for coming while, if you like, traditional accounting shows along this afternoon and sparing some time to be renewables to appear comparatively expensive the with us. I am always asked to make sure, if you can, gap is overstated because of the externality eVect, the that you speak up and reasonably slowly so that we gap is narrowing because of the way in which can have a reasonable recording of what is going on. traditional energy costs are travelling. While there is I do not know if there is anything that you would like no absolute answer to your question, certainly the to say by way of introduction. If you wish to do that, balance is moving in the direction towards kick oV now otherwise we will start the questions. renewables and making renewables increasingly Mr Wolfe: I think you know who we are and why we viable for a wider and wider range of applications are here. We are very happy to answer your even without the externalities. questions. Mr Heller: There was a very broad study done on this question in Germany using data from 2006. They did Q136 Chairman: Excellent. Perhaps I can start with the calculation of the total cost of bringing a fairly general question. How do the costs of renewables on to the system and then compared it to generating electricity from renewables compare to the avoided supply costs of alternatives and added all fossil fuel and nuclear generation? What are the the external costs. Essentially, the conclusion there current estimates for the costs of what you might call was that when you take direct costs and external costs “greener” fossil fuel generation with carbon capture the cost of renewables was basically nil to the entire and storage, and how do those costs compare with German system. That was a study done in 2006 renewables? looking at all renewables brought on to the system. Mr Wolfe: Shall I kick oV and I am sure my colleagues will want to join in as well. Firstly, it is Q138 Chairman: But if we are looking at increasingly hard to answer that question because we comparisons with nuclear and carbon capture and would suggest that the costs of renewables are quite storage, and you are saying they are uncertain, how well-defined and quite stable, whereas the costs of can you be dogmatic, if you like, about saying they certainly fossil fuel generation is becoming are overstated on the diVerences between the two? increasingly uncertain and less stable, and the costs of Mr Wolfe: One can be dogmatic about that because nuclear are still really open to question. The other the traditional accounting cost for fossil fuel issue, of course, that has to be borne in mind is that generation does not have any allowance for the costs on the costs of renewable generation, broadly of emissions. Obviously those costs are starting to speaking when you install the system you are creep in under the Emissions Trading Scheme but, basically meeting the entire costs of that system at the broadly speaking, until the cost of carbon reflects the time of installation, there are not hidden costs related costs that would be incurred in totally removing that to renewables in the same way there are the hidden carbon from the generation you are still not really costs of things like emissions that relate to fossil fuels. getting a true view of the cost. The cost that you see for a renewable generator is broadly speaking the total cost, whereas— Q139 Lord Lawson of Blaby: I would like to ask you a follow-up question on what the Lord Chairman has Q137 Chairman: Can I just stop you there. When been asking you. You mentioned a moment ago you are talking about total cost do you include the about the European Emissions Trading Scheme. Can knock-on costs so far as standby generating power is you say how changes in the cost of carbon via the concerned to deal with intermittency? Do you include Emissions Trading Scheme aVect this question of the any costs that may come about from the modification relative cost of renewables and other sources of of the grid? energy? In particular, would a more eVective trading Mr Wolfe: Costs related to modification of the grid scheme remove any need for any other kind of normally are included within the project costs. The support for renewable energy? costs of standby generation, were it needed, usually Mr Wolfe: That is a very important question. A key are not. Having said that, standby generation, issue under the Emissions Trading Scheme would be certainly at the levels we are at today in the UK, is not the extent to which it provides a long-term pricing. generally needed. The point I was trying to make was The problem with the present scheme is, of course, there are external costs related to both fossil fuel the durations are relatively short and, therefore, for generation and nuclear in terms of the legacy eVects investing in infrastructure which has a life of several of both those forms of generation whereas these decades, like the renewable generating station or, Processed: 17-11-2008 19:10:15 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

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10 June 2008 Mr Philip Wolfe, Ms Maria McCaffery and Mr William Heller come to that, a gas-fired generating station, it is very Q142 Lord Lawson of Blaby: I understand that wind hard to factor in the cost of carbon because the cost cannot compete, but what I am asking is how much really only has visibility up until the end of the will it have to go up to enable it to compete? current EU ETS trading scheme. Mr Heller: At the current prices it can compete. Mr Heller: If I could answer that in a slightly diVerent way. The current support mechanisms for renewables Q143 Lord Lawson of Blaby: It can or cannot? are there really to allow renewables to compete with Mr Heller: It can compete at current market prices. fossil fuels whose current pricing do not reflect all their external costs. If one was to take all the external Q144 Lord Lawson of Blaby: So, therefore, you do costs from fossil fuels, renewables could be quite not need any subsidies or assistance from the eVective. We would like nothing more than a government at all then? completely level playing field but, unfortunately, that Mr Heller: Well, we are at $125 oil and ƒ27 for would add huge costs. If one was to charge fossil fuels carbon, so if that was to fall we would require the the full costs on a societal basis then cost to the support mechanisms. customers would rise enormously, and that is why we are basically working on a renewables mechanism. Q145 Lord Lawson of Blaby: So it cannot compete otherwise you would not require the support mechanisms. Q140 Lord Lawson of Blaby: You can get any Mr Heller: It competes at a price level. answer you like that way because the societal cost of emissions you believe is purely conjectural, so you Q146 Lord Lawson of Blaby: Finally, if I can put it can pluck any figure out of the air and make it do in a slightly diVerent way, which is slightly more plain whatever you want it to do. English, how much would the price of oil and gas and Mr Heller: The Germans did take a shot at it using coal have to rise to make wind power competitive their own 2006 data and they calculated that the total without any government assistance of any kind, no remuneration paid to all renewables in 2006 in Renewables Obligation, no feed-in tariVs, nothing? Germany was ƒ5.6 billion. The avoided costs were How much would these fossil fuels have to rise in conservatively estimated at 2.3 billion and the price to enable wind power to compete on that basis? avoided external costs were calculated at 3.4 billion, Mr Heller: I am sorry, I do not know. making the entire system more or less a wash. Q147 Chairman: If you want to drop us a line that would be very useful. Q141 Lord Lawson of Blaby: It would help if you Ms McCaffery: My Lord Chairman, we could were to send us this German study and we could certainly do some work on this and report back. study it ourselves and see whether we feel that it helps. May I come to this issue, which is quite an Q148 Chairman: That would be useful. important issue, from a slightly diVerent angle? Ms McCaffery: If I may, I would like to supplement Leaving what you call the societal costs of emissions the answer to your original question and I think it to one side, forget it for the time being because there might be helpful to Lord Lawson as well. We are is another way of looking at it anyway, apart from the perfectly well aware that the price of oil is extremely fact it is highly conjectural you could say this is not volatile at the moment, I think yesterday it was so much a cost, this is for the benefit of not having trading at $137 a barrel. Taking that it were possible carbon energy on the other side of the equation. In to forward purchase, say for 10 years, you could your judgment, how much would the cost of carbon work on the basis of $100 per barrel. If we also then have to rise to make wind power genuinely took an average of ƒ25–30 per metric tonne of competitive, that is to say without any government carbon dioxide and factored that into the equation, assistance of any kind and without factoring in any on that basis, to answer your initial and basic emissions, just wind generation compared with question about comparative cost, wind energy is carbon generation? How much would the cost of cheaper than fossil fuel generation. It is marginally carbon have to rise? cheaper than nuclear powered generation, and Mr Heller: It would have to be the cost of carbon plus carbon capture and storage on the same basis is the avoided costs which would basically be natural estimated to be a fraction more than twice the cost of gas-fired generation. So, with current natural gas wind electrical power generation. prices priced oV of $125 oil plus the current market price of forward selling emissions credits of around Q149 Lord Lawson of Blaby: May I add something, ƒ27 per tonne, wind can compete against that. The because you very kindly agreed to the Chairman’s issue is going to be the volatility in both of those request to put in a paper in answer to the question, if numbers. I may just define slightly more clearly what the Processed: 17-11-2008 19:10:15 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

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10 June 2008 Mr Philip Wolfe, Ms Maria McCaffery and Mr William Heller question is. The question is not about the generation at a point where we have to make the decision and the of wind power and electricity from a single generator. investment commitment for the new grid Ms McCaffery: Quite. infrastructure to be designed and implemented for modern energy. It will need to increase in capacity by Q150 Lord Lawson of Blaby: It is about a system approximately 50 per cent or to replace like-with- which brings in the back-up question. like, which we do not regard as a sensible way Ms McCaffery: We were anticipating a question on a forward given the situation regarding security of back-up power station. supply and the clear intention to increase the Chairman: If you want to drop us a line and include contribution from renewable sources as we go the back-up, that would be very useful. I think Lord forward from 2020 and beyond. Paul has a follow-up and then Lord MacGregor. Mr Heller: Might I also add that under the existing Lord Paul: As an addition, when you send us these system the balancing mechanism does charge all wind figures will you take into account that the renewable generators a fee for the potential intermittency, so we energies costs also keep escalating with the oil price, are currently paying for it under the existing system. et cetera, otherwise it is not a proper comparison. Mr Wolfe: Could I make one other point on intermittency as well, and that is it is often overstated because one assumes that there is only one single Q151 Lord MacGregor of Pulham Market: Still on source of generation, and that is wind, and it is wind power and on the back-up, how would you mostly in the same location. Obviously the eVects of handle the problem of intermittency? For example, is intermittency can be mitigated in part by a well- reliance on fossil fuel plants to back up wind farms distributed mix of renewable generators, even a unavoidable or are there other measures that can be distributed mix of just one type such as wind power taken? Just one other question on wind farms. There all around the country because it is very often that the was this major announcement by the Government on wind may not be blowing in one part but it is in oVshore wind farms last week. What are the another. Similarly, it can be mitigated by a broader implications in terms of linking the grid and the mix of diVerent renewable forms of generation. Quite costs? Generally, would you like to give a comment often there is an oVset between the time when the on the implications of that announcement and how in wind is blowing and the waves are at their highest, for terms of all these do they compare with onshore? example, so a portfolio of wind and wave would fit Mr Heller: May I start with the back-up. All together well; a portfolio of wind, wave and tidal even generating capacity requires back-up. The current better. Then, of course, there are forms of renewables system that we have today runs at about 75 gigawatts that are available as continuous standby—biomass to cover a peak demand of 63, so regardless of the generation, bioenergy generation—which can stand technology back-up is always required. National behind as a back-up for wind in exactly the same way Grid conducted a study recently that estimates that that fossil can. 20 per cent of wind power can be accommodated into the existing system without any additional back-up investments. There are parts of Spain and Germany Q153 Chairman: While we are on this, are there any which have wind providing well in excess of 20 per costs ever associated with too much wind rather than cent where they have determined that no additional too little? We generally hear about the anticyclone back-up has been required. So back-up is required when there is too little, but does storm force wind above a certain level but we are currently running at cause any problems? less than five per cent and, as I said, the current study Mr Wolfe: Typically wind farms are self-protecting, if said that no addition will be needed until we breach you like, they are designed to protect themselves at least 20 per cent. against over-wind. Yes, there will be cases where there is a very strong wind and a wind farm shuts Q152 Lord MacGregor of Pulham Market: The down to protect itself. question of oVshore? Ms McCaffery: The turbines are actually engineered Ms McCaffery: Grid access is a central issue in the to shut down above a certain wind speed. My realisation of this ambitious target. We were understanding is that in 30 years of onshore wind delighted, naturally, to see a specific exercise for a deployment in the UK there has only ever been one further 25 gigawatts to take us to 33, adding to the occasion of the turbine collapsing or failing as a eight that have come forward in applications in consequence of the force of the wind. Rounds 1 and 2. When we generate this electricity we have to bring it ashore and we have to get a connector Q154 Lord Lawson of Blaby: That is because it shuts through to the grid. The grid access issue is central to down automatically. the deployment of wind. Given that 60 per cent of the Ms McCaffery: They will shut down above 25 metres current grid infrastructure will have to be replaced per second, and they are engineered to do that. 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10 June 2008 Mr Philip Wolfe, Ms Maria McCaffery and Mr William Heller turbine collapse as a consequence, but that is one Q158 Lord Macdonald of Tradeston: The feed-in example in 30 years of onshore wind deployment in mechanism would expand the volume of renewable the United Kingdom. electricity but it would not necessarily be the most cost-eVective? Mr Wolfe: In that marketplace I think it would be the Q155 Lord Macdonald of Tradeston: 25 metres per most cost-eVective so, yes, it would increase the second, what is that in English? volume. It would, if you like, reach the parts that the Mr Heller: 56 miles an hour. RO does not reach and, therefore, increase the overall size of the market and be the most cost- V Q156 Lord Moonie: Ms McCaVery, your e ective way of reaching that particular market. The Association has argued for the Renewables RO has relatively high transaction costs, which is fine Obligation to be extended when it reaches the end of when you are dealing in bulk energy as a commodity its life. Do you believe that the Renewables but it is not really suitable for small scale generation V Obligation needs to be reformed and, if so, how? and that is why it is not a very cost-e ective Ms McCaffery: We believe the proposed reforms that mechanism for that end of the market. are going through the Energy Bill now are adequate. We need to be thinking now about what is going to Q159 Chairman: Do you have any views on the happen after 2020. At the moment it just stops dead. banding of the Renewables Obligation to favour These are massive investments and the investment technologies which are perhaps not so far developed terms are usually in excess of 15 years, so as we start as onshore wind, perhaps oVshore wind or others? moving from 2010 on to 2015 investors will be That could equally apply to feed-in tariVs. Do you looking very carefully at what we propose to put in have any views on that? place to replace the RO or plans to extend it past the Mr Wolfe: As Maria suggested, we are supportive of 2027 milestone. the current changes going through on the Renewables Obligation, including the banding proposal. Certainly the hope is that it will make Q157 Lord Macdonald of Tradeston: In countries oVshore wind a competitive and viable technology in like Germany, I believe, there are other forms of a way that it has not been under the RO historically. support like the feed-in tariVs which seem to That is very important. Similarly, one could have a guarantee a higher price for the electricity generated tariV mechanism that was banded. A tariV from renewables. What is the most cost-eVective mechanism because, as I say, it will be addressing a form of support that you have seen in other countries diVerent part of the market would probably also need or, indeed, the UK? to deal with a diVerent range of technologies that are Mr Wolfe: It is very much a question of horses for not really coming forward under the Renewables courses. Under the UK energy system the Obligation. One could even envisage it being Renewables Obligation is a mechanism that is structured so it could address renewable heat as well proven, bearing in mind that we have a very much as power generation. For technologies like more liberalised energy market than they have even photovoltaics, for example, which is not a bulk in most of Europe and the RO is specifically tailored renewable energy generator typically, it is a building to that. Our view, and BWEA’s view similarly, is that integrated type of generation, a well-constructed the RO is a mechanism that has served the UK tariV mechanism would suit that very nicely. market certainly for large scale centralised V generation very well. It is arguably less e ective for Q160 Chairman: Could that embrace carbon smaller scale generation and those organisations sequestration? whose main business is not energy supply, Mr Wolfe: I cannot envisage how a tariV would organisations like supermarkets, for example, who address sequestration because, again, sequestration may want to provide some of their own power is likely to be used within the bulk energy market, not through renewables or individual households who within the decentralised energy market. want to provide some of their own power through Ms McCaffery: The BWEA also supports the view renewables. The RO is not a particularly eYcient that a feed-in tariV would be highly appropriate for mechanism for them, it was never designed for them. small micro-generation and for the lesser developed For those users, potentially something like a feed-in technologies. In answer to Lord Macdonald’s earlier tariV could be more eVective. We do not feel there is question, we think there would be no diVerence. The any one single best option, it is a question of choosing RO is not costing any more than a general feed-in the options to suit the marketplace. We certainly do tariV. We feel the important point here is that the not feel that the Renewables Obligation should be time for making that choice was when the decision dismantled just because there are other mechanisms was made to introduce the RO in 2002. 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10 June 2008 Mr Philip Wolfe, Ms Maria McCaffery and Mr William Heller support mechanisms, it is the consequences of proposing to Ofgem that they allow National Grid to switching horse mid-race now that we have had the make appropriate investments now both in the way it RO and we have had it for six years and it has done is designed and also to trial connect and manage its job quite eVectively. It has brought 23,000 because this is a no-risk option and if in 12 or 18 megawatts of wind energy applications into the months’ time we found it was not able to work well planning system since it was introduced in 2002, we could consider other options, but it would not which is exactly what it was intended to do. actually cost anything to trial it right now.

Q161 Lord Paul: Is there anything you would like to Q162 Lord Paul: Would increasing the capacity of change in the rules about connecting renewable interconnection between Britain and the rest of sources to the electricity grid? Europe be economically viable, particularly if we are Mr Wolfe: There are lots of things we would like to relying more on electricity from renewable sources on do. It is likely that we will be obliged under the the Continent? Mr Wolfe: forthcoming Renewable Energy Directive from the I think that is highly questionable. Many EU to provide eVectively priority access to the grid of our European partners would cast their eyes very for renewables. This is not just priority access, if you enviously in our direction. We have a very high level like, for getting connected in the first place but of resource of renewables; we have the best wind priority despatch, in other words the energy system resource in Europe, the best wave and tidal resource would favour renewable generation first. Of course, in Europe, and actually there is no reason why we this is appropriate, it means you are getting your low should not be producing our own renewable energy carbon energy into the system first and using the high here. If one increased the size of the connector, it is energy carbon, the fossil fuel, as back-up. We are very quite possible that the Europeans would be wanting supportive of the concept of priority access. We to take our renewable energy back to Europe because envisage that it will need to be introduced as part of we have so much resource here. Mr Heller: the response to the new Renewables Directive. We Greater interconnectivity will always be also believe that a good way of doing that would be useful. It helps manage the system. It also addresses to change the way in which we manage the system some of the intermittency issues but in terms of net from the current approach to what is known as a exports, our renewable resources are the envy of connect and manage approach, in other words it Europe, so it is very unlikely that we would be a net enables new generators to connect to the system. importer in bulk. They are not constrained by the apparent capacity on the system, they are allowed to connect, and after Q163 Lord Paul: Given that we are so far behind, I that the national system operator will manage which cannot see us being able to supply the Europe, or the of the generators connected to the system are Europeans hoping they will get it from us. providing power at any one time. In theory, it would Mr Heller: Everybody else in Europe has very large enable you to over-connect to the grid capacity you targets to meet as well. Nobody is running ahead of appear to have precisely so that you can then manage their 2020 targets these days. intermittent renewables so you can provide priority Mr Wolfe: We are, as you rightly say, very far behind access to the low carbon renewables. but there are other countries that have shown very Ms McCaffery: The connect and manage initiative sharp increases in their renewable generation when that Philip just mentioned would be preferred over they have needed to do so, and we certainly have the the present arrangement which is based on invest and resources to enable us to do that. then connect, so they pay for the investment first and then connect. The reality of the situation is that if you Q164 Chairman: The Renewable Energy are a wind energy developer and you had consent Association has argued that the energy regulator later this week to go ahead and construct your wind Ofgem’s remit needs to change to help boost farm and applied for grid access today you are likely renewable electricity generation. What changes are to be given a date in the second half of 2018. Under needed and why? connect and manage you could be given a date much Mr Wolfe: The primary change that we have been earlier than that. The priority access means we would advocating is the alignment of Ofgem’s remit with the overcome the diYculty imposed by the non- priorities of energy policy. At the moment Ofgem’s discriminatory remit Ofgem imposed on the remit is primarily an economic remit, whereas energy transmission operators. If we balance these two with policy has now moved on to encompass not only the Government’s targets and this binding target to competitiveness issues but also energy security issues generate 15 per cent of all primary energy, which and environmental issues, and these are all relatively translates into at least 35 per cent, possibly more, of equally weighted within the energy policy. This our electrical power from renewable sources by 2020, creates a distortion because Ofgem’s remit does not we cannot do one without the other. We are match that. Ofgem does not have to deliver the same Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

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10 June 2008 Mr Philip Wolfe, Ms Maria McCaffery and Mr William Heller level of environmental results that the policy is Mr Heller: We would like to see the planning regime aiming for. It does not even have to deliver actually applied as written. The concept of buVer necessarily the same level of energy security the zones around special areas of beauty was— policy is aimed at. It does therefore create distortions like the one that Maria referred to earlier in terms of Q167 Lord Lawson of Blaby: This is an issue which Ofgem interpreting the rules in a particular way that is not confined to special areas of beauty. This is the does not enable the connect and manage approach to important thing. I know people want to talk about it be adopted in the UK when it has been adopted in but those are weasel words, words designed to almost every other country. We would like to see the obscure what the true position is, not to clarify it. primary remit of Ofgem being realigned to energy Mr Heller: To be very specific, we believe that if the policy and staying aligned to energy policy, so planning rules were applied as written, we would be Ofgem’s remit would have to reflect all of the perfectly fine with the planning process. The fact is priorities of energy policy, not solely the economic that people try to extend them to have small, one. We are very hopeful that the amendments minority, anti groups block development, despite the proposed in your Lordships’ House to the Energy Bill fact that if you apply the planning rules as written achieve exactly that. permits would be granted. As I said, we are perfectly happy with the planning rules as written; we would like them to be applied as such. Q165 Lord Lawson of Blaby: You mentioned the environmental considerations. Of course, as far as Q168 Lord Lawson of Blaby: You do not believe onshore wind is concerned, most people who live in they are being applied? areas where there is a projected wind farm consider Mr Heller: No, I do not. that to be an environmental outrage, as you well know, and they very understandably think that. Q169 Lord Lawson of Blaby: Why do you think There is clearly a very high societal cost, to use the that is? term you used earlier. Does this study that you refer Mr Heller: Very often we will find that planning to, which you said refers to the societal cost of oYcers will basically state that they believe that the emissions, also deal with the societal cost of ruining visual aspects should be grounds to deny a permit the English countryside, for example—or the whereas when one looks at the area where these are German countryside, because it is a German study? going and look at general support in the area, one Mr Heller: There are a great number of safeguards would grant planning permission. We have planning built into the existing planning process to safeguard oYcers basically disregarding that and areas of special beauty, designated areas, national recommending refusal. parks. What we have found through research that has been done several times is that support locally for Q170 Lord Lawson of Blaby: But if planning oYcers wind farms generally runs at 75 per cent for, 25 per disregard it, there is an appeal process, is there not? cent against. Once a wind farm has been built in an Mr Heller: Yes, there is. It is incredibly expensive and area support actually goes up. As I said, there are takes a great deal of time to go through, so generally plenty of safeguards in terms of protecting the we get the right answer in the end but it takes years countryside, and they work quite well within our and years to get there, with unnecessary cost and planning system. unnecessary time delays.

Q171 Lord Lawson of Blaby: So you are confident Q166 Lord Lawson of Blaby: That in a sense is, if I that you do get to what you call the right answer in may say so, a slightly misleading answer because the the end? areas of special beauty in any country, whether it is Mr Heller: Generally, we do. Scotland or any other country, are relatively few and Ms McCaffery: In approximately two-thirds of the far between. That does not mean that the people in an cases we do. Planning guidelines for the UK stipulate area which is not actually designated as an area of quite categorically that visual impact alone is not an special beauty do not wish to preserve the sort of acceptable reason for refusing a planning application environmental attractiveness they have. They still but in fact that is too often the case, which then feel strongly about it, and there are plenty of obliges the developer to initiate the appeal process, problems that have occurred with planning inquiries which causes additional expense and additional which make it clear that that is the case. You are very delay. Our industry and the BWEA has great respect optimistic about this, as I understand it. Does that for the views of those for whom a wind turbine is not mean that you really therefore do not feel that there an attractive proposition. We are pleased that the is any need for any change, streamlining, or change of vast majority—and we are talking about upwards of any kind in the planning regime? 75 per cent—independently surveyed and assessed, Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

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10 June 2008 Mr Philip Wolfe, Ms Maria McCaffery and Mr William Heller are actually pro wind energy. So we are talking about consideration all the local flora, fauna, hydrology a minority, it all be it a vocal one. Our appeal is that and archaeology. All of that is taken into the counter-argument, the issues appertaining to consideration and is well documented in the security of supply, the climate change argument, fuel environmental impact assessment that every poverty and the potential for renewable energy to application has to file. redress all of these imbalances is a far more compelling case than visual impact alone. Q174 Chairman: Who does the research into possible impacts on people? Is it the industry? Q172 Lord MacGregor of Pulham Market: I suspect Mr Heller: These are generally done by expert that as we get more and more of these applications in consulting firms. not areas of natural beauty but areas of very attractive countryside—and it is not just the visual aspect—there will be more and more objections. The Q175 Lord MacGregor of Pulham Market: I would 75 per cent you refer to are supporting for the climate just like to turn to some of the questions in the paper change reasons and so on and so forth, but would be Mr Wolfe submitted. We have concentrated so far on arguing that there are other areas where this can be wind power but you point out that there is almost a done more eVectively, for example, oVshore wind complete vacuum when it comes to policies to farms. I would not be quite so derogatory of the promote other renewable sources such as solar, planning process as you are. water, ground and air source heat pumps, biomass Ms McCaffery: It is true we do rejoice in the fact that and combined heat and power. Would you like to say we have yet to have an oVshore wind application something about what you think their contribution rejected in the UK, and we hope that situation could be and whether it needs to be encouraged? continues, but right now, as we speak, 7,200 MW of Mr Wolfe: Their contribution would be very wind energy is stuck in the planning system for significant indeed. As you are doubtless aware, the onshore wind. If we had just two-thirds of that split of the current total energy mix in the UK is consented, we could contribute a further six per cent roughly speaking equally one third electricity to the renewable electricity targets for the UK. generation, one third heat, one third transport OVshore wind is not here today. The projects energy. The historical focus of almost all of our consented under round three are not going to go into energy policy into just the electricity sector is really construction until 2015. Between now and then, even only addressing a third of the issue. The transport if we just kept to the pattern of consent, which is sector is now starting to be addressed under the approximately two-thirds, we could still be making a Renewable Transport Fuel Obligation but the heat much bigger contribution. I think another thing to be sector is still largely ignored and its contribution can borne in mind here is that onshore wind energy has be as large as electricity. Furthermore, and of had 30 years of technological development. In particular relevance to your own deliberations, the Denmark recently, and I am sure we have cost of producing renewable heat, the incremental comparative examples here, I was shown a wind farm cost, is substantially lower than the incremental cost with 120 turbines on it and it is due for re-powering. of producing renewable electricity and it has been It is approximately 20 years old. That wind farm will estimated that one could achieve the same carbon be re-powered for the same amount of output by savings in renewable heat for about a third of the cost three wind turbines. A modern wind turbine is of the same carbon savings in renewable electricity. generating 40 times its 20-year-old predecessor. So This is (a) a neglected area and (b) a very rich area in we are not looking to populate the British terms of economic benefit. The issue, of course, is countryside with a density of wind turbines that that heat is a far more distributed energy source than would not enable you to walk between them. The vast is electricity. Electricity is largely centrally generated majority of the British public would not actually see and therefore it is quite easy to ring-fence that and to them most of the time. come up with policies that will address the majority of the market. Heat is of course a more distributed market but again, the type of policies, like the tariV Q173 Chairman: If you are in the business of sticking options that I referred to earlier on, could up TV transmission masts or mobile phone masts, prospectively be applied in this market too. you spend a fair amount of time and eVort in researching whether there might be potential adverse physical eVects on the people living and working Q176 Lord MacGregor of Pulham Market: You also nearby. Is this an issue for wind farms? say in terms of on site renewables—and we have Mr Heller: Yes, there are issues that we have to deal talked a bit about that already—that this sector must with when planning a wind farm. We have noise become a major contributor to the UK’s renewables limitations that we have to adhere to, we have safe footprint, perhaps one third of the 2020 target. This is operating distances, we also have to take into in areas like biomass boilers, solar, thermal and heat Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

70 the economics of renewable energy: evidence

10 June 2008 Mr Philip Wolfe, Ms Maria McCaffery and Mr William Heller pumps. Do you think enough is being done to the Caribbean were talking about these changes in encourage the use of those? terms of food security, food prices and all of that sort Mr Wolfe: Frankly, no. We see that market, again, as of thing. I think we are going to have this debate a large area of untapped potential. In fact, we think beginning to happen about the balance between the it will be very diYcult to meet our targets unless we two. I wonder if you have any comments on that? adopt far more positive policy measures, in particular Mr Wolfe: Yes. It is a very important aspect, the in the built environment. When I refer to built inter-relationship of biofuels and food, and indeed environment, importantly, we are not talking solely the inter-relationship of biofuels and the ecology; about residential buildings. The contribution that they are both relatively sensitive and clearly, as an can be made in industrial buildings is very substantial industry which has a primary objective to make the indeed. A contribution could be made by the environment better, not worse, it is very important commercial sector, by the supermarkets, by British that we respond to that and that we do not allow Telecom, by organisations like that, who all have biofuels and other forms of biomass that have very major energy needs, who all have relatively large adverse impacts or relatively adverse impacts to property portfolios, and they have the ability—and actually enter the chain. The UK, albeit as a many of them are addressing it—to produce their newcomer to this field, has a very good track record own renewable energy generation. That is a major in seeking to establish environmental standards for sector and if we do not come up with some more its biofuels, and that is an area where arguably we focused policies in that area, it will be very hard to lead the world. We are expecting that sort of meet our targets. approach to migrate beyond biofuels into other areas of biomass within the energy sector. We expect the Q177 Lord Macdonald of Tradeston: I just wanted to same high standards to be applied progressively into take you back to the question of the changed remit of biomass for electricity generation and biomass Ofgem. You want it broadened to take in areas like heating, which at the moment do not have any security and environment. At the moment it is an sustainability standards. There will be a level at economic regulator. To bring in security and which that eventually provides a constraint on the environment, which are very debatable and amount of biomass that can be employed within the sometimes ill defined areas, would that not make the energy sector. I should say we are a long way from board more political and perhaps the judgements that at the moment, and biofuels is getting a lot more more subjective if you gave it that extra, rather ill- than its fair share of the bad press. Take, for example, defined latitude? the issue of palm oil plantations contributing to Mr Wolfe: It does not have to, and of course, yes, they deforestation. Yes, palm oil plantations are in some are an economic regulator but the decisions that areas contributing to deforestation. However, only Ofgem takes aVect the actual way in which the energy three per cent of palm oil is actually used in biofuels; system operates. It is important that their remit, in the vast majority of it is used in the food market and doing that, is very well aligned to government policy. the cosmetics market, yet it is the biofuels industry So yes, it becomes a somewhat more complex that has really been the whipping boy for that entire decision-making process but nonetheless, if we do issue. So it is important that the standards are good, not align policy with regulation, we will continue to and equally it is important that the arguments are get the perverse outcomes that we are achieving at the better balanced with the facts than they have been in moment, indeed, the outcome where energy recent months. companies eVectively can only make more profit by selling more energy. We all understand that it is vital Q179 Lord MacGregor of Pulham Market: What I that we focus on ways of consuming less energy and mean by the law of unintended consequences is that yet the whole regulation system does not really allow suddenly biofuels has been perhaps only a part, the companies to do that and make the same level of certainly only a part, of the increasing wheat prices, profitability. maize prices and so on, but there is no doubt there has been a huge expansion in the United States, for Q178 Lord MacGregor of Pulham Market: I would example, of the use of land for maize for biofuels. I like to ask a question on the RTFO and biofuels. just wonder whether you feel you will have to pay There has always been a lot of support, not least in more attention to that aspect, the land use, the food terms of climate change, about introducing RTFOs prices, all these views about India and China and so and encouraging more use of biofuels in this country, on changing their food consumption, and that the and I have to declare an interest in that respect. Just balance may be changing in the debate? recently we have seen the law of unintended Mr Wolfe: Yes, the food and fuels issue is certainly a consequences coming into the debate. I was at a live one. We would expect it to progressively diminish World Bank meeting this morning in Parliament as the biofuels industry becomes more established where World Bank oYcials from Latin America and and becomes better at using energy crops that are not Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

the economics of renewable energy: evidence 71

10 June 2008 Mr Philip Wolfe, Ms Maria McCaffery and Mr William Heller directly competing with the food market, and so- longer-term planning cycle. At the moment decisions called second-generation biofuels, which are still are made on the basis of a seven-year planning cycle some way from reality but nonetheless will come, use but given that our present National Grid the woody part of the plant that is not used for food. infrastructure was put in place in the 1950s and is due It can actually be very complementary with food for renewal, we think we would get further-looking supply because you can use the part of the crop that decisions if they were able to take a wider view and is edible for food and you can use the rest of the crop then the investment impact and the sustainability for biofuel. We would expect, provided the biofuels factors would be easier to incorporate into the market is not strangled at birth by this, provided it is decision-making. allowed to expand, that the food versus fuel issue will progressively become less polarised. Ms McCaffery: I would just like to supplement very Q180 Chairman: Thank you very much. Thank you briefly the answer to one of Lord Paul’s earlier again for spending some time with us this afternoon. questions about the changes we would like regarding We look forward to your written additional Ofgem’s remit and the National Grid situation and submission. You have been very helpful. access. That very simply would be to encourage a Mr Wolfe: Thank you for inviting us.

Memorandum by Professor David Newbery

1. What are the key considerations for UK energy policy? How do and should renewables fit into Britain’s energy policy? Is their role likely to change between the medium term (to 2020) and the long term (to 2050 and beyond)? Answer In a liberalised market with regulation for the natural monopoly elements the main function of energy policy is to ensure clarity, consistency and rationality for Government intervention into the energy markets. This means addressing market failures where they arise, reducing uncertainty about future policy as far as possible, and supporting those activities that require collective action (those that produce public goods that would be undersupplied by the market, such as R&D). The two major market failures that are being addressed at the EU level are climate change and low carbon RD&D. Pricing carbon is critical for the former, and the only justification for renewables is that latter. Carbon pricing at present suVers from uncertainty about the future price, and that should ideally be reduced by, preferably, seeking an EU mechanism to place a floor under the current price (by withdrawing permits from the market) and possibly a ceiling (by auctioning)—see Q6 below. Renewables are dealt with in Q7. Reducing the cost and wasted time in planning is recognised as important. Ensuring that markets are transparent, competitive and eYcient is a task for the competition authorities together with regulators, and requires active collaboration with neighbouring countries over interconnectors and oVshore installation information management. There are also issues over market design that are addressed under Q4. Issues of fuel poverty are exacerbated by the particular way in which the RD&D support to renewables is charged to consumers, rather than financed as other public R&D is financed through the tax system. In a world in which electricity EUAs should be auctioned there is an obvious source of revenue, should one be needed, to finance that. Energy taxes are a disaster area, with little consistency, largely driven by short-term expediency. I have written at some length on that and leave copies of my article. Security of supply is best assisted by clarity of long-term price and policy signals, a proper balancing regime, and, if there are default risks, by similar arrangements that address credit market default risks. As a test of whether the system is fit for purpose, ask how the Rough fire would have impacted gas suppliers had it occurred at a less timely moment, and whether they have adequate incentives to contract for a suitably diverse storage portfolio.

2. Do liberalised energy markets provide the right incentives for investment to meet society’s needs? If not, how can the correct level of investment be encouraged? Answer This could be interpreted in two rather diVerent ways. The natural question is whether energy markets provide the right incentives for an adequate volume of investment in capacity, primarily generation capacity (transmission and distribution investment are separately incentivised by regulators). In short, will liberalised Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

72 the economics of renewable energy: evidence markets ensure security of supply? The second question is whether liberalised markets provide the right incentives for the right kind of investment—the right set of technologies in the right places. The first question is simpler, the second question is more complex. The answer to the first question is yes, under a number of conditions: — markets are transparent, competitive, and operate in a stable and predictable policy environment, — investors have eYciently priced access to the right infrastructure, — the risks (of shortage, price spikes, etc) are properly priced to those best placed to take action to reduce their cost (though balancing charges, storage prices, etc) and if those risks can be properly hedged through contracts, and — if planning is timely, predictable and rational. If so, then there is every reason to argue that energy markets, as with other markets for capital intensive products such as steel, aluminium, oil, coal, etc, can deliver at lower cost than alternatives. Most claims that they are not delivering adequate and timely investment are indirectly criticisms of the system of regulation, price control, arbitrary government intervention, unpredictable policy, or conflicts over objectives (sustainability, economics, national interest, and a dread of nuclear power, for example). The second question depends on whether market failures are properly addressed, where the market failures can come from the external costs of pollution, greenhouse gas emissions, and the public good nature of RD&D. Some of these are addressed below.

3. Professor Helm has said that the EU’s targets for renewable energy “require nothing less than a rethink of the structure of the energy sector, the role of system coordination, and the integration of generation, networks and supply” and that the Commission “needs to ensure a competitive investment framework”. How would you recommend this framework be created?

Answer I have argued at length at conferences and seminars that the current Transmission Access Regime is not fit for delivering the 30-40% of renewable electricity that the EU target implies for Britain; which, if largely wind, amounts to an installed capacity of more than 100% of peak demand. I have argued that the current Transmission Access Review is not taking a suYciently broad view of the problem, and the desirable enduring regime should most probably be nodal pricing (as in the North-eastern US and elsewhere), with contract coverage to adequately but not excessively protect incumbent’s legitimate revenue and cost expectations while confronting all new generation with a stable and diVerent pricing regime. I consider that the Balancing Mechanism is not best designed to handle the very large variations in wind output over time and space, at least without granting the System Operator very substantial powers to contract ahead and manage a larger fraction of dispatch in real time. Something like a pool system would be considerable superior to the current trading arrangements and balancing mechanism.

4. Do the UK’s electricity trading and transmission arrangements provide a suitable framework for an industry with a high proportion of renewable electricity generation?

Answer No—see previous answer.

5. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? Does the fact that the cost of renewable energy is likely to be less volatile than that of fossil fuels give it any competitive advantage in the market?

Answer I cannot comment with any professional knowledge on the exact costs, except to note that clearly the right carbon price should be included in those costs, and that the results are typically very sensitive to the interest rate chosen, and to the assumed future prices of fuels. Interest rates are increased if there is more uncertainty, particularly about future policy, and the economics of nuclear power would be transformed if they were to be appraised at, for example, the Treasury’s discount rate of 3.5% real. The same would be true for many wind farms, in both cases even more so with a stable and predictable contracted price for future electricity. I have Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

the economics of renewable energy: evidence 73 argued in a letter to the Financial Times that such generation might usefully be part financed by issuing debt linked to the price of domestic electricity. At present, the price of electricity moves closely with the price of gas, and the price of carbon is largely determined by the gap between the cost of generating electricity with gas or coal, so that investment in gas is almost automatically hedged, and coal is to the extent that generators are granted EUAs on the basis of new investment in coal—a perverse practice that fortunately we do not follow. Delinking the price of EUAs from the gas price, auctioning EUAs to the power sector, and stabilising or underpinning the price of carbon would make both renewables and nuclear relatively more attractive than fossil generation.

6. Professor Newbery has argued that a long-term carbon price is needed, and that the Government might issue long- term contracts to back up this signal. How would such contracts work in practice?

Answer

The preferable solution would be at the EU level with agreement about the range within which the EUA price should lie. If that could be agreed then one might set up a European Emissions Trading Bank that would be issued with some fraction (eg 15%) of member states’ EUA allocations once the National Allocation Plan has been agreed. The EETB would auction EUAs when the price rose above an agreed level (which would rise annually at the rate of interest, so as not to disturb the present market) and would use those revenues to buy EUAs when the price fell to the floor level. Profits would then be credited to MSs or to an RD&D fund. Absent such an agreement the UK could issue or sell one-sided or two-sided contracts for diVerence on the future EUA price to eligible customers (specifically low or zero-carbon electricity generators). One can imagine many possible contract designs for such CfDs, but perhaps the simplest would be that for every MWhe generated, the holder would have to pay the government the spot price of EUAs less the strike price of the CfD (eg 25 euros, or £20) (possibly a negative amount if the EUA price falls) times a deemed carbon content per MWhe (eg 0.8 if the aim is to back out of coal-fired generation).

7. Does renewable energy deserve any support, beyond that given by setting a price for carbon?

Answer

The aim of the renewables obligation is to stimulate the development of non-nuclear low-carbon technologies that are currently not commercial even with the current carbon price but which might become so, at which point the public good of RD&D will have justified itself. Requiring each MS to deliver a certain level of deployment is a neat way of burden-sharing the cost of the RD&D, but not necessarily the most cost-eVective. The test should be whether increasing deployment is likely to lower unit costs—which will depend on the maturity of the technology. Nuclear is fairly mature and has enjoyed massive past R&D subsidies. The Severn barrage uses mature technology and would teach us nothing. CCS on the other had is a clear candidate for such demonstration stage support.

8. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should policy be designed to promote such technological advances—and, if so, how?

Answer

It is hard to predict what may be possible, but there seems every chance that there might be as in the past, we have not devoted much research eVort in this direction, so there are likely gains to be made. The gains from making such breakthroughs could be little short of saving the planet, and so worth pursuing. How best to do so is less clear, except that the current systems are most unlikely to be the best, as they were not designed to deliver the most promising research ideas, only those technologies that are currently least cost. Ideally we need a method of evaluating potential technologies for future promise, of assessing the barriers that prevent them becoming commercial and how to overcome them, a means to best harvest the information about their prospects in ways that makes it available to those best placed to deliver the technologies, and a means of killing projects that look as though they are not going to deliver. Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

74 the economics of renewable energy: evidence

9. Do you believe that policy to support renewable energy has become too complex?

Answer Yes, new policies are being added to existing policies to address their flaws, most recently with the idea of banded ROCs to overcome the incentive to only go for on-shore wind farms. See below to 10.

10. Professor Helm has told the Prime Minister’s Strategy Unit that the Renewables Obligation is “seriously flawed”. Can it be reformed? Or should it be replaced, and, if so, with what?

Answer It should be replaced by a system of locationally and technologically specific and vintaged feed-in tariVs (FITs), or tender auctions for feed–in tariVs that would ideally reflect the least cost current method of delivering renewable energy at that location from the portfolio of technologies that our RD&D strategy deemed promising on the basis of learning about future prospects. This would also need either a reform to the transmission access regime or a clear set of criteria to determine the full cost of connection to each location, to be assessed along with the FIT for that location to determine the least cost system expansion plan. The advantage of FITs over ROCs is that there is no need to give inframarginal rent to incumbents or those in favoured locations, it reduces uncertainty and hence lowers the cost of capital and the entry costs, it eliminates balancing risk and hence lowers the advantage to incumbent vertically integrated electricity companies, and it can be shaped annually without creating policy uncertainty for existing ROC holders. 10 June 2008

Examination of Witnesses Witnesses: Professor David Newbery, Cambridge University and Professor Dieter Helm, Oxford University, examined.

Q181 Chairman: Welcome to Professors Newbery climate change would be the starting point, and the and Helm. Thank you very much for agreeing to question would be to what extent renewables reduce, spend some time with us afternoon and thank you, by how many parts per million, global climate Professor Newbery, for giving us some answers in change—not British emissions but global climate writing to our questions. I am not sure whether all change—and the answer is they make some members of the Committee will have digested it yet contribution but there are lots of other technologies but it has been very helpful. Do either of you or both too that make contributions. Nuclear power makes of you wish to say anything by way of introduction, contributions, improving the thermal eYciency of or shall we move straight into the questions? coal stations makes contributions, solar, et cetera. So Professor Newbery: We are happy to move into as far as the extent to which renewables have a role to questions. play, it is whether they are an eYcient way of achieving that climate change objective. So far in the Q182 Chairman: Perhaps I can start and aim this one UK they turn out to be an order of magnitude more first to Professor Helm. What do you believe are the expensive than some of the other alternatives. It is key considerations for UK energy policy? How do also claimed that renewables contribute to security of renewables fit into that policy? Is the role of supply. That is a highly contentious question. It is renewables likely to change between the medium true that there are some advantages of having home- term, say up to 2020, and the longer term to 2050 grown renewables compared with importing fossil and beyond? fuels from outside but there are lots of other ways of Professor Helm: The starting point is the objectives of improving security of supply. It would be perhaps energy policy, and these have shifted with the times best to increase the coal burn if security of supply was because climate change and security of supply have what you had in mind. It is very bad news for climate gone up higher on the agenda, whereas in the Eighties change but that is what you do for security of supply, and Nineties when we had excess supply and low long before you invest in renewables. On fossil fuel prices and less concern about climate competitiveness, it is hard to argue that renewables change, competitiveness was the main focus of have improved at least the price competitiveness of attention. We have those three broad objectives and energy produced in this country. So the question is: governments throw in extra objectives to that, like what do they contribute in terms of objectives? They reducing fuel poverty, along the way. Renewables: it contribute primarily to the climate change objective is important to ask what is the question to which they but there are other ways of achieving that and it is far are supposed to be an answer? You might think from obvious that they have a major contribution to Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

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10 June 2008 Professor David Newbery and Professor Dieter Helm make. It is also far from obvious that their seems to me incredibly important that you say what contribution should go up through time as you are going to do and then you achieve it. Saying technology change takes place, as carbon what you are going to do in a world where nobody sequestration and storage becomes available, as believes you are going to do it, indeed, including the nuclear power and other alternatives may be there to people who signed up to it, seems to me not to be a be had. It would be a mistake to think that the persuasive way of taking forward climate change contribution of renewables will be bigger in 20 or 30 policy. years’ time than it is now. That is not to say they do not have a contribution; it is simply to put it in the perspective of the overall energy policy objectives Q184 Chairman: Professor Newbery, do you share we have. the same view? Professor Newbery: No. I share some of Dieter’s concerns about the way in which we are pursuing it Q183 Chairman: We all understand that, given the but let us consider why it is important that Britain, in fairly low proportion of carbon emissions that come collaboration first with the European Union and from the UK anyway, what is done here may not then with the OECD and a broader range of have a major direct impact on climate change across countries, agrees to tackle climate change in various the board, but do you think there is anything in the ways. The most obvious and direct way of doing that argument that the UK should provide an exemplary is to price carbon to encourage people to substitute approach to encourage others to follow, given that, low carbon alternatives, but not all the world is going to the extent that there is a climate change problem to be part of the carbon pricing mechanism, and we ahead of us, it will require everybody to muck in and will need to develop technologies that at present are sort it out? not commercially viable in the rest of the world to the Professor Helm: We certainly have a serious point at which they do become commercially viable responsibility to address climate change, and we are elsewhere. So in addition to a climate change policy responsible for quite a lot of the past emissions that we need essentially a collective research and are up there in the atmosphere, so I would not in any development policy, a technology development way want to belittle the need for the UK to make its support system. There are many things wrong with contribution but I think one has to be extremely such things as the renewables target but it does have careful in policy terms. Let us remember what the the property that it devolves the responsibility for current Government’s policy is: it is precisely to developing technologies fairly equally amongst provide leadership. To do this they set the objective Member States. It is a very simple way of allocating in 1997 that they would domestically, irrespective of the burden of developing these lower-cost what anyone else did, reduce CO2 emissions by 20 per technologies. That does not mean that I think it was cent by 2010. They would do it through renewables a well-chosen target. I would have preferred a and energy eYciency and they would demonstrate technology target. I would have preferred setting that this could be done at extremely low cost and objectives about what we were trying to do, which is therefore particularly George Bush would sign up to to develop currently promising but not yet Kyoto. What we have done in Britain is demonstrate commercially viable technologies that could be that we cannot achieve the objective, that what we deployed elsewhere, and it is not entirely clear that have achieved has been at extremely high cost, and we the renewables objective is the best way of doing that. have not persuaded the Americans on the basis of If we were clear about the objectives, I think it is that. I agree we should show leadership and I agree entirely reasonable that Britain, along with other we should adopt a tight set of carbon targets but what Member States, and preferably a wider group of I think is most important is that we do not go around countries, should collectively contribute to doing wishfully promising that we are going to achieve this that. renewables target or that particular CO2 target in a Professor Helm: I agree with that. My view is not that way that just is not credible. To illustrate that point, we should not have a renewables target; it is that we we have happily signed up to the EU’s 20 per cent should have a credible one that there is a reasonable renewables target by 2020. That means that in this prospect we can achieve. It is not that we should not country we will have to probably increase wind on have a target. Fine, but 20 per cent as conceived by our electricity system to something like 35–40 per the EU by 2020 requires such a huge investment in cent from a current level which is below five per cent. the next 11 years as to be implausible that it might be That means we have signed up to increase sevenfold delivered. Therefore I think the target loses the very the amount of wind on our system in the next 11 credibility that David suggests would be useful to years. I do not believe anybody seriously thinks that have, because nobody believes that at the end of the is a credible commitment to make. If you really want day we are actually going to go to that level, so they to do something about climate change and you want are not sure what it is the Government can support a to persuade other people to do something too, it level to. Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

76 the economics of renewable energy: evidence

10 June 2008 Professor David Newbery and Professor Dieter Helm

Q185 Chairman: You seem to be talking about two Between now and 2050 who knows what technologies quite diVerent things, if I may say so. Professor Helm, will be available? In the 1970s one had no idea about what you are talking about is the current approach of the internet, biotechnologies and so on. The R&D the Government to the levels of renewables and side of this is extremely important and that is where emissions. Professor Newbery, what you seem to be the carbon price plays in. I would put no faith in the touching on is specific encouragement of the idea of the numbers 500 or 200 or 50 or whatever, and development of new technologies which have yet to indeed, I would go slightly further and say what that reach maturity. These are rather diVerent things. Can number is depends on what all the other supporting they be embraced within the same economic structure policies might look like at the same time. It might or do they need a diVerent approach? turn out to be much more expensive if governments Professor Newbery: No, they are very closely particularly pick winners in particular ways and so connected, because we very specifically have the on. We do not know the answer to that question. The emissions trading system to set a price for carbon, point is if we want to sign up to a target like that in and then we have a renewables target on top of that. 2050, it may be that the main mechanism we might If the sole purpose was to try and price carbon for want to use is the price of carbon, and we have to fossil fuel and therefore to protect and encourage allow the carbon price to move around according to renewables, and we thought there was no research how well we achieve that target, through R&D and and development benefit from that, we would not lots of other things as well as existing technologies, have needed an additional support mechanism, but like nuclear, like wind farms and so on. the fact that we have these two approaches suggests Professor Newbery: Perhaps I can respond in a slightly that there are two things we are trying to do. more encouraging way to Lord Lawson. If we take the $200 a tonne of carbon in 40 years’ time, that is Q186 Lord Lawson of Blaby: On the cost of carbon, about $50 a tonne of carbon dioxide. The current just following that up for a moment, the price is about $35 a tonne of carbon dioxide. That is International Energy Agency in its latest report, a very small rate of increase in the price each year. which came out at the end of last week, suggested that There is a lot of good argument that says whatever to meet the target of stabilising the global the price is, it probably should rise at the rate of temperature by a further two degrees Centigrade by interest over time. I am not quite sure what sort of 2050 would require an increase in the cost of carbon rate of interest you would like but that number, those on the basis of existing technology to $500 a tonne, two end points, would encompass an extremely low which is, of course, a staggeringly high figure. Does rate of interest. that sound about right to you? Have you studied the report? Q188 Lord Lawson of Blaby: Yes, I think I got it Professor Newbery: I have not studied the report and wrong. You are quite right; it was carbon dioxide, not anybody who knows what the cost of the technology carbon, so in fact the increase is very much greater. is in 50 years’ time or even 40 years’ time— Professor Newbery: Then I think they are incredible because Lord Stern produced numbers which Q187 Lord Lawson of Blaby: That was on the basis everybody thought were high and I think they were of existing. They have two figures. They said on the about a quarter as high as those. question of the existing technology to achieve this, it would have to cost—and going your route, most Q189 Lord Lawson of Blaby: These are the latest economies would raise the price of carbon—would figures.Anyhow, itisall quiteconjectural.May Icome have to be $500 a tonne. If you assume what they back to something which is a little bit firmer, and you think is the maximum conceivable technological may have diVerent answers to this. What do you think breakthroughs, it would need to be $200 a tonne, it is, going back to wind power, and this inquiry is into therefore the range is between those two. the cost of renewable energy and the favoured form of Professor Helm: I think there is a confusion here, and renewable energy in this country and a number of it is as follows. One reason why people support using others is wind power. If I can focus on that, what is the the price of carbon is that they have a target, say 500 maximum proportion of our electricity needs you ppm, and they say “We want to achieve that in the think it is feasible to supply from wind power? cheapest way possible so we will let the price move to Professor Helm: That depends on what you mean by whatever level is necessary to achieve the target “feasible”. If you want to have 40 per cent wind by precisely because we do not know what those costs 2020, it is possible to do it. Between 1936 and 1940 we are going to be.” If we knew that it was $200 for this took a peacetime economy and turned it into a and $300 for that and this is the plan which would wartime economy. If you really want to devote the full take us there by 2050, like some kind of tractor plan powers of the state and the direction of resources to for Eastern Europe in five-year chunks, we do not build wind farms at the rate that would be necessary in need the market mechanism in the first place. 11 years to achieve that target, it could be done, but Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

the economics of renewable energy: evidence 77

10 June 2008 Professor David Newbery and Professor Dieter Helm that isnot the relevant question.The relevant question Q191 Lord MacGregor of Pulham Market: Professor is at what cost relative to the other alternatives that Helm, you have said the EU’s targets for renewable might be available. That in turn depends on several energy, and I quote “require nothing less than a aspects of the way in which these renewable targets rethink of the structure of the energy sector, the role of have been proposed by the EU. First of all, it is not at system coordination, and the integration of all clear that 2020 is the right target date to choose. generation, networks and supply” and that the Why does it all have to be rushed through by that Commission “needs to ensure a competitive particular date? David Newbery rightly points to the investment framework.” What sort of framework do importance of R&D. There is not going to be much you envisage? R&D in that period of time. Why 2020? Why 2025? Professor Helm: If you really wanted to achieve a Global warming is a longer-term process. Why should radical roll-out of renewables policy, if that were the it be confined to the technologies that are listed? Are Government’s objective and that were the EU’s we interested in reducing carbon and therefore objective, then one moves to a diVerent kind of addressing global warming, or are we interested only territory. One is not in the territory of asking what is in reducing carbon by particular technologies which the most eYcient way of addressing climate change. we deem to be renewables? I am not sure what the One is in the narrower one of how you deliver this word “renewables” means. I do not know if there is a policy. I think then, given you only have 11 years to do definition which could be translated into a particular it in, you have to start to think quite quickly about technology or not. Why geographically are we tied to whether the market model we are using at the moment the notion that these must happen within individual is going to achieve that outcome. I think there are countries, when a reduction through renewables in basically two ways of going about this and they are China is just as important for global warming as it quite closely related. If you want to do it on that scale, might be in the UK? I think there are practical you might want to treat this as a utility. You might questions around the feasibility which relate to cost, eVectively want to say that consumers are forced to and there is a limit to how much consumers are going pay the cost of the investments, to underwrite them, to be willing to pay to achieve the environmental and that the assets, once constructed, become part of objectives we have set ourselves, which are very the regulatory asset base, like water pipes do or demanding. That is why I am rather reluctant to push electricity cables or transmission systems. There was for very short-term—high, in my view—unachievable cost passedthrough fromthe duty tofinance functions targets around a narrow band of technology rather for the regulators to the consumers, and the risks that than a large one. The practical question of whether the developers face are the development of the project you could do it, yes, of course you could. We build but,oncefinished, itisrolledforward. Whywouldthat Spitfires pretty quickly but I do not think anyone is be a plausible way of going forward? It would produce proposingthe kindofeconomythat wouldberequired an extremely low cost of capital and these are very to achieve those outcomes. capital-intensive assets. It could be regulated, with a planned development phase, there would be costs passed through and so on. If you are thinking about really big projects like the Severn barrage, thinking Q190 Chairman: It is conceivable though that one about that as essentially a government-induced could look at the R&D expenditure in that way, and project with a regulatory asset base, essentially instead of creating a market within which you expect financed as debt at something over the gilt rate could todrive thatyou placecontractsas ifthey weredefence be a practical way of doing that. I am not advocating contracts. Is that a policy which has any validity or that should be done; I am simply saying if you want to potential? deliver the policy, you could go down that route. You Professor Newbery: Clearly, for carbon capture and could make it very simple and just have a rate of return storage, that is, as I understand it, pretty much the cost pass-through regime, so you have feed-in tariVs plan we have in mind, and other technologies as well. but the feed-in tariVs are eVectively whatever the costs Let me just put a slight gloss on what Dieter was are, so it is a kind of cost plus regime. Again, that saying. One of the arguments for setting time limits is reduces the cost of capital and could be made that it concentrates the mind. There are clearly many compatible with the utility type model but what you things wrong with the present transmission and access probably do not do is an eYcient market-based regime, the planning permission regime, and so on, approach using ROCs, tradable certificates, because that a degree of urgency might cause us to address and the problem with that regime from the point of view of deal with, and that actually wouldbe the least cost way achieving this dramatic policy target is you cannot be of doing things, whereas if we do the usual British sure you are going to achieve the objective. We were thing of sitting on our hands, we will be here in 2020 very careful when the original ROC system was set up wondering why, with the best wind resources in the to try to build incentives into the scheme and buy-out world, we have the least wind penetration. prices in case the cost became too high, et cetera, and Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

78 the economics of renewable energy: evidence

10 June 2008 Professor David Newbery and Professor Dieter Helm the result is we have 4.6 per cent renewables. In other Q193 Lord Moonie: I was just thinking that 2020 is words, we did not get what we thought we were going probably a date far enough in the future that most of to get at the end of the process. Really, what I am the politicians involved will not be around to have to saying is, if the EU and the Government, account for it. notwithstanding the arguments about the eYciency of Professor Helm: You made that remark, not me! the policy, notwithstanding the questionable logic of Professor Newbery: That is, of course, the attraction of something which has the nice ring of “20–20 in 2020”, a target. which you almost automatically think must be wrong, Professor Helm: Also, the costs will be back-end notwithstandingthe criticisms,ifyoureally wanttodo loaded, which is very important in the politics of how this, thismay requirea much moreregulated, directed, targets are set. planning policy that has to be driven through, and using a utility type model might at least be one way of Q194 Lord Moonie: Do liberalised energy markets keeping the cost of capital quite low. You have to start provide the right incentives for investment to meet thinking in that way. What you cannot do—and this is society’s needs? If not, how can the correct level of the importance of the point I was trying to make—is investment be encouraged? Do you envisage changing muddle on with the ROCs and the Renewables roles for Ofgem, for example? Obligation and hope somehow that this is going to Professor Newbery: We can break that down into two produce the outcome of 40 per cent wind on our parts. Do liberalised markets, providing they are well system by 2020. That, I am absolutely certain, will not designed, deliver an adequate volume of investment in be delivered under that regime. generation, transmission and distribution? The answer to the transmission and distribution is they are regulated. That is not part of the liberalised market. Q192 Chairman: Professor Newbery, that was By and large we seem to have developed a regulatory actually aimed at Professor Helm. I do not whether system that is capable of delivering the right amount you want to add anything or not. and the right quality of investment, and I think the Professor Newbery: I have submitted some comments. water industry is a very good example of how it was Professional Helm’s approach of the utility model impoverished under state ownership and dramatically addresses one of the critical issues, and that is we are transformed under that regulatory model. The talking about very capital-intensive, zero running cost interesting question, of course, is the generation technologies so the cost of capital is critical in the final investment where it is exposed to the liberalised viability and the price you would have to pay for it. market. The evidence seems to be that if that market is There are essentially two ways in which you can drive well designed, the investment is forthcoming, the cost of capital down. One of them is for the costs to providing there is policy stability and predictability. be passed through—the American rate of return The thing that is lacking at the moment is policy stability and predictability. We do not know what regulatory utility model. The other approach is the sorts of requirements, interventions, changes to the German and Spanish feed-in tariV, possibly with Renewables Obligation system and other forms of tender auctions to try and see how low you can get that intervention may take place, and in that uncertainty feed-in tariV but by guaranteeing the price over the life the obvious thing to do is to wait and see, unless it is so of the equipment, it can be essentially completely staggeringly profitable that you want to get access to a bond financed and bonds are a relatively cheap way of grid transmission point. financing capital. However, if you go down that route, ProfessorHelm: Iam notconvinced thatone hasa lotof and you have to integrate it with the liberalised time to wait and see. I think David is absolutely right electricity market, there are massive changes that need in emphasising that there is a world of diVerence to be made to the transmission access regime and the between a liberalised market that is well designed and balancing mechanism. We unfortunately have one that may not be well designed. It is also an abandoned a model that was actually quite well important one where there is market power and one designed to deal with that called the electricity pool. where there is not market power. I happen to think Something like that would probably have to be that the way the market is designed at the moment is at reinstated. The fortunate thing is that a number of the best imperfect. I think there are very weak signals for United States and various other parts of the world investment and I think, given the scale of the have developed a nodal pricing regime, which is the replacement investment required in the next ten or 11 logical wayin which youcan accommodate thekind of years, which is very substantial, and the progress price signals and dispatch arrangements that you towards making that investment which has or has not would need with that degree of intermittent been forthcoming, we face a really quite serious generation. So there are models out there that are very investment problem and potential capacity gap, and, diVerent from the present regime that we can imagine of course, a tight market is extremely profitable to the being compatible with this wind penetration. incumbent with the existing assets. So market power Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

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10 June 2008 Professor David Newbery and Professor Dieter Helm matters a lot in that context. In terms of reforms, and fact that people are desperately queuing up to make there are lots of diVerent types of energy markets huge sums of money out of the business is promising around the world to look to, I personally favour a but, of course, they are being overly subsidised by the proper capacity market which pays for the capacity Renewables Obligation scheme. The fact is we could separately from the energy. I am much more get that wind on to the system at probably two-thirds favourably disposed to a market which looked more of the price we are paying at the moment and they likethe oldpool systemthan theNETA systemthat we would still be quite happy to do it. currently have, and I think there is a matter of urgency Professor Helm: I have nothing to add. I agree. of addressing those particular problems. What I do not think is a good idea is to say: we do not have a perfectly liberalised market, it does not produce Q196 Lord Paul: Can I just ask a general question? perfect results, therefore we should move to a more If there is more awareness of climate change in planned system. I do want to make this point: Britain, why are we so reluctant to build facilities for Government Ministers are very keen to talk about renewable energy? Why is there not more public how competitive and liberalised our market is. pressure instead of waiting for the Government doing Actually, it is very important to realise what has been something? going on. Slowly what I call the onion peels of capacity Professor Helm: Let us stand back and just remember have beenplanned inby Government.Renewables are what is going on in climate change. This is a global not decided by markets; they are decided by public bad of which we have a part to play in governments. Government is deciding, or they think addressing. Emissions are projected to rise by 50 or they are deciding that we will have 40 per cent of our perhaps 60 per cent by 2030. China is projected to electricity capacity as wind by 2020. That is not build 1,000 GW of coal between now and then. Coal determined by a market. I do not believe the nuclear is the growing fuel in world energy demand. In that power programme is being determined by markets. context, you have to ask yourself what contribution Markets have a role to play but there is a crucial does, for example, a wind farm in the Outer Hebrides political role in providing a framework around that. make to the parts per million being created by what That is potentially, if Ministers are believed, going to is at the global level substantially a coal burn be 30 per cent of our market. The coal plant are not problem? Of course, it makes a contribution, but we determined in the market; they are determined by the kid ourselves in thinking we are going to make Large Combustion Plant Directive and the serious progress with global warming unless we environmental regulation, so the reality of our market devote considerable resources to the coal question. is that our so-called liberalised market is really about Put another way, unless we find a way of dealing with residual gas stations in the system. So we are moving coal in a more benign environmental way, we are away from a market system to a planned system by going to see not 500 ppm but 600 or more, serious stealth, and if we are going to do that, we ought to face climate change. We are devoting here in this V up to the consequences of doing that and realise the discussion a lot of e ort to one technology: wind, and regulatory burden that follows from that to ensure it has a part to play, but we sit on the edge of the that our market behaves eYciently because no longer North Sea with depleted gas wells, we have coal are we relying on the normal competitive forces. This stations around the North Sea, and we know a lot is no longer a competitive, liberalised market. This is about the technology of carbon sequestration and increasingly a government-driven, invested market. storage. We have a chance to make a contribution on that front. There are limited resources available to devote to climate change, and I wonder why we spend Q195 LordMacdonald ofTradeston: Giventhe policy so much time on wind to the exclusion of emphasis on unpredictability that you mentioned and the other technologies, and, not ruling out wind in any instability in prices in the market and so on, can we way, I think we should get serious about carbon actually sensibly compare the future cost of sequestration and storage. If we cannot do it in the renewables againstfossil fuelor nucleargeneration, or shallow waters of the North Sea, it is going to be very do you just have to take the plunge and say that diYcult anywhere else. I also find it extraordinary renewable energy is likely to be less volatile than the that we provide a subsidy regime, which indeed carbon fuel market and therefore worth bagging for creates enormous ineYciencies through the returns it the future? has for wind, but exclude nuclear power from that. I Professor Newbery: I think it is reasonably clear that am not an advocate of nuclear power but the idea onshore wind is at or near commercial viability at that governments should put so much emphasis on present carbon and gas prices. If you thought that wind power in this context of climate change leads me locking in, as it were, that downside cost against the to the conclusion that there must be a political risks of what might happen to either of those two explanation for the emphasis on this technology prices was actually quite useful, it does seem to make rather than an economic eYciency one or a genuine sense in the portfolio of energy in this country. The concern with addressing this huge increase in Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

80 the economics of renewable energy: evidence

10 June 2008 Professor David Newbery and Professor Dieter Helm emissions that coal burn is going to cause around fact correct or whether in fact they are more the world. expensive than they said they would be. I would stress to any inquiry into renewables that you go Q197 Lord Paul: Professor Newbery, you have back and do some ex-post predicting; look at the argued that a long-term carbon price is needed and predictions that were made about the cost of wind that the Government might issue long-term contracts in particular over the last ten years by the various to back up this signal. How would such contracts vested interests and see how they turned out. It is work in practice? very important to do that ex-post exercise. We were Professor Newbery: There is, if you like, an ambitious told the cost of the technology was going to fall. We and a less ambitious way of doing it. The ambitious were told that the producers of these technologies way would be to persuade the European Union to would come on stream so that you could buy recognise the importance of carbon price stability windmills when you needed them. Actually, the and to think constructively about how to achieve it. costs have gone up enormously because the capacity There are a number of ways in which it could be done. is not there to develop these things. It may turn out One of the most obvious ways is that since we are in the future these things are going to be stunningly moving to auctioning emission allowances, we would cheap. Then in a commercial auction they will win, allocate some fraction of Member States’ allocation but I prefer the market to test that out rather than to a central trading house which would try and to let governments, who are very vulnerable to stabilise their price in much the same way as the Bank lobbying in these contexts, pick particular winning of England stabilises the exchange rate. That is, if you technologies. I think that is detrimental to like, the EU-wide stable carbon price objective, addressing the primary objective, which is global which then would have wider eVects than just on our climate change, not national political objectives. country. If we could not do that, there are a whole range of options for doing it within this country if we Q199 Chairman: Can I follow that up in the context wanted to try and improve the investment climate for of carbon capture and storage, because you have low carbon technologies. One of them is just to issue both mentioned this. We know that the elements of options on the carbon price to the generators of low carbon capture and storage are all pretty well carbon technologies so that if the price fell below the proven, but the problem is how you bring that into a strike price in the option, they would then cash it in practical, holistic system, and this is an engineering at HM Treasury. We would have to, of course, make issue. How would you both approach that? What is sure that HM Treasury received the auction receipts the best way of getting that done and should it be from the EU allowances so that it had some fund flow done on a UK level or should it be done on a to pay for this but that should not be beyond the wit wider level? of intelligent people in the Treasury. So there are a Professor Newbery: I am not an expert but I have whole range of financial instruments and contracts colleagues who are. I think the first thing to do is V V for di erences which would achieve this e ect. not to be very technology-specific, which I understand the present tender auction is for post- Q198 Lord Paul: Professor Helm, would you like to combustion capture and storage. There may be a comment? role for that but it is not that one wants to foreclose Professor Helm: Cameron Hepburn and I have other options. Clearly, we are going to have to have proposed a longer term carbon auction system quite a few of these plants. Clearly, each plant is which is not incompatible with what David has said. extremely expensive, so there is quite a lot of sense If you genuinely want carbon reductions beyond in asking a number of countries each to do one, and 2020—and I want to stress that 2020 is a very short- in particular to try out the various options available, term target (I agree with David that you need a and in particular how they are going to transport, sense of urgency)—but climate change is going to be store and monitor the storage of the captured addressed beyond 2020 and R&D and so on goes carbon dioxide. EVectively, it needs a lump of through that period. A sensible thing would be to money, a tender auction and some very close say that some part of the carbon reductions that you observations of what then happens, done in a want to make beyond 2020 you should auction now. number of places—clearly in China, certainly in Just oVer contracts for those reductions and allow Europe, obviously in America, and why not in the nuclear power to bid, wind farms to bid, anybody UK? else who wants to bid into those contract forms. The Professor Helm: I think that is right but I think that financial instruments help to smooth that through is only part of the answer. What carbon and to work out that within carbon markets, and sequestration and storage is is basically three things: preferably link it to the EU ETS. Then we will separating out the gas, pumping it through some discover whether what all these lobbyists tell us pipes and sticking it in a hole and putting a plug in about the costs of these diVerent technologies is in it. 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the economics of renewable energy: evidence 81

10 June 2008 Professor David Newbery and Professor Dieter Helm is putting it in a hole that has held gas for some change, it is rather odd to use sequestration as a considerable period of time in the past, i.e. depleted mechanism for getting more carbon out that you fields. So it is not just about the kit on the end of can burn subsequently. I think the objective is to use the power station; it is about the pipeline network depleted gas-only fields first and the three and it is about the reservoirs and storage at the Norwegian CCS projects are all separate from other end. To my mind, this is a new utility. This oilfields, so they are single gas depositaries, and that is a reverse pipeline system, with all the regulatory has to be the long-term objective. For the short framework that needs to go round it. I think we term, enhanced oil recovery is a very proven need to be far more ambitious than having an technology and already used, particularly by the auction for a single post-combustion plant. I am not Norwegians. sure what question that is the answer to. It is almost saying “What is the smallest contribution we can make but at the same time look as if we are doing Q202 Lord Lawson of Blaby: Although the something?” What we ought to do is have a serious Government’s emphasis on wind is absurd, for the North Sea study with our European partners reasons that Professor Helm has pointed out, it is around the North Sea and consider what would be understandable why they have given it, because the involved in treating the North Sea as a major carbon only thing that can conceivably meet this problem, reservoir with its depleted wells, what the pipeline if you think there is a problem, is carbon capture systems would look like, how they would be co- and storage, because coal is going to play a large ordinated and where stations would feed into this part in energy generation for as far ahead as one can system as a whole rather than just the individual possibly see, and this is a technology which, on a cases. The answer might be it is fantastically commercial basis, even though it is not rocket expensive and completely uneconomic, but it might science, simply does not exist at the present time and not be; it might actually be do-able and that requires nobody knows whether it is going to exist in ten a European initiative, yes, but the UK must be a years or 20 years or 30 years or how long it is going prime player because we have a lot of the to take. Nuclear technology does exist now, of Continental Shelf and a lot of the deep-water course, but there is considerable popular—and in expertise to handle this. many countries in the world not only popular but government opposition to nuclear power. It is not something that I share but that exists as a factor and Q200 Chairman: Technology-neutral procurement therefore faute de mieux the Government fell back is what you are both suggesting because you can on wind power, which is a technology which exists take the carbon out after or before. here and now and is not disliked. Focusing on wind Professor Helm: This is not rocket science power, even though for the reasons Professor Helm technology. Separating out the gas is something gave it is absurd, and he is right, may I ask one from the 19th century. Pumping CO2 down pipelines specific question and one other specific question is something that has been done for a very long time which arose from something he said. The specific and storing gas in holes in the ground is, again, not question is supposing you do have 40 per cent rocket science. I think we want to move away from renewables, supposing 40 per cent is wind power— what is the minimum marginal discrete single I am not saying by which year—given the need for investment we can make to the question: what will back-up when there is little or no wind or when this utility look like, what will this system look like there is too much wind and you have to stop the and how can governments facilitate the kinds of turbines going round otherwise there would be investment required for large-scale carbon storage? damage, what is the net reduction in carbon dioxide emissions implied by this 40 per cent? Q201 Lord Macdonald of Tradeston: They reckon Professor Newbery: The target is set on the that about half the oil in the North Sea is still down percentage of electricity that is generated, and then there; it is just harder to get out. Is it compatible you ask how much capacity is needed to generate with getting that oil out more quickly to pump the that electricity, so roughly speaking, if you want 40 CO2 down there? per cent—that is probably on the high side—of Professor Helm: There are two points here. First of electricity generated you would need 80 GW of all, virtually no oil well in the world has been wind, something like that, in other words, more depleted by more than 50 per cent. So if we are than 100 per cent of the existing capacity. A lot of talking about oil wells as opposed to gas wells, yes, the plants that we have on the system would then and of course, the way in which CO2 sequestration be operating at very much lower load factors than already works is enhanced oil recovery, that you use at the moment and would eVectively provide that gas pumping into the wells rather than using water standby. We would then have to find ways of to do that. But you have to be careful what your making sure that it was profitable enough to remain objective is here. If you are interested in climate on the system, either by capacity payments or Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

82 the economics of renewable energy: evidence

10 June 2008 Professor David Newbery and Professor Dieter Helm procurement by the system operator or some and the Committee Stage will be shortly—says that other system. of the reduction in emissions, which is what it is all about, not less than 70 per cent must be from reductions in emissions in the United Kingdom. There is a maximum of 30 per cent which can be Q203 Lord Lawson of Blaby: This standby is not done by emissions elsewhere, presumably through nuclear standby, is it? emissions trading systems or the Clean Professor Newbery: No, it is the existing gas and Development Mechanism or whatever. Can you see coal power. any logic in this? Professor Newbery: Yes. The idea is to keep the price of carbon high enough because if we could import enough CDMs at a low enough price, we would Q204 Lord Lawson of Blaby: Exactly. That is the essentially crash the carbon market. If you like, all question I asked you. The question I asked you is of the EU Member States have to collectively agree one you have not yet answered . . . that they are not going to solve the EU reductions Professor Newbery: It is. It is 40 per cent. by just persuading somebody in Brazil to do it for them.

Q205 Lord Lawson of Blaby: . . . which is what is Q208 Lord Lawson of Blaby: Why not? the net reduction in CO2 emissions Professor Helm: Let us unpack that. We want to Professor Newbery: It is very straightforward. If 40 separate out two things here. What is the most per cent of the electricity comes from zero carbon eYcient way to reduce global emissions of carbon sources of wind and another whatever it is, 18 per given global targets? The answer must be to use the cent comes from zero carbon nuclear, the rest of it widest geographical domain you can possibly think comes from carbon-based fossil fuels, and what about because you do not know in advance where mixture of gas and coal that is I am not quite sure it is going to be cheapest to do things. You want to but it will increasingly be gas, so that, relative to the find the cheapest location and it does not matter a present system, it is a very large reduction in the hoot whether it is done in the Outer Hebrides or in amount of carbon emissions from electricity. China or somewhere else because wherever the emissions reduction is made, it will have the same eVect on climate change. Therefore, in such a system you want to end up with the lowest price of carbon Q206 Lord Lawson of Blaby: I understand that but consistent with achieving that objective and if by the question was how big is the reduction, but it buying in loads of CDMs the price fell to a lower does not matter. I will go on to my other question. level, good. For example, just to take the extreme case—perhaps Professor Newbery: There would be no additionality. I did not make myself clear; this is for argument’s Professor Helm: Hang on. That is one point I want sake—supposing that you had 100 per cent of your to make. The second point is, however, we are electricity generated by renewables, in fact you engaged not in a world in which everybody has would not have a 100 per cent reduction in agreed to contribute to reducing CO2. We are emissions because you still have to have this back- engaged in trying to create a global cartel in which up. people have diVerent costs, diVerent pay-oVs, Professor Newbery: Of course, yes. diVerent incentives, and this is a problem essentially about global equity. In other words, an argument between countries as to who should bear what burden of those carbon costs. The solution that we Q207 Lord Lawson of Blaby: All I was asking is are adopting, which is that we in Europe, what in fact is the percentage reduction but it does particularly we in the UK, should take on a greater not matter. If you can give us the answer, perhaps proportion of that burden is essentially to say that you can let us have a note on that. The other we will bear the higher cost. The net result globally question I am going to ask is arising from what is that the cost of reducing CO2 will be higher than Professor Helm said about why should we be doing it otherwise would have been for exactly the reasons it in this country, because this is a global issue; we you set out, but we are not in a position where we would not be messing about with this at all if we can simply say to the Chinese or to the Indians, were concerned with emissions, and emissions are a “Well, it may be true that your carbon consumption global matter. Section 25 of the Climate Change Bill per head is lower than ours, it may be true that you which is before the House of Commons at this did not make the contributions to the CO2 in the present time—it had the Second Reading yesterday, atmosphere in the past but tough, we are just Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG4

the economics of renewable energy: evidence 83

10 June 2008 Professor David Newbery and Professor Dieter Helm looking at the cheapest way of coming to that cause induced damage elsewhere that were it to be outcome.” It is when you put it in the context of within a European Union with a carbon price will how you signal to get the global cartel to reduce be avoided because the price is sending the right these emissions and how equably you take on those signals, whereas the moment it gets to a non-price burdens that you get into the game that we have to regime, you have to worry a great deal about what be seen to bear a higher burden and do it ourselves. the final consequences of the particular bit of the I am not particularly sympathetic to that view but carbon you have saved are going to be in terms of I understand precisely how we get there. In general, net carbon reductions. I think it would be very sensible for the European Professor Helm: But a windmill in the Isle of Lewis Union to think about buying in significant or a windmill on the Chinese peninsula is going to proportions of its 2020 target of renewables from have exactly the same eVect. The question is which outside the EU. That will produce a lower price of is cheaper, David. carbon. From my point of view, looking at the Professor Newbery: The question is, would they not climate change problem generally, good. have done it anyway?

Q209 Lord Lawson of Blaby: Indeed, your own Q211 Lord Macdonald of Tradeston: On the other argument does not really stand on the case you have hand, climate change is presumed to have a severe put. It only stands on the slightly more political case eVect and you seem to ignore the imperative that the of setting an example, in fact, almost inflicting more Indians and Chinese might suVer more from climate damage than we need to on our own economy in change than the adaptable West might. order to show what a fine example we are setting, Professor Helm: For a start, China is not a because the question of equity between, say, China democracy so we have to focus on what the eVects and Europe, which you are addressing, can be met are on the elite, and similarly in Russia. Secondly, if Europe is actually paying for the reduction in at their phase of development the trade-oVs are Chinese emissions. It is a question of who pays, not diVerent from the trade-oVs that we face in a where the reductions are happening. relatively rich developed economy. Thirdly, the Professor Helm: Yes, and this is why it is political. timescales and the development plans that are Essentially, if the Chinese say, “Our emissions per already being put in place are deadly serious: 97 new head are much lower than yours and we did not put Chinese airports by 2020, 1,000 GW of coal by 2030. the stuV up there, and we are going to develop,” the These are not hypothetical; these are already being solution to climate change or a part of the solution planned and begun to be driven through. That is we have to pay the Chinese and the Americans shows the trade-oVs are, unfortunately, not enough have to pay the Chinese not to develop their to persuade these countries in their own interests to economy in the way that they are proposing to do make the kinds of steps which may actually in the it. That involves, in my view, large fiscal transfers long run be sensible for them now to do. I think to from the North to the South, or from the developed base a climate change policy on the idea that the to the developing countries. The CDM route, the Indians or particularly the Chinese or the Russians buying in of these reductions, which could include are going to adopt themselves tight targets to de- renewables, is essentially a softly-softly and rather carbonise their economies—not so, on the contrary; well disguised way of making those fiscal transfers. particularly China is chasing up every coal reserve That is why I am very keen that in any of these agreements the CDMs play a significant role, it can find in a whole host of countries to fuel its because if they do not, we fall back on direct industrial development. governments making transfers and the question I always ask myself when I look at that huge coal Q212 Chairman: So if they are going to do the thing burn increase in China is: is the American of their own accord, is it necessary for the West to government going to pay a chunk of its GDP to the develop the technologies at an economic price to communist Chinese regime in order to industrialise allow them to do that? Is that the approach? V in a more e ective way to make them more Professor Helm: That is why I am so keen on the competitive with the American economy? That is carbon sequestration and storage and addressing the what makes me very pessimistic about this problem. coal question, because, as I said earlier on, coal is the expanding fuel. Coal is the contributor above Q210 Lord Lawson of Blaby: Of course it is not any other fuel to the expansion of those emissions going to happen, so the whole thing is a sham. we are going to see between now and 2030, and Professor Helm: No, the CDMs help this process. unless we arrest the speed of the emissions growth Professor Newbery: I would just add one thing. Let in coal before 2020, the options after that date to us just take biofuels. Would it be sensible to buy do things which will stop quite substantial climate biofuels from abroad? The danger is that that will change are severely limited. Processed: 17-11-2008 19:10:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG4

84 the economics of renewable energy: evidence

10 June 2008 Professor David Newbery and Professor Dieter Helm

Chairman: It all goes up in smoke. you again for your written answers, Professor Lord Lawson of Blaby: Or does not, as the case Newbery, and the discussion. We were anticipating may be. a little creative tension between the two of you this Chairman: If there are no other questions, we have afternoon and I am glad to say there has been a traded on your time rather more than we expected. great deal more creativity than tension. Thank you Thank you again for spending your time and thank very much. Processed: 17-11-2008 19:12:43 Page Layout: LOENEW [SO] PPSysB Job: 408616 Unit: PAG5

the economics of renewable energy: evidence 85

TUESDAY 17 JUNE 2008

Present Best, L MacGregor of Pulham Market, L Griffths of Fforestfach, L Moonie, L Lawson of Blaby, L Paul, L Layard, L Vallance of Tummel, L (Chairman)

Memorandum by Scottish and Southern Energy plc

Introduction and Overview Scottish and Southern Energy (SSE) is grateful to have this opportunity to submit evidence to the Committee’s inquiry into the cost of renewable energy. SSE is determined to play its part in meeting the EU renewable energy targets and, already the largest renewable generator, SSE has an internal company renewable energy objective of 4,000MW set for 2013 in the UK and Ireland, as well as our wider aim to reduce the carbon intensity of our generation portfolio by 50% by 2019/20. Going forward, SSE will invest over £3 billion capital investment in renewable energy in UK and Ireland up to 2013. It is also involved in the generation, supply, transmission and distribution of electricity and in the supply, storage and distribution of gas. The Committee’s inquiry aims to set out the costs and benefits of renewable energy and establish how they compare with other sources of energy, while examining the Government’s policy towards renewable energy. It is important to recognise that the role that renewables play in electricity production is to provide zero- carbon, zero-fuel energy. The benefits therefore extend beyond reducing carbon to displacing fossil fuels and delivering independence from imports, price rises and price volatility. Renewables do not generally provide a good source of capacity which is a role that still has to be played by alternative generation or storage technologies. If the industry is allowed to develop there will be expanded business opportunities in the UK right the way along the renewable energy supply chain. That said, renewables are not the only solution to tackling Climate Change sustainably. Politicians, policymakers and others should not underestimate the role that non renewable low carbon generation can play in reducing global emissions, whether through more eYcient use of fossil fuels, nuclear new build, or carbon capture and storage. If the world is to tackle Climate Change, all low carbon generation will have to be considered as part of the energy mix. It is also vital to stress that overall energy demand management and reduction will be crucial in tackling Climate Change and meeting European energy targets. Successful demand reduction reduces the overall scope of the challenge. For simplicity, this response is structured in relation to each question posed in the call for evidence.

1. How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? Put simply, renewables have become increasingly important to the UK due to: — Climate change pressures. — Fuel price increases. — Fuel availability (imports are often from politically instable regions). This is reflected in the European Renewable Energy targets which were also stimulated by the European goal of securing safe and reliable energy across the continent. If the Green Package goes through as we expect, to meet its allocated share of the EU renewable energy target, the UK will need to deliver 15% of its energy from renewable sources by 2020. Since this is a legally binding target with sanctions, it is important for the Committee to realise that Britain’s overall energy policy must be seen in the context of these targets. Processed: 17-11-2008 19:12:43 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

86 the economics of renewable energy: evidence

An initial high-level assessment, conducted by SSE in partnership with the United Kingdom Business Council for Sustainable Energy (UKBCSE) supports the developing view that the European targets are most likely to translate into: — 10% heat (an increase of almost 70 TWh from current levels); — 10% land transport (an increase of over 45 TWh from current levels); and — up to 40% of electricity from renewable sources (an increase of over 125 TWh from current levels). These figures reveal that it will require a step change in the development the UK’s renewables industries and for illustrative purposes, SSE has modelled a scenario looking at the impact of the draft Renewables Directive while assuming that energy demand across heat, electricity and transport remains at 2006 levels. While this does not reflect current and future energy demand projections, it provides an insight into the scale of the increase in renewable energy needed to meet the target, and the implications for the supporting infrastructure. However, before analysing this information, it is important to understand that the electricity sector may have to deliver more than 40% renewable energy if there is a significant increase in electricity demand; and/or the heat and transport sectors do not realise their renewable energy potential. In addition, as technologies develop, there is likely to be an increased pressure on electricity demand created by the emergence of mains powered electric cars, which would need to be charged up from buildings overnight. In addition, given the lack of any Government policy on incentivising renewable heat, assuming a constant electricity demand and a significant contribution from renewable heat or transport is far from certain. Anyway, while assuming a demand level based on 2006 for 2020, the below table shows the breakdown of expected heat, electricity and transport energy consumption by 2020:

Consumption (TWh) 2006 2020 (based on 2006 levels) Electricity (conventional) 375 248 Electricity (renewable) 18.78 145 (4.8%) (36.9%) Total Electricity 393 393 Heat (conventional) 730 661 Heat (renewable) 4.52 73.5 (0.6%) (10.0%) Total Heat 735 735 Land Transport (conventional) 478 432 Other Transport (conventional) 173 173 Land transport (renewable) 2.09 48 (% of all land transport) (0.4%) (10.0%) Total Transport 653 653 Total Energy (conventional) 1,755 1,514 Total Energy (renewable) 25 267 (1.4%) (15.0%) Total Energy 1,781 1,781 Processed: 17-11-2008 19:12:43 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

the economics of renewable energy: evidence 87

This information is displayed below graphically

Energy Mix 2006 Energy Mix 2020 (demand at 2006 levels)

Renewable heat Renewable heat (0.6% of total heat) (10% of total heat)

(land)

HEAT HEAT TRANSPORT LAND TRANSPORT

(aviation)

Renewable transport (10% of total road transport)

Renewable transport ELECTRICITY Renewable electricity (0.4% of total land transport) (4.8% of total electricity) ELECTRICITY Renewable electricity (37% of total electricity)

To deliver the target, it is expected that the UK will need to generate a total of around 145 TWh of electricity from renewable sources by 2020, from less than 20 TWh generated in 2006. SSE has made a preliminary estimate of the expected technology mix that could make up the renewable electricity component if is delivered entirely in the UK. SSE expects that the bulk of the new renewable electricity generation (around 75%) is likely to come from onshore and oVshore wind. This information is displayed graphically below:

Micro Marine Hydro (<1 GW) (<1 GW) (2 GW)

Severn Barrage (7 GW)

Offshore wind (25 GW)

Biomass (10 GW)

Onshore wind (15 GW)

These models and the section above essentially outline what the Government will have to facilitate through policy and regulation to reach its targets, and how important renewables are in Britain’s overall energy policy. The Government has a range of initiatives already in place that are making progress in encouraging the uptake of renewable energy. For example, the Renewables Obligation (RO) has successfully underpinned renewable electricity development in the UK, and will continue to be the key support mechanism for onshore and oVshore wind energy and biomass projects, and possibly marine projects in due course. SSE is also confident that the RO, with a higher target, and extended time period, will be an eVective mechanism to stimulate investment in renewable electricity to 2020 and beyond. However, the key is for Government to refrain from excessive tinkering with the RO, in terms of banding and other parts of its operation. Investor confidence is paramount for this mechanism to work long term. That said, the RO needs to be backed up with policies addressing planning, networks, and grid access (addressed below in response to Question 2) or it will not be able to deliver what it is capable of achieving. Processed: 17-11-2008 19:12:43 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

88 the economics of renewable energy: evidence

In general, we believe in the use of market based mechanisms like the Renewables Obligation. Comparisons between Britain and other countries are diYcult due to the fact that our energy market is significantly more liberalised than others.

2. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? There are a number of barriers to greater deployment of renewable energy, and SSE would argue that if these barriers are not overcome, the UK will not achieve its European renewables targets. Here SSE focuses on planning issues, as we focus on network and grid issues in response to question 5 but we would also recommend that the Committee look into the renewables supply chain and skills base. The current planning system takes too long and is applied inconsistently and unpredictably, undermining the UK’s ability to address the challenges of security of supply and climate change. While we clearly do not expect a positive decision on all planning projects, we feel it is essential that planning decisions are made in a timely, transparent and accountable manner. With the sheer amount of infrastructure needed to meet our future energy needs in all areas, the current planning regime is, quite simply, not fit for purpose. For example, under the current regime, analysis we have undertaken indicates that a new onshore wind farm could require around two to three years of preparatory work, and currently the planning process can take up to five years, which will be followed by a further one to two years of construction. This does not take into account the time associated with building new transmission infrastructure, which could in parallel take three to four years preparation, plus two to four years to construct, and again up to five years in planning. As these indicative timescales show, new renewable projects, and the associated infrastructure, must be initiated in the next year or two in order to make a significant contribution to the 2020 targets. We should not revisit those matters that are already in train through a lengthy consultation process, but ensure that the critical decisions can be made expeditiously. It is for the reasons outlined above that SSE has supported the Government’s Planning Reform Bill and believes that the Bill’s proposed approach is a potentially significant step in the right direction, appropriately balancing concerns over environment, the economy and local communities, while providing the required level of expertise needed for ruling on these complex inquiries through the vehicle of the Infrastructure Planning Commission (IPC). The reform package comprises enhanced community engagement; the establishment of an independent Infrastructure Planning Commission to determine all nationally significant infrastructure projects; National Policy Statements setting out the policy framework against which decisions should be made; and simplification of the energy consents and the Town and Country Planning regimes. Overall, the proposed system oVers a better way of dealing with applications to build key national infrastructure, at a time when we need it most. There are still issues to be ironed out in the Bill, such as the need for end to end timescales for applications, and how the National Policy Statements will be applied in devolved administrations (where much of the renewables projects will likely be located), but one thing is for certain: if the planning system is not reformed adequately, energy projects will be held up and the UK will not reach its targets.

3. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? It is impossible to predict the future, and predictions are often proved wrong over time, but Government must ensure that it does everything it can to promote R&D, particularly in helping new technologies to become commercially viable. The current Energy Bill is not helpful in this regard. As it stands, clause 37, subclauses 32D–32E of the Energy Bill contain sections which mean that any energy project that is in receipt of a grant will not be able to qualify for “upbanded ROCs”. Basically, a developer of a project will have to choose to repay a grant in full, before they can receive the upbanded ROCs that other renewable energy generators will receive. We are concerned that these clauses, although important for preventing near-commercially ready projects from achieving inappropriate profits, will have significant side eVects on renewable Research & Development projects, disincentivising them significantly. The current grant schemes already have substantial clawback provisions to ensure that government gets a share of current and future revenue streams. These are all modelled so that, in the event that the scheme becomes a success, the Government will receive its grant back in full. It is therefore in Government’s interest for projects to work, so excluding R&D projects from receiving Processed: 17-11-2008 19:12:43 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

the economics of renewable energy: evidence 89 the upbanded ROCs means grants are even less likely to get paid back, and thus will take longer to be re-issued to other R&D projects, all of which we will need to tackle Climate Change.

The objective of the clause in the Energy Bill is to prevent projects in receipt of grants obtaining double profits; however, the drafting catches R&D grants as well as other capital grants, and does nothing to help renewable energy to become cheaper or more eYcient.

More generally, it is important that support measures are tailored to the appropriate phases of development. R&D programmes need significant support to get oV the ground, which is why they receive grants in the first place. At some advanced stage when technologies near commercial viability, a revenue support mechanism creates suYcient incentive until full viability has been achieved. However, it is in the stages between these that we currently see a funding gap—often driven by State Aid limitations, or our over-cautious interpretation of them. To avoid these, revenue support is oVered where continuing grant support would still be the appropriate measure. This is particularly true of Demonstration and Deployment projects that are very expensive but where insuYcient viability has been shown to make revenue support attractive to investors. This is an issue for all technologies, for example CCS, not just renewables.

4. Has Government support been eVective in leading to more renewable energy? What have been the most cost- eVective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariVs versus the UK’s present Renewables Obligation Certificate (ROC) regime?

In response to Question 1 SSE expressed its confidence that the RO, with a higher target, and extended time period, will be an eVective mechanism to stimulate investment in renewable electricity to 2020 and beyond.

The question we ask is: “Why do Feed in TariVs (FiTs) appear so popular?” In continental markets where FiTs operate with success, two factors have been responsible for this: the much higher level of subsidy oVered (eg 40p per KWh in Germany versus 4p in the UK for solar PV under the RO); and the determination of the appropriate governments (national and local) to ensure that planning and grid access do not prevent project deployment.

In the UK there is no shortage of large scale projects, stimulated by the RO—they just cannot get planning permission or, even when they do, get connected to the grid. At the smaller end of the market however, the administrative costs of applying for support and selling in to the market (including metering, data collection, and incremental billing costs) are a critical issue, regardless of the delivery mechanism. FiTs transfer all the transaction costs (metering, data collection, and incremental billing costs) away from the microgenerator and are spread across all consumers. This increases the overall reward paid to a microgenerator. In the RO these costs are borne by the microgenerator and/or supplier.

One way to reduce the transaction costs and remove the price risk for the microgenerator would be by deeming the contribution from microgeneration and capitalising this up front. This may well be appropriate for Feed in TariVs but is, however, equally applicable to an RO approach, as has been shown in Australia.

The need to end the current discrimination against the use of (micro-)generation for heat solutions suggests that any support mechanism should be capable of dealing with heat. A deemed approach can also help here in cases where metering the heat output is disproportionately diYcult or costly.

In general, obligations, where a fixed return is paid regardless of the technology solution create a strong incentive for cost reduction. FiTs like grants, are more likely to be factored into the technology suppliers’ pricing and do not put the same downward pressure on costs and, by their nature, do not lead to the market picking the best solution—that is why they are most popular with those selling the more expensive technologies. That is not to say that this is an outcome that should not be sought for emerging technologies that need to be shielded and require a particular support level, only that it is not a good long term or universal approach.

In conclusion, SSE believes that more analysis is needed into FiTs before a decision is made over whether they should be brought in to assist microgeneration, but we are firmly opposed to any form of replacement of the RO, for larger scale generation, as it is planning and grid issues not the RO which are stopping the projects. Processed: 17-11-2008 19:12:43 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

90 the economics of renewable energy: evidence

5. On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables? There is no technical limit to the percentage contribution that renewables can make—the limits are purely economic. Even here, if all that is needed to facilitate greater renewable electricity penetration is more transmission, a doubling of the Transmission cost would lead to an increase of 3% to the domestic electricity price, compared with the 95% average household bill price increase seen between 2004 and 2007 due to the 170% rise in the wholesale gas price over that period. Electricity transmission infrastructure will be key to enabling increased levels of renewable generation. Working with the UKBCSE, and the other two GB electricity transmission licensees, SSE has examined the capacity of the existing GB transmission system to accommodate new renewable generation without the construction of new overhead line routes, with a particular focus on the 2020 targets. This is an initial view with just the broadest of assumptions and without undertaking detailed system studies. The diagram below is intended to give a general indication of the levels of renewable generation that could be accommodated on the GB transmission system by 2020. It assumes completion of transmission upgrades already in train (eg the Beauly-Denny rebuild and south west Scotland works) as well as completion of those works expected to be achieved without protracted planning issues, eg relatively uncontentious re-conductoring and re-insulation work on existing tower routes, and substation extensions. Processed: 17-11-2008 19:12:43 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

the economics of renewable energy: evidence 91

CAPACITY OF THE TRANSMISSION SYSTEM TO ACCOMMODATE RENEWABLES

Existing renewable generation in 2008 ~ 2,200MW (including 1,400MW pre-1990 hydro)

Grid potential for additional renewable ~4,200MW generation in 2020

Existing renewable generation in 2008 ~ 1,200MW (including 100MW pre-1990 hydro)

Grid potential for additional renewable ~ 3,900MW generation in 2020

Existing transmission connected ~ 140MW renewable generation in 2008

Grid potential for additional renewable ~ 1,175MW generation in 2020

Existing transmission connected ~ 0MW renewable generation in 2008

Grid potential for additional renewable ~ 3,100MW generation in 2020

Existing transmission connected renewable ~ 0MW generation in 2008 Grid potential for additional renewable ~ 2,065MW generation in 2020

Existing transmission connected renewable ~ 0MW generation in 2008

Grid potential for additional renewable ~ 1,963MW generation in 2020

Levels of renewable energy generation that could be accommodated in 2020 Scotland 10,000 MW1 England and Wales 8,300 MW TOTAL 18,3002 There may be scope for this to be higher subject to further examination of generation scenario assumptions in England and Wales. Rounding the indicative figure up to 20 GW for the amount of renewable generation that could be accommodated in 2020 still however highlights a significant shortfall against the likely requirement for some 60 GW of renewable generation derived to meet the 15% overall target.

1 11,500 MW less 1,500 MW pre-1990 hydro 2 Includes some 2,000MW of existing installed renewable generation capacity connected since 1990 Processed: 17-11-2008 19:12:43 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

92 the economics of renewable energy: evidence

High level assumptions used in analysis 1. Demand Severn Year Statement user demand data extrapolated out to 2020. 2. Generation Scotland: No contribution from Hunterston or Cockenzie power stations. All other Scottish generation contributory.

England and Wales: All contracted generation proceeds and no closures (apart from Magnox nuclear and LCPD opted-out plant) 3. Planning Standard Apply current GB Security and Quality of Supply Standards The intention is to give an indication of the potential for the existing GB transmission system in 2020 (ie including upgrades that do not carry a high consenting risk) to accommodate additional renewable generation, and for that number (approximately 20GW) to be set against our estimate of the total volume of renewable generation (some 60GW) that we anticipate will be needed to contribute to meeting the 40% overall target for renewable electricity. While there is considerable capability in the potentially achievable 2020 transmission system there is still nevertheless a substantial shortfall compared with what would be consistent with the 40% renewable electricity target. Detailed and coordinated study work by the three transmission licensees is therefore required to identify appropriate reinforcements to deliver a transmission system capable of accommodating some 60 GW of renewable generation in 2020. In particular this work would quantify the trade-oV between more costly oVshore transmission capacity versus more onerous barriers to associated with new onshore transmission routes (see indicative unit costs below). However, SSE must stress that the consenting and completion of the Beauly-Denny transmission re-build is absolutely key to releasing the upgrade potential of the existing Scottish transmission system. By rebuilding the weakest leg of a north of Scotland transmission ring it allows the other elements of that ring to be re- conductored and re-insulated (ie no new overhead line routes) to increase the capability for renewable generation in the north to some 6.4GW (cf 2.2GW already connected). The reinforced ring facilitates collection of the output from onshore developments and the subsea island links are planned for connection onto the reinforced transmission ring. In addition, at the moment grid access is hindering new entrants, who may receive a connection date in around ten years time. Clearly this does not encourage investment in renewables. However, it is not just connection dates that prove a problem, but part of it is the current perverse mechanism of regional charges that the current regulations provide. Ofgem must remove these unnecessary barriers and incentivise speedy connections of renewable and non renewable generation.

6. How do the external costs of renewable generation of electricity—such as concerns in many aVected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the diVerent considerations? It is essential that the right balance is struck between the longer term (inter-)national climate change impacts and the shorter term local conservation impacts of developments. This is true not only of renewable generation projects, but of all generation and supporting infrastructure. This is why we are so supportive of the Planning Reform Bill which includes the need for Government to lay out how this balance should be struck in the national Policy Statements (NPS) to then allow faster decisions to be made on individual projects. A fundamental concept of the Bill is that full consultation will be carried out on the NPS as well as on the individual projects but that this will be done within fixed timescales— a decision that can be made in months does not become better if it takes years. The outcome should be a series of consents AND refusals. Industry supports such an approach since clear, objective decisions whatever the outcome, help deliver clarity about what is and isn’t acceptable for future projects.

7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? When comparing and contrasting the costs associated with diVerent types of generation, it is important to compare like with like or to understand what the diVerences are. DiVerent technologies contribute variously to political, economic and social goals. For example, renewables help to deliver long term energy supply security as well as climate change mitigation and can also deliver local environmental benefit, although this Processed: 17-11-2008 19:12:43 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

the economics of renewable energy: evidence 93 may be perceived diVerently. Nuclear energy delivers medium term energy supply security, as well as climate change mitigation, along with a mixed local environment impact and a long term liability. CCS delivers some short term energy diversity but may reduce energy security due to the eYciency penalty of the technology, as well as climate change mitigation, along with a mixed local environment benefit and a long term liability. Without incorporating the above, or improvements in technology development, the bare fact is that the current cost of renewables is over and above the cost of conventional thermal energy (including the current carbon price of ca £8/MWh/ƒ20/tonne). The following graph illustrates how the marginal value of wind generation varies with oil price. The point at which a typical onshore and oVshore wind project would become competitive with oil, is represented by where the investment cost lines cross the value line (for onshore wind this is at approximately $165 per barrel, and approximately $210 for oVshore).

Cost of Renewables vs Cost of Oil

120

100

80

60 £/MWh

40

20

0 70 90 110 130 150 170 190 210 Oil $ per bbl

Gas Onshore wind Offshore wind

The cost of renewable energy is also dependent on the price of oil since this feeds through into the costs of material, transport and operations. The increases shown above are illustrative to show the eVect—actual impact may be lower. It must also be noted that we have omitted nuclear from the comparison since our estimates for nuclear cover a huge range. This is, quite simply, because nobody has built a nuclear power station in the UK for a long time and the technology has developed in the meantime. It becomes even more diYcult when attempting to expand this analysis to include additional types of generation. For CCS, as there are no commercial scale plants in operation, economic estimates vary so much and the analysis becomes unreliable as it is reliant on too many variables. However, it is also worth noting that CCS does not give fossil fuel independence because as the cost of fossil fuel escalates, the cost of power from CCS-enabled generation escalates in line. In terms of biomass, SSE has not modelled its cost because we believe that issues regarding its sustainability and availability need to be addressed before any policy decision is considered. However, it is clear that the cost of bio fuel and biomass are very variable and linked to commodities, not least oil.

8. How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? SSE supports a non-discriminatory whole economy approach to delivering carbon and renewable targets, and does not believe it appropriate or cost eVective to rely on electricity alone to take the full burden of decarbonising the UK economy. There is no silver bullet that will achieve the level of emissions reductions necessary to meet our long term targets and we may be surprised by what ultimately delivers our goals. It is Processed: 17-11-2008 19:12:43 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

94 the economics of renewable energy: evidence therefore essential that a comprehensive economy wide framework is put in place that allows and encourages innovation across every aspect of the energy sector. Making sure that eVort is equally distributed across all sectors of the economy is critical to ensuring the most cost eYcient solutions are uncovered and to avoid creating market distortions. In the future, the three main energy markets for electricity, heat and transport should become increasingly inter-related. A harmonised approach will be essential to allow loads to shift between these markets. For example if electricity is to play a part in decarbonising the heat and transport sectors it must not be unequally burdened with the cost of carbon mitigation since this will distort this market and potentially prevent this solution from being developed. We calculate that in the UK prices for gas and electricity customers are distorted by up to £100 per customer as a result of the unequal application of climate policy3. Electricity sales prices incorporate an element that covers the cost of carbon emissions under EU ETS and the cost of meeting the Renewables Obligation (RO), while gas sales do not have equivalent carbon or renewable policy cost supplements, hence the variation. A customer using electrical heating to heat their homes will therefore potentially pay up to £100 more than a potential customer using gas heating. If, in 2020, 40% of electricity to come from Renewables, and there remains no renewable signal on gas customers in 2020, customers with electrical heating will end up potentially paying £230 per year (in real 2008 prices) for renewable and carbon abatement whilst gas customers will potentially pay nothing4.

9. If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK?

SSE has been campaigning on a related issue concerning the Climate Change Bill, and has contributed towards attempting to ensure that the bulk of emissions reductions are achieved in the UK. Whilst we recognise climate change is an international issue, if the Climate Change Bill is actually intended to display genuine international leadership on climate change, it is vital that within the Bill there is a clear intention to actually reduce emissions within the UK. When the Climate Change Bill entered the House of Lords, the Bill set emissions targets for the UK, which could be met entirely by the UK purchasing carbon credits from abroad, without taking any action at home. This displayed no responsibility for tackling our own domestic emissions output. We therefore supported an amendment to the Bill which led to the inclusion of Clause 25. This clause enshrines the intention that in meeting emissions targets at least 70% of the eVort to meet the target should be achieved through policies to uncover savings in the UK, leaving the remaining 30% (hopefully less) to be met via buying in emissions reductions made in other countries. This clause does not, however, set in stone any actual cap on trading to meet our final emissions targets but instead influences the nature and ambition of the UK’s energy and climate policy framework to meet those targets. We are an active participant in the EU’s emissions trading scheme and support its continuation and extension therefore could not support a clause that was incompatible with emissions trading policy instruments. However, our view is that being able to trade is diVerent from deciding we will trade. Emissions trading is a cost eVective way of reducing emissions for countries that have diYculties in delivering their own emissions reductions, but the UK is blessed with the greatest potential resource of renewable energy in Europe, has considerable scope for improving the energy eYciency of our buildings and the building blocks to develop carbon capture and storage. In short, we have the potential to meet our targets at home, so let’s match it with ambition. It has been suggested that this is an issue that should be decided by the Committee on Climate Change before including it in legislation. This argument, however, ducks political leadership as this is a political rather than a technical or scientific decision. Government should not seek to delegate it. As a significant investor in UK infrastructure we need this clarity to help us to assess the level of investment that will need to be made to decarbonise the UK’s energy supply in suYcient time. 3 Our calculation is based on the following assumptions. A typical Electricity customer with electric heating uses 9.6 MWh per year. RO level is 9.1%. Each unit of ROCable power costs £35.76/MWh more than “brown” power. The carbon content of power is 0.43 tonne per MWh. The carbon price is ƒ22 per tonne. The exchange rate is ƒ1.27 per £. Renewable Cost % 0.091 * 9.6 * 35.76 % £31.24 Carbon Cost % 9.6 * 0.43 * 22 /1.27 % £71.50 4 renewables cost is as above but based on 40% % £134.4 ETS cost as above but based on £30 Euros % £97.50 Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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We believe it is economically rational to take this approach since investment in low carbon solutions here in the UK will deliver on-going emissions reductions, increased eYciency, jobs and economic growth. Every constituency in the country will have the opportunity to play its part. In contrast the purchasing of credits through trading leads to financial flows out of our economy and credits have to be repeat purchased in each new trading period. We believe it is right therefore that the UK should commit to genuinely displaying international leadership on this issue and to demonstrating how a low carbon economy can be achieved. We take exactly the same line on renewables and would like the bulk of the meeting of the EU Renewables target to occur in the UK. This will provide us with the clarity we need to invest in renewable solutions and will ensure that the UK does not constantly have to play catch up as the rest of Europe moves to a low carbon economy.

10. How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? The price of carbon can feed through to the wholesale power price, not only through fuel costs, but also through operational and capital costs for any form of power generation. As the carbon price changes, the wholesale price changes. The rate of change of wholesale price is less for renewable energy since this is not dependent on the fuel element. The potential revenues available to a renewable generator will increase with an increasing carbon price. Running counter to this there is a likelihood that the cost of constructing and operating renewable power plant will increase as the carbon price increases. This is likely to arise due to actual increases in manufacturing and construction costs as well as opportunity price escalation by equipment suppliers and construction firms who may exploit increasing demand for their services as the carbon price increases by increasing their prices. We do not think that a more eVective emissions trading scheme would help in the short to mid-term.

11. What are the costs and benefits of the present generation of bio fuels? Will there be a second generation of bio fuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation bio fuels, and what are the other relevant environmental effects? SSE believes that clear policies are needed regarding the availability, cost and sustainability of bio fuels. June 2008

Memorandum by Centrica

Centrica and Renewable Energy 1. Centrica has already made a significant commitment to develop renewables assets as part of our energy portfolio. In July 2003 we announced plans to invest in our own renewable generation assets, primarily oVshore wind farm developments although we continue to keep other forms of renewable energy generation under review. 2. We are currently investing in six oVshore wind farm developments, one of which, Barrow OVshore Wind, is now operational. Two others, Lynn and Inner Dowsing (LID), are under construction, and are expected to be fully commissioned by the end of the year. Once operational, this will be the world’s largest oVshore wind project. 3. Of the remainder, Lincs had its application for consent submitted in January 2007, and we are awaiting determination, whilst Race Bank and Docking Shoal will have their consent applications submitted this year, based on detailed environmental impact assessments. Barrow is a joint venture development with the Danish energy group DONG energy; all other projects are wholly owned by Centrica. 4. We have two operational wind farms onshore in Scotland, the wholly owned Glens of Foudland wind farm in Aberdeenshire, and Braes of Doune wind farm in Stirlingshire in which we acquired a 50% ownership from Airtricity in July 2007. 5. We are also investing in a range of power purchase agreements with renewable electricity developers which will increase the amount of green electricity that we buy through oVtake contracts in the UK over the next five years. These projects cover a diverse range of technologies such as wind, landfill gas and biomass generation. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

96 the economics of renewable energy: evidence

6. Assuming they are all built, our existing renewables plans will cost over £3 billion, and will provide around 1.5GW of capacity. Centrica is currently looking at the possibility of working with investment partners and would currently expect to invest around £1.5 billion on our current development portfolio. The EU 20% renewable target is likely to bring about a significant increase in investment in renewable generation. With 10% of the overall UK electricity market (including 23% of the residential market), we expect to be one of the largest investors in wind in the future and are currently evaluating a major step change in our renewables investments. 7. Centrica are also investing and developing a range of distributed generation technologies. We recently sponsored a BERR report into the potential of microgeneration in the UK, which showed that with ambitious policy measures there was significant potential in this market for both renewable, and low-carbon technologies. 8. We are a leading framework supplier on the Low Carbon Buildings Programme and have installed significant photovoltaic installations under the programme. British Gas now has the capability to install solar thermal products across the entire country. Customers can take advantage of our eco save tariV which rewards customers for exported electricity from solar photovoltaics and small scale wind.

1) How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? 9. The 2007 White Paper on Energy identified two long-term energy challenges: to tackle climate change by reducing carbon dioxide emissions both within the UK and abroad; and to ensure secure, clean and aVordable energy as we become increasingly dependent on imported fuel. Renewable generation is already an integral part of meeting these challenges and is playing a growing role in Centrica’s generation portfolio. Onshore wind is an established technology that is already commercially viable. OVshore wind is established and is approaching commercial viability against fossil fuel generation. Both technologies bring diversity to Centrica’s and the UK’s energy mix, helping to increase security of supply, as well as reducing UK carbon emissions. 10. The growing evidence of the eVects of climate change in recent years has been matched by an increasing global acceptance of the need for an international agreement and a continuing significant reduction in global CO2 emissions. 11. The decline in UK continental shelf gas production, meanwhile, which will see around three-quarters of the UK’s gas imported by 2015 against around 20% today, is happening at the same time as record wholesale energy prices. And around a quarter of the UK’s power generation fleet, largely dirty coal, will be retired under EU environmental directives and will need replacing with new, cleaner low-carbon alternatives. Renewable generation oVers a solution and can make a significant contribution to all these issues. 12. In spite of these challenges, however, the most significant driver to an increased uptake of renewable generation will be the EU’s 20% renewable target by 2020, adopted at the 2007 Spring Council and currently out for consultation. Under the EU’s basket arrangement for sharing targets, the UK is likely to adopt a target of 15% of primary energy from renewable sources by the same date. 13. Centrica believes that the UK target is challenging but achievable. As yet, it is unclear precisely how this figure will be achieved as the capacity of the three diVerent sectors (heat, transport and electricity) to deliver is still being assessed. 14. It is our understanding that around 40% of the UK’s total electricity requirement will need to be generated from renewable sources. Wind power is currently the most economically viable and scaleable renewable technology and will play a major role in meeting the target. 15. In December 2007 the Government announced plans for a major expansion of oVshore wind development, opening up the seas oV the UK coastline for up to 33GW of wind energy. The Government draft plan aims to develop up to 25GW of oVshore wind by 2020, in addition to the 8GW already planned. 16. After 2020, other technologies are likely to be deployed including wave and tidal generation. These emerging technologies will require early deployment support outside the Renewables Obligation which is designed to deliver renewables investment at least cost. 17. Centrica believes that a significant contribution from small-scale renewable technologies such as solar, heat pumps and biomass to the 2020 Renewables Target is also possible, and that such a contribution would have the benefit of reducing the risk of under-delivery against the target. Our experience suggests that large numbers of smaller measures can also help to deliver significant change against tight timescales. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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18. Moving to a renewable electricity target of around 40% would have a significant impact on UK security of supply by dropping load factors for coal and gas plants dramatically. Gas fuel use could drop by around 50% from 2007 levels by 2020–25 from a combination of wind and new nuclear build. 19. We accept that to date there have been diVerences in the level of take-up of renewable energy across diVerent European member states, and that the UK has been slower to invest in these technologies. Fundamentally, this is a reflection of barriers to deployment such as grid connection, planning permissions, public engagement and supply constraints. We expand on these issues further in question 2.

2) What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? 20. Centrica believes that the UK electricity sector is capable of rising to the challenge of deploying renewable projects at scale over the next decade, though this will require significant eVort from all stakeholders to remove barriers to investment. Government will have a key role to play in creating the framework which incentivises companies to deliver these projects. 21. It also requires that firm investment decisions be made in the very near future on areas such as grid and in many key elements of the supply chain. For this reason it is of utmost importance that investors are clear of the Government’s ambitions in this area, and have confidence that these ambitions will be unswerving. 22. In addition, an eVective, streamlined planning system which allows the delivery of both oVshore and onshore infrastructure is crucial. A new consenting regime will be needed to better manage stakeholder conflict which has characterised many developments in the past. Fishing, shipping and radar concerns from MoD and NATS are among the potential barriers to the early implementation of new wind projects. 23. Centrica is encouraged by recent amendments to the planning system, proposed through the Planning Bill and the Marine Bill, and hopes that existing planning system constraints will be alleviated and the consenting timeline dramatically reduced. Whilst due consideration for the environmental is key, it is important that this is balanced with the need for renewable development. 24. Planning constraints: There are around 8 GW of renewable developments that are currently held up in the UK planning system. This underlines the diYculty that developers have in gaining consent to build their projects. Under the new planning regime, the proposed IPC will need to be appropriately resourced and directed to deliver sustainable development in order to overcome the current planning bottleneck. 25. Grid connection: Many renewable projects have grid connection dates that extend out to 2018 (for which developers have to pay significant security costs) and it is clear that the connection of an additional 25 GW of oVshore wind in line with government ambition will be extremely diYcult without a national, strategic approach to grid connection, which encompasses a plan for strategic investment. 26. As identified in the Energy White Paper and confirmed by the Transmission Access Review carried out by Ofgem and BERR, access to the transmission system is a significant barrier for both renewable and conventional generation. Currently there is more than 40GW of projects (both renewable and conventional) waiting to connect to the transmission system with connection dates which extend beyond 2018. 27. To replace existing conventional generation, and to provide necessary back-up to new renewable generation, around 22.5GW of conventional power stations will need to connect by 2020 in locations which are often remote and distant from centres of demand and/or current generation locations. Centrica believes that new access arrangements should support the connection of renewable generation, but at the same time not undermine investment in existing and new conventional generation, in particular as intermittent renewable generation requires back-up from conventional generation. 28. Going forward the grid needs to be made fit for purpose and in particular, in addition to allowing for increased connection, be able to cope with intermittent generation and distributed generation. 29. Supply chain constraints: Developers have diYculty in securing wind turbines and other equipment for their projects due to the constraint in component supply such as bearings, gearboxes, transformers, cables, generators, turbine blades and towers. There are insuYcient turbine manufacturers to drive the necessary competition that would lead to the expedient delivery of low cost turbines. The supply chain is experiencing a shortfall in trained staV which will become a major issue for the industry shortly. Centrica is optimistic that, if the investment signals are there, confidence can be created in the long-term nature of the renewables industry, and more manufacturers should be attracted into the market, improving both supply and competition. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

98 the economics of renewable energy: evidence

30. Public acceptability: If the likely EU renewable targets and the UK share are to be met by 2020, public acceptability of the need for investment, the cost of investment and the physical impact of investments will need to be courted. This will be of particular significance in the event of any economic downturn when competing priorities on the public purse are more exposed. Public education will be crucial to achieving this. Government needs to take a lead in changing the terms of this debate away from stark costs and impacts, to the need to reduce emissions, increase diversity and reduce gas volatility, and the positive societal benefits that this investment will have. The high level of misinformation around renewables developments needs to be addressed. 31. Barriers to microgeneration include the often high up-front capital costs, as well as regulatory issues (including problems with planning and high transaction costs for accessing ROCs), and a lack of consumer understanding about what can be achieved in this area.

Technical Limits 32. It is likely that as the volume of variable output (such as wind, wave, tidal, solar) reaches a very high level of penetration, this may cause electricity system balancing diYculties. At this point, the economics of the marginal renewable project will become less attractive. It is not yet clear at what level this will become an issue. This will result in conventional gas generators supplying mainly peak power. The economic rationale for such assets will therefore need to change from the current baseload power model. 33. It is possible that electricity storage may become economically attractive when the market reaches this point as storage would be able to smooth the output from renewable projects, potentially turning variable output into baseload power. At high renewable penetration levels, this could reduce the amount of conventional backup required to secure the integrity of the system. 34. Alternatively, a breakthrough in demand side management could lead to similar benefits, for example hybrid cars that can charge overnight, household appliances remotely switched oV for periods of time, or other forms of dynamic demand management.

3) Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 35. In Centrica’s opinion, it is unlikely that any new technologies would be commercially viable in the short to medium term without government support for R&D and deployment, and until the carbon price is high enough to support these technologies against fossil fuels. 36. As power and carbon prices rise, it is likely that the cost of more established renewable technologies will move closer to conventional generation. Increased competition should also drive down costs. Ultimately, Centrica would like to see the carbon price driving the construction of all renewable and low carbon technologies. Until that time, we believe that the proposed banding of the Renewables Obligation will bring about increased investment in large-scale renewable technologies in an eYcient and eVective way. Microgeneration and distributed generation technologies will require a separate support mechanism.

4) Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime? 37. Centrica believes that the Renewables Obligation provides a mechanism that works well in our liberalised energy market and has been successful in enabling investment in large-scale renewables in the UK. This year in fact, the UK will overtake Denmark as the world leader in oVshore wind development. 38. We accept that some other European countries have more renewable capacity available—and that in some cases this is significant. Each country has varying motives for implementing renewable energy programmes, with climate change and security of supply being sometimes conflicting strategic objectives. In the same way there are a wide variety of barriers to development that exist across member states with grid constraints, local planning consent, national planning decisions, consumer engagement, renewable resource availability, and supply chain issues each having a diVerent impact in diVerent countries. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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39. The lack of development in the UK is often compared to a high take-up in Germany where a system of feed in tariVs is seen to have been eVective in bringing on significant renewable investment against a failing RO in the UK. We believe that it is wrong to assume that this is because feed-in tariVs work and the Renewables Obligation doesn’t. 40. This fundamentally understates the additional encouragement that German developers receive in the form of easy and cheap access to the grid, low cost finance for developments and relaxed planning constraints. By contrast, each of these three areas represents a significant barrier to development in the UK. 41. Centrica strongly believes that those calling for the replacement of the Renewables Obligation with a feed- in tariV have failed to grasp the impact of these constraints. We do not believe that a feed in tariV would have been any more eVective than the RO in bringing forward renewable capacity in the UK. 42. Maintaining but reforming the existing system will allow a continuous flow of investment, will maintain investor confidence, and is consistent with the parameters of a competitive market. Under a banded RO, suppliers will remain obligated to deliver renewable generation, thus encouraging their participation in renewables. 43. Any move to radically change the support mechanism is likely to result in a market damaging hiatus in renewable build, as investors struggle to get comfortable with new parameters. It is likely that there would also be a negative impact on investor confidence in the supply chain. This would occur just at the time when we are trying to accelerate the development of projects and could jeopardise the UK’s achievement of the EU targets. 44. Building oVshore wind costs around three to four times that of gas-fired plant. To meet the targets, therefore, industry will need additional government support through a strengthening of the existing Renewables Obligation targets and extending the timeframe past 2027. This will signal the long-term nature of the UK renewables sector and, if set at the right level, should encourage the necessary investment in projects, skills and in growing a UK supply chain. 45. The RO has a fixed cost to consumers, irrespective of the generation that takes place. In the early years, high ROC prices were required to stimulate development and so the value for money was low. In the new banded RO, we believe that significant generation will be stimulated and that the value to consumers will be much higher. It is important to remember, however, that higher returns for early movers are vital to stimulate the market, and that without them, investment in new technologies may falter. 46. We do not believe that a support mechanism should favour one particular form of renewable energy over the others. We do recognise, however, that diVerent technologies are at diVerent stages of development and support the proposed banding of the Renewables Obligation to reflect this. This will ensure that in future developing technologies such as oVshore wind, receive more funding than established technologies. As a major oVshore wind developer, Centrica has played a significant role in helping to develop these modifications and supports the implementation of technology bands. 47. The support framework for new large-scale renewable electricity technologies via the Renewables Obligation is at a justifiable level. This is based on the positive contribution that technologies such as oVshore wind can make to carbon emissions reductions and also on the basis of helping an emerging technology to benefit from cost reductions through increased deployment, helping to deliver diversity and security of supply and in delivering a robust energy supply chain to “UK plc”. Centrica believes that the same arguments hold true, in some cases even more strongly, for smaller scale low carbon and renewable energy technologies. 48. In order to maximise the deployment of microgeneration technologies, an appropriate support framework is vital. Any eVective support mechanism for microgeneration will need to recognise the specific deployment issues involved, and the diVering needs of diVerent microgeneration technologies. It must both deliver an appropriately high level of support and make it as simple as possible for the customer to benefit from such support. These aspects are, in our view, more important than the precise form of support mechanism chosen. It is important that any support mechanism is funded in a way that aligns incentives and avoids perversities. For instance, if energy suppliers were required to fund the support mechanism themselves, they would not have a strong incentive to develop the market. 49. Assistance could be in the form of either capital support or revenue support. We see merit in both and would work within either framework to deliver products to our customers. The most often mooted revenue support mechanism is a feed-in tariV. The eVectiveness of this mechanism is likely to depend on the level at which it is set, and its operation. 50. Suppliers, who have an existing relationship with customers, are best-placed to administer a feed-in-tariV scheme for microgeneration. Allowing suppliers to reclaim revenue paid out to customers from a central fund is crucial. If the scheme is not funded centrally, suppliers may be disproportionately disadvantaged and unwilling to promote microgeneration technologies as a result. The scheme could be funded from general Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

100 the economics of renewable energy: evidence taxation, although we note the significant revenues that are likely to be raised from auctioning emission allowances in the future and believe that this could be a source of future support. 51. A feed-in-tariV for microgeneration would provide an ongoing revenue stream for a defined period. We believe that if the appropriate revenue were guaranteed, suppliers and others would actively consider introducing services designed to lower the capital cost of relevant technology.

5) On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables? 52. There is currently a queue of more the 40GW of projects of both conventional and renewable generation that are waiting for a connection to the transmission system. The current access rules are non-discriminatory. Irrespective of technology, generators are connected on a first-come-first-serve basis. A generator will only be connected once wider system reinforcements, if required, have been completed. 53. The existing access regime is currently being reviewed by BERR, Ofgem and the industry. As part of this Transmission Access Review (TAR) the industry is looking at ways of sharing access to the transmission system between conventional and variable renewable generation, in particular wind generation, to take into account their diVerent operating characteristics. 54. In addition, the industry is looking at technical networks standards (GB SQSS) to see how variable renewable generation can best be taken into account when planning and operating the transmission system. 55. Until now these standards have been based on a system with mainly large-scale conventional plant with an assumed 80% load factor (ie availability) when calculating network reserve capacity requirements. The equivalent assumed load factor for wind takes into account its variability and is around 20–30%. (Both load factors are lower than actual availability as planning for peak demand requires a more pessimistic outlook). In practice, this means that some additional conventional reserve generation will need to be kept on the network to maintain a suYcient reserve capacity margin at peak demand when there is wind generation on the network. 56. Regardless of any changes in these areas, there will still be a requirement for significant network investment, in particular in the transmission system, to meet the 2020 targets and to accommodate the conventional and renewable projects that are currently in the connection queue. Compared to conventional generation, the amount of network investment is likely to be higher for renewable generation because a large part of these projects are naturally located in the most windy areas of the country, which are at the periphery of the system. 57. Upgrading and extending the transmission system can take many years, not least because of planning issues. To avoid further delays in connecting both renewable and conventional generation, Centrica believes strategic investment in the transmission system should be considered, as outlined previously. 58. It is important that a balance is met between conventional and renewable generation, not least because the former is still required to provide back-up for renewable energy which is mostly of a variable nature. Renewable generation without adequate reserve or backup would have security of supply issues.

6) How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations? 59. Since 2002, the Government has placed an obligation on electricity suppliers to meet an increasing proportion of their electricity sales from renewable sources. This Renewables Obligation is 7.1% for 2007–08 and increases to 9.1% in 2008–09. The eVect of the EU target, supported by high and volatile fossil fuel prices and UK climate change targets will see increased investment in renewables in the future. 60. We accept that whilst wind power has significant benefits, it is essential that projects are designed to have minimum impacts on local communities and the natural environment. 61. One of the key drivers for developing oVshore wind is the environmental benefit. It is vital therefore to identify any potential environmental impacts (positive and negative) that may arise from such an oVshore development. In developing our projects, all potential impacts are therefore considered and studied regardless Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

the economics of renewable energy: evidence 101 of how realistic they may initially appear to be. By taking this “worst case” approach, evidence can be gathered by scientists and other marine experts to inform on actual risks and how these may be mitigated against. 62. Similarly, we accept that the planning system needs to take a balanced account of the global environmental benefits of renewable generation against any potential local environmental impacts. Renewable projects need to be appropriately sited and the planning process followed. To date we have had a concern that the balance of planning consent decisions has been in favour of local issues rather than the national or global imperatives. We trust that the remit of the IPC will support sustainable development rather than prevent local environmental impact. 63. Developing energy assets requires close liaison with local stakeholders, particularly in the pre-consent planning stages and construction, but also during the following years of operation. We engage widely with stakeholders to assess the social and environmental impact of our renewables projects and are committed to working with local communities at every stage. 64. Our approach is to deliver a proactive and responsive programme of meetings with individual groups and public exhibitions to engage with our neighbours and ensure that their interests are taken into consideration. We circulate a wide range of information such as scoping documents, which sets out the basis for scientific studies, enabling interested parties to comment and provide further information where necessary. 65. We focus our community investment on education, working with local schools and other community organisations to raise awareness of renewables and wider issues relating to sustainability. 66. For example, we have supported the redevelopment of the visitor centre at Gibraltar Point National Nature Reserve in Skegness, near our Lynn and Inner Dowsing oVshore development. The reserve, which stretches from the southern edge of Skegness to the entrance to The Wash, attracts around 180,000 visitors each year. Another educational initiative has been to work with local teachers in Skegness to help deliver useful lessons on renewables and sustainability that help meet the needs of the National Curriculum. 67. In Barrow-in-Furness, near our Barrow oVshore wind farm, we have forged a partnership with Walney School, supporting the school’s ambitions to make engineering a key part of the curriculum. 68. It is important to note that our work with local communities over the past four years has demonstrated a strong underlying support for the development of oVshore wind but that education is key to overcoming the many misunderstandings that lead some to oppose or potentially be concerned about such developments. Public opinion research for our current projects oV the Lincolnshire coast show 85% of respondents in favour of the development with just 6% strongly opposed.

7) How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? 69. At the current time electricity generation from renewables is not commercially viable against fossil fuels without government support. As the carbon price rises, and when fossil fuel prices are comparatively high, the economic case becomes more optimistic. 70. Support is currently provided to technologies such as oVshore wind in excess of the price of carbon avoided. This is done where these technologies oVer additional benefits such as diversity of supply, technological learning and creation of a UK export industry. Where other technologies provide similar benefits then a similar level of financial support should be available. We believe this is the case, for example, for a number of renewable heat technologies. This is a significant opportunity, with a potential market of many millions.

Microgeneration 71. The cost of microgeneration currently appears high compared with centrally despatched plant. However, direct comparison with centrally despatched plant is diYcult. Microgeneration avoids transmission and distribution losses, as well as significant investment in grid reinforcement. 72. Manufacturing and installation costs are projected to fall as volumes increase. It is diYcult to predict by how much as many of the technologies are in global markets. The Renewables Advisory Board believes, for instance, that the capital costs of photovoltaics could fall from £5,159/kW in 2008 to £2,991 in 2025, a 44% decrease. 73. Fuel costs are uncertain for technologies powered by gas, electricity or biomass. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

102 the economics of renewable energy: evidence

74. Furthermore, microgeneration costs vary greatly between diVerent applications. For example, when dealing with retro fit; solar thermal can cost between £1,000kW-£2,318/kW, ground source heat pumps cost between £800/kW–£1,660/kW and wind between £3,141/kW–£5,500/kW. The age and size of property, its location and the point at which the decision whether to install microgeneration is taken all have a significant impact on economics. 75. For many of the consumers who have adopted microgeneration thus far, cost is only one of a range of factors influencing their decision. Reducing carbon emissions is the main motivator for considering microgeneration, while reducing ongoing bills is also important.

Large-scale Generation 76. When comparing the costs of generating electricity we use a levelised cost to compare costs over the life of the asset. A levelised cost takes into account a number of variables to give a consistent view on diVerent technologies. Capital and opex costs, long term market prices, station life and capacity are used to calculate a real 2008 post tax figure. Capital cost assumptions and levelised cost are shown in the tables below. Industry source capital cost assumptions

£/kW CCGT 600 Pulverised Coal 1,300 IGCC 1,400 IGCC with carbon capture 1,800 Nuclear 2,000 OVshore Wind 2,500

Levelised cost range—based on real 2008 post tax figures at 8% discount rate

£/MWh CCGT 56–92 Pulverised Coal 55–80 IGCC 60–89 IGCC with carbon capture 57–85 Nuclear 50–70 OVshore Wind 74–110 OVshore Wind incl. ROC 37–55

77. The levelised costs are dependent on assumptions on fuel input costs, in particular coal and gas.

8) How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? 78. Centrica believes that meeting the EU’s 20% renewable target by 2020 will be extremely challenging but that the UK can achieve a 15% target, assuming the removal of barriers, the existence of an appropriate fiscal, policy and regulatory support framework, and an imminent scaling-up of ambition in these areas. Whilst the precise details are still to be finalised following a consultation over the summer, this will be predicated on around 40% of electricity generated from renewable sources. 79. That electricity target assumes a significant step-change in the proportion of heat and transport sourced from renewables. It is unlikely, therefore, that eVort can be transferred between the sectors on the basis of a cost analysis. All technologies will have a significant role to play. 80. The costs to deliver some large-scale wind technologies are rising due to increases in commodity costs such as steel and copper, and restrictions in the supply chain, although the establishment of a more competitive supply chain should help to drive costs down in future. Whilst initial capital expenditure on oVshore wind projects are higher than fossil generation, the “fuel” is free over the lifetime of the wind farm and not linked to a volatile wholesale market or rising oil price. 81. Given the additional drivers of the need for diversity and to counter volatile and high gas prices, therefore, power generation is in a strong position to take up any slack in meeting the target. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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82. Going forward, the even more challenging climate change target identified in the climate change bill of a 60% reduction in CO2 emissions by 2050 (possibly rising to 80%), implies a significant decarbonisation of the UK economy. At that point, for example, cars are likely to be hybrid and be powered on electricity. It is vital that whilst the focus is naturally on meeting 2020 targets, the frameworks are established that will allow the UK to meet even more demanding targets in the future. That points to an even more significant role for de- carbonised electricity after 2020, and is a powerful argument that cost should not be the only driver in setting an investment framework.

9) If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK?

83. Centrica believes that the majority of the eVort required to meet a 15% primary renewable target in the UK will come from a greater use of renewable sources of electricity. Estimates suggest that the electricity sector will be required to deliver around 35–45% renewables. The predominant technology is likely to be wind as it is the only technology that can be deployed in the necessary timescale in bulk. 84. We believe that there is some scope for part of the UK requirement to be delivered via trading with other countries but at this stage it is unclear how much trading will take place. Trading across the EU could be a cost-eVective way for the EU as a whole to meet its targets, but this needs to be reconciled with the need to keep existing investments in home countries on track. 85. The Directive allows for limited trading with countries outside the EU under strict conditions including the import of the electricity generated. Centrica does not oppose this level of trading, but we strongly oppose any amendment of the EU Directive to allow more widespread international trading. We believe this would undermine some of the objectives of the Directive, particularly in reducing dependence on fuel imports, and security of supply, and could significantly undermine investment within the EU. 86. Furthermore, meeting the UK target predominantly from projects within the UK will have additional benefits in terms of improving security of supply and building a domestic capability and capacity in the renewables sector, bringing value to UK plc. These benefits will be lost if the domestic target is diluted through trading. Potential UK investors will need to be confident that the UK government is serious about meeting the target before committing resource in this country. 87. We also have a concern that the potential for trading within the EU will not be known until the middle of the next decade. We believe that the scale of the deployment required is extremely challenging, and requires firm action to be taken in the short term. Anything that throws doubt on the necessity for such deployment will undermine chances of achieving changes of the scale necessary.

10) How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy?

88. The relative costs of renewables and other sources of energy are clearly impacted by both the carbon price, and the price of other commodities, most notably gas, oil and coal. As the carbon price is expected to rise in the future, and fossil fuel prices remain high and volatile, we expect that renewables and other low-carbon technologies like carbon capture and storage will become increasingly commercially viable in the future. The dynamics of climate change and the need for fuel diversity, however, coupled with a generation gap which oVers a window of opportunity to decarbonise the UK’s power fleet, highlight the need to bring on these technologies sooner rather than later. In order to do that, government support is needed to bring these technologies down the cost curve and enable early investment. 89. Centrica believes that the EU ETS is working extremely eVectively and that the carbon price is now a consideration in any company’s decision to invest in new power. The carbon price is a direct result of the supply-demand balance, and the exceptionally low prices in Phase I were a result of over-supply of allowances rather than any fundamental problem with the mechanism itself. As the cap on allowances tightens and the supply-demand balance tightens, the price of carbon is likely to rise. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

104 the economics of renewable energy: evidence

11) What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects?

90. Centrica does not have direct experience of biofuels. We note that the Carbon Trust has recently identified that biomass is best used for heating rather than electricity generation and support this view. However, more work needs to be done on the economics and supply chain risks of biomass, especially where it is produced from specifically grown crops (albeit it is less critical when using existing waste). This is a new commodity, global demand is likely to increase dramatically, and as such its future price and availability are extremely diYcult to predict. June 2008

Memorandum by E.ON UK

Summary — Renewable energy has an important contribution to make to the UK’s climate change targets. It will also contribute to energy security by improving diversity of energy sources and reducing dependence on oil and gas. However, in general, renewable technologies are currently more expensive than alternative sources of energy. — The EU and UK should aim to achieve reductions in carbon dioxide emissions at least cost and in a way which takes account of the need to maintain secure energy supplies. The optimum approach to achieve this is to encourage development of all low carbon technologies on a consistent basis through a single price of carbon. — The targets set out in the proposed EU Renewables Directive are inconsistent with this approach in that they require a level of renewables which is likely to lead to a higher cost of delivering CO2 emission reductions, given the high cost of some renewable technologies compared to alternatives such as nuclear or energy eYciency investments. However, it is the case that energy eYciency improvements are diYcult to deliver in policy terms and that nuclear power is not accepted as an option in some Member States. — It is therefore essential that the UK puts in place policies to achieve the targets which ensure that the financial support required for renewables delivers as much value as possible for the UK economy and for energy consumers. — The Government should publish its estimate of the full cost to the consumer of meeting the UK’s share of the EU Renewables target in each sector: transport, heat and electricity. — Government must provide a robust long-term policy framework for renewable energy delivery, to give investors confidence and to encourage development of the supply chain. E.ON UK supports a market-based approach and would prefer to see continuity in the existing policy mechanism based on the Renewables Obligation. — The main barriers for renewable energy projects in the electricity sector are: the extended timescales and uncertainties for reaching planning determinations; grid constraints on the system which will need to be addressed through significant new transmission investment; supply chain bottlenecks; and the limited availability of engineers with the skills to develop, construct and operate renewable projects. The reforms proposed in the Planning Bill would help address the problems with the planning system. — Intermittent renewable energy sources incur costs to the power system beyond those of the technology itself. Large volumes of intermittent renewable generation may lead to curtailing of renewable or baseload generation at times of low electricity demand and high renewable generation. Moreover, 90% or more of intermittent renewable generation such as wind will need to be backed up by more flexible fossil-fired capacity to help ensure that suYcient generating capacity is available at winter peak. — Consideration has to be given to how investment in that additional conventional plant is to be incentivised and rewarded, when some of it may only run on an infrequent basis. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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E.ON UK 1. E.ON UK is one of the UK’s largest retailers of electricity and gas. We are also one of the UK’s largest electricity generators by output and operate Central Networks, the distribution business covering the East and West Midlands. In addition, our E.ON Climate and Renewables business is a leading developer of renewable plant in the UK with 21 onshore and oVshore wind farms and a dedicated biomass power station currently operational, and more in development. 2. Across the E.ON Group we currently have renewable generation capacity in excess of 7,300MW. We have recently doubled our investment budget into renewables to ƒ6 billion between 2007 and 2010. E.ON is looking to increase its overall share of renewable electricity significantly by 2030 which will assist the company in meeting its target to be 50% less carbon intensive by 2030 (based on 1990 levels). Our answers to the Committee’s questions are as follows.

How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? 3. The UK’s energy policy goals are to reduce carbon emissions while maintaining aVordable and secure supplies of energy. Against this background, renewable energy has an important contribution to make to the UK’s climate change targets. It will also enhance the UK’s security of energy supply by diversifying the UK’s sources of energy and reducing the UK’s dependence of oil and gas where we are becoming increasingly reliant on imports. However there are also disadvantages in terms of the costs of many of the technologies and potential security of supply disadvantages from a rapid expansion in relatively undeveloped technologies such as oVshore wind. 4. The UK should aim to achieve reductions in emissions at least cost and in a way which takes account of the need to maintain secure energy supplies. The optimum approach to achieve this would be to encourage development of all low carbon technologies on a consistent basis, so that those with the lowest costs are deployed first, for example through a single price of carbon. The EU Emissions Trading Scheme achieves this objective by capping total EU CO2 emissions at a level consistent with the reductions in emissions needed to address climate change, while giving flexibility to market participants to invest in the most appropriate way within it. 5. The targets set out in the proposed Renewables Directive are inconsistent with this approach, since they require a level of renewables which is likely to lead to a higher cost of delivering CO2 emission reductions, given the high cost of some renewable technologies compared to alternatives such as nuclear or energy eYciency investments. However, it is the case that energy eYciency can be diYcult to deliver in policy terms, and that nuclear power is not an option in some Member States. 6. It is therefore important that the UK puts in place policies to achieve the targets which ensure that the financial support required for renewables delivers as much value as possible for the UK economy and for energy consumers. 7. While wind is an important renewable electricity resource for the UK, the UK should adopt a portfolio approach to renewables to avoid undue reliance on any one technology. Biomass and marine technologies such as tidal power should also have a role to play depending on the cost-eVective contribution they can make.

What are the barriers to greater deployment of renewable energy? 8. The main barriers for renewable energy projects in the electricity sector are: the extended timescales and uncertainties for reaching planning determinations; grid constraints on the system which will need to be addressed through significant new transmission investment; supply chain bottlenecks; and the limited availability of engineers with the skills to develop, construct and operate renewable projects. The reforms proposed in the Planning Bill would help address the problems with the planning system. In addition, it is necessary to ensure continuing confidence in the stability of the policy framework which incentivises renewable energy investment. 9. In the electricity sector, we and other developers are already progressing renewable investment rapidly, given the economic and practical constraints, and to accelerate this will depend on a number of practical barriers being removed to facilitate investment and attract capital. The European power sector requires investment on a very large scale in a number of areas, so returns will need to be attractive compared to investment elsewhere and UK Government policy to support this level of target will need to reflect this. For E.ON and other companies to commit to investments to approach this target will require a number of obstacles to be addressed. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

106 the economics of renewable energy: evidence

10. Government must provide a robust long-term policy framework for renewable energy delivery, to give investors confidence and to encourage development of the supply chain. While reform of the Renewables Obligation (RO), as provided for in the Energy Bill, will more eVectively incentivise oVshore wind, clarity will be needed in the longer term framework. The Renewables Obligation currently expires in 2027 but support will be needed beyond that date if renewable investment is to be maintained throughout the next decade. E.ON UK would prefer to see continuity in the existing market-based policy mechanism but further changes may be needed. This will need further analysis in the light of the Government’s consultation on delivery of the renewable targets, expected in the next few weeks. 11. It is unlikely that the RO would be a suitable mechanism for incentivising a large capital project such as the Severn Barrage with very long lead times. Also, in the heat market there are currently no policy mechanisms to encourage renewable heat specifically and this will need to be addressed as part of the Government’s current policy work on heat. 12. Much shorter and more predictable timescales for reaching planning determinations on renewable projects and related transmission reinforcements will be essential if the UK is to approach the renewables target. At present the lead times associated with providing the required transmission reinforcements are many years longer than the lead times for delivery of the renewable projects themselves. Reforms in the Planning Bill, if implemented and resourced, should improve the outlook for larger scale renewable and transmission projects. The proposed Infrastructure Planning Commission, the introduction of national energy policy statements subject to full public consultation, and the single consenting regime will help ensure that timely decisions are taken on renewable (and indeed other energy) projects in a way which balances national policy considerations and local impacts. However delays to smaller projects, not defined as major infrastructure projects, could increase the risk of missing the UK target. The planning system must also enable decisions to be reached on smaller projects on a more eYcient and predictable basis. 13. The full cooperation of other Government departments not directly responsible for planning, including the Ministry of Defence with regard to military radar, will be necessary to ensure that decisions on renewable projects can be reached in an eYcient and predictable manner. 14. Additional investment in the transmission network will be required to connect oVshore wind including oV the coast of Eastern England where the shallower depth of the North Sea will permit most construction. This will require significant construction eVort in advance of actual projects proceeding. However, transmission investment will need to be planned in a coherent way which avoids abortive capital expenditure and which reflects the actual deployment of new renewable energy resources. We believe that Ofgem can approve the required level of transmission charges to fund this expenditure within its current statutory duties, but the Government could helpfully give Ofgem more specific guidance under the statutory social and environmental guidance it provides under the Electricity Act 1989. 15. The wind sector and oVshore wind in particular are aVected by significant bottlenecks in manufacturing capacity of turbines and the availability of vessels capable of installing foundations and turbines in UK territorial waters. Without a substantial increase in turbine production, there will be delays to oVshore wind projects including those enabled by the Round 3 process announced by The Crown Estate on 4 June 2008. Limited supply in the oV-shore turbine market has constrained growth and has contributed to higher costs. Over time we expect the market to respond and this will be encouraged if there is a clear long-term policy framework for supporting investment. 16. The renewable industry will also need to attract people, particularly engineers, with the skills to develop, construct and operate renewable projects and will need to do so at a time when skilled people are increasingly required in other areas of energy infrastructure investment in the UK and elsewhere. The shortage of skilled engineers may limit the number of projects which can be pursued in the UK. This will need to be addressed by the industry itself and also by Government in its forthcoming consultation.

Are there technical limits to the amount of renewable energy that the UK can absorb?

17. The power system can accommodate a certain amount of intermittent renewable generation without adverse impacts on the stability of the system. According to the UK Energy Research Centre’s 2006 report on The Costs and Impacts of Intermittency, the current design of the UK Grid should be able to accommodate up to 20% of the country’s annual electricity demand from intermittent renewable energy sources before voltage and frequency issues begin to impact system stability. Whilst wind turbines can provide response to frequency dips (through the provision of more power), this requires them to run at a sub optimal output and therefore requires more turbine capacity to achieve a given level of total output. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

the economics of renewable energy: evidence 107

18. In addition, in circumstances where cumulative baseload and renewable generation exceeds demand (for example on a windy summer’s night) it will be necessary to curtail either wind or marine generation or generation from nuclear and fossil plant which are designed to operate baseload. These are economic costs rather than technical constraints which could be alleviated to some extent by improving the responsiveness of demand to price signals of by increasing the level of UK interconnection with other systems on continental Europe to allow power to be exported.

19. Our analysis suggests that, at 50GW of intermittent renewables, over 5% of its output or the equivalent generation from baseload plant would need to be curtailed. We anticipate that curtailing of output would commence at around 33GW of intermittent wind power (assuming just 10GW of baseload plant). As baseload capacity increases, the level of output curtailed will also increase and would therefore commence at lower levels of intermittent generation.

20. In addition, because wind capacity can be relied only to a limited extent to be available to meet peak demand particularly during the winter, wind will need to be backed up with more flexible gas or coal-fired generation, increasing the overall costs of operating the power system. Overall our initial analysis suggests that the capacity dependability of intermittent wind power is less than 10%. In other words, if we wish to maintain the same level of system security as today, for every 1GW of wind power installed on the transmission system we would require 900MW or more of conventional plant as back up capacity.

21. Consideration has to be given to how investment in that conventional back-up plant is to be incentivised and rewarded, when some of it may only run on a relatively infrequent basis.

22. It is important that the estimated costs to the UK of meeting the renewable targets are fully understood. The Government should publish its estimate of the full cost to the consumer of meeting the EU Renewables target in each relevant sector: transport, heat and electricity.

Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances?

23. Technological advances are gradually reducing the cost of production of renewable energy sources, but there does not appear to be a technological breakthrough which will lead to a dramatic reduction in costs in the near future which would avoid the need for Government support. Improvements are likely to be incremental and will only come about through a coordinated programme of support through the R&D, Demonstration & Deployment process. This should be designed to ensure there are no support gaps in the innovation chain and that technology push and market pull are both able to drive technologies to commercialisation.

24. OVshore wind technology continues to rely on the technology employed on land despite the operating characteristics prevailing at sea. This has resulted, for example, in gear box failures which have reduced the availability of oVshore wind farms. Improvements in availability of oVshore wind turbines will improve oVshore wind costs. Manufacturers need to respond to the opportunities made available through the Round Three process in the UK and devote eVort to developing turbines specifically for oVshore conditions.

25. The Environmental Transformation Fund (ETF) provides support for large scale demonstration and deployment of new low-carbon energy technologies which are close to market. However, if the deployment of emerging technologies is to occur at the rate necessary to contribute to the 2020 target, Government will need to commit a greater level of funding than promised to date.

26. The Commission has proposed that revenue from the auctioning of emission permits under the EU Emission Trading Scheme (EU ETS) should be used by Governments to fund demonstration of emerging low carbon technologies. E.ON agrees that this mechanism could provide an assurance to investors that funding would be provided at consistent levels and will not fall victim to periodic Government spending reviews. However the key goal is to ensure that a high level of funding is consistently available over time. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

108 the economics of renewable energy: evidence

Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime?

27. To date the RO has been eVective in stimulating investment for large renewable energy schemes in the UK. What has inhibited the rate of renewable electricity growth has been the planning regime, grid access issues and supply chain deficiencies. 28. Renewable development in Germany has been supported through feed-in tariVs and this has led to a substantial development in onshore wind capacity as well as other technologies such as photovoltaics. This approach has been in place for longer than the UK and planning and transmission constraints have been less significant issues. Given that the RO is incentivising large volumes of renewable development, that its structure is being amended under the Energy Bill to support a range of technologies, and that transmission and planning constraints are being addressed, we see no point shifting at this stage to a diVerent support mechanism given the disruption and uncertainty this would cause for investors. In addition, support for some technologies in Germany, for example photovoltaics, has been extremely generous and we question whether this would be seen as an eVective use of customers’ or taxpayers’ money in the UK. Feed in tariVs do not channel investment to the most economic operating sites, are complex and carry their own administrative costs. In Germany over 500 separate tariVs are needed to support diVerent technologies at diVerent locations and complex arrangements are necessary to spread the cost of this support across all suppliers. 29. The development of the EU ETS, and more specifically the achievement of a credible and sustainable price of carbon, will continue to incentivise the growth of the renewable energy industry across the EU. The EU ETS is and should remain the principal mechanism to incentivise investment in low carbon technologies to meet the UK’s climate change targets.

On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables?

30. There are a number of variables which make it diYcult to estimate accurately the required investment in the transmission and distribution networks, not least the sectoral target for renewable electricity and the location and type of renewable energy source. However, there are a range of factors which suggest that the investment required to deliver the renewable energy targets could be substantial. 31. Intermittent renewable generation will not displace significant fossil or nuclear capacity because of the need for back up plant, as discussed in paragraph 20. Therefore, a much higher total volume of new plant (replacement nuclear, fossil and new renewables) will need to be connected to the system than would have been the case. Whilst new gas, coal or nuclear generation plant can in many cases be built on the same sites as previously decommissioned installations, and may therefore have access to adequate transmission infrastructure (except where the capacity of the new plant exceeds that of the old capacity), this is unlikely to be the case for new renewable installations. 32. Much future renewable build will be in areas where the network is weak. For example wind farms tend to be located in remote regions for best wind speeds and to avoid planning issues concerning visual impact on dwellings (demand in these areas is obviously low and the established network capacity reflects this). The result is often a requirement for significant new network infrastructure and associated indirect upgrades in other areas. 33. Even with more investment, there are always likely to be limits on the capacity of the transmission system to transmit power from renewable and other sources of generation. Reform of transmission access arrangements, which is currently under discussion with Government and Ofgem, will need to balance the need to connect new renewable generation and the need to avoid imposing additional costs on the system by constraining oV thermal and fossil plant which NGC then has to compensate. Charging for use of the transmission system should continue to reflect the costs to the system associated with generating from renewables and other generation at that location on the system. This will help ensure that these costs are taken into account in the decision where to site the project in the first place. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

the economics of renewable energy: evidence 109

34. Again, this emphasises the need for Government to publish its estimate of the full cost to the consumer of meeting the EU Renewables target.

How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations?

35. Impacts on visual amenity are by their nature subjective, and it is impractical to try and compare these impacts with other pollution related impacts in a quantitative way. The primary goal of the planning regime should be to make the best judgment on these issues, taking account of the circumstances of each case and to balance national and local benefits against the adverse local impacts. At present the planning system does not allow this judgment to be reached in a timely and eYcient way and lacks a clear and consistent expression of the need for energy projects in terms of their contribution to the UK’s energy policy goals. The National Policy Statements proposed by the current Planning Bill should clarify how diVerent projects contribute to these goals and will help the proposed Infrastructure Planning Commission to make this judgment for each project.

How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions?

36. The chart below gives an indication of the costs associated with each technology type. However, it is important to make clear that these costs are based on one long term view of both capital costs and fossil fuel prices, both of which are subject to significant change. The costs estimated for coal and carbon capture and storage (CCS) are the costs once CCS technology is commercially established.

Cost Comparison of Various Technologies 120

100

80

60

40

20 Long-Run Marginal cost (£/MWh)

0 CCGT Coal Coal + CCS Nuclear Onshore Offshore Wind Wind

Capex & Opex Fuel Costs Cost of Carbon 20€/te Cost of Carbon 40 €/te

37. Most renewables are intermittent and require backing up with conventional capacity as discussed above. This makes them relatively more expensive than nuclear, gas and coal when total system costs are considered.

How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? 38. There are a number of technologies within the heat sector which may be able to produce renewable energy at a competitive cost compared to the current cost of oVshore wind. These include some forms of biomass heating, biogas and heat pumps (both air and ground source). Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

110 the economics of renewable energy: evidence

If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? 39. Renewable electricity will not necessarily provide the greatest share of renewable energy in the UK, although it is currently the most developed sector. Progress on developing renewable heat and transport has been slow to date, but more can be done to accelerate this particularly in the heat sector. The target should be shared between sectors on the most cost eVective basis. 40. Under the proposed Renewables Directive each Member State is required to increase the proportion of its final energy consumption from renewable energy sources by 5.5% and by a further % related to the relative GDP of each Member State. This means that the targets do not relate to the economic renewable potential of each country. Thus there should be substantial potential for investments in one Member State to contribute cost-eVectively to the target in another. Allowing more economic renewable investments in other Member States to contribute to the UK target should help bring down the overall costs to the UK and should help deliver the overall EU target at least cost. We would very much support this as it will reduce the cost to the UK consumer of meeting the target. 41. In the Directive, provision exists for trading across the EU of Guarantees of Origin (GOOs) (certificates representing renewable output) to encourage the lowest cost sources of renewables to be exploited at EU level. However this can be restricted by Member States if they are concerned this will have the eVect of undermining delivery of national targets. Trading needs to be developed in a way which will provide confidence that delivery of national targets are not at risk. Countries most likely to trade are those for whom delivery of the targets will be particularly expensive and those who are likely to have significant economic renewable potential beyond that required to meet their national targets.

How would changes in the cost of carbon—under the European emissions trading scheme—aVect the relative costs of renewables and other sources of energy? 42. A higher cost of carbon will benefit those technologies with the lowest carbon emissions. Renewables and nuclear would benefit in relation to more carbon intensive technologies. This could decrease the level of support needed under the RO or other support mechanism.

Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? 43. Probably not. Although a higher carbon price would reduce the level of special support for renewables needed and, if the carbon price rose to a high enough level, could make some technologies economic without support, a specific scheme would still be required to ensure available capital was committed to renewables to deliver the required target. What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? 44. There are a number of sustainability issues which will need to be addressed when assessing the potential of biofuels. These include particulate emissions, local air quality issues, the importance of monitoring ‘cradle to grave’ carbon emissions (including production and transportation emissions), biodiversity issues and compatibility with food production goals. 12 June 2008

Examination of Witnesses Witnesses: Dr Keith MacLean, Head of Policy and Public Affairs, Scottish and Southern Energy plc, Mr Sarwjit Sambhi, Director, Power Business Unit, Centrica and Mr Bob Taylor, Managing Director, Generation, E.ON UK, examined. Q213 Chairman: Good afternoon and welcome to runners, if I can put it that way. Before we move into Mr Taylor, Mr Sambhi and Dr MacLean. Thank you questions I do not know whether you would like to very much for giving up some of your time to be with make any preparatory or introductory remarks. No. us this afternoon. Thank you very much for the In which case let us go straight into questions. I will written submissions that each of you has given us in start by asking you how do the costs of generating advance. Whether we will have been able to read all electricity from renewables compare to fossil fuel and of them I am not sure; I think two of them were late nuclear generation? What are the current estimates Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor for the costs of greener fossil fuel generation with Q216 Chairman: Are there any further comments or carbon capture and storage and how do those costs do you both agree with your colleague? compare to renewable generation? Mr Sambhi: On the comment on the long run costs of Mr Taylor: Firstly we have shared some costs in the generation I would add the word of caution that it evidence in this regard. Before I go into the detail of really does depend on what you assume the long answering the question, energy investments of course range prices are for the input fuels. If I took, for are long term investments and the basis of the example, today where we have very high gas prices analysis to come forward with these costs takes long and very high coal prices, building a coal fired station term judgments about the relative commodity prices or a gas fired station looks very expensive; if you use for fuels, in addition to some other costs. In our today’s commodity prices, the cost of gas would be evidence you will see that we are showing costs for over £90 per megawatt hour and coal above £70. oVshore wind—these are long run marginal costs—of They are pushing to either at least or above the cost of around £107 per megawatt hour; the costs for oVshore wind which does not have any fuel exposure. onshore wind of around £75 per megawatt hour. However, if you assume that prices are half of what That compares to coal, assuming 40 euros a tonne for they are in the long run the picture does look carbon price, of around £70 per megawatt hour. diVerent. On your question around the cost of Broadly you can see that if you make some intermittency, I think that that point could be assumptions around the cost of carbon you can see overplayed because we have to remember that in the the cost of coal with the cost of carbon approaching future if we do have a lot of oVshore wind in the the cost of onshore wind. As soon as you move away power system in the UK, the role of our existing plant from the carbon price and just take the basic changes—the existing plant being the existing fossil underlying costs you get diVerent figures with fossil fuel plant—and they change to become backup fuels being much cheaper than the cost of renewable plants; they have longer lives because you are using generation. When it comes to carbon capture and them for less hours and therefore the new investment storage our view is that the cost of coal with carbon cost may not be prohibitive. capture and storage, once carbon capture and Dr MacLean: A further point on that, I think it is storage is commercially proven, will break even at the important to underline the fact that once the order of 40 to 50 euros per tonne, so you get a cost for investment has been made in the renewable forms coal plus carbon capture and storage of around that we are talking about, they are then independent about £70 a megawatt hour. That is sharing with you of the fuel price going forward, whereas one of the big the information given in our written evidence. issues that we are facing at the moment is not only the high price but the volatility and uncertainty of the Q214 Chairman: Just coming back to wind for a price, but also the diYculties with availability that moment, you were talking about long run marginal will increasingly have in the prices. It is slightly costs, does that include the impact on standby diYcult to do a comparison. In our written facilities, given that there is intermittency in the wind, evidence—which I think was amongst the later and does it include the impact on the grid? papers—you will see that that we have tried to show Mr Taylor: No, this is purely the long run marginal a graph which compares the price dependency of gas costs of the renewable investment, the wind generation versus renewables and it can be seen from investment itself. It will assume a certain cost of that that the curve for gas goes up very, very steeply connection charge in the economics and the capital depending on the oil price, whereas for renewables it cost of that investment, but it does not include any is a much flatter curve. With regard to the back up costs associated with supporting the intermittency of issue, I think it is wrong to think that it is only wind on the system. renewables that have to have backup. We currently have a system that is made up of generation that is Q215 Chairman: In order to make decisions best suited for doing diVerent things. Peak lopping, presumably one would have to look at the total for instance, is not something that nuclear does and systems. This is perhaps not for you. we already have to have things on the system which Mr Taylor: Exactly. We are looking at these as will do that. As you rightly said, the capital costs of individual investment decisions, but it is important many of the backup measures—which need not be when you are looking at the overall generation mix to generation, they could be storage, they could be consider the holistic economics of operating the demand side measures as well—if those are, as with system. Going forward, as we move from two coal or gas, relatively low capital cost then the overall gigawatts of wind on the system to 20 or 30 gigawatts cost to the system is still relatively small because the of wind on the system then there are other issues to main cost will then be incurred only when they are take into account and maybe in other questions we having to run to provide that backup capacity. That can address these issues and other colleagues can also is an economic reality that we already face with the comment. mixed portfolio of generation that we have and we Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor are just changing the balance of that situation by running capability outside of planned outages of 95 moving to a higher renewables penetration. per cent. When we analyse the data from our real wind farms that exist now—we have 21 Q217 Chairman: Previous witnesses have suggested geographically dispersed wind farms across the to us that the degree of intermittency associated with UK—and we look at that data, that data clearly wind is of a diVerent order than for any other form of demonstrates that in particular during the winter generation; is that correct? peak periods (which are some of the most essential Dr MacLean: It is a diVerent type. If you look at the periods for capacity on the system) the firm capacity situation we had a couple of weeks ago when Sizewell of our wind portfolio is somewhat under 10 per cent, B and Longannet both dropped oV the system at the around eight per cent. In the longer term we will same time, that was a massive intermittency of aspire to solve some of that through energy storage, gigawatts. That is something we would never have through demand side management and indeed with that single point of failure with renewables. The through very significant interconnection between the system has been built to be able to cope with that sort system. If we look at northern Germany—of course of change. It must also be remembered the biggest our company is present there—there are some 20 intermittency on the system at the moment is not on gigawatts of wind and there are lessons to be learned the supply side but actually on the demand side. The from how the system operates and the impact there. change from the summer trough to the winter peak is Some of the submissions we have made elsewhere absolutely enormous and the system has been have demonstrated that we could require the capacity designed to be able to cope with those ups and downs, to be increased from around 76 gigawatts (which is minute by minute, hour by hour, month by month. the current total capacity on the UK system) to We are altering the balance but we are not beyond 100 gigawatts, possibly up to 120 gigawatts, fundamentally introducing a situation that we have in order to support up to 40 gigawatts of wind and not been dealing with for many years already. towards 50 gigawatts if we go even further. So I think there are some diVerences and it needs to be addressed and thought through. There are diVerences Q218 Chairman: Is there not a diVerence between technically and diVerences commercially. intermittency which is a failure of plant and intermittency which is a failure of the source of power? Q220 Lord Layard: Could you tell us how much Dr MacLean: The durations are certainly diVerent capacity is held in reserve to cope with fluctuations in and I am not saying that we will not have to modify the wind and how much more reserve capacity will be the system to cope. All I am saying is that we already needed as the proportion of wind within the system manage these issues within the current system; the increases? Does the backup have to come from technical means are there and we believe the fossil fuel? economic model that we currently have will probably Dr MacLean: The answer to that is partly what we cope with that change as well. were saying before, that there is already currently somewhere between ten and 15 gigawatts of capacity Q219 Chairman: Is there a point at which there is so that is kept in reserve over and above what is much wind generated into the system that the costs technically needed to meet the absolute peak in the then flip into being significant? You are suggesting at system. It is over 20 per cent at the moment but that the moment that it is done on the margin. Perhaps number is coming down rapidly as plant closes and is your colleague would like to answer that. not replaced. Our companies have all worked Mr Taylor: I do think there is a diVerence once we together on a report from the UK Business Council start going to the extreme levels that we aspire to in for Sustainable Energy and I am happy to give the order to meet the renewables target. At the moment Committee a copy of the paper or a link to that. We we are able to cope with that on the system and, as my have calculated that we will need an extra 17 colleague mentioned, National Grid operate enough gigawatts of capacity in order to balance the increase spinning reserve to cope under most circumstances of renewables from about five gigawatts to 55 with a major plant coming oV the system. If we look gigawatts, so 17 gigawatt increase in the backup. at the load factors, and in particular here we are That can be in the form of generation or storage or talking about wind as the main part of renewables demand side measures which will allow either the investments, we are looking at onshore load factors peaks to be met or the other situation that we have of around 30 per cent, a little higher towards 40 per that if, for instance, in the middle of the night a gale is cent for oVshore. If we look at the inherent variability blowing, it is raining very hard, the tides are all doing compared to the running variability of a what they are doing very well, we are quite likely in a conventional plant, then the running capability high renewable penetration world to be generating available of a conventional plant suVers up to five per far more energy than we have actually got demand cent forced outages resulting in an average technical for at the time and that will make storage as an Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor element of that 17 gigawatts much more important in then there will be a requirement almost to create a order to be able to harvest all of that energy. That is new market which is a backup market and so your 17 gigawatts over and above what would be held at last question about the incentive for companies, the moment. today in the current market design there is limited incentive and that is one of the things that the Q221 Lord Lawson of Blaby: Have you got any industry is discussing at the moment: how should this figures on the cost of storage? backup plant be rewarded? Is there a regulated Dr MacLean: The cost of storage at the moment is mechanism? Is there a market for backup that is relatively high. I am not a great expert in that area but created amongst the generators? So we have not there is a lot of work being done at the moment, for solved the problem; we know what the problem is but instance in Scotland, looking at what more we can do there are diVerent solutions. with storage and what we can do with the existing Mr Taylor: If you think about it at the moment, we hydro plants that are there in order to be able to have some 76 gigawatts of capacity on the system. better use them for those sorts of purposes. We are Over the next 12 years a third of that will close out talking about an order of magnitude of change but anyway, that is the old coal plant and the old nuclear one which we think, by 2020, could play a significant plant. We have the challenge of potentially role in that overall one, but it will not replace the need supporting some 40 gigawatts of variable renewables for a big proportion of that 17 gigawatts to come capacity which can vary between being 40 gigawatts from some form of despatchable generation. and four gigawatts and that will require us to replace and invest in capacity to support the renewables Q222 Chairman: I think Lord Lawson was asking capacity that will be coming on the system. That is a whether you had anything on paper that you could very significant challenge and one that needs to be give us. thought about holistically in terms of the costs of Dr MacLean: No, I do not have at the moment. We running a system with that mix. are currently commissioning some work on that and we will have to share that at a later date. Q225 Lord Macdonald of Tradeston: When you come to the need for backup sources for your wind Q223 Lord Moonie: Have you done any modelling farms if it is not required yet, what do you think the work on, for example, charging batteries as a means net eVect will be on carbon emissions? As the amount of looking to the future or production of hydrogen? of wind capacity rises can you help with the equation Dr MacLean: One of the very interesting measures of how the carbon emissions will decline? that is being considered at the moment is to use peak Dr MacLean: All of the calculations are based on capacity for the charging of batteries for electric energy rather than capacity and I think it is hybrid vehicles. In carbon terms, even using current important that we split out the two issues. Let us grid electricity and the carbon intensity of that, it is take, for example, one of the scenarios we are actually preferable to charge the battery of a hybrid working on that we reach a penetration of renewables vehicle from the mains than by doing it through the of 40 per cent, it means that 40 per cent of the ineYcient internal combustion engine of the car electricity will be generated by fuel free means and the itself. As we move to a situation of 30 or 40 per cent remaining 60 per cent will require us to burn fossil renewables it then becomes much more attractive to fuels or to use nuclear plants in order to provide that. use electricity for batteries for vehicles and for heat The carbon equation is based purely on that energy; storage as well through immersion heating. You are it is only in a tiny, tiny way impacted upon by the then actually looking at the much wider picture of amount of capacity that we have sitting there in the heat and transport as well as electricity in order to system. In a world where we expand the system that make the best use of the resource that you have. we have at the moment of 70-something to 120- something then that increase in capacity does not Q224 Lord Layard: I do not quite understand the have a significant impact on carbon. It is only when return to the individual company that is supplying you actually start running the plant that the big the wind energy. Is there some linkage between the benefit of renewables is that it displaces the need to wind capacity and the backup capacity? burn fuel in order to create that energy. That Mr Sambhi: Today the requirement for backup for displacement is what is giving us the carbon saving V wind is relatively small because wind as a percentage and it is una ected almost completely by the capacity of the generation mix is tiny. To answer the question that we have sitting there. of whether today we hold backup generation the answer is no because the grid has enough reserve Q226 Lord Macdonald of Tradeston: It is quite a capacity in the system to cope with fluctuations in simple reduction. supply from wind farms in the UK. Fast forwarding Dr MacLean: Yes, absolutely simple, based on that to the future where the share of wind is much bigger, penetration level. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor

Mr Sambhi: Let us say we went to 40 per cent must also, on the planning side, ensure that we are renewables and let us say we had 20 per cent nuclear building what new network needs to be built in and the balance of electricity being provided by fossil order to accommodate the renewables in those areas fuels—so the balance is 40 per cent—that is nearly where they are going to be developed. That is going half of what we have today. In simple terms you are to be particularly true of the oVshore wind where halving the amount of carbon emitted. we are going to have to ensure that there is a lot of investment not only in the wires to bring the power Q227 Lord Lawson of Blaby: Lord Macdonald has a in but also onshore to make sure it gets to the right point because if, to take an extreme case, you went to places once it is there. Those are the two things and 100 per cent renewables there would still not be 100 I hope one of my colleagues will come up with an per cent reduction in carbon emissions because you answer to the second part. still require the backup. Mr Sambhi: Lord Paul, could you please clarify Mr Sambhi: You could not go to 100 per cent your second question because I am not sure I fully renewable energy because there will be days where understood it? the wind does not blow. Q230 Lord Paul: If you have to build a new plant Q228 Lord Lawson of Blaby: Exactly, that is the for fossil fuel generation and if you have to supply point. along with that 20 per cent of renewable energy, Dr MacLean: Even if you did get to a very high what will be the cost to the consumer? penetration the only carbon there is in the system Mr Taylor: Assuming that the figures I quoted a comes from the embodied carbon that you have little earlier on which were of the order of £100 a because you have built the thing and for any fuel that megawatt hour for oVshore wind versus the base you burn as you run it. That is the simple equation costs of coal without the cost of carbon which is and the embodied carbon is so much lower than the around £50 a megawatt hour, if you were doing 20 carbon from the combustion process that it can be per cent by oVshore wind and displacing the coal pretty much ignored for the purposes of that you would incur a 20 per cent increase I think of calculation. the overall cost. That is just a quick calculation that can be done from the figures that we quoted in the Q229 Lord Paul: What have been the main evidence. I would just like to add to the comments obstacles to building more renewable power from colleagues. I fully agree with the issues of the stations? Is it the money? Is it the planning grid, planning and supply chain. I think, given the permission? Or is it the connection to the network? scale of investment that we are now talking about Does it make any diVerence who owns the network? here (if we go to 30 gigawatts of oVshore wind we Have you done any studies that if you built a brand are talking about £60 billion plus investment just in new fossil fuel plant and then at the same time if the actual plant itself without other investments in you are asked to supply 20 per cent of renewable new support capacity and transmission) one of the energy, what will be the diVerence in cost to the things that of course is an issue is the attractiveness consumer? of the market for investors that have a choice across Dr MacLean: There are a lot of points there; I will a whole range of countries. We have seen some take the first part. The two main blockers that there examples of that most recently. are to progress are planning and grid. It is not the availability of money; it is not the support Q231 Lord Paul: I was not asking the question about mechanism. The Renewables Obligation has created your costs; I am talking about delivery to the a lot of interest; it has created a lot of backing from consumer which includes connection and storage investors. Our problem is that there is a queue of backup. projects waiting to get on to the system and either Mr Taylor: I am sorry I am not able to answer that. they cannot get planning permission or, when they My answer was really just an implied increase in the do get planning permission, they cannot connect to wholesale cost. the network. All of us are very supportive of the Planning Reform Bill and the ideas in there to speed up decision making. We do not expect every Q232 Lord Moonie: Shell has recently pulled out of decision will be a yes; we want quick “yeses” and the London Array oVshore wind farm project in quick “nos”. The decisions are not better but if they which E.ON is an investor, citing unfavourable can be made in months that is better than years as economic factors. Could you expand a bit on the we have at the moment. Grid access must be economic problems facing oVshore wind compared reformed to allow renewable generators to connect to onshore projects and other forms of renewable to the system when it is technically possible for them generation? Do you think this is going to change to do so. At the moment that is not happening. We over time? Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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Mr Taylor: In a sense I have to leave Shell to make interested in. You can get a lot of power out of a low their own comments, but the comments they have capacity. It is really a misleading comparison. The made are that they are reviewing their investment renewable world is a diVerent one. We have looked at options including opportunities to invest in onshore hydros with capacity factors of less than 20 per cent wind in the US and they have concluded that they quite happily and they do a good job for what they wish to dispose of their share as was announced. are designed to do, which is to provide energy at Everything is relative and they were looking at other particular times. Wind and tide and wave will do options for their investment. The investments in exactly the same. Let us see the energy rather than the oVshore wind are significant. London Array is £2 capacity. billion-plus for one gigawatt of oVshore wind and therefore these are big investments. We are now Q235 Lord GriVths of Fforestfach: I would like to looking at that in the light of what has happened with ask you questions about carbon capture and storage. Shell and of course reviewing that project to One is what are the challenges to making it understand the economics and to work with the commercially viable? Secondly, in terms of your own supply chain to try to make sure that the economics company, what is the potential of CCS for cutting work for that project. I cannot really go into too your own carbon emissions? Thirdly, how advanced, much more detail really on that, suYce to say that if at all, are the plans of your own companies to there is bound to be a delay as a result of Shell—who install these facilities in plants? Fourthly, is there had a third of that project—deciding to sell their anything the Government should be doing to enable share. We hope to resolve this as quickly as possible this technology to be developed more rapidly? so that we can determine whether that project goes Fifthly, in the chart we have from E.ON the marginal ahead or not. cost of coal compared to coal plus carbon capture seems at first sight to be almost negligible; I just Q233 Lord Moonie: Is one gigawatt the headline wondered if you could comment on that. figure or the 30 per cent figure? Mr Taylor: On the last point, the reason why it looks Mr Taylor: That is the headline figure, so its comparable with coal is because if you have carbon contribution will be of the order of 38 per cent of that costs at 40 euros a tonne then when you add the cost on average. of carbon on to an unabated coal plant you see it approaching a similar kind of cost. Q234 Lord Moonie: Is the winter profile any better than for onshore? Q236 Lord Lawson of Blaby: Where do you get that Mr Taylor: I do not have the exact figures but on figure from? average over a portfolio of wind farms we actually Mr Taylor: It is based on some of our own analysis have an average contribution during the winter peak plus other publicly quoted figures for a view of periods of around eight per cent. I cannot quote what commercially proven costs of carbon capture and we expect during that period specifically for the storage. London Array project. Dr MacLean: Perhaps in contrast we have just made Q237 Lord Lawson of Blaby: The cost of carbon? an announcement in recent weeks of a big oVshore Mr Taylor: In our information you can see we have project which will be the biggest in the world— quoted it at 20 euros a tonne, we have quoted it at 40 assuming we are there before the London Array—of euros a tonne, and this is basically looking at future half a gigawatt and that is an even higher cost per scenarios of carbon costs dependent on the European gigawatt than Bob was talking about there. It is 500 Emissions Trading Scheme and the decrease in caps. megawatts for £1.3 billion. We are putting our money where our mouth is; we believe that we can make the Q238 Lord Lawson of Blaby: So it is pretty economics of that project work. We would be contextual. delighted if the capital costs were lower but we still Mr Taylor: It does make some assumptions about the believe in the environment we are investing in at the price of carbon as a result of the European Emissions moment that that makes economic sense for us to Trading Scheme. That is why you see the figures move ahead with what is a very, very significant aligning when you assume a certain cost of carbon. I investment. I just want to reinforce the point, it is have just a few comments on carbon capture and very diYcult to compare capacity and energy. We are storage and then I will oVer it across to colleagues. building the project because we get money for The importance of carbon capture and storage providing energy not providing the capacity. The probably cannot be understated. Coal, whether we capacity is almost an irrelevance. As with a car the like it or not, is a very important part of the energy capacity of the engine is actually far less of interest resource both in the UK but particularly elsewhere in than the acceleration, the fuel consumption and the the world, in China and India. As you know, in China top speed, depending on which particular one you are in 2006 they built 90 gigawatts of coal plant—a Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor modern coal fired plant—but of course unabated coal initiatives aimed at reducing carbon that we emit in plant in terms of carbon emissions. I think if we are the normal course of business, but for utilities the serious about solving and reducing carbon emissions biggest impact that they can make is by reducing the from generation plant then carbon capture and carbon intensity of their fleet. storage is a fundamental issue to be addressed. In terms of the technology, in essence the components of V the technology exist today and are used at a smaller Q241 Lord Best: How e ective is the UK’s system of scale and in their various parts across aspects of the support for renewables compared to other countries energy industry today. You can see examples of that your companies are working in? For example, V V carbon being sequestered and stored underground, would a feed-in tari be a more cost-e ective way to whether that is for enhanced oil recovery or into boost renewable generation than the Renewables depleted gas fields elsewhere. There are three or four Obligation? fairly sizeable examples of that. Dr MacLean: I think I mentioned in an earlier question that we believe that the Renewables Obligation has been very eVective. In contrast to V Q239 Lord Gri ths of Fforestfach: In the UK? other countries the problem has been that they have Mr Taylor: Not in the UK, in Norway, Algeria and introduced support mechanisms; they have also Canada. If you look at transporting CO2 over long supported running applications and they have made distances through pipelines there are a lot of sure that good access has been possible so that examples of that particularly in the US where they do projects can be built and do not get stuck at one or pipe CO2 over quite long distances—1000 kilometres other of the stages. Our problem with the plus—as part of enhanced oil recovery processes as Renewables Obligation has not been that it has not well. When it comes to the capture part, how you generated the projects; we have had gigawatts and capture CO2 from either post-combustion, gigawatts in the queue. That has then made the combusting coal and then treating the flue gases and Renewables Obligation do what it was designed to separating out the CO2 from the flue gases, there do which was to further increase the financial benefit again some of that technology exists but it is smaller to those who are able to produce in the short term. scale at the moment. For pre-combustion there are This is why we have had a lot of criticism of the examples of other aspects of how you capture carbon. system because it appears to be over-rewarding One of the issues is that there needs to be a major those who are coming through and to an extent that initiative to establish a large scale demonstration is true, but the way to sort it is to remove the project. There are number of initiatives for the pre- blockage in the system so that we get the planned combustion process and the US are trying to get some number of projects being built and generating the V of that o the ground. The UK Government has electricity that they need to. That will then reduce come forward with its competition for a the price down to where it was designed to go in the demonstration project for post-combustion carbon first place. We certainly do not believe that feed-in capture and, as you will see in our evidence, we tariVs will be more eVective. We have lived for a submitted an application to compete for funds to be number of years under the Non-Fossil Fuel able to demonstrate large scale carbon capture and Obligation and other approaches which were very storage in the UK. The main issues to be sorted are similar to feed-in tariVs and they were totally scaling issues—scaling up this technology— ineVective in bringing forward projects. The first integration issues, so operating it as an integrated thing that has really ramped up the market’s interest chain, as part of a power station as well, and also and investors’ interests in renewable energy in the research and development to make the process more UK has been the Renewables Obligation and it is Y e cient because at the moment there is a sizeable far better matched to the liberalised electricity amount of power and energy that is needed in order market that we actually have in the UK. One final to operate the process itself. There are issues to be point, if you look at the example that is often solved and the next decade should really be about the quoted of the success of feed-in tariVs in Germany demonstration and commercialisation of that for solar photovoltaics, I would just remind you that technology. the level of support in Germany under the feed-in tariV was 40 pence and in the UK under the RO it Q240 Lord GriVths of Fforestfach: How far away are has been four pence. I think we would probably we from realising this? come to the same conclusion, that 40 pence is Mr Sambhi: If I look at what we are doing we set a probably the reason that it has happened rather target to reduce the carbon intensity of our than the delivery mechanism that was chosen for generation fleet, so that is the grams of CO2 emitted giving that to the generator. per unit of electricity produced. How do we get there? Mr Sambhi: If I look at other markets in terms of The main driver is by investing in more oVshore wind renewable support a lesson that I take away from which clearly has zero CO2 emission. There are other countries like Germany where they have introduced Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor feed-in tariVs is that they selected a mechanism and Mr Taylor: You are right in that to a certain extent they stuck with it. That is very important for the this is predicated on wanting to de-carbonise our UK because the RO is a relatively young mechanism generation infrastructure but to do so in a secure and I think we are now seeing utility and investor and aVordable way. That must be the objective. confidence to put in more capital to meet the Renewables is part of the answer—a very important Government’s targets. part of the answer—if you are seeking to de- carbonise our energy infrastructure. I do believe, for all the reasons of uncertainty which you have pointed out over the various other fuels and other Q242 Lord Lawson of Blaby: So far as carbon parts of the mix, that a diverse energy mix is capture and storage is concerned this is obviously important, including a strong and material role for completely speculative because it does not exist on renewables as part of that process. a commercial scale at the present time and it is Mr Sambhi: There are two points I would like to certainly not going to be introduced on a make, Lord Lawson. The first point is that the costs commercial scale for a very long time and might have gone up in terms of oVshore wind. That is not never happen. I am all in favour of research and because there is a misunderstanding of the development but this is completely speculative. It is technology and it is a more complex product to probably going to be very expensive indeed not least deliver; it is because the input cost and the supply because the idea of getting some return using the chain components have become more expensive. Oil carbon dioxide and enhanced oil recovery not only has gone up but so have steel and copper which are a is it not possible to be done on a large scale but also big component of the costs of building an oVshore the plan is to phase out oil, coal and gas altogether. wind farm. Will the costs come down? I think they Clearly there is no market there so this is pretty will. I am not betting on steel or copper prices coming dicey altogether. I will not ask any further questions down but I am looking at the supply chain for about that because we are running out of time and delivering these large infrastructure projects coming because it is so expensive. I would rather focus on down. An example would be moving manufacture wind power because wind power is the here and now closer to the source of demand. We know that wind whereas carbon capture and storage is just a twinkle turbine manufacturers are already considering this in the eye. I entirely accept that your companies are given the future demand in EU and the US. The seeking very hard to produce wind power in the second point is what is the alternative? You have most economic way you possibly can; I accept that already said that carbon capture and storage is a long unreservedly. However, the fact is that all your way further ahead. In terms of other options on the projections are mere wishful thinking. As Dieter supply curve for reducing carbon emissions, oVshore Helm has pointed out, “There is little doubt that wind is the next best alternative; it is expensive but it wind has turned out to be so far much more is proven. expensive than forecast by the politicians and the wind power lobby”. It is very striking, is it not, that when the Government put out its original Energy Q243 Lord Lawson of Blaby: If I may I would like to V White Paper in 2003 it expected wind power to be get at this question a di erent way. What you are economic as against conventional power in the near talking about is what is the cost of cutting carbon future. The price of oil then was 25 dollars a barrel; emissions? I think that is something we would like to the price of oil now has increased by more than five know. Clearly there is no case for doing any of this times and yet you still need government support, unless you want to cut carbon emissions because the you still need taxpayers’ support. This is without conventional stations are clearly very much cheaper. taking into account that the costs, as you pointed The question which we need to find out is in these various diVerent fields what is the actual cost of out, of technology, of the spinning return and the cutting carbon emissions? connection costs. Is it really not the case that in fact Dr MacLean: I think there has been quite a lot of what you are doing is something which is totally work done on that. There are the carbon abatement uneconomic by a huge margin, is likely to continue curves which show the whole range of diVerent to be uneconomic which you are doing, as I said, in measures. What is interesting from that is that a lot the most eYcient, low cost way that you possibly of the very low cost measures are actually on the can and working very hard at that, but basically the demand side rather than the supply side, things that business case is that the Government has made its could be done in terms of energy eYciency in particular targets, the European Union has its reducing the amount that we actually consume. particular targets, you have this great confidence in politicians—bless you!—and therefore you feel that whatever it costs there is the commitment to give Q244 Lord Lawson of Blaby: You are quite right, but you whatever support is required? this inquiry is about renewables. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor

Dr MacLean: The point I was wanting to make from Dr MacLean: We believe that there are good reasons that is that despite the fact that some of these things, for the investment beyond simply the carbon. We when you actually have a very positive business case, believe, as I said previously, decoupling ourselves they do not happen automatically and they require from the need for imports and the uncertainties of intervention, they require subsidy or some sort of that, decoupling ourselves from what seems to be the money to make them happen. That is no diVerent to inexorable rise in the price of fossil fuels and of the what we have seen with mobile phones or the volatility and the uncertainty that that creates has a internet; they did not happen naturally, they required value which we do not actually have a way of a lot of marketing and input. We will get to a stage at calculating into the system at the moment. It makes Y some point if the oil price continues to rise where it very di cult to compare one thing with another and the diVerence that is required to make these wind is actually comparable with the fossil fuel things happen is not just the price of carbon and plants, but that does not mean that all the investment waiting for that or establishing the value of that and that needs to be made will happen and will happen then using that will not be enough to make these fast enough. That is why, at the moment, there needs things happen on their own. to be an intervention and a subsidy to make sure that these things are happening and are happening Q247 Lord Macdonald of Tradeston: Could you give quickly enough. It is not simply the diVerence us a reckoning on what the total annual cost of public between one or the other and whether that makes it subsidy might be once the system is fully developed worthwhile doing, whether that is the measure of the under the Renewables Obligation? price of carbon. You have to add into that the cost of Dr MacLean: I do not have that figure. I believe it will actually making it happen and of accelerating the be published next week in the Renewable Energy process to make it happen quickly enough. At the Strategy as part of the analysis that the Government moment that is the big challenge for the 2020 targets has done. It is not a number that we have access to at to make the investment decisions on nearly all of this stage. these things in the next two or three years otherwise Mr Taylor: I think it is essential that as we respond they will not be there for 2020. to the consultation on the green package that there is absolute transparency about how much investment and how much this is going to cost customers so that they can understand the trade-oV—there is a genuine Q245 Lord Lawson of Blaby: That is a completely trade-oV here—being made between carbon security arbitrary date. and cost. There is considerable investment and Dr MacLean: The 2020 date is, yes, but it is an although there are obligations on companies and we arbitrary date which the Government will be bound seek to use those obligations and make investments, by and will face sanctions if it misses the target. That it is important at the end of the day for customers to is the reality of the situation we are moving into. understand the full underlying costs of these choices. Chairman: Thank you. We have traded upon your time rather longer than either you or we were Q246 Lord Lawson of Blaby: That is what gives you expecting, but thank you very much indeed for the confidence to invest in something which may be spending your time here and answering our totally uneconomic. questions.

Supplementary memorandum by E.ON UK

REQUIREMENT FOR THERMAL GENERATION TO BACK-UP WIND CAPACITY 1. Following the recent oral evidence session this supplementary note provides further explanation for the statement that a high % of wind capacity needs to be “backed up” by thermal plant to meet winter peak demand.

Variability in Wind Generation

2. Wind generation and thus its contribution to meeting electricity demand varies with wind speed. A typical single 3MW wind turbine generates no electricity output when wind speed is less than about 3 metres per second (m/s), reaches its maximum output at about 15 m/s, and shuts down when wind speed reaches around 25 m/s to preserve its physical integrity. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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3. A single wind farm with a number of turbines will smooth or average this eVect as wind speed will vary somewhat across the area of the wind farm. For example at an average wind speed of about 3 m/s there will be some output because the wind will be above that speed at some locations and below it at others. On the same basis, it is less likely that the wind speed will be high enough across the entire area to deliver maximum output from all wind turbines. For a small part of the year (less than 1%) an individual wind farm is close to full output, but for much of the year it generates far less and for 15–20% of the year it generates no output. 4. The eVect of operating a portfolio of wind farms is to smooth this eVect further, with less variation in output across the year. The portfolio never reaches full output and peak output is around 80% of full capacity, but there is only a very small portion of the time when there is virtually no output.

Correlation between wind output, season and time of day, and with electricity demand 5. The extent to which wind speed, and thus output from wind generation, correlates with periods of high electricity demand is important in assessing the extent to which we can rely on wind generation to meet winter peak electricity demand. Winter is generally windier than the summer, with the median output for a winter day higher than in the summer. However, on the coldest days (with temperatures below zero), there tends to be little to no wind, corresponding to winter anti-cyclones. There is an increased risk of very low wind speeds, with wind generation output less than 10% of theoretical maximum, on high demand days. 6. It is also important to recognise that the output of windfarms are correlated with each other, so that if a particular windfarm is suVering a lack of wind it is very likely that those nearby are too, and even the most distant windfarms are less likely to be generating. This is a result of weather systems such as windless anticyclones being large enough to aVect all of the UK. 7. The precise correlation between UK wind generation and wind speed is complex and needs further analysis but, overall, we conclude that the relationship between the level of UK wind power output and UK electricity demand is very weak and, at best, the availability of wind generation is no better during high demand periods than in periods of lower demand.

Assessment of the extent to which we can rely on wind to generate to meet winter peak demand 8. From the point of view of the system operator (National Grid) who must schedule suYcient capacity in order to meet winter peak demand with a very high degree of probability, an assessment must be made of how likely it is that the capacity available will in fact operate at the time required. For this purpose, planned outages and weekend maintenance can be ignored as they are highly predictable and scheduled for low demand periods. 9. Excluding these factors, the weekday availability (actual availability/maximum total availability) of thermal (ie burning coal, gas, oil or biomass) plant over the winter period is about 95% with breakdowns accounting for 5% of maximum total availability. Crucially, breakdowns are generally not correlated with each other. There are exceptions and these have to be taken into account (such as loss of gas supply at a number of stations, or type faults), but they are generally a small eVect. So, if a unit at Station X is unavailable, there is no reason to suppose that another unit at a diVerent station is going to be unavailable. This means that conventional units are very eVective at backing each other up, especially when the portfolio contains a mixture of plant types and fuels. 10. To assess the extent to which investment in wind capacity will be able to replace thermal plant on the system while ensuring that peak demand can be met at the same level of reliability, we need to assess how much wind capacity on the system can be relied on to meet peak demand at a dependability of 95%. Our assessment of winter wind generation data in 20075 indicates that the system operator could rely on 8% of total UK wind capacity to meet winter peak demand at the same level of dependability as thermal plant. On this basis, if the UK required, say, 40,000MW of wind capacity to meet its renewable target by 2020, only 8% of this renewable capacity (3,600MW) could be relied on to meet winter peak demand. This would avoid the need to build 3,600MW of new thermal plant but the remaining 36,400MW of renewable capacity would need to be “backed-up” by thermal plant to meet winter peak electricity demand in 2020. This eVect could be to some extent mitigated by more extensive electricity interconnections with continental Europe (which would enable “back-up” power to be imported), the longer term development of new electricity storage technologies at a significant scale (which would be able to store power from the grid and produce it when required), or more demand side management capability which would enable demand to be varied in relation to the level of wind generation. 5 Based on E.ON and E.ON contracted windfarms but assumed to be representative of all of UK. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

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11. This assessment is consistent with other studies carried out in the UK and Germany6, where there is extensive experience of operating grids with large volumes of onshore wind. However, for the UK, the calculation should be refined in the light of a more detailed assessment of the actual wind portfolio likely in 2020, further analysis of the correlation between wind speed and demand and an analysis using data over a longer period, but we believe the broad implications for future generation requirements will remain valid. We recommend that the issue is explored in more detail as part of the Government’s forthcoming consultation on delivery of the UK’s share of its renewable targets. June 2008

Examination of Witness Witness: Professor Gordon MacKerron, Sussex University, examined.

Q248 Chairman: Welcome, Professor MacKerron. area too. There is of course a direct eVect on climate Thank you for coming to give evidence to us. What change. You have already explored with the previous do you consider to be the key considerations for UK witnesses who have more expertise than I do some of energy policy (that is energy and not just electricity)? the issues about intermittency of renewables which, How do you see renewables fitting into that policy? in another dimension of security, may be thought to Professor MacKerron: That is a big question; I will reduce security. My own view is that we will probably endeavour to be fairly brief on it at least to start with. find ways of managing that relatively cheaply partly I would have thought the most important single because other countries such as Denmark are already diYculty facing energy policy is the potential trade- facing and, as far as I can judge, making reasonably oV between diVerent objectives. Clearly the two good technical progress in solving the problems. In major objectives now are energy security on the one economic terms there are two major market failures hand (which seems particularly powerful as an involved in renewable energy. First of all it helps the objective at the moment) and the long term climate problem of unpriced carbon which, of course, despite change objectives (which, as you know, the the European Emissions Trading Scheme, is not a Government has espoused since at least 2003). I think good investment incentive at all, and the fact that the diYculty is that policies designed to counteract R&D will tend to be underprovided in any private climate change are nearly always good for security, system because of its widespread availability to other but policies that are designed to be good for security parties. Whether renewables currently are well are not always good for climate change. Specifically managed in relation to these objectives is a diVerent a policy for security that emphasises the use of coal is question. I would diVer slightly from the previous going to counteract objectives for climate change in witnesses in thinking that there are real diYculties in the absence, as we have already heard, of any realistic terms of risk around the Renewables Obligation. In prospect for carbon capture and storage in my terms of value for money feed-in tariVs appear to opinion probably for 15 or 20 years and that is if have strong advantages. That is a subject you may things go reasonably well. Perhaps in a slightly more wish to return to later, but those would be my political context, the real diYculty Government faces opening remarks on the subject. is the urgency which it and the European Union perceive in proceeding towards rapid carbon Q249 Lord Layard: Looking at electricity, how do emission cuts and acquiring enough political the costs of generating electricity from renewables legitimacy to do so. It may require some diYcult compare in your view with fossil fuel and nuclear choices which voters and consumers may find quite generation? awkward and making policies stick while having the Professor MacKerron: It is very easy being an urgency which Government now believes is necessary academic to say that that is a very hard question to I think is a big and diYcult issue which Government answer, but that is how I will start. The first issue is will have to keep grappling with for some time. On that although the stand alone costs of individual the subject of renewables, renewables have a number technologies do matter and of course to private of advantages in relation to policy objectives. In companies who are going to invest their return will terms of the security objective they add diversity to very much depend upon the balance of the costs and the system and a subject to which I might return later the return they will get on their investment but, to if we have time is the portfolio eVect of adding come back to the point I made earlier, it is important renewables to a system that is predominantly fossil to look at the system impacts on investments; fuel. They clearly substitute at some level for fossil whether that is a nuclear investment or a renewable fuels; they reduce pressure on world fossil fuel or a fossil fuel investment matters a great deal. A markets to the extent that security is an issue of particular advantage of renewables is that because dependence on oil and oil prices. There is help in that their risk profile is not correlated with the risks of 6 DENA Grid Study: “Planning of the Grid Integration of Wind Energy in Germany Onshore and OVshore up to the Year 2020” Cologne, February 2005 Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Professor Gordon MacKerron fossil fuel generation—so when fossil fuels become subsidies but I think it is important to recognise that more expensive that does not aVect the generating it is a subsidy rather than something that the market costs of renewables or, for that matter, nuclear—the has provided. That is my somewhat qualified answer, value to an energy system (an electricity system) of but I just do not think it is worth pretending that we adding renewables which are currently a small know things about the future that we do not; that is proportion of the system and where the risks are not a major diYculty for Government and for private correlated with the fossil fuels, the value to the system investors. is greater than reflected in the probably much higher stand alone costs. The diYculty in a privatised, Q250 Lord Macdonald of Tradeston: Just picking up liberalised system is that that advantage cannot be on your quote in the Financial Times on the hidden captured by the individual investor because it is a subsidies, as you saw it, for new nuclear plants in the system property which aVects consumers. That must form of fixed price for waste disposal. Do you think be set against some of the drawbacks of renewables that the Government should support nuclear power which you have heard about before which include a in a similar way to renewables? If so, the waste need for backup, which again is a cost that will not be disposal that you talk about, is that where subsidy met by the renewables investor as and when it might best be focussed? How would subsidising becomes an important issue. That is important to say. nuclear aVect the economics of renewable What are the costs of renewables? They are very generation overall? various. You have heard estimates for onshore and Professor MacKerron: There is clearly a case for oVshore wind. For other technologies for which we subsidy of nuclear on the grounds that it is a low have hopes but which are not yet commercial such as carbon option and because carbon is not adequately tidal and wave, frankly it is really not very helpful to priced there is a case for helping nuclear power on put numbers unless you put a very wide range around those grounds similarly to renewables. On the other them in which case their value is of restricted use. hand I would have thought the subsidy that nuclear, When it comes to fossil fuels it is clear that under as it were, deserves in this kind of analysis is current conditions they are the cheapest and most somewhat less because nuclear has a long history of commercial option, historically gas and probably research and development support. There is a very coal now if that was not subject to regulatory large and increasingly now flourishing international provision. However, as we have also heard, oil and industry in nuclear power and in those circumstances gas prices do vary very substantially. To quote a I think the subsidy probably should not be so great single number for what is the cost of, say, a gas fired because renewables I think have greater and longer power station built today with a lifetime perhaps of term prospects because their research and 30 years depends entirely upon unknowable figures development has historically been so limited. In Y for the future of gas prices, so it is very di cult to say. terms of how a subsidy might be given, it does seem Y In terms of nuclear there are real di culties in to me that waste is a very likely area because that is prediction there as well. We have not tried building a what investors seem to worry about most, even if the nuclear power station in this country for over 20 discounted costs of waste so far ahead are relatively years; we do not yet know which design we might low. It does seem to me that the back-end of the build; we do not know what regulatory provisions nuclear fuel cycle—that is the decommissioning and will adhere to that design with implications of cost. waste—is a responsibility which always in the end Perhaps, most importantly of all, we do not know devolves to governments partly because of the whether or not we will build a series or a single unit. extreme hazard that might be represented by the If we were to build a series we would probably have worst possible outcome but also because of the very construction costs something like 30 per cent lower long time horizons. On current estimates we would than if we build only one. Our history, as you not start to dispose underground of waste from new probably know, is that we tend to build one at a time build for about 100 years. That is because of the time in the UK; that could change, but that is our history. it will take us to build a repository and the fact that There are finally issues about the back-end of the our legacy waste is inevitably ahead of new build nuclear fuel cycle, about radioactive waste and de- waste in the queue to be disposed; one would not commissioning which probably are not very large want to re-package it at very high cost. We are talking costs, especially if you allow a discounting over a long about timescales of 100 to 150 years which we do not period into the future, but which nevertheless worry really have any mechanisms for private firms to investors a great deal. I am quoted in the Financial handle. In the end I think it has to be a government Times saying that Government has oVered now a responsibility and that may be seen as a drawback of fixed price to take waste oV nuclear operators’ hands nuclear power but I think it is an inevitable which may be a necessary condition for nuclear consequence of support for it. Finally on the subsidy investment but is, in my view, a subsidy of some issue, clearly what investors in nuclear power also indeterminate kind. I do not necessarily object to desperately want is some guarantee of the selling Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Professor Gordon MacKerron price they will get for their product which will be Q252 Lord GriVths of Fforestfach: How long do you something like 10 to 30 years ahead. Of course think it is going to take before we see this practically present market conditions do not provide that and implemented in the UK? although the carbon price may be positive and large Professor MacKerron: I would have thought 2020 in ten to 30 years’ time no private investor will bet on would be very optimistic. We have yet to demonstrate it right now. I think these are questions that are still it fully on a commercial scale and there are questions somewhat open and Government’s reluctance to about whether pre-combustion or post-combustion is admit to subsidy I think is because if they did they the right route to go down. The Government is going would be sent oV to Brussels under state aids and we for post-combustion probably because it thinks the do not know quite how long it would take before they long term export prospects to India and China might would come back out of Brussels on that score. be better served that way. It is not clear to me that that would necessarily prove to be economically the most viable or best way forward. I heard on the radio the other day the Energy Minister saying that in the Q251 Lord Paul: How significant, in your view, is current comprehensive spending review there is no the potential for reducing carbon emissions by money for government support for the carbon capture placing greater emphasis on the development of and storage project to move onto the competitive carbon capture and storage? How cost-eVective, process. I have heard industry people saying perhaps compared with the alternatives, is carbon capture 2025 as a more or less hoped-for estimate of when and storage? Should the government be more pro- commercial application at scale might be possible. active in supporting its development? These things are of course speculative. Professor MacKerron: I will try to be brief; my answers are not terribly diVerent from those you have already Q253 Chairman: Let me put the question in a slightly heard this afternoon. It is clearly going to take a long diVerentwayandthatisthatifGovernmentdecidedto time. I have recently been speaking to people who put its shoulder to that wheel and put the resource in, represent the Government of India at a bureaucratic how soon could it be done? level who tell me that for India there is no serious Professor MacKerron: I think you could then talk policy interest of any kind at all. It is a matter of about 2020 as being a more realistic timeframe but probably 20 years before it gets fully onto the policy there are still significant technical uncertainties. It agenda. Of course that could be sooner, but that is could go very slightly better than that, but even with their current estimate. From a domestic perspective, shoulder to the wheel it might go worse than that as carbon capture and storage is probably more helpful well. One might say 2020 would be a reasonably in relation to gas than to coal because it will be optimistic timeframe. cheaper and gas still emits carbon dioxide. Because of the international perspective, especially in relation to India and China, coal is inevitably the main focus. Q254 Lord Moonie: Do the UK’s electricity trading and transmission arrangements provide a suitable The major diYculty about predicting the cost is that framework for an industry with a high proportion of the cost will vary enormously depending upon the renewable electricity generation? storage location and the distance from the point at Professor MacKerron: I think the answer broadly which the carbon is captured and the point where it speaking is no but that does not mean that there is no will finally be stored. If it is in a relatively nearby V hope. On the subject of transmission and particularly o shore oil well and there is the possibility of the distribution in local systems they were of course enhanced oil recovery, that part of the cost equation designed for large centralised remote power stations, will be very low. If, on the other hand, one has to find simply stepping the power down from very high a deep saline aquifer and characterise it and it is voltage down to factories, households and so on. perhaps a couple of hundred miles from where the There is already a big and technically quite complex capture takes place, the costs are frankly yet eVort to try to change the transportation system for unknown but probably very high. It will be an electricity to allow for a much more interactive system expensive technology, there is no question about which can accept much smaller and more local that. On present technologies you pay a significant generation which Ithink most of us think isgoing to be penalty in reducing the power output because of the one important ingredient of any future which is more power you need to run the capture plant. That is a low carbon. There are real transmission diYculties major objection that, for example, the Indian which you have heard about already today in Government currently has, that it will lose a great renewables because of course renewables have to be deal of the power that it badly wants for its sited where they have to be sited not necessarily near development eVort and capturing the carbon is of centres of demand and that is an issue that takes some rather less interest to the Indian Government for time to resolve. I think it is possible that we can change quite legitimate reasons at present. our transmission and distribution arrangements in Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Professor Gordon MacKerron time for the expansion that we expect in renewable advantage might be of introducing renewables and energy, but the one area which I think is badly there are other techniques being developed around neglected and does need more attention is in the area valuation, diversity, trading it oV against of very small scale renewable generation. There is real performance in the form of standalone costs which I prospect in the long term for micro-generation at would be happy to share literature with you on if that household and block of flats level which is, among is of interest. There are ways of doing the other barriers, seriously inhibited by the fact that we quantification. The more diYcult issue is how to do not have any arrangements for trading or physical reward the existing rather fragmented market system distribution—reversing the flow—to give an incentive for system benefits which at the moment cannot be to owners of small commercial premises, captured by individual investors. That is one of the householders or blocks of flats to engage in renewable reasons why I personally think that the Government and other forms of micro-generation. That is an area I needs to intervene somewhat more than it currently think that is seriously neglected and in which does in order to try to find ways of rewarding genuine Government has been extremely slow to take action benefits for systems—which could apply to nuclear despite a number of reviews. technology as well as renewables—where those eVects take place. Q255 Lord Best: You said blocks of flats and commercial buildings and one is perhaps looking at Q257 Lord Best: In terms of that Government quite big blocks of flats—tower blocks—and big commercial buildings. Would you agree that eVorts to intervention, you are saying more of it is necessary. You would not say that the Government has been micro-generate at the level of the individual V household are likely to be waste of everybody’s time, very e ective so far in its policies in terms of more unless you live in the Scottish Highlands? renewable energy. What have been the most cost- V Professor MacKerron: Micro wind at household level e ective forms of support in your view in the UK and in urban areas is, I think, a dead duck; there is no in other countries? What should be the balance obvious future in it without any major technological between subsidies, guaranteed prices, quotas, carbon change. Some types of micro-generation do not work taxes and other forms of support? at that scale. The kind of micro-generation more likely Professor MacKerron: I think one has to confine one’s to work at that scale would probably involve the use of attention to those instruments that seem politically fossil fuels but probably at very high levels of plausible. Within Europe I think carbon taxes on any eYciency, so very small scale combined heat and significant scale are not currently plausible and power is potentially quite an attractive prospect and emissions trading is the fashionable way. I do not say that will save a lot of carbon emissions compared to “fashionable” to decry it but nevertheless, politically using mains gas or central heating. I know it is not the speaking, it is the way we are going. In terms of subject of your inquiry but in the area of micro- specific renewables instruments the research with generation that is much more promising than micro- which I am familiar does quite strongly suggest that wind which frankly has not got much future at all for well-designed feed-in tariVs, where you diVerentiate the great majority of householders in a country like the guaranteed price you will give for individual the UK. technologies, not only elicit renewables more rapidly but they do elicit them at a lower cost to the Q256 Lord GriVths of Fforestfach: Do you think it is consumer. There is good, reputable published important that we have in the UK a broad range of research comparing, for example, Germany and the technologies providing electricity and do you think UK, which will show that value for money is the benefits can be quantified? substantially greater in the German system. Having Professor MacKerron: I think it is important to have a said that, I think that the Government has a real reasonable range. It is diYcult to say how many; one dilemma. Having gone for a renewables obligation it cannot come to very deterministic answers. I think to is very sensitive to the criticism that comes from return to a point I made earlier, there are some investors, that investors want some kind of certainty techniques, mostly borrowed from orthodox finance in the public policy system; they do not want theory—mean-variance portfolio analysis—which Government to keep changing horses every five do suggest that where a technology has a small share years. I think there are ways around that. You can and its risks are uncorrelated with those of the ring-fence those people who have already invested in dominant technology, the value to the system as in the renewables obligation system; it is a little bit standard portfolio analysis is actually somewhat messy but it could be done, and I would not like us to greater than the standalone cost. My late colleague be trapped forever in the renewables obligations Shimon Awerbuch from the University of Sussex did systems when I think increasingly the evidence is that very good work on precisely trying to quantify the a feed-in tariV would be more eVective. However, I diVerent standalone costs, what the system recognise that the transitional problems are quite Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Professor Gordon MacKerron substantial and Government has some diYculty energy technologies, among which the marine with that. technologies (in which, as you know, Scotland has a particularly strong interest) do have major long term prospects, not least because some of them do not Q258 Lord Lawson of Blaby: This is all really totally have some of the intermittency characteristics that unreal, is it not? You very correctly pointed out that wind does (in particular tidal is a possibility). the Indians have no interest at the present time and Biofuels are of course a major issue at the moment. I for the foreseeable future in making their energy think there is a certain hysteria about biofuels which more expensive by carbon capture and storage. That suggest that they are in almost all circumstances is really part of a general pattern. It is certainly the terrible. I do not think we have the research base to case of China and India and a number of less say that, but clearly people are right to point to some important countries; their priorities are the cheapest of the conflicts between food and fuel for land use possible energy. That does not mean to say that they and they are unavoidable. If you want to come to will reduce their energy intensity through nuclear, I think we are still in a position of enormous Y improvements in e ciency, but they are going to uncertainty about nuclear. If we repeat our past keep on using carbon and producing energy and policy on nuclear which is to build the odd reactor therefore the whole thing is pie in the sky. All the here and there to a diVerent design, frankly I think money we are spending is only to reduce global they will turn out to be very expensive. On the other emissions, and global emissions are not going to be hand, if we were to go for a very large programme reduced by this massive amount we are told is with Government support we would seriously run the necessary. Whether it is or not is another matter, we risk of undermining the market that we so will not go into that. All we can try and do is do this painstakingly built up over the last few years. There charade at the least cost and that is really my question are some diYcult trade-oVs there and frankly I do not to you. If we are going to say that we want to have a think we know in the case of nuclear where we are. renewables policy, have a significant part of our The short answer is that what we have been doing is energy produced by renewables, the Government has the best option to date. gone very heavily into wind power and, although it is not a renewable thing, they are going in a slightly less enthusiastic way into nuclear. How that is going to Q259 Lord Lawson of Blaby: Let me put the question work out we shall see. With your great knowledge of another way, but maybe the answer is the same. these various diVerent forms of electricity generation Supposing the Government were to come in and say what is in your opinion the best buy of the various “We are prepared to provide a subsidy of whatever it renewables and by how much is it the best value? Or is per gigawatt of electricity generating and we are are they all much of a muchness? You may include committed to maintaining that for a reasonable nuclear in your answer. period of time” and leave it to the market—the Professor MacKerron: Let me start by saying industry—to decide which of these various sources of something that is a repetition of what you heard energy or electricity they would be most likely to find before but I still hold that it is genuine. Renewables investors to support, would they all go for wind do bring other benefits than simply reduced carbon power do you think, or not, looking across the world emissions. In a world that is increasingly worried and not just from our own experience? about energy security renewables can be quite helpful Professor MacKerron: The UK would certainly go for as both a more diverse source and a source that wind for now because there is a reasonably well- reduces our dependence on fossil fuels. There are established cost base for wind. You heard the countries—but we are not among them—that have previous remark that the costs of the raw materials acquired industrial policy benefits from renewables for wind such as copper and steel have inflated in but I am afraid the way Government has organised recent years which has made wind, at least its policy in that area in our country that is not the temporarily, as well as nuclear substantially more case. Coming now to the substance of your question, expensive than we expected. Nevertheless, there is a what is the sort of Which? report best buy on this kind of certainty about wind which would give subject, I think there is no doubt that because of the investors some comfort. I am sure they would then way the Renewables Obligation has worked it has wish to explore whether or not nuclear would give sought out and concentrated on that technology them the same degree of comfort and it is possible which currently has been the best buy and that is that over time—it would not be immediately—they onshore wind. OVshore wind, I believe, can become might decide that nuclear was a good bet. If you look not quite as cost eVective as onshore but will become, at other countries you get a diVerent picture. If you I think, substantially cheaper. I think we need, in went to France you would almost certainly discover cooperation with other countries—I stress that very that nuclear seemed the best bet, not especially much—to have much more intensive research and because of the market but because the French state development eVorts into other credible renewable has built up a huge protective subsidy implicit and Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG5

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17 June 2008 Professor Gordon MacKerron explicit around its nuclear enterprise which has been Q262 Chairman: As you suggested governments run quite eYciently for a long time. There would be have not spent as much time or attention as they have large national diVerences and of course we have one done on power generation. How would they tackle of the more liberalised markets in the world; others promoting heat in a way that was comparable to the would not have quite that kind of open market Renewables Obligation in power generation? How competition, the sort that is imaginable in the UK but would one approach this if you really wanted to get probably would not happen to the same extent at heat? What would they do? elsewhere. I suspect my answer has not been terribly Professor MacKerron: There have been suggestions diVerent from the other way round when you first about imposing various kinds of heat obligations not asked me it. unlike renewable energy obligations. That is not impossible but I do not think it has been thought through in any way as to make it potentially at the Q260 Lord Lawson of Blaby: It would be wind and moment a coherent issue. There is clearly significant nuclear but you think it would most unlikely to be scope for combining heat with power or combined wave, tidal or solar. heat and power at various scales ranging from the Professor MacKerron: It would not be wave or tidal household to the industrial to the municipal and so and it absolutely would not be solar photovoltaics on. To be commercially viable you need a reasonably V because, although they are technically very exciting good spread between the various di erent prices, in and getting cheaper, they are still very expensive. particular the probable gas input price and the electricity output price. When gas prices rise too high it becomes commercially unattractive, but in the long term I suspect that we could get a lot further than we Q261 Chairman: Can I just move to heating for a currently have by judicious expansion and little and perhaps ask you the same question about incentivising on combined heat and power at various the best buy in terms of renewables. What is the best scales. However, that has not been a matter of buy against fossil fuels or gas central heating? enough policy interest nor has there been enough Professor MacKerron: Heat has been a sector which, governmental work or, for that matter, academic whether you are dealing with renewables or anything research to enable us to say with confidence that we else, has been much neglected. Energy policy has can get very far with technologies like combined heat been all about electricity for a very long time in a way and power, but I would say that is probably, because that I think has over-emphasised the importance of well established technically, a very fruitful way electricity. For heat there are a number of established forward. small scale technologies that are, by some definitions, renewable but work very well. There are various forms of waste combustion which raise political Q263 Lord Lawson of Blaby: In another context you diYculties but are actually normally cheap and in my pointed out various kinds of collateral advantages view a rather eVective way of managing a good deal you saw in various diVerent renewables. There are of waste. Although not much widely used in the UK, also sometimes disadvantages. In the case of biofuels biogas from agricultural waste is actually a very is it not the case that biofuel production requires the eVective form of generating potentially heat and use of inordinate quantities of water and is that not other by-products, but probably not a major source something of a problem and indeed a cost in the for a country like the UK. Then one comes onto the real sense? diYcult question of biofuels and the obligations for Professor MacKerron: You are absolutely right and it renewable transport fuel obligation and wider is very important to say that biofuels are far from the European Union obligations which I think same thing in diVerent agricultural and other realistically are too taxing for us to meet whether it is regimes. Brazil, the pioneer, happens to have a form 2010 or 2020. Nevertheless I think there are real of biofuels based on sugar cane which does oVer very prospects and again in the area of second and even large carbon emission reductions compared to the so-called third generation biofuels there is a very equivalent volume of fossil fuels. The use of maize in great need for substantially greater eVorts in research the American Mid-West does not at all and on some and development because in these newer generations calculations is a net carbon emitter compared to of biofuels the plant matter will almost certainly not fossil fuels, so one has to be extremely careful to compete in the same way with food uses of land specify what kind of biofuels in what environments. because using cellulosic and other materials may Your point about water use is a very serious one in allow us to use marginal land in quite productive water short areas. Biofuels is a very diverse set of ways. I think for heat biofuels as a longer term bet technologies and we should be very careful not to talk have some real prospects. Beyond that it is very about it as if it were a single thing, but in many diYcult to know. circumstances it has real problems, I agree. Processed: 17-11-2008 19:12:44 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG5

126 the economics of renewable energy: evidence

17 June 2008 Professor Gordon MacKerron

Q264 Lord Macdonald of Tradeston: I would like to technologies like that to control the cost, especially ask a quick question on nuclear cost. We are told in when you have not built them in very large scales some of the more recent developments the costs have anywhere before. been escalating in an unexpectedly aggressive fashion. Why is this happening when it is an old and Q265 Lord Layard: Do you think it is going to be apparently stable technology in places like France? possible for us to meet the target by 2020 of 15 per Are people striving for some particular gain that is cent from renewables? producing all this uncertainty and undermining the Professor MacKerron: It is possible but I would say economic model? low probability. I think if we do meet it it will be Professor MacKerron: Some of the recent escalations potentially at quite high costs, taking costs in their are, as it were, the backwash eVect of world stand alone sense. We have every possibility that as commodity prices which aVect nuclear construction we build more renewables and we learn and we get as they do others, but the other thing to say is that economies of scale we will come down some cost virtually all the nuclear technologies that are now curves but we are also likely to move to less and less under commercial construction in the world—that favourable locations given that renewables, includes both Finland and France, the two especially in the form of wind, are very location prominent EU recent examples—although they are dependent for their economics. It is imaginable but I think it is fair to say that within Government and based on historic technology and the nuclear core is Y really very similar to technologies that are now 40 or perhaps behind closed doors most of the o cials are exceptionally worried about the feasibility of the 50 years old, nevertheless they have been target. I do not think we are currently in a position substantially improved with more passive safety of planning for it. When Government, for example systems and improvements of one kind or another. announced the possibility of the 33 gigawatts of However, unfortunately, none of them has ever been oVshore wind it does not seem to have done any built at full scale until the first commercial order. As serious work on the huge industrial and logistical most engineers will tell you, even if it looks like it is implications of such a vast programme, whereas it familiar, if it is new and you have never built it before does seem to be a bit more interested in the logistical you are very likely to run into first of a kind— implications, for example, of a nuclear programme. sometimes second and third of a kind—problems. I think we would only realistically be getting That has certainly occurred in Finland where there towards that 15 per cent if we pay a lot more Y has been di cult interaction between the local safety attention to some of what we used to call indicative regulator and the French leading constructor. Even planning back in the 1960s because markets are jolly in France some diYculties are emerging. Although good things but they do not actually solve all the oYcially the design of reactor in France, the so called problems. When one has a huge industrial project EPR (European Pressurised Water Reactor) is in the of this kind we do need a bit more of what we used same family as the one in Finland. The French design to call planning if we are to get somewhere near is not the same as the Finnish design, maybe because meeting the target. the safety regulatory systems in the two countries Chairman: Thank you very much indeed, Professor diVer. It is very diYcult when you play around with MacKerron. You have been very helpful. Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [SO] PPSysB Job: 408616 Unit: PAG6

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TUESDAY 24 JUNE 2008

Present Best, L Lawson of Blaby, L Griffiths of Fforestfach, L Macdonald of Tradeston, L Hamwee, B MacGregor of Pulham Market, L Kingsdown, L Paul, L Lamont of Lerwick, L Vallance of Tummel, L (Chairman)

Memorandum by National Grid plc

Introduction 1. National Grid plc owns and operates the high voltage electricity transmission system in England and Wales, and as Great Britain System Operator (GBSO), we operate the Scottish high voltage transmission system. National Grid also owns and operates the gas transmission system throughout Great Britain and through our low pressure gas distribution business; we distribute gas in the heart of England, to approximately 11 million oYces, schools and homes. In addition National Grid owns and operates significant electricity and gas assets in the US, operating in the states of New England and the state of New York. 2. In the UK, our primary duties under the Electricity and Gas Acts are to develop and maintain eYcient networks and also facilitate competition in the generation and supply of electricity and the supply of gas. Our activities include the residual balancing in close to real time of the electricity and gas markets. 3. Through our subsidiaries, National Grid also owns and maintains around 18 million domestic and commercial meters, the electricity Interconnector between England and France, and a Liquid Natural Gas importation terminal at the Isle of Grain. 4. National Grid is pleased to have the opportunity to contribute to this inquiry. Our submission will focus on: — Projected costs of reinforcing and upgrading the transmission systems to accommodate the renewable sources needed for the 2020 target. — Challenges of connecting new renewable generation, including management of system access, existing regulatory regime particularly on proposals for managing oVshore connections and planning delays. — Developing technologies that could serve to contribute towards meeting the target that include smart metering technologies and biogas injection. 5. With the significant increase in the proposed oVshore generation, it is essential that a proactive approach to investment based on judgement of requirements is taken as opposed to developers’ commitment. This will ensure that the infrastructure is in place when new renewables are ready to connect. Ongoing work investigating the level of investment required estimates the cost of onshore network reinforcement at about £3.5 billion to meet the 2020 target. The oVshore developments require co-ordination with the onshore work as it is clear that whatever is built oVshore will have a significant impact on what is needed onshore. Along changes to the regulatory regime to facilitate investment, National Grid is also looking at ways to reform the way generators connect to the system to speed up renewables connections to the grid. We are committed to support the Government and BERR in the delivery of any regime that they choose.

The Role of Renewables in Britain’s Energy Policy 6. National Grid welcomes and supports Government policies to facilitate investment in renewable energy and we take a proactive role in contributing to the debate on the subject amongst decision makers. The EU wide 20% target for all energy to be generated from renewable sources by 2020 is expected to translate to around 15% for the UK. To achieve that target, it is estimated that around 40% of electricity will need to be generated from renewable sources in the UK by 2020. This is due to doubts over whether heat and transport can make a significant contribution in this timescale. The current GB generation mix is heavily reliant on carbon-based fuel of coal and gas which provide over 70% of the primary fuel source for electricity generation. Electricity sourced from renewables account for only around 2%, this highlights the magnitude of the challenge ahead. Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

128 the economics of renewable energy: evidence

7. The emphasis of Government policy is currently on promoting renewables from electricity generation. However, work on developing renewable heat and transport is required in order to meet the climate change targets in the future. This is particularly relevant to domestic and commercial heating which account for nearly 50% of the UK’s total emissions. Policies around the decarbonisation of heat need to be developed in order to continue progress towards the UK Government’s target of a 60% reduction in CO2 emissions by 2050. 8. National Grid has a key role to play as Great Britain System Operator and has a significant responsibility in delivering any oVshore transmission regime, as well as many other key programmes which will be critical to the achieving the UK’s renewable energy targets.

Investing in the Transmission System to Meet the UK Renewable Energy Targets

9. If we are to have 40% of UK electricity coming from renewables by 2020, we will need to change the locations where electricity is generated. In other words, the locations where electricity needs to be transported from will change. In areas where renewables especially wind are most abundant, the network either does not exist, or has only been built to serve small amounts of generation, such as the Highlands and Islands of Scotland. Significant investment in the transmission system will be required, to both connect new generation and upgrade the wider system to accommodate larger flows to demand centres.

Transmission system investment costs

10. National Grid is undertaking a joint study with the Scottish transmission system owners to work out costs and options for achieving the 2020 target. Analysis on possible costs and energy flows discussed in this response is based on preliminary findings of this ongoing work. 11. The demand and supply profile in 2020 is likely to contain heavy flows from North Scotland through to Upper North England, high volume of oVshore wind farms oV the East Coast and potential contribution from Central Wales renewable generation as shown on the diagram in Appendix 1. 12. As stated in paragraph 25, National Grid believes that a regulatory regime needs to be put in place, in order to facilitate more strategic investment ahead of firm commitments from customers. National Grid estimates that capital investment to reinforce the onshore transmission networks across the GB market to accommodate the 40% target of renewable electricity will cost around £3.5 billionn.1 13. Our analysis explores a number of strategic investment schemes to connect oVshore wind on the East Coast, onshore windfarms in Wales and options for connecting Scottish renewables that would all together deliver the targets 2020 targets. See Appendix 2 for more details.

System operation costs

14. In addition to the network reinforcement costs outlined above, there are also system management costs to be taken into account especially as most renewables by 2020 will be wind. This is due to the fact that wind requires flexible generation with stored fuel to be available on standby for low wind days. 15. On a “business as usual” case where the electricity market continues to maintain suYcient generation capacity to meet peak demand (including suYcient backup capacity for low wind days), we estimate the additional short-term balancing costs arising with wind providing circa 40% of electricity in 2020 to lie in the range £500 million to £1,000 million per annum.2 These balancing costs represent an additional £6 to £12 per annum on average consumer electricity bill of around £390.3 16. The cheaper end of this range of balancing costs represents a scenario with reserve generation and balancing performed as today and with the market prices of the various balancing services remaining constant (despite the larger volumes required). The higher end of the cost range includes network constraint/congestion costs which might arise if there are delays in establishing network capacity or if there is significant network capacity sharing. 1 The amount quoted does not include local reinforcement costs on distribution networks. 2 For reference, current total balancing costs are circa £530 million per annum. 3 Source: EnergyWatch website. Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

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Barriers to the Greater Use of Renewable Energy 17. Since the introduction of the British Electricity Transmission and Trading Arrangements (BETTA) in 2005, unprecedented number of applications to connect to the system have been processed. National Grid, as Great Britain System Operator has made around 180 oVers to connect to the system with connection dates to 2015 and beyond. Throughout Great Britain, we are currently managing 16GW of signed connection contracts for new renewable generation projects—7GW of which is in England and Wales and 9GW is in Scotland. In total 49GW of new generation have signed connection agreements with National Grid compared with the 77GW of generation capacity currently connected to the transmission system.

Planning 18. Delays in securing planning consent are the most significant block to the timely connection of projects and the development of network capacity to enable this. Of contracted wind projects in Scotland, only 17% have consents. Across Great Britain, only 23% have consents. National Grid supports reform of the planning regime and in particular the Government’s proposals to provide for greater certainty in reaching decisions.

Transmission Access Review 19. Transmission access arrangements dictate the transmission capacity available for a generator to use. As wind in particular does not require access when the wind is not blowing, National Grid is committed to developing new transmission access arrangements to better facilitate the connection of renewable generation. The changes being proposed aim to make better use of existing capacity while incremental system reinforcements are underway by introducing options and flexibility for generators in the way they connect to the system. 20. We are playing a pivotal role in driving this forward with BERR and Ofgem within an industry wide discussion on reform of the current transmission access arrangements. There are three broad models of access reform which National Grid is leading the industry in developing. 21. The existing “invest then connect” system requires generators to make the required financial commitment but waits until full network reinforcement for the required capacity is complete before they can connect. Under the first of these referred to as “connect and manage”, generators will be able to connect ahead of wider transmission system reinforcement to accommodate their required capacity. 22. The second proposal involves short-term access commercial arrangements that would allow for some reallocation of existing transmission capacity to new entrants. The third option aims to bring in a system of auctions for long-term capacity rights. In the period before additional long-term transmission capacity can be provided, long-term access rights could be obtained through the auction process. Given the support mechanisms in place for renewable generation, this could allow for the reallocations of existing capacity rights to renewable generators. 23. Consideration of these issues by the entire industry through the appropriate governance arrangements is essential. We have put forward modifications to the relevant industry codes, and final fully developed and assessed amendment proposals could be delivered to Ofgem for determination by the end of 2008, with the aim of implementing the selected reforms by April 2010. Such improvements to the access regime would allow for the more eYcient use of the existing transmission system, and facilitate the connection of additional renewable generation. However, it is important to recognise that achievement of the very challenging targets for renewable generation will still require the delivery of significant additional transmission capacity.

Connection agreements and financial securities needed for grid connection 24. National Grid operates under a licence condition that ensures the company does not discriminate between individual generators or types of generation. At present we oVer connection to generations in the order in which they approach us. Some projects at the front of the connection queue do not have planning permissions and are holding capacity which could be utilised more quickly by projects which do have permissions. We have implemented a more vigorous management of connection contracts in an attempt to weed out those projects which are not progressing as contracted via the use of project milestones, quarterly progress reporting and by taking a less flexible approach to project slippage. In order to reduce any barriers for small projects, we have also introduced changes which reduce the amounts of financial securities required from customers as well as giving them more choice in how they provide them. Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

130 the economics of renewable energy: evidence

25. National Grid recognises the level of commitment required from generators wishing to connect to the system under the current regulatory regime would be a barrier to renewables. Investment in the transmission system still needs to be carried out in the most economically eYcient way to ensure that consumers are protected. This is especially relevant in light of other developments within the market—for example, wholesale energy prices are rising. However, given the scale of the challenge and the short time that the industry has to deliver solutions, new approaches are needed. One example could be “no regrets investment”, whereby the Regulator and network companies consider what network developments are likely to be required ahead of definite and confirmed customer needs to upgrade and reinforce the network. Such an approach is rare but not without precedent. National Grid is in active discussions with Ofgem around diVerent regulatory models to ensure that the required investment is made in order to help deliver renewables and ensure security of supply is maintained. One key issue to be worked through is the eVect any changes may have on the risk and reward profile under new regulatory models and how this impacts upon the wider market and upon consumers.

COMPARISON OF THE CURRENT REGIME AND PROPOSED CHANGES TO ALLOW FOR STRATEGIC NETWORK INVESTMENT

Current Regime Proposed Regime Developers’ commitment particularly for Invest to facilitate emerging requirement renewables entrants might be difficult rather than individual developers given the size, general characteristics commitment and planning issues. Large risk and little reward for Rebalance incentives to permit anticipatory investment in networks anticipatory investment while continuing to protect consumers

Offshore Transmission Regime

26. Due to limited space and planning considerations onshore, the bulk of the renewables needed to meet the EU target will need to be accommodated oVshore. It is, therefore, critical that the Government get the oVshore regime right. Ofgem and BERR have proposed a competitive tender approach to appoint OVshore Transmission Owners, ie the companies that will make investments and build transmission infrastructure to connect oVshore windfarms. This approach aims to deliver a regulated solution that introduces competitive benefits to end consumers. This will encourage single radial links for windfarms, rather than co-ordinated oVshore networks to develop. At the time this decision was made this was an appropriate solution and fit for purpose, however the need to develop renewables oVshore has changed significantly since then, most significantly with the EU targets for c 40% renewable generation by 2020 and BERR’s announcement of their aspiration for around 33GW of oVshore renewables to be in place by 2020.

27. As Great Britain System Operator, National Grid is committed to support Government policy to facilitate connection of renewables. However, National Grid is not currently persuaded that the proposed regulatory regime for oVshore transmission is the best way to deliver the UK Government’s aspirations. The proposed regime appears overly complex with many areas of the regulatory arrangements still uncertain and undecided. There remains questions on the consumer benefits in terms of cost reductions that the proposed regime will produce. In National Grid’s view, the deployment of simple, co-ordinated, regulated transmission build as demonstrated by the diagram below is a more eVective approach to help meet the significant challenge which is ahead of us in the next 12 years. The quickest, simplest and most eVective option is to extend the current regulated onshore transmission franchises oVshore, but other options are available.

28. With the significant increase in the proposed oVshore generation, it is essential that a strategic approach to investment is taken to ensure that the infrastructure is in place when new renewables are ready to connect. This should also be co-ordinated with the onshore developments as it is clear that whatever is built oVshore will have a significant impact on what is needed onshore. Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

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Technological Developments

Smart metering 29. National Grid strongly supports the roll out of smart metering. We believe that smart metering could deliver significant energy eYciency and carbon abatement savings. Smart meters are the next generation of electricity and gas meters. Through remote two-way communication technology, much like that used in mobile phones, they will bring about the end of estimated bills and meter reads, provide the platform for the development of a much greater choice in energy tariVs, and enable consumers to be informed to make choices about how much energy they use. 30. National Grid is currently assessing the potential contribution that a range of other smart technologies could make in facilitating renewable generation once smart metering is in place. For example, demand management technologies—that allow electric appliances, such as refrigerators and air conditioning units, to be automatically turned oV or down in response to changes in supply and demand—are now becoming available. These technologies could provide a more eYcient, and lower carbon, solution to the intermittency associated with renewable generation than the current approach of using conventional stand-by generation. Rather than calling on stand-by generation, National Grid could remotely and instantaneously reduce demand from these appliances in order to dynamically balance supply and demand.

Grid injected bio-methane 31. As stated in paragraph 7, heat is a key contributor to the UK’s total emissions. Bio-methane is a renewable energy source with similar properties to natural gas produced from the anaerobic digestion or gasification of organic material including waste. Bio-methane has significant potential as a renewable energy source. Injecting bio-methane into the gas network eVectively would reduce the carbon intensity of gas and can be used to convert existing gas fired power stations or domestic central heating systems to a renewable source of energy. As bio-methane is normally generated from locally sourced feedstocks it increases the diversity of fuel sources as well as the security of energy supply for the UK. 32. Due to Government subsidies in the form of Renewable Obligation Certificates (ROCs), the production of biogas from organic wastes is likely to expand significantly in the UK. However this economic support mechanism requires the biogas produced to be fed directly into an engine to qualify for ROCs. If instead, the gas distribution network is used to convey the equivalent amount of gas to a remote engine, this would not qualify for ROCs. Therefore, this incentive is likely, in many cases, to skew the market away from the optimum solution because it eVectively discourages the option to purify the biogas to bio-methane, and move it via the Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

132 the economics of renewable energy: evidence gas grid to a more convenient location where the energy (heat as well as electricity) is actually required and can be used in the most carbon eYcient manner. To address this issue, the Government could take one of two approaches: (i) It could be made easier for bio-methane producers to access mechanisms such as ROCs by making it possible to feed in a certain amount of bio-methane to the grid at one location and extract that same amount elsewhere to provide heat, power or transport fuel. (ii) A feed-in or production tariV could be paid directly to the bio-methane producers. 33. It is important that whichever approach is taken, that it appropriately rewards and incentivises grid- injected bio-methane producers in proportion to the reduction in carbon and methane emissions delivered by the technology relative to other technologies currently receiving support. For further details on some of the technical barriers to this technology, please see appendix 3.

Hydrogen Enriched Natural Gas (HENG) 34. Hydrogen Enriched Natural Gas reduces the carbon content of natural gas. National Grid is investigating a technology which converts methane into solid carbon and gaseous hydrogen. This is a form of pre- combustion carbon capture. The hydrogen produced can then be combusted to create energy with a sole by- product of water. The solid carbon can be used in various manufacturing processes. 35. The technology is in its early stages of development and there are several challenges to overcome. However, National Grid envisages a number of potential applications of the technology including enriching natural gas to be used in electricity generation. 36. Although this technology is in the early stages of development, National Grid wish to highlight the potential of HENG to reduce the carbon intensity of gas in a similar way to other renewables reducing the carbon intensity of electricity. Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

the economics of renewable energy: evidence 133

APPENDIX 1 The diagram below illustrates a scenario for meeting the 2020 targets characterised by very heavy flows from North Scotland through to Upper North England, high volume of oVshore wind farms oV the East Coast and potential contribution from Central Wales renewable generation. Energy flows in this diagram are based on ongoing analysis of what the 2020 supply and demand profile will look like.

PROJECTED ENERGY FLOWS IN 2020

Generation Demand CapabilityCapability

6573 1463 SCOTLAND 5170 B4 15001500

B6 22002200 4033 3793 5350

SCOTLAND 300 UPPER NORTH 2736 4645 NORTHERN 7259 IRELAND

12994 11985 B7 35203520 NORTH B8 92629262 8268 MIDLANDS B9 1075810758

7474 8800 4006 4230

2693 4935

ESTUARY B13 CENTRAL 23842384 1988 15360 23496 894 2648 1753 FRANCE

SOUTH WEST B15 76947694 Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

134 the economics of renewable energy: evidence

APPENDIX 2

OPTIONS FOR CONNECTING SCOTTISH RENEWABLES

Offshore Cable Routes Incremental Onshore Reinforcement

• This can be delivered in stages to • Estimated cost circa £1.3bn accommodate 10GW of • Accommodate 10GW of renewables from Scotland renewables from Scotland • Estimated cost circa £1.7bn • Additional costs associated with • Can be used to optimise the connecting additional offshore onshore network and avoid cost generation onshore of replacing assets if the need does not materialise offshore. • Option of connecting offshore wind Please note that the viability of both of these two options depends on the Beauly – Denny line going ahead. Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

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ONSHORE INVESTMENT CONNECTING EAST COAST OFFSHORE WIND

Required Potential Strategic Investment Investment

— Facilitating large volumes of oVshore wind generation on the East coast in an already congested part of the network. — 3–4GW of renewables connected to North of Humber at an estimated cost of £300 million. — 10–12GW of renewables connected to South of Humber at an estimated cost of £500 million.4 — Cable connections between Sizewell and Bradwell with 2.5GW of renewables connected at an estimated cost of £500 million.

4 The estimated £500 million for the South of Humber connections includes both the cost of connecting renewables as well as boundary capacity. Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

136 the economics of renewable energy: evidence

CONNECTING ONSHORE WINDFARMS TO DELIVER WIND FROM CENTRAL WALES

• Estimated up to 1GW of onshore wind looking to connect in areas B,C and D • Several new Over Head Lines options available at an estimated cost of £150m

APPENDIX 3

Grid Injected Bio-methane 37. Bio-methane is already being injected into the gas distribution and transmission networks in other parts of the world. Germany has a target to provide 10% of its natural gas supply from bio-methane by 2030, and has implemented feed-in tariVs to encourage production. In the UK there has been to date no bio-methane injection to the gas grid. National Grid has, for over 25 years, had experience of injecting biogas from Staten Island Municipal landfill site in New York into our gas distribution network. In the UK, other than the commercial barriers highlighted in the main body of the response, there are two key technical barriers: (i) Gas quality—Regulations in the UK have been focused on the injection of large quantities of natural gas from the North Sea and imports from Europe and will present some barriers to the entry of bio- methane which has diVerent characteristics to those of natural gas. One solution might be for Ofgem to and the HSE to exempt renewable gas from obligation on certain criteria that bio-methane has to reach subject to safety considerations. (ii) Equipment Requirements—The current requirements for monitoring and metering gas quality and volumes require very expensive equipment. The economies of scale needed to make this technology viable will require large plant deployment. National Grid would like to investigate the feasibility and assess the impact of less onerous monitoring and metering requirements for low volume injections. June 2008 Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

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Examination of Witnesses Witnesses: Mr Chris Bennett, Future Transmission Networks Manager and Ms Nicola Pitts, Head of UK and EU Public Affairs, National Grid, examined.

Q266 Chairman: Welcome to Mr Bennett and Ms onshore reinforcement is to facilitate the bulk Pitts; thank you for giving up some of your time this transfer of generation to the centres of demand. At afternoon to be here and thank you too for the the moment our studies have not looked into the written evidence which you let us have in advance. impacts on the distribution networks. Just to make it easier for the recording of the Ms Pitts: It also does not look at the connections proceedings, if you can speak reasonably slowly and from an oVshore windmill to shore as well, it is only reasonably firmly, that would be great, and if you can the onshore connections. speak reasonably briefly that will also be excellent. I do not know if there is anything you want to say by Q268 Chairman: But it would include in Scotland way of introduction or whether your written report the Beauly to Denny line. stands as it is. Mr Bennett: Absolutely. Ms Pitts: We just wanted to say that the figures contained in that are obviously our preliminary view; Q269 Lord MacGregor of Pulham Market: Could I we are expecting the Government’s renewable energy just follow up on that? You mention in paragraph 13 strategy to come out later this week so obviously we and in your appendices the three you have just will need to look at that and refine our thinking mentioned for the £3.5 billion; do you also have accordingly, but this is our estimate at the moment. issues about onshore wind apart from Wales and how much will that cost? Q267 Chairman: As of today. Perhaps I could start Mr Bennett: The onshore element assumes one the questioning; you have estimated that to meet the gigawatt in Wales and the associated reinforcement UK’s target for renewable extra energy an investment there; ten gigawatts of renewables in Scotland is all in the onshore transmission system of about £3.5 onshore, so the onshore elements are primarily billion will be required. How much renewable Scotland and Wales. There is a major oVshore capacity would that accommodate and are you aware reinforcement required oV the east coast of England of estimates of the additional investment needed in for the oVshore elements and the onshore element to the distribution networks as well as in the national connect the oVshore would be estimated at £1.3 grid? billion. Mr Bennett: Preliminary studies suggest that that £3.5 billion, which as Nicola said is our initial Q270 Lord Lawson of Blaby: Just to clarify what you estimate, would enable the connection of 30 said a moment ago before going on to another gigawatts of renewable wind which in our scenario question, there was one element in the cost which you would suggest 11 gigawatts of onshore wind and 19 said was not included in this. Can you explain that gigawatts of oVshore wind. So the £3.5 billion would because I did not quite understand what that element facilitate the connection of 30 gigawatts of wind; is and what you think that would add to the cost? broadly that reinforcement would be in three areas: Ms Pitts: The element that is not included in that is, in Scotland we would be anticipating 10 gigawatts of if you like, the single connection from an oVshore renewables, associated reinforcement costs around station, an oVshore wind farm onshore if you like, so about £2 billion; in England with the facilitation of that connection is not covered. What we are talking the oVshore regime we would be anticipating up to 19 about is the onshore costs and associated gigawatts of oVshore wind connecting on the east reinforcement—I think I am right in saying that the coast of England. That would probably cost in the potential for those additional costs could be— region of £1.3 billion of onshore reinforcement. The other area where we are expecting wind to connect is Q271 Lord Lawson of Blaby: I understand now, Mid Wales and we have anticipated for a gigawatt of thank you for clarifying it. Of course, the connection generation perhaps up to £200 million for the Mid from oVshore to onshore has to be done. Have you Wales connection. That is our initial estimate: 30 made a provisional estimate of what that would cost? gigawatts. As Nicola said we have recently Mr Bennett: We have looked into it and the oVshore commissioned a joint study with the Scottish regime, the rules as currently applied, would have a transmission owners and have committed in the next competitive tendering arrangement for it. If you look six months to really delving into looking at the at the numbers at the moment for the Round 2 wind investment and the deliverability issues so we will be farms, the number that is being quoted for seven producing a report that firms up on those numbers. gigawatts of oVshore renewables is in the region of £2 As far as the distribution network side of things is billion. If you extrapolated the Round 2 oVshore concerned, our studies have concentrated on 30 costs, £2 billion for seven gigawatts, in our scenario gigawatts connected to the transmission system. That to hit the 2020 targets you might need up to 20 Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

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24 June 2008 Mr Chris Bennett and Ms Nicola Pitts gigawatts oVshore so you could be talking in the across Great Britain and the 23 per cent, is that in region of £6–£10 billion for the oVshore investment. relation to your planning requirements or is that in relation to the projects as a whole? The main question Q272 Lord Lawson of Blaby: Plus the onshore. I want to ask you is how much of this investment in Mr Bennett: Plus the onshore element. transmission would be likely to require planning permission and how long would you expect to be Q273 Lord Lawson of Blaby: The oVshore, although needed to complete the investment? it probably does not have so many diYculties with Ms Pitts: Just on the first point, the figures are that planning permission, is actually quite considerably those generating stations have not got planning more expensive for a gigawatt coming from oVshore permission. than a gigawatt from onshore. Mr Bennett: That would be the case. Q277 Lord MacGregor of Pulham Market: It is the generating stations, not your bit. Q274 Lord Lawson of Blaby: One further question if Ms Pitts: That is right. Just to explain why planning I may, obviously this is only to 2020 when you would permission is critical, what happens at the moment is have something like 40 per cent of electricity that we need a fairly strong signal from a generator in generation coming from this, but the plan is that that order to trigger the transmission investment. is an intermediate staging post and it goes on Generally people will only want to do that once they increasing right up to 2050 anyway and possibly have got their own planning permission and their beyond that for all we know. When you extend it financing in place. They then trigger the transmission further will the cost per extra gigawatt come down— investments and what tends to happen is that the can we assume that if you were to double the amount generator is semi-ready to start building but they then of the electricity generated from this source it would may have to wait for the transmission investment to double the connection cost or would it less than go through planning itself, so it happens in series double it or more than double it? rather than in parallel at the moment. The other Mr Bennett: That is an interesting question and one factor that we have in the current planning of the challenges that we face at the moment is do you arrangements are that BERR will consent the build a network that assumes the final position and overhead line but substations are consented by local try and build capacity with the full endgame in mind, planning authorities so it is potentially like getting or do you take a more incremental approach to the authority from BERR to build a motorway but then investment? That is one of the challenges that we face having to go to each of the local authorities to get the in terms of the sizing of the network and how you size planning permission for the on and oV ramps if you that network in the first place. like, so we think that under the planning reform Ms Pitts: The other issue of course is if you are talking arrangements having that within one body is a very about reducing carbon emissions, heat for example sensible way forward. There is also a big issue around represents almost half of those carbon emissions so the uncertainty and I will give you an example. The the further that you go past 2020 and on towards last time that we attempted some large scale 2050 then you do have to tackle some of these other electricity transmission investment it was a project areas such as heat and transport and their called the Second Yorkshire Line and from start to contribution. finish that took 13 years to complete; much of that was in planning inquiries so we are very supportive of Q275 Lord Lawson of Blaby: Finally, I am not an the planning reforms that will put some time scales engineer at all but this is quite a substantial around this for us having a certain yes or no within engineering challenge is it not? four years is a lot better than having an uncertain yes Mr Bennett: It is. As far as the oVshore networks in or no within seven or eight years. Going back to the particular are concerned we are looking at trying to issue that I spoke about, that transmission push the boundaries as far as technologies are investment happens after the generators are ready, concerned, so there are engineering issues associated what we have proposed to the regulator is the with delivering the infrastructure but we think those potential for us to undertake strategic investment so are challenges that the industry can rise to and be able we will look at the generality of what needs to be built to deliver to. and we are talking about how regulation might incentivise us rather than dissuade us from doing Q276 Lord MacGregor of Pulham Market: I would that. As far as we are concerned 2020 is not that far like to ask you a question about planning permission. away in terms of planning horizon so the quicker we You refer in paragraph 18 to the problems of can get on with that investment the better. I have planning consents and the preliminary question is I spoken about how long it can sometimes take to get was not quite clear when you talked about contracted planning permission and building after that will wind projects in Scotland the 17 per cent of consents really depend on the type of project, how long that Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

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24 June 2008 Mr Chris Bennett and Ms Nicola Pitts project is and whether there are lines there in the playing is very much we have taken the work that future, but we do expect that pretty much all of the BERR and Ofgem had instigated on the transmission investment that we need to do will require planning access reform and we have now proposed a suite of permission. modifications to the existing contractual arrangements to deliver revised access arrangements. Q278 Lord MacGregor of Pulham Market: If you We believe the suite we put forward, all of the options went along the existing lines of the 13 years you spoke do better facilitate the connection of renewables and about, you would not really have very much in place weare currentlygoing throughwith industrya process by 2020, would you? of assessing all the various options and going through Ms Pitts: We really need traYc lights to be on green. a cost-benefit pros and cons analysis, and that is taking place this summer with the aim that a final Q279 Lord Best: My Lord Chairman, I wonder if I report with all the options fully costed, with the pros could ask a supplementary relating to planning and and cons, will go to Ofgem by October/November of indeed therefore to cost? In the Planning Bill which is this year so given the role that we are playing at the shortly to arrive in this House an amendment from moment, which is very much trying to facilitate a this House is about ensuring that power lines do not range of access arrangements, all of which have the travel too close to people’s residential potential to facilitate the connection of renewables, accommodation for fear of leukaemia for children we would prefer to go through the assessment phase and other health risks. Have you costed in the and then having gone through the assessment that will additional cost thatyou would have to incurif you had then hopefully give a steer in terms of which is the to underground your power lines in built-up areas best model. where it is possible that there will be a prohibition on taking the power lines too close to the inhabitants of Q282 Lord Best: You have partially answered my those places? question but how much oVshore wind capacity did Ms Pitts: To underground lines is more costly. I am you include in your studies, how much would it cost to afraid I do not have the figures in my head but it is a connect this capacity to the grid and now a new factor of five to ten on current costings so it would add dimension, are the current rules governing oVshore to the cost quite significantly. We do have rules that networks likely to lead to an eYcient pattern of are in place already around the distance that you have investment or would you like to see any changes? power lines from dwellings so there are some rules that Mr Bennett: As I mentioned earlier, our assumptions are there and I am very happy to write to you and set in our studies at the moment for 2020 assume 19 out those rules if that would be helpful. gigawatts of oVshore wind connecting primarily on Chairman: If you could let the clerk have a note on that the east coast of England. As I referred to earlier, if and anything that you do have in terms of the costs of you look at the costs that are currently being talked putting things underground would be useful to clarify. about for the Round 2 oVshore regime, seven gigawatts is estimated to be costing £2 billion, so our Q280 Lord Lawson of Blaby: The existing costing you best estimate at the moment for the oVshore costs gave us earlier is on the assumption that there is associated with connecting 19 gigawatts oVshore nothing underground. would be anywhere up to £10 billion. As far as the Mr Bennett: That is right; the exception being the regime associated with the oVshore networks is examples that were provided in our evidence. There concerned, it is diYcult to say at the moment that the are the Scottish options that are being considered and regime as proposed will necessarily lead to an eYcient you will see that there are two options that are being level of investment. Why do I say that? I say that for considered there,one is an onshorereinforcement that two reasons: one is you need to ensure an optimal is overhead lines, the other option that is being network design oVshore and that then triggers the considered is actually cables oVshore which clearly is question do you just build for piecemeal investment an alternative solution so we are looking at a range of for each gigawatt or do you oversize certain cables to solutions oVshore and onshore to get the power out of think for the future requirements of those cables? The Scotland. second challenge is ensuring that when we bring the oVshore network together with the onshore network Q281 Lord Kingsdown: In your written evidence you the twomap acrossin a fullyeYcient manner.We have have said that you are committed to developing new therefore got some concerns with the current arrangements for access to the transmission system. approach of competitively tendering for the oVshore Do you have a preferred outcome from the regime and there is a risk that we will end up with Transmission Access Review? piecemeal oVshore investments and the onshore Mr Bennett:I supposeour preferred outcomeis aset of transmission owner will not necessarily know where access arrangements which do facilitate the the network is going to land. We think further debate connection of renewables so the role that we have been is therefore required on the optimal design to ensure Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

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24 June 2008 Mr Chris Bennett and Ms Nicola Pitts that you get a fully co-ordinated network both Ms Pitts: Because the transmission system is there to onshore and oVshore, and we are currently having bulktransfer itis actuallyafairly eYcientway ofdoing those discussions with Ofgem and BERR. it and so the losses are only about 1.5 per cent, so the smaller the lines the more losses you get. On the distribution system they are around five per cent. Q283 Lord GriYths of Fforestfach: Given that planning permission is going to be diYcult in extending transmission lines onshore do you think Q287 Lord MacGregor of Pulham Market: How that building aviable oVshore network ispossible? If it much allowance have you taken in that £3.5 billion is, how much more expensive would it be compared to estimate for increased costs because I quite take the an onshore expansion? point that costs are rising all the time. Ms Pitts: The cabling oVshore that would be used to Mr Bennett: It is fair to say that that £3.5 billion at the reinforce the network and the estimations that we moment is a pretty rough estimate. I referred earlier to have made on the maps with the two lines coming the work we are doing with the Scottish transmission down from Scotland, the actual cabling is cheaper owners to really look at both the deliverability issues, than it would be to do onshore overhead lines; what is the supply chain issues, some of the other things that more expensive is the converter stations each side so have been mentioned and the cost. £3.5 billion is our there is a scale issue here and once you get to a cable best estimate at the moment with the costs that we are length of around 250 kilometres then the economics aware of, but clearly there are uncertainties around are very similar so it would be more advantageous to the costs at the moment. do that oVshore but you do need that length of cable to enable that, so it is not really possible to do shorter Q288 Lord Paul: How serious are the constraints on versions of cable, that would be a more expensive the transmission system likely to be as shown by your option. studies? How often would you have to reduce output at some stations in order to keep the power flows within safe limits and how much would it cost you? Q284 Baroness Hamwee: Lord Lawson referred to Would you ever have to “spill” wind energy because of the scale of the engineering project; what about transmission constraints? capacity in the construction industry which is Mr Bennett: The studies that we are undertaking try to something one worries about in other contexts. Is this develop a transmission system to ensure that there is likely to be an issue? not a huge increase in transmission constraints, so we Ms Pitts: It is a big issue for us and we are already are trying to design a network and the investment that investing a huge amount in the transmission system we have spoken about is to try and avoid a massive which is reaching 40 years of age. increase in constraints. On the basis of the investment that we have talked about we would not expect a Q285 Baroness Hamwee: The issue is the distinction massive increase in transmission constraints. Just to between renewables and other investment. put it in context, if you however decided that no Ms Pitts: One of the things that we have had to do is reinforcement was required out of Scotland and we create partnerships with our supply chain so that we would cope with the current system capability, also can ensure that we have got the materials and the include in that assumption plans in place at the labour in place, so some of those arrangements mean moment to allow a transfer capability from Scotland that we have to contract quite far ahead to enable us to into England of 3.3 gigawatts. If no investment was securetheresourcesthatweneedandwhenyoulookat undertaken and you assumed the 10 gigawatts of a situation where the whole of Europe is obviously renewables did connect in Scotland you could get to trying to get to an increased renewables target then we constraint figures of between 500 million a billion per very much will be competing with the rest of Europe so year if you did not do the reinforcement, so we are Y the sooner that we have certainty around the scale of trying to design a system that has su cient investment the challenge that we have to face and what there such that the wind can generate. Our view is that proportion the Government is going to incentivise if you did not do the investment there are real risks of V oVshore the better we can make those plans. having to constrain o plant and there is a question then whether you constrain oV renewable plant or whether you constrain oV the conventional plant, but Q286 Baroness Hamwee: Are there distinctions we our analysis at the moment tries to keep transmission should be aware about as to whether if you are constraints at the moment on the system around creating an oVshore wind farm in the north of about £100 million. We would foresee, even with Scotland or further south in the North Sea or putting the investment in place, transmission whatever there is a loss in transmission the further the constraints probably going up a bit because it is more distance from concentrations of population, or is that diYcult to co-ordinate outages with wind farms than just an irrelevance? with conventional plants, so we would expect to see an Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

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24 June 2008 Mr Chris Bennett and Ms Nicola Pitts increase in transmission constraints but there would obviously, the market itself is incentivised to balance be a large increase intransmission constraints if we did in longer timescales. In our role as residual balancer not undertake the investment in our view. we currently hold approximately 3.5 gigawatts of reserve in this period from real time to four hours; that Q289 Lord Paul: What is the confidence level of this is roughly broken down to about one gigawatt that study? deals with immediate frequency response, which deals Mr Bennett: As far as the constraint costs are with the loss of a major generator, and then 2.5 concerned, reasonably confident. As I say, at the gigawatts of stand-in reserve that can then be used to moment we are currently incurring costs of around replace the energy lost by the generator. We currently about £100 million a year, primarily in Scotland hold 3.5 gigawatts therefore and the combined cost at because we are currently taking out part of the the moment of the reserve that we hold and the transmission system to reinforce it to enable the frequency response that we hold is about £300 million. renewables to connect, so the capability of the system If you now roll forward to a world with perhaps 40 per is temporarily reduced while you are taking outages to cent renewables, the main area where we would actually do the system reinforcement, so we have got a anticipate requiring additional costs is in this stand-in reasonable history of costing constraints and seeing reserve, it is in this period out to four hours the what the costs of constraints are over the last few uncertainty and unpredictability of wind would years. probably mean that we would be looking to hold additional reserve. Our initial estimates have Q290 Chairman: Can I take you back to the point suggested that we could be looking to hold between about the loss of power over a distance as I would like seven to ten gigawatts of reserve. To put a cost on that, to understand that 1.5 per cent. If we were talking the overall additional costs of balancing the system about taking power from the north of Scotland with could be in the region of £500 million to £1 billion a the big wind farms there down to London, would you year, but just to put that in the context of a customer expect a 1.5 per cent loss or would it be greater? bill that probably equates to between £6 and £12 on Ms Pitts: That is the average loss on the system and the end consumer’s bill because obviously you have to remember that there is quite a lot of transmission is a small element of the final consumer investment that will be happening in the south of the bill. country as well. It is not that all the power will be in the North. Q294 Lord Lawson of Blaby: How do you hold the reserve? Q291 Chairman: I know what you mean; you were Mr Bennett: You hold it on generating plant, partially talking about an average and that is what I was trying from part-loaded generating plant but we also do hold to get at. Is power loss not a function of distance? some reserve on the demand side, so the likes of Mr Bennett: Yes. As a supplementary question it is Anglesey Aluminium we hold demand on that. It is a probably fair that we follow it up: if the average is one mixture, therefore, of part-loaded generating plant— per cent what are the diVerences in terms of the north of Scotland. We could happily follow that up. Q295 Lord Lawson of Blaby: Do you have your own Chairman: That would be very useful. generating plant? Mr Bennett: No, this is the market. We procure with Q292 Lord Macdonald of Tradeston: On that is there the market for them to eVectively hold that capacity a choice then between a DC-based system and an AC- ready for us to call them. As I say, there is also some Y based system in terms of e ciencies? Are you looking demand side response as well. at that at all? Mr Bennett: We are. One of the options of the reinforcements from Scotland at the moment is Q296 Baroness Hamwee: Can I just pursue that, is the looking at DC links so we are looking at those areas. £500 million on top of the £300 million? Mr Bennett: Yes, it would be additional costs of £500 Q293 Baroness Hamwee: How much short-term million to £1 billion per annum. reserve capacity do you normally require for fluctuations and failures—outages—and so on and Q297 Lord Lamont of Lerwick: A similar question, can you tell us what the costs are associated with that, how much capacity would you need in total to meet how much you have to pay for that and how much peak demand and have an adequate plant margin if we reserve you would require if renewables were to assumed 40 per cent of electricity coming from wind provide 40 per cent of our supply? power specifically. What proportion of this would Mr Bennett: In our role as residual balancer we look to really be used and would you need to make additional procure suYcient short-term reserve to cover the payments to ensure that the owners were willing to period from real time to four hours out, and keep it available in all circumstances? 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24 June 2008 Mr Chris Bennett and Ms Nicola Pitts

Mr Bennett: It is not National Grid’s role to ensure with that; the second one is if that is not the case, let us that there is suYcient plant margin, it is for the market look at a world with a high degree of nuclear, a high to determine how much generation is required to degree of renewables and then what gas and oil do you balance their end positions, but the studies that we need to still hold on the system if that is the only plant have undertaken under this 2020 scenario with a big available for flexibility, so we are very much looking penetration of wind has got an assumption of total beyond 2020 to 2030 and a world of renewables and generation capacity of 99 gigawatts against a peak nuclear and how we would operate the system. demand of 61 gigawatts so that would give on the face ofitagrossplantmarginof62percent,butasIamsure Q301 Lord Macdonald of Tradeston: OVshore wind you are aware there is then a debate of what can you has higher generation levels than onshore wind so assume the contribution is of wind on a peak day, so does that mean that it is less demanding in terms of the there have been various studies with the industry short-term reserve that you require and the margin of about what contribution should you assume from spare capacity that you need? wind which varies anywhere from 60 per cent to 20 per Mr Bennett: Our analysis at the moment suggests that cent. If you took a 20 per cent contribution assumed thekey driverfortheamount ofreservethatwe needto V by wind that would get you to probably an e ective hold is the uncertainty and the intermittency of wind plant margin of 22 or 23 per cent, and just to put that in rather than the load factor of the wind, so at the context, the current plant margin that we operate to is moment we believe a slightly higher load factor for the 26 per cent. In that world, in the study that we have oVshore would not impact on the amount of reserve done, there is the question of other generation that is that we would be looking to hold. The reserve running. If you have 30 gigawatts of wind and you numbers that I quoted earlier deal with the scenario of assume a load factor of, say, 35 per cent of that, you 11 gigawatts onshore and 19 gigawatts oVshore. would have ten gigawatts of renewable wind generating and there would still be a big percentage required of conventional plant to meet the average Q302 Chairman: Can we look at the demand side for demand which is, say, 39 gigawatts. We believe with a moment? To what extent do you think demand side that penetration of wind you have still got a management can reduce the cost of accommodating substantial need for conventional plant to meet the the intermittency of renewable energy? As an overall demand requirement because of the load alternative ploy do you see any prospects for energy factor of wind. storage? Ms Pitts: To start oV we just have to think of the system as it is now, and demand side responses are a Q298 Lord Lawson of Blaby: When you say relatively new thing. It has generally been managed by conventional plant do you mean either conventional generation, either turning it up or down, but as Chris nuclear or do you mean conventional? said there are demand side oVerings that are out there; Mr Bennett: It is the combination of gas, coal and Anglesey Aluminium can come oV very, very quickly nuclear. In our studies that we are starting to do, and can stay oV for up to 20 minutes, so there are rolling out to 2030, because of the broader CO 2 people whoare thinking aroundthe demand sidebut it ambitions we are looking at increased nuclear is a new area so it is quite immature at the moment. In capacity and therefore we are looking at the terms of balancing wind at peak times demand side combinationof nuclearplantandrenewables andhow management will be crucial. How can you actually you operate the system with a large degree of facilitate that? Certainly things like a smart metering renewables and nuclear. rollout will help; that will enable suppliers to oVer diVerential tariVs so that people are incentivised to use Q299 Lord GriYths of Fforestfach: As we turn out electricity oV peak. There is also dynamic demand these very large numbers of investment are we right to which is a potential and it could be that National Grid assume that they will be entirely financed in the in its residual balancing role could be able to say turn private sector? down fridges for half an hour or turn oV a washing Mr Bennett: That should be the working assumption. machine, so all of that is the potential that is out there. In terms of how much would that shave oV these Q300 Chairman: Just coming back to nuclear, can additional balancing costs, something like dynamic you turn up and down the power of nuclear at will? demand is probably more shaving oV tens of millions Mr Bennett: That is an interesting question. My rather than the hundreds of million, so there is the understanding at the moment is that there are potential but I do not think it is the complete solution. discussions to look at that question of whether in the The other issue of course is the system is really set up to future generation of nuclear it can be more flexible satisfy every piece of demand that is out there, and than historically has been the case, so there are two maybe we have to look at the system in a diVerent way questions being asked: one is, is it feasible to do that, and think about greater energy eYciency so that we let us look into the costs and economics associated are actually reducing the amount of energy we are Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

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24 June 2008 Mr Chris Bennett and Ms Nicola Pitts using overall. In terms of storage I am sure lots of wind there is still suYcient energy left to meet demand people have told you about lots of exciting projects thatwould requireother sourcesof powerso wedo not that are outthere. Some of the simplerones, things like envisage in a 2020 world that we are in a world storing hot water and potentially a new generation of whereby there is not a requirement for other plant to storage heating could help to use the potential of wind actually meet demand. As I say, 30 gigawatts of power that is generated overnight when demands are renewables, the average demand is 40 gigawatts lower, so storing that is extremely feasible. There are anyway so there is suYcient energy for conventional also some other projects that are being developed in plant in a 2020 world. Purely from our system certain parts of the world—there is the potential for operating role, the residual balancing role, the reserve creating hydrogen using seawater next to oVshore numbers that I mentioned earlier to be happy that we wind farms—so there is a broad array of things that could manage the short-term reserve requirement we could happen. We are obviously looking at what is out were talking about a requirement of seven to ten there but we have not come to any sort of firm gigawatts of reserve for the residual balancing role, conclusion that there is one answer for the demand but clearly the market may well be looking to provide side at the moment. more generation than that to keep itself balanced. As I said, our central scenario of 99 gigawatts of capacity, Q303 Chairman: Coming back to the reserve for a if you work through the factors, would achieve a plant moment, what proportion of your reserve do you margin similar to the plant margin that we have got currently buy from the demand side and would you today and that 99 gigawatts, if 30 gigawatts of that is expect that proportion to change over time as you renewables there is still a significant amount of have a significant amount of renewables on the conventional plant under that scenario. network in 2020? Q305 Lord Lawson of Blaby: That is just to 2020; as Mr Bennett: I have not got the precise numbers to the plan goes beyond 2020 if it does—and it seems to hand but we can definitely send that information be the Government’s policy that you increase it—and through. We are always interested in the demand side the Climate Change Bill for example has a 2050 target and at the moment it is the large industrial plants; we of either 60 or 80 per cent decarbonisation, then very much look to encourage those customers to presumably renewables under the present policy provide demand, so at the moment the vast majority is would be even bigger, would they not? held on generation rather than demand, I do not know Mr Bennett: That is definitely feasible. In our the precise percentages but going forward we preliminary work that we have done post 2020 very definitely see the role of the demand side becoming much the nuclear and carbon capture comes into the increasingly important, so we are very much looking equation as well as renewables, on the basis that there to facilitate the demand side of the market but we can is nota renewablestarget per seafter 2020,it isthen the firm up on the precise percentages. carbon reduction targets, so we are looking at the full suite. As I said, for the residual balancing role you Q304 Lord Lawson of Blaby: Assuming this is the have got probably a requirement of up to ten route we go down, with the wind power from 2020 and gigawatts of reserve and it is then for the market to maybe a further expansion beyond that, and given the decide to balance its own position whether it does fact that not only are there times when the wind does want to hold a combination of conventional plant as notblow butthereare timeswhen itblowsso hardwith well as renewables such that they can balance their current technology that you have to stop the wind individual portfolios. turbines then, what do you consider is the residual Chairman: Thank you very much for spending time minimum capacity of conventional power that you with us and answering our questions. We look would need to have to cope with these, bearing in mind forward too to your further written submission and I that the demand side adjustment although technically wonder if there is one additional question you might possible has all sorts of diYculties, not least it would address in that further submission. That is that in your probably be very unpopular if you tell people they first written evidence you mentioned the possibility of cannot use their washing machines. If you agree, what using bio-methane in the gas pipeline network; could amount of back-up is the residual minimum that you you expand on that and perhaps tell us how much of would need and how many hours a year would you the UK’s natural gas could be replaced by bio- expect that back-up to be used? methane, looking at both the sources of supply and Mr Bennett: In the central scenario that we have any technical limits that there might be in the mixture worked to at the moment, even with the penetration of you would deliver, that would be very helpful. Thank wind thatwe are talkingabout, given the loadfactor of you very much indeed. Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

144 the economics of renewable energy: evidence

Supplementary memorandum by National Grid Further to your request for additional information, please find attached below detailed answers for the respective questions.

1) Rules governing where we can site overhead lines The most cost eVective method of bulk transmission of electricity on mainland Britain is by overhead lines. To date virtually all transmission requirements for renewables have been met by utilising existing overhead lines although future requirements are likely to require new lines. The siting of our overhead lines is governed by three factors: 1. The “Holford Rules” which are used as the guiding principles for routeing new overhead lines. These were originally formulated by Lord Holford, formerly an adviser to the Central Electricity Generation Board (CEGB), and later reviewed and supplemented by National Grid. These deal with a number of areas including route planning considerations for areas of high amenity value, scientific interest and urban areas. 2. We would seek to route new overhead lines away from existing properties on the grounds of general amenity. We would not seek to route a new overhead line over an existing residential building (except in exceptional circumstances, such as specifically at the request of a landowner or property owner.) 3. We would follow environmental impact assessment procedures to route a new overhead line, having followed the two factors above. Planning authorities, statutory and non-statutory bodies, administrative bodies, landowners and the general public are consulted as part of the environmental assessment process for all major new lines. 4. If no overhead route was possible to achieve for a new line using the 3 factors above, then an undergrounding option would be considered based on case specifics. However alternative corridors / reinforcement options may exist away from built up areas and these would generally be used in preference to undergrounding. The information provided in both the written, as well as the oral responses, represents our preliminary views on what the investment is required to meet the 2020 target and does not include the level of detailed analysis of exact localities for the lines proposed. All the investment will be carried out in the most eYcient and economic way while ensuring the above guidelines are followed.

2) Power loses associated with transmitting over large distances in our 2020 scenarios Typically transmission losses account for 2% of demand seen on the transmission system. Onshore wind locating in Scotland should not increase overall loses significantly. However, for oVshore wind generation, particularly for the areas designated in the Dogger Bank and the Wash on the east coast of England which are expected to contribute around 19GW, it will result in power being transferred over a large distance before connecting to the onshore grid. Initial estimates indicate losses will be in the region of 3–6%, dependent on the network technology adopted. To accommodate these increased losses it is assumed that a correspondingly larger volume of oVshore generation will be needed to ensure that the overall renewable target is still met. In designing extensions for the networks, due consideration is given to minimising losses, where it is economic to do so.

3) Level of generation reserves currently obtained from the demand-side and changes expected with high amount of wind on the system Currently (2008–09) 30% of the total contracted reserve is procured from the demand side. This has increased from 23% in 2000–01. We expect to see a modest increase (to 34%) next year. This is generally sourced from industrial-scale demand side providers (eg turning down demand in chemical processes and steelworks). Looking forward, and with more renewables on the system, our requirement for reserve will increase. There is the potential for the demand-side to play an expanded role in the provision of this reserve, however this may need to be sourced from much smaller, and more distributed loads than our current providers. In order to gain access to this reserve, and utilise it eYciently, new technology will need to be developed. We would expect that smart metering will have a role to play in this regard. Demand management technologies—that allow electric appliances, such as refrigerators and air conditioning units, to be automatically turned oV or down in response Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

the economics of renewable energy: evidence 145 to changes in supply and demand—are now becoming available. These technologies could help provide a more eYcient and lower carbon, solution to the intermittency associated with renewable generation than the current approach of using conventional stand-by generation.

4) Possible amount of UK natural gas replaced by bio-methane and challenges for both technical and sources of supply Work to determine the potential contribution of bio-methane in replacing part of the UK’s natural gas consumption is still ongoing. There are currently no definitive figures to indicate the proportion of such consumption that it may account for. Our analysis is based on examples elsewhere in Europe such as Germany, Switzerland and Austria where bio-methane is already being injected into the gas grids. A report commissioned by the German government in 2007 on possible European biogas strategies found that EU produced bio-methane has the potential to replace roughly 50% of EU natural gas imports from Russia by 2020. This conclusion certainly serves to highlight the potential for bio-methane injection on a large scale the potential for bio-methane injection on a large scale. Such a significant contribution to the UK Government’s overall renewables target of 15% would significantly reduce the burden on other technologies and would also add to the diversity of fuel sources—thus improving security of energy supply for the UK.

4.1) Sourcing bio-methane A proportion of bio-methane production could come from anaerobic digestion of waste and sewage which has the added benefit of capturing the potent greenhouse gas methane from such sources. Another benefit of anaerobic digestion of waste and sewage is that it avoids the need for incineration of such waste which can cause local air-pollution. Delivery of large-scale bio-methane production is likely to require the use of energy crops. Clearly there is competition in the current and developing market place for such crops. However studies suggest that of all bio-fuels, biogas delivers the most energy per hectare of crops and it is also the least carbon intensive production path, with some biogas pathways actually delivering carbon-negative bio-energy. Bio-methane can be produced from a range of dedicated crops such as grass species (like sorghum, Sudan grass or hybrids) or specially bred “super” biogas maize.

4.2) Technical challenges in supplying bio-methane Below are specific technical challenges in delivering bio-methane through the gas the distribution network in the UK market. These challenges are by no means insurmountable and National Grid believes that, with support from the Government and the relevant regulatory bodies, solutions can be found for each of these barriers. (i) Gas quality—Regulations in the UK have been focused on the injection of large quantities of natural gas from the North Sea and imports from Europe and will present some barriers to the entry of bio-methane which has diVerent characteristics to those of natural gas: a. The first issue is the Calorific Value (CV) of bio-methane. Typically bio-methane has a CV of around 36 MJ/m3. The CV entry requirements are 36.9 to 42.3MJ/m3. As a comparison the CV of North Sea natural gas is 40MJ/m3. In addition, there is a cap that requires the lowest CV source has to be within 1MJ/m3 of the flow weighted average CV to avoid CV capping and the inability to bill all the energy delivered. Bio-methane can be enriched with butane or propane to reach this minimum level, (although there would be an economic and environmental cost of doing this). There are other viable solutions including removing renewable gas from the CV cap obligation. Such solutions would require Ofgem approval. b. The second issue is that the oxygen content of the treated bio-methane (typically 2%) is likely to be always above the Gas Safety Management Regulations limit of 0.2%. The oxygen could be removed but this is very expensive. The other option could be to reduce the regulations on oxygen content. National Grid is investigating the feasibility of this. c. There is also potential for other trace elements to enter the gas. National Grid does not currently fully understand the potential for trace elements to enter the gas and whether they could be a safety concern. Further work needs to be done to assess the appropriate monitoring of the gas/feedstock to prevent any harmful elements entering the gas network. Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

146 the economics of renewable energy: evidence

(ii) Equipment requirements—The current requirements for monitoring and metering gas quality and volumes require very expensive equipment. The economies of scale needed to make this technology viable will require large plant deployment. National Grid will investigate the feasibility and assess the impact of less onerous monitoring and metering requirements for low volume injections. I hope the above helps to answer the Committee’s questions and we will be happy to clarify and any specific parts of this supplementary evidence. 11 July 2008

Memorandum by the Energy Technologies Institute

1. Introduction The Energy Technologies Institute (ETI) has been established to spearhead the UK response to the energy and climate change challenge by developing a focused portfolio of technology programmes, and to accelerate to full deployment commercially viable, sustainable energy technologies and systems. A 50:50 public/private partnership, its current members are BP, Caterpillar, EDF Energy, E.ON, Rolls-Royce and Shell. The ETI brings together the skills, eVorts and investments of both the public and private sectors, and by focusing on key energy challenges with a new level of scale and ambition, it has the potential to catalyse step-change advances in deployment of low carbon energy technologies. Our programmes over the next 10 years will contribute to:

— Reducing greenhouse gas emissions (UK target—60% CO2 reduction by 2050). — Accelerating development and deployment of aVordable low carbon technology solutions. — Increasing security of energy supply in conjunction with greenhouse gas mitigation. — Increasing the level and capacity of the low carbon skills pool—both in the UK and internationally. The ETI’s Technology Programmes are seeking to bring about a step change in the deployment of low-carbon energy technologies in the UK by focusing on the critical area of integrating and demonstrating novel technologies into whole system solutions. Much of the UK government investment emphasis to date has been on either the initiation of novel technologies at the fundamental science level or the validation of systems at full-scale ahead of commercial deployment. The de-risking stage between these two activities—technology integration and system demonstration—has been less well supported to date and yet is perhaps the most important in developing commercial investor confidence. ETI will focus on this area, providing the opportunity to de-risk new technologies at full energy system level in relevant environments and identify significant science and technology opportunities for the future. Developing these types of projects will also increase the capability and capacity of the skills base.

2. Response to the Issues being Examined by the Inquiry In submitting our response to this Inquiry, the ETI wishes to make clear that it is still developing its long-term strategy, which includes in-depth research and analysis of many of the issues covered by this Inquiry. To date, the ETI has launched three Technology Programmes, covering: —OVshore Wind. — Marine—Wave and Tidal. — Distributed Energy. Future programmes will address areas including Carbon Capture and Storage (CCS), Networks, Buildings and Transport, although the ETI will seek opportunities across the entire spectrum of low-carbon technologies. As such, our submission of evidence reflects some of the early analysis work we have carried out to launch our first three Technology Programmes and so should not be regarded as either comprehensive or conclusive. Equally, we welcome this Inquiry and look forward to using its findings as part of the process of developing the ETI’s long-term strategy. In direct response to the specific questions posed in the Committee’s Call for Evidence, we would make the following comments: Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

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Question 1 There is an opportunity for renewables to play a significant role in the future UK energy system. Renewable energy resources available in the UK include onshore and oVshore wind, wave power, tidal power, solar power, bioenergy and hydro. There are various studies on the practically useable resources in each of these but, given the emergent state of many technologies, the estimates of accessible resource and economics vary. Table 1 provides a preliminary assessment of renewable potential for electrical power generation based on published sources that is being reviewed and verified by the ETI.

Table 1

RENEWABLE ENERGY RESOURCES FOR THE UK POWER SECTOR

Accessible Long term Resource Capital Cost5 Capital Cost Load Factor Renewable Resource (TWh/yr) (£/kW) (£/kW) % Onshore Wind 50–150 450–550 350–500 35 OVshore Wind 100–200 750–1,250 500–650 40 Wave 10–30 2,000–4,000 500–1,000 40 Tidal Current6 5–15 [1,500–3,000]7 —40 Solar PV (500 2,500–4,000 300–1,000 15 Biomass8 30–150 1,500–2,500 — 85 Hydro Limited scope for — — — further large hydro but some potential for small schemes Conventional (Coal) Current UK total9 500–600 750–900 85 generation from all (with CCS) sources: 395

The capital costs represent the market for equipment in the period leading up to the production of the IEA report and are useful in comparing diVerent technologies. Longer term costs are on a comparable basis and assume major expansion of the equipment supply chain to meet demand. Current (2008) costs are in fact very much higher as a result of the major mismatch between global supply and demand for capital goods. The capital costs do not include additional transmission investment to take the power from the regions where generation is located to major demand centres. Solar PV however is assumed to be integrated into building structures and may significantly avoid transmission and distribution costs. The capital costs are compared to conventional coal-fired power and, in the longer-term, to coal with carbon capture and storage (CCS) as another important low carbon power option. Fuel costs will be higher for coal than renewables. Operating and maintenance costs will be higher for renewables than coal (counting biomass harvesting etc. as O&M), apart from Solar PV. There is a real possibility that renewable energy will be economically attractive versus CCS but there are suYcient uncertainties with low carbon power technologies that it will be important to invest in a broad set of alternatives. Overall, the scale of the challenge to securing long-term, low carbon energy supplies for the UK is immense but, given their substantial resource base and economic cost potential, the role of renewables will be essential.

Question 2 The main technology-related barrier for all energy technology deployment, including conventional energy, is the limited capacity of the international supply chain to deliver the equipment and the inevitable significant recent increase in the cost of all major capital goods. The higher costs for most renewable energy (versus conventional sources) will require technology innovation, carbon pricing and transition incentives to be 5 Based on IEA report “Energy Technology Perspectives 2006”. 6 Excludes barrages but some resources overlap. 7 No IEA data, figures from Carbon Trust report “Future Marine Energy”. 8 Excludes co-firing. Biomass could form part of the fuel mix for CCS coal-fired generation. 9 DUKES 5.2 2006 (excludes imports). Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

148 the economics of renewable energy: evidence competitive, as well as infrastructure development. The UK will also be competing for investment with other regions, for example the US for onshore wind. The current transmission and distribution system is based on a particular style and pattern of generation. It is inevitable that this system will require investment and changes to cope with future patterns of supply and demand, whether renewables are a significant part of the mix or not. Renewables face two issues: — Mostly remote from current power generation sites and major demand centres; and — Variability of resource with time from daily cycles for sun and tide to weather related variations over the year for wind and wave. The technical limits will be determined by both supply and demand-side factors. On the supply-side, this will depend on the renewable mix eg the proportion of wind power versus biomass versus solar. On the demand- side, load/demand management, electrical storage and further European grid interconnection can all play a role in oVsetting the impact of intermittent renewable energy supplies. We do not believe that the issues have been studied in suYcient detail to identify the most cost eVective solutions and the issues involved in developing and deploying them although we are aware that the Government will be consulting on its strategy for delivery of the EU renewables target later this month.. We expect that demand management and storage close to the point of use will play a significant part, along with improved resource forecasting and further grid interconnection with Europe.

Question 3 It is almost certain that future developments in technology concepts, equipment design, manufacturing and installation methods and supply chain capacity will dramatically reduce the costs of renewable energy. Forecasting this over the relevant time period to address energy security, infrastructure planning and climate change is akin to predicting the development of mobile phones out to 2000 from the viewpoint in 1958. There is a very broad evidence base for long term technology cost reduction in many fields. Onshore wind cost reductions with deployment in recent years give confidence for other renewable energy technologies. We believe that the level of likely improvements over the period to 2050 needs to be assessed against more explicit road-maps to build confidence in the likely outcome and the return on investment in technology development.

Early confidence in mechanisms to discover long term CO2 pricing ranges are important to investment. Government support for de-risking technology development also has a significant role to play in accelerating the future deployment of lower cost technologies.

Question 4 The ETI is technology focused but through our roadmapping and strategy planning exercises, we expect to identify key issues in these areas.

Question 5 It is likely that transmission and distribution systems will require significant change to accommodate renewables but the investment will be influenced by both supply and demand-side factors as discussed in Q2. Developing a better view on these issues is a current high priority for the ETI.

Question 6 In our view it is essential to develop good openly published renewable resource maps and models for the UK that show how hard and soft constraints have been included, and how diVerent externality costs would aVect the availability of resources.

Question 7

Power generation accounts for around one-third of UK CO2 emissions and there is potential for renewables to play a key role in reducing this based on the accessible resource base and potential to drive down costs. There are however suYcient uncertainties with low carbon power technologies that it will be important to invest in a broad set of alternatives, including CCS.

Question 8 The ETI recognises the potential for renewables, such as bioenergy, solar thermal and heat pumps, to play an important role in transport and heating, but the evidence base is not well established. For example, the role of increased UK biomass production and the most eVective use of this in power generation, heating and transport fuels is an open and diYcult question. Any evidence gathered on this would be very valuable is Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

the economics of renewable energy: evidence 149 setting ETI priorities. Furthermore, if UK power generation can be decarbonised and expanded via renewables and CCS, this would open opportunities for heat pump applications for space and water heating. In any case, given the very long lead times, there is an urgency with which the UK power grid infrastructure should be extended to accommodate substantial use of renewable energy.

Question 9 Achieving 15% of energy consumption from renewables requires major change in all areas, particularly generation. However, other areas such as transportation, energy eYciency, (at all stages in the delivery and usage chain) and utilisation of “waste” heat will also be critical.

Question 10 Long term investments in assets, infrastructure and technology development require long term confidence in a reward for emissions reduction.

Question 11 Biofuels remain an important area for the overall energy supply mix, so is an area which we shall be exploring further in the near future.

3. Collaborating Across the Energy Landscape The ETI acts as the hub of a collaborative research and technology network which aims to bring together the best scientists and engineers from industrial organisations academic and institutions in the UK and overseas— all with the shared vision of delivering technologies which will provide a secure, sustainable and aVordable energy supply for this and future generations. The ETI, the Energy Research Partnership, the Engineering and Physical Sciences Research Council Technology Strategy Board, the Carbon Trust and the Environmental Transformation Fund have been working in close collaboration to ensure the UK develops a coordinated research, development and demonstration portfolio of projects across the energy sector. This will also help maximise all Government investments in developing sustainable energy technologies. 16 June 2008

Examination of Witness Witness: Dr David Clarke, Chief Executive Officer, Energy Technologies Institute, gave evidence.

Q306 Chairman: Welcome, Dr Clarke, thank you Dr Clarke: The role of the Energy Technologies very much for coming along this afternoon and thank Institute is very much to progress the demonstration you too for your written submission which all of new low carbon energy systems and some of those, members of the Committee will have read. I do not as you rightly imply, will be renewable systems and know if there is anything by way of an introductory some of those could be fossil fuel systems. The only statement that you want to make, or we can go thing which is explicitly not part of that agenda is straight into questions. nuclear, that is one item which is explicitly outside of Dr Clarke: Let us go for the questions; the our interests. The structure of the ETI is as a public background is in the written submission. private partnership between a number of major corporates and the UK Government. The nature of that is such that the priorities for the Institute are set by a board, the membership of which is the same as those investors, so the UK Government and the Q307 Chairman: Excellent. Perhaps I can ask you a major corporates, acting as a board for the Institute. general background question and that is, what is the In terms of the priorities going forward there are a role of your Institute in developing new forms of number of mechanisms by which we actually develop renewable energy and in improving existing ones, and those, some of which are by dialogue with the various what are your priorities? Perhaps you could explain industrial parties, some of which are by dialogue with how much of your budget you expect to spend on government groups and some of which are by renewable energy as opposed to other energy sources independent analysis by ourselves and by groups that or increasing the eYciency of energy demand? we commission specifically to help us in that, so there Processed: 17-11-2008 19:13:48 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

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24 June 2008 Dr David Clarke is quite a broad set of activities there to develop those down the cost of the electricity generated in many priorities. The Institute has been in existence since the cases is to improve the reliability and the operating start of this year and the current priority list that we costs of the machines themselves and then the are working through in terms of establishing areas systems, including the grid and the network where we could deliver the most value and the most infrastructure that is necessary to support those, benefit towards particularly the 2020 and then the whether it is gas or electricity. Those are the kinds of 2050 targets for the UK are oVshore wind, marine issues that we are seeking to address through the power from a generation point of view, distributed Energy Technologies Institute but if you look at the energy, carbon capture and storage, electrical kind of analysis we have done so far and what networks which is very much the conversation you everybody else has looked at, that says that given that were just having in some ways, gas networks as well with conventional fossil fuels we are likely to have to and then energy eYciency in buildings and in introduce carbon capture and storage mechanisms transport. That is the first set, there is another set on big central plant, as we put in our written evidence after those which we will be addressing in due course. that we put in to date, the answer to your question is Of those, as we said in our evidence, the ones which that in the long term, by which we mean 2020 to 2040, we have actually sought to commission work on so somewhere in that bracket—and I could not be any far are oVshore wind, marine and distributed energy more exact than that—onshore wind in particular which is the third factor. In terms of how much of our should be most definitely competitive with large budget will be allocated to renewables versus any central generation, oVshore wind will probably be other form of energy or energy eYciency issues, the competitive and other mechanisms are likely to be answer is it will really be allocated on a case by case slightly more expensive. basis. We are not making any immediate decision on what percentage should go on renewables. The targets we are working to are the UK targets, both for Q309 Lord Lawson of Blaby: For the sake of renewable energy introduction but also for CO2 clarification, that is of course as you have just said on reduction bearing in mind issues around security of the assumption that the conventional requires carbon supply, energy poverty and aVordability and the capture and storage which is a highly expensive thing development of skills as well, both in the UK and to do if it can be done at all. The technology on a internationally to support that activity, so at this commercial case is yet to be proven. If in fact you did stage there is no intention to actually develop a not have this carbon capture and storage, which is specific split for the budget between any particular rather conjectural for the reasons I have just programme areas. mentioned, then presumably by your own reasoning you would be unlikely to become competitive at any time, although you cannot say for sure obviously. Q308 Lord Lawson of Blaby: One of the striking Dr Clarke: You cannot say for sure. The two that things about renewables—and this goes for the whole stand out are onshore and oVshore wind where there range and it possibly applies to nuclear, but I do not is real potential to drive down the cost from those know, you say nuclear is not part of your portfolio— systems to a level that is competitive with current is that despite the huge rise in the price of oil and this centralised generation. is spilling over into the price of gas inevitably, these renewables are still not competitive, they still need quite substantial government assistance. At what Q310 Lord Lawson of Blaby: What is the evidence point if ever do you think they will be economic and for that because so far the cost has gone up? therefore competitive with conventional generation Dr Clarke: If you look at where we are today the without some form of special assistance? reasons for the cost going up are probably twofold, Dr Clarke: I would not put a number on it in terms one of which is machines being put into environments of a year but what I would say is that the outstanding which they were not explicitly designed to go into, factor in trying to answer that question is the which is a case of what we have seen oVshore and variability of the answer, depending how you those machines either being operated in a diVerent approach the question and who you ask, so I am not environment or maintained in a diVerent actually going to say the answer is any particular year environment for various reasons, that has led to but the reality is the challenge that we face is that we problems with those systems generally. In the are dealing with a distributed energy system broadly, onshore environment the issue there perhaps is one of whether it is oVshore wind, marine or small-scale the scale of the machines and the local conditions fossil fuel systems. The eYciency of those from the they are being operated to, but the industry has been point of view of both electrical conversion eYciency developing very rapidly over the last four to five years and plant operation is likely to be lower than for a to address those issues and what we are seeing now large central plant. The implication of that is that the from the major players in the wind industry is a move way to reduce the cost on those systems and to bring towards machines and designs which fundamentally Processed: 17-11-2008 19:13:49 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

the economics of renewable energy: evidence 151

24 June 2008 Dr David Clarke take us towards those kinds of reliability targets and acceptance required with those technologies, since to cost targets. make them eVective a significant number of them for instance will be deployed at a residential level and, Q311 Lord Lawson of Blaby: There is one last clearly, it is going to be a longer challenge to follow-up if I may. So far this is somewhat introduce those eVectively. The technologies we are aspirational, is it not, because the reality is not like looking at after that again are in the line of even that? If you take Denmark, for example, which has longer term deployment eVectively, so next gone further in reliance on wind power than anyone generation CCS, transport technologies and so on else it is very expensive, is it not? which may take quite some time. Dr Clarke: It is relatively expensive, yes, but that goes back to a number of the points that I just raised which Q314 Lord Kingsdown: Are you aware of any is about the machines that have been put into that speculative technologies which may well fail but environment in the past ten years in particular, and could produce a very good payback if they were what we are now seeing is the industry has addressed successfully developed? Do you see it as your those critical issues and they are moving towards a Institute’s role to invest in technology of this kind? diVerent generation of machines and what you would Dr Clarke: Yes. Our role very much is to look at also see is the types of suppliers now operating in that projects where there is significant risk but there is environment have quite markedly raised their game significant potential benefit. On that basis the type of as it were from the point of view of both their project you describe is most definitely one we would engineering and their manufacturing systems and explore; however, we would not normally look to support. fund what would be classed as basic research. There are other mechanisms, particularly through the Q312 Chairman: Just before we leave this one can research councils and universities for developing that you say anything about the cost of carbon, have you kind of capability in most cases and we are looking made any assumptions about those in your really to pick up capability at the next stage when it predictions? has been at least demonstrated at a laboratory type of Dr Clarke: No, I would not comment on that in terms scale and to then move it on into deployment in a of the analysis we have done so far, no. relevant environment, potentially at full scale. The implication of that is we will be taking a significant Q313 Lord MacGregor of Pulham Market: You risk with some of the projects that we do and equally mentioned earlier the projects that you are starting some of them will be relatively low risk I am sure with as priority areas. Why did you choose these from the point of view of demonstration capability. particular areas to start with and are you looking for Are there specific speculative technologies? The big wins in that they are far from guaranteed or answer is yes; the process that we are adopting in quick wins? these first programmes for identifying project areas Dr Clarke: We chose in particular oVshore wind and enables anyone to come to us with any idea they wish marine as being two critical areas from the point of and we will then assess it through a series of panels view of development of the UK energy base, with and independent experts. By taking that route we regard to 2020 targets in particular. The remit for the have found a very wide range of projects, I can assure Institute really is to demonstrate technologies which you. Some of them which we have in development at we can take to commercialisation realistically in the the moment as possible contracts—I cannot explain timeframe of 2020 to 2050 because most of the what they are in detail for commercial reasons in a technologies we will be using in 2020—not all by a public forum—would be classed as very speculative long way but most—are already in the technology, very high risk but with potentially manufacturing base at the moment. Therefore, the extremely big benefits and those are in the three choice of marine and wind as the first two areas was sectors that I have mentioned of oVshore wind, a case of there are particular issues in those industries marine power and energy around CHP systems in which we felt we could address and which would particular. benefit the 2020 targets. The next area that we have selected, which is distributed energy and covers a broad range of issues including biomass, feedstocks, Q315 Lord Lawson of Blaby: Presumably a lot of this the use of gases from those as part of the fuel supply kind of work is being done in other countries around as well as micro CHP systems on a residential scale or the world, particularly in the United States where thereabouts and also light commercial scale CHP there is a huge amount being spent on energy, systems. Those areas are ones which are much more research and development and applying research and complex both technologically and also critically from development. Is there anything particularly the point of view of how they are deployed into the interesting that you have looked at there from what market and there is a much greater degree of public they are doing? Processed: 17-11-2008 19:13:49 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

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24 June 2008 Dr David Clarke

Dr Clarke: I do not think there is anything that we Q318 Lord GriYths of Fforestfach: You have been have seen so far which you would class as very optimistic in the potential for technology that outstandingly radical, if I can put it that way. The could dramatically reduce the costs of renewable topics that you would find in American laboratories energy. Do you think that there are equally and companies are broadly similar to what we would significant technological developments in terms of find elsewhere in the world at the scale we are talking storing electricity to deal with the intermittent about. There are clearly some radical technologies problem of wind generation? being developed at the university scale, if I can call it Dr Clarke: In terms of what you may perceive as that, very much in the laboratory, and some in in- optimism the issue there is one of the degree of house industrial labs, not just in the US but around technological power that has yet to be brought to the world and those, as you can probably imagine, some of these areas and what we are now seeing, are not accessible to us at this stage. We have looked really for the first time in the last few years, is the and we have not seen anything that is outstandingly major industrial corporations of the world starting to diVerent. tackle some of these issues whereas before, and with many of the projects that are still proposed to us, we are dealing with very small groups, working on very limited budgets and who are, frankly, having to make V Q316 Lord Best: Is there one outstandingly di erent do with what they have got, in some cases quite speculative technology in bringing solar power from literally in their garage, to start with. the Sahara across Europe; is that the kind of thing that you might get into? Dr Clarke: There is a whole range of challenges Q319 Lord GriYths of Fforestfach: It is not the associated with that type of activity, by the very technology which is developing, it is that more nature of it, in the sense that the only way that is resources are being put into it. likely to be really cost-eVective would be with a Dr Clarke: More resources at a higher level in many combination of solar concentrators (as it would be cases. Fundamentally, most of those developments termed) from the point of view of increasing the and the speed of those developments now are being eVectiveness of the actual solar panels themselves. led by major industrial corporations around the That technology is in development at the moment world, not just in the UK. The question around and is something that is interesting. energy storage similarly is energy storage systems exist today in a whole diverse range of forms. The challenge is if you look at what is available there are clearly diVerent solutions for diVerent problems. Q317 Lord Best: Is it showing any promise? Energy storage at the point of energy production— Dr Clarke: Yes, the solar concentrator technology from oVshore wind for instance—is a route to most definitely shows promise and would be a route reducing transmission costs and transmission losses to significantly reducing the cost and the installed by stabilising the level on the grid. Energy storage at area necessary for solar, yes. Purely from the point of the other extreme, at the point of use, allows you to view of available resource and in terms of the amount manage local demand much more eVectively, but of sunlight and energy, it is clearly an area that we obviously the technologies you would need at either should be interested in, yes. The other major issue end are completely diVerent. There has been a whole though with that technology is obviously the actual range of studies done, therefore, and we have been transmission across very long distances and that looking recently at energy storage potential, and for would require really the type of technology which instance there are a very small number of large-scale National Grid highlighted in some of their evidence compressed air storage units around the world—a around high voltage DC transmission, which is very large one in Germany, an underground cavern, practical—as has been demonstrated in some for instance. Those are very interesting devices for countries—but obviously would require a major point of generation large-scale storage for smoothing investment to bring it in over that kind of scale. The out network stability. At the other extreme, down at work done in Germany by the Aerospace Research the local CHP level where you have got waste heat Institute and the DLR in Germany has been which you may not want to use at certain times of the considerable on this type of project and the types of day, high temperature batteries become a significant numbers they have postulated say that a 10 x 10 opportunity. Those batteries exist today, mostly used kilometre array in the northern Sahara could provide in the defence industry for military purposes where of the order of 10 to 20 per cent of the UK electricity their cost is tolerable and the performance you get is needs. Clearly, the question that is then raised is one of great benefit in those areas, but extrapolating that of security of supply because this now is a very distant into a commercial situation where you have heat, asset, as are many fuel sources that we are now faced because these batteries run at high temperature if you with, but the potential is significant. have waste heat then it becomes a real opportunity. Processed: 17-11-2008 19:13:49 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

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24 June 2008 Dr David Clarke

So those technologies exist but simply have to be would go for a completely new transmission system deployed on a commercial and industrial scale and can be obviated to some extent. that is the case with many of the renewable technologies. Those technologies are developed but Q323 Baroness Hamwee: Can you tell us about your in many cases it is probably not as advanced as you view of the role of Government, whether it should be might think, they exist today in diVerent areas but it supporting research and development or leaving that is a deployment issue. That is really part of the remit to the private sector with the Government providing for any group, to try and demonstrate that a guaranteed market? deployment in a diVerent environment. Dr Clarke: The critical issue is that development of any of the technologies in this area tends to be a very Q320 Lord Paul: One of the problems of renewable long process, ten years from first concept through to energy is that the best sites are far from where the actual commercialisation would be normal. The demand is. Is there any research which could help implication of that is that any financial investment by reduce the power transmission loss of energy through a large industrial group on that timescale will be seen cables over a long distance? as high risk; it does not mean they will not do it, but Dr Clarke: To date we have seen two main areas of it will be seen as high risk and any mitigation will interest, one of which is super-conducting cables and therefore be of benefit. That means that there is a one of which is high voltage DC. The reality is that requirement for long term stability in the target and high voltage DC is probably a better option; I say the potential market but there is also a requirement probably because there has been more work done in for short term support from the point of view of the that area and the costs are likely to be significantly kinds of mechanisms we are now seeing through the lower. Probably the bigger issue is the one which technology strategy board and through my institute. National Grid would be the specialists on which is I am afraid normally I would try and give an answer actually the degree of loss in the cable and in many which is one or the other but on this you need both, cases the work that we have done to date in ETI you need short-term support to mitigate the financial suggests that rather than seeking to find new risk of developing the capability in a very novel set of technology to fundamentally change the technologies generally, and certainly how they are transmission lines, the more eVective option is simply used together, but you also need a long term market to reduce the load on the line. For a given cross- incentive and consistency in the availability of that. section of transmission line the loss is reduced by the square of the reduction in the load on them which is Q324 Lord Macdonald of Tradeston: Is there any a complicated way of basically saying that the lower evidence that a lack of manufacturing capacity or a the power going through the line the less the loss, shortage of skills are proving to be significant significantly. So the opportunity of things like energy obstacles to meeting our targets or can you simply storage to enable you to smooth out the load on the buy or import those items? line and potentially reduce the peak load on the line Dr Clarke: There is evidence that the capacity in the is possibly a much more economic way of actually supply base is inadequate for what we currently need. increasing your transmission eYciency, albeit the That takes the form of lead times on delivery of losses are very small either way. equipment being of the order now—for wind turbines—of several years. What we are attempting to do is actually bring new players into the market Q321 Baroness Hamwee: Just to follow that up, we because we can expand the supply base we have got, are going to need more lines, is that correct? but if I talk to the marine power developers then they Dr Clarke: It depends. will most definitely cite shortage of skills in the marine industry from the point of view of dockside Q322 Baroness Hamwee: I should not have asked, skills in terms of fabrication, assembly of very large should I? structures. You are talking on the marine side of Dr Clarke: I apologise. The point is if you retain a structures of oil rig jacket scale, and the companies generation base as it is today then the answer would that are familiar with that kind of work are already be yes, but in a world where we now have more involved in this kind of activity now but they do not generation distributed around the UK in smaller yet have the capacity they envisage needing to individual entities in oVshore wind farms, in actually build those machines. biomass-fuelled local sites or more local sites, then the reality is that as we shift generation from the end Q325 Lord Macdonald of Tradeston: I noticed in the of the transmission lines to a degree into the survey by The Economist at the weekend that they distribution network that automatically takes the reckoned that marine technology was so distant as a load oV the transmission line, so whilst there is viable technology they did not even cover it. Is there reinforcement required the question of whether you not a danger if the Government piles in and starts to Processed: 17-11-2008 19:13:49 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG6

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24 June 2008 Dr David Clarke subsidise some of these manufacturing options we technologies on what you called earlier on will waste a lot of money? industrial scale? Dr Clarke: The reality is that marine is clearly a long Dr Clarke: Yes. way away compared to some other technologies as in the target for deployment of two gigawatts by 2020 is Q328 Chairman: If that is the case and if time is of opposed to 20-plus gigawatts for wind—it gives you the essence as some would say here, then is there any an indication there. However, the long-term model that is an international model that you can potential for marine is very big worldwide from the think of which would pull together not just co- point of view of environmental resource energy operation between people involved in the technology availability. Is it ever going to be as big an industry as but co-operation between countries in getting wind, I cannot answer that question but there is suYcient resources behind the technologies? potential there. Is it appropriate that Government Dr Clarke: We have not yet seen an outstanding supports that industry, from the point of view of the model, if I can put it that way, from any country. UK resource base and the UK skills base then we There are elements in diVerent countries but whether have already the answer—we have an opportunity. that is the fundamental collaboration between Whether industry and Government together can industrial groups and Government or whether it is in exploit that in the form of the export potential, which the economic policy side and so on, we have seen is where the jobs would really come in, is obviously elements in a number of countries and I do not think dependent on markets developing worldwide. anyone has the complete integrated package in any form at all, no. Q326 Chairman: Is there anything more that you think Government should be doing to promote a UK Q329 Chairman: Or the resources to bring it renewables industry that could be competitive forward? Let me lead you a little, if it were the defence worldwide? industry and not the renewables industry would not Dr Clarke: There is a whole range of technological the resources be forthcoming? and engineering developments which could and in the Dr Clarke: Taking Lord Lamont’s point from earlier, current climate are being carried out in the UK. I if you went to the US you would find significant think the key issue from the point of view of rolling resources in this area, absolutely, and you would find that out worldwide is we need to seek greater significant resources in certain other countries— collaboration internationally, which we are doing Germany notably—from the point of view of partly through our Institute with the help of both manpower skills and expertise in these areas. We do UKTI and the Foreign OYce, but critically there is need to build on those capabilities, and certainly my an issue in that we have an opportunity, shall we say, Institute is not trying to do this on a UK basis, our to use the UK as a demonstrator facility, to remit is explicitly to seek international collaboration demonstrate that this capability operates in this kind where it is appropriate and we are trying to do that. of industrial environment and this kind of world. If we approach that in the right way with the right kind of background to it, then there is a real potential to Q330 Lord Paul: If one had to choose between the sell that capability worldwide. The elements of that various renewable energies with the experience that are numerous though and I could start, for instance, you have now, which one would you choose that with the fact that in the UK we do not really have a would be successful in the UK and you can also very good techno-economic model of the UK energy market it in the world? system. If we had that and we demonstrated the Dr Clarke: The outstanding example today is operation of it and the ability to actually use it to onshore wind. If you go to Vestas Wind Turbines on design an eVective system for the future, then I think the Isle of Wight, every single blade they make goes that is the kind of approach that you could then take onshore in the USA; every single one. If you look at to other countries at all stages of their industrial and the cost base of the onshore wind market then it is economic development and actually use that as a already becoming close to competitive with modelling tool to help develop that capability in conventional generation. Is that the perfect answer those countries. Elements of it exist around the world for the UK? It is a good answer but there are all sorts but few if any countries have really developed that to of other issues around transmission, distribution the level it needs to be done, it does not have to go systems and planning permission, at which point you down to individual house level obviously but it needs may say that oVshore wind in the UK is a more to be relatively detailed. valuable option right now.

Q327 Chairman: Is that not the point in a way, that Q331 Lord MacGregor of Pulham Market: Can I ask perhaps no individual country has the resources on a question about biofuels because you refer in your its own that are required to bring forward these new submission to biofuels in one sentence but you do say Processed: 17-11-2008 19:13:49 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG6

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24 June 2008 Dr David Clarke it remains an important area for the overall energy Dr Clarke: Indeed. supply mix and is an area that you will be exploring further in the near future. Can I ask you to expand a Q333 Lord Lawson of Blaby: You probably know bit on that? him well. He has very recently, in the last few days, Dr Clarke: Our primary interest, certainly in the near brought out a paper which you may have read called term around biofuels, will be around biomass for Renewables: Time for a Rethink. One of the things he stationary power generation as opposed to biofuels says is—and why he thinks it is time for a rethink for transport. One thing that we have to be cognizant indeed—is that there is no way in which in reality the of in our Institute is that whatever we do we have to UK target of 15 per cent of energy from renewables, demonstrate additionality to that area from the point which is about 40 per cent of electricity from of view of our funding, and I think if you look at the renewables, or for that matter there is no way in biofuels in what many people consider in terms of which the European Union target of 20 per cent of transport particularly, and also for some stationary energy from renewables by 2020 can be achieved. applications, there are very significant amounts of Would you agree with that judgment? work being done already around the world and the Dr Clarke: In what we do we have to look at all the investment that we could make in ETI would make V inputs we can and we then carry out a degree of no di erence to that activity whatsoever. However, in independent analysis ourselves. Would I agree with certain other areas such as biomass in relatively those judgments? I would agree with part of them but small-scale power generation, there are some I would also agree with some of the judgments from significant opportunities there which need to be the Renewables Advisory Board who believe it is explored more fully. In our distributed energy nearly achievable. There are elements of what programme we have projects being proposed in that Professor Helm said which are absolutely right, it is area at the moment and we would be looking at how going to be extremely challenging. Is it possible? With we take some of those forward.That will lead us to the right mechanisms and with the right people the issue of the use of gases from biomass and the involved, yes it is. But it will be extremely diYcult I introduction of these as either full feedstock or part can assure you and it will require a very, very feedstock into stationary power generation and into coherent and concerted eVort, the like of which, the gas network. Those issues we will be picking up bluntly, we have not yet seen. longer term because currently there are relatively small amounts of resources being directed at those, but there is the potential in the UK for significant Q334 Lord Lawson of Blaby: Including a lot of benefits around those technologies. The area where it money. is unlikely that we will do significant work, certainly Dr Clarke: Yes, both Government and industry in the near to medium term, is around biofuels for money. transport. Chairman: That is a good point to bring our proceedings to a close. Thank you again, Dr Clarke, Q332 Lord Lawson of Blaby: Professor Dieter Helm both for your written evidence and for answering at Oxford is quite an authority. questions so succinctly. Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [SE] PPSysB Job: 408616 Unit: PAG7

156 the economics of renewable energy: evidence

TUESDAY 1 JULY 2008

Present Hamwee, B MacGregor of Pulham Market, L (Chairman) Lamont of Lerwick, L Moonie, L Lawson of Blaby, L

Examination of Witnesses Witnesses: Ms Vivienne Cox, Executive Vice President and CEO of Alternative Energy, BP; and Mr James Smith, Chairman, Shell UK, examined.

Q335 Chairman: Good afternoon and welcome. and to have diverse energy sources. There is clearly an Lord Vallance, our Chairman, cannot be here this issue of security of supply because when you look at afternoon so I am taking the chair in his absence. Can where those proven resources are, they are I thank you both very much for coming. I am asked increasingly concentrated in a very few places around to remind you as usual that because this is being the world so there is the issue of security of supply. recorded and for the benefit of our stenographer to Clearly there are concerns around climate change speak reasonably slowly and clearly, but I am sure and there are issues around development of new you will. You have not submitted any written industries, jobs, and sustainable competitive evidence so I wonder whether there is anything you advantage for nations, and so I think there is a wide would like to say in advance—I think you know the range of reasons why you would be wanting to issues that we are interested in—or would you be consider a renewables policy which is not linked happy for us to just go straight into questions? directly to scarcity of oil and gas. Ms Cox: I am certainly happy to go straight into Mr Smith: I think I would agree with that. If you like questions. I could maybe give a gloss from my perspective on Mr Smith: Likewise. that. I said I did not really want to make any opening remarks but Shell does long-term energy scenarios, Q336 Chairman: Thank you very much. Let me kick and we have done some of those recently, and we oV with this question. Renewable energy is often have a little booklet and I have got copies if the advocated as something we need to develop for when Committee would like to have them. Taking up the oil and gas supplies become scarcer. That is one of the themes that Vivienne was talking about, in the middle reasons of course. Do you agree with this view? What of the century we are probably going to have a global are your estimates for the totally economically economy that is about five times the size of today’s, if recoverable reserves of conventional oil and gas? you compound population and economic growth, How much is in UK waters? and to think that we can have an energy system that Ms Cox: There are two diVerent questions in your is five times today’s size replicating today’s energy first statement. The first is around scarcity and the system seems a little bit improbable. I think there second is around whether renewables are substitutes needs to be a very considerable amount of energy for oil and gas and what the motivation for eYciency found in industrial processes and transport renewables is. In terms of the scarcity issue, I think and also in homes and in our own actions as well such one of the most telling statistics is that if you look at that perhaps we end up with an energy system that is the proven reserves-to-production ratio for oil, in delivering twice as much energy despite the fact that other words how much do we know we have got the global economy is five times the size. There is no versus how much we are actually using, that ratio is doubt that fossil fuels will play a role in that. Fossil at about 40, so we have 40 years of oil in production fuels deliver something like 80 per cent of the world’s terms in our proven reserves, but interestingly that requirements of coal, oil and gas today. The ratio has been at 40 for 40 years, so for the last 40 remainder is rather simple biomass and some nuclear years we have said oil has got 40 years of proven and some renewables. As we look at it, by the middle reserves to go, and we keep on finding, either through of the century we think that fossil fuels, given what technology or through new exploration, additional Vivienne was just saying, will still be delivering reserves to make up for production. So the figure for something like 60 per cent of the global energy oil is 40 years, gas is 60 years, and coal is 130 years. demand on an energy demand that has doubled, but In our assessment it is not a question of oil and gas we think that renewable sources will probably have (hydrocarbon) reserves running out; we believe there got to about 35 per cent or so, with the remainder are suYcient oil and gas reserves. I think the issue is being nuclear. The question that Vivienne was then why are we interested in renewables, and of addressing and you are talking about as well is why course there are many, many reasons why a would that be if there is plenty of oil and gas. I think renewables agenda makes sense. One is to diversify there are some hard truths behind the oil and gas Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG7

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1 July 2008 Ms Vivienne Cox and Mr James Smith scenarios. One is that energy demand growth is and new ways of reducing the cost. The other thing of accelerating. The conventional sources of oil and gas course is so-called easy oil, as I have said, is becoming are getting harder to produce so the easy oil and gas less easy to find and alongside oil sands we are has probably been found and produced. There are looking at putting production facilities in 8,000 feet also environmental stresses particularly to do with of water in the Gulf of Mexico, for example at a very climate change. I think renewables would be a complex energy plant at Sakhalin, so in the available response both to the need to tackle climate change portfolio of oil and gas production it is not widely out but also to ensure that the world does have enough of line because the costs generally are getting higher energy because oil and gas production, plenty though so it is an economically produceable resource, albeit it is, will tend to get more expensive over time at the higher end. On carbon emissions, it is whereas the renewables can come down the cost of sometimes said that it is two or three times as high. Of earning curve and can be competitive over time. course you can find steps in the up-stream production where that is so, but the important measure, I would Q337 Lord Lamont of Lerwick: Does the recent suggest, is to look at it well-to-wheel so once the action on the price of oil this year cast any question product (which is essentially gasoline) is burnt in the marks against some of these statistics like your 40 vehicle, and to compare that with the alternatives and years for 40 years? the alternatives are gasoline either indigenously Ms Cox: Of course my 40 years for 40 years has been produced or from imported oil, and on that basis it is through a very wide variety of pricing environments about 15 per cent on a well-to-wheel basis. The other but interestingly it is certainly the case that those thing to note is that some of the old fields in the North countries where there are very heavy taxes, Sea oV Shetland for example when they get to the end particularly those countries where there are very of their life they become pretty energy intensive as heavy taxes and no subsidies on fuel, have seen well, so what I am trying to suggest is oil sands should reductions in demand. In the US gasoline demand is not be seen as something quite diVerent, it should be down three per cent year-on-year and has seen seen on a continuum for oil production at the heavier declines month-on-month versus the prior year for end, at the more expensive end. Yes, there is more the last 12 months, so there clearly is an impact of CO2 produced but it is not the very substantial figures price on demand, but actually we have been surprised that sometimes people talk about, and we have made by the inelasticity of demand given the extent of the commitments to reduce the CO2 that comes from the price rises. production of oil sands. We are looking at a carbon capture and storage project beside what we call the upgrader near Edmonton, improving energy Q338 Lord Lamont of Lerwick: Turning to Y unconventional sources, of which one example is tar e ciency for later phases and also supporting the sands, how much more expensive are those to extract actions that the Albertan Government and the compared with conventional oil? How large are the federal government in Canada are taking to see emissions involved in extracting oil in that way as carbon mitigated, because we recognise that it is opposed to conventional oil? Are there other necessary that the fossil fuels produced from the oil environmental costs involved? sands will have to find their place in the carbon Mr Smith: Shell, as you may know, has fairly mitigation world with carbon prices. You mentioned substantial interests in oil sands in Alberta. The other environmental factors as well. The oil sands use Albertan oil sands for Canada as a whole, not just water in order to separate them from the sand and Shell’s share but the entire interest there, has there is a call on water from the Athabasca River and recoverable reserves of something like 175 billion that is a concern. We estimate 2.5 million barrels a barrels. That makes Canada second to Saudi Arabia day, or say three million barrels a day production, in terms of global oil resources so it is a very which is where the industry may get in time over 15 significant hydrocarbon resource and important for to 20 years. The call on the water from the Athabasca energy security (if we think about energy security and River might be 2.5 per cent of the water from the river price and climate change as some of the factors that so it is not huge and there is a statutory cap on calling are important) in that part of the world. You rightly for more than five per cent at any time as the water imply that it is more expensive than conventional oil level changes over time. We use a closed loop system and gas so there are some fairly energy-intensive steps so we do not actually discharge any water back into upstream, there are some very large trucks, you may the river. The arboreal forest is another matter. The have seen pictures of these 400-tonne trucks and big arboreal forest is very large and although the mines shovels, and quite a lot of work that then needs to be are big, relative to the scale of the arboreal forest it is done to take the bitumen, dilute it, transport it and really quite small. There are obligations which we then upgrade it, as it is called, near Edmonton. It is and the others are happy to fulfil to store the topsoil more expensive. We and others in the industry of when you dig the mines out and once you have mined course are continuing to try to find new technologies the oil sands to go back and remediate and put the Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG7

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1 July 2008 Ms Vivienne Cox and Mr James Smith topsoil back so the arboreal forests can be reinstated. essential technology to do so. In the medium to long It takes a while, I should say, it is probably about a term we have carbon capture and storage technology 15-year cycle to do that but it is an obligation on the and we are also looking at technologies such as industry that we are happy to fulfil. concentrated solar thermal technology and biomass. Our current portfolio is wind, solar and biofuels and Q339 Baroness Hamwee: Just to follow that up then a number of technologies which we are not briefly if I may, are there costs associated with the investing in today but where we are intending to grow distances involved from fields? I heard a comment our business for the longer term. In terms of whether recently about a likely battle over the Arctic and that it is our technology or other people’s, it is both, so we as the ice melts Canada and Russia are going to be have a significant investment in research and fighting over that, and presumably the fields there development but we also invest small equity stakes in will be expensive in all sorts of ways to extract? start-up companies, venture capital companies, Mr Smith: Yes, I think that probably Vivienne has venture capital funds, in order to access intellectual some comments there about gas pipelines across property which is being developed by others. There Alaska as well from the Mackenzie River delta. That are many people doing great research and is what we are finding of course and that is what the development but what we have found we can bring to industry is confronting. I go back to this phrase “easy this industry is our capability to operate at scale, to oil”, in easy-to-access places oVshore where we are, develop at scale the project management skills that which seemed pretty unconventional at one time and we have from the oil and gas industry, which are is more straightforward today. It is in more complex highly relevant if you wish to develop a material reservoirs, in deeper waters, in more diYcult places, alternative for the renewables business going further away from the market and therefore, forward. generally speaking, the resource cost of producing it gets higher and you have to find new ways of getting Q341 Lord Lawson of Blaby: May I ask a follow-up it to market, for example liquefying natural gas. But question. I am sorry, I did not catch the figure you there is a substantial pipeline system from Canada said you were investing in alternatives and into the United States already and we would envisage renewables and so on? that pipeline system that has been used perhaps Ms Cox: It is $1.5 billion. extended. Q342 Lord Lawson of Blaby: What proportion is that of BP’s total investment? Q340 Baroness Hamwee: Coming back to Ms Cox: From memory, this year BP’s total renewables can you tell us about your investments in investment is around $20 billion so it is 1.5 out of 20. renewable energy and which technologies you see as the most promising and also your role in developing them or using other people’s developments? Q343 Lord Lawson of Blaby: So over 90 per cent you Ms Cox: We have an alternative energy business. We are investing in oil and gas? brought together all the activities that could be called Ms Cox: Correct. alternative energies into one organisation and we did that as a low-carbon power organisation in 2005 and Q344 Lord Lawson of Blaby: Is it the same then extended the remit into biofuels and beyond at proportion for Shell? the beginning of this year. We made a commitment in Mr Smith: It is not dissimilar. We are investing 2005 that we would spend $8 billion over ten years in something like $25 billion this year in total. this area. In 2008 we are spending just short of $1.5 billion (per annum) on alternative energies and that Q345 Lord Lawson of Blaby: It is well under ten per is at the current time primarily in wind, in solar, in the cent of your total investment? development of sugar cane ethanol, and what are Mr Smith: Our renewables would be under ten per commonly called second-generation biofuels, so cent of our total investment, that is right. those are our current investments. We are looking at carbon sequestration and storage, and although we Q346 Lord Moonie: What have been the main do not have capital investment, we do have projects obstacles to investing in renewable energy in the UK? being developed in carbon sequestration and storage, Is it the amount of funding available? Is it the and we believe that to be an extremely important problem with planning permission or the diYculties technology for the medium and long term, for the in getting connection to the network? reasons that James was talking about, which is that it Mr Smith: Vivienne is looking at me because we have is clear that hydrocarbons are going to be an been involved in a wind farm in the Outer Thames important part of the energy mix. If there are Estuary so perhaps I should try to respond. Maybe concerns about climate and a desire to mitigate CO2 just a brief preamble. My answer to the general emissions then carbon capture and storage is an question on renewables would have been quite Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG7

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1 July 2008 Ms Vivienne Cox and Mr James Smith similar to Vivienne’s but if we look at what we are successful. Onshore we did not think there was doing in the UK it has been principally wind, and anything we had that was particularly diVerent from oVshore wind in particular, again for the reasons many others. I should add though that we have a Vivienne was saying because we understand big, reasonably substantial wind business and that the long-term engineering projects oVshore. The project majority of that is in the United States and there it is I am thinking about is one in the Outer Thames onshore. So the land mass and the availability of Estuary called the London Array which is one wind resources is much more conducive to onshore gigawatt of capacity where earlier this year we wind in the United States. decided not to continue with that project. You ask Ms Cox: We are in a similar position. We have an the question about impediments or incentives. If we onshore wind business in the United States and it is think about planning—and I think the Government this issue of scale there that makes it appealing to us. well knows that planning has been an issue in so far There is not the consistency of the legislative as getting the energy infrastructure that is required environment which we would like but the scale of the with the new legislation there—and we did experience resource there makes it attractive, and that is of a delay of something like 15 months there for the course what makes the oVshore UK wind onshore substation in Kent. An application was opportunities also attractive, and with 40 per cent of made and then turned down and we went to appeal the European wind resource in UK waters, the UK and the appeal was eventually found. I am hopeful does appear to be comparatively advantaged in the that the changes in the planning legislation will issue of oVshore wind. improve things there. You mentioned connections to the Grid and that is an issue. You have to work out Q348 Lord Lawson of Blaby: Just finishing oV on the project timing to ensure that when the National oVshore wind before going back to hydrocarbons, if Grid are ready that you are ready too, but that was oVshore wind in these parts is so great, why did Shell planned in without too much diYculty. I think that withdraw from the London Array? will become more of an issue in future, particularly if Mr Smith: Because it was not meeting our economic there is an acceleration of the amount of renewable criteria; it is as simple as that. Whatever project we energy that is deployed, particularly if it is getting are doing, whether it is renewables or fossil fuels, we back to a question about transportation. If it is in have economic hurdle rates. Scotland (where the resource is) and it has to be brought to England (where the demand is greater) Q349 Lord Lawson of Blaby: So oVshore wind at the then the upgrading of the Grid is going to be quite present time is seriously uneconomic? important. I think you also asked about financial Mr Smith: I would not go that far. For Shell we had incentives. You are aware of the ROCs. OVshore the a project, we looked at the economics, we looked at factor is 0.5 for ROCs. Just to give some public the response to our hurdle rates, and decided that we information by way of background: in 2003 there was could not proceed. There are two partners in that some public data that the capital cost of oVshore project as well and I cannot speak for them of course. wind was something like £1.3 million per megawatt installed. There is public information today that new projects are something like £2.6 million per megawatt Q350 Lord Lawson of Blaby: Going on to installed so that is a very significant increase. It looks hydrocarbons, Ms Cox was saying at the beginning as if when the Government went to 1.5 for ROCs that there is an energy security problem with oVshore that the estimates were something less than hydrocarbon and I thought you were saying there £2 million per installed megawatt. We now seem to be was no absolute shortage, and obviously there is 40 in a higher cost environment so it may well be that the years and that is likely, to go on past form, to Government will choose in the work that it is doing continue for 40 years, but you did say something on the Renewables Strategy to look at those about energy security which I think is, if I may say so, incentives. a little implausible because there is no energy security problem with coal, and coal of course can be gassified if necessary, and of course there is no energy security Q347 Chairman: You mentioned that you were problem with the oil sands in Canada which you were mainly in oVshore in wind in the UK and you talking about, so I do not think that stacks up, if I indicated that is partly because of your great may say so. In fact, you would not be in this expertise and experience in that area. Is that the main renewables game at all if it were not for the concern reason or are there other reasons why you favoured about carbon dioxide emissions. That is what it really oVshore against onshore? all comes down to. I would like to ask you about that. Mr Smith: When you put something in your portfolio Obviously both companies take a long view and it is because you think you may have something that always have done and you continue to take a long can diVerentiate you, not completely but where you view. You are investing over 90 per cent in carbon think you have something that can make you energy, oil and gas, so you obviously consider oil and Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG7

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1 July 2008 Ms Vivienne Cox and Mr James Smith gas to have a great future and indeed you are put together and that the technology risk is relatively assuming that in 2050, I think you said Mr Smith, low. In terms of the cost associated with it, our that you thought that carbon emissions would be 60 experience—and we are engineering a number of per cent. these projects (one in Abu Dhabi and one in Mr Smith: Including coal. California at the moment) is we are seeing significant cost escalations associated with these projects, Q351 Lord Lawson of Blaby: In carbon energy. The largely because of the escalation that we are seeing only way I can see that this squares with for example across the whole of the industry, but ball-park these Lord Stern’s latest pronouncement in May at the projects are costing about $2 billion for a 500- London School of Economics, and of course this is 60 megawatt project. Clearly they are significantly more per cent of a much higher total— expensive at this stage than a traditional 500- Mr Smith: Correct, twice as much. megawatt power plant. However these are very early days and these are the very first projects which are being developed and we would expect that as you get Q352 Lord Lawson of Blaby: He said that by 2050 the experience with the technology that you could global emissions have got to be reduced by 50 per drive the costs down that experience curve that we cent below 1990 levels and by 2050 in developing have seen in many industries, including many other countries they have got to be reduced by 90 per cent. I parts of the renewables industry. Certainly the would like to know whether you think that is realistic. objective has to be to get these projects so that they Secondly, the only way you can square that with this can compete with a price set for carbon and that has huge future for oil and gas and carbon and the virtual to be the objective. However, at this point they are total decarbonisation of the economy as far as more expensive and therefore are going to require emissions are concerned is if you can bring in carbon some sort of transitional support if we are going to capture and storage quickly and eVectively and enable these projects to happen. successfully. I would like your assessment a) of how realistic you think that prospect is and b) what it would cost over and above carbon energy without Q354 Lord Lawson of Blaby: Do you wish to add carbon capture and storage because there must be an anything to that? add-on, there must be an extra, and it is a question of Mr Smith: I would pretty well agree with all of that. how much that extra is. Also why are you convinced, I think unless we can get carbon capture and storage as the pattern of your investment policies indicates, working on coal then it will be very diYcult when the technology does not even exist at the eVectively to tackle climate change. I think the present time, that that will be a better bet technology needs to be capable of large-scale economically than renewables? deployment by about 2020 for all the new coal-fired Ms Cox: There are a lot of questions in there, sir. If I power plants in the OECD at that time. Our scenarios may start by saying I did not say that energy security have got CCS on all the coal-fired power plants in the was a problem. I said that increasingly around the OECD by 2050 and half the non-OECD. By the way, world there are political concerns about energy our scenarios are not quite making it on climate security because I think you are right that there is a change so they are realistic scenarios but it is very global market and a functioning global market for diYcult to bring emissions to a level that seems to be hydrocarbons, but nevertheless we observe around appropriate. There is a need for probably 12 large the world that there is increasing political concern demonstration projects by 2015. As Vivienne says, and an increasing desire for a higher percentage to be the technology is there to be assembled. You asked domestically produced. about renewables. We have coal gasification technology that we are already selling licences for, so Q353 Lord Lawson of Blaby: Coal is domestically we have an interest in seeing that happen, but it is produced of course. about ƒ1 billion extra for each of the 12 projects that Ms Cox: If I move on to the issue of carbon capture would be needed in order to get them launched. We and storage, first of all, the component pieces of need to see some means of launch aid on a technology are proven so although no-one has yet competitive basis to enable those projects to get done a project end-to-end which takes hydrocarbon, launched. I think the ETS may be a mechanism for doing so. Of course, there would have to be some produces energy and sequesters CO2, the component pieces have been done in other industries or in other fairly strict controls around it. places. At BP we have experience of the CO2 storage piece of this in the In Salah project in Algeria which Q355 Lord Lawson of Blaby: I am not so concerned is storing a million tonnes a year of CO2, which is about the mechanism used for raising the price giving us a lot of understanding of the concerns and because obviously there are diVerent mechanisms the issues technically raised by storing CO2. you could use—emissions trading or tax—what I am Technically I believe that these projects can now be more concerned about is where you actually stand, Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG7

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1 July 2008 Ms Vivienne Cox and Mr James Smith and you have both helped on this but I am still not these things equate, but they are there for diVerent entirely clear. Carbon capture and storage is purposes. obviously very dicey, BP pulled out of Peterhead, and Mr Smith: I would certainly say that we at least have there are obviously some huge problems and you no sense that the cost of carbon or the concerns about refer to cost escalations and so on. Nevertheless, you carbon will go away and therefore that carbon costs clearly consider that carbon capture and storage will diminish. We advocate for action on carbon. We (because otherwise you would not remain in the oil believe in our scenarios that it is a better world where and gas business for that long ahead because it would that is dealt with and we have clearer rules earlier so be a thing of the past, subject to one thing I will come that we can see what to do. The other answer is we to) is the future despite the cost escalations and just do not know in answer to your question because despite the fact that it is still on any commercial scale we have pots on the fire on clean coal technology, a great unknown and despite the problems so far. It pots on the fire on sustainable later-generation seems to me that one of three things must follow. biofuels, on solar, and on wind, and on hydrogen. Either you think that it will be more economic Part of the reason our costs, relatively speaking, are otherwise you would be going much more for low is because we are doing the research and we are renewables, because obviously the market is going to V trying to gear up and trying to understand which may choose between the two di erent kinds of non- work in the hope that some day we will be able to carbon energy, whichever is the cheaper, whichever is build a very substantial business on one or more of the more economic, so you are making a statement those, on the S-curve where you are keeping the costs that you consider renewables less attractive—this is low until you are clearer, and then we may find one possibility—economically than carbon energy ourselves able to invest more in the future. It is not and carbon capture and storage. The other that we have a firm view that we can see that CCS and possibility is that you in fact think that renewables are less uneconomic than carbon capture and storage coal is likely to be necessary. We can see that but for practical reasons it is simply not realistic to renewables are likely to have to play a role. We are see them bearing a great deal of the weight of the trying to invest and create options for ourselves in all world’s energy demands. The third possibility is that those areas, ultimately recognising that we will have you feel that the anxiety as time goes by about carbon to focus . dioxide emissions is going to diminish, in which case clearly being heavily in oil and gas and coal is the Q357 Lord Lawson of Blaby: I understand. I think it sensible thing to do. Which of those three reasons is is just very telling that you are spending more than 90 it? per cent on carbon energy and less than ten per cent Ms Cox: I do not think it is a binary answer. on renewables. I am sure you are right, for various reasons, but that makes it clear where you are Q356 Lord Lawson of Blaby: There were three! coming from. Ms Cox: It is not a tertiary answer in the sense that Mr Smith: It is not unusual in a nascent industry of we are going to need renewables; I think there is an course, if renewables is regarded as a nascent opportunity for renewables; I think renewables will industry, to be doing research and development increasingly be competitive. There are practical work. limitations on the rate at which those industries can grow. You have two per cent of the energy demand being satisfied through renewables at the moment. Q358 Lord Lawson of Blaby: If the Stern thing is not Even at extraordinary rates of growth, there is a limit realistic—and perhaps you can say if you think it is— to the rate at which you can grow those industries. I that we reduce our emissions by 90 per cent, or maybe think renewables will be part of the equation, carbon more, by 2050 with a halfway target by 2020; is that sequestration and storage will be part of the realistic? That is an enormous change, a dramatic equation, and I think oil and gas will be part of the change. equation, so I think we are looking at a changing Mr Smith: The changes for the world and for the UK energy mix which has an increasing percentage of would be enormous. The UK would have an renewables and where concerns over climate change economy double the size with no more energy, or require you to do carbon capture and storage at scale. perhaps less energy, so the energy intensity of the In terms of the cost, I do not think that carbon economy would have gone up. We would probably capture and storage will get to a point where it is have carbon capture and storage on all the coal, we cheaper than renewables but I do think we can get the would have doubled vehicle eYciency, we would be costs down. The issue of course with carbon capture using later-generation biofuels and we would be and storage is that you are not producing energy, it is deploying the renewable energy that is here so there simply to store CO2, so when we say cheaper we virtually everything you can think of that could be are really talking about at what price of carbon do done would need to be done in order to achieve that. Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG7

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Q359 Lord Moonie: Just looking at carbon capture, Ms Cox: The only renewable investment we are is this only viable for carbon dioxide as opposed to making in the UK is in biofuels where we are sulphur dioxide? Is there a possibility of doing both, investing $400 million in a biofuels plant at Hull that because it would change the economics of some of the we are investing in with British Sugar in a deal with plants that would have to be written oV because of DuPont. We have chosen to invest in wind in the US the Directives, would it not? for the reasons that I talked about earlier. It is about Mr Smith: You can use sulphur in other ways. The scale as much as anything else. It is about what can sulphur does need to be scrubbed out of the system we as BP do with relative advantage, and we believe and the regulations on sulphur have preceded those that is with large-scale projects/wind projects on carbon so there are already technologies for doing onshore in the US. The UK market should not be the so and you tend to create elemental sulphur. As it right market, in my opinion, for solar. There are happens we have a fairly large business on elemental other parts of the world where solar technology is sulphur for precisely those reasons and we are using better applied and our solar business is concentrated sulphur to make strong concretes for example. in Spain, Germany and California where I think if you took the issue of comparative advantage you Q360 Chairman: We are due to stop at about 4.15 to would say that they are markets that are more suited 4.20 with you but we do not have written evidence to solar technology and I think this issue of from you and I think you are very, very key players comparative advantage is an important one. Looking on the scene and I am sure the Committee would forward the pattern of our investment may well shift want to go on a bit beyond 4.20 if that is possible. Just if there is an oVshore wind industry in the UK following up the point Lord Lawson made, a number because we do believe that that is somewhere again of our witnesses and also quite a lot of our written with comparative advantage where we have evidence has suggested that the 2020 15 per cent opportunities to play but at this point we are not target is, and the phrases vary from “extremely choosing to put our renewables investments into the challenging” to “unrealistic”. What is your view on UK for diVerent reasons in diVerent technologies. that because they have also stressed that this will have Mr Smith: A couple of things come to mind. You a substantial cost to the consumer? Is there any asked about renewables, and if you will indulge me I particular reason, apart from the EU fixing that will mention carbon capture and storage again as figure, why we should have 2020 and would it ease the being very important for the UK as well, in my cost if we relaxed it? opinion, and therefore the carbon capture and Ms Cox: I think the number you choose is a political storage competition could be extended to things like choice because you can choose a diVerent number pre-combustion technologies as well as post- and it has a diVerent cost associated with it. I would combustion. The other comment I would have is on say that there is merit in having longer term targets the Renewables Transport Fuel Obligation where I in order to make sure that the technologies that are think the Government knows that what they have successful are the right long-term technologies. If I done is a start, it is a volumetric obligation without have a concern about the numbers it is the time necessarily looking at the sustainability criteria. A period is short and there is therefore a risk that the transition—which I think is recognised—towards an investment would be skewed to those technologies obligation that relates to carbon content and requires which work today as opposed to those technologies sustainability criteria would be the right direction to which might be right for the longer term. move in. Mr Smith: I think I would probably echo that. You may have seen the consultation on the Renewable Energy Strategy that BERR produced last week, all 282 pages of it, and in there it does talk about 45 new Q362 Lord Lamont of Lerwick: Any there any gigawatts of power by 2020, 30 of which would be renewable projects in either of your two companies renewable oVshore and 15 of which would be which would be viable in the sense of not requiring an conventional and very considerable increases in economic subsidy? renewable heat and also for transport. That does Ms Cox: We are seeing solar projects which are seem quite a lot to achieve in a relatively short period competitive with the Grid in some markets. If you of time. I think it is wise to consult on it. take California where they have a very high power price and where they diVerentiate in terms of time of Q361 Chairman: If I could turn to the next set of day, solar energy is competitive with peak power questions. How does the UK compare to other pricing. In Japan it is competitive with peak power countries in which you operate in terms of the policy pricing. So in certain markets we are seeing solar environment for renewable energy? If you had projects competing. I would say that with a $50 a additional capital to invest in renewable energy tonne carbon price then onshore wind projects are which countries would you look at first? also competitive in some markets. Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG7

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Mr Smith: Onshore wind, with the increasing cost of places about pricing. I suppose it is bound to be fossil fuels and the cost of carbon, is becoming circular. competitive. Also on solar, we are involved in thin- Ms Cox: I think the fact that these technologies are film solar and we are involved in a pilot plant in becoming increasingly competitive is driven by a Germany. Thin-film solar has certain potential number of things. First of all, there is an experience advantages. It is not at market yet but it is an example curve. You can see it very clearly with solar PV or of something that if it works, and it is still an “if”, with wind that over the period of time that these could be competitive without subsidy of course. industries have been in existence, the cost per unit of power produced has come down and that of course is Q363 Lord Lamont of Lerwick: Could I just come helping. It is also true that there are certain markets back to Ms Cox and a question I put to you earlier. which are naturally advantaged either because of the At the very beginning I referred to your 40 years/40 quality of the wind resource, because of the quality of years on oil supply predictions and you said were you the sun, and clearly they are naturally advantaged for absolutely confident that something fundamental certain technologies. On the other side, it is also true had not changed in the world recently, and I have not that the cost of the fossil fuel based power is read the actual document but I have obviously read increasing and that is meaning that the point is in the press about BP’s analysis of world oil supply rapidly narrowing for grid parity. and world oil demand. You are very firmly of this view and the fact that we have had this rather Q367 Baroness Hamwee: In your example of extraordinary increase in the price of oil in a very California you mentioned the pricing structure there short period, with an extraordinary percentage and diVerent prices for use at diVerent times of day— increase, has not caused you to question whether any sorry, I am rather thinking aloud—and there is of those fundamentals in your analysis might have clearly a circularity in that. Sorry, what I am been wrong and whether the situation might be more supposed to be asking you is about the roles for your serious in a way than people had thought? respective companies in supplying renewable energy Ms Cox: As you are aware, we do the statistical for heating and which forms of renewable energy you review of world energy on an annual basis. Every think are likely to be most eVective in this? year we look at the whole macro and micro set of Mr Smith: I am afraid I do not have anything to say trends and certainly our analysis which we have in answer to that question. It is not a business in recently published says that in spite of the increase in which we are involved. Heat is referenced in the oil and the impact that is having on demand in some BERR Strategy Report and consultation that it is a countries, the increase in demand in the non-OECD countries will continue and that the overall supply/ very substantial user of energy and there are a demand balances remain within the boundaries of number of technologies such as heat pumps and what we would reasonably expect. Clearly there are burning biomass and also solar thermal which can adjustments happening and they are happening in contribute towards it but it is not a business in which diVerent ways in diVerent countries but there is no we are engaged. fundamental reassessment of supply and demand. Q368 Baroness Hamwee: Have you taken a positive Q364 Lord Lamont of Lerwick: If these prices levels decision not to be engaged? were sustained a lot of the investment economics Mr Smith: I would say yes. would change, would they not? Ms Cox: They would but the other factor of course Q369 Baroness Hamwee: Because? that you have got is the phenomenal increase in demand in the non-OECD countries. Mr Smith: I suppose because we have got a lot on our plate and at some point you might look at something and say that is quite interesting and you might say Q365 Lord Lamont of Lerwick: That has always you have some capability but you decide not to do it been there. because you are already investing £26 billion and you Ms Cox: It is at a much higher rate over the last five have a number of pieces of renewable energy to work years than we have seen historically. on already. Ms Cox: We are in exactly the same position. It is not Q366 Baroness Hamwee: Just going back to an area we are involved in and for us again it is an economic viability, I suppose thinking about it this issue of focus. You focus on those areas where you must be the case but it seemed to me that what you think your skills are going to give you the greatest were saying was that certain projects and certain advantage and it is not clear for us that going into forms of renewable are viable in certain places many, many homes is something that we have much because of the choices which have been made in those advantage in. Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG7

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Q370 Lord Moonie: When you are talking about do it to gas from biosources, so wood chips to a very solar power, I take it that you are talking about clean diesel or wood chips to jet fuel as well. We are photovoltaics? involved in a project in Hawaii on marine algae which Mr Smith: In that case what I meant was solar looks quite interesting. The potential productivity of thermal. You run photovoltaics through a solar marine algae per hectare could be significantly larger panel. than from other biosources. There are quite a few challenges to making it work. We are also involved in Q371 Lord Moonie: In the latter yes, but in the a number of other scientific joint ventures where we general comments on California I presume that is are trying to use catalysts not to make bioethanol but generated electricity? to make petrol because petrol is a better thing than Ms Cox: Yes. ethanol to burn in your car because the energy density is better. We are also working with a life Q372 Lord Moonie: I assumed it was but I thought I science company to try to make the enzymes more had better ask. productive. There is a range. We are looking, too, at Mr Smith: You mentioned concentrated solar power plant science so for example perennial crops so you earlier and I think ultimately that may be an do not have to till the soil, there would be less demand interesting technology as well. on fertilisers, and from things like miscanthus and poplar you can crop those annually and that can become the biomass source for technologies of that Q373 Lord Moonie: Arrays, mirrors and things? kind. You said how long does it take. The unit price Mr Smith: That is what we meant. is high but these are early days. We hope to build a world-scale plant in Canada relatively soon; the Q374 Lord Moonie: How important are biofuels for German one is a bit further behind. I think it would your company? Are you investing in the development take five or so years to begin to prove the technology of second-generation biofuels? When would you and another five years before you could think of expect them to become commercially available? How large-scale commercial deployment. much would they reduce carbon emissions compared to first-generation biofuels and conventional oil and gas? Q375 Lord Moonie: Are you doing any work on Mr Smith: It is interesting because Vivienne gave the fuel cells? last answer and I could have said the same thing so it Mr Smith: The simple answer is no, for much the will be interesting to see if you would have said the same reason as we are not doing work on heat pumps, same thing as I do. If you are involved in supplying because you end up having to make millions of those liquid transport fuels then there is not really a things in mass manufacture and that is not what we strategic choice to be made; you are going to be do. Other people can do that better than us. We have involved in biofuels, and we are involved been involved in catalytic work in re-forming as a substantially in biofuels already in the US and precursor to fuel cells because we have some Germany and Brazil in particular, but recognising capability. that those are early generation biofuels and we need Ms Cox: Our involvement in biofuels is very similar, better technology for the future to lower the cost and although I think Shell have a broader range of also to avoid contention with food. We have been activities that they are involved in. We are involved in involved in what we are beginning to call later- Brazilian sugar cane. We see that as being something generation biofuels rather than second-generation which will in an economic and in a greenhouse gas biofuels because not all first-generation biofuels are sense be part of the transport fuel pool on an on- the same either. There are some that are much better going basis. People call it first generation but we see than others. We are in a joint venture with a company it as being a very good first generation biofuel that in Ottawa that makes bioethanol from corn stocks, should survive. We are involved in this project in Hull so you use a special enzyme to be able to break down so our next generation molecule is actually a butanol the long sugars in corn stalks so you are not then molecule and we are looking to develop that molecule competing with food. You asked a question about in a demonstration plant and then to take the large- technologies and we have a joint venture in Germany. scale plant and move the butanol across to that plant. It is interesting there because they have a piece of We are also looking at the algae technologies. They technology to gasify wood chips and we have a look interesting but are some way oV. In biofuels in technology to take the gas and turn it into a very terms of R&D there are many more R&D options to clean diesel. We have been practising that technology generate new molecules or to grow diVerent crops to in Malaysia for many years and we are building a process them in diVerent ways to produce diVerent large plant in Kuttawa at the moment, so it is a fossil molecules. There are more solutions potentially fuel-type technology and you can do it to gas from available in biofuels than in some of the other fossil foils or you can do it to gas from coal or you can technologies. Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG7

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1 July 2008 Ms Vivienne Cox and Mr James Smith

Q376 Chairman: I think those are very interesting our biofuel suppliers and requiring that they sign up. answers because you will be well aware that currently For those who will not sign there is a detailed in the food and agriculture debate there is a great deal conversation; for those who sign too readily there is of concern about the impact in Brazil and Latin also a detailed conversation because we want to make America generally and the United States because of sure they take them very seriously and that we can the sugar cane take-up and the corn and maize take- trace back through their supply chain to ensure that up. Your answer seemed to indicate that you are there is proper sustainability. aware of that issue and you are looking to biofuels from other sources and that is where you would Q377 Lord Lawson of Blaby: Just on that last point expect them most in the years ahead? very briefly, you are quite right to point the finger at Mr Smith: We did not answer your question about the important issue of land use because land use is not simply a question of biodiversity and all that, it is the the carbon eVectiveness. Some of the biofuels that fact that if land is used for fuel the land is not used you are talking about have very minimal even energy for food? benefits far less carbon benefits, whereas the later Mr Smith: Yes, you are right, and although there are generation technologies that Vivienne and I have about 100 million hectares of arable land in Europe, been talking about can give you up to perhaps 90 per there is other land that is not useful for arable crops cent or more carbon benefit and you do not have the where you can plant these perennials so if you are contention with food. You do have to be very using perennials to create energy crops you are not concerned about land use. There are still issues about necessarily in contention with food, but you do need maintenance of biodiversity, maintenance of the to be very careful about that, I agree. habitat, and all of that still needs to be carefully dealt Chairman: We have kept you longer than we expected with. We have set out a series of sustainability and I think that is a reflection of the interest that the standards in something called the Roundtable on Committee has had in your answers. We are Sustainable Biofuels and the Roundtable on extremely grateful to you for coming and we will Sustainable Palm Oil and we are taking those certainly reflect very much on the responses that you standards and putting them into the contracts with have made. Thank you very much indeed.

Examination of Witness Witness: Mr Neil Hirst, Director for Energy Technology and R&D, International Energy Agency, examined.

Q378 Chairman: Mr Hirst, can I thank you very case) and also for the first time a scenario in which much for coming. I ought to explain that one member global CO2 emissions in 2050 would be 50 per less of our Committee may have to go very shortly for than current levels. We chose that scenario partly other reasons; it is nothing to do with any answers because the Intergovernmental Panel on Climate that you give! Could I also remind you that this is Change have said that we need cuts at least that deep being broadcast so if you could speak loudly and not in order to contain global warming within the range too quickly that would be helpful for the of two to three degrees Celsius. These models are stenographers. I would like to start by asking you a based on in-depth least-cost analysis of energy very general question: how large a role does technologies. If I may focus on the 50 per cent renewable energy play in the IEA member countries? reduction case, what we see there is that by 2050 How much do you expect this to change in the future? almost 50 per cent of global electric power generation How do you see the contribution in electricity comes from renewable sources. That is chiefly from generation and even in transport fuels? Have you any wind, from the diVerent varieties of solar power and comments about how those might change? It is a very from hydro. Those each account for about a quarter wide question, I am afraid. of the renewables in the share, with all other Mr Hirst: At the moment renewable energy accounts renewables making up the remaining quarter of for about six per cent of total OECD energy supplies renewables. To look at it in another way, if you look (membership of the IEA is approximately the same as at the carbon savings that are required from the the OECD) and more than half of that is biomass. If business as usual case down to 50 per cent lower than you just look at electricity, hydro accounts for 12 per at present, renewables accounts for about 21 per cent cent of OECD electricity generation. We have of the total savings. For comparison, energy recently published a major study called Energy eYciency is the most important area and accounts for Technology Perspectives with a range of scenarios for 36 per cent. 19 per comes from carbon capture and the future energy markets, including a business as storage, not just for power generation, and nuclear usual scenario; a scenario where carbon dioxide power and advanced vehicle fuels also play important emissions would come back to current levels in 2050 roles. I have given you the overall figure for (that is still a big reduction from the business as usual renewables today in OECD countries. Of course, this Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG7

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1 July 2008 Mr Neil Hirst varies greatly between individual countries. If you storage for industry and advanced energy for look at wind power, Germany, the US, Spain, India, vehicles, which is getting into territory of hydrogen China and Denmark are all leading countries in the vehicles or electric vehicles, and that is why the area, and for photovoltaics it is Germany, Japan, the marginal cost is so much higher. That, as I said, is USA and Spain, which tend to be sunny countries as about $80 a barrel. you would expect. If you look at marine power sources, tidal and wave sources, these are very much Q383 Lord Lawson of Blaby: So for the 200 it is at the research and development and early about $80 a barrel extra on the cost of— demonstration phase and there the United Kingdom Mr Hirst: --- what it would otherwise have been, yes. is amongst the most important technology developers. If you look at biofuels you have Brazil, the United States, and Germany becoming Q384 Lord Lawson of Blaby: And for the $500 per increasingly important. tonne? Mr Hirst: $50. Q379 Lord Lawson of Blaby: I was very interested that you referred to your recent Energy Technology Q385 Lord Lawson of Blaby: That is $50? Perspectives, which is a very interesting paper indeed. Mr Hirst: No, the 500 I see what you mean. If I recall in that paper you suggested that if you are going to reach this target which you mentioned a Q386 Lord Lawson of Blaby: For the upper one it is moment ago of a 50 per cent reduction in emissions therefore presumably two and a half times that so on from 1990 levels by 2050, then on optimistic top of the 140 we have now it is an extra 200? assumptions about the progress of the relevant Mr Hirst: It is not on top of the 140. When we did this technologies—renewable technologies and so on— study we used oil price projections which were made this would involve a cost of $200 per tonne of a little bit more than a year ago of about $65 a barrel. carbon dioxide. Mr Hirst: Marginal cost. The cost of the most costly Q387 Lord Lawson of Blaby: So it goes from 65 to option. The average is a lot less. 265? Mr Hirst: It would in that case. In the optimistic case Q380 Lord Lawson of Blaby: What is the average? it would go from 60 to 140. Mr Hirst: I think it is more like 35 to 50. Q388 Lord Lawson of Blaby: An extra 140? Q381 Lord Lawson of Blaby: So 35 to 50 rising to 200 Mr Hirst: In the optimistic case $200 per tonne of at the margin, and if this optimistic assumption about CO saved, $80 per barrel of oil, it would have the progress of technologies does not happen then it 2 increased the price to the user from $65 per barrel of will be up to $500 per tonne of carbon dioxide. I think oil, which was the price we were using, to 145. people have some diYculty in understanding what cost per tonne of carbon dioxide means in the real world. Can you say in simple terms what this would Q389 Lord Lawson of Blaby: Yes, quite, and add, say, to the cost of electricity? therefore for the $500, the less optimistic view of Mr Hirst: Yes, the examples we give are $200 per technological advancement, it would then be $265? tonne of CO2 which to the motorist would add about Mr Hirst: If I have followed your arithmetic, yes I $80 per barrel to the price of oil, if you look at it from think so. the point of view of the oil consumer paying that. Q390 Lord Lawson of Blaby: I think 265 is right if Q382 Lord Lawson of Blaby: Okay so $80 extra? you multiply by five over two and then add 65. Those Mr Hirst: But you asked me the other question about are interesting orders of magnitude but I think it is electricity. I can describe it a little bit more. What this diYcult when you just talk about carbon dioxide to is made up of is a large tranche of savings that are understand in ordinary terms what that is, and very cost-eYcient for energy eYciency, a range of obviously there will be a corresponding increase in costs to decarbonise power which come in at around the price of electricity presumably by the same kind $50 per tonne of CO2, and the reason I want to dwell of factor? on that is that is about enough to double Mr Hirst: Not quite. For domestic consumers, the approximately the wholesale cost of generating wholesale price of generating electricity is typically power from a conventional, reasonably low-cost somewhat less than half of what they pay. For power station—three or four cents per kilowatt domestic users if the price of generation doubled, the hour—but if you want to get to a 50 per cent price for them would go up by about a quarter but for reduction you have then got to go for some more big industrial users most of what they pay is the diYcult technologies, things like carbon capture and wholesale cost of generation. Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG7

the economics of renewable energy: evidence 167

1 July 2008 Mr Neil Hirst

Q391 Lord Lawson of Blaby: Staying with electricity Mr Hirst: The upper end does include the costs of for a moment but going on to a diVerent aspect of it, back up. Let me just say a little bit about that because you have obviously looked at both the generation of this is something that we have done a study on that electricity through wind power and also the we are going to publish in the autumn. Estimating the generation of electricity through nuclear. How do costs of back up for wind, or indeed other variable they square up against each other? I realise that some renewables, is very far from being simple. It depends people have particular problems with nuclear but enormously on what the flexibility of your network is, putting that to one side, as far as the simple cost of what the alternative is, what the rest of the balance of generating electricity is concerned, how do wind your energy supply is and, very importantly, how power and nuclear stack up (we are talking about on much inter-connectivity you have with other systems, a large scale obviously)? so many of our member country systems can go up to Mr Hirst: If you look at current costs, I should give somewhere in the range of 15 to 20 per cent of wind a health warning on this because there are all sorts of without high back-up costs, but you eventually cross factors which will vary in particular cases, but the the threshold at which you do have to put them back range that we are using for current costs is for up and there you may have significant additional nuclear—and, sorry, I am doing this from inspection costs, but there is a certain amount you can do in the of our charts—something like three cents per design and development of your generating network kilowatt hour up to seven or eight cents a kilowatt (many of the things that are desirable to do anyway hour and for wind from about seven cents per in the modernisation of the network) that will limit kilowatt hour to about 14 cents per kilowatt hour. the cost of providing the variable increment. You What I must add to that is the costs of wind, we cannot express it as a standard increment on cost. believe, are on a long-term downward trajectory because this is a technology that is at an early stage in Q394 Lord Lamont of Lerwick: What information its development, so we expect that wind costs will has the IEA got on the experience of some of its come down over time, assuming there is widespread member countries like Denmark, Germany, Spain mass deployment, to a situation where they are which have higher levels of renewable generation? broadly competitive with nuclear costs. I have got to What information have you got of the costs from that make one very important proviso in saying that. The experience of incorporating it within an electricity costs of almost all these technologies have risen system and how far would this be relevant if the levels sharply over the last year because there has been a of renewable energy were even higher for countries bottleneck in supplies of both skilled people and like the UK which are not strongly interconnected on materials from energy generation plant so we have the overall European electricity system? not seen in the last year a decline; in fact, I think in Mr Hirst: We have a fair amount of information on most areas probably the cost of living has gone up, the costs of renewables in diVerent countries and in but we do not see that as a permanent state of aVairs; many cases you will find the costs are actually lower we see that as something that will change when we where the deployment is highest, simply because pass this period. there is an industrial infrastructure for manufacturing and there is a learning by deploying elements which tends to bring costs down. For Q392 Lord Lawson of Blaby: If I can just go back to instance, the costs of Danish wind power are amongst what you say is the immediate prospect or short-term the lowest in the countries that we have looked at. I prospect, whatever may happen in the longer term think you are right to point out that it is very relevant future on your figures, the cost of generating to the Danish experience that they are linked electricity through wind power is roughly twice that particularly to the German electricity market and of generating it through nuclear, according to your actually the Norwegian market is important because figures? of hydro. We may not have as much flexibility as Mr Hirst: My figures range from the upper end of the Denmark has to introduce high levels of renewables nuclear range to almost twice the nuclear range, yes, without back-up penalties. that is true. Q395 Lord Lamont of Lerwick: If I could just ask Q393 Lord Lawson of Blaby: The lower end is about then on something that I think is related to that which twice the lower end and the upper end is about twice you have just touched on. How far do the costs of the upper end, so it is twice in simple terms. In the renewable energy vary from country to country and case of wind does that include the extra cost of being how much is this because of natural environment an intermittent source of energy and therefore having factors and how far is it because of expertise in the back-up requirement whereas of course with technology? Obviously some countries have a better nuclear it does not need an alternative source of landscape for wind and hydro is obviously easier in energy? some country than in others. Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG7

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1 July 2008 Mr Neil Hirst

Mr Hirst: They vary considerably and it is a mixture predictably transitional over time so that of those factors. Some of them are extremely obvious progressively the technology is required to become it is solar or wind but in others there is a big competitive in the market. We have found that diVerence. For instance, I am not sure it counts as mechanisms tend to be more eVective if they do renewable but it is linked to renewables, heat pumps, diVerentiate between technologies at diVerent stages installing a heat pump in your home in the UK is a lot of development. It is a problem with single incentives more expensive than it is in Sweden and the reason is that they will not tend to bring forward any but the that there is a huge industry with a very widespread technologies which are most cost eVective and deployment of heat pumps in Sweden and we have available today. The technology also needs to take not developed our industry to the same degree, so into account the point that we have just discussed, the that is undoubtedly one of the big factors. implications of larger scale penetration of grids. Those are the main messages; there is not a simple Q396 Chairman: You have said in answer to Lord message. There is one other message that I think is Lamont’s first question that you have got a great deal important. There is actually some international of information on these relative costs. This is convergence between these mechanisms. On the one something that interests the Committee very much so hand, countries that have capital/capped quota if you were able to let us have a note. systems have tended—and I think the UK is amongst Mr Hirst: We can send you the information. those—to introduce diVerentiated elements within Chairman: That would be very helpful. Thank you that for diVerent technologies. On the other hand very much. countries with feed-in tariVs in some cases are moving from feed-in tariVs which are the gross sum V Q397 Lord Moonie: What is the specific reason for received by the supplier of electricity to feed-in tari s the Danish cost advantages? which are increments on the market price, and V Mr Hirst: Denmark has a long history of developing e ectively those are somewhat bringing together V wind energy. They took a strategic decision on it at these di erent technologies. least 20 years ago, I think. Q400 Lord Lawson of Blaby: Obviously we would Q398 Lord Moonie: It is a time factor. not be into this renewables game if it were not for the Mr Hirst: And in many respects this has turned out concern about carbon dioxide emissions on any scale to be a big success for their economy, not only the so there is obviously a clear comparison between fact that they have relatively competitive power but renewables on the one hand and carbon capture and that their wind turbine manufacturing industry is storage on the other as a means of eliminating these now a world leader. emissions. You mentioned indeed that that had a part in your scenario. May I ask you therefore one or two Q399 Lord Moonie: What evidence do you have questions about that. When do you think, if ever, it about the cost eVectiveness of diVerent policies for will be commercially available? When it is, how much supporting renewables like feed-in tariVs between do you think it will add to the cost of power ROCs, things like that, and any other alternatives generation by conventional carbon means? In other you can think of? words, how much will the extra cost of the capture Mr Hirst: We have done quite a detailed study on this and sequestration be and how much will the total cost which we will publish in the autumn. We did not find of producing electricity that way compare, in your that there was a simple correlation where feed-in view, with renewables, in particular wind power tariVs work and tradable certificates do not work. We because that is the British Government’s favourite found quite a varying pattern, although I must say renewable source? feed-in tariVs on the Continent had been quite Mr Hirst: We do think that carbon capture and eVective in promoting wind power particularly, but storage is an enormously important strategy for the diVerences are more subtle than that. It is in the managing global CO2 emissions because coal is such details of the design of the system. The main an accessible and relatively low-cost fuel for the most conclusions that we came to as regard to what makes dynamic of the global economies, particularly Indo- renewable deployment strategies eVective are first of China. Also I think we should take into account the all focusing on removal of the non-economic barriers fact that to some extent in the UK and US situations to the deployment of the renewables. A lot of schemes there is a need over the next decade, too, to replace have been relatively ineVective because there are very large amounts of generating capacity, so there is other barriers not to do with the scheme itself— a potential for a lot of coal capacity to be brought in planning barriers, barriers to do with integration into around the world in the next couple of decades, and electric grids and so on. You need to have policies if that either does not have carbon capital or it cannot that are predictable and transparent so that industry have carbon capture and storage—I am having to can invest. The costs need to be predictable but also choose my words a bit carefully here—it really makes Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG7

the economics of renewable energy: evidence 169

1 July 2008 Mr Neil Hirst it extraordinarily diYcult to achieve the sort of costs or you find that you cannot meet the target of a overall cuts in account CO2 emissions which 50 per reduction so, yes, life is significantly more government leaders are calling for. That is why we diYcult without CCS. have called, as part of the advice we are giving to the G8, for a commitment to be made by 2010 to at least Q402 Lord Lawson of Blaby: On your scenario, 20 full-scale coal plants with CCS. That is a which I rather unkindly called a wishful thinking commitment that was actually endorsed by G8 scenario, as I understand from what you were saying leaders when they met in Aomori in Japan a couple to us earlier the cost of electricity would be roughly of weeks ago. That is quite tough and I should double? perhaps have said earlier, we are not saying these are Mr Hirst: The wholesale cost of electricity from a easy options; they are tough options. That is quite coal plant, yes, could be roughly doubled. tough but we think it is necessary and that could create a situation whereby 2020 CCS is available Q403 Lord Lawson of Blaby: How would it then internationally as a fully commercial option. I do not compare, in your judgment, with the cost of mean by that of course that it is competitive with coal electricity from renewables, particularly from wind without CCS—it will never be competitive with coal power? without CCS—but it is a cost which would be Mr Hirst: That is a fantastically diYcult question regarded by utilities as commercially proven and of because of all the change. You have got to make which there was some confidence as to its costs and as assumptions about how successful we will continue to its reliability. We think that—and I could not put to be in bringing down the costs of wind power. Our an exact date on this—in this process when this broad conclusion, which is embodied in this costs technology is fully developed and commercialised the minimisation model, is that they will both be costs could come down to around three to four US competitive in diVerent circumstances. With wind cents per kilowatt hour. Paying that to install CCS diVerent parts of the world have much better quality would approximately double the cost of generating wind and more wind or more reliable wind. Other Y electricity from a fairly e cient coal plant. You have parts of the world have coal which, as I have just to realise that a large part of the cost of coal is explained, hinges very much on whether you can cite transport and therefore the cost of a coal plant varies a power station close to a low-cost source of coal, so enormously on where it is located and what its source they will both be competitive. It is our best estimate of coal is. I am sorry, I have answered most of your in the right circumstances. questions. Q404 Lord Lawson of Blaby: And for the UK? Q401 Lord Lawson of Blaby: That is very helpful. Mr Hirst: The same applies for the UK. It is diYcult What you are saying is clearly there is an element of to say but one would definitely be more competitive wishful thinking here. That does not mean to say that than the other. your wishes may not come true, who knows, but in a sense, as I understand it, you are driven by the fact Q405 Chairman: Could I turn now to nuclear and that you have got to believe that this is going to come just ask you what you expect to happen to the cost of good because realistically you cannot see any other nuclear power over the next two decades? How large way of meeting the targets which are of virtual are the world’s supplies of uranium? If we turn to the elimination of carbon dioxide emissions which have question of plant decommissioning and waste been set or talked about? deposal that so many people are concerned about, Mr Hirst: When I was sitting behind I heard how many countries appear to have found a solution described by the oil companies, very accurately I to that problem? thought, the fact there is nothing missing in the sense Mr Hirst: We currently have the levelised costs of of there is bit of technology that we do not know nuclear power in the range of four to 7.5 US cents per works, but nobody has put it together yet, and so I kilowatt hour, so that is significantly more than a agree with you, it would certainly absolutely rely on relatively low-cost coal plant without CCS but it is in this technology which as a complete whole as an the same broad region as we think could be attained integrated plant, demonstrated to the public, with in the future by a coal plant with CCS. I have not got confidence with the costs, does not exist at this a figure to what we think those figures are. There are moment. We think it is very likely that it can be a number of factors which could bring those costs developed in this way but we certainly do not think it down. One of course is if there are very large, as we is certain and therefore in this publication we do look see from the French experience, runs of construction at a scenario. We say what if for any reason carbon of very similarly designed plant that could bring the capture and storage simply is not available, and I am costs down. There is the prospect of more advanced afraid I forget the exact figures but what you find is plant generation for plant which does have economic either you have a very significant further increase in benefits and again could reduce the cost, so we do see Processed: 17-11-2008 19:16:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG7

170 the economics of renewable energy: evidence

1 July 2008 Mr Neil Hirst some potential for reduction in those costs. Nuclear will be required is a hurdle which this technology has waste: there are diVerent elements to this. I think that still to get over. there are a number of examples where the decommissioning of plant has been successfully Q408 Lord Moonie: Looking at the use of renewable conducted back to green field levels. There are a energy for heat, which countries make the greatest number of examples of where countries have found use of this? What factors explain this, and are there solutions for the disposal of low-level nuclear waste. any lessons for the UK there? If you are talking about high-level nuclear waste, the Mr Hirst: I think one very interesting example is situation there is quite a number of countries have China which is by far the leading country in thermal well-defined strategies for the disposal of high-level and solar heating for domestic water. China has nuclear waste. In almost all countries the issues now developed a huge industry, a low-cost technology and are around essentially public acceptability for many millions of this plant have been installed. Other strategies which will find solutions which will last for examples such as Germany and Sweden certainly are a very, very long time but I do not believe that there making much more use of these technologies than we is any country that has of this moment actually are. You also see quite a lot of use in countries with disposed of significant amounts of high-level waste in large forestry industries with forestry waste products long-term industries. being used for heat generation where it cannot be used for combined heat and power, so I would say there are a lot of good examples there that the UK Q406 Lord Lawson of Blaby: You have a similar could probably follow. problem, do you not, with carbon sequestration? Admittedly, there are not the same sort of fears about Q409 Lord Lawson of Blaby: May I ask a question the radio-activity but you do have a real problem not perhaps for you to answer now but this paper of because nobody has sequestered huge quantities of yours Energy Technology Perspectives is very carbon dioxide until now and if that went wrong that interesting indeed but it is a massive paper. Do you could be quite unpleasant too, could it not? have a convenient executive summary you could send Mr Hirst: Probably comparisons are odious in this to us? particular regard. You are right that, as I have Mr Hirst: Yes. mentioned earlier, one of the issues with carbon Q410 Lord Lawson of Blaby: I think it would be very capture and storage is winning public acceptance. useful for us to have that. Are the public comfortable with sequestering what Mr Hirst: I may have enough for you and your would be very large volumes of carbon dioxide? colleagues.

Q407 Lord Lawson of Blaby: Huge, yes. Q411 Chairman: For the numbers who are here at Mr Hirst: Of course there is a certain amount of the moment! It would be helpful to have other copies experience with this because oil companies have for for the rest of the Committee. Mr Hirst: I am not quite a travelling salesman but I quite a long time pumped rather large volumes of have some of these with me. CO underground for tertiary recovery of oil reserves 2 Lord Lawson of Blaby: We are not asking to buy and there are a number of quite major tests going them! along around the world. There is one in Canada, V Chairman: If you could give us enough copies for the there is one o shore in Norway, where people are, rest of the Committee and also the note that we and have been for several years now, pumping discuss earlier. Also if there are any points that we significant volumes of CO2 into natural reservoirs have not been able to cover that you particularly and there are already quite a few results from want to put to us, for example in relation to biofuels advanced seismic examination which tend to show and transport, please let us have a note on that too, that CO2 does indeed stay in situ as far as people can perhaps from some of the preparatory work that you judge. How should I characterise that? It appears a have done. I apologise for the small number of people perfectly viable option. We do not believe that there here. It is for a whole variety of reasons this are really evident hazards that people should be afternoon that we are down to quite a small number concerned about, but that does not alter the fact that but of course the evidence will go to all of us. I am actually having approval to do this, having in place very grateful to you for coming; thank you very the details of a monitoring and reporting regimes that much. Processed: 17-11-2008 19:18:46 Page Layout: LOENEW [SO] PPSysB Job: 408616 Unit: PAG8

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TUESDAY 8 JULY 2008

Present Best, L Macdonald of Tradeston, L Griffiths of Fforestfach, L MacGregor of Pulham Market, L Hamwee, B Moonie, L Lamont of Lerwick, L Paul, L Lawson of Blaby, L Turner of Ecchinswell Layard, L Vallance of Tummel, L (Chairman)

Memorandum by the Office of Gas and Electricity Markets (Ofgem)

How do and should renewables fit into Britain’s overall energy policy? 1. The 2007 Energy White Paper set out four overall energy policy goals: — to put ourselves on a path to cutting the UK’s carbon dioxide emissions—the main contributor to global warming—by some 60% by about 2050, with real progress by 2020; — to maintain the reliability of energy supplies; — to promote competitive markets in the UK and beyond, helping to raise the rate of sustainable economic growth and to improve our productivity; and — to ensure that every home is adequately and aVordably heated. 2. More recently, the Government’s Renewable Energy Strategy consultation (RES), which was published on 26 June, focuses on two serious challenges: — tackling climate change by reducing emissions both here and abroad; and — ensuring that our energy supply remains secure. 3. Measures to achieve individual policy objectives inevitably interact withthe pursuit of other goals. In the case of steps to meet the Government’s environmental objectives, there are synergies and trade-oVs with the goals of ensuring aVordable and secure energy. It is for the Government to decide on the appropriate level of greenhouse gas reductions and the trade-oVs it is prepared to make in order to achieve its objectives. Given our statutory duties, our role is to provide advice to the Government on how to deliver its objectives—and in particular those that relate to the sectors for which we have a statutory responsibility—seeking the best value for money, which often means at the lowest possible cost to present and future energy customers. 4. In general, we support using broad-based economic instruments as the most cost-eVective way of meeting environmental challenges. We think the best approach is for the Government to decide on its desired objective— such as a specified reduction in greenhouse gas emissions—and then allow the market to find the most cost- eVective abatement options and technologies. This is because Governments, and regulators, do not have the necessary knowledge, expertise or information to judge the most eVective and cheapest ways of meeting a particular goal. This is particularly the case for reducing carbon emissions where there are a range of competing technologies at diVerent stages of development and whose costs may change rapidly over time if, for example, fossil fuel prices change or if there is rapid technical innovation. We have therefore argued for broad, carbon based instruments such as the European Emissions Trading Scheme (EU ETS) in all sectors where they are appropriate. These instruments are essentially technologically neutral and allow the market process to determine the most cost-eVective technologies to meet a defined reduction in carbon emissions. 5. We have recognised that other policies may be appropriate to provide a bridge to the time until the EU ETS has a longer time horizon and covers more carbon emitting sectors. We also recognise that for some sectors that emit carbon, such as domestic heating or retail petrol, the transaction costs associated with trading schemes may be prohibitive. In such cases it may be more appropriate to consider carbon taxes, with the level of any tax linked to the price in the emissions trading scheme to make sure that emissions reductions are achieved in the sectors with the lowest abatement costs. In addition, as set out in the Stern report, there is a need for additional intervention directed at consumer awareness and technological development. This is discussed further under question 3. Now that the UK Government and other EU Member States have agreed on targets for renewable energy, we want to help ensure those targets are met in the most cost-eVective way. Processed: 17-11-2008 19:18:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

172 the economics of renewable energy: evidence

6. Meeting the 2020 renewable energy target will not be cheap. It requires unprecedented investment in all areas of the supply chain; financial support mechanisms add to cost to consumers; and the increase in intermittent generation may have an impact on price volatility. This all comes at a time when prices are already rising and around 4.5 million households could be in fuel poverty. It is therefore important to ensure that the policy instruments designed to meet the target also protect customers from facing excessive or ineYcient costs. 7. The Government acknowledges that renewable generation is not the only way to achieve a low carbon economy. Demand side measures such as energy eYciency can achieve carbon savings at a lower, or even negative, cost.This representsa crucial synergyin helping totackle climatechange whilst helpingcustomers save money. In addition, the RES consultation recognises the smaller, but equally important, role that other technologies can play in facilitating this transition, for example distributed energy and bioenergy, as well as the larger role that can be played by renewable energy in other sectors such as heat and transport. 8. The Government’s commitment to more renewable energy is shared by other EU Member States. The European Commission has also signalled the importance of the movement toward a low carbon economy through the binding targets that it proposed should be adopted in the Strategic Energy Review that it published in January 2007. These targets specifically required: — a reduction in Green House Gas (GHG) emissions of 20%, compared with 1990 levels, by 2020 (binding); — an increase in the share of renewable generation in the overall fuel mix by 20% by 2020 (binding); and — an improvement in energy eYciency of 20% by 2020 (non-binding). 9. In March 2007 all Heads of Government within the EU signed up to these targets and the process to embed these within EU legislation began in January of this year, with the publication of the EU Green Package. This Package seeks to put in place arrangements for Phase III of the existing EU ETS to facilitate further abatement of GHG emissions, amend the existing Renewables Directive to incorporate binding targets on renewables deployment as well as improving existing provisions relating to renewables and to examine the progress made in Member States with respect to energy eYciency. Information on some of the diVerent support mechanisms used to achieve the targets in diVerent Member States can be found in our answer to question 4.

What are the barriers to greater deployment of renewable energy? 10. The potential barriers to increases in renewable electricity capacity include: — obtaining planning consents (for generation sites and for grid connections/upgrades); — obtaining access to the electricity transmission grid; — constraints in the supply chain for generation (eg wind turbines) and connections (especially oVshore); — sourcing finance from investors and debt suppliers; — cost-eVective support mechanisms; and — achieving the best balance between the heat and electricity sectors. 11. The planning regime remains the principal obstacle to meeting the Government’s renewables targets. The BritishWind EnergyAssociation estimateintheir evidencethat, ofthe 15GWofonshore windprojects thathave entered the planning system since 2002, only 2GW are currently in service. We recognise that the UK Government’s Planning Bill aims to improve the planning process for major infrastructure projects, but this legislation would apply only to England and Wales, where planning delays are less acute at the moment. 12. The electricity transmission networks—the wires which carry electricity from generators to customers—do nothaveenough capacityorappropriateaccess rulestomeetthe target.Newlinesneed tobebuiltinorder tohelp connect more renewables, and better use needs to be made of existing lines. Ofgem is playing its part by allowing a 160 per cent increase in investment in the electricity networks and by reviewing the arrangements for allowing generators to gain access to the networks. The existing access arrangements do not provide appropriate signals in suYcient time to allow the transmission companies to invest to expand capacity when it is required. In addition, the arrangements prevent better use of the existing capacity being made through allowing new renewable generation to connect quickly and share capacity with existing generators. Without major reform, as proposed in our Transmission Access Review published this month jointly with the Government, these problems would continue. The issues relating to the electricity networks are explored in further detail elsewhere in this submission. 13. Our discussions with other energy regulators through the Council for European Energy Regulators suggest that grid access and planning constraints for new transmission lines are also significant issues in many other Member States. Processed: 17-11-2008 19:18:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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Are there technical limits to the amount of renewable energy that the UK can absorb? 14. We are unlikely to hit a limit on the amount of renewable and intermittent generation that can be absorbed given suYcient time and money. However, there could be technical challenges in the medium term, for example to 2020, and the costs may be excessive. 15. High wind penetration and current typical demand patterns could lead to more volatile wholesale electricity prices. Demand during night time in summer can fall to 30% of winter daytime peak levels. Prices may even fall tozero atnight whenthereis morewind generationthandemand. Supplierswilltherefore havea strongincentive to oVer new services and tariVs to encourage customers to redistribute their demand across the day by, for example, using more time-controlled domestic appliances, although this would require a rapid roll out of smarter metering technology. 16. The short space of time available to meet the target may require the use of similar technologies or the same manufacturing design for a significant proportion of our generation fleet. This reduces diversity and increases the risks associated with any “type faults” being discovered later, for example with the design of a particular wind turbine. There are also risks associated with individual technologies that are not yet fully tested in operational conditions, notably oVshore wind. Such issues need to be weighed against the potential carbon savings and other benefits associated with action to tackle climate change. 17. An increase in renewable energy supplies could help security of supply by increasing overall generating capacity; deliveringa morediverse energymix; and loweringBritain’s relianceon importedfossil fuels. Thereare potential risks to security of supply as well. There is limited experience of the operational challenges of running an integrated transmission system reliably and within existing quality standards with a high proportion of intermittent generation, mainlywind powered. The scale of the2020 target and the limited timeavailable to meet it could also impact on security of supply. Ambitious renewables targets, especially if supported by attractive financial incentives, could divert investment away from other generation technologies, some of which would be needed to cover the intermittency features of certain renewable energy supplies. 18. In the longer term, the challenges associated with intermittency can be met through a range of established and emerging technologies combined with behavioural changes. Intermittent generation requires back up, for examplewhenthewindisnotblowing,andthiscouldbeprovidedbypumpedstorageandopencyclegasturbines as well as coal. However, as the proportion of wind energy increases, the back up generation becomes correspondingly more expensive as it sits idle for much of the year. Emerging technologies including batteries and fuel cells could become economically viable if their costs continue to fall or if electricity prices generally continue to rise. Finally, behavioural and technological changes can help by managing demand in response to intermittency. For example, smart meters, time of day pricing and also new technologies that control domestic and industrial appliances—such as shutting down fridge motors—to manage demand in response to intermittency. However, all of this costs money and takes time.

Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 19. Without specific support for renewables, the major factor determining investment in renewable generation would be current and expected prices for carbon and electricity. A combination of a strengthened and deepened EU ETS and continued high commodity prices could therefore make some sources of renewable energy competitive. Many forms of renewables are in need of technological development and there is great potential for advances in this area to benefit future electricity customers. However, there is a real risk that technological development is used as a residual explanation or “catch-all” for large subsidies, even for mature technologies. We would advocate that subsidy attributed to technological development should be justified on the basis of the development and potential of the technology. Perhaps as a consequence of the lack of justification here, it also seems that insuYcient attention is focussed on customer awareness. 20. In itscurrent RES consultation document,the Government notes that“The current RO wasdesigned on the basis of wholesale prices fluctuating around a relatively stable level of £40/MWh [Megawatt hour]. At the time of writing the wholesale electricity prices for a year ahead are closer to £70/MWh.”1 As the expected long-term value of a Renewables Obligation Certificate (ROC) would have been around £40/MWh, this implies that renewableinvestmentstodatehave beenmadeonthebasisofrevenuesofabout £80/MWh,notfarabovecurrent prices without any subsidy. While the costs of windfarm construction have increased recently, we understand that well-located onshore windfarms would probably be viable if future revenues could be locked in at today’s wholesale electricity prices. 1 UK Renewable Energy Strategy: Consultation Document, BERR, June 2008, page 94 Processed: 17-11-2008 19:18:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

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21. In this context, the best support mechanism for renewables is one where the level of support is inversely linked to changes in the wholesale electricity price. This would make sure that if wholesale prices either stay at their current levels or increase—due to higher fossil fuel prices or a strengthening of the EU ETS and higher carbon prices—the consumer would not provide renewable generators with a greater subsidy than they actually require.

Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime? 22. There are four main types of support schemes for renewable energy currently used in various Member States. These include feed-in tariVs; obligations or quotas; tenders; and tax incentives or rebates. A feed-in tariV is an additional premium (fixed or variable) paid on top of the electricity market price that renewable energy producers receive. An obligation or quota system normally involves a finite set of renewable energy generation certificates being generated and traded, with penalties in place for not possessing them, when it is mandatory to do so. Tenders involve inviting companies to bid for a fixed level of subsidy to deliver defined volume of renewable generation. Finally, tax incentives or rebates provide tax advantages for those choosing to generate renewable energy. 23. These schemes have had varying levels of success in encouraging renewables and at very diVerent costs to customers and costs per tonne of CO2 emissions avoided. A recent evaluation of their relative eVectiveness concluded that feed-in tariVs were generally more eVective at encouraging larger volumes of renewable generation at generally lower costs than the other options.2 However, these studies are very context specific and a policy that is ineVective and/or expensive in one Member State may be more eVective and cheaper in another Member State if, for example, there are fewer planning constraints and more spare transmission capacity. 24. The mandatory nature of obligations means that is the costs are largely passed through to business and domestic customers. This has been the case in Britain, where the Renewables Obligation currently adds around £10 to a domestic electricity bill per year and is set to rise to around £20 a year by 2015. Lessons can be learned fromthe Britishexperiencewiththe RO.Itsadvantageshave beenthat,first, itismarket-basedin thatcertificates can be traded. Second, it is technology neutral and so investment is incentivised in the most cost-eVective technology at any given time. Third, it was designed to sit alongside the competitive wholesale market and allow subsidies to fall away as technologies became competitive. 25. However, in practice, the RO has not been as eVective as the Government had hoped. The proportion of Britain’s energy coming from renewables has increased but by far less than is required to meet the target. It is worth noting that the two principal reasons for the relative failure of the RO were not predicted at the time it was introduced. First, the principal barrier to the expansion in renewables has been the planning regime. Second, the existing arrangements for giving generators access to the electricity grid have not provided the appropriate early investment signals or allowed for the best use to be made of existing capacity. These factors have inhibited the cost-eVectiveness of the RO. For example, in 2006–07, the cost of carbon abatement through the RO was in the range of £65–140 per tonne of CO2 depending on the fuel that is assumed to have been displaced, compared with just £18/tCO2 under the UK Emissions Trading Scheme. The high cost of abatement under the RO could at least partly be addressed either by replacing the RO with a feed-in tariV or tender system or simply by reforming the RO arrangements. 26. The Government is now considering what form the RO should take in the future. Given the risks and uncertainties in meeting the very challenging EU target, any new policy instrument needs to be robust to any future obstacles. There could be continued problems with planning if the Government’s reforms take time to implement or are unsuccessful. In addition, for the next few years there may be bottlenecks in the renewable manufacturing supply chain—for example for wind turbines—as European and global demand surges and manufacturers seek to increase their manufacturing capacity. Finally, there is a risk that the Government’s proposed approach for the RO could exacerbate these diYculties. Although “banding” the level of support for diVerent technologies could reduce costs to consumers by cutting the level of support to forms of generation that are increasingly viable, it would meaning losing the advantage of having a technology-neutral support system. The introduction of a headroom or “ski slope” is likely to mean that if wholesale electricity prices remain high, and if the planning regime remains a constraint, then customers could end up paying a bigger subsidy than is necessary. This problem could be addressed by linking the level of support inversely to the electricity price, thus 2 Feed-in TariVs and Quotas for Renewable Energy in Europe, CESifo DICE Report, April 2007, link) Processed: 17-11-2008 19:18:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

the economics of renewable energy: evidence 175 ensuringthe subsidyonlygoes whereit isneeded.Another optionwouldbe tocapture themoneythat iscurrently recycled to generators through the “buy out” fund and use it for other purposes—such as tackling fuel poverty— instead of adding further to the profits of existing renewable generators.

On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables?

Funding to renew the energy networks 27. Ofgem has played its part in providing the necessary funding for the transmission companies to invest to increase capacity to connect new renewable and other low carbon generation. In recent price reviews Ofgem has allowed an unprecedented 100% increase in investment in the energy networks to upgrade the existing pipes and wires and connect new generation, much of it from renewable sources. The Transmission Price Control Review for 2007–12 allows the electricity transmission companies to invest £3.8 billion to maintain and upgrade their networks. The funding is flexible and transmission companies’ funding will increase automatically if more generation seeks connection than was assumed when the price control was set. 28. Prior to that, in 2004 Ofgem approved £560 million of additional investment in transmission capacity outsidethe normalprice controlprocess toavoid delayin theupgrade worknecessaryto connectrenewables The main project aVected was the upgrade to the line running from Beauly, west of Inverness, to Denny, west of Falkirk: a key part of transmission network in Scotland where much proposed renewable generation is located. Most of this allowance has not been used because of major diYculties in gaining planning permission. In 2006 the Scottish Executive referred the project to a public inquiry. 29. There is the potential for more investment as more generation comes forward. For example, we are facilitating more “localised energy” (smaller-scale distributed energy and household-scale microgeneration) which we are addressing through our work on the next Distribution Price Control Review for the period 2010–15.

A new offshore electricity transmission regime 30. OVshore, there is the potential for over 30GW of renewable oVshore wind generation to connect to the system, potentially operating at a load factor higher than 35%. Together with the Department for Business, Enterprise and Regulatory Reform (BERR), we have been developing and implementing a new regulatory regime for oVshore transmission to make sure this generation can access the onshore market. OVshore transmission has diVerent technical characteristics and it costs much more to build lines oVshore than onshore. Thetransmissioncostsfortheinitialtworoundsof oVshoresitescurrentlybeingdeveloped,whichcouldconnect approximately 8GW of oVshore wind generation to the onshore network, are estimated at £2.5 billion. This figure could potentially rise to around £10 billion if a further 25GW is connected through the “round three” process recently launched by the Crown Estates. These figures are indicative at present and they do not take account of any onshore network reinforcement costs that may be needed, or the costs of connections to the Scottish Islands. 31. BERR and Ofgem have therefore decided to base the arrangements around competitive tenders for major oVshore transmission projects. Ofgem will organise tenders and appoint the most competitive bid to build, own and maintain the oVshore transmission lines. Subject to the Energy Bill becoming law, the first tenders are likely to commence in April next year. 32. The challenge lies in rebuilding the transmission system to accommodate this major change in the location and nature of flows across the transmission system. Funding of onshore reinforcement works should not present diYculties since Ofgem can allow the expenditure provided it is eYciently incurred. However, the sheer magnitude of the task will place an immense burden on the planning system.

Reforming access to the grid 33. A vital requirement for meeting the Government’s renewable energy target is to change the rules governing access to the electricity transmission network. The long overdue reform of the access regime has, however, been blocked in the past by the electricity industry. The Commons Innovation, Universities and Skills Committee recognised this in its recent report on renewables. “[Our] frustration is compounded by the knowledge that Processed: 17-11-2008 19:18:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

176 the economics of renewable energy: evidence

Ofgem attempted to pilot transmission access reform in 1999 and 2000 but, under threats of legal action, was unable to proceed.” At the time, many in the industry argued that reform was unnecessary. In addition, existing conventional generators have had an incentive to oppose reform as they do not want to share their access rights with, for example, new renewable generators. 34. We want a new grid access regime which requires all generators to make a clearer financial commitment of their future demand for capacity—or else give up their access rights to new renewable generators who may be more willing to make such a commitment. This approach has two significant advantages. First, it gives National Grid a lot more information about generators’ demand for access to the network, which in turn allows them to invest in new capacity to meet that demand where necessary. Second, it allows for much greater sharing of capacity, for example between renewable and conventional generation. Much renewable generation is intermittent,andsowind farmscouldsharecapacitywithconventionalgeneratorswhich canstartrunningwhen the wind is not blowing. 35. We are pleased that the industry is now making much more positive comments about access reform and we hope they will follow these with real action to amend the industry rules. As the joint Ofgem/BERR transmission access review draws to a close, National Grid has raised a suite of proposed changes to the key industry codes to reform the current arrangements based around three distinct models of reform. The proposals are now being analysed and discussed and National Grid will present its recommendations to Ofgem in September. We will then carry out an impact assessment on the proposals before reaching our final decision on which model to implement. We aim to have new arrangements in place by April 2010, which will also allow time for the necessary IT system development, although the timetable may be threatened if any of our decisions are subject to legal challenge. The Government has made clear that it will consider primary legislation if the industry does not improve its performance and bring forward appropriate reforms quickly. Ofgem is doing all in its power to facilitate the reforms.

Short term measures to bridge the gap 36. The signs of progress on transmission access reform are promising. However, the 2020 target is too pressing for us to wait for a new regime to be in place. A lot can be done in the meantime to help bridge the gap. For example, we have encouraged National Grid to move away from a “first come first served” approach to dealing with the queue for grid connections. At present, generators who have finance and planning permission may be further down the queue than generators who do not have either in place but who approached National Grid first. National Grid is now taking a more robust approach to removing unviable or purely speculative projects. National Grid is also progressing an amendment to the industry codes which would make it easier for existing and new generators to share access to the grid. 37. We estimate that these shorter term measures are capable of bringing forward 1GW of new renewable connections including just under 600 MW of projects that already have planning consent. We remain open to any other ideas which will accelerate longer term investment in the grid to meet the target.

Longer term measures looking to 2020 38. Even with transmission access reform, there are still significant challenges ahead. For example, the Government is committed to providing support mechanisms to help deliver the 2020 targets but it has not yet confirmed the precise form these will take. This means that renewable generators may not be able to signal their future capacity needs to National Grid and sign contracts because of the uncertainty over what financial support they will receive. By the time the subsidy mechanism is clear, there may not be suYcient time to build the capacity early enough to meet the target. 39. Ofgem is engaged in several projects to help ensure the grid can be properly configured for the renewables challenge. We have asked the transmission companies to produce an investment study to identify the options to invest to provide the extra transmission capacity that will be required to deliver the 2020 targets. For example, National Grid have suggested investing around £2 billion in two oVshore subsea cables that could transmit electricity from renewable generators in the north of Scotland, where there is a surplus of electricity, to the main demand centres in England. Another option would be to focus on incremental onshore grid reinforcements which National Grid estimate could cost around £1.8 billion. We are working with the transmission companies and will implement a new investment incentive framework that will allow them to reach decisions on the necessary investments given the long lead times for significant transmission investment. This will make sure, subject to the planning regime, that we have the necessary grid capacity in place in time to meet the 2020 targets. The framework will allow this investment to take place whilst protecting customers from the risk of having to Processed: 17-11-2008 19:18:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

the economics of renewable energy: evidence 177 pay for substantial investment in new transmission that is not required. This is clearly important given the context of rising energy bills. 40. All this is in addition to Ofgem’s existing work through our price controls. In the current transmission price control, we are allowing a 160% increase in investment in the onshore electricity grid, with flexibility for the network operators to go beyond this amount in response to demand for additional capacity. We are also implementing, with BERR, the new oVshore electricity transmission regime which will allow the potential of marine renewables to be fully and quickly achieved. 41. These contributions should allow a significant expansion in renewables by eliminating undue network barriers.

Protecting consumers 42. The measures needed to meet the renewables target will not be cheap. This raises particularly important choices at a time of high energy prices and rising fuel poverty. The companies understandably wish to protect their shareholders from as much risk as possible, and to transfer the risk and potentially more of the costs to the consumer. However, at a time when around 4.5 million households could be in fuel poverty, we believe it is vital that consumers are protected from excessive or ineYcient transmission costs. 43. That is why, for example, our new incentive package encourages the transmission companies to manage some of the stranding risk, ie that there is not enough demand from generators to use the new capacity once it has been built. In return for taking on more of this risk, the companies will be allowed to invest early and earn higher returns. Measures such as this allow us to be more confident, on customers’ behalf, that the investments requested by the transmission companies are genuinely required. At the same time, we want to see more long term commitments from generators to use their capacity rights—or else make way for new renewable generators who are ready and willing to connect.

How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? 44. We favour the use of market mechanisms and broad-based carbon trading schemes to determine the most cost-eVective technologies to reduce carbon emissions. We do not forecast their respective future prices as this is the role of the commercial, competing generating companies. A range of estimates has thus far been provided to the Committeeby several witnesseswho areengaged in thismarket. What isclear from theseforecasts isthe great uncertainty about what the most cost eVective technologies are and how this is likely to change over time as some technologies become established and reduce their costs, others prove not to be viable and as the price of fossil fuels and uranium change. Given this, we think it is all the more important to use market mechanisms wherever possible to determine investment in new capacity as markets are the most eVective way of dealing with this uncertainty.

If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? 45. This is principally a political question for Governments to decide. Considered purely from an environmental and economic point of view, ie how to meet the target in a way that is eVective and on time, whilst avoiding unncessary cost to consumers, it makes sense to allow the necessary investment to be made where it is most cost-eVective. This may mean a greater share coming from particular sectors or particular Member States.

How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? 46. Expected levels of coal, gas, carbon and power prices are the major factor driving investment in new capacity. Higher carbon prices will tend to skew investment towards lower carbon generation plant, such as gas and nuclear. As noted by both the Government and the European Commission, the renewable targets will tend to deflate the carbon price, eg from ƒ49 to ƒ39 on one scenario. Processed: 17-11-2008 19:18:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

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47. However, market participants are unable to predict the future. In addition, they value diversity, particularly if market and political signals are uncertain. As a result, generators are likely to favour a diverse mix of generating assets in the future, including some new coal. 48. We favour broad-based instruments which place a price on carbon, and ensure generators face the costs of the associated externalities, whilst allowing the market to find the cheapest way of reducing carbon emissions. Carbon trading provides the purest way of achieving this. In practice, there are ways to improve the cost- eVectiveness of the European Emissions Trading Scheme. The free allocation of permits under phase II of the EU ETS, which runs from 2008–12, has led to a windfall for generators. At the start of phase II in January this year, we estimated on the basis of prices at the time that the windfall of emissions allowances could be around £9 billion pre-tax over the five year compliance period. This is because generators seek to recover the costs of these permitsthroughtheprice atwhichtheyselltheirgeneration, eitherinthewholesalemarketor totheirownsupply business. Even though they receive some of the permits for free they will still seek to recover the value of the permit, since otherwise it would be more profitable not to generate and to sell the permit in the EU ETS market. The impact of this increase in the carbon price accounts for about an extra £9/MWh in wholesale electricity prices. Under the UK’s National Allocation Plan, large electricity generators receive slightly less than half of their emission allowances free of charge, so the resulting increase in the price of power represents a windfall gain for these generators. 50. Even with a more eVective carbon trading scheme, there may still be justification for support for some renewable technologies to help develop options for meeting future targets more cost-eVectively. However, support for these reasons would probably take a very diVerent form from the RO. The Government has already developed some policy interventions targeted in these areas, such as establishment of the Energy Technologies Institute. The costs involved are, however, orders of magnitudes lower than the subsidies to relatively mature technologies, over and above the cost of carbon, through the Renewables Obligation. 51. We hope that this information is useful. We would be happy to provide any further information that the Committee may require. Alistair Buchanan Chief Executive July 2008

Examination of Witnesses Witnesses: Mr Alistair Buchanan, Chief Executive, and Mr Stephen Smith, Managing Director, Networks, Ofgem, examined.

Q412 Chairman: Welcome to Mr Buchanan and Mr Buchanan: I will split the answer if I may into your colleague Mr Smith from Ofgem and thank you three and try and answer that succinctly and then for giving up some of your time this afternoon to come back on the individual parts. In terms of our answer our questions. Thank you too for your role in a way we have a multi-faceted role: we have a written submission, but as it only reached us leadership role with regard to setting network prices yesterday afternoon you will probably find that most and with regard to setting out the oVshore regulatory of the members of the Committee have not had a framework, we have a facilitation role which is that chance to read it, if you could bear that in mind. If we very much seek to understand what is the desire of you could speak up, please, that is helpful, it helps the Government with regard to the renewables with the recording, and if you could be reasonably targets—and some of the decisions we have taken, succinct in your answers that is also helpful. Do you particularly in 2004 where we broke the normal five- want to say anything by way of introductory remarks year price control cycle to step forward and agree or go straight into questions? nearly £600 million spend on the grid is a good Mr Buchanan: We are very happy to go into your example of that facilitation role. We have an advisory questions and thank you for inviting us here today. role, we seek to advise both Defra and BERR on elements of both energy eYciency (with regard to Q413 Chairman: Perhaps you could outline Ofgem’s Defra) and renewable policy (with regard to BERR). role with respect to renewable energy. We have We think we are listened to but sometimes, as you can received evidence which suggests that most sources of imagine, with the critical attention we feel a little but renewable power generation are more expensive than like Nelson at Copenhagen, but we try to make an conventional generation; given your statutory duty impact. A very important though often less to protect consumers, does the move to increase the newsworthy aspect of our job is that we administer level of more expensive renewable energy cause you nearly all the schemes, so we administer the ROC any concerns? scheme, we administer the Energy EYciency Processed: 17-11-2008 19:18:46 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

the economics of renewable energy: evidence 179

8 July 2008 Mr Alistair Buchanan and Mr Stephen Smith

Committment and CERT scheme, we administer the figures include the back-up that is required to deal Climate Change levy, and that is a very large part of with intermittency, did they include incremental our business, becoming an increasingly large part of costs if any of the grid and did they include our business. We are therefore very much involved, potentially any loss of power through transmission to answer your question, My Lord Chairman, in this. over long distances? As regards the expense of renewable energy, in a way Mr Buchanan: To the best of my knowledge it is no, this will take us when we go into discussion on to no and no on those. various subsidy mechanisms, but the figures that I have seen most recently come from Frontier Q415 Chairman: The second question is on the first Economics from June of this year. They are very point of your role. Is your role in Scotland and Wales interesting figures because in terms of a megawatt precisely the same as it is in England given that a lot hour what we are looking at at the moment—these of renewables are expected to come from Scotland are their figures—is onshore wind between £40 and and indeed Wales? V £75; o shore wind between £40 and £85 and then we Mr Buchanan: We have a responsibility to all take a step up and a barrage at the low end of their consumers in Great Britain so we do not discriminate charging range would be £140, photovoltaic is £275, regionally either within England or between which is at the top end of the range, and fuel cell is in Scotland, Wales and England. the middle at around £175. Those are the latest Chairman: Thank you. Lord Lawson. figures, but what is interesting then is if you slip nuclear in, which is broadly in the range of £60 to £80, and if you slip coal and gas in, which at the moment Q416 Lord Lawson of Blaby: I would like to follow is broadly in the range of £70 to £80, you have quite up what My Lord Chairman has just been asking an interesting spread of values there. For me the because it is clear that you were asked the question interest is that you have got onshore wind arguably whether these costings that you gave include system starting to compete with the traditional fuel sources, costs or back-up costs because of intermittency and and that is quite interesting. The final part of your the answer was no to both and no to something else question if I may is our statutory duty, which we take too, which means that really they are not worth the extremely seriously. Clearly, as we look into this paper they are written on as a guide to policy winter with wholesale prices going through the roof although they may be of some intellectual interest. In we are particularly concerned with regard to the fuel light of that I would like to refer to something that poor. An alarming statistic that is always worth you say in your very interesting written evidence, hanging onto is that every one per cent increase in which I have not had time to read very thoroughly power prices that you see is 40,000 people going onto because it came a little bit late, but you say “We are the fuel poor lists. We do take this very seriously and, unlikely to hit a limit on the amount of renewables clearly, one of the features of the renewables strategy and intermittent generation that can be absorbed Y is that of a £1,000 bill currently for the average given su cient time and money. However, there household, £80 is environmental connected—it is the could be technical challenges in the medium term, for EU ETS, it is the energy eYciency charge and it is the example to 2020 [which of course is the target date] renewable subsidy. I am afraid that is only going to and the costs may be excessive.” Can you elaborate go one way and that is up; therefore we are minded to on what you mean by these excessive costs—because try and ensure that consumers are very much that is a very strong statement—and if possible can considered within this debate. It may interest you you quantify them? that we carried out a survey with Henley Associates Mr Buchanan: Yes. Could I just start with an apology last year to find out what consumers thought about which I should have given to My Lord Chairman environmental issues and only 11 per cent of them with regard to the lateness of the document? We had thought that the environment was not worth been wanting to see in particular what the worrying about, which in a way was a very Government’s renewable strategy was going to be encouraging statistic. Certainly, we have to stay very before we responded and I suspect we are going to much attuned to consumers and we have just set up come on to talk about that. With regard to both a specialist consumer panel to advise Ofgem and intermittency costs, you have seen National Grid, a broad consumer panel so that we can make sure they have signalled that intermittency costs from that we are very much attuned to what consumers’ their perspective could be as high as £1 billion extra appetite is towards in particular environmental spend per annum with regard to the wind targets that have going forward. been set and clearly there may well be additional balancing and system costs that may be included if the EPR design were to be used for the nuclear power Q414 Chairman: Could I just ask you just two quick stations, so you have got these costs potentially follow-ups then? One is that in the figures that you coming through and aVecting the consumer. What were quoting for renewables with wind, did those we do say—and you rightly point to our document— Processed: 17-11-2008 19:18:46 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

180 the economics of renewable energy: evidence

8 July 2008 Mr Alistair Buchanan and Mr Stephen Smith is that broadly the advice that National Grid has billion; the figure that when I have spoken to provided to you is what we can buy into which is that National Grid they have discussed that the additional if the funding is there—and National Grid used a new nuclears may cause to the system is substantially figure of £9 billion to you and the kind of figure that lower than that figure. we have seen is six to nine and the kind of figures we have put in our document which you have seen already is that for the oVshore £2.5 billion for the first Q420 Lord Lamont of Lerwick: Professor Bain, in a eight gigawatts of power would be the kind of scale, paper written to this Committee, argued that your so these are very large sums of money. In addition to conclusion that the reinforcement of the Beauly- that there will be large system, balance and reserve Denny transmission line—and maybe you could just charges, which again National Grid has given to you. remind me about that particular project and what its It is worth stepping back and saying can National status is—would bring a lot of wind generated Grid handle that technically? They believe they can electricity from Scotland to England he was not and we do have the advantage of starting with an convinced by, he was not convinced that it was exceptionally strong network, a network that handles economically justified, and he also suggested that at the moment some quite significant swings; it does there might be a degree of political pressure being put handle 20 per cent of the power broadly coming from on you from Scotland. That is not really the nuclear which at times can be very large base load important point, the important point is the first one. chunks, we have got nearly five per cent of Mr Buchanan: If I could start and then maybe Steve renewables already, they have quite a large flexibility will want to pick up on this, for those of you who are within the system for voltage reduction so we are not familiar with the Beauly-Denny line broadly, to starting from quite a strong position, but that is not give you some geography, it is a 250 kilometre to deny the question which I think you are driving at standing line at the moment at a medium voltage which is this is going to place pressure onto the between Inverness and Stirling. Basically that is system. Technically in a way the demand is now out going to be upgraded to super grid level. It is a highly to see can we develop forms of storage and battery, controversial project: there were 16,000 individual V can we take that forward, and in terms of cost is this a complaints to five public inquiries when they set o cost that consumers are going to be prepared to meet. down the public inquiry route three years ago, and Those are the challenges but it would be wrong to what Ofgem did four years ago, in 2004, was break suggest that because of this issue the 2020 target away from its usual approach to five-year cycles of would not be met. analysis and provisional agreement of capex. What we did in 2004 was, on the basis of our economic analysis, award primarily Scottish Hydro-Electric Q417 Lord Lawson of Blaby: When you say the cost and Scottish Power £332 million to build this may be excessive— network. Where that system is today is nowhere; we Mr Buchanan: The costs will be very large. are still waiting for the planning process to grind its way through. It may sound a bit pessimistic but it Q418 Lord Lawson of Blaby: Excessive was your may not be unreasonable to think that this line might word. not get built until 2015. Bear in mind that a 25-mile Mr Buchanan: Yes. stretch across the North Yorkshire moors took nearly 12 years to get through planning permission Q419 Lord Lawson of Blaby: You imply also in your and be built in the 1990s—these planning inquiries written evidence that the costs of, say, nuclear may are intense and this is a particularly controversial overall be less than that, you do not say whether they issue. The controversy to which you are referring is would be or not, you say they may be, and in your on the economic side. Just by way of process, we used opinion it would be much better if the Government engineering advisers SKM to do this work for us, we had not got a nap on wind power—supported by the used as you would expect an Impact Assessment Opposition I may say—but let the market decide approach, a cost benefit approach, we also went to which was the better. That seems to me to be what public consultation. The two key elements that I you are saying. would see at the high level in terms of his concern Mr Buchanan: What we try to do—and you will not were, firstly, that we seemed to miss 500 megawatts of be surprised to hear me say this—is not to get into potential capacity and therefore we did not need to Ofgem intimating that we want to pick winners. One make this build. When we did the analysis, 1,200 of the concerns that we originally had with the megawatts was the breakeven, there was 1,900 renewable obligation, a subsidy approach, was that megawatts sitting north of Inverness, today there are there was an element of picking winners there by the 6000. We understand what he was saying, therefore, Government. Certainly with regard to, let us say, but we felt that the analysis that we did suggested that balancing and system support costs, the National there was not plentiful spare capacity so that area we Grid have given you that figure, which is up to £1 slightly disagree on. The second area which Steve can Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Alistair Buchanan and Mr Stephen Smith pick up as an entre´e into talking about our Mr Smith: His argument is a technical one, he is transmission access reform positioning is that he did basically questioning whether they are high enough. say that the system could be run better, that we could I know you have various academics presenting to you squeeze more juice out of the current system, and I and this is something that the various academic think he had a point in that. cognoscenti disagree on. There is a review going on at the moment as part of our transmission access review Q421 Lord Lamont of Lerwick: Would your answer and the thing that we have always been clear on, be aVected if the nuclear in Scotland was not replaced which has attracted a lot of political opposition in by nuclear? Scotland as to the principle, but it is clear and any Mr Smith: No, because the constraint actually sits electrical engineer will tell you the costs of north of where the nuclear is connected so you are transmission increase with the distance you travel, actually building in a very remote area. and really the debate we are having which is Professor Bain’s point is whether National Grid’s Q422 Lord Lamont of Lerwick: But it would not be methodology captures that appropriately. able to be exported to England, would it? Mr Smith: It is not contingent on nuclear for that Q425 Lord Turner of Ecchinswell: May I also, My very reason Alistair said, that since we did that Lord Chairman, seek a clarification in relation to the analysis we have now got six gigawatts of wind, of questions from Lord Lawson. We had some figures in signed connection agreements with the National relation to the cost of renewable energy per megawatt Grid to come onto the system in the north of hour and we had some total system costs which were Scotland, so actually the debate has moved on now in billions. I wonder whether you could just clarify if and the debate is not just do we need Beauly-Denny it my mathematics is correct in terms of how you is actually do we need further reinforcement over and translate from one to the other? I believe that our above that, and that is why National Grid is now total demand across the system is of the order of talking about potentially building sub-sea cables that magnitude of 350 or so terawatt hours or 350 billion will come either down the east or west coast. In kilowatt hours; if those were costs put forward from essence, that was the debate we were having a few the National Grid which would support renewables years ago but now there is so much wind seeking to moving to, say, 30 per cent, then there are costs to connect, that has actually signed binding contracts support a move to something like 100 terawatt hours with National Grid, that even Beauly-Denny may of renewables in which case £1 billion is 1p per not be enough. Just on the political interference, kilowatt hour or £10 per megawatt hour. there are two obvious points there: one is that we did Mr Smith: Indeed. get a judicial review from one of the Scottish companies about our transmission charging Q426 Lord Turner of Ecchinswell: That would be methodology which forces people in Scotland to pay correct; that might help the Committee to place the more if they want to generate, reflecting the distance context of a billion within the context of the previous that electricity has to travel, and we successfully figures that you quoted of £40 to £75 for onshore defended that so we would stand on our record there. wind versus £70 to £80 for coal. £1 billion could make The second thing is when the Government took the £10 diVerence but it does not make £50 diVerence. power to cap transmission charges that Professor Mr Buchanan: Yes, you are absolutely right and, in Bain criticises them for, we were very public and fact, to be fair to the National Grid, they used a figure vocal in our criticism, saying that we thought that of £12. that was the wrong thing to do and it was absolutely right that people who were at the extremities of the Q427 Lord MacGregor of Pulham Market: Do system should pay very high charges that reflected the present electricity trading and transmission economic costs of transmitting electricity a long way arrangements—and coming to the access review we from where it is produced to where it is used, so we have just talked about—provide a suitable are comfortable that we have been as robust as we framework for an industry with a high proportion need to be on that. of renewable electricity generation? You have just referred of course to the fact that you and BERR Q423 Lord Turner of Ecchinswell: Can I just clarify, have just published your report on the Transmission you are saying that at the moment your transmission Access Review; can you tell us what the key charges do charge more for longer distance. outcomes of this review are and how quickly do you Mr Buchanan: Yes. expect the industry to implement them? Mr Buchanan: Broadly the trading arrangements are Q424 Lord Turner of Ecchinswell: In which case the robust and do work but in this area there has been thing put in by Professor Andrew Bain is wrong, is it? as it were an element of a black hole for some time, He appears to say the opposite. and we have tried to sort this out—if you get a Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

182 the economics of renewable energy: evidence

8 July 2008 Mr Alistair Buchanan and Mr Stephen Smith chance to read our submission—aggressively a something that, as I have said, they may choose to number of times before and it is not unreasonable challenge us on, either through existing appeal to say, because it is a phrase that Steve uses, that mechanisms or through the courts, so that is the we are slightly in the last chance saloon in trying to only danger to the 2010 timetable, if we find sort out transmission access. The way I approach it ourselves in litigation. is that it is almost a story of three no’s that we have got within the system at the moment: there is no Y prioritisation in terms of access, it has been first Q428 Lord Gri ths of Fforestfach: What other come, first served and you become very lazy, you do measures are you taking, if any, to promote the not try and work out who really can get onto the connection of renewable generators? system; there has been no incentive for any of the Mr Buchanan: Apart from the work we are doing parties to basically trade their access rights—we with regard to creating an opportune regime and, as have had some shambolic scenes in the last few years we have just discussed, the access review/reform, for example with British Energy, when nuclears there are two that I would particularly pick out and have been shut down, actually wanting to trade its they probably, to be honest, came from criticisms of access rights—and there has be no speed to the Ofgem and of our remit. The first takes you back process. These three no’s have needed to be resolved to 2004 where we were given a sustainability duty and what we have announced broadly is a package and within the price controls that we have put of both short term and medium term measures. In through since then we have been very minded about the short term this is tapping into something we sustainability and, in particular, to try and promote talked about a few minutes ago: what we are research. There was this sense that whilst RPI minus looking at is improving and making more relevant X—the price formula that we used very successfully the system standards and squeezing the system for the last 20 years—eVectively was just a case of basically where we think we can identify another squeezing the opex so hard that in fact the one megawatt of potential that can tap into organisation will not spend any money, either on renewables. In the medium term, which is far more opex or in fact on capex and R&D, what we put in important, what we are trying to do here is provide in 2004 was a line, we broke away from RPI minus proper incentives for the companies, but this is not X to a certain extent and put a line into the a one-way ticket, we have to be responsible to regulatory equation for research and development. consumers, so we want to put in proper incentives What is quite encouraging there is that for example that will properly reward them but by the same in Orkney Scottish Hydro-Electric have taken that token we want to put in penalties for those who do forward and have now developed a system within not actually meet their commitment to connect. So Orkney that needed a degree of research and there is an element of carrot and stick that we want development funding to get it oV the ground. They to bring into the process and we want the concept have now got an integrated system and that I am of incentives to be built into this process. I am really very pleased with; it is a good signal of the kind of quite encouraged in that National Grid—and as you thing we have done and we know there are other can imagine at times we have a degree of critical projects going on, particularly in rural locations like tension with National Grid—have stepped forward Mid Wales, and Lincolnshire. The other area which very well in this area. You may want to ask yourself I am pleased about—and we are going to make why they have not stepped forward before but they quite a song and dance about it in September/ are doing it now and I am encouraged by that. October time—is that there was a concern that we Mr Smith: The only things I would add are on were becoming very five-year focused as an timescale. We hope to introduce the new access organisation and, therefore, we announced about 18 arrangements by 2010; the only cloud on that months ago that we were going to commit to what horizon is the threat of litigation because in essence we call our LENS programme which is a Long term you have a number of the big existing conventional Electricity Network Scenarios analysis. The work generators who view themselves as having evergreen has started and I will let Steve talk a little bit about rights to use the system and who have been litigious that. We have worked with Strathclyde University in the past at protecting those. Our view has always and we have taken 2050 as our timescale so that we been that they have never had those rights, there are do not tell the market what we think is going to not any contracts they can point to and when times happen in terms of will it be nuclear or will it be were bad in the earlier part of this decade they local generation, but there are massive implications mothballed the system, stopped paying and happily for the network and for the network spend; went and spent a few years oV. We have always said therefore we are going to put out a report—it is to them we do not think you have existing rights, eVectively already done—with a range of scenarios. we need a mechanism that basically allocates rights Steve, I do not know how much more we should to whoever is willing to pay the most. That is say today. Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Alistair Buchanan and Mr Stephen Smith

Mr Smith: As Alistair said, the big issue is if you October, certainly within the next three to four look out to those time horizons some views of the months, that if the companies can make the case to world tell you that you do not need much of a build what are eVectively two motorways down transmission system, it will all be distribution and either the west coast or the east coast of the country, things will be done locally, other people tell you that there is eVectively £2 billion worth of spend there. you can have huge amounts of oVshore wind and I do not believe, therefore, that we are being tardy you can have big nuclear stations and therefore you here at all, but we must be able to turn around to need to spend billions on transmission. What we are consumers and say we have checked the numbers trying to do is we have got some leading academics vigorously and there is value for money. Equally, working with us to look at what the diVerent an important issue here for Ofgem with the broader scenarios are, what the cost implications of them are pressures that are coming on us, comes back to and what we could or should not do in terms of the political pressure. What we are seeing in America at way we regulate to either avoid spending billions of the moment are some very interesting things. If I use pounds that we find becoming redundant in 10 to the Illinois regulators, recently because of the very 15 years or not do simple things that we could do high pressure on the wholesale prices that we are in terms of network design that would keep options having to endure as well the transmission and open. As Alistair said, we will be publishing that in distribution of electricity, Commonwealth Edison September and we have been doing a lot of work went to the Illinois regulators and said “We need with the industry, with the network companies, with £300 million for capital expenditure, just to keep the the University of Strathclyde and with Imperial system as it is.” The regulators chose to give them College on that. just £6 million because they wanted to keep the overall price, because of the wholesale charge, Q429 Chairman: Given the timescales we are down. That to me is starting to break down why you talking about here and the targets, it all seems rather have an independent regulator if those kinds of fluid, or am I misinterpreting it? decisions are made—and of course they are not Mr Buchanan: In terms of our promotion of spend? independent arguably in America because they are politically appointed in many states but you start to get that kind of pressure. When we put through the Q430 Chairman: In terms of preparedness to take 100 per cent increase in capital expenditure for on the amount of renewable generation that is National Grid in 2006 it was an increase in expected over the time that is expected to be taken. consumers’ prices at a time when prices had gone Mr Buchanan: It is a good question and if I gave the up very sharply in 2006 because we were extremely impression that we were comfortable with being worried about the security of gas supply, you may very laissez faire here, that would be an incorrect remember, and what had happened to the price in presentation. If you look at what we have done at 2006 was that prices had broadly gone from 40p per Ofgem in the last five years there are a number of therm up to 70p per therm. It was important indicators with regard to networks and as long as however to make sure that the network was funded Y the spend is e cient and economic, meets our for the future and therefore we did not look at the criteria and meets open challenge then we will overall price and say I think we should pull it back. support it. In 2004 we authorised a 50 per cent You would be right to call us in if you felt we were increase in capital expenditure at the local electricity doing that and enquire of us why we felt we needed network level; in 2006 we put through 100 per cent to do that. increase in the super grid spend. Part of that is because the network needs to be upgraded but it is also a feature of us providing the money to the Q431 Lord Best: In terms of these costs what is organisations to make sure that the systems can be your estimate of the total amount that is going to built out and they are fully funded. Most be needed on transmission and distribution particularly, consumers have a very low pain networks by 2020 if we are to achieve the 15 per cent threshold when it comes to blackouts and we have target for the UK? What is your role also in getting one of the best systems. When the Department of value for money out of that spend and how do you Energy published its White Paper only the implement that role? Netherlands had a better system than we do and Mr Smith: In terms of the numbers, National Grid that is something that we feel is incumbent upon are talking about something of the order of £6 to Ofgem, to make sure that we support the funding. £9 billion on the onshore transmission network. The We supported the early funding as I mentioned figures for oVshore vary between £2.5 billion and, before for Beauly-Denny and a number of other for eight gigawatts of oVshore wind, up to about £10 schemes—that was £560 million that we authorised billion. If you move to 25 gigawatts of oVshore in 2004—currently we have told the companies, and wind—and many people will tell you that to meet they are coming back to us in September or the 2020 target you are going to need at least 25 Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Alistair Buchanan and Mr Stephen Smith gigawatts oVshore because of the diYculties and the transmission capacity, the transmission company limits to how much onshore wind you can get—we has to start before it knows what the extra capacity have actually asked the three transmission will actually turn out to be, and who is going to companies within the next six months to come carry the risk associated with that? forward with a technical study which sets out clearly Mr Smith: That is broadly right and to go back to what the options are for investing both onshore and the previous answer that is why we are pushing for oVshore and cost that. this new incentive scheme, because we cannot have customers bearing all of that risk. The transmission Q432 Lord Best: It sounds at the moment as though companies tell you that the nature of network it is about £20 billion. investment is that you do not need to know precisely Mr Smith: Give or take, yes. On the distribution where or how much and that they are confident side we are actually at the beginning of our five year enough in the broad order of magnitude that they price control review so we are waiting for the would be willing to make some of these investments. companies’ business plans, which will come later in We are obviously much more comfortable if there the summer, of how much they want to invest over is some real shareholders’ money on the table and the next five years and beyond. We would be happy if they get these calculations wrong it is going to cost to give you written evidence but I would not like to their shareholders. take a stab at that at this stage. In terms of Mr Buchanan: Can I just make two additional incentives—I know this has been a big issue for the observations there? The first is on new nuclear and Committee—what we are trying to do is strike the certainly it is going to be a challenge to think about right balance because obviously whenever we are building the wires to connect, for example, a new signing oV on these investment programmes it is French design EPR at Sizewell or at Dungeness costing customers money, so one of the things we because certainly from all the analysis I have seen have proposed to the transmission companies for you are going to need 70 to 80 kilometres across the this investment is that shareholders begin to share North and South Downs if you are at Dungeness, V some of the risk so that the amount of money the or across Su olk and Norfolk if you are at Sizewell, companies actually earn when they invest will be and there is no point in building your new nuclear linked to how much generation actually connects station and having the wires coming in late, so we after it is built. For example, if they build a big wire are going to have to think very, very carefully about down the east coast the rate of return they earn will how we do that. The second issue which in be linked to how much oVshore wind actually preparing for this session certainly caught my eye connects on completion, and that is so that we can was about the turbine development. The Secretary be more certain because otherwise under the existing of State was talking about 7000 turbines in order to process they just come forward to us and say hit the targets for 2020; there is immense pressure “Approve £10 billion of spend” and then once we globally at the moment on all parts of the power have approved it they have a guaranteed rate of generation chain and also on the transmission return. We just do not think that is a good deal for network chain. Just to put that in context, the customers; what customers need is some assurance American Wind Association thinks that they will that because shareholders’ money is also on the have demand for 75,000 turbines by 2030. There is table if these things are being built they are actually enormous pressure on the turbines, so when you going to be used. Two of the transmission look at the turbines you say how quickly will they V companies have so far indicated that they are happy arrive, but with o shore turbines we are into new V to move to that sort of set of arrangements and, territory because for o shore turbines the broad similarly on the distribution side, most of our work characterisation is that you are using onshore V to connect wind has been about incentives, where turbines and slinging them o shore. The Germans we say to the companies you can earn greater are leading the way here in trying to develop them rewards but you have to take more risk, so if the and for the five megawatt turbine the latest from wind generation does not turn up you do not and their pilot is we will not know whether it is going if it does turn up you earn a bit more. to work properly until 2011. So there is enormous Chairman: I am going to have to ask you to be pressure building up here from the technology side slightly more succinct in your answers because time and also from the global demand side, and I think is marching on. Lord Layard. those to me are very interesting events to debate, in terms of how we are going to get to our targets. Q433 Lord Layard: That relates to this question in that there is a time diVerence between the Q434 Lord Turner of Ecchinswell: Can I first of all construction time of the transmission line and the just ask for some clarification of what you said and renewables power station. Does it mean that if the then there is one particular question that I want to renewable generator is to be sure of having the ask about oVshore wind. The £2 billion big Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Alistair Buchanan and Mr Stephen Smith motorways down the side of the country, those are huge pressure because the ships that lay cables undersea intentions. oVshore are the same ships that lay telecoms cables Mr Buchanan: Yes. and are involved in oil and gas, so there is this huge cost inflation there. It is also to do with the fact that Q435 Lord Turner of Ecchinswell: Am I right that you have to be very careful when you are laying those would almost certainly be DC rather than AC, oVshore that you do not lay across gas pipes and therefore they would have significantly lower telecoms wires. We have seen studies from around the transmission losses and therefore the extent to which world; we have seen the costs of laying similar the transmission charge should go up with distance oVshore wires in Australia and it is pretty robust would decrease if one built those, is that correct? information but I would have to ask you to ask an Mr Smith: The first part is right, they would be high engineer to give you a thorough breakdown on why. voltage DC cables, so lower losses; unfortunately the Mr Buchanan: Perhaps another angle is that whilst it economics of onshore versus oVshore means they will is more expensive than the traditional overhead, still be more expensive because it is more expensive to bearing in mind that the figures you have had given lay sub-sea than it is to do it on land. to this Committee for undergrounding, you are looking at £6,600 for the first kilometre against Q436 Lord Turner of Ecchinswell: Would they be overhead at £600. If it is underground from Beauly- instead of Beauly-Denny or do you still need Beauly- Denny or going by sea then the economics change. Denny as well? Mr Smith: We are waiting for the technical studies Q439 Lord Turner of Ecchinswell: My final point of from the transmission companies but our early views clarification and then one question is when you were have been that if you are looking at the 2020 targets using the figures earlier in response to Lord Best on and talking about potentially 30 or 40 per cent the total figures of the transmission and distribution renewables you need both and actually your choice is spend, those were for the capital expenditure and to do you do Beauly-Denny and then put even more get those onto an annual basis—leaving aside the onshore or do you do Beauly-Denny and then go complexity of whether you might make it risk- oVshore because, as I said, in north Scotland at the related—essentially we multiply by 5.5 per cent, do moment we have already got more people wanting to we not, so £20 billion becomes about £1 billion—is connect to Beauly-Denny when completed than it that how the National Grid essentially gets to the will be able to accommodate. charge? You agree a capital expenditure and they are allowed a rate of return which is of the order of Q437 Chairman: Can I do a follow-up on that? If the magnitude of five per cent. 2020 target were to lapse by a few years would that Mr Smith: Absolutely. You then need to add to that change the economics? a depreciation charge, so about a twentieth of that Mr Smith: Yes, I think it would because the basic number. As a rule of thumb operating expenditure is trade-oV is that oVshore is more expensive but it is roughly about a tenth of the capital cost. quicker and time is really what you are trading oV. Onshore is cheaper but there is a very real issue about Q440 Lord Turner of Ecchinswell: This is how the the extent to which you begin to hit hard constraints £20 billion or so capital ended up as £1 billion or so. about how much capacity you can get from Scotland Mr Smith: Yes. into England because if you look at where the interconnectors are they are in areas of outstanding Q441 Lord Turner of Ecchinswell: I just wanted to natural beauty, and you have to question whether ask a question about the regime on connection for you would ever be able to double up on the towers oVshore wind generators because at the moment it is and wires. There is a view that says there is a technical an individual, competition-based process. limit because you are never going to be allowed, Mr Smith: Indeed. whatever planning reforms are made, to run a second set of towers and wires. You may therefore still come Q442 Lord Turner of Ecchinswell: Some people have to the conclusion that you have to go oVshore argued that we need a more co-ordinated approach however much time you have got. to oVshore wind, perhaps giving a bigger role to National Grid rather than to the individual Q438 Lord Moonie: How much more expensive is operators. What are your thoughts on that? oVshore. You have implied it is more expensive but Mr Buchanan: Our starting point will not surprise you do not have to build any towers for a start and you, it sits with statute where within section 3 of the you do not have to pay for any planning inquiries. Utilities Act we have to seek the best route forward Mr Smith: As an order of magnitude I think you are through competition and markets wherever looking at three to four times as expensive and it is appropriate, so it is worth bearing in mind that that purely to do with the costs. 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186 the economics of renewable energy: evidence

8 July 2008 Mr Alistair Buchanan and Mr Stephen Smith as we discussed in earlier parts of today value for slopes put into place eVectively capping the price money for consumers. The best example I can use going down and we are pleased that that has been here is the Government of Tasmania which built a changed in the current recommendations. Our broad substantial link—it was the best part of 300 advice is that wherever you can try to link this scheme kilometres—using Pirelli, Siemens and our own to the market price, we would feel comfortable with National Grid. They were the winning tender out of that but we have not actively promoted the feed-in 13 tenders to build that undersea cable and they felt tariV, rather we felt that that would be coming from it was highly successful in terms of cost, it gave them BERR if that was what they wanted to do. Steve, do what they wanted and, consequently, looking at both you want to add to that? international examples and looking at our remit we Mr Smith: As administrator of the scheme we have believe this is the right way to proceed for now but clearly set out to Government that the ROC scheme that does not deny the proposition that if at some was not designed with the idea in mind that someone stage in the future we feel that we need to have more in their house has put a turbine on their roof, so we of a grid structure in the oceans then that has not have said to them clearly this a bit mad because we been denied. will end up having thousands of people somewhere in an oYce handing out these pieces of paper that are Q443 Lord Turner of Ecchinswell: The Tasmanian worth less than it costs us to process them, so I think thing sounds like it is one large project where the the Government has to think about that. As I say, the nature of these oVshore developments may be a ROC scheme was set up in anticipation of big number of diVerent things, so the choices between turbines, so whether you do it through a feed-in tariV each link of that being subject to competition versus or some other mechanism we certainly say as an somebody as it were competing to build the total grid. administrator it does not make any sense to be Mr Buchanan: Yes, it is a 600 megawatt link from handing out these pieces of paper that will be worth memory and at the moment we are looking at a fraction of what it costs us to do that. substantial wind farms. The London Array is one Mr Buchanan: Just to add to that, as I mentioned V gigawatt, the scheme o Margate which was earlier we administer this. Only 185 of 10,000 Warwick Energy and is now owned by fund potential individual applicants for a ROC before the managers is 300 megawatts, Walney in Morecambe aggregation scheme was introduced very well under Bay is a sizeable project, around 400 megawatts, but the Climate Change and Sustainability Act ever we will have to check that, so these are sizeable bothered doing it because the complexity and cost of projects in themselves that would have that kind of the admin just swamped the attraction of doing it. megawatt capacity to take on shore, but this is a very important part of our position. If it transpires that we need to develop a grid then that is something that we Q445 Lord Paul: You said you had this survey and would not rule out. people were concerned about climate change and were happy with renewable energy, but once they Q444 Lord Paul: Do you support the move to band know that the cost might be higher would they have the Renewables Obligation? Have you considered the the same opinion? case for a feed-in tariV, at least for smaller renewable Mr Buchanan: There are two surveys that I look at to generators? try and stay abreast of this. The first was a survey that Mr Buchanan: We broadly do support the move to Electricite´ de France gave us, and there the most banding ROCs. We were pretty noisy about not important issue for consumers was energy price at 38 being thrilled about the concept of ROCs originally, per cent and environment came in at 15 per cent. That but one of the reasons that we like the banding is was a year ago and I think if EDF did that survey aspects like landfill, now receive a very reduced ROC. again today the gap would be bigger between those It is worth bearing in mind that of that increase in two. The Financial Times did a survey—and I am renewables from 1.8 to four per cent in the first five happy to go and dig it out for you—about three years of the ROCs, 70 per cent was landfill and small months ago that showed that the appetite for the hydro. Consequently, I think banding does send an environment had fallen from something like that 15 element of a message here. As I say, our support of per cent to something like seven per cent, so you are banding is in with an overall slightly negative right, price is certainly an issue in everybody’s mind. approach to the ROC scheme. I think the question as to whether we have considered the case for a feed-in tariV is that what we have recommended to the Q446 Lord Lawson of Blaby: Of course, when people Government in the past are schemes that have a link say they are concerned about the environment a lot to a market mechanism which the original ROC of them will mean they do not want these wind certainly did. The ROC then slightly got changed and turbines and they do not want these power was not going to have that, it was going to have ski transmission lines. Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

the economics of renewable energy: evidence 187

8 July 2008 Mr Alistair Buchanan and Mr Stephen Smith

Mr Buchanan: That may be the case, I have not seen Mr Smith: It is exactly that. The whole arrangements the breakdown of the numbers. The other interesting were set up with the idea of large power stations set of numbers came from the MEUC which is our centrally despatched, so if you are a brave consumer industrial body. They did a survey of British who thinks I would like to look at doing something companies and the numbers there that stand out for locally you just find yourself bogged down in a set of me are that 67 per cent do not believe that we can tariVs and you would require a PhD and an awful lot reach our 2020 target and 71 per cent feel that the of time to work out which of the suppliers is oVering greatest concern they have is that across Europe the you the best deal and you would get caught in a 27 Member States are all doing diVerent things and, requirement to be told you need two meters, one to therefore, you ultimately just play each state oV measure your imports and exports and the second--- against the other, Again, I am happy to send you the details of that survey if you would like. Q449 Baroness Hamwee: It is putting me oV entirely. Mr Smith: Exactly. The simple answer, what we are Q447 Chairman: Could I come back just for a saying to the suppliers, is this all needs to be simplified. We did a review for the Treasury that moment to the banded ROCs and bring you back to V the point that you were making about the relative looked at whether the actual prices being o ered were costs of wind. If you are right then onshore wind is fair, and interestingly we concluded that if anything now competitive. Are there ROCs for wind though, a they were probably on the generous side and there was probably an element of either a loss leader or a zero ROC or what? desire on the supplier’s front to be seen to be doing Mr Buchanan: It is a very, very interesting question the right thing, and therefore if you did get massive and I think the NAO were driving towards this in take-up of those tariVs they are oVering they their report. It is almost worth stepping back because probably would not be sustainable. What we said we when the ROC was introduced in the early part of need is a single one-stop shop that if you want to do this decade electricity had fallen from about £30 per this it says right, here is what you need to do, here is megawatt hour to £14 and therefore you needed a who can sort it out for you in terms of getting a meter, ROC of about £30 then to get your return, so you here is what you will get paid and here is how much were in your mid-40s. EVectively what we are looking you will save. We suggested to Government that if it at now is that you have got your electricity price and was particularly keen given its micro generation your ROC which will take you up to about £110 to strategy then some limited funding to one of the £120 and your onshore wind is £70 to £80—it is a very existing price comparison websites to enable them to fair question to raise but of course prices are volatile provide a simple service to customers, that may cut and they will maybe go down. through this complexity, is probably the best way to Mr Smith: This is why we have consistently argued go. that if you are going to have support, link it to the wholesale price so if the wholesale price rises the support falls, and that is all you need to do. It may Q450 Baroness Hamwee: This is something that well be the case if you have that sort of scheme at the Government would have to do. You are, in moment then for onshore wind the support price will shorthand, the consumer’s friend here, is your remit be zero, but you are saying that at today’s carbon limited to that sort of advice? Mr Smith: We felt it was more appropriate for prices and fossil fuel prices there is no need to provide Government because it had this micro-generation any support. strategy. As I said, we were asked to look at whether Mr Buchanan: I went back and dug it out because it the market was working, and our conclusion was the is such an interesting report; it is page 41 of the NAO prices are fair but it is a question of complexity. report on this, because the NAO were so concerned Obviously we have something called a Microgen they hired Oxera to do a quick run of the numbers. Forum where we try and use our brand and our Oxera did a quick run of the numbers and said wind influence to cajole or encourage the suppliers to make is viable on £15 not £30—that was at the time of the things simpler but we do not actually have formal review—and they also went on to say that by 2026/27 powers or the ability to commit funds to these sorts in the NAO’s view, this is their view, a third of the of things. profits that are being earned are eVectively super Chairman: I am afraid we have run out of time but I profits. know that a couple of members would have liked to ask you a question. Lord Macdonald. Q448 Baroness Hamwee: You have already talked about the bureaucracy associated with domestic Q451 Lord Macdonald of Tradeston: Slightly micro generation but what changes do you think are tangential to what we have been discussing, given the needed to the industry’s code to improve the process rapid increase in prices have you noticed any slippage and what are you doing to encourage the industry? in demand? Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

188 the economics of renewable energy: evidence

8 July 2008 Mr Alistair Buchanan and Mr Stephen Smith

Mr Smith: Yes, we have and quite significant. If you two to four per cent for about the last three years. As go back to the first gas price spike of 2005 and even I said, I know there is a lot of work going on in the adjusting for weather, demand on the gas network companies and amongst the suppliers to understand was down about 8 per cent year on year and gas what is driving that. demand is still very depressed and we will probably see a further reduction. The thing that has not been Q452 Chairman: As I was saying, I know that there done yet is to really unpick that at a level to are a couple of questions that members would have understand whether that is things that would worry liked to ask and if I could ask you perhaps to drop us you, which is people actually turning their thermostat a note on them, the first was are there any lessons that down, with all that that could bring in terms of the we can learn from the Danish experience, given the social problems, or whether that is actually people high proportion of renewables in the Danish network investing in energy eYciency measures so that they and the second was could you enlighten us on the can continue to heat their houses. Electricity regime for back-up or standby generation that would networks have been declining year on year in peak be required for wind and other renewables? Who demand for about three years now which is just pays for it, is there a requirement for an incentive and unprecedented. You could bet your house from the so forth? If you could do that, that would be very Seventies to 2000 that electricity demand would rise useful. by between one and one and a half per cent year on Mr Buchanan: I would be very happy to do that. year, but as I have said you have actually had the Chairman: May I thank you both again for your local distribution networks reporting year on year answers this afternoon and your written evidence; reductions in peak electricity demand of the order of thank you very much indeed, it has been very helpful.

Supplementary memorandum by the Office of Gas and Electricity Markets (Ofgem) 1. The Committee heard oral evidence on 8 July 2008 from Ofgem’s Chief Executive, Alistair Buchanan, and Managing Director of Networks, Steve Smith. The Committee raised several issues during the course of the session on which it was suggested that Ofgem could provide additional advice and information.

Lessons from the Danish experience with renewables

2. Renewable energy currently constitutes 14% of total energy in Denmark and 28 per cent of electricity generated.3 The UK Government’s target is for renewables to contribute 15% of Britain’s total energy which equates to approximately 35–40% of electricity generated. 3. The principal challenge that has faced Denmark in accommodating such a large proportion of renewable generation has been to manage the load variations associated with intermittency. At night time and in summer they have often had a surplus of wind generation. In order to balance the system, therefore, they have been forced to sell this electricity to neighbouring countries at very low or even negative prices. A similar challenge could be faced in Britain where demand during night time and in summer can fall to 30% of winter daytime peak levels. At the moment it would be diYcult for Britain to export large amounts of surplus electricity because of our relatively smaller interconnector capacity. However, a new interconnector to the Netherlands is under construction and there are plans for new interconnectors to the Republic of Ireland, Belgium and France. 4. One solution that has been tried in Denmark is to put heating elements in Combined Heat and Power (CHP) boilers so that they can be switched from gas to electricity, thus using surplus wind power overnight and saving on high gas costs. While this specific solution may not be as relevant to Britain where we have a lower proportion of CHP, given time and investment it could be possible to deploy similar solutions, for example using immersion heaters in domestic heating systems. This would be likely to take time and require smarter metering and control systems to allow remote switching between gas and electric heating in response to changes in prices that may occur over short time periods. 5. More generally, there are a range of potential solutions involving suppliers oVering new services and tariVs to encourage customers to redistribute their demand across the day. More use could be made of time- controlled domestic appliances such as dishwashers and washing machines or more advanced technologies 3 Danish Energy Authority Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

the economics of renewable energy: evidence 189 that are able, for example, to reduce the load taken by refrigerators and freezers whilst maintaining temperature in response to prices. However, this too would require smarter metering technology as well as dynamic demand control technologies.4

Requirements for reserve generation capacity 6. National Grid (NG) operates the electricity transmission system in Britain and is responsible for forecasting demand and ensuring that enough reserve capacity is available to deal with sudden changes in demand or loss of generating capacity over operational timescales (typically changes within the existing half hourly balancing period). Generators and suppliers contract with each other in the wholesale electricity market to meet this demand and they notify NG of their contractual and physical positions. NG can then signal to generators if additional capacity needs to be brought on stream. In the event that generators’ and suppliers’ contractual and physical positions are not in balance at any given time, they incur imbalance or “cash out” charges that are designed to reflect the costs incurred by NG in dealing with any imbalance. 7. NG procures diVerent types of reserve services depending on their assessment of risk. Generally, NG holds primary reserve (ie reserve that can respond within 2 seconds for up to 30 seconds) large enough to cover the loss of the largest single generating unit (currently Sizewell B at about 1.3GW). Under its licence obligation it is required to hold enough reserve for an event that can be reasonably expected. 8. Intermittent wind generators would contract with suppliers in a similar way to other generators. They would then predict their likely output, based on wind forecasts, and would have two options to ensure that they have enough electricity to meet their contractual obligations even when there is insuYcient wind for them to be able to generate. Firstly, they could contract with other generators who would provide power when their wind turbines are unavailable. (Many wind turbines are part of larger generation portfolios so this process would be relatively straight forward for them.) Alternatively, they could rely on NG to procure reserve but accept that they would have to pay the costs that NG incurs in procuring and using this reserve. 9. A new generation of nuclear power stations would also have an impact on the amount of reserve capacity required. It is likely that new nuclear power stations would be larger than the existing ones, at around 1.6GW, and that NG may therefore be required to hold more reserve capacity to insure against the risk of the sudden loss of a nuclear power station. This may not solely be an issue for new nuclear power stations as some of the planned oVshore wind farms could all feed into a single line connecting to the onshore grid and be of a similar size. This would also require NG to hold more reserve. NG have estimated on the basis of current market prices that the costs of additional reserve necessary to secure the system against the loss of the larger nuclear designs (or similar sized oVshore connections for oVshore wind) could be of the order of £100 million per annum to make sure they could maintain system frequency if a larger nuclear station (or oVshore renewable connection) became suddenly unavailable over operational timescales—as happened recently on 27 May. These additional reserve costs would not increase proportionately for every large new nuclear station added to the system as the probability of losing two large nuclear stations is much lower than the probability of losing a single station. NG would therefore assess the cost of procuring reserve against the level of risk. 10. We have stated that NG would need to consult on a cost reflective methodology to target the recovery of any additional reserve costs, wherever possible, at those generators which are causing them to be incurred. This should ensure that the arrangements do not favour any particular technology but instead seek to target any additional network and balancing/reserve costs on those generators who cause them. It would simply extend the existing principles that apply to the recovery of transmission infrastructure costs and balancing and reserve costs. 11. In the longer term, the challenges associated with intermittency can be met through a range of established and emerging technologies combined with behavioural changes. Intermittent generation requires back up, for example when the wind is not blowing, and this could be provided by pumped storage and open cycle gas turbines as well as coal and gas stations (with or without Carbon Capture and Storage). However, as the proportion of wind energy increases, the back-up generation becomes correspondingly more expensive as it sits idle for much of the year. Emerging technologies including batteries and fuel cells could become economically viable if their costs continue to fall or if the volatility of electricity prices rise. Finally, behavioural and technological changes can help by managing demand in response to intermittency. For example, smart meters, time of day pricing and new technologies that control domestic and industrial appliances—such as shutting down fridge motors—can be used to manage demand in response to intermittency. However, all of this costs money and takes time. 4 Dynamic demand control devices can either be built into appliances or be attached to appliances and communicate with a smart meter to change their electric demand dynamically according to the conditions on the grid and/or movements in energy prices. 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190 the economics of renewable energy: evidence

The role of Ofgem in helping to meet the target 12. Ofgem has clear plans and timetables to ensure that there are no barriers arising from electricity and gas regulation to meeting the Government’s renewable energy target. 13. For example, we have three main areas for action to improve access to the electricity transmission grid. First, new transmission access arrangements from April 2010 will enable better use of existing grid capacity (eg through sharing and trading), faster connections and better information to National Grid about future demand—all of which will contribute to better investment planning. Second, we are introducing short term measures to allow renewable generators to connect to the grid in the next two years, before the new enduring access arrangements come in, if they are able to accelerate their plans. Third, we aim to have in place new investment incentives on the network companies within the next 12 months which will protect consumers by encouraging grid companies’ shareholders to take on more of the risk when they seek to invest. More information on this work can be found in paragraphs 27–43 of our initial memorandum. 14. All this is in addition to Ofgem’s existing work through our price controls. We are allowing a 160% increase in investment in the onshore electricity grid between 2007 and 2012. This is to upgrade the wires and connect new generation, much of it from renewable sources. The funding is flexible and can increase automatically if more generation seeks connection than was assumed when the price control was originally set. 15. We also have workstreams addressing the issues for smaller generators, covering distributed energy, microgeneration and the role of the electricity distribution networks. We are advising Government on design of policy in relation to heat and energy eYciency. Could the costs become excessive? 16. Members were interested to understand the circumstances in which the cost of promoting renewables could be excessive. 17. The cost of promoting renewable electricity generation will depend on a number of factors including the level of any target, the robustness and eYciency of the policy measures, the resource costs of the technologies and their evolution over time, and the impact on system security and balancing costs. 18. One scenario could be if the subsidy mechanism to meet a renewable energy target is poorly designed and has unintended consequences. For example, when the existing Renewables Obligation was designed, few in the industry would have anticipated the large increases in wholesale electricity prices that have occurred since 2003 or the introduction of a carbon price through the European Emissions Trading Scheme. As a result, the level of subsidy for some forms of renewables has exceeded the amount needed to make them viable. This problem could be addressed by Ofgem’s suggestion of linking the level of subsidy inversely to the wholesale electricity price. 19. A second scenario could be if insuYcient attention is paid to other more eVective and eYcient ways to achieve green house gas emission reductions. These means could include other low carbon generation technologies, energy eYciency, emissions trading and renewable heat—as well as renewable electricity. At present, for example, there is considerable uncertainty about the future costs of diVerent renewable energy technologies. The main rationale for supporting renewables at greater cost than the shadow price of carbon is to develop the technology so that costs fall. Generally, the best way to ensure that the costs incurred do not exceed the level necessary is not to support particular technologies but to put in place broad-based policy instruments which allow the market to find the most cost-eVective way of reaching the overall objective of reducing carbon. 20. A third scenario whereby costs may be excessive would be if there was no locational signal in transmission charging and most new renewable generation chose to locate in the most diYcult areas for the network to accommodate at significant cost and with potential environmental damage if there were other, low carbon generation technologies that could be located closer to demand reducing the economic and environmental cost of a much larger grid. This is discussed further below.

Locational transmission charging 21. The further a source of energy is from its end user, the more it generally costs to transmit. Generators who are sited closer to the main centres of demand therefore pay lower network charges than those who are further away. 22. The approach of locational charging has two main benefits. First, it is equitable because the charges to generators reflect the costs they are imposing on the grid. Second, it encourages generators to make eYcient decisions about where to locate. This helps to reduce costs to customers and cut carbon emissions. To see how Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

the economics of renewable energy: evidence 191 this works in practice one can look at the example of the north of Scotland. This largely rural area is far away from the main sources of demand for electricity in Britain. Generators who choose to locate in the north of Scotland therefore pay higher network charges to reflect the associated costs of transmitting it to the main urban centres. Scottish customers, on the other hand, pay substantially lower network charges than in the south of England, because they live nearer to the electricity and it does not have to travel as far to reach them. 23. Critics of the current approach tend to come from one of two perspectives. Some argue that the locational charges do not vary enough and that there should be an even stronger economic signal to generators to site their plant closer to demand. For example, Professor Andrew Bain argued in his written evidence that there should be an additional locational charge to take into account the cost of the electricity lost as it travels down the transmission wires. At present, all generators pay equally based on the average cost of electricity lost on the whole transmission system rather than for their specific loss factor, which can vary significantly at diVerent locations on the network. We are sympathetic to Professor Bain’s argument and for over 15 years we have supported proposals to change the industry rules in order to introduce locational charging for transmission losses. However, some generators have vigorously opposed the proposals and have subjected them to judicial review three times—most recently winning a challenge in June this year. We have continued to indicate our support for the principle of locational transmission losses charges but there are currently no such proposals on the table. Under the current industry rules, Ofgem does not have the right to initiate such proposals and so they must come from the industry itself. 24. Others argue that the current approach unfairly penalises Scottish generators by making them pay higher charges (even though Scottish customers benefit by paying lower charges). We do not think that this argument is convincing. The introduction of locational charging has not proved to be a disincentive to renewable generation in Scotland, and the major barriers to renewables are in fact planning delays and the time needed to build transmission connections. 25. Before locational charging was introduced, Scottish generators had to pay a number of separate fees for accessing the network and transmitting their power. These fees have now been replaced by a single locational transmission charge, thus making the system much simpler. Second, locational charging does not harm the viability of renewables in Scotland given the support these schemes receive through the Renewables Obligation. In fact, since the launch of the Britain-wide electricity market in 2005, a queue has built up in Scotland of around 165 renewable projects awaiting connection—significantly more than is needed to meet the Scottish Government’s renewable energy targets. This evidence is in line with the conclusions of two sets of consultants hired by the Government to assess the economic case for using the power under section 185 of the Energy Act 2004 to cap transmission charges for renewables in remote parts of Scotland. The consultants concluded that even with locational transmission charges a 250MW windfarm on the Orkney Islands could earn a rate of return of nearly 40% based on the current level of support oVered by the RO scheme. Both sets of consultants concluded that using the powers would not be necessary to make wind projects in Orkney and Shetland viable, and that there was only a marginal economic case for using the powers in respect of the Western Isles.5 26. We hope this information is useful to the Committee and we would be happy to provide any further assistance that you may require. Steve Smith Managing Director of Networks 1 August 2008

Memorandum by Dr Karsten Neuhoff, University of Cambridge

1. Does renewable energy deserve any support, in your view, beyond that given by setting a price for carbon? Would carbon reductions be achieved more economically by setting a carbon emissions target rather than a renewable energy target? If we follow the IPCC recommendations and UK and European government policy—UK emissions have to be reduced to 20–30% of today’s level by 2050. If we want to allow at the same time for economic growth a shift to zero or low-carbon energy technologies is required. Three non-renewable energy sources are being discussed: — If we continue to support nuclear fusion programs in 30 years it could provide large scale commercial energy.

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192 the economics of renewable energy: evidence

— If desired, nuclear energy can provide some additional low-carbon energy. Large-scale global contributions require closed fuel cycles and would probably increase the number of countries with access to plutonium. I am concerned about non-civil use of this material should any of the countries face social instability or war. This risk is likely to increase with climate change impacts and scarcity of food, fossil fuels, and other commodities. — Carbon capture and sequestration might reduce emissions from fossil fuel use in large scale installations by 80% (85% captured, but 20% increase of energy consumption for capture). Large scale availability is expected post 2020—with major uncertainties associated with storage sites. Because of this and constraints on future availability of oil and gas the technology is frequently labelled as bridging technology. A shift from gas based CCGTs to coal based CCS will only reduce emissions by 60% (carbon intensity of coal is higher, and eYciency of coal powered stations is lower). This does not reduce emissions to 20–30% of today’s levels, especially not with economic growth. All three options might have a role to play for energy and climate policy over the next decades, but it is diYcult to see how they can replace the need for large scale use of renewables. This brings me to the second part of your question—will imposing a carbon constraint be an eVective mechanism to deliver the timely investment in a portfolio of renewable energy technologies in order to: — develop and improve the technologies with regard to cost, scale and quality factors; — increase production scale along the supply chain to serve a UK and global market; — aid diVusion of technology, including the training, experience and organisation of UK based staV and firms for their deployment; and — achieve system integration—including transport chains for bio-mass, network structure and management for power generation, and possible alternative transport infrastructure with electricity/ batteries as energy carrier. This is a complex set of changes and I doubt that the UK or any European government has the ability to micro- manage them. So incentives are required to ensure that market participants deliver the diVerent components— after all most of the R&D, production and organisational skills and scale are already in place. I do not think that the carbon price signal alone will provide this incentive for three reasons: First, many of the renewable technologies are at an early stage, and will have to be built and installed much more often in order to allow cost reductions from learning-by-doing. Very few consumers are prepared to pay the necessary premium for renewable energy to finance this investment. So the learning investment will either have to subsidised by firms or by governments. Firms will only sell products below costs in the expectation of future profits from a competitive product. But, in this case, the time scales are too long, the investment volumes are too large, the technology spill over is too quick, and too many firms have to be involved for private investors to believe that they will capture this future benefit. This investment environment is in contrast to mobile phone markets, where product diVerentiation allows firms to capture their investment, or the pharmaceutical industry where patent protection is viable. Hence targeted deployment programs are required to create initial markets for diVerent renewable technologies. Even large venture capital firms only invest in new renewable technologies if they see the possibility of supplying markets created by government renewable policy. Some policy analysts are concerned about targeted technology policies by governments—arguing governments are bad at picking winners. Strategic deployment programs, eg feed-in systems or banded ROCs, create a market interface between governments and technology firms, allow for continuous transparent evaluation of the programs, and limit regulatory capture. In addition, the output, energy, is clearly defined and can therefore be targeted with the deployment programs (in contrast to fashion, IT, or other consumer products). Hence I feel more comfortable with targeted technology policy for renewables than for other technologies. Second, the transition to a low-carbon economy creates technological, resource and political uncertainty that needs to be managed. Especially when the exact timing of the use of new technologies is uncertain. In the absence of targeted programs, it is diYcult to predict costs and regulatory regimes in order to anticipate whether the second wave of renewable technologies will involve tidal stream energy or expand use of dedicated bio-mass. For most technologies a change in timing of a few years makes the diVerence between a profitable marketing strategy and bankruptcy. However, in the bigger picture of emissions reductions to 2050 or considering the overall social cost benefit analysis, the exact timing does not matter. Hence it is desirable for governments to commit to a timing and market volumes even at the risk of getting it slightly wrong, thus creating a stable framework to facilitate private sector investment. Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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Third, the successful use of new energy technologies requires new infrastructure and regulatory frameworks and action across a multitude of policy areas of government. Any one delay can derail investment strategies of companies. Unless there is a clear commitment of governments to create the framework for a specific technology it is diYcult to see how investment will be pursued at the relevant scale.

2. Less than half of the UK’s greenhouse gas emissions from heat are covered by the EU Emissions Trading Scheme. Could the ETS be extended, or some other scheme brought in, to spur the deployment of renewable heat sources?

The ETS could in principle be extended. However, as all the other emissions sources are small in scale, to limit transaction costs the ETS would have to move upstream, eg to the fuel input. This was not desired with the ETS so far, because direct exposure of emitters to the carbon price signal creates more management attention and is therefore more eVective in changing operational and investment decisions. The focus of the ETS is on energy and carbon intensive industries, where competition between Member States has so far resulted in very low energy tax levels. Such competition is not an issue for small scale heat sources— and therefore also allows for national policies. As the politics of fuel poverty diVers across Member States, and it is important to have complementing regulation and information provision, it might be desirable to pursue these policies at national level against emissions reduction targets defined for the non-covered sector at the national level. In the UK aligning energy tax levels and abandoning VAT rebates for heating fuel and starting to imposing taxes that reflect carbon costs would be important for both supporting renewable heat and energy eYciency. This should be accompanied with some redistribution of additional tax income towards low income households and a continued focus on energy eYciency measures for these income groups. But no government will pursue such changes unless the fuel poverty index is redefined, from the share of household expenditure spent on fuel towards the household expenditure minus direct support for energy services of total income. Biomass might prove to be very valuable for decentralised provision of renewable heat. Decentralised biomass generation avoids long transport chains, energy losses in transformation, and oVers the opportunity to store energy for cold winter periods when UK energy demand is peaking. I do not know what support scheme, including investment and operation divides, is most suitable—particularly given the characteristics of its application by private households.

3. What expectations do you have for the level of the carbon price in future years? Is anyone currently trading carbon permits for the period after 2012?

Current prices are 28 Euro/t CO2 and forward prices for 2012 are traded at 32 Euro/t CO2. Trading beyond 2012 is—to my understanding—very limited. I think prices for 2020 are around 40 Euro/t CO2 and at a recent PointCarbon conference several traders gave presentations suggesting that prices would be around 50 Euro/ tCO2 by 2020. Looking at the overall European Climate Package, I can easily imagine that prices could fall bellow 20 Euro/ tCO2, if the emissions reduction target is not increased to 30% by 2020. Obviously, if oil, gas and coal prices stay as high as currently, they will drive far more demand response than anticipated from current carbon pricing (complementing regulation and information will be in place in both cases). This suggests a perspective with potentially rather low-carbon prices. But then again, the global resources for coal are excellent and therefore coal prices are likely to revert to lower levels. In this case even with lower energy demand, a shift to coal would increase carbon emissions and would therefore push up the carbon price. You notice lots of uncertainties. But given that the UK does not control global oil, gas and coal prices, it would make little sense to fix a carbon price for 2020—the carbon price has to be able to respond to fossil fuel prices and technology costs. Therefore a strong commitment to an emissions cap will be far more important including limited inflows of CDM credits. The firm cap gives some certainty about the market shares for diVerent fuels in 2020 and the market opportunities for energy eYciency and low-carbon technologies. A reserve price in auctions can then ensure that the price does not drop below, for example 20 Euro/t CO2—thus providing a parameter that banks and project investors for low-carbon projects can confidently use as their worst case scenario, and avoiding emissions that are far below the social cost of carbon. Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

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4. Do you think the UK should be allowed to count renewable energy in other countries towards its national targets? Would it be possible to trade renewable energy (or just green certificates) across borders in a manner that guaranteed that additional supplies were being produced as a result? The main argument in favour is that it this captures least cost potentials. But this obvious advantage must be balanced by the objective to create a framework and pressure to develop a portfolio of renewable technologies that can deliver the necessary scale. Also if trading results in the majority of skills for installation being cultivated abroad, it does not prepare the UK for emissions reductions of 70-80% relative to today’s levels. Finally, if the majority of deployment of renewables happens abroad, additional benefits for security of supply and some domestic jobs, profits and tax revenues are not captured. An additional factor that is even more diYcult to quantify is the sense of shared ownership. By creating financial frameworks that allow people across the UK to install and participate in renewable projects, they are more likely to appreciate and support the technology and policy. The EU Renewable Directive will allow countries to cooperate bilaterally to deliver against their shared renewable target. For example the UK can cooperate with Poland and subsequently count some of the renewables deployed against the UK renewable target, and not the Polish quota. This approach allows for long-term cooperation across diVerent institutional levels and can thus benefit both countries. The payment may be negotiated but could be linked to an average European support level. The Directive ensures that Poland could only export renewables once the domestic target is met—thus ensuring additionality and creating a strong incentive for both countries to make the cooperation work. Renewables investments outside the EU can, according to the Directive, only be counted, if they are delivered physically (eg solar concentration in North-Africa with a DC link to Italy or Spain). Not allowing other projects sounds reasonable to me, because of the largely diVering marginal resource costs of renewables. Otherwise globally all good on-shore wind resources would be counted against the EU scheme, even though many might be viable without additional support. Renewable investment in developing countries should be supported—but in a more targeted manner so as to ensure technology transfer. This could include using EU ETS auction revenues to support developing countries in implementing domestic policies in order to accelerate the use of renewables.

5. Through Clean Development Mechanism projects, rich countries can partly meet their carbon emission targets by investing in “green” projects in poor countries. Does your experience of such projects offer any lessons about the scope for international trading in renewable energy? I think CDM projects are very eVective in creating private sector incentives to pursue new project and technology types and to oVer profits as incentives to pursue diYcult first of kind projects in a new country so as to create eVective demonstration projects. But all projects receive the same carbon price—with only small risk adjustments—even though the additional cost for emissions reductions are vary widely. This creates significant rent transfers to private sector investors, which would be of concern if the mechanism was scaled up. Also, CDM subsidises projects often against prevailing energy subsidies and regulation. Hence we might contemplate moving towards cooperation with developing countries on implementing domestic climate policies. The experience of CDM type trading—and the limited success of ROC trading in the UK—was my main concern when arguing against an installation based trading scheme at the EU level as initially proposed by the EU Commission. It would have created large rents, and significant regulatory risk that increases costs of capital for investors and the subsidies paid by electricity consumers. The approach would also not have created clear targets for national governments to implement the necessary market design, grid framework and investment and planning regimes. It seems that the EU Directive will use country level transfer of renewables. This allows countries to agree early on the volume of renewables they want to transfer—and thus creates clear targets for national and regional administration to ensure the necessary framework is in place. This will have to be reported in national action plans. I think this kind of approach learns from positive experience that was internationally collected with Poverty Reduction Strategy Papers of the Worldbank and the (L)PSAs in the UK. It will be important to create a robust non-compliance mechanism at the EU level. My sense is that various administrations of Member States are reluctant to fully commit to action and will try to impose a lax compliance mechanism in the EU Directive. But only a strong compliance mechanism at the EU level will make the renewable targets defined in the Directive credible. Only credible targets will enable the level of investment required into the supply chain—including cables and turbine production and ships for oV-shore installation. Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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6. What are the key considerations for UK energy policy? How do and should renewables fit into Britain’s energy policy? How far is their role likely to change between the medium term (to 2020) and the long term (to 2050 and beyond)? I think a secure, aVordable and sustainable energy supply is typically the key consideration. For reasons of simplicity most analysis is usually focused on a static short-term perspective. It would be important to reflect on uncertain and volatile energy prices. This would create more of a focus on the value of long-term energy contracting to hedge against high prices and provide stable revenue streams for investment through low price periods. Unfortunately policy makers (like consumers) are only looking at long- term contracting at times of high energy prices, and then lock themselves into high prices (see California example in power market). At times of low prices, there is a reluctance to look long-term. In addition, Ofgem’s focus on retail competition implies a focus on switching of retail consumers and therefore limits the ability of supply companies to sign long-term contracts with generators. Vertically integrated companies bet on the limited scale of retail competition and invest against their customer base which is assumed to be rather stable. It would also be important to develop a more dynamic perspective on the energy system. Sustainability looks at the long-term carbon emissions, but in the day-to-day business is translated into a shadow price of carbon. As mentioned above, taking climate change policy serious will require an transition towards a low-carbon economy and can not be achieved by only capturing low hanging fruits (least cost carbon reductions). The Climate Change Bill with carbon budgets, the renewables consultation and this committee allows for a focus on the trajectory for diVerent renewable technologies. I think it would be valuable to judge energy policies not only by the cost born in 2008, but also by the outcome of the system in 2030—where does the UK population want the energy to come from?

7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? How likely, in your view, are these relative costs to change in the future, and how robust are the estimates? What are the main cost drivers for renewable energy? For onshore wind, the German feed-in tariV generated 22 GW of investment with current tariVs between 49£/ MWh at sites with high wind speeds and 63£/MWh for sides with lower wind speeds. Capacity shortages in production and high commodity prices however resulted in recent costs increases. To ensure continued high investment volumes, the German government increased the tariV for installations commissioned in 2009 by about 10%. I think this is a temporary cost increase that will be resolved as production capacity increases. Production scale and learning-by-doing is likely to reduce costs after that—I would assume towards £40/MWh in 2020. For oV-shore wind, a new publication by the IEA—Energy Technology Perspectives—lists the costs of past oV-shore wind parks at 80–100$/MWh—at historic exchange rates around 45–55£/MWh. Some of the projects might have been underpriced at the time and most sites were close to the shore in shallow water. To accelerate deployment in deep water, the new German feed law oVers 97£/MWh support level for oV-shore wind parks, that will decline in 2015 to 79£/MWh. Power prices have dramatically increased and are now at 95£/MWh. The increases are driven by higher gas prices that follow the oil price increase, but also coal prices have within the last year increased from 80$/tonne to 210$/tonne. At least according to forward markets covering the next few years, fossil fuel prices are expected to stay high and therefore forward electricity prices for 2009 and 2010 are 90£/MWh and 85£/MWh. At such prices even oV-shore wind is at the edge of breaking even. So why do we need any support policy at all? First, it is uncertain whether coal and oil prices stay at their current extremely high levels. Particularly for the coal price it seems more like a production constraint if not exercise of market power. But also for oil, and therefore gas, the high prices will trigger demand reduction, or if not new production. Given this uncertainty, risk averse private investors are use far lower numbers when valuing investment projects. Even the adventurous oil industry had—when oil prices already had moved into the 50 and 70 $/barrel range—only pursued investment projects that could break even at 30$/barrel. Feed-in tariV oVer typically a twenty year revenue guarantee for investors. This reduces the risk and therefore financing costs by about 20%. Second, so far incumbent utilities make large profits with their conventional generation asserts. Investment in renewables creates competition for conventional assets and reduces their value. Iberdrola is the only large Utility that had focused on investment in renewables—because in Spain electricity demand increased and therefore new investment was required rather than competing with existing assets. The UK also needs to create a policy environment that allows new entrants to take forward renewable projects independent of long-term projects with incumbent utilities—if only as a credible threat to ensure incumbent utilities focus on renewables. Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

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This approach has succeeded once before in the UK—with the dash for gas. New entrants in generation signed long-term power purchasing agreements. A feed-in tariV would again oVer such a price guarantee. Finally, most renewable energy technologies do not provide base load power but intermittent output. This reduces the value they can contribute to the system and creates two uncertainties for renewable investors: First, will the UK government implement an eYcient market design that allows for optimal integration of dispatch and congestion management and limits the additional cost. Second, who will bear the cost of intermittency under the new market design—and will incumbent conventional generators be able to exercise market power in the design of, and operation under, such a design at the cost of intermittent generation technologies. With an eYcient market design, using nodal pricing, centralised unit dispatch and careful market monitoring, the cost could be a few £/MWh. But the experience during the initial months of the balancing market under NETA, when balancing costs exceeded energy revenue for some generators, illustrates how important it is that the power market design evolves to reflect the requirements of the generation mix.

8. How likely are there to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should policy be designed to promote such technological advances, and if so how? Learning-by-doing suggests that technologies exhibit cost reductions usually between 10% and 20% with doubling of global installed capacity. We have confirmed this with an extensive literature survey. Separate studies were pursued for on-shore wind with Luis Olmos, photo voltaics with Gregory Nemet, Misato Sato and Katja Keller, and marine energy technologies with Jason Hayman. For on-shore wind we found that cost reductions per delivered MWh declined between 2000 and 2003, because cost reductions were partially compensated by diseconomies of scale as turbines increased beyond 1MW. A larger scale is still a good idea, because it allows better harvesting of wind resources. In the subsequent years global demand for turbines grew faster than predicted, resulting in continuous production scarcity and therefore higher prices. This example was paralleled in photovoltaics. After three decades of successful learning-by-doing when the cost was reduced by the factor 100, the price suddenly stalled in the last four years. A global interest of policy makers to support deployment programs multiplied demand. This resulted in scarcity rents captured in a capacity constrained supply chain, particularly for silicon and prevented price reductions for several years. The constant price, however, masks the significant cost reductions that will now be harvested—the German feed-in tariV for roof top installations will be reduced by 9–10% annually staring in 2010. One important lesson from both technologies is the importance of long-term signals about the market size. The European Renewables Directive oVers countries the opportunity to credibly to commit to renewable targets up to 2020. It will be important to formulate the indicative trajectory that is part of the Directive as a mandatory trajectory with compliance mechanism to increase the credibility and visibility of the signal for investors in the supply chain. With the work on photo voltaics we also wanted to address a long-standing question—should we invest in R&D or subsidise the deployment of the technology? Deployment is crucial for cost reductions. Profitable opportunities have attracted companies from many sectors of our economies to apply their specific skills and technologies to the PV production line—a result that was crucial for their success and almost impossible to deliver with R&D subsidies. Also, many of the new ideas can only be explored on real production lines, which oVer the precision and allow for an optimisation of processes. But subsidy costs for strategic deployment are a multiple of R&D expenditure—governments could explore how to better target R&D funds to companies to give incentives to be more adventurous in trying out new technology and manufacturing ideas. Wave and tidal stream costs are diYcult to predict. But if they are to be taken seriously, they will require real focus from government. So far the companies pursuing demonstration projects are very small start-ups, focussed on getting the next round of funding for their first large-scale demonstration plant to simply prove that their concept has merit. This distracts the focus from the use of more sophisticated materials and designs that would enable the mass production required to reduce costs and deliver the scale. The companies involved in the industry currently don’t have the capacity to pursue a more sophisticated design approach and there is insuYcient incentive for larger engineering firms to engage. The Marine Energy challenge of Carbon Trust initially approached this challenge, but again the level of investment was not in line with the scale of the engineering challenge. Rather than building individual demonstration projects at a few million pounds each, one might consider working in parallel to really get things moving. I don’t think we can guarantee success, but I would feel uncomfortable if this option is not really explored. Also, it is the one renewable technology where the UK has competitive advantages and could be a successful global leader with large export potential. Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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All marine energy technologies, including oV-shore wind, are currently desperately competing with the oVshore oil and gas industry for engineering resource and physical resources such as installation vessels and equipment. It is not practical for companies to ignore the current demand created by high oil prices and it will require very strong government policy to give credible signals that it will be profitable to shift this attention.

9. Does the fact that the running cost of renewable energy is likely to be less volatile than that of fossil fuels give it a competitive advantage in the market? The example of power systems with large shares of hydro power shows that the opposite is the case. The marginal power price is still set by fossil fuel generation, and therefore revenue streams are volatile. I think for many years we will remain with power systems where the marginal generation is based on fossil fuels, and therefore private investors in conventional, not renewable, generation technologies have more stable revenue streams. The risk to which renewables are exposed in the current market design is in marked contrast to the benefits they would oVer to final consumers. Final consumers suVer from price volatility of global oil, therefore gas prices and now also from volatile coal prices and would benefit from more stable prices if they could sign long- term contracts for the energy from renewables. This is, however, diYcult under the current design of the power market—which focuses on allowing retail competition, rather than on long-term investment frameworks. Long-term contracts signed by retail franchises or under feed-in tariVs would oVer an alternative. The current market design for congestion management and balancing has been designed for conventional technologies and is not suitable for large shares of renewables. Significant changes will eventually be implemented. Renewable energy technologies are most exposed to network congestion and balancing markets, because they have volatile or intermittent output and usually lower numbers of full load hours. It is diYcult to predict when exactly this change will occur, but renewables face the biggest uncertainty from the outcome of such a change.

10. There have been suggestions that the Renewables Obligation should be replaced with a Feed-in Tariff system, as used (for example) in Spain and Germany. Would a Feed-in Tariff be more effective at deploying renewables? I think the UK would benefit from a shift to a feed-in system for all investment combined with a tender for oV-shore wind parks. This approach has been successful in deploying renewables across Europe and exhibits significantly lower costs per turbine than the UK ROC scheme. Cost reductions of about 20% can be achieved by reducing financing costs. The feed-in tariV gives long-term price guarantees, thus reducing exposure to regulator risk about the future ROC design, future congestion management and future balancing market design. The feed-in tariV can also be cheaper for consumers—as the tariV can be set to reflect the costs of diVerent resource location. With certificate schemes all projects in one technology band receive the same payment, irrespective of the depth of water or wind speed. If only a limited number of projects are to be implemented, this allows the certificate mechanism to target the best resource location. But many projects are required to deliver the UK renewable target, and therefore many inhomogeneous sites have to be developed. Therefore the certificate price has to rise to finance projects at somewhat lower wind speed or deeper water. The projects at better sites will also benefit, and receive higher rents at the cost of consumers. The feed-in tariV also oVers a clear and transparent payment scheme that allows both large scale and small scale market participants to pursue investment. This opens the market for local and specialised project developers that might be better positioned to engage with local communities and gain support for projects, as experience in other countries has demonstrated. Also, the threat of entry of new firms is likely to be required to ensure incumbent utilities shift their eVorts towards renewable projects. The UK government suggests adjusting the ROC scheme to address some of these concerns. Using adjustment mechanisms (ski-slope and head-room) the ROC price is stabilised and gradually transformed into a premium scheme. The Spanish example shows that a premium scheme alone is not acceptable if wholesale prices rise. Therefore, in Spain the scheme was subsequently adjusted to implement a price floor and ceiling for the sum of wholesale price and premium. Judging by current UK wholesale prices the next round of changes is probably already on the table. A further change that will be implemented to the ROC scheme is, that it will provide diVerent bands for diVerent technologies—eg oV-shore wind receiving more than one ROC, while co-firing bi-mass only receives a fraction of a ROC. These technology bands can be reviewed in five year review periods. Given the uncertainties about the costs oV-shore wind and marine energy projects, this is likely to be a bit slow. Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

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Anticipating forthcoming changes, the renwables review suggests implementing some grandfathering of provisions—such that future changes of the scheme will not change the revenues of current projects. I guess with careful formulation the ROC scheme can eventually be translated into a feed-in system—albeit with a few drawbacks. For example, a feed-in approach allows governments to sign explicit long-term contracts with investors. Thus renewable projects that want to be supported have to promise to deliver their energy at a fixed price. At times when wholesale prices exceed the feed-in tariV for wind power this reduces the electricity bill for consumers. The main concern expressed in the renewable consultation document by BERR about a change to a feed-in system is a potential investment hiatus—if the government changes the investment framework again. Perhaps I am an optimist—but I think the transition can be managed without detrimental impacts on investment. European human rights law ensures property rights and protects the existing investment from expropriation, and therefore ensures that it will receive fair treatment under the new scheme. Even more importantly, if the UK parliament expresses a shared interest in delivering the renewable target and the EU Renewable Directive makes this obligatory, then it is clear that project investors will require cash and goodwill to develop the necessary projects—and will therefore be treated with generous transition provisions. This can makes it more attractive to invest during the transition and will possibly contribute to an accelerated deployment. July 2008

Examination of Witnesses Witnesses: Mr Steve Read, Investment Manager, Ms Coralie Laurencin, Associate, Climate Change Capital, and Dr Karsten Neuhoff, University of Cambridge, examined.

Q453 Chairman: Welcome to Dr NeuhoV from incentives to support this transition. Will the carbon Cambridge University and to Coralie Laurencin and price signal by itself provide all the right incentives Steve Read from Climate Change Capital; thank you for this? I think not. There are three main concerns for spending some time with us this afternoon and that I would have. The first one is that if we want to thank you to Dr NeuhoV for your written answers to take a lot of renewables forward we need a portfolio our questions, which arrived a little late for us to have of renewable technologies. Various of these are at an read them but they will be useful to have on record. early stage and we will need a lot more learning about Feel free to answer the questions anyway when they these technologies in order to get them to the quality are put to you. Please may I start and ask you does and the quantity that we want. Many of the renewable energy deserve any support, in your view, renewable energy technologies are at the stage of the beyond that of setting a realistic price for carbon? Ford Model T—to use a comparison from the car Would carbon reduction be achieved more industry—but we want to have energy technologies economically by setting a carbon emissions target that can compete with current cars. That will require rather than a renewable energy target? a lot of learning and internationally a lot of Dr Neuhoff: I think if you want to look at this production of these technologies, even though they question it really is a question of where we want to go might currently be more expensive. In the energy with this policy altogether. If you start from the sector it is very unlikely that technology companies IPCC recommendations, you want to reduce or utility companies will upfront that investment European CO2 emissions probably by 70 to 80 per because at the end the new technologies deliver the cent to deliver global emission reductions of 50 per same products so why would they go for the more cent. If you want to deliver these emission reductions expensive technology. We cannot use patents to by 2050 there are various options on the table. We protect the learning by doing, because it does not certainly would have a lot to do on the energy seem to work in the engineering sector. Also, eYciency side and we can hope for some contribution electricity produced from renewable technologies is from nuclear fusion, but it is very uncertain whether the same product so product diVerentiation which we that comes forward. There might be some use for mobile phones to create incentive for contribution from nuclear energy but again it only innovation does not work either. With non of these can deliver a share of the overall energy, and some traditional approaches to innovation working, the people think that carbon capture and sequestration public has directly provide incentives and pay for can play an important role but again as a bridging technology learning. The second reason for specific technology. Altogether I think we will require a large renewable targets is that to get to those larger shares share of renewable energy if we want to deliver of renewables we have observed—and the recent against our climate change objectives. Therefore the renewables review has just published documents on 2020 targets are a question of transition, where do we this—that it is going to be a challenging transition. It want to go by 2050, and then to see how do we have does not only imply building a few wind turbines, it to frame the market arrangements to create the right implies, as we have discussed in the previous session, Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Steve Read, Ms Coralie Laurencin and Dr Karsten Neuhoff changing the market design and changing some of the those are valuable things and justify the added cost great infrastructure and operation, but it also implies that the renewable policy would provide. training a lot of engineers and people that actually can operate the system, so we have to slowly start and we cannot do that too quickly. 15 per cent renewables Q455 Lord Moonie: Less than half of our by 2020 is a good start. Thinking of the overall greenhouse gases from heat are covered by the EU objective and drawing any trajectory to where we Emissions Trading Scheme. Could the ETS be want to go by 2050, the 2020 target is not a very extended, or some other scheme brought in, to spur ambitious objective but more a minimum the deployment of renewable heat sources? Y requirement of for a renewables trajectory to 2050. Ms Laurencin: From our point of view it is di cult to The third motivation for a specific renewables target imagine that you would extend the ETS to include is related to the question who will take forward these heat more widely. We tend to think that heat needs investments, and there I have a certain concern specific incentives and those have been carried out in especially in the power sector. Incumbent utilities other countries so it is interesting to see what have made a lot of money with their existing assets. countries have done. We tend to think that heat Across Europe only in Spain an incumbent utility networks should definitely be a priority, that was very active in investing in renewables—that was everywhere where you are setting up new industrial because they had a growing electricity demand with developments with maybe residential, commercial or growing GDP so they went forward very actively to industrial buildings and facilities it is interesting to take that forward.1 Across the other countries it was support the development of heating networks. These mainly the entry of new project developers facilitated need some form of specific incentive and in our view by support schemes that brought forward renewable they should be viewed pretty much as a water technologies on a larger scale. So we need to provide product, so they need the type of regulation that a framework that allows for new entrants to compete water assets need, so a concession model, a type of in the market even if they do not co-operate with the regulated monopoly model that you can work incumbents. There is also a big role to play for the around with the investment. For renewable heat, incumbents. People in incumbent utilities that want specifically in homes, we feel that those require grants to take forward renewables have to be able to show to individual house owners and possibly supply chain to their management and stakeholders that only by support to make the renewable heat resources competing in the renewable sector they can make available. profits in the future. If they do not compete in the Dr Neuhoff: Extending the ETS to the very small renewable sector then new players will come into this installation would be really complicated because it sector and can take forward projects, so I think that creates the same problem we discussed previously is where they need the support. with the ROC trading scheme for small installations. One could go upstream with the trading scheme. This is clearly not pursued at the European level and is not Q454 Chairman: Does Climate Change Capital in the draft envisaged in the draft Directive so it share those views? would not be possible to do that before 2020. But it Ms Laurencin: We completely share those views and would be in theory possible to implement. Secondly, in our view the most important part of what Karsten it is quite important to have incentives for national said is that the carbon price is too low to deliver some governments to take renewable heat policies forward of the technologies that we do need to deliver the because it is national governments that know best targets, it is not just about the onshore wind which what is suitable in their specific circumstances. Hence may be competitive at today’s prices and with today’s that renewable target and policy instruments to carbon price. There are other technologies which deliver the target need to be kept in the national need more maturing, need more support—biomass is domain. Part of the policy response could also be to one that is definitely on that list—and if you add to implement carbon taxes or at least start to abolish the that the fact that there is implied volatility in the VAT rebate on the use of conventional fuels in electricity price and in the carbon price you do not domestic heating. This question brings back this fuel have the visibility that today’s prices will last for the poverty issue and raises the a question whether to investment timeframe so renewables do need more redefine the measure of fuel poverty. As long as fuel support aside from the carbon market. Maybe the poverty is measured as a share of income that is spent one last thing I wanted to add to what Karsten said on fuel, any increases in fuel expenditure will push up is that renewables provide added benefits which we the fuel poverty index. If instead you compensate and have not discussed so far, they provide security of say that you can provide subsidies to fuel-poor supply and they do provide emissions reductions but households, then those households can choose they also provide jobs and industrial building. All of whether they will use the subsidy to pay for the fuel Y 1 The Spanish company Iberdrola has invested actively in new or for energy e ciency. This would create good renewable power generation. economic incentives. Any government that wants to Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Steve Read, Ms Coralie Laurencin and Dr Karsten Neuhoff change this will also have to change the definition of Q457 Lord Lawson of Blaby: May I ask one the fuel poverty index. particular question of Dr NeuhoV. I was interested to see that one of the things you are working on at the moment is border tax adjustment. As the Economic AVairs Committee we are obviously very interested Q456 Lord Macdonald of Tradeston: What in the economics of trading, protective tariVs and so expectations do you have for the level of carbon on; is it your view that it is going to be necessary to prices in future years and is anyone currently trading have a border tax as indeed President Sarkozy is carbon for the period after 2012? advocating, as indeed the abortive Senate ruling in Dr Neuhoff: Right now they are traded at ƒ28 per the United States included. Can you say something tonne of carbon dioxide, for 2012 it is ƒ32. 2020 is not about that? very much traded but I think you would guess Dr Neuhoff: I will try to do that very quickly. I am somewhere around ƒ40. At a recent carbon rather concerned about the way it is currently conference various speakers suggested it could be in phrased by Sarkozy and I am rather concerned about the order of ƒ50 per tonne of carbon dioxide. This the way the discussions are going in the US Congress. high projection is uncertain and no one would invest We have been looking very carefully at which sectors against it. It is like the oil market; over the last years would really be exposed and at the end it is only the oil price was between $50 and $70 per barrel but about one per cent of the UK economy where carbon oil companies only took forward projects that were prices, direct or via electricity prices, would really viable at $30 per barrel for oil, so there are result in higher production costs which would be uncertainties in there. Part of the uncertainty comes really significant. Only some of them again would in terms of what are the drivers? If we continue to face a leakage risk if carbon prices were in the order have high energy prices, they will reduce energy of ƒ30 to ƒ50 per tonne. We talk about clinker which demand and CO2 emissions. Therefore carbon prices is £400 million value added in the UK. Basic steel could drop quite a bit, but at the same time if coal production is only a very small part of the steel prices start to drop earlier we might see a further shift industry, all the subsequent steps are not very energy to coal which has higher CO2 emissions and could intensive so where you might think that border push up the CO2 price. There is, therefore, quite a lot adjustment is a good idea could be for very specific of uncertainty and we need the carbon price to be commodities, five, six or seven, which really make up flexible enough to respond to this uncertainty. Thus an insignificant part of economic activity. The way the carbon price can help to deliver the emission border adjustment is currently discussed and the risk targets and to create investment certainty for in the political process is that it might be widely investors that look at future market shares for their applied to address competition, not environmental, low-carbon technologies. At the same time we should concerns. Perhaps we find some international implement some form of reservation price or price framework for discussing border adjustment, some floor to the carbon price to make sure the carbon international agreement to limit the use of border price does not drop below perhaps ƒ15 or ƒ20 and adjustment. This would oVer the opportunity to therefore facilitate some project investments. restricting the scale and scope of border adjustment Ms Laurencin: If I can add a word, we also share the to make sure it does not discriminate against foreign expectation that carbon prices will continue to producers but can be used to allow countries to increase in the future and we base those feelings on maintain robust carbon prices. I do not think it the fact that the proposed directive released by the should be implemented unilaterally, by the French or EU in January which is currently being debated at the the Europeans. Border adjustments can only be EU level does provide for clear rules that are very pursued in discussion with developing countries and stringent for phase three, so post 2012. Because there emerging economies so they understand the purpose. is banking between our current phase which is phase I do not think we have to commit to the use of border two and phase three that high expectation of price is adjustment now. We can discuss them internationally feeding back into phase two, so the outlook that we and if we do not find an agreement we can use state aid or freelance allocation if specific sectors are have is that the carbon price will continue and concerned about leakage. The decision can wait till become an even clearer signal for investors and 2010 or 2011 post-2012 if there is a long term policymakers. That being said, it is not suYcient for expected diVerence in carbon. investors in renewables to make their decisions without renewable support because the clarity is still not there and you cannot hedge yourself against a Q458 Lord Lawson of Blaby: There is a WTO carbon price, you cannot find a long term contract. element to this, is there not? Even if there are some deals, as Karsten said, there is Dr Neuhoff: I like the rules that come from the WTO not enough market depth for you to be able to have in that you can implement, to my understanding, this certainty. border adjustments for carbon on both imports and Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Steve Read, Ms Coralie Laurencin and Dr Karsten Neuhoff exports. If you auction certificates, industry faces a territory where the cost of delivery is lower. That for cost increase at least at the level of best available me does raise a secondary issue in the UK context technology. If you compensate exports at the level of and the issue is that the UK renewable energy best available technology then domestic producers strategy is not just about the price of energy delivery are still worse oV than their competitors. So border but also a security and stability of supply issue for the adjustments do not discriminate against foreigners UK. Given that the UK is becoming a net importer of and is WTO compatible. It still provides suYcient electricity, certainly a fundamental plank of the UK protection in terms of avoiding relocation of renewable energy strategy should be about long term production facilities to other parts of the world in sustainability and security of supply from indigenous response to carbon price diVerentials. This is, UK sources and therefore if the ability to substitute because domestic firms compete with new foreign credits in from other EU or global jurisdictions is installations that use best available technology2.We allowed into the renewable obligations certificate, if can therefore pursue a scheme which is compatible they have a lower cost of delivery in other with WTO. This also has the benefit that WTO rules jurisdictions that over time will not create additional create strict constraints that reduce the risk of renewable energy generation capacity in the UK. abusing border adjustment for protectionist purposes. The impact that is more challenging and more risky is the political fallout. This could happen Q460 Lord MacGregor of Pulham Market: Through if border adjustment is seen to be pursued unilateral, Clean Development Mechanism projects, rich if emerging countries and developing countries think countries can partly meet their carbon emission that developed countries use an instrument of climate targets by investing in “green” projects in poor V policy against them—as developed countries have countries. Does your experience of such projects o er experienced often enough in the past how these any lessons about the scope for international trading instruments proliferate and can be used for various in renewable energy? purposes in the end. We should not use it unilaterally Dr Neuhoff: The CDM projects are a success in terms therefore, but only in an international framework of creating incentives for private parties to take with other countries together. projects forward in new countries and push the regulatory frameworks to really allow for that to happen. The first challenge is that the marginal Q459 Lord Lamont of Lerwick: Do you think that abatement costs for diVerent projects types are very the UK—or presumably any country—should be diVerent but all projects receiving the same payment. allowed to count renewable energy towards its The second challenge is the uncertainty of the future national targets and related perhaps to what has been price. What does that imply for renewables trading in said already would it be possible to trade renewable the European context? On the European side we need energy (or would it just be green certificates) across a trading arrangement or a sharing arrangement borders in a way that guaranteed that supplies were because the Commission eVectively had to find a way additional? of sharing the 20 per cent renewable target across Mr Read: It is highly likely that that will happen over Europe. Sharing can be based on the renewable time. The carbon market within the EU ETS already resource basis of countries or it can been done demonstrates that where the policy framework and according to the economic strength of the countries. the legislation is set there are permissible cross border It was not politically possible to go for the resource trading certificates. I am also aware that there have base because a lot of the new Member States that are been certain organisations that have looked at the weakest economically would have to deliver a lot of legality of substituting green certificates that have the renewables. Therefore new Member States have been awarded to generating stations in the EU zone lower targets and countries like Belgium have quite into the UK renewable obligations system, so supply an ambitious target. For example the Belgium target companies that have a renewable obligation supply in might be more diYcult to deliver domestically. To the UK satisfying that requirement by installing address this concern there needs to be some generating capacity in the EU zone. As a secondary arrangement for cooperation among member states. question to this it does raise the possibility that in a The initial approach discussed last year for the cross-border trading environment where companies directive envisaged a European-wide trading are free to install and substitute certificates into arrangement of green certificates with guarantees of various individual jurisdictions, it raises the origin. Various people including myself were rather opportunity for arbitraging where obviously the cost unhappy about that approach because it would have of deployment in a certain jurisdiction is cheaper implied that all the countries that currently are very than the home territory and it will also automatically happy with their feed-in support scheme would have lead to the generation being focused towards that to shift to this other scheme. Then the directive as was V 2 Border adjustment is set at the appropriate level for these presented in January o ered two options. It allows installations countries to opt out and say we will continue with Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Steve Read, Ms Coralie Laurencin and Dr Karsten Neuhoff their national scheme, but it also allowed countries to Q462 Lord GriYths of Fforestfach: I have three say we will work together with European wide related questions. What are the key considerations in trading. The challenge then was whether that actually the UK energy policy? What role should renewables is legally robust or whether it will be subject to play in that and, thirdly, how is their role likely to be challenges of market participants that say wait a changed in the medium term (to 2020) and the longer second why did our government opt out of term (to 2050 plus)? international trading? We want to sell somewhere Mr Read: Can I answer this question in two parts? If else. My sense is that the discussions at a European I understand the direction of your question, it is level converged to a situation without international shorter term goals and medium to long term goals, trading between installations. That is something and it is important to establish the linkage between which I think has come out already in the UK the two in so far as encouraging the deployment of context—all the documents that you see in the UK renewable energy technologies to establish the suggest that there was no trading really envisaged in stepping stones to longer term goals, and as longer terms of moving to one ROC price across the UK and term goals we should be focused on the greater across Europe, it is something which very few deployment of non-wind technologies. It is also countries really support. That raises another important to recognise that to get to the deployment question of how to co-operate to deliver renewables of non-wind technologies there already has to be in in another country and count these against a national place the right framework of policy and economic country target. That is something where target incentives to encourage the technological skills and sharing is possible across Europe, countries can work know-how and manufacturing base into the UK together and if, for example, Poland delivers more market, so clearly at the moment there is a substantial renewables than its national target then these can be reliance on wind as the dominant and closest to being V counted against the target in Belgium or the UK. It cost-e ective technology to deliver on the short term will be important to base this cooperation on long renewable energy targets. Something that the term arrangements between two countries to give previous panellists (Ofgem) said was in terms of early clarity for grid expansion and various creating the environment for the pull-through of complementary measures. Over the next one or two non-wind technologies, which at this particular point in time require a substantially higher level of tariV years countries need to discuss whether and how support to be able to encourage the manufacture and many renewables we want to share; for example deployment, so in the UK context in the short term I whether Belgium wants to work together with think that the wind industry and a greater Bulgaria and deliver some of their renewables in deployment of wind, together with its visual impact Bulgaria. This oVers the opportunity to sign a long and its cost of grid, should be seen as a short term term agreement between countries that allows co- almost pact with the devil as it were to encourage the operation across TSO and diVerent administrative right environment for the manufacture of non-wind levels. Both parties have a strong interest in this V technologies and create a breathing space for non- cooperation, because it o ers benefits for both wind technologies to come through. Certainly in the countries by leveraging the better renewable period 2020 and beyond—you mentioned in your resources. The big challenge that remains is question 2020 to 2050—we can see that over that sort compliance. I think the European directive in the end of time horizon, so over a 10 to 15 year horizon from requires very firm compliance mechanisms, such that now—a greater deployment of wave and tidal every country knows if it signs up and has to deliver technologies, potentially energy from waste against that target to be fair to other countries. technologies and biomass technologies that have a closer proximity not in the case of wave and tide but Q461 Lord Macdonald of Tradeston: In terms of in the case of biomass and energy from waste— marketing green projects in poorer countries, how between generation and point of usage which reduces much concern do you have about abuse and reliance on further grid reinforcement beyond what is corruption and so on? required for short term and medium term wind. Dr Neuhoff: Given where we seem to be moving right now I am not very concerned because at the end there Q463 Lord Best: How do the costs of generating will be co-operation between governments. electricity from renewables compare to fossil fuel and Governments will work together and say we pay you nuclear generation? I think you said earlier, Dr something if we get two additional percentage points NeuhoV, that the capacity for nuclear was strictly of renewables from your country. The government limited and I was not quite sure why you said that. money in the UK will probably come out of retail How likely in your view are these relative costs to tariVs but it would not go directly into private hands. change in the future and how robust do you think I am fairly confident that it will not directly lead to your estimate are? What are the main cost drivers for corruption. renewable energy? Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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Dr Neuhoff: I have to admit I am not a nuclear expert you go, for example, for photovoltaics, the German and therefore I cannot really make good judgments in feed-in law that was passed last week suggests annual terms of where nuclear costs are. The numbers on the reductions of the tariV by nine to ten per cent, starting table vary very much and it is diYcult to see real in 2010. This reflects cost reductions which have not market prices in the current pricing. The concern I been passed on to final prices because of supply have with nuclear is based on the open cycle. If you constraints. There is an expectation that prices will go continue to use nuclear on the open cycle and you down to costs. For marine energy technologies it is really want, on a global scale, to deliver 20 or 30 per more diYcult to make price estimates. The UK has a cent energy from nuclear then we are running against good resource potential, and being right now quite resource constraints eventually. At that level of committed to renewables, so I think that is one of the global contribution to energy supply, therefore, you areas where there could actually be a commercial would have to move to a closed cycle system and this benefit for the UK economy by developing this raises all the issues about plutonium and technology. The main challenge is that we have a lot proliferation—a lot more countries would have of small developers who focus on their next access to plutonium with a closed cycle system demonstration project. They have designed it such including reprocessing. There were various that it is going to survive, to get money for the suggestions on the table which speak about open subsequent demonstration project. There is, so far, cycle but that limits the volume of energy delivered no one with a big strategic interest and a long term globally. Given that the new climate policy in the UK vision in terms of getting a few gigawatts out there. and the European context is not only to satisfy our Without that there is not suYcient expectation of own happiness in Europe but to contribute and profits and you will not get any of the engineering perhaps take a leadership role on a global scale, we people to shift their expertise from oVshore oil, where have to do that in a way that is compatible with a there is a lot of money on the table right now, to this mechanism that we can also suggest to other new technology. There needs to be more countries. If we use a technology here which we commitment, therefore, if we want to develop those would not want other countries to use to deliver their technologies. emission reductions, that does not really make very Mr Read: I agree fully with what Dr NeuhoV said much sense. In terms of where the costs are, in there but there are just two other observations that I Germany the prices of feed-in tariVs are currently in would like to add. On the question of how the cost of the order of between £50 and £60 per megawatt hour generating electricity from renewables compares to and 22 gigawatts of wind were delivered against these fossil fuel and nuclear generation, there are obviously feed-in tariVs. They will be increased by 10 per cent a number of price signals in the market. I always next year, mainly because of bottlenecks in the supply think that the question is a very diYcult one to chain. We have observed in the last year a significant answer because you have to ask the question first of increase in the global deployment of wind power, all what do you factor into the cost, and particularly solar power and various other renewable when you think of fossil fuel generation and nuclear technologies, and the deployment usually was generation you have to try to put some kind of quicker than was anticipated by market participants, quantum figure on the long term environmental so there was insuYcient investment in the production liabilities associated with those technologies. Clearly, capacity. That is from my perspective one of the main renewable energy technologies by their very nature objectives for the European Renewables Directive, to are not polluting and have a lower environmental create a clear trajectory for the volume of renewables impact, and also in the case of wind they have a very investment over the next 10 or 15 years and commit low long term decommissioning liability. For V to this trajectory. This will allow technology example, onshore wind turbines can e ectively be companies like ABB to invest in suYcient cable taken down in the space of a day and the hillside can production capacity and wind turbine producers to be restored very close to a virgin condition. Clearly, V V invest in suYcient capacity to produce wind turbines. o shore is a slightly di erent category of engineering They need the certainty that there is going to be the capability but as a broad rule of thumb the long term demand and government policy is usually the most decommissioning liabilities and the long term uncertain thing that there is out there.3 I would environmental liabilities associated with renewables Y assume that onshore wind as the potential for at least are su ciently lower. Therefore, to compare the cost 10 to 20 per cent cost reduction. On this topic, we of generating from renewables and the cost of fossil have been doing studies on onshore wind where that fuel, one does have to give some consideration to the is pretty much on the table, and it was the constraints wider environmental cost associated with the latter. I of the production line that pushed up the prices. If would also just make an observation at this point, although it is relevant to a number of other answers 3 Otherwise, because of uncertainty about government policy capacity expansion, learning by doing and costs reductions are as well, in terms of the significant rises in the cost of slow plant, particularly for wind turbines. The fund that I Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Steve Read, Ms Coralie Laurencin and Dr Karsten Neuhoff manage at Climate Change Capital purchases wind Q466 Lord Layard: I wanted to ask you about the turbines for installation in the UK market and we role of basic science in promoting technical advance. have seen a 25 per cent rise in the price of onshore Is there a whole set of issues where there is a real wind turbines in the space of a year, driven problem—I think it was hinted at before—for fundamentally by the cost of underlying raw companies in terms of getting a return on some of the materials—steel and core metals—and also critical research which would be the most rewarding at the supply chain constraints in the global market. It is social level in terms of solving this whole climate important to bear in mind that clearly the UK does change problem? You mentioned some of them and I not operate in a vacuum and, therefore, while UK would also think of harnessing the energy of the sun. planning has various constraints in there, larger My question is, is there a case for some much more manufacturers are deploying their turbines in larger concerted, publicly financed and maybe volumes in other global economies such as China and internationally co-ordinated research eVort, on the the States. The final point I would mention there is scale of the Moon Shock programme or something that because there is no manufacturing capacity in like that, to try and tackle this problem? There seems the UK for wind turbines, everything is imported so to be a very fragmented approach quite frankly when exchange rates have been, unfortunately, very sour I listen to the witnesses that we have had to a problem cream on top of the supply cost increases that we of this scale and a lack of a very strategic approach have seen over the course of the last year. when, surely, there must be some basic scientific discoveries which could really contribute to the long term solution. Q464 Lord Turner of Ecchinswell: Just on the cost Dr Neuhoff: We analysed this question in a project on increase, a lot of those cost increases, which are cost photovoltaics with various research institutions, to increases in steel and engineering, are also what is ask: is it basic research that we have to support or is driving an increase in the estimated cost of it the deployment of new panels that we need to deploying nuclear. support. Talking to various other companies I get the Mr Read: Correct. sense that a lot of the expertise on how to reduce costs is actually in industry nowadays. Across various Q465 Lord Turner of Ecchinswell: Indeed, increases sectors the research departments know how to do also in the cost of building new coal power stations their specific component of the production process, and increases in the desktop calculations of the cost they know the specific material and how to handle that. Production incentives create an incentive for of doing carbon capture and storage. Have you seen V any analysis which suggests whether the relative cost companies to o er their specific technology. For of these diVerent technologies is actually changing as example, a laser producer from medical appliances cuts silicone for PV production at higher precision. A a result of these supply chain limits, or have we just lot of companies can thus transfer their know how got supply chain limits across the board and from other sectors and contribute to cost reductions. everything is going up, there is no particular change That then raises the question: do PV manufacturers, in the relative cost? when they build a new production line, experiment Mr Read: I think you are absolutely right and I have with these new technologies and take them on board? not seen any analysis that compares technologies by Some of the technology companies say it is hard to technologies and clearly wind turbines are not the get them to actually try out a new technology because only technology that uses rolled steel for its obviously the production line is going to be down for processes. The point I was really trying to make was a longer period at the beginning, so I think there is a that because the UK for wind technology does not role for government subsidies to support have any manufacturing capacity—and that is experimental methods of production. We need primarily because the UK’s tariV support continued strong deployment incentives that also mechanisms in the mid 1980s, the early 1990s were give companies an incentive to explore more diVerent not as high as other jurisdictions’ support approaches in terms of how you produce a PV panel, mechanisms, therefore the manufacturing base is how you produce a wind turbine. Basic R&D is a Germany, Denmark and Spain and those core firms good idea and I do not think it will waste money, but have set up operations in the United States and in the end we need to know exactly what China. It is a useful pointer for other non-wind configurations are working in the market so that we technologies, for example the marine technologies— can produce a scale and reduce the costs. wave and tidal—and potentially biomass and energy from waste technologies where the UK can, with the right policy frameworks, secure the manufacturing Q467 Lord Layard: There was a very interesting price as it were and the technological know-how to be survey in The Economist which raised all sorts of able to manufacture in the UK economy for a scientific possibilities which have not been mentioned number of wider benefits. at all so far. All the discussion we have witnesses here Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Steve Read, Ms Coralie Laurencin and Dr Karsten Neuhoff is about cost reduction of known technologies but problem. You could be saying our renewable energy this is a huge world problem and we may not be able targets in Europe reflect what we really need to to solve it with the known technologies within the achieve, the EU ETS was too mild an objective and if timeframe in which it needs to be solved. Is it not only we had set 1500 million tonnes or 1720 million quite possible that there is something that we do not tonnes for 2020 we would have a higher price and that yet know of that will actually turn out in 50 years time would be fine, so the price is too low and the to be the main thing? If it is, ought we not to be quantitative target is restrictive. The second spreading money wider across the board to try and argument could be it is too volatile and uncertain and tackle the basic research problems, such as the issues whatever the price is, it is moving around so the that were raised in The Economist article, which have renewable energy guy thinks I will build my windmill, not been mentioned by any witness? the gas and coal guys will in 2020 have to buy carbon Mr Read: I read the same article fairly recently and permits at ƒ15 per tonne but I cannot rely on that, there was a strong focus on certain things such as therefore I do not go ahead because I might be smart grids and, if I am reflecting on the same article, undercut by people who give a lower carbon price. it also mentioned certain philanthropy groups that That then relates to the issue of liquidity because of are oVering substantial financial prizes for the course if I was a Chicago school, pure market inventor that can bring forward the technology that theorist, I would say that such a renewable energy will turn the renewable energy and sustainability person could enter a sell contract for permits in 2020 world upside down. The founders of Google have and if the price was lower they would make so much launched such an initiative and I think Richard profit on this futures contract that it would oVset Branson was also sponsoring an initiative under the their insuYciently economic wind farm. That is Virgin brand some time ago. In the area of industry where a pure market theorist would end up, as long as and finance that I invest we are focused primarily on things are suYciently liquid it will produce the right fairly mature technologies rather than the pure R&D result. Do you have a point of view as to whether any stage so I am not best placed to answer that question, of these problems are solvable? If we had tighter but it is entirely possible. Because, clearly, that level targets, longer set in advance, would you be willing to of activity is going down at currently a sub-market rely more completely on a carbon price or do you level and at such a fragmented level it is entirely think there is something inherently not doable about feasible that there could be tomorrow or even 20 relying entirely on a carbon price so that we will years from now a technological solution that could always have to have alternative policy instruments come through—for example, ultra-eYcient PV such as a renewable energy target? panels would be the most obvious place so that Dr Neuhoff: I have spent the last three years mainly compared to current PV panels they were a hundred on the carbon trading schemes, so you would expect Y or a thousand times more e cient than what we me to support them. Market participants will always already have, which clearly reduces the look at government policy uncertainty that influences manufacturing costs but reduces the reliance on the the value of the carbon allowances and their low land expanse requirements and really turns the carbon projects. To get a more stable basis for a long economics of these sorts of things upside down and term decisions, the government can guarantee that makes the physical deployment that much more the price will not drop below a certain price level. Y e cient. If you are looking for parallels you might Such price floors helps to address risks of very low look at the step change in technology that has taken prices and thus supports some low carbon projects if place in the microprocessor in a 20-year period and they do not find the counter party for their long-term the power of computing that has gone very low when contracts because of policy risk. But a reserve price is IBM launched their first module to palm pilot type not the carbon price for 2025 we do not know the fuel devices that are available now. It is therefore entirely prices and we do not know the technology prices. possible and the technocrats and technological Too low is one of the issues but politically it is diYcult companies are heavily involved in the renewable to push up the carbon price right away to the level energy space and would lead that drive. that would perhaps be required in the long term. One reason is that the transition including changing Q468 Lord Turner of Ecchinswell: You have each of relative prices has a lot of equity implications across you suggested that we cannot just rely on the carbon society. I guess we agree that the cap and trade price to achieve what we need to do in terms of scheme does therefore oVer the benefit of adjusting decarbonising energy and in particular electricity. I the price to do this trick. On your second point, some just wanted to work out why that is the case because of the new technologies would require a really high it strikes me that you could be arguing either that the carbon price to get them cost competitive until they present carbon price is too low and uncertain or that reduce costs with market experience, for example of the market is too illiquid. This then has an influence PV. I do not know whether we want to have a price on whether this is a fixable problem or an inherent that first goes up and then after five or ten years starts Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

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8 July 2008 Mr Steve Read, Ms Coralie Laurencin and Dr Karsten Neuhoff to drop again, especially given that we are talking Dr Neuhoff: It is a beautiful question. One of the about a portfolio of technologies. If the carbon price things I hope to do when the new PhD students start first spikes to facilitate investment in the first in October is try to quantify how much money we can technology and we then realise we need the second save in terms of transmission investment or in technology, then the carbon price has to spike again. operational expenditure by making better use of our The market based approach can work in markets systems. Across Europe I do not see any country that where market participants can internalise this has really an eYcient market design that is tailored learning investment and say we invest now although for large shares of renewable energy technologies. we know our technology is not viable for the first five They were all designed for large shares of or ten years, but in ten years time we will get the conventional generation technologies where you had technology costs down the early investors benefit stable despatch and you knew what was going to from their know how and market position. This does happen the next day and you do not need much not work for renewable energy technologies, among liquidity over the last 24 hours. With wind you want other reasons becausee they are very complex and a to readjust four hours before despatch; all lot of diVerent companies are working together to technologies can do that but the market currently develop a PV panel with all the supply chain does not provide all the information exchange to components. How would they share the learning really allow for that. In the first discussion it was investment and how would they share the benefits in discussed do we currently create locational signals for the future? I think it is diYcult to co-ordinate that one the right incentives for plant location? That is a long really. The final point is a concern about timing. For term question and I think the answer is to some companies it is very diYcult to make big investments extent. The second question is, whether locational if they do not know when your product is going to be signals create the right incentives for the despatch of ready or when there is going to be a market. If a the right plant at the right moment? I would say no, product is ready and the market is ready five years and I think the transmission review did not really later the company is bankrupt, so in a way you need come out with a solution that is going to ensure that either, so at the end we have an ineYcient despatch to have quite a close coordination between when the but unfortunately I cannot quantify the costs this market opportunity emerges and the time when the creates. product is ready, and that again implies that governments have to step in a bit further than they did in the past to guarantee these opportunities and Q470 Lord Paul: There have been suggestions that then test whether the technology performs. The nice renewable obligations should be replaced with the part with renewables is that we have a clear market feed-in tariV system as used in Spain and Germany. interface, there is a price at which technology Would a feed-in tariV be more eVective at deploying companies sell their product. We do not have the renewables? close interaction that we observed for past energy Mr Read: I think the proposed banding of the technologies where people at the industry ministry renewables obligation in the UK, which is currently were eVectively running the technology and had a going through its final reading, is already tending the hard time to step back. The final concern about a UK towards a style of feed-in tariV as the previous carbon price only approach is governments need to nature of the renewables obligation being technology implement complementing policy, whether it is blind clearly appeared to be, in most industry views, regulation, whether it is grid excess, whether it is unsustainable in the long term given its over-reliance market-designed components. There needs to be a on wind and not encouraging the pull-through of clear signal to market participants that governments non-wind technologies and in particular not will take that forward and have a commitment to do providing the level of economic support required to that. Again, I think the carbon price by itself does not deliver the volume of oVshore wind that was desired. imply the UK Government is going to do the 15 What I would say is that at this particular juncture in things it has to do, but specific targets can. the UK’s renewable energy market development further significant structural changes would not be welcomed by the finance and investment community. Q469 Lord Macdonald of Tradeston: A quick The renewables obligation has only really been live question to Dr NeuhoV just on the basis of the since 2002 so we are through the fifth and into the eYciencies that might be gained from the present sixth compliance period renewables obligation and I system given your pan-European research. If think what the vast majority of the finance and Brussels were able to break down the resistance of investment community would like to see would be a France and Germany to unbundling and the creation period of continuity. There has already in the short of more market-based systems, have you any sense of life of the renewables obligation been a welter of what the eYciency gain would be inside the present consultation and policy debate which, as a financier, distribution systems in Europe? is extremely diYcult to stay on top of and actually Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

the economics of renewable energy: evidence 207

8 July 2008 Mr Steve Read, Ms Coralie Laurencin and Dr Karsten Neuhoff decipher into what the medium to long term eVectively it was cut and the premium was cut as soon economics are likely to be. The renewables as the price exceeded a certain level. This suggests obligations banding has been broadly welcomed but that also for the ROC scheme the next change is my overriding feeling is that there should be a period coming up already and various changes will continue of stability to allow the UK to be able to get on and to be necessary if we continue to use this mechanism. start delivering on the technological deployment. I share the concern that we want to retain the interest Dr Neuhoff: That is probably the one area where we of the big utilities to take renewable investment disagree. I am happy that we sit together on this one forward and that therefore changing the UK scheme but I am not 100 per cent sure of my position here. In from ROC to feed-in-tariV is, like any change, tricky. terms of a feed-in tariV type approach or long term But on the other hand if there is a strong commitment take-or-pay contracts they oVer a stable price over from the UK Government, across Parliament and the project for the investor and I think that produces across parties, to deliver against the renewable target financing costs of two to four per cent, as the rate of then it is clear for everyone that they need utilities and return required, which feeds through into 20 per cent project developers to take these projects forward. So cost reductions from that. The second aspect comes no one would want to annoy these investors and say in in terms of resource grants. If you go to oVshore if you invest it now we will not have a favourable transition approach for old investments under the locations, some of them are close to land and some new scheme. Also the European human rights are far oVshore and that has quite a big impact in legislation created property right protection which terms of what the costs are. If you want to subsidise guarantees that existing investment can not be all of them by the same amount and you only want to expropriated under a new scheme. If you look at subsidise one or two plants then a ROC-type Denmark, they at some time changed to a scheme approach is good because it gets the cheapest plant V V which did not o er as high profits as the previous one o shore forward. If you want to take forward all of and, as a result, before the change to the new scheme, V these o shore plants or onshore plants then in a way every investor was pushing to finish projects to be we have to put the ROC price high enough to get the covered by the old scheme. This shows, that if you least suitable plant forward to deliver our target and design a transition arrangement cleverly and try to all the other plants infra-marginal rents which move quickly it can actually accelerate investment in increases the cost for consumers. The third part is renewables rather than create an investment delay that you hinted already at the complexity of the during a transition, which some people are scheme right now. The complexity implies that only concerned about. big investors can actually take projects forward and Lord Lawson of Blaby: I have one question of even big investors tend to look for a long term clarification to Dr NeuhoV in relation to your answer contract with utilities to finance their project. This to Lord Turner. I must say that the hugely elaborate limits the opportunity for entry of third parties into extent of government intervention which you were this market. If we could create a very simple scheme saying is going to be necessary appals and alarms me so that you can look up what is the feed-in tariV you because the cost of detailed intervention is will get if you commission a plant in 2009, so you can tremendous. I understand what you are saying, that go to your local bank and tell them that that is what the alternative would be a very high cost of carbon in you are going to get for the next 20 years, in a way many cases which would not be very popular, but my that then facilitates that and allows entry and the question is this: you said in the case of nuclear there opportunity for entry. Even for incumbent utilities, was a resource constraint. If you mean uranium then however, they have not really worked up to the scale I am afraid I do not believe you. I remind you of for of the challenge. If we are talking about 30 per cent how many decades we have been told that the world renewables the volume of investment required is far is running out of oil and it always looks as if it is, but bigger than any of their balance sheets which implies it is not. One day it will but it is not now or in the that they are going to have to leverage the capital on foreseeable future. It is exactly the same with their balance sheets a lot more than they are looking uranium, there is no evidence whatever that the world is likely to run out of uranium or economically- for right now. Then they will start to look at it in mineable uranium in the foreseeable future, and of terms of how can we get a more stable revenue stream course uranium is a much smaller proportion of the in the future which is currently not on the table? I total cost of nuclear generation than oil is of think, therefore, that the ROC scheme is moving in conventional generation. I am afraid that unless you this direction, the reviews are looking at ski slope and can give us some evidence to support your assertion V headroom which e ectively stabilises the ROC price I would not find it credible. and puts it into this kind of premium scheme. Spain has this premium scheme and they have noticed if the Q471 Chairman: I am not sure that was a question, wholesale price goes up or the premium goes up, it was rather a challenge, but if you would like to eventually the rents for project developers get so high respond to it by all means do, either now or in that it has to be changed. It was changed such that writing later. Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG8

208 the economics of renewable energy: evidence

8 July 2008 Mr Steve Read, Ms Coralie Laurencin and Dr Karsten Neuhoff

Dr Neuhoff: On the second one I am happy to respond and then use a very simple approach, like a feed-in- in writing. On the first one my sense is that if you use tariV, which is transparent enough and can be market-based instruments like the CO2 trading handled in the political process. With clearly defined scheme in the policy area they have to be very simple objectives and simple policy instruments I am to be eVective, otherwise they can start to be abused confident that we can address the climate change and can have a lot of provisions which makes it challenge. diYcult to handle them. If you want to have policy on Chairman: If you would like to respond to the other other areas it is easier to clearly define your objective one in writing that would be very helpful. May I thank you all three very much for spending time with us this afternoon; it has been very helpful.

Supplementary memorandum by Dr Karsten Neuhoff, University of Cambridge

Do uranium resources constraints limit the contribution nuclear power can make to global emission reductions? It is sometimes argued that renewable energy sources do not have to be supported because nuclear power can address the climate change problem. By 2050 global CO2 emissions have to be reduced by at least 50%. Even with ambitious eYciency improvements final energy consumption is likely to remain at high levels, due to ongoing economic growth. Large scale exploitation of low carbon energy sources is therefore necessary. Can nuclear the job by itself? In 2004 nuclear energy served globally 3% of final energy consumption. The number might be surprisingly low—from the perspective of OECD countries with an average share of 20% nuclear power generation. But once non-OECD countries are considered, and all the non-power energy consumption is included, the role of nuclear looks surprisingly low, particularly in contrast to various renewable energy sources that contribute globally to 17% of final energy consumption. Some of the scenarios that are currently discussed envisage that nuclear power generation will increase by 2030 by 13% (IEA 2006 base case), or even 41% (IEA 2006, alternative policy scenario). But in both cases, the share of nuclear in final energy consumption is declining. The World Nuclear Association assumes in the upper scenario a doubling of global nuclear capacity, which increases the share of nuclear to global electricity generation from 16% to 18% in 2030 (WNA 2007). These are the scenarios that are typically discussed by industry representatives and analysts—and it is generally agreed that uranium resources will suYce under these scenarios. But please note, in all these scenarios, nuclear energy will only serve 3% of final energy consumption on a global scale. I think the interesting question is whether uranium resources would suYce if nuclear power were to make a contribution to global energy supply corresponding to the time that is spend in many countries and international for a to discuss the topic. Lets therefore assume global nuclear generation capacity increases from 364 GW in 2003 to 3640 GW and power generated from nuclear increases from 2.740 TWh to 27.400 TWh so that 30% of final energy consumption would be supplied by nuclear power (assuming energy eYciency measures keep demand constant). For how long would the global resource base suYce to meet this demand? The main determinant of the answer is whether nuclear power uses an open, once through fuel cycle, or whether spent fuel is reprocessed. The extensive study of MIT argues that “the best choice to meet [cost, safety, proliferation and waste management challenges] is the open, once-through fuel cycle” (Ansolabehere et al., 2003). There is currently limited support for reprocessing activities, given that they facilitate access to plutonium. To fuel nuclear power stations in an open-cycle approach, about 200 tonnes of Uranium are required to fuel 1GW power station for one year (capacity factor.9, based on Ansolabehere e.a., 2003). Our envisaged fleet of 3640GW would therefore require 0.73 million tons of uranium per year. The “Red Book” jointly published by OECD Nuclear Energy Agency and International Energy Agency has traditionally been the main source for data on uranium resources. 4.7 million tonnes identified resources, 3.3 million tons reasonably assured and 1.5 million tons inferred resources that can be captured at costs below 130$/kg Uranium are listed (OECD/NEA and IAEA 2006). There are some discussions whether additional resources could be identified with increased global eVort and the WEA (2000) estimates resources at extraction costs below $260/kg Uranium at 20 million tons, while Ansolabehere e.a. (2003) argue that with increased Processed: 17-11-2008 19:18:47 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG8

the economics of renewable energy: evidence 209 demand also exploration would increase, and the Australian Uranium Information Center suggests 30 million tons might be recoverable at prices below $80/kg (2000). These numbers suggest that above mentioned global fleet could be operated between 6 and 40 years— dependent on the resource assessments. Particularly the lower range, between six and 13 years based on the “Red Book” is surprisingly low. This is driven by the tenfold increase of uranium consumption relative to current levels. Given thus limitations, it is sometimes argued that the large scale exploitation of uranium resources in sea water (three parts per billion) should be explored, and Ansolabehere e.a. (2003) refer to Japanese research that estimates costs between $300–$500/kg of Uranium. Also, instead of uranium based nuclear power generation, some countries like India are contemplating to explore the thorium based cycle. The approach was initially not pursued because it is less suitable fur military use, but might for exactly this reason be more suitable. This note does not to argue for an increase of nuclear power production by the factor of 10. It seems that even nuclear industry representatives do not consider such an increase viable, eg because of constraints on qualified labour. Also other implications, like the requirement to increase safety standards if the likelihood of an accident is to stay at similar levels are not considered. The purpose of the note is merely to argue that nuclear power can even in ambitious scenarios only make a limited contribution to meet global demand for low- carbon energy. This implies that in the European context, the ambition to pursue climate policy in a manner that engages other countries requires a strong focus on a portfolio of renewable energy technologies.

References Ansolabehere S, Deutch J, Driscoll M, Gray P E, Holdren J P, Joskow P L, Lester R K, Moniz E J, Todreas N E. (2003) The future of nuclear power, an interdisciplinary MIT study, Boston. International Energy Agency (2006) World Energy Outlook. OECD/NEA and IAEA (2006) Uranium Resources, Production and Demand 2005 Uranium Information Center (2000) Nuclear Electricity, 6th edition. WEA (2000) World Energy Assessment: Energy and the Challenge of Sustainability, New York: UNDP. World Nuclear Association (2007) The global nuclear fuel market, Supply and Demand 2007–2030. www.world-nuclear.org Processed: 17-11-2008 19:19:56 Page Layout: LOENEW [SE] PPSysB Job: 408616 Unit: PAG9

210 the economics of renewable energy: evidence

TUESDAY 15 JULY 2008

Present Best, L MacDonald of Tradeston, L Griffith of Fforestfach, L MacGregor of Pulham Market, L Hamwee, B Turner of Ecchinswell, L Lawson of Blaby, L Vallance of Tummel, L (Chairman) Layard, L

Memorandum by the Department for Business Enterprise and Regulatory Reform (BERR)

1. How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries?

The overall objectives of our energy policy and in international energy policy are to ensure security of supply, sustainability and aVordability of energy. We strongly believe that we need a range of low carbon solutions to meet these challenges. These include renewables, but also energy eYciency measures, reducing demand, nuclear power, carbon capture and storage and developing new technologies. We will need to develop this diverse, low-carbon energy mix at competitive prices. We believe that the best way to achieve this is through independently regulated markets, with the right interventions to correct specific market failures. We will shortly be consulting on a possible package of measures for our Renewable Energy Strategy. In developing the strategy we are studying the policies of other countries to learn lessons where necessary. Our overall approach to low carbon energy policy of developing a portfolio of solutions is in line with the policies of our partners in Europe and the US, although individual countries are of course giving diVerent degrees of emphasis to some policy areas. Within renewable energy policy, again our approach is line with the generally accepted principles for supporting renewables eVectively, namely to provide a policy framework that is (i) stable, that (ii) removes barriers (such as planning and grid), and that (iii) provides financial support to a range of renewable technologies. Nevertheless, we see significant diVerences in the levels of renewable energy across countries. For instance: UK 1.3% of final energy consumption Germany 5.8% of final energy consumption France 10.3% of final energy consumption EU average 8.5%1 of final energy consumption USA 4.7%2 of total primary energy supply By comparison, the current levels in the UK may appear low. But we need to bear in mind that we started oV from a low base level, with very low levels of cheap hydro resource compared to other countries. Hydro power made up about three-quarters of the overall EU renewables level in 2005. At the same time, we have already put in place eVective renewables policies over the past several years. They are already showing significant results, tripling the amount of renewable electricity to around 5% since the introduction of the Renewables Obligation. Renewables are an important way to reduce our dependency on fossil fuels, and as the challenges of energy security and climate change become more pressing, we believe it is right to give additional emphasis to renewables. We therefore now intend to build on our existing policies to do even more for renewables. This is why we are supporting the current proposed EU Directive aiming at increasing the share of renewables in the EU to 20% by 2020. As you know we are currently considering what additional policies may be needed to deliver the UK’s share of this target. We will consult on proposals this summer. 1 EU figures: 2005, source: European Commission 2 2005, source: IEA Energy policies of IEA countries, 2007 Review the United States Processed: 17-11-2008 19:19:56 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG9

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2. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? Renewable energy sources are currently more expensive than their conventional counterparts and the levels of renewable deployment needed to meet the EU targets cannot be reached without significant further intervention from the Government to encourage investment and innovation. Other important barriers to deployment are in the areas of planning and grid access. Supply chain blockages, for example, for key components such as wind turbines and gear boxes also provide barriers to the greater deployment of renewable energy. Our consultation on the Renewable Energy Strategy will set out a raft of measures to tackle all of these barriers. Clearly a step-change increase in renewables deployment over the coming decade or so raises questions on how renewables will interact with the existing energy markets. This is particularly an issue for renewable electricity. For instance intermittency of wind power raises questions how we can continue to make sure that the lights stay on even when the wind isn’t blowing. We are currently looking carefully at these questions, and will present the initial results of our analysis in our consultation this summer.

3. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? Technological advances are likely to help bring down the cost of building, running and maintaining existing renewable technologies in the future. New technologies, or variants on existing technologies, may also emerge which are significantly cheaper than existing technologies (such as second generation solar panels). However even mature renewable technologies are still likely to cost more than traditional methods of power production, so a suitably designed market framework (where sustainability is rewarded) is likely to remain essential. The cost of technologies can fall without any direct Government intervention. For example, developments in the materials and components used in wind turbines (both in terms of their performance, and in the cost of producing them) have reduced manufacturing costs and maintenance costs. The scale on which they are manufactured has cut costs, and experience in operating them has led to ongoing design improvements. Going forward, further developments such as “direct drive” wind turbines could be simpler and cheaper to run than current designs. However the more innovative technologies (particularly those which have not yet widely deployed) generally require a degree of Government support if they are to develop to a point where they are cost eVective in a useful timeframe. The private sector plays the major role in technology development and deployment, and will only invest if there is a reasonable prospect of commercial return. There are a wide range of reasons why investment in energy technology underperforms that of other sectors, many of which are particular to the energy sector— including the unusually long development times involving costly full scale trials, perceived uncertainty over future policy direction, the diYculty of protecting the engineering-based knowledge gained in the development process, and the cost of establishing new enabling infrastructure such as network connections. It’s also worth noting that as electricity is a commodity product, there are few “niche markets” for developers to secure early returns on their investments, and energy companies have relatively little appetite for using unproven and more costly technologies. In order to promote such technological advances, we need to: — Develop appropriate pricing and “market pull” measures (such as carbon pricing, and the use of standards)—to increase developers’ confidence in receiving a market return for renewable technology work. — Fund basic research, development and demonstration of new technologies (in partnership with the private sector), where there is less incentive for companies to invest. — Tackle other barriers to the development and deployment of new technologies (such as such as streamlining legal and regulatory frameworks, ensuring reliable information on the technologies is available, and ensuring timely network connections). Ultimately, supporting technology development—directly or indirectly—means investing in energy sources which may not be cost eVective in the short term, in order to accelerate learning and cost reduction to secure economic return and wider social benefit (in the form of cheap renewable technologies that make the most of the UK’s renewable resources) in the future. Funding for renewable research and technology development is provided by the Department for Innovation, Universities and Skills through the Research Councils, Energy Technologies Institute and Technology Strategy Board. The Councils and ETI are submitting separate evidence to this inquiry. Processed: 17-11-2008 19:19:56 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG9

212 the economics of renewable energy: evidence

4. Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime?

The Renewables Obligation (RO) is clearly working as a financial incentive—eligible renewable generation more than doubled between 2002 (when the RO was introduced) and 2006, with another 18 GW of capacity in the pipeline. The first GW of wind took around 14 years to become operational (mostly under the predecessor to the RO the Non-Fossil Fuel Obligation, and the second only 20 months. The RO has been an incentive not only for wind for example there are significant amounts of biomass-fired generation coming forward. Microgeneration has also benefited from changes to the RO accreditation process, and as a result we have seen the number of accredited microgenerators rise from 300 to over 1000. A further 300 are waiting for accreditation. Additionally, under proposed reforms to the RO, microgenerators will be able to claim two ROCs for every 1MWh of renewable electricity generated from 1 April 2009. The main barriers to the deployment of additional resources have been in projects getting planning permission and grid connection. Of the 18 GW of capacity in the pipeline more than 10GW are awaiting planning consent. Success in terms of bringing forward renewables depends not only on financial support, but also on having a stable, reliable, long-term policy framework in place, and removing barriers such as planning, grid and supply chain issues. On planning, for example, the eVect of wind turbines on military and civilian radar has in a number of cases proved a barrier to the deployment of onshore and oVshore wind. In response to this problem, the Government and the wind farm industry have this month signed up to a landmark agreement to work together to identify and develop technical and other solutions. This joint Government/Industry Aviation Plan aims to remove aviation and radar objections as a barrier to the expansion of UK wind generation capacity. It will allow the continued and increased deployment of turbines necessary for us to meet our climate change obligations while allowing us to continue to operate a safe aviation airspace and ensuring national security. As regards renewable electricity, we currently have about 18 gigawatts of wind projects in various stages of development. This indicates that it’s essential that we are successful at tackling planning barriers and other non-financial barriers. We are already implementing reforms in the Planning Bill currently before Parliament, and we are considering what more we may need to do. Changes have also been made to remove planning barriers to domestic microgeneration installations which have little or no impact beyond the host property. Solar thermal and solar PV, ground source heat pumps, biomass boilers and CHP are now permitted development; wind turbines and air source heat pumps will be included in due course. Nevertheless, we also need to look carefully at our financial support framework. Particularly as regards heat more can be done. Our recent Call for Evidence asked what the best way of providing financial support for heat would be, and our consultation document this summer will propose next steps. I have also said before that we would look at how best to support renewables at the household level (both renewable heat and electricity), through feed-in tariVs or otherwise. The forthcoming consultation document will set out the initial conclusions from the work we’re currently doing on these questions, including what additional support is required for all renewable energy technologies. The Energy Bill currently before Parliament is designed to allow the RO to provide diVerent levels of support for diVerent technologies (banding the RO). This is expected to make the RO a more eVective and cost-eYcient mechanism. The details of this approach are set out in the consultation document (ref) and government response to consultation (ref). Our decision to band was also informed by our own modelling of the changes and associated cost benefit analysis. This work was based on: — an analysis and informal consultation on current market costs of each technology. This work was undertaken on our behalf by Ernst & Young; — a report, giving details of the cost review findings and those organisations consulted, was published alongside the consultation document; and Processed: 17-11-2008 19:19:56 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG9

the economics of renewable energy: evidence 213

— modelling of the renewable electricity market, undertaken on our behalf by Oxera. Details of this work are also published on the BERR website. In summary, modelling suggests that we will be able to deliver 13.4% of electricity from ROC eligible renewable sources by 2015 under a banded scenario up from 11.4% under the base (technology-neutral) scenario. These figures do not take account of the renewable technologies which are not supported by the RO, including existing large hydro-electric schemes and conventional Energy from Waste (EfW) power stations. A Feed-in tariVs regime makes it compulsory for somebody (eg in Germany the network operator) to pay fixed prices for renewable electricity. This approach provides generators with a regulated, fixed income/MWh. However it imposes additional hidden costs on the electricity market which will be passed onto the consumers and renewable generators have no incentive to build plant near centres of demand. For example, network operators need to balance generation when the wind doesn’t blow and reinforce the networks. However, Germany’s Feed-in tariV regime also comes at a price. The International Energy Agency estimates that the German feed-in tariV regime between 2000 and 2012 will result in payments of ƒ68 billion and that by 2012 the annual cost would be between ƒ8–9° billion. It is also worth noting that solar PV provides only some 4.5% of Germany’s renewable electricity, while taking some 20% of the total payments. The Renewables Obligation (RO) places an Obligation on electricity suppliers (the companies who sell direct to consumers) to source a certain percentage of their electricity sales from renewables, or to pay a penalty (buy- out payment) for each MWh by which they fail to meet this Obligation. The buy-out fund is then shared among those who have supplied renewable electricity. This provides a positive incentive to compete in delivering renewables as success for a supplier means that they will receive money from their competitors. It also allows the market price for renewable electricity to go up in less windy years, spreading the risk for generators. Renewable Generators enter the market on equal terms with other generators. They have to pay the cost of connection to the grid and any regional use of system charges that apply. So there are no hidden costs imposed on consumers. Generators receive their reward by selling both their electricity and Renewable Obligations Certificates (ROCs; which evidence their renewable production) to suppliers. Generally they enter into a long-term power purchase agreement with suppliers which covers both of these elements and oVers a guaranteed floor price plus a share of any upside. In practice, therefore, they get a negotiated feed-in tariV from the suppliers.

5. On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables?

The renewable energy targets set an unprecedented challenge for our electricity networks. We will be publishing analysis of the likely reinforcement requirements alongside the Renewable Energy Strategy and setting out in the Transmission Access Review how the planning of essential investment will be taken forward by the network companies with the support of BERR and Ofgem. A major area of investment will be the connection of oV-shore wind farms to the main on-shore transmission system. The indications from National Grid and our own advisers are that there is no technical barrier to the connection of renewable generation at, for example, a 40% penetration level. The indications are that the challenge is an economic rather than technical one, ie ensuring that suYcient capacity of all technologies has the right incentives to remain on and join the network to support the deployment of intermittent renewable technologies and ensuring the economic and eYcient operation of the balancing mechanism. We will be publishing the final report of the Transmission Access Review shortly. Among the key conclusions of the review are that grid access rules need to change significantly in order to meet the demands of a diVerent generation mix, in particular to allow transmission capacity to be eYciently shared between thermal generation and intermittent renewable generation. Firm connection dates for developers coupled with better incentives for the transmission companies to deliver timely connections are likely to have an important part to play. Industry working groups have already started work on the detailed analysis needed to deliver the necessary changes to industry codes. Processed: 17-11-2008 19:19:56 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG9

214 the economics of renewable energy: evidence

6. How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations? Visual disamenity is a non-market good and therefore its value has to be estimated using valuation methods such as survey and choice experiment techniques or from evidence collected through stakeholder participation methods. Evidence from such studies suggests that visual disamenity costs are very location and project specific, and are a function of number of factors including: type of landscape being disturbed and the nature of the disturbance, the characteristics and incomes of people being asked, the distance they live from the landscape, the extent to which the landscape is unique, already contains existing man-made structures, the extent to which amenities are lost and peoples’ valuation of these losses. The importance of these eVects and the values people assign to them are site and project specific. No estimates of visual disamenity costs of electricity generation from renewables, fossil fuels or nuclear have been made by Defra or BERR. It is important to ensure that a consistent and comprehensive framework is used for valuing both the positive and negative environmental impacts of renewable energy proposals. As indicated above there are number of valuation methodologies which can put values on environmental benefits and costs to enable comparisons between diVerent proposals. “In the Government’s Planning White Paper Planning for a Sustainable Future which we published in 2007 we underlined planning’s fundamental importance to the quality of people’s lives. We have described how, when planning is done well, it enables us to build thriving, healthy, sustainable communities where people want to work, shop, live or visit. It supports the economic development which is vital to create jobs and ensure our continuing prosperity as a nation. It helps us to protect our natural and historic environment and ensure everyone has access to green space and unspoiled countryside. It enables the delivery of essential infrastructure which allows us to travel and enjoy access to clean, aVordable energy, water and waste facilities. And it supports individual citizens in improving their homes and property while protecting the wider community from over-intrusive development. Planning does all of this by helping to ensure development meets economic, social and environmental objectives in an integrated and sustainable way. This is why an eVective and eYcient planning system which is responsive to the needs of society is essential. But we know people have diVerent views of, and diVerent interests in, the way land is used. Planning is the forum for resolving those diVerences. On the one hand, it needs to help necessary development and modernisation, on the other, it seeks to protect and enhance our natural and historic environment and to ensure that a community’s way of life, health and well-being are enhanced rather than harmed. Planning departments and committees are one of the parts of local government that people most frequently engage with because they take a strong interest in the future development of their neighbourhood and community. The vision set out in the Planning White Paper is for a planning system which supports vibrant, healthy sustainable communities, promotes the UK’s international competitiveness, and enables the infrastructure which is vital to our quality of life to be provided, in a way that is integrated with the delivery of other sustainable development objectives, and ensures that local communities and members of the public can make their views heard. We have said in the Planning White Paper that on the whole the planning system works well and allows us to encourage a thriving economy, deliver vibrant, healthy communities, protect and enhance our environment, and ensure people have a say in how their area develops. In particular, the plan-led approach with development plans and policies at both local and regional level on which the public is consulted, and which then provide a framework for assessing individual planning applications, is a good one. But we also made it clear that the long-term challenges for planning are increasing. Over the coming decades, debate and decisions about where development should take place are likely to become more diYcult. We want to ensure that the whole planning system, including both the town and country planning system covering residential and commercial development and some infrastructure, and also the range of separate consent regimes for specific types of infrastructure, is fit and able to cope with these challenges. These challenges include the need to reduce emissions of greenhouse gases to tackle climate change and to use natural resources wisely. At the same time we need to support economic development so that it can generate high quality jobs in the context of rapid globalisation. We also need to see more Processed: 17-11-2008 19:19:56 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG9

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houses built so that people can aVord decent homes. And we need to put the right infrastructure in place to meet our needs for travel, energy, water and public services. The Planning White Paper set out our detailed proposals for reforming the planning system, building on Kate Barker’s recommendations for improving the speed, responsiveness and eYciency in land use planning, and taking forward Kate Barker’s and Rod Eddington’s proposals for reform of major infrastructure planning. It proposed reforms on how we take decisions on nationally significant infrastructure projects—including energy, waste, waste-water and transport—responding to the challenges of economic globalisation and climate change. It also proposed further reforms to the Town and Country Planning system, building on earlier improvements to make it more eYcient and more responsive. Many of these reforms are to be taken forward through the framework set out in the Planning Bill. But we have already given a boost to renewable energy through our new Planning Policy Statement (PPS) on Climate Change, published in the run up to Christmas last year. This is already helping create an attractive environment for innovation and for the private sector to bring forward investment in renewable energy. At the same time, the PPS has given local communities real opportunities to influence and take action on climate change. Regional and local planners are expected to actively plan for, and support, renewable energy generation, including through allocating and safeguarding sites. Regions are expected to set targets for renewable energy capacity in line with national targets, or better where possible. Applicants for renewable energy should no longer be questioned about the energy need for their project, either in general or in particular locations. These new rules are being supported in the Planning Bill by a statutory duty on local planning authorities to take action on climate change.”

7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? The costs of generating electricity from renewables are in general currently higher than their conventional fossil fuel and nuclear counterparts. For renewables the cost per MWh depends largely on the technology involved. The generating costs for hydro, for example, are relatively similar to those for coal, gas and nuclear. In general, however, most renewable technologies, in particular emerging technologies, are currently not competitive and so require government support. Over the summer we will be consulting on a package of measures that we believe will deliver the most cost-eVective approach to meeting our renewable energy targets. A barrage or other tidal scheme in the Severn Estuary could make a significant contribution to renewable energy targets but the Government needs to understand better the costs, benefit and impact of such a project before deciding whether to support it. A two-year, cross-government feasibility study is now underway, looking at all the issues involved. UK energy industries are the largest single contributors to UK greenhouse gas emissions, contributing over a third (54 million tonnes) of the total amount of carbon dioxide emitted in the UK. As such, generating our energy from sources that emit low or even zero levels of greenhouse gases, such as renewable energy, oVer the potential of significant carbon emissions reductions.

8. How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? On 13 March 2008, Poyry Energy (Oxford) Ltd published a report, commissioned by BERR, assessing the impact of the commitment made at the Spring Council 2007 to deliver 20% of EU energy consumption from renewable sources by 2020. The report is available on the BERR website. The analysis analyses the relative costs and renewable resource availability across the UK and other EU member states for the electricity, heat and transport sectors. It examines the mix of technologies needed to achieve the target across the EU member states. The study presents the cost of achieving the target through diVerent methods, ranging from least cost trading mechanisms through to domestic deployment in individual member states. Whilst it is recognised that a step change in the deployment of renewable technologies will be needed to deliver the 2020 target, the study does not explore the barriers that need to be overcome for this to take place or the financial support schemes that would be needed to be introduced across member states. Processed: 17-11-2008 19:19:56 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG9

216 the economics of renewable energy: evidence

We will be consulting this summer on the Government’s Renewable Energy Strategy. The consultation will contain assessments of the impacts on the electricity, transport and heat sectors of a potential scenario for meeting the EU2020 target.

9. If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? Preliminary estimates based on research studies in the electricity, heat and transport sectors suggest that a cost- eVective split in renewables technologies would result in just under half of the target met through the electricity sector, one third in heat and one fifth from transport. However, within the overall framework the Government puts in place, it will be for the market to determine what kinds of technology should be used, and to deploy it. The contributions from diVerent sectors will largely depend on how the market and supply chain respond to the signals we provide, and how successful we are in overcoming the constraints on development. The burden-sharing methodology proposed by the Commission did not take into account the cost-eVective potential of renewables in the Member States. Therefore without eVective and workable trading provisions which allow for a more eYcient use of renewable resources across Europe, it will not be possible to meet the 20% EU target cost-eVectively. Independent research carried out by Poyry consultants for the UK suggests that full and open trading could save the EU up to ƒ7 billion a year in 2020, chiming with the Commissions own impact assessment—although this is unlikely to materialise. In addition to the trading regime based on the transfer of Guarantee of Origin certificates that has been proposed in the directive, the Commission have also proposed that some renewable electricity that is produced outside the EU, under certain conditions, could also contribute to targets.

10. How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? Installations that are covered by the EU Emissions Trading Scheme (which includes large electricity producers and energy-intensive industrial sectors) are required to submit one EU allowance for each tonne of CO2 that they emit in a given year. In Phase I (2005–07) and II (2008–12) many of these allowances were allocated to installations for free but in future Phases it is likely that a significant number of allowances will be auctioned. The combination of the cap on emissions and a high rate of auctioning will mean that electricity producers will face the full cost of carbon associated with the power that they generate. Generation that does not produce carbon emissions will not face a carbon price and will, therefore, face a cost advantage relative to conventional fossil generation. All things being equal, a higher carbon price will increase the incentive for zero-carbon generation capacity and would potentially result in greater deployment of renewable capacity. The Government is currently working with the Commission and other Member States to agree a new and ambitious ETS Directive for Phase III of the scheme. It is unlikely however that the level of the carbon price in Phase III will be suYcient to remove the requirement for special support for renewable energy. The EU ETS is a market-based instrument that should result in the emissions cap being met in an eYcient manner through bringing on the least-cost abatement options. The level of the carbon price that would be required to incentivise some of the renewable energy technologies that would be required to meet the target (eg, ƒ100/ tCO2 abatement through oVshore wind & ƒ260/tCO2 through wave) is significantly higher than any feasible level of the EUA price that we are likely to see in Phase III of the scheme. Furthermore, there are certain renewable technologies (in particular, biofuels for transport and renewables heat in the domestic and service sectors) that do not fall under the EU ETS, so would not benefit from a higher carbon price.

11. What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? The Renewable Transport Fuel Obligation as currently envisaged will mean carbon dioxide emissions from motorists should be cut by around 2.5 million tonnes a year by 2010 as biofuels are gradually introduced into fuel sold at UK filling stations. The Impact Assessment for the Renewable Transport Fuel Obligations Order 2007 (SI 3072) estimated that the main cost of the RTFO up to 2020 is the expected higher costs for biofuels Processed: 17-11-2008 19:19:56 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG9

the economics of renewable energy: evidence 217 compared to the fossil fuels they replace. This predicted a range of possible discounted total fuel costs (in 2007 prices) from £2.1 billion to £5.8 billion. Other costs identified were the cost of new facilities, administrative costs and some costs at forecourts. The Impact Assessment therefore estimated the total cost at between £2.4 to £6.6 billion whilst the total benefit of the policy was estimated at between 0.8 billion to 0.9 billion in terms of the value of reducing carbon emissions. In the future the great hope for biofuels is that over time their costs will come down and their carbon savings go up. It is through creating a market for today’s biofuels that we will encourage the advancement of second generation biofuels. Second generation biofuels are generally those produced from feedstocks other than food crops, for example, “green waste” which can reduce pressure on land and the amount of waste that goes into landfill. Some biofuels will oVer good carbon savings whilst others may not oVer any at all. In the light of the concerns that have been expressed recently around some of the wider, indirect impacts of first generation biofuel production, the Government has asked the Renewable Fuels Agency to lead a review of the emerging evidence on these impacts. The review will look at the wider environmental and economic impacts of biofuels and will also look at the evidence on GHG-savings of current and future biofuel technologies and identify key areas of uncertainty. The review’s findings will be published in late June, and should help to ensure that we have the right evidence base to support decisions on the future of the Renewable Transport Fuels Obligation (RTFO) scheme and longer-term targets. 16 June 2008

Examination of Witnesses Witnesses: Malcolm Wicks, a Member of the House of Commons, Minister of State for Energy, Mr Simon Virley, Head of the Renewable Energy and Innovation Unit, and Ms Tera Allas, Chief Economist Energy Group, Department for Business Enterprise and Regulatory Reform, examined.

Q472 Chairman: Welcome, Minister, and your tune of, over time, £100 billion. While it is unlikely to oYcials. Thank you very much for spending some impact energy bills before 2010, in 2020 both gas and time with us this afternoon to answer our questions. electricity bills will be higher due to the cost of Thank you, too, for your written submission that renewable energy, and it is important to recognise came earlier. I believe you would like to say a few that. That said, we remain committed to meeting the words before we start, and we would be very happy if target and significantly increasing the use of you do just that. renewable energy in the UK over the next twelve Malcolm Wicks: If I could just spend a couple of years. Underpinning this strategy will be the aim to minutes on that, my Lord. May I thank the achieve this step-change in the most cost eVective Committee for giving us the opportunity to talk to way. Decisions on renewable energy cannot be made you and discuss with you the topical issue about the merely on the basis of cost in the short term; it is cost of renewable energy. May I introduce my two about tackling climate change and securing energy colleagues who are with me: Simon Virley is the Head supplies for the future. The Stern Review into the of Renewable Energy and Innovation Unit in the economics of climate change was absolutely clear Department for Business and Enterprise, and Tera that we needed to invest now or else pay a higher Allas is our Chief Economist in the Energy Group. price later. We are clear that we will need renewables Over the last few weeks this issue of renewable energy but they will not be the only solution; we also need a has become headline news, as we have just published range of other technologies including nuclear and the consultation on a UK Renewable Energy including carbon capture and storage if we are to Strategy. We are seeking views on a wide range of decarbonise the power sector by 2050 and meet our measures that will enable the UK to meet our legal CO2 reduction targets. While renewable energy can commitment to the EU’s target that 20 per cent of reduce our dependence on fossil fuels we also believe Europe’s energy should come from renewable it will create thousands of business and employment sources by 2020. Our proposed share of this target is opportunities, developing cutting-edge, innovative likely to be 15 per cent, and I know the Committee green-collar industries. We are committed to Members are aware that this is a challenging and ensuring that as many of these benefits and jobs are certainly ambitious target, but it is a target that the created here in the United Kingdom. Thank you. UK was instrumental in designing and we are committed to meeting. No doubt you will have seen Q473 Chairman: Thank you very much. Perhaps I the newspaper reports that accompanied the could open the questions and ask you, would not a publication of the consultation. We have not tried to more robust and higher carbon price remove the need hide the fact that meeting this target will require for the cumbersome support mechanisms that additional investment from the private sector to the currently exist for renewable energy? That would be Processed: 17-11-2008 19:19:56 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG9

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15 July 2008 Malcolm Wicks, Mr Simon Virley and Ms Tera Allas the route, I suppose, of least intervention by the will see quite a steep decline in price. I cannot quite Government in the market and, by extension, would predict when but when you see the extra give the greatest opportunity for the market to manufacturing coming on in places like China, at the respond in an eYcient way in reducing CO2 moment, of course, PV (photovoltaics) are really emissions. expensive. We are reforming the renewables Malcolm Wicks: We do not believe that they are obligation through the Energy Bill, which is now alternatives; we think they are complementary. before your House—it has been in the Commons—so Certainly, we are supporters of the European that it can become a rather more sophisticated Union’s Emissions Trading Scheme and we are instrument, more sensitive, to the costs of some of the ambitious about its development, not least in Phase newer renewable technologies. So we will be 3. Even if you look ahead to Phase 3, people are supporting oVshore wind more than onshore wind; projecting a price for a tonne of carbon dioxide at, we will be supporting even more the marine say, about ƒ35, whereas probably to develop technologies of tidal and wave. renewables alone through this mechanism might require a carbon price of somewhere between ƒ100 to ƒ200 [per tonne of carbon dioxide]. We feel that, in Q476 Lord MacDonald of Tradeston: Nuclear power addition to the ETS, the carbon price mechanism, we cuts carbon emissions without the intermittency do need to support renewables in other ways, and problems of renewables, and recently Sir David King principally, of course, through the development of argued that nuclear power should account for 40 per our existing Renewables Obligation. cent of maximum electricity demand. What is your view? Malcolm Wicks: My view is that diversity should be Q474 Chairman: Do you think, therefore, if there is the name of the game when it comes to our energy a substantial gap between the prospective carbon strategy and our strategy for tackling global price under the trading system and what would be warming. This Government has been through a required to encourage renewables to the pace that process of, first, deciding whether or not civil nuclear you would wish, that is a failure somehow in the power should have a role to play going into the mechanism of the trading system? future. We decided, following the Energy Review, Malcolm Wicks: I think the trading system, the ETS, that the answer to that question should be yes, that is still a fairly new creature, and certainly in the early we would authorise the private sector to come phase, or so, it was very much trying to move forward with proposals for new nuclear reactors. We forward—sometimes tumbling over, sometimes need a suite of policies. Not that you were saying so, staggering. However, I think as we see the my Lord, but I know that some would like to see this development towards Phase 3 we start to see the as a battle, a tussle, between renewables on one side development of a more robust mechanism where and nuclear on the other. I think that is a naı¨ve there will be a significant amount of auctioning, for analysis. We need a range of things, both for the example, and as the price increases we can start to nation’s energy security and to tackle global build into it aviation, which is very important. I hope warming. I would not put a percentage on nuclear; at it will become a means of helping but not fully supporting carbon capture and storage as well as the moment, about a fifth of our electricity (probably renewable technologies. So carbon trading is very, 18 or 19 per cent) comes from nuclear. Those reactors very important but, to repeat the point, we do not feel are old, they will need to be decommissioned and we that for the foreseeable future it will help fully fund probably will not see the first nuclear reactor built in renewables; we do need other mechanisms. this country and operational until 2018, probably, being optimistic (some might say more realistically 2020). I personally would hope we would then get a V Q475 Chairman: I guess, if the di erence between significant proportion of our electricity from nuclear, the prices is not a measure of the weakness of the for the reasons that you gave: that it is clean and trading system then it certainly indicates that green and it helps us in terms of our energy security. renewables will be a very high cost means of However I think it is diYcult to put a proportion achieving reductions in CO2 emissions. on that. Malcolm Wicks: Yes, and I said in my opening statement that there are significant costs attached. Although the diVerent technologies have diVerent Q477 Lord Turner of Ecchinswell: Can I ask a histories and some are better developed than others, follow-up to that? Would you have any concerns if they are new technologies still and, like any new nuclear did grow as Sir David King has suggested to technology, they are relatively expensive. Over time 40 per cent—ie if, over the next 20 years, pre-market we would hope that the unit costs would come down. operators bring forward proposals that would take it I think that is not an unreasonable expectation: if you to 40 per cent of our electricity? Do you think there is look forward to, say, the costs of photovoltaics, we any reason why there should be a policy concern Processed: 17-11-2008 19:19:56 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG9

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15 July 2008 Malcolm Wicks, Mr Simon Virley and Ms Tera Allas about that, or is that a completely acceptable result, support for renewables (and you say in your written if it was to occur? evidence that you are going to need further support) Malcolm Wicks: I think it is perfectly acceptable, is far greater than the support for nuclear, which I should it occur. I am just trying to think whether I suppose, to some extent will include—I do not know need to qualify that in any technical way. My what it will be—the disposal of nuclear waste, or colleagues might want to come in on that. I do not storage. Anyhow, it is far higher for renewables, think so. As I say, we do not set a target, we do not which does not seem to me to be even-handed at all. set a proportion, we do not talk about the number of What is the reason for that? nuclear reactors that should be built, but I think for Malcolm Wicks: I must check the record but I do not reasons of climate science and energy security a think I used the term “even-handed”. I hope the significant proportion coming from nuclear impression I was giving earlier on was that I did not alongside the renewables would be very, very see this as some kind of battle and contest between important. I should say to this Committee that I renewables in one corner and nukes in the other worry greatly about climate change and global corner; I think we need both, for diVerent reasons, warming, although I think, with one or two which I have touched on. I understand what you are exceptions, we are winning the argument on that saying, Lord Lawson, because it certainly is the case one—with one or two important exceptions I think that whereas we have made it clear that public we are winning the argument on that one—but I spending will not subsidise or support in any way worry more about energy security and national nuclear going forward, we are in diVerent ways, security. When you look around the world at where partly through public spending on R&D and partly the energy resources are concentrated, they are not by the provision of the renewables obligation, always in places best associated with human rights subsidising renewables. I think the reason we are and democracy, and the more energy we can produce doing that is these are a range of relatively new for ourselves in a troubled world, I think, the better. technologies. Like many technologies, they need The only thing, if I may add, is that I think that, both support in the early stages of their history. So you are for reasons of diversity but, also, for the operation of right to point out that in that financial sense we are the Grid and the network, we also need fossil fuel not being even-handed; we are giving more support generation to give us the flexibility; it can come on to renewables compared to nuclear, which we are not stream faster, as I understand it, than nuclear, and directly supporting at all. therefore we will need fossil fuel power stations— hopefully, as soon as possible, with CCS. Q480 Lord Kingsdown: Just a short question. I thought you said, Minister, that it would be 2020 Q478 Lord Lawson of Blaby: As a follow-up to my before any new nuclear plants were in operation. If Lord the Lord Chairman’s question, and on the little that is right, does it really take 12 years to get a new sort of aside that the Minister made, I would make nuclear plant going? another aside that I think it is a matter, on your side, Malcolm Wicks: Probably, yes. The most optimistic of assertion rather than argument, and that is not scenario I have seen is that there possibly could be what we are about in this Committee. one up and running by 2017 and then some others Malcolm Wicks: No. talk about 2018. I guess I am just being a little bit more cautious when I said 2020. We are now going Q479 Lord Lawson of Blaby: What we are about in through, really, quite a complicated process; the this Committee is seeing what the economics of Energy Bill is still going through Parliament and the renewable energy are and, also, how they compare Planning Bill is still going through Parliament (with with the needs of achieving the objectives that the some controversy, I understand) and that is part of Government has stated. I am slightly puzzled: you the structuring that we need to develop. There will be say you are even-handed as between nuclear and environmental assessments to look at appropriate renewables. That is the impression you gave. sites for new nuclear, and there will be a National However, in fact, in your own written evidence you Policy Statement, should the Planning Bill achieve have said that the costs of generating electricity from Royal Assent—so there is a quite a process here. renewables are, in general, currently higher than their Meanwhile, we are being very active; we have asked conventional fossil fuel and nuclear counterparts. In the appropriate agencies, the nuclear inspectors, the other words, you say very clearly that nuclear, in Health and Safety Executive and other bodies to do your opinion, is cheaper. So that might suggest that what we call a generic design assessment to look at a it is sensible because (we are a wealthy economy but short-list now, I think, of three technologies—three not all that wealthy) we will be looking to find the possible nuclear reactors—which are being best buy. So if you did have a bias it should be in developed in diVerent parts of the world to see favour of nuclear, but, in fact, you have a whether they are fit for purpose in terms of UK pronounced bias in favour of renewables. The requirements. So a great deal of work is going on, but Processed: 17-11-2008 19:19:57 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG9

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15 July 2008 Malcolm Wicks, Mr Simon Virley and Ms Tera Allas that will take some years and then perhaps it takes renewable electricity in 2020 are, roughly speaking, four years to build a nuclear reactor, which is why I £4 per megawatt hour for the kind of short-term am being cautious (but I do not think too cautious) system balancing costs for each unit of electricity in in suggesting that the first one will not be up and 2020, and then further costs of enabling the back-up running until well by the end of the next decade. that needs to, basically, stand aside in order to kick in when the wind is not blowing, of roughly £0.9 per megawatt hour—so adding up to, in total, roughly, Q481 Lord Turner of Ecchinswell: Tempted as I am £5 per megawatt hour of electricity. to make an aside on Lord Lawson’s aside on the Minister’s aside, I will avoid that and move to the third question, which relates to the other thing which Q482 Lord Turner of Ecchinswell: Which would be Sir David King (who I do not think could be accused about a half-a-pence per kilowatt hour—just so that of being unbiased between renewables and nuclear) we can relate it to a retail electricity price of 10p or said last week, which was that he believes there is a 11p per kilowatt hour. problem in going above, say, 20 per cent reliance on Ms Allas: Yes. wind because of intermittency. Clearly, if we go to 30 Lord Turner of Ecchinswell: So £5 per megawatt or 35 per cent from renewables we will probably be hour, just for clarification, is half-a-pence per going above 20 per cent in wind, maybe to 25 per kilowatt hour. cent. At what level do you think intermittency problems become seriously large, or do you believe that it is simply a matter of the cost of back-up, and Q483 Lord Lawson of Blaby: Could I ask one specific what do you think is the rough cost of that back-up? question? What do you regard as the capacity credit Malcolm Wicks: Let me speak briefly, and then I will of wind power? ask my colleague, Tera Allas, to come in on this. If it Ms Allas: There are various diVerent analyses. Our is confirmed that our target as part of the wider analysis suggests that it, first of all, depends on the European target is that 15 per cent of all energy (of penetration of wind; it depends on the penetration of course, it is not just electricity it is all energy) should other renewables on the systems—so intermittent come from renewables by 2020, then given the need renewables from, let us say, marine—but, broadly for some real caution about renewables and motor speaking, the estimates we have seen are between 10 cars—where the current concerns are about and 20 per cent capacity credit, which of course is not biofuels—a significant eVort needs to be made in the same as the amount of electricity that that wind terms of renewable electricity. We are talking in farm will be generating, which is the load factor, terms of, maybe, 30 to 35% of our electricity by the which is more like 30 or 40%. end of the next decade, 2020, coming from renewables. All the advice we receive is that that is possible—the National Grid can be run that way. Q484 Lord Lawson of Blaby: That is an unusually The National Grid itself is doing a great deal of work optimistic estimate. The value used to run the Danish looking forward to see what a grid would look like. wind power said it is approximately 0, and most The challenge is to the Grid, with a significant people think it is around 5%. proportion from renewables and then, after that, Ms Allas: It obviously depends on how you define perhaps, a growing proportion from nuclear. So a capacity credit. The way we have decided to define it great deal of technical work is being undertaken. So is so you can compare apples to apples. In other although I have learnt a great deal from David King words, what is the contribution of wind to security of when he was the Government’s Chief Scientist, I do supply, and in order for you to maintain exactly the not agree with his analysis of this one. Tera, would same level of security of supply, how much can you you like to come in? rely on the wind to blow is a probabilistic concept. Ms Allas: I will, perhaps, just go into some more The nukes are not there 100% of the time either, the detail. That is basically our understanding and all the gas-fired power stations are not there 100% of the engineers, consultants and other groups of people we time either, so you have to take into account the have spoken to suggest that there is not any technical average availability and the distribution of the reason why you could not have very significantly availability, and its correlation with demand. If you more wind on the system. So even at penetrations of take all those things into account, then the 30-35 per cent, technically, the system should be able probabilistic calculation gives you roughly 10 to 20%, to operate. You would need changes to the system in but it does depend on what you assume about the the form of faster response, or more fast response, distribution of wind. Obviously, wind does not blow utilised more often when the wind speeds change every hour of the year; the more distributed it is unpredictably, and that would incur some costs. The across the country the more it will be available, and kind of costs that have been estimated by SKM (a there are very few hours when there is no wind at all consultancy for us) in the scenario of 30-35% across the UK. Processed: 17-11-2008 19:19:57 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG9

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Q485 Baroness Hamwee: You mentioned the need conventional plant. That is just one of the scenarios for fossil fuel generation to back-up renewables. How that we have illustrated in the consultation much? Secondly, are new nuclear plants flexible document. As the Minister says, these are scenarios enough to provide back-up to renewable generators? based on a host of assumptions: change the I take it that is part of the assessment that you are assumptions and you will get a diVerent result. carrying out at the moment, but perhaps you could just amplify on that. Q488 Chairman: Can I ask a follow-up question on Malcolm Wicks: Yes, I think so. I am loath to answer this? The fossil fuel generators which are needed as a the “how much” question, partly because I do not back-up to renewables will run at a lower than know and partly because for good or ill—I think normal percentage of capacity, and that implies that broadly for good—we are no longer in the era of there will be an increase in carbon emissions per unit national planning, where a minister of power sits in a of electricity. That is the nature of the engineering, we chair and writes out percentages or figures. I have are told. Could you let us know what would be the net said earlier that looking forward, as it were, nuclear impact on carbon emissions taking account of the use becomes more and more important, but after 2020; of that back-up capacity, assuming that we are at renewables will have become very important by 2020. about 30-35% renewable-generating electricity? However, I think, partly for reasons of just security Mr Virley: I can give you that figure. The net saving and diversity, we also need fossil fuels, and partly from the scenario that you have illustrated is about because it helps the system operate in extremis.Itis an additional 20 million tonnes of carbon dioxide in easier to bring electricity into the Grid from a gas- 2020. That is outside of the sectors that are already fired power station or a coal power station, so I capped by the Emissions Trading Scheme. That is the understand, than it is to turn up the switch, as it were, net impact of the scenario of 32% renewable which is not easy with nuclear power or from electricity that has been modelled in our renewables renewables. It is very interesting that two winters ago, consultation. when we faced some quite serious diYculty because Malcolm Wicks: May I just add to that that. Much the Langeled pipeline had not come on tap from depends on the development of carbon capture and Norway and we were facing quite a tight winter, with storage or sequestration technology. It is diYcult to gas prices rising very high at one stage in that winter predict that but the UK is a leading nation in CCS. for several months, I think, some 50 per cent of our We will have our demonstration project hopefully electricity was from coal, whereas it is normally demonstrating the technology by 2014, something of about one-third, I believe. that order, and what one would like to think is that during the course of the next decade we will see CCS Q486 Baroness Hamwee: Forgive me, I do not mean being demonstrated and becoming more this as impertinently as it is going to come out— universalised as a technology, and if that turns out to Malcolm Wicks: Do not worry. be the case, as I would hope and expect, then it aVects the scenarios about CO2 emissions. Chairman: I think we will come back to carbon Q487 Baroness Hamwee:—national planning or not, capture a little later. Lord Layard? you are going to have done internal calculations, and are you not going to have to share those in order to take the public with you along what are controversial Q489 Lord Layard: This is pursuing the same point routes, whether one is in favour, on the one hand, of that we have been discussing about the overall renewables above all, or, on the other, nuclear? wholesale cost of electricity. In your consultation Malcolm Wicks: My colleague Simon Virley will come document you suggest that that would fall with in but what I was implying was that although, renewable generators replacing the more expensive obviously, for certain work you need to make certain conventional ones. How is that consistent with this assumptions, I do not think, in a competitive energy problem of having to keep the conventional ones market, it is sensible for government to prescribe the going because of intermittent output? number of gigawatts from this source or that source, Malcolm Wicks: May I turn to my chief economist. or the precise amount of nuclear energy. Simon, do Ms Allas: First of all, we need to separate price and you want to come in? cost. I was not sure if I heard you correctly. Mr Virley: Just to say that we have published some scenarios in our consultation document, and one of Q490 Lord Layard: I corrected myself. the scenarios that we have illustrated in here, which is Ms Allas: I probably misheard you but what will go a scenario with 32 per cent of electricity coming from down is the wholesale price of electricity. As we renewable energy, the sort of additional plant you discussed earlier, costs in terms of the electricity need on the system is about 30 gigawatts of system would have to be higher because we are additional renewable capacity coming on by 2020 implementing some of the higher cost renewables, relative to 2008, and about 17 of additional but putting that aside, the lower price of wholesale Processed: 17-11-2008 19:19:57 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG9

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15 July 2008 Malcolm Wicks, Mr Simon Virley and Ms Tera Allas electricity is a result of having more renewables because our analysis suggests that the last one pushing out some of the higher cost fossil fuel plants percentage point, as it were, of renewable energy in the short term. How that is consistent with there would probably be the most expensive point to still being quite a lot of fossil plant on the system is achieve, and if through some sensible trading within because the fossil plant will kick in exactly in the the EU we can bring that cost down then on behalf of hours when the wind is not blowing, which is exactly the consumer we should do that. the hours in which prices will be much higher than that average, so even though the time-weighted Q493 Chairman: Leaving the trading to one side just average price will come down, there will be maybe for a moment, just as a matter of fact, at the five or ten per cent of hours in the year when prices European level has the decision been taken that our are very significantly higher than average and they target should be 15 per cent? Put slightly diVerently, will be suYciently high to remunerate the very low if the Government were not committed to it, is there load factor plants within the conventional system, so still any scope for renegotiation? if you look at the hours in which the low load factor Malcolm Wicks: It is still being discussed and I think plant is generating, they actually make quite a lot of we will know for certain by next spring, and so there money from those few hours. is discussion going on, but the Commission have produced draft targets for Member States and all Q491 Lord GriYths of Fforestfach: The document Member States are now looking at the implications. just referred to by my colleague Lord Layard says We have published our document and the discussion that the Government is committed to the EU still goes on, but it is going to be there or thereabouts. proposal of 15% of energy from renewables by 2020 and then it makes a very strong statement for a Q494 Lord Best: You have picked up on the point, Government document and says it is a “very Minister, that one extra per cent from 14 to 15 is challenging target”. The question is: are you really extremely expensive and you have explained how it committed to this? If you are committed to it and you may be possible to negotiate around that, but is the find as we approach 2020 that this target is not going 15 per cent target only really possible if British to be met, does that mean that you will be increasing funding of renewable energy projects overseas can your subsidy for example to the renewables sector? If count towards the target? I were a producer in that sector and I thought I might Malcolm Wicks: I think it is possible to hit the target switch from what I am doing and go into renewables, without that. The idea that there could be some extra what could you tell me which would ensure that this European development and funding as part of a would be a profitable investment, because it is a trading mechanism is something that is being highly uncertain situation? discussed. It is not clear yet what the final European Malcolm Wicks: First of all, I hope that strong judgment will be on that. statements and Government documents are not always strangers! Q495 Lord Kingsdown: But Lord Best just made the point that going to 15 per cent is far more expensive Q492 Lord GriYths of Fforestfach: There have been than going to 14 per cent. Is this not an argument for many failures along the way! negotiating a slightly lower target or is that not done? Malcolm Wicks: I think we are just talking in plain Malcolm Wicks: I think it is an argument for looking English; it is hugely challenging. These are not weasel at sensible ways of hitting the target. I do not myself words. We are committed to achieving this target, but think it is an argument for saying let us try to go for to show the scale of the challenge, we are talking ten per cent, but the idea of trading is perfectly about percentages of all energy, at the moment sensible. It is something we have looked at. We have probably 1.5 per cent of all energy is coming from also suggested in the past that because we are ahead renewables in this country. It is now about five per of other European Union nations (Norway is where cent of our electricity but only 1.5 of all energy, so it we are I think) in developing carbon capture and is obviously a ten-fold increase that we need to storage, we have said to the Commission could this achieve, so, yes, it is very challenging. We have set out not somehow be allowed for in the setting of our in our Renewable Energy Strategy Consultation target, not because CCS is renewable because it is not published a week or so back how we hope to move in but because this is another expensive technology, so that direction. We do need to have regard to cost- there has been some discussion on that as well. eVectiveness because I am very conscious that at the moment at the top of the agenda in terms of energy Q496 Lord MacGregor of Pulham Market: I would concerns is the sheer price of energy, and certainly gas like to turn to biofuels and ask you a number of and electricity in the home, so we need to be sensible questions about that. As you know, the recent about this, which is why we are in favour of some Gallagher Review called for biofuels to be introduced trading within the European Union on these issues more slowly because of uncertainties, one of them Processed: 17-11-2008 19:19:57 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PAG9

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15 July 2008 Malcolm Wicks, Mr Simon Virley and Ms Tera Allas being the estimated recent eVects on food prices, and using the right kind of land and making sure that we others as well, and the Government seems to have are using the right biofuels that are actually reducing accepted that target of introducing it more slowly. greenhouse gas emissions and that is the evidence The review also warned that current policies might that we are trying to pull together now. increase rather than cut greenhouse gases not least because of the implications on forests. I am not talking about the UK but in Brazil, et cetera. I would Q498 Lord Lawson of Blaby: Minister, you said that V be interested to know your view about that as to you were very concerned about cost-e ectiveness whether you agree that current policies on biofuels because you were concerned about the burden on the might increase rather than cut greenhouse gases? consumer which is going to be a huge burden for Then the question of timing: does this derail your them and we can already see that. We have already plans for ten per cent of fuel to come from renewables established that as far as nuclear is concerned, the V if we are becoming more cautious about biofuels, and cost-e ectiveness yardstick really goes out of the also your hopes of reaching the EU’s overall window, but you have focused particularly on using V renewables target by 2020? trading to increase cost-e ectiveness. I would like, if Malcolm Wicks: I do not think it undermines our I may, to ask you two questions on that front which eVorts to hit those targets, but clearly we are all really are closely related. One comes from the learning a great deal about biofuels and, as you have excellent written evidence which your Department said, what we have learned is partly about the law of has given us, where you say, and I will remind you: “Without eVective and workable trading provisions unintended consequences. We have learned that Y there is absolutely no point in, as it were, appeasing which allow for a more e cient use of renewable resources across Europe, it will not be possible to Western consciences on climate change and on V renewables if it leads to terrible consequences in meet the 20 per cent EU target cost-e ectively. terms of food crops, so I think all of us in this debate Independent research carried out by Poyry are pausing for thought and reassessing, and the Consultants for the UK suggests that full and open Gallagher Review has helped us do that, but perhaps trading could save the EU up to ƒ7 billion a year in Simon Virley could add to my general comments. 2020, chiming with the Commission’s own impact Mr Virley: In essence, we are slowing down on assessment—although this is unlikely to materialise.” biofuels to make sure that we are reviewing the My first question is why is it unlikely to materialise? evidence to make sure that we have got the right The second question is this: clause 25 of the Climate Change Bill lays down that “the Secretary of State sustainability criteria in place to ensure we bring V through the right biofuels, biofuels that will reduce must ensure that at least 70 per cent of the e ort greenhouse gas emissions rather than increase them, undertaken for compliance with section 5(1) is and that science is evolving rapidly all the time. What achieved by domestic emissions reductions...”In the Gallagher Report has said is that ten per cent by other words, there is a maximum of 30 per cent that can be done by trading, even if 40 per cent or 50 per 2020 might still be possible but it would only be V possible subject to those stringent sustainability cent would be much more cost-e ective, so why do criteria being in place, so that is the basis on which we you have that clause? are moving forward now. Malcolm Wicks: I think when looking at this you need to judge it against a number of criteria and one which we would emphasise is cost-eVectiveness. Another Q497 Lord MacGregor of Pulham Market: Can I ask one—and I touched on this earlier—is about energy a supplementary and perhaps declare a form of security. I think we need to do our best in the future interest in that I was a former Director of Associated to get the balance right. We can argue what the right British Foods which has got the British Sugar balance is between the energy that we will need to biofuels plant. In terms of greenhouse gases and import into our nation as our own reserves of oil and feasibility and the law of unintended consequences, gas in the North Sea and wider UKCS decline and we are really talking about imported biofuels by and getting the balance right between imports and what I large because the eVects are actually in the United would simply call home-grown energy. I do feel States and Latin America rather than here where the myself that the more energy we can produce in this aspect of alternative land use and food crops does not country as a safeguard for the nation is very sensible. really apply. I imagine that is the case and it is the Therefore if it was theoretically sensible to build all import of biofuels that is the main concern. the renewables in Asia or Africa, I do not think that Mr Virley: It is one of the concerns and obviously we would help us in terms of our energy security. The need to also look at the full carbon cycle of the other thing is a commonsense test. I think when biofuels that are being produced, including the people see a British target they would not be terribly transportation element, so in a sense moving forward convinced if we hit most of that target by doing things on this we need to get the sustainability criteria in abroad. I think it is sensible that we do most of it here place and the controls in place to ensure that we are in Britain. Processed: 17-11-2008 19:19:57 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG9

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15 July 2008 Malcolm Wicks, Mr Simon Virley and Ms Tera Allas

Q499 Lord Lawson of Blaby: I do not think that heat is something of a poor cousin amongst really answers the question, if I may say so. It does renewables and not enough attention has been paid not answer the question as to why in your written to it. What would be the best way to boost the evidence you say that the increased cost-eVectiveness amount of renewable heat? Would it be to bring fuel through trading is unlikely to materialise. Also I used in heating into the European Emissions Trading would say that the trading does not in any way Scheme or to create one of the schemes described in diminish our energy security. In fact, if it did, we your consultation paper, perhaps a renewable heat would not want to do as much as that, but I do not incentive or indeed a renewable heat obligation? think it does and I do not see how it does. Malcolm Wicks: May I say that I think there is an even Malcolm Wicks: I suppose I am just working on an wider issue about heat. Many people feel, as you have assumption that a wind farm here in Britain in said, that it has been a poor relation, the Cinderella extremis is more likely to be secure than a wind farm that has never been invited to the ball, and it is not on some corner of Europe. That is what I was getting just about renewable heat, there is a lot of concern in at. Let me ask my colleague Tera Allas to comment terms of power generation where we waste the heat. on the other point you raised. There is a lot of new interest therefore (it is an old Ms Allas: On the question about why the benefits of idea) in combined heat and power. We asked the trading are unlikely to materialise, it should say OYce of Climate Change to do a review in terms of unlikely to materialise “in full” so the ƒ7 billion that heat strategy and they have produced their report has been estimated per annum savings is a theoretical and now in terms of renewables in our Renewable number, assuming perfect competition, assuming a Energy Strategy Consultation document we have perfectly liquid trading mechanism, and assuming discussed the issue. We want to see a debate and we essentially least cost way of meeting of the EU’s want to see new evidence on this. The consultation overall target across 27 Member States. Obviously it document favours tentatively a renewable heat is underpinned by some assumptions about costs and incentive over an obligation, so we are now looking resources in each of those countries. In reality, the at mechanisms to encourage renewable heat, but my kind of trading mechanisms that are being negotiated colleague Simon Virley can add to my remarks. within the scope of the EU Directive are not going to Mr Virley: As the Minister says, we see renewable be those kinds of fully liquid and totally competitive heat as being a big part of helping meet these targets. and entirely transparent mechanisms and indeed, The issue we see with bringing heat into the EU ETS even if they were, there are no markets that are totally is essentially one that it will not provide, as we were perfect competition in this world, so it is a kind of describing earlier, a suYcient price incentive for the theoretical number. We would expect that with a take-up of these new technologies, and therefore we good trading system, which still was within the scope have looked at more dedicated support mechanisms of the Directive you could probably get most of it, to try and incentivise the take-up by households and but you will never get the full theoretical benefits of businesses of renewable heating. We are favouring competition in any market. tentatively in the consultation document a renewable Lord Turner of Ecchinswell: Could I clarify heat incentive primarily because of the diYculties of something in what Lord Lawson said. I think I am imposing an obligation-style system on such a right in saying that the amendment to which Lord fragmented market with a large number of suppliers, Lawson refers is an amendment not in the Bill— so an incentive mechanism would essentially be a Lord Lawson of Blaby: Yes it is; I have got it here. I subsidy for those new heat technologies, whether it is think Lord Turner ought to know the Bill since he is ground source heat pumps, biomass boilers, and that Chairman of the Climate Change Commission subsidy will be paid for by a levy on fossil fuels used Committee! for heating elsewhere. That is what we are proposing Lord Turner of Ecchinswell: My understanding was but obviously we are now looking for views as to that the issue of how much we should rely— whether in fact that is the best mechanism going Lord Lawson of Blaby: I will read it out. It is section forward to incentivise a step change in renewable 25 and it is headed “UK Domestic EVort” and heat. subsection (1) says: “The Secretary of State must ensure that at least 70 per cent of the eVort undertaken for compliance with section 5(1) is Q501 Chairman: Do you think there are any other achieved through domestic emissions reductions and countries in Europe that have got heat right in terms domestic removal of sinks.” This is in the Bill. of incentives and obligations? Mr Virley: The truth is that heat has been a Cinderella in most countries and most countries are Q500 Chairman: I think I must bring us back to only now starting to think about the policy asking questions of our witnesses and perhaps I can frameworks that they need to put in place to lead the way by asking you a bit about renewable incentivise both low carbon and renewable sources of heat. A number of witnesses have suggested to us that heat. 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15 July 2008 Malcolm Wicks, Mr Simon Virley and Ms Tera Allas configurations of gas grids and so on, which gives Q504 Lord Turner of Ecchinswell: Can I ask how you them diVerent policy questions, the truth is that not see the role of renewable energy relative to other ways many countries have moved in the direction of that we could reduce carbon emissions, for instance producing discrete and significant incentives for heat by demand reduction energy eYciency but also how technologies. Germany is one country that is starting you see the potential for carbon capture and storage to move in recent months in that direction but there and when you might anticipate that that will be are very few others that have done so to date. available? Malcolm Wicks: That is a question that could lead on to an attempt to outline a comprehensive energy Q502 Chairman: Not even heat and power together? strategy and we have written the book and you have Mr Virley: Combined heat and power has received seen it, sir, so I do not need to do that. I do think any incentives in some countries, yes, but obviously most sensible energy policy and any sensible climate policy combined heat and power is still gas-fired and starts with trying to reduce energy demand, certainly therefore not renewable, so whilst we are keen to in economies like the United Kingdom, and therefore incentivise all forms of low-carbon technology, for energy eYciency needs to be given a far higher the purposes of meeting this target of course we priority, whether that is about technology, whether it would need to focus on renewable sources of is about the development of new engines for our combined heat and power of which there are some, motor cars which use fuel more eYciently, or whether and that is what our renewable heat incentive would it is about how we can start to think about retrofitting act to do. the existing housing stock with insulation and maybe Malcolm Wicks: Copenhagen is an interesting renewables in a more ambitious way than we have example of combined heat and power on a major done hitherto. I would start with energy demand and scale. There is a power station there producing a lot trying to reduce it and therefore I would start with of heat for thousands of homes in Copenhagen and energy eYciency and then after that you get on to the retail too but it is co-firing; they actually have great things we have discussed and, in no particular order, bales of straw going as well as coal and it is not all you get on to the development of renewables, you get renewable, so in diVerent parts of Europe there is on to the development of a new generation of nuclear interesting practice. reactors, and you certainly get on to clean coal technology and CCS.

Q503 Lord Macdonald of Tradeston: Your consultation paper shows that the unit cost of Q505 Lord Layard: As a sort of follow-up I wanted electricity micro-generation is roughly double that of to ask how you see the role of basic research and other renewable energy so why are you considering development in tackling the problem of climate policies to support micro-generation when it is such change. This is a fairly recent challenge and I wonder if you think that enough money is going into the basic a high-cost option? research and development which may find solutions Malcolm Wicks: I understand the question and I think which we have not even been discussing today? There given the economics of the moment, if we were just must be huge public good issues involved here. focusing on the economics, we probably would not Whoever does this, a firm cannot be sure of trapping want to look seriously at micro-generation, but I the returns to a basic discovery that it might make. think there are other issues. Personally I feel strongly Are you satisfied with the international eVort? Do that if we are to hit our climate change targets, if we you feel that the world of science and technology has are to reduce CO2 by this enormous amount, then given suYcient priority to the climate change this should not just be a matter for big institutions challenge and do you think our community is doing and the G8 or the EU and government and big enough and getting enough support for doing it? organisations. I think many citizens are concerned Malcolm Wicks: I guess you could always argue about about climate change and many citizens are what we mean by ‘suYcient’, but I think I am concerned about waste more generally and many confident that worldwide and certainly here in the concerned citizens are asking how they can United Kingdom, a great deal of extra resource is personally make a diVerence. They are the recycling now being brought to bear on this issue. generation, as it were, who are now thinking about Internationally the International Energy Agency are their own dwellings and are interested in micro- doing very important work. They have produced a generation. Much of it is still a very expensive technology handbook which compares and contrasts technology and if in suitable ways we can enable the economics of diVerent technologies. I think that people to become micro-generators, build some is an excellent piece of work. I am impressed that you renewables into their dwellings, I think that hits the go around many parts of the world and there is huge button in terms of active citizenship even if it does not development in some of these technologies. Recent pass a pure economic test. announcements on CCS in Canada come to mind for Processed: 17-11-2008 19:19:57 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PAG9

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15 July 2008 Malcolm Wicks, Mr Simon Virley and Ms Tera Allas example. Here at home we have established the this technology. Whether that is the passing of a Energy Technology Institute which is now up and year— running. It is public/private sector and many major companies have subscribed. We are still looking for Q507 Lord Lawson of Blaby: Or wishful thinking, one or two other subscribers. The idea is to have a whatever you like? budget of £1 billion over a 10-year period to invest in Malcolm Wicks: No, I really do not think so. I think energy technologies. You have also got now part of what Alistair Darling was reminding the House is our sister department DIUS the Technology Strategy that this is a new science, a new technology, new Board, which is funding developments in energy. I engineering and at scale has never been tested. Of think they have done some recent support for wind course what we are doing in the United Kingdom is turbine technology, for example, because we should to fund this. You talked about the cost and it is not assume that the kind of turbines we need in the expensive and will cost hundreds of millions of future oVshore are exact replicas of what we have pounds for one demonstration project. We want to onshore, to put it in rather over-simple terms. We test CCS with a coal power station, stripping out the have a fund of money ready to fund the deployment CO2, transporting it and successfully storing it almost of marine technologies and so on. There is the certainly in a depleted oil or gas reservoir under the Environmental Transformation Fund that we also North Sea. No-one has tested that yet, but this is not, have. We have set these out somewhere and I will however, science or technology fiction because, as make sure, my Lord, that you see the documentation. you know, sir, around the world there are diVerent The research councils too of course are very active practical examples of diVerent aspects of the CCS and we are beginning to see new developments in cycle. The Norwegians have demonstrated in the university departments. There is certainly new Sleipner field that you can return CO2 successfully to interest in nuclear science for example in our a depleted reservoir. They have been doing that now universities. for a dozen years and geologically it is behaving as one would expect, which I think in plain English Q506 Lord Lawson of Blaby: A brief parting shot on means it is still there. I have seen in Mississippi myself carbon capture and storage which Lord Turner asked the use of CO2 to inject into oil reservoirs for you about. Obviously we do not have the faintest idea enhanced oil recovery and so on. There are a number at the present time of what it will cost but, leaving of practical examples of this but, as yet, not the full that aside, more fundamentally one of your demonstration. I think I would be as confident as a predecessors in Energy, Mr Alistair Darling, told the mere social scientist can be that the technology will House of Commons last year that the technology work. needed for carbon capture and storage might never become available. That is what he said to the House Q508 Chairman: Thank you very much indeed, of Commons, presumably on advice from your Minister, to you and your colleagues for spending so excellent oYcials. Is that still the position? If not, can much time with us this afternoon in answering our you explain to us what has happened over the past questions. Although our report when it comes out year that has changed it? will not be a direct response to your consultative Malcolm Wicks: I come from further south in the document, I hope it will be a useful contribution in country and therefore by temperament I am more—I your consultative process. have to choose my words carefully—optimistic about Malcolm Wicks: Thank you very much indeed. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [SO] PPSysB Job: 408616 Unit: PG10

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Written Evidence

Memorandum by Professor Andrew Bain I am a semi-retired professional economist. During my career I have been a Professor of Economics at several Scottish universities and from 1984–90 was chief economist at Midland Bank. I have been involved with a number of government bodies, including the Wilson Committee on the City, and I served on the Board of Scottish Enterprise for eight years. I am currently a Member of the Competition Appeal Tribunal. I participated in the Royal Society of Edinburgh’s Inquiry in Energy, though I resigned before the Report was completed, and I have given evidence at Public Inquiries into the proposed Beauly-Denny transmission line and the proposed Beinn Mhor wind farm in Lewis.

1. Introduction 1.1 I welcome this opportunity to submit evidence to the House of Lords Select Committee on Economic AVairs in connection with its inquiry into The Economics of Renewable Energy. My particular concern is with the costs of electricity transmission and their impact on the location of renewable generation. It is important to ensure that the incentives and constraints facing developers provide the correct locational incentives and do not lead to electricity consumers incurring unnecessarily high costs for renewable energy. Consideration of transmission costs led the RSE Committee to express its “grave doubts about the overall economic rationale for large-scale wind turbines in locations remote from the consumer.”1 1.2 In a properly functioning system electricity consumers would pay the same for energy, regardless of the location of the generator. By setting renewables targets, imposing renewables obligations on distributors, and granting variable entitlements to renewables obligation certificates (ROCs), the UK and Scottish Governments have fragmented the energy market, so that energy generated from renewables receives a premium which varies according to the source of the energy. As a result consumers will pay more for wave or tidal energy than for energy from wind, and more for energy from oV-shore than from on-shore wind. Nevertheless, within each category the cost to the consumer should be independent of the location of the generator, with any diVerences in production and transport costs being reflected in the profits of the generating companies.

2. Transmission Charges 2.1 For this to occur the costs necessarily incurred in transmitting energy from a generator in, say, Central Scotland to a distribution company in, say, the London area would be charged to the generator. That is not what happens in practice. There are two categories of transmission cost: the capital and operating costs of the grid, and the transmission losses associated with transmission through the grid. Charges to generators for the use of the grid are determined using National Grid’s Transmission Network Use of System (TNUoS) Model. No account is taken at present of transmission losses. 2.2 Transmission losses are materially greater when the generator is distant from the consumer, and are likely to be particularly large for generators in the Western and Northern Islands of Scotland. For example, generation losses on the proposed interconnector to transmit energy from the Western Isles as far as Beauly, west of Inverness, are said to amount some 5% of output, and for energy generated in the Western Isles there would be further significant losses during transmission from Beauly to the south of England. Failure to take account of these losses means that generators are receiving payment for significantly more energy than they are delivering to consumers—a cost that is borne by electricity consumers generally. Devising a robust method for allocating transmission losses to generators, and imposing charges correspondingly, should now have a high priority. 2.3 The TNUoS model used at present is not an appropriate model for allocating the capital and operating costs of the grid to intermittent generators. It is a peak demand pricing model, in which the charges for grid access reflect the use made of the grid at peak demand periods. This presupposes that the grid configuration is determined by the configuration of generation and demand at that peak demand. For intermittent renewables generation this is patently not the case—what is required is a model that takes account of peak supply. 1 Royal Society of Edinburgh Inquiry into Energy Issues in Scotland, Final Report, June 2006, p.73 Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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2.4 To illustrate. The scale of wind generation in Scotland is geared to exporting energy from Scotland, and the peak transmission requirement from intermittent generators in Scotland will occur when demand in Scotland is low but wind conditions are favourable. For example, on a warm and windy summer night Scotland’s two nuclear power station plus its conventional stations operating at minimum practical loads already provide more generation than is required to meet Scotland’s demand, with the result that some energy has to be exported through the Scotland-England interconnector. To provide suYcient capacity to accommodate the proposed high level of wind-energy from Scotland the interconnector will have to be substantially reinforced, as will major sections of the grid to the north and south of it. This has absolutely nothing to do with meeting peak UK demand. Indeed it is not unlikely that peak UK demand will coincide with severe winter conditions, when an anticyclone with still air predominates over the UK and wind turbines make very little contribution to supply. 2.5 There are other weaknesses in the TNUoS model. It allocates less than 30% of the costs of the grid network to generators, with the rest being payable by distribution companies. There is no evident rationale for this division, though it may reflect the fact that there is a high degree of redundancy built into the system to ensure that the supply of energy to consumers is secure in the event of unavailability of sections of the grid. This redundancy is of much greater benefit to consumers than to generators.2 The TNUoS model also assumes that the grid has a 40-year life and that capital charges can be geared to that period. Wind farms are currently assumed to have a 25-year life, and may well be superseded by other technologies after that period. If account was taken of the “stranded asset” risk TNUoS charges for wind farms would be higher. 2.6 Transmission charges may also be adjusted by government direction under Section 185 of the Energy Act 2004. This gives the government power to adjust the transmission charges for generators in particular areas if it seems likely that renewable generation would otherwise be discouraged. The government has decided that the additional costs of transmission from the Scottish Islands should be halved. There is no evidence that industrial-scale wind turbines in eg the Western Isles will be needed in order to meet the Scottish Government’s 50% target for renewable generation (see below), so there is no compelling case for encouraging wind farms in Lewis. Nevertheless, if a new connector for the Western Isles is constructed and generators pay for only half of the additional costs, consumers throughout the UK will end up paying more for wind-energy from these Islands than from other regions. 2.7 The upshot is that the present method for determining transmission charges needs a radical overhaul to ensure that the financial incentives facing wind farm developers encourage development where the costs, including transmission costs, to the consumer will be lowest.

3. Scottish Renewables Policy and the Need for Investment in the Grid

3.1 Regardless of the financial incentives for renewables development, actual development is frequently constrained by planning requirements and by access to the grid. These are driven by a mixture of economic and political considerations. 3.2 It is generally accepted that within a European context conditions in the north of Scotland, and in particular in the Western and Northern Isles, are uniquely favourable to renewables generation from wind and marine sources. This has led many to conclude that there is a very strong case for developing wind and marine generation in these areas. Statements such as “Strategically it make sense to harvest renewable energy where the resource is greatest and operational eYciencies can be maximised”3 are treated as axiomatic by the Scottish government and by regional authorities in Scotland. The need to transport the energy to the market, and the costs incurred in doing so, are overlooked. Far from it being axiomatic that renewable energy should be harvested where the resource is greatest, it is appropriate to harvest energy in these areas only if the operational eYciencies are suYcient to compete with other renewable energy sources and, in addition, more than compensate for any higher transmission costs. 3.3 This “axiom” underlies much of Scottish policy towards renewables. It is prayed in aid in support of the Scottish Government’s target for renewables generation equal to 50% of Scotland’s electricity consumption in 2020. It is reflected in continuing political pressure to relieve generators in the North of Scotland and the Islands of part or all of the transmission costs, as evidenced by, for example, Section 185 of the Energy Act 2004, statements from Scotland’s First Minister that the TNUoS charges are unfair, and a recent consultancy 2 The TNUoS model is intended to ensure that the diVerential between generators whose energy is transmitted on average over great distances and those that are close to their markets reflects the diVerence in the grid costs, but the absolute amounts of the charges are not geared to the absolute costs involved. 3 Beinn Mhor Power Public Local Inquiry, Scottish Government Reference IECIEC/3134, Precognition of Calum Iain Maciver, Head of Economic Development of Comhairle nan Eilan Siar, paragraph 69(5). Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 229 report commissioned by the Highlands and Islands Councils and Highlands and Islands Enterprise recommending greater “socialisation” of grid costs.4 3.4 It is also reflected in the Scottish Government’s draft National Planning Framework 2 (NPF2)5. This includes amongst its “national infrastructure priorities” proposed grid reinforcements to facilitate the attainment of the target and promote marine development. The proposals emanate from the Scottish grid companies, Scottish Hydro Electric Transmission Limited (SHETL) and Scottish Power Transmission Limited (SPTL), in response to applications for connections from potential wind farms. The total capacity in these applications, many of which will be turned down on planning grounds, greatly exceeds the amount required to attain the 50% target. There is no evidence that the grid priorities set out in NPF2 have had regard to the likelihood of planning consents for the proposed developments, to the capacity of the existing grid to cope with increased levels of intermittent generation, to the economic viability of wind farms if the transmission costs had to be borne by the generators, or to the likelihood that wave and tidal development will ever prove to be economic. Moreover, the Scottish Government’s 50% target is predicated on much of the energy being exported to the Midlands and South of England. To the extent that generators do not pay for all the necessary grid reinforcement consumers throughout the UK, not only in Scotland, will have to bear the cost. 3.5 NPF2 recognises that individual proposals for strengthening the grid will not be implemented without first being approved by Ofgem. Before approving investment in the grid Ofgem conducts an economic assessment, with the object of ensuring that the investment is economically justified. So the fact that a particular proposal for new grid is identified as a national priority by the Scottish Government does not necessarily mean that it will happen. But it does mean that there is strong political and industrial pressure on Ofgem to approve the proposal, particularly when Ofgem’s objectives include not only the promotion of eYciency and economy in supply and transmission but also to contribute to the achievement of sustainable development6. If Ofgem turns down a Scottish “national priority” on the strength of an unfavourable economic assessment it will inevitably be accused both of failing to contribute to sustainable development and of thwarting the policies of the democratically-elected Scottish Government. There is danger that this may put more strain on the regulator than it can reasonably be expected to bear, with consequences for the rigour of its economic assessment.

4. Ofgem’s Economic Assessment Methodology 4.1 When so much depends on Ofgem it is essential that its methodology for assessing the economics of grid reinforcement is sound. Unfortunately, this cannot be relied on: the methodology adopted by Ofgem in 2004 for identifying its baseline programme of grid investment was defective7. Its assessment of the proposed Beauly-Denny grid line provides an example. 4.2 Ofgem approved the Beauly-Denny grid reinforcement as part of its baseline programme on the strength of an economic analysis in which it compared the present value of the costs of constraining oV energy— primarily the cost of compensating generators—if the grid was not reinforced with the present value of the costs of reinforcing the grid to accommodate additional wind farms in the north of Scotland. It found that for the likely level of wind farm development the constraint costs exceeded the cost of the line, and that the reinforcement was therefore justified. 4.3 Ofgem’s methodology was defective in several respects. It assumed that the same level of security in the system was required for intermittent generators as for conventional generators8. That meant the capacity of the existing grid was taken as some 500MW less than it could actually transmit9, ie the existing grid system between Beauly and central Scotland was capable of transmitting another 500MW before constraint costs would have to be incurred. 4.4 No allowance was made for the rather obvious possibility of storing energy by operating hydro stations in a way that complements wind power and reduces the need to constrain oV wind-energy in peak generating conditions10, and the scope for using the pumped storage facility at Foyers to add to the demand load at wind power peaks, and thus avoid constraining oV, was underestimated; no account at all was taken of the possibility of operating the Cruachan pumped storage facility (in the SPTL area) to provide temporary storage for peak generation from wind farms along the southern part of the proposed line. 4 Xero Energy, Grid Connection of the Scottish Islands—A Strategic Viewpoint, 20 June 2007. 5 National Planning Framework for Scotland 2: Discussion Draft, paragraphs 226–9 6 Electricity Act 1989, Section 3A (a) and (ba), as amended. 7 Ofgem, Transmission investment for renewable generation—final proposals, December 2004. 8 SHETL now recognise that a lower level of security—a “non-firm connector”—is appropriate for wind-energy from eg the Western Isles. 9 Subject to some relatively minor capital spending for “operational intertripping” to protect the rest of the system if a fault arose. 10 SHETL now recognises that this is feasible. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

230 the economics of renewable energy: evidence

4.5 No account was taken of the cost of the further substantial grid reinforcement to the south of Denny that would be required to enable the energy to be transmitted to southern England. 4.6 Taken together these omissions fatally undermined Ofgem’s conclusion that the Beauly-Denny proposed grid line was economically justified11. 4.7 Apart from these errors of implementation, Ofgem’s methodology is inherently unsound because it eVectively double-counts the ROCs associated with constrained-oV energy. This is because Ofgem assumes that the wind farm developments will be in place, and then calculates the constraint costs, including the cost of the ROCs. So, the income from ROCs is taken into account, first by the developer in deciding whether to proceed with the development and then again by Ofgem in respect of any energy that has to be constrained oV the system when considering the case for grid reinforcement. A proper economic assessment of the whole project, namely constructing a wind farm together with any associated grid reinforcement that will be needed, would take the total capital cost and compare it with the total expected net revenue from the development, counting the ROCs only once. 4.8 My conclusion is that experience to date does not give grounds for confidence that Ofgem will ensure that only those grid reinforcements that are justified by economic fundamentals receive authorisation. It is in the financial interest of the grid companies to maximise the size of the grid, because once authorised they can reasonably expect to earn profits on it over its assumed 40-year life. The political pressures will always weigh in favour of allowing proposals to proceed. The present arrangements put too much weight on the proposals from the companies, with too little independent objective scrutiny, backed by political muscle, of the need for reinforcing the grid. The outcome is likely to be that electricity consumers in future will be saddled with unnecessarily high grid costs. 13 June 2008

Memorandum by Carolyn Barker

1. Why we are Responding to this Call for Evidence

Question 6 1.1 I am a home and small-holding owner in the small parish of East and West Newbiggin, in Darlington. There are a small number of properties in out parish where two farmers have decided to place eleven 100metre high wind turbines. On the plans drawn up by the energy company, “Pure renewable energy’ there are wind turbines sited at around 400 metres from people’s homes. 1.2 Energy companies are actively seeking out land owners, through farming publications, to host wind turbines on their land. The subsidies and payments to farmers are resulting in wind turbines being placed in inappropriate areas due to pure greed and financial gain. The farmer is this case should expect to reap a large financial payment from the energy company, plus recurrent funding on an annual basis for the rental. The amount of money available seems to take over from any reasoned thoughts about siting the turbines in appropriate spaces. 1.3 The wind turbines will be visible for miles and will impact greatly upon six local villages. Research on noise interference is still non-existent, and although the energy companies deny this is an issue, there are many examples of turbine sites near to homes where the noise and flicker has been unbearable. I believe that wind turbines should be sited in industrial areas, or oV shore where people’s quality of life will be unaVected. I am also concerned about democracy for our small local communities, as I suspect that when this goes into the formal planning process, our voice will not be listened to because of the overwhelming government support for renewable energy at all costs. 1.4 The other issue is over the value of properties situated near to wind turbines. This is not an allowable issue to bring to planning committees, but it is a very real issue for people like us, whose home is their investment for the future. Whilst some farmers choose to profit greatly from the turbines, fellow neighbours have to tolerate a reduction in house value, and an uncertain future. 1.5 We live in a beautiful valley, which has already been marred by two wind turbine sites, both of which can be seen from my property. How long will it take the government to realise that our beautiful countryside will soon be lost to what will become industrial sites. Once wind turbines have been built on agricultural land, it changes the site to industrial usage, and therefore in the future we could lose huge swathes of our green countryside. 11 Ofgem did not give evidence to the Beauly-Denny Public Inquiry. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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1.6 In terms of carbon emissions, has any independent research been carried out in calculating the actual eYciency of wind turbines against the carbon emissions generated for the concrete bases? Most turbines in the country are running at only a 30% loading. One particular wind farm close to use have not been turned on for the last four months. 14 June 2008

Memorandum by Mr Derek Birkett

Introduction 1. My name is Derek George Birkett. I am a graduate and chartered electrical engineer having a lifetime of experience within the electrical supply industry and resident in the Scottish Highlands for thirty-eight years. My initial training and employment with the CEGB in Yorkshire was with coal based generation, progressing onto project installation and commissioning at five power station locations, three of which were nuclear. In the mid seventies I moved into hydro generation then Grid system operation with the North of Scotland Hydro Electric Board before retiring in 1999 as shift System Control Engineer. All my employment has been in the nature of direct practical application. 2. Over the last two years I have actively opposed renewable development at three Public Inquiries. The first two with wind farm applications at GriYn and Lochelbank in Perthshire and the last as one of two independent witnesses for the strategic session of the Beauly-Denny Public Inquiry into a 400kV transmission line application. 3. The evidence I wish to present is submitted on an individual basis. There is a substantial annexe component included with material taken from the above public inquiries. This is preceded by a submission made to the Royal Society of Edinburgh for their Inquiry into Energy Issues for Scotland. The scope and complexity of technical issues make it diYcult to oVer statements without verification but to limit my submission to a manageable length, many appendixes have not been included. 4. In opposition to these developments, my motivation has been the impact on the local environment and knowledge of the destabilising eVect that projected wind resource would have on the GB Grid System. This has been reinforced by the perceived excessive overall cost and unease with the political justification for renewable policy.

Evidence for Interconnection 5. Throughout the evidence contained in the Annexes12 it has been assumed that the basic integrity of the GB Grid System would be maintained as a self-contained entity. This assumption can no longer be maintained in the light of recent developments. The means of fully coping with intermittence show no indication of being reinforced except by increased interconnection with the continental grid. This may well be a commercial solution in that an alternative use for trading exists but in so doing a one-way dependency on the continental grid is created. This may well be unacceptable for political, strategic and security considerations. 6. With increasing intermittent renewable generation capacity, primarily wind resource, being introduced onto the GB Grid system, the expected means to accommodate this additional intermittence would be shared by a larger proportion of spinning reserve, supported by generation plant with fast reacting response, such as Open Circuit Gas Turbines (OCGT) or hydro-electric pumped storage schemes. A recent Ofgem/Berr report (reference 1) suggests no increased capacity for this category of generation whilst indicating a significant increase of interconnection capacity around 2010 (figure 1). 7. Current HVDC interconnection capacity with the GB Grid system has a 2GW connection from France and a 450MW connection between Northern Ireland and Scotland. A projected 1300MW interconnection with the Netherlands is indicated within the National Grid SYS statement. 8. There has been a recent announcement by National Grid and Elia (Belgium transmission system operator) to study the potential for a 700-1300MW interconnection (reference 2). 9. An all Ireland study into investment for renewable development would double the existing 450MW interconnection from Scotland to 1GW, with fast acting generating plant also contemplated. Part of their problem with intermittence would then be passed onto the GB Grid system (reference 3). 12 Annexes not published here. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

232 the economics of renewable energy: evidence

10. An assessment of Grid connection options for the Scottish Islands proposed a Norwegian interconnection that could tap the high load factor wind resource potential of Shetland (reference 4). (This report provides detailed options for subsea cable connection to England). 11. The recent government decision to promote a UK nuclear programme from continental suppliers would suggest reactor sizes to be in excess of existing construction. This would expect to increase the requirement for fast response plant. The questionable option of promoting interconnection as a substitute solution remains.

Hydro Electric Development 12. From a technical standpoint hydroelectric generation with storage has the most attractive features of any energy resource and its limited exploitation arises from the significant capital outlay required that is essentially a long-term investment. The scale of potential resource within the Scottish Highlands reflects existing development and its exploitation would provide an ideal operational complement with any intermittent resource (reference 5).

Perspective of Approach 13. System operation demands a predictable framework for eYcient operation. There should be a presumption against the introduction of uncontrollable generation onto the GB Grid system. The situation that currently exists imposes on the Grid authority technical adaptation leading to ineYcient operation, complexity and cost. Although accommodation can be made, no single body is responsible to make overall technical and cost judgements to prevent excessive and distorted decisions from being implemented. 14. All these technical measures are essentially a response to overcome potential instability that must question just how essential is this policy justification. Grid integrity is being sacrificed to accommodate unpredictable and uneconomic generation whose capacity must be almost replicated with alternative firm generation. Any scale of renewable development undermines the economic basis of such standby capacity. A structural impediment is being introduced to what purpose and advantage?

Evidence within Annexes (not printed in this volume) 15. Annexe 1 presented as evidence to the Royal Society of Edinburgh, investigates the response times of standby generation plant and describes the circumstance of Grid operation. Appendix A reveals the unsustainable targets promoted by the Scottish Executive whilst Appendix C was a published letter in response to a prominent article in the technical press advocating wind development (reference 6). 16. Annexe 2 examines the issue of wind resource load factor as presented in a precognition for the Lochelbank Public Inquiry. It updates similar evidence as given to the GriYn Public Inquiry in July 2006. The evidence reveals excessive estimates for carbon saving and provides actual energy production details from all Scotland wind projects. Only appendixes 5 and 11 have been included. 17. Annexe 3 is a precognition for the Beauly to Denny Public Inquiry questioning the scale of intermittent wind resource capable of being absorbed onto the GB Grid system. This issue would impact on the assumptions made to justify not only the Beauly to Denny transmission line but with supporting substation infrastructure along its route. Intermittence issues are explored, as are future uncertainties. Appendix 7 and 12 are included. Appendix 6 is identified as Annexe 1 above. The closing submission is also presented. 18. Annexe 4 is in two parts. A Summary paper was judged necessary for clarity when presenting this Rebuttal paper in the course of the Beauly/Denny Public Inquiry. These documents were submitted but not accepted by the Reporters. 20 May 2008

List of References 1. Transmission Access Review—Interim Report. 76 pages. Ofgem (08/08) BERR(URN 08/609). 31 January 2008. 2. Engineering & Technology. IET Journal Page 13. 23 February-3 March 2008. 3. An Island Grid Study. 16 pages. Irish Dept of Communications, Energy and Natural Resources. January 2008. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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4. TNEI Report. Assessment of the Grid Connection Options for the Scottish Islands. 129 pages. Highlands and Islands Enterprise. 27 March 2007. 5. Review of potential hydroelectric development in the Scottish Highlands. Electronics and Power. Pages 339–346. (IEE Journal). May 1979. 6. Feedback. IEE Review. Page4. July 2004. Response to article Assimilating Wind by David Milborrow. IEE Review. Page 9–13. January 2002.

Supplementary memorandum by Mr Derek Birkett As part of my submission for the Call for Evidence into the Economics of Renewable Energy I would wish to include the following addendum: 6A. An alternative fast acting response can be obtained from demand management. However, this option is not straightforward and could only present a limited solution. Aside from industrial use, any commercial/domestic load demand is largely constrained to water and space heating on dedicated circuits. In summer conditions this response would be minimal at the very time when the Grid system would be most vulnerable to problems of intermittence. There needs to be incentive with both tariV and installation measures, administered by distribution utilities and whose costs would be correctly categorised as balancing services for the national Grid, eventually to be borne by the consumer. 11A. Recent enquiry into planned reactor size has established an electrical power output of approximately 1600MW for new construction. This compares to the existing single example of Sizewell with power output of 1320MW. I believe system design currently accepts 1250MW for any single loss event. I would be grateful if this clarification could be included with my submission. 13 June 2008

Memorandum by Bishopton Village Hall Management Committee

PROPOSED WIND TURBINE SITE—WEST NEWBIGGIN, NR BISHOPTON, TEESSIDE Please accept this letter on behalf of Bishopton Village Hall Management Committee as our strong objection to the siting of the above proposed wind farm. Whereby we welcome any attempt to increase renewable energy as such, it is simply that this location is totally wrong for the following reasons: a) The proposed site is within 2 kilometres radius of a number of rural villages: Redmarshall, Carlton, Stillington, Sadberge, Great & Little Station, Elton, but specifically Bishopton which has conservation status where the turbines will be within a few 100 metres of the nearest houses. None of these villages are shown on the Developers site location plan. b) The proposed site will be adjacent to an ancient monument, namely Castle Hill, which we understand should be protected under existing planning law. c) Teesside Airport management have already written to the Developers advising that they will object to the proposal on safety grounds due to possible radar interference. d) And finally, the sheer size of the turbines (100 metres high with 80 metres blades) will totally dominate the local countryside visually, together with the always understated very high noise levels which will be carried towards this village on the prevailing south-westerly wind. We trust that this objection will receive your due consideration. 13 June 2008

Memorandum by Dr Phillip Bratby 1. My name is Phillip Bratby. I have a first class honours degree in physics from the Imperial College of Science and Technology (London University) and a doctorate in physics from SheYeld University. I am a semi-retired energy consultant, being the sole director of my own consultancy company. 2. This is my personal evidence to the inquiry by the House of Lords Economic AVairs Committee into the economics of renewable energy. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

234 the economics of renewable energy: evidence

3. In calling for evidence, the Chairman stated “Renewable energy is expected to play an important role in reducing carbon emissions but we know comparatively little about the possible costs and benefits.” 4. I am not surprised by the statement concerning the lack of knowledge as it has been apparent for a long time that the renewable energy policy is target-driven and is not based upon any engineering or economic analysis of the eVect of renewable energy on the UK electricity supply industry. 5. The BERR (formerly the DTI) does not appear to have the expertise to formulate a sensible or sustainable energy policy. It has been badly informed by NGOs such as the UK Energy Research Council and the Sustainable Development Commission (SCD), which has produced a series of seriously flawed documents. These documents contain little evidence and much opinion and dogma. This is not surprising given the background of the Commissioners of the SCD. 6. The premise for renewable energy is largely based on the perceived necessity to mitigate climate change. Climate change is currently assumed by politicians and the media to imply global warming. However, the concept of anthropogenic global warming is politically-driven by the IPCC. All the forecasts by the IPCC for global warming are based on computer models of the earth’s climate. The behaviour of the climate is non- linear and chaotic and the mechanisms which influence climate are not fully understood. Having worked for several years with computer models of complex flow and heat transfer systems, which were validated against experimental data, I suggest that there is no validity for the results of any computer models of the climate. With so little understanding of how the climate works (the eVect of the sun, ocean currents, the atmospheric layers and constituent gases etc), it is evident to any scientist that, with so many degrees of freedom and unknown parameters, the computer models can produce any outcome desired. If we cannot reliably calculate the weather more than a few days in advance, how is it that the IPCC can make forecasts for the climate 100 years ahead? I submit that there is no validity for global warming forecasts. Evidence shows that the earth has been cooling since 1998 despite increased CO2 emissions and increasing CO2 concentrations in the atmosphere. None of the climate models have predicted this cooling whilst CO2 concentrations have been increasing. Instead, the IPCC has perversely claimed that the cooling is masking the long-term warming and that more funding is needed to improve the climate models. 7. Sir John Houghton (Scientific Assessment for Intergovernmental Panel on Climate Change, Chairman and Co-Chairman 1988-2002.) said “Unless we announce disasters no one will listen” and “The impacts of global warming are such that I have no hesitation in describing it as a ‘weapon of mass destruction’”. Incorrectly predicting future disasters (mainly for political reasons) is nothing new. I give some examples from individuals and government organisations: In 1969, environmentalist Nigel Calder warned, “The threat of a new ice age must now stand alongside nuclear war as a likely source of wholesale death and misery for mankind”. CC Wallen of the World Meteorological Organisation said, “The cooling since 1940 has been large enough and consistent enough that it will not soon be reversed”. In 1968, Professor Paul Ehrlich predicted there would be a major food shortage in the U.S. and “in the 1970s...hundreds of millions of people are going to starve to death”. Ehrlich forecast that 65 million Americans would die of starvation between 1980 and 1989, and by 1999 the US population would have declined to 22.6 million. Ehrlich’s predictions about England were gloomier: “If I were a gambler, I would take even money that England will not exist in the year 2000”. In 1972, a report was written for the Club of Rome warning the world would run out of gold by 1981, mercury and silver by 1985, tin by 1987 and petroleum, copper, lead and natural gas by 1992. Gordon Taylor, in his 1970 book “The Doomsday Book,” said Americans were using 50% of the world’s resources and “by 2000 they [Americans] will, if permitted, be using all of them”. In 1975, the Environmental Fund took out full-page ads warning, “The World as we know it will likely be ruined by the year 2000”. Harvard University biologist George Wald in 1970 warned, “civilisation will end within 15 or 30 years unless immediate action is taken against problems facing mankind”. In the same year Senator Gaylord Nelson warned, in Look Magazine, that by 1995 “somewhere between 75 and 85% of all the species of living animals will be extinct”. In 1885, the US Geological Survey announced there was “little or no chance” of oil being discovered in California, and a few years later they said the same about Kansas and Texas. In 1939, the US Department of the Interior said American oil supplies would last only another 13 years. In 1949, the Secretary of the Interior said the end of US oil supplies was in sight. Having learned nothing from its earlier erroneous claims, in 1974 the US Geological Survey advised that the US had only a 10-year supply of natural gas. There is no evidence to suggest that the current global warming predictions have any more validity than any of the above dire warnings. 8. It would be precipitate to bet the house on global warming when, based on historical evidence and not computer models, global cooling may be more likely. The evidence is in the form of the Milankovitch cycles (the earth’s eccentric orbit around the sun, the tilt of the earth’s axis and the precession of the earth’s axis), the sun-spot cycles and the behaviour of ocean currents such as the Pacific Decadal Oscillation (El Nino and La Nina) and the Atlantic Multidecadal Oscillation). The natural climate change consisting of cooling lead to ice-ages and warming (inter-glacial periods) is well known. Scientists independent of governments for funding Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 235 have long been sceptical about global warming claims made by government funded and government controlled scientists. Global warming would in fact be more beneficial to mankind than would global cooling which could lead to the next ice-age.

9. Thus, although it would be prudent to minimise man-made CO2 emissions, the need for drastic action which could have a serious eVect on the future well-being and prosperity of the citizens of the UK and the need for renewable energy, are seriously called into question. 10. My evidence is mainly concerned with wind power stations for generating electricity. This is because these form the major component of all major country’s future renewable energy policies. Hydro-electric power has much greater benefit as a source of renewable electricity than does wind power, but the hydro-electric potential in the UK is very limited due to the shortage of suitable rivers and geography. 11. The most important consideration for the future electricity supply has to be security of that supply. The eVect of the supply of electricity not meeting the demand at some time in the future would be potentially disastrous, possibly resulting in deaths, food shortages, transport problems and collapse of the country’s infra- structure. Economic ruin could follow if international financial business relocated from the UK due to uncertainty about the security of electricity supply. 12. Security of supply implies firm generation capacity with a margin above the peak (winter) demand. The firm generation is supplied by baseload power stations (such as nuclear) and despatchable (controlled by the grid) power (such as coal, gas and certain renewables such as hydro-electric—including pumped-storage schemes such as Dinorwig). Neither on-shore nor oV-shore wind power stations contribute significantly to the security of supply because the electricity is intermittent, unpredictable and is embedded on the grid (not despatchable). Invariably peak winter demand occurs during extreme cold weather when a high pressure system settles across northern Europe and drags in cold continental air with little wind. Even with wind turbines distributed widely across the UK, under these low wind conditions, little electricity would be generated by wind turbines. Wave power is intermittent and unpredictable and tidal power is intermittent but predictable. 13. Many nuclear and coal-fired power stations are coming to the end of their lives and need to be replaced to ensure continued security of supply. Thus non-despatchable renewable sources of electricity must not distort the electricity market and divert resources from the necessary construction of new baseload and despatchable power stations. 14. In answer to your first issue, non-despatchable renewables should only be considered after security of supply has been guaranteed. The current UK policy of subsidising wind power at the expense of secure electricity generation is typical of most countries such as USA, Canada, Australia, New Zealand, Germany, Spain and Denmark. It contrasts with the policy of France and Sweden which have placed security of supply at the heart of their policy. 15. In answer to your second issue, the barriers to greater deployment of wind power stations are suitable on- shore sites, supply of wind turbine components and shortage of equipment needed for oV-shore construction. In addition, serious planning issues confront on-shore wind power stations. These include the visual (landscape) and other environmental impacts, military objections (radar interference) and more recently the eVect from the current large wind turbines (heights in excess of 100m) of noise and its consequential health impact. The Local Government Ombudsman has recently stated that the planning condition for noise “put in place to protect local residents” and based on the industry standard ETSU-R-97, is “vague, open to interpretation, immeasurable and thus unenforceable”). Thus it is likely that planning applications for wind power stations near to residents will receive stronger opposition and planners will not be able to justify their siting on the basis of noise and consequential health issues. Wind turbines will have to be sited in more remote locations further away from human habitation. This will severely limit suitable locations for siting wind power stations. The issue of noise and health from modern wind turbines will need properly addressing before siting close to residences can be justified. 16. In answer to your third issue, the technology of wind turbines is mature and it is unlikely that there are any technological advances that could make it cheaper. 17. I now turn in greater detail to the technological concerns with wind turbines. As a physicist, it oVends my learning, experience and intelligence to attempt to produce electricity on a large scale from wind power. This is for four reasons. Firstly because of the very low energy density of wind (the energy per volume of moving air). For comparison and in round terms, the energy density of moving water is about 1,000 times as great, that of fossil fuels (coal, oil, liquefied gas) is about 1 billion times as great and that of nuclear is about 1 million billion times as great. Thus wind turbines have to be enormous to capture a useful amount of energy. Secondly, because the power of the wind is a function of the cube of the wind speed, the electrical output is very sensitive to the wind speed. Thirdly, because of the variability of the wind, wind turbines only produce electricity at Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

236 the economics of renewable energy: evidence about 25% to 30% of their rated output (capacity or load factor). Fourthly, because of the intermittency and unpredictability of wind the electricity production bears no relation to the demand for electricity. In summary, wind turbines are enormous, produce a pathetically small amount of electricity, intermittently, unpredictably and not when it is most required.

18. The CO2 emissions saved by wind turbines have been calculated based on the CO2 emissions from displaced plant (coal and gas-fired power stations). A consensus figure of 430 kg/MWh is currently used. However, this figure is only part of the equation needed to calculate the CO2 emissions saved. Also to be included in the equation are the CO2 emissions resulting from the manufacture and construction of the turbine (estimated by various people at the equivalent of between several months to many years of operation—the payback period); the electricity losses down the low voltage distribution line to the consumers (estimated at between 5 and 15% of the electricity generated, due to the long distance as the result of the remoteness of many turbines); and the CO2 emissions produced by conventional power stations operating very ineYciently on standby (and burning fuel) ready as backup to meet the electricity demand when the wind drops. Evidence form Denmark and Germany suggests that CO2 emissions savings from the use of wind turbines are at best small and at worst, they may actually lead to an increase in CO2 emissions. 19. Although the wind is a renewable source of energy, wind turbines can only operate on the grid in conjunction with backup generation to ensure demand is met when the wind fails. For this reason, it has been claimed that wind-generated electricity cannot be classed as renewable. 20. Because of the intermittency and unpredictability of the wind and thus of the electricity generated by wind turbines, wind turbines cannot replace a significant number of conventional power stations. Thus wind turbines are being constructed as a secondary source of electricity. In essence, the consumer is paying for two sets of electricity generation; the conventional despatchable power stations, necessary to meet demand at all times and wind turbines which operate only when the wind blows and which then displace despatchable power stations. 21. Wind turbines are usually connected to the low voltage distribution grid, rather than the high voltage transmission grid to which conventional power stations are connected. Wind-generated is embedded on the grid as it is not despatchable and cannot be controlled. The national Grid was designed so that electricity flows from the power stations on the eYcient high voltage transmission lines and is transformed (stepped) down progressively on the distribution grid to consumers. Thus electricity flows one way and by the most eYcient route. However, embedded electricity can flow the wrong way if there is not suYcient downstream demand. This can cause grid problems. 22. Electricity cannot be stored on the grid and grid voltage and frequency are maintained in tight margins to protect sensitive equipment. This is not normally a problem, the grid having operated successfully for over 60 years. This is because demand is accurately predictable and despatchable power sources of various response times are available to match the grid. However, with increasing amounts of intermittent and unpredictable embedded generation on the grid, control becomes increasingly more diYcult. This can lead to grid failure and collapse as has happened recently across a large part of Europe and in Texas. 23. In answer to your sixth issue, because of the low energy density of wind and the large separation distance required between individual turbines, the area of land aVected by wind power stations is proportionally greater than that of traditional power stations. For example 100m tall wind turbines of 2MW rated power need to be spaced several hundred metres apart and not close to dwellings and roads. Thus except in remote areas, about four wind turbines can be accommodated per square kilometre of land. This is not dissimilar to the figure for nuclear power stations or gas-fired power stations. For comparison purposes, and taking into account capacity (or load factors), the land area covered by a wind power station of the same energy output as a nuclear power station would be about 2000 times as great (or an area of land 20km by 25km would be covered by wind turbines to produce the same electrical output as one nuclear power station occupying an area of land 500m square). Furthermore, the wind turbines are of greater height and rotate so that their visual impact is amplified. A considerable infrastructure in terms of possibly improved roads and access tracks is required for wind turbines. In addition, the wind turbines provide few if any jobs in the district, and possibly destroy employment due to the loss of tourism-related business. Conventional power stations provide considerable local economic benefits in terms of a range of permanent types of employment. These external costs in terms of environmental and other impacts should be compared in terms of benefits and disbenefits for each technology on a like-for-like basis (noting that comparing a nuclear power station producing baseload electricity with a wind power station producing intermittent, unpredictable and uncontrollable electricity is like comparing chalk and cheese). The like-for-like basis must be in terms of energy output (ie MWh, GWh or TWh of electricity generated per year) rather than installed capacity (MW). Thus, for example the benefits and disbenefits of a nuclear power station of 1,600MW rating with a capacity factor Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 237 of 90% producing 12.6TWh of electricity per year should be compared with a wind power station consisting of 2880 2MW turbines with a capacity factor of 25% also producing 12.6TWh of electricity per year. The planning system for renewables, as embodied in PPS22, is first and foremost about meeting Government targets for renewable energy, both nationally and regionally. The key principles of PPS22 are written such that planning authorities “promote and encourage, rather than restrict” renewable energy projects so that targets can be met. The planning system is thus biased in favour of development of wind power stations regardless of other considerations such as the environmental damage, the eVect on competitiveness and the eVect on fuel poverty. 23. I am not submitting evidence on any of the other issues. 15 May 2008

Memorandum by British Energy

(I) Background

British Energy welcomes the opportunity to contribute its views to the House of Lords (HoL) Economic AVairs Committee Inquiry, The Economics of Renewable Energy, an issue that has the potential to have significant economic impacts on the power sector in the UK. British Energy is the UK’s largest electricity generator. We own and operate the country’s eight most modern nuclear power stations, one coal-fired power station, four small gas plants and we also hope to develop wind generation projects. Our fleet of nuclear stations make the largest single contribution to tackling climate change in the UK. Carbon emissions from our coal plant are subject to the constraints of the EU Emissions Trading scheme. We provide electricity to the large Industrial and Commercial electricity market, which requires us to buy and sell renewable electricity to satisfy our supplier’s obligation under the renewables obligation. It is proposed that the EC’s renewable energy target will be delivered from three sectors: heat, transport and electricity. In this Submission British Energy focuses on the cost implications of the targets on the electricity sector. We have engaged fully in the climate change and energy policy debate over the years and have responded to many significant consultations and Inquiries, including the HoL recent Inquiry into the EU’s renewable target. All our recent Submissions can be found on our website (www.british-energy.com).

(II) Summary Key Points — There should be greater focus on the three key objectives of reducing greenhouse gas emissions, maintaining security-of-supply, and the provision of aVordable energy for consumers, rather than on the delivery of particular types of technology. — Renewables should form part of a portfolio of electricity generation in the UK but it should not be at the expense of the liberalised market. Government should minimise its interventions in the market as these can have far reaching consequences, not least the cost to the consumer. — Current barriers to renewable electricity include the costs, which remain in the main higher than other low cost options, and the constraints of planning. — Once a technology has demonstrated itself as cost competitive with existing technologies it should receive no further funding support. Any support beyond this is a distortion to the market and places additional unnecessary costs on the consumer. No such mechanism to limit support is in place. — Bearing in mind there are now only 12 years to go before 2020, the original BaU renewables contribution of 5% would have been diYcult to reach—achieving a trebling of this value (ie 15%) would seem extremely challenging, even with heavy market interventions and involve substantial additional cost to the consumer. — A robust carbon price is needed to incentivise the market to make the necessary emissions reductions being sought by government to meet its targets, through the adoption of the most cost-eVective low carbon options. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

238 the economics of renewable energy: evidence

(III) Detailed Response to Questions

Question 1. How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? 1. Within Britain’s energy policy there should be greater focus on the three key objectives of reducing greenhouse gas emissions, maintaining security-of-supply, and the provision of aVordable energy for consumers. 2. Renewables provide one form of greenhouse gas abatement technology but there are other technologies and approaches that can deliver reductions in greenhouse gas emissions. These include nuclear and fossil fuel generation fitted with carbon capture and storage technology. 3. Security of supply is important from both the context of indigenous primary energy and the availability of energy on demand. Renewable technologies contribute to the former but in the case of the later, the eVectiveness of a number of renewable technologies is reduced due to the fact that they can be extremely variable, requiring back-up generation when they cannot operate. 4. Access to aVordable energy is central to this Inquiry so it is important to note that, in general, electricity from renewable sources costs the consumer more than other conventional technologies. 5. Renewables should form part of a portfolio of electricity generation in the UK but it should not be at the expense of the liberalised market. Government should minimise its intervention in the market as these interventions can have far reaching consequences. Depending on the initiative Government intervention can lead to increased costs to the consumer. 6. When comparing energy policies it is important to remember that the UK is in a diVerent position when compared to other European Countries. The UK is largely an island generator with limited electrical interconnection to Europe thus variable generation requires significant back-up. 7. EU Policy is derived centrally and all Member States are involved in the process of determining energy policy. The Green Package introduced the draft renewables directive with the aim of delivering 20% of Europe’s energy from renewable sources by 2020. The UK’s national 15% renewable energy targets is extremely challenging, bearing in mind renewable energy currently contributes less than 2% of the total. 8. The renewable energy target will be delivered from three sectors: heat transport and electricity. Independent analysis (see Table 1 below) suggests that the largest single contribution is likely to come from the electricity sector, and implies about 40% of the electricity generated in 2020 must come from renewable sources.

Question 2. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? 9. Current barriers to renewable electricity include costs, which are high for most technologies (please see question 7) and planning constraints. 10. Planning constraints are currently being dealt with under the Planning Bill and these will address planning issues across England and Wales. Planning reforms have taken place and are in force across Scotland. 11. Significant technical issues arise as a result of increasing the quantity of variable renewable generation onto the grid. As well as those issues specifically mentioned above there will be an increased requirement for fast response units or spinning reserve to load follow and potentially to cover periods when variable units are not available or do not export as expected. This results in additional cost to the system and ultimately the consumer. 12. Under a scenario where we are required to deliver a very high percentage of renewable electricity it is possible that there will be periods in the year when there is an excess of generation and it will become necessary for some stations to “spill” excess electricity to the grid or to force their closure, both of which result in a significant economic loss to the generator. This potential outcome does not appear to have been addressed by Government analysis to date. 13. National Grid is charged with control of frequency within very specific constraints and in order to do this they have contracts with plant that is specifically operated to maintain the frequency within these limits. An increased dependence on more variable renewable generation will increase the complexity of this balancing, and the cost to the system. 14. There is a capacity landscape for renewable energy which needs to be assessed region by region. This must also account for the cumulative impact on the land and visual aspects of renewable generation. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 239

15. We are concerned about the inconsistency of interpretation by statutory bodies of the Habitats Directive. An example is the Scottish Ministers’ recent decision on the application by Lewis Wind Power, in which British Energy is a joint venture partner. Lewis Wind Power and its advisors believe the interpretation in this case to be inconsistent with that in other parts of the EU. This may set an unnecessarily restrictive precedent, which could aVect other projects.

Question 3. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 16. Currently under the Governments Renewables Obligation (RO) projects are not undertaken unless they are seen to be profitable. The current situation is particularly perverse as an economic rent is being paid to those organisations that have been able to obtain planning permission and access to the grid. This economic rent increases annually as the obligation on suppliers increase and developers are unable to build and connect new equipment to the grid. This means consumers are paying for the RO whether there is delivery or not. This situation is highly undesirable and needs to be addressed. 17. British Energy highlighted in their response to the consultation on the banding of the RO that we do not agree with the approach because: — it will not adequately address the issues associated with the range of technology options and will create an uncertain obligation in which investor confidence is damaged; — for developed technologies, such as onshore wind, it would be preferable to address the planning and infrastructure constraints first, since this would likely prove eVective in delivering further development, before embarking on the reforms that may not deliver the desired outcomes; — we believe a system of grants would be more eVective for developing technologies. This could account for the project specific nature of these developments, and could reflect the cost reductions that occur as technologies evolve. 18. Onshore wind is now a mature technology with no significant further learning expected. According to some commentators13,14 it is now cost competitive without economic support with traditional power generation technologies when a carbon price is included in generation. (It should that there may be short term price increases in turbine price due to manufacturing constraints and the price of steel.) 19. Once a technology has demonstrated itself as cost competitive with existing technologies it should receive no further funding support. Any support beyond this is a distortion to the market and places additional unnecessary costs on the consumer. No such mechanism to limit support is in place.

Question 4. Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime? 20. It is worth noting that the 2% of energy for the UK in 2005 in Table 1 below is the result of a policy to promote renewable electricity through the NFFO and RO schemes since 1990; also, this figure has a significant contribution from hydro electricity which was largely built before 1990. Bearing in mind there are now only 12 years to go before 2020, the original BaU renewables contribution of 5% would have been diYcult to reach— achieving a trebling of this value (ie 15%) would seem unrealistic, even with significant market interventions and substantial cost to the consumer.

Table 1

RENEWABLES CONTRIBUTION TO TOTALS

2005(1) 2020 BaU(2) 2020 EU Directive(3) EU (% of total energy) 7 12 20 UK (% of total energy) 2 5 15 UK (% of electricity) 4(4) 41(5) UK (TWh electricity) 17(4) 150(1)

13 http://www.ukerc.ac.uk/Downloads/PDF/06/0706 Investing in Power.pdf in which the levelised cost of onshore wind is quoted as £39/MWh 14 Severn Barrage costing exercise, IPA for REF, March 2008 (see diagram later in this report) Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

240 the economics of renewable energy: evidence

References: (1) Compliance costs for meeting the 20% renewable target for 2020, A Report for BERR, POYRY Energy Consulting, March 2008 (2) European Energy and Transport: Trends to 2030, EC, update 2005 (3) Draft Directive on the promotion of the use of energy from renewable sources, EC, 23 January 2008 (4) Digest of UK Energy Statistics (DUKES), July 2007 (5) Based on 368TWh electricity generation in 2020, Energy White Paper, May 2007 21. The Government recently intervened in the market to adjust the renewables obligation and introduce banding. Key to any support mechanism designed to encourage deployment of any large scale technology is certainty. To intervene again and change the mechanism will further reduce investor confidence. 22. A feed-in tariV delivers capacity on the ground but it costs more than the RO and it requires perfect knowledge of the renewable electricity supply curve. Without this knowledge it is diYcult to correct the tariV for significant changes in the electricity market particularly changes in fossil fuel prices and the carbon price, both of which are very diYcult to forecast. A poorly functioning market intervention can increase cost to the consumer, distort the market, and may still fail to deliver the objectives.

Question 5. On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables?

23. As identified earlier there are a number of constraints in the system currently on the flow of electricity between regions leading to grid congestion. This is particularly apparent in Scotland and between Scotland and England and this problem will become more acute as greater quantities of renewables are connected in these regions. It is important to note that the areas of highest natural renewable resource are also areas of low population and low demand for electricity, and often in regions of great natural beauty. 24. Particular renewable technologies require connection to the grid from more remote regions. This includes wind and marine technologies. As well as the issue with grid congestion there is a requirement to enlarge the network to more rural regions requiring either completely new transmission lines or an upgrade of the existing systems, bringing with it additional cost to the consumer. 25. Greater quantities of renewable technologies with higher degrees of variability on the grid will require more fast response units and/or more plant running part loaded. Part loaded plant is less eYcient than plant running at full load and it is necessary to compensate this plant for running in this manner. The costs of variable generation will get smeared across generators through the Balancing Services Use of System Charge and will ultimately get passed to the consumer further increasing costs.

Question 6. How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations?

26. External costs (or externalities) include issues such as emissions of pollutants, health impacts, visual impacts, noise, and land use change. The damages caused by these impacts are not integrated into the pricing system and are consequentially referred to as external costs. 27. The ExternE (Externalities of Energy) research project15 of the European Commission defined external costs as follows: “An external cost, also known as an externality, arises when the social or economic activities of one group of persons have an impact on another group and when that impact is not fully accounted, or compensated for, by the first group” 28. The ExternE project calculated the external costs of a number of technologies by member state and the UK specific figures are summarised in Figure 1. 15 http://www.externe.info/ English Press Release Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 241

Figure 1

ENVIRONMENTAL COSTS ASSOCIATED WITH VARIOUS TECHNOLOGIES16 Pence / kWh 3.5 3.0

2.5

2.0

1.5

1.0

0.5

0 Coal Coal Gas Nuclear Wind Hydro (Current) (FGD) (CCGT)

29. Externalities of energy are of course not limited to environmental and health related impacts but may also result from macro-economic, policy or strategic factors not reflected in market prices such as security of supply, cost stability and broad economic impacts on employment and balance of trade. If such externalities were also to be internalised the eVect would be positive for low carbon options such as renewables and nuclear power.

Question 7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? 30. The Governments Energy Review completed in 2006 prepared comprehensive models to deliver levelised costs of a number of major power generating technologies. The results from this analysis showed that with a carbon price nuclear is a very cost competitive form of electricity generating technology. 31. Figure 2 from the Energy Review shows the results of this analysis with the high gas price assumption17 18 from the time of the analysis together with a ƒ25/tCO2 carbon price. Nuclear is cost competitive on this basis. This analysis shows that a high carbon price has to be reached to make wind technologies cost competitive.

16 Adapted from ExternE, Externalities of Energy, Volumes 7 and 8, EC (1999) 17 The high gas price assumptions from the Energy Review (53p/therm) have been chose as they better reflect today’s gas prices. The fossil fuel prices in the Energy Review were lower than Governments most recent fossil fuel price projections 18 Today’s carbon price is currently trading higher than this for phase 2 Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

242 the economics of renewable energy: evidence

Figure 2

ENERGY REVIEW (CHART B6) BASE CASE COSTS WITH CARBON PRICE (ƒ25/TCO2) AND HIGH GAS PRICE (53P/THERM) SOURCE: BERR ENERGY REVIEW, JULY 2006

Offshore Wind (100MW) Onshore Wind (80MW) CCGT with CCS CCGT IGCC with CCS IGCC PF with FGD with CCS PF with FGD Retrofit PF with FGD with CCS Nuclear 0 1020 30 4050 60 70 80 90 100 £/MWh

Cost RangeExtended Ranges Carbon Cost

32. Figure 3 extracted from a report by IPA Energy to the Renewable Energy Foundation19 shows levelised costs in p/kWh. The cost ranges are as a result of considering carbon price ranges from ƒ10–ƒ50/tCO2. This clearly shows nuclear to be the emerging benchmark technology in this scenario. It should also be noted that the cost for wind technologies in this analysis makes onshore wind cost competitive without financial support in this scenario.

Figure 3

SEVERN BARRAGE COSTING EXERCISE, IPA FOR THE RENEWABLE ENERGY FOUNDATION, MARCH 2008

Levelised costs,p/kWh 12

10

8

6

4

2

0 Nuclear Coal PF Onshore Coal Gas Coal PF Offshore Severn Wind IGCC CCGT with CCS Wind Barrage

33. Figure 2 and 3 show levelised costs vary, depending on assumptions. It is important to note the there are high capital costs associated with building nuclear power stations that require long term certainty. Nuclear power is built in large installations typically over 1GW in size—this reduces the impact of having to construct 19 Severn Barrage costing exercise, IPA for REF, March 2008 Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 243 multiple smaller installations. (Please see Appendix 1 for a calculation that shows that nearly 2,000 onshore wind turbines would need to be constructed to deliver as much output as Sizewell B, British Energy’s 1.2GW nuclear power station in SuVolk.) 34. Levelised costs is only one tool that investors will consider when choosing whether to invest in new power generation technology. Whilst levelised costs are a quick means to compare power generation technologies there are a number of aspects they do not capture: — Policy uncertainty (and the option value of waiting). — Planning constraints.

— Price risks (fuel price, CO2 price, electricity price). — Technical risks (capital cost, operating and maintenance cost, decommissioning and waste regulation, utilisation levels, build times). — Financial risks (weighted cost of capital, credit risk, contractual risk). Of these risks the electricity price risk is very significant for highly capital intensive projects such as renewables and nuclear. 35. Costs associated with Carbon Capture and Storage vary because there are no such systems operating at the current time. 36. As noted in our response to the Question 1, British Energy believes that reducing greenhouse gas emissions should remain a key priority for Government. For this reason we encourage Government to consider the marginal abatement costs of the diVerent technologies considered: — nuclear power is a known technology with very low lifecycle levels of carbon emissions20 associated with it; — when considering life cycle emissions of variable renewable technologies it is important to factor in the emissions resulting from the requirement for part loaded plant or fast response reserve. This is particularly relevant at high penetrations of the technology; and — the Governments CCS competition suggests that the CCS capture target is 90% which results in 10% of the carbon dioxide emissions being released. Together with a higher cost this increases the marginal abatement cost of this technology. 37. Figure 4, based on analysis by British Energy, shows the marginal abatement costs for a number of diVerent technologies. Appendix 2 outlines the methodology and sources used to derive these costs. What this chart shows is that at current carbon prices (around ƒ25/tCO2) nuclear is a viable economic option for delivering low carbon electricity and reducing emissions of UK greenhouse gases.

20 A study on our Torness AGR Nuclear power station identified that there were approximately 5g/kWh of carbon dioxide released over the stations complete lifecycle (http://www.british-energy.com/pagetemplate.php?pid%251) compared to nearer 1,000g/kWh for coal power stations (POST note 268 http://www.parliament.uk/documents/upload/postpn268.pdf) Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

244 the economics of renewable energy: evidence

Figure 4

MARGINAL ABATEMENT COSTS OF VARYING LOW CARBON TECHNOLOGIES21

€/tCO2 500

400

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200

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0 Nuclear Onshore Coal Offshore Biomass Severn (PWR) Wind CCS Wind Barrage

38. The carbon associated with balancing the system and back-up generation has to be considered, when calculating carbon savings as a result of the implementation of “variable” renewable technologies (particularly at higher penetrations): — in order to balance a system with a high penetration of variable generation it is necessary to run some thermal plant at reduced load which means that the plant operates less eYciently and produces more carbon dioxide per unit of output. This plant is able to respond to fluctuations in generation from the variable plant and maintain the required frequency; and — when variable generation is not producing power (periods of low wind or the tides are wrong) it is necessary to operate back-up generation that has been specifically built for this purpose. These are often fast response plant such as Open Cycle Gas Turbines which have lower eYciencies than Closed Cycle Gas Turbines. It is necessary to account for these emissions in the policy to deliver higher proportions of renewable technologies as they are a direct result of the policy choice.

Question 8. How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating?

39. Renewable energy from heat and transport have a number of complications associated with them: — the use of biofuels needs to be carefully considered as it can lead to undesirable consequences. These include competition for food (and associated cost impacts), a greater use of monocultures and impacts on global biodiversity. Amongst these sustainability concerns there are growing questions over whether biofuels actually reduce carbon emissions due to their impact on land use;22,23 — the use of heat from power stations leads to a loss of electrical eYciency unless the plant has been optimised for this purpose; — it is not clear whether or not the developments required in renewable heat and renewable transport will come forward; — the potential for renewable heat and renewable transport to contribute by 2020 is limited; and — this places a significant burden on the electricity sector to deliver the overall UK renewable energy target of 15%. 21 Sources: Based on Investment Analysis for Energy White Paper, Redpoint, May 2007, Data from Severn Barrage Costing Exercise, IPA for REF, March 2008. Notes: Left hand bar denote abatement costs for 2007 and right hand bar for 2031 22 “Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change” Timothy Searchinger et Al, Journal of Science, February 2008 23 “Land Clearing and the Biofuel Carbon Debt” Joseph Fargione et Al, Journal of Science, February 2008 Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 245

Question 9. If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? 40. For the reasons identified above, electricity from renewables will form a higher proportion of the UK’s final renewable energy share. This results in significant impacts on the power generation sector including: — higher costs, both for the technologies and managing the networks, which will subsequently be borne by consumers; — requirement for more variable generation technologies; — necessity for significant grid expansion; — modifications to the market (through financial subsidies for some technologies) leading to greater price volatility; and — greater possibility of stranded assets. 41. It should be noted that the burden sharing process for the renewables directive was not based entirely on the countries technological potential to deliver renewable energy but also on its ability to pay (through a link to the MS’s GDP). For this reason all available economic tools should be allowed for MS’s to deliver their renewables targets and this should include a measure of trading of guarantees of origin (or green certificates).

Question 10. How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? 42. As the carbon price increases it supports low carbon forms of generation including renewables, nuclear and fossil fuel fitted with CCS. As noted in response to Question 7, a higher carbon price is required to support wind generation according to the Governments figures. 43. A robust carbon price will incentivise the market to make the necessary changes, including the construction of low carbon forms of power generation in order to deliver the emissions cap. When it becomes economically viable to use renewables with only the carbon price as support then the market will deliver renewables. Until this stage should the Government wish to deliver renewable technologies then it will be necessary to provide additional support.

Question 11. What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? 44. It is important to successfully deliver a first generation of biofuels before the market is able to assess the potential for a second generation. 45. British Energy believes the Government should concentrate on the lowest cost abatement options first. There are limited gains to be had with biofuels in the near term and improving the eYciency of cars and encouraging consumers to carry out a modal shift to lower carbon intensity forms of transport should be addressed first. 46. The quantity of bio-fuels delivered will impact on the overall renewable energy target and possibly place additional burdens on other sectors involved in the targets. As noted earlier this is most likely to impact the electricity sector.

APPENDIX 1 47. Sizewell B, British Energy’s most modern nuclear power station generated 9.8TWH of electricity in the financial year 2007–08. For the purposes of comparison a calculation has been carried out to show the quantity of wind required to deliver a comparable quantity of electricity. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

246 the economics of renewable energy: evidence

Table 2

WIND TURBINES REQUIRED TO DISPLACE GENERATION FROM SIZEWELL B

Onshore wind OVshore wind Electrical output 9.8TWh 9.8TWh Load factor24 33% 38% Capacity required 3.4GW 2.9GW Average turbine size 2MW 3MW No turbines required 1,695 981

APPENDIX 2 British Energy derived levelised costs from data presented by Redpoint25 and data pfor the Severn Barrage was taken from IPA Energy.26 Similarly this data was used to determine the emissions factor for each of the technologies based on the eYciency of the power station and for CCS the Governments assumption that 90% of carbon dioxide would be captured by CCS technology. Abatement cost is defined as follows:

[Full cost of CO2eeYcient alternative] " [Full cost of reference solution] Abatement cost % [CO2e emissions from reference solution] " [CO2 emissions from alternative] The reference solution was considered to be a Combined Cycle Gas Turbine. This is Governments current approach to calculating carbon dioxide savings and is used to avoid optimism bias. By understanding the emissions intensities of the various low carbon alternatives and the levelised costs it is possible to calculate the abatement cost. June 2008

Memorandum by the British Hydropower Association (BHA) I am writing on behalf of the British Hydropower Association (BHA) with regard to your call for evidence on the economics of Renewable Energy. The BHA is the trade association of the UK hydropower industry. With around 120 members, the Association represents a wide range of interests: consulting engineering, design, manufacture, investment and operations, and specialist service providers. The BHA represents generators from small owner-operators to large UK and international companies.

Present and Potential Hydropower generation in the UK Hydropower at present contributes 43% of the UKs renewable generation (51% in Scotland) and with continued development this value is not likely to reduce significantly before 2010. An estimate of the potential contribution of new generation from hydropower is as follows:

Microgeneration (Micro Hydro Schemes) 0.2 GW Conventional hydropower—storage and run-of-river: A. Removal of 20MW cap to enable refurbishment and upgrade— 0.5 GW an extra B. New build (greenfield and water/wastewater supply) 2.5 GW Total estimated potential—land based hydropower 3.2 GW Tidal impoundment projects C. Severn Barrage 8.0 GW D. Other tidal impoundment 5.0 GW 24 Redpoint, Dynamics of GB Electricity Generation Investment, May 2007 25 Redpoint, Dynamics of GB Electricity Generation Investment, May 2007 prepared in support of the Governments Energy White Paper 26 Severn Barrage costing exercise, IPA for Renewable Energy Foundation, March 2008 Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Total estimated potential—oVshore hydropower 13.0 GW Total estimated further hydro potential circa 16 GW We welcome your invitation to provide evidence and address the points made in your invitation below:

Barriers to Greater Deployment of Renewable Energy (Specifically Hydropower Generated)

(a) Grid connection The diYculty in accessing the electricity transmission network for larger scale schemes is a constant problem across the UK. Inconsistent charging for connection and long delays in the connection being promised and provided can seriously endanger a project’s chances of being implemented.

(b) Distribution system connection There is great untapped generation potential across the renewable technologies which may never be realised due to impossible distribution network connection conditions. Example: A developer has been trying to secure 400kW of hydro capacity in northern England for two years and still cannot proceed. It has taken two years of negotiating with the DNO to increase the capacity of their system. These negotiations have now been largely resolved; however, there are now hold-ups in the wayleave process for upgrading the existing supply line. We are told the process could take up to another two years. The scheme is now at risk of being scrapped

(c) Inflexibility of environmental requirements EU directives are in conflict with each other, ie the Renewables Directive is diYcult to implement due to other environmental directives. Example: This is clearly seen with the Catchment Abstraction Requirements (CAR)/Water Framework Directive (WFD) requirements throughout the UK. Despite all agencies stating that they actively support the development of Renewable Energy projects, the planning/WFD process for small scale hydro development is invariably a disincentive to potential development. The cost of meeting the regulatory requirements as part of the consenting process is disproportionately high, particularly for small scale developments

(d) The significance of hydropower in the UK A major frustration for the UK hydropower sector is the continuing assumption that this technology is not “significant” in the future energy mix for the country. From the data presented (in the box above), the BHA believes that we have an important existing and future role to play. The fact that hydropower is a developed and proven technology should not aVect the degree of support which we should expect from government. The remaining potential capacity together with the other benefits of hydropower should result in our being treated in the same way to other proven and emerging technologies.

Technological Advances that would make Renewable Energy Cheaper and Viable

(a) Storage and pumped storage Hydropower is the only existing generation technology which can store energy. It achieves this in storage and pumped storage schemes. Large projects are capable of grid stabilisation, rapid response to load demand and peak generation control. These are developed in the UK but with increasing demand, more oVshore wind and the uncertainty of the nuclear future more storage schemes would be desirable. Smaller schemes could work in conjunction with local wind generation to oVset the latter’s intermittent nature. There are early studies into this type of solution, for example, in Cornwall.

(b) Combined water supply control and hydroelectric generation The BHA is addressing the fast-approaching need to combine water supply and flood control schemes with hydroelectric generation. This needs more study and consultation but is seen as a pressing need for the country with its climate change and energy poverty issues. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

248 the economics of renewable energy: evidence

(c) Tidal impoundment As well as the Severn Barrage there is the potential to develop oVshore tidal impoundments which will use tidal variation to generate on both inflow and outflow. The generation technology used will be conventional hydropower. Innovation will be in the combined generation and infrastructure development necessary to make this type of project viable.

Has Government support been effective in leading to more Renewable Energy? The implementation of the Renewables Obligation and award of ROCs have revitalised our industry which did not happen under the NFFO system. Reviewing the support systems in other countries there has been a general desire for a feed-in tariV process which could benefit the smaller (sub 1 MW) UK hydropower generator. However, if this is not possible at present, capital allowances for schemes of, say, 50% would remove the majority of economic barriers to new development. We have always seen “tinkering” with the ROC system, especially capping and banding to encourage certain sectors, to be unsettling and dangerous. In the hydropower sector the 20MW limit for ROC allocation for refurbishment and upgrade of existing plant caused the de-rating of a number of power stations to come within the cap limit and the non-refurbishment of plant above the limit thus depriving the UK of considerable Renewable Electricity generation. If we are to live with banding we would urge the following measures: — remove the 20 MW cap for allocation of ROCs for refurbishment; — increase the band for double ROC allocation for micro hydropower; and — consider banding at rates between 1 and 2 ROCs per MWhr for up to 500kW plant. (BHA has already made representation to BERR and the Public Bill Committee on the Energy Bill on the last two items.)

If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? The BHA cannot comment for all technologies but hydropower has a significant role to play as described above—this is significant and deserves government, industry and community support I hope that our evidence meets with your approval. We will be pleased to provide any necessary clarification. David Williams Chief Executive OYcer 31 May 2008

Memorandum by the Campaign for Responsible Energy Development in Tynedale (CREDIT) 1. I am writing in response to the House of Lords Economic AVairs Select Committee’s call for evidence regarding the Economics of Renewable Energy. 2. I act as Secretary to the above organisation (CREDIT), a community group formed to represent the views of local residents (and other concerned individuals) faced with a seemingly uncontrolled, unco-ordinated free for all by energy companies seeking to build multiple large scale windfarms in the Knowesgate area of Tynedale, Northumberland. 3. I stress from the outset that CREDIT does not claim to possess either the technical or commercial expertise to comment with any great authority on the relative costs of the various forms of renewable energy production. However, we are particularly keen to share our experiences with you in regard to your questions “How do the external costs of renewable generation of electricity—such as concerns in many aVected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the diVerent considerations?” 4. It is with particular regard to the last issue listed above, that CREDIT seeks to draw the Committee’s attention to a factor which is routinely overlooked when the costs/benefits of renewable energy (and in particular onshore wind energy) are scrutinised, namely the enormous cost to the public purse in contesting lengthy, extravagant and often wholly unnecessary public inquiries. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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5. CREDIT wishes to advise the Committee of its own experience but is acutely aware that such experience is being repeated across most of the rural areas of England because of the headlong rush by developers to take advantage of the huge Government subsidies and liberalised planning regime which currently favours the building of onshore windfarms almost to the exclusion of everything else. 6. The Knowesgate area lies within the district of Tynedale, in mid-Northumberland. The Committee might be familiar with the term “Wilds of Wanney” and indeed the Knowesgate area sits squarely within it. The area is deeply rural and, as you would anticipate, is not densely populated. There are only a few centres of population as such (Kirkwhelpington, West Woodburn, Redesdale) with the remainder of residents living in small hamlets or isolated farmsteads and cottages. There are few community facilities and very little public transport. However residents place a high value on the peace, tranquillity, cultural heritage and largely unspoiled nature of their surroundings and many have founded small businesses based on leisure and tourism activities. 7. Responding to central Government planning policy directives, the North East Regional Assembly has prepared a Regional Spatial Strategy (RSS)27 which requires that local planning bodies must include an overall renewable energy target for the region with details of the contribution to the total which will be made by sub-regional partners. In the case of the County of Northumberland this equates to 212MW by 2010. It should be noted that this target is meant to cover renewable energy from all sources and technologies. This sub target is not broken down any further into district level contributions but, given that the document recognises that onshore wind energy is likely to contribute the largest share of the target, it goes on to indicate that within Northumberland there are six “Areas of Least Constraint” (ALC’s) where onshore windfarm development might be acceptable. The Knowesgate area of Tynedale is designated as one of these ALC’s.28

8. The RSS has been in production for some considerable time and is now going through its final re-drafting prior to formal adoption within the next month or two. It is, in fact, this particular piece of planning policy which, in CREDIT’s opinion, has prompted the present situation in Knowesgate whereby five diVerent energy companies are vying to build six major windfarms all within the space of a few square kilometres. That in itself would be problematic enough, but the obvious diYculties are compounded by the fact that the output from some of these windfarms falls below the 50MW threshold whereby they are determined by the local planning authority, whilst others exceed this threshold whereby they are classed as Power Stations and determined by the Secretary of State for BERR. Thus applications are submitted to and decided by two diVerent regimes. It is therefore not diYcult to understand the complexities which arise in considering the matter of cumulative impact of multiple wind farm schemes.

9. As we have noted, the Knowesgate area has been identified in the RSS as an ALC but it is clearly stated that the area may be suitable for medium scale development which is further defined as being between 20–25 turbines. However, despite the fact that one particular energy company (AMEC) had been actively investigating the possibilities of a windfarm on Ray Fell since the mid-1990’s, the policy steer provided by the Government in the form of PPS 22, its Companion Guide, various Energy White Papers, ministerial announcements and of course the system of ROCs has resulted in other developers jumping on the subsidy bandwagon and signing up willing landowners in the vicinity with a view to erecting even more turbines. The local community has been completely overwhelmed and, in no small measure, intimidated by the heavy handed and irresponsible tactics used by the developers. Not only that, but the issue is socially divisive, setting neighbour against neighbour, landlord against tenant and, in some cases, family member against family member. 10. The North East Assembly eventually recognised the acute problems which this “gold rush” mentality was causing in the Knowesgate area (although we should point out that this situation is not unique to Knowesgate and that other ALC’s within Northumberland are being subjected to similar attentions) and, as part of the RSS suite of documents, commissioned a series of Landscape Capacity Studies from the Ove Arup partnership. Their report recommended appropriate levels/locations of wind farm development for each ALC which struck a balance between renewable energy generation and landscape and visual considerations. The report concluded that in the (two separate but adjacent) Areas of Least Constraint at Knowesgate and Harwood there was potential capacity to accommodate 100MW of wind energy generation. The report suggests a fairly even split of this potential total between the two ALC’s ie. approx 50MW each.29 27 North East Regional Spatial Strategy Original Draft 2005 Policy 42 Onshore Wind http://www.northeastassembly.gov.uk/ document.asp?id%614 28 North East Regional Spatial Strategy with Sec of States Further Proposed Changes Feb 2008 http://www.gos.gov.uk/nestore/docs/ planning/rss fpc/a maps.pdf (Page 225) 29 Ove Arup (for the North East Assembly) Windfarm Development and Landscape Capacity Studies; Knowesgate and Harwood Forest June 2006 http://www.northeastassembly.gov.uk/document.asp?id%390 Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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11. Sadly the slow response and belated intervention by the Regional Assembly and its constituent partners meant that by the time the landscape capacity report was commissioned there were already three separate planning applications on the table for the Knowesgate ALC alone; Steadings (21 turbines, H J Banks) Green Rigg (18 turbines, Wind Prospect) and Ray Fell (now 16 turbines, AMEC). These windfarms, totalling 55 turbines with a combined output of approximately 150MW, are currently the subject of a joint local Public Inquiry which commenced in January 2008 and is likely to continue until at least October if not beyond. Unfortunately it appears that the fact that there is currently an ongoing public inquiry into three existing applications has done little to deter other developers and there are now three further applications in the same vicinity at scoping/pre-application stage which together could total a further 28 turbines. Indeed at the time of writing this submission we have just been notified through the post of NPower’s intention to formally submit a planning application for an eight turbine development at Kirkharle.30 Details of the current Public Inquiry and its associated documentation can be accessed at http://www.persona.uk.com/tynedale/Tynedale.htm 12. There have been objections to all three current applications from both County and District councils as well as from the Northumberland National Park Authority, the Ministry of Defence, Newcastle International Airport, NATS En Route Ltd and English Heritage to name but a few. 13. CREDIT is playing a major role in the PI and believes that evidence submitted to the Inquiry on the basis of compliance with national and local planning policy, land use, heritage, culture, ecology and, perhaps most fundamentally, aviation concerns means that there are serious doubts about whether any of these developments will be consented. Nevertheless, publicly funded agencies have been compelled to participate in the PI at great expense and, given the applications in the pipeline, may well be forced to do so again in future. It is therefore unarguable that the high levels of subsidy on oVer make it worthwhile for developers to engage in purely speculative applications on the oV chance that they might just be able to convince the powers that be that the need for onshore windfarms as an alternative source of energy outweighs all other considerations. 14. CREDIT do not believe that such blatant free for alls were ever the intent of Government policy and we understand that more enlightened Ministers and their advisers are rightly concerned that there is now an over emphasis on onshore wind energy almost to the exclusion of all other technologies, many of which are far more eYcient and far less intermittent than wind turbines. The fact that the planning system is log jammed from end to end with windfarm applications is not, as the British Wind Energy Association would have us believe, due to intransigent local authorities persisting in refusing permission for windfarms in their area, but is rather a product of Government planning and subsidy regimes which have been interpreted by the developers as carte blanche to build as many onshore windfarms as they possibly can irrespective of the impact on local landscapes and communities—and all apparently in the name of national policy. 15. However it is worth noting that it is often the case that many of the issues which PPS22 advises should be resolved by the developers before planning applications are submitted are left unresolved in the stampede to get applications on the table. This is especially true of aviation matters where the onus is firmly on the scheme promoters to prove that their proposals will not aVect aviation interests and/or safety. The fact that three aviation bodies (MOD, NATS en Route and Newcastle Airport) have all objected to each and all of the schemes under scrutiny at the current (Knowesgate) Public Inquiry demonstrates the diYculties which statutory and other interested organisations have in convincing the developers that when they say no they mean no. 16. The planning regime is therefore in part responsible for encouraging this headlong rush for onshore wind which, if left unchecked, will lead to an over –reliance on a technology which is unreliable, intermittent and, on current evidence thus far, has failed spectacularly to live up to the claims made for it by its supporters in terms of both energy production and reductions in CO2 emissions. 17. We have no doubt that other contributors to this Inquiry will provide the Committee with convincing and well-founded arguments regarding the real cost of on-shore wind energy and we are not minded to repeat such arguments here. We simply make the point that the cost to the public purse of processing speculative and ill- conceived applications is rising exponentially as more and more local authorities find their decisions being challenged by large, well-resourced developers willing to ride roughshod over local authorities and local communities. 18. We are aware that in terms of the present Inquiry, Tynedale Council has set aside £250,000 to pay for legal advocacy and expert opinion. A leading Councillor has indicated to us oV the record that the Council is expecting that it will get no change from £1 million when everything has been paid for. For a small rural district council this is a substantial amount of money and it needs to be viewed alongside those costs which will be similarly incurred by Northumberland County Council, the MOD, Northumberland National Park and English Heritage in providing evidence to the Public Inquiry. Given that this is not the only windfarm Public 30 Tynedale District Council Submission to Knowesgate Windfarm Public Inquiry showing current windfarm proposals at planning and pre-planning stage http://www.persona.uk.com/tynedale/PROOFS STATEMENTS/Tynedale/Add Docs/TDC-0-02.pdf Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Inquiry in which such agencies have participated it is self evident that considerable sums of money are involved. If such sums were multiplied throughout England the bill must surely run into tens of millions of pounds already, with the likelihood of more to come as applications continue to pile up in the planning system. To the best of our knowledge this is a price which has never been factored in to any previous discussions on the cost of renewable energy. 19. CREDIT believes that the present situation is inherently unfair and indeed many in our group speculate as to whether this kind of “carpet bomb” approach by the developers is a deliberate tactic designed to either intimidate local authorities and local communities or bleed them dry of the resources and political will to contest the applications. The cost to local people participating in the process is prohibitive; as CREDIT has already pointed out in their evidence to the Public Inquiry31 for us to raise funds to contest one application would be onerous enough, to contest three is quite simply beyond our means. 20. CREDIT would be delighted to provide further information to the Select Committee should they require it and would be most happy to appear in front of the Committee if this was felt appropriate. In any event we trust you will find this statement worthy of your consideration and helpful to your deliberations. 9 June 2008

Memorandum by the Campaign to Protect Rural England, Devon Security of Supply of Energy is at risk, as indeed is Security of Supply of Food. We are aware of capacity gap foreseen by EDF for 2015, and of capacity shortfall currently in South Africa where there is civil unrest. We are also aware of the outages that occurred on 27 May. Irrespective of Climate Change, there is clearly a need to build proper power stations now in UK. Renewables do have a role to play, but will not replace capacity nor do base load. In Devon, we have been opposing on-shore wind turbines on landscape grounds and on generation (load factor) grounds. With knowledge of the wind availability, it is possible to calculate load factor (LF). Some turbines will not reach the subsidised financial break even of LF 18%. This would lead to the abandonment of these large machines in our countryside; all of them, if ROC subsidy is withdrawn, as LF needed is 40%. We do support nuclear power. However, there does need to be clarification of various factors, including: (a) Waste disposal—glassification etc. (b) Regulation—acceptance (or not) of French/US A certification for EPR 1600/AP1000. as timescale is crucial. (c) Market—confirmed price and market for nuclear electricity. This is probably not the place to question the Climate Change dogma, but pursuing Renewables to reduce CO2 is massively expensive. No doubt the committee has this in mind.

Introduction Set out below are comments upon questions raised by HL Committee in the note dated 25 April 2008. Numbered paragraphs reflect the list of issues mentioned.

1. UK Energy Policy

There is no such specific policy. Instead we have a market experiment, with priority given to reduction of C02 emissions, based upon morbid fixation of the fear of “Climate Change”. Totally irrespective of Climate Change, UK needs to concentrate on Security of Supply and build some proper Power Stations. A possible mix would be 30-30-30-10 (Coal, Gas, Nuclear, Renewables) based upon capacity ie MW. One needs to define what are “Renewables”—eg Wind, Wave, Solar, Tidal—all of which are intermittent, so that none of them will do Base Load. The Royal Academy of Engineering (“RAE”) talks about “Nuclear and other Renewables”. Although 95% of used nuclear fuel can be reprocessed and reused, Nuclear probably does not come within the ambit of the common use of the phrase “Renewables”. Then there is Waste (agricultural, food, etc), Bio fuels (timber, husks etc), which attract ROC’s, and probably should be entitled Surplus Products. Hydro is the only firm and reliable renewable source. The USA has a similar lack of proper Energy Policy. 31 CREDIT Proof of Evidence Submission to Knowesgate Wind farms Public Inquiry Dec 2007 http://www.persona.uk.com/tynedale/ PROOFS STATEMENTS/CREDIT/Proofs/CREDIT-1-1.pdf Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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2. Greater use of Renewables Renewables do have a role to play, but (other than Hydro) will never replace Capacity (MW). Use of Wind Turbines in a local grid, such as Avonmouth Docks, contributes some Energy (MWH), with excess being exported to the National Grid. This is a form of load amelioration. The maximum amount of Wind input which could be accepted by the UK Grid is probably about 15% (c 1OGW) due wind’s stochastic intermittency. Ireland has stopped at 5%. Germany has planned 48,000 MW of wind, but needs to build 46,000 MW of standby generation. There is a case for CHP for new build Housing estates, but dissipation of heat in summer has to be dealt with.

3. Promote Renewables Micro generation schemes are useful in remote parts, but are generally expensive. Tidal streams energy limit for UK has been assessed by ENTEC as 18TWHpa, and Tidal Barrage as 19TWH. Total electricity usage is c 390TWH (2007). Of the Tidal, Severn Barrage of 8,640MW could produce 17TWH at 22°% Load Factor, but would be very expensive at c £15 billion, and would not do Base Load. This energy output of 17TWH could be produced by 2 in no. modern nuclear stations for ´ cost, which would do Base Load. The ROC system is an indirect subsidy, so not illegal state aid. The consumer pays it, thus increasing fuel poverty. It is a clumsy tool, which stifles innovation and primarily promotes Wind Turbines. It would be best to drop the ROC system, as Ofgem recommend. It is possible to obtain from the Met OYce for certain places, such as Airports, detail of Wind availability. Below 10 knots, wind turbines eVectively do not generate and Power relates to the cube of Wind speed, with 100% power at about 25 knots. From the wind data, one can calculate Load Factor—but LF is not related to Mean Wind Speed, as that is a diVerent graph. Knowing the capital cost, maintenance costs of wind turbines, sale price of electricity, ROC subsidy, one can calculate the financial breakeven figure for LF to be c 18%. If the ROC subsidy is removed, breakeven is LF c 40%. As wind turbines do not do what it says on the tin, many are likely to be abandoned as LF is average c 27% maximum.

4. Grid Investment Recent information indicates that the 16GW of Wind Turbines in the pipeline for Scotland would require Grid investment of c £4 billion. That for the UK overall would be c £9 billion. Add the £30 billion of the ROC system, produces large expenditure related to Renewables. One needs to consider the balance of cost vs gain. For instance, the capital cost of onshore wind would move from c £l.2M/MW to c £1.5M/MW. If current power station sites can be used, so can the current infrastructure, with consequent reduction in grid expenditure.

5. External Costs In Devonshire, Tourism is the second biggest employer behind the Civil Service ie Government. Farming comes third. The spend on Tourism in Devon is about £2.2 billion per annum, of which about £520 million goes on accommodation. An important segment is the walkers/hikers. All of the tourists come to enjoy the tranquillity and good landscape. These assets are damaged by unsightly and moving wind turbines, which can be seen from afar. Once the tourists have decided to leave the area, they will not return, as people do have habits. Near to Wind turbines, land values fail. Damages have been successfully claimed in court, because of failure to mention the turbines prior to sale. This means inter alia loss of revenue (rates) to local authorities and loss of value of property.

6. Cost Renewables The table attached sets out costs and other factors of Renewable and Conventional Sources of Energy. These average figures are derived from sources such as RAE and IPA consultants. They do not include additional costs for renewables due extra grid costs, but do include standby generation. Load factor is important for the return on investment. Generally for Renewables that achieved will be c 25%, and for proper Power stations 65%–95%. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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7. Biofuels Research is underway through Imperial College and the Porter Institute to improve yield of Biomass and enhance output. This includes considering synthetic fuels from gas or coal to produce Biobutanol, with an energy content of 29 MJ/litre, compared to alcohol at 19.6 and gasoline at 32. The aim is to reduce cost from c $4/litre to $.6/Iitre. Work is also underway on bio-plastics, which has intellectual property aspects for licensing. Concern has been expressed that corn should be retained for food, where security of supply is also at risk, rather than use for fuel. It is however important to keep the Farmers in being, and use of corn can be changed. Note also that about 140 years ago 30% of the USA energy burn was corn for horses, for transport. Plus ca change.

ELECTRICITY GENERATION—COSTS

Levelised Source C02 Base Load Capex £M/MW O & M £/KW .p/KWH Severn Barrage (CardiV) 0 No 2.5 14 11 Severn Barrage (Chepstow) 0 No 2.5 14 10 Lagoon (SB) 0 No [2.5] — [7.5] Tidal Stream 0 No 1.3 50 6.1 On Shore Wind 0 No 1.2 48 5.4 OVShore Wind 0 No 1.7 56 10 Wave 0 No 3.1 [56] 21 Bio/Waste .20 Possibly 2.7 25 7.5 Nuclear 0 Yes 1.5 48 3.7 Coal .86 Yes 1.0 25 5.1 Gas .34 Yes .4 15 5.0 Hydro 0 Yes 1.3 [4.2]

T J W Hale Chairman 4 June 2008

Memorandum by the Campaign to Protect Rural England, Durham 1. In setting its 2010 target, the Government stated that the cost of renewable energy should be acceptable to consumers. 2. 2001, the Department estimated that by 2010 the Renewables Obligation would have increased electricity prices by an average of 5.7% across all electricity consumers. This price increase will cost the typical domestic consumer about £10 to £12 per annum (at 2002 prices). Wind generated electricity is subsidised by the Renewables Obligation (RO) plus its market increment plus the Climate Change Levy exemption (CCLe). I read at the time that this amounts to nearly twice the value of conventional generation and more than 25 times that on coal-fired generation per MWh. Gas and nuclear generation not subsidised at all. 3. 2003, the DTI’s Energy White Paper said: “We have . . . introduced a Renewables Obligation for England and Wales in April 2002...Thecost is met through higher prices to consumers...By2010, it is estimated that this support and Climate Change Levy exemption will be worth around £1 billion a year to the UK renewables industry”. 4. 2005, The House of Commons Committee of Public Accounts (CPA) reported that: “The Renewables Obligation is currently at least four times more expensive than the other means of reducing carbon dioxide currently used in the United Kingdom...”andasnoted in the Introduction d (i): “By 2010, the cost of the Renewables Obligation, which does not appear on electricity bills and is not explained to consumers, is expected to reach £1 billion per annum”. 5. Additionally, the CPA drew attention to the lack of democracy in the RO arrangement: “the Department [DTI] has not consulted consumers, or their representative groups, about their willingness to contribute to the cost of renewable energy”. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Resurrecting HOC Committee of Public Accounts report is essential.

6. 2007 UCTE study Integration of Wind Power into European Electricity Grids http://www.ucte.org/ library/otherreports/2007-01-15-Final-report-EWIS-phase-I-approved.pdf Abstract “The variable contributions from wind power must be balanced almost completely with other back-up generation capacity located elsewhere. This adds to the requirements for grid reinforcements”.

7. 2008 June, E.ON has launched its new energy manifesto, warning that if the UK is to meet its target of generating 20% of its energy from renewable sources by 2020, it will still need to develop a new generation of fossil fuel-fired power plants. The company said the UK would require 50GW of renewable energy to meet the EU target, but that would require up to 45GW of backup capacity from coal and gas-fired plants that could be used to ensure energy supply when renewable energy supplies are not available.

8. Benefits of wind power in line with the Energy White Paper and emissions saved is a material planning consideration so the load or capacity factor needs to be about 30% as the predicted if emissions saved and electricity generated are to be as claimed.

9. HL Paper126 at 3.1

Doubt was cast on this UK load factor of 30% by Hugh Sharman an independent energy consultant working in Denmark. He noted Danish turbines have operated at a load factor of only 21%. If this was to be the case in the UK not only would half as many turbines again be needed to deliver the same target output but also potential investors would face dramatic reductions in the income derived from wind farms.

10. Advertising Standards Agency ASA found that BWEA member company npower had breached its rules by using a figure of 860 g/kWh for CO2 displacement* for its proposed new Batsworthy Cross wind farm. “The 860 figure is still in use on the BWEA website yet in October 2007 they were said to be looking with ASA at a revised figure”.

11. BERR’s calculation in the Fullabrook Down press release is 0.36 not 0.86 and Load Factors appear to be averaging less than 30% Thus it appears we need about 3 times the number of turbines BWEA has said we need for a given saving. Where will they go?

12. 2007 May, The Energy White Paper, Meeting the Challenge, sets out the Government’s energy strategy to address the long term energy challenges we face and deliver our four energy policy goals:

— to put ourselves on a path to cutting CO2 emissions by some 60% by about 2050, with real progress by 2020; — to maintain the reliability of energy supplies; — to promote competitive markets in the UK and beyond; and — to ensure that every home is adequately and aVordably heated.

Policy goal 4 is not being met. Policy 2 essential to our survival is at risk. Renewables are not just wind.

13. The NFFO system drove developers to the windiest sites where the electricity would be cheapest but unfortunately coincided with our most valued landscapes. The Renewable Obligation and its associated ROCs is an excessive “consumer-led” subsidy which has never been explained to those who pay for it.

14. The cheapest electricity is that we don’t use and the dearest that we don’t have, which is why we need a firm supply. The problem it seems is the eVect wind is having on the eYcient operation of the remainder of the generating plant and the grid. However that is an issue for the technicians.

15. Our main concern has been the weakening of the planning system with the heads they win, tails we lose scenario and the fashionable idea that there are no disbenefits from wind energy Planning has become draconian The UK protocol for wind and the BERR guidance for onshore wind seemed to just “appear” with no prior warning The idea of the IPC seems to make a nonsense of democracy as the people who will be most aVected are seemingly being ignored.

16. In the North East Wind Turbines are not doing what they promised yet a letter from the Energy Minister stated there were no problems in the North East. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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The following figures show the reality:

LOAD FACTORS AS % (COMPILED BY E MANN FROM FIGURES ON OFGEM WEBSITE)

Name of wind power station 2003 2004 2005 2006 2007 Blyth Harbour Wall 12 11.6 13.2 10.5 9.57 Great Eppleton 11.2 15 zero zero zero Kirkheaton 25.3 26.8 23.2 27.6 25.74 Tow Law 26.2 31.7 30.8 28.6 21.64 High Hedley Hope 27.4 32.2 33.8 28.6 31.89 GlaxoSmithKline — — 8.9 8.2 10.07 Holmside — — 19.1 14.2 16.7 Holmside nVo — — 19.8 16.2 22.03 Hare Hill — — 14.6 16.2 21.94 Hare Hill nVo — — 18.3 21.1 18.29 *High Volts — 15.7 18.4 15.5 21.38 *High Volts nVo — 30.1 20.1 6.6 21.74 Blyth oVshore WTG 1 16.2 26.5 8.8 2.1 zero Blyth oVshore WTG 2 (LF zero 2002) zero zero zero zero zero

Elizabeth Mann 12 June 2008

Memorandum by the Carbon Capture and Storage Association (CCSA)

Introduction 1. The Carbon Capture and Storage Association (CCSA) welcomes this opportunity to submit its views to the Committee’s inquiry into the economics of renewable energy. 2. The CCSA brings together a wide range of specialist companies spanning the spectrum of CCS technology, as well as a variety of support services to the energy sector. The Association exists to represent the interests of its members in promoting the business of CCS and to assist policy developments in the UK and the EU towards a long term regulatory framework for CCS, as a cost-eVective means of abating carbon dioxide emissions. 3. The Main Points Arising are: — To solve the climate problem needs all technologies as quickly as possible. — Fossil fuel with CCS is comparable in cost to renewable sources and is likely to be able to achieve major cost reduction as it matures. — Fossil fuel with CCS is entirely complementary to renewables. Indeed it can help to increase renewable penetration. — CCS is not currently given favourable treatment in the UK, in Europe and elsewhere to enable it to become a mature and mainstream technology. — Given the complementary nature of the two technology types and the fact that the sources of emission reductions are immaterial in hitting global targets, the incentivisation of both technologies should be broadly comparable.

Potential for CCS 4. CCS has the capability to deliver large quantities of carbon abatement. As an example, annual emission reductions of seven million tonnes CO2 could be delivered by capturing emissions from a single large new coal station, equivalent to the savings from around eight hundred wind turbines. A study recently published by Yorkshire Forward outlines how 60 million tonnes of CO2 could be collected and stored from the Humberside region alone. Internationally, the market for equipment and services for CCS is likely to be extremely large and will be interdependent with that for renewables. Processed: 17-11-2008 19:38:16 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

256 the economics of renewable energy: evidence

5. The CCSA argues that there is a strong case for predicting that costs of carbon abatement from carbon capture and storage are likely to be comparable with a large proportion of renewables in the longer-term—a view supported by several independent researchers due to the fact that CCS: — Is a relatively immature technology with major scope for cost reduction through learning; — Has lower external costs than many renewable technologies (less backup generation and grid reinforcement); and

— Gives the opportunity for economies of scale in CO2 transport and storage network with multiple CCS projects. 6. We submit that given the above, CCS should be considered as an additional and complementary generation technology to renewables for decarbonising the electricity sector in the UK, and be given access to comparable levels of incentives.

Challenge of Decarbonising the Power Sector

7. The British Government32 has committed to a target of reducing targeted greenhouse gas emissions by at least 60% by 2050. It is highly likely that the majority burden of this target will fall on the electricity sector, and it is not unreasonable to suggest that over this timescale complete decarbonisation of the electricity sector is likely to be required. The prospect of decarbonisation of the heat and transport sectors further raises the need for new low-carbon energy conversion. 8. The primary choices for new low-carbon generation technologies lie between nuclear, CCS, solar-, wave- and wind power. To achieve large scale decarbonisation, and given that photovoltaics are a long way from being cost competitive in the UK, the greater part of this new and replacement capacity will come from nuclear, CCS and wind power. 9. Recent lead times for power station projects and networks reinforcements, combined with a world market in which equipment suppliers are struggling to produce suYcient supplies of (amongst others) turbines, boilers and cables, suggests that reliance on any single technology to deliver the new generation capacity will be extremely risky33. Experience also suggests that the lead times required for both wind and nuclear projects to gain public consent can be considerable, and it is not clear that the aims of the Government’s Planning White Paper34 will be fully realised. 10. We believe that constraining policy to renewables and nuclear in these circumstances would be very unwise. Incorporation of CCS into policy thinking would not only create diversity in the fuel mix but significantly strengthen the UK’s potential to deliver rapid reductions of carbon emissions.

Limits to the Role Renewables Can Play

11. The primary renewable technologies in the UK electricity sector are likely to be limited to onshore and oVshore wind in the near future. Typically the load factor for viable windfarms is 25–40%, with the higher end of the range only achievable by oVshore windfarms. 12. Wind intermittency will be a major challenge for the electricity system. Industry experts35 suggest that a wind capacity of 25GW will oVset only 5GW of thermal power meaning that a further 20GW of thermal capacity will be needed on the system. This sets some natural limits to the capacity for delivery of a decarbonised power sector from wind. 13. As a low-carbon thermal generation technology, CCS is very well placed to complement wind power with the additional capacity needed to maintain system flexibility and operational security of supply. Such flexibility will be in greater demand due to the system eVects of substantial intermittent generation volumes, while the ability of other low-carbon technologies to provide suYcient volume (at a reasonable price) is very limited. 14. A mix of wind, nuclear and CCS appears to provide a technically feasible way forward, and to deliver the best prospect of rapid reductions in carbon dioxide emissions. 32 UK Government Climate Change [HL] Bill—2007–08 33 For example anecdotal evidence suggests the current lead time for a new CCGT is in excess of five years. 34 Planning for a Sustainable Future, White Paper, May 2007 35 Strbac et all, 2007 Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 257

Need for New Technology Incentives for CCS

15. Making a robust economic comparison between renewables and CCS is not straightforward. Like many renewable technologies, CCS requires credible and material policy support to realise its longer-term potential and with these we believe that CCS will be competitive with other generation technologies. The current approach of selecting the renewables sector as a technical winning sector carries the real risk of delaying CCS development. 16. A historical comparison between oVshore wind and CCS is limited by technological immaturity: the few oVshore windfarms in UK waters have a limited track record, and economic assessments of CCS projects are limited to those based on engineering studies. In a similar vein, both wind and CCS can legitimately claim the potential for cost reductions in the future as their deployment grows worldwide. 17. Events in world markets have made comparisons even more diYcult: global demand for Engineering & Procurement Contracting services in the energy sector in recent years has increased costs of engineering projects by around 25% annually and, in several cases, suppliers not quoting for projects; rising gas and coal prices have had a direct impact on the generating costs of all thermal power stations. 18. Although skewed by recent movements in the market the CCSA believes that there is a strong body of evidence from recent studies to conclude that CCS generation costs can be comparable with renewables. A study published by DTI in 2006 provided estimates of the costs of CO2 abatement from CCS that would be comparable to many renewable technologies36. We also believe that CCS will be competitive with nuclear power stations, although the comparison is even more complex. As CCS is high on its learning curve it is reasonable to expect costs to fall rapidly with deployment, while in contrast, nuclear power and onshore wind are mature technologies, and the costs are therefore less likely to fall. 19. Of the three low carbon power generation technologies, nuclear power has benefited from many billions, maybe trillions, of public support, and renewable energy has certainly benefited from many billions. Even though nuclear power and some renewables can be considered quite mature technologies they still receive considerable public support. We must ensure that CCS, which is not a mature technology, is similarly treated. 20. A truly comprehensive economic comparison between wind and CCS should also consider additional costs for renewables attributable to its intermittency and any additional networks investment. Inclusion of these system-wide costs will only strengthen the competitiveness of CCS. 21. As CCS is not yet a proven commercial generation technology, it should be considered as an “early mover”. In order more strongly to stimulate investment in demonstration projects we believe that robust incentives will be required to overcome the particular risks of a technology at this stage of development. Access to comparable financial support available to more mature renewable technologies would provide an appropriate stimulus.

Recognition of CCS Contribution towards European Carbon Targets

22. It is worth noting that reductions in carbon emissions from CCS will have exactly the same eVect on climate change as emission reductions arising from renewable generation technologies. 23. By limiting the EU renewables targets to those achievable by renewables technologies, we believe that the proposed Directive is unwisely limiting its technology choice from an implementation view, as well as from an economic standpoint. Enabling CCS to contribute to European renewable energy targets, as has been suggested by a number of commentators, is likely to make delivery far more likely as it provides an incentive for EU Member States to put in place incentives for CCS as well as renewables. At present the renewables targets disincentivises Member States support for CCS because the renewables commitment will be joint & several and binding whereas the EU aspiration for 12 CCS demonstration projects is not several and not binding and is thus secondary in competition for State funding. We would therefore urge the inquiry to recommend that policy support for renewables does not distort incentives for other low-carbon options like CCS. 24. Given the immense challenge of the draft Renewables Directive and the high risk of not meeting it, inclusion of CCS could well help to reduce potential EU penalties if the UK fails to meet its target. 36 www.berr.gov.uk/files/file36782.pdf Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

258 the economics of renewable energy: evidence

Conclusion 25. The CCSA believes that Carbon Capture and Storage should be adopted by policymakers as a parallel approach to renewables in the drive to reduce greenhouse emissions. 26. Expanding the range of credible choices open to governments and markets to deliver carbon abatement will give greater chance of meeting already ambitious targets. 27. By providing system flexibility fossil fuel power plants with CCS will actually enable greater penetration of intermittent generation sources. 28. CCS is cost competitive with most renewables now, especially if intermittency and system costs are factored in. It has the potential to become cheaper than renewables in future with greater maturity, and indeed is expected in due course to be competitive on the basis of the carbon price alone. However this will only happen if CCS is given financial incentives of the sort renewables have been granted, to enable early deployment. 16 June 2008

Memorandum by Peter and Maureen Caswell We attach evidence mainly relating to points 2 and 6 (below). Our evidence is concerned with the proliferation of industrial wind turbines due to the Government’s ROC policy. “2. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb?” “6. How do the external costs of renewable generation of electricity—such as concerns in many aVected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the diVerent considerations?” We strongly believe that the current imposition (through existing planning guides) of 125m (410ft) high industrial structures into rural areas is flawed. Rural does not mean unpopulated. The reality of today is huge turbines sited with blades within 25m of non-participating neighbours land. Those that do not have evangelical blinkers realise installation of huge structures will negatively aVect the landscape and “amenity” of local residents. The reality is (for England at least) we have a high density of population compared with EU neighbours. With onshore wind, we are using the most invasive and dominating option for what is only a supplementary not a replacement power source. There is little trust in the Governments wind energy policy. For now we can only believe that turbines are being used as giant political pawns, soon to be peppering the countryside, making millions for astute investors, whilst local communities are split and their health and homes negatively impacted in exchange. 1. At long last we have hope that there will be a reality check on what is going on under the renewable energy banner, how a seemingly noble cause is being hijacked by murky goings on and ordinary people are being sacrificed to “get rich quick” scams. I am of course referring to the attempt to cover as much of the countryside as possible in “wind farms”, before people realise how these adversely aVect local communities. 2. We live in the very tip of rural Leicestershire, the beautiful Vale of Belvoir and are currently under threat of not one but two separate wind farm developments in an area of low wind resource. We asked ourselves why anyone would choose sites surrounded by villages, where the distance across the sites between two of the villages is less than 2 miles. Well the answer came as no surprise as an advert in a farming magazine explained: “Fancy making millions? Have a Wind Farm!” This goes on to say “most landowners are not aware that they can make further millions out of a wind farm project if they are prepared to deal with the planning application themselves.” The first wind farm, although recommended for approval by planning oYcers was turned down by the planning committee, but is now going to appeal. The second is in scoping. 3. The first (10 turbines; each 125m/410ft high) is so close to a newly approved oYce that it is less than the fall over distance at something less than 63 metres. Advice according to Vestas Wind Systems in their safety regulations for operators and technicians states; “Do not stay within a radius of 400m (1,300 feet) from the turbine unless it is necessary.” So why would planning oYcers consider 63m is safe?! There are bridleways and public rights of way at both sites far closer than the 400m. One footpath would go directly between two turbines only 200m apart. This separation will aVect eYciency as well as health and safety. Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 259

4. The nearest home is less than 700m away from the first development, half the distance recommended by two recent health reports. The second development site has 8 turbines about 750m from our village and two other villages with a combined population of 3,500; again well within the distance documented to cause health problems. The current British regulations fail to recognize these problems, because doing so would mean having to admit they’ve already been sited too close to homes! The out of date guidelines that are used ETSU- R-97, were drawn up to a large extent by people involved in the wind energy and associated industries. Even so they said at the time it would need updating within a couple of years, ie before the turn of the last century! ETSU-R-97 provides less protection than the standards of the World Health Organisation for community noise. An Ombudsman looking into a noise problem at one dwelling described the current standard as “vague, open to interpretation, immeasurable and thus unenforceable” So hence they are sticking to it as it aVords no protection to anyone and thus allows wind development to take place where they know it is highly unsuitable. The “Hayes Mackenzie report 2006” (noise) which the Government uses in planning guidelines is another example of a company with direct interests in the wind industry. We believe they are being employed at one of the sites, therefore we see them as far from impartial. 5. We have taken the time to visit two sites, so as not to prejudge the situation. On a very windy day we stopped at a shop where we could hear very eerie noise. The shop owner said it didn’t bother him, but we were later to learn that the land was his and he was organising tours. At a diVerent site we noticed a number of homes close to the site were up for sale. At one we asked; what it was like living close to the wind turbines? The initial response was no problem, but when they realised that we were not interested in the property, they said that they would tell me the truth “they loathed them”. Two of the household were feeling ill. They had already dropped the house price by 17%. People who had put in an oVer withdrew once they found out about the wind farm. They were stuck. They showed us a response from the developer which refused to acknowledge any problem with any issue, no proof of health problems or eVects on animals (their dogs behaved diVerently once the wind farm went up). The drop in the house price was put down to the credit crunch. We were told of a noise issues at two neighbouring properties. We spoke to another couple seriously thinking of moving after their retirement home had now become a nightmare. We then went closer to the site. To be honest we didn’t hear more than a slight whoosh, but were astounded to discover that we both started to “feel” strange. As we left, we turned on the car radio, we couldn’t believe our ears, it was pulsing in time to the rotation of the blades. 6. So far we know there have been issues at: Deeping St Nicholas Lincolnshire Conisholme Lincolnshire Bradworthy North Devon Askam Cumbria Wadebridge Cornwall Bears Down Cornwall Blaen Bowi Wales Taurbeg Cork Eire Elmira Prince Edward Island Canada Pubnico Nova Scotia Canada Meyersdale Pensylvania USA Mackinaw City Michigan USA Fenner New York USA Mars Hill Maine USA Atherton Tablelands Queensland Australia Te Apiti North Island New Zealand 7. This is just the tip of the iceberg. The problem appears to be a combination of noise which is audible and noise which is low frequency or infrasound. Lower frequencies are felt rather than heard. Through the research that we have carried out, we’ve learnt that this type of noise has been used as a weapon of war where people exhibited similar symptoms to those being reported by people living close to wind turbines. We got in touch with Nina Pierpont, an American doctor who has researched the health implications of wind turbines for over 3.5 years. She recommends that a buVer zone of 1.5 miles between homes and turbines and uses the term “Wind Turbine Syndrome” to describe the symptoms she found. 8. This is a similar distance to the UK based “Health & Human Rights Report”(2007) which recommends 2km and The French Academy of Medicine which recommends 1.5km. Research in Portugal indicated that long term exposure could lead to VAD or vibroacoustic disease. World Health Guildelines for community noise 1999; “evidence on low frequency noise is suYciently strong to warrant immediate concern”. Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

260 the economics of renewable energy: evidence

9. So when an advert claiming “wind turbines are not a danger to health” despite these reports being freely available, we asked the ASA to take a look. Surprisingly they didn’t find in our favour, despite the inclusion of the letter from Nina Pierpont. Considering what information is available this is an impossible statement to make. We feel the ASA decision is dubious to say the least. Just consider, a new drug with this many reported side eVects would not be allowed onto the market. There has been no health research. 10. The whole process to implement renewables regardless of the local cost is a complete shambles. Health is not considered a planning issue, nor is whether it is likely to produce significant electricity. Grid connection is a separate planning issue, as is the erection of an anemometer mast. 11. Denmark is considering compensation for those people who have had wind turbines imposed on them and we should do the same. People who suVer are trapped, being unable to sell their homes for anywhere near market value. The real cost is the gradual destruction of rural communities, “robbing the poor and giving to the rich”. Local people have their amenity, quality of life and possibly their health taken away from them. In our location 7,500 people will be directly aVected, although there are knock on eVects spreading out from the area. 12. In response to the first application over a 1,000 individual objection letters were sent to the council. As much credence was given to the mass produced tick sheets put forward by the developer. I asked a planning oYcer why the concerns of local people weren’t taken into account? He looked directly at me, smiled and said “we don’t have to!” The latest government planning “guidelines” encourages this biased attitude which leads to an abuse of basic human rights, as peoples homes are reduced in amenity and value. This amounts to double standards, we condemn other countries for doing similar. The end result is to turn people who were in favour of doing something to help the environment against the idea because of the way it is cynically misused by big businesses to line their own pockets. Are targets really more important than the lives of UK citizens? 13. The existing UK law oVers no protection whatsoever to residents. I beg of you to change the law to establish a 2km buVer zone between any industrial sized wind turbine and any home, so there is at least some protection for communities as is recommended in Scottish planning guidelines. All around the country citizens are being sentenced 25 to life, just for choosing to live in a rural area. They have lost everything and gained nothing, whilst developers profit and landowners can aVord to move on. 14. Please please please for the sake of all communities throughout the country, look at what is really going on and not the hype.

Other Factors to Consider 1. Wind turbines don’t work in a power cut—so will not save us from having to find alternatives. 2. The levels of electricity they actually produce are far lower than the levels they proudly claim in their brochures 3. On stormy days they are shut down to prevent spinning out of control. Reconnecting to the grid with high winds can cause black outs as shown in Europe 4. There are no Government sponsored studies to look into what is actually going on in areas already changed by wind farms Unfunded reports indicate increased levels of depression, heart attacks etc in areas where wind farms have gone ahead. 5. The eVects on local wildlife. We have heard that bats and birds end up being killed in quite large numbers at some locations. 6. The biggest myth is the environmental banner the developers hide under. The company which is appealing in our area is made up of Dutch group fined for cartel activities, a property company (once respected) which has a conflict of interests by contributing to devaluing local properties and a chief executive who imports digital goods from China (low carbon footprint??). He sees himself as an eVective money maker. This shows the real reason to be money not environmental. 7. Ecosystems change once turbines are up and running (Everything from worms and insects to larger animals). It is well known that creatures pick up vibrations and low frequency noise long before humans do, yet there are no studies on what is happening around wind farms currently in operation. 8. Larger mammals apparently change their behaviour around wind farms. There are no studies to see what implications this has for livestock or crop pollination on neighbouring farms. In Germany micro climate changes with localised drought eVect have been reported. There is no research on what eVects will be if we lose local eco balances up & down the country. Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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9. Just because nobody has bothered to look into eVects doesn’t mean they don’t exist. There are enough people right around the globe giving warnings to make you realise that there are problems and serious problems at that. 10. Once some wind turbines get planning permission—others follow as the area is already blighted, there is nothing to save. More than one site is facing a doubling of the original numbers of turbines. 11. Justification appears to be that if any light industry exists or a row of pylons is present, the land is deemed ugly by developers. Using this logic there is very little in the UK left to save, which is obviously not the case. 12. The developers do not help local people. They hide behind poor legislation and ineVective guidelines. They create problems, move to another area and do the same again, sometimes using a new name. 13. There is obviously no UK law to protect local people. The European human rights act should protect us, but no-one has tested it yet. It is probably only a matter of time. 14. Much of Europe already has years of experience with wind energy. It is apparent it is not a magic solution. Why are we not learning from mistakes already made elsewhere? Surely common sense should prevail over artificial targets. 22 May 2008

Memorandum by Christofferson Robb & Company

Background 1. ChristoVerson, Robb & Company (CRC) manages the CRC Global Structured Energy Fund, Ltd., which owns 100% of Thanet OVshore Wind, Ltd. Thanet is an oVshore wind farm development located 11 kilometres from North Foreland in the Thames Estuary. After it is commissioned in late 2009, Thanet will be the world’s largest oVshore wind farm with a capacity of 300 MW. It will generate approximately 3% of the average electricity consumed by London and 0.2% of the electricity consumed by the UK. When the wind blows at more than 15 m/s (34 miles per hour), Thanet will generate 9% of London’s electricity. Thanet will save approximately one million tons of CO2 emissions per annum compared to a typical coal-fired power plant. 2. Prior to Thanet, CRC’s Energy Fund acquired 430 MW of onshore wind farm capacity in Germany and France. CRC refinanced the construction debt for these farms by issuing a ƒ470,000,000 whole-business securitisation called “CRC Breeze Finance”. According to Windpower Monthly (May 2006), this was the “first international financing where renewable energy infrastructure has been funded directly from the capital markets”. 3. CRC is a private money management firm with oYces in London and New York. Its funds are supplied by institutional investors, primarily in Europe, North America and Asia. ChristoVerson, Robb & Company LLC is registered as an Investment Advisor with the U.S. SEC. ChristoVerson, Robb & Company (UK) LLP is authorised and regulated by the Financial Services Authority. 4. CRC has focused this submission on the economic insights gained from the Thanet project and the ensuing policy implications.

Summary of Offshore Wind Economics 5. Wind is by far the least costly technology for generating meaningful amounts of power by 2020. Solar photovoltaic requires five times the feed-in tariV of wind to break even in sunny places such as Spain and Italy. Tidal energy will remain a laboratory experiment for at least the next decade; no tidal project in the world produces commercial amounts of energy, and history has taught us that complex technologies only take root after years of trial and error. Only wind power—which has benefited from 40 years of continuous improvements—is here and now. Onshore wind is feasible in principle, but faces fierce local opposition in a densely populated, scenic country. OVshore wind projects are perfectly suited to the UK’s long, windy coastline. 6. A back-of-the-envelope calculation summarises the returns an investor can expect for a Round 2 oVshore wind farm: 100 turbines x 3 MW per turbine x 40% eYciency (since the wind does not blow all the time) x 93% availability (to account for downtime due to scheduled and unscheduled repairs) x 24 hours x 365 days Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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x 97% (adjusting for transmission losses) x 85% (assuming operating and maintenance % 15%) x [£70 per MWh (electricity) ! 1.5 x £52 (ROC) ! £4 (LEC)] per MWh x 87% PPA (to account for costs of marketing power under PPA) % £107,000,000 per annum Cost % £725,000,000; Annual revenues divided by upfront cost: 14.7%. 7. Accounting for depreciation of the equipment over 20 years, decommissioning reserves, income taxes, and a two-year delay between outlay of funds and the onset of revenues, the project’s internal rate of return drops to 10%. With bank financing, the base case return could be boosted as high as 12%. This calculation—which already assumes 1.5 ROC per MWh—demonstrates that investors can expect a meager return for bearing significant risks to construction, power prices and the amount of wind. It demonstrates in general terms why the UK build-out so far has been immaterial:

COMMISSIONED OFFSHORE UK WIND MW THROUGH JUNE 2008

Year Project MW Owner Turbine Supplier 2000 Blyth 4 E.ON Vestas 2003 North Hoyle 60 Beaufort Wind Vestas 2004 Scroby Sands 60 E.ON UK Vestas 2005 Kentish Flats 90 Elsam, Vattenfall Vestas 2006 Barrow 90 Centrica, DONG Areva, Vestas 2007 Burbo Bank 90 DONG Siemens 2007 Beatrice 10 Talisman Energy RePower Total 404

High Capital Costs and Imperfect Information Undermine the Theoretical Benefits of a ROC Obligation Scheme

8. Under certain conditions, market-based schemes, such as ROCs, can harness the eYciency of price competition without requiring the government to select the winning technology or micromanage the implementation. Consider, for example, a model with various suppliers of electricity derived from bio-diesel. Assume (i) perfect competition for electricity generation as well as for the factors of production (ii) capital can be immediately expanded or contracted with constant returns to scale (iii) government policy desires a fixed amount of electricity from bio-diesel at the minimal cost to society. Given these assumptions, the optimal subsidy policy would require utilities to produce or purchase a fixed amount of electricity from bio-diesel (or equivalent certificates). The utilities would purchase this electricity at the lowest cost. Each generator would charge its marginal cost based on the cheapest possible feedstock and the generator’s technology. In this way, each generator would balance social costs of the factors of production, such as alternative feedstocks, with the market price. 9. But the above model does not describe the economics of wind. Nearly all the cost is upfront: engineering, constructing and installing foundations, the oVshore substation, inter-array cables (between turbines), export cables (from the turbines to the shore), the turbines and reinforcements for transmission to the onshore grid. Either a wind farm is built or it is not, and once built, the owner has few decisions to make. Wind—the principal input—is free. A renewable trading scheme may transfer wealth, but it will have no bearing on eYciency. A similar analysis applies to solar energy. 10. With banded multiple ROC obligations, the Government must set RO levels for each technology. This puts the Government squarely in the business of selecting what forms of renewable energy it wishes to promote. There is a one-to-one mapping between RO levels and outcomes, as there is a similar mapping from feed-in tariVs to outcomes. A ROC regime, however, maximizes uncertainty both for investors and policymakers: for example, does 1.5 ROCs per MWh make oVshore wind economical? The answer hinges on investors’ guesses about build-out of renewable technologies, future modifications to rebanding and the legislative obligations to present ROCs over time. Power prices feed into the model for ROCs, since merchant electricity, along with ROCs, is a joint output of a renewable power plant—higher power prices stimulate renewable supply, holding everything else constant. Policy makers, trying to assess the eVect of rebanding, Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 263 must predict how investors will model these factors. The only way to know the result of a rebanding is to try it, wait several years, and see what happens. As argued below in the section on Policy Recommendation, a feed-in tariV for wind will deliver results that will be immediate and predictable.

Incentives to First Movers 11. Technical progress in any industry—whether automobiles, computers, or wind farms—is incremental. The industry learns by doing. Not only does the world gain scientific knowledge from each project, but a wide range of service providers and distributors evolve over time and improve eYciency. In the case of oVshore wind, the first projects are helping to educate workers who install the foundations; each project conducts environmental studies that are useful in the future; when the projects begin operations, they generate data that reduces uncertainty and improves financing terms for projects that follow. 12. The first projects cannot capture the monetary value of these externalities, so, in an eYcient market, profit- making competitors will under-invest in the absence of transfers or subsidies.

Expectations of Regime Shift 13. Investors know that the current subsidy regime is not achieving the UK’s policy objectives. That knowledge creates an expectation of more generous subsidies in the future. This causes prospective wind investors to wait, because an investor who starts a project now faces the risk that it might not qualify for whatever subsidy comes next. In a vicious cycle, waiting further reduces investment and reinforces the expectation that policy will change. 14. The way out of this negative feedback loop is twofold: (i) binding assurances that any project commissioned in the future will be eligible for new subsidies that the government oVers to others; and (ii) quick action on the new plan. A lengthy debate inhibits investment in the short-term, as rational investors postpone their decisions until they are sure of the outcome.

Supply Chain 15. An oVshore wind project relies on specialised equipment, including jack-up barges, heavy-lift cranes, pneumatic hammers for pounding the foundations into the sea bed, and high-strength gearboxes that will not corrode in humid, salty air. These, in turn, depend on components that require heavy capital outlays to manufacture. Today, every oVshore wind farm developer must confront an array of monopoly or oligopoly suppliers of these specialised inputs. Many components are procured from the oVshore oil and gas industry at a premium. Each supplier contract must be negotiated separately, and frequently presumes deployment of a particular technology that has not been secured. Therefore, at each stage, the supplier may try to “hold up” the project as the price of securing the required technology, and extract a large share of the future revenue. As an example, if a wind farm developer has entered into construction contracts for £675 m, and has only one £25 million contract left to sign with the owner of a specialized barge, the barge owner could instead charge something nearer to the price of a new barge plus the lost revenues the wind farm would forego during the barge construction period. A new barge would take two years to build and cost the developer £50 million while the delay would costs £100 million in lost revenues. Therefore, the barge owner could demand more than £125 million and force the developer into a loss overall. A rational developer must anticipate some of these “hold ups”—CRC estimates that windfall rents to monopoly suppliers might account for 10–15% of project costs. 16. A mature industry deals with “hold ups” in two ways. The first is vertical integration. Firms expand their scope because it is less costly to negotiate contracts internally than with third parties. The second is competition among suppliers. Both vertical integration and competition will require major capital outlays, which will not happen unless oVshore wind economics improve.

Policy Recommendation 17. The public policy challenge is to promote the most eYcient projects using the least possible subsidy. (i) The subsidy should be just large enough to attract the desired investment. (ii) It should provide certainty to investors in wind projects, and equally, to firms further down the supply chain, to support capital investment. Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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(iii) Any new policy should be decided upon and implemented quickly, since market participants will postpone their projects while they await the outcome of the debate. (iv) Finally, it should provide incentives to first movers who create know-how that benefits those who come later. 18. CRC has experience with the German model and believes it satisfies these criteria. It provides a guaranteed feed-in tariV for 20 years and mandates the grid operator to purchase all the electricity a wind farm can produce at the guaranteed price.37 The principle of “grandfathering” is rooted in the German constitution: anyone who invests based on a prevailing law will be protected if that law changes. The feed-in tariV stays fixed for 20 years and depends on the year the farm was commissioned. The tariV drops by 2% per annum—that is, a wind farm commissioned in 2006 receives ƒ83.6 per MW/h for 20 years while a farm commissioned in 2007 receives ƒ83.6/1.02 %ƒ82.0 for 20 years. This annual tariV drop also ensures that technical progress will not result in a windfall for developers, but will preserve steady returns. 19. Specifically, CRC recommends: Feed-in TariV: (£160 per MWh) x RPI inflation factor x (1.02)-t for 20 years after commissioning where t % number of years commissioned after 2010 (t%0 for turbines commissioned in 2009 or 2010; t%1 for turbines commissioned in 2011; t%2 for turbines commissioned in 2012 . . .) The £160 per MWh corresponds to a power price of £78 per MWh, 1.5 ROC per MWh at a ROC price of £52 per MWh and a LEC price of £4 per MWh. Thus this proposal is not materially more generous than the existing regime. 20. The costs of the feed-in tariV would be borne by utilities in proportion to their share of power supply market, and ultimately passed on to consumers in proportion to their electricity consumption. 21. The feed-in tariV would result in the following key eYciencies: By reducing uncertainty, investors would be willing to accept lower rates of return. Projects would support more bank financing, further lowering the (unleveraged) required returns. Projects would save the costs connected with a power purchase agreement. A credible, supportive regime would justify investments along the supply chain, including competition and vertical integration that would sharply reduce transactions costs.

Conclusion

22. Thanet OVshore Wind has particularly attractive features that, to some extent, ameliorate the weak support regime. But the fact that Thanet can generate an acceptable return on investment does not mean that policy is on the right track or that UK wind energy construction is likely to surge in the near future. Thanet’s economics hold up uniquely because it is an ideal site. The cable landing site is a decommissioned oil-fired power plant, formerly the Richborough power station, so no reinforcements are necessary for transmission to the on-shore grid. The oVshore substation is only 100 kilometres from the centre of London, enabling Thanet to produce electricity near where it is consumed with minimal transmission losses. Average water depth is about 22 metres and maximum depth is 25 metres, well within the operating capability of the vessels used for installation. The seabed is hard and topographically consistent. The Thames Estuary is one of the windiest locations in the world that is suitable for oVshore wind development: Thanet’s average long-term wind speed is 9.4 m/s (21 miles per hour) at the 80 metre hub height. Compared to the winds of 6.3 m/s (14 miles per hour) in CRC’s previous onshore portfolio, Thanet will generate more than twice the energy yield per installed MW (owing to a nonlinear relationship between wind speed and power production). Yet even under such ideal conditions, Thanet’s expected returns on capital barely reach the typical returns for less risky, conventional infrastructure projects. 23. With today’s subsidy regime, CRC expects the UK to add fewer than 300 MW of new wind capacity per year. This would lead to approximately 3 GW of capacity by 2020, which equates to 1 GW of continuous production—less than 2% of 2007 consumption. No other source of renewable energy is likely to contribute meaningfully in the next 12 years. 37 For extraordinarily productive farms, the tariV can run out prior to 20 years based on a formula. In practice, this has not happened as far as CRC knows. Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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24. However, with swift policy action, the developers and suppliers will invest in the infrastructure needed for an eYcient, rational supply chain. Switching to a feed-in tariV and grandfathering the early adopters will minimize the social cost. CRC believes that a 20-year feed-in tariV of £160 per MW/h would radically transform the industry and deliver 5–7% of the UK’s electricity by 2020 while imposing a comparable social cost per MW/h to the existing scheme. 16 June 2008

Memorandum by Jane and Julian Davis

1. Why we are Qualified to Respond to this Call for Evidence? 1.1 We are Jane and Julian Davis, we farm (on a county council smallholding) in Spalding, South Lincolnshire. Julian has always farmed, in the place that is our home, and is also an agronomist. Jane is a Nurse, Midwife and Health Visitor (retired) and has been involved with mainly rural communities since 1980. 1.2 Our house, which we own, on our tenanted arable farm, is 930m from a wind farm, and is downwind of the prevailing wind. The wind farm, comprised of eight wind turbines, each 100m high at blade tip with 2 MW capacity, became operational in the summer of 2006. Immediately we started having problems with the noise and hum coming from the wind turbines. 1.3 By May 2007 we were forced to abandon our home as a place in which to sleep and live; we currently rent a property 5 miles away so that our family can live as near a normal life as possible. Our house is now likely to have a value of just the land—£35K to £50K and is no longer marketable as a home for people to live in.38 1.4 We did not object to the wind farm in the planning stage as we had no reason to think that there would be any issues for us and we believed, at that time, that wind power was a good way of meeting the energy gap. 1.5 As a result of our experiences, including the fact that to date nothing has been done by anyone even to attempt to mitigate the noise issues which we suVer, we have been invited to talk to in excess of 40 communities across the UK where wind farms are proposed, and occasionally we co-present with other noise pollution victims from wind farms across the UK. 1.6 Some of those communities have been in touch with us to suggest, by virtue not only of our own experiences, but also as a result of enormous interaction with individuals, groups, and experts in diverse fields relating to wind farms, that we are in a unique position to submit very relevant evidence to the Select Committee. We have also presented at the International Wind turbine Noise Conference held in Lyon in 2007.39 1.7 We now know that we suVer from aerodynamic or amplitude modulation created by the noise from the wind turbine array. The government has found it necessary to set a specific measurement for wind turbine noise (ETSU-R-97) and has publicly acknowledged that aerodynamic modulation is not fully understood by scientists. This means that no developer can categorically state that there will not be a noise problem. 1.8 We know that not every wind farm creates noise issues but those that do make life impossible for those who live near them. By near we mean within 1.5 miles, or 2 km.

2. Our Response to the Committee’s Question 2

What are the barriers to greater deployment of renewable energy? 2.1 As far as wind farms are concerned, one of the main barriers to greater deployment is the understandable negativity with which wind farms are now perceived. 2.2 A deluge of inappropriately and insensitively sited wind farms has resulted in huge, unprecedented communication between people across the UK which, in turn, has fostered increasing cynicism towards wind energy, if not Renewables per se. 2.3 The behaviour of the wind energy industry, whose tactics to succeed at any price, promotes the impression that there is something unsavoury about wind farms in the first place. Therefore, in our view, the wind energy industry has only itself to blame. 2.4 People generally do have a genuine concern for their environment, both locally and globally, and do appreciate the need for security of energy supply. 38 Appendix 1: Housing Issues 39 http://www.windturbinenoise2007.org/ p 7 Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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2.5 However, because these wider concerns are used tactically by the industry, they leave individuals and whole communities subsequently feeling that they have been disenfranchised. beguiled or even duped. 2.6 Noise, with possible consequential health eVects,40 and flicker from the blades, combine to diminish significantly, and even eradicate, the ability to enjoy the amenity of one’s home, loss of value of the home itself, all these increasingly justifiable fears make people very worried. Increasing knowledge is demonstrating that Wind Turbine Syndrome does exist, and emerging evidence from across the world does demonstrate the devastating eVects that this can have.41 A study into flicker and association with photosensitive epilepsy has recently been published.42 2.7 Many people, rightly in our experience (appendix 1), are concerned that their property values will fall. Hopefully not as drastically as our now unmarketable home, but by 20% at least. Given that successive UK governments have promoted home ownership and that wind farms, in the main, are built in small rural areas and villages, this is a significant and greatly underestimated reason for people strongly resisting wind farms near their home. Existing studies, even by such eminent bodies as the RICS have been shown to be flawed in their reporting.43 Hansard reports some Local Authorities are already giving discretionary Council Tax reductions thus acknowledging the devaluation of some aVected properties. 2.8 As far as our issues with noise are concerned, various investigations have been carried out. The Local Government Ombudsman has been involved. Her conclusion is that the noise planning condition (which is the same as, or similar to, every other noise condition imposed in the country for Wind Farms, based around ETSU-R-97, the so called industry standard) is “vague, open to interpretation immeasurable and thus unenforceable”. In our case planning conditions were approved by the Planning Inspectorate, which is outside the jurisdiction of the Local Government Ombudsman, so the matter of a non specific planning condition is now being investigated by the Parliamentary Ombudsman. 2.9 We know that 20% of all current wind farms have some noise problems, and at the moment at least 5% of the total operational numbers cause problems that are as bad as ours. However no-one really knows why, or appears interested in researching and finding out ways to solve an issue which clearly has the capacity to increase, if more wind turbines are built too close to homes. Because the wind energy industry cannot accurately predict if a site will experience problems with noise, and because ETSU-R-97, the guidance used by BERR for planning applications oVers no protection to families, wind turbines should never be sited near homes. 2.10 Therefore our experiences as described in this paper show that if you have a problem, even when authorities acknowledge one exists, nothing gets done. 3. Our Response to the Committee’s Question 3

Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? 3.1 We do not have the Scientific knowledge to be able to answer this, but based on our existing knowledge we are surprised that more work is not being undertaken to examine the viability of using geo-thermal applications (as an example, see Gresham Clacy’s work with the DTI in 199344). Wind energy is highly visible politically, whereas serious study/uptake of the geo-thermal option remains neglected. 4. Our Response to the Committee’s Question 6

What are the external costs associated with different forms of renewable energy, such as the impact on rural areas of an increase in wind farms? 4.1 We have recently written to the Rural Advocate, Dr Stuart Burgess, about this very subject, with specific reference to what we see as the fragmentation of rural communities caused by an impending wind farm application. As a result of our experiences we have since early 2007 made ourselves available, at no cost, to groups in other areas who wish to obtain more information about wind turbines, and any problems associated with living near them. 40 http://www.windturbinenoisehealthhumanrights.com/wtnhhr june2007.pdf 41 Nina Pierpont, MD, PhD, Wind Turbine Syndrome: A Report on a Natural Experiment (Santa Fe, NM: K-Selected Books). August 2008 42 Graham Harding, Pamela Harding, Arnold Wilkins (2008) Wind turbines, flicker, and photosensitive epilepsy: Characterizing the flashing that may precipitate seizures and optimizing guidelines to prevent them. Epilepsia. 2008 April 3. doi:10.1111/j.1528- 1167.2008.01563.x 43 http://www.publications.parliament.uk/pa/cm200708/cmhansrd/cm080513/text/80513w0003.htm. 44 http://en.wikipedia.org/wiki/Geothermal power in the United Kingdom Processed: 17-11-2008 19:38:17 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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4.2 In the past 18 months we have visited and delivered over 40 presentations. In our experience Wind Farm developers mainly target small, rural communities. We know that the industry somewhat insultingly calls these NGA’s.45 (Naive, Gullible and Apathetic) areas and they are prime targets. (Not, as we had naively thought, as a result of scientific research to pinpoint areas of high wind and appropriate locality, but simply areas where landowners wish to farm “wind turbines” alongside crops and livestock). Rural communities do not have the financial resources to fight inappropriate wind turbine applications. What is interpreted as apathy by developers is often a loss of morale within communities after prolonged campaigns over wind turbine applications. 4.3 Over this time we have become increasingly concerned not only about what we see as the fragmentation of small rural communities that is occurring, driven by some rather unpleasant tactics adopted by the wind farm developers, but also because rural communities are by their nature not strong empowered societies with eVective infrastructures. We have also seen evidence of what we believe to be undemocratic practice across the UK.

5. Tactics Employed by Developers (all of which lead the ordinary citizen to become even more suspicious of and opposed to the proposed development)

Some examples: 5.1 Marshland St James Norfolk there has been considerable animosity ever since the wind farm was first mooted. This has now divided the whole village. Unusually—in our experience—this is the only village where there has been criminal activity, damage to property, vandalism, arson attacks, and tragically a suicide. An internet search will give you much of the detail and the Police OYcer leading the Enquiries is Inspector Paul Durham. This wind farm application has not yet been submitted and all this is still happening. 5.2 Deeping St Nicholas (our own village), a Wind Farm Committee was set up to administer the so called community fund that allocates the village a small percentage of its profits (£30K initially and £10K annually). A complaint has already been made to the Parish Council about how this money is administered. My observation is that small communities (those with less than 2,000 residents) are often used to raising money for church fabric, community halls, for specific purposes and specific groups—but do not have the infrastructure in place to be able to easily administer unearned money with no specific target. Much unease and unrest has been caused, most of it between those who see themselves as “locals” and those who are perceived as “incomers”. The gift of money with no identified purpose seems to cause more disagreement than the raising of money for a specific entity. 5.3 Long Benington, Lincolnshire The aspiring developers, Infinergy, sent a document to all members of the Development Control committee before a planning application decision was discussed. We can confirm, on oath if needs be, that we have in our possession evidence and proof from South Holland District Council that all the statements within that document are flawed and based on false information and unrepresentative data. The monitoring of noise levels referred to was carried out by the local Council over 27 hours during the month of October 2007. That month turned out to have seen the lowest wind speed across the UK, and thus the turbines were only operating at an unrepresentative 11% during the month. (on average, they usually operate at 25%). These facts would have been known to the Fenland Wind Farms (our operators) when they asked South Holland District Council to issue the statement that provides the basis of the “Wind Prospect Statement on Deeping St Nicholas”. Despite evidence that this data is inaccurate, there has been no action to rescind the statement’s inaccuracies by the BWEA, which is still using this material. 5.4 Glyndebourne, Ringmer Sussex. A version of the Wind Prospect statement was sent out by the BWEA. [See sec 5.3]. This was submitted as a “Proof of Evidence” by the Acousticians acting for the Developers at the Glyndebourne Inquiry. South Holland District Council issued a rebuttal in part to the Inquiry 45 Sourced from MD of turbine manufacturer. J Lilley. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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5.5 Tynedale Public Inquiry, still in progress, Northumberland BWEA statement [see sec 5.3] submitted as a “Proof of Evidence” by Acousticians acting for the Developers. Mr & Mrs J Davis will be rebutting this, with evidence, at the Inquiry, in person. 5.6 Old Hutton Wind Farm Application. (Banks Development) (South Lakeland District Council) Banks Development oVered, and the Local Tennis Club have accepted in writing, a sum of money (believed to be about £19,000). Three of the members of the Tennis Club are also on the Local Parish Council who had not yet met to consider the Wind Farm proposal. When the Parish Council did meet later to discuss and consider the planning application for the wind farm, those members had to declare their interest and thus the Parish Council was left not quorate so that matter could not be acted upon. The villagers, therefore, were eVectively robbed of their rights to put forward a view, whatever those views might have been. 5.7 Mountboy site, Rossie Moor, Angus, Yelland, Isle of Wight, Berwick, (Toft Hill) and many others Activists, brought in from elsewhere by the Developers, set up stalls in local markets and even outside schools to canvas opinion as to whether people support renewable energy, and wind power in general. That response was then taken, and the figures used, to signify support for their specific scheme. As one would expect, many people were concerned and supported a broad renewable strategy, but did not expect their support to be submitted to planning authorities as support for a specific wind farm, which is quite a diVerent thing altogether. Sometimes children were encouraged to sign such cards. A similar tactic is employed when consultations are sent out within Parishes. Those who do not respond to the so-called consultation are counted as being “broadly in favour” as they did not actively respond to indicate they don’t want the wind farm. 5.8 “Community Funds” (Bribery.) These “funds” often come with a caveat that suggests they will be paid only if there is no significant opposition to the wind farm. These “funds” represent a minute fraction of the profits earned by developers, yet are very tempting to communities.46 5.9 Photomontages. The photomontages used by developers often misrepresent the true scale and impact of the development. For example, photomontages have been criticised for presenting panoramic views, often taken in weather conditions which further diminish the actual visual impact (this includes the infrastructure of the wind farm as well as the wind turbines themselves). This kind of misinformation, deliberately designed to misguide the public and planning oYcials alike, has done much to foster cynicism, frustration and fury within local communities. 5.10 Planning Regulations Decentralised planning conditions mean that there are geographical areas that have numerous wind farms because planning is undertaken without consistency or coordination and without any real understanding of the enormity of the cumulative impact; this can be seen in areas like Cumbria, the Lune valley, Wales, and Norfolk. 5.11 Time and money We are quite sure that the Government has no concept of the immense amount of time, money and emotional energy expended by villagers, in the vicinity of each inappropriate application. People are trying not only to protect the visual amenity of the area in which they live, but also not to lose the very thing which they have spent their lives working and saving for, notably an environment that promotes the health and well-being of families, as well as the peace, tranquillity and amenity of their homes and gardens. In our experience, each anti-wind turbine campaign (or “pro community and local environment campaign”), costs villages about £100,000 in real terms. If the matter goes to a public inquiry, then this amount can be tripled. This tremendous unseen cost represents the loss of important resources to local government and the communities. Moreover, these processes and inquiries also breed significant distrust, dislike, and disbelief in those who set our planning policies, as many appear to accept as de facto the reports produced by the wind turbine developers to support their applications, without further investigation or independent analyses. 5.12 Emotional Distress One current wind farm application in Devon aVects two local smallholding farmers with young families who had bought a small amount of land from a neighbouring farmer and built log cabins for the tourist industry. The farmer from whom they purchased the land has now applied for a wind farm to be built behind the cabins, some 400m away. This has understandably upset many people in the area. The emotional distress experienced by these families is, we understand, mirrored in cases up and down the country. 46 Evidence available. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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5.13 Public Inquiries Public Inquiries for turbine applications can last for weeks, if not months, the current so called Tynedale Inquiry being a case in point. The developers persist because there is so much profit to be made with ROC’s. They employ barristers and their legal teams, in addition to an array of planning consultants, often for extended periods. Local authorities and campaign groups struggle to represent local concerns and protect community well-being, even though financial resources are stretched and strained to accommodate this process. Such unequal financial burdens may already be aVecting the ability of many councils to address such responsibilities. Many will be unable to fund proper defence of decisions through the Appeal Courts. 5.14 Security of Supply There are two kinds of power, base load, and reserve (or back up). Wind turbines cannot be used as base load production as wind generated electricity is not reliable or predictable enough to allow this. 5.15 Jobs Developers often use the phrase “local employment may be created during construction, boosting the local economy”. In our experience “may” is usually a may NOT, unless you count temporary short-term local contracts for sand and gravel. The more complex engineering, electrical and construction works are put out to local tender, and then aspiring contractors are told—“sorry,—you do not have the appropriate expertise”— after which the services, components and workers are brought in from 3rd party suppliers almost always outside the UK, eg Vesta, Nordex, Re-Power, Hanssen Transmissions, Suzlon, GE etc. 5.16 BWEA The role of the BWEA is misunderstood, as many members of the public believe that it is an independent organisation set up to give accurate factual information about wind power. In fact, BWEA is the trade and professional body for the UK onshore and oVshore wind energy industries. In our experience it does not always present accurate information, as the ASA has pointed out on several occasions. For example, ASA said that BWEA had misrepresented CO2 “savings”47, 48 Closer to home as already mentioned in our case, BWEA has yet to correct the misinformation that it has put out about us.. BWEA has included this misinformation in summaries submitted to Public Inquiries as part of “Proofs of Evidence”. Thus, it seems that the role of the BWEA is to present misinformation that benefits the industry. 5.17 Noise and the Nature of Noise Our own experience and research suggests that the intrusive nature and the volume, depth, breadth and intensity of the noise are not yet fully understood. We find it very interesting that across the world people, such as ourselves, who suVer intensely from the noise use the same phrases to describe it. Phrases such as “a toy in a tumble dryer”, “a train that never arrives” “a thumping heartbeat”, “someone blowing in your ears”, “two or three helicopters flying above my house”, “a low-pitched, penetrating non-directional hum”, are used by suVerers in Canada, the USA, New Zealand, Italy, Ireland, Scotland, Wales, and other countries. These people usually experience the problem before realising there are others who have already been exposed. Yet developers still promise that noise will not be an issue. 5.17A A reasonable man may question why it is necessary to hold an “International Wind Turbine Noise Conference” every two years, outside the UK, with 24 countries attending over 2.5 days if, as the BWEA would contend, Wind Turbines are not noisy. 5.17B What the Wind Turbine Noise Does . . . Wind turbine noise is characterised by its loudness, pulsating character, low frequency component, and its continuous nature (often 24/7), which combine to aVect: — Sleep — Rest — The ability to enjoy the amenity that is your home (or was) — Health issues. — Loss of value to home — Concentration making using complex equipment potentially dangerous — Impaired cognitive ability — Social lives, eg it was no longer possible for our daughter to have “sleep-overs” — Mood changes and constant tiredness which leads to increased irritability, feelings of despair, and feelings of inability to cope with normal day to day activities. 47 http://www.asa.org.uk/asa/adjudications/Public/TF ADJ 43298.htm 48 http://www.asa.org.uk/asa/adjudications/Public/TF ADJ 43563.htm Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Tiredness means that you become more prone to accidents, not ideal in any circumstance but dangerous on a farm. The peculiar noises that the wind turbines emit cannot only be heard, they can also be felt by the body, and thus trying to rest becomes impossible. We tried: fans, white noise machines, sleeping tablets, red wine and ear plugs. The latter mask background noises but allow the low frequency sound wave to penetrate so that it feels part of your body. Meanwhile the beat, the pulsation, that is slightly faster than our human hearts beat, means that you feel as if you are constantly trying to get your heart to catch up with this external rhythm that is felt by the body rather than heard, so rest is impossible. The problem with the noises from the wind turbines is that they are so unpredictable, and the noise draws your attention and completely distracts you.

5.18 Safety Issues

There are an ever increasing number of reports about turbine blades breaking or fracturing and being thrown considerable distances, also some fires, ice “throws” and a small number of deaths in the construction phases. People find these worrying and concerning, particularly when homes are being built nearer to turbines in the UK than anywhere else in Europe.

5.19 Wildlife Issues

There are reports of raptors and bats being killed by turbines. Our moles have gone as they cannot tolerate the vibrations and there are ongoing studies into the eVects on essential fungi and invertebrates at the bottom of the food chain, which only live in still conditions.

5.20 Changing Specifications

Developers seem to change specifications of the wind turbines or the siting of the turbines after planning permissions have been granted with no further amendments or applications, to the detriment of the visual impact, and more worrying, to the audible eVects on the health and well-being of those living near the wind turbines. For example, the wind turbines proposed for Deeping St Nicholas initially had a tower height of 67 metres and a rotor diameter of 66 metres. In September 2004, 15 months after the Planning Appeal Decision, Wind Prospect said they wished to change the turbines to RE Power MM82’s with a Tower height of 59m and a rotor diameter of 82m. The rotor blades are thus nearly 25% longer, with a corresponding increase in noise, but no further application, measurements or amendments were undertaken that we can ascertain.

5.21 Community ownership

Companies such as Energy4all are set up to promote so-called community ownership within a co-operative set up. The most recent to come on line were two turbines at Deeping St Nicholas, the same site that has driven us out of our home. The Financial Services Authority complained about the proposal and the Company had to issue a supplementary prospectus correcting many areas of misinformation.

5.22 Local Councils

Local councils do not have the time, equipment or expertise to measure the specific noise standard applied to wind farms. Therefore, they rely on the wind industry’s measurements, documentation, and analyses. The councils also have to rely on the operating company releasing wind and operating conditions in order to be able to accurately measure the noise emissions. Councils have no legal powers to insist on a shut down for measurements of background noise to take place. Hence the Ombudsman’s conclusion (see paragraph 2.8) DEFRA has recently also put out a research proposal to address this very issue.49

6. Summary

We hope that we have been able to impress upon you why we are so concerned about the behaviour and actions of the Developers of industrial wind turbine sites. However, we are also concerned about the long term impact on fragile rural communities and their futures, particularly when local voices are ignored and the health and well-being of communities, families, and the local environment are sacrificed for financial and political expediency. 6 June 2008 49 Environmental Protection NOISE and NUISANCE page 10 Research Newsletter 2008—2009 ISSUE 1—May 2008 DEFRA Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Memorandum by EDF Energy

Introduction to EDF Energy EDF Energy is one of the UK’s largest energy companies. We provide power to a quarter of the UK’s population via our electricity distribution networks in London, the South East and the East of England. We supply gas and electricity to over 5 million customers and generate about 5GW of energy from our coal and gas power stations, as well as combined heat and power plants and wind farms. The company is also a key player in national infrastructure projects including management of private electricity networks serving four London airports and the Channel Tunnel Rail Link, the country’s first major new railway in 100 years. We employ nearly 13,000 people at locations across the UK. EDF Energy is a core part of EDF Group, one of Europe’s largest power companies. EDF Energy recently announced the formation of a new company, EDF Energy Renewables, to take forward its sustainability and renewables agenda. The deal formalises a well established history of cooperation between two EDF Group companies—EDF Energy and EDF Energies Nouvelles. Each party will combine its renewable energy development skills, expertise and resources in one place in order to spearhead their renewables development activities in the UK. As one of the UK’s largest energy companies, EDF Energy already owns and operates two onshore wind farms in the north east of England, and has around 120 MW of on and oVshore wind projects under construction or in advanced development. We have also entered into Power Purchase Agreements (PPAs) providing approximately 900 MW of electricity from renewables, thereby supporting the development of capacity by third parties. EDF Energies Nouvelles is a leading international player in the renewable energy sector and a 50% owned subsidiary of EDF Group. The company has an overall installed capacity of over 2,500 MW in operation or under construction worldwide and in the UK owns 154 MW of capacity. The creation of EDF Energy Renewables will be a cornerstone of plans, announced last year in Our Climate Commitments, to transform our business to help tackle climate change. A key commitment is an investment by 2012 in around 1,000 MW of UK renewable energy production. EDF Energy Renewables will be key to meeting this target and has ambitions to participate in the UK Government drive to develop increased oVshore wind capacity by 2020.

Summary of EDF Energy’s Evidence The 15% renewable energy target for the UK is extremely challenging. It will: — significantly increase the cost of delivering greenhouse gas emission reductions; — create new security of supply challenges (by increasing the amount of plant that must be built to achieve a satisfactory capacity margin and increasing the volume of actions that the system operator must take to ensure that supply and demand are matched in real-time) if a very high percentage of intermittent renewable electricity generation is built; — create the need for radical change in how the UK electricity and heat sectors are structured and operate; and — alter investment incentives for other types of new plant including nuclear and clean coal fitted with carbon capture and storage equipment both of which are important elements of a low carbon, diverse, secure energy mix in the future. Government’s primary environmental objective must be greenhouse gas emission reduction targets. The delivery of the 2020 renewables targets must be a “stepping-stone” that facilitates delivery of the UK’s 2050 climate change target in the least-cost manner. When deciding on the apportionment of eVort between UK sectors the cost-benefit of proposed measures must consider the whole lifetime energy system cost.50 A target of 40% renewable electricity by 2020 will be extremely diYcult and very costly to deliver. All sectors including heat and transport must take a fair share of the burden and the electricity sector should not be used as the sector of “last resort” for delivering the UK renewable energy target. Given the large cost increases that customers will face, delivering expensive renewables targets in the most eYcient manner possible is essential. The ability to trade renewables certificates across national borders will help reduce the additional costs. The current draft Directive text restricts trade and should be amended. 50 This should include the additional costs of transmission, back-up capacity and reserves to cope with intermittency, and costs associated with the displacing more cost-eVective methods of low carbon electricity generation for the lifetime of the renewable generation assets. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

272 the economics of renewable energy: evidence

Renewable electricity delivery to-date has been slowed by transmission access and planning issues rather than the nature of the financial support mechanism. However, despite this, we consider that there is a major question mark over whether the Renewables Obligation is fit for purpose for delivering a large, mandatory renewable energy target because: — suppliers have the option to pay the buyout and do not have to contract with enough renewable generation to meet the target; — the size of the target will require simultaneous construction of both expensive and lower cost projects within each technology type51—RO banding may prove insuYciently flexible to deliver simultaneous construction in a cost-eVective manner; and — if carbon price rises (and this was not foreseen when ROC bands were initially set) existing ROC- eligible projects will receive excessive support and increase costs for consumers. We support a full review of the most appropriate financial support mechanism. Whilst the existing transmission access arrangements can be reformed to improve the allocation of existing capacity, for example by enabling the sharing and trading of instantaneous access rights to the transmission system, the key to accommodating much larger volumes of renewable generation is the construction of new assets. Strategic investment ahead of need is necessary to build these assets in time to meet the 2020 target. Proposals in the Renewables Directive for priority access for renewables are of concern because the UK requires major investment in both new renewable and new thermal capacity. Investor confidence must be maintained for investment to occur in all technologies. A recent report by the Council of European Energy Regulators (CEER)52 recognised that the draft provisions relating to priority access could exacerbate the implications for system balancing as well as impacting competition and security of supply.

How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? 1. The four main objectives of UK energy policy as set out in the 2007 Energy White Paper are:

— to put the UK on a path to cutting CO2 emissions by some 60% by about 2050, with real progress by 2020; — to maintain the reliability of energy supplies; — to promote competitive markets in the UK and beyond; and — to ensure that every home is adequately and aVordably heated.

2. A 60–80% reduction in CO2 emissions by 2050 will require significant decarbonisation of all sectors (electricity, heat and transport). In the electricity sector, nuclear and CCS provide alternative low carbon options to renewables. In the heat sector, energy eYciency, solar thermal and biomass have only limited potential. Implementing low carbon heat solutions on a large-scale for millions of existing properties in urban environments is likely to require the use of heat pumps which use c 1 unit of electricity to deliver c 3–4 units of renewable heat. In the transport sector biofuels are likely to achieve only limited penetration due to resource availability and sustainability concerns—low carbon electricity provides an alternative decarbonisation route as described in the King Review. It therefore seems inevitable that UK energy policy will result in a large increase in (decarbonised) electricity demand. 3. The current targets for renewable electricity build in the UK are a pragmatic response to the non-binding renewable electricity targets in the existing Renewables Directive and a desire to create an indigenous renewable electricity industry. The introduction of a mandatory 15% renewable energy target for the UK will create major additional costs for consumers.53 Current BERR thinking appears to be to place a large proportion of the burden onto the electricity sector (indicative targets of 40% renewable electricity, 10% heat and 10% transport by 2020). 4. Reliability of energy supplies is a function of diversity of energy sources and reliability and spare capacity of energy infrastructure. At a high level renewable energy targets will displace imported fossil fuels in the EU and improve security of supply.54 However, the targets will also create problems for the UK because the primary means of meeting the proposed electricity sector target will be intermittent onshore and oVshore wind. Managing this intermittency will create additional costs for consumers because it will entail:

51 For example, the cost of the 1st GW of oVshore wind could be much lower than the 30th GW due to factors such as water depth, distance from shore, etc. 52 Green Package—Proposed EU ETS and Renewables Directives—A CEER position paper. 53 Poyry report—Compliance Costs for meeting the 20% Renewable Energy Target in 2020—A report to the Department of Business Enterprise and Regulatory Reform. 54 They may also displace indigenous fossil fuels such as UK coal and German lignite. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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— greater reserves held by the system operator to ensure system balancing; — backup plant to provide reliable capacity at times of low wind speed across the UK55; and — lower load factors for conventional plant which will therefore require higher prices when these plant do run to recover their fixed and financing costs over fewer running hours. The need for lower load factor mid-merit or peaking plant is likely to lead to the construction of low capital cost, flexible plant which is likely to be gas-fired Combined Cycle Gas Turbine (CCGT) and the less eYcient Open Cycle Gas Turbine plant. This may lead to an increased dependence on gas than would otherwise have been the case if renewable build was more limited. 5. With the exception of the heat sector, none of the four policy objectives necessarily requires the use of renewable energy. In particular large-scale deployment of intermittent renewable electricity generation runs counter to the second and fourth objectives because: — nuclear (and potentially CCS) can provide large volumes of low carbon electricity at lower cost than renewable technologies; — large volumes of wind generation, whilst reducing dependence on imported fossil fuels, will create new security of supply risks associated with intermittency, the management of which will also incur major additional costs; and — it could delay investment in the technologies which will be required to deliver the 2050 target (nuclear, CCS) because subsidised investment in renewables will cause wholesale electricity prices to become more volatile (and even negative at times of moderate demand and high wind resource). 6. High penetration of renewables in the UK electricity generation mix by 2020, as a consequence of the proposed Renewables Directive, therefore appears to be a very ineYcient mechanism for delivering energy policy objectives.

7. Our current understanding is that BERR is considering a sectoral split of approximately 10% transport, 10% heat and 40% electricity. How the burden is allocated between the sectors is within the control of the UK government. Redistributing the burden such that a greater emphasis is placed onto heat would reduce the logistical diYculties associated with major electricity transmission system reinforcement and installing c 30GW of oVshore wind capacity in little more than ten years. This could make the UK target more easily achievable. It may also be more cost-eVective when considering the necessary decarbonisation of the heat, transport and electricity sectors to deliver a CO2 emission reduction target for the UK of 60–80% by 2050 to have a more balanced low carbon electricity generation portfolio with a lower penetration of intermittent renewable generation. We believe the following principles should define the UK’s approach to implementing renewable energy targets: — reduction in greenhouse gases at least cost must have primacy relative to technology-specific targets to deliver renewable energy; — when deciding on the apportionment of eVort between UK sectors the cost-benefit of proposed measures must consider the whole lifetime energy system cost56; and — all sectors should take a fair share of the burden and the electricity sector should not be used as the sector of “last resort” for delivering the UK renewable energy target. 8. Ideally this would mean no specific renewable energy target and reliance instead upon a long-term carbon price to provide the economic signal for investors to select the most cost-eVective low carbon technologies. However, given that the UK’s intent is to use best endeavours to implement its share of the EU renewable energy target then in practice this should mean: — maximising deployment of measures in the heat sector to minimise overall cost and start the process of decarbonising the heat sector that will be needed to deliver the 2050 GHG emission targets; — ensuring trading is eVective to allow the UK to access lower cost projects elsewhere in the EU; and — reducing the capacity threshold on the late deployment clause to allow the target to be delivered over a longer time period. 55 The wind capacity that can be relied upon to deliver energy at times of peak demand is approximately the square root of the installed capacity in GW. 56 This should include the additional costs of transmission, back-up capacity and reserves to cope with intermittency, and costs associated with the displacing more cost-eVective methods of low carbon electricity generation for the lifetime of the renewable generation assets. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

274 the economics of renewable energy: evidence

What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? 9. A number of barriers exist to the greater deployment of renewable energy including: — delays in the planning system—which are being addressed via the Planning Bill although concerns still remain that the new IPC process may not provide binding, definite timescales for decisions on planning applications; — long lead times for obtaining connections to the transmission system; — constraints in turbine manufacturing and installation, particularly oVshore; and — public acceptance of wind farms and new forms of renewable energy generation. 10. Stable financial support mechanisms that provide adequate levels of support and suYcient confidence to investors are also a necessary prerequisite for greater deployment. 11. Intermittency of wind generation can be managed by holding additional reserve for short-term balancing and keeping additional conventional plant on the system to provide an adequate plant margin to maintain security of supply—at additional cost. There is unlikely to be a technical limit, instead the willingness to pay these additional costs will create a barrier. 12. 40% renewable electricity generation (dominantly from wind) combined with a nuclear portfolio of c.10GW with suYcient plant synchronised to manage fluctuations in demand and generation output will cause a significant number of half-hour periods in the UK when generation output exceeds electricity demand. Technically this could be managed by the system operator constraining plant oV the system at additional cost. Perversely the SO could be forced to constrain renewable generation oV the system for system stability reasons—this would force the construction of yet further renewable capacity to meet the renewable energy target. Increased interconnection, storage and demand management may play a role in mitigating this eVect subject to their cost-eVectiveness. 13. The Transmission Access Review (TAR) is seeking to improve the timeliness of transmission connection. However a key concern for EDF Energy is that the TAR primarily introduces measures to improve short term allocation eYciency which could in turn increase long term uncertainty for market participants and undermines long term investment in both generation and transmission. The core issue is scarcity of transmission capacity and securing this capacity and utilising it well must remain the prime objective of the review.

Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 14. A number of technologies clearly have potential for cost reductions due to their relative immaturity. For example, PV, wave, tidal stream, tidal barrage, oVshore wind and heat pumps have relatively small installed capacities globally. As installed capacity increases, learning curve eVects may be realised, reducing costs. Also, more manufacturers may enter these markets and existing manufacturers are likely to increase manufacturing capacity reducing supply chain constraints. OVshore wind deployment is however likely to move to deeper water and more hostile environments in future years which will increase capital costs. 15. Government support is likely to be needed for the foreseeable future for almost all renewable energy technologies unless either the carbon price rises significantly or fossil fuel prices rise to much higher levels. 16. We believe thatR&Dandcommercialisation support should be provided to new emerging technologies to assist them in reaching maturity, at which point they should compete on a level-playing field with other low carbon technologies.

Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime? 17. Financial support from the Renewables Obligation has led to more renewable energy deployment and the creation of a large pipeline of renewable projects. 18. Direct comparisons between UK and overseas support mechanisms are not straight-forward because: Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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— the cost eVectiveness of a 25 year obligation style mechanism cannot be accurately based on the subsidy per MWh delivered in the first few years of the obligation; and — generators may require financial support to cover diVerences in costs (eg diVerent transmission charging arrangements) in diVerent markets. However, the quota-based Renewables Obligation has clearly been ineYcient from a consumer perspective in the UK market where deployment of renewables has been delayed by planning and transmission access issues. This is because: — consumers pay the buyout price for the target percentage of renewable energy generation irrespective of the how much renewable energy is actually delivered; and — delays that have prevented deployment of lower cost generation have increased the ROC recycle value and provided excessive support for low cost generation whose deployment has not been delayed. 19. Conceptually, support should not unduly favour one renewable technology relative to another. However, it is clear that diVerent renewable technologies are at diVerent stages of maturity resulting in large levelised cost diVerences. Using a uniform support level that is suYcient to deliver the last MWh of renewable energy from the marginal technology necessary to meet the target can be highly ineYcient for consumers because it can over-reward cheaper technologies. This ineYciency must be avoided if costs to consumers are to be minimised. 20. In the longer-term, intermittent renewables will become increasingly dependent upon the financial support mechanism because power prices will be inversely correlated to national wind output (ie wholesale prices will be low when it is windy so the price that suppliers will be prepared to pay for electricity from wind generators will decrease). Maximising the eYciency of the support mechanism will become ever more important. 21. The Renewables Obligation has a number of drawbacks when considering its appropriateness for delivering the greatly enhanced renewable electricity target. These include: — the target is likely to be so stretching that almost all available projects in the UK will have to be constructed—the eYciency benefits of a market-based solution which delivers the most cost-eVective projects within the UK is therefore likely to be diminished; — within each technology band, support costs are likely to be divergent. For example the cost of supporting the 30th GW of oVshore wind, in deep water and distant from shore, may be very diVerent to that of the 1st GW of oVshore wind in shallow water and close to shore. The current approach of providing adequate support for the marginal MW to be delivered will create ineYciencies for consumers and windfalls for cheaper technologies or projects within each band; — the RO, which is intended to have five-yearly band reviews, may not be flexible enough to rapidly adjust to short-term changes in turbine costs etc. For example, concerns are already being expressed that a 1.5ROC/MWh band for oVshore wind may be insuYcient (even though the band has not yet been introduced). A FiT or CfD approach would be flexible enough to enable annual changes in financial support to reflect changes in project economics. To deliver the target it is essential that the UK remains a competitive location for deployment if turbine supply remains constrained; — suppliers may not want high exposure to intermittent generation because of ROC price or balancing market price risks and may therefore rationally not contract with enough renewable generation to meet the UK target (alternatively, suppliers will be prepared to pay less for each additional MWh of renewable generation). If a FiT was introduced, government would be capable of finessing support level until desired volume of renewable generation was delivered; and — if carbon or commodity prices rise then existing projects with their grandfathered banding will receive excess support. 22. The most likely alternatives to a quota-based system include: — feed-in tariVs where the support-level is determined either by government or through a competitive tender process; or — contracts for diVerence against either carbon price or electricity price where the support-level is determined either by government or a competitive tender process. In the former, the support mechanism would have to finance the whole cost of renewable generation whereas in the latter only the diVerence between the market price and the strike price would be financed by the support mechanism. Penalties for non-delivery would address the defect that existed in the Non Fossil Fuel Obligation Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

276 the economics of renewable energy: evidence tender process that existed before the Renewable Obligation was introduced, whereby generators bid at levels which subsequently proved uneconomic for them to develop projects. Both mechanisms provide protection to the consumer if carbon or electricity prices rise. The CfD option would enable a transition to support solely from the carbon price in the longer-term.

23. The table below compares the main support mechanism options against assessment criteria. It indicates that the RO may not be the optimal support mechanism to support delivery of increased renewable support mechanisms.

Criteria RO FiT CfD4 Build diVerent technologies simultaneously Yes Yes Yes EYciently support construction of low and No Possibly Possibly high cost projects of same technology simultaneously Prevent windfall to generators if carbon No Yes Yes prices rises Guarantee delivery versus targets No Possibly Possibly Integrate auction revenues into support No5 Yes Yes mechanism Continuity for investors Yes No No

We consider that a full review of the appropriate financial support mechanism is necessary.

Financial support for renewable heat

24. Renewable heat sources would be more viable if the cost of CO2 emissions from conventional heating sources was internalised in the cost of heating. This could be achieved by including the CO2 emissions arising from fuels used in heating in the EU ETS.

25. Alternatively assuming that customers are required to make at least a contribution to the costs of any support mechanisms, EDF Energy’s preferred funding solution would be for Government to levy a p/kWh charge on sales of fossil fuels used for heating, with the charge based on the carbon content of the fuel. The revenues would be paid into a national fund used specifically to pay for the delivery of low carbon heating solutions.

26. An advantage of this approach is that by levying this charge on all customers, including domestic customers, Government would be ensuring that all sectors of the electricity and gas markets now paid a “cost of carbon” in their energy use. At present, unlike with electricity, the cost of carbon is not reflected in domestic and small business gas prices, therefore leading customers to make potentially ineYcient decisions when selecting replacement heating technologies. A “low carbon heat levy” set at an appropriate level would resolve this market failure.

27. For micro-generation heat technologies, such as single dwelling heat pumps, biomass boilers and solar thermal, the key barrier to uptake is capital cost. We believe that capital grants should be provided to reduce the cost diVerential between conventional heating sources (such as gas) and lower carbon solutions.

28. For larger low carbon solutions, such as community scale gas, biomass or waste fired CHP, ongoing financial support should be provided on a £/MWh generated basis. Proposals for feed in tariVs and a “low carbon heat obligation” should be considered in more detail.

29. Government will need to determine the most equitable basis for raising funds and consider limiting the impact on vulnerable customers. Some form of contribution from Government will ease the burden on customers, and Government should consider all available options including using part of the revenues generated through the auctioning of European Union Emissions Trading Scheme (EU-ETS) carbon permits. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables?

30. The challenges are not unique to UK; northern Germany, Denmark and Spain already have considerable experience in integrating capacities of wind generation. However, much research, development and deployment remains to be undertaken to fully explore the challenges and opportunities of integrating large volumes of renewable sourced electricity generation with transmission and distribution networks. With this in mind, The European SmartGrids Technology Platform57 has been created and has already produced a “Vision and Strategy” document and a “Strategic Research Agenda”. In the summer of 2008 a “Strategic Deployment Document” will be published providing guidance on developing business cases for deployment of the more advanced and relevant technologies.

Transmission Systems

31. For transmission networks which are already designed to accommodate generation, the issues are essentially capacity (and/or constraint) management, frequency and voltage stability, and system balancing capability. Much work, strongly supported by the GB Transmission Network Operators and the GB System Operator (GBSO), has already been undertaken by the Government (BERR)/Ofgem sponsored Electricity Networks Strategy Group’s Transmission Working Group (TWG). Examples of relevant studies include: the development of a framework for oVshore transmission licensing; queue management; Connection and Use of System Code (CUSC) amendments; Transmission Access for Distributed Generation (TADG); managing the allocation of Transmission Export Capacity (TEC); and the Transmission Access Review (TAR). 32. The proposed oVshore licensing regime will give rise to individual licences for connecting oVshore wind farms to the onshore grid, sometimes directly and sometimes with 132kV distribution networks providing the linkage to the national 400/275kV transmission system. In terms of network investment, it has been estimated that this strategy would enable the 9GW of “Round 1 and 2” oVshore wind farms to be connected for around £10 billion of network investment; roughly £300 per KW of wind capacity connected. 33. While studies have shown this “radial connection” approach to be the most economic in the context of the Round 1 and 2 wind farms, development on the scale implied by the 33GW oVshore wind proposal raises questions as to whether this radial arrangement is sustainable or whether instead (or in addition) an oVshore interconnected transmission grid might be desirable from both a technical and economic perspective. Whether such a grid might be best developed as a conventional AC system or possibly as a multi-point DC system, potentially interlinking with subsea inter-connectors,58 would be a matter for detailed assessment. Each approach has its own merits and challenges, and such work is now being undertaken by the Government (BERR) sponsored Centre for Distributed Generation and Sustainable Electrical Energy (SEDG). 34. Other important transmission related work that SEDG intends to pursue through 2008–09 includes: dynamics and control of wind generation (including small signal stability)59; harmonic resonance and switching transients with highly capacitive AC systems60; fault ride-through capability of voltage-source inverter connected wind sourced generators; examining the aerodynamic performance of wind turbines; and investment access and pricing of transmission systems with significant penetrations of wind power (including requirements for GB Security and Quality of Supply Standards). 35. Much has been reported about the current “GB Queue” and how current transmission system constraints might be eased through a “connect and manage” approach, perhaps coupled with access rights being prioritized towards wind farms with planning approval and/or actually under development, and with a more dynamic approach to transmission system thermal ratings. While these suggestions have merit, in the context of 33GW of oVshore wind capacity, the scale and materiality of the issues being studied by SEDG will need to be thoroughly understood, and cost-eVective solutions developed, before the financial implications for transmission grid investment can be reliably evaluated. 57 http://www.smartgrids.eu/ 58 DC systems are generally point-to-point; a multi-point system would be a relatively innovative development and would require careful consideration from a technical and economic perspective. 59 Studies have indicated that with high levels of Doubly Fed Induction Generators (DFIG) in Scotland (ie associated with wind farms) and high levels of synchronous generation in England (eg nuclear, coal and CCGT) system instability could occur. 60 Equipment failures, including at the Horns Rev 160MW wind farm in Denmark, are suspected to be related to this issue. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

278 the economics of renewable energy: evidence

Distribution Networks

36. In England and Wales, the interface between transmission and distribution networks is at 132kV with NGET being responsible for the 400/275kV grid and for 400 (or 275)/132kV transformation, and Distribution Network Operators (DNOs) managing the remainder of the network infrastructure ranging from 132kV through various voltage levels (including typically 33kV and 11kV) down to 400/230V. In Scotland, 132kV is treated as a transmission voltage with the Scottish DNOs taking responsibility from 33kV down to 400/230V. 37. As noted above, while large oVshore wind farms will impact mainly on transmission networks, 132kV distribution networks will provide the oVshore to onshore link in some cases. Often this will require reinforcement of the 132kV networks (including use of higher thermal rating/lower sag conductors). At the other end of the scale, the Government’s “Zero Carbon Home” initiative61 will impact on new low voltage (LV), and to a lesser extent 11kV, networks and might require new approaches to network design, for example shorter LV feeders and automatic voltage regulating equipment on 11kV/LV distribution transformers. 33kV and 132kV connected generation (typically onshore wind farms and biomass power stations) may require conventional reinforcement possibly in conjunction with “Registered Power Zone” (RPZ)62 developed techniques such as enhanced voltage management, active constraint, and active (dynamic) conductor rating. There may be some opportunities for using non-intermittent forms of renewable generation (or intermittent generation in conjunction with storage) and Demand Side Management to oVset network capacity reinforcement. 38. For distribution networks, the challenges are those associated with “distributed” generation (DG); ie generation connected directly to distribution networks which have hitherto been designed to deal with (so- called) “one-way” powerflows down through the “hierarchy” of voltages from 132kV to 400/230V. The key DG related technical issues for distribution networks are: voltage management63; plant and equipment thermal ratings under diVerent cyclic loading patterns; electrical protection requirements at the network/ generation interface64; fault level management (ie ensuring plant and equipment ratings can safely deal with increased levels of short-circuit current as a consequence of additional locally connected generation); overall system electrical protection co-ordination65; network constraint management; voltage inversion (due to reverse powerflows at voltage transformation points); and maintenance of design levels of network security.66 39. Much work, strongly supported by DNOs, has already been undertaken by the Government (BERR)/ Ofgem sponsored Electricity Networks Strategy Group’s Distribution Working Group (DWG) and its predecessors the Distributed Generation Coordinating Group and the Embedded Generation Working Group. Many studies have been undertaken and reports written to support the wider penetration of DG, including for example: a “Report into Network Access Issues” (2001); “Solutions for the Connection and Operation of Distributed Generation” (2003); the “Technical Guide to the Connexion of Generation to the Distribution Network” (2004); and more recently, the “Future Network Architectures” report (2007).67 Work is currently in progress to review the requirements under Engineering Recommendations ER G59 and ER G75 that might under certain circumstances ease the requirements on generators in terms of interface protection.

40. The “Future Network Architectures” report considers a number of DG penetration scenarios and provides an insight into the scale of change to network architecture that might be required under each. In terms of the scale of required investment in the distribution networks between now and 2020, the report notes that the relationship is very non-linear with investment estimates ranging from £19 to £89 per kW of connected DG (the latter being more closely associated with high levels of 11kV and LV network connected DG, and a market wherein there is wide deployment of micro-generation and active participation in demand-side management facilitated by a comprehensive smart metering and an associated Information Communication Infrastructure). 61 From 2016, all new homes must be “zero carbon” meaning that emissions of carbon dioxide from all energy use must net to zero. In practice this will require the connection of suYcient on-site or local “zero carbon” (or carbon neutral) generation to balance the home energy consumption. 62 As part of the 4th Distribution Price Control Review proposals, Ofgem introduced an incentive mechanism to encourage DNOs to develop innovative network technologies to facilitate the connection of DG; such networks are termed “Registered Power Zones”. 63 Statutory obligation under the Electricity Safety, Quality and Continuity Regulations to maintain voltage within prescribed limits of variability. 64 Detailed in Engineering Recommendations G59, G75 and G83; the requirements under G59 and G75 are currently under review in order to consider possible relaxations on generators under certain circumstances. 65 DNOs have a statutory obligation under the Electricity Safety, Quality and Continuity Regulations to restrict, so far as is reasonably practicable, the number of consumers aVected by any fault in their network. 66 As part of their Standard Distribution Licence Conditions and Distribution Code obligations, DNOs are required to maintain design levels of network security in accordance with Engineering Recommendation P2/6. 67 http://www.ensg.gov.uk/ Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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41. With very high levels of penetration of DG it is envisaged that DNOs might have to provide ancillary services to the GBSO, including system balancing and reactive power (voltage) support. The report concludes that while the technical challenges are manageable in the medium to longer term, the current GB commercial framework could become a constraint to the development of the fully integrated “Smart Grid” regime (such as that envisaged by the European SmartGrids Technology Platform). 42. In conclusion to this question the costs of developing the transmission and distribution systems will be significant and there are a number of initiatives that are being brought forward as a result of existing incentives that should help in accommodating an increased role for renewables in electricity generation. However this development needs to take place in the context of a system that allows renewable generation and other forms of low carbon generation to co-exist and there is a need to ensure that any enabling solutions for renewables do not undermine investment in other lower cost low carbon technologies that are essential for the UK to deliver its CO2 reduction aspirations.

How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations? 43. Some of these issues are relevant for both renewables and other forms of generation as the latter may also require transmission system reinforcements. What is clear is that, although all forms of generation have external costs associated with them, society places great value on reliability of electricity supply which therefore necessitates the construction of new power stations and associated infrastructure. These issues need to be addressed by the new National Policy Statements proposed by the Planning Bill to provide an appropriate framework for the IPC to make decisions balancing national need with local concerns.

How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? 44. Costs for all forms of generation technology have increased in the last 12–18 months in response to rising steel prices, high demand and constraints in manufacturing capacity. However we believe that the relative price diVerentials presented as a marginal abatement curve in the Government’s Energy White Paper (Meeting the Energy Challenge—A White paper on Energy, May 2007) remain broadly valid. The costs of generating from renewables technologies are higher than the generation costs from conventional technologies including nuclear. The relative cost diVerences in the diVerent renewable technologies are reflected in the varying level of subsidy provided through the Renewables Obligation. 45. Longer-term cost estimates for CCS are still uncertain, particularly how these costs might evolve as deployment increases, technology develops and manufacturing eYciencies are achieved. Current estimates of CCS costs suggest that they are comparable with oVshore wind. 46. A number of studies have investigated the full lifecycle emissions of diVerent electricity generating technologies. They demonstrate that nuclear and renewable technologies have very low lifecycle emissions68 circa 5g/kWh.

How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? 47. Before comparing technology costs it is important to note that:

— domestic gas prices do not include a CO2 cost. This automatically creates a financial disincentive to invest in low carbon heating solutions; and — for any such analysis to be comprehensive it must include whole system costs (eg for renewable electricity this would include increased balancing costs, the cost of maintaining additional conventional capacity on the system as backup, increased transmission costs, etc). 48. The key issue that comparative analysis of cost diVerences between technologies in diVerent sectors needs to address is how the target is allocated between the heat and electricity sectors, ie does the marginal technology in the electricity sector (which is likely to be oVshore wind) require more or less subsidy than the marginal technology in the heat sector. 68 Parliamentary OYce of Science & Technology Note 268 Carbon Footprint of Electricity Generation (October 2006). Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

280 the economics of renewable energy: evidence

49. EDF Energy’s analysis indicates that a high temperature air-water source heat pump, which can be retrofitted to a conventional hot water and radiator heating system in an existing property, would require less subsidy per MWh of renewable energy produced than an oVshore wind farm. When considering the cost per tonne CO2 abated, the heat pump is considerably more expensive. However, on an integrated basis it is as cost- eVective because CO2 can be abated using non-renewable technologies at a relatively low EU ETS market price. 50. Over time, heat pumps will become even more cost eVective (with regard to renewable MWh delivered and CO2 abatement) because: — major improvements will occur in eYciency (learning curve gradient is steep); — there will be cost reductions as the volume manufactured increases; and

— they will achieve higher CO2 savings as the grid decarbonises (and the new generation technology benchmark emission factor moves from CCGT to lower carbon technologies). 51. In Europe, heat pump deployment rates are much higher than in the UK and increasing rapidly in a number of major markets. This demonstrates the potential customer uptake that exists for this technology if it is appropriately incentivised. The assumed deployment rate in the Renewable Heat Call for Evidence appears to dramatically underestimate what could be a achieved in practice. Redistributing the renewable energy target to place a greater emphasis onto heat will reduce the logistical diYculties associated with major electricity transmission system reinforcement and installing c 30GW of oVshore wind capacity in little more than 10 years. This could make the UK target more easily achievable. It will also be more cost-eVective in the long-term when considering the necessary decarbonisation of the heat, transport and electricity sectors through the use of low carbon electricity to have a more balanced low carbon electricity generation portfolio with a lower penetration of intermittent renewable generation. 52. We consider it is essential that heat pump (both air source and ground source) is an eligible renewable technology under the Directive. In the long term, heat pumps are likely to be the main low carbon technology for delivering low carbon heat as biomass supplies are limited and the transport of large volumes of biomass into urban environments is problematic. The Directive provides an excellent opportunity to commence the roll-out of this technology in the UK and develop a large supply chain and installer base. The technology is developing, eYciency is improving rapidly and units are now available that can be retrofitted to conventional radiator-based heating systems found in most properties in the UK. In other European markets annual deployment rates are as high as 120,000 units per annum.

If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK?

53. It is clear that the electricity generation sector will make a major contribution to the UK target. However as set out above making a large deployment in the heat sector will: — potentially be more cost eVective by requiring less subsidy; — avoid additional costs associated with mitigating the impact of high levels of intermittent renewable electricity generation; — create the supply chain and installer base that will be required to deliver the level of decarbonisation in the heat sector that will be needed to meet 2050 targets; and — reduce the risk that investment in nuclear and CCS will be deferred. The technologies to increase renewable heat above 10% penetration, already exist. 54. UK support for renewables in other EU countries, or countries directly linked to the EU, should be allowed to contribute to meeting the target for the UK. Trading can lead to eYciencies and lower costs for UK consumers by allowing either the development of cheaper projects or development of similar cost projects in countries where barriers such as transmission access and/or planning do not prevent construction. 55. Trading beyond EU borders where there is no flow of power into the EU is more controversial. It would lower the cost of the policy and provide benefits to consumers but would not deliver benefits associated with reduced import dependence. Also, it would create complexity through its interaction with Clean Development Mechanism projects developed under UNFCC protocols, many of which are renewables. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy?

56. An increased cost of carbon in the EU ETS will make renewables more cost competitive because it will increase the SRMC of fossil generation and therefore increase the wholesale electricity price that renewable generation will receive. However maintaining free allocation to new entrants would reduce the long-term electricity price needed for thermal plant new entry and discriminate against low carbon technologies. 57. A more eVective carbon trading scheme may not remove the need for special support for renewable energy because: — the abatement required by the market may be delivered by lower cost options such as energy eYciency, nuclear, fossil fuel switching between coal/lignite and gas and potentially CCS; and — carbon pricing will provide a uniform support level—this may be insuYcient to enable deployment of higher cost renewable technologies which may not have reached maturity yet.

What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects?

No comment. 16 June 2008

Supplementary memorandum by EDF Energy

EVIDENCE TAKEN BY THE ECONOMIC AFFAIRS COMMITTEE ON 13 MAY 2008 I would be very grateful if you would treat this letter as evidence to the Committee in relation to its current inquiry into the Economics of Renewable Energy. On 13 May the Committee took oral evidence from, amongst others, Benet Northcote of Greenpeace. In his evidence, at Q79, Mr Northcote claimed that the Chief Executive of EDF Energy, Vincent de Rivaz, had said that, if carbon commanded a high price, and that fostered an increase in investment in renewables, it might “crowd out’ investment in nuclear power. He went onto say that “they (EDF Energy) very much saw it as a threat to their industry”. Unfortunately the evidence that you received is not in any way an accurate reflection of what Mr de Rivaz has said on this matter or the view of EDF Energy. The comments suggest that Mr de Rivaz has voiced opposition to renewables, whereas on the contrary, it is on public record that EDF Energy believes renewables are an important part of the generation mix. We understand that the witness is referring to speeches where Mr de Rivaz has stated our belief that the carbon market is the most eVective way to encourage investment in low carbon generating capacity. This market places the onus on industry to identify and put in place the most eVective means of delivering the country’s targets for carbon emission reductions. We do not believe that setting targets for a particular technology will be as eVective: in fact it could undermine the carbon market. This would threaten investment in other forms of low carbon technology and might not deliver a low carbon generation mix. We therefore strongly believe that an eYcient and eVective carbon market will allow investment in renewables to occur, alongside investment in nuclear and in other low carbon technologies. EDF Energy is already a significant investor in renewables technologies. We operate onshore wind farms in the North East and with a portfolio of around 120MW of on and oVshore wind projects under construction or in advanced development. We recently announced the creation of EDF Energy Renewables, a joint venture with EDF Energies Nouvelles, to spearhead our renewables development activities in the UK. EDF Energy Renewables will be critical to meeting the commitment that we made last year to invest by 2012 in 1,000 MW of UK renewable energy production. Globally, EDF Group is investing ƒ3.3 billion in renewables by 2010. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

282 the economics of renewable energy: evidence

I hope that this clarifies the evidence given to the Committee on 13 May. Denis Linford Director of Regulation 15 July 2008

Memorandum by EEF Introduction 1. EEF is the representative voice of manufacturing, engineering and technology-based businesses with a membership of 6,000 companies employing around 900,000 people. Comprising 11 regional EEF Associations, the Engineering Construction Industries Association (ECIA) and UK Steel, EEF is one of the leading providers of business services in employment relations and employment law, health, safety and environment, manufacturing performance, education, training and skills. 2. This memorandum is a submission in response to the call for evidence on the economics of renewable energy issued by the House of Lords Select Committee on Economic AVairs.

How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? 3. In the UK, renewable energy accounts for a relatively low share of energy consumption compared to other EU countries. Like in most other countries, at present, renewable technologies are primarily used for power generation (as opposed to heating or transportation). 4. Renewable energy has an important contribution to make as part of a balanced UK energy policy aimed at delivering lower carbon dioxide emissions, security of supply and competitive energy prices. Alongside nuclear power, and possibly carbon capture and storage depending on how the technology develops, renewables will be an important source of low-carbon energy in the future. Renewables occupy a similar position in North American, Australasian and other EU countries. Although considerable variation exists from country to country in both the current penetration and future share targeted for renewables. 5. Renewable energy is also an integral part of industrial policy in a number of countries (eg the nations which have deliberately nurtured significant wind and solar industries). In the UK however, exploiting the industrial opportunities associated with renewable energy appears to be a much lower priority. In EEF’s opinion, this is a significant missed opportunity.

What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? 6. Renewable energy encompasses a diverse range of technologies designed to capture energy from wide range of sources. Therefore, the barriers to deployment and technical limits inevitably diVer by technology. However, a number of generalisations can nevertheless be made. 7. For large-scale renewable electricity, some of the main barriers are: (a) cost (ie renewable electricity tends to be more costly); (b) location (ie sources are remote entailing additional costs association with grid extension and reinforcement); (c) intermittency (entailing additional complexity for network management and additional costs associated with back-up sources of power); (d) land use (ie technologies such as wind require significant areas of land compared to conventional generation technologies, often in areas of natural beauty, entailing conflicts over land use and planning issues); (e) supply chain constraints (ie potential pace of deployment in certain subsectors limited by shortage of key components and availability of key resources—eg turbines and installation vessels for oVshore wind); and (f) stage of development (ie certain promising technologies, such as wave and tidal stream, are still at an early stage of development and a long way from potential widespread deployment). 8. For renewable heat, especially promising small-scale technologies such as heat pumps and solar thermal, some of the main barriers are: Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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(a) lack of incentives (ie technologies with high capital costs but quick payback periods are not backed up by policy incentives in the same way as renewable electricity); (b) unfamiliarity and lack of information (ie householders are unfamiliar with renewable heat technologies and there is a general lack of information on its potential applications); and (c) unsuitability for certain types of dwellings (eg ground source heat pumps for flats). 9. The amount of renewable energy which could be deployed in the UK depends on the type of technologies deployed and the nature of the energy networks developed. As a general rule, the greater the level of intermittent power sources connected to a network, the more complex and costly will be the management of that network. Experience from Germany and Denmark, both of which have relatively high levels wind power connected to the grid, supports this observation. However, there is no practical experience of managing a grid with the level of intermittent power connected implied by the government’s plan for 33GW of oVshore wind capacity in the UK by 2020.

Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 10. Like with any technology, there is the scope for the cost of renewable energy technologies to fall over time as a result innovation, operational experience and economies of scale. This is especially, but not uniquely, the case for technologies which are currently at relatively early stage of development (eg oVshore wind and marine renewables). 11. In the short to medium term, technological development is unlikely to completely obviate the need for subsidy if the 2020 target is to be met as renewable energy is in general considerably more costly than conventional forms of generation. However, from the perspective of a longer time frame, encouraging technological development will be essential to lowering the costs of renewable energy and reducing the need for subsidy. 12. It should be noted that, in some circumstances, the cost of some renewable technologies has actually risen or proven higher than anticipated—eg the cost of oVshore wind owing to supply chain constraints, rising metal prices and operational conditions ore challenging that anticipated. 13. Greater public support for R&D will be central to promoting technological advances and reducing costs. However, the UK devotes a significantly lower share of GDP to supporting energy-related R&D than the other major industrialised economies. According to IEA, in 2005, UK public funding, in terms of % of GDP, was only third of that of the second lowest ranked nation in G7 and less than a tenth of that the highest ranked nation in the G7. As well as increasing the level of support, the UK should also consider focusing support on those technologies which oVer the most significant economic and abatement opportunities. 14. Creating a support framework which maximises certainty for investors in the renewables sector will help to make encourage the best use of private sector resources to drive technological advances.

Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime? 15. Whilst renewable electricity capacity has increased since the introduction of the Renewables Obligation (RO), it remains low by EU standards. Moreover, its cost-eVectiveness is questionable—a number of independent studies suggest that obligation schemes (including the RO) compare unfavourably with feed-in tariVs in terms of the cost per unit of renewable generation capacity deployed. 16. Experience suggests that obligation schemes favour large developers (eg vertically integrated utilities) and technologies which are closest to market. Feed-in tariVs, on the other hand, have proven more flexible in terms of the range of technologies which they have successfully promoted and the parties (eg smaller developers and cooperatives) which they have drawn into the renewables industry. 17. EEF believes that government should explore the case for targeted feed-in tariVs to support those technologies which are less responsive to the RO (eg domestic-scale technologies and technologies which are further from the market) and make support for R&D s central part of policy. Wholesale changes or abolition of the RO, given that 2020 is relatively close from the perspective of power sector investment decisions, should only be undertaken with extreme caution to avoid destabilising the renewables industry and confidence in it. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

284 the economics of renewable energy: evidence

On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables?

18. As a general rule, the remoteness of the majority of the UK’s large-scale renewable electricity resources (eg oVshore wind, wave and tidal stream resources) means that increasing the share of renewable generation at the expense of conventional forms of generation (eg fossil fuel and nuclear power stations) is likely to increase the need for investment in networks. Increasing the quantity of intermittent renewable generation connected to the network is likely to increase the total cost (ie the need for reserve power and potentially more interconnection) and the complexity (ie managing variable loads) of the system. 19. A notable exception to this general rule is renewable heat. Small-scale technologies such as heat pumps and solar thermal technology can be deployed locally to satisfy onsite demand (eg household heating requirements) obviating the need for network investment to match supply with demand. In addition, any intermittency would not impose the same level of additional costs because heat can be more easily stored than electricity (eg in the form of hot water).

How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations?

20. EEF does not feel suYciently qualified to comment on this issue.

How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions?

21. Numerous studies exist comparing the unit costs (ie £/MWh) and total system costs (ie a more comprehensive measure accounting for, amongst other things, back-up, network reinforcement/extension, decommissioning and capital expenditure) of electricity generated from renewables sources, fossil fuels and nuclear fission. The general conclusion is that renewable sources are significantly more expensive than conventional sources of electricity. However, it should be noted that considerable variation exists in the cost of diVerent renewable technologies (eg onshore wind versus solar PV) and the cost of nuclear power depends on estimates of long-term waste storage over which major uncertainty exists. Owing to the immaturity of the application of the technology to power generation, estimates of the cost of generating electricity from fossil fuel plant with carbon capture and storage are largely speculative at the moment. The demonstration projects anticipated in several countries (including the UK) over the next few years should help refine cost estimates considerably. 22. In general, the carbon dioxide emissions per unit output of renewable generators are significantly lower than those of fossil fuel plant and (depending on the technology) comparable to nuclear plant. However, the impact of renewable generators on total emissions is aVected by the load factor and degree of intermittency of the technology in question—ie the lower the load factor and the greater the intermittency, the greater the need for back-up generation and the lower the impact on total emissions.

How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating?

23. Historically, in most countries, renewable electricity has been the focus of policy, research and business. Therefore, the costs and benefits of renewable electricity production are better understood than those of renewable heat and transportation. 24. However, renewable heating presents a major opportunity for cost-eVective and carbon abatement. A significant proportion of UK energy consumption is accounted for by domestic heating and cost-eVective and mature technologies, such as heat pumps and solar thermal, already exist which can reduce dependence on gas-fired boilers. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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25. Significantly increasing the proportion of transport powered by renewable energy in the short to medium term will be extremely challenging: the environmental credentials and land-use impacts of biofuels need serious analysis and widespread use of electric vehicles is dependent on significant advances in technology (eg battery technology). In the short-term, modest blending of sustainable biofuels with conventional fuels and incremental electrification of road transport via progressive hybridisation appear the most likely options.

If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK?

26. Meeting, or getting anywhere near meeting, the UK’s EU-mandated 2020 renewable energy target will very challenging and very costly. Therefore, policy-makers must be as open minded as possible about the technologies and location of renewable energy production. Heating should be given as much emphasis as electricity and renewable energy from other countries (where verifiable and demonstrably sustainable) should be considered a legitimate option for meeting targets. For example, the proposal in the draft Renewables Directive permitting intra-EU trading of renewable energy to meet targets could reduce the cost and increase the chance of meeting the UK’s 2020 target.

How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy?

27. Obviously, an increase in the cost of carbon would reduce the cost of low carbon sources of energy (eg renewables and nuclear fission) relative to energy derived from fossil fuels. 28. In theory, a significant enough increase in the cost of carbon should remove the need for subsidy of renewable energy. However, in practice, this is unlikely to be the case in the near future as renewables are considerably more costly at present. In addition, as long as policy objectives are focused on increasing renewable energy rather than reducing carbon dioxide emissions, renewables are likely to need subsidy to compete with other forms of (sometimes more cost-eVective) carbon abatement.

What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects?

29. EEF does not feel suYciently qualified to comment on this issue. 16 June 2008

Memorandum by Energy Networks Association

Long-term Investment Implications of Hitting the Renewables Target

1. The UK faces a significant challenge in delivering its share of the EU Renewable Energy target. Critical to success is Government support and recognition of the need for significant investment in network infrastructure and the creation of a more eYcient and supportive planning framework. In addition, the need for a supportive regulatory regime, aligned to Government’s ambition in meeting EU targets, is paramount. 2. The Business Council for Sustainable Energy UK (UKBCSE) believes that by 2020 around two-thirds to three-quarters of the new renewable electricity generation capacity could come from oVshore and onshore wind energy. This will have implications for the supporting infrastructure needed to maintain energy system stability, including securing suYcient generation capacity to manage intermittent supply from renewables. 3. There is a need for significant investment in the network infrastructure to manage the increased contribution from renewable energy, and to manage the associated peak capacity and operational and system stability issues. Innovative approaches to optimising use of present network assets as well as network expansion will need consideration. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

286 the economics of renewable energy: evidence

Electricity Distribution Systems 4. Distributed Generation by definition is connected to the distribution networks. Within England and Wales distribution networks are defined as 132kV and below which are owned and operated by Distribution Network Operators. In Scotland 132kV and above is defined as transmission network with distribution limited to 33kV and below. As of March 2007, approximately 3.5GW of renewable generation was connected to distribution systems throughout the UK. 5. A number of projects have been undertaken to assess the potential levels of distributed generation, in particular the Supergen Future Network Technologies Consortium work and the UKBCSE May 2008 paper. It is estimated that the potential for onshore renewable distribution connections will be in the order of 12GW by 2020. This can be further classified into generation technology; onshore wind—1–2GW; Biomass— 2–4GW; Hydro—1GW; Marine—1–2GW; Microgen—2–3GW. 6. Larger schemes, such as oVshore wind farms, large onshore wind farms and projects the scale of the Severn Barrage will connect directly to the transmission system, with no impact on the distribution network. 7. Although there are some exceptions, in England and Wales projects generating less than 100MW are likely to connect to distribution networks. These networks were originally designed to supply energy and when distributed generation results in the reversal of this flow of energy, this can trigger modification to the associated network. 8. In areas where natural renewable resources are plentiful, for example wind, the distribution system is often sparse. This will result in new generation triggering significant infrastructure, and in many cases this will include the construction of new overhead lines. The provision of infrastructure to accommodate 2020 targets will be challenging. This will only be achieved with supportive planning policies and a regulatory regime that enables the timely investment in new network infrastructure. 9. As distributed generation connects, it will initially displace local demand, however it will ultimately result in “export” onto the transmission system, this in turn will have implications for the requirement for transmission infrastructure including potential uprating. 10. The energy mix that will be realised by 2020 will be a major influence on where infrastructure will be required. If the larger projects do not proceed but a larger volume of distributed renewables do connect, then the impact and resulting need for investment in the distribution system will be intensified. 11. To date, significant work has been undertaken by the joint BERR/Ofgem sponsored Electricity Networks Strategy Group (ENSG) to consider the future penetration of renewable generation connecting to the Distribution Network. This work has culminated in several reports being written covering topics such as Network Access; Solutions for the Connection and Operation of Distributed Generation; Technical Guidance on the Connection of Generation to the Distribution Network; and more recently, completed in 2007, Future Network Architectures Report. 12. The Future Network Architectures Report considered a number of DG penetration scenarios and provides an insight into the scale of change to network architecture that might be required under each scenario.

Electricity Transmission System 13. Electricity transmission infrastructure is key to enabling the increased levels of renewable generation estimated to be seeking a connection. The three GB electricity transmission licensees have provided a preliminary view of the capacity of the existing GB transmission system to accommodate new renewable generation without the construction of new overhead line routes. The diagram below, taken from the May 2008 paper produced by UKBCSE, is a summary of the indicative guidance from the three licensees. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 287

Figure 6

CAPACITY OF THE TRANSMISSION SYSTEM TO ACCOMMODATE RENEWABLES

Existing renewable generation in 2008 ~ 2,200MW

Grid potential for additional renewable ~4,200MW generation in 2020

Renewable generation seeking ~6,300MW connection i.e. contracted

Existing renewable generation in 2008 ~ 1,200MW

Grid potential for additional renewable ~ 3,900MW generation in 2020 Renewable generation seeking ~4,500MW connection i.e. contracted

Existing renewable generation in 2008 ~ 570MW

Grid potential for additional renewable ~ 1,175MW generation in 2020 Renewable generation seeking ~1,035MW connection i.e. contracted

Existing renewable generation in 2008 540MW

Grid potential for additional renewable ~ 3,100MW generation in 2020 Renewable generation seeking ~1,811MW connection i.e. contracted

Existing renewable generation in 2008 350MW

Grid potential for additional renewable ~ 2,065MW generation in 2020 Renewable generation seeking ~1,565MW connection i.e. contracted

Existing renewable generation in 2008 100MW

Grid potential for additional renewable ~ 1,963MW generation in 2020 Renewable generation seeking ~1,963MW connection i.e. contracted

14. The diagram provides a general indication of the levels of renewable generation that could be accommodated on the GB transmission system by 2020. It assumes completion of transmission upgrades already in train (eg the South West Scotland and Beauly–Denny upgrades) as well as completion of those works expected to be delivered without protracted planning issues.

15. The proposed oVshore licensing regime gives rise to individual licences for connecting oVshore wind farms to the onshore grid. This will promote a “radial connection” approach and raises questions as to whether such an arrangement is sustainable or whether instead (or in addition) an oVshore interconnected transmission system might be desirable from both a technical and economic perspective to fully realise the potential oVshore resource. It should also be noted that in order to accommodate oVshore generation (expected to be in the order of 33GW), significant investment in the onshore network will be required (estimated at £300/kW). It will also be necessary to consider an integrated approach towards both the planning and design of both the onshore and oVshore system. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

288 the economics of renewable energy: evidence

16. Delivery of the 2020 renewable energy target will require swift action to ensure that; the supporting infrastructure is in place; planning decisions are made in a timely manner; and that key issues such as technology supply chain constraints are addressed. In addition to planning and construction for renewable energy projects, there are also time implications of new network infrastructure, including identifying OVshore Transmission Owners, coordinating connection between oVshore and onshore infrastructure followed by construction. 17. It is therefore particularly important that investment in necessary network infrastructure is facilitated in a timely manner to ensure progress towards delivering the 2020 renewable energy target. David Smith, CEO 13 June 2008

Memorandum by the Energy Technology for Sustainable Development Group, Imperial College London

(a) Are there technical limits to the amount of renewable energy that the UK can absorb? Taking this question as “how much intermittent electricity from wind, tidal, wave (solar) etc. can the UK absorb”, the answer depends critically on: (a) what other sources of electricity generation are on the grid, (b) transmission constraints and (c) the uses to which the electrical energy can be put. Given time to reconfigure the UK as a low-carbon electricity economy, perhaps 20–30 years, it is quite likely that a combination of strategies (drawing on a range of insights including technology design and policy for successful deployment) could be developed to absorb electricity from such sources equivalent in energy terms to at least the current electricity output (then perhaps 25–50% of the much-increased total electricity generation). Promising options include: — electric vehicles and electric heating using heat pumps in addition to “conventional” electricity use; — demand side management (eg through economic incentives such as a dedicated electricity pricing strategy at individual and business level); and — prioritised isolation protocols.

(b) How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? The authors believe that studies showing oVshore wind costs to be roughly comparable to those of fossil fuel with CCS (e.g in the 2007 Energy White Paper) are broadly correct, but the question as posed is almost meaningless due to the extensive qualifications that must be placed on any answers. Some of these will be listed below. It is also important to consider how the system costs for diVerent penetrations of renewable deployment are calculated and translated into cost of electricity impacts. This is a complex issue that requires consideration of a number of factors including what other generating sources are assumed to be included in the network and, hence, how much change is required to support intermittent generation from many renewable sources (both in terms of energy back-up and maintaining security/quality of supply when, potentially rapid, changes in electricity delivered to the grid occur). As a guide to practical policy development, if the question implies that the cheaper source(s) of generation should preferentially be developed then it is inappropriate. As things stand we need to explore whether or not CCS can be implemented as a viable large-scale energy technology option as quickly as possible, because it does many things that many or all renewables cannot do (eg tackling CO2 emissions from fossil fuels without prohibiting fossil fuel use and providing electricity generation capacity that can be controlled to ensure that real-time supply matches demand, hence maintaining quality and security of supply). Similarly, so long as renewable electricity can be produced and used eVectively, a certain amount as a fraction of the energy mix is desirable. For both renewables and CCS the costs of current deployment eVectively also include the cost of developing options for further implementation and technological advancement in the future, until such time as the technologies and the infrastructure and markets are mature—probably many decades ahead. Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Carbon emissions from CCS plants can be any value, from unabated fossil emission levels down to typically 15% or lower with any viable capture technology operated at full eVectiveness (order 100 kg/MWh for new coal), to very near zero with some oxyfuel technologies, or negative (potentially to quite large values) with partial or total heat input to the CCS plant from biomass. Interim emissions levels (between unabated fossil emission levels and typical CO2 emissions with “full” CO2 capture) would be obtained by partial bypass of the capture system if this was allowed by policy-makers and economically attractive for plant operators. Some factors determining the estimated cost of electricity generation from fossil fuels with CCS are: — fuel costs; — carbon costs (avoided by CCS);

— credit for negative CO2 emissions associated with biomass use in CCS plants, expected to be co- utilisation with fossil in many cases; — payments for ancillary grid services provided by controllable and flexible fossil CCS plants (which intermittent renewables require as a complement); — whether or not the CCS plant is first of a kind (ie the UK CCS Competition), first generation, second generation or later; and — how costs for CCS pipelines are apportioned between first and subsequent plants.

(c) How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? This question appears to assume that renewable electricity cannot be used for transport and heating. Previous work by some of the authors69 suggests that even when starting with biomass, its use in transport via conversion to renewable electricity, instead of via conversion to “2nd generation” biofuels, will result in improved overall biomass utilisation and, if combined with CCS during electricity generation, negative emissions per km travelled. For heating, conversion of biomass to electricity combined with the use of the same electricity in a heat pump also compares very favourably in terms of conversion eYciency to direct utilisation. The conversion eYciency in electricity generation (30–45%, the latter with co-utilisation) is oVset by the multiplying eVect of the heat pump (typically three or higher). If the electricity generation is combined with CCS, negative CO2 emissions per unit heat used can also be obtained. Of course, electric vehicles and transport also allow the use of primary renewable electricity (wind etc.) in these applications, as well as biomass and products derived from biomass; it was not clear that the question allowed for this flexibility.

(d) Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? Renewables in other countries will not achieve much in the way of a contribution to UK energy security and may have little or no eVect on global CO2 emission rates, especially if the other country is covered by an emission cap (since emission caps tend to get used to their full extent whatever the energy mix).

(e) What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? It appears to be inconsistent that electricity produced from biomass and used as a transport energy source is not treated in the same way as biofuels, and that this treatment is not extended to all renewable electricity so used. It is also arguable that any low-carbon electricity used in transport, which will achieve comparable climate and energy security benefits to biofuels (assuming acceptable lifecycle impacts for the latter) should also be treated in the same way when it comes to incentives and targets. Indeed, increased use of low-carbon electricity in transport is arguably a more transformational step than the use of biofuels, since the latter do nothing to encourage the national car fleet and transport energy supply infrastructure to change in ways that will reduce long-term dependence on liquid fossil fuels. 69 Gibbins, J, Beaudet, A, Chalmers, H and Lamperth, M. Electric vehicles for low-carbon transport Proceedings on the Institution of Civil Engineers: Energy (2008), in press Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

290 the economics of renewable energy: evidence

The authors gratefully acknowledge thought-provoking conversations with colleagues at Imperial College and elsewhere. The opinions and interpretations expressed here are, however, our own. June 2008

Memorandum by energywatch energywatch welcomes the opportunity to respond to the issues raised in the inquiry. This response is non- confidential and we are happy for it to be published. energywatch is the statutory independent watchdog representing gas and electricity consumers in GB. We help domestic and business consumers with their complaints against energy companies, provide them with advice and information about the market and act as an advocate for their interests to energy companies, government and regulators.

Summary The UK Government is committed to playing its part in achieving the EU’s target to achieve 20% renewable energy by 2020. This includes electricity, heat and transport. It is likely that the UK’s target will be 15%, or 13% more than we currently achieve. This 700% increase in renewable energy will be very demanding. energywatch supports the EU’s proposal. However, switching to renewable energy is relatively expensive in terms of £/tCO2. Therefore, energywatch considers it essential that the UK makes much more eVort to reduce energy consumption, for example by ratcheting up its energy eYciency programmes, in parallel with the drive to meet the renewable target. It will be easier, and cheaper, to meet the target on the basis of reduced consumption. energywatch considers it essential that consumers are provided with clear, accurate and real time information about their energy consumption. Smart metering and integrated real time displays, coupled with tailored energy advice, would provide consumers with this information and enable them to take greater control over their consumption and usage patterns. energywatch also considers it essential that consumers are provided with greater transparency over the fuel mix of their electricity supply to enable them to play a greater role in driving demand for increased renewable generation. Changes to the infrastructure and planning regimes are also required to meet the volume of renewable energy required. Consumers will have to pay to meet the target either through their energy bills or through taxes. Assuming a cost of £28 billion for the banded Renewables Obligation by 2020, the cost to consumers by this year is expected to rise to £33 per household per year. However, existing policies are only expected to source 20% of electricity from renewable sources, that is only half the estimated 40% target that the draft Renewables Directive entails. Given such high costs, energywatch considers it essential that mechanisms for subsidising renewables are as cost eVective as possible. These costs will disproportionately impact on low income and fuel poor households. In the commercial sector, they will impact on small and medium-sized enterprises facing higher energy bills. It is therefore essential that measures are taken to mitigate these negative distributional eVects. energywatch supports the proposed reforms to the Renewables Obligation outlined in the Energy Bill, since banding will reduce the “deadweight” element of the subsidy and increase renewable deployment. However, we recognise that banding will also increase costs to consumers and again raise our concerns for low income and fuel poor households. energywatch would like further debate on where the costs of subsidy should lie, for example, between energy consumers and general taxpayers. We consider there may be a case for some elements of the renewable subsidy being borne by taxpayers, for example research and development for newer technologies. This also represents a more progressive method of raising revenue. energywatch considers that consideration of the cost of renewable energy should not be made in isolation. Comparisons should be made with fossil fuels and nuclear energy and greater account should be taken of the various externalities associated with other energy sources. Such externalities are mostly negligible in the case of renewable energy. energywatch considers that the potential contribution from small-scale renewables and renewable heat and gas towards the UK target is currently not being realised. We consider new policies are required to stimulate this sector as a matter of urgency. energywatch therefore supports the introduction of a renewable energy tariV Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 291 to support small scale renewables. This would also bring about a number of additional benefits, such as increasing energy security for consumers (generators) and allowing them to play a greater role in renewable policy. BERR evidence suggests that renewable heat technologies, plus fuel cell micro-CHP, represent more cost eVective means of meeting renewable and carbon reduction targets than small scale electricity technologies, such as PV and micro-wind. energywatch therefore suggests that the proposed small scale feed-in tariV should focus more on encouraging renewable heat than renewable electricity. This is also likely to have a greater impact on reducing fuel poverty (in that fuel poor households have a greater need for low cost heat than low cost electricity). energywatch recognises that parallel measures are needed to encourage decentralisation of existing energy networks to facilitate the deployment of renewables.

The Costs of Meeting the Renewable Target70

Poyry Consulting report

In March 2008 BERR published a report commissioned from consultants Poyry Energy Consulting into the costs of meeting the EU’s 20% renewable energy target. Poyry concluded that there is suYcient resource in the EU-27 to meet the target on condition that: — reported biomass potential is realised, — sustainability and land-use competition considerations do not adversely aVect assumed global biofuel supply volumes, — all technologies are capable of implementing a step change in “build rate”, and — additional support is provided to incentivise investment above that in project baselines. Poyry has estimated the resource cost to the EU-27 of meeting the 20% target. This is the cost to the economy from using higher cost renewable technologies in place of their conventional alternative. Their central case “least-cost scenario” gives the incremental annual cost of meeting the target in 2020 as ƒ18 billion, and the lifetime costs of the project as ƒ259 billion, discounted to 2006 prices. The resource cost is sensitive to the costs of the conventional technologies replaced as well as the overall renewable potential and the assumed costs of each renewable technology. Poyry estimates that the incremental annual cost to the UK of meeting its share of the target in 2020 will be in the range between ƒ5 and ƒ6.7 billion. The lower end of the range will be achievable if trading with other Member States is a realistic option. If it is not, then more expensive domestic actions will be required. The lifetime costs will fall in the range between ƒ59 and ƒ93.1 billion, again depending on whether trading is an option.

Poyry estimates that meeting the target will achieve substantial CO2 savings. The annual savings in 2020 of meeting the target in the EU-27 will be 388 MtCO2 (32 in the UK), while the total lifetime savings are expected to be some 9,834 MtCO2 (1,034 in the UK). These figures assume that biofuels are zero carbon, which they may not be. Poyry concludes that these savings will be suYcient to meet around 45% of the EU’s 20% reduction target. Poyry identifies further research that will allow its estimates to be refined over time. These are: — an audit of available biomass resource potential across the EU, — detailed modeling of the global biofuel supply market,

— insight into the CO2 savings generated through biofuel use, — review of potential supply chain constraints on increased renewable deployment across the EU, and — assessment of missing or hidden costs, such as the costs of additional network investment or reinforcement and infrastructure costs associated with heat grids. 70 This document draws upon the following reports: — Poyry Consulting report (http://www.berr.gov.uk/files/file45238.pdf) — BERR Partial Impact Assessment for changes to the RO (http://www.berr.gov.uk/files/file39497.pdf) — Heat Call for Energy(http://www.berr.gov.uk/files/file43609.pdf) — Element Energy study on the growth potential for micro generation in England, Wales and Scotland (http://www.berr.gov.uk/ files/file46003.pdf Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

292 the economics of renewable energy: evidence

The Impacts of Changes to the RO The Government intends that the Renewables Obligation (RO) will remain the principal instrument for delivering the required investment in renewable capacity, although it is exploring possible support mechanisms for renewable heat (see following section). Capital grants will no doubt continue to exist alongside the RO, but the level of these grants may decrease as the level of the RO increases. The major regulatory burden imposed by the RO is that, in order to provide additional support for the generation of electricity from renewable sources, costs to all electricity consumers are increased. These costs are capped by the levels of the RO and the “buy-out” price in the RO. The RO also imposes some regulatory burdens on renewable generators and the electricity supply industry in relation to the administration required to benefit from and comply with the scheme. From 1 April 2009 the RO will be banded: each technology will be assigned to one of four banding levels: 0.25, 1, 1.5 and 2 ROCs. The change will result in additional investment in renewables generation, in particular in higher cost technologies. The modelling indicates that under central electricity and central technology cost assumptions, the amended RO will deliver 8.6% ROC eligible renewables generation by 2010, 13.5% by 2015 and 13.5% by 2020. This is an increase to UK renewables capacity of 40% over 2009–15 compared to the existing RO. The cost to the economy of producing renewable energy as opposed to conventional generation is expected to be £4.8 billion. However, the ability to target support in a banded RO, means that banding has the potential to significantly increase the eYciency of the RO (reducing the “deadweight” element of the subsidy) through providing support levels more closely linked to the needs of diVerent technologies. The precise outcome will of course depend on the impact of the changes on renewables generation, which in turn rely on a number of external market forces. Among those factors external to the RO are future electricity prices, future carbon prices, and future capital and operating costs for renewables. Sensitivity analysis carried out by BERR indicates that a 10% reduction in future generation costs has the potential to increase the level of ROC- eligible renewable electricity generation by 10–15% in 2015. Ofgem estimates that the total subsidy will amount to £28 billion over the lifetime of the RO, which equates to £33 per electricity consumer per year by 202071. This will save 103.1 MtC of Carbon over the lifetime of the technologies, an increase of 12.5 MtC over the existing RO. The figure for £/tonne of carbon is £188 higher than the existing RO. Introducing a banded obligation will increase the cost to consumers by an additional £1.4 billion, compared to the existing RO, over the lifetime of the RO. The out-turn will vary with the actual level of deployment—increased deployment will be accompanied by increased costs to consumers.

Option Three: Four Bands Low 20151 High Low Lifetime High Central Central Resource Cost £bn 1.1 1.1 1.1 19.9 19.4 19.1 Carbon Saved MtC 3.9 4.5 5.1 86.8 103.1 123 NPV Cost-Benefit £bn (cost!/benefit-) 0.8 0.8 0.7 14.4 12.9 11.5 Cost-EVective £/tC 229 188 155 RO Deadweight Cost £bn 0.2 0.3 0.5 3.8 5.7 9.5 Distributional Analysis Exchequer Cost £bn 0.1 0.1 0.1 1.8 2.2 2.6 Firms Cost £bn 1.1 1.1 1.0 19.1 18.5 18.1 Consumer Cost £bn 1.3 1.4 1.6 23.7 25.1 28.6 Notes: 1. All costs are at 2007 real prices, discounted. Low scenario is modelled assuming technology costs are 10% higher in the central case, with a lower level of renewable generation. High costs assume technology costs are 10% lower than in the central case, with a higher level of generation, and therefore costs.

Heat Call for Evidence In the 2007 Energy White Paper, Meeting the Energy Challenge, the Government announced it would: “. . . conduct further work into the policy options available to reduce the carbon impact of heat and its use in order to determine a strategy for heat. The work will look at the full range of policy options, including the range of existing policy mechanisms such as the EU ETS.” 71 Ofgem (2007), Ofgem’s response to BERR consultation on the Renewables Obligation, Ofgem Processed: 17-11-2008 19:38:18 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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The Heat Call for Evidence, published in February this year, includes information on CO2 emissions from the generation and use of heat, assesses the potential for this to be reduced, and asks about the eVectiveness of existing policies to bring this about. It also includes questions about whether further measures might be needed and what shape these could take. The document also includes consideration of the increasing role of cooling. The Government has sought the views of stakeholders and heat users in industry and local government, NGOs, academics and energy companies. Existing practices in the UK and other countries have been reviewed and assessed, including the impact of policy and regulation. Almost half of the final energy consumed in the UK (49%) is in the form of heat. Heat is generated by burning fuels such as gas, wood, coal or oil, or from electricity. Of this heat, 70% is used by households and in commercial and public buildings. The remaining 30% is used in the industrial sector. In total 907 TWh of heat was consumed in the UK in 2005. Households use heat for space heating (69%), heating water (27%) and cooking (3%). The majority of household heat (81%) is met using gas, similar proportions are met from electricity (9%) and heating oil (8%). The remainder is from solid fuels such as wood and coal (2%). Household demand for heat varies from year to year according to the severity of the winter. It has risen somewhat over the past 30 years from 400 TWh/y to a little under 500 TWh/y. This is despite the marked improvement in the energy eYciency of homes (SAP rating). Householders now enjoy much warmer indoor temperatures—the average internal temperature of homes has risen by 6)C since the 1970s. The other reason for the growth has been the increase in the number of households which have risen by about 40%. Heat for the commercial and public sectors is mainly used in buildings for space heating (71%), water heating (13%) and cooking (15%). The industrial sector uses heat for a variety of processes and at a range of temperatures. For example low- grade heat at less than 100)C is used for purposes such as drying, while high-grade heat at greater than 400)C is used for glass and steel manufacture. Industry uses a diverse mix of fuels to meet its heat requirement, including natural gas (47%), oil (26%), electricity (19%) together with other fuels such as refinery flue gases.

Generation of heat, including electrical heating, accounts for around 47% of UK CO2 emissions. The domestic and industrial sectors generate roughly the same level of CO2 emissions, even though domestic heat demand accounts for a larger proportion of final energy use. The reason for this is that industry uses a higher proportion of more carbon-intensive fuels or electricity to achieve the high temperatures needed.

The proportion of the UK’s CO2 emissions from heat is forecast to fall as a result of changing patterns of heat use together with Government policies, including those announced in the Energy White Paper. It is possible to reduce the emissions from heating in several broad ways, which are not mutually exclusive. — First, we can enhance the energy eYciency and management of buildings and processes so that less heat is lost to the environment or is wasted by heating empty buildings. Government runs a number of programmes to encourage households and businesses to take-up cost-eVective energy eYciency and management measures. These include building regulations, Decent Homes Standard, the Carbon Emissions Reduction Target (CERT), Warm Front, the activities of the Carbon Trust and the Energy Saving Trust; better information including Energy Performance Certificates and the recently announced Green Homes Service. A number of recent reports have argued that the Government could do much more to encourage installation of energy eYciency measures72. Certainly, increased eVorts to reduce energy consumption will make it easier, and cheaper, to meet the renewable target. However, this document focuses on the supply of heat and does not discuss energy eYciency further. — Another broad approach is to decarbonise the energy source, which means either making much greater use of renewable heat sources or heating from low or zero carbon electricity (which could be produced from either nuclear, fossil generating plants fitted with carbon capture and storage, or from renewable electricity). — Finally, there is considerable potential to make use of surplus heat that is presently discarded from high temperature processes like electricity production. This would eVectively displace other, more carbon-intensive ways of generating heat. Widespread use of surplus heat or other centralised heat production might widen adoption of district heating. 72 For example, Boardman, B (2008), Home truths—a low carbon strategy to reduce UK carbon emissions by 80% by 2050, Oxford University Environmental Change Institute; CSE et al (2008), How low—achieving optimal carbon savings from the UK’s existing housing stock, wwf Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

294 the economics of renewable energy: evidence energywatch also argues that much more can, and needs to be done on engaging consumers with their energy consumption, both gas (ie heat) and electricity. Smart meters with integrated real time displays are one means of ensuring that consumers have access to meaningful information about their energy use. In addition, an integrated approach needs to be taken in relation to energy eYciency, fuel prices, and income so that consumers have easy access to comprehensible advice that is tailored to diVering household’s circumstances.

Element Energy Study A study entitled “The Growth Potential for Microgeneration in England, Wales and Scotland” part-funded by many organisations, including BERR, was published in early June this year. The principal findings are: — while strong policy support measures could drive significant uptake of micro generation, the cumulative policy cost of this subsidy would be £21 billion by 2020 and £76 billion by 203073;

— this expenditure would save 24 million tonnes of CO2 annually, which is about 4% of UK emissions (560 million tonnes). This is a high cost for a modest contribution to fuel saving and emissions reduction; and — a rapid rise in conventional energy prices would render subsidy support needless, with a doubling in fossil fuel prices driving spontaneous uptake in 10 million homes by 2030. Further details of the costs and benefits of the diVerent subsidy options are set out below. The report included consumer research into attitudes to micro generation. The main findings among owner-occupiers were as follows: — the majority are satisfied with their existing heating systems; — there is high interest in purchasing loft/roof insulation; — a minority claim to have considered purchasing micro generation; — few of those who claim to consider purchasing micro generation actually go on to obtain quotes, and only a minority of these actually buy the technologies; — respondents claimed the key driver for purchasing micro generation would be reduction in energy bills; — among micro generation supportive policies options examined, consumers strongly prefer grants; — consumers evaluate ongoing costs and benefits over a short time period; — respondents strongly dislike maintenance costs, and especially additional maintenance costs; — consumers strongly dislike inconvenience; — there is little evidence of regional or income eVects on consumer priorities; and — of the roof-based discretionary microgeneration technologies, consumers significantly prefer solar technologies to micro-wind.

Subsidy Options Considered in Element Energy Study

Annual subsidy A £100 annual subsidy is suYcient to promote significant uptake of Combined Heat and Power (CHP) by 2020, with over 2.5 million units installed by this time. CHP systems are modelled as receiving between £200 and £500 under CERT or post-2011 supplier obligation, and a further annual subsidy is suYcient to drive high sales. When CERT ends in 2020, the unfamiliarity penalty associated with CHP has been reduced to zero, allowing them to compete well with gas boilers. Increasing the annual subsidy to £200 increases the microgeneration stock to six million in 2020 and nearly 14 million in 2030.

Feed-in tariff A tariV of 40p per kWh degressed at 1% per year increases uptake of PV to 130,000 units by 2020 and 900,000 by 2030. The tariV is insuYcient to stimulate micro-wind, which has similar costs to a 1kW PV system but a much lower energy output in most sites. The value of the tariV to a household with a 2kW PV system in 2008 is £680 per year. The same system installed in 2030 would receive £550 per year because of the low degression rate. A 30p tariV at 1% degression results in only 240,000 PV installations by 2030. 73 However, a recent report by the Government’s Renewables Advisory Board estimates that micro-generation has the potential to contribute 23% towards the 15% renewable target (RAB (2008), 2020 vision—how the UK can meet its target of 15% renewable energy, RAB). This demonstrates the considerable value in stimulating take-up of micro-generation measures. Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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A 40p tariV is required to stimulate uptake before 2020, although technology cost reductions mean that at a 1% degression rate, the subsidy is equivalent to over 80% of capital costs by 2030. Paying a FIT every year, while ensuring that devices continue to operate in the future, requires a much higher tariV for a given level of uptake due to consumers’ short time horizons. It should be noted that in Germany, where an ongoing FIT has stimulated installation of PV at a rate of 1 GW per year, uptake by domestic consumers was largely dependent on the availability of soft loans. This has the same eVect as deeming in that it overcomes the capital cost barrier, and the value of feed-in tariV in Germany is suYcient to oVset the loan repayments. Since soft loans were discontinued in Germany, purchases by domestic consumers have fallen significantly and most uptake is now by commercial and industrial consumers who have access to low-cost finance and probably longer time horizons.

Heat-based feed in tariff Deeming the feed-in tariV for 10 years at the government discount rate of 3.5% leads to substantial uptake of air source heat pumps (ASHPs), with over two million units installed by 2030. Biomass boilers and ground source heat pumps (GSHPs) show no uptake since they are unable to compete with ASHPs which receive the same subsidy. Deeming at a commercial rate of 7% reduces uptake slightly to 1.8 million units by 2030. At the support levels modelled, the non-deemed heat based feed-in tariVs can provide less support than the post-2011 supplier obligation, and so uptake is lower than in the baseline in 2020. This is particularly true for biomass, which receives favourable support under the CO2-based supplier obligation but receives the same subsidy as the lower cost heat pumps under the heat based FIT. Solar hot water systems receive very little benefit from a 2p/kWh heat FIT. This is because a typical system installed in 2008 generating 1,500 kWh of hot water per year only receives £30 per year from the 2p/kWh tariV. Even when this is deemed over 10 years, it is equivalent to a capital subsidy of less than 10%. Therefore, to support mass market uptake of solar thermal using an energy-based subsidy, a higher p/kWh heat reward may be required than for primary heating systems.

A tariV deemed at 3.5% leads to annual CO2 savings of nearly 1.5Mt by 2020 and 4Mt by 2020. Over 15TWh of renewable heat are supplied in 2020, equivalent to 5% of the government’s 2020 renewable energy target. This rises to 39TWh per year in 2030. The cumulative cost of a tariV deemed at 3.5% is £2.6 billion by 2020 and £6 billion by 2030. This compares with a cumulative subsidy cost of £2 billion by 2030 for an undeemed tariV. This underlines the cost- eVectiveness of deeming a feed-in tariV, as a tripling of the subsidy spend in the deemed case leads to over five times more renewable energy being delivered.

Heat and electricity tariff The undeemed combined renewable tariV results in a total microgeneration stock of 4.5 million units and generation of 7 TWh of renewable heat and electricity in 2030. Heat pumps and PV show much stronger uptake than in the baseline, with one device for every five homes in 2030. The deemed renewable tariVs are much more eVective and deliver microgeneration stocks of 2.8 million and nine million units by 2020 and 2030. These generate over 17TWh of renewable energy in 2020 and 45 TWh in 2030. Despite the fact that PV has a higher stock than heat pumps, the contribution of electricity to the total renewable energy production is relatively small at less than 20%. The costs of the deemed combined renewable subsidy scheme are high, with a committed spend of around £8 billion by 2020 rising to over £26 billion by 2030. Although PV and wind generate much less energy than heat pumps throughout the scenario, they receive the bulk of the subsidy, taking over £20 billion of the ca. £26 billion by 2030. This suggests that a heat feed-in tariV could contribute much more to overall renewable energy targets for a lower cost than a renewable electricity tariV can. The final scenario illustrates that a relatively low level of support of 5p per kWh is suYcient to drive widespread uptake of CHP. This is because CHP systems, particularly fuel cells, generate much more electricity than a PV system costing a similar amount. Deeming the tariV means that the cost of a CHP system is reduced to the same cost as a condensing gas boiler, since the value of the deemed subsidy for a unit generating 4,000kWh per year is £1,600. Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

296 the economics of renewable energy: evidence

The cost of a CHP subsidy is very high, with a cumulative subsidy spend of £13 billion by 2020 and £44 billion by 2030. This means the total subsidy spend for all electricity and heat technologies is £21 billion and £76 billion in 2020 and 2030. While the Element Energy study suggests that a feed-in tariV support mechanism does have considerable cost implications74, energywatch supports the introduction of a renewable energy tariV for small scale renewables for the following reasons: — It would lever in new sources of investment for renewable energy that are currently not being realised through the Renewables Obligation; for example in Germany, 90% of renewable investment comes from outside the energy industry. — By encouraging micro-generation, it would change the balance between energy companies and consumers (who also become generators). — If parallel mechanisms (eg subsidies for up-front installation costs) are introduced to make sure that low income and fuel poor consumers benefit from small scale renewable technologies, particularly heat, it could have a dramatic impact on reducing fuel poverty. Renewable technologies represent an eVective solution, alongside solid wall insulation, for fuel poor households living in hard to treat properties (those oV the gas network and/or built with solid walls), many of which are found in rural areas. — Increased visibility and take-up of small scale renewables by consumers will also help stimulate energy reducing behavioural change and take-up of energy eYciency measures. — It may help encourage new entrants to the energy market place, for example smaller companies able to oVer energy service packages, and thus increase the competitiveness of the UK energy market.

Fuel Poverty Advisory Group Review of Micro-generation A recent report to the Government’s Fuel Poverty Advisory Group75 reviews the potential of micro- generation for tackling fuel poverty. The review was prompted by the problem of tackling fuel poverty among households living in “hard to treat” properties (those built with solid walls and/or oV the gas network). The report argues that 50% of fuel poor households cannot be assisted by existing insulation and heating grants, in part due to limitations on the measures oVered under conventional programmes (Warm Front etc). The review examines a range of micro-generation technologies, including air sourced heat pumps, ground sourced heat pumps, bio-mass boilers, micro-wind, solar thermal, photovoltaics and micro CHP. It considers their suitability for inclusion in retrofit programmes aimed at the fuel poor. The review argues that micro-generation technologies can play a role in tackling fuel poverty. However, policy should focus more on renewable heat technologies than electricity. This is because low cost heat has a much greater impact on reducing fuel poverty than low cost electricity (assuming initial capital costs are grant- funded).

Conclusion and Recommendations energywatch considers it is possible for the UK to meet the challenging target of providing 15% of its energy from renewable sources. However, this will require a number of new policy initiatives for ensuring the target is met: — A dramatic increase in measures to reduce energy consumption, for example, expansion of energy eYciency programmes, universal smart meters76 and increased regulation of domestic housing and non-domestic buildings to increase their energy performance. — The introduction of a feed-in tariV to encourage the deployment of small scale renewable technologies, particularly heat. Parallel measures should be introduced to encourage the installation of such technologies in the homes of low income and fuel poor consumers. — Renewables policy should address social objectives, eg increased eVorts to mitigate the impact of higher fuel costs on low income households, as well as environmental (reduced carbon) and economic (increased security).

74 These costs do not necessarily have to be met in full by energy consumers. energywatch advocates further debate on possible funding routes for the measure. 75 Microgeneration sub-group of Fuel Poverty Advisory Group (2008), Microgeneration—demonstrating its role in tacking fuel poverty, report to FPAG, 5/6/08 76 Improved billing and metering represent real tools for consumers to take control of their energy consumption and contribute to carbon reduction targets. Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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— A much greater policy focus on heat, particularly renewable heat, in general. — Measures to address potential supply chain constraints on increased renewable deployment. — Investment in grid and in network management to encourage decentralisation of energy networks and to transport renewable electricity to demand. Meeting the target will entail increased costs for energy consumers, either through energy bills or taxes. energywatch calls for a debate on the most appropriate allocation of costs between energy consumers and taxpayers, given that the latter course represents a more progressive route for raising revenue. energywatch also advocates a thorough analysis of the distributional eVects of the measures required to meet the targets and the introduction of parallel measures to mitigate the negative distributional eVects. energywatch advocates the mandatory disclosure of the fuel mix of individual tariVs and contracts to all fuel consumers. We consider improved transparency will help drive consumer demand for increased renewable content of their electricity supply. This will also require the establishment of an independent accreditation body to verify supplier’s claims and to assess any additional environmental benefits suppliers claim for “green tariV” products. June 2008

Memorandum by the Environmental Defense Fund On behalf of the Environmental Defense Fund (EDF), I am pleased to respond to the House of Lords Select Committee on Economic AVairs’ inquiry in to the economics of renewable energy. EDF is a leading United States-based non-profit environmental organisation representing more than 500,000 members, with oYces across the United States and in Beijing, China. Since 1967, we have linked science, economics and law to create innovative, equitable and cost-eVective solutions to society’s most urgent environmental problems. There is no more urgent environmental challenge facing our world today than the problem of global warming, and renewable energy technologies have an important role to play in solving it. Over the past 18 months, in researching and writing Earth: The Sequel with my co-author, Miriam Horn, I have spent countless hours speaking with energy technology inventors and entrepreneurs about the necessary pre-conditions for bringing advanced low and zero-carbon energy technologies to market. Lessons learned from this work, along with EDF’s thirty-year history of pioneering market-based environmental regulation, informs my response to your request for information on renewable energy policy. Energy technology inventors and entrepreneurs are not looking for subsidies and set-asides. What they are looking for is a level playing field upon which to compete. Currently, the greatest obstacle that many renewable energy technologies face is a market that fails to fairly value the avoided carbon dioxide pollution attributable to renewable energy. Therefore, the most important policy for commercializing renewable energy is one that caps carbon dioxide emissions, allows for trading of the emission reduction obligation underneath that cap, and thereby sets a market price for avoided CO2 emissions that rewards low and zero carbon technologies for their positive emissions profile, while forcing high-CO2 emitting technologies to internalize the cost of their emissions into their production costs. We know that cap and trade mechanisms can drive environmental technology investment and innovation from the United States’ experience with the regulating sulphur dioxide emissions (SO2) from power plants. The U.S. Acid Rain program, targeted at achieving a 50% reduction in power plant SO2 emissions, achieved greater reductions, sooner, at considerably lower costs than forecasted when the program was enacted. In 1990, on the eve of legislation, analyses estimated that the U.S. Acid Rain program would cost $6 to $7.5 billion annually by the time it was fully implemented in the year 2010. Subsequent estimates a few years later predicted costs of roughly $2.5 billion. The most recent analyses—including one by the OYce of Management and Budget in the White House—peg the costs at $1.1 to $1.8 billion a year.77 Meanwhile, academic studies have estimated savings of hundreds of millions of dollars a year due to the use of a cap-and-trade system rather than a hypothetical facility-level performance standard achieving identical emissions reductions (with savings running into the billions relative to a requirement that all generators install end-of-pipe pollution control equipment).78 77 Cost estimates cited in National Acid Rain Precipitation Assessment Program, NAPAP Report to Congress: An Integrated Assessment (Washington, D.C.: 2005). 78 See A. Denny Ellerman, et al, Markets for Clean Air: The U.S. Acid Rain Program (New York: Cambridge University Press, 2000), and Nathaniel O. Keohane, “Cost Savings from Allowance Trading in the 1990 Clean Air Act: Estimates from a Choice-Based Model” in Charles E. Kolstad and Jody Freeman, eds., Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience (New York: Oxford University Press, 2006). Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Perhaps what is most remarkable about this environmental policy success story is that the program led to the development of compliance strategies not contemplated when the program was first enacted. Given the price incentive to reduce emissions, engineers at power companies and technology firms found ways to modify power plants to take greater advantage of lower sulphur coals, and refine emerging SO2 scrubbing technologies to make them more reliable and less costly to build and operate. The point about innovation is important because none of us today can fully imagine the types of low and zero carbon renewable technologies and the many permutations of them that will evolve over time. The best policy is one that does not try to dictate an outcome based on a known set of current technologies, but rather creates an incentive for inventors and entrepreneurs to achieve the greatest output of low and zero carbon energy at lowest cost. Cap and trade policy can be a powerful driver for technology deployment, but only if done right. There are two lessons to be learned from the first phase of the European Trading Scheme germane to the Select Committee’s inquiry into renewable energy deployment. First, the price signal must be real. A cap must be set based on the best scientific understanding of the emission reductions necessary to avoid the worst consequences of global warming, and the baselines used to assess the emission reduction responsibility of sources covered by that cap, must be based on real, verifiable, historic emissions data. The combination of politically expedient targets and baseline data based on guesstimates of future emissions growth will conspire to create a cap that is neither eVective in driving technology innovation and investment or in achieving any meaningful environmental progress. Second, the price signal must be sustained. Energy technologies are capital intensive and long-lived. Deployment of renewable technologies will not occur if investors cannot reasonably expect to recover the value of their investment over time. Cap and trade programs will not succeed in stimulating investment or reducing pollution if they sunset every few years, or if the emission reductions created by an investment in low and zero carbon technologies cannot be banked with a reasonable expectation that such reductions will have value in the future. A real and sustained cap and trade program can be a powerful tool for renewable energy deployment. U.S. Energy Information Agency (EIA) modelling of the proposed Lieberman/Warner national cap and trade legislation recently debated in the U.S. Senate demonstrates the power a comprehensive cap and trade program can have in commercializing renewable energy technology. According to EIA, implementation of the Lieberman Warner cap would result in 40 to 146% greater deployment of renewable energy technology by 2030 than would otherwise be achieved in EIA’s business as usual scenario. According to EIA, under the Lieberman Warner cap and trade program, between 21 and 61% of all generation built between now and 2030 would be renewable resources. These results are all the more impressive when you consider that EIA’s business as usual scenario already takes into account favourable renewable energy provisions of the Energy Independence and Security Act of 2007 and the fact that 29 states have renewable energy portfolio standards of varying stringency. In short, the considerable renewable energy gains achieved through the Lieberman Warner cap and trade program are wholly additional to an already considerable policy eVort to promote renewable energy in the United States.79 More to the point, at the request of Senator James Inhofe of Oklahoma, EIA analysed the eYcacy of a national renewable portfolio standard requiring 25% of electricity to come from renewable energy by 2025. While this standard produces roughly the same amount of renewable deployment as the Lieberman Warner cap and trade bill, there is no comparison between the two policy initiatives in terms of achieved CO2 reductions. The national renewable portfolio standard moderated national CO2 emissions growth, achieving a 14% reduction in electricity sector CO2 emissions against EIA’s business as usual base case, but national electricity sector emissions still increased by 14% above 2005 levels.80 In contrast, the Lieberman Warner bill results in an absolute reduction in electricity sector emissions between 17 and 47% below 2005 levels. In short, even an aggressive national renewable energy policy is no substitute for a reasonable cap and trade policy where the policy goal is reducing greenhouse gas pollution. EDF has supported state initiatives to adopt renewable portfolio standards as a way to jump start technology deployment in absence of concerted national policy to cap and reduce greenhouse gas pollution, but we do not see RPS requirements as a substitute for a national cap. They are complimentary, at best. Likewise, the United States has achieved some success in promoting renewable energy development through a production tax credit for wind, and more recently, for solar. Here again, in absence of a national cap, the production tax credit has proven to be invaluable in jump-starting wind development in the United States. We know of the direct relationship between this subsidy and wind development, because, unfortunately, Congress 79 Report to be found at: http://www.eia.doe.gov/oiaf/servicerpt/s2191/index.html 80 Report to be found at: http://www.eia.doe.gov/oiaf/servicerpt/eeim/index.html Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 299 has not seen fit to enact this credit consistently. When the credit is in place, wind development occurs. When it expires, wind development virtually grinds to a halt. (See chart)

Historic Impact of PTC Expiration on Annual Installation of Wind Capacity 6,000 Expired Production Tax credit (PTC)

5,000 Production Tax Credit (PTC)

4,000

3,000 73% 77% Drop Drop 93% 2,000 Drop

1,000 Annual Capacity Installed (Megawatts, MW) 0 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: American Wind Energy Association As with a cap and trade program, the eVectiveness of the tax credits rests in large measure on the consistency of economic incentive is essential for lasting impact on energy project developers. Even then, as with the RPS, a production tax credit, at best, is a down payment on needed technology deployment, but it does not create the fundamental restructuring of electricity production costs necessary to push renewable energy development ahead of more carbon dioxide intensive options for generating electricity. Convinced as I am that a well-designed cap and trade program is the cornerstone of any eVective policy for capping and substantially reducing greenhouse gas pollution, I recognize that the traditional utility business model and nature of the electricity grid are such that price signals alone may not be enough to realize the full environmental potential of renewable energy technology. Renewable technologies typically have low variable costs but high capital costs, and rules must be in place that enable utilities to enter into long term power purchase agreements with project developers such that these developers can demonstrate a revenue stream stable enough to secure financing from lending institutions. Work also needs to be done to upgrade transmission lines and infrastructure to enable renewable energy resources to easily integrate into the grid. By way of example, EDF is working with policymakers in Texas to create pre-set renewable energy corridors where transmission lines are easier to site and permit for the purpose linking sites in west Texas that have high wind power potential with growing population centers in eastern Texas. EDF is also initiating work with utilities and regional transmission planning organisations in the United States on ways to more quickly deploy “smart” transmission and distribution technologies along with innovative retail tariVs that promote demand response, which, in total, will help maintain and improve grid stability the grid plays host to greater amounts of variable wind and solar generation. Finally, there is room for government support in basic research and development. For example, solar technology was an early beneficiary of the United States space program, and the network of United States national labs and research universities obtaining government grants have a long legacy of helping to incubate the technologies and materials reaching the market today. Basic science is a cost diYcult for any corporation to bear alone, and a well-structured program of basic government-sponsored R&D is valuable for spreading those costs broadly across society. Here the trick is to develop methods of subsidizing research without the government falling into the trap of picking technology “winners.” Inventors and entrepreneurs I speak with favour competitive mechanisms like technology “prizes” as a way to reward research that leads to commercial innovation. I should also note that auction of even a fraction of CO2 allowances created under a cap and trade program create a large and sustained funding source for government-sponsored R&D, thus addressing one of the single greatest frustrations associated with government-sponsored research: inconsistent annual appropriations of funding from the treasury. Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

300 the economics of renewable energy: evidence

In conclusion, renewable energy is not an end in and of itself, but a means to an end. The defining environmental challenge of the 21st century is abating the threat of catastrophic climate change. Renewable energy can play a large role in meeting this challenge, but adopting strong policies to promote renewable energy absent a commitment to cap and substantially reduce greenhouse gas pollution is neither the most eVective way to promote renewable energy nor the way to solve the problem of climate change. Indeed a laser- like focus on renewable energy deployment may actually serve to obscure other more cost-eVective strategies to reduce greenhouse gas pollution, such as aggressive energy eYciency and strategies to slow and reverse tropical deforestation. Society is best served when environmental policy is achieved cost-eVectively, and a market for emission reductions created by a cap and trade system is a proven method for doing just that. I appreciate the opportunity to submit these comments to the select committee and stand ready to be helpful to your members in any way that I can be as you continue your deliberations. Fred Knapp President 7 July 2008

Memorandum by the Environmental Industries Commission (EIC)

Environmental Industries Commission (EIC) EIC was launched in 1995 to give the UK’s environmental technology and services industry a strong and eVective voice with Government. With over 330 member companies, EIC has grown to be the largest trade association in Europe for the environmental technology and services (ETS) industry. It enjoys the support of leading politicians from all three major parties, as well as industrialists, trade union leaders, environmentalists and academics. EIC’s Renewable Transport Fuels Working Group represents over 70 organisations from small biodiesel producers to multinational commodity companies, and has actively participated in consultation around the policy and practical implementation of biofuels in the UK. This response is from that Group and is, therefore, focused purely on the issues relating to biofuels.

Introduction In order for the UK to achieve its carbon emission reduction targets all sectors of the economy, including transport, must contribute. Transport is a particular challenge as it is the fastest growing area of carbon emissions. Biofuels are one of the few commercially available technologies able to produce significant carbon emissions savings from the transport sector. Biofuels can also play a role in diversifying fuel supplies, contributing to fuel security, and in providing new opportunities for our rural economy. However some biofuels, like most technologies, can have adverse consequences if they are developed without due regard to sustainability and ensuring real carbon savings. It makes no sense to support those biofuels that lead to deforestation and habitat destruction. The Government has introduced the Renewable Transport Fuels Obligation (RTFO), a legal requirement to include biofuels in the fuel sold at petrol stations across the country. This gives it the ability to ensure that only the right biofuels, which meet high standards of sustainability and deliver significant reductions in carbon emissions, are allowed to qualify as fulfilling this obligation. EIC has worked with Government and NGOs to develop clear, robust and sensible sustainability standards for biofuels. We would encourage Government to apply these standards as soon as possible and to press for tough standards at EU level in the Renewable Energy Directive.

Question 11

What are the costs and benefits of the present generation of biofuels? Growing crops for biofuels has the potential to generate numerous local environmental, social and economic impacts both positive and negative. Energy crops, for example have the potential to provide an incentive to keep land in productive use following the changes to the Common Agricultural Policy to de-couple subsidy from production. The UK remains one of the most eYcient arable farming nations in the world, with high standards of environmental stewardship. Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Harnessing this productive capacity will enhance both fuel security and the long-term confidence of a sector that has suVered significant loss of capacity in recent years. It is, therefore, important that the Government uses the policy mechanisms at its disposal to ensure that biofuels have a positive impact. In particular the sustainability criteria integrated into the RTFO and Renewable Energy Directive will be central to ensuring transport energy crops have beneficial impacts.

Impact on food production At the 5% inclusion level required by the RTFO the UK’s ability to produce its own food would be unaVected; however, at higher inclusion levels the UK may start to face a choice between importing either biofuels, or food or both. Global food stocks are at their lowest level for decades and agricultural commodity prices have been rising rapidly in recent years. However, there is a complex interaction between food prices, agricultural commodity availability and fuel prices, since the cost of fuel forms a major part of production costs and farm gate prices have become decoupled from food retail prices. Therefore, at the present low levels of biofuel production it is unlikely that rising food prices can be attributed to diversion of raw materials to biofuels. The long term certainty and carbon and sustainability accreditation, championed by biofuels, has the ability to enhance the security and sustainability of food production, if adopted in a sensible and holistic fashion. However prior to biofuels rising beyond the current level of 10% proposed in the EU the impact on food security and prices will need to be kept under review.

Impact on farmers Farm gate prices in the UK have been falling for over a century and have fallen by 18% in the last ten years alone—despite recent commodity price increases. Biofuels will provide an alternative market for agricultural products which will boost the incomes of farmers in both the developed and developing world. Of the world’s 47 poorest countries, 38 are net oil importers, and 25 of these import all of their oil. Many of these countries have substantial agricultural bases and are well positioned to grow highly productive energy crops, which would save these impoverished countries from spending scarce resources on importing expensive oil, hence biofuels have the potential to improve farm viability and alleviate poverty in developing countries. The impact in practice will need to be kept under review as biofuels develop to ensure these benefits are realised.

Will there be a second generation of biofuels and, if so, what are the estimated costs? Progress on the development of the biofuels industry has been slow, most notably in the UK, as a consequence of inadequate value and period of fiscal support and lack of transparency in government policy and regulation. There are now, however, signs of this changing and recent progress has been welcome. The UK Government has exercised valuable EU leadership with its RTFO initiative, under which an obligation to provide road transport biofuels to the market is integrated with essential elements of sustainable development and carbon accreditation. Nonetheless, we are concerned that UK investor confidence is subdued, and are alarmed that market uptake— currently less than 0.5% by volume in the UK—remains so far below that required to contribute to the RTFO. The next decade will require dramatic development in the scale and eYciency of biofuels manufacture and logistics, and an inevitable transition from the cottage industry of today to a highly eYcient, commodity industry serving a vibrant, free flowing international market. To be successful, this will need to set clear target outcomes and support mechanisms so that the best endeavours of the agricultural sector, and developers of existing and new technologies can be harmonised. The market is not well served by Government picking “superior technologies”. Each will develop based upon commercial and technical risk, and should be judged on their results in delivering carbon savings at least cost and with high environmental standards. Existing assets and technologies have much to contribute. Plant scale-up and improved eYciency can be applied to both process and logistics. We believe that substantial advances can (and should) be achieved without compromise to biodiversity and land-use, and are capable of meeting or exceeding the EU biofuels substitution target of 5.75% by 2010. There are three significant areas of potential within the existing biofuels industry, namely: Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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— Agronomy—As crops are developed for specific biofuels use, they will rapidly develop higher yields with lower fertiliser inputs. — Process—As Europe engages with process engineering, we will see higher yields at lower energy cost. — Synergies—The industry will rapidly establish new ways of utilizing its co-products in much the same way as the oil industry. The National Non Food Crop Centre has much experience in this area, but needs a processing base. At present the most mature biofuels technologies are based on wheat and oilseed rape feedstocks. In the future new feedstocks may play an increasing role. These include miscanthus and perennial ryegrass. The attractiveness of these so called second generation feedstocks lies in their ability to utilise more marginal non food producing land, with little input and produce significant biomass yields. In addition to chemical engineering and fermentation technologies, it will be necessary through plant breeding research (much of it already underway) to produce higher biomass yielding crops, reducing the land, water and fertiliser take, yet with enhanced conversion potential. The urgency of renewable energy deployment is often overlooked, as clearly identified by last year’s Stern Report. It is important that existing technologies are deployed to build market infrastructure and achieve short-term carbon impacts in abeyance of new technologies, rather than waiting for a technological silver bullet. It is clear that the current slowdown in UK development plans, and the current low production base, make secure achievement of the 2010 targets highly unlikely. The potential gap in certainty between the current duty incentive for biofuels, and a robust transparent carbon and sustainability linked obligation scheme is a major threat to the whole range of biofuel benefits.

What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? The transport sector is responsible for one quarter of the UK’s carbon emissions and this is growing rapidly, threatening to derail Government targets to reduce carbon emissions. The technology to produce biofuels is still developing and diVerent feedstocks, both from crops and waste materials/by products, are being developed and used. However, there is ample evidence from Government and independent studies to demonstrate that biofuels are a promising technology for tackling a proportion of carbon emissions from the transport sector. For example, the report published by DfT in July 2004 “Liquid Biofuels and Renewable Hydrogen to 2050” concludes that “It would be possible, by 2050, to reduce total carbon emissions from road transport to very low levels, through significant use of renewable hydrogen or biofuels. This could help the UK to achieve its goal to reduce CO2 emissions by 60% by 2050”. However, if biofuels are produced without making real carbon savings and sustainability a key requirement of Government support then there is a major risk that they will not deliver real carbon savings and have other negative environmental impacts. For example, crops which displace rainforests will create far more carbon emissions than they save and have unacceptable impacts on biodiversity. There are a range of feedstocks and process for biofuels which have diVerent carbon saving and overall sustainability benefits. EIC believes that Government should give greater support to those biofuels that have the greatest benefits. In assessing these benefits it is important that the Government gives due weight to wider sustainability considerations as well as carbon savings. Otherwise the Government may promote fuels that are produced in such a way as to run contrary to its environmental policy objectives in areas such as biodiversity (for example through encouraging deforestation). Whilst it is too early, therefore, to come to a final conclusion on the benefits of biofuels it would be a mistake to fail to support the development of a promising technology and to guide this in the “right” direction. There are promising technologies for using by-products / waste from agriculture, forestry and general biodegradable wastes for producing biofuels. Indeed, the principal feedstocks for biodiesel currently produced in the UK are used cooking oil and tallow. Waste and by product feedstocks will score highly on carbon savings and sustainability considerations and the key to encouraging them will be providing greater levels of incentive through the RTFO for fuels that score highly in these areas. Government will also need to address the regulatory hurdles that can result in by products being considered waste and therefore subject to the rigours of a waste management licensing system principally designed for those running landfills. EIC is pressing at both EU and UK level for action to tackle the problems caused by Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 303 the wide application of the definition of waste—whilst ensuring that the potential environmental impacts are properly controlled. It is clear that biofuels alone are unlikely to provide the solution to carbon emissions from transport. They are one promising technology which should be developed alongside other technologies and behavioural change.

Conclusions Biofuels are a promising technology to contribute towards tackling carbon emissions from the transport sector. They are, however, only part of the solution and they carry risks of negative impacts if the market is not given the right signals by Government support strategies. Government should, therefore, support the development of biofuels, particularly domestic production where high standards can be ensured, through a policy framework which is consistent and long term to provide investors with the opportunity to make a return on their investment. That policy framework should also provide clear signals to the market as to the standards biofuels will be expected to meet. We must, therefore move rapidly to a scheme which links Government support to the level of carbon savings delivered and to meeting minimum standards of sustainability and which is also practical to achieve. 12 June 2008

Memorandum by the Environmental Research Institute

1. Renewables within UK Overall Energy Policy The UK has very considerable potential wind, wave and tidal power renewable energy resources. The installed electricity generating capacity is around 83GW yet despite the very large potential renewable resources, less than 8% of that capacity is in renewable power and around 2/3 of that is from hydro-electric power (BERR, 2007). This is much less than the EU average and even the 2010 target appears very limited. Given the recent rises in oil and gas prices and the increasing demand from China and India the UK is well placed to make much greater use of renewable energy which not only would ensure much more stability of generation costs but would also provide better energy security.

2. Barriers to Greater Deployment The intermittency of supply presents problems if renewable power becomes a significant percentage of total generation. This is particularly true of wind and, to a lesser extent, wave power, while tidal flow (as opposed to tidal barriers) although predictable, may provide peak output at periods of low demand. There are potential approaches that can overcome the intermittency problem which are addressed later in this response. Another barrier to greater deployment is the limitations of the transmission grid. Average wind power capacity factor (actual output as a percentage of output if operated continuously) for the UK is just over 28% yet in parts of the Highlands and Islands the capacity factor exceeds 40% and in the case of Shetland is well over 50%. There is a proposal for a 600 MW wind farm in Shetland but there is no grid connection to the mainland. In addition, the Transmission network use of service (TNUoS) cost will be high adding to the price of electricity (one estimate puts it at £42/kW per annum as compared to £12/kW per annum in the south of Scotland). OVshore wind power oV the coast of northern Scotland, which would have similarly high capacity factors again suVers from the lack of suitable grid connection. In addition, there is insuYcient applied research funding to help universities and research institutes address these problems. Research Councils oVer funding for “blue skies” research but what is needed is more targeted applied research funding which should be allocated to universities and research institutes who are collaborating with industry and other organisations with an interest in renewable energy development. Industry and other organisations may have limited funds to undertake initial applied research but may be able to oVer support “in-kind”. It is also important to look at the mechanism for support for renewable energy. The evidence from Germany strongly suggests a feed-in tariV encourages much greater deployment of renewable energy than the Renewables Obligation Certificate approach adopted in the UK. Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

304 the economics of renewable energy: evidence

3. Technological Advances While there is always the potential for technological advances that do not require government support, other countries are supporting research and development of renewable energy either directly or via the use of variable feed-in tariVs to help encourage development. This is particularly important to provide suYcient incentive for nascent technologies eg wave and tidal. The great danger of not providing government support is that UK industry will be disadvantaged as compared to their European, North American and even Asian competitors. The UK has the largest potential renewable energy resources in Europe and the Government should support industry to become world leaders in wave and tidal energy. The failure to provide suYcient support to the development of wind power has meant that already the leading companies are based outside the UK and failure to support research, development and deployment of wave and tidal power will mean that UK industry is again likely to be out-competed by industry outside the UK. This reinforces the need for additional applied research support to enable universities and research institutes to work with industry and other stakeholders.

4. Has Government Support been Effective? The fact that the UK has one of the lowest proportions of renewable energy in Europe strongly suggests that Government support has not been eVective. The most cost-eVective support appears to be the feed-in tariV approach adopted by Germany but given that the UK is already lagging behind much of Europe, as noted in Section 2, additional funds are needed to support applied research in universities and research institutes collaborating with industry and other key stakeholders. The feed-in tariV mechanism provides one approach to providing more eVective support to certain types of renewable energy and the way it has operated is to recognise the stage of development and manufacturing costs of diVerent types of renewable energy. However, it is also important to provide support for development of energy carriers such as hydrogen and for fuel cells which can use hydrogen as a fuel.

5. Investment in UK Transmission Network As noted in Section 2, the current transmission network places considerable barriers to development of renewable energy in many of the areas of the UK with the greatest potential renewable energy resources. Investment is needed to develop the network and to keep TNUoS costs low rather than penalising the generation from remote areas (it was noted in Section 2 that the TNUoS for Shetland may be set at a level of 3.5 times that in the South of Scotland). With regard to the question of intermittency, one approach that could be adopted would be to generate hydrogen locally (or close to landfall in the case of oVshore generation) at times of low demand for electricity and to provide power at times of peak demand. The hydrogen could be used as a fuel in transport, for space heating but importantly it could also be used in gas turbine power plants either directly or mixed with natural gas. As gas fired power stations can respond quickly to increases in demand their use in conjunction with intermittent renewable power which is also used to generate hydrogen, could help overcome some of the problems of intermittency. There will be still be issues for the peak demand on the transmission network but the use of hydrogen may alleviate the problem. In addition, the generation of hydrogen could help maximise the income stream for renewable power and enhance the energy security of the UK.

6. External Costs As noted in the question, wind farms have the potential to spoil areas of natural beauty. It is possible to site wind turbines to reduce such visual impact but developers clearly wish to maximise returns which generally means that turbines are sited on high ground increasing their visual impact. One of the issues is that although the capacity factors in upland areas may be higher than the UK average, the TNUoS charges may also be higher reducing profitability. This reduces the opportunity to reduce visual impact by careful choice of (possibly sub-optimal) locations for turbines. Processed: 17-11-2008 19:38:19 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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It is diYcult to make direct comparisons with nuclear or fossil fuel generation as wind farms by their very nature are likely to cover a much wider area for the same electrical output. However wind turbines often have little impact on land use (sheep appear happy to graze under turbines) while nuclear or fossil plants sited in open land have a major impact on the land use as a result of the structures and roads they require.

A more tangible external cost is the total CO2 emission associated with each development. Full-life-cycle analysis of carbon budget is necessary for each technology and individual developments. While renewables and nuclear do not produce CO2 as a direct bi-product of energy generation there are carbon costs for any technology and these should be counted carefully (including the carbon cost of extracting and processing nuclear fuel). A particular concern is land management and potential disturbance of large terrestrial reservoirs of carbon. UK peatlands are a major reservoir of carbon and loss of these could result in massive release of CO2. Since peat is common in the windy uplands that are otherwise favourable to wind farm developments, this is a crucial issue for the full appraisal of onshore wind, while accurate and complete evidence of the scale of soil and hydrological disturbance is lacking. There may be a case for the planning system to be revised to allow early discussion of the best design of wind farms to ensure an appropriate balance is struck between development and impacts. In the case of wave and tidal power the concern is more likely to be with their impact on navigation and on the aquatic environment (flora and fauna and also on sediment movement). Again a number of these issues could be addressed by oVering more support for applied research in universities and research institutes to collaborate with industry and other stakeholders.

7. Costs of Generation Generation costs of renewable power are currently high. The rapid rise in oil and gas prices is reducing that diVerential but until full costing of future greenhouse gas impacts are included in the case of fossil fuels, renewable power is likely to remain more expensive. In the case of nuclear power, construction, operational and full decommissioning costs may mean nuclear power cost is similar to onshore wind in parts of the country with high capacity factors. The issue is whether a full accounting is made of the decommissioning costs and whether the cost of storage and security of long term storage of nuclear waste is included in the overall cost of nuclear power. Given the long half-life of some of the wastes the on-going costs could be substantial and must be properly accounted for in assessing the true cost of nuclear power. In addition, if renewable generation is available (given intermittency that will not always be the case) it should be fully used. If that renewable energy can provide a substantial proportion of overall power when operating at full capacity, a requirement to make full use of that power could reduce the income stream of nuclear power. It is therefore necessary to consider income streams and not just costs. Carbon capture and storage may provide a means of continuing to operate fossil fuel plants while emitting little or no greenhouse gases. However, given the volatility and recent increase of oil and gas prices, it may be that carbon capture and storage will only be cost eVective in the case of coal fired power stations. An expansion of coal fired power stations would lead to an impact on the countryside if open cast mining is used and there are other concerns if there was to be an expansion of deep mining. It is also important to note that the costs of onshore wind power and of oVshore wind, wave and tidal power are likely to reduce over time due to economies of scale and rapidly advancing technology (for wave and tidal), while the cost of fossil fuels and even nuclear fuel is likely to rise over time. Careful estimates of future fuel costs are therefore essential when comparing the cost of renewable power with that of fossil and nuclear fuel.

8. Costs and Benefits of Renewables As noted in Section 5, renewable energy could be used to generate hydrogen which can be used as fuel for space heating, transport and for electricity generation in gas turbine generators or by fuel cells (on a small scale). Renewable energy can be used for space heating (for example wood fuel from sustainable sources; ground and air source heat pumps using electricity from renewable generation) and in transport (biodiesel and bioethanol). In the case of fuel for transport there is an issue about the displacement of agricultural land from growing food or fodder crops to growing crops for biofuels. While some biofuels may have a role to play, in the longer term electric vehicles possibly powered by hydrogen in fuel cells may be a better solution and if Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

306 the economics of renewable energy: evidence hydrogen generation is developed it can be used directly in internal combustion engines prior to the development of fuel cell vehicles. It is therefore perhaps more appropriate to consider how renewable generation can be increased to allow the generation of hydrogen which can act as a non-greenhouse gas emitting fuel for space heating and transport.

9. Meeting the EU 2020 Target It has already been noted (Sections 5 and 8) that the use of renewable generation for hydrogen would provide an opportunity to expand renewable energy in both space heating and transport (hydrogen generated from renewable electricity can be considered a renewable fuel). If such an approach is adopted then electricity generation will be the largest proportion of the UK’s use of renewable fuels but there could be greater use in other sectors (space heating and transport) that is likely to be achieved using biofuels. In the case of space heating, energy eYciency can have a very substantial impact in reducing energy needs which would reduce demand for fossil fuel for space heating.

10. Cost of Carbon The higher the cost of carbon is set, the more economic it will become to invest in renewable power. The increasing cost of oil and gas will reinforce this. A more eVective emissions trading scheme could remove the need to support wind power but a feed-in tariV approach is still likely to be needed to encourage the development of other renewable power for at least a decade.

11. Cost and Benefits of Biofuels The most appropriate use of each energy crop should be identified. In most cases this will not be through conversion to biodiesel or bioethanol. At present a substantial increase in the use of current biofuels could have an adverse impact on agricultural production of food and fodder crops. If biofuel crops can be developed that are able to grow on land that is presently unproductive, such crops could be useful in enabling a much greater use of biofuels. The carbon emission impacts of any biofuel will be related to whether it is used on its own (for example 100% biodiesel) or mixed with other fossil fuels (methane from waste or crops with current gas supplies or bioethanol or biodiesel mixed with fossil hydrocarbon fuel). Biofuels mixed with fossil hydrocarbons are simply a way of slightly reducing the overall greenhouse gas emissions from such fuels rather than changing the type of fuel used. Dr John McClatchey and Dr David Woolf 16 June 2008

Reference BERR (2007) http://www.berr.gov.uk/energy/statistics/source/renewables/page18513.html

Memorandum by Dr John Etherington My name is Dr John R Etherington, formerly Reader in Ecology in the University of Wales, CardiV. Since my retirement from the University I have spent much time researching the implications of intermittently available renewable electricity generation, in particular wind power.

Summary There is now ample evidence that wind power will require backup from conventional power stations to very nearly the installed capacity of the wind farms, a fact which has been ignored to the present and yet has enormous economic implications. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Intermittent Availability of Wind Power The Government and wind power industry has been warned on many occasions that the unpredictability of wind power will make it a threat to security of supply unless very substantial and costly dedicated back-up power is provided. It is disingenuous of the wind power industry to claim that backup is already in position to insure against failure of conventional supply which will progressively lead to under-insuring as the installed capacity (i.c.) of wind power increases. Early warnings came from one of the largest wind operators in the world, E.ON Netz Gmbh with the publication of its Wind Report 2005 (Reference 1) which claimed that a backup provision of 90% of the wind i.c. would be necessary. By 2007 this problem was widely appreciated and the European Transmission Union (UCTE) summarised it in the statement: “The variable contributions from wind power must be balanced almost completely with other back- up generation capacity located elsewhere. This adds to the requirements for grid reinforcements.” (Reference 2). Despite various reports which have attempted to refute this problem and the need for a solution (Reference 3) the UK subsidiary of E.ON Netx, E.ON UK has very recently made a public statement reiterating the need for 90% wind power i.c. “insurance”: “E.ON said that it could take 50 gigawatts of renewable electricity generation to meet the EU target. But it would require up to 90% of this amount as backup from coal and gas plants to ensure supply when intermittent renewable supplies were not available”. (Reference 4) In other words, to quote Dr Dieter Helm speaking in 2003 on a BBC 2 programme: “So the paradox of building windmills is that you have to build a lot of ordinary power stations to back them up” (Reference 5) Not only does this have implication for the overall cost of the venture which is so high that it requires the near 100% consumer-sourced subsidy of the Renewables Obligation but it also comes with a carbon dioxide (CO2) price-tag. Sir Donald Miller, former Chair of Scottish Power, speaking at the Whinash Public Inquiry suggested conservatively that the loss of CO2 abatement might be 20% of the equivalent wind power feed. I believe that these facts have not received suYcient attention, despite the warning from the Auditor General in 2005 that: “The Renewables Obligation is currently at least four times more expensive than the other means of reducing carbon dioxide currently used in the United Kingdom . . .” (Reference 6). 18 June 2008 References 1. E.ON Netz (2005) Wind Report 2005 2. UCTE (2007) European Wind Integration Study: Towards a Successful Integration of Wind Power into European Electricity Grids. 3. Oxford Environmental Change Institute (2005) Wind Power and the UK Wind Resource and UKERC (2006) The Costs and Impacts of Intermittency. 4. E.ON UK (2008) Statement by the CEO of E.ON UK, reported in The Guardian, (4 June. “E.ON warns over backup for renewables”). 5. BBC 2 (2003 10 March) If….. The Lights Go Out. 6. House of Commons 210 Session 2004–05 (11 February 2005) Renewable Energy: Report by the Comptroller and Auditor General.

Memorandum by Barbara Frey 1. My name is Barbara Frey. I am a retired medical librarian and library director, after spending a career in university academic medical centres and teaching hospitals. My interest in energy issues evolved from initial concern about adverse health impacts on people when developers build wind turbines too close to homes. Though oYcial and corporate documentation often states that wind turbine noise is inconsequential, this is in direct contrast to the reports of those living nearby. Indeed, there is a substantial body of research on the adverse eVects of noise on health, with an increasing body of evidence that wind turbine noise also has an Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

308 the economics of renewable energy: evidence adverse eVect on health. This particular interest led to my broader concern about energy policies, with their long-term economic and environmental implications, and how politics often shapes these policies, rather than scientific evidence. 2. The confluence of volatile economic and energy markets have combined to create an atmosphere of unease and uncertainty among governments and people worldwide. In the UK, the stability, predictability, and security of energy supplies and costs have emerged as vital issues that need urgent attention for the national security and economic viability of the nation. Businesses and households are dependent not only on a secure and steady energy supply, but also on the stability and predictability of costs. It seems to ordinary people that the BERR (Dti) Energy Department have, during the past decade, relied on the benefits of North Sea oil and gas, yet failed to plan a future, though fully aware of the declining North Sea resources. 3. This paper will not dwell on statistics, as these would reiterate the details included in many submissions for this Call to Evidence, not to mention numerous Government papers and consultations and news reports. Instead, this paper concentrates on the viability and logic of available options, rather than unfounded fears, political expediency, or agency, corporate, or organisation agendas. The discussion revolves around a balance among energy resources and markets, policy, and the public. 4. In a volatile energy market, such as now exists, it is tempting to succumb to quick-fix solutions, especially when current eVects resonate to the broader economy, weakened by threats of deepening recession and inflation. No matter which direction people look, there are news reports highlighting problems: underperforming schools, health care predicaments, declining house values, contracting mortgage opportunities and rising interest rates, rising unemployment, international strife, and skyrocketing utility costs, just to name a few that are often publicised. 5. Moreover, the Government seeks to make people more accountable for individual “carbon footprints” even as local services are under threat. Particularly in rural or remote communities, public transport is severely limited or unavailable, forcing people to travel more often and greater distances in their cars; just as they can least aVord this option, they are being penalised by the Government. Moreover, the UK has assumed responsibility for reducing its carbon footprint as well. Public and personal purses have only finite funds, so getting the energy mix “right” the first time is critical. 6. A failure to strike the right balance will without doubt lead to economic deprivation as the financial centre in London decamps to other more thriving zones, eg Zurich or Singapore. BERR (Dti) seem totally oblivious to the fact that there is a commodity and economic realignment taking place in the world; while a decade earlier, the UK held a position of strength, this has slowly eroded by pursuit of a blinkered and untenable energy and food supply policy, and instead pursued an economic policy that failed to build these resources. 7. The issues of “carbon emissions” and “carbon footprints” result from concern about “climate change” and/ or “global warming”. The latter are indeed quite diVerent, yet often the terms are merged for commercial benefit, without appropriate definition, so that people—including oYcials responsible for decision-making— are unclear about what precisely is involved, so that the foundations for discussion shift constantly, sometimes within the same conversation, but without attention to the definition of each. 8. Whatever one’s views of “global warming”—whether it constitutes an apocalyptic threat, whether the UK can make a diVerence in a world of expanding economies, indeed, whether it exists, the UK must make swift decisions about its energy supply simply because of shifting world politics and economic pressures. However, decisions about energy provision and security must be devised and implemented by Government in a calm, rational, scientific manner, without succumbing to lobbying by organisations, trade associations, special interest groups, or those who benefit by fear-mongering. Without doubt, failure by Government to provide a reliable and secure supply of energy (and food) will destine this country to a breakdown of life style and a diminished standard of living, in contrast to the broader prosperity enjoyed by the UK in the 20th century. 9. The current uneven economic climate is partly due to the UK’s reliance on imported energy supplies, such as natural gas and oil, from countries as diverse as Russia, Nigeria, France, Norway, and the OPEC nations. These supplies depend upon the political environment and the national needs for each of those supplier countries, with prices considerably aVected by increased competition globally for these same resources. China and India are often cited as the more obvious growth economies competing vigorously in world markets, but equally Russia has leapt forward as a strident commercial competitor, understandably intent upon achieving the best price on world markets for its products. The UK cannot aVord to sustain this arrangement. If it continues to import most of its energy requirements from world markets, not only will the UK’s standard of living remain under threat, its ability to withstand unwelcome influences on its policies and governmental decision-making will also be in jeopardy. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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10. As an example, during the past few years, GAZPROM of Russia has negotiated independent agreements with Germany, Italy, and Austria regarding energy supplies. By negotiating arrangements separately with these countries, GAZPROM has eVectively—and cleverly—split their interests, and thereby weakened any EU advantage as a bargaining bloc, as each country will naturally want to protect its own access to critical resources, should there occur a crisis regarding energy supply and distribution of resources. GAZPROM has pursued a policy of buying strategic stakes in energy supply companies, including Norwegian gas fields that supply the UK, and is now pursuing opportunities in the USA. 11. Because natural gas, coal, and oil are finite resources, and because coal and oil are fossil fuels associated with “global warming”, renewable resources are in demand, eg solar, wind, wave, tidal, and hydropower. Renewable energy resources are often proclaimed as a panacea to the nation’s energy problems, but in actuality, this is wishful thinking, and a “sticky plaster” response to cover past neglect of designing a viable secure energy policy for the UK, whereas the reality is far more complex. 12. This is not to deny that renewable energy has a part to play in the energy mix for the UK. However, the role of renewable energy needs more critical analysis, so that it contributes eVectively, benefitting the public and meeting business requirements, without bending to other market, special interest, and political influences, which lie outside an analysis of and plan for energy requirements for the future. If eVorts to incorporate renewable energy into the UK energy mix are tainted by self-serving motives, the public will quickly lose faith in measures sought by Government, and the economic pain endured by the public will translate to its response at the ballet box. 13. Although there are now thousands of wind turbines in Denmark and Germany, not one “conventional” power station has closed; indeed, more are planned and underway. However, as the law requires utility companies to provide a percentage of output from renewable resources, wind turbines have become the “quick fix” because they are “oV the shelf”. The embrace of industrial onshore wind turbines by BERR has a major negative impact on “the market” and on renewable energy entrepreneurs. A level playing field would have encouraged UK engineers and scientists to design and develop renewable technologies, but the shortsighted “quick fix” solution by BERR has produced an unreliable and insecure electricity supply devoid of a realistic long-term plan. 14. One must step back and with objectivity examine why wind turbines remain an attractive renewable energy option for utility companies since: — it is impossible to predict wind turbine energy production (the wind has not enrolled in this scheme); — wind turbines operate well below “installed capacity” (circa 25%, and the wind energy companies do not willingly share their data); — the electricity generated by wind turbines fluctuates constantly, thereby creating diYculties for the national grid to accommodate these erratic fluctuations (not to mention the high cost of changes to the grid to accept the power generated by wind turbines); and — “conventional” power stations must remain operational to provide backup for wind turbines because the wind does not always perform when electricity is required. 15. The requirement for utilities to provide a percentage of energy from renewables dovetailed with the sense of urgency surrounding global warming. This requirement, as underscored by the Kyoto Treaty and the United Nation’s IPCC recent report, resulted in policy changes, leading to subsidies for wind turbines and ROCs. Utility companies and their wind energy divisions and independent wind energy companies, receive “renewable” allowances for wind turbines, which on land are relatively inexpensive to construct, compared to developing other renewable options, such as solar, tidal, or wave. The subsidies are paid on the “installed capacity” for each turbine, not on their significantly lower actual electricity production, and these subsidies are paid year-on-year. Wind turbines have grown in height from under 23m to over 125m, with “installed” capacities of 2MW to 3MW; the increase in the installed capacity means greater subsidy per turbine. Moreover, these companies also receive ROCs for providing the required percentage of renewables, again based on the installation, not on actual production. Because wind turbines have provided a windfall for utility companies, the subsidies and ROCs have distorted the renewable energy market in favour of wind turbines, to the detriment of other renewables, eg, solar, which receives minimal acknowledgement or subsidy. The British Wind Energy Association (BWEA), the wind industry’s trade and lobbying organisation, has been eVective in garnering media attention and working eVectively with environmental agencies, as well as with some government agencies, benefitting from public concerns about global warming. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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16. This misapplication of subsidies combined with the ROCs has also stifled innovation and markets for other renewables. For example, solar energy (photovoltaic and other solar energy innovations) oVers great potential for existing homes and buildings and could easily be incorporated into new buildings as well. The energy savings—and reduction in CO2 emissions—would be significant. Yet the financial incentives weigh heavily in favour of wind turbines. If those same subsidies now going to utility companies—which would have to source a percentage of production from renewables regardless—went instead to home-owners, landlords, and builders for energy eYcient improvements and installations, the breadth and depth of CO2 and energy savings throughout the country would provide greater benefit to the environment, and also benefit people directly. This type of subsidy scheme would at least reflect real CO2 and methane emission reductions, and might extend to more public transport schemes, work toward redesigning the fuel requirements for cars and other vehicles, encouragement of alternate heating and cooling systems for homes and oYces, and the use of industrial waste and by-products for energy sources. 17. The UK not only has finite energy resources, it also has a finite land mass, with a dense and growing population. Food is yet another commodity “growing” in value because of increased global competition for food and fuel, increased cost of delivering product to consumer, among other factors—the UK will need all its resources to provide a secure and stable food chain if food imports are threatened by crop failures, or spiralling fuel costs. UK food production and agriculture, after years of decline and “cheap” imports, may indeed become a “growth” industry. Wind turbine arrays, often sited in rural, agricultural areas, require a significant land area and footprint. Each array requires roads, concrete and steel foundations, ancillary buildings, and either above ground pylons or below ground cables. These installations break up ecological habitats and permanently alter environments, industrialising agricultural and rural areas that are part of a dwindling resource: arable land. Wind turbine arrays also create a large footprint to production ratio when compared to a conventional power station, which has a smaller footprint and much greater energy production. 18. Environmental organisations have gone quiet about biofuels. After applauding changes to allow and promote crop production for fuels, these organisations neglected to foresee the negative impact that these changes would have on food production and costs. As crops were channelled from food to fuel, and as costs escalated because of competition for these crops, food prices—for people and for livestock—have risen sharply. The cost of these food staples—corn, wheat, rice—has had a dire impact on the most impoverished nations, straining their resources and causing hardship and hunger among those who often have no resources or hope of help. Thus, another reason for careful consideration of renewable energy options, because one must analyse the possibility of unintended consequences. The cost—to ordinary people—is too high. 19. Professor James Lovelock CH, internationally acclaimed scientist, environmentalist, and author (Gaia hypothesis) has suggested that nuclear power oVers the most rational solution to UK (indeed, world) energy needs, currently and well into the future. There is genuine urgency to reduce CO2 emissions while at the same time to guarantee a supply of energy to growing populations, and this must be done quickly in order to avert a national or global disaster. Professor Lovelock has said that even if one covered the length and breadth of the UK with wind turbines, this would do nothing to slow global warming, yet six new nuclear power stations in the UK would contribute to an actual slowing of this process. Moreover, as Prof Lovelock notes, most recently in his book, The Revenge of Gaia, methane, a far more destructive emission than CO2, is released with the use of natural gas, including any natural gas that escapes during its transit via the pipelines or shipment. The rate of loss in transit is about 4%. According to an article in the Financial Times, “Each methane molecule is 30 times more potent as a greenhouse gas than carbon dioxide, though methane has caused less global warming so far because it is much less abundant in the atmosphere than carbon dioxide.” [Cookson C, Science briefing: Ice Age “trigger”, Financial Times May 30 2008] 20. Certainly, France exemplifies the benefits of a nuclear energy program to its people, as it is electrical energy independent, and therefore not as subject to the vagaries and vacillations of the market or to external political influence. Yet the UK public, and that includes many of its politicians, have a visceral unease about nuclear power stations: eg, presuming an equivalency of nuclear power with nuclear weapons (untrue), and concern about nuclear waste and radioactive leaks. Well-designed and properly maintained nuclear power stations produce energy throughout the world, without incident, and newer nuclear power stations have a smaller footprint than older reactors, as well as running more eYciently with less radioactive waste. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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21. Significantly, nuclear power stations produce energy without carbon dioxide or methane emissions, and produce at a capacity that serves a large population with a predictable, stable, secure energy supply. With a network of nuclear power stations, the UK would prosper from energy independence, leading to security for its public, creating a more stable economic environment even when world markets go through volatile cycles. This secure, predictable stable, aVordable energy supply is essential in order to maintain the UK’s stature as an enterprising and productive country, and to provide its people with a future of opportunities and prosperity. Certainly, this is a critical objective, upon which so many national and personal aspirations rely, and without which these aspirations have little hope. The job of government is to see these aspirations realised. 16 June 2008

Memorandum by Genersys plc 1. The Select Committee on Economic AVairs of the House of Lords has called for evidence about the economics of renewable energy, aiming to set out the costs and benefits of renewable energy and seeing how they compare with other sources of energy, and examining the Government’s policy towards renewable energy. 2. It is traditional, I suppose, to preface a response by saying how welcome the inquiry is, but frankly, this call for evidence is simply one more call for evidence, inquiry-come-consultation about renewable energy in a long line of endless calls, consultations and inquiries. I hope that it will not be as large a waste of time as all the others, which as far as I can see have been started with pre conceived and pre determined ends or are conducted without power or the political will to enforce any necessary changes. 3. The United Kingdom must lead the way among nations in inquiries, consultations and calls for evidence by quite a margin. Unfortunately it falls behind every other country in renewable energy with which I do business by a similarly long margin. 4. I note that from the questions set out in the call for evidence that the Committee appears to be mainly concerned with electrical energy. The Committee’s call for evidence’s preamble that “Electricity generation, as opposed to heating and transport, is widely thought to have the most potential for greater use of renewable sources” indicates an over emphasis on electricity at the expense of doing any thinking at all about heat. It is actually wrong; the greatest scope for renewables lies with heat generation. 5. The UK’s energy policy as a whole is really an electricity policy and not an energy policy; the Committee asks four and a half questions specifically concerned with electricity but only a quarter of a question about heat. This might be justified if heat was such a small proportion of our overall energy use or if there was not renewable heat providing technology. 6. I have spent many years studying renewable energy and the result of that study led to me establishing a thermal solar business, Genersys. I have written “the Energy Age” which has sold around 10,000 copies and write a daily web log “ideas for the environment” at http://robertkyriakides.wordpress,com which has over 200 posts and over twenty thousand views in the past six months. 7. My company, Genersys plc is the largest supplier of thermal solar panels in the United Kingdom. I am its Chief Executive. It has (through its shareholders) part ownership of ThermoSolar AG, which is one of Europe’s largest flat plate manufacturers and Genersys distributes their panels throughout the English speaking world and Latin America. 8. Genersys also has exclusive distributorship of thermal solar panels from Dimas SA of Greece, another leading European manufacturer. Genersys has thermal solar businesses (where I serve on the board of directors) in Costa Mesa California, Johannesburg South Africa, Townsville Australia, and Mexico City Mexico and we are working to establish in Amman Jordan and in Colombia. This gives me some insight into renewable strategies being pursued in these jurisdictions. 9. I am limiting my evidence to that about solar thermal energy. The Select Committee will receive plenty of evidence from the electricity industry. If the UK manages to get 15% of its energy consumed from renewables by 2020 and most of this comes from electricity, the UK will have missed a significant opportunity and will have made a costly (both in environmental and financial terms) mistake. 10. I have said that in my view the Committee’s concentration on electrical energy is wrong minded. The storage of electrical energy is very hard, expensive and in many cases unfeasible, the grid network is massive and requires huge changes; electrical energy is provided by huge multinational companies whose interests do not always coincide with that of the state and which are diYcult to control, and renewable electricity also suVers from the fault of intermittency. Electricity is a big problem and it will take more than a select committee to come up with any meaningful solutions. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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11. On the other hand, although less “sexy” heat is an easier problem to solve in renewable energy terms. The technology and techniques have been developed; the technology can be used in the UK for water heating or as a supplement to space heating and/or for industrial processes and/or for pool heating and/or for air conditioning. 12. Renewable heat energy can be safely and easily stored, unlike electricity, and there is no conflict caused with energy suppliers because solar thermal heat is a form of microgeneration so it does not involve digging up roads or spoiling the countryside. 13. Heat energy accounts for about half the UK’s total energy. In households it accounts for two thirds of the energy spend with about 24% (the figure varies from year to year according to weather) of their energy being used by households for water heating. A good solar thermal system can provide around 50-70% of a dwellings hot water demand and with more panels around 30% of its space heat demand, (more if underfloor heating is employed). 14. Every jurisdiction in which Genersys operates except one—(England & Wales) solar thermal energy is regarded as a starting point for emission reduction, security of supply and renewable energy. 15. In addition, all of these other jurisdictions feel it right and economic to establish some kind of incentive scheme for solar thermal technology to enable it to be taken up more readily and economically. There are established incentive schemes in most states in the United States, an overall Federal Tax Credit, as well as grants in Australia; South Africa is developing an incentive scheme combining a one of grant to householders with a carbon incentive for the electricity company installing solar thermal systems. Mexico has instituted a “green mortgage” to enable householders to take up the technology as well as investing in solar thermal technology for state swimming pools and government buildings. Virtually every government building in Seoul, in South Korea has a solar thermal system. 16. In the European Union, Germany has an established grant mechanism which is simple to operate and which is well funded. As a result it installs around 100 times more square metres of thermal solar panels each year than the United Kingdom. New laws in Spain and Portugal requiring solar thermal systems on all new build homes and on all homes in the course of construction have led to massive uptake, not just in new build but also in retrofit. France with incentives is experiencing double digit solar thermal growth, as is Italy and Ireland. 17. By contrast England and Wales have two tiny solar thermal grant schemes. 18. The first relates to householders and oVers £400 under Phase 1 Low Carbon Buildings Programme provided the applicant can fulfil conditions that do not relate in any way to water heating. These include low energy light bulbs and cavity wall and loft insulation. The conditions make about as much sense as a condition requiring the applicant to use a bicycle. The importance of this is twofold; £400 does not make a buying decision for a system costing £4,000, but it unmakes that buying decision if the grant is found to be too complex or too costly to take up. The cost of the measures required by the grant often exceeds the value of the grant. As a result take up of grants has slowed to a trickle and take up of solar thermal systems in England and Wales has declined. 19. The second scheme is Phase 2 of the Low Carbon Building Programme. This oVers up to 50% grants for not for profit organisations but they have to purchase from a list of four framework suppliers, appointed after an underpublicised tendering process resulting in old fashioned solar collectors being available under the scheme. There seems some evidence of higher prices being charged by framework suppliers under the scheme (taking advantage of their virtual monopoly) as well as higher margins being added by various scheme framework partners to cover their elements of risk, so the scheme oVers poor value for money for the taxpayer. This being a closed market makes competition in terms of value and in terms of quality, non existent. In addition the scheme is targeted at schools. When the solar thermal systems are at their most productive—in the school’s summer holidays—the demand will be lowest. 20. Neither grant scheme, for all their respective complexity, provides any diVerentiation to enable renewable technology to be used where it provides the most financial and carbon benefits—oV the gas grid network. 21. I have dwelt on the grants, subsidies and incentives because all renewable technologies, not just solar thermal, require a capital investment that is much greater than a fossil fuel energy source. Because having a renewable energy system is optional—there are no laws requiring one—the technology is always viewed in terms of “payback” or return on investment and neither concept applies to a source of heat energy produced by fossil fuel. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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22. It is a disgrace that the Energy Savings Trust—concerned with saving energy but also advising people, suggests that the savings from a solar thermal is around £40 per annum, using illogical methodology and drawing comparisons with the cheapest form of gas, low hot water use and assuming incredible boiler eYciencies that do not exist in the real world. 23. In fact the savings vary quite considerably depending on use, fuel displaced and future rate of fuel price growth. It is hard enough to persuade people to invest in a solar system which will save them somewhere between £200 and £500 a year because they have to part with a large capital sum, without the EST providing misleading information. 24. The cost of a solar thermal system for heating water that is supplied by one of Genersys’s installers is around £4,000. Around 30% of the cost is equipment and 45% installation. The remaining costs are made up of non solar related equipment and margin for the installer to cover selling and marketing costs. Of the installation cost, a large proportion is made up of scaVolding. 25. Working with various local authorities around the country, and also working in Scotland where the grants are higher, we find that against a price of £4,000, a grant or subsidy of £1,000 significantly increases take up. 26. We also know that requiring solar thermal on new build (when scaVolding is up and tradesmen can work in empty properties) significantly reduces installation costs. 27. If solar thermal was required in new build homes and the builders did not seek to impose excessive margins on it, it would be cheaper for a home buyer to have a solar system and pay for it by a small addition to his or her mortgage than it would be for the home buyer not to have a solar system. 28. In other words, solar thermal is relatively expensive under the present circumstances for various reasons but with the right conditions and the right policies solar thermal renewable heat created from benign sunlight would be economical and thus used more than it is now, for the greater benefit of society with fewer emissions and much lower pollution. 29. In eVect fossil fuel is subsidised because the users of fossil fuel do not pay for the damage done by burning fossil fuel. A true price which reflected the damage caused by pollution and climate change of burning fuel would provide renewables with a level fairer playing field. As it would be politically unacceptable to tax fossil fuel more than it is already taxed, it must be right to incentivise renewables, particularly microgeneration renewables like solar thermal systems. 30. Finally I hope that the work of the committee will not be in vain; it seems to me that the UK seems to have recently lost its much stated commitment to a lower carbon economy and to emission reduction by renewable energy means in the light of recent statements by the Chancellor of the Exchequer and the Prime Minister about prioritising increased oil production. Such a policy makes nonsense of any enquiry about the economics of renewable energy. Robert Kyriakides Chief Executive 15 May 2008

Memorandum by Mr Colin Gibson The author has more than 40 years’ experience in the electricity supply industry, including five years as Power Network Director of National Grid Group (1993–97). This post carried responsibilities covering the electricity transmission system of England and Wales for Commercial Development, System Design, Asset Management, and System Operation. The author was General Manager of the generation business of National Grid through the period of privatisation up to his joining the main Board. Prior to this he held various posts in planning, design, and operations in the electricity supply industry in Scotland.

Summary The evidence presented proposes that the extra system costs caused by the intermittency of renewables should be for the account of the renewable owners and thus part of the competitive generation market. These system costs occur in both the short-term operational time scale, and in the long term planning time scale. An alternative market structure is suggested which will ensure that long term risk to Security of Supply is contained. Whilst the author believes the costs given to be of the correct order, it is more important that the principle be established that all the costs imposed on the system by a development are carried by that developer within the competitive generation market. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

314 the economics of renewable energy: evidence

1. Fitting Renewables into the GB System 1.1 GB is essentially an “islanded” system—the only major interconnection is the link to France. This is important since electricity cannot be stored in any meaningful and practical manner on a large scale, so GB must ensure that it can match demand in an operational timescale (frequency control); and match demand in a planning timescale (contain the risk to Security of Supply). 1.2 Some forms of renewables present problems for both frequency control and Security of Supply risk. Wind farm output is both intermittent and unpredictable: tidal power is intermittent but predictable. 1.3 The link to France is limited in both capacity (2GW), and by virtue of its being direct current and, therefore, limited in its ability to contribute to frequency control. On the other hand, North America and the European mainland are strongly interconnected over a large land area with varying weather patterns. They are, therefore, better positioned to accommodate a larger proportion of renewables such as wind turbines with intermittent and unpredictable output.

2. Technical Limits to Renewable Energy 2.1 In an operational time scale, these limits are dictated by the capability of other operating plant to provide frequency control to compensate for the intermittency of wind. In a planning time scale, the low probability of wind farms generating at the time of system maximum demand would require the construction of ‘back- up’ plant to contain the risk to Security of Supply. 2.2 The former (frequency control) requires that extra ‘response and/or reserve’ plant is carried on the system. The cost of this (taken to be some £3/MWh of wind output) is not attributed to the wind farm as part of the competitive generation market, but it becomes part of the cost of running a stable system. This cost should be charged to the wind farms. 2.3 The latter (containing Security of Supply risk) is not recognised in BETTA as a separate requirement, nor is it the responsibility of a particular party. There appears to be an assumption that the market in energy [MWh] will provide suYcient incentive for new plant capacity [MW] to be built to provide the necessary plant planning margin to contain the risk. However, the addition of wind farms, compared to thermal plant, will, because of intermittency, increase the risk. The capital costs of building “back-up” plant (open cycle gas turbines, say) to contain the risk should be, in principle, part of the competitive generation market and charged to the wind farms. These costs could amount to some £20/MWh on the basis that 100MW of wind would have to be supported by 80MW of gas turbines. 2.4 Initially, the extent to which renewable plant can be connected to the system will be limited by the amount of “response and reserve” and “back-up” plant available and for which the customer is prepared to pay. Ultimately, the large amount of renewables proposed would make the system frequency very diYcult and expensive to control. If all these costs were charged to the generator then the market would decide the limits for renewables. 2.5 An alternative to the provision of “back-up” plant would be to recognise power capacity [MW] as a separate product to be met by competitive tender for long term contracts. Generators would receive fixed annual payments for providing assured capacity at peak demand times eVectively covering their capital charges. The greater the generator’s confidence of delivering power capacity at times of peak, the greater the proportion of installed capacity it would commit. This arrangement leaves the energy market free to optimise operational costs. Because the capacity payments would be “high quality earnings” and the energy market would be operating more eYciently than at present, the overall costs will be lower, and the Security of Supply risk contained.

3. Technological Advances 3.1 Given the diVerences in total costs (see 7 below) it is unlikely that further technological advances will make renewables economically competitive. Other types of generation could also make technological advances thus maintaining the diVerential.

4. Support and Subsidies 4.1 Currently, in the main, subsidies to renewables are being provided by the electricity consumer—not by Government. This comprises not only ROCs but also the costs imposed by intermittency and the costs of extra transmission plant if the wind farms are located remotely eg north west Scotland. In a properly competitive market these costs would be met by the wind farm developer. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 315

4.2 Policy should be directed towards providing a competitive market which is equitable to all types of generation without subsidies and without preferential treatment.

5. Transmission Networks 5.1 The amount of investment in transmission will be dictated by the location of the renwewables. In an endeavour to achieve higher load factors, it is proposed to build wind farms in remote locations and oVshore. Building in north west Scotland, for example, will require not only reinforcement of the local system but also reinforcement of the GB system all the way to the south of England. This is evident from examination of National Grid’s Seven Year Statement. 5.2 However, account should be taken of the low load factor of wind farms and their probable output at the time of winter maximum demand in deciding on transmission reinforcement. Therefore, in many cases, justification on technical requirements will not be established, and a decision will need to be made on economic grounds based on “constrained oV payments”.

6. External Costs 6.1 No comments.

7. Generation Costs 7.1 A useful source for these costs is “The Future of Nuclear Power” which uses the concept of “levelised cost”. This gives the costs of nuclear, clean coal, and gas generation at around £40/MWh. It gives the costs of oVshore and on shore wind as £85/MWh and £55/MWh respectively. However, these wind costs do not appear to include the extra costs of intermittency of wind nor the extra costs of transmission. Also, the specific capital costs for wind farms have increased since the data for this study were collected. 7.2 The costs for the intermittency of wind generation could add some £25/MWh making the costs of oVshore and onshore £100/MWh and £80/MWh respectively. The costs of extra transmission requirements are diYcult to calculate but the cost of the Beauly-Denny line alone which was proposed to accommodate about 2GW of wind in north west Scotland would add £8/MWh. Extending this to cover the GB system (see 5.1 above) could easily incur costs of the order of £20/MWh. This would make the total cost of onshore wind generation as seen by the customer about £100/MWh—an increase in cost of £60/MWh compared to a mixture of nuclear, coal, and gas. So, for say 10GW of wind, the extra cost would be £1.6 billion p.a. 7.3 For the Severn Barrage, the capital charges and operating costs would be some £73/MWh, the cost of containing the risk to Security of Supply some £12/MWh, and extra transmission £3/MWh, giving £88/MWh in total. Because this scheme is predictable (though intermittent), it could make a contribution to stabilising system frequency and voltage, worth say £7/MWh giving a net cost of £81/MWh. To make the scheme competitive with nuclear, coal, or gas, credits for flood control and road usage would have to sum to £40/ MWh.

8. Comparisons with Transport and Heating 8.1 No comments.

9. EU Targets 9.1 No comments.

10. Costs of Carbon 10.1 The cost comparisons given above include the cost of carbon.

11. Biofuels 11.1 No comments. 9 June 2008 Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

316 the economics of renewable energy: evidence

Memorandum by Christiane Golling and Marco Nicolosi, Institute of Energy Economics (EWI), Cologne

General Overview The German Renewable Energy Act (EEG), which has become eVective in 2000, should advance the development of renewable energy plants in Germany. By 2010 at least 12.5 % electricity should be generated by renewable energy sources (RES). Since this objective has already been reached (RES-E reached a share of 14.2 % in 2007—see table 1) it will be increased further to at least 30% electricity from RES (RES-E) in 2020 within the upcoming amendment in 2009. Table 1 and 2 are going to provide an overview of the RE deployment, generation and total costs.

Table 1

TOTAL EEG GENERATION

Hydropower Windpower Biomass Biowaste Photo- Geothermal Sum Power Share of Average Total Year voltaics Power Generation demand Remuneration Remunderation GWh GWh GWh GWh GWh GWh GWh % ct/kWh Mrd. EUR 2000 24.936 7.550 2.279 1.850 64 0 36.679 6,3 8,50 0,88 2001 23.383 10.509 3.206 1.859 116 0 39.073 6,7 8,69 1,58 2002 23.824 15.786 4.017 1.945 188 0 45.760 7,8 8,91 2,23 2003 20.350 18.859 6.970 2.162 313 0 48.654 8,1 9,16 2,61 2004 21.000 25.509 8.347 2.116 557 0,2 57.529 9,5 9,29 3,61 2005 21.524 27.229 10.495 3.039 1.282 0,2 63.569 10,4 10,00 4,50 2006 20.000 30.710 15.500 3.639 2.220 0,4 72.069 11,7 10,88 5,81 2007 20.700 39.500 19.500 4.250 3.500 0,4 87.450 14,2 11,40 7,90 Source: BMU (2008).

Table 2

TOTAL EEG CAPACITIES

Hydropower Windpower Biomass Photo- Geothermal Total Year voltaics Power Capacity MW MW MW MW MW MW 2000 4.572 6.112 664 100 11.448 2001 4.600 8.754 790 178 14.322 2002 4.620 11.965 952 258 17.795 2003 4.640 14.609 1.137 408 20.794 2004 4.660 16.629 1.550 1.018 0,2 23.857 2005 4.680 18.428 2.192 1.881 0,2 27.181 2006 4.700 20.622 2.740 2.711 0,2 30.773 2007 4.720 22.247 3.238 3.811 2,4 34.018 Source: BMU (2008). Core elements of the EEG are the obligation of the grid operators to connect the RE plants to the grid and to buy the RES-E at a pre-specified tariV.81 The EEG is a technology specific feed-in tariV system (FIT). Every technology has diVerent tariVs, according to size and/or fuel or site quality. For Biomass, diVerent bonuses are granted for sustainability of the fuel, combined heat and power (chp) and new technologies. For Wind, diVerent tariVs are granted for locations with diVerent wind speeds. Due to the complexity of the law, this “piece of evidence” is going to focus on the regulation for wind power.

Onshore Wind Power The tariV structure for wind power is quite complex. The tariVs are diVerentiated by basic tariV and starting tariV. The EEG 2004 and the current amendment (which will become eVective in 2009) have basically the same methodology. Altogether, the guaranteed remuneration is granted for 20 years. The starting tariV is valid for five years, if the site reaches 150% of the reference yield. The reference site has a wind speed of 5.5 m/s 30 meters above ground. For every 0.75% below this reference yield, the starting tariV is extended by two months. Very 81 The fixed tariV characteristic of the EEG reduces the investment risk for the renewable investor markedly compared to a more market based promotion system. This should be taken into account when comparing reimbursement rates. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 317 good sites receive the high starting tariV for five years and low quality sites, which receive only 60% of the reference yield, obtain the starting tariV for 20 years. Plants with a yield below 60% of the reference value are not eligible for remuneration. The motivation behind this methodology is to increase the attractiveness for lower yield wind sites. Thereby, the policy makers try to reduce the margins for optimal wind sites at the shore and at the same time encourage deployment within the whole country. Table 3 provides an overview of the annual wind power deployment and the corresponding feed-in tariV.

Table 3

COMPARISON OF WIND POWER REMUNERATION AND DEPLOYMENT

2003 2004 2005 2006 New Installations (MW/a) 2.644 2.036 1.808 2.234 Total Wind Remuneration (Mio. ƒ/a) 1.696,9 2.278,9 2.386,3 2.734,0 Wind Remuneration (ct/kWh) 9,06 8,93 8,76 8,90 Source: BMU (2007). In order to encourage manufacturers to lower their costs, the tariV is reduced by a certain percentage every year. In the eVective EEG this degression is defined to be 2%. As the degression is expressed in nominal percent taking account inflation the real degression amounts to about 4%. Along with the high steel prices, this increases the pressure for manufacturers to reduce their costs. Therefore, the degression will be reduced to 1% in the amendment. Moreover, the starting and the basic tariV will be increased (see table 4).

Table 4

REMUNERATION COMPARISON BETWEEN EEG 2004 AND 2009

EEG 2004 EEG 2009 ct/kWh ct/kWh Starting TariV 7,87 9,2 Basic TariV 4,97 5,02 Degression 2% 1% System Bonus 0,5 Source: EEG (2004), EEG 2009 preliminary (2008). One of the main reasons for the amendment is the currently high world market price of steel. The high price levels have direct influence on the turbine costs and cannot be overcompensated by technology improvements. In addition good quality sites for wind power deployments in Germany are limited. Slowly the limits are reached. Only higher tariVs may allow a further wind penetration which will be located at sides with lower wind speeds. Repowering As an alternative old wind power plants may be substituted by new installations—called repowering. Since wind energy deployment started already in the early 1990s, good quality sites are mostly occupied by outdated windmills. Therefore, the EEG tries to encourage investors and operators to repower the existing sites with newer technologies and increased capacity. Repowering overview: EEG 2004: Plants which started operation before 31.12.1995 qualify for repowering. Installed capacity has at least to be tripled. Starting tariV is extended by two months for every 0.6 % below 150 % of the reference yield. EEG 2009: A site qualifies for repowering if it was at least 10 years in operation. New capacity has to be between two and five times the capacity of the old plants. Starting tariV increased by 0.5 ct/kWh—time period according to regular new installations. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

318 the economics of renewable energy: evidence

Offshore Wind Power Basically the same principle as for onshore wind power applies for oVshore wind power as well. Total support is granted for 20 years. In this case, however, the higher staring tariV is valid for 12 years. It can be expanded according to a greater distance to the shoreline or a higher water depth. For every further seamile beyond 12 seamiles, the starting tariV is extended by 0.5 months and for every full metre beyond 20 metres water depth, the starting period is extended by 1.7 months. Additionally, an early start bonus of 2.0 ct/kWh is granted in the EEG 2009, if the site becomes utilised before 31.12.2015. According to the EEG 2009, the degression of 5% starts in 2015.

Table 4

REMUNERATION COMPARISON BETWEEN EEG 2004 AND 2009

EEG 2004 EEG 2009 ct/kWh ct/kWh Starting TariV 9,1 13 Basic TariV 6,19 3,5 Degression 2% 5% System Bonus 2,0 Source: EEG (2004), EEG 2009 preliminary (2008). The main reason for the increased tariV rates is obvious: By now, in Germany there are no oVshore wind parks in operation. Since oVshore wind parks in Germany are going to be constructed in water depths beyond 20 meters, the constructions are quite risky. Investors seek to receive higher remunerations for these risks in order to invest. As soon as projects are realised costs can be estimated better and risks can be reduced. Therefore, the high starting tariV of 15 ct/kWh will be reduced after 2015 by the abolition of the early bonus and the high degression of 5%.

Other New Aspects of the Amendment The new EEG 2009 introduces two new elements. First of all, operators have a choice between two diVerent RES-E sale options. The first one is the fixed feed-in tariV system. The second option is the possibility to sell the RES-E on a bilateral basis or via power exchange. Since the wholesale prices have been relatively high during the last months in Germany, plants, especially which receive only the basic tariV (and not the higher starting tariV), receive higher margins if they sell their RES-E on the wholesale market. Plant operators can choose on a monthly basis, whether they want to sell their generated RES-E directly or via fixed FIT. The second innovation is a bonus for “system services”. These system services are going to be defined in the near future and can be services, such as reactive power, voltage control, reserve power, etc. Both new elements are motivated by the increasing share of wind power in the electricity market. The policy makers try to improve the integration of the wind power RES-E to become more independent of conventional power technologies. August 2008

Literature EEG 2004: Das Erneuerbare Energien Gesetz, 2004, Berlin http://217.160.60.235/BGBL/bgbl1f/bgbl104s 1918.pdf. EEG 2009: Bundestagsbeschluss zum EEG vom 06.06.2008: http://www.eeg-aktuell.de/fileadmin/ user upload/Downloads Politik/EEG-2009-BWE-Arbeitspapier-neu.pdf. BMU 2008: Erneuerbare Energien in Zahlen—Nationale und Internationale Entwicklung, Berlin: http://www.bmu.de/files/erneuerbare energien/downloads/application/pdf/broschuere ee zah len.pdf. BMU 2007: EEG Erfahrungsbericht 2007, Berlin: http://www.erneuerbare-energien.de/files/pdfs/allgemein/ application/pdf/erfahrungsbericht eeg 2007.pdf. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 319

Memorandum by the Gru¨nhaus Project, Liverpool

NOTES ON “GREEN” PROJECTS IN UK AND ELSEWHERE APRIL 2008

1. Sustainable Communities The Sustainable Communities Bill has been passed [see www.localworks.org] There should be a recognition that Green Technology is best and most economically set on “locally”. Sustainable Communities should develop their own energy supplies as far as possible. Further as all Renewable Energy and Energy Conservation engenders an inflation proof tax free [energy] income, the benefits of this are almost more important than being “Green” and countering Climate Change. As other energy costs rise and taxes are imposed, energy “Harvested from the Heavens”—and the Oceans—rises in value in line. As do Energy Conservation cost savings. The SUSTENG.xls program disk is available on request for doing calculations on the above.

2. UK Energy End Use Please see diagram below, and note the relative percentages of end uses for Heat and Electricity. These two types of Energy are “interchangeable” BUT electricity used for heating [unless through a Heat Pump] is very wasteful. As is heat used to generate Electricity unless a Combined Heat and Power [CHP] unit is involved.

In 1086 William I, King of England, conducted an “energy survey” of the renewable energy [all the energy there was then apart from a little coal in Durham] of beasts, men, mills, tillage and timber in his new kingdom, known today as the Doomsday Book. So that he could exploit it for fiscal benefits to the Kingdom. The same should be done now, for assessing the “energy potential” of each and every UK Local and Municipal Authority, so that by raising revenue from collecting and distributing energy locally they could remove the need for Council Tax [in time past the local gasworks was a good source of revenue], encourage the development of both renewable energy, CHP and conversion of waste to useful energy [see www.greenfinch.co.uk and www.woking.gov.uk for two good examples. Waste disposal energy producing sites are operational with Hampshire CC and the Isle of Wight]. See also http://www.veoliaenvironmental services.co.uk/hampshire/pages/energyrecovery.asp. One might consider Nuclear CHP, as used elsewhere in the World. There should be no “cap” on such moves, Authorities in “energy surplus” should be able to do appropriate deals with those in deficit. Central energy provision in my view is wasteful, leading to a greater than necessary “Carbon Footprint”. And my late father in law Eric Colbeck who invented the Boron Steel for Control Rods which made the Nuclear Power Industry feasible was never very impressed by it’s thermal eYciency. Way back in 1998 my cousin Lord Liverpool extracted from HM Government the information that Solar PV could potentially supply most of our electricity demands. [1994 ETSU report]. For a commercial concern Solar PV is often financially beneficial as it provides an inflation proof tax free [energy] incone from an investment that can be “amortised” against tax liabilities through standard depreciation allowances against tax.. The CI Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

320 the economics of renewable energy: evidence

Tower of the Co-op in Manchester I think benefits from this approach. Lord Liverpool also brought up the subject of CSP [Solar power from deserts] in a recent debate on the Energy White paper [HoL Report Vol 693, No.118] See item [7] below.

3. Crops and Resources Energy and Food are two sides of the same coin. The more so as on average in UK about twice as much energy is required to be imported to the farms and food processing factories as compared to the food energy produced from them. In the case of farms the above does not include the input of labour and sunlight energy. Further globally resources are declining both absolutely and per head of population. Emphasising the need for local resource development and economy to ensure reduced imports. ESTIMATE OF WORLD RESOURCES PER HEAD

(Source: The Real Wealth of Nations, by Dr S.R Eyre, University of Leeds, 1978, pub Arnold) OR WHAT ARE WE ALL GOING TO LIVE ON AND WORK WITH?

RENEWABLE RESOURCES

VEGETATION (N.P.P) (Tonnes/annum/head)

FISH (Kg/annum/head)

(NPP-Net Primary Productivity, the yield above ground on present World crop & forest areas)

1960 1975 1992 2010

RESERVES OF NON-RENEWABLE RESOURCES

CRUDE OIL BBL/HEAD

COPPER KG/HEAD (Pure Metal)

1960 1975 1992 2010

ESTIMATED WORLD POPULATION, MILLIONS DRAWN BY A. STODART 1982 3000 4000 6000 8000 Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 321

4. “Non Crop”Biofuels

4a. From sewage ponds to aviation fuel Secret Kiwi fuel ingredient is pond scum Air New Zealand and airliner manufacturer Boeing are secretly working with New Zealand-based biofuel developer Aquaflow Bionomic Corporation to create the world’s first environmentally friendly aviation fuel, made of wild algae. If the project pans out the small and relatively new New Zealand company could lead the world in environmentally sustainable aviation fuel. The fuel is essentially derived from bacterial pond scum created through the photosynthesis of sunlight and carbon dioxide on nutrient-rich water sources such as sewage ponds. Virgin Fuels announced in April it was working with Boeing to demonstrate biofuel in a 747-400. The focus is on testing algae-derived jet fuel, especially its freezing point. Boeing’s Dave Daggett was reported this year as saying algae ponds totalling 34,000 square kilometres could produce enough fuel to reduce the net CO2 footprint for all of aviation to zero. http://www.smh.com.au/news/ technology/secret-kiwi-fuel-ingredient-is-pond-scum/2007/07/19/1184559919499.html

4b. Algae Biofuels, work on using Algae to produce biofuels from Waste and Carbon Dioxide There would seem to be no need, quantitatively or qualitatively to use food crops to make biofuels, see http://www.cnn.com/2008/TECH/science/04/01/algae.oil/index.html http://peswiki.com/index.php/Directory:Biodiesel from Algae Oil http://www.smh.com.au/news/technology/secret-kiwi-fuel-ingredient-is-pond-scum/2007/07/19/ 1184559919499.html http://www.earthtimes.org/articles/show/11116.html http://news.com.com/Want!alternative!energy!Try!pond!scum/2100-11386 3- 6145197.html?tag%st.prev http://www.green-trust.org/2000/biofuel/biooils.htm http://www.i-sis.org.uk/GAFCCAB.php http://news.nationalgeographic.com/news/2006/08/060818-ethanol.html http://www.eastvalleytribune.com/story/89616 http://xldairygroup.com/pressrelease.cfm?ContentKey%610 It is suggested that someone joins http://groups.yahoo.com/group/oil from algae which has an on going discussion on the whole subject, and several files which may be of interest. Algae are prolific and can produce 15,000 gallons of biodiesel per acre, compared to just 60 gallons from soybean. [per annum I think] Berzin [MIT researcher] estimates that a 1,000 MW power plant using his system could produce more than 40 million gallons of biodiesel and 50 million gallons of ethanol a year. But that would require a 2,000 acre farm near the power plant. While a cheap alternative to gasoline may still be pie in the sky, ethanol producers in cattle country will soon be reaping the energy rewards of pies on the ground. Ethanol production plants fuelled by cow manure are under construction in Hereford, Texas and Mead, Nebraska.

5. Waste Disposal with Power Production http://www.veoliaenvironmentalservices.co.uk/hampshire/pages/energyrecovery.asp http://www.startech.net/photoPages/art3.html http://www.startech.net/online brochure.html Food waste to power and heat see www.greenfinch.co.uk—the Ludlow Digester Project and GASREC digester Albury project. Also start building 500kW CHP units at most local transformers actively managed with standby [waste] fuel. Result for each one built and connected % gas consumption for area halved compared to supply from individual boiler and central electricity.

Doubles life of most valuable CO2 displacement fuel natural gas. Two interconnect individual units to build city wide heat network units back each other up through 11kV system and as each one is installed it releases capacity in the HV system of 500kVA plus 25% ie 625kVA of capacity. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

322 the economics of renewable energy: evidence

Reason Marginal losses on electricity supply around 20 to 25% [comment from Williamworchardpartners.co.uk]

Co-Production of Ethanol and Electricity from Waste A gasification/biocatalytic process developed for BRI Energy by a team led by Dr James L Gaddy enables the co-production of electricity and ethanol (and/or hydrogen) from any carbon-based material, such as municipal solid waste; biosolids and animal wastes; biomass waste; used tires and plastics; and hydrocarbons (coal, natural gas, refinery tars and waste oils) [more detail on this last if required] http://peswiki.com/index.php/ Directory:Green Power Inc%27s NanoDiesel:Catalytic Pressureless Depolymerization %28Oiling%29

6. Plastics to Biofuels http://environment.newscientist.com/article/dn12141-giant-microwave-turns-plastic-back-to-oil.html Key to GRC’s process is a machine that uses 1,200 diVerent frequencies within the microwave range, which act on specific hydrocarbon materials. As the material is zapped at the appropriate wavelength, part of the hydrocarbons that make up the plastic and rubber in the material are broken down into diesel oil and combustible gas. GRC’s machine is called the Hawk-10. Its smaller incarnations look just like an industrial microwave with bits of machinery attached to it. Larger versions resemble a concrete mixer. “Anything that has a hydrocarbon base will be aVected by our process”, says Jerry Meddick, director of business development at GRC, based in New Jersey. “We release those hydrocarbon molecules from the material and it then becomes gas and oil”.

7. Economic Solar Electricity Green and Gold Energy http://www.greenandgoldenergy.com.au/. recently announced an order for 105 MW of Emcore’s 37% eYciency photovoltaic concentrator chips http://www.emcore.com/news/ release.php?id%163 and setup a large manufacturing operation in China. They already have over 200 MW worth of orders and are about to place a 500 MW followup order to Emcore. The 105MW order is the largest ever for concentrating PV chips. Their system is reportedly economic without any subsidies. Current best price [May 2008] $950 per 500 watt panel [£950/kW] http://www.rega.com.au/Documents/Fact%20Sheets/6.%20Competitveness%20and%20energy%20prices.pdf see also http://ec.europa.eu/energy/res/publications/doc/2007 concertrating solar power en.pdf Nano-technology is now in production, photo-voltaic foil providing electrical power at lower cost than coal burning plants. If true, the promise of energy independence for every household at around $0.30/watt manufacturing cost. See: http://www.enn.com/energy/article/24430 A UK firm probably using the same technology, and with the same low cost prospects can be seen at www.g24i.com See also Nanosolar Ships First Panels http://www.nanosolar.com/blog3/2007/12/18/nanosolar-ships-first-panels/ $0.99/watt as panels ex works is being quoted For new batteries for this see Stanford’s nanowire battery holds 10 times the charge of existing ones http://news-service.stanford.edu/news/2008/january9/nanowire-010908.html Another Solar technology much in the news is Concentrated Solar Power—CSP. see www.trec-uk.org.uk/press.htm£press nov 2007 Clean Power from Deserts for Europe, the Middle East and North Africa Prince Hassan bin Talal of Jordan presents White Paper to EU Parliament On 28 November 2007, His Royal Highness Prince Hassan bin Talal of Jordan, former President of The Club of Rome, presented the White Paper “Clean Power from Deserts—The DESERTEC Concept for Energy, Water and Climate Security” to the European Parliament in Brussels. It is based on studies by the German Aerospace Center on the potential of deserts to supply clean power to Europe, the Middle East and North Africa (EU-MENA). http://www.sciam.com/article.cfm?id%a-solar-grand-plan By 2050 solar power could end U.S. dependence on foreign oil and slash greenhouse gas emissions. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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8. Solar Water Heating See www.iea-shc.org/publications/downloads/IEA-SHC Solar Heat Worldwide-2007.pdf Chinese have over 52,000 MWTh installed !! UK has 140 [2005 data] Full UK installation on all 25 million or so domestic premises would be the equivalent of 4–5 1,000 MW power station’s energy output. Much UK high energy rating electric power is currently used just for low energy heating and hot water. Very few Heat Pumps in use which multiply High Energy electricity into 3–4 times the amount of low energy heating/hot water.

9. Wind Energy The current popular Renewable Technology with HM Government. However it’s full costings/economics are being questioned, and should be reviewed. There is much resistance to on shore wind farms, and the proposed use of the wrong technology for oVshore. Current oVshore cost estimate about £2,500 /kW installed. About half that on land. The basic mechanical principles of the currently popular three bladed large Wind Energy Collectors (they are not strictly turbines having only one rotor) go back to 1185 or before when Nicholas rented the “milling by the wind” (Molendium venti) from the Knights Templars in East Yorkshire. And possibly as far back as when the “slave skilled in the manufacture of windmills” slew the Sultan Omar of Baghdad in 644 AD. A friend of Betz who is sometimes described as the “father of modern wind energy collection theory”, Hans HonneV, wrote a book on the use of contra-rotation, using two rotors one behind the other, driving the two halves of an electrical generator.Thus creating a true “Wind Turbine”. Development work was done in Germany 1935–45 and an actual machine produced in UK 1976–81 see http://www.earthtoys.com/emagazine.php?issue number%07.04.01&article%contra http://www.wipo.int/pctdb/en/wo.jsp?wo%1992012343&IA%WO1992012343&DISPLAY%DESC www.osti.gov/energycitations/product.biblio.jsp?osti id%5279087 www.osti.gov/energycitations/product.biblio.jsp?osti id%7300750 The possibility exists of a major cost reduction in Wind Turbine technology, especially for oVshore, and “on building” installations.

10. Tidal Energy A barrage across the Severn Estuary has been under investigation since before 1974. The Sustainable Development Commission’s report “Tidal Power in the UK” concludes the UK’s outstanding tidal resources could provide at least 10% of the country’s electricity through a combination of technologies. A Severn barrage alone could potentially supply just under 5%—the report covers barrages, tidal stream and tidal lagoons www.sd-commission.org.uk/presslist.php?id%72 For smaller projects BERR have recently announced that they will provide extra support under the Renewables Obligation to tidal lagoons and barrages under 1GW in capacity. The SDC’s report on tidal power recommended that Government look to support the development of one or more tidal lagoon demonstration projects. The challenge now lies with the renewables industry and those involved with tidal lagoons to develop a viable tidal lagoon project that successfully demonstrates the concept at scale. See also www.tidalelectric.com

11. Feed in Tariffs Solar PV now requires no more subsidies in Germany. Due to the provision of long term “Feed in TariVs”. See also http://www.all-energy.co.uk/UserFiles/File/2007JeremyLeggett2.pdf

12. UK Government Support for Renewables See www.lowcarbonbuildings.org.uk/about/ http://www.eca.gov.uk/ Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Where is Renewable Energy ?? See Diagram

14 May 2008

Memorandum by Mr Peter Hadden

Summary This Paper considers the economics of renewable energy in the context of rural communities and the potential violation of their Human Rights as a result of current BERR policy. For the past two decades, the UK energy policy has basked in the security provided by North Sea oil and gas, and the security of electricity supplied from nuclear, coal and North Sea gas-fired power stations. Only recently has the Energy Minister appeared to realise that the flow of North Sea oil and gas will decline, that ageing nuclear power stations will start to shut down, that coal burning is incompatible with Kyoto. Our cities and towns and villages, our hospitals and schools and homes and industries and farms and transportation— the UK’s entire economy relies upon a reliable, predictable, and secure flow of electricity. Global warming has come to the rescue of the Energy Minister by emphasising the need to reduce carbon emissions, which has coincided with the ‘oV the shelf’ availability of wind turbines. The Energy Minister has embraced the wind turbine as the saviour of UK energy needs and has invested the weight of BERR in support of wind turbines, irrespective of the cost to rural communities and families. Enlisting the direct help of the wind turbine industry, Environmental and Planning laws have been re-engineered to smooth the passage of industrial wind energy schemes through the Planning system. Indeed, Minister John Healey has said that some of the changes proposed by Infrastructure Planning Commission are intended to ease the Planning approval of onshore industrial wind turbine arrays. Other submissions to the Select Committee will show that wind energy does not provide the reliable and secure flow of electricity vital to the economic wealth of the UK. This Paper provides a focus on the public awareness of the lengths the Energy Minister has gone to circumvent informed public opinion, community objection and the human suVering of families when wind turbines are built too close to their homes. This is a single-minded drive to achieve visually an answer to the renewable energy quota, but failing to provide the vital need for a Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 325 reliable and secure flow of electricity to our economic infrastructure. Another uneasy result includes the erosion of the economic security of the UK, and City of London Investment Houses are asking when the power cuts will start. However, this Paper focuses on rural communities and identifies why they adamantly object to industrial wind turbines when built too close to homes.

Response to Call for Evidence:Issue No 6 — How do the external costs of renewable generation of electricity—such as concerns in many aVected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? — How should these be measured and compared? — Is the planning system striking the right balance between all the diVerent considerations?

Introduction The concerns of rural communities against onshore wind power are expressed in the large number of objections raised by communities when a wind array is proposed in their locality, close to family homes. The planning system identifies the need to strike the right balance but Government Planning Guidance is heavily weighted in favour of wind energy development and therefore fails to strike the right balance. The cost to rural areas of Government’s failure to protect basic Human Rights of the family has resulted in a serious erosion of civil liberties and confiscation of family wealth. The primary reasons for local objection to wind turbine developments are: A. noise from the turbines and their potential serious health impact on family life; B. material financial loss to a family’s lifetime savings held in their home; C. economic impact on the community; and D. perceived disregard by Government and its Agencies, for the opinion of rural communities.

A. Noise from the Turbines and the Potential Serious Health Impact on Family Life 1. During the past few years, reports of wind turbine noise and its adverse health impacts have emerged internationally as more and larger wind turbines are built as close as 400 meters to homes. Clinical evidence is recent and medical research just beginning to address this specific issue. However, there is evidence in the following documents: (a) The French National Academy of Medicine, March 2006; (b) “Wind turbine Syndrome”, Dr Nina Pierpont, USA, 2006–08; (c) “Wind Turbines, Noise & Health” Dr Amanda Harry, UK, 2007; (d) A preliminary study: “Respiratory pathology in vibroacoustic disease”, Prof N Castelo Branco, et al, Portugal, 2007; and (e) A review: “Noise Radiation from wind turbines installed near homes: eVects on health”, Section 5, Health eVects, Frey & Hadden, USA & UK, 2007. 2. The noise guidance for developers of wind arrays is provided by the Dti (now BERR) in the form of “ETSU R 97”. This document was drawn up in 1996 under the Chairmanship of the Dti, which convened a Noise Working Group (NWG) to investigate a group of small wind turbine arrays that were creating noise problems to those living nearby. This NWG produced ETSU R 97—The Assessment and Rating of Noise from Wind Farms, Sept. 1996—a document providing information and advice to developers and planners on the environmental assessment of noise from wind turbines. The NWG membership was weighted in favour of representation from the wind turbine industry, largely acousticians and engineers. However, there is no evidence that qualified medical or epidemiological experts were consulted to oVer guidance on how the technical acoustic data might translate into any adverse impact on human health. 3. In 1996 existing wind arrays in Cornwall and Wales were between 49–59 metres high and 0.4–0.6 mw installed capacity. Today’s proposed wind arrays are 120! metres high and 2! megawatts installed capacity. Among its recommendations, the NWG stated that ETSU R 97 might need revisiting and recommended revision within two years, with reviews at regular intervals because of changes in wind turbine technology. There is no evidence to show that the Dti revisited ETSU R 97 despite wind turbines and schemes becoming dramatically larger than those on which ETSU had been based, and despite the newer World Health Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Organisation Guidelines for Community Noise 1999 being materially updated, and despite Parliament enacting the Human Rights Act 1998. 4. ETSU R 97 states: This document describes a framework for the measurement of wind farm noise and gives indicative noise levels thought to oVer a reasonable degree of protection to wind farm neighbours, without placing unreasonable restrictions on wind farm development or adding unduly to the costs and administration burdens on wind farm developers and local authorities. (Summary S1). ETSU-R-97 continues: The recommendation of the NWG is that, generally the noise limits should be set relative to the existing background noise at nearest noise-sensitive properties . . . We have considered whether the low noise limits which this could imply in particularly quiet areas are appropriate and have concluded that it is not necessary to use a margin above background approach in such low-noise environments. This would be unduly restrictive on developments. (Summary S 11). 5. In 2004 Planning Policy Statement 22 (PPS22), “Noise” was introduced by the ODPM, and section 22, states that “The 1997 report by ETSU R 97 for the Dti should be used to assess and rate noise from wind energy developments”. Planning OYcers and Inspectors at Planning Appeals feel an obligation to consider noise only under ETSU R 97. 6. There is material evidence available to show that ETSU R 97 has failed to provide a reasonable level of protection to family homes from unbearable noise pollution where wind turbines are located too close to homes. Symptoms include sleep disturbances and deprivation, sometimes so severe that families are forced to evacuate their homes in order to stabilise well-being and to resume normal family life. This is a worldwide phenomenon where wind turbines are located too close to homes. 7. An example of this in the UK is the Davis family, who presented evidence of their plight to the Second International Meeting on Wind Turbine Noise [Lyon, France, September 2007]: “Living with amplitude modulation, lower frequency emissions and sleep deprivation”. On 29 May 2007, the Lincolnshire Free Press reported: “A family whose lives have been blighted by wind turbine noise have abandoned their . . . home”. Mrs J Davis has indicated that the acousticians “Hayes McKenzie”, who were on the original NWG that prepared ETSU R 97 and who consult extensively in advising wind turbine developers, visited the home of Mrs Davis. After measuring the noise, Hayes McKenzie reported that the scheme complied with ETSU R 97, and therefore the Planning Condition on noise levels was satisfied. The Commission for Local Administration in England [17 March 2008], commented to Mrs Davis, “It is not possible to establish definitively whether a breach has taken place because no background checks were taken at your property. In order to measure background levels now, a shut down would be required. While ETSU R 97 contains the methodology for what should be done in the event of a complaint it does not give the Council any powers to impose a shut down”. The Davis family appear to be without redress. Ironically, the Davis family supported the landowner and developer’s wind turbine application, as they believe in renewable energy and accepted the developer’s assurances that noise would not be problematic. Additional reports on family suVering can be found in section 3 of “Noise Radiation from wind turbines installed near homes: eVects on health”, (Frey & Hadden). This document also reviews medical research that establishes links between noise and its adverse impacts on health. [see www.windturbinenoisehealthhumanrights.com]. 8. The character of the noise is not the hum that is experienced by those living near a busy road or motorway. It is not the intermittent, every 1.5 minutes interruption for a period each day of an aeroplane landing at Heathrow airport. The noise from a wind turbine array is very diVerent: It has a pulsating character, and it has a low frequency character, which acousticians from the wind industry would have us believe is not a health problem. Yet neurologists, epidemiologists, and the World Health Organisation warn of potential serious medical impacts where low frequency noise is present. The constant throbbing, pulsation, continues to be delivered to the family home within the aVected zone, without respite, 24 hours a day for as long as the wind blows above 4 m/s (metres per second). It has been referred to as “a living torture of a family”. 9. In 1999, The World Health Organisation published its “Guidelines for Community Noise”. These Guidelines incorporated important changes to the previous WHO Guidelines of 1980, 1993, and 1995, particularly in setting maximum noise limits in a bedroom where noise with a pulsating and low frequency character are present. Despite the WHO 1999 Guidelines, ETSU R 97 was not updated to reflect these changes. An analysis of the inadequacy of ETSU R 97 to protect people when wind turbines are built too close to homes was prepared by NWG member Mr D Bowdler (in “ETSU R 97: Why it is wrong”, July 2005). Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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10. The problem has also been highlighted outside the UK. GP van den Berg, acoustic engineer and member of the WHO Community Noise 1999 working committee, produced a paper, “The beat is getting stronger: the eVect of atmospheric stability on low frequency modulated sound of wind turbines” (Journal of Low Frequency Noise & Vibration 2005:24:1-24). Prof Ffowcs-Williams, Emeritus Professor of Engineering, Cambridge University, one of the UK’s leading acoustical experts and an advisor to REF (Renewable Energy Foundation), commented on the van den Berg Paper: “Van den Berg’s paper adds weight to the criticisms frequently oVered of the UK regulations covering wind turbine noise, ETSU R 97. The regulations are dated and in other ways inadequate. It is known modern, very tall turbines, do cause problems, and many think the current guidelines fail adequately to protect the public”. 11. Following public concern after a published article noted “. . . that wind turbines at a Cornish wind farm was giving rise to health problems associated with low frequency noise emissions . . .”, the Dti (now known as BERR) appointed acousticians “Hayes McKenzie” to investigate. In August 2006, the Dti published the Hayes McKenzie report, “The Measurement of Low Frequency Noise at 3 UK Wind Farms”. Although the acousticians prepared the report without any apparent or acknowledged contribution by medical or epidemiologic experts, the report for Dti included in its conclusions, [p 66] the following quotation from a WHO Community Noise Report as a summary of its findings: “Community Noise, WHO ‘there is no reliable evidence that infrasound below the hearing threshold produce physiological or psychological eVects’”. 12. This Hayes McKenzie Dti report—issued in 2006—repeats this quotation on pages 2, 10, 46 and 66 of the report. However, this quotation appears in the superseded “WHO Community Noise Paper 1995”. The implication is that the H-M/Dti report appears to ignore the World Health Organisation Guidelines for Community Noise published in 1999, which superseded the 1995 document. This is significant because the WHO Guidelines for Community Noise 1999 clearly states in section 3.8: “The evidence on low frequency noise is suYciently strong to warrant immediate concern”. “Health eVects due to low frequency components in noise are estimated to be more severe than for community noises in general (Berglund et al 1996)”. And from section 4.4 “WHO Guidelines, 1999, Values”: “It is not enough to characterise the noise environment in terms of noise measures or indices based on energy summation (eg LAeq) because diVerent critical health eVects require diVerent description. . . . For indoor environments, reverberation time is also an important factor. If the noise includes a large proportion of low frequency components, still lower guideline values should be applied”. The “WHO 1999, Guidelines, Critical health eVects” for sleep disturbance, sets a limit of total noise in the bedroom at night at 30dBA, before additional reductions are applied to reflect the presence of LFN and the pulsating character of the noise. Section 3.8 of WHO 1999, clearly states, “Many acoustical environments consist of sounds from more than one source. For these environments, health eVects are associated with the total noise exposure, rather than with the noise from a single source (WHO 1980b). In contrast ETSU R 97 allows noise levels to rise to 5dB(A) above background, to a maximum of 43dB(A) at night. 13. Merely as illustration to show a pulsating noise and the presence of low frequency noise, Appendix 1, first chart, is an acoustic recording of wind turbines taken in the first floor bedroom of the Davis family home. The pulsating character may be readily seen (5 July 2007 measured by Mr M Stigwood, Acoustician and qualified Environmental Health OYcer). The second chart illustrates an analysis of low frequency noise from a 1.3 MW wind turbine in 2004 by Dr G Leventhall, Acoustician. The low frequency noise appears between 0Hz–20Hz. Although inaudible to most humans, low frequency noise may still impact a person. 14. The 2006 Hayes McKenzie/Dti Report concluded on page 66 that: “. . . infrasound associated with modern wind turbines is not a source which will result in noise levels which may be injurious to health of a wind farm neighbour”. No evidence has been found that the authors of this report have any medical qualifications to make this statement, nor is there any evidence in the report that medical experts were consulted. There is no substantive epidemiological or physiological evidence in the Dti report to support this conclusion. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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15. Public concern is reflected in the questions on the issue of wind turbine noise and its adverse impact on health that have been brought to the House of Commons. Referring to Hansard 15 June 2007: column 1418W, House of Commons: Mr GeoVrey Cox, QC, MP: To ask the Secretary of State for Trade and Industry pursuant to the answer of 14 May 2007, OYcial Report, column 1003W, on turbines: health hazards, what qualifications Hayes McKenzie possessed in relation to infrasound emitted by wind turbines; and what role medical experts played in the production of the report. (142509) Malcolm Wicks: The Hayes McKenzie report for the Dti “The measurement of Low Frequency Noise at three UK wind farms” investigated the levels of low frequency noise and infrasound emitted by wind turbines, it was not within the remit of the study to undertake new medical analysis. However, the study did refer to the document prepared for the World Health Organisation “Community Noise”, which states that: “there is no reliable evidence that infrasounds below the hearing threshold produce physiological or psychological eVects”. It also referenced work undertaken for DEFRA on low frequency noise and its eVects. Dr Andrew McKenzie and Malcolm Hayes are acoustic experts with between them over 45 years experience. They have conducted work in relation to wind turbines at over 400 proposed, consented or completed sites in the UK and overseas. Mr Cox: To ask the Secretary of State for Trade and Industry what research his Department has carried out on the numbers of individuals and households adversely aVected by infrasound emitted by wind turbines (142510). Malcolm Wicks: Dti and Defra have recently commissioned a report by Salford University one of the objectives of which is: “to establish the levels and nature of the noise complaints received across the UK relating to noise issues from wind farms, both historic and current, and determine whether Aerodynamic Modulation (AM) is a significant eVect”. 16. The 2006 Hayes McKenzie Dti report referred to “Amplitude Modulation” (AM) as the underlying noise problem. In August 2006, the NWG recommended that the Dti should commission a further study to better understand the extent and cause of AM. Defra, Dti and DCLG commissioned the study. 17. Dr Andrew Moorhouse and his team at Salford University were instructed to undertake the study with Hayes McKenzie. In April 2007, Ms Zoe Keeton of Dti led the NWG in evaluating the report. At the meeting, Ms Keeton advised the NWG that the Dti had released a statement in November 2006, “Advice on findings of the Hayes McKenzie report on noise arising from Wind Farms”. Ms Keeton also reminded the NWG that their role was advisory to Dti, solely to provide expert technical advice and guidance on issues surrounding AM (Amplitude Modulation). The NWG advised the Dti additional work should be undertaken. Ms Keeton advised that a meeting would take place with Defra and DCLG to discuss funding. 18. In July 2007, when Salford University/Hayes McKenzie published their Report, Chris Tomlinson, of the British Wind Energy Association (BWEA) and a member of the NWG, apparently circulated a letter to the members of BWEA thanking Zoe Keeton of Dti (now known as BERR) “for her eVorts in driving through the work on this issue with such a great result and a robust Government statement”. NB: In 2002, Ms Keeton joined Npower, but since 2006, Ms Keeton has been on secondment to BERR (Dti), co-ordinating activities to address the planning and aviation issues that hinder wind farm development. (see http://www.all-energy.co.uk/Biographies aviation.html) 19. The ETSU 1997 committee was heavily weighted by experts from the wind industry. The report on LFN was prepared by acoustic consultants to the wind industry. The most recent NWG was weighted in favour of experts from the wind industry and indeed led by a person seconded to the Dti from the wind industry. The Salford University/Hayes McKenzie report was influenced by acousticians and engineers from the wind industry. 20. It is reasonable to wonder, in the light of the conflict of interest found by the NAO when it investigated HIPS (Home Information Packs), whether the NAO would find a similar conflict with the BERR appointments. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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21. On 2 August 2007, Dick Bowdler, an acoustician and member of the NWG, resigned from the Noise Working Group. This highly unusual step was taken because, as his letter states: “I have read the Salford Report and the Government Statement. As a result I feel obliged to resign from the Noise Working Group. The Salford Report says that the aims of this study are to ascertain the prevalence of AM from UK wind farm sites, to try to gain a better understanding of the likely cause, and to establish whether further research into AM is required. This bears little relation to what we asked for which clearly set out in the minutes of the meeting in August 2006. We all knew then (as was recorded in the original notes of the meeting) that complaints concerning wind farm noise are currently the exception rather than the rule. The whole reason for needing the research was that ‘The trend for larger more sophisticated turbines could lead to an increase in noise from AM’. It was not the intended purpose of the study to establish whether more research was required. We all agreed at the August 2006 meeting that such research was needed. That was precisely the outcome of the meeting. The prime purpose of what eventually became the Salford Report was to identify up to 10 potential sites which could be used to carry out objective noise measurements. The brief for the Salford report, which was never circulated to the NWG, completely ignored the NWG views. Additionally, I find it entirely unacceptable that we are not to be told the names of the wind farms listed in the Salford report. So the only part of the report of any value to assist future research is inaccessible to those of us who would like to progress matters further. Looking at the Government Statement it is clear that the views of the NWG (that research is needed into AM to assist the sustainable design of wind farms in the future) have never been transmitted to government and so the Statement is based on misleading information”. 22. The Editor of “Noise Bulletin”, where Mr Bowdler’s letter appeared, commented: “‘New report eases concerns over wind turbine noise’ trumpets the Government press release, then saying aerodynamic modulation is ‘not an issue for the UK’s wind farm fleet’. This conclusion is not justified based on the report, and by halting further research work without transparently monitoring the wind farms subject to complaints will inflame, not ease concern of objectors . . . Only when the public can trust the Government and wind farm developers on noise issues will there be a chance that the public will accept them without a fight . . .” (Noise Bulletin, Issue 15, Aug/Sept. 2007 page 5). 23. It is important to note that modern wind turbines are controlled by remote computer. It is possible, for example, to remotely slow the revolutions per minute of the blades. In theory, having in mind the field research on noise from wind turbines undertaken on behalf of BERR (Dti) was undertaken by acousticians working in the wind industry, it is quite possible for the wind turbine owners to slow the revolutions when on site noise measurements are taken by any acousticians. There is no evidence that this has happened but in future for the benefit of transparency and data analysis, noise should be measured against wind speed and rpm (revolutions per minute) of the blades. It is the rpm that directly influences the pulsating character of the noise. 24. A House of Commons debate 5 July 2007 (1078–1081) addressed wind turbine noise: Mr John Whittingdale “. . . if he will review the noise limits for onshore wind farms” (147642) Malcolm Wicks: We continue to support the approach set out in PPS 22 renewable energy . . .“ensure that renewable energy developments have been located and designed in such a way to minimise increases in ambient noise levels” . . . I do not consider that a review of that guidance (ETSU R 97) is justified at present. Mr Whittingdale: Is the Minister aware of the growing evidence that people who live in close proximity to wind turbines suVer significant risks of adverse health eVects? Will he give urgent consideration to increasing the minimum separation distance from large turbines to at least 2 km? . . . Malcolm Wicks: No, I am not aware of such evidence, and I do not believe it exists. A Government commissioned Hayes McKenzie study published 2006 concluded that there was no evidence of adverse health eVects from wind turbines . . . Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Sir Patrick Cormack: May I support my hon Friend’s general point and ask the Minister whether he will conduct an assessment of the environmental impact of these monstrous things and their eVects on our tourism reviews. (HC Deb 5 July c 1085)

25. By encouraging the wind industry to design and set its own standards on an acceptable noise level from wind turbines measured at nearby homes, the BERR (Dti) has legalised, in Town Planning terms, noise levels that can be so disturbing to family life that some families are forced to abandon their homes or suVer sleep deprivation. It has set a standard that might easily be manipulated to the benefits of developers by comparing noise levels with background noise levels, which in most instances are measured by the developers and not checked by Local Councils because of lack of resources. BERR (Dti) has made no eVorts to investigate, with independent health researchers and experts, the reported serious health consequences to some families where wind turbines are built too close to homes. Instead, BERR (Dti) has unreasonably asked acousticians to give an opinion on health issues and astoundingly, BERR (Dti) has acted on that opinion.

26. By carefully promoting the development of onshore wind energy as Government Policy and by promulgating wind energy as the vital part of the provision of future UK energy supply and therefore in the national interest, BERR (Dti) has virtually denied families their rights under Article 8 of the Human Rights Act: Article 8 provides: (A) Everyone has the right to respect for his private and family life, his home and his correspondence. (B) There shall be no interference by a public authority with the exercise of this right except as in accordance with the law and as necessary in a democratic society in the interests of national security, public safety or the economic well- being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedom of others.

It is clear that some families, who suVer sleep deprivation and consequent health problems, have had their right to respect for their private and family life violated. However, by setting high levels of allowable noise from wind turbines operating 24/7, Planning permission has been granted because developers have provided assurance that the ETSU R 97 noise guidance would be met.

In a speech to the Human Rights Lawyers Association in London, 29 September 2006, the Lord Chancellor stated: “We in Government will campaign passionately and defiantly for human rights for everyone in Britain. Because we believe it is the foundation of both our security and our prosperity”.

27. Clearly, in a desperate eVort to ease the Planning process to allow the building of large numbers of industrial wind turbines in well-populated rural communities, BERR (Dti) has had to support excessively high noise level standards in order to squeeze wind turbines close to family homes. There is no evidence BERR has considered the health implications on the families, and no evidence BERR has considered the basic rights of families under Article 8 of the HR Act 1998.

28. It is inspirational that in Dennis & Dennis v M.O.D. (2003) EWHC 793, Mr Justice Buckley found an interference with the convention rights of the claimants whose enjoyment of their home (and its value) was impaired by the noise: “I believe it is implicit in the decision S v France, that the public interest is greater than the individual private interests of Mr and Mrs Dennis but it is not proportionate to pursue or give eVect to the public interest without compensation for Mr and Mrs Dennis...inmyview, common fairness demands that where the interests of a minority, let alone an individual, are seriously interfered with because of an overriding public interest, the minority should be compensated”.

29. A number of acousticians and health experts have called for a minimum distance of 2km between wind turbines and homes. The wind industry calls foul because it claims such a minimum distance would reduce the number of sites available. It could be argued that if a small number of homes within the 2km zone would stop the site being developed, then it is the recourse of normal property developers (whether commercial or residential) to buy out those homes at market value to allow the scheme to proceed. Another argument is that there are huge land resources oVshore that could accommodate all the Government’s wind energy aspirations, and that allowing developers to make greater profit margins by developing onshore close to homes on marginal sites at the expense of ordinary families is a violation of basic Human Rights. Allowing wind array developers to make higher profits at the cost of individual families is repugnant and contrary to the stated intention of Parliament to protect basic Human Rights for citizens of the UK. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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30. The people of the UK have no confidence in the way the BERR (Dti) has managed the problem of noise from wind turbines. The only way to restore and build confidence is to: — First, set a 2 kilometre zone on all industrial wind turbine sites where turbines of over 0.6MW and 50 metres high are proposed: No industrial wind turbine should be within 2 kilometres of a dwelling. — Second, there should be an independent working party of acousticians and medical experts to fully explore the problems of wind turbine noise and the health consequences. — Third, the NAO should be appointed to ensure that there is independence during the process and that there are no conflicts of interest. The Equality and Human Rights Commission should be appointed to ensure basic Human Rights are respected during the whole process of setting new standards for control of noise and setting new Planning Guidance.

B. Material Financial Loss to a Family’s Lifetime Savings Held in Their Home 31. For most British families the largest investment they are likely to make in their lifetime is their family home. Many families when reaching retirement will consider downsizing their home to release capital, allowing them to enjoy their later years. An “Englishman’s home is his Castle” still applies, and when their lifetime savings are unreasonably taken by actions of the State, families are understandably upset and often without financial recourse. 32. There is substantial evidence from around the world that homes within 2 kilometres of a wind array suVer material loss of value. The greatest decline in value is at circa 500 metres, but the rate of decline decreases out to about 3 kilometres. The UK housing market is a free market dependent upon a willing seller and a willing buyer entering into contract to complete a deal. Usually, the willing buyer has a number of properties to consider within a price range, accommodation size, and geographical location. Because most wind turbine arrays are in countryside locations, an important factor influencing choice is “environment”, particularly in terms of noise. The visual aspect from a home is also important in the countryside. A property enjoying a pleasant view in a quiet location is attractive to a prospective purchaser. If a single, slender, radio communication mast 120 metres high and 1.5 kilometres distant is located within that view, there would be a modest reduction in value, but if the property had other strong attributes including a much sought after location, the reduction would be minimal. 33. However, if every time the occupier looked out of the windows, the view was of 120-metre high revolving blades, filling most of the view at a distance of say 1.5 kilometres, the impact on value would be a material decline. Not many families would choose, if alternatives were available, a home where every time a family member looked out a window, their gaze would be captured immediately by “giant mobiles” reaching high into the sky, filling the view. Additionally, if the main rooms of the house faced east, south, or west, a serious problem of flicker will occur on sunny days as the sun’s elevation in the sky falls behind the revolving blades of the wind turbines. (Wind turbines, flicker, and photosensitive epilepsy; characterising the flashing that may precipitate seizures and optimizing guidelines to prevent them, Harding et al, Neurosciences Institute, Aston Univ & Dept Psychology Essex Univ, April 2008; and “Evaluation of Environmental Shadow Flicker, Analysis for Dutch Hill wind project”, R Bolten, January 2007). The Bolten review also commented on the impact at night by a rising and setting moon, with the flicker from the blades playing on windows while families try to sleep. By far the most serious negative influence on value is the impact of noise, discussed in Section 1 of this Paper. 34. The low frequency noise emitted from a wind turbine delivers a particularly penetrative character, comparable to “sonar”. While Acousticians can measure the technical delivery of low frequency noise, it must be for the medical experts to advise on how that delivery impacts on the human torso. An investigation for the MOD by Keele University, (Microseismic & Infrasound Monitoring of LFN & Vibrations from Windfarms) concluded in July 2005, “This analysis allows us to define an exclusion zone of 10 kilometres within which No windfarm/turbine development is acceptable . . . Beyond 50 kilometres, we do not anticipate that Any reasonable wind farm development will have an impact on the detection capabilities of Eskdalemuir”. While this investigation was considering a very sensitive military ground listening station, it nevertheless provides evidence of the existence of ground vibration within the 2 kilometre zone. Even minute ground vibration will aVect the human torso [Appendix 1] (see also Section 5.0 Health EVects, Noise Radiation from wind turbines installed near homes: EVects on health, Frey & Hadden, 2007, www.windturbinenoisehealthhumanrights.com) 35. It is not surprising that a family trying to sleep in a bedroom, with the window slightly open and just a thin layer of slate, roofing felt, thermal insulation and plasterboard, between them and the delivery of pulsations at night, find it diYcult to sleep. Few families would choose to buy such a house, and a special purchaser, if one could be found, would clearly demand a substantial reduction on normal open market value. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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36. A limited scope study by Oxford Brookes University, which looked at the impact on property values of two early wind arrays in Cornwall, with turbines of about 0.4MW and much lower in height than to-day’s giant turbines, found that the thought of turbines made a greater impact on value than when the turbines were in position. However, to-day’s giants have a huge impact on value as is evidenced by property experts active in the residential market, for example: (i) Valuation, April 2008, of “The Farm House”, Grays Farm, North Drove, Spalding, Lincs., by Valuers “Munton & Russell”; (ii) Valuation, July 2005, of “. . . sample of properties inspected near a proposed wind farm at Esgairwen Fawr, Nr Lampeter, by RE/MAX,‘The Estate Agency Leaders’”, Carmarthen, Wales; (iii) Hansard, House of Commons, written answer 20457 (13 May 08, column 1442W) John Healey: Details of the types of local council tax discount that were being awarded: “Property aVected by the proximity of electricity generating wind turbine”; and (iv) “Noise Radiation from wind turbines installed near homes: EVects on health” (Frey & Hadden, 2007, Appendix—Property Values, P Hadden FRICS). It is no wonder that families are adamantly opposed to wind turbines being located close to their homes.

C. Economic Impact on the Community 37. The economic impact of industrial wind turbines on a community is a generally subjective problem, but there are economic ramifications where the area is dependent on tourism and holiday homes to provide employment in an otherwise agricultural community. It is not diYcult to produce an opinion poll in the West Country that suggests most people support renewable energy and therefore, wind energy. One only has to walk along the beaches at Newquay, St. Ives, Bude, or Paignton, and holiday visitors will gladly cast their votes. This, though, is a deeper question, vital to an area largely dependent on agriculture to sustain communities. Staying with the West Country, farms are generally small and normally can just sustain the basic family unit. Children often go on to further education and follow careers away from home. Those not so inclined discover that local job opportunities are more diYcult to find. An agricultural area will be able to sustain only a small number of contract tractor drivers. Job opportunities are limited and incomes are low. It is diYcult for young couples to buy a home in competition with those seeking retirement homes. Villages lose young people who move to towns for employment. 38. It is of vital importance to encourage inland tourism and keep the countryside open to visitors who enjoy holidays, not only at the seaside, but also in quality countryside. Projects including the construction of cycle routes along country lanes and disused railway tracks are popular. Hikers have an abundance of routes that are well charted. As a result, small hotels and holiday cottages have built up repeat clients and farms have diversified into converting barns to holiday cottages. Visitors from towns and cities welcome the opportunity to enjoy short breaks in the countryside, and pensioners find the area attractive for a lifestyle based on rural communities and outdoor activities. Restaurants and Pubs providing quality food have flourished. Shops and the service sector thrive and revitalise towns and villages as a result of the increased trade. These small businesses have provided job opportunities to local people, some working part time, from cleaning, cooking, and serving at tables to working in shops and oYces. Builders are provided with work maintaining accommodation and reconstructing old barns. Consequently, the local economy builds upon itself and new investment takes place creating further job opportunities. A countryside, which might have been facing a slow slide into deprivation, has an economic future. 39. One then has to ask what happens when giant 120-metre wind turbines are introduced into the community. The landscape will take on an industrial character, and holiday units near the turbines will suVer the same environmental pollution described previously. Will people return to holiday units that suVer from the pulsating throbbing noise at night, will walkers and cyclists return to an area where the turbines monopolise the views as giant perpetual-motion mobiles in the sky? Pensioners do not rely on the local economy for income, though they support a variety of services, businesses, and trades; with a portable income, pensioners can vote with their feet, removing another building block important to the success of the rural economy. 40. A report produced by the Small Business Council (February 2006) in Recommendation 6 stated, “The eVects on the rural economy of onshore wind development should be a material consideration in the determination of the applications for development and should constitute part of the cost benefit analysis . . .” Wind array developers argue that their schemes bring prosperity to a community. However, although some short-term jobs are created when construction work takes place, once the turbines are in place, computers Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 333 hundreds of miles away can control them. Maintenance is normally monitored by an Engineer managing a number of arrays. The landowner may enjoy a large increase in income, but there is no evidence that this money is reinvested in the community.

D. Perceived Disregard by Government and its Agencies, for the Opinion of Rural Communities 41. While Government often pronounce the importance of listening to the people, rural communities feel excluded from this policy when it comes to onshore wind turbine development. A proposal to build an array of nine 2MW wind turbines 120-metres tall in well-populated rolling countryside just east of Okehampton, Devon, was met with strong local opposition and reflected in the local Council’s refusal to grant Planning permission. The developers appealed and the local community mounted a strong Rule 6 Party presentation of the community’s views supported by nearly 3,000 letters of objection and about 200 letters of support. Objections included noise, negative impact on property values, potential violation of Human Rights, and REF (Renewable Energy Foundation) tabled a well-argued case that wind energy onshore failed to provide the benefits to the national interest that were claimed by developers. The Planning Inspector allowed the Appeal. 42. The community were so opposed to the scheme that they raised nearly £30,000 to take their case to Judicial Review and the Court of Appeal. While it is accepted everyone is entitled to develop their own land, provided it is legal, where a proposal involves huge scale industrialisation of a rural community, producing environmental noise pollution, at questionable benefit to the nation, it is not surprising that the rural community asks whether public consultation is merely a nuisance for Government—a process that has to be seen to be done, with a “rubber stamp” result. 43. Part of the problem is that communities must raise large sums of money to employ experts to argue their case, often to no avail. Any objections on grounds of noise are brushed aside by placing a standard Planning Condition citing noise control under Guidance ETSU R 97. 44. Developers assure residents living near new wind arrays that there will be no noise disturbance from the site, yet in many instances where the present generation of wind turbines are built within 2 kilometres of homes, there is a noise disturbance. The BWEA have issued “Myths” of wind turbine objectors (A rebuttal for seekers of the truth of the BWEA top myths about wind energy) and labelled objectors as Nimbys. This shows a lack of sympathy and understanding for communities of human beings who have genuine and well- researched objections to wind turbines being located too close to their homes. In north Devon, a developer issued an information leaflet stating that their scheme will not have a negative impact on property values. The leaflet was sent to the “Advertising Standards Authority”, which replied, “We will ask them to amend their advertising to remove” that statement (Batsworthy Cross).

Conclusion 45. Because electricity produced by wind energy fails to meet the key objective of Government energy policy, that is, to provide a reliable and secure flow of electricity, it is not possible to justify allowing wind energy to claim status as being in the national interest. As a result, wind energy schemes should be treated in Town Planning terms, on equal footing with any other proposal to industrialise areas of the countryside. Impact on families, communities, visual intrusion, and landscape degradation would then be considered by decision makers unfettered by the straightjacket of BERR. Ironically, BERR instead promotes permissive considerations in favour of developers. 46. Thus, onshore wind turbines built within 2km of homes oVer no benefits and should not be part of a plan to provide the UK with a viable, secure, predictable supply of electricity. Indeed, onshore wind turbines ensure an unpredictable energy supply, by the very nature of the wind, with a long list of adverse impacts that diminish their supposed usefulness. Other renewables, such as solar and hydropower, oVer more options and more predictability, especially combined with the still necessary (and technologically advancing) conventional sources of energy. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

334 the economics of renewable energy: evidence

APPENDIX 1

NOISE MONITORING DAVIS HOUSE—MIKE STIGWOOD 5 JULY 2007

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Memorandum byJHRHampson

1. Introduction There are compelling reasons for saving energy in buildings, transport and industry. When we achieve these energy savings there are always huge economic gains and reduced carbon emissions. Conversely when we provide incentives for renewable energy, whilst there are some minimal carbon savings, the cost of electricity is increased forcing great financial burdens on society and industry. The dreams of harnessing our natural resources cannot be fulfilled without great cost penalty to the electricity consumer. Nor can substantial reductions in man-made carbon emissions actually be achieved with Renewables. As a Consulting Engineer it was against the grain for me to oppose technological development on alternate energy but I always felt that every aspect of this romantic and political initiative must be tempered with realism. After retirement I was asked to help save a beautiful landscape from wind turbines. I expanded by research and exposed the Great Renewables Myth of renewable when I quantified the lack of carbon saving benefits. There is a total misconception with regard to Renewable Energy in the UK. I wish to correct this. To do this I assume that there could be 15% Renewables and show what that really means in terms of carbon reduction. Since alternate energy sources are not always available we have to apply load factors to their installed capacity. I will demonstrate the impact of Renewables on the World’s man-made emissions, the impact on UK’s man- made emissions and the impact on the world’s total carbon emissions. I have used DTI published load factors. My estimates need to be adjusted downwards for carbon emitting back-up when the alternate energy source is not available, for example when the wind speeds are either too low or too high. Counter arguments state that there is already suYcient back-up available but at one point in time all additional non reliable forms of renewable energy will require additional back-up by carbon emitting plant. Renewables have been unfairly supported for far too long and have diverted attention away from the areas where real carbon savings could be achieved. Not only are the savings exaggerated but Renewables already impose cost penalties on electricity consumers. Alternatives, such as reducing energy consumption in transport and buildings and increasing the eYciency of our power stations, save consumer cost as well as reducing carbon. Renewables on the other hand add considerable costs and saves little carbon. This fact needs to be published and understood by the whole population of the United Kingdom. I have prepared a similar paper with respect to Scotland where they are out of touch with reality in terms of Renewables and consumer costs. This is especially the case with their recent proposed rejection of DTI/BERR information on wave and tidal energy. BERR claim that these are not worthy of special support at this time and I endorse that view. In Scotland the situation is diVerent since there is hydro capacity and they do not support nuclear. Sadly they have been unable to develop support for the preservation of the countryside from the expansion of wind farms as distinct from what has been achieved in the Lake District. The key issue is that Scotland is a net supporter of electricity and their 50% proposed Renewables target means expensive transmission either sub-sea, under-ground or by the use of ugly high pylons. The visual intrusion will be on both sides of the border unless more expensive options of undergrounding or sub-sea are accounted for. I have not focussed on the actual costs since I know that others are better equipped to provide this information. I have concentrated on the lack of benefits from Renewables. SuYce to state that we are dealing with between 3.5 and 12 times the cost of conventional power which the consumer pays for, even although this whole exercise does little for the reduction of the world’s carbon reductions.

2. Quantification of Renewables Contribution

2.1 Effect of 15% Renewables in UK on the World’s man-made emissions:

FIGURES FOR UK BASED ON MAN-MADE CO2 EMISSIONS

UK Carbon Contribution 2.2% of World Contribution ElectricityGeneration 35% of Man-Made

Wind Power 11% of Installed Capacity of Generation Load Factor of Wind 35% Wind Energy Corrected for Load Factor 3.85% Wind Carbon Saving 0.02965% Man-made Carbon Emissions Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

336 the economics of renewable energy: evidence

Wave Power 1% of Installed Capacity of Generation Load Factor of Wave 25% Wave Energy Corrected for Load Factor 0.25% Wave Carbon Saving 0.00193% Man-made Carbon Emissions

Tidal Power 1% of Installed Capacity of Generation Load Factor of Tidal 27% Tidal Corrected for Load Factor 0.27% Tidal Carbon Saving 0.00208% Man-made Carbon Emissions

Hydro Power 2% of Installed Capacity of Generation Load Factor of Hydro 35% Hydro Corrected for Load Factor 0.7% Hydro Carbon Saving 0.00539% Total Carbon Emissions

Total Carbon Saving for 15% Renewables 0.039% Total Carbon Emissions

We can conclude from this that 15% UK Renewables would represent a reduction in the world’s man-made emissions by 1 part in 2,561.

2.2 UK Renewables influence on UK’s man-made emissions:

Electricity Generation man-made emissions 35% of UK’s man-made emissions 15% Renewables contribution to reducing carbon emissions from Electricity Generation Wind Energy Corrected for Load Factor 3.85% Wave Energy Corrected for Load Factor 0.25% Tidal Corrected for Load Factor 0.27% Hydro Corrected for Load Factor 0.7% Total Reduction of Electricity Generation emissions 5.07% of Electricity Generation 15% Renewables contribution to UK’s man-made 1.7745% of UK’s Carbon Emissions

From the foregoing we can conclude that 15% Renewables would reduce UK’s man-made carbon emissions by only 1.8% or 1 part in 56.

2.3 Influence of 15% UK Renewables on the World’s total carbon emissions:

FIGURES FOR UK BASED ON TOTAL CO2 EMISSIONS

Man-made CO2 3.2% of Total CO2 UK Carbon Contribution 2.2% of World Contribution Electricity Generation 35% of Man-Made

Wind Power 11% of Installed Capacity of Generation Load Factor of Wind 27% Wind Energy Corrected for Load Factor 2.97% Wind Carbon Saving 0.00073% Total Carbon Emissions

Wave Power 1% of Installed Capacity of Generation Load Factor of Wave 25% Wave Energy Corrected for Load Factor 0.25% Wave Carbon Saving 0.00006% Total Carbon Emissions

Tidal Power 1% of Installed Capacity of Generation Load Factor of Tidal 27% Tidal Corrected for Load Factor 0.27% Tidal Carbon Saving 0.00007% Total Carbon Emissions Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Hydro Power 2% of Insta_lled Capacity of Generation Load Factor of Hydro 35% Hydro Corrected for Load Factor 0.7% Hydro Carbon Saving 0.00017% Total Carbon Emissions

Total Carbon Saving for 15% Renewables 0.00103% Total Carbon Emissions

We conclude from the foregoing that 15% UK Renewables would represent a mere reduction of 0.001% or 1 part in 96,860 of the world’s total emissions. From this it is easy to see that UK Renewables not only make an insignificant contribution to World emissions but even at a level of 15% they actually contribute only a 1.8% saving in UK’s man-made CO2 emissions. It is my understanding that Renewables is a devolved responsibility so that regardless Scotland is likely to opt for 50% renewable. This would have the eVect of increasing the foregoing figures by just under 4% since Scotland’s electricity share is around 11% of the UK generation.

3. Costs I now turn to the cost burdens of Renewables. Now that the days of nationalisation are over, all costs are borne by the consumers. Electricity prices have risen by a third this year and that probably means that 1 million UK households will be consigned to fuel poverty. Industry and commerce are responsibly addressing those carbon reductions which matter. At this time they too are also carrying the burden of Renewables in their electricity costs. These costs will continue to rise unless the policy is changed. It is outrageous that ineVective and expensive Renewables should be financed at the same time as such other initiatives by responsible consumers. Both the UK and Scottish governments are being fanciful about the leVect of Renewables and ignore their high cost to the consumer. These high costs are concealed because they do not need to be accounted for as government expenditure. AVordability is a strong feature in the UK Energy Policy and with the benefit of this Inquiry we should at last see that in the UK the CO2 change through Renewables can only be a token gesture and we indulge in this at great inconvenience and cost with negligible influence on world emissions. Carbon is only one of the emissions which could influence climate change and it is naive to continue to focus solely on carbon and electricity generation. All forms of renewable energy cost considerably more than electricity generated by conventional means. The penalties to consumers have to be properly assessed. The people of Scotland have made it clear through their extensive objections to the Beauly–Denny tall pylon infrastructure that they do not want to see Scotland’s landscape decimated in this manner. The Public Inquiry process for the Beauly–Denny line has not yet been concluded. The people’s reactions to pylons and turbines are similar in England. The transmission costs through the borders to England have not yet been demonstrated. These energy forms are already prohibitively expensive even without transmission costs being taken into account. They will require new infrastructure and whether this involves high pylons or is put underground or sub-sea it has to be fully accounted for. BERR recognises that the wave and tidal energy forms are not ready for support at this time. The issue of non- viability is not something which can be tackled overnight. These energy forms have been on the academics’ and engineers’ wish lists for decades. The sites where energy from these sources are consistently strong are remote from consumers. The situation in Scotland is diVerent from the rest of the UK. They intend to promote wave and tidal by changing the banding. Whilst in overall terms inflation seems to be under control, food and energy are inflating beyond all expectations but not beyond reason. We are already paying the penalty for delaying decisions on UK energy policy, as well as the cost penalties of the initiatives of both Westminster and Holyrood to encourage non- viable wind energy which is several times the cost of conventional energy.

4. The Limits of Renewables As demonstrated above the carbon argument for Renewables is weak. Furthermore whenever the carbon emitting reserve has to be increased to back-up additional Renewables the carbon argument completely disappears and incentives must be stopped. Without these incentives it will no longer be a great money spinner and the development of wind energy will then grind to an immediate halt. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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AVordable electricity costs are essential for our economy and well being. Non viable forms of electricity generation should not be encouraged. The UK grid and the transmission infrastructure are designed for power stations feeding out to remote and diverse users. Where renewable energy sources are plentiful they are far removed from the points of demand and new infrastructure is needed. Wind energy has to be limited to ensure grid stability and also in order to avoid grid failures similar to those recently experienced in Europe and USA.

5. The Causes of Climate Change are still under Scrutiny We must recognise that the assumption is now being challenged that man-made carbon emissions are a key influencing factor in Climate Change. The scientific and engineering communities remain divided as to whether or not man-made emissions are key influencers of global warming. To date no study has proved this to be the case. The major proponent of this premise is the IPPC but even they acknowledge that major climate change preceded man-made emissions. Their recent summary document states that, “Paleoclimate information supports the interpretation that the warmth of the last half century is unusual in at least the previous 1,300 years. The last time the Polar Regions were significantly warmer than present for an extended period (about 125,000 years ago), reductions in polar ice volume led to 4 to 6 metres of sea level rise . . .” There were no man-made emissions in the former situation and there is plenty of evidence to show the cycles of warming and cooling before then and between then and now. This is strong evidence from the very body which the government relies on to back up their case on carbon emissions. It is beyond question that Global warming and cooling are natural phenomena. SuYce to state that there is an opposing view on whether man- made emissions have a meaningful influence. We will have wasted a lot of consumer monies on addressing this subject before it is ultimately proved that the influence is not significant, Those who promote Renewables on the basis of major carbon impact are presenting a misleading cure since 65% of the UK’s man-made emissions CO2 do not emanate from electricity generation and Renewables only contribute to electricity generation. However even if the government concentrated on the higher 65% in the form of transport, heating and industry because of its size the UK is unable to meaningfully influence world carbon levels and climate change This subject needs to be fully understood by all politicians not just a few.

6. Summary — The ability of the UK to influence world emissions is near zero, even if we hypothetically considered the production of all our electricity by non carbon emitting means. The larger portion of UK’s man- made emissions is from transportation, heating and industry. — Consumers cannot aVord the additional costs of Renewables which in any case only relate to a small percentage of the 35% of man-made carbon emissions which in turn relates only to electricity generation. — Until the issues of aVordability can be properly addressed there is no justification for pursuing high cost non-viable forms of renewable energy. — Wind energy is decimating our beautiful countryside. — Wind energy will always be considerably more expensive than conventional energy and the carbon argument is not an acceptable card to play where the eVect on world emissions is negligible. — Vested commercial interests and eYcient lobbying of Westminster coupled with deals done in Brussels by many who are ill informed are the root cause of this burden on British society. Ministers have not considered the severe cost implications on electricity consumers of the necessary additional transmission together with its visual intrusion on our landscapes or further increased costs in its concealment have not been properly investigated. — Biomass releases carbon on combustion and the incentives oVered will lead to farmers moving away from food production. I hope that this inquiry will lead to an independent quantification of the limited benefits of Renewables and the burdens placed on electricity consumers by these,together with the decimation of our countryside and shorelines by wind turbines. 3 June 2008 Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Memorandum by Highlands Against Windfarms 1) Renewables cannot provide “base load” electricity, although hydro can give a limited contribution. Hydro is handicapped by the need for large amounts of stored water so, as was shown in 2002–03, a shortage of rain means very low water levels and hence very low load factors. The load factor is the ratio of power actually generated/installed capacity. Nuclear, gas and coal fire power stations normally have a load factor of 80–95%, whereas the load factor for wind power in 2007, both oV-shore and on-shore was less than 28%. The National Grid requires what is called “despatchable” electricity, this means electricity that is available when required. Windpower clearly does not fit into this category because of it’s intermittency and any electricity generated by wind is eVectively “surplus to requirement”. Wave power would also fall into this category as most of the waves around our coast are “wind generated”. Incidentally, UK oVshore load factors in 2007 were no better than on-shore, and considering the prohibitive cost of building windfarms oV our coasts (Shell pulled out of the London Array because of the economics) this too would seem to be a “fool’s errand”. In terms of anthropogenic climate change (if there is such a thing) if all the UK’s requirements were met by renewables (not possible) this would reduce global CO2 emissions by a theoretical 0.6%, see calculation below.

2) It is estimated that global CO2 emissions are 27000 megatonnes, or 27 gigatonnes per annum (and rising). It is also widely accepted that windpower theoretically displaces 430kg of CO2 per megawatt hour of generation displaced. At normal times the UK requires approximately 45 gigawatts (45,000 megawatts) of despatchable electricity, therefore: 8760(hours in a year) x 45,000 x 0.43 x 100 % 0.62% 27000,000,000

3) Global CO2 emissions are estimated to be increasing by almost 3% per annum so quite clearly if the UK stopped using electricity tomorrow this would not make a jot of diVerence. E.ON, the energy giant, have stated recently that we will need at least 90% of any installed wind capacity available in conventional generation, simply as back up for those many non-windy days. The cost of this will be prohibitive. 4) So why are we the consumer subsidising the wind industry to the tune of £55 per megawatt hour (ROC and CCLe) when they cannot help the much needed security of supply and cannot make the remotest diVerence to global CO2 levels? To make matters worse most of the hardware used by the wind industry is either Danish or German. Last year this “subsidy” cost us £318 million, and this is predicted to reach £1 billion over the next three years. 5) Germany has over 22,000 windturbines yet have just commissioned three new gas-fired power stations and are planning 26 more coal-fired versions. There is approximately 2.4 gigawatts of installed windpower in the UK and its uselessness was highlighted when we recently lost the outputs from Longannnet and Sizewell “B” power stations—500,000 homes were without electricity during this period. ** ROC % Renewable Obligation Certificate (Currently £51/MWh) CCle % Climate change levy Exemption (£4.30/MWh) Bob Graham Chairman June 2008

Memorandum by Highlands Before Pylons Highlands Before Pylons is a campaign group based in Ullapool in North West Scotland, set up four years ago to counter proposals for a new overhead transmission line across Wester Ross. This new power line is planned to be part of an interconnector from Stornoway to Beauly, to be built and owned by Scottish and Southern Energy (SSE)’s subsidiary company Scottish Hydro Electric Transmission Limited ( SHETL), to transmit electricity generated from onshore windfarms in the Western Isles. The points that emerge from our experience and research related to the issues you raise, particularly under points 5 and 6, are: — The external costs of renewable energy, in our case a major overhead transmission line through unspoiled areas of the Scottish Highlands, have been one of the main focuses of our campaign. We are therefore pleased to see this raised under item 6, but feel that the wrong question is posed. This is because the UK needs a mix of electricity generation technologies, with nuclear for base load, renewables for further low carbon generation, and a responsive generator such as coal fired power stations that can vary output to balance the grid as renewable output rises and falls. The real question Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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to ask is how renewable energy can be generated in a socially acceptable way, such that the schemes put forward by the industry do not get delayed in the planning system. This is discussed in the points below, leading on to discussion of the wider points raised in the consultation. — Proper strategic planning for renewable energy development is essential, but is only just being addressed. This has hindered development and led to inappropriate schemes getting bogged down in the planning system. — UK government policy of leaving the developers to decide where and how electricity should be transmitted has led to schemes such as the Beauly Denny upgrade that are not cost eVective or necessary. — If on and oVshore wind turbines are appropriately sited they will be able to make much better use of the existing grid. There seems to be an assumption that they must be built on remote high land or islands involving massive extra costs for transmission and the waste of substantial amount of the generated energy through resistance. — The use of brown field sites close to major conurbations and a properly developed subsea grid around the UK linked to a European supergrid would be the best and most economic way to plan future transmission of onshore and oVshore energy. — It is inconceivable that the UK will meet the EU targets on renewable energy if the UK focuses only on electricity generation. To do this would require that around 50% of electricity be generated from renewable resources, and even the most optimistic analysts do not hold that this amount of intermittent energy can be accommodated by the transmission system. The importance of the capacity factor in power generation should also not be ignored—having 50% of installed generating capacity powered by renewables does not mean that 50% of power generated will come from those sources, due to the intermittent nature of the generation. It is therefore essential that the government also address energy used in transport and heating. — ROCs have led to a rush of onshore wind schemes, many inappropriately sited and in danger of becoming stranded assets as the nuclear power programme reduces the need for England to import electricity from Scotland. The fast profit to be made from onshore wind farms has also led to a lack of industry investment in new oVshore renewable technologies. — ROCs have led to an expectation of quick rewards in the renewables industry which will make it harder for future development to proceed without government support. Feed in tariVs would be a surer way of encouraging domestic installation of solar and photovoltaic panels. — Wave and tidal power are deemed to be technologies of the future, yet Portugal is already deploying a wave generator made in Scotland and a Dutch company is applying to build a tidal generator in the Pentland Firth. In Australia, the CETO wave energy system is scheduled to achieve commercial viability in 2009. Government investment roughly ten times that presently given is required if these technologies are to be taken to commercial viability in a reasonably short time scale in the UK. — The intermittency of renewable electricity generation is a real problem. It has been suggested that coal fired power stations such as Peterhead in Scotland could share grid capacity with wind generated energy as a temporary solution to the “log jam” in the grid. This would involve the owners voluntarily reducing their output on an intermittent basis dependent on the strength of the wind, not always possible to forecast. — Research is still underway, by the John Muir Trust among others, into the true impact of the various forms of electricity generation on carbon emissions. To the layman the emissions from the manufacture of concrete platforms for onshore turbines, the pylon lines, turbine manufacture and transport, the building of roads on the sites and the massive displacement of peat, nature’s carbon sink must be an issue. — With SSE announcing planned expansion into the wind turbine industry in China it is tempting for the UK to look to other countries to meet the target..but essentially dishonest. A requirement by consumers to reduce consumption could achieve this aim. — Landscape is priceless. President Sarkozy in France declared in his first few weeks in oYce that turbines and pylons should not be built in scenic areas. France is engaged in an ongoing millenium project to undergound powerlines. The extent to which various parties within the UK, a small and heavily populated landmass, seem to be willing to sacrifice major tracts of the countryside to wind turbines and pylon lines will seem incomprehensible to future generations. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Footnote:ACautionary Tale We felt that a brief account of our learning curve in getting to grips with transmission issues might be of use to the committee as background information, in particular when you are addressing transmission and distribution networks as outlined in section 5 and 6, but relevant also to other points you are discussing. This is presented below, and although relevant it is anecdotal and local.

Sorting out Fact from Fiction HBP became interested very quickly in the economics of Renewable Energy and the tangled web of government agencies and commercial interests involved. Plans were progressing for three large windfarms on the Island of Lewis. Brian Wilson a former Energy Minister had commissioned a report into the cost of subsea cables to transmit electricity directly to England. The report concluded that the expense ruled this out. HBP’s researches, even at this early stage, showed that the rapidly diminishing price and improved technology of such cables, which could feed directly into the existing grid, set against the expense of creating new overland interconnectors made them a viable alternative. Brian Wilson himself admitted that the previous estimated costs were “gold-plated”. Lewis Wind Power, the company including AMEC, concluded that the best way to transmit electricity south from Lewis was via a subsea cable to Hunterston. This is the company whose scheme to build a huge windfarm at Barvas Moor has recently been rejected by the Scottish Government. Two other windfarms for Lewis are currently in the planning system and have applied for a connection to Beauly, which will involve an overland section from the West Coast to Beauly. HBP investigated the cost of undergrounding the cables and was told at every turn that this would be hugely expensive and involve a “motorway sized conduit”, a myth regularly repeated to this day by representatives of the utilities companies. Modern DC cables occupy much less space and eliminate threats to supply from wild weather and do not endanger health. As a result of our campaign, Scottish HydroElectric (SHETL) a subsidiary of Scottish and Southern Electricity (SSE) has surveyed and will put forward for planning consent in October a subsea and underground DC cable from Stornoway to Beauly.

The Beauly Denny Bandwaggon In the meantime a SHETL proposal to upgrade an existing pylon line from Beauly to Denny ran into massive opposition which led to a public inquiry currently under consideration by the Scottish Government. The pylons are planned to be of a height not seen in the Highlands before and to carve a way south through the Cairngorm National Park. We joined in the objections and took part in the inquiry because by now we had become seriously sceptical about the need for the scheme. The possibility of a subsea grid down the Scottish coasts has now begun to look attractive. The Crown Estates are surveying the East coast. A Highland Industrial Enterprise inquiry concluded it would be viable. There are initiatives underway to build a European supergrid to link existing cables such as NorNed and others. Most recently the National Grid expressed an interest in the possibility of subsea cables south from Peterhead and Denny. We are currently writing to ask why they have left out the logical Northern links from Stornoway and Dounreay. Add to this the possibility spelt out by skilled engineers at the Beauly Denny inquiry of making better use of the existing grid and the need for Beauly Denny goes away. Two questions then arise:

1. Is Beauly Denny part of a strategic plan for transmission? The surprising answer is No. The Westminster Government retains overall control of the grid, the Scottish Government controls planning consent. Ofgem can rule proposals out on grounds of cost to the consumer. National Grid has a monopoly of the grid currently extended to Scottish Power and SSE in Northern Scotland. Westminster is belatedly developing an energy strategy, but UK government policy as spelt out in a white paper in the days of the DTI, is that the developers are best placed to decide where and how energy shall be transmitted. The Scottish Government is now making a bold attempt at a Strategic Planning Framework for Scotland and HBP attended the second round of consultations. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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SPF2 and we were able to point out to the planners that the transmission maps they provided made no sense without the Beauly Denny upgrade which was omitted because the inquiry was still underway. Arrows pointed to subsea links from Stornoway to the mainland and ambitious desire lines for subsea cables elsewhere, but omitted a possible link from Stornoway South. It looked as though the oYcial mind was made up.

2. Who stands to gain from Beauly Denny? You will be aware that Phil Willis of the Select committee on Innovation, U niversities, Science and Skills has recently expressed the committee’s frustration with the delays to Beauly Denny, claiming that it is essential to further progress in the generation and transmssion of renewable energy throughout the UK. What has actually happened is that SSE, a powerful company with interests in both generating electricity on Lewis and currently with a monopoly of transmission in Northern Scotland drew up plans for a series of interconnectors and upgrades which would greatly enhance its regulated asset base with capital from electricity consumers. No alternative schemes were considered as, before the Strategic Planning Framework, there was no forum for discussion of alternatives, only a planning system to accept or reject plans put before it.

HBP’s Conclusion Our conclusion is that if the Scottish government agrees to the upgrade we may be stuck with an inappropriate scheme based on a massive and intrusive pylon line through the Highlands with more relevance to the company’s profits than the UK’s transmission needs. This will have come about through a lack of strategic planning and no in depth consideration of alternatives. It will create a transmission infrastructure in Northern Scotland which will do lasting damage to one of the most remote and scenic areas of Britain. There is an alternative which is for government to ask the developers to go back to the drawing board. An appropriate scheme based on full use of subsea cables and better use of the existing grid would progress quickly through planning. The prolonged controversy surrounding Beauly Denny should encourage both government and developers to avoid rushing into damaging and inappropriate schemes. 25 June 2008

Memorandum by Rear Admiral Robin Hogg and Professor Leslie Bradbury

Introduction This submission deals specifically with “Issue 6” in the Select Committee’s call for evidence. In Devon generally, and in the South Hams in particular, planning applications for Wind Farms have caused widespread concern, both locally by those living in the aVected areas, and more widely by all those concerned with the peace, tranquillity and beauty of the largely unspoilt countryside. Whilst there is general support for the use of renewable energy, the trade-oV between the eVectiveness of Wind Farms on land and their eVect on the countryside has resulted in much misunderstanding and cynicism in the public mind. It was for this reason that I commissioned the attached study by an aerodynamics consultant, Professor Leslie Bradbury, to examine the overall eVectiveness of two typical Sites currently being applied for in the South Hams: one at the New Town of Sherford and one close to a remote rural community near Kingsbridge. His brief was to provide a balanced overview of the contribution made by Wind Farms to national power generation. This was to enable us to make a coherent cost-benefit analysis of the likely utility of these proposed Wind Farm Sites, set against their undoubted damage to the landscape and the wide enjoyment of it by all those who live in or visit the area. His conclusions have nation-wide relevance.

The Results I attach Professor Bradbury’s report as a contribution to the debate but several key factors emerge that would, I hope, inform and influence their Lordship’s discussions: — Wind Turbines are inherently low energy sources and intermittent generators of electricity. Unless they are very large; typically with rotor diameters in excess of 90 metres demanding overall heights of around 120 metres and are sited in areas where there is suYcient predicted wind, they will not be eVective. These sites tend to be in elevated areas and, by definition, highly intrusive to the landscape. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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— For a wind turbine to be viable it needs to be erected in a position where there will be a “guaranteed average minimum wind speed of a 7.5 metres/second or above”. It follows that any application to erect a Wind Farm that cannot guarantee such average Wind Speeds should not be considered. Such a limitation should form part of Planning Law. — The technology and economics of wind power dictate that Wind Farms of less than 10 Turbines are not cost-eVective. Small groups of turbines make little practical or economic sense unless forming part of a coherent industrial or business enterprise. — Wind Farms make quite unreasonable demands on the environment in terms of land usage, typically requiring 1,000 times the land area of a single fossil fuel generation plant of the same generating capacity. — Major cost-drivers tend to be: gaining access to the National Grid, the need for numerous turbines of very large size to make the investment viable and the lack of sensible Planning Guidance in PPS 22 and its extension. — All investment in renewable energy involves “Trade-OVs” of one sort or another, whether it is for the application of Nuclear, Hydro-Electric, Wave or Wind power. Electricity generation using wind power is the only one of these technologies that cannot, by definition, contribute to Base Load, relying as it does on an unpredictable and unreliable source of energy. Any wind energy contribution must, therefore, be judged more critically for its eVects on the environment when proposals to construct wind farms on land come forward. In submitting this short technical appraisal for your Lordships consideration we would strongly argue that an absolute minimum technical and planning requirement should be imposed on all applications to erect wind farms in England and Wales and that these limitations should form part of future Planning Law. This minimum technical requirement should be: — Any proposed Wind Farm site on land should have an average wind speed of at least 7. 5 metres per second. — No Wind Farm application should be considered involving less than 10 turbines. — As a general rule, no Wind Turbine should be allowed within two kilometres of an habitable building unless linked to a coherent industrial or business enterprise. — Bearing in mind Wind Farms excessive demand for land usage, the intermittent nature of the power generated and the unavoidable impact on the landscape, all future planning applications should be forced to give greater weight to environmental considerations.

“WIND FARMS”—THEIR PLACE IN THE DEMAND FOR RENEWABLE ENERGY

Summary This note deals primarily with issue 6 in the Committee’s Call for Evidence document.

How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations? The present scheme whereby landowners can approach power companies to install wind turbines on their land is creating anarchy in the development of wind power in rural areas and, for that matter, elsewhere. It is resulting in large numbers of planning application disputes which are causing aggravation and costs to rural communities and, at the same time, encourages applications that would, in any case, make a negligible contribution to the nation’s “renewables” power targets. The origin of this problem is vagueness in planning guidelines (like Planning Policy Statement 22 and its extension) and the fact that the Renewables Obligation Certificates make it attractive for power companies to install even relatively small numbers of turbines on sites that from a technical standpoint are not suitable in terms of the wind characteristics. In the long term, this could add significantly to the cost (as much as £10 billion) and the number of turbines (up to 50% more) necessary to meet the “renewables” targets. This problem is discussed in this submission and it is suggested that the planning guidelines and the overall planning process need modification to avoid these problems. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Some comments will be made about the relative environmental impact of fossil and nuclear power stations compared with wind turbines and it will be argued that the planning system is not striking the right balance at all and that more precise criteria need to be met before planning applications should even be considered.

1. Basic Data used in this Submission — Electrical power production in the UK in 2006 was 44,000 megawatts. — A typical coal or gas power station has a rated output of around 1,000 megawatts. — The submission mainly uses a 90-metre diameter wind turbine that has a so-called rated output of 2 megawatts as an example of a design that is likely to be most common for on-shore developments in the future. These stand about 120 to 140 metres from base to rotor tip. In the context of wind turbines, “rated” output does not mean deliverable power as it does with a conventional power station. Deliverable power is about a third of this and is a function of the hub mean wind speed as will be shown below. — The area occupied by a 2 megawatt rated turbine is taken to be 0.16 square kilometres (ie a square of 0.4 x 0.4 kilometres). — The cost of installing wind turbines is taken to be £1 million per rated megawatt for wind farm installations (say, 10 turbines or more) and £1.25 million for installations of one or two turbines.

2. Output Power from Typical Wind Turbines as a Function of Mean Speed

It is important to put numbers to our argument and so to set the scene, figure 1 contains calculations of the output of three wind turbines over a range of mean wind speeds from 5 to 10 metres per second. They are based on commercial designs. The first is a 52 metre diameter rotor that has a so-called rated output of 850 kilowatts. This unit is rather typical of the early units on wind farms in Cornwall and elsewhere. The actual power output from these turbines is very low at around several hundred kilowatts and they have made a negligible contribution to the “renewables” target and so should not be considered in any future planning applications. The other two turbines are more typical of recent designs with rotor diameters of 90 metres and 126 metres giving rated outputs of 2 megawatts and 5 megawatts respectively. The larger is a massive structure and probably suited only to oV-shore developments. Thus, we are going to use the 90 metre 2 megawatts design in our submission as it will almost certainly be typical of the bulk of the on-shore units to be installed in the future around the UK. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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3. The Impact of Mean Wind Speed on Turbine Numbers,Area Covered and Costs If we take 20% of the UK’s electricity output for 2006 as an ambitious and long term guide target for wind power (ie 8,800 megawatts) then table 1 shows the impact of mean speed on (i) the number of turbines necessary to meet this target, (ii) the area they will occupy in square kilometres (iii) the overall cost and (iv) the cost per kilowatt-hour of the electricity produced. Also shown for the cost data is the influence of installing wind turbines in farms of, say, 10 or more as against installing them in small clusters of 1 to 3.

Table 1

INFLUENCE OF MEAN WIND SPEED ON TURBINE NUMBERS AND THE OPERATING COSTS OF WIND POWER

Cost per turbine (10! Cost per turbine Total power Life of turbine windfarm) (1 to 3 units) (megawatts) (years) (£M) (£M) 8,800 20 2 2.5

Pence per Cost (£ Cost (£ Pence per kilowatt-hour billions) for billions) for kilowatt- hour for small Mean wind Mean power Area covered high number small number for high number number speed per turbine Numbers (square wind farms installations wind farms installations (metres/sec) (kilowatts) needed kilometres) (10!) (1to3) (10!) (1to3) 6.5 638 13,793 2,207 27.6 34.5 1.79 2.24 7.5 802 10,973 1,756 21.9 27.4 1.42 1.78 8.5 932 9,442 1,511 18.9 23.6 1.22 1.53

Because there are no quantitative planning guidelines on the wind speed of sites, many on-shore planning applications are made where the mean wind speed is 7 metres/second or less. As can be seen from the table, this sets a bad precedent because it will lead to far more turbines than are necessary if only sites with wind speeds greater than, say, 7.5 metres per second were considered as suitable. The consequences of this are that the wind power contribution to our overall power needs will be far more intrusive than it need be and at a far higher cost. As an illustration, if we take the extreme cases in the table of 6.5 metres per second and 8.5 metres per second, the extra costs are of the order of £10 billion for 50% more turbines. In addition, many of the rural sites being considered would contain only small numbers of turbines and this contributes further to the cost increment. From an examination of the wind map of the UK, there is no shortage of good sites both on-shore and oV-shore but a more pro-active planning process is needed to ensure that they are used sensibly. Relying on the randomness of landowners striking contractual relationships with power companies is not the way to do it.

4. Proposal With some particular exceptions referred to later, planning permission should not be considered for on-shore wind turbines unless the wind characteristics of the site meet some minimum standard. The suggestion is that this should be set at a minimum of 7.5 metres per second at the turbine hub height. In addition to this (also with some specific exceptions), planning permission for sites of less than, say, 10 or 20 turbines should not be considered. By virtue of their scale, these larger sites should therefore be reasonably remote from residential areas. Many do not appreciate that the requirement from “renewables” is not only that they produce “green” energy but they also have to produce electrical energy on an industrial scale. This is not going to be achieved by random small-scale developments but by properly sited large-scale wind farm developments. This is self- evident in oV-shore developments but it applies equally well but—with more diYculty—to on-shore developments too. In this context, it should be noted that according to the latest British Wind Energy Association database, there are now a total of 2,032 wind turbines installed in the UK (both on-shore and oV- shore). The rated output of these is given as 2,545 megawatts. If we assume a power factor of a third, this gives a real output of about 850 megawatts—still less than one conventional power station! Even this comparatively Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

346 the economics of renewable energy: evidence small contribution to the nation’s power has caused an inordinate number of planning disputes and, unless the planning guidelines are modified, the whole development of wind power will become mired in a continuation of this process.

5. Comment on the Proposal One of the Catch-22 aspects of wind power is that areas like cliVs, hilltops and elevated terrain generally will have the most suitable wind characteristics and these are often areas of the greatest natural beauty and the most visible sites from afar. However, whilst the visual impact of wind turbines is a subjective issue, most would acknowledge that they are not too intrusive when viewed from a distance compared to, say, electricity pylons and other tall structures that litter the countryside. On the other hand, because of their great height and the dynamic eVect of the rotors, their near-impact can be very invasive and can seriously detract from the attractiveness of, say, a rural village area.

6. Exceptions to the Proposal There are many industrial sites and estates on which small numbers of quite large turbines have been erected. These are mostly privately sponsored by the company or companies on these sites. Good examples of this are Avonmouth Docks (3 x 82 metre 2 megawatt turbines) and McQuains Oven Chips, Whittlesey (3 x 90 metre 3 megawatt turbines). Even when they are not particularly wind sites, these types of developments should not be discouraged because (a) they create no environmental or aesthetic problems, (b) they are invariably close to points of connection to the grid and so are comparatively less expensive than similar developments in rural areas and (c) they enhance the “green” credentials of the developers.

7. Consequences of the Proposal If the above guidelines were incorporated formally into planning guidelines, it would at a stroke remove most of the contentious planning disputes such as characterise those proposals in rural areas and also those low- wind sites such as fenland areas. It would stop planning applications being made on small farm land plots adjacent to rural villages and it would concentrate eVorts on those sites that oVered a real contribution to our industrial power requirements as opposed to the almost token-like contribution that is a feature of many of the existing developments.

8. Visual Impact in Rural Areas of Wind Turbines Compared to Fossil Fuel or Nuclear Power Stations The overall impact on the environment of diVerent forms of power generation is a complex issue but we are here just concerned with the basic visual impact in terms of the land area occupied by the diVerent power sources. The site of a typical 1,000 megawatt nuclear power station occupies around 0.5 to 0.7 square kilometres (123 to 173 acres) whereas a gas turbine power station with a similar output occupies 0.2 to 0.25 square kilometres (50 to 60 acres). In the case of nuclear power stations, they are invariably sited adjacent to the seashore because of the need for large amounts of cooling water. These sites can be selected so that their overall visual impact is very small. The visual imprint of gas turbine power stations is even smaller and, because cooling water is not required, they can be sited even quite close to urban developments without making a noticeable impact. A simple screen of trees will almost entirely disguise their presence. To generate 1,000 megawatts of wind power on shore using a 2-megawatt rated turbine will require between 1,250 and 1,500 turbines and they will occupy about 200 to 240 square kilometres (50,000 to 60,000 acres). Thus, there is about a 1,000:1 diVerence in the land usage and, unlike a fossil fuel or nuclear power station, this number of turbines would be visually very self-evident. It should be stressed that there are many hidden environmental eVects from conventional power stations beyond their straightforward visual impact whereas the environmental influence of wind farms is almost entirely related to their visual impact. Nonetheless, as the basic sum shows, this is not trivial and it is yet one further factor making oV-shore wind farms a more attractive option than on-shore ones. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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9. Local Examples to Illustrate Inappropriate Wind Turbine Planning Applications For background, Devon uses an average power of about 655 megawatts. Until recently, the county had no significant conventional power stations but, from late 2008, a new Centrica gas turbine power station just north of Plymouth is due to come on line giving an output of 878 megawatts. The South Hams area of Devon is a particularly attractive and rural part of the county. As yet, it is free of any wind farms but there are two proposals currently in place which, if approved, would set a very bad precedent for the future.

9.1 Sherford new town Sherford is a new town of 5,500 homes to be built east of Plymouth and to the eco-town specification. The plan includes provision for just two wind turbines rated at 2 megawatts that will stand in a parkland area within about 500 metres of the easternmost edge of the town. From base to tip, they would be about 120 metres in height. Based on the best wind speed data available, these two turbines would have a combined average power output of about 1.2 megawatts. No estimates of the overall power requirements of the town are to be found in the planning applications but a reasonable estimate is that it will lie in the range 6 to 8 megawatts. The inclusion of the turbines in the plan seems to be driven by concepts of local sustainability but, in the matter of electrical power, this is not sensibly achievable with wind turbines. The proposed town lies about one kilometre from the new gas turbine power station mentioned above.

9.2 East Allington, near Kingsbridge There is a hotly disputed proposal for three turbines to be erected on farmland in an area of attractive rolling countryside adjacent to three villages. It is an elevated and fairly windy site and the three proposed turbines would have a combined output of between 1.3 and 1.6 megawatts. Their base to tip height would be around 100 metres. This example would set an extremely bad precedent for the whole of South Devon. Once again, the power output would make an entirely negligible contribution to the county’s power needs (let alone the country’s) and yet it will impact on the ambience of the three villages in an entirely deleterious way. On page 8 of PPS22, there is the following paragraph: “(vi) Small-scale projects can provide a limited but valuable contribution to overall outputs of renewable energy and to meeting energy needs both locally and nationally. Planning authorities should not therefore reject planning applications simply because the level of output is small”. This is typical of the vagueness of the planning guidelines and it is leading to some frankly absurd planning applications that totally fail to address the real problem of providing industrial scales of power from “renewable” sources. The guidelines need to be rewritten to reflect that the “renewables” target represents a major engineering undertaking in which there is little place for ad hoc small-scale developments. 16 June 2008

Memorandum by Mr Robert Horler I understand that the Select Committee on the Economics of Renewable Energy are gathering evidence on the feasibility of Renewable Energy. Whilst I am not suggesting I am an academic expert on the subject I did work as an engineer for the National Grid Company for over 30 years, I have subsequently retired. My experience is based on many years in the Grid Control Centre and therefore on the day-to-day operation of the grid system. The vast majority of people have no idea how the electricity system works and that includes many of the people who are currently making decisions on future sources of energy. Therefore, might I respectfully suggest, before you try to evaluate the feasibility of any renewable energy source you arrange a visit for your committee members to the Grid Control Centre at Wokingham. This will enable you to understand the very delicate balance of matching generation to demand on a minute to minute basis. You will then be able to assess for yourselves the impact on the functioning of the Grid System of the various renewable energy sources. Renewable energy comes in various forms, Solar Power, Photo Voltaic, Hydro, Tidal, Wave and Wind energy. They all have a role to play but are too small, too expensive and too unpredictable to play a significant role in the future energy needs of our country. Solar and Photo Voltaic could be considered as part of a demand reduction drive. More generous grants should be forth coming to assist households to install these schemes. Perhaps making them zero rated for VAT. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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All or nearly all feasible sites for Hydro have already been used. As fuel cost rise more Hydro sites may become cost eVective, but even then very small amounts of generation would be available. France who have a much bigger Hydro potential than the UK still only generate 15% of their demand from Hydro.

Tidal and Wave schemes have very low availabilities due to rotation of the tides and weather availability, and could quite likely not be available when the demand is at its highest.

This leaves wind power and this represents the biggest misunderstanding of all. ( Some would say Scam ). Wind energy is not green and is responsible for the production of C02 when connected to the grid system. Because it is of such a variable nature any wind generated energy has to be backed up with conventional fossil fuelled plant running partly loaded. This of course results in C02 emissions and extra cost.

The back up cost needs to be added to the cost of the wind energy to give the true cost. Something the wind farm developers conveniently forget to do. On average there are fifty days in the year with no wind at all. There are other days when generation is not possible because the wind not strong enough or too strong. It is not uncommon in this country to experience a high pressure over the UK in the middle of winter. This can result in very low temperatures causing the highest demand of the year and no wind to drive the turbines. At best wind power has 24% availability, which means that a wind farm of 100MW installed capacity will on average only generate 24MW.

As a general rule the grid system developed with the sources of generation reasonably close to the areas of high demand. Now wind power is situated in extremely remote areas with long, sometimes tenuous links to the main grid system. This results in increased line losses and an increased possibility of system stability problems. In the event of faults on the grid system caused by perhaps bad weather, any wind turbines connected to the system will shut down, possible making the fault situation much worse and increasing the risk of loss of supply.

In addition these vast structures which can be well over 400 feet tall are being sited in some of the most beautiful countryside in the whole of the UK. The eVects on wildlife, water courses and on the peat that’s being destroyed are all played down by the developers who want to reap the rich harvest of subsidies. There are also health problems associated with wind turbines especially from the eVects of low frequency noise.

The current situation regarding the supply of coal gas and oil must be a cause of great concern to those responsible for the security of electricity supplies in the UK. I’m sure you are all aware of how politically unreliable our suppliers of fossil fuels are and it needs very little imagination to picture the worse case scenario of major blackouts in the UK. However, the case for coal has changed dramatically over the last 10 years and with the advent of eVective de-sulphurizing plant and improved filter systems coal has become a much cleaner source of fuel. Indeed I understand the German Government has recently given approval for five new coal fired stations to be built. France has shown what an eYcient clean source of energy Nuclear Power is. The government should now go all out on the next nuclear programme. It should review the coal situation and the clean technology now available. It needs to redirect the £30 billion subsidies being poured into the wind developers pockets and direct it to assisting householders to insulate eYciently and install solar and photo voltaic units in domestic properties,

In the global economy in which we live we simply cannot aVord to have the most expensive energy in Europe. Therefore the myth that large scale wind power is the way forward must be refuted. 2 June 2008

Memorandum by the House of Bishops’ Europe Panel, Church of England

1. The House of Bishops’ Europe Panel is a sub-committee of the House of Bishops. It acts as a point of reference for items aVecting the Church of England’s relations with Europe and the European Union institutions.

2. The Europe Bishops’ Panel (EPB) welcomes the opportunity to contribute to the inquiry on the economics of renewable energy. The review is an important part of the process for facilitating the necessary increases in the use of renewable sources of energy in the UK energy industry and therefore essential not only to our eVorts to protect the environment but also to mitigate the eVects of climate change on the marginal communities of our world. The EPB therefore welcomes this work as part of the task shared by humanity to act as careful stewards of God’s creation and to care as a neighbour for those in need. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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The Costs of Renewables 3. Government policy on renewable energy and in particular the rate at which its uptake should be increased is currently being shaped by the EU target that 15% of energy consumed in the UK should come from renewable sources by 2020. We note that Mr Malcolm Wicks, Minister of State for Energy at the Department for Business, Enterprise and Regulatory Reform, has produced initial assessments suggesting that the direct cost to the UK of meeting a 15% target will be at least £5 billion per annum by 2020, in addition to indirect costs in the form of higher energy prices. 4. We recognise that higher energy prices are likely to have the eVect of incentivising reduced levels of consumption, and will therefore contribute to meeting UK targets. However, we are concerned at the eVect this will have on the numbers experiencing fuel poverty and on the levels of hardship experienced by those already in fuel poverty. We recommend that the inquiry and future policy following on from it should both calculate and explicitly take into account the eVect of meeting our renewables target on the numbers experiencing fuel poverty and the economic impact on those already experiencing fuel poverty.

Local and Global Communities 5. Meeting the targets set by the EU will require a fundamental change not only in the structure of our generation capacity and our energy industry more broadly, but also in the way we perceive our own energy use and the extent to which individuals and industries alike are empowered to make changes to their patterns of consumption and to the sources they use. We recommend that the government harness the power of local communities to shape public opinion by removing the existing barriers to developing microgeneration capacity, in particular by facilitating the sale of surplus energy into the Grid, and by oVering economic support to renewable microgeneration projects run by churches, schools and other community organisations. 6. The experience of the diYculties faced by St Aldhelm’s Church, Edmonton, in selling the surplus electricity generated by their church hall photovoltaic generation project demonstrates the diYculties faced by small generators. It also shows that substantial amounts of eVort and commitment are available for community energy projects. St Aldhelm’s estimate that they lost between six and nine months of revenue due to a combination of: the lack of guidance from Ofgem, even on basic matters such as how to sell their electricity and the need for an export meter; diYculties in arranging authorisation of their export meter; and a bureaucratic system that was clearly designed for very much larger generators. 7. The fundamental basis for an increase in our use of renewable sources of energy is the need for the world’s population to live sustainably. Our current use of fossil fuels is unsustainable in the long term through the ultimately limited nature of such resources and the increased diYculty and cost associated with extracting progressive quantities of such fuels. More urgently, however, we are also now aware of the short and medium term social and environmental unsustainability of our current patterns of consumption as a result of climate change and its eVects on marginal communities in the world’s poorest regions. 8. We note with concern the IMF’s recent conclusion that an increased demand for biofuels has been partially responsible for substantial recent increases in world food prices. We recognise that the global social and economic costs that could arise from instability resulting from a sustained level of increased food prices are substantial. We note that the IMF recommends the removal of EU and US subsidies and tariVs on imports of biofuels as of benefit to the environment and to the economic viability of renewable energy by switching the likely source of biofuels to lower-cost producers using a diVerent mixture of crops. 9. We therefore recommend that the inquiry place a high priority on establishing the likely global social impacts of any particular economic system of support for renewable production and use within the UK. We recognise that the Church Commissioners, through their land holdings, have a significant stake in UK agriculture and may benefit from increased food prices. Nonetheless, in response to the concerns raised by the IMF, we also recommend that the inquiry consider the eVect that the removal of EU subsidies and tariVson biofuels would have on the economics of renewable energy and the potential for its increased uptake in areas other than electricity generation.

Harnessing Technological Creativity 10. We note that within the EU target, there is the option for UK investments in renewable energy in other EU member states to be counted towards the UK target under developments to the Guarantee of Origin Certificates system. We welcome this development both as an opportunity for the UK to develop a lower-cost renewables policy than might otherwise have been possible and also as a source of valuable investment in the economies of lower-cost member states. Alongside this we recognise the substantial creativity available within Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

350 the economics of renewable energy: evidence

UK research and industry, and the potential it has to contribute to the global availability of low-cost solutions to the need for the increased use of renewable energy. 11. We therefore recommend that the inquiry consider the most eVective economic basis for supporting and promoting such technological development alongside its eVorts to establish an acceptable economic basis for meeting the target set by the EU within the challenging timeframe associated with it. We consider that the aim of becoming technological leaders in renewable energy development would be of value to our own economy as well as supporting the necessary global challenge of developing renewable energy sources. We recognise the role of the Carbon Capture and Storage demonstration project competition as part of such a technological strategy and recommend that the inquiry consider the economic framework for extending such support for innovation. June 2008

Memorandum by W J Hyde

Summary Infinite renewable Energy is available if cost is not a consideration. But renewables are guaranteed to fail to meet our need for Power, however much is spent. Thus, regardless of renewable build, we must have enough traditional power to supply our peak load on a winter’s evening in the dark. Solar power is then zero, and, when the UK is enveloped by an anticyclone, wind and wave power will deliver only a tiny fraction of what it says on the label, maybe zero. At some states of tide, tidal power too, can be zero, or near. The problems of renewable generation technologies lie in the basic immutable scientific principles on which they are based. Nobody will build renewables without subsidies, which demonstrates their economic weakness. Fossil fuel prices will undoubtedly escalate, and nuclear is already economically viable, with oVers from the private sector to build without subsidy. That technology has every prospect of very considerable development. The attractions are indicated by the number of nations who are going down that route, including our competitors in the world’s market places. The anti-nuclear lobby is led by many who believe they are on a crusade, and are not open to reason. They seem ignorant of the basics of the technologies they argue about, and carry no responsibility for supplies of energy to UK homes, businesses and essential public services. When shortages are artificially created to put the prices up it is usually frowned upon. In the case of electricity, the UK government is putting up the prices to subsidise technologies that will create shortages, and are ultimately economically unsustainable.

Reducing fossil bum and emissions of CO2 is the real target. Sub-optimising to a target of maximising renewable generation is a serious mistake. It has been likened to pursuing motoring economy by sub- optimising to an mpg target. That can lead to a 60 mile journey via motorways where high mpg can be achieved, to avoid a 10 mile route to the same destination, using unclassified roads, where mpg will be less. We should reduce fossil bum, for several reasons. Sub-optimisation of that to a target of “renewables” is ludicrous, as Germany shows. Seeking to boost nuclear to cut CO2 emissions is the only sensible way, as the French experience shows. Renewables cannot give us the supply reliability we need without traditional backup. If that is nuclear, which needs no subsidies, we don’t need subsidised renewables. The enclosed presents the detailed arguments, together with three wind power charts I have prepared from Met OYce data during the 07–08 winter.

Realities of Renewable Electricity Generation 1.1 WEATHER SYSTEMS and the WIND RESOURCE: Anticyclones aVect the UK in whole or part several times each year, winter and summer, and give rise to light winds. They are large and slow moving, and often aVect us for some weeks, in part or whole. On occasions one will cover an area from the Azores to the north Baltic, to the White Sea, to Turkey, covering all Europe and the Mediterranean. Look at your newspaper’s daily weather map for widely spaced isobars. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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1.2 Depressions are smaller and move faster, mostly coming across the Atlantic. While they are usually gone in three or four days, another often follows close behind, with short periods of light winds between successive systems. They also have light winds in their centres, “the eye of the storm”. No weather system gives us consistent wind speeds in the full power range. 1.3 The potential UK wind power can be calculated from the hourly Met OYce wind speeds published on Ceefax 404. I have noted figures at 8 am, 1pm, and 7pm, added 20% for tall windmills and short anemometers, and then applied the cube law, (bwea.com), to get Kilowatts. The results for Oct 07, Dec 07 and Feb 08, typical of recent winters, are shown on the attached charts. For periods of about a fortnight, aggregate UK power was about 5% of that installed, with dips below 1% on some days. 1.5 The total energy output of a UK-wide wind installation is about one quarter of what would produced by conventional generation of the same capacity running at continuous full load. 2.1 I would recommend careful attention to the precise meanings of words in the report on “Wind Power and The UK Wind Resource”, published by the Environmental Change Institution, (copy from 01865 275 848). It includes the following statement, with my emphases: “Large wind turbines do not generate at speeds below 4m/sec, and so all winds below this speed are included in the definition of ‘low wind speed conditions’” And, “There was not a single hour during the study period where wind speeds at every location across the UK were below 4m/sec” 2.2 The ECI table for the Nordex80 2,500 KW machine shows it delivering 15 KW at 4m/sec. So if just one in the UK armoury was doing that, then all is well? And is 4m/sec regarded as a low wind speed? It seems not. 3.1 The British Wind Energy Association web site, bwe.com/ref/stop/html contains the following item, which I would also recommend reading with close attention to exact meanings. “Winter anticyclones These it is alleged, frequently becalm the whole country, and will cause problems for the system operator, due to the absence of any wind power, especially at periods of peak demand Two points need to be made: Neither the Renewable Energy Foundation, nor any reference cited by them, have ever produced evidence that this occurs regularly. The Environmental Change Institute at the University of Oxford, was quite clear in appearing before a House of Lords Select Committee that “we have looked at this [stationary anticyclones in the middle of winter over the British Isles] occurring in the wind data, and the wind data does not show it.” 4.1 SOLAR: The tilt of the Earth’s axis reduces winter solar energy reaching UK latitudes to about one sixth of summer level. The 24 hour rotation reduces it to zero, sunset to sunrise. Crucially, it is always zero at the time of annual maximum demand, winter, around 6pm–7pm. 5.1 WAVES: Wind is an important contributor to wave height: big waves and light winds seldom come together. The Pelamis “sea-snake” is being trialled oV the Orkneys. The maker’s figures say that 100% full power needs a wave height of 5.5 metres and a wave period of 6.5–8.5 seconds. If the wave height is 1.0 metre and the wave period is 5.5 seconds, the output is under 3%. The emphasis on wave period suggests that wave periods outside the specified range will give reduced output. See Review, Institution of Electrical Engineers, September 2002. 6.1 HYDRO-POWER: The most useful UK sites have been developed. Although more may become economically feasible as fossil fuel prices escalate, there are few. France, with much more mountainous terrain, can only manage about 10% of electrical energy from hydro. 7.1 SEVERN BARRAGE: This has been predicted to achieve a load factor of 22%. That implies long periods of zero or little output, determined by the moon, not our needs. The River Rance barrier, built by the French about 40 years ago, has never been copied. 8.1 GAS FUELLED GENERATION: About 30% of the cost of gas-fired electricity can be attributed to the power station itself. The other 70% is the cost of the gas, government figures, 2006. Fossil fuel costs are expected to rise as world demand increases. 8.2 Thor Otto Lohne, executive Vice-President of Norwegian pipeline co, Gasco, said that long-term contracts to supply mainland Europe meant the UK could not always rely on Norwegian gas exports, regardless of the price we were prepared to pay, Observer Business, 20 April 08. Processed: 17-11-2008 19:38:20 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

352 the economics of renewable energy: evidence

8.3 CARBON CAPTURE and STORAGE: CO2 never decays, ever, and will be a threat for all eternity, should it escape. It has been used to flush out oil wells. Does it leak? Has anyone checked? Has the world enough storage space for the decades to come? I am highly sceptical. 8.4 SECURITY of SUPPLY: Renewables will always fail to deliver more than a fraction of their power rating at peak load times, and will give significant periods of low or zero output. That is why wind-power champion BWEA, says we need gas or nuclear “when the wind stops blowing”, bwea.com. We can store gas to last several days, nuclear fuel to last us for years. 9.1 NUCLEAR GENERATION: Nuclear power stations are expensive to build, their fixed charges constituting 90% of the price of the electricity produced. The uranium costs about 1.5%, while processing and final dismantling and disposal make up the remaining 8.5%. Thus nuclear electricity is not sensitive to the price of uranium, which comes from stable parts of the world, Canada and Australia. 9.2 Sir David King, previously Government Chief Scientist, said, “We can bury nuclear waste or use it as free fuel for life. We have 6 tonnes of plutonium and 60 tonnes of uranium “waste” left over from the 50s and 60s which could provide 60% of our electricity needs until 2060. Burnt in modern reactors, it will last to 2100”, Observer, 23 December 2007. 9.3 The Scientific American, December 2005, published an article by Hannum, Marsh and Stanford, describing fast reactors, which, combined with electrolytic high temperature processing, would enable over 95% of uranium’s energy to be utilised, compared with the 5% of existing thermal reactors. They say that means we would “not need to mine any more uranium for hundreds of years”. On-site re-processing avoids the enrichment stage, the first step towards nuclear weapons. Among other advantages is the reduction of the waste problem. 9.4 NUCLEAR DELAYS: The Greens dragged out the Sizewell B inquiry far beyond the two years it should have taken. When it was finally approved, it was built “in the public sector within budget to program”, using direct placement of contracts. No third party had overall project management, against the government policy laid down in December 1979. The contract and industrial relations strategies used had been developed at Drax and Heysham II, per Dr Lomer, CBE, formerly board member and director, CEGB. Thirty years later, with EDF experience, the build time, under eight years, should be easy to beat. 9.5 NUCLEAR GENERATION POTENTIAL: The UK winter maximum demand is around 63,000 MW, including about 12,000 is nuclear. I pay EDF 12.64p/KWh, for daytime electricity. As demand diminishes after evening peak, the most expensive generators are shut down successively, until only the cheapest are running, to supply a night-time 30,000 MW. 9.6 That includes all UK carbon-free nuclear stations, supplying nearly half the night-time demand, with the best fossil stations supplying the rest. EDF supplies this electricity for my storage radiators and hot water. It costs me 4.1p/KWh. 9.7 Retro-fitting a storage radiator system costs little more than a replacement gas boiler. Premises far from gas mains, currently burning fossil oil or coal, could do it now. In new houses the concrete floor slab can be used for heat storage, freeing up living space, wall space. 9.8 Thus a substantial part of our gas demand for heating can also be eliminated, transferred to nuclear power. There are no additional costs of transmission or distribution, as the system is being under-used at oV- peak times, by definition. Indeed, switching blocks on and oV by radio enhances the Control Engineer’s opportunities to optimise system loadings. 9.9 If fuel cell powered transport can be successfully developed, nuclear powered electrolysis could produce the hydrogen. It is probably wishful thinking to imagine a domestic hydrogen generator to fill up your car. Probably. 10.1 OTHER NATIONS: Nuclear stations are being planned or built in Algeria, America, Brazil, Bulgaria, China, Egypt, Finland, France, India, Iran, Japan, Malaysia, Morocco, Myanmar, Namibia, Pakistan, Qatar, Russia, Thailand, United Arab Emirates and Yemen, according to press reports. All are potential competitors for inward investment and trade. 10.2 ADVERTISING THAT MIGHT MISLEAD: The statement that a wind-farm will supply enough “to power some thousands of homes” is an extremely common example of ignorance. Clearly, renewables can produce any amount of electrical energy you want, just keep building until you get there. But no amount will ensure that the power is there—when you want it. If it isn’t the lights go out. 10.3 EUROPE: Germany has 50% bigger population than France, and burns more than three times the gas. Germany has the most generous renewable subsidies in the developed world, and thus more renewable generation installations, although a poorer wind regime, and hence a worse capacity factor, under 20%. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 353

10.4 France has over 85% nuclear generation, and emits 6 tonnes of CO2 per citizen, although exporting 2,000 MW to the UK most days. The UK has under 20% nuclear and emits 11 tonnes of carbon per citizen, in spite of French nuclear imports, 2,000 MW most days. 11.1 AMENITY: Which would you prefer in your county, a nuclear power station on or beside the old one being dismantled; or a fossil station plus some hundreds of wind turbines on 300 ft towers, with a rotor diameter of 250 ft, with tip speeds up to 160 mph. If turning. 11.2 RESPONSIBILITY: Who will you hold responsible if we find ourselves in South Africa’s position, expecting regular power cuts for the next five years? A: the Government, B: the Greens, C: the private companies for not risking their shareholders money? 12.1 ECONOMICS: The low outputs from wind and waves are a consequence of the fundamental physics of hydrodynamics, not amenable to development. Solar and tidal generation is limited by the structure of our Solar system, equally immutable. ROCs constitute a tax which increases fuel poverty, to subsidise renewables which will never be able to stand on their own financial feet. Feed in tariVs will force suppliers to buy uncertain supplies at retail prices, increasing fuel poverty. Is there a strategy for the day when reality arrives, and subsidies have to be withdrawn? 12.2 All renewables suVer from the economies of scale. A 600 MW generator will deliver more energy per tonne of copper than 200 generators of 3MW, even if they could run 2417 at full power. Actually, the typical wind power capacity factor is 25%, requiring 2,400 MW of those small generators to match the energy output of one 600 MW machine. Even then, power cannot be guaranteed—wind might be light, or below cut-in speed. 12.3 The private sector will build Nuclear to produce C02-free electricity, with no subsidy. It competes with renewables, which the private sector will NOT build without subsidies. Indeed, they want bigger ones. 13.1 However much we spend on renewables, we still must have conventional generation to avoid blackouts. If that generation is nuclear, we do not need renewables. They will never be financially competitive, and there will be ructions when the subsidies are withdrawn. 13.2 Some strident supporters of renewables have a near-religious objection to nuclear power. It reminds me of their campaign against Shell’s proposal to dispose of the elderly Brent Spar oil rig in the deep ocean. Shell had listed the unpleasant substances contained in the rig, and said their studies showed that dismantlement on land was environmentally worse than their proposal. Greenpeace refused to accept Shell’s statements, and threatened action. Shell conceded in the face of the threat, and it was dismantled on land. That enabled accurate measurement—Shell was right, and Greenpeace admitted they were wrong. 13.3 The nuclear v renewables argument is more serious, as people will realise, perhaps when darkness descends on houses, hospitals, City screens, supermarkets, bakeries, dairies, and those establishments that make chemicals for water purification. 13.4 James Lovelock has wondered who will pay for removing windmills’ 1,000 tonne concrete foundation blocks. Me too. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

354 the economics of renewable energy: evidence

Aggregate UK Wind Power October 07 Power actually produced by a wind 30.0 machine is given by the formula,

A = RX (W/F)3 25.0 Where A=Actual power produced R=Rating of the generator W=actual Wind speed 20.0 F=Full power wind speed (15m/sec) Based on Ceefax 404 data with 20% mark up for hub height 15.0

10.0

5.0 MW per 100 installed

0.0 0.1.00 1.10.07 2.10.07 3.10.07 4.10.07 5.10.07 6.10.07 7.10.07 8.10.07 9.10.07 -0.5 10.10.07 11.10.07 12.10.07 13.10.07 14.10.07 15.10.07 16.10.07 17.10.07 18.10.07 19.10.07 20.10.07 21.10.07 22.10.07 23.10.07 24.10.07 25.10.07 26.10.07 27.10.07 28.10.07 29.10.07 30.10.07 31.10.07

Aggregate UK Wind Power 1st to 31st December 07 Power actually produced by a wind 60 machine is given by the formula,

A = RX (W/F)3

50 Where A=Actual power produced R=Rating of the generator W=actual Wind speed 40 F=Full power wind speed (15m/sec) Based on Ceefax 404 data with 20% mark up for hub height 30

20 MW per 100 installed

10

0 1.1.08 2.12.07 3.12.07 4.12.07 5.12.07 6.12.07 7.12.07 8.12.07 9.12.07 10.12.07 11.12.07 12.12.07 13.12.07 14.12.07 15.12.07 16.12.07 17.12.07 18.12.07 19.12.07 20.12.07 21.12.07 22.12.07 23.12.07 24.12.07 25.12.07 26.12.07 27.12.07 28.12.07 29.12.07 30.12.07 31.12.07 Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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80 UK Wind Power Feb 1 to 29 2008

70 Power actually produced by a wind machine is given by the formula, 60 A = RX (W/F)3

50 Where A=Actual power produced R=Rating of the generator W=actual Wind speed 40 F=Full power wind speed (15m/sec) 30 Based on Ceefax 404 data with 20% mark up for hub height

20

Percentage of INSTALLED CAPACITY Percentage of INSTALLED 10

0 1/2/08 2/2/08 3/2/08 4/2/08 5/2/08 6/2/08 7/2/08 8/2/08 9/2/08 10/2/08 11/2/08 12/2/08 13/2/08 14/2/08 15/2/08 16/2/08 17/2/08 18/2/08 19/2/08 20/2/08 21/2/08 22/2/08 23/2/08 24/2/08 25/2/08 26/2/08 27/2/08 28/2/08 29/2/08 6 May 2008

Memorandum by the Institute of Physics The Institute of Physics is a scientific membership organisation devoted to increasing the understanding and application of physics. It has an extensive worldwide membership and is a leading communicator of physics with all audiences from specialists through government to the general public. Its publishing company, IOP Publishing, is a world leader in scientific publishing and the electronic dissemination of physics. The Institute welcomes the opportunity to respond to the House of Lords Economic AVairs Select Committee’s Inquiry into “The Economics of Renewable Energy”. The attached annex highlights the key issues of concern to the Institute which have been linked to the specific issues raised in the call for evidence. This response was prepared with input from the Institute’s Energy Sub- group, which includes a range of leading physicists working across the energy sector. The Sub-group reports to the Science Board of the Council. THE ECONOMICS OF RENEWABLE ENERGY

Key Points — The UK has the least renewable energy supply proportion of all European countries, other than some small countries, such as Malta. It is clear that countries implementing a simple feed-in tariV system for electricity (Denmark, Germany, Spain and Portugal with established systems, and now France, Italy and others) have the both the greatest proportional renewables generation and the greatest manufacture of renewables plant. The UK’s competitive energy markets and Renewables Obligation Certificate method have not induced significant new renewables capacity, perhaps because the UK’s approach is extremely complicated and expensive to administer. — Given the likelihood that renewable energy is the only resource capable of providing the amounts of energy that will be demanded by the middle of the century without excessive carbon emissions, it is imperative that the UK government (i) removes remaining barriers to the realisation of the technology, and (ii) establishes the best financial mechanisms for rapidly increasing renewables markets. — Therefore, the UK would greatly benefit by adopting a straightforward feed-in tariV system for electricity, which is clearly the most successful method in the EU for increasing renewables generation and associated manufacture. — The Institute stresses the importance of harnessing solar energy via photovoltaics. Photovoltaic solar electricity is already commercially viable, but far greater eYciency at much less capital cost is likely from sustained and well-financed research. These solid-state components have no moving parts and no operational emissions, making the technology eminently sustainable. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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1. How do and should renewables fit into Britain’s overall energy policy? 1.1 Renewable energy technologies are zero to low-carbon energy sources for heat, fuels and electricity, which reduce dependence on fossil fuels. In general, they enhance diversity in energy markets, secure long-term sustainable energy supplies, reduce dependency on imported energy, and reduce emissions of air pollutants. A major use is for grid electricity, for which in conjunction with load management and storage, they can also contribute to stand-alone oV-grid systems. 1.2 Renewables are therefore an essential part of the future UK energy mix, but as with all expanding technologies, there is a need for increased research and innovation in the relevant RD&D sectors. 1.3 Because ofthe naturalvariability, of theenvironmental sourcesof most renewablesupplies (egwind power), strategies are needed for their significant integration with present supplies. This particularly applies to electricity supply, where all forms of generation require national “back up” because of power station and grid failures. Presently, the UK grid has suYcient overcapacity for large central fossil and nuclear plant outages and this same overcapacity is suYcient for UK renewables plant for the next five to 10 years. However, when, for instance, wind power capacity exceeds about 20% of total grid capacity, then national integration strategies are needed, such as load management, centrally controlled wind farms, increased interconnection with other countries, and generation from storage (eg pumped storage, fuel cells). 1.4 UK energy is now totally dominated by fossil fuels and nuclear power. Obviously, therefore, changes and improvements are needed in fossil fuel and nuclear supplies, and their integration with renewables, which will steadily increase in capacity. In addition, most significant improvements are needed in the eYcient use of energy. All these factors are essential to meet UK targets and the proposed EU 2020 renewables requirement82. 1.5 The Institute notes the UK government’s commitment to see renewables grow as a proportion of the UK’s electricity supplies to 10% by 2010, with an aspiration for 20% by 2020. According to the 2007 Energy White Paper, Meeting the Energy Challenge83, only around 4% of the UK’s electricity was generated from renewable sources in 2006, with the percentage contribution gradually increasing. These targets therefore represent significant challenges, especially the 2010 target, which currently faces significant challenges due to market conditions and planning consents; but upcoming changes to the latter may improve the outlook for renewables. 1.6 In addition, there is the UK government’s stated ambition of achieving new homes being zero carbon by 2016 and non-domestic buildings from 2019 (with new public sector buildings being zero carbon from 2018) as outlined in the Budget 200884 and in a policy statement by the Department for Communities and Local Government entitled, “Building a Greener Future”85. The “net zero” condition can only be met by buildings having microgeneration, especially exportable electricity. 1.7 Therefore, these commitments are not likely to be achievable without a significant increase in the implementation of photovoltaic technologies. Photovoltaics and solar thermal are the simplest renewable technologies to implement in the urban environment. In addition, the constraints associated with applying the EU 2020 renewables requirement to the overall energy mix makes the practical implementation largely dependent on electricity generation because sectors such as industry, transport and the general building stock are unable to achieve the increases necessary in renewable technologies. Within the electricity generation sector, wind power will be an important factor. 1.8 At present there appears to be no coherent, structured, plan of implementation of renewable technologies, either for simple and sustained market incentives, or for nationally supported RD&D.

2. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb?86 2.1 Realising the large potential of renewables in a low carbon economy requires a number of technical, economic, institutional and social constraints to be overcome; in particular, the issue of variability (ie intermittency, but this term implies faults). 2.2 Most renewable technologies, for example, wind power, are variable in output, since they follow the variability of their resource in the environment. An authoritative analysis of over 200 publications made by the UK Energy Research Centre87 shows that renewables electricity could displace around 20% of the power generated in the present electricity system, with two important consequences: 82 http://ec.europa.eu/energy/climate actions/doc/2008 res directive en.pdf 83 www.dti.gov.uk/energy/whitepaper/page39534.html 84 www.hm-treasury.gov.uk/budget/budget 08/bud bud08 index.cfm 85 www.communities.gov.uk/documents/planningandbuilding/pdf/building-greener.pdf 86 The question refers to “energy”, not just electricity. Thus renewables do indeed relate to the full spectrum of energy supplies, including heat, fuels and electricity. Nevertheless, electricity, which amounts to about 15% of end-use energy, tends to dominate policy. 87 The Costs and Impacts of Intermittency: “An assessment of the evidence on the costs and impacts on intermittent generation on the British electricity network”, UK Energy Research Centre. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 357

— Increased balancing reserves: At 20% and with no other changes, the output of fossil fuel-plant would need to be adjusted more frequently than at present to cope with the fluctuations in output inherent in nearly all renewable energy sources. Some fossil-fuelled power stations would have to be operated below their maximum output to facilitate this, and extra system balancing reserves will be needed. Central plant eYciency may be reduced as a result. The analysis concludes that the additional balancing cost at the 20% penetration level would lie in the range 0.2–0.3 p/kWh. — Increased “standby capacity” or “system reserves”: The “capacity credit” of renewables capacity declines as the share of electricity supplied by variable sources increases—falling to approximately 20–30% of installed renewable capacity at 20% energy penetration. To maintain the reliability of the whole system at its present level at times of peak demand, the system margin, ie the excess of available fossil generating capacity over peak demand, would need to be increased if no other technical solutions are considered (eg load management, demand side procedures). More renewable electricity would not necessarily result in the permanent closure of fossil-fuelled stations, but would result in less fossil-fuel consumption. The analysis concludes that the cost of maintaining system reliability at the 20% penetration level lies within the range 0.3–0.5 p/kWh. 2.3 Assuming that wind power, in particular, is variable and that it is geographically widespread, the analysis estimates that the total cost of variability of renewables on the electricity system at the 20% energy penetration level would lie in the range 0.5–0.8 p/kWh on top of the cost of the renewable electricity produced. 2.4 However, to meet the proposed EU 2020 renewables requirement will require new large-scale renewable electricity sources, mainly wind powered—with a capacity in the range of 38–45% of total electricity capacity88—and extensive new connections to the grid. At that level, the capacity credit for variable renewables would fall below 20%, and with no other changes, it would be necessary to maintain or replace all the existing conventional generating plant to supply the necessary system balancing and reserve capacity when required. The extent of sub-optimal conventional operation will increase and at present fossil-fuel costs, the overall cost of supply would increase. However, other technological innovations can reduce such diYculties, for example, by stronger integration with other renewable generation, with modern loads management, and with the European grid. 2.5 Other barriers to the deployment of renewables include: — Maturity: The maturity of renewable technologies varies considerably. While several are commercially proven, others are still at a pre-commercial stage, and some still require quite fundamental R&D. — Cost: Please see the response to question 4. — Distributed nature: An individual renewable electricity plant, often called embedded generation or microgeneration, is usually small in scale compared with conventional power stations (typically a gigawatt or so). Therefore, the present network and control systems are able to absorb their power without significant adjustment. Nevertheless, in certain regions, some wind farms, particularly oVshore, and tidal range plant can be expected to have aggregated renewable power output comparable with that from conventional power stations. Central control of such renewables plant can be expected, for example, oVshore wind farms providing spinning reserve. Here, there will need to be some reconfiguring of the grid or distribution systems. Where major renewable sources are remote from areas of major consumption (eg in remote parts of Scotland), new or increased grid infrastructure will be necessary to transport the power to the load centres. — Skills base: Several UK studies which examined the renewables supply chain have reported that technology and project developers have found a lack of suitably qualified personnel at all levels in the implementation chain—both general technical skills and also more specialist skills89,90. Hence, encouraging physicists, and indeed other scientists and engineers, to consider a career in renewables, could help to plug the skills gap. Currently, there are relatively few university departments with the relevant expertise and few courses or UK students applying for posts. For those who have undertaken postgraduate training the career path in the UK is limited by the lack of companies and research posts and financial rewards. — Social and institutional constraints: Issues which may hamper implementation include public acceptability, planning constraints and institutional barriers. For example, lack of clarity over planning consents, permitting of plants, and investment regimes. While most renewables are 88 In practice, the capacity factor of wind power in the UK averages about 25–30%, whereas the capacity factor of central thermal plant is about 70%. Therefore, much more capacity of wind power is needed than the thermal capacity it replaces. 89 Mott MacDonald 2004 “Renewable energy supply chain analysis”, DTI 90 ICCEPT & E4Tech Consulting 2004 “The UK innovation systems for new and renewable energy technologies”. A report for the DTI Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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environmentally benign in terms of carbon dioxide and other air pollutants (even allowing for their manufacture), they do have a number of other local environmental impacts. The Severn barrage plan is a good example of the real social, environmental and political problems encountered in adopting many renewable technologies. The plan to build a tidal barrage across the Severn estuary to produce electricity is, according to the National Assembly for Wales, potentially the largest single renewable source in the UK, which could generate at least 5% of the UK’s electricity. However, the plan is receiving much opposition from some environmental pressure groups that claim the barrage could cause irreversible damage to wildlife91.

3. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 3.1 The technical challenge is to provide new technology for both load management and storing electrical energy, or the product of electrical energy. Since the scope for large-scale central storage by such methods as pumped water or tidal barrages is limited, there is a need to devise local methods of small-scale storage at the domestic, commercial, industrial and community level, distributed throughout the system. Solar water heating with hot water storage could make a useful contribution on diurnal timescales as would a much enlarged fleet of electric vehicles as a possible early evening supply of electricity if discharged at that time (and recharged overnight). 3.2 However, it seems likely that a much greater use will need to be made of demand-side management, disconnectable tariVs and load-switching. All of this will require extensive changes to the distribution system and its control, and to consumer behaviour. 3.3 An important area where physicists are contributing to RD&D is in photovoltaics, where they are carrying out much of the fundamental research required to develop novel types of cell that may result in step changes in the cost of photovoltaic generation. Photovoltaics can readily be adapted to suit the diVuse light conditions as evidenced by their widespread use in Germany. There is a strong research eVort in the UK but to benefit fully from this vitally important technology, investment in the underpinning science needs to improve considerably. 3.4 The UK appears to be attempting to be selective in developing a few chosen technologies such as “dye- sensitised photochemical” and “molecular organic” solar cells. The EU approach for RD&D in order to maintain and build on the lead that Europe already has is provided in a publication entitled, A Strategic Research Agenda for Photovoltaic Solar Energy Technology92. The publication represents valuable guidance to the UK’s RD&D eVorts domestically and in engaging with other EU partners in forthcoming European research programmes. It provides a research framework which is aimed at reducing the cost of turnkey photovoltaic systems to ƒ1/Wp by 2030 and goals of electricity that is cost competitive with retail and wholesale electricity. 3.5 The short- to medium-term is likely to see thin-film materials (eg gallium arsenide) bring photovoltaic electricity costs down, towards levels competitive with conventional electricity generation. This is likely to be happen sooner than previously expected due to the increasing cost of fossil fuels.

4. Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime?

Support for RD&D 4.1 A significant problem facing renewable and other low-carbon generating technologies is that, following the liberalisation of the UK energy market, the current price of electricity was so low that it is not economically attractive 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. 4.2 The solution to date has been to have UK government incentives for RD&D, but with relatively small amounts of financial commitment. Renewables have benefited from these and support must continue to stimulate investment at increased amounts for pilot and full-scale demonstrations of technologies that are suYciently mature for near-term deployment. 91 http://www.guardian.co.uk/environment/2008/jun/12/conservation.wildlife1 92 http://cordis.europa.eu/technology-platforms/pdf/photovoltaics.pdf Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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4.3 Investment is also required in the development of whole-lifecycle financial models, including full acquisition, operating, distribution, disposal/recycling and environmental costs for all renewable technologies. Models are also required to predict how significant power levels generated from renewables might change the characteristics of the transmission network planning and operation. 4.4 The Institute’s report, The role of physics in renewable energy RD&D93, revealed that renewables RD&D is funded in the UK through a number of routes, the main ones supported by the government and the public sector (such as the much lauded EPSRC SUPERGEN initiative94), together with EU funding. In addition, there is industry funded RD&D, and the commercial deployment of renewables supported by the Renewables Obligation95. The House of Lords Science and Technology Committee suggested in its report, The practicalities of developing renewable energy96, that the level of funding for RD&D is not suYcient if the UK is to meet its renewables targets. While UK expenditure has increased in recent years (from $37 million in 2004 to $68 million in 2005), it is still lower than in some other leading European countries, such as Germany ($115 million in 2005), according to data from the International Energy Agency97; US expenditure on renewables RD&D was $255 million in 2005. The photovoltaics budget for the US National Renewable Energy Laboratory was over $140 million in 2006–07. Japan, China, Spain, Italy, and India are increasing funding in photovoltaics research. 4.5 A DTI/Carbon Trust review98 found that there appears to be a funding gap in moving renewables to the pre-commercial stage, and from the pre-commercial to the supported commercial stage. The review also considered that the current landscape for renewables funding is complex, which suggests that a clearer overall strategy for UK RD&D in both renewable and other new technologies, together with a clearer map of RD&D funding and clearer demarcation of the roles of diVerent funding bodies could be useful. This could be a key activity for the UK Energy Research Centre to undertake. 4.6 The UK’s RD&D policies for new renewables compare very unfavourably with those of the leading countries as evidenced by the slow progress and insignificant total renewables contribution that the UK has achieved so far. For instance, when considering wind power, lessons from Denmark, Germany, Spain and Portugal have not been learned. In Denmark, implementation gave incentives to small communities to install wind turbines, from which a major manufacturing industry has emerged. The total share of new renewable energy in Denmark in 2005 was 17% and it has a target of 30% renewables by 2020. Germany had 5.8% new renewables share of its energy in the final consumption of energy in 2005 compared to a UK value of 1.3%. Only a few small countries, such as Malta, had a smaller share of renewable energy in 2005. 4.7 With regards to photovoltaics, Germany is the largest single market with 40% of the world’s total photovoltaics sales in 2007. This is largely achieved by a bottom-up approach and a long-term coherent strategy. It has a number of joint funded (ie government, industry) research centres in addition to universities. These include the ZSW, the Fraunhofer ISE and the HMI, each receiving annual budgets of well over ƒ10 million. These centres provide a reservoir of expertise and continuity that helps coordinate the long-term research necessary to develop the technologies. Recently there have been some encouraging signs that the NaREC99 in the North East of England has begun to take on some of these roles. But this needs to be built on and receive long-term core funding.

Feed-in tariffs 4.8 The UK would greatly benefit by adopting a straightforward feed-in tariV system, which is an EU recommended method of growing distributed generation through photovoltaics. The feed-in tariV system has allowed a number of European countries, such as Germany, Denmark, Spain and Portugal, to install significantly more renewables capacity than the UK at lower cost; these countries also manufacture photovoltaics at a significant level. The feed-in tariV system guarantees a price for renewable electricity fed back into the grid. In fact, in Germany there has been a dramatic rise in photovoltaic installations as the feed- in tariV system reduces and the market takes over. 4.9 The feed-in tariV system used in Germany is recognised internationally as the most eVective support mechanism for photovoltaics. It has encouraged microgeneration and is not based on government subsidy. The UK has approximately 80% of the irradiance levels of Germany and would therefore be able to produce significant renewable contribution from photovoltaic electricity. 93 www.iop.org/activity/policy/Publications/file 4145.pdf 94 www.epsrc.ac.uk/ResearchFunding/Programmes/Energy/Funding/SUPERGEN/default.htm 95 www.berr.gov.uk/energy/sources/renewables/policy/renewables-obligation/what-is-renewables-obligation/page15633.html 96 www.publications.parliament.uk/pa/ld200304/ldselect/ldsctech/126/12602.htm 97 www.iea.org 98 Renewables Innovation Review, DTI/Carbon Trust, 2004 99 www.narec.co.uk Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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4.10 Previously, the UK government was opposed to a feed-in tariV system. The 2007 Energy White Paper1 briefly mentions that other European countries have introduced such schemes but dismisses them by stating that it was, “…hard to draw firm conclusions as to the eVectiveness of these mechanisms…”. This ignores the evidence of Germany’s lead in the installation of wind and photovoltaics. In the UK, the Renewables Obligation Certificates (ROC) method has clearly failed for inducing significant new capacity in comparison with the feed-in tariV system100. Therefore, it is vital that the eVectiveness of the ROC system is critically reviewed, the reasons for its relatively poor performance established and a new and better system put in its place as soon as possible. 4.11 Encouragingly, in the Budget 20083, the UK government states that it will consult in the summer on the most appropriate support mechanism at the individual and community level to develop microgeneration as part of its aim to triple renewable electricity generation by 2015. The Budget report (section 6.43) specifically mentions feed-in-tariVs as an option. This should be encouraged and if an appropriate tariV was introduced it would bring the UK’s policy in line with its closest EU partners.

5. On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables?

5.1 The present system will not be able to support the 35–45% of variable renewable generation that is generally considered necessary to meet the EU 2020 renewables requirement. The location of the most productive projects—wind, tidal and wave—will require extensive new transmission lines or undersea cables. Because the connection has to be capable of taking the full output, but the load factor of the best wind farms is only around 35%, it follows that the cost of connection to them per unit of electricity produced is about 2.5 times that of a conventional generator of the same maximum output and a typical load factor of 90% or more. Undersea cables will be more expensive than overhead lines of the same capacity. 5.2 A detailed study is required to assess the impact of potential additional renewables capacity in the 2020 time frame. The study will need to address cost alternative scenarios for the mix of technologies providing the additional capacity and, in particular, the issues associated with distributed resources and the potential “grid connected market”. This concept requires a radically diVerent approach to manage the transmission network and current trading arrangements. Such information, together with any additional network associated maintenance and security costs is a prerequisite for calculating the cost of energy produced. 5.3 Microgeneration needs no changes to electrical supply lines, unless of almost universal use. The national potential for microgeneration could be at least 10% of total supply, so having such a resource with no significant changes in the grid is important.

7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation?

7.1 Present costs are not a good guide to future costs. Discussions at a recent meeting101 revealed that the projected growth in demand for renewable energy projects is creating upward price pressures throughout the world. Several factors were leading major utilities to acquire existing operating projects—shortage of new good sites, shortage of turbines (approximate two-year waiting time), long development times and opposition to wind farms. A survey by KPMG102 of global mergers and acquisition activity in the renewables sector revealed that the prices being paid for renewable energy companies were rising rapidly, averaging $4.9m/MW in recent large acquisitions—well above their original cost. There was increasing competition for investment funds from less uncertain renewable investment opportunities in other countries. This would all be reflected in increased costs for new renewables developments in the UK. 13 June 2008 100 Essentially, conventional fuels do not charge for their full life-cycle external costs, so credit should be given to renewables when they abate conventional fuels. Therefore, ROCs, etc, are not a “subsidy”, but a payment or credit for the abatement of the external costs of conventional energy. 101 “Renewable Energy: UK & EU Investment Issues and Deliverables”, The Westminster Energy Forum, 15 May 2008. 102 www.kpmg.co.uk Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Memorandum by The Institution of Engineering and Technology (IET)

Introduction

1. The Institution of Engineering and Technology (IET) is pleased to make this contribution to the House of Lords Economic AVairs Committee’s enquiry into the economics of renewable energy. 2. There are many shades of opinion, and many parties seeking to advance arguments supporting their own perspectives. We expect you to receive a diversity of responses reflecting many shades of opinion. The inherent complexity of energy technology and economics makes this very diYcult to disentangle. 3. The IET’s role is to provide an independent perspective on engineering issues. We attempt in this response, and in particular in Annex A, to explore the factors which aVect the economics of renewable energy, to help the Committee understand and interpret the responses received from others.

Key Messages

4. The points the IET particularly wishes to emphasise are: — In developing renewable energy policy, understanding the “timescales” is as important as understanding “cost”. This aspect is particularly lacking from public debate. — The cost data for renewable energy contain huge variable elements, particularly as we compete for manufacturing capability and expertise in a global marketplace. They can also change substantially over time due to factors that are not entirely rational or predictable. — Recent increases in oil price, if sustained, have the potential to be transformational to the economics of renewable energy, and also energy eYciency. Sustained high oil prices will impact consumer and business behaviour, and also perhaps make it easier to build a stronger public consensus over the need for renewable energy and its associated infrastructure.

Responses to Questions

Q1. How do and should renewables fit into Britain’s overall energy policy?

5. Renewables currently meet a very small fraction of our total energy needs and it will take decades of sustained support before they begin have an appreciable impact. This is an enormous long term challenge that will require strong and sustained Government commitment, as a part of a long term multi-stranded energy policy. 6. A holistic energy policy is required, balancing costs, benefits and deliverability of a full range of options including demand reduction. 7. Many low carbon initiatives, particularly demand reduction strategies, have vast potential and are of little or even negative cost. However these tend to require behavioural change and can be politically and socially diYcult to deliver on a large scale. A challenging but realistic view therefore needs to be formed of their potential, both now, but also in the future as social attitudes change. The change in social attitudes can be accelerated by appropriate marketing, a route that should be explored further by government. 8. Within this framework there will be a substantial role for renewable energy, and every opportunity should be taken to develop and deliver projects using today’s technology, and to support the evolution of new technologies best suited to the UK’s resources (eg deep water oVshore wind, wave and tidal). 9. One issue of great importance is time to market. Large scale deployment of renewables and also other carbon saving measures requiring mass behavioural change will take many years—perhaps 20–30 years to become a core part of the market. In the meantime existing energy assets will require replacement. Whilst this should in no way slow down eVorts to maximise renewables, it is necessary to take a realistic view of the ongoing needs for secure energy supplies in the short to medium term. New gas and coal fired generation will have to be an important part of this picture. Carbon capture and storage represents a possible route to decarbonise this at a later date, but the economics of this remain to be proved. Nuclear provides a low carbon option for the medium to longer term, ie after 2020. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? 10. The size of a country, its political ambitions, meteorological climate and existing electricity system will influence the way in which renewable policy is adopted. 11. Many European states have used generous support schemes to deliver multi GW scale deployments. A “feed-in tariV”, as adopted in many EU states, runs contrary to the concept of a free market in electricity. However, the clarity of these schemes has made it easier to get projects done. Germany, Spain and Denmark have the highest penetration of renewables in the world and have feed-in tariVs. 12. Tax credits in the USA have played a role in encouraging mass deployment there. 13. In countries such as China the political decision making process has facilitated rapid deployment. However all countries are diVerent, and the UK’s high population density and democratic tradition have acted as barriers here. OVshore wind oVers a solution in the UK by placing the technology out of sight, but it is a high cost option.

Q2. What are the barriers to greater deployment of renewable energy? 14. A generalised answer could be misleading. In Table 1 we suggest the barriers for each technology together with actions that would be required to address them.

Are there technical limits to the amount of renewable energy that the UK can absorb? 15. There are no fundamental limits to the amount of renewable energy the UK could absorb in the long term. Technical challenges increase with increased levels of renewable generation but these are soluble given the will to do so. 16. However in the short term intermittent renewables are probably limited to around 20% of total capacity. The large scale deployment of intermittent renewables has the potential to challenge grid stability. However if we gradually re-engineer our networks, loads and systems to deal with higher levels of renewables, the penetration level can increase. This process would take several decades of concerted eVort. 17. The technologies of demand management, for example by smart metering and smart networks, have the potential to make this more manageable. The problem will also emerge only slowly as the deployment of intermittent renewables will take time, and it will be possible to adjust the approach as the evolution of technology and social behaviours takes place over time. 18. The issues that will set an upper limit to the level of renewables that are eventually deployed are economic rather than technical. The cost of electricity in a 100% renewables system would most likely be very high. However given the outlook for fuel prices, equipment capital costs and the value of carbon it is hard to see any scenario where energy costs do not increase substantially from today in real terms. It may be argued that this would then incentivise energy saving properly.

Q3. Are there likely to be Technological Advances that would make renewable energy cheaper and viable without Government support in the future? 19. Research into the currently unproven renewable technologies such as carbon sequestration, ocean thermal gradients, wave energy and nuclear fusion requires sustained eVort and is very costly. At the current rate of progress these technologies will not be available to contribute to any significant scale to meeting the carbon reduction targets for 2020, and their ability to contribute materially to the 2050 target must be regarded as uncertain at the moment, though it is very much hoped that this will become more certain over the next few years. 20. Good news about research breakthroughs is beneficial in that it could encourage young people to consider a career in engineering research. However, policy makers may gain the impression that all the hurdles are close to being overcome, which is far from the case. Policy makers need to be aware of an inherent optimism bias in the academic community which results from the nature of the research grant awarding process, and also in the very diVerent challenges of cost-eVective engineering deployment at scale, once technologies have been demonstrated to work under ideal conditions. 21. Government policy should adopt a better integrated strategy covering the whole innovation chain,to maximise the chances that successful R&D will deliver successful products. Piecemeal policies have delivered mixed results, mainly limited to the deployment of mature lower-cost technologies at the expense of larger- scale and emerging technologies. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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22. We recommend that Government policy should: — Be more selective in setting priorities and allocating funding for early stage research. — Be more successful at leveraging support for costly demonstration and commercialisation. — Take advantage of the potential for international partnerships. — Pre-emptively identify and address barriers to deployment, including the supply of technical skills, cost, robustness and maintainability.

Q4. Arguments for and against “feed in tariffs” 23. Funding support for renewables exists to: — provide a proxy for carbon pricing where this does not yet exist; and — to encourage development of technologies and deployment capacity. 24. The market mechanism used in the UK (the Renewable Obligation) provides a relatively sophisticated means to provide incentives to develop utility scale renewable energy sources; however it is too complex to send appropriate messages to those considering small scale renewables. These also have a part to play in meeting climate change targets and improving security of energy supply, but householders and small businesses are not equipped to handle cumbersome incentive mechanisms, which are therefore a barrier to deployment. Simple incentive mechanisms, for example feed-in tariVs or capital grants, are more likely to lead to wider deployment. 25. However, care needs to be taken to avoid perverse incentives in this area. Whilst certain small scale renewables can be cost and carbon-eYcient, other small-scale renewables are of considerably less benefit. Public or consumer funding support would better be directed towards demand reduction, energy eYciency or larger scale low carbon projects rather than funding what can, in eVect, be totemic installations rather than real benefits. 26. There are arguments to say that some of these totemic technologies will become more cost eVective over time and should therefore be supported. Solar PV is an example of this. 27. On a global level there are other considerations: the eVect of generous feed in tariVs in Germany and Denmark has led to the situation where there is a high level of solar photovoltaic deployment in countries with relatively low solar radiation, compared with low levels of adoption in southern European countries with the most sun. In technologies where resources are in short supply this may not be the most eYcient global policy.

Q5. Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? 28. The existing transmission network connects demand centres and coal fields (coal being the fuel of choice when the existing transmission network was constructed in the 1960s) The significant sources of renewable energy tend to be remote from load centres and grid access points, thus requiring heavy investment in network extensions and consequential delays to connection. Note that the long lead times for installing major transmission lines result from the need to consult aVected land owners and residents through the planning process. 29. Where renewables are closer to load centres, new technology and adaptation will be required for multi- directional flows of power in electrical distribution systems to make eVective use of microgeneration, although there is currently adequate capacity in the existing networks to mean this will not be a major barrier for several years. 30. Generally the costs of new overhead transmission lines and substations are not a major barrier to new projects—this is much more driven by planning consents. However, this position will change if planning consent requires the use of buried or sub-sea cables. At major transmission voltages, underground cables cost around 10–20 times overhead lines, though this gap narrows substantially at lower voltages. The cost of major transmission lines in the UK is quite uncertain as there is little recent experience of building them in any substantial way. An estimate of £1 million per km is a reasonable all-in figure to use for major overhead transmission lines for approximate calculations. Additional costs are incurred for substations; these are often included within a power station budget for new generation. For example, the cost of a new substation for a recent 1,000 MW class generator was around £25–£30 million. These costs have all increased substantially in the last few years, mainly as a function of global commodity and equipment prices. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

364 the economics of renewable energy: evidence

31. However even though overhead lines are usually of modest cost in comparison to power stations, it is important that the regulated environment in which the transmission and distribution companies operate provides adequately for strategic investment in new lines when needed. 32. The UK also needs to consider the impact of expected climate change on the power infrastructure and adaptation strategies that will be necessary. This is likely to aVect the design and location of substations and lines, and to require modifications to existing infrastructure. It may also aVect the design, location and economics of generating plant.

Q6. External costs—environmental impacts Not addressed in the interests of brevity.

Q7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? 33. This is likely to be a key question for the Committee. However, the inherent complexity of the subject makes this very diYcult to disentangle. This is because: — Cost estimates change substantially over time owing to volatility in world equipment and services markets. — Actual costs of existing renewables cannot be compared on a like for like basis with projected costs of unproven technologies. While hydro-power, on-shore wind and other established technologies have been critically appraised by commercial concerns in order to make significant investment decisions, the energy technologies that are still in the R&D phase have not been appraised in this way. It is not possible to give reliable estimates of unproven technology costs because the timescales for their deployment are some way in the future. — Forecasts of economies of scale and can easily be over- or under-estimated and require detailed engineering input. — The factors aVecting cost changes are not entirely rational or predictable. 34. Data aVecting costs contain huge variable elements that require sophisticated analysis. It is impossible to assess the validity of any cost estimate or comparative cost estimate without knowing the many assumptions that have been fed into the calculations. 35. We address this issue in more detail in Annex A.

Q9. If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? 36. IET members and their employers are working worldwide on energy projects. It is often true that energy is used much more carbon-intensively in other countries, particularly in the developing world. Also there is a high rate of build of carbon intensive infrastructure such as coal fired power stations, which will have lives of 30–50 years and potentially lock in emissions for this time. Measures to reduce these emissions can yield carbon reduction benefits many times those that the same investment could yield in the UK. These measures include renewable energy projects but equally improvements in end use of energy. However there are challenges in auditing these benefits that are only partially addressed in the current Kyoto mechanisms. 37. There is also a question of whether “follower” countries in this area would give less regard to the UK as a leader if it was seen to be not putting its own house in order. 38. These are perhaps more political than engineering questions and as such the IET does not comment further. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Table 1

CURRENT STATUS, FUTURE PROSPECTS AND ACTIONS ON RENEWABLE TECHNOLOGIES IN THE UK

What needs to be Where are we? What can be achieved? What is holding it back? done? ON-SHORE WIND Gradual expansion of Objections under planning R, D&D into active POWER capacity (over 15GW regime. grid management. of potential wind Technology is mature and capacity has been Transmission grid capacity. economical with current applied for in policies in utility scale Scotland alone). Increasing costs due to application. global competition for raw materials and equipment. Not really eVective in small scale application. Concerns about managing variability for increased Very large projects will have wind capacity. significant visual impact in UK landscape.

OFF-SHORE WIND Potential for large High capital cost— May be favoured POWER scale development. increasing due to global under reformed competition for raw (banded) Renewables Fundamental technology is materials and equipment. Obligation. mature but uneconomic under current policies. Transmission grid capacity. R, D&D into active grid management. Deployment oVshore will Transmission/distribution continue to bring grid expansion. technological and operational challenges. Concerns about managing variability for increased wind capacity.

HYDROELECTRIC Around 1,000 MW of POWER future potential in UK, vast remaining Mature technology. potential worldwide.

TIDAL POWER Sizeable natural Risk/cost of demonstration. Demonstration resource to be support. Several technologies exist in exploited in UK. High initial costs and prototype, in need of full- extended operating Development of scale demonstration and Potential for lifetimes. standards. commercialisation. technology export.

About 10–15 years from full commercialisation, and uncertainties over cost competitiveness. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

366 the economics of renewable energy: evidence

What needs to be Where are we? What can be achieved? What is holding it back? done? WAVE POWER Sizeable natural Risk/Cost of Demonstration resource to be demonstration. No large support. Several technologies exist in exploited in UK. companies pushing the prototype—all inevitably technology. Development of large with high embedded Potential for standards. energy and uncertain technology export. Size of devices (typically maintenance and operating 100m per MW) and impact Deployment requires costs. on shipping. Requires the commitment of hundreds of machines, each large shipbuilders and At least 15 years from large the size of a tube train, power engineering scale commercialisation. packed with hydraulics, companies— generators, etc. commitment that will take time to build. Energy transmission from large numbers of floating structures.

Limited supply chain.

TIDAL BARRAGE Multi GW scale Cost, environmental issues, Studies in progress. possibilities in UK (eg investment risk, grid Substantial structural Technology is proven, but Severn Barrage), but connections. change to electricity capital costs tend to be very power limited to market and/or high. certain (changing) government subsidies times of day. probably needed for large schemes.

SOLAR PHOTOVOLTAICS Limited potential for High capital cost. R&D into improvement of manufacturing. Mature but costly current (first and Competition for raw technology, currently used second generation) materials (silicon) resulting R&D into “second mainly in niche and technology but some in high cost. generation” thin film “showcase” applications. scope to improve silicon PV, organic production costs Lack of skilled installers. PV and high-eYciency through improved “third generation” PV manufacturing Lack of information and (eg quantum dots). processes. accreditation schemes. Skills development. Higher eYciency and more flexible Technology and materials currently in installation development could accreditation. result in lower-cost, higher-eYciency applications.

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What needs to be Where are we? What can be achieved? What is holding it back? done? SOLAR THERMAL Large potential for Lack of skilled installers. Skills development. ENERGY domestic use, both retrofit and new build. Lack of information and Technology and Technology is mature and accreditation schemes. installation relatively cost-eVective. accreditation. Integration with building stock. Introduction of “microgeneration- ready” standards for new homes.

CONCENTRATED SOLAR Very suitable for Not suitable for UK; long Support studies. ELECTRICITY desert regions— term potential for mass requires plenty of application in North Africa Mature but quite expensive. sunshine and large and export to Europe. land areas.

ENERGY FROM WASTE Significant potential, Potential for landfill gas Interaction with waste depending on local limited by restrictions on management policies. A variety of mature or near- circumstances. landfill. market technologies exist for recovering energy from waste. Planning consent for thermal waste to energy Electricity generation from plants. landfill gas is the most widely used.

BIOMASS Biomass for heat and Lack of supply chain Establishment of power generation coordination. sustainable supply Technologies using “first could be more widely chains. generation biomass resources used in parts of the Lack of skilled installers. for heat, power generation country. Skills development. and transport are fairly Lack of information and mature but relatively costly. Potential limited by accreditation schemes. Resource, technology other demands for and installation Higher-yield “second land use, especially accreditation. generation biofuels are being food crops. Currently researched but are at least biomass is imported R&D into “second 10–15 years from from Europe, this is generation biofuels. commercialisation. likely to reduce as EU states all turn to biomass to achieve their renewable energy targets.

GEOTHERMAL High cost of installation. Skills development.

Mature but costly technology Lack of skilled installers. Technology and for UK. installation Applied on a large scale at Lack of information and accreditation. lower costs in countries with accreditation schemes. good resource (eg Iceland, Introduction of Philippines). Integration with building “microgeneration- stock. ready standards for new homes. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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What needs to be Where are we? What can be achieved? What is holding it back? done? GROUND SOURCE HEAT Significant Getting people to apply the Changes to building PUMPS opportunities in space technology. regulations. heating, easiest to Mature technology that can apply in new buildings be cost eVective. or major refurbishments.

GREEN BUILDING Huge opportunities Lack of interest/knowledge Aggressive approach DESIGN (USING for new construction amongst people to building NATURAL HEAT, LIGHT and retrofit, more commissioning buildings or regulations and their AND COOLING) examples of best retrofits; weak building enforcement; better practice needed for regulations and marketing of the Exemplar projects abound retrofit. enforcement. benefits, higher energy but not deployed universally. prices.

HYDROGEN AND FUEL Trials in USA using Finding cost eVective Basic R&D on CELLS fuel cells power by oV applications and developing hydrogen generation. peak electricity to hydrogen production Hydrogen is not inherently provide hydrogen for infrastructure. R&D on hydrogen renewable; in the near term, motorcycles. transport the most likely sources are Also ensuring that power to infrastructure fossil fuels, resulting in CO2 Portable power make the hydrogen does requirements. emissions unless accompanied sources (eg phones, not come from high carbon by abatement technology. laptops) in advanced sources. This is an immature development. technology.

STORAGE TECHNOLOGIES

PUMPED STORAGE Allows storage of Not an attractive Flagging of HYDRO energy to balance investment, also potential opportunities, and intermittent environmental issues. impact on market Mature technology, often renewables and/or price of intermittency. quite expensive. demand peaks and Will not be troughs. Large scale commercially possibilities exist in attractive until value UK and have been of intermittency or studied in the past. gap between peak and base prices becomes high.

DEMAND CONTROL Potentially allows non Market not yet ready to Deployment of smart essential demand to deploy it; attention needed meters is a first step Technically possible but be removed at times to regulatory and legislative and government is massive deployment of peak demand or frameworks. active through Energy challenge. low outputs from Bill enabling intermittent provisions, changes to generation. domestic appliance standards and wiring regulations may be needed. Deployment of ESCOs would help (as in Energy White Paper). Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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What needs to be Where are we? What can be achieved? What is holding it back? done? SMART WHITE GOODS Potentially allows Constructing the “value Proving the interruptible demand chain” so that those who technology (in hand Manufacturers are engaged to be “intelligently bear the costs can receive with some big white with innovators; selective disconnected” at times the rewards. Also needs goods manufacturers); trials taking place. of power system mass roll out. Needs demonstrating it stress. The value of consumer acceptance. eVectiveness and this is could be commercial value; significant because it constructing a route may be a cost eVective to market and the way of replacing value chain for expensive fast- rewards. response standby generation on the grid.

ELECTROCHEMICAL Short term energy Market not yet interested. More development STORAGE storage to manage work. Will not be demand peaks or low commercially Significant R, D and D done intermittent attractive until value in UK a few years ago but generation. of intermittency or subsequently abandoned. gap between peak and base prices becomes high.

For further details on renewable technologies, see the IET Factfiles: http://www.theiet.org/factfiles/index.cfm

Annex A

FACTORS INFLUENCING COMPARITIVE COSTS OF RENEWABLE ENERGY A1. Quoted cost estimates for future renewable energy generation vary widely and comparisons can be meaningless unless the costs quoted are based on the same input assumptions. Particularly misleading results can be obtained by comparing the quoted costs of renewables already in commercial production with indicative costs of those still at the research stage. A2. Below we set out the factors that need to be taken into account when estimating future costs of renewable energy technologies. We also discuss the factors influencing the cost of alternatives which are necessary for comparison in a holistic energy policy.

Costs of Electricity or Heat from Renewable Sources

A3. Costs of electricity or heat from renewable sources are aVected by: (a) Capital costs of equipment. (b) Other capitalised costs of producing complete working power or heat plant. (c) Capital costs of necessary infrastructure to export the power or heat to where it can be used. (d) Quality of the primary energy resource being converted into energy or heat. (e) In some cases, the cost of providing primary energy resource at the point of use. (f) Costs of operation and maintenance. (g) Costs of finance and equity return expectations. (h) In some cases, costs associated with intermittency of output. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

370 the economics of renewable energy: evidence

We explore each of these in turn below: Capital costs of equipment and construction A5. The capital cost of equipment for energy production depends on a wide and sometimes surprising range of factors. At one level there is variability from site to site (for example diVerent wind farm layouts to suit diVerent landscapes and ground conditions require diVerent expenditures on cable lengths and foundation requirements; diVerent biomass fuel types require diVerent storage, handling, combustion and emission control solutions). A6. However, at least as significant is pricing pressure in global markets for all types of equipment depending on supply and demand balance, and raw materials costs, for example copper and steel prices. At the moment almost all power equipment is supply constrained globally, and we have seen price rises over the last two to three years of 50–100%. In turn this signals investment to increase supply capacity and potentially new entrants to the market, creating the possibility of downward price corrections in the future. It also may cause developers to defer projects in the hope of securing better pricing and availability later. A7. You are therefore likely to be presented with data showing very wide ranges of equipment capital costs. Also the pricing prevalent today is unlikely to represent a long run average price.

Other capitalised costs A8. Other costs associated with building new power plant include land acquisition, environmental and social assessments, permits, engineering costs, legal fees, costs of planning gain, and the internal costs to organisations of having staV devote eVort to developing projects. In aggregate these tend to be in the range of 5–20% of the capital costs of equipment and construction, and are proportionally higher for smaller projects, “first of a kind” projects, and projects with unusual characteristics.

Infrastructure capital costs A9. For power plant these costs include the connection to the grid and any necessary reinforcement of the grid necessary to allow the plant’s output to be exported to a point of consumption. This can include anything up to major new transmission lines and substations. Infrastructure investment is as complex as power station investment and is subject to many of the same constraints. In particular the costs of gaining planning consent for new transmission lines can be very substantial, and transmission infrastructure costs are highly influenced by global commodity prices (steel, copper, aluminium). A10. Infrastructure costs also vary hugely depending on plant location. At one extreme a wind farm in southern England close to an existing major substation may have very low infrastructure costs, whereas a similar wind farm in northern Scotland may incur infrastructure costs of the same order as the costs of the wind farm itself. A11. For renewable heat the same issues apply, but at a more local scale, as heat degrades in long distance transport. The costs of a district heating network can be substantial, especially if it is to be used to supply existing premises rather than a new development.

Quality of primary energy resource A12. Many renewable technologies harvest a primary energy resource made available free of charge by nature. However the cost of a unit of energy production depends substantially on the extent to which the resource is available to be harvested. This can vary significantly from site to site. For example achieved capacity factors for onshore wind farms range from 10% to 35%. A13. In assessing claimed costs it is important to understand the underlying assumptions used.

Costs of providing the primary energy resource at the point of use A14. Further costs arise where the primary energy resource requires intervention to be made available in a form suitable for use at the power station location. This is a particularly important issue for biomass and waste. A15. Some biomass and waste projects are located adjacent to a ready supply of waste material (eg woodchips from a wood processing plant). Others can be paid to take a feedstock (eg municipal solid waste which would otherwise attract landfill tax). However those which take feedstock from energy crops, or distributed sources Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 371 of waste, will incur a transport cost (which can be substantial) and may have to compete for alternative uses for the feedstock such as food production, or alternative biomass power plants. There is already substantial import of biomass for power production. It should be noted that individual plants are designed for particular types of biomass—it should not be assumed that a plant designed for woodchips can burn chicken litter for example. A16. Calculating the cost of the delivered feedstock is not only dependent on the particular circumstances of each plant but is also very vulnerable to future supply and demand balances, both locally and internationally. The UK’s relatively small land mass means that a heavy dependence on biomass will imply substantial imports. Other countries in Europe and beyond are considering major roles for biomass. Hence in the future costs of feedstock are likely to rise, perhaps substantially. Transport costs are also likely to increase with increasing oil prices, and the transport has its own emissions implications.

Costs of operation and maintenance A17. These costs include staV salaries, overhauls and repairs, rates, insurance and use of grid charges. They vary with technology (eg onshore wind requires almost no staV and limited maintenance, whereas biomass is relatively labour and maintenance intensive). However, for a given technology they are generally reasonably predictable. An exception to this are the oVshore technologies, where there is as yet limited experience of long term maintenance and hence less certainty.

Cost of finance and equity return expectations A18. Unit electricity costs vary depending on financing costs, and the return expectations of developers. Both of these depend on the perceived risk of the investment. The risks involved include engineering performance but also perceptions of risk of change in regulatory environment or other uncertainties. For the established technologies these are well established, but less so for new technologies.

Costs associated with intermittency A19. Intermittent technologies such as wind and wave power impose costs on power system operations around the provision of replacement capacity. These costs are negligible when the amount of intermittent generation is small, but could be substantial at levels of intermittent renewables implied by the EU targets for 2020, especially if dedicated power plant has to be provided as back-up. Alternative options such as intelligent load management are developing, these in turn will incur infrastructure costs for control and metering systems. Concentrations of intermittent generation in particular geographic regions, eg Scotland, will also create a need for investment locally to ensure the stability of local and regional grids.

Alternatives to Renewable Generation A20. When assessing renewable generation costs against other options it is important to understand the uncertainties in: — other generation options; and/or — non-generation options such as demand reduction and energy eYciency.

Alternative Generation Options A21. The alternative generation options are gas and coal fired power plant and, potentially, nuclear energy. All the same issues as for renewable plant aVect the cost of providing the physical generation assets. Market pressures worldwide aVect pricing in just the same way, over time this will increase supply capacity and may ease pricing. However, barriers to entry are generally higher in the gas, coal and nuclear power plant equipment markets and their responses are likely to be more sluggish, meaning that higher prices may persist for longer. However a large unknown at present is the impact of low cost Chinese plant entering world markets, particular coal fired. This is something that is currently gathering momentum rapidly. A22. The major issue governing cost of alternative generation options however is global fuel prices. Recent oil price increases have been well publicised, and the consensus is that we have entered a prolonged period of much higher oil prices. Gas prices are linked to oil prices through indexation clauses in long term gas supply agreements in Europe, and we can therefore expect a prolonged period of high gas prices. Coal prices are set more globally, and are currently high driven by demand in emerging economies and high oil and gas prices. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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A major global recession could soften this, but the general picture is of energy becoming much more expensive. However there seems little consensus over how much primary energy prices will increase over a 10, 20 or 50 year horizon. A23. A further uncertainty is carbon price, especially over the long term. To date this has had limited impact; it seems certain this will change, but only limited progress has been made on the international commitments that will give this clarity. A24. This backdrop increases substantially the attractiveness of non-generation options such as demand management and energy eYciency.

Demand Management and Energy Efficiency

A25. A whole spectrum of these is available, ranging from home insulation to the redesign of cities to minimise car usage. Many of these options are low cost (even negative cost), but have not proved popular owing to their transaction costs or lifestyle implications. A26. Heavily rising energy prices are likely to change this and it is interesting to speculate on possible consequences. An early sign is the reduction in motoring that seems to have occurred between January 2007 and January 2008. 20 June 2008

Memorandum by the Institution of Mechanical Engineers The Institution of Mechanical Engineers (IMechE) is a professional body of over 78,000 professional engineers in the UK and overseas. The Institution’s membership is involved in all aspects of energy exploration, conversion, supply, use and recovery. As a Learned Society, IMechE’s role is to be a source of considered, balanced, impartial information and advice.

1. The Role of Renewables in UK Energy Policy

The Institution welcomes the EU-set target of 15% of energy consumed in the UK to come from renewable sources by 2020. However, despite its abundant natural renewable energy resources, both on land and around its coastline, the UK lags far behind other EU nations in expanding its renewable energy production. If the UK is to achieve its target, renewable energy must be rapidly deployed across the transport, power and buildings sector. Put simply, an ambitious and coordinated package of measures across the energy field is urgently required.

2. Barriers to Entry

Existing markets, economic models and mindsets all tend to artificially favour conventional (fossil-fuel and nuclear) energy technologies and inhibit the growth of new, radically diVerent, alternatives. Current barriers to the greater deployment of renewable technologies include (but are not limited to): 2.1 Research and development in the UK energy industry is low, hampering the development of new technologies and allowing other countries to gain market advantage. 2.2 Most renewables incur a much higher proportion of their life-cycle costs in the early planning, manufacture and build phase. Their operating costs and decommissioning costs tend to be very low (particularly when compared to existing technologies like nuclear). However, the lack of availability of financing for renewables projects has impacted on their deployment. 2.3 The UK suVers from a lack of skilled engineers and scientists needed to develop renewable energy capacity. Renewable energy must be seen as an exciting opportunity for young people. Without this the UK will cannot hope to be competitive in the global market place for renewable energy. 2.4 Much of our manufacturing base has now moved overseas. Achieving the necessary scale of manufacturing capacity in a desirable time frame is unlikely without coordinated and concerted government support. In the absence of this support, it is likely that most of the components will need to be imported. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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3. Future Costs There are already a very wide range of renewable energy technologies that are likely to become cheaper both in real and comparative terms. Once built, most renewables utilise freely and permanently available resources. The early-stage additional costs of renewable energy must be thought of as an investment, not just in the achievement of long-term energy and climate policy objectives, but also as an instrument of industrial policy, stimulating future jobs and export earnings.

4. Feed-in Tariffs International experience has clearly demonstrated that feed-in tariVs have delivered far more renewables, far quicker, than quota-type systems like the Renewables Obligation. IMechE believes there is a very strong case for introducing a FIT system for small-scale energy producers (electricity and heat) at the earliest possible opportunity. At larger scale, careful consideration needs to be given to ensure that any FIT proposals do not cause a collapse in what little investor confidence the RO has so far built up.

5. The Electricity Grid The existing electricity grid (transmission and distribution networks) was designed in the first half of the 20th Century to take energy from the coal fields to the major industrial centres. That model is now totally inappropriate; over 70% of the electricity grid is beyond its designed capacity. Major investment and upgrading of the grid is already required. The advantages of renewable and distributed sources of energy (particularly those providing electricity and useful heat at the same time) are numerous and well documented. There is a strong case that future investment and upgrading of the grid should be geared towards a more distributed, less centralised model.

6. Intermittency Most renewables are variable—they only produce energy at certain times when the prevailing conditions are appropriate. They are not, however, unpredictable, at least not within the timescales required for eVective operation of the electricity grid. With the exception of biomass and Energy from Waste plants, other forms of renewable generation will require marginally more back-up than conventional plants. The Institution can provide much deeper technical evidence on these matters if required, but in summary we believe that the intermittency issue is entirely manageable, at an acceptable cost, provided that a balanced portfolio approach is pursued. No one technology (and here we emphasise that renewables are not one single technology) should be allowed to become too dominant in the mix. While a wide range of scenarios are possible, a reasonable working model on which to plan is that no one energy source (eg wind, nuclear, coal, gas, biomass, wave, tidal, solar, etc) should generate more than 25-30% of overall electricity demand.

7. Cost Comparison The applicability of renewables is often highly site-specific, so generalisations about their cost relative to the market incumbents are subject to significant imprecision. Conventional technologies see a higher proportion of their life cycle costs discounted into the future, making them appear cheaper. The estimated £75bn (and rising) bill to decommission safely our existing fleet of nuclear power stations shows how misleading such up- front calculations can become. Global stocks of oil, gas, coal and uranium are all finite, all depleting, and all likely to see considerable price volatility over the coming decades. Most renewables utilise indigenous natural resources and so enhance security of supply because they are not subject to geo-political supply chain risks.

8. Other Forms of Energy Consumption There is a wide variety of renewable technologies able to deliver electricity, heat and/or fuels for transport. While the opportunities for renewable energy in the transport sector are relatively limited, substantial opportunities do exist in the heat sector. The immediate focus in the heat sector should be on energy eYciency improvements, particularly to the existing building stock. However, incentives and support mechanisms are needed to encourage their uptake of both energy eYciency mechanisms and heat supply technology in the UK market, and achieve cost reductions through economies of scale. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

374 the economics of renewable energy: evidence

9. EU ETS The EU ETS is an important tool, but is unlikely to bring forward the required large scale investment in renewable energy when employed in isolation. The carbon price is neither suYciently high nor suYciently predictable to provide long-term investor confidence.

10. Biofuels Despite recent controversy, IMechE sees no fundamental reason why biofuels can not provide a significant source of low carbon energy for the transport sector, sustainably and without unacceptable impacts on food or natural eco-systems. The current target to supply 10% of our road transport fuels from biofuels is a reasonable aspiration for the current (1st generation) energy crops, provided it is managed appropriately. With the right investment, 2nd and 3rd generation biofuels have the potential to supply much more.

11. Overall Energy Policy In general, the development and delivery of all forms of renewable energy needs to be planned and managed in ways that takes due account of the whole energy scene, and its inter-relationships with other policy areas eg climate change, foreign policy and security, taxation and the economy, manufacturing, agriculture, etc. It is vital, therefore, that renewable energy technologies are developed as part of a co-ordinated and balanced overall energy policy, alongside major investment in energy conservation and eYciency, the development of carbon capture and storage, and a much greater focus on the heat sector. 12 June 2008

Memorandum by Delia Jack 1. This submission is made by a member of the public to provide evidence of the costs sustained by the public in the government pursuing renewable generation of electricity by promoting the development of on-shore wind farms. 2. I live in Cleveland where large areas of the landscape have been desecrated by electricity pylons. Already in this county, wind turbines are becoming a scar on the landscape just like the electricity pylons. I fully support, in common with many people, the drive for renewable energy, but when there is the option of having oV-shore wind farms then why continue to desecrate the countryside? Why not move now to having all wind farms oV-shore? 3. As I drive around County Durham for work, what strikes me is that for much of the time many of the wind turbines are non operational. I understand this is because, South of Scotland, apart from the odd site, there is insuYcient wind to run the wind turbines continually. Because of this, I understand wind farms are falling far short of their targets. This suggests again that oV-shore farms should be the policy, as it is these and not on-shore farms in England, which are most eVective in contributing to the targets we need to achieve for renewable energy production. 4. Wind farms impact heavily on us all because they are so huge and these days already no long journey can be made without sighting wind turbines, but for those who live close by the eVects are considerable. The blight on people’s houses begins immediately the possibility of wind farm development nearby becomes public. Perhaps the government should consider making those who make profits from wind farms compensate local people pound for pound for the financial losses they experience because of their development. 5. As a member of the public I would ask the committee to heed the evidence of the eVect of the noise and wind generated by the turbines on the people who live close by. I understand people who are prone to epilepsy have particular problems but all those living nearby are at increased risk of emotional stress, physical ill health and certainly a reduced quality of life. There is no need for the public to suVer in this way when there is the alternative of placing wind farms oV shore. 6. The simple fact is that the growth in on-shore wind farms is against the wishes of many members of the public and the government should heed this. The first line of action should be to consider whether wind farms need to be sited on –shore at all. I would suggest doing so is misguided in terms of the returns from such developments. If wind farms have to be on land then the height of the turbines should be restricted and the location should be a minimum of three miles away from any hamlets or larger areas of habitation. I would also hope for a similar restriction for ancient buildings, or monuments, and conservation areas. Processed: 17-11-2008 19:38:21 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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7. Undoubtedly various wildlife organizations will provide evidence of the eVect of wind turbines on birds, bats and other wildlife, so I will restrict my comments to say that, as a member of the voting public, I expect the government to choose options for providing renewable energy which do not have a negative eVect on the wildlife of this country. 8. In a similar vein the committee needs to heed the eVect of wind turbines on the radar equipment of aircraft. Safety in the air is of great importance to members of the public, not just from a personal safety point of view, but also because airports and the travel industry create jobs for people. Placing wind farms too close to airports can impact on safety and, in the future, restrict what might be much needed expansion. I would suggest the minimum distance from an airport needs to be much more than currently seems acceptable. 15 June 2008

Memorandum by Professor Michael Jefferson 1. I assume that the Select Committee is well aware that the UK ranks 25th out of the 27 EU Member Countries in terms of the share of renewable energy resources in the final use of energy. I further assume that the Select Committee is sceptical about the realism of the15% target for this share by 2020 allocated to the UK. Having spent some 35 years directly involved in the energy industry; taken an interest in renewable energy for some 30 years; taken an interest in climate and climate change for over 50 years; and taken a close professional interest in renewable energy and global climatic change for 20 years (including 17 years direct involvement with the Intergovernmental Panel on Climate Change) it might be thought that I would applaud the UK’s endeavours to expand renewable energy provision and tackle greenhouse gas emissions. Such are the weaknesses of policies and measures, however, that despite the UK’s relative strengths in terms of wind and wave resources and the eYciency of its agricultural industry, no such plaudits are merited. 2. The UK’s Renewables Obligation (RO) scheme overly rewards investors, places excessive costs on energy users (particularly domestic and business electricity users), supports mature technologies but does little for less mature technologies, and costs an excessive amount in carbon emissions avoidance (£400 per tonne carbon, on a grid average basis according to Ofgem). These are criticisms made by the government’s own agencies in this field—Ofgem, The Carbon Trust and the National Audit OYce, among others. Instead of radical change, the government has recently fiddled about with minor changes in banding. It is widely agreed that the Feed- in TariV system (as applied in Germany, for example) would be more eYcient than the RO scheme (although, simply by considering the low wind energy load factors this system has fostered in Germany, and the sub- optimal support of solar PV in a country with low solar insolation, it is clear even this system is not above criticism). Recent research has concluded that UK wind energy projects receive 40% more in subsidy (from electricity consumers) than they would under a German-style REFIT Feed-in-TariV system. Despite the recent government review of the RO system, and its minor tinkering, a major overhaul is required. 3. Given the UK’s relatively strong wind resource, it might be thought that the UK wind energy sector would be performing strongly. It is not (little more than 10% of Germany’s contribution). The UK wind energy industry is keen to point the finger of blame at issues and others which do not bear close examination. First, planning diYculties are blamed, yet peer-reviewed literature indicates that planning delays are no more serious than they are in Germany, Denmark, or Spain. Secondly, key members of the industry [especially the Chief Executive of the British Wind Industry Association (BWEA), and some of her senior colleagues and associates] consider that load factors are irrelevant. The Chief Executive of the BWEA, when responding to quotations of load factors from Ofgem data, has said: “These claims about low load factors are absolute nonsense, load factors are irrelevant . . . a stream of factual inaccuracies, bogus pseudo-science . . . we can refute them all with valid evidence.” [see: http://www.bwea.com/media/news/070830.html] Dr. Donald Swift- Hook, an ex-Chairman of the BWEA and Chairman of the Wind Energy section of the World Renewable Energy Network/Congresses has stated more than once (on the basis that there is insuYcient wind in what he termed “the Milton Keynes area”) that to place wind turbines there “is crazy”. Nevertheless, on another occasion he has remarked of quotation of Ofgem data on wind turbine load factors that such “claims” are “stupid” and “akin to imposing a Communist-style command economy.” [The Scotsman, 31 August 2007,as reported by Ian Johnston.] 4. The Companion Guide to PPS22 states (using the term capacity factor, which is inter-changeable with the term load factor): “Capacity factors in the UK may generally fall anywhere between 0.2 and 0.5, with 0.3 being typical in the UK.” [para. 34, p.165] Not surprisingly, some may consider, there is a resonance with the following statement by the BWEA: “At very good sites the capacity factor can be over 40%. At other sites the capacity factor may be under 30%.” [http://www.bwea.com/ukwed/operational.asp] And for many years the BWEA has encouraged developers and any other interested parties to assume a 30% load factor in their calculations. One pities the BWEA’s Director of Communications, when confronted with the realities, stated that a 30% load factor is “an arbitrary and inaccurate threshold.” [Charles Anglin in a complaint to the BBC, Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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22 November 2007] What are the facts? According to Ofgem data for 2007, of the 81 onshore wind energy developments which were operating in England throughout the twelve months only 13.6% achieved a load factor of 30% or over. In other words, 86.4% had load factors below 30%, and the weighted average load factor was 24.42%. There were 49 (60.5% of the total) wind energy developments achieving a load factor of under 25%, and 23 (28.4% of the total) achieving under 20%. No oVshore developments in England achieved over 28%. A detailed Note of this situation, due for publication, is attached. In Scotland the situation was better: one-third of developments achieved a load factor of 30% or more. In Wales under 20% did so (excluding North Hoyle), and in Northern Ireland 26%. 5. The implications of this situation are stark. In England over £26 million, out of a total of ROC payments/ consumers’ subsidies of just over £34 million in 2007, went on wind energy developments achieving load factors below 30%; and nearly £16 million on those achieving below 20%. If policy and planning rules required wind energy developments only to take place in high average wind speed areas then this problem could be largely avoided (say, speeds over 8 metres per second—m/s—at a hub height of 80 metres above ground level, bearing in mind that an OXERA research report commissioned by the former DTI concluded that at average wind speeds below 8.5 m/s permanent subsidies would be required). Largely avoided, it should be stated, because even in high average wind speed areas turbines can be sub-optimally placed. One needs only to consider the experience in Cumbria of two developments a mere 2.3 kms. apart—Lowca, which achieved load factors of over 30% in each year from 2003 to 2006; and Siddick, which has never achieved 27%. The Chairman of the Board of Nuon (2002-2008), Ludo van Halderen, has said: “Wind energy should be developed where it makes sense instead of seeing wind farms receiving substantial subsidies in countries where they run for barely a fifth of the year (a load factor of 23%).” [“Responding to Climate Change”:www.rtcc.org/2008/html]. 6. Among the results of this misallocation of resources are: — turbines are being placed where they do not maximise electricity generation from renewable energy, nor houses supplied from renewable energy, nor carbon emissions avoided—contrary to government policy objectives; — turbines placed in areas of relatively low average wind speeds divert supplies of turbines, rotor blades and ancillary equipment from sites where the average wind speed is higher, electricity generation would be greater, and carbon emissions avoidance would be higher. This is a major reason why supply chain diYculties have mounted for the wind energy industry, nationally and internationally, lengthening delays and pushing up costs (as more than one BWEA report from BVG Associates has discussed, and among the reasons for Shell’s withdrawal from the London Array). — Turbines are being proposed, and in some cases placed, over large areas of what loosely may be described as “Central England” where average wind speeds are relatively low, yet landscapes and historic assets (and sometimes SSI’s and oYcially designated AONB and AOGLV areas) are jeopardised. Zones of Visual Influence and Cumulative Zones of Visual Influence are casually handled by the planning authorities in too many instances, and the would-be developers typically engage in distortion of facts and evidence. The result is great social discontent with decisions which too often run counter to the public interest, largely because a “gravy train” exists for developers. The general public, for the most part, simply do not realise that through their subsidies as electricity consumers they are funding individual turbines to the extent of over £174,000 per year where the load factor is about 22%, to over £237,000 per year where the load factor is 30%. It is a matter for separate debate whether any subsidy should be paid where load factors achieved are below, say, 25% (and some reduction from the maximum available where less than, say, 30% is achieved); and whether current subsidy levels are optimal even where load factors in excess of 30% are achieved. — Some regional planning authorities, and others, in their spatial plans have assumed that wind energy developments should not be placed where average wind speeds are below 7 m/s. Although this is not an irrational criterion, it is in fact a contravention of PPS22 Key Principle 1(v): “Regional planning bodies and local planning authorities should not make assumptions about the technical and commercial feasibility of renewable energy projects (e.g identifying generalised locations for development based on mean wind speeds). Technological change can mean that sites currently excluded as locations for particular types of renewable energy development may in future be suitable.” There are good reasons for seeking the earliest withdrawal of this “Key Principle”, in order to relieve planning authorities of undesirable costs and other burdens; provide greater certainty to would-be developers; permit closer focus on wind energy proposals on sites where average wind speeds are relatively high; protect large swathes of the countryside, where average wind speeds Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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are relatively low, from severe and avoidable threats; and reinforce the statement in the Companion Guide to PPS22: “The planning system exists to regulate the development and use of land in the public interest. The material question is whether the proposal would have a detrimental eVect on the locality generally and on amenities that ought, in the public interest, to be protected.” [para.39, p.167] Care should be taken, however, to ensure that all known and likely planning applications relevant, or likely to be relevant, to cumulative visual influence are taken fully into account from the outset. — It is widely assumed that, because the UK has a relatively good wind resource, this is generally true. The preceding discussion has indicated this is not the case. One can go further. It has been claimed that the chances of low wind speeds insuYcient to turn wind turbines in the UK occurring in the UK are “around one hour in every five years.” [Graham Sinden] In that case, one wonders, how was it that for hours over eleven days (arguably twelve) in October, 2007, there was insuYcient wind recorded at around 90% or more of the 64 Met OYce sites? — Other examples of distortion, exaggeration or duplicity concerning the UK wind energy industry could be cited. Claims for electricity generation, households which would be supplied, and carbon emissions avoided by proposed and operating wind energy schemes abound. Despite repeated UK Advertising Standards Authority adjudications against wind energy developers claiming that their schemes would avoid emissions based on 860 grammes CO2 per kWh (coal displacement), this comparison is still seen in planning applicants’ documents (even the BWEA seemed to retreat from this point on 15 October 2007). This sort of conduct undermines public support for renewable energy and action to curb anthropogenic greenhouse gas emissions. 7. The recommended conclusion to be drawn from the above is that a major and critical review is required of UK onshore wind energy operations, aimed at ensuring for the future that developments only take place in acknowledged relatively high average wind speed locations, and where even in these there is high confidence turbines are optimally placed. The electricity consumers’ subsidy system should be urgently reviewed as it is excessively costly for consumers and over-rewards investors (who may have no other links to the UK, operate from tax havens, and have no history of involvement in the renewable energy sector). Load factors are an important consideration, as is agreement on realistic household electricity use (many households comprising the elderly, those who work from home, or have large families are not adequately reflected in the oYcial statistical average); and on grammes CO2 per kWh to be assumed (various government departments back 430 grammes or 480 grammes, while the Advertising Standards Authority has backed the former in the past). 8. Among other considerations required of such a review is that onshore wind, inparticular, is a mature technology. There are other technologies which arguably are deserving of much greater support: second and third generation biofuels; oVshore wave; and Concentrating Solar Power (CSP). OVshore wind, because of the additional challenges of installation and maintenance (though noting earlier comments on supply chain challenges which will gravely hamper the government’s ambitions in this field for 7,000 oVshore turbines by 2020), may also deserve greater incentive than the modest band advantage they have been oVered over onshore wind. However, greater caution is required in the technical assessment of all renewable energy technologies (and advanced nuclear, and carbon sequestration, technologies) than appears to have been the case in recent years—nationally and internationally. The importance of using biomass wastes rather than their foodstuVs component should be obvious, and points in the direction of second (and eventually third) generation biomass and biofuels. However, serious questions are asked about the eYciency of producing ethanol from biomass, and results in claims that this cannot be done eYciently because cellulose is highly resistant to biochemical attack. The proposed EU Directive on the promotion of the use of energy from renewable resources [COM(2008) 19 final of January 23, 2008] paid brief lip service to second generation bio- technology; seemed nave in its discussion of the use of first-generation biofuel technology and the ability to prevent tropical forest destruction; appeared unaware of the proportion of anthropogenic global carbon emissions arising from tropical forest destruction (about 18% of the annual total); and failed to mention, as did its commissioned background report, that without substantial imports of feedstocks no less than 27% of the EU’s current arable land would be required to grow biofuel crops to meet its 10% target by 2020. 9. OVshore wave has only been pursued by small entrepreneurial and academic units in the UK to date, despite the UK’s large natural resource. This is unfortunate. By comparison, the Severn barrage, first put forward in 1849, is being given excessive promotion. The proposed EU Directive mentioned above contains, in Article 5 (2) a reference to construction of renewable energy plants with very long lead-times and having a capacity of 5 GW or more, started by 2016 and operational by 2020. This is a reference to the Severn barrage achieved by UK government negotiators, based upon an assumed total generating capacity in excess of 8 GW for a barrage running from CardiV to Weston (an even larger barrage with a claimed total generating capacity Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

378 the economics of renewable energy: evidence in excess of 15 GW has been mooted in the past). With annual UK electricity generating power at around 395,000 GWh, 8 GW capacity suggests a theoretical output of 70,000 GWh, or 17.7% of that total. Actual output, as a result of diurnal tidal flows, has variously been estimated as likely to reduce the contribution to between 4% and 5% at a cost of between £15 billion and £25 billion. Again, “special interests” abound behind the scene, especially those of large engineering and construction companies, currently facing especially tough prospects due to recession. However, although the Severn barrage oVers a contribution to electricity supplies, it is a huge project well beyond current UK experience, therefore fraught with great diYculties and the likelihood of major cost escalation. It will also have severely adverse environmental impacts (it may be recalled that EdF declared their La Rance barrage “destroyed the local ecology”, and that tidal barrages once considered for the Minas and Cumberland basins in the Bay of Fundy have not proceeded due to environmental concerns). However, relative to most other estuaries along the English and Welsh coasts, in particular, the Severn is arguably less important for over-wintering and migratory birds due to its turbidity. However, a 4% to 5% contribution is really rather modest in relation to what is required to make a major diVerence, and greater eVorts to improve energy eYciency and focus directly on curbing carbon emissions might well provide larger-scale benefits. 10. The large-scale potential of CSP is clear, and the technology has a history going back a century. Space does not permit discussion of its potential here. Reference is made to the writer’s: “Win-Win Strategies for Tackling Oil and Natural Gas Constraints while Expanding Renewable Energy Use” in Barbir, F. and Ulgiati, S. “Sustainable Energy Production and Consumption”, NATO Science for Peace and Security Series, Springer, 2008. (Please contact the author for a copy of this paper.) 11. The perceived costs of pylons and wind turbines (now generally 125 metres or 410 feet high to blade tip) for many people in rural areas is so high that they exceed the perceived costs of fossil fuels and, in many cases, nuclear power (see public attitudes in the proximity of Sizewell). How such perceived costs are translated into defensible “external costs” are beyond the powers of this economist. 12. There are many other issues which should be discussed here, among them: why is there no rational micro- generation policy so that, for example, within twelve months of completion of purchase those who have paid stamp duty (much increased under the present government) could get up to that amount refunded provided they had invested in an approved micro-generation scheme. Those with suYcient land could invest in a ground-sourced heat exchanger, providing for a huge number of rural dwellers and many suburban dwellers an eYcient means of avoiding fossil fuel use. This is important in a country with poor solar insolation and highly variable wind conditions (not least in urban and suburban areas where small wind turbines stuck on chimney stacks may take 150 years to repay the investment—and only have an expected life of under 20 years).Why has the European Emissions Trading Scheme been so costly and ineVectual to date, why has administrative allocation of emission rights been so prolonged, and who has been allowed to benefit and why (yet another example of the great gravy train in motion)? The Inquiry also intends to examine important issues relating to comparative electricity generation costs, outside the writer’s competence. 14 June 2008

Memorandum by Professor Nick Jelley, University of Oxford

Comments on the Issues Identified 1. Renewables should be an essential part of Britain’s overall energy policy. This is Government policy but their share of the market and their growth compare badly with several other EU countries, eg Germany, and with what is needed to address the risks from Climate Change. 2. Planning permission is still a major factor that is hindering their growth; for example, several GWs of wind power are awaiting planning permission. The original renewable obligations certificates proved ineVective in promoting growth; it is hoped that the revised scheme is much better. It is important that any scheme of support is not changed at short notice, and ideally runs for many years, to encourage investors. Wind could provide up to 20-30% of the UK’s electricity without an appreciable increase in ‘spinning reserve’, due to the variation in demand. A tidal barrage across the Severn would provide a steady 5%, while wave power might provide 10% within a few decades. This would suggest that up to 50% could be absorbed, though it would be easier with more pumped storage and an improved grid for re-distributing the renewable power. 3. Government support will increase the likelihood of technological advances. Support required both for established and developing technologies. Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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4. The government has failed to increase the share of renewable energy significantly. There is excellent wind around the UK, amongst the best in the world, and the UK policy must be directed toward obtaining at least 20% of the UK electricity supply from wind as quickly as possible. Looking for cost-eVective policies has proved ineVective. The urgency of the situation requires more the attitude that the country would adopt if it were at war. It is not acceptable for the UK to keep on missing targets.

5. Government support for an improved grid would be excellent as it would make it much easier to exploit the high winds oV the West Coast of Scotland, for instance. Selling renewable energy back to the grid must be made easier to encourage micro-generation.

6. External costs of renewable energy can be the spoiling of areas of natural beauty for some, but the costs of using fossil fuels are an increased risk of loss of life—humans, animals and plants—through climate change. The current legislation does not appear to recognise the environmental eVect of inaction- not introducing renewable energy is very damaging to the environment. The planning system is not striking the right balance- preserving local natural habitats can mean the loss of other natural habits elsewhere in the world and also an increased risk of loss of life. Looking for ways to make schemes attractive to the local population is very important- eg low cost electricity.

Nuclear power is low-carbon and the concerns are very diVerent to those arising from the use fossil fuels. Safety, waste disposal and proliferation are key concerns. All can be addressed and nuclear power should be used in the UK. It provides energy security as well as low-carbon energy.

7. Straight economic costs from good wind sites are close to those from fossil fuels. However the penalty of “planning costs” make wind more expensive. Wind is a developed technology while CCS is still under development, but estimated costs for CCS are competitive with several renewable sources. CCS is low-carbon so should definitely be encouraged.

8. Renewable electricity has generally the lower carbon footprint; for instance, biomass can cause significant carbon emissions through forest clearances.

9. Yes, because the UK has one of the best wind resources in the world. Yes, it should, provided “additionality” is established.

10. Provided the scheme is set up well, emissions trading should make renewables more competitive. However it would not remove the need for support for renewable energy- solar energy could provide the world’s energy needs easily if costs could be reduced, storage devices improved and distribution made easier; also fusion power should be supported, as should research on Enhanced Geothermal Systems (EGS).

11. Biomass, such as palm tree plantations, cause significant carbon emissions through forest clearances. However, crops like jatropha, which grow on arid land not suitable for food crops, could be beneficial. Second- generation fuels such as bio-ethanol from cellulose could also be eVective; however, biomass has a low energy per unit area, MW per square kilometre, so its contribution is unlikely to be large. Algae in water may also be a good biomass crop.

Energy Savings

Reducing the energy demand from housing and from cars are very eVective ways for the UK to reduce its emissions significantly. Ground-source heat pumps for housing are eYcient, and better fuel eYciency for cars would give significant savings. Plug-in hybrids may well be a good low-carbon form of transport.

Target for 2050

There is increasing scientific evidence that the UK should reduce its GHG emissions by 80% compared to its 1990 levels and this makes it even more imperative that the UK acts quickly and decisively. Quotas rather than taxes would appear to be the best way to ensure that a target is achieved. 15 June 2008 Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

380 the economics of renewable energy: evidence

Memorandum by the John Muir Trust

Why John Muir Trust is Giving Evidence 1. The John Muir Trust is a Scottish based, UK charity whose aim is to conserve and protect wild places with their indigenous animals, plants and soils for the benefit of present and future generations, and to increase awareness and understanding of the value of such places. The John Muir Trust is concerned about the eVects of climate change and the implications of global warming for people, the environment and wild land. The John Muir Trust supports calls for a strong UK Climate Change Bill, incorporating targets of 80% greenhouse gas (GHG) reductions by 2050—using the IPCC conclusions in its 2007 reports that, in a global context, 50% cut in emissions from a 1990 baseline by 2050 and, for industrialised countries like the UK at least 80% cut by 2050, are required to try and prevent average global warming exceeding 2)C. 2. These reductions should be achieved by a combination of measures—including increasing the proportion of energy produced by a broad range of renewable energy sources, but also, crucially and as the preferred choice, by reducing energy consumption. Within that context, renewable developments need to take place with due respect to the local and national importance of one of the UK’s key assets—its natural heritage. Our natural heritage is increasingly recognised as being of major economic importance, as well as of social and environmental benefit. The John Muir Trust has been represented as an objector at the Beauly Denny 400kV transmission line Public Local Inquiry and at the Muaitheabhal wind development application Public Local Inquiry. The latter application, concerning a site in South Lewis, is the first major proposed wind development in a National Scenic Area to come forward. 3. It is within that context that the Trust makes this submission. The John Muir Trust welcomes the House of Lords inquiry into the economics of renewable energy as an opportunity for the strategic issues involved in energy and climate change decision making, and the success so far, to be considered. Lessons learned can then be used to achieve the Government’s key aims.

Key Government Aims 4. The following key aims of the UK Government should be borne in mind at all times when making decisions on energy issues, if a sustainable and holistic approach is to be achieved. 5. The Government’s top priority in this context is to limit greenhouse gases as much as possible, to make the UK’s contribution to global eVorts to minimise global warming. 6. The Requirements of the Electricity Act 1989 section 3A (as amended), need to be met. “The Regulator must carry out the . . . functions in the manner which he or it considers is best calculated: (i) to secure that all reasonable demands for electricity are met; (ii) to promote eYciency and economy on the part of the Applicants; (iii) to contribute to the achievement of sustainable development; and (iv) to pay adequate regard to its eVect on the environment”. 7. So it is welcome and essential that the inquiry is not limiting itself to considering renewable energy generation in isolation but is also looking at how renewable energy fits into Britain’s overall energy generation and transmission policy. The inquiry aims to set out the costs and benefits of renewable energy and establish how they compare with other sources of energy. However, the most eYcient energy is that which is not used— energy which would have had to be produced but was saved because of energy conservation or eYciency measures.

Energy Conservation and Efficiency 8. It is well recognised that energy conservation measures in business and homes could have a very significant eVect on demand, whilst addressing fuel poverty—increasingly a major issue. The Scottish Parliament in its 2005 Report into Climate Change found that “approximately 40% of energy could be saved, and half of the 60% CO2 reduction target for 2050 could be achieved cost-eVectively by improved energy eYciency. Energy eYciency measures have struggled to gain a high priority for individuals and businesses. A range of radical additional policy instruments is required. Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 381

The Executive’s planned Scottish energy eYciency strategy should include targets for: —diVerent sectors at individual, public sector and business level; — the development of small-scale renewable energy projects; and — an overall reduction in demand for energy, as rising demand threatens to undermine all other measures. Large reductions in Scottish emissions require change towards lower-emission methods of electricity generation. The Executive must work urgently with the UK Government to produce an energy strategy that provides a clear vision of the energy generation mix required to meet emissions reduction targets, and a clear route map towards achieving that mix”. 9. Unfortunately, three years on, the urgency of the situation has not led, in either Scotland or the UK, to speedy implementation of major programmes for energy conservation or to “joined-up thinking” throughout the UK governments and, within those governments, across departments to produce that much-needed energy strategy. It seems inexplicable, given the relative costs of energy conservation versus any kind of electricity generation, that the focus is not squarely on conservation. So it is vital that this inquiry focuses on what is the maximum that can be achieved, throughout the UK, towards the key aims set out above, and how to make it happen. Decision-making should not be focused on exceeding secondary targets (renewable energy) if there are better, more cost-eVective, less environmentally-damaging options to achieve the primary aims of reduced GHG emissions and also ensuring an adequate energy supply (easier to achieve if consumption is reduced).

Energy Hierarchy Model 10. UK governments and local authorities should be using an “energy hierarchy” model, see below, whereby every decision, in whatever department, is considered against the model to see which option is the most sustainable in order to rationalise the policy approach. The hierarchy sets out diVerent options for delivering carbon reduction, with those at the top having least risk of adverse social and environmental impact. All elements of the hierarchy must be pursued but capacity should be taken up in the top elements to prevent environmental conflicts when setting targets for those elements lower down the hierarchy.

Table 1

ENERGY MEASURE

Conservation and avoidance energy management systems to control lighting, heating etc Energy eYciency (including insulation, eYcient building design, energy eYcient appliances) Micro-renewables and micro-CHP Household/development scale incl CHP boilers, rooftop turbines, heatpumps, pv, solar thermal etc Heat Electricity Macro-renewables, Community scale wind, biomass, hydro etc Heat Electricity Macro renewables and Carbon Capture & Storage, Commercial scale wind, wave, tidal, biomass—avoiding areas of environmental sensitivity Distributed Generation Grid based Generation Non-renewable generation CHP Electricity generation only

11. Comparative costs, which are indicative only, using Energy Saving Trust statistics for conservation measures, are of the order below:

(i) Cavity Wall Insulation £8.64/MWh (ii) Loft Insulation 0–270mm £7.07/MWh (iii) Loft Insulation 50–270mm £25.92/MWh (iv) Draught Proofing £15.55/MWh Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

382 the economics of renewable energy: evidence

12. Compared with the costs for new power stations, using government source statistics, (i) Nuclear £38/MWh (ii) Coal (including carbon cost) £44/MWh (iii) Gas (including carbon cost) £44/MWh (iv) Onshore wind £55/MWh (v) OVshore wind £84/MWh 13. A key problem, when considering the relative costs of any kind of energy provision and what we might call “climate change” costs, is the fact that most additional costs associated with renewable energy production and increased transmission costs are met by the consumer ultimately, whilst provision to encourage energy conservation measures generally comes from taxation. In essence, the government pays out to increase energy conservation measures, through grants, whilst the consumer pays for the Renewable Obligation Certificate Scheme (ROCs) and for increased transmission costs through electricity charging. 14. Add to this the fact that these activities often involve diVerent UK governments and it is easy to see why, so far, there seems to be no move to look at what the returns are, in each case, for the various “subsidised” initiatives—far less any attempt to rationalise the overall approach to gain the most per pound spent. Consideration should include gains in both GHG reductions and energy equivalent—either by production or saving measures. In terms of real problems and real solutions, it should not matter whether that pound is from the consumer directly or from the government, from taxes. But in political acceptability, it matters a great deal.

Proposed Model for Increasing Conservation Measures 15. As it is desirable to shift emphasis from energy production to conservation, one way which might be politically achievable would be for energy conservation measures to be installed at no immediate cost to the householder/business who would continue to pay the same amount for their energy per year, as if there was no energy saving—with the surplus paid paying oV the costs of the installation. Once this “debt to the government” had been paid oV, the householder would then pay the true cost of his/her current energy consumption and gain from the savings. Whilst possibly cumbersome in administration, such a scheme could get round the political diYculty of moving away from the current system of consumers picking up the costs of ROCs and increased transmission costs, towards conservation measures.

Renewable Energy Costs—Economic and Environmental 16. There are very major problems with a market which is called a competitive market but which is heavily subsidised in a number of ways which skew decision-making. The Renewable Obligation encourages speculative applications for very large onshore wind power developments in sensitive, remote, environmental areas for the following reasons. 17. There is no national energy generation and transmission strategy, for the UK or for devolved nations. So there is no presumption of “good” or “bad” sites. It is a free-for-all, with the early bird catching the bigger percentage of ROCs subsidy. The planning system in Scotland (the John Muir Trust has not had the capacity to engage with the other UK countries’ planning system) cannot prioritise when considering an application. Each must be considered in isolation. 18. There is no requirement that the proposed power development might, at some time in the future, become economic as the subsidies are the main reason the scheme is proposed. The original rationale for ROCs was to kickstart the renewable sector, not as a permanent prop. 19. There is no requirement for all aspects of a development to be considered in relation to assessment of carbon emissions from that development. Whilst Environmental Statements for developments might refer to “payback time”, these generally only consider the carbon emissions associated with construction of turbines. There are major concerns regarding sites on peatland, over the release of carbon from the peat. Peat bogs in the UK, the majority of which are in Scotland, store the equivalent of Britain’s output of carbon dioxide for the next 21 years. There is great uncertainty about how much carbon might be released from wind developments on peat sites. This needs further work, urgently, and a moratorium on building on deep peat until suYcient understanding allows rational choices. 20. Transmission costs are not picked up by the developer but by consumers throughout the UK, who are paying most of the additional transmission costs. There is, therefore, a perverse incentive to go to cheap sites, far from the market for electricity. This is a completely separate incentive from the much-quoted argument about wind speeds. In fact, with regard to the perceived advantage of the increased wind speed in the Western Isles, Professor Andrew Bain, who has submitted evidence to this inquiry, has calculated that the increased Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 383 wind speeds in the Western Isles do not oVset the increased transmission costs of installing a Western Isles interconnector and taking electricity to the market in either central Scotland or into England, for instance. However, it is not in the developer’s interest to assess this. Less obviously, it is not in the interests of either the transmission company (who will make a good guaranteed return from consumers and increase their asset holding) or the interests of National Grid to do a true cost/benefit analysis.

Ofgem 21. It is Ofgem’s duty to consider “eYciency and economy” and “sustainable development” but Ofgem is under considerable pressure to facilitate the perceived need for large amounts of increased transmission capacity. Ofgem have said, in regard to the proposed Beauly–Denny 400kV interconnector, that it is not their job to assess all alternatives when a proposal is brought forward. This is an area which needs looked at. The John Muir Trust would suggest that undertaking such broad balancing duties is properly a government responsibility and that it should be done by developing a national energy strategy. In the meantime, however, Ofgem must take a broader view of its remit than it has with regard to the Beauly–Denny application, for instance.

Decentralised Grid 22. The current rush for large-scale onshore wind developments, connected by a hugely centralised grid system shows a poverty of imagination and thinking rooted in the early 20th Century. There is a huge risk of stranded assets if there is not a strategic rethink about how energy is produced, saved and distributed. Others have given evidence to this inquiry about the inappropriateness of the current grid models and security standards being used, when considering wind generated supply. Intermittent supply cannot be treated in the same way as firm supply. One way in which wind power production can be better used is when it is used on a community scale, as part of a mix of power sources and, looking towards the future, using hydrogen storage which requires more Research and Development.

Conclusion 23. The John Muir Trust believes it is the government’s duty to consider all aspects of energy production and conservation carefully, to consult widely and produce a National Energy Strategy to achieve a sustainable, eVective energy system and maximise the greenhouse gas emissions reductions. If attention continues to be focused on increasing renewable energy targets, without any requirement for the developments brought forward to have to demonstrate their ability to actually bring about greenhouse gas emissions reductions, we face a possible worst case scenario. This would be where we achieve renewable energy targets through inappropriate developments, at great cost to important environments, only to discover that our greenhouse gas emissions are up, along with our energy consumption, and our energy supply is not secure. Energy conservation measures must be prioritised immediately. They can bring about the most eVective results, most quickly with most environmental gain. They will also have most social benefit, with regard to jobs and fuel poverty. It is only lack of political will, possibly due to extensive industry lobbying, which prevents this happening. Helen McDade Head of Policy, John Muir Trust 13 June 2008

Memorandum by Mr Neil Kermode My name is Neil Kermode. I am the Managing Director of the European Marine Energy Centre (EMEC) in Orkney a post I have held since late 2005. The evidence below is centred upon my experience in the Marine Energy sector both from my time at EMEC and beforehand as a tidal energy scheme developer. EMEC has been set up and funded by a public partnership of Highlands and Islands Enterprise, The Carbon Trust, Orkney Islands Council. It has also received funding from BERR, The Scottish Government, Scottish Enterprise. To date some £15 million has been invested in setting EMEC up. More information is available at www.emec.org.uk Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

384 the economics of renewable energy: evidence

Preamble P.1 In order to put the following comments into context I wish to make it clear where I believe marine energy technologies presently sits. I characterise marine energy as being where the Wright Brothers were when the first became airborne in 1903. The first successful trials have been undertaken and the sceptics have been proved wrong. However the massive range of opportunities and challenges have yet to be met, and in some cases have yet to be even realised. P.2 The UK has a lead in this at present, but others are waking up fast and making confident progress. They will overtake the UK if we do not rise to the challenge, build on the visionary support given so far and maintain our lead by redoubling our eVorts. P.3 The analogy of the Wright Brothers is not to suggest that this is an un-commercial industry. The Wright’s after all sold aircraft from the beginning, but it is the case that they did not need to worry about a huge range of issues that a developed aviation industry now routinely deals with. However to have an industry at all it was necessary to go through the initial stages. P.4 In their day their machines were the wonder of the age. We now look at their work and marvel at how primitive it all was, but that is with the advantage of hindsight. We are unlikely to recreate that sense of wonder with the range of competing technical advances in modern society, but the challenges we face are as great, and some of the steps will look similarly primitive to our successors. We must, however make those steps, and we need to make them now. P.5 Just as the US is largely regarded as the powerhouse of aviation, so the UK can build on its maritime heritage and prowess to secure this as its next area of expertise.

Imperative P.6 It is also crucial that the UK weans itself oV its carbon addiction for the two well known reasons of climate change and security of supply. We know that we are not making any more oil (even if we do find more occasionally) and we know consumption rates are increasing, so there will be an end to oil. P.7 We also know that there is energy in UK waters and that our energy demand is not showing signs of being brought under control yet. So we will need energy and we will be competing for decreasing oil based supplies in a more crowded market unless we do something diVerent. P.8 Marine renewables provides us with an exit opportunity from the oil age. Marine renewables, along with other sustainable energy supply systems, will allow us to get beyond fossil fuels into the next energy age; but the time to invest is NOW so that the technology is ready when we need it. We cannot aVord to wait until the oil or uranium is exhausted before we make that change. P.9 The Stone Age didn’t end because we ran out of stone. It ended because we found a better technology. I believe the same applies to the end of the oil age and the beginning of the next. Investment made now in marine renewables will directly eVect that transition from carbon to sustainability. To answer the questions posed in the Call for Evidence using the same numbering system: 1. Energy policy: Renewables should underpin the energy supply system, not be an add on. Carbon based systems should be called upon to fill the gaps in renewable production, not be the systems of first resort as at present. Renewables provide sustainable energy solutions and potential business opportunities for the UK if properly encouraged and supported. 1.1 I cannot comment on other countries policies, except to say for marine energy that the UK clearly led with the visionary setting up of EMEC and associated support processes. But others are now beginning to follow and there is going to be direct competition form other countries to host the industries. Announcements by the USA, Canada, Chile, South Africa, New Zealand, Korea, Taiwan, Spain, Portugal, Ireland all have announced plans for their own versions of EMEC. 2. Technical Barriers to greater deployment: In terms of marine energy there are presently a number of surmountable technical barriers: — We are at such early stages that it is unclear which technologies will lead. In order to get past this it is essential to get “metal into the water” at both advanced prototype and full prototype stage. In doing so we will learn what works and then how to expand the eVort. Inadequate funding is holding up progress. Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 385

— The grid does not go to the places where marine energy exists. These are generally remote and exclusively coastal locations. Energy will have to come from these locations. Whether it comes long distance as electricity in sub sea cables, overland cables, or short distance by cable before being turned into something else in remote areas remains to be seen. Infrastructure in and around these locations will be needed and whilst it will be of a smaller cost than installations in the North Sea, the technical challenges may well be as great. 2.1 There are unlikely to be significant limits to the integration of marine energy, however an energy storage technology is most likely to be needed to optimise tidal energy. 3. Marine energy will get cheaper as we build more of it and there will be technological advances as experience is gained. Marine energy will become cost eVective without long term support, but this requires the industry to get to a critical mass. At present the industry is grossly undercapitalised and generally characterised by small technology companies struggling to get their first machines into the water. The opportunities to prove present costs and demonstrate cost reductions have not yet been reached. Excellent work has been done by Max Carcus of Pelamis Wave Power on this subject. 3.1 How should government policy be designed? —SuYcient. At present there are tiny amounts of money available when compared to the scale of the industry we are trying to build. The money that is available is heavily scrutinised (so generating excessive oversight overheads), hard to get to in the first place, dispensed slowly and in my opinion often seems to feel like charity for which the recipients should feel grateful. This does not have the hallmarks of a well funded dynamic strategically important industry. — Simple. Present regimes are imaginative and intellectually challenging, but seem excessively complex. We see a great deal of eVort being expended in seeking funding when that eVort would be better directed in making the machines work. — Safe. There are other policy initiatives that are hampering progress. An example being the failure of the state to take on decommissioning requirements or major insurance risks for projects they are funding. As a result the developers bear disproportionate shares of risk and are therefore reluctant to be brave or pioneering. A more paternal adoption of risk by the state would encourage more rapid development. 3.2 If asked to make a recommendation it would be to seek to see if State Aid rules should be removed for marine energy. Energy is becoming a strategic issue and the approach that needs to be taken to securing it is diVerent from general industry. Energy underpins industry, but also society as a whole and without it modern society suVers. This was seen during the coal strikes and the 70s oil crisis. In my opinion the strictures placed on funding for renewable research are excessive given the scale of the challenge to be faced and the dangers of failing to meet them. 3.3 My experience of dealing with a number of developers of devices is that they are grossly underfunded and as a result simple decisions that will entail cost take too long. This position needs to be changed so that they are able to move swiftly and eVectively to develop the machines that will benefit us all. 3.4 It has been suggested that we need to be ready to go to war against climate change. If this is the case we need to get to a point where funding for the weapons or our defence are readily available. In eVect an energy system re-armament is needed. State aid rules are hampering the necessary investment and their relaxation or re-interpretation would enable generous funding to be put into this area and rapid progress will ensue. 4. Government support has had positive eVects on renewable energy, however it has clearly not been as eVective as it could be. When Spain puts up as much onshore wind in four months as the UK has achieved in 40 years one must question how eVective the mass roll out support may be for marine. Present support is welcome, but feels as though it is given begrudgingly. It does not feel as though this has been an area where high-level drive is forcing the pace. 4.1 There are others better placed to answer for the best details of present support. From my perspective as the MD of the main testing site to which these devices will be brought it is my opinion that the support has been suYcient to encourage the first steps, but insuYcient to take the second and third steps of getting machines into the water in significant numbers. 4.2 I have, however witnessed a significant increase in activity in the industry as a result of both the announcement of the Scottish Wave and Tidal Energy Scheme (WATES) in 2006 and also the Energy Technologies Institute (ETI) call in 2007. Pelamis Wave Power are working more in Portugal then the UK as a result of the feed in tariVs available and other developers look worldwide to follow the money. Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

386 the economics of renewable energy: evidence

4.3 In my opinion the nature of the money is less important than the scale of it. At present it is too little, but distributed too cleverly. It needs to be more, made available quicker and with a package of other measures to drive rapid spend.

5. Grid. I am not able to comment in detail on grid issues, but the rules on grid access and use are not geared to bringing renewables forward ahead of older fossil generators. See 1. above. An example is that it seems presently impossible for a new connection for renewables to be sized suYciently to leave space for later further renewables without the cost falling on the first developer. There seems to be a lack of strategic thinking in the rule making area.

6. Pylons. No comment.

7. Costs. See Pelamis Wave Power information on “Learning by doing”.

7.1 Carbon emissions from marine renewables are likely to be eVectively nil after initial construction. There are wind turbines here in Orkney that provided a carbon payback within three months of erection. It is likely that this will be emulated with marine once the industry has achieved critical mass.

7.2 In addition the decommissioning costs of marine renewables are likely to be very low and are probably closer to other renewables than oil and certainly not in the area of nuclear.

8. Renewables generally produce electricity, however the electricity need not be the means of final consumption. Electricity can be used directly for transportation, or could produce liquid/gas fuels for transportation by hydrolysis. Similarly hydrolysis could be producing fertiliser, or smelting aluminium etc. both of which are high energy uses. Renewables can therefore displace other conventional high energy activities, and moving these processes to the energy may well be more eVective than moving the energy to the activity.

8.1 There is a presumption that electric heating is a bad idea, however this is only the case because of the poor eYciency of most electricity producing systems. With only 1/3rd of coal energy making it to the consumer it electricity is a poor heating option. With renewables the critical measure is the amount they deliver, so using renewables to deliver heat is not such an issue.

8.2 In terms of cost: the use of wind energy to produce hydrogen to both run a vehicle and provide a fuel cell with feed stock to run business units has already been proven. The same will inevitably be possible with marine energy in the near future. See the PURE project in Unst.

8.3 A further use of hydrolysis could be to bleed hydrogen into the exiting gas grid and so increase the calorific value of gas, thereby extending its life.

8.4 All options for the use of renewable energy need exploration and a number of solutions progressed in parallel o as to maximise progress.

9. See 8.

9.1 Overseas contribution? No. The best way to build an eVective renewables industry is to have a healthy and vibrant home market. Externalising this would be disastrous when the target is so low. This may be a valid process when seeking the final 15%, but not the first 15%. In addition there will be opportunities to create and deploy the technologies in the UK first and then go overseas for this final 15% so making an export opportunity. If the first tranche goes overseas then the IP and the market will follow it and the UK will lose out.

10. Carbon costs inevitably support renewables. The higher the carbon cost the greater the benefit to renewables and also the greater incentive for energy conservation.

10.1 I cannot comment on whether a more eVective scheme would remove the need for support for marine renewables as it is too early to say. However, the costs for the support of marine are so tiny at present that seeking to reduce this cost is unhelpful. There needs to be a dramatic scaling up of support generally, and whilst this needs to be reasonably eYcient, it is more important that it is eVective in stimulating an industry.

11. I cannot comment on biofuels. 16 June 2008 Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 387

Memorandum by Professor Michael Laughton

1. Introduction Energy from renewable sources would result in significant increases to the present electricity supply cost levels. This submission seeks to explain and to quantify factors underlying these circumstances from a power systems engineering perspective. The feasible cost limits for consumers are not addressed. Instead the focus here is on the costs arising from maintaining power supply security, ie “Keeping the lights on”. Extra costs arise mainly from the: — Simple substitution of existing lower cost electrical energy supplies by higher cost alternatives (! 6% to ! 33%). — Higher system operating costs due to lower utilisation of necessary existing or new conventional generating capacity, operating at lower load factors and thus lower eYciency and higher long-run marginal costs (!12% to !39%). — Extra transmission network capital costs for network modifications and additions that will be required for the accommodation of renewable generation occurring in geographical locations without adequate, or even any, existing network connections. — Extra constrained-oV payments to renewable plant unable to access the electricity market because of network constraints (potentially a significant future revenue stream for renewable plants in Scotland).

2. Substitution of Existing Electrical Energy Supplies with Higher Cost Renewable Sources With regard to current costs of supply a May 2008 update of the widely used analysis of the costs of generating electricity from the leading firm of Consulting Engineers, PB Power, is shown in Table 1. The costs of renewables can be seen to be considerably higher than those of coal, gas and nuclear plant; therefore it can be concluded without any reservation that if, say, 20% of electricity generation is supplied by renewables displacing the equivalent contributions from a combination of existing conventional plant, then the average generation cost and hence price of electricity supplied will increase.

Table 1

COSTS OF ELECTRICITY GENERATION (MAY 2008)103

Energy Source Cost of Electricity p/kWh Wave 21.8 Tidal 12.6 Wind-oVshore 10 BFBC 7 Open Cycle Gas Turbines 7 Integrated Gasification 6.4 Combined Cycle (IGCC) Wind-onshore 5.6 CFBC 4.6 CCGT 4.2 Coal Plant 4.2 Nuclear 3.8

The present day supply of electricity in the UK comes from three main sources of energy namely, coal, gas and nuclear. The approximate respective shares of the electricity market met by these fuels are shown in Table 2.104

103 Communication, PB Power—Costs include capital expenditure, fuel, operation & maintenance, general overheads and carbon emissions. 104 Digest of UK Energy Statistics 2007, DTI, London Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

388 the economics of renewable energy: evidence

Table 2

FUEL USED ON AN ELECTRICITY SUPPLIED BASIS IN THE UK

Fuel % Coal 37.5 Nuclear 18 Gas 36 Oil 1 Imports 2 Other fuels and renewables 4.5

Applying the costs of table 1 to the percentage contributions of energy sources in Table 2 gives a weighted average generation cost of 4.3p/kWh. The eVects on the present electricity supply system of simply substituting the costs of energy obtained from these conventional sources with the costs of electricity from renewable energy sources and neglecting all other costs is shown in Table 3. Six hypothetical energy contributions are considered replacing equivalent amounts of either gas or coal-fired electricity, or all of nuclear plus an appropriate amount gas or coal derived electrical energy from, in turn, 20% onshore wind, then alternatively 10% from onshore and 10% oVshore wind and finally adding a 7% contribution from tidal sources.

Table 3

INCREASE IN PRESENT DAY ELECTRICITY GENERATION COSTS FROM THE SIMPLE SUBSTITUTION OF EXISTING CONVENTIONAL SOURCES WITH HIGHER COST RENEWABLE ENERGY

Replacing Replacing same equivalent % of % of Coal/gas Nuclear/ coal/gas 20% onshore wind 0.28p/kWh 0.35p/kWh %!6.6% %!8.3% 10% onshore 0.72p/kWh 0.79p/kWh 10% oVshore wind %!16.9% %!18.6% 10 onshore 1.30p/kWh 1.38p/kWh 10% oVshore wind %!30.5% %!32.4% ! 7% tidal

The results show that even with this basic substitution of supplies the generation costs increase from between 6% and 33%. Applied across the total primary and secondary production in 2006 of approximately 360 TWh pa from the major power producers these increases translate into extra generation costs of between £1 billion and £5 billion pa.

3. Higher System Operating Costs Arising from the Necessary Retention of Conventional Generating Capacity Unfortunately the problems of calculating the extra costs cannot be solved by simply the substitution of alternative energy source costs as above in Table 3. Electricity supply depending on renewables adds a whole new set of problems and also costs to consider. The power demand on the national grid varies over the course of a day, a rise and fall every 24 hours, a night- time minimum and a daily maximum, with a minimum summer load of about 23GW and a winter peak above 60GW (see Figure 1). A mixture of diVerent types of conventional generation plant with varying degrees of speed of response is indispensable to meet the base-load, mid-range and peak-load requirements. Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 389

Whereas the commercial operation is measured against energy delivered (area under the curve in Figure 1), the central grid control by the National Grid Company (NGC) has to ensure that the power generated balances the power demand, ie the height of the curve at all times; thus the electrical power system operated by the National Grid has to have suYcient capacity installed that can be scheduled as required to meet demand. Most renewable energy cannot be scheduled or the availability predicted suYciently accurately.

Figure 1

DAILY LOAD VARIATION ON THE UK NATIONAL GRID SYSTEM SHOWING MAXIMUM AND MINIMUM DEMAND DAYS FROM 1 JULY 2005 TO 30 JUNE 2006

70000 60000 50000

40000 17-Jul-05 30000 28-Nov-05 20000

National MW Demand 10000 0 010203040 Daily Half Hour Periods

The total power generated by wind turbines in Britain, for example, is not constant and suVers from large variations depending on the weather pattern over the country. Figure 2 shows, for example, the total output of all the wind turbines delivering power Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

390 the economics of renewable energy: evidence

Figure 2

TOTAL WIND POWER TO THE UK NATIONAL GRID IN NOVEMBER/DECEMBER 2006105

to the National Grid during the recent winter months of November/December 2006. This power represents about 70% of all the wind power generated, the rest being delivered directly to the low voltage distribution systems and not to the high voltage grid transmission system. Several studies of wind speeds in GB show that there are significant periods in an average year when demand is high as in the winter period shown in Figure 2 and wind output is low. Such large-scale variability occurs for wind (or wave power) when a large high-pressure weather system moves in over the whole country or a large part of it, those occurring in the winter are invariably accompanied by low temperatures, frost and fog, the occasions when heating and lighting loads can also be at maximum, ie at winter peak load times. In particular, a typical year would have over 1600 hours when wind generated output would be less than 10% of maximum rated installed wind generation capacity, including 450 hours when demand is between 70–100% of peak demand.106 Although the risk of system failure is greatest when demand is at its absolute peak, the risk is still significant relative to this for demands within a few percent of the peak, say within 2 to 4 GW of peak in the system of NGT. SuYcient electrical power has to be supplied to meet demand at all times, however, and so conventional plant capacity that can be scheduled has to be available when renewable power generation is not to be had. To summarise the situation: — The system generating capacity requirement is measured against the peak system demand. In the UK this peak occurs in the winter. The National Grid has historically required a 20% capacity plant margin above peak load. — The renewable capacity connected to the system does not lead to an equivalent amount of conventional capacity being retired from the system. — The Severn Barrage, for example, has zero power output daily and such periods can coincide inevitable with peak system power demand; therefore the Severn Barrage, although contributing carbon free electrical energy, does not replace any conventional capacity, ie has a zero capacity credit. — Wind, on the other hand has a small capacity credit that is determined by a balance of risks, ie of the probability of little output measured against the consequences of lack of supply. For the UK an approximate rule is that the amount of conventional baseload capacity that can be retired is the 105 Sourced from PB Power 106 “The non-market value of generation technologies”, OXERA, June 2003 Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 391

square root of the wind capacity measured in GW. Thus 25GW of wind installed, suYcient to supply about 15% of electrical energy demand, would allow about 5GW of conventional plant to be retired without compromising National Grid security of supply standards. — An equivalent amount of conventional capacity, or slightly less, has to be retained and to operate at lower load factors producing electricity at higher unit costs. — These requirements mean that with regard to wind generation alone the requirement for conventional plant capacity will never be less than the system peak load. Some of this supporting capacity (in Germany called “shadow capacity”) would be on “hot standby”, ie connected to the network and operating at part load to ensure a stability of connection as in the case of steam plant, or available for instant start-up and connection as is the case for hydro and gas-turbine plant. Such plant operates at a low load factor107 and at a lower eYciency. As pointed out in a Royal Academy of Engineering study108, lower plant utilisation incurs a higher cost per unit of energy supplied. The rise in the capital recovery component of energy-supplied costs is illustrated in Figure 3. Costs of generation depend on a number of factors including capital expenditure, fuel, carbon emissions, operation and maintenance and general overheads, some of which are fixed and some variable depending on plant output. Using the percentage of breakdown of costs supplied by PB Power for Table 1 above the cost increases associated coal and gas-fired plants can be calculated for diVerent load factors109.

Figure 3

EFFECT OF PLANT UTILISATION ON THE UNIT COST OF ELECTRICITY PRODUCED

Generation Fixed Costs

14 12 10 8 6 p/kWh 4 2 0 00.20.40.60.81 Load Factor

If wind and tidal energy is inserted into the system, then the percentages of electrical energy supplied by a combination of gas, coal and nuclear plants will have to be reduced accordingly. A number of diVerent scenarios can be explored, the decreases in load factors calculated and the extra unit costs found as shown in Table 4. The increases in average generation costs are thus likely to be range in the range from !12% to !39%. ie 0.5- 1.65p/kWh, or approximately £1.9b–£6b pa added to the major power producer 2006 costs depending on the assumptions made, the highest being associated with the inclusion of tidal energy, the lowest with onshore wind alone. Finally, additional further investment may be required to ensure energy supply against the possible loss of high load factor conventional plant capacity if retired. With additional wind capacity connected it is theoretically possible to withdraw some plant from the system without compromising security of power (not energy) supply considerations. In order to maintain the existing standards of security of energy supply, however, other supporting plant in the form of gas turbine or diesel plant may be added. The additional costs could be of the order of 0.2 p/kWh to 0.3p/kWh, the same as the increase in costs due to lower load factors. They are the sole 107 Load factor is simply the ratio of average output to peak output, so that a plant with, say a 50% load factor is operating at only 50% of capability. 108 “The cost of generating electricity”, Royal Academy of Engineering, London, 2004, p12. 109 The fixed cost p/kWh increases can be found from (fixed cost / load factor), the variable cost increases from decreases in the plant conversion eYciencies with lower load factors. Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

392 the economics of renewable energy: evidence subject of various reports such as the SCAR Report from ILEX Consultants in 2002110 and a review report from UKERC in 2006111. These reports do not consider the additional costs associated with the substitution of existing conventional sources with higher cost renewable energy plant, however, as shown in table 4.

Table 4

INCREASE IN ELECTRICITY GENERATION COSTS WITH SUBSTITUTION OF EXISTING CONVENTIONAL SOURCES WITH HIGHER COST RENEWABLE ENERGY SOURCES AND INCREASED LONG-RUN MARGINAL COSTS OF RETAINED CONVENTIONAL PLANT

Replacing same % of Coal/gas 20% onshore wind 0.50p/kWh %!11.6% 10 onshore 0.97p/kWh 10% oVshore wind %!22.8% 10 onshore 1.65p/kWh 10% oVshore wind %!38.7% ! 7% tidal

4. Extra Renewable Dependent Transmission Costs Increased generation costs are not the only cost increases caused by a large addition of renewable power capacity to the national grid, however, because considerable investment in new grid reinforcements will be necessary. Many of the best renewable energy sites are far from the existing transmission system, especially in the North-West of Scotland. Some examples along with the estimated costs for new transmission lines are as follows: — Scottish and Southern are now planning for possible future renewable energy developments in the Western Isles, Orkney and Shetland, as well as undertaking an environmental impact study of the sector between Beauly and Bonnybridge, which would alone require a £200 million investment. — The cost of the cable linking Lewis to the mainland is put at £250 million. — Scottish Power say that they have plans for £165 million investment in the southwest of Scotland. — Even when such sources are connected to the grid the existing transmission system does not always have the capacity to transmit the power as required. The interconnector between Scotland and England is a case in point and an oVshore subsea cable is under consideration. A PB Power study of 2002 estimates a 200km, 2000MW HVDC subsea cable oV the west coast would cost £800 million. To these can be added the upgrading costs of both transmission and distribution networks of many sites around the coasts as oVshore wind farms are developed. Under forthcoming legislation, which will create a Great Britain-wide market in electricity, the costs of such investment will be spread to all consumers nation- wide, rather than being borne within the local area alone. Taking the recent cost estimates of the Beauly to Denny transmission line as an example the expenditure required £190 million where the return on capital with depreciation, running costs and maintenance added, required a net annual charge to the consumer of £22.32 million pa.112 By this measure every £1 billion required for new transmission facilities is matched by an implicit standing charge of 0.3p/kWh.

5. Extra System Operating Costs Arising from Constrained-off Payments Unlike in other EU countries the National Grid happens to operate basically an island system with sole responsibility for balancing instantaneous power supply and demand and maintaining frequency of electricity supply, voltage control and dynamic stability. Eventually with increasing wind and other generation capacity in the other EU systems the large uncontrolled variations in power produced from such as wind sources can be oVset by technical support from neighbouring systems. In Denmark, for example, with a high percentage of wind capacity in the system such support is required frequently; however with a feed-in tariV policy in 110 “Quantifying the System Costs of Additional Renewables in 2020”, ILEX Energy Consulting Report to the DTI, October 2002. 111 “The Costs and Impacts of Intermittency”, UKERC, 2006. 112 “Overview of the Proposed 400kV Overhead Transmission Line near Beauly, Scotland”, Report by ICF Consulting, 3 August 2004 Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 393 operation guaranteeing renewable energy priority access to the grid, the necessity of having to export electricity to balance the Danish system results in electricity exports at below the subsidised costs or, more expensively, constrained oV payments to the wind generators. Priority access to the grid and appropriate compensation for renewable generators throughout the EU is to be strengthened by a draft EU directive113 (p. 17, para. 31,) that states: “In certain circumstances it is not possible to fully ensure transmission and distribution of electricity produced from renewable energy sources without aVecting the reliability and safety of the grid system. In these circumstances it may be appropriate for financial compensation to be given to those producers.” In addition Article 14, in particular p. 31, 14(2), adds: “Without prejudice to the maintenance of the reliability and safety of the grid, Member States shall ensure that transmission system operators and distribution system operators in their territory guarantee the transmission and distribution of electricity produced from renewable energy sources. They shall also provide for priority access to the grid system of electricity produced from renewable energy sources. When dispatching electricity generating installations, transmission system operators shall give priority to generating installations using renewable energy sources insofar as the security of the national electricity system permits.” Such operational practices have worrying implications for the costs of electricity supply in the UK! Constrained oV payments are already made by the National Grid. They are given whenever generated output from a generator cannot be accepted by the transmission system and therefore must be “constrained oV”. The reasons can be various, but, in total, represent a charge on the transmission operator. The costs are substantial and figure largely in the economic justification for new transmission capacity. As noted already the national transmission system has not been configured to align with the geographical locations of renewable energy sources and severe limitations on transmission access are possible without prior, not post, investment in new network capacity. A particular problem arises with the future development of the extensive renewable resources in Scotland, for example, where the total planned renewable generation capacity if realised (contracted and consented for connection) will far exceed local demand and interconnector upgraded transmission capacity.114 New transmission lines to England or connections to other European systems would take many years to construct. It would be an intolerable cost if for several years renewable generators had to be supported by substantial constrained oV payments under the terms of the EU Directive because of a lack of timely network investments. June 2008

Memorandum by Lawrence Graham LLP

Introduction LG is a leading London-based law firm with a recognised and expanding renewable energy group, combining the firm’s recognised strengths in capital raising, corporate advice, real estate development, planning, entrepreneurial growth services and environmental law. Our clients include corporates, promoters, investors, entrepreneurs, government agencies, developers and contractors, covering a wide spectrum of renewable technologies including wind, wave & tidal, biomass, energy from waste, biofuels, carbon trading and recycling. As a result we have a good understanding of the issues which companies and investors see as the key barriers to increased investment and productivity in the renewable energy and low-carbon sectors.

Barriers to Greater use of Renewable Energy If the government is committed to reaching its target of 15% of electricity from renewable sources by 2020 (as mentioned in the following section this will actually need to be significantly higher than this to satisfy the energy gap that will have developed by 2020) and 60% by 2050 then barriers to the funding, construction and connectivity of renewable energy projects need to be addressed as a matter of urgency. In our experience the presence ad extent of these barriers means that many renewable energy companies and investors believe that that UK is significantly less attractive than many other jurisdictions for the development of such projects. 113 http://ec.europa.eu/energy/climate actions/doc/2008 res directive en.pdf 114 Contrary to the view that a feed-in tariV policy would accelerate the development of renewable electricity generation in the UK there is no evidence that the very substantial support aVorded by the Renewable Obligations Certificates has held back the planned investments in renewable resources. Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

394 the economics of renewable energy: evidence

LG attended the two day All-Energy conference in Aberdeen in May, and we noted that many speakers felt that if the current “business-as-usual” approach continues then is unlikely that electivity from renewable energy sources will be more than 10% of all energy produced by 2020.

Energy Mix As you will be aware, all but one of the UK’s nuclear power stations will have been decommissioned by 2020. In addition a number of large fossil fuel plants will also have to close or significantly reduce capacity by 2015 to meet restrictions under the Large Combustion Plants Directive (2001/80/EC). The earliest that new nuclear power stations could come online is expected to be from 2020 as it takes around a decade to build a nuclear plant. Demand for electricity is set to continue to rise, however even without an increase in forecasted demand for electricity there will be a significant energy gap by 2020. Many commentators believe that renewable energy can play a crucial role in meeting this demand. We understand that if increased use of renewable energy alone was used to satisfy the energy deficit then by 2020 the electricity from renewable energy sources would need to account for over 40% of all electricity generation. Due to issues such as planning and connectivity (as discussed below) it often currently takes many years for a renewable energy facility to start producing renewable energy. As a result of these delays, if the government is committed to the targets it has announced then it is imperative that the current barriers and hurdles to development are reduced and/or simplified as soon as practicable.

Planning The planning process can take an unacceptably lengthy time for companies investing in renewable energy projects, and the outcome is often viewed as highly uncertain. For example, Shell has recently declared its wish to dispose of its 30% stake in the London Array scheme, which would amount to the largest oVshore wind farm in the world. Condemned by politicians and environmentalists for being greedy and irresponsible, Shell said that costs at the London Array had soared by 45%. since work commenced. At a renewable energy conference which members of our firm attended in Aberdeen last month, Dermot Grimson (Head of UK Government Relations at Shell International) confirmed that Shell’s decision was based on many factors including lengthy delays in the project, spiralling production costs and that, in a global market, Shell could invest the capital committed to the London Array project in other projects in diVerent jurisdictions which would see a quicker return on investment. Planning is a key constraint, both in terms of time and complexity. For example, in 2007 the target time period for consenting for onshore wind farms was three months. However the average timeframe was 10 months in England, 27 months in Wales and 14 months in Scotland. Currently only 5% of wind farm projects are being consented in the 16 week target period. For major, or highly controversial projects, the timescale can be significantly longer, which compares unfavourably with other countries. In our view there are strong grounds for making renewable energy projects a “special case” and to fast track them through the planning system (in a similar way to mobile telephony in the past) and for reviewing potentially obstructive case law which is proving unhelpful in the commercial uptake of renewable energy.

Special case for renewable energy Our view, based on discussions with companies across the renewable energy sector, is that the government could address current unease over planning in the UK in two ways: (a) first, by lowering the threshold at which strategically important projects (such as in the renewable sector) can be considered by the new Infrastructure Planning Commission (the IPC) and so be fast- tracked. The 50 MWh (100MWh oVshore) threshold for a renewable energy project equates, for example, to a large wind farm and many organisations such as the British Wind Energy Association had lobbied for the threshold to be set at lower levels for renewable projects; and (b) secondly by making the renewable energy sectors a “special case” to promote faster growth, a precedent which was set in the UK with a similar approach for mobile telephony. This could be achieved by extending permitted development rights and/or specific planning policy statements. By making renewables a “special case”, the government might perhaps also re-consider another common issue faced, namely of objections to proposed projects on the assumption that wind farms interfere with MoD radar systems. For example, E.On recently submitted plans to build one of the largest ever wind farms in the country, Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 395 but the project will need to overcome objections form the Ministry of Defence, which fears that the 83 turbines to be situated five miles oV the coast of East Yorkshire will interfere with radar defences. E.On had hoped to begin building the £700 million wind farm in 2010 with production of up to 300MW electricity in 2012. Review of the Merton Rule The so-called “Merton Rule” which requires that use of renewable energy on site to reduce carbon dioxide emissions is now being widely invoked by local authorities when planning permission is sought on commercial developments in urban centres. The eVect of the rule is to oblige retailers and other large businesses to generate 10%. or more of their energy requirements for a particular development through renewable energy generated ON SITE. In our experience, whilst most businesses are in theory very happy to use a higher proportion of electricity generated from renewable energy, the practical diYculties of generating this on site are considerable. It would make more sense, in our view, to free businesses from the obligation of generating renewable energy on site but raise the total amount they are required to buy in from renewable sources. We believe that, even were the threshold to be raised, this change would be welcomed by the business community. This proposal would also lead to the more eYcient production of renewable energy as energy would be produced from larger plants and sources and this in turn would be attractive to third party investors as costs of energy production would be lower. Offshore Projects OVshore wind farms (together with the more developed onshore wind farms) is the most important form of renewable energy production if the UK is to significantly increase production of green electricity over the next decade (on the assumption that the Severn Barrage may not be built). A significant and increasing number of renewable energy projects involve oVshore development which, in the past, was particularly diYcult due to the lack of a single body taking responsibility for the marine estate. To some extent, the government is addressing this broader issue in the Marine Bill, currently out to consultation, which will simplify the current system and create a new overseeing body, The Marine Management Organisation (MMO). These developments are broadly welcomed. However, LG is concerned about the impact of the Marine Bill on the renewable energy sector, as the Bill appears to do little to help independent operators, or those with necessarily smaller, innovative or exploratory projects. Whilst larger oVshore and onshore renewable energy projects would fall under the auspices of the new IPC (created in the Planning Bill) oVshore projects generating less than 100 MWh will still fall under the current consenting regime of the Electricity Act combined with the new system of marine licences issued by the MMO outlined in the Marine Bill. The Planning Bill does enable the Secretary of State to “promote” developments which otherwise fall below the IPC thresholds into the IPC regime if he considers that they are nationally important, but we suggest that given the imperative of increasing renewable energy capacity all but the smallest oVshore project should automatically be able to benefit from the regime. The IPC will have the overriding objective of prioritising strategically important projects in what are recognised as key sectors, including energy. In contrast, the MMO will have wide-ranging responsibilities, not just in relation to licensing but also nature conservation, spatial planning and enforcement, and concerns have already been expressed as to whether it will also have the resources necessary to handle applications for the more complex developments in any sector. Any perception that as a result the operators of smaller oVshore projects may be subject to a less favourable consenting process is likely to make it harder for them to raise capital and may well discourage innovation and more experimental developments oVshore. This could in turn hold back development in the sector. It is worth noting, by way of illustration perhaps, that a more favourable regime encouraged independent operators to play a key role in developing North Sea oil—where they often proved more willing than larger players to experiment in new fields and technologies.

Marine Environmental Considerations The Marine Bill ironically could also have the eVect of putting increased hurdles into the planning process for the oVshore projects that fall within its remit (ie those under 100 MWh), through the introduction of Marine Conservation Zones (MCZs). The need for thorough Environmental Impact Assessment (EIA) for developments forms an important part of what is often seen as the delay inherent in applications for consent for onshore development: for example, there may be a need to undertake particular surveys over specific time periods which are often seasonal. The processes associated with conducting an EIA are slowly improving as more data as to onshore biodiversity Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

396 the economics of renewable energy: evidence interests is collected but there is currently very little equivalent data which can be used in relation to oVshore projects and the costs to the developer of obtaining it can be high. MCZ’s will add an extra dimension to this and we are concerned that the eVect will be to further discourage potential development of smaller renewable energy projects oVshore. Potential oVshore developers may be surprised to realise that MCZs are not intended merely to protect the “best” areas in terms of conservation/biodiversity value, but more to create a wide ranging network of protected sites simply representing the diversity of particular interests. The criteria for their creation and the subsequent control of activities in them reflect, in slightly less stringent terms, the approach of the Habitats Directive, including the precautionary principle in relation to potential environmental damage (pursuant to which it will be for the proposed developer to demonstrate that the project will have no or very limited impact on the marine environment) and the need for it be demonstrated that there are no practical alternatives to the development, that public interest outweighs any damage that might be caused and that the developer will provide suitable compensation. The implementation of the Habitats Directive in the UK initially brought significant uncertainties—both for developers and conservation bodies—concerning the basis of the selection of sites, the criteria against which assessments should be carried out and the meaning of the no alternatives/ public interest/compensation requirements. If similar uncertainties are not to act as a deterrent to smaller renewable energy projects oVshore and to those who might fund them, it will be critical that the whole industry participates fully in the designation process and the setting of clear conservation objectives for sites that are selected.

Grid and Connectivity Issues The fact that a large proportion of new renewable generation capacity is often located in geographically remote locations, often with intermittent output, means that there are questions as to whether the current transmission regime is fit to achieve the Government’s current renewables targets. We recently hosted a renewable energy dinner the focus of which was the barriers to funding in the sector. The debate was chaired by Lord Moyniham. One of the many issues which our clients and contacts felt was a significant barrier to investment was the lengthy delays involved in renewable energy and conventional generators connecting with the transmission network. These delays were seen as being primarily due to: — The scale of demand for new generator connections—at the moment the National Grid operates a first-come-first-served approach to connecting generation without reflecting the status of projects in the queue for connection. With the re-banding of the Renewable Obligation, demand for connection is only set to increase; — Planning permission; — Existing generators have limited incentives to release or sell transmission capacity in the short term; and — Limited information is made available between transmission licensees and generators. Various ideas have been put forward to try and release the queue for Grid connectivity. One issue is whether to adopt fundamental change (for example charging electricity suppliers to invest and connect to the Grid) or incremental change revolving around queue juggling. The organisations which are controlling the Grid queue system are not geared up for seismic change therefore this issue cannot be left to the Grid companies alone and public body involvement is required. Other factors which could assist would be linking Grid connectivity access to planning consent. We understand that this is contemplated in respect of the fast-track large infrastructure projects which is welcome news. However consideration also needs to be given to smaller power generators. At a recent speech given by the British Wind Energy Association (BWEA), it stated that if the consenting process for onshore wind farms was reduced to nine months, this in itself would have a minimal impact on wind farm development and output going forwards. In their view, the key limiting factor is Grid connectivity and if these issues were resolved then this would have a highly marked impact on the output of energy from renewable sources. This is even more marked when considering oVshore wind farms since the establishment of an oVshore grid is in its infancy. On 31 January 2008 OFGEM and DBERR published an interim report to the Secretary of State on its findings so far in its review of transmission access. One of its key findings is that stronger commercial incentives could be placed on the transmission companies to deliver on time firm connection dates to developers who have made an appropriate financial commitment. Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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The current Energy Bill includes provisions to assist in implementing a new regime that will provide the infrastructure to transmit electricity from oVshore renewables to the onshore electricity supply network. At present, existing oVshore connections are owned and operated by the generator-developers. A new oVshore transmission regime, to optimise existing and future oVshore connections by requiring that they be owned and operated by a separate licensed entity, is being implemented under the Electricity Act 1989 and the Energy Act 2004. The Bill gives additional powers to enable GEMA (Gas and Electricity Markets Authority) to run a tender process for licensing connections of large scale oVshore renewables projects to the onshore electricity network. These proposals are broadly welcomed by the industry.

Regulatory Regime and Financial Incentives A common theme expressed by many of our clients and contacts in the sector is that a stable regulatory and economic regime is required over the medium term to provide investors with the confidence that they will obtain an acceptable return on their investment over say a five to 10 year period. The re-banding of the Renewable Obligation from 1 April 2009 has been broadly welcomed by investors and renewable companies alike. However, there are calls for the banding to be increased for certain of the emerging technologies which require almost prohibitively high levels of capital expenditure to research, develop, test and deploy these technologies. We feel that the government should consider raising the banding in certain sectors even further to ensure a significant continued inflow of investment into the various renewable energy generation sectors. In addition the Renewable Obligation is due to be reviewed by Government every five years. In order to aid investor confidence (which will be looking for medium to long-term stability) we would suggest that the Government should commit to an upwards only re-banding at any such review. We note that prior to the implementation of the RO, the Government did consult on various methods of incentivising investment in the industry, including the use of feed-in tariVs. Whilst the Government has decided that a green certificate such as the ROC is the preference in the UK, there is still much debate over whether the subsidy system developed by the feed-in tariV principle is actually more lucrative for renewable power generators and therefore more attractive to investors. The investors involved with medium to large scale renewable energy projects are sophisticated and are often not constrained to solely investing in the UK. The costs of developing, installing and maintaining a renewable energy plant in the UK (in terms of both time costs and capital expenditure for R&D, construction costs, professional fees and ongoing maintenance) are high compared to other jurisdictions. In our experience the more sophisticated renewable energy companies are often choosing to establish operations outside the UK. One example would be our client Clipper Windpower plc which is a UK company listed on AIM which constructs wind turbines—to date its entire wind farm portfolio is established in the US rather than the UK. There are many reasons for this including ease of planning consent in US states, accessibility of skilled engineers and scientists and the monetary exchange rate. It goes without saying that the more incentives (such as tax breaks and grants) which central or local government can provide to entities involved at each stage of the development and implantation of renewable energy projects the better. The establishment of the Energy Technology Institute in December 2007 has been welcomed. This is a 50:50 partnership between the Government and various leading companies and which provides grants for the funding of testing of prototype renewable technologies. The Government should encourage the development of more organisations of this kind.

General Mood within the Industry As previously mentioned we recently held a dinner for 50 clients and contacts in the renewable sectors (both companies and investors). The theme of the dinner was the hurdles to investment in renewable energy projects and we held a round table discussion chaired by Lord Moynihan. Members of our firm have also recently attended the two day All-Energy conference in Aberdeen. At both of these events we detected a very strong feeling of frustration with the amount of red tape, delays and other hurdles which renewable energy companies need to overcome. The individuals leading these companies are passionate about their technologies and processes and demonstrate huge drive and determination to ensure that their businesses are successful. The government on the one hand is claiming that it is committed to producing certain levels of renewable energy within certain timeframes and on paper these are impressive targets. However, within the industry there is resignation and extreme frustration at the hurdles which the industry needs to overcome to be able to Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

398 the economics of renewable energy: evidence produce energy from renewable resources. Examples include the complexity of the planning approval system and non joined up thinking between diVerent government departments and tiers of government. Processes urgently need to be streamlined and simplified as we are in danger of many such companies seeking to establish their renewable energy technologies and business overseas rather than in the UK. 16 June 2008

Memorandum by Dr and Mrs J Lyne We would like to make the following points, with reference to the document “The Economics of Renewable Energy”. 1. With reference to Point 6. We think more regard should be taken to the impact of Wind Farms in rural areas, especially conservation areas. We are very concerned that Government policy and planning with run rough shod over the wishes of local communities, simply to tick boxes and attain targets. We are not against Wind Farms per se however, they must be sited appropriately so as not to have an impact upon communities. 2. The example of this is the possible sighting of a Wind Farm in the East and West Newbiggen area of Darlington. This site is totally inappropriate as low land Wind Farms have a very low load capacity ('30%) and therefore placement of turbines is simply a matter of a money making exercise by Wind Farm companies allied to large incentives to local farmers. Wind Farms should be located in highland areas or oV-shore where load capacity makes the project worthwhile and will not impact on local communities in terms of light and noise pollution, house prices and impact upon conservation areas. 3. Our local village of Bishopton is located with a Darlington Conservation area. We have a 12th century Mott and Bailey Castle. The placement of at least two of the 11 planned 100 metre turbines will directly aVect the views of the monument. An impression of this is shown below:

4. We are worried that planning committees, oYcers, local councillors and MP’s have received a very one- sided view of the Wind Farms by slick commercial companies. We also doubt any of them live within 1km of any Wind farms themselves. Teesside and Darlington have many industrial sites where Wind Farms would not only be more appropriate but more eYcient. Traditional power stations still need to be running constantly to provide electric when the wind stops blowing, as it often does in low land areas! Common sense must prevail and planning consent not simply pander Government targets and large financial incentives. 5. This proposed site is also with 3 kilometres of Durham/Teesside airport! We understand that the airport is concerned with interference with its primary radar and will mount an objection. This again demonstrates that an entirely inappropriate site has been chosen simply on the grounds of a willing group of local farmers and a commercial company that may make a significant amount of money should the project be approved by a Government policy with a target to be met. Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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6. Many of these Wind Farm projects are simply not based on sound Green Policies but commercial opportunism. June 2008

Memorandum by Dr Rayner Mayer and Dr Roger Bentley

Comparative Cost of Fossil Fuels and Renewable Energy 0. Renewable energy sources will be installed in large numbers once the cost of renewable energy becomes cheaper than that derived from fossil fuels. This cross over point cannot be fixed as the resource base of fossil fuels is finite and so its cost will rise as the resource depletes. Renewable energy sources, by contrast, are wide spread, abundant and inexhaustible as they derive directly or indirectly from sunlight so their cost base will always be low.

Peak Oil 1. The world’s supply of conventional oil is close to peaking and may already have peaked; out of about 100 oil producing countries over 60 have already peaked. The North Sea and the North slope of Alaska are examples of two of the biggest finds in recent decades yet within one generation the production in both these regions has peaked and is in sharp decline. 2. One of the more independent assessments comes from ASPO, the Association for the Study of Peak Oil and Gas, whose latest production estimates for all hydrocarbon (HC) resources is illustrated below. What is significant in terms of economics is the sharp decline in total hydrocarbon supply once the peak has past. A 3–4% reduction per year will quickly cause huge imbalances between demand and supply leading to further price increases, and possibly rationing.

THE 2004 UPDATED SCENARIO FOR OIL AND GAS LIQUIDS UPDATED BY COLIN CAMPBELL (http://www.peakoil.net/uhdsg/Default.htm)

3. In times of rising prices, producers can aVord to reduce production for geo-political reasons or to maximise recovery from their fields thus aggravating an already unstable situation regarding supply. There is also a strong economic argument that suggests that it is better to leave some oil and gas in the ground to help future Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

400 the economics of renewable energy: evidence generations. As we discussed before the HOL Select Committee on Energy Security in 2001, “the concern that we have about energy security is not what happens if we and a number of other groups are wrong, but what happens if our predictions [of peak oil and gas] are correct”.

Dash for Gas 4. Any large scale switching of supply from oil to gas for applications such as electricity generation, transportation or heating, will simply bring forward the date of the supply peak for gas. Our best estimate is that this is likely to follow 10 to 15 years after the oil peak provided no large scale switching occurs. Once oil and gas have peaked, production will inevitably decline as smaller, deeper fields have to be developed and so the rate of production will decline.

Making the Transition 5. Fossil fuels are primarily used for generating electricity, transportation and heating. Eurelectric, the European Union of the Electricity Industry, has investigated the transition to 2050 and has produced a report “Electricity production in a carbon constrained world”. This report concludes that the carbon content needs to be reduced by 60% for each unit of electricity generated. Renewable energy sources are regarded as a very important part of any future electricity mix. 6. Transportation is the sector which will have the greatest diYculty in making the transition. The industry itself seems unable to relate their products to the likely timescale of peak oil—so the concept of very fuel eYcient vehicles with an eYciency of 3 litres/100 km (90 grams CO2/km) for passenger cars in city traYc is still a vision. Cars are still being marketed with emission rates up to 300 grams CO2/km thus bringing forward the day of peak oil. 7. There are many means of providing renewable heating, so the transition from oil and gas to renewable heating sources will be easy to accomplish.

Rising Material Costs 8. The rising price of oil and gas will increase the cost of materials that require large amounts of energy during their production. Metals like aluminium and steel are the most aVected which will increase the capital cost of fossil fuel plants. 9. Renewable sources use materials much more eYciently and so are likely to become more cost eVective than conventional energy sources. Even wind turbines with their large blades made from glass reinforced plastics will be less aVected as the price of these materials is rising much slower than of metals.

Improving Technology Renewable Sources 10. The technology of renewable energy sources is still maturing so increases in eYciency and performance will continue for some years (for photovoltaic, maybe for decades). This will enhance the cost competitiveness of renewable energy sources.

Impact of Increasing Demand 11. As many of the renewable technologies vary diurnally, improved short term storage of electricity will help to smooth fluctuations in supply. For renewable energy sources such as solar thermal, hot water can be stored in hot water cylinders. However, these cylinders require an extra coil so that the solar heated hot water can transfer its heat to the water store. The buildings regulations should be changed to require all storage cylinders to be sold with this extra coil fitted to reduce the cost of fitting solar water heaters at a future date.

Micro-generation 12. The greatest impact of renewable energy sources will be micro-generation, that is small scale renewable generation of electricity, hot water, space heating or space cooling for use in the home or in an adjacent cluster of homes. This will reduce the need for centralised generation of electricity and equally important reduce the losses and costs associated with transmission and distribution. There is little reason why some form of micro generation could not be included in every dwelling. Processed: 17-11-2008 19:38:22 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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13. Increasing demand for micro renewable sources will lead to reduction in costs. Specific examples of this include: — manufacturers willing to train installers; one prominent heat pump supplier aims to train 1,000 installers in 2008; — trained installers able to oVer renewable sources rather than fossil fuel systems for heating to consumers; — for ground source heat pumps, drilling contractors are now purchasing specialised drilling equipment which will reduce drilling time and cost for drilling bore holes; and — increasing sales will be reflected in reduced unit costs.

Integration of Micro-generation into New Buildings 14. Integration into the building is easy for new dwellings so the additional cost will be low and can be financed via the mortgage. For example, by installing under floor-heating rather than radiators, the delivery temperature of the hot water will be 35) C rather than 60) C so the standing losses will be less. As the eYciency of a heat pump depends upon the uplift temperature (the diVerence between source and output temperature), for 35) C output, heat pumps will typically produce 4 units of heat for each 1 unit of energy consumed. This gives an eVective eYciency of 400% compared with 95% for a condensing gas boiler. To maximise the output of photovoltaic electricity or solar thermal hot water, the building and roof orientation can be optimised. For wind turbines, the height and shape of adjacent buildings is critical.

Integration of Micro-generation into Existing Buildings 15. As the replacement rate of the housing stock is less than 1%, micro-generation will primarily need to be fitted to existing buildings. Photovoltaic and solar thermal arrays can generally be fitted to pitch roofs with the appropriate orientation and small wind turbines can also be roof mounted. Biomass and heat pump systems can use existing distribution systems. However, costs will be higher than for new-build where the appropriate plumbing and wiring can be readily installed. These one-oV costs are a better investment for society than subsidising continued fossil fuel heating through winter fuel payment.

Building Schools for the Future (BSF) 16. This is an ambitious Government programme to rebuild or refurbish all secondary schools in England and Wales at a estimated cost of £50 billion. The declared aim is by 2016 for all schools to be carbon neutral for which the Government is willing to finance an extra £70 per square metre. This will provide a high market for micro renewable energy sources which will bring a significant reduction in both capital and running costs.

Q1. Fit of renewables into the UK energy policy 17. At present, renewable sources are seen as like-for-like replacement of fossil fuels in generating electricity to be fed into the grid. Neither the Government nor the Select Committee have fully recognised that the potential for renewable heating is as great as that of renewable electricity; as first quantified in the EU 1997 White Paper. Of all the European industries, Danish firms, on the one hand, have dominated the manufacture of wind turbine generators since the erection of the first modern style turbines in 1975 at Nibe. On the other hand, since 1980, Sweden has been the dominant manufacturer of heat pumps which concentrate renewable heat located in the air, ground or water. The reason why these two countries are world leaders is due to a combination of long term energy planning, favourable tax regimes, informed and educated citizens and an understanding of transforming the market.

Q2. Barriers to greater deployment 18. The most important barriers include— — lack of information and knowledge of the potential for renewable energy sources at a micro as well as macro scale; the “Kyoto in the Home” project is trialling such resources with the help of an EU grant, but this work will cease in December 2008 unless an alternative source of funding can be found; Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

402 the economics of renewable energy: evidence

— no sense of urgency to replace fossil fuel boilers by renewable heating sources in central heating systems as the concept of limits to supply of fossil fuel is not yet accepted by central Government or many press commentators; the Energy Performance in Buildings Directive only requires providing advice about the use of renewable heating systems for buildings which are greater than 1,000 m2 after the boiler is 15 years old; it would be sensible to reduce this limit to say 50 m2 so that house owners are faced with a clear choice; — lack of trained installers to install heat pump, solar water heaters and other micro renewable sources; industry should be encouraged to train such installers who will then be able to advise people of the economics of switching from fossil fuel to renewables at the end of life of their current boiler; and — inadequate buy back tariV of renewable electricity attached to the home (micro wind and photovoltaic); utilities should be required to buy back at a rate commensurate with renewable generation as part of their public service obligation.

Technical Limits to the Amount of Deployment

19. The current model of centralised generation of electricity and production/supply of gas involving electricity and gas grids is not suitable for large scale micro generation of renewables attached to homes. It will be more eYcient for the surplus of renewable electricity and heat to be stored by the end user(s); the end users being typically a cluster of houses at the end of the distribution grid. Dispersed micro-generation will reduce the local variation in wind and sunshine and so can stabilise the supply.

Q3. Technological advances

20. The imminent oil and gas peaks require large scale Government intervention to support industry in bringing forth readily identifiable technological advances. This should be carried out at European scale and UK funding made available directly to Eureka approved projects. The Technology Strategy Board’s current policy of rotating calls for proposals should be scrapped in favour of open calls based on a set of technology priorities which reflect current global issues such as limiting climate change, how to manage the transition away from fossil fuels towards renewables, limiting environmental pollution and adapting to global warming.

Q4. Effectiveness of current government support

21. For renewable electricity, a feed in tariV would be easier to understand and operate than a renewable obligation certificate and is much more likely to stimulate growth of renewable electricity as has been observed in other countries eg Germany. To encourage renewable heating sources for new buildings, a minimum level of renewable energy (that is renewable heating a well as renewable electricity) should be set for all size of dwellings. This would extend the Merton Rule which many local authorities have adopted and this minimum level should be set at 20% of all the energy used in the home. As renewable heating sources are much cheaper than renewable electricity sources, this would create a growth market for such heating sources. For existing buildings, the obligation in the energy performance bill to survey a heating system after 15 years should be extended to cover buildings of all sizes above say 50 m2 and for the installer to provide a report on the economics of replacing with a renewable as well as non renewable source. These two clauses should be added to the new climate change bill under discussion by Parliament.

Q5. Role of transmission and distribution networks

22. The networks need to be able to accept as well as supply renewable electricity. With micro generation, this is not likely to be a concern provided that there are local loads to absorb any excess generation. Some storage at source of supply could be mandated. For larger wind farms at community level, the grid may need strengthening locally; this should be financed from operating revenues of the network as a public obligation. Utilities will have to manage demand as well as supply which is not easy if both are fluctuating in a random manner; however current cost meters and maximum demand switches on the supply to any dwelling will help to manage demand. Smart metering and time-of-day tariVs will help to regulate demand from some industry sectors. Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Q6. External costs 23. The prime concerns are visual impact and audible noise from wind farms. The visual impact can be reduced by careful siting of turbines and comparing the intrusion of more turbines at a lower height. The noise impact is related to the level of background noise and again can be reduced by careful siting and new design. These external costs are much lower than fossil fuel or nuclear power generation.

Q7. Costs of renewables relative to fossil fuels and nuclear power 24. The inability of supply to meet the demand for oil and gas is resulting in rapidly increasing prices even before production decreases. Nuclear power is handicapped by decommissioning costs, the magnitude of which are uncertain. Thus the timeframe over which renewables will be cheaper than other sources of generation for electricity is likely to be well within the lifetime of any new power station to be built today.

Q8. Costs and benefits of renewable sources for transport and heating 25. As half of Britain’s energy requirement is for low grade heat, this is most economically supplied by renewable heating sources directly. Of the three renewable sources, heat pumps, particularly ground source, are likely to have the greatest impact as they are already a volume product in continental Europe. Renewable energy sources have a much high capital cost and lower running cost than fossil fuel systems. For example the installation of a small ground source heat pump to heat a typical well insulated family home will cost about £8,000 whilst a condensing gas boiler will cost about half this amount. As the heat pump will save about 15,000 kWh gas per year, the annual savings amounted to £250 in 2002, £500 in 2008 and as much as £1000 in 2012 if the current rise in price of gas continues. So the major impact of rising fuel prices is to reduce the payback time for recovering the higher investment cost of renewables. 26. The most likely renewable source for transport is electricity as electric drivelines are much more eYcient than diesel drivelines. This electricity can be provided by a variety of sources including renewables and even fuel cells if the technological challenges can be overcome.

Q9. Meeting EU renewable targets for 2020 27. At least half of the target could come from renewable heating sources primarily heat pumps and the remainder other half from renewable electricity generation. Transport is unlikely to make any significant contribution to this target on this timescale.

Q10. Costs of carbon emissions 28. The cost of carbon should be raised in line with the recommendations of the Stern report. This will help initiate the transformation to more renewable sources of energy in transport and housing.

Q11. Bio fuels 29. Bio fuels can have useful local impact and should be pursued, but cannot be a major energy source on a national scale. Bio fuel production should be limited to crops which are not useful for feeding humans such as algae. 24 May 2008

References Communication from the Commission Energy for the future : Renewable sources of energy: White Paper for a Community Strategy and Action Plan. COM(97)599 final (26/11/1997). Written and oral evidence to the HOL Select Committee on Energy Security Monday 29 October 2001 by Roger Bentley and Rayner Mayer 14th HOL report 2001/2 p39–48. The Role of Electricity: A new Path to Secure and Competitive Energy in a Carbon-Constrained World. Eurelectric Brussels 2007. For status of heat pump technology consult European Heat Pump Association web site www.ehpa.org Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

404 the economics of renewable energy: evidence

Rayner Mayer is a Senior Visiting Research Fellow at the University of Reading, Foundation Chair of the European Heat Pump Association 2000–06, Former Chair of Bus Working Group (Low Carbon Vehicle Partnership) and teaches part of the MSc renewable energy course at the University of Reading. Roger Bentley is a visiting Research Fellow at the University of Reading, Head ofR&DforWhitfield Solar, Secretary of Association for the Study of Peak Oil and Gas 2002–05, Secretary Oil Depletion Analysis Centre, London 2001–02.

Supplementary memorandum by Dr Rayner Mayer and Dr Roger Bentley

UK Renewable Energy Strategy Consultation Document (BERR) A1. BERR published on 26 June 2008, a consultation document setting out a policy framework by which the UK could meet its 15% target which is equivalent to 260 TWh of energy from all renewable sources by 2020. An investment of the order of £100 billion is envisaged in order to meet this target. The mean price of oil over this time period is assumed to be $70/barrel (paragraph 21, page 8).

Price of Oil A2. This is currently in excess of $140/barrel at a time when the global oil supply is close to or has peaked as discussed in our memorandum (paragraph 2). If the predictions of Colin Campbell and a wide range of other industry forecasters including ourselves are correct then by 2020 there could be a reduction in supply of up to 30%. The implicit global demand is unlikely to reduce by this amount as it has risen almost every year for the past 30 years. Although there will be demand reduction and alternative supplies coming forward, it is not unreasonable to assume oil prices could rise to $200/barrel.

Resource Cost and Economics of Renewables A3. The resource cost of the various types of renewables, set out in table A1, comes from figure 1.4 of the BERR document. It shows that only 6.5% heat is cost eVective at $70/barrel. By contrast In table A2, we calculate the resource cost of oil assuming 100% energy conversion eYciency of one barrel of oil. If this was burnt in a power station to generate electricity, its conversion eYciency would be no greater than 50% thus doubling the resource cost.

Table A1

RESOURCE COST OF RENEWABLES (FROM FIGURE 1.4 OF BERR ANALYSIS)

Amount of renewables Resource cost Renewable source (TWh) (£/MWh) 6.5% heat 35 0 10.5% heat 28 12 5% transport 4 15 8% transport 15 16 10% transport 10 17 14% heat 22 25 28% electricity 50 35 32% electricity 15 40 37% electricity with 20 45 Severn barrage microgeneration 3 80 of electricity Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 405

Table A2

RESOURCE COST OF OIL AND ECONOMIC AMOUNT OF RENEWABLES

Oil price Resource cost Economic amount of ($/barrel) (£/MWh) renewables (TWh) 70 20 35 140 40 95 210 60 180 280 80 205

By comparison of the data in these two tables, it can be seen that as the oil price rises then a higher proportion of renewables becomes economic and at $200/barrel the UK’s renewable target can be exceeded.

Switch Investment from Fossil Fuels A4. On this simple analysis we conclude that no additional investment is required to install renewables. What is required is a strong Government intervention to encourage the shift in investment from burning fossil fuels to installing all the renewable energy sources cited in the strategy document. Whilst more analysis is needed, this suggests that the investment expenditure is likely to be no greater than the avoided cost of building conventional fossil fuel power stations or developing new gas or oil fields [1].

Energy Bills A5. Such a strategy will help to reduce any increases in energy bills because renewable energy sources are characterized by high initial costs and low running costs. So the higher proportion of renewables, P the more the consumer will be shielded from the rising cost of fossil fuels. 15 July 2008

Reference [1] Art Beijdorf Energy eYciency Shell (1979)

Memorandum by Sir Donald Miller

Introduction 1. Government, in setting out their policy on renewable energy, have on several occasions stated that the targets are “subject to the costs being acceptable to consumers”; White Paper Cm 5671 P16 Section 1.22 lines 7–8 is one such example. However no steps have been taken to assess what these are likely to be and to consult consumers on what they consider acceptable. This paper concentrates on the costs of wind energy and particularly the costs to consumers, wind being the technology for which the costs are most clearly established. It first examines the various areas where costs are incurred before attempting to quantify each to arrive at a total figure. It then adds some more general comment, based on established engineering criteria and long experience of power generation, on the likely relative costs of other renewable sources such as marine and dispersed local generation.

Wind Energy 2. It is frequently claimed that the output from wind developments will supply so many houses. In reality, as Fig 1 published by National Grid shows, the output is so intermittent and unpredictable that it cannot be relied on as a supply. An electricity system cannot store energy in significant quantity so that its operation requires there be an exact balance at all times between the demand and generation output. Thus any source of generation which cannot be relied on to produce power on demand requires to be backed up by conventional fossil fuelled generation. The burdens of this are met entirely by consumers and comprise (a) the capital costs of providing this spare generating plant but also (b) the increased operating costs required to ensure that the system can compensate for the short term and unpredictable swings in output from wind farms. Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

406 the economics of renewable energy: evidence

3. Dealing first with (a), the capital costs of support plant, it is sometimes claimed that wide dispersement of installations throughout the country will greatly mitigate the requirement for such back-up but experience does not support this. An examination of Danish performance shows that on 29 December 2000, with 1,860MW of wind turbine capacity installed and an output of 1,715MW, this was reduced to 951MW over one hour under storm conditions. Since the period of study is necessarily short, this is unlikely to correspond to the worst conditions, but nevertheless it represents a power swing of 41% of wind output per hour. 4. Similarly, in Germany the grid operator E.ON* in their report Wind Year Overview 2003 describe a reduction from 4,300 MW to 660MW (a drop of 3,640MW) over six hours with a peak rate of about double that or 30% of output per hour. 5. National Grid in their evidence to a House of Lords Select committee gave as their criteria for when the intermittency of wind power would incur additional costs for the UK system as: “When there is a potential loss over one hour greater than 3% of peak demand. 3 % of the UK peak demand of 60,000 MW amounts to 1,800 MW and the system must be capable of withstanding this loss at all times including the hours when wind output is falling rapidly The UK grid system is designed and operated to cater for the instantaneous loss of a major generating station or a double circuit high voltage line and thus has already to accommodate a maximum power loss of 1,250MW. If we take the maximum short term wind power reduction at say 35% of wind output we can readily calculate the capacity of installed wind generation beyond which, according to National Grid, significant additional operating cost will be incurred on the system. This calculation below shows that this occurs once the installed wind turbine capacity exceeds: 1,800 " 1,250 % 1,570 MW 0.35 6. Already there some 2,500 MW of wind turbines in the UK in operation and some 19,000 MW including those in the planning process. In Scotland alone, see Fig 1, some 2,000MW are in operation or under construction and as much as 8,000MW, including those for which applications have been made for planning consent, so that we are already in line for very significant system support costs. Discussing costs, the Royal Academy of Engineering, comment in their Annual Review 2002–03 on the Government’s Energy target of generating 20% of our electricity by 2020 from renewables say “this is over-optimistic and fails to address the fundamental diYculty of all renewable sources—they are intermittent.” *E.On, owner of UK generator Powergen, is a major player in the UK wind market. 7. An analysis by the Grid arm of the large German utility E.On has demonstrated that this additional back up thermal generating plant needs to be 80% of the installed wind turbine capacity, a figure which is supported by the Irish Grid, The Royal Academy of Engineers, by OFGEM and more recent work in a BERR/SEDC study. Indeed other work based on probability theory both here and in Germany suggests that if the reliability of our supplies is to be maintained at traditional levels something like 90% back up will be required for the high levels of wind power envisaged. 8. Turning to (b), the need for operational support, since output from wind generators can vary dramatically over a short time any reduction must be compensated for by quick response conventional generating plant. However fossil fuelled plant, such as a large coal fired generation, takes typically 10 hours to start and load up from cold so that it becomes necessary to run suYcient back up plant at less than rated load whenever the wind turbines are in operation. The minimum load at which a 600MW coal fired generator can be operated is typically some 200MW or one third of rated full load so that to match the wind turbine output at any time on the system a large number of fossil fuelled units will require to part loaded with the loss of eYciency this entails. Experience suggests that the total amount of this de-loading on the system should be some 60% of the wind turbine output at any time and that this will need to be done on a regional basis, if large swings in the power transfers are to be avoided. Operation in this ineYcient mode incurs further additional costs which are met by the consumer. It also increases the quantities of CO2 released compared with operation at full load, so reducing the gain in CO2 emissions by at least 20% compared with that given by a simple calculation based on the wind energy output. 9. Nor does this represent the whole of the financial costs incurred as a result of an excessive reliance on wind energy. There is also the cost of transmitting the energy to the consumer. It is clear that based on present planning the vast majority of wind installations, will be mainly in Scotland and to a lesser extent in Wales and the West of England, and all remote from where the demand is required in the South and South-East of England. It may therefore be instructive to look in more detail at the situation in Scotland. National Grid are planning on an installed wind farm capacity of 8,000MW in Scotland by year 2013–14 which compares with existing conventional generating capacity of 8,900MW and a maximum system demand of some 5,700 MW. The present capacity of the transmission system from Scotland to the north of England is some 2,200MW so Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 407 that there is at present no outlet for additional capacity either in Scotland or over the interconnectors to England without displacing existing Scottish generating capacity. Recognising this limitation, Government and Ofgem (the electricity regulator) have authorised the Scottish Grid Companies to spend an initial £800 million on reinforcing the HV transmission system to the North of England to cater for exports from wind farms in Scotland. £350 million of this initial expenditure is for the construction of a new EHV line along the major tourist route of the A9 in the Highlands from Beauly, north of Inverness, to Glasgow with the remainder for reinforcing the cross Border links to the North of England. This will increase the capacity of the transmission to England to some 3,300MW, suYcient only to cater for the expected wind capacity for this year (2008). The extra cost this year of this transmission expenditure, which would not be required but for excessive installations of wind energy is equivalent to £35/MWhr of energy produced and alone is comparable with the price of bulk power from conventional generation 10. Even the heavy expenditure on the transmission system referred to above will not be suYcient to cater for the large amounts of wind power projected for installation in Scotland. The Authoritative source for information on the UK Grid System is the 1,000 page statutory Seven Year Statement published annually by the three transmission companies, National Grid, Scottish Power and Scottish and Southern. This most recent Statement (2007) contains an exhaustive analysis of the eVect of increasing wind energy in Scotland on the required power flows to England and is depicted in chart form in Fig 3. The National Grid figures show an increase from wind power of 3,625MW (from 8,827 to 12,493) over the seven years to 2013 with export flows (the red line in Fig 3) increasing by 3,094MW (from 2,653 to 5,746 MW). This is all from proposed increases in wind installations in Scotland. It should be noted that these increases in wind output are not balanced by reductions in conventional generating plant, even supposing this were technically possible on the system. Indeed heavy expenditure is now being undertaken to fit flue gas desulphurisation at Longannet and Cockenzie power stations to extend their working lives beyond 2015 and further licences can be expected to extend the lives of Scotland’s nuclear plants. National Grid’s analysis also shows that these same levels of import are required to maintain supplies in England. This situation is illustrated pictorially in Fig 4 where by 2013 over 5,000MW is shown being exported from Scotland and transported throughout England to the SE, even aVecting flows to the continent over the sub sea cables. 11. It should be noted that the flows described above are those used by the Grid companies for system planning and investment purposes and are for conditions at maximum demand and with wind power outputs set at 60% of installed capacity. Thus the export of 5,746 MW in 2013–14 means that the whole of the wind generation in Scotland (8,000 MW installed capacity) will be exported even at periods of high system load on the Scottish system. At lower loads, because of the relatively lower operating costs of other generation in Scotland (nuclear and high merit coal) compared with England, the high levels of wind power outputs exported to England will be maintained or even increased. 12. The costs of all this transmission for these massive wind power developments proposed for Scotland could not be better illustrated than by the Commentary of National Grid “Upon completion of these planned reinforcement programmes, the Scottish-England boundary continues to show insuYcient transfer capacity indicating further reinforcement may be required” and proposing substantial further expenditure in Central Scotland as well as two additional double circuit high power 400KV Transmission lines from Kilmarnock in the west and Eccles in the east across the border as well as substantial reinforcement of the transmission system all the way to the SE of England–the costs of which will all be met by the electricity consumer. 13. It is worth noting in passing that without any wind farm installations Scotland already generates some 60% of its electricity from non CO2 emitting sources (nuclear and water) one of the highest world wide after France with its 80% nuclear and Norway with significant water power resources. 14. Having established that there would be very heavy expenditure on the transmission system it is next necessary to examine where these costs fall. While it is true that all costs are eventually met by electricity consumers some paths are more direct than others. For transmission costs, the charging system is operated by National grid on behalf of the three transmission owning companies. In the case of “Use of System Charges”, only a proportion (currently 27%) of the cost of the transmission capacity that their installations require is met by the generators with 73% being met by electricity consumers by payments to the Distributors through their tariVs. In addition generators of less than 100MW capacity currently qualify for a “Small Generator Rebate” amounting to some £4.5/MWHR. TariVs published by National Grid quote a cost per annum to genertaors of £ 13.5/KW of generation capacity connected in the South of Scotland (increasing to over £ 22/KW in the North) these representing 27% for their present estimate of costs. While these costs can be expected to find their way indirectly through to consumers the remaining 73% ie £36.5/KW for generation connected in central Scotland, is charged to consumers through their tariVs as a recoverable cost by the Grid Operators from the Distributors. Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

408 the economics of renewable energy: evidence

15. It is accepted that even though the developer is relieved of some of the above charges the costs of wind power would make it uncompetitive in the UK market. The Royal Society of Engineering, The UK’s premier Engineering Institution published an assessment of generation costs in 2005 and a further updated study has more recently been published by PB Power one of the UK’s leading Firms of Consulting Engineers Firms. The latter shows (Fig 5) onshore wind, (even when virtually ignoring system support and transmission costs) at £55/MWhr against a market price of some £40/MWhr for bulk power in recent years and an even lower cost for new nuclear. In order to make the construction of wind farms attractive to developers the Government has decreed that wind power developers are paid a subsidy (Renewables Obligation Certificate) currently £35/ Mwhr escalated with RPI as well as being relieved of the Carbon Tax Levy of £ 1.4/MWhr. These costs are also paid by consumers through their electricity bills. However because the buy out payments by Distributors who are short of the required ROC certificates are redistributed to the ROC holders, the prices at auction are considerably higher than the nominal ROC values. 16. The implications of these various factors for the costs of electricity from wind power located in Central and in Northern Scotland to the Consumer are therefore:

Item Cost £/MWhr Central Northern

Auction price (Energy !ROC !CCL) 93.3 (average of last 4 auctions) Capital charges for back-up plant (80%) T T 22.6 (as R Academy of Engineering) Additional running costs for part loaded plant. T Transmission charges (73% not met by developer) 14.9 24.2 £130.8/MWhr 140.1/MWhr

17. These figures of £130/MWhr and £140/MWhr are some three to four times the cost of bulk power in the electricity market (Fig 5) or power from a new nuclear station. The direct subsidy to the developer alone in the auction price at some £ 50/MWhr is more than the market value of the electricity and this is before adding the additional costs incurred by the grid operator or the additional transmission charges and system losses which are a direct charge on the consumer. 18. It should be noted that for new generating plant, whether replacement or additional, located in the South of England where it is needed, capital investment in transmission would be minimal. There would be no requirement for Ofgem’s recently authorised £800 million to cater for wind energy in Scotland, or the further heavy expenditure which is foreseen by National Grid to transmit this energy all the way to SE England. 19. To put this matter in perspective, the total increase in annual costs of 8000MW of wind energy in Scotland by 2013–14 would reach the startling figure of £2,000 million in that year alone. By 2020, if the cost of the Government target of 40% wind in Scotland is met, the cost of the ROC subsidy alone, all met by the consumer, would aggregate to the startling figure of some £4,000 millions with the figures for the UK some £ 30,000millions. (See the estimate of aggregate ROC subsidies by 2020 amounting to given in the House of Lords by the Parliamentary Secretary to the DTI on 5 May 2004 and the statement by the National Audit OYce that subsidies would be running at £1,000 millions/annum by 2010). 20. The continuance of these subsidies is at variance with claims that the present support is to be regarding as launch costs and that wind turbines will become more economic with time. Engineers know that unlike conventional methods of generating electricity, the weight and thus the cost of wind turbines goes up faster with size than does the output. So the potential for cost reductions is very limited indeed. 21. Even if it is accepted that some premium in the cost of energy from renewable sources is justified because of reductions in CO2 emissions these levels of cost go far beyond any foreseeable level of carbon pricing. Surely too, if we are to accept such financial penalties it should only be against the assurance of a fully eVective policy but this does not appear to be the case. At present there are some 19,000 MW (compared with some 25,000 MW of renewables to meet the 2020 target) wind power installations in prospect or under investigation in the UK alone. If built there would be practically no where on high ground that one would not be dominated by wind installations. As to eVectiveness, a simple calculation shows that we would need to install some 10 times this capacity each year even to compensate for the additional CO2 emissions from new coal fired power stations being commissioned in China. Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 409

22. The inevitable conclusion is that this massive concentration on wind must be about the worst energy investment yet devised either for its ineVectiveness or its cost/benefits for consumers. It is surely time that consumers were made aware of the massive subsidies being awarded to developers and the costs being incurred in his name and the views of consumers taken into account. It raises the question as to what level of costs is required to trigger the Government criterion of “provided the costs are acceptable to the consumer” but I submit that if these costs were more widely known they are far beyond what would be acceptable to the majority of consumers, particularly as with rising energy costs, fuel poverty is a growing issue for many households and when concern is being expressed about the competitiveness of British Industry

Other Renewable Energy Sources and Dispersed Generation

23.It is too easy when looking at the power of the waves to believe that here is a massive energy source which could be tapped for commercial needs and recent oYcial statements have tended to reflect this view. Objective professional engineering opinion, as typified by the 2003 Report of the Royal Academy of Engineers and the recent report of PB Engineers (Fig 5) takes a markedly less optimistic position and one which objective engineering assessment would support. 24. The fundamental diYculty with many, if not all, all renewable energy sources is that the energy density is low and therefore the costs of development are inherently high; it is not for nothing that high energy density, coal, oil, gas, nuclear and high head water power have been the favoured sources for energy generation and will continue to provide the lowest cost power. The energy density in a moving fluid (wind or water) is a function of the density of the fluid times the cube of the velocity. But the velocity of a fast moving tide is some 6 knots at best over a few hours at springs (much lower for most of the time) compared with some 25 knots for a brisk wind so that even with the greater density of water the energy density on average is not that much diVerent from wind. After taking into account the much larger forces acting on a marine turbine and the harsh environment of a marine installation, the prospects are far from promising. Nor it is likely that any new technique will overturn this conclusion; we have had screw propellers and paddles, the basis of the present marine tidal prototypes for some two hundred years during which there has been no shortage of development and no-one is holding out the prospect of a better means of transferring energy between an electrical generator shaft and a marine current. 25. Most engineering opinion would put the prospects for wave power development even lower than for tidal, not least because of the uncertain forces to which such devices are subjected and the logistic problems of anchoring and servicing any substantial installation. With installations on any scale there must also be a high risk of danger to navigation. These disadvantages seem to be recognised in the recent decisions of Government to determine a buy out price (admittedly at the development stage) of £177/MWhr for Tidal and no less than £196/MWhr for Wave. 26. Turning to micro level generation for application on a domestic scale a fundamental diYculty is that of the economics of scale. It is a good rule of thumb for most plant such as that for generating electricity that a doubling of the unit size allows a reduction in the capital cost by one third per kW of output. Thus in moving from a 600MW generator to multiple units of say 6kw there will a massive capital cost penalty and also a not insignificant reduction in thermal eYciency of generation? This can of course be compensated for to a degree if the exhaust heat which would otherwise go to waste can be used for space heating but this requires a good match between the electricity and the heat demands at all times throughout the 24 hours and the year. At best this could only be achievable and that on a short term basis by use of an associated energy storage system. 27. It is frequently asked why large central heating systems on a town scale have been so widely employed in say Sweden and Finland and not in this country. There is of course the obvious diVerence that they have longer and colder winters than Britain with its maritime climate but detailed investigations of this in the past have shown that the district heating is heavily subsidised by the electricity sales to the detriment of the latter. 28. More recently we have seen increasing demands for a “buy back” tariV for electricity sold to the grid from small installations to match the buying price. It should be recognised that this is simply a call for another form of subsidy since the value of the output from any generator which cannot guarantee to provide output over periods of maximum demand is nothing more than the value of the fuel displaced. Nor of course does the small generator bear any of the costs of providing the electricity system, the expenses of which have to be recovered within the prices for energy sales to consumers. To the extent therefore that any such tariV exceeds the fuel price this would simply amount to an additional tax on the generality of electricity consumers Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

410 the economics of renewable energy: evidence

Conclusion 29. The question has to be asked whether the present concentration on renewables is an appropriate response to the possibility of global warming being down to anthropomorphic CO2. The science of this seems far from being firmly established, and until it is, any measures to lessen its possible impact should I suggest be regarded as more in the nature of an insurance policy with premiums rated accordingly. To accept a charge of as much as three times the current price of bulk power would seem altogether excessive in such circumstances especially when we have to hand alternative means of electricity generation which are fully proven, vastly more economic and capable of being introduced on a much shorter time scale. 3 June 2008

Supplementary memorandum by Sir Donald Miller 1. Since submitting my evidence I have studied the BERR Consultation Document on a proposed Policy for CO2 reductions using Renewable Energy. This substantially increases the target proportions of electricity from renewable energy from some 15% by 2020 to 35% and would clearly have significant implications for the costs of electricity to consumers. I have therefore carried out a quantitative assessment of its implications which I trust will be of interest to the Committee. 2. Para 74 of the Consultation document states that electricity tariVs for domestic consumers are currently increased by 7% from renewables and suggests that costs will increase by a further 10–13% if 35% of our electricity comes from renewables by 2020. This would mean a total addition to domestic tariVs of some 20% and rather higher for industrial. 3. For year 2006, the base year for the Consultation Document, 4.4% of our electricity was from renewables; however les than half of this (some 2%) was from sources qualifying for ROC subsidies, the remainder being low cost old established hydro generation and similar non CO2 emitting generation. The 35% target for year 2020 therefore implies a 17fold increase in subsidised renewables making it diYcult to reconcile with the claimed three fold increase in tariVs for consumers. 4. The assessment I have carried out suggests that the 20% increase is a gross underestimate and that the true figure, based on median projections, would be in the region of a 50 % increase. In view of the importance of this and the need to validate the assumptions I have asked Mr Colin Gibson, formerly Director of Networks at National Grid, and who I see has also submitted evidence to the Inquiry, to carry out an independent check and this has confirmed that the true figure is likely to be in excess of 50%. 5. In view of the enormous cost of this proposed policy and the damage it would do to the UK economy, I believe that work should begin immediately on developing an alternative energy policy which will be more eVective and acceptable to electricity consumers. With the proper measures in place this could be put into eVect more quickly and with greater certainty of meeting the planned CO2 reductions than with the proposals in the Consultative Document. 19 July 2008

Memorandum by the Mynydd Llansadwrn Action Group

Statement The Mynydd Llansadwrn Action Group accepts the need for an energy policy that focuses on emission reduction, but as the contents of this submission show, wind power is not an eVective technology for achieving these policy objectives.

Summary and Conclusion Evidence shows that wind power is an unreliable and intermittent source of energy that cannot provide firm predictable generating capacity; it is extremely expensive compared to almost every other energy source, and, it has limited value in reducing carbon dioxide emissions because of the need for spinning reserve backup from fossil-fuelled power plants. Wind farms are deeply unpopular with a growing number of people who object to the visual intrusion, the noise and light pollution and the damage to the environment and wildlife. We are paying a high cost—socially, environmentally and economically—for poor results. Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 411

1. Fluctuations in Generating Capacity Wind-generated electricity is intermittent and unpredictable and, therefore, requires spinning reserve backup. Fluctuating energy supplies from wind turbines cause problems for grid operators, who have to stabilise supply with demand.

1.1 Spinning reserve The intermittent and unpredictable nature of output from wind farms causes problems. In order to stabilise supply and demand, grid operators must maintain continuous spinning reserve backup ready to go on stream immediately in response to changing weather conditions. This spinning reserve is emitting CO2 even when not producing electricity.

1.2 Spinning reserve in Denmark and Germany The more wind energy penetrates the grid system, the more spinning reserve becomes crucial in meeting demand. The 2003 West Danish Grid [ELTRA] System Report … identified Spinning Reserve capacity as between 300MW and 500MW per 1000MW of installed capacity which means that with a Danish load factor of about 20%, “backup” can be of greater capacity than realised generation.1 The power company E.ON said it would take 50 GW of renewable energy for the UK to meet EU targets, but this would require 90% backup from gas and coal plants to ensure supply when “intermittent renewable supplies” are not available.2

1.3 Unusable wind-generated electricity Evidence from Denmark shows that even a large wind farm system is incapable of providing firm predictable capacity. Sometimes output is low when demand is high; sometimes output is high when demand is low. As a result, Denmark exports most of its wind-generated power to its neighbours at a financial loss.3 The UK has no grid connections with other countries; therefore our unusable wind-generated electricity cannot be sold, even at a loss. It is wasted.

1.4 Grid instability As more wind penetrates the grid system, more problems arse. Hugh Sharman has warned of the problems that can arise when trying to stabilise supply and demand. He concludes: The Government is advised that the UK’s system can accept anything up to 26 GW of wind power…. this advice cannot be regarded as sound. Ample evidence from relatively large wind systems in Denmark and Germany exists to prove that 10 GW (!/-25%0) will be the probable safe upper limit of all wind capacity. Wind power’s contribution at 10 GW, albeit small and costly, can be significant. However, its construction will do nothing to oVset the inevitable loss of firm generating capacity.4

2. Wind Turbines and CO2 Emissions

Estimates of the Contribution of wind power to a reduction in CO2 emissions are generally exaggerated.

2.1 Exaggerated claims The British Wind Energy Association (BWEA) assumes that wind will replace coal-fired capacity unit for unit and bases its calculation for emission savings on this assumption. The BWEA figures are used to support developers’ claims in their planning applications.

2.2 CO2 emissions from spinning reserve The estimated emission savings from wind turbines must be balanced against the emissions from the fossil- fuelled spinning reserve required to balance supply and demand when wind power is brought into the grid system. [Reserve] capacity is placed under particular strains when working in this supporting role because it is being used to balance a reasonably predictable but fluctuating demand with a variable and largely unpredictable output from wind turbines. Consequently, operating fossil capacity in this mode generates more CO2 per kWh generated than if operating normally…Thus the CO2 saving from the Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

412 the economics of renewable energy: evidence

use of wind in the UK is probably much less than assumed by Government advisors, who correctly believe that wind could displace some capacity and save some CO2, but have not acknowledged the emissions impact of matching both demand and wind output simultaneously. As a result, current policy appears to have been framed as if CO2 emissions savings are guaranteed by the introduction of wind-power, and that wind power has not concomitant diYculties or costs. This is not the case.5

The amount of CO2 emissions a wind turbine can save is a matter of conjecture since there are no mechanisms in place to take accurate measurements. However, Denmark, the country with the most wind-generated electricity per capita, has shown no reduction in its overall CO2 emissions; in fact, Denmark’s CO2 emissions are rising.6

3. Wind Turbines and Global Warming Wind turbines will have no significant eVect on global warming trends. 3.1 Wind farm construction and global warming Electricity generated by wind turbines is emission-free at the point of generation, and to this extent it does not contribute to global warming. However, there are many emissions and pollutants associated with turbine manufacture and delivery and in the construction of the wind farm site with its access roads, grid connections, substations, etc. Each turbine foundation requires between 500 and 1,000 tonnes of concrete and aggregate; concrete manufacture is one of the largest sources (about 7%) of man-made CO2 emissions.

3.2 Removing CO2 “sinks” Many wind farms are being proposed on Forestry Commission land, which will mean chopping down vast areas of trees, which, if left standing, would absorb CO2. According to the Environment Agency, one acre of coniferous trees absorbs 3.5 tonnes of CO2 each year. However, when trees are clear felled, the decomposition of vegetation that is left behind actually adds to the CO2 emissions problem.

4. Environmental Damage Building a wind farm with all its associated works and grid connections is a major construction project that inevitably causes environmental damage.

4.1 Visual intrusion Wind farms are built on high-altitude prominent sites, marring some of the UK’s most scenic regions. Modern turbines are about 400 feet tall, three times the height of a typical electricity pylon, with a bladespan greater than the wingspan of a jumbo jet. Our remote and beautiful landscapes are further degraded by hundreds of miles of pylons and transmission lines.

4.2 Environmental degradation Turbine construction will inevitably aVect the local environment, probably destroying wildlife habitats. Building access roads, crane pads, and concrete foundations, felling trees and draining peat bogs change the soil composition at the site. The result is faster run-oV during heavy rainfall with the associated risk of flooding in the lowlands.

4.3 Damage to peatlands Peatlands represent more than 50% of the world’s terrestrial wetland and hold around 25% of the global pool of soil carbon. Peatlands contain more than three times the amount of carbon that is stored in tropical rainforests. During the construction of a wind farm at Derrybrien, Ireland, in 2003, there was a bog slide. Here is an extract from the report on this incident: Peatlands are the one part of the landscape where wind farm construction results in significant additional and ongoing CO2 release.. It is thus diYcult to understand the logic of disturbing and releasing such long-term carbon stores in order to install devices whose whole purpose is to reduce carbon emissions. If wind farms are to be built, it is surely sensible to avoid using a habitat which, as 7 a result of the wind farm, will release CO2 into the atmosphere throughout the life of that wind farm. Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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5. Noise Pollution The low-frequency noise and vibrations from wind turbines can be very disturbing for some people and have serious health implications.

5.1 Low-frequency noise and vibration Noise of the mechanical gearing system is similar to that of a motorcycle and this can be quietened to a limited extent. But the low-frequency, penetrating sound of the rotating blades is more troublesome. It has been compared to the low thud of base notes from loud music, or the sound of a helicopter at a distance. So far there has been no success in eliminating this noise, which can continue day and night for extended periods. Low-frequency noise, which is sometimes inaudible, is ground borne and felt through vibrations that can resonate with the human body; it travels for several miles, much further than audible noise.

5.2 Health issues For some people living near wind turbines there is no eVect, but for others the low-frequency vibrations can cause health problems such as pulse irregularity, headaches, dizziness and sleep disturbance. A recently identified disease, vibroacoustic disease (VAD), has been observed in people exposed to low-frequency noise.8 In a press release on 31 May 2007, the Centre for Human Performance, a non-profit organization dedicated to research into VAD, gave the following statement based on their studies of several families living near industrial wind turbines: These results irrefutably demonstrate that wind turbines in the proximity of residential areas produce acoustical environments that can lead to the development of VAD in nearby home-dwellers.

6. Light Pollution Strobe eVect and shadow flicker caused by wind turbines and pulsating lights that are sometimes installed on the turbines themselves are sources of light pollution.

6.1 Strobe effect and shadow flicker The strobe eVect when sun is behind the rotating blades can, according to medical opinion, cause dizziness, headaches and trigger seizures. Shadow flicker and reflected light from the blades can also cause problems. These light disturbances are experienced inside the home as well as outside. In April 2005, the BBC reported that the owners of a wind turbine near the Whitemoor Prison in Cambridgeshire had agreed to turn the turbine oV in the early mornings to prevent possible “security problems” because the prisoners were becoming upset by the flickering shadows. Homeowners suVering from shadow flicker are not able to strike such a deal with the wind farm operators.

6.2 Pulsating lights on turbines Because of the great height of the new generation of turbines, which are built on high hill tops, there may be need to install flashing red lights to prevent aircraft collisions. There are pulsating lights on turbines in France, for instance.

7. Threat to Wildlife Wind farm construction is a threat to wildlife, Once operational, wind turbines kill birds and bats. Noise and light flicker from turbines can disturb livestock.

7.1 Bird and bat kills According to the RSPB, birds may be scared away from their usual locations during construction and/or operation of wind turbines. Access roads may destroy feeding, breeding and roosting sites There is considerable evidence from around the world that spinning blades have killed huge numbers of birds. This seems inevitable when one considers that turbine blades weigh in the region of 1.5 tonnes and their tips can travel over 180 mph. According to the RSPB, birds may fly into the towers or the blades, especially during Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

414 the economics of renewable energy: evidence storms and conditions of poor visibility. The first major study into bird kills, carried out in northern Spain, found that about 6,000 birds and hundreds of bats were killed by turbines in one year.9 Bats kills are also a serious problem. It is suspected that bats are killed from turbine chop and shock death from wake turbulence. Scientists with the Bat and Wind Energy Cooperative studying two wind farms sites in the USA found that the 66 turbines at the two sites killed as many as 2,900 bats during the six-week period of the study. They concluded that this was not a sustainable kill rate.10 All bats are protected species under UK and European law.

8. Jobs and Tourism Wind farms threaten the local tourist industry and create few, if any, jobs.

8.1 Threat to the tourist industry Evidence from Europe suggest a 40% drop in tourism in areas where there are wind farms. The 2002 VisitScotland Survey of visitor attitude showed that tourists avoid landscapes with wind turbines. A typical wind farm employs one maintenance person.

8.2 Effects on the rural economy The eVects of a drop in tourism will be felt most keenly in rural areas. Most tourists travel to countryside to enjoy the peace and tranquillity and to engage in outdoor activities. Wind farms are incompatible with this type of tourism. The result will be fewer visitors to rural areas and, therefore, fewer tourism-related jobs in communities where employment opportunities are already very limited. Our Action Group is aware of three rural business enterprises—a game shoot and two sound studios—whose continued existence is under threat from proposed wind farms. All these businesses employ local people, and visits from clients from outside the area to these businesses are a benefit to the local economy.

9. Property Values Wind farms have been shown to reduce the value of nearby properties.

9.1 Legal ruling on loss of value There has been a legal ruling on the loss of property value against a couple in the Lake District who sold their house without telling the buyers that a wind farm was likely to be built nearby. The judge, Michael Buckley, upheld the purchasers’ claim that their house had been de-valued as a result of the noise pollution, light flicker and damage to visual amenity caused by wind turbines, and he ordered the vendors to pay compensation of 20% of the purchase value of the house. A study of eight properties near a proposed wind farm in Carmarthenshire estimated that the total loss in value if wind turbines were built nearby would be in excess of £1.5 million, or typically 20–25% on each property.11

10. The Economics of Wind Power Wind power is one of the most expensive forms of electricity; it survives on direct and indirect subsidies. This extra cost to taxpayers is not good value because wind energy cannot provide firm generating capacity nor can it make a significant contribution in reducing greenhouse gas emissions.

10.1 Cost of wind power According to a report by the Royal Academy of Engineering12 the cost of generating electricity from onshore wind farms is 5.4 pence per kWh with standby generation. The cost of generation from oVshore wind farms is 7.2 with standby generation. (The cost of the standby generation capacity was based on an open-cycle gas turbine, which is the cheapest new plant option.) In comparison, the cost of generating electricity from gas- fired (CCGT) plant is 2.2; from nuclear fission plant, it is 2.3, which includes decommissioning costs. (Decommissioning costs are assumed to be neutral in the calculations for the cost of wind power.) Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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10.2 The subsidy system Wind-generated electricity is too expensive to be commercially viable without huge subsidies. It has been estimated that wind farms receive about thee times as much in subsidies as they do producing electricity.13 The Renewable Obligation subsidy system pays for wind power at the point of generation, not delivery. This means that even the wind-generated electricity that is lost in transmission or wasted because it is generated when there is no demand is rewarded with government subsidies. The Committee of Public Accounts Report on Renewable Energy, published in 2005, concluded that the Renewable Obligation subsidy system gives undue support to wind power at the expense of other renewable technologies.

10.3 Cost to consumers The Committee of Public Accounts Report on Renewable Energy, published in September 2005, estimated that the Renewable Obligation subsidy system will be adding £1 billion a year to electricity prices by 2010. The expansion of transmission capacity needed to meet the government’s 10% renewables target will add another £1.5 billion to consumer costs.

10.4 High cost for poor results This high cost of wind power for taxpayers and consumers is unjustified given the poor performance of wind turbines in providing firm generating capacity and reducing greenhouse gas emissions. Wind power is not an eVective technology in fighting global warming, nor can it make a reasonable contribution in meeting the UK’s growing energy demands. We are paying a very high cost for very poor results. 6 June 2008

References 1. “The Renewable Energy Debate” by Henry Thoresby, Chairman of the London School of Economics Environmental Initiatives Network, appeared originally in the September 2004 edition of Business-Money 2. The Guardian, 4 June 2008 3. Hugh Sharman, “Why wind power works for Denmark” Civil Engineering 158, May 2005 4. Hugh Sharman, “Why UK wind power should not exceed 10 GW” Civil Engineering 158, November 2005 5. David White, BSC, C Eng, Fl Chem E “Reduction in Carbon Dioxide Emissions; Estimating the Potential Contribution from Wind-Power” Commissioned and published by the Renewable Energy Foundation, December 2004 6. V C Mason, “Wind power in West Denmark: Lessons for the UK”, October 2005. See www.countryguardian.net/vmason.htm 7. R A Lindsay and O M Bragg, Wind Farms and Blanket peat: The Bog Slide of 16 October 2003 at Derrybrien, Co. Galway, Ireland. University of East London, 2004 8. N A A Castelo Branco and M Alver-Pereira, “Vibroacoustic Disease” Noise and Health, 2004, 6:23, 3–20 9. See www.iberica2000.org 10. Reported in Charleston Gazette, Charleston WV, 8 June 2005 11. Gareth Scourfield, “Report on a sample of properties inspected near a proposed wind farm at Esgairwen Fawr, near Lampeter, Ceredigion” 11 July 2005 12. The Cost of Generating Electricity, The Royal Academy of Engineering, March 2004 13. The Economist, 18 March 2004

Memorandum by Natural England

Executive Summary — Natural England recognises that climate change represents the most serious long term threat to the natural environment. We believe that there is an urgent need to reduce greenhouse gas pollution if we are to avoid potentially catastrophic impacts on the natural environment. A particular challenge is the necessity to move towards becoming a low carbon economy, as this will entail the need to Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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develop clean energy supplies, whilst ensuring that the natural environment is not irreversibly damaged by such developments. — We therefore support Government’s ambitions for increased renewable energy generation. In pursuing the European Union’s 2020 renewable energy target, we would stress that the full impact on the natural environment must be considered alongside the wider contribution towards reducing greenhouse gas emissions. — There will be diVerent impacts on the natural environment from diVerent options available to deliver on the renewable energy target. That is why Natural England is calling for the Government to undertake a strategic assessment of the relative environmental impact of diVerent renewable and clean energy development options, for the United Kingdom. We believe that that this comprehensive assessment will inform better long term policy making and provide greater certainty for investors and developers. — The current evidence base available to inform decisions about sustainable energy developments is largely based on predictions of the immediate impacts of any development on the existing natural environment. This evidence base is developing as the deployment of sustainable energy technologies proceeds and the actual impacts are monitored. The evidence base around the cumulative impacts of sustainable energy infrastructure in particular, needs significant development. There is also a need to expand this evidence base to also consider how the natural environment is likely to change in the face of climate change.

Introduction 1. Natural England is a statutory body created in 2006 under the Natural Environment and Rural Communities Act by bringing together English Nature and parts of the Rural Development Service and the Countryside Agency. Natural England has been charged with the responsibility to ensure that England’s unique natural environment, including its flora, fauna, land and seascapes, geology and soils are protected and improved. 2. Natural England’s purpose, as outlined in the Act, is to ensure that the natural environment is conserved, enhanced and managed for the benefit of present and future generations, thereby contributing to sustainable development.

Responses to Specific Questions

Question 1: How do and should renewables fit into Britain’s overall energy policy and how does it compare with other countries? 3. Natural England believes that there is an urgent need to put in place climate change mitigation measures. We therefore support the uptake of renewable energy generation for electricity, heat, cooling and transport in the UK, particularly sustainable energy developments which minimise impact on the natural environment and optimise their contribution to the reduction in greenhouse gas pollution. 4. We believe that it is essential that the Government undertakes a strategic assessment of the options for delivering renewable energy targets, and their direct and indirect impacts on the natural environment. This should be coherent with the Government’s work on a land use strategy, and be undertaken before any renewable energy policies are put in place. This will avoid developing renewables in inappropriate places where there could be adverse eVects on the natural environment and in doing so help to streamline the onshore and oVshore consenting process.

Question 2: What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? 5. Natural England is aware, through its own role as a statutory adviser on most renewable energy developments, that delays in the on and oVshore renewables consenting process can be caused by a lack of information on the environmental impacts of renewable energy technologies and energy cropping. In order to avoid such hold ups, it is crucial that all the environmental implications of renewable energy options are assessed at an early stage in the development process. Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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6. We believe that the potential cumulative and in combination impacts from competing pressures on land and sea are one of the largest barriers facing large scale development generally. Renewable energy development in the UK must be strategically assessed in the context of its cumulative impacts on the natural environment. 7. The current evidence base available to inform both on and oVshore decisions about renewable energy developments is largely based on predictions of the immediate impacts of any development on the existing natural environment. We note that there is large variation in the environmental impacts, depending on the location and the risk of cumulative impacts and these must be taken into consideration by taking a more strategic approach to environmental assessment of the renewable energy options. The evidence gathered from the current piecemeal approach to energy development is inadequate to address this. 8. Government also needs to take full account of the entire environmental and social costs and benefits across the full life cycle of renewable energy generation (including crop production, infrastructure manufacture, generation, transport, transmission and end-use) when appraising alternative options for renewables. 9. Natural England is currently developing guidance and spatial locational mapping for both onshore wind and energy crops, to focus development and cropping towards those areas that we believe are more appropriate. We are aiming to identify broad areas of search for larger scale onshore wind energy infrastructure and crops for energy production. 10. Natural England will provide its advice on the implications of any proposed sustainable energy infrastructure development based on our statutory functions and include an assessment of: — the impact of the infrastructure on the existing features of the natural environment; — the changes to the existing features of the natural environment that will occur as a result of climate change which is already locked in; — the potential for the infrastructure development to contribute to improving the resilience of the natural environment to further climate change; and — The contribution of the infrastructure to reducing greenhouse gas pollution. Question 3: Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 11. Government policy should promote technologies with minimal adverse impacts on the natural environment and that demonstrate significant greenhouse gas savings. 12. We therefore stress that all renewable strategies and policies should be designed so as to include a strategic environmental assessment and cumulative impact assessment for all emerging and new technologies, with a full carbon life cycle analysis of the development and ancillary infrastructure.

Question 6: How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations? 13. We believe there is a need to weigh up the environmental impacts of renewable energy generation against the longer term environmental benefits of mitigating climate change. This requires an assessment of the impact of renewable energy infrastructure on current features of the environment and the contribution that it might make to reducing greenhouse gas emissions. Such assessments also need to factor in the potential changes to the environment as a result of climate change and to assess how the development might contribute to enhancing the resilience of the natural environment to climate change. 14. Without a strategic assessment of all the available options in the energy mix, taking into account the cumulative impacts in the context of climate change, the external costs of negative impacts on the natural environment cannot be fully assessed.

Question 8: How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? 15. Natural England believes that an increase in renewables in each of the energy generation sectors will be needed to meet the Government’s climate change and renewable energy targets. Energy of all types must be sustainably produced, distributed and used and have taken into consideration all the environmental benefits and costs through relevant strategic assessments and environmental impact assessments. Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Question 11: What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? 16. Natural England believes the sustainable production of bioenergy for both electricity, heat and transport fuels could form an integral part of the Government’s renewable energy strategy and contribute to reducing greenhouse gas emissions. An increase in first generation biofuels production and use, however, has the potential to create sizeable direct and indirect environmental costs associated with increased crop production, particularly overseas. We urge that robust sustainability criteria and reporting measures should be implemented with appropriate targets as swiftly as possible. It is imperative that these are in place before an increase in the production and use of biofuels is encouraged. 17. Second generation biofuels will vary in their cost and benefits depending on the feedstock used and technology implemented. Further support is needed in this area to encourage new and emerging low or zero carbon technologies which have minimal or no adverse impacts on the natural environment. 17 June 2008

Memorandum by Mr Michael Negus

General Considerations and Electricity Supply Strategy The Committee’s task is extremely diYcult, if not almost impossible, because of the continually changing costs of generating electricity, due to a world energy market that has never been so unstable and is, at least currently, becoming more and more expensive such that it impinges upon global politics, comodity costs and economic stability. At the moment in the UK “renewable energy” is synonymous with wind power, hence wind turbines and wind farms. There are task groups both within and outside of government considering how to use the sea that surrounds our island as a source of energy for electricity generation. This has many important advantages over the use of wind as a renewable source. It is important to remember that a national energy strategy is long-term and expensive. It is not as easy as putting up more and more windfarms, but the long-term returns and benefits for our nation are immensely greater. I am thinking principally of independence from political influence by countries that have massive oil and gas resources, such as Russia and the Middle East, and the urgency of reducing our carbon dioxide emissions. I would suggest that the Britain should aim at generating at least 25% of total electrical energy from the sea. We should now have a 20 year national project to plan and implement such a strategy. It will be expensive, the Severn barrage alone will cost £10–14 billion. The Carbon Trust suggested (BBC News Channel 24 January 2006) that 20% of our electricity could come from “wave farms” (50 TWh/year) and “tidal stream” (18 TWh/year). This together with the 5% coming from the 100 underwater turbines of the Severn barrage would give the 25% total contribution from the sea. The great advantage of sea over wind power is the size of the contribution and its relative lack of variability and unpredictability, these being the main problems with wind power. Wind power must be used as a contribution for our national electricity needs. But it must play a subsidiary role to power from the sea. There should also be a national survey to define precisely those areas of Britain where it is really economically worthwhile to set up windfarms, without government subsidies or guaranteed electricity prices. Such a study must take into account the eVects of wind turbines on the landscape and seascape, hence the quality of life in rural Britain, because the turbine towers are very high and seem to be getting higher. Imposing them on beautiful, wild landscapes is foolish and shortsighted. How is it possible to put an economic value on the complex of factors, political and economic, arising from global warming? Although I realise that a major task of the Committee is to do precisely that. There seems to be an obvious axiom: reduce electricity generation that burns fossil fuels and generates carbon dioxide. Currently 71% of our electricity comes from burning gas (37%) and oil (34%). About 22% of our elecricity comes from nuclear, including 4% imported from France EDF. We could, as I suggested above, generate up to 25% of our electricity from the sea, and possibly 10% from wind. Without an expansion in nuclear generation we would still be emitting far too much carbon dioxide. I would suggest that our nuclear power should be doubled to provide about 50% of our needs. This would mean that our electricity supply from carbon sources would drop to about 15%, so reducing our carbon dioxide emission from electrcity generation to about a quarter of what it is now, without the expense of carbon capture. Processed: 17-11-2008 19:38:23 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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It is instructive to look at the carbon dioxide emissions from three European states in relation to their GDPs. France, UK and Germany are not very diVerent in terms of their GDPs. However Germany already produces more than twice the carbon dioxide emission of France, and almost one and a half times that of the UK. Yet Germany generates 11 times more electricty from wind power than either France or the UK. Moreover, I think foolishly, it is closing down its nuclear power industry (19 stations) and in the future will rely on an expansion of wind power, which can provide only a small percentage of its needs, and must inevitably burn more and more gas and coal. The gas of course will have to be bought from Russia. I have seen infra-red satellite pictures of Europe that show Germany, which has eleven times more wind turbines than France, as the hottest atmosphere in Europe, because of its hot gaseous emissions. These will no doubt get worse.

The 2015 Energy Gap The strategy outlined above, with its long-term aim of providing suYcient electricity to “keep the light on” is only attainable over a period of 20 or more years in the future ie 2030 and beyond. But it must be started now, and properly costed and provided for. But what about the problem of generators, both carbon based and nuclear, that are scheduled to close down in the near decades? I would draw the Committee’s attention to the House of Commons Select Committee on Environmental Audit, in particular the written submission by Matsui Babcock. That submission, after detailed analysis, concludes that, although nuclear electricity generation is the only way of producing suYcient base generation and low carbon dioxide emmision, it is in fact inpossible to achieve this by 2015. Matsui Babcock conclude that the only option open to us is clean coal generators, because the other carbon source, gas, is increasingly unreliable, and could fail during cold winters. They conclude that the contribution of renewables in the face of the 2015 Energy Gap crisis is almost irrelevant.

Conclusions I would suggest that the Committee does not fall into the trap of equating renewables with wind turbine farms. It could be that in the future a quarter or even a third of our electricity supply comes principally from the sea, with a smaller amount from wind, preferably oV-shore windfarms. At the moment the cost of generating electricity from wind, especially oV-shore wind, is the most expensive of the methods available. The rising cost of oil and gas will not necessarily make wind power cheaper because of the need for carbon fueled back-up to step in when the wind fails. In the short term we need to quickly build carbon-capture coal-fired generating stations. For the longer term we need to begin now to build suYcient nuclear generating stations to supply at least half of our future electricity needs. 8 June 2008

Memorandum by Mrs N Penk, Mr C Penk and MrDPCPenk, Pitfield Farm 1. I welcome the Select Committee on Economic AVairs decision to conduct an inquiry into the “The Economics of Renewable Energy”. 2. I would like to say that our family are against the erection of wind turbines spoiling the natural beauty of the countryside and creating industrial sites, often on prime arable land. 3. I object to the Government’s attitude of supplying very large amounts of tax payers money into wind turbines which the wind farm operators and landowners are pleased to accept with no thought to people living nearby. 4. In reality 21% and less production of electricity from each turbine is appalling, if farmers only got 21% production in a field of corn or any other crop we would be ineYcient and soon bankrupt. 5. The 100 metre high turbines are very hazardous for bats and numerous birds which have flight paths to and from water lakes, not to mention aircraft movement in rural areas. The noise is not acceptable close to houses and villages and the light flicker is distracting for animals, vehicles and people especially the migraine suVers and those who are prone to epileptic fits. 6. The oVshore turbines are the only alternative where the wind is more constant which would cause the least damage to people and wildlife and the countryside if this ineYcient source of energy is to continue. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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7. Statistics say that any scheme for turbines that goes to the council planners has a 94% chance of being passed, presumably because of the government incentive, with no consideration of the feelings of the residents or other objectors. In my area all the aVected parish councils (eight in all) have voted against the proposal on land adjoining my farm. 13 June 2008

Memorandum by Mr Richard Phillips I write the following comments as a retired professional research scientist, having spent the last 35 years of my professional life with the UK Atomic Energy Authority at the AERE Harwell. In retirement I have continued to have an active interest in all matters concerned with energy generation.

Question 1 The enquiry relates in its terms of reference to “Energy”. I will assume that this energy, in all but a miniscule degree, will refer to electrical energy as the final product. Bio-mass and bio-fuels are addressed later. At the heart of this whole enquiry is the fundamental nature of the various forms of energy which it is proposed to harvest. All the sources of “renewable” energy, wind, solar, tidal (wave, tidal stream or tidal barrage), are all, on the industrial scale, very dilute forms of energy. This is in spite of their apparent power, indeed ferocity when encountered by individual human beings. Humans, on the energy scale are extremely feeble, our own rate of working, in a mechanical fashion, is unbelievably low. It is very hard work indeed for one person to keep a 100 watt light bulb illuminated for any length of time. Thus the emotional reaction to the possibility of deriving energy from a source which seems so much more potent than ourselves, is very tempting. These facts also account for the immense amount of space or area needed to provide the energy. By their very nature, “renewable” sources are either chaotic in nature, or extremely variable with time. The wind is not predictable on any long time scale and variable in strength. Tidally associated energy is predictable, but continuously variable. Solar energy is similar in character. The scale of these vagaries makes it a necessary demand that “renewable” generation is backed, to the extent of 80%, by “spinning reserve”, older, less economic power stations idling until they are needed to make up the deficit of renewable sources, in the main, when the wind drops or is too strong. Denmark has been in the position of importing electricity in times of dearth, and paying to export it in times of glut. They build no new turbines. And the Danes have closed no fossil fuel power stations. Germany has a huge wind investment. It is building, in spite of this three new spinning reserve stations on the Baltic, and twenty six new coal fired stations else where. This is to be compared with France which now has miniscule “renewable” generation, but 83% nuclear generation, and the smallest carbon footprint in Europe. In my view there is very little place for “renewables” in our energy policy. The exceptions are to the be found in those remote places where it is very uneconomic to provide connection to the National Grid. The huge expenditure on subsidies for “renewable” energy would have to be boosted still further even to have some nominal eVect on our provision of energy. It is, in my opinion, a poor investment, but a considerable business opportunity for a copper-bottomed profit for certain sectors of the business world who have little real interest in our energy provision.

Question 2 The barriers to the development of “renewable” energy lie in the nature of the energy. The harvesting of dilute energy is an undertaking subject to the law of diminishing returns. I do not believe that any but marginal improvements of the existing technologies are possible. This, essentially, is due to the simple methods employed. No alternative methods exist, neither do alternative sources. In my opinion, too much attention has already been paid to these sources.

Question 3 In my opinion, the likelihood of any significant advance in “renewable” technology is not possible. This a matter not aVected by investment, from either the public or private purse. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Question 4 In my opinion, the already considerable investment of Government funds has been made under a misapprehension that the technology is viable on a very large scale. It is not. The application of an administrative structure such as the ROCs and associated measures are an overburden to a system which will be costly and achieve very, very little in reducing our carbon footprint.

Question 5 I am not in a position to comment quantitatively to this question but without any doubt, the investment in connection of a multiplicity of producers, including a large number at sea, under very hostile conditions, and their maintenance, must be much greater that connection to a large central producer In addition there is the problem of unifying the output of a large number of small producers (ie each wind turbine being a producer). This is well illustrated by the Fair Isle experience. When asked if they wanted a connection to Orkney, the Islanders politely declined, it was simply too expensive for their small community. They opted for wind power instead. Now that they have this facility, the control of frequency has been found to be diYcult, household goods such as washing machines do not take kindly wandering frequency, they like a stable 50 Hz. Many other appliances will behave in exactly the same way. Now imagine connecting up twenty of thirty times as much capacity as we have at the moment. Strong winds in Germany have caused the grid to crash, blacking out some two million consumers. Interconnection is expensive and diYcult. Central large generation is not.

Question 6 I do know how the despoilage of the countryside can be measured as a cost in any financial terms. It may be pointed out, however, that one 1000 Mw nuclear or fossil fuelled station would have to be replaced by rather more than 1200 3Mw turbines (eYciency 27.5% of nameplate), The visual impact is diYcult to imagine. I have printed out 1200 turbine pictures, it is exceedingly sobering, I recommend that the Committee do the same. At the same time, these turbines have to have a power station in spinning reserve, a structure which the turbines were supposedly replacing!

Question 7 I would refer the committee to a letter which I wrote separately to Lord Vallance and which is reproduced below. I have attempted to obtain more up to date costs from BERR, but find myself on an administrative merry-go-round. Each section or person passes me to another until I arrive back to my original advisor. I can only hope that your Lordships’ enquiries carry greater weight, I found merely confusion, perhaps it is all rather new in BERR and needs time to settle down. But a pity. In my opinion the only energy source which may prove viable, and this depends much upon microclimate, is the use of solar energy for heating. My own analysis of solar energy shows that again it is a weak energy source, producing at best, some 200w/m2 over a 24-hour period. If the situation of the collector is favourable, and installation costs do not prohibit it, this may be useful for domestic space heating. I see no real prospect for photovoltaic production except, like wind, for small demands in remote situations. In my opinion the diYculties of CCS, carbon capture and sequestration, mitigate very strongly against any real possibility of its use. The CO2 separated from the flue gases will have to compressed to some 850 pounds per square inch, pumped over very considerable distances from its source to the point of interment, and the pumped underground. As a rough guide, the liquid will occupy over three times the volume of the fossil fuel which produced it. It does not decay, as does radioactivity. Several companies have already backed away from this technology which has yet to be demonstrated in commercial situation. The new station in Kent, supposedly having this addendum, will be built without it. It has been deferred indefinitely. I consider this technology to be quite uneconomic.

Question 8 I find this question particularly diYcult, since the fashion in which it is asked seems to be muddled, in as much as it appears to ask for a comparison between apples and loaves of bread, it is not comparing like with like. I understand that the real costs of “renewables” compare very unfavourably with either fossil or nuclear generation of electricity. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Transport, however is in a diVerent category, if hydrogen is discounted for the moment, the only “renewable” is bio-fuel. The more this is investigated, the worse bio-fuel appears. The net energy gain appears to be much more marginal than was at first mooted, since so much energy is expended in its’ manufacture. Secondly there has been a major impact in certain geographical areas, on the price and availability of staple foods, which have been diverted into fuel manufacture. My own opinion is that the sooner bio-fuel is consigned to all but a tiny market, the better. The use of vegetable matter as fuel for furnaces has been shown to uneconomic if it is grown for this purpose. It should be borne in mind that even in dry cellulose, more than half the weight is in the form of combined water, and contributes no heat when combustion takes place. It is chemically a carbohydrate, a carbon/water compound. The combustion of waste has diVerent objectives, and deserves a much larger place in our economy. But it has to be carried out to the highest technical standards.

Question 9 As I believe is clear, in my opinion, “renewables” should have little place in our, or the European economy. There is no doubt whatsoever that a cardinal error was made by the EU in separating nuclear and “renewable” sources. The objective was, and if not should have been, the production of electricity using processes minimally productive of CO2. I therefore maintain the UK should follow the French example and maximise its expansion of nuclear generation, and suspend further economically expensive and ultimately unsuccessful investment in “renewable” energy, whether in the UK or other EU countries.

Question 10 I have little faith that a Carbon Market will achieve any real change in the use of fossil fuels. I certainly recognise that it opens business opportunities for carbon trading, but the only way to reduce CO2 emissions is to burn less fuel. This may sound only too blindingly obvious, but it seem to escape recognition in so many quarters.

Question 11 Bio fuels are derived in the first instance from solar energy. A small proportion of the sunlight falling on any crop is converted into plant material. Of the plant, the seed element used for bio-fuel production, is a small proportion again. Of the seed, a small portion is converted into bio-fuel. Thus only a minute portion of the incident sunlight results in the end product. There is great deal of processing which is energy adsorbing, and in many cases, there is doubt that there is a net gain in the whole scheme. This is to disregard the imbalance being introduced into the global supply of food. We have limited arable areas, should we be using them for such purposes. In the case of the alcohol being put into our petrol, it has only about half of the calorific value of the petrol it replaces, thus producing a fuel with less energy and thus poorer mpg. I must confess to being confused by the reference to first and second generation bio-fuels, but as a chemist I would see no great fundamental diVerences occurring. Perhaps I am mistaken. As the story of bio-fuels unfolds, it would certainly be showing all the signs of an impending environmental tragedy. The sooner we start to move onto the real environmentally friendly fuel, hydrogen, in my opinion, the better. But it must be produced from nuclear energy, either by electrolysis, of directly by the use of heat, through the Bunsen reaction, this shows great promise. The letter to which I refer in Question 7: Dear Lord Vallance of Tummel, May I introduce myself in a few words. I am a retired research scientist, having spent the last 35 years of my professional life with the United Kingdom Atomic Energy Authority at Harwell. I have seen the invitation to submit comments to your HoL Committee on the Economics of Renewable Energy. The following paper is allied, although not quite directly, to this specific subject. I sincerely hope that you will be able to give it your earnest consideration, I believe that there is no more important a matter than our electricity supply, not even our national economic policies, for without absolutely rock firm power supply, we have no economy worthy of the name. You will see that I am also greatly concerned that the electrical generation industry is a predominantly technical one, an aspect poorly understood by Administrations of all colours. Indeed this situation is of absolutely no surprise; the careers of senior administrators and business men has left no time for the acquisition of the knowledge which it has taken a lifetime for me to accumulate. Yet, paradoxically, it is this knowledge which is so vital before objective judgments can be made. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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I sincerely hope that my short paper will be of interest, and please feel completely free to contact me at any time, should you feel that I may be of any assistance, in any way.

“A SUGGESTED RE-TITLING OF ENERGY SOURCES WITH REFERENCE TO CARBON EMISSIONS The Climate Change Programme, as it has emerged into public perception, has at its core the role played by carbon dioxide in the atmosphere. It has become overwhelmingly accepted by both the scientific and lay communities that it is the steadily increasing concentration of this gas in the atmosphere that is in the process of bringing about seriously large terrestrial heating eVects, and thus radical changes in the climate in all areas of the Earth. In order to minimise, and eventually halt, this eVect, much attention has been focussed on alternative forms of energy production; those whose reliance upon carbon based fuels is minimised. It has become common usage to refer to these new methods of energy production as “Renewables”, as to a large extent they utilise energy sources such as wind, solar, and oceanic flows as the energy sources; and these are not noticeably aVected by this energy abstraction, and thus seem to be self renewing. The use of this title,, “RENEWABLES”, was further emphasised by the EC when the central administration adopted it in the pursuit of minimal carbon technology. At an early stage in their deliberations, the EU Committee responsible for these matters, made clear distinction between nuclear energy and “renewables”, instead of regarding both as low carbon means of electrical generation, and then accepted it as oYcial nomenclature of the technology to be pursued. This literal adoption thus prohibited the inclusion of the lowest of the carbon technologies, namely nuclear power, amongst the technologies which the EC required. The origin of this problem of separation, which, like Topsy “just growed”, would appear to be the lack of a scientific and technical background by those drafting the European-wide Renewables Obligation, and the emotional attraction of “something for nothing”, the wind is free. In the UK this was compounded by a similar non comprehension of the consequences of the lack of such technical knowledge. This accentuation on these technologies has detracted in very great measure from the primary objective of aiming to produce energy from a source as low as possible in the production of carbon dioxide. It is thus much more objectively sound to refer to the new technologies as “minimised carbon” technologies, since this is the their primary purpose. Such a move allows a quantitative scale to be introduced which would reflect the amount of carbon dioxide with which each system was associated, when generating a specific amount of energy. A relevant measure could be the amount of incidental carbon dioxide, in grams, (or the weight of the carbon in the carbon dioxide), generated for each kilowatt hour of energy produced. Such a change in nomenclature would refocus the process on the real objective of the exercise; to enhance the reduction in carbon emission during energy production processes. A suggested overall new title for such technologies, truly reflecting the real objective, could be:

MINIMISED CARBON ENERGY The following table has been drawn up by the British Nuclear Energy Society using data from the Government’s Energy Technology Support Unit, and confirmed by the OECD. The figures are taken over a complete life cycle of the relevant technology.

Energy Source Grammes of Carbon per KWh of electricity

Nuclear 4 (14.7g of CO2) Wind 8 (29.4g of CO2) Hydro Electricity 8/9 (29.4-33.0g of CO2) Energy Crops 17 (62.4g of CO2) Geothermal 70 (256.9g of CO2) Solar 133 (488.1g of CO2) Gas 430 (1,578g of CO2) Diesel 772 (2,833g of CO2) Oil 828 (3,039g of CO2) Coal 955 (3,505g of CO2)

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424 the economics of renewable energy: evidence the target for renewable energy. The error of this process needs, therefore, more than ever to be brought to public attention, and reversed.” I shall, of course be submitting my observations to your Committee before 16 July.

(Footnote on technical knowledge

At the end of August 2007, BBC Radio 4 broadcast a programme in the Costing the Earth series, entitled Wind Rush, in which the Minister for Energy, Mr Malcolm Wicks personally stated, quite definitively, that wind farms had an eYciency of 40 to 46%, and that the energy was “carbon free”. EYciencies have never in fact reached 30% as a whole, and the carbon “footprint” of wind energy is twice that of nuclear power. This error, to Mr Wicks’ credit, has since been corrected. On the Shadow Benches, I queried the accuracy of statements in a video clip on the Energy Policy website. The response aYrmed that Mr Duncan had had a career in, and understanding of, the energy industry. This was a business career including trading in oil futures. This had no technical content relating to power generation. The conversation continues.) 29 May 2008

Memorandum by the Renewable Energy Association

1. Introduction

1.1 The important question is not how much renewable energy costs, but how we achieve renewable energy targets at least cost. If cost is a factor in deciding the level of achievement, it should be asked before a target was set, rather than afterwards. 1.2 There are two ways of achieving renewable energy targets at least cost; one is to encourage—as far as possible—the very cheapest renewable sources. The other is to have the most lowest cost policy measures. This generally means the bankable, low-risk mechanisms. There are factors which must be taken into account with both approaches. 1.3 Aiming to rely on only the very cheapest technologies has many dangers. The cheapest electricity generating technology is co-firing imported biomass with coal, but over–reliance on this would be undesirable for several reasons. It is also more cost eVective to use biomass for heat production, rather than power. It is least cost-eVective to use it for transport. However, using biomass (defined as all grown material) is the only lower-carbon fuel substitution solution available for the transport sector in the short to medium term—unless we convert to renewably-charged electric vehicle transport, which brings serious considerations of availability of renewable electricity. 1.4 Leaving aside landfill and sewage gas, both of which are limited in terms of resource, the next cheapest technology is onshore wind. However relying exclusively on this would entail us being required to meet some 60% of the UK’s electricity demand. Not only would accommodating this amount of intermittency have cost implications—but there would undoubtedly be significant planning diYculties. It is clear we need to have a diversity of renewable sources and scales of project, and cannot rely on simply exploiting the very cheapest forms of renewable energy. 1.5 There are fewer downsides to relying on the lowest cost support mechanisms—but there is one very important factor—that of maintaining investor confidence. Any firm, bankable policy, be it Feed in TariVsor fixed price contracts are likely to be cheaper than market-based mechanisms which carry a risk premium. This is not an argument to convert to a Feed in TariV in the UK—a question we come back to later in this evidence. A shift at this stage would create a major hiatus and undermine investor confidence. There is also the question of how well the policy would fit into the wider picture, discussed below. 1.6 We do not address all the questions in the call for evidence, but have grouped our response into several themes. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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2. Policy Comparisons and Grid Issues 2.1 The Select Committee asks how renewables fit into Britain’s overall energy policy. This section tackles this question from the perspective of power generation, as there is no heat policy in the UK and renewables transport policy is considered separately below. 2.2 The Renewables Obligation (RO) results in a premium being paid for each MW of renewable electricity produce. Beyond this there is no special treatment for renewable generators, nor the power they produce. The same rules apply for connection to the grid for renewable generators and non-renewables as well as for dispatch and the regulatory and commercial arrangements for transmission and distribution. 2.3 This is, to a large degree, desirable. However, where it comes to connection, the rules are inappropriate, as they favour incumbent generators over newcomers. The incumbents are primarily fossil fuel generators whilst the newcomers are almost exclusively renewable. 2.4 The current EU Renewables Directive includes provisions to allow priority access to the electricity network for renewable generation. It states that Member States “may also provide for priority access to the grid system of electricity produced from renewable energy sources”. The new draft EU Renewable Energy Directive strengthens the provisions, saying Member States “shall also provide for priority access to the grid system of electricity produced from renewable energy sources”. (Emphasis added.) 2.5 UK policy is not decided in this area. We are in the process of a review of the transmission arrangements and it would have made much sense for the UK to have decided its position prior to the review. There is a risk that work may have to be re-done if the outcome is in conflict with the policy decision. At the very least the process would have involved less work had the decision been taken beforehand. 2.6 With the exception of the rules on connection, such equitable treatment is a good way for renewables to fit into energy (electricity) policy. It better prepares them for the eventual time when external costs of carbon emissions are fully internalised—at which point they should need no additional support or special treatment. 2.7 In countries with feed in tariVs (FITs) the policy often goes beyond the scope of the tariV payments themselves, dealing with dispatch, transmission and distribution aspects. It is often very favourable elements, such as that electricity utilities have to pay for the costs of connection that have contributed to the successful deployment of renewables. The premium payment is, of cruse, important too, but it must be noted that the price of the premium is not always higher for feed in tariVs than for tradable certificate policies. Indeed it is often the reverse. It is the bankability of the FIT as opposed to the higher risk tradable mechanisms that means the price can be lower, yet still more attractive. 2.8 There is a specific question on the comparisons of FITs within question 4—“what are the relative merits of FITs versus the RO?” The inherent simplicity of a tariV based system is a key advantage with respect to encouraging on-site generation. We use the terms “merchant” power for power stations built for the export of power to the grid. Examples of merchant plant includes wind farms, biomass power stations, hydropower schemes etc. We thus distinguish these types of project from “on-site” generation, where the objective is to produce power to meet the users own energy needs. 2.9 Onsite generation will mostly comprise developments initiated by companies which are not specialist renewable energy project developers. The latter will be well-versed with the Renewables Obligation, whereas for companies for whom energy is not their core business, this legislation is dauntingly complex. 2.10 These include entities whose main line of business is not energy, eg community wind turbines and units serving industrial estates, water treatment works, out of town shopping areas etc. The RO is less eVective at stimulating these kinds of developments, due to its inherent complexity and risk characteristics. A more straightforward tariV arrangement is required here to engage the wider set of owners we need to reach out to. We need to bring such sites into the fold if the 15% target is to be reached. 2.11 The Renewables Obligation (RO) is complex and the administrative arrangements onerous for onsite renewable electricity generators. At present the very smallest generators (ie micro-renewables under 50kW capacity) provide only 0.2% of the renewable electricity generated, yet occupy around 70% of the RO administrator’s time. The RO was never designed with small scale generation in mind. It was targeted at merchant power and is eVective in that role. 2.12 Feed in tariVs also have merits for early stage technologies such as wave and tidal energy, which are expected to see significant price reductions over the next decade. These technologies are at an early stage, and project developers have to manage a significant degree of technology risk. It would be preferable for all other risks to be removed. Simply knowing exactly what prices will be paid for each MWh of wave or tidal stream power generated is far better than the current situation, where there will be such worries as will the conditions for a top up grant be satisfied?—to what degree is the top-up grant additional to ROCs under a banded obligation?—how might the price of ROCs change over time?—what banding levels will be set for wave and Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

426 the economics of renewable energy: evidence tidal stream energy?—how will the grandfathering arrangements work when the banding level is reduced?— how will the Scottish RO and the rest of the RO interact? 2.13 These are complications and risks a project developer with a significant degree of technology risk, could well do without. 2.14 The FIT proposed within the Energy Bill does not cater for this—however, although previous proposals the RO has put forward do cater for bankable wave and tidal power purchase agreements.

3. Enduring Questions 3.1 A number of the questions in the call for evidence have been around since the development of renewables (wind in particular) first started. Many studies on intermittency have been published and we do not propose to comment further. 3.2 Question 6 asks if the planning system is striking the right balance between all the diVerent considerations. It is well known that the planning (along with grid connection) is one of the main barriers to the deployment of renewable energy. 3.3 The Planning Bill aims to insulate the larger projects from political interference, by giving the decision making to an independent committee. For renewable energy projects, this means that projects previously determined by the secretary of state under Section 36 provisions are now dealt by this committee. For these projects it is legitimate to have a political aspect, as it is Government policy to increase renewables deployment, and meet ambitious targets. 3.4 It is, unfortunately, the projects that are dealt with by local government decision makers that are more prone to unhelpful political interference—albeit local politics as opposed to national politics. The planning bill will do little to help under 50MW projects, which comprise 75% of renewable generation capacity accredited under the Renewables Obligation.

4. Renewable Energy and the UK Transport Sector 4.1 The transport sector accounts for about 25% of the UK’s carbon emissions and this is predicted to continue to rise, in contrast to most sectors of the economy which are reducing emissions. Given that reducing carbon emissions is the major driver for the Government’s renewable energy policies, it is important that the transport sector makes its contribution. Currently, the use of biofuels, as noted in the overall “Introduction” to this submission, is the only lower carbon fuel substitution solution available in the short to medium term. Biofuels, provided they are produced sustainably (see Paras 5.5 and 6.1), can be a valuable and valid use of renewable biomass.

5. The Effectiveness of Government Policies 5.1 Question 4 asks about the cost-eVectiveness of diVerent forms of Government support.

Transport sector support mechanisms 5.2 Support for the development of a UK biofuels industry began with the introduction of a 20 pence per litre fuel duty rebate for biodiesel (2002) and bioethanol (2005). This policy proved largely ineVective in stimulating more than just a niche biofuels industry based on used cooking oil. Given that the EU Directive on the promotion of biofuels (2003/30/EU) set an indicative target for biofuel use of 5.75% by energy by 2010, reliance on fuel duty rebates alone could also have proved costly to the Exchequer in duty foregone. The Government therefore consulted widely on alternative forms of support and decided in 2005 to introduce a Renewable Transport Fuel Obligation (RTFO) from April 2008. 5.3 It was the consensus view of the stakeholder community that the RTFO was the most eVective way to support an emerging biofuels industry. The potential UK producers of biofuels also felt that the fuel duty rebate should remain a part of the policy mix until the RTFO was tested and understood by the investing community. However, in Budget 2008, the Government announced that the fuel duty rebates would be abolished from 2010. Support will continue through the RTFO, which will rely on the Buy-Out Price mechanism for its eVectiveness. At present, the combined value of the duty rebates and buy-out price is 35 pence per litre. When the duty rebates are removed in 2010, the only support will be the buy-out mechanism— which will be set at 30 pence per litre. The REA remains concerned that this level of Buy-Out Price will be insuYcient to ensure that obligated suppliers supply biofuels, rather than buying out of their obligation. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Furthermore, the way in which the Buy-Out Price is set is not transparent. Given the changes in both commodity prices and the crude oil price recently, the industry would like to see a more transparent mechanism for setting the Buy-Out Price. 5.4 The key policy mechanism under the RTFO is the establishment of targets for the sale of biofuels. The RTFO came into eVect in April this year with a target of 2.5%, rising to 5% by volume by 2010. While the industry has accepted these targets, they are conservative—95% of fuel use will remain fossil based. In order to encourage and justify investment and to ensure that sustainable biofuels can make a meaningful contribution to greenhouse gas emission reduction, targets should rise in the future to reach the proposed mandatory EU biofuels target of 10% by energy by 2020. This mandatory 10% target was agreed by EU Heads of Government in March 2007. If this target is either reduced or made indicative, this will put a correspondingly bigger, and more challenging, burden on the other sectors of the economy to reach the 15% UK target. It would not be right for transport to be allowed to duck its responsibilities in this way.

The longevity of policy 5.5 The introduction of policy mechanisms to encourage the use of low carbon biofuels aims to correct market failure, by creating a market where none might otherwise exist. However, policy has to be long term if investors are to have confidence in the new market. Unfortunately, UK Government policy on biofuels has wavered and the longevity of the RTFO looks more shaky than was the case a year ago. When the RTFO was announced in December 2005, investors responded and in early 2006 investment plans for the production of some 4.5 million tonnes of biofuels were announced. Since then, about two million tonnes worth of investment in the UK has been abandoned, with corresponding employment potential destroyed. The REA believes that the Government should have confidence in its own biofuels policy, which is underpinned by a world-leading set of sustainability standards set out in the Technical Guidance on Carbon and Sustainability Reporting as part of the RTFO, and set mandatory targets out to 2020.

6. Principles of the UK’s Biofuel Policy 6.1 The main driver for the UK biofuels policy is the reduction in greenhouse gas emissions. Government has also been determined that robust sustainability standards for the production of biofuels should be in place. More recently, the Government has announced a study into the indirect impacts of biofuel production, fearing that UK and EU biofuels policy would encourage unsustainable practices elsewhere in the world. The REA has been at the forefront of support for the Government’s principles for a biofuels policy both in the UK and the EU and supports all eVorts to ensure that biofuels are produced sustainably across the world. However, the UK industry can only ensure that its own biofuels are produced to the standards set out in the RTFO. It is for Government to ensure that all imports of finished biofuels are produced to the same standards.

7. Future Technologies 7.1 Question 3 asks about technological advances in relation to cheaper renewable energy. In the transport sector, consideration has to be given not only to cheaper sources of renewable energy, but, more importantly, to sustainable sources. The question of the contribution, if any, that the production of biofuels makes to rising world commodity prices is not a debate for this enquiry. Nevertheless, there is no doubt that future developments in the production of biofuels should move to the greater use of sustainable feedstocks that do not compete with feedstocks primarily used for food, for example biomass wastes and residues, as well as non- food crops such as jatropha. A great deal of research is still required to develop new technologies and to bring these to market. However, investment in such research requires a working market and a reasonable promise of a return. The market must start, as it is doing currently, with the use of sustainably produced conventional feedstock. It will then be able to transit towards the commercial deployment of alternative feedstocks and technologies. It is wholly unrealistic, and a recipe for doing nothing in the transport sector, to call for the development of new technologies before policies and targets are in place. Calls for a moratorium on the use of biofuels in this context are na-with-diaeresisve at best and irresponsible at worst. Government should be supporting technological advances in the transport sector in parallel to giving the market confidence in the future. 7.2 Question 11 asks about the costs and benefits of the present generation of biofuels as against so-called “second generation”. The REA finds the terms “second generation” or “advanced” biofuels somewhat misleading. As has been stated, the key principle underpinning the UK biofuels policy is the reduction of greenhouse gas emissions. It is against this principle, as well as that of sustainability, that biofuels should be judged. Many current generation biofuels produced in the UK can deliver significant greenhouse gas savings Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

428 the economics of renewable energy: evidence entirely sustainably. For example, British Sugar has announced that its sugar beet-to-ethanol plant in Norfolk delivers a 71% saving against fossil petrol, and Argent Energy delivers an 83% saving against fossil diesel at its tallow-to-biodiesel plant in Motherwell. Other biofuels, such as sugar cane- to-ethanol can deliver high levels of greenhouse gas savings, but safeguards to protect against indirect impacts on rainforest or other valuable carbon- or biodiversity-rich environments must be taken into account. To the extent that the technologies to use other non-food feedstocks—including wastes and residues—can be developed at a commercial level in the future, they are likely to deliver good levels of greenhouse gas savings. 7.3 The key to UK Biofuels policy must be: — Mandatory targets at the EU level, providing a working market, to ensure investor confidence and the commercial delivery of new generation biofuels. — Robust sustainability standards at UK, EU and eventually at the global level. — The achievement of good levels of greenhouse gas emissions reductions. The REA supports the UK Government’s target for 50% by 2010. June 2008

Memorandum by Renewable Energy Finance—Policy Project, Chatham House

The Renewable Energy Finance-Policy Project at Chatham House has sought to examine the finance sector perspectives on renewable energy policy design and investment, by working directly with renewable energy financiers, predominantly located in the City. This submission would simply like to provide the Committee with the bullet point results, and attached short discussion Summaries, of two meetings with financiers concerning: (i) current investment conditions in the UK market; and (ii) the matter of how renewable energy trading across the EU might aVect renewable energy financing, including cost savings. This submission may therefore, have some bearing on the following questions set out in the Call for Evidence: — How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? — What are the barriers to greater deployment of renewable energy? — Has Government support been eVective in leading to more renewable energy? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariVs versus the UK’s present Renewables Obligation Certificate (ROC) regime? — How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? — Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? Two initial points may be useful to highlight:

1. There is now very significant interest and activity from the finance and investment sector in renewable energy. The latest data set from New Energy Finance, the global clean energy financial research and information provider, demonstrates the very significant growth in the last four years to a 2007 global total of US$148.4 billion across all segments of clean energy sector investment activity. Rising and high oil prices, climate change, energy security are all driving the general perception that this is a growth sector and will remain so. The New Energy Finance analysis finds that the 2007 total is 19% of energy industry infrastructure investment globally. This draws attention to the fact that the current, relatively low level of renewable energy installation is a result of past investment. The exponential year on year rise in investment from 2004-2007 indicates a stronger degree of energy sector change is underway, which will start to become evident in the next years as investment into expansion and technology feeds through into installed capacity. It also demonstrates that financiers and investors perceive a commercially attractive economic upside to renewable energy, and are actively looking for opportunities with the right risk and return profile in which to invest. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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A further reflection of this is the mid-2007 total of $18 billion under management in approximately 180 investment funds focused on sustainable energy. The UNEP Sustainable Energy Finance Initiative-New Energy Finance report Global Trends in Sustainable Energy Investment 2007115 finds that both publicly quoted and private funds have seen high growth since 2005 (43% and 59%, respectively). Private funds are split across specialist and, more recently, generalist fund managers who have recognised the value—and profile– of sustainable energy investment.

Notwithstanding the credit crunch, renewable energy continues to attract strong investment interest, albeit within the context of greater caution in the overall marketplace.

2. Capital is mobile, as such, the UK has yet to prove as attractive an investment location as other European countries.

Renewable energy investment, in terms of projects on the ground, is a policy driven market, as such the national regulatory environment (including planning, grid as well as the support scheme), and its stability (perception of regulatory risk), is a key factor in whether investments proceed.

It may be relevant to consider this in the context of UK government intention to develop its renewable energy industry capacity short to medium term, lead on new technology development, and capitalise on financing expertise in the City.

Summary points from Finance breakfast meeting on UK investment issues, May 2008: — Capital is mobile, and RE investment in the UK has largely stalled, or is actively leaving, in favour of other more attractive locations elsewhere in Europe or further afield. — Planning is a significant and immediate problem, with delays, appeals, filing for non-determination and last minute objections from the MoD (Ministry of Defence). MoD was singled out as systematically challenging wind farms, and for which solutions are required in the near term. Grid connection issues and timing also directly impact ability to finance projects. — There is no strong argument against RO Banding (“pick the system and stick to it”), although some financial institutions and certainly all the banks present will need to see banding enacted into law before they can invest against a higher ROC multiple, this creates a timing/delay issue. Further uncertainty should be actively avoided (such as “its all up for grabs on the RO” approach) as this could further increase perception of regulatory risk. — The state of the financial markets means capital is being managed very carefully indeed, institutions are “de-risking”. Well structured and priced RE is able to be financed, but through increased syndication, banks clubbing together to bring about the right risk/return conditions for bigger deals.

More generally, in the last 18 months, the large financial institutions have arrived at a deeper level of understanding about RE; they are “there” in terms of the more mature renewable energy end (eg onshore wind) and want to put capital in, under the right conditions. Finance is therefore not a constraint, per se,in scaling up the sector.

The slightly longer Summary note of this meeting, with greater information on the discussion, and views, from financiers, is attached.

Summary points, Finance Roundtable on EU trading of Renewable Energy, November 2007: — There are already significant flows into the sector from the mainstream finance and investment institutions; there is no issue in the demand (liquidity) for Renewable Energy (RE) assets, and a ‘glut of money’ is available to invest in this industry if the conditions are right. — London-based financiers are actively investing across Europe, and looking further afield. — Investment is going into the UK, but deal flow is not meeting potential. Notwithstanding a shift to “banding”, real concern remains around planning and grid issues, as well as turbine supply issues. The UK competes with other territories where those are expedited.

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430 the economics of renewable energy: evidence

— Renewable energy trading across Europe is conceptually a good idea, and could assist build-out, with investment flowing to most favourable territories; however, there are a number of issues and concerns. These include: — length of time to “bed down” a new system, and get investor confidence, given both the complexities, and the fact this may be perceived as ‘unnecessary tinkering’, impacting confidence in financing stability; — cost-savings are unlikely to meet potential: for example investors opting to trade would need to be attracted by high enough returns for the risk; — linkage with domestic support schemes, for example the impact on current ROC values in the UK; —diYcult domestic politics may arise with the potential for public backlash, and may increase perception of regulatory risk; and — reduced pressure to solve grid, planning or other domestic issues could actually result in ongoing delays and reduced build overall. — Any announcement that keeps the ‘door open’ to trading would need very carefully managed, including very clear information on the impact on current schemes, including ROC values, in order to avoid being counterproductive. — The general conclusion is that it is better to strengthen existing schemes, including the ETS, and the existing support mechanisms, which investors are comfortable with, rather than start a complex new scheme, which some indicate may not actually help achieve the target, or could in fact prejudice the ability to meet targets. We would be happy to submit the more extensive Summary note of the this Roundtable on Renewable Energy Trading, if it would be helpful to understand the broader discussion; and would be happy to help with any further information arising from this submission.

NOTE: FINANCIERS MEETING, UK RENEWABLES ENERGY INVESTMENT 28 MAY 2008 Financiers ranged across banks, private equity (including projects and project developers) and specialised advisory, covering Europe and the Middle East. The renewable energy sectors covered were: onshore wind, oVshore wind, solar, biomass and energy from waste. Key Issues — Capital is mobile, and RE investment in the UK has largely stalled, or is actively leaving, in favour of other more attractive locations elsewhere in Europe or further afield. — Planning is a significant and immediate problem, with delays, appeals, filing for non-determination and last minute objections from the MoD. MoD was singled out as systematically challenging wind farms, and for which solutions are required in the near term. Grid connection issues and timing also directly impact ability to finance projects. — There is no strong argument against RO Banding (“pick the system and stick to it), although some financial institutions and certainly all the banks present will need to see banding enacted into law before they can invest against a higher ROC multiple, this creates a timing/delay issue. Further uncertainty should be actively avoided (such as “its all up for grabs on the RO approach in the consultation) as this could further increase perception of regulatory risk. — The state of the financial markets means capital is being managed very carefully indeed, institutions are “de-risking”. Well structured and priced RE is able to be financed, but through increased syndication, banks clubbing together to bring about the right risk/return conditions for bigger deals. More generally, in the last 18 months, the large financial institutions have arrived at a deeper level of understanding about RE; they are ‘there’ in terms of the more mature renewable energy end (eg onshore wind) and want to put capital in, under the right conditions. Finance is therefore not a constraint, per se, in scaling up the sector.

Discussion

Finance sector view of UK market — Investment has largely stalled or leaving UK at present, due to regulatory uncertainty; planning delays and other factors. One player has decided not to put further money into the UK. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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— There remains strong interest in the sector, but capital is mobile and is going where it is easiest to invest and make right level of return: markets such as Spain, Germany, Ireland, Italy, Sweden and France are attractive, as well as Eastern European countries (and the US and China) as growth areas. — Many financial institutions take a long term view—20-25 years—they are looking ahead to the regulatory regime across that timeframe, and how this might change. — Significant investment will be required in renewables, infrastructure refurbishment and energy and utilities more generally described as an “energy revolution”. This needs set out in an integrated way, in the form of an energy strategy where all forms of energy production are more closely linked together. This needs to provide clarity on the regulatory underpinning across those areas (many renewables financiers also finance other parts of the power or energy sector). — Banks will have to have a degree of comfort that they will get their money back, and in this regard will have to be able to present on regulatory issues internally. On the private equity side, major UK institutional investors (including pension funds) are contributing to RE funds; at present there is a consistent message back about delays and hold ups in the UK sector due to various factors. There is currently seen to be a disconnect between targets and implementation. Water sector regulation is seen as relevant: the Regulator provides certainty in five year blocks and advanced warning about ‘tweaks’ to inflation which the banks can incorporate into sensitivity analysis undertaken on financial models for these projects. This approach helps provide stability.

Planning and Grid — Planning is significant problem, with an expectation now that every project will be turned down and go to Inquiry; a solution to the MOD’s radar-related opposition to projects is required—in the near term—otherwise a number of projects will fail. — A new planning regime, won’t help small and medium scale distributed generation, which are also important for implementation of UK’s targets. There is frustration at the fact that Local Planning Authorities are eVectively carrying out national energy policy. The Scottish Executive has met with financiers and is seen to be ahead on taking a more active stance with its Local Authorities on planning matters, with the intention to actively engage to raise awareness on RE. However, the sense is that a real solution will require a strong stick or carrot at local level. On solutions, relevant approaches noted: — the current waste obligation on Local Authorities which face penalties for non-compliance, this has opened up significant investment activity; — Spain takes a national level planning approach—major infrastructure projects are completed within a year; — An enforced time period for assessment through the Town and Country Planning Act, with payment of costs for any overrun. One financier separately estimated that an average nine month delay (project goes to Inquiry) has costs of £500,000. Framing of the employment opportunities (“green collar jobs”) in the RE sector could help, but is largely absent from the UK debate, including at a local level. This is in contrast to places like Germany, where this factor has been analysed, and is actively presented. — Looking ahead: grid connection is also a significant issue; if a project developer comes with a grid connection slated for 2017 they will be told ‘come back in 2014’, financiers will need to see this before they will invest.

Stability of RO Regime — There is no disagreement with ROC banding approach at this stage, more a case of confidence that it will be implemented. There was a sense of “keep the system (enacted into law), but clear out the undergrowth if you want it to work”—referring to grid and planning issues. — It is very important not to create further uncertainty over this in the Consultation process ie an ‘its all up for grabs approach’ as this will only increase the perception of regulatory risk in the UK. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

432 the economics of renewable energy: evidence

RO Banding levels From a debt perspective oVshore wind is risky—turbine prices added on top of technology, operation and maintenance, grid connection risks mean that at present the economics of oVshore are diYcult: 1.5 ROCs “may not be enough”. Banks need to have an appropriate return for the risks they are taking, and currently there are only a handful that will play in oVshore wind. Shell’s decision to pull out of the London Array reflects this. However, if ROC banding tracks turbine price in some way, then it will be buVeted by external market factors and not be stable, plus raising tricky questions such as how often it is reviewed etc.

RO versus feed-in tariff and the cost of capital It has been suggested that a feed in tariV system would be better from a consumer/taxpayer perspective, as it reduces risk and makes the cost of capital lower. However, there would be significant risks from such a change due to the disruption it would cause. It was explained that, in the case of a wind farm, there are four actors that share the value: the developer, long-term equity investor, the bank, and the turbine supplier (each will have to provide a level of return for the risks they take, with the bank generally taking less risk and a smaller slice). Each system (RO, FIT) would rebalance the relative size of the slice that each of those actors would get. Wind turbine manufacturers, for example, are pricing turbines according to the market they are in, and what price can be tolerated by the other players.

Heat and Biomass This was not explored in the short timeframe, however a question over the availability of biomass feedstock for the heat market was raised, but not answered. June 2008

Memorandum by Renewable Energy Systems UK and Ireland Ltd 1. Renewable Energy Systems (RES) is a leading renewable energy company with businesses in Europe, North America and Australia. Part of the British Sir Robert McAlpine Group of engineering and construction companies, RES has been at the forefront of wind energy development since the 1970s. We built our first wind farm in Cornwall in 1992 (the UK’s second project) and since then have completed more than 2550MW of wind energy capacity worldwide, including projects in the UK (10% of the UK’s installed wind capacity), Ireland, France, Scandinavia, Portugal and across the United States. The RES Group has more than 1500MW currently under construction and a large portfolio in development around the world. RES is active in a range of renewable energy technologies for on-site and building-integrated heat and power generation, including biomass heating, solar (PV and thermal) and ground source hot water, heating and cooling. Recently the Group launched a sustainable buildings consultancy, Inbuilt, which provides technical and consulting excellence in the research, design and delivery of sustainable built environments. 2. Energy policy—in particular its sustainability and economics—is a key issue at present, as we face the twin challenges of climate change and declining fuel resources, and a consequent rise in conventional energy prices. We need to see a paradigm shift in economic drivers. The huge consequences of major climate change and the extremely long term nature of the investment decisions required cannot be driven eVectively by conventional commercial evaluation. Nevertheless, environmental challenge is economic opportunity and a shift to a sustainable energy policy will bring a range of economic, employment and social benefits at a local, regional and national level. With the price of oil at record levels and continuing to rise, the specific economics of renewable energy development can only become more favourable. Rising fossil fuel prices and improved technology mean that renewable energy generation is becoming increasingly competitive with conventional technologies, even without including the subsidies for, or the external costs of, conventional power generation.

How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada and other EU countries? 3. There are two significant issues driving the development of renewable energy—climate change and security of supply. In 2007, RES published two reports—Plugging the Gap: A survey of world fuel resources and their impact on the development of wind energy and Global warming: a guide to its origins and eVects. Plugging the Gap showed that while global energy demand will grow by more than half over the next quarter of a century, we are now consuming more than three times as much oil as we discover, resulting in a peak in the Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 433 next decade and a gap between supply and demand by 2030 equivalent to five times the current production of Saudi Arabia. We have just started to use more gas than we find—by 2030 production will have peaked and demand will have doubled, resulting in a gap equivalent to the current production of Europe and the Former Soviet Union. Coal is abundant and large energy consumers will be self-suYcient for some time, though by 2050 the world will have consumed 40% of its coal reserves, with a 10% decline each decade subsequently, and environmental concerns will continue to constrain its use. Current reserves of uranium will last 60 years with modest growth in nuclear generation but in the long-term alternatives would have to follow if there were substantial nuclear growth. Climate change is now recognised across the spectrum as a serious issue and the need to reduce greenhouse gas emissions is a priority. Responding to these twin challenges means reducing consumption, reducing fossil fuel based generation and replacing it with sustainable low-carbon sources. 4. Renewable energy must be at the heart of the Government’s energy policy. The potential for renewable energy in the UK is significant. Each technology has its own characteristics and timelines that need to be addressed in a national strategic plan. The 15% renewable energy target (the UK’s share of the EU 20% target by 2020) translates to a 45% target for electricity -a massive challenge. The government’s plan for 2020 must be part of a much longer term strategic plan for sustainability and must result in clear policies and instruments to ensure implementation of the actions required. 5. RES welcomes the Government’s commitment to increase the development of renewable energy generation in the UK but firm action on a number of issues is required in order to reach existing targets and to go beyond to the level of emissions reduction scientists now say is necessary (ie 80% by 2050). The UK is not on track to meet its 2010 targets for renewable energy generation and the new EU Renewables Directive requires us to go even further. We believe that ambitious renewable energy targets are necessary and, with political will, achievable. 6. Onshore wind is the only technology with an industry ready and able to deliver the large-scale increase in generation needed to meet the 2010 target. It is expected to play a major role in plugging the short-term gap left by gas and in decarbonising the power sector over the next quarter of a century. Modem wind turbines are eYcient, powerful machines that generate electricity from a resource that the UK has in abundance. Every year, projects developed and built by RES in the UK and Ireland are cutting CO2 emissions by more than 450,000 tonnes, generating electricity equivalent to the annual needs of around 160,000 households and, because wind is an indigenous energy resource, contributing to our national energy security. Wind power has the potential to bring significant economic and employment benefits for the country. RES employs more than 200 people in the UK and has a policy of using local firms for the civil engineering contracts during the construction phase of our wind farms. 7. Europe is a leader in wind energy technology and development. The 75GW of wind energy installed in Europe by 2010 is expected to meet one third of the EU’s 2010 Kyoto target. In Europe, the leading wind energy nations are Germany, Spain and Denmark. In Spain, government targets have increased regularly in response to its success and currently, about 10% of national electricity is provided by wind, increasing to 15% by 2010 (26,000GWh produced in 2007, forecast to increase to around 29,000GWh in 2008). In Germany, a strong Renewable Energy Law has encouraged a flourishing wind energy industry, with more than 22,000MW installed capacity at the end of 2007. Germanys renewable energy target for 2010 under the EU renewables directive is 12.5% of electricity consumption but this was met and exceeded in 2007, with a share of 14%. The German government has recently increased its target for 2020 from 20% to 25–30%.

What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can support? 8. The renewable energy sector is hindered from reaching its full potential in the UK by number of continuing barriers. These are largely institutional rather than technological. The key issues that need to be addressed are: planning, grid, aviation, supply chain, skills shortage, and support and research for less mature technologies. 9. The planning system has not kept pace with the growth in interest in renewables. It is time-consuming and unpredictable, making it a lottery for developers large and small Decision time for planning consents is too long, both at local planning authority level and at appeal, across all four UK countries. According to the British Wind Energy Association, only 5% of wind farm applications are determined within the statutory 16 week period, compared to an average of 70% for all other major developments. 10. National policy on renewables is pretty robust and positive, but this is not translated at a local authority level, for a variety of reasons, including little understanding of or training in energy issues, misinformation and lack of resources. This leads to inconsistencies in approach. The government must be more diligent in monitoring and enforcing the delivery of national renewables policy on the ground. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

434 the economics of renewable energy: evidence

11. The Keadby wind farm project, developed by RES, demonstrates how planning risk for developers is too high. The 34-turbine, 85MW project proposed on semi-industrial land near Keadby in North Lincolnshire, will generate power equivalent to the needs of approximately 38,000 homes every year. RES first starting surveying the site in 2001 and submitted a planning application in 2003. North Lincolnshire Council objected to the proposal which pushed the project to a public inquiry, which eventually took place in 2007 after significant delay. In February 2008 the Secretary of State granted consent for the project and construction has been planned to begin soon, with the project operational and contributing to national targets by 2010. This project could have been determined at the end of 2004 at the latest and the delay has cost RES well in excess of £1 million. More importantly, however, the delay was a missed opportunity to add to the UK’s renewable energy generating capacity with a low impact, locally-supported project that can bring much-needed local economic benefits. 12. In fact a Judicial Review application has recently been made on the Keadby consent. This is likely to result in further delay as we would naturally be reluctant to place deposits for turbine orders in the region of £10,000,000 whilst a legal challenge hangs over the consent. We are seeing an increasing number of consented projects, especially in England, being delayed either by Section 288 Challenge or Judicial Review. We say delayed, rather than stopped, because in most cases it is clear that a delay is the likely outcome as the grounds are generally weak. We believe Judicial Review and Section 288 Challenge are being seen by national groups opposed to wind farms as legitimate tactics in their campaign to stop onshore wind farm development. 13. Another scheme, the 18MW Den Brook wind farm in Devon, was consented in February 2007, underwent a legal challenge, which was finally heard and dismissed in March 2008, but leave to appeal the High Court’s decision has been granted and a date for that is currently set in December 2008. 14. RES generally supports the proposals in the Government’s current Planning Bill to streamline the process by replacing the current system with granting consents for major infrastructure of national importance. However, this only applies to projects of over 50MW (for onshore wind) in England and Wales, so only 300MW out of the 8000MW of capacity currently in the planning system is aVected and not until after 2010. The success of the Planning Bill’s proposals are, in our view, utterly dependent on the development and interpretation of a robust set of national policy statements. We would like to see the Bill’s scope increased to encompass onshore applications below 50MW and all oVshore consents. It is also important that any replacement for Section 106 does not place undue burden on wind farm applications. We fundamentally object to any proposals to change the planning application fee structure. Uniquely, wind farm development boundaries are considerably bigger than the “footprint” of the project infrastructure. Adopting the preferred fee structure would result in unacceptably high application fees probably deterring development and thereby compromising on Government renewable energy targets. 15. The availability of grid capacity in the UK is a major obstacle to the achievement of renewable energy targets. We need a modern grid network that can support our ambitions into the future for low-carbon generation and that has the administrative processes, strategic planning and investment that is consistent with the Government’s climate change policy. 16. At the moment, even consented projects that are ready to build and start contributing to the UK’s renewable energy targets are not being connected to the grid. Renewables are not getting a fair deal in grid access. The Drummuir wind farm, a project developed by RES, is an example of this. Drummuir is a 42MW, 21 turbine, wind farm planned for Moray in Scotland. It was submitted in 2002 and after being turned down by the planning authority went through a lengthy and costly public inquiry, despite it being a well-designed, low-impact project in a good location. In 2006 the project received consent from the Scottish Executive. However, although we are ready to build this project, we are not able to go ahead because it is held up in the grid connection queue. 17. Planning delays in the UK have been further exacerbated by recent changes in the way the Ministry of Defence handles wind farm applications. They have recently started to issue last-minute objections to wind farm proposals which have previously had letters of “no objection”, giving no time to respond and reducing market confidence as investments are lost. Again, the barrier here is institutional—there are technical solutions available to ensure that wind turbines do not interfere with radar. See also paragraph 23. 18. Over the last few years the cost of turbines has increased as a result of higher steel prices, pinch points in the turbine supply chain and soaring global demand for turbines, resulting in reduced market confidence. In the oVshore wind sector, turbine supply is a key issue—manufacturers are looking to supply most of their capacity to the onshore market because oVshore is still a higher financial risk. 19. The renewable energy industry faces an impending skills shortage. This is a critical issue considering the scale of development needed to meet the 2020 targets and beyond. There is a shortage of skilled and experienced workers in the manufacturing, construction and operating sectors, along with a shortage of Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 435 graduates with the scientific, technical, commercial and social knowledge needed to take the industry to the next level. Initiatives must be put in place at company, sector, governmental and EU level to educate, train and attract skilled workers to the industry. 20. Support mechanisms and increased R&D for energy generating technologies that are currently less market mature but which will fill the gap in the medium to long term between supply and rising demand are needed. There is still a large heat demand that can be met in a sustainable way and we need to exploit the huge potential for building-integrated and on-site renewable energy generation. 21. We support the recommendations of the Renewable Energy Association on policy measures to overcome existing barriers to—and to implement new support mechanisms for—the development of a range of renewable heat and electricity generating technologies. These would include a production tariV to be applied to metered heat generated from on-site renewable energy installations and a Feed-in TariV for microgeneration of electricity. 22. We would also like to see an improved long-term grant system for installing renewable energy technologies that is simple, well-publicised and well-resourced and recognition of the potential for biomass—especially in urban areas.

Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 23. The roll out of well developed but not yet implemented or approved technological solutions to radar interference will free up many more potential wind farm sites and reduce the costs of failed applications. Objections to wind farm proposals on the grounds of aviation or radar issues currently aVect x4.5 GW of projects in planning.

Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forams of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime? 24. The Renewables Obligation has been relatively successful as a support mechanism to encourage renewable electricity, and wind energy in particular, into the market place. While the capacity of renewably-generated electricity so far installed under the RO is falling short of that needed to achieve the Government’s 2010 target, it is important that the RO remains in place in order to maintain stability and investor confidence into the future, particularly with the 2020 targets being set at European level. 25. In our evidence to the Government’s consultation on Reform of the Renewables Obligation in 2007 we agreed with the need for additional support for the more expensive renewable energy technologies but cautioned that increasingly fragile market confidence for onshore wind would be undermined by changes initially proposed to the RO and concluded that, should the Government be minded to adopt a banding approach, there should be no banding down of onshore wind but that additional funding should be provided. We welcomed the Government’s conclusions published subsequently and agreed with the proposed banding levels, although cautioned that the levels may not be suYciently high for some emerging technologies. We would like to see the RO’s life extended beyond 2027. 26. With regard to the issue of the Renewables Obligation versus a Feed-in TariV, we agree with the Government’s conclusion that the RO should not be replaced by a Feed-in TariV, although this may be appropriate for microgeneration as a way to encourage greater uptake by householders, the RO being too administratively expensive and complex for this sector. While renewable energy capacity is higher in a number of countries where the Feed-in TariV system has been used, this is likely to also be a consequence of more favourable planning and grid connection regimes. It would not be beneficial to the UK renewables industry to change support mechanisms at this stage. A harmonisation of support mechanisms might be appropriate once Europe has moved towards a single electricity market. 27. A report by the European Wind Energy Association of the RE-EXpansion project comparing payment mechanisms in the EU116 concluded that it was too early to draw final conclusions on the full range of policy options available. Policies based on fixed tariVs and premiums can be designed to work eVectively but 116 Support Schemes for Renewable Energy: A Comparative Analysis of Payment Mechanisms in the EU, EWEA, May 2005. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

436 the economics of renewable energy: evidence introducing them is not a guarantee of success—the design of the mechanism and its combination with other measures (grid access and development; administrative procedures; public acceptance and support) determine its success.

On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables? 28. The existing electricity infrastructure is aging and suVers from 30 years of under-investment. Without network investment and access reform, renewable generation will remain inhibited. However, the opportunity for modernisation within a strategy for sustainability is huge. 29. It cannot be left to the market alone to deliver strategic infrastructure solutions as current private investment criteria are incompatible with the strategic timescales of relevance. Such commercial investment criteria would not have resulted in the London sewage and underground railway systems—strategic infrastructure often has very significant value beyond its initial commercial life. Generation and grid infrastructure is currently privately owned and investment is based on commercial return. In future, public- private partnerships will be essential for delivering the scale of new infrastructure required. This presents opportunity for both. Great care is also needed in the application of discounted cash flow analysis to very long term high impact issues like avoidance/mitigation of climate change. Policies need strategic timeframes well beyond 2020 and need mechanisms to enable creation of a flexible and enduring infrastructure. 30. Investment and operation of the grid is regulated by Ofgem, with short-term cost-to-the-consumer as their key metric. This inhibits radical development to access main centres of renewable resource. Extension of the grid will result in additional cost to the consumer, hence the reluctance of Ofgem to commit to the vision, but grid forms only a small percentage of total electricity cost so should not be a major constraint on ambition. Ofgem’s remit must be rethought specifically to prioritise sustainability and also to enable large-scale and very long term strategic investment. 31. The rules about how we connect capacity to the grid are not supportive but inhibitive of renewables. There is no priority grid access or dispatch for renewables; development of the grid is reactive to emerging projects whilst reform of the operating regime is inhibited by process rigidity. This cannot be addressed through evolution of existing codes; radical redesign is needed. Giving priority access for connection and production to renewable energy capacity means not doing so for centralised fossil plant. It is essential to overcome resistance from the aVected incumbents. Renewables must have priority grid access and dispatch. Shared access rights and flexible security-of-supply rules need to be introduced. 32. Consenting of electricity infrastructure projects is slow and diYcult. The process in England and Scotland is being radically reformed; a specific aim is better and speedier decisions on such projects, which is to be welcomed. Consenting must be strategy-led and development control must enable rather than impede. 33. Work on developing a long-term infrastructure plan needs to start now. Government must enable the creation of that plan and provide the necessary instruments to ensure it becomes reality. Government must undertake a major education programme to address the need to change attitudes and create public and stakeholder buy-in. 34. Today’s grid reflects historical not future need. Renewables must be harnessed where they occur, not where the grid is now. The grid must be strengthened and extended and rather than do this piecemeal, strategic planning should identify and enable long-term, ambitious solutions that have relevance well beyond the short- term 2020 horizon.

How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations? 35. For our views on the planning system’s eVectiveness in balancing the positives and negatives when assessing renewable energy proposals, specifically onshore wind farms, see paragraphs 9–14 above. 36. In general, the external costs of renewable energy generation are less than the external costs of fossil fuels and nuclear power. They can be mitigated by sensitive design and development and local consultation and the E IA process already in place facilitates this. While there are concerns about the visual impact of wind turbines, Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 437 our experience is that the greatest supporters of wind energy are those communities living near an existing project. Public opinion is favourable towards wind energy in general. The Eurobarometer opinion survey in January 2007 showed that 71% of EU citizens were “very positive” towards the use of wind energy in their country. The popularity of a range of energy sources was surveyed and they were (in order of popularity with greatest first): solar energy, wind energy, hydroelectric, marine, biomass, gas, oil, coal and nuclear. 37. The issue of external costs of diVerent types of electricity generation is an important one. The European Commission-funded ExternE study (1998) estimated that the cost of producing electricity from coal or oil would double and the costs of electricity production from gas would increase by 30% if external costs (in the form of damage to the environment and health) were taken into account. It estimated that these costs amount to 1–2% of EU GDP or between Euros85billion and Euros170billion, not including the cost of climate change. The ExternE study gave the external costs of various energy sources expressed as Eurocent/kWh. According to the RE-Xpansion analysis, wind power is expected to avoid external costs of Euros25billion/year by 2020.

How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? 38. Regarding “greener” fossil fuel generation, in our 2007 survey of world fuel resources (Plugging the Gap), RES considered the availability of coal over the next few decades and the role for “clean coal”—a series of new technologies that aim at reducing the specific emissions of coal-fired power plants and ultimately eliminating them. The first step in this strategy is reducing emissions by improving thermal eYciency through supercritical stream cycles and IGCC. IGCC also paves the way for Carbon Capture and Storage (CCS), for which there are several technological options. 39. CCS is currently at an R&D stage and uncertainties persist as to the potential chemical and physical interactions of CO2 with the storage medium. No mature technology exists for CCS today, but coal-rich countries like the US are investing heavily to develop it and aim at having a demonstration project in the coming years. 40. According to a DTI (UK) study117, CCS costs for a new IGCC plant are estimated at 97 ƒ/tonne of abated CO2, including the cost of the energy used in the process. In terms of electricity cost, a carbon-free kWh generated in such plant would cost 3.9cƒ more than one produced by a modem CCGT. Clearly, CCS will not develop without incentives but a support scheme will not be easily established, as nuclear generators could probably claim for similar premiums. However, costs are expected to be reduced as capture technology improves. Financial returns from enhanced oil recovery (EOR) could further ease the burden.

If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? 41. In the short-term, onshore and oVshore wind will provide the majority of renewable energy generation in the UK, as wind power is the most advanced and economic of the technologies. However, with the right investment triggered by eVective support mechanisms as part of a long-term strategic plan, other renewable energy technologies—specifically those to meet the large demand for heat and on-site/buildings-integrated generation—will play a major in meeting the targets that must follow the 2020 target. Marine renewables have huge potential around our coastline and continued support for tidal stream and wave energy technology development is important.

How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? 42. A higher price for carbon would be beneficial for renewables. The ETS should be designed to ensure a stable and appropriate regulatory framework which gives investors the confidence they require for long term development plants; create a level playing field for renewables in comparison with other—often more polluting—energy technologies ie internalisation of external costs; take into account all benefits associated with renewables; allow the renewables sector to receive suYcient compensation in recognition of those 117 UK Department of Trade and Industry (DTI), “Review of the Feasibility of Carbon Dioxide Capture and Storage in the UK”, September 2003 Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

438 the economics of renewable energy: evidence

benefits. However, CO2 trading—a single payment mechanism based on CO2 price—cannot be relied upon to bring forward renewable energy because the price is too volatile to promote investment. 16 June 2008

Memorandum by Research Councils UK (RCUK)

Executive Summary The Research Councils support a full spectrum of energy research and postgraduate training and seek to expand UK university and institute research capacity in energy related areas. The Research Councils’ Energy Programme builds on a substantive portfolio of activities bringing together researchers from many disciplines to tackle the research challenges involved in developing and exploiting energy technologies and understanding their environmental, economic and social impact. Research supported includes areas of direct relevance to the economics of renewable energy (eg improving energy yield from second-generation biofuel crops) through to underpinning support that has an impact on the economics of renewables (eg development of technologies, siting of facilities, environmental impacts, economic models, social aspects). The provision of skills is key to the continued economic viability of the renewables sector. Funding from the Research Councils maintains and develops the skills base in renewable energy through a combination of both responsive and strategic approaches across all of the main renewable energy themes. The Research Councils all support studentships in renewable energy and the number of students has increased markedly since 2004, in particular through Towards a Sustainable Energy Economy (TSEC) and the Sustainable Power Generation and Supply (SUPERGEN) consortia. The Research Councils recognise the importance of strong partnerships and engagement with research users such as industry and government in order to meet their needs and increase knowledge transfer and economic impact. The business focus that industry partners bring includes the long-term economic viability of renewable energy in the UK. The Research Councils’ Energy Programme is also one of the funders of the Energy Technologies Institute, a public-private partnership working to accelerate the development and commercial deployment of a focused portfolio of energy technologies.

RCUK Introduction 1. Research Councils UK (RCUK) is a strategic partnership set up to champion the research supported by the seven UK Research Councils. Through RCUK the Research Councils are working together to create a common framework for research, training and knowledge transfer. Further details are available at www.rcuk.ac.uk 2. This evidence is submitted by Research Councils UK on behalf of all the Research Councils and represents their independent views. It does not include or necessarily reflect the views of the Department for Innovation, Universities and Skills (DIUS). The submission is made on behalf of the following Councils: — Biotechnology and Biological Sciences Research Council (BBSRC). — Economic and Social Research Council (ESRC). — Engineering and Physical Sciences Research Council (EPSRC). — Natural Environment Research Council (NERC). — Science and Technology Facilities Council (STFC).

Response to the Inquiry 3. Our response to the inquiry comes in two parts: — Summary of Underpinning Activities. Whilst not specifically addressing the economics of renewable energy, the wealth of underpinning activities supported by the Research Councils will have a direct impact on the economics. A summary of these activities has been included as a separate section to avoid repetition when responding to the specific questions. Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 439

— Responses to Specific Questions. Here we have identified activities supported by the Research Councils’ Energy programme that are relevant to a specific question. The individual research groups we have identified may be able to provide a fuller response to some of the questions outlined in the inquiry.

Summary of Underpinning Activities 4. The principal Research Councils supporting energy research are BBSRC, EPSRC, ESRC, NERC and STFC. The Councils have a joint Energy Programme118, coordinated by EPSRC. The Programme’s vision for energy research is to position the UK to successfully develop and exploit sustainable, low-carbon and/or energy-eYcient technologies and systems to enable it to meet the Government’s medium and long-term energy and environmental targets. 5. Expenditure on energy research by the Research Councils has increased substantially in recent years, from about £40 million in 2004–05 to approximately £77 million in 2007–08. Within this, Research Council spend on renewable energy research has increased from £8.3 million in 2000–01 to £13 million in 2004–05 and £30 million in 2007–08 (Table 1).

Table 1

SUMMARY BY FINANCIAL YEAR OF THE RESEARCH COUNCILS EXPENDITURE (IN £,000S) ON RENEWABLE ENERGY ACTIVITIES

2000–01 2001–02 2002–03 2003–04 2004–05 2005–06 2006–07 2007–08 Wind £260 £330 £490 £481 £242 £125 £1,140 £767 Solar £4,125 £4,666 £3,927 £3,834 £4,179 £4,065 £3,685 £6,572 Fuel cells & Hydrogen £981 £1,463 £1,984 £2,687 £2,393 £2,705 £3,074 £6,183 Wave & tidal £300 £605 £616 £830 £995 £1,026 £1,080 £1,015 Bioenergy £622 £752 £927 £1,177 £1,249 £2,023 £2,646 £6,579 Geothermal £40 £64 £63 £73 £79 £106 £124 £347 Storage £837 £888 £809 £730 £466 £789 £1,193 £1,713 Networks £919 £1,114 £1,388 £1,804 £2,390 £3,666 £4,037 £3,336 Other renewable £267 £432 £587 £453 £1,220 £1,315 £2,380 £3,500 Total £8,354 £10,314 £10,791 £12,069 £13,213 £15,820 £19,359 £30,012

6. The Research Councils’ main funding mechanism for renewable energy research is through the directed activities of each Council which include, for example, the Sustainable Power Generation and Supply (SUPERGEN)119 Programme, the Towards a Sustainable Energy Economy (TSEC)120 Programme and through the Research Councils Institutes. 7. SUPERGEN is a multidisciplinary initiative led by EPSRC involving BBSRC, ESRC and NERC and with funding from the Carbon Trust. The initiative builds critical mass in energy research to help the UK meet its greenhouse gas emissions targets through a radical improvement in the sustainability of power generation and supply. Researchers work in consortia, multidisciplinary partnerships between industry and universities, focused on major programmes of work. 8. TSEC (funded by BBSRC, ESRC, EPSRC and NERC) adopts a multidisciplinary, whole-systems approach to energy research and is a broad-based programme that aims to enable the UK to access a secure, safe, diverse and reliable energy supply at competitive prices, while meeting the challenge of global warming. 9. The UK Energy Research Centre (UKERC) (funded by ESRC, EPSRC and NERC, and coordinated by NERC) is a key component of the Research Councils’ directed activities and was established as part of TSEC. UKERC’s mission is to be the UK’s pre-eminent centre of research, and source of authoritative information and leadership, on whole system energy research including renewable energy121. UKERC seeks to bring together government, industry and the research community; be a networking centre to co-ordinate UK research, facilitate industry collaboration and promote UK participation in international projects; be a centre of excellence in research and training and help maximise returns from research investment. UKERC is making a separate submission to this inquiry. 118 www.epsrc.ac.uk/ResearchFunding/Programmes/Energy/default.htm 119 www.epsrc.ac.uk/ResearchFunding/Programmes/Energy/Funding/SUPERGEN/default.htm 120 www.nerc.ac.uk/research/programmes/sustaineconomy/ 121 www.ukerc.ac.uk Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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10. Additionally a substantial portfolio of renewable energy research is also supported through the Councils’ responsive mode activities, which proposals to be submitted in any research area within or across the individual Councils’ remits. All applications, whether responsive or under directed programmes, are peer reviewed and judged on the basis of scientific excellence. 11. The Councils maintain a balanced portfolio of studentships across the main renewable energy themes and strategically intervene where appropriate. For example, increased numbers of project studentships have been encouraged in the SUPERGEN and TSEC programmes, including multidisciplinary studentships within UKERC. Research Councils also fund PhD studentships in the renewable energy area through responsive routes. 12. The Councils recognise that strong partnerships and engagement with research users and stakeholders including government is needed to facilitate knowledge transfer and economic impact. The business focus that industry partners bring includes the long-term economic viability of renewable energy in the UK. Within the Energy Programme, and specifically the engineering and physical sciences portfolio on renewables, 45% of projects involve collaboration with industry, resulting in £12.7 million of direct and indirect support to UK universities over the lifetime of the projects. 13. The Research Councils are working closely with the Technology Strategy Board (TSB) and the Energy Technologies Institute (ETI) to ensure the eVective translation of knowledge into innovation and new and improved products and services. EPSRC is one of the public funders of the ETI122, a 50-50 public-private partnership established in December 2007 aiming to accelerate the development and exploitation of new energy technologies. ETI is making a separate submission to this inquiry.

Responses to Specific Questions

1. How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? 14. The main driver for the Research Councils’ Energy Programme is to support a full spectrum of energy research to help the UK meet the goals set out in the 2003 Energy White Paper. Research related to renewable energy is one of the key priorities for the programme. 15. ESRC has commissioned comparative research at City University into the use of renewables demonstrations and trials in North America, Europe and Japan, to examine their eVectiveness in terms of accelerating innovation, and the impact of external policy factors. 16. Complete assessment of the economic benefits of renewables has to be made in terms of changes to traditional generating costs and impacts. This assessment must take into account environmental impacts and capacity. For example, NERC’s Centre for Ecology and Hydrology (CEH) is involved in monitoring the atmospheric deposition of sulphur and nitrogen from existing power generation and use123 and the movement of radioisotopes released through normal nuclear power production124, and data from the latest Countryside Survey will be used to update estimates for capacity for biofuel crops.125 17. The fit of renewables into Britain’s energy policy is being modelled by UKERC in its UKERC Energy 2050 model126. The model investigates the interplay between diVerent energy sources and parameters influencing selection (eg availability) with diVerent scenarios being presented and interpreted for environmental impact.

2. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? 18. Various activities supported by the Research Councils involve investigating technological, social, economic or environmental barriers to renewable energy deployment. Some examples are outlined below. 19. The Energy Research partnership (ERP), in which the Research Councils are represented, has undertaken a review of the innovation chain for 12 key technology areas. This highlighted gaps and barriers in the innovation chain and produced specific recommendations to overcome these.127 122 www.energytechnologies.co.uk 123 http://www.ceh.ac.uk/sci programmes/biogeo.html 124 http://www.ceh.ac.uk/sections/ecp/Radioecology.htm 125 Countryside Survey http://www.countrysidesurvey.org.uk/ 126 http://www.ukerc.ac.uk/MediaCentre/UKERCPressReleases/Releases2007/0711Energy2050.aspx 127 http://www.energyresearchpartnership.org.uk/files/UK%20Energy%20Innovation.pdf Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 441

20. UKERC has produced a number of road maps128 that attempt to identify the sequence of research (and other) problems to be overcome before new technologies can be commercially viable. For each roadmap, key forward actions are identified, relating to R&D or wider policy aspects. 21. As part of TSEC, research undertaken by Dr Karsten NeuhoV at the Electricity Policy Research Group129 at the University of Cambridge suggests resource constraints are not an obstacle to the large-scale deployment of renewable energy technologies. NeuhoV’s economic analysis does however identify barriers to the adoption of renewable energy sources resulting from market structure, competition in an uneven playing field and various non-market place barriers. 22. The Marine Energy Research Consortium130 (SUPERGEN) led by Edinburgh University is increasing knowledge and understanding of the extraction of energy from the sea to reduce investment risk and uncertainty. This will increase confidence for future stakeholders in the development and deployment of the technology. 23. The National Oceanography Centre Southampton (NOCS) [NERC/Southampton University] conducts wave climate research in the North Atlantic and British shelf seas, and this is valuable for assessing the “available resource” for wave energy and some of the risks for all oVshore installations (including wave and oVshore wind). NERC’s Proudman Oceanographic Laboratory (POL) conducts oVshore wave modelling and near-shore wave measuring—research which could underpin the development of oVshore wave power technology. 24. NERC’s Research and Collaborative Centres conduct a substantial amount of research relevant to the development of tidal power schemes. Particularly notable is POL’s contribution to the DTI’s Renewable Energy Atlas131. NERC also supports ecological and biodiversity research which would be relevant to the siting of tidal barrages and CEH assessed most of UK’s estuaries for the environmental impact of barrage schemes in the 1980s.

3. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances?

25. The Research Councils support research into a range of technologies that could result in cheaper renewable energy. By working closely with the TSB, the ETI, and partners in industry, the Research Councils seek to enable the rapid exploitation of these technologies, examples of which are given below: — The SUPERGEN Wind Energy Technologies Consortium132 led by the Universities of Strathclyde and Durham consists of nine research groups and brings together wind turbine technology and aerodynamics expertise with other specialists from outside the wind industry in hydrodynamics, materials, electrical machinery and control, reliability and condition monitoring. The Consortium’s key objective is to undertake research to improve the cost-eVective reliability and availability of existing and future large-scale wind turbine systems in the UK. — The Excitonic Solar Cell Consortium133 (SUPERGEN) brings together leading UK researchers from Bath, Imperial College, Edinburgh and Cambridge in this field and is exploring the potential for the next generation of organic and dye-sensitised photovoltaic systems. — The Photovoltaic Materials for the 21st Century (PV21) Consortium (SUPERGEN) is conducting research into the generation of electrical energy from sunlight using advanced wafer silicon and thin film devices with the primary objective of making a step change in the reduction in the cost of solar cells. The Consortium is led by the Universities of Bath and Durham and involves four leading academic partners and seven main industrial collaborators134. — A £4.2 million project at Imperial College, New and solar renewable routes to hydrogen energy, seeks to exploit low temperature natural biological and photocatalytic processes to develop alternative, and cost eVective, methods for harvesting solar energy to produce renewable hydrogen fuels directly, and to explore how these could be embedded within novel, integrated energy production systems, incorporating fuel cell and hydrogen storage technology.

128 http://ukerc.rl.ac.uk/ERR001.html 129 http://www.econ.cam.ac.uk/eprg/TSEC/index.html 130 http://www.supergen-marine.org.uk/ 131 www.oVshore-sea.org.uk/site/scripts/documents info.php?categoryID%21&documentID%25 132 www.supergen-wind.org.uk/ 133 http://www.bath.ac.uk/chemistry/supergen-ESC/ 134 http://www.pv21.org/ Processed: 17-11-2008 19:38:24 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

442 the economics of renewable energy: evidence

— NERC’s British Geological Survey (BGS) has been leading the way in assessing the potential for Ground Source Heat Pumps, identifying resource135. They use a two-stage assessment, first interrogating their national datasets, then making site-specific measurements on site visits. 26. ESRC-funded research by Professor Gordon Walker at the University of Lancaster and Professor Bob Evans at the University of Northumbria has shown that small-scale community renewable energy projects can contribute to a revitalisation of local economies and help alleviate poverty.

4. Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime? 27. We interpreted this question to be on subsidies related to renewable energy generation and as such have no comments to add.

5. On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables? 28. Alternative generation methods present many specific challenges when compared to the centralised generation model currently prevalent. These include remote location of renewable resources, variable power production, and distributed generation models. The Research Councils’ Energy Programme supports a range of activities focussed on the eVect this will have on future transmission and distribution networks, examples of which are outlined below. — In 2006 UKERC published a highly regarded report on “The Costs and Impacts of Intermittency”136, dealing largely with the intermittency inherent in wind generators. The report was targeted at non-specialists and policy makers, but also provided new information for the expert community. — The SUPERGEN Highly Distributed Power Systems Consortium137 is assessing the impact of smaller generators and incorporating these into the grid. This project is led by Strathclyde University. — The SUPERGEN Future Network Technologies (FutureNet) Consortium138 is making a major contribution to understanding how networks need to change so as to support and encourage renewable low carbon energy sources while providing the standards of service that customers expect. This consortium is led by Imperial College London and the University of Strathclyde. — A research partnership139 involving seven universities and three major international companies in the power industry are exploring ways to remove technical barriers to the connection of small scale renewable generation without large cost penalties, and to better manage faults in electricity distribution systems as a means of improving the quality of supply oVered to customers.

6. How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations? 29. Attempts to externalise the complete costs of energy were made in the 1990s in projects such as ExternE140 in which the University of Bath and NERC’s CEH (then Institute of Terrestrial Ecology) participated. The study identified the importance of and diYculty in defining a valuation system for comparing electricity- generating systems. One approach examined was the use of Life Cycle Analysis (LCA). UKERC is completing 135 http://www.bgs.ac.uk/reference/gshp/gshp report.html 136 www.ukerc.ac.uk/component/option,com docman/task,doc download/gid,550/ 137 http://www.supergen-hdps.org/ 138 http://www.supergen-networks.org.uk/ 139 http://gow.epsrc.ac.uk/ViewGrant.aspx?GrantRef%EP/E003583/1 140 http://externe.jrc.es/ Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 443 a review of LCA for diVerent generating systems (biomass for heat and power, biofuels for transport, carbon capture and storage and oVshore power)141. 30. Public acceptability is increasingly recognised by policy makers, the research community and other stakeholders as a necessary condition of reaching government energy targets. The “Beyond Nimbyism” project, supported through the TSEC “Managing Uncertainties” theme, addresses the issues of public acceptability, perception and engagement and how they aVect technology development and diVusion142.It seeks to examine a range of technologies which are expected to figure in the UK renewable energy profile to develop a sophisticated understanding of public responses to such technologies in diVerent contexts.

7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? 31. We have no comments to add for this question.

8. How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? 32. UKERC’s ongoing study “Life Cycle Assessment in the Bioenergy Sector”143 is carrying out a systematic review of LCA studies of the use of bioenergy crops for diVerent purposes. The project has identified the components of supply chains within diVerent studies and has extracted the values used to describe those components in approximately 150 studies (75 biofuel, 75 heat and power) to investigate the variation in parameters and attempt to explain some of the discrepancies in conclusions drawn from studies. The work will be completed and published by late summer 2008.

9. If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? 33. We have no comments to add for this question.

10. How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? 34. We have no comments to add for this question.

11. What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? 35. Life sciences research supported by BBSRC underpins the development of new and improved bioenergy crops, and improved methods to extract usable energy from them. In March 2006 BBSRC undertook a review of Bioenergy144 which examined the contribution that its science base could make to renewable energy and biofuels. However, establishing the economic costs and benefits of biofuels was beyond the scope of the review. 36. Bioenergy has a key role to play in the replacement of fossil fuels with renewable, low-carbon alternatives. Natural plant photosynthesis is a much more eYcient process than can be derived from equivalent technologies, and at the moment we have a poor understanding of what happens once a plant captures this energy. 37. Biofuels are the only renewable source of liquid fuels for transport. Ethanol and butanol are suitable petrol substitutes for fuel and manufacturing in some situations. Present “first-generation biofuels” are derived by fermenting sugars from food crops, such as maize, sugar cane or wheat, and by using land that might otherwise be used in food production. Countries such as Brazil are investing heavily in this area to 141 http://www.ukerc.ac.uk/ResearchProgrammes/FutureSourceofEnergy/Bioenergy/LifeCycleAnalysis.aspx 142 http://www.sed.manchester.ac.uk/research/beyond nimbyism/ 143 http://www.ukerc.ac.uk/Downloads/PDF/L/LifecycleAssesmentwp0408.pdf 144 http://www.bbsrc.ac.uk/organisation/policies/reviews/scientific areas/0603 bioenergy.pdf Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

444 the economics of renewable energy: evidence exploit their natural resources, but such production is only really viable where land and labour are cheap or on a vast scale, and has limited viability in Europe. It can also lead to damage to the environment and the exploitation of less developed regions. 38. An ESRC-funded research project at University of Essex is comparing innovation processes, challenges and obstacles for transition to a bio-economy, with a particular focus on bioethanol in Brazil, the USA and Europe.145 39. The current focus of UK development of biofuels is on the use of willow and Miscanthus as feedstocks for co-firing, use of oil seed rape for biodiesel production and use of various crops for bioethanol generation. Short rotation coppice willow is already being grown as an energy crop in parts of the UK but crop breeding has the potential to greatly improve yields, making it economically viable for a much wider range of growers. The SUPERGEN “Biomass and Bioenergy” consortium brings researchers and breeders into contact with growers and power providers to ensure that new crop varieties are tailored to the needs of British agriculture and the energy industry. Rothamsted Research (a BBSRC sponsored institute) is a key partner in the project.

Second-generation 40. Biofuel technology development is still in its infancy. First-generation biofuels are derived from simple extraction of oils or fermentation of available sugars, with the remaining energy content of the plant unexploited. “Second-generation” biofuels are being developed that are derived by converting woody materials into oils, alcohols or gas, thus using the whole plant much more eYciently. However these require the application of complex biotechnology to be realised. 41. BBSRC is now committing £38 million to bring together the UK research community and expand capacity. This funding is in addition to the figures quoted in Table 1, and includes an £18 million Bioenergy initiative to focus on second-generation biofuels whilst also enhancing international interactions. The funding will expand the capacity and skills base allied to turning laboratory excellence into products and processes, and will bring the research community together as well as increase engagement with the emerging industrial base. 42. The UK has the expertise and capacity to make a significant contribution to bioenergy, particularly sustainable second-generation biofuels. This will require ongoing and increased investment in research and development to contribute to both UK and global solutions. In addition to delivering environmental benefits, the opportunity for the UK to be associated with the likely development of biofuels as a major international commodity can bring economic advantage. BBSRC’s plans to develop improved links with Brazil is one example of how these aims can be progressed through international collaborations. 43. In addition to the use of biofuel crops, biorefining also oVers both longer-term potential alternatives to petrochemicals (such as the use of microbes to produce liquid or gaseous fuels), and also of using plants in the production of chemical feedstocks for manufacturing, thus freeing up fossil fuels for other uses. To derive the full benefits from such research these processes need to be developed at the industrial scale. 44. The bacterium Clostridium acetobutylicum makes butanol, a replacement for petrol. Researchers including those at the University of Nottingham now have the complete genome, and are funded through the Systems Biology of Microorganisms (SysMo) programme146 to undertake an extensive analysis of the biological processes of butanol production. This will make it easier to improve the yields of butanol on a commercial scale.

Carbon Emission Impacts and other Environmental Effects 45. The development of “second-generation” sources are particularly important because they do not necessarily replace food crops and can be grown on marginal land with otherwise low productivity. Further basic bioscience research is needed to develop plants which grow faster and convert carbon dioxide to biomass faster and using less fertiliser. By combining new approaches with breeding solutions, new crops research has the potential to significantly reduce carbon emissions compared to first generation biofuels such as ethanol from corn in the US. Additionally, soils research is increasingly providing an understanding of the impacts of cultivation of biofuel crops on greenhouse gas emissions, and how to minimise these. 46. The TSEC-BIOSYS Consortium147 (BBSRC, EPSRC and NERC) coordinated by Imperial College aims to provide authoritative and independent answers on technical, economic, environmental and social issues related to the development of bioenergy in the UK. Specific issues include the potential role of bioenergy in 145 http://www.esrcsocietytoday.ac.uk/ESRCInfoCentre/ViewAwardPage.aspx?ts%3&data%z8HSvl3fWwVY2sDo4JNP8iOLJQdQ nq85xFaxyg3u19HPhGXqbRQC2GZIgBT5T034EKT5aOoSiev70YvpIzGkzKbDkHnEppFRkM95HjhjgtU%3D 146 SysMo is supported by six partner countries Austria, Germany, Norway, Spain, The Netherlands and the UK. Further details of the COSMIC (Clostridium acetobutylicum systems microbiology) are at http://www.sysmo.net/index.php?index%54 147 www.tsec-biosys.ac.uk/ Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 445 satisfying UK energy demand, the potential contribution of bioenergy to UK Government objectives, and the economic, social and environmental implications of large-scale bioenergy development. The project will integrate research findings from the SUPERGEN Bioenergy and Distributed Generation consortia, the EPSRC-funded Sustainable Urban Environments (SUE) programme, the cross Research Council Rural Economy and Land Use (RELU) programme, DEFRA bioenergy crop networks, and Carbon Vision activities, as well as relevant information from EU and international bioenergy activities. 47. The Rural Economy and Land Use (RELU) Programme funded by BBSRC, ESRC and NERC, with additional funding from SEERAD and Defra, includes biomass research148. The project brings together a wide range of experts from various institutions, including BBSRC’s Rothamsted Research and NERC’s CEH, to study the social, economic and environmental implications of increased land use for energy crops. The aim is to provide an integrated, interdisciplinary scientific evaluation of the implications of land conversion to energy crops, focusing on short rotation coppice (SRC) willow and Miscanthus. The project has attracted additional funding from DEFRA. A second RELU project will start later this year to analyse the environmental risks and conduct cost-benefit analysis of anaerobic digestion in on-farm energy production. 48. CEH has projects underway examining the carbon, greenhouse gas and nitrogen balance of three first- generation biofuels (SRC willow, Miscanthus and wheat) in studies supported by NERC’s Integrating Fund149 and the Ecology and Hydrology Funding Initiative. The impacts and constraints from hydrology have been studied in a number of projects (including TSEC Biosys150). June 2008

Memorandum by The Royal Academy of Engineering

Summary The Royal Academy of Engineering is pleased to respond to the House of Lords Select Committee on Economic AVairs consultation on The Economics of Renewable Energy. This is an important topic within the wider field of climate change and energy. Fellows of the Academy with experience and expertise in the area have contributed to this response and a summary of the main points are listed below. The Academy would be happy to provide any additional information, either orally or in writing, that would assist the Committee as they move forward with this inquiry. — Tackling climate change while maintaining a secure and aVordable energy supply requires an integrated and co-ordinated energy policy. — The EU target of 15% of all energy consumption to be sourced from renewable energy by 2020 is extremely challenging given that the current level is less than 2%. — Renewable energy cannot be treated in isolation. It must be part of a clear and integrated UK energy policy along with other low-carbon technologies and demand reduction strategies. — The current expansion of renewable generation will impose strains on the electricity transmission and distribution systems, both in terms of the geographical location of the renewable generators and their likely intermittency. — Forecasts of the increase of renewable electricity should be treated with caution as predictions do not always translate into reality. The engineering practicalities of delivering such a large increase in renewable power must not be underestimated. — There must be suYcient investment in education and training to ensure an adequate number of skilled engineers and technicians. — The UK is lagging behind other EU states on deployment of renewable energy despite its rich resources of wind and marine energy. — The main barriers to greater deployment of renewable energy are capital costs, the planning system, grid connection and the global procurement chain. — Feed-in tariVs could make development of renewable energy more attractive by reducing the financial risk that developers are exposed to, giving fledgling renewables industries the confidence to invest, develop and grow. 148 http://www.relu-biomass.org.uk/ 149 http://www.ceh.ac.uk/sections/epfs/NiallMcNamara.htm 150 http://www.tsec-biosys.ac.uk/index.php?p%2&pp%0&pt%8 Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

446 the economics of renewable energy: evidence

How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? 1. Since the Government’s 2006 energy review there has been a number of important developments in energy policy for the UK. In terms of renewable energy, the most pertinent of these was the May 2007 Energy White Paper that led to the Energy and Climate Change Bills, both currently progressing through Parliament. In addition, the Planning White Paper is also relevant as it relates to planning permissions for new energy installations and their grid connections. The European Union (EU) has also agreed in principle binding targets which will impinge on UK policy. 2. Within these various documents there are a number of targets, some of which will be legally binding and some merely aspirational. The Energy White Paper repeated the Government’s commitment to the target of 10% of electricity from renewables by 2010 along with an aspiration to double this by 2020. It remains to be seen if the Climate Change Bill, which will enshrine in law a variety of targets associated with climate change, will include targets relating directly to renewable energy. 3. The EU currently has a Proposal for a Directive which aims to establish a binding target of 20% of all energy consumption to be sourced from renewable energy by 2020. Within this directive are targets for each member state to achieve 10% of biofuels in transport and individual targets for renewable energy—the UK’s proposed target is 15% by 2020. 4. Both the White Paper and EU targets represent enormous challenges when the current situation is taken into account. In 2006, just over 4% of the UK’s electricity came from renewables and overall less than 2% of its energy came from renewables—lower than all other EU states bar Malta and Luxembourg. This is in part owing to the UK having, until recently, an indigenous supply of cheap oil and gas. But given that it also has one of the best natural resources of wind and marine energy it could be argued than progress on renewable energy has not been as rapid as might have been hoped, especially taking into account the current Government’s claim to be leading the way in tackling climate change. 5. The main policy mechanism for incentivising growth in renewable energy is the Renewables Obligation (RO). Introduced in 2002, it requires the electricity utilities to source a certain amount of their supply from certified renewable generators. The proportion of supply increases year on year, thus providing a continued form of subsidy for renewable technologies which are still being developed. This scheme has, in general, succeeded in achieving its goals and the Government still expects to reach its target of 10% renewable electricity by 2010. It does, however, tend to favour technologies that are more developed and thus less mature technologies do not benefit as much as hoped—a situation which becomes increasingly acute. As a result, for example, much of the recent increase in renewable electricity has come from on-shore wind while marine technologies have not advanced as quickly despite the UK’s abundant supply of wave and tidal energy. Consequently, the RO system is in the process of being amended in order to take into account the relative levels of maturity of diVerent renewable technologies. A banding approach has been proposed and is likely to be adopted that will favour less mature technologies such as wave, tidal and solar photovoltaics. Regardless of any amendments, the Government remains committed to its existing target of RO levels rising to 15.4% by 2015–16, with the possibility of that increasing to 20% given suYciently rapid growth. 6. In addition to the RO mechanism, the Government has also introduced the Renewable Transport Fuel Obligation (RTFO) which will require that 5% of all vehicle fuel to be supplied from sustainable renewable sources by 2010. This comes into force in April of this year and represents one of the first mechanisms to reduce emissions from the transport sector—where carbon emissions have continued to rise in recent years. There are however, concerns over the sustainability and carbon life cycle of biofuels and their eVect on world food prices. 7. Overall, renewable energy in the UK is making progress but is lagging a long way behind our European neighbours. Countries such as Germany, Denmark, Spain and Portugal have all attained a considerably higher proportion of energy from renewable sources. This has been achieved through a variety of economic and regulatory measures. Feed-in tariVs have been particularly successful in Germany, giving the fledgling renewables industry the confidence to invest, develop and grow. 8. Over the coming years, a number of major projects will be needed alongside the more gradual expansion of the renewables sector. The wind and marine resource in the UK would make this possible, but recent developments suggest that progress may in reality be more diYcult. The rejection of the Lewis wind farm and the withdrawal of Shell from the London Array project demonstrate that large wind farms, both on- and oV- shore, still face an uphill struggle both in terms of planning approval and finance. In addition, the Severn Estuary could potentially provide a significant amount of predictable renewable energy through a tidal barrage scheme—but despite over a century of feasibility studies and proposals, the barrage is no nearer being built. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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9. There is much work to be done in the UK if we are to fulfil our promises to lead the world in tackling climate change. The targets that have been set are extremely challenging but meeting them will ultimately provide us with secure, low-carbon energy. This must be strongly encouraged by the Government in as clear and coordinated a way as possible. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? 10. One of the main barriers facing most forms of renewable energy is the capital cost of installation. Unlike the traditional thermal forms of generation where fuel costs represent a significant proportion of costs, renewables such as wind, marine or solar require no fuel but are more expensive to install initially. The exception to this is biomass and energy from waste, in which case renewable fuels often compete directly with hydrocarbons. 11. The high capital costs aVect both large and small installations. At national grid level, a large renewable scheme such as the Severn Tidal Barrage requires capital expenditure far in excess of a typical gas fired power plant. Once installed, it would provide low-carbon, secure and predictable electricity but the level of investment needed is one of the main reasons the scheme has never gone ahead. 12. This problem is often mirrored at the small scale. Even renewable technologies at the domestic scale such as solar water heating, which would eventually pay back any initial capital outlay through fuel savings, can be prohibitively expensive to install. 13. At the national scale, another serious barrier for renewable power is connection to the grid system. With much of the best renewable energy resource occurring a long way from where the power is needed, expensive new grid connections are necessary. For example, the west coast of Scotland has one of Europe’s best wind energy resources but is a long way from the south east of England where the highest electricity demand is located. 14. Gaining planning permission for renewable energy projects is also a major barrier. The recent failure of the proposed Lewis wind farm is a case in point and demonstrates that the Government’s assumptions on the future growth of renewables may not always be well founded if proposed projects fail to be built through lack of planning permission. It is hoped that the Planning Bill currently proceeding through Parliament will help alleviate some of the current diYculties and give both industry and Government greater certainty going forward. 15. Another barrier results from the global demand for commercially viable technology to combat climate change. This results in strains on the procurement chains which can slow the rate at which a technology can be installed. This is currently felt most acutely with wind turbines where world shortages have led to higher prices for the turbines coupled with long lead times. This situation is liable to be duplicated for other forms of renewable technologies as they mature. It demonstrates that even when a technology is commercially viable, the engineering practicalities of large scale deployment can still present barriers. 16. Thus, global procurement chains can limit the rate at which renewable energy can be integrated into the UK electricity system. For intermittent sources such as wind, wave and solar there is also a limit as to how much can ultimately be absorbed into the national power system. While it is untrue that every MW of intermittent source needs to be backed up with an equal level of thermal generation, a certain level of back up is necessary to cope with variations in supply and demand. The level of back up increases as the proportion of intermittent electricity goes up. This results in external costs and negates some of the carbon savings, however, international experience and research suggests that these eVects are manageable for up to 20% of intermittent supply151. The more diverse and dispersed the renewables the better as this can provide contingencies for particularly uncommon weather events, although, it should be noted that levelling and reducing demand is also important and as the proportion of renewables increases a method of storing the energy may become crucial.

Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 17. Technological advances will make renewables cheaper. This will be as a result of experience gained through R&D, new materials (particularly in solar PV) and economies of scale—as has been seen in on-shore wind over the last five years. However, owing to the barriers detailed in the answer to the previous question, renewables will still require Government support throughout the whole innovation chain from early research to full commercial implementation if they are to help decarbonise UK society. 151 UKERC (2006) The Costs and Impacts of Intermittency, UK Energy Research Centre. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime? 18. The Government already has a number of mechanisms for encouraging investment in renewable technologies, particularly renewable electricity generation, such as the Renewables Obligation and the Road Transport Fuel Obligation. In addition to these supply obligations, Research, Development and Deployment (RD&D) is being encouraged through the Energy Technology Institute and the Carbon Trust. 19. The Renewables Obligation and Renewable Obligation Certificate (ROC) system was originally designed to be technology blind and oVered the same level of financial incentive per kWh of renewable electricity generated, regardless of the technology. It is now recognised that the system favoured above all others the most mature and lowest cost technology, on-shore wind. Proposals are now in place to band the financial incentives oVered by the ROC system according to the maturity of the technology involved and this should help to bring wave and tidal stream generating technologies on line. 20. While the RD&D support through the Energy Technology Institute and Carbon Trust, and the support to the generator through the Renewables Obligation do cover both the technology development and its deployment, there is still a real likelihood that the UK will fail to meet its current targets for renewable electricity generation and this is for a number of reasons, some of which are beyond the Governments control. 21. The Renewables Obligation has provided stability over time for the renewable electricity generator market and the industry understands the need to introduce banding for technologies of diVerent market maturity. However, because the ROCs are tradable and generators rely on the wholesale price of electricity as well as the ROCs, developers are still exposed to a high level of price risk. Gas powered electricity generation is usually the price fixer within the electricity market (occasionally coal when fuel prices dictate) because of its dominant position. Consequently gas powered generators can generally pass any short term fluctuations in fuel prices through to the consumer, meaning that renewable generators are directly exposed to an element of gas price risk even though they do not use the fuel. In a number of Continental electricity markets, feed-in tariVs, giving a fixed and guaranteed price for every kWh generated, reduce or transfer this price risk element. 22. The majority of the UK’s renewable electricity targets are likely to be met through on-shore and oV-shore wind developments by virtue of their market maturity compared to other technologies. However, serious supply chain constraints exist in the wind turbine manufacturing sector. It must be recognised that all energy generator manufacturers now operate in a highly international market and when demand for products such as wind turbines is high, the price will correspondingly rise. 23. Further down the wind turbine supply chain there are issues surrounding competition with other industries for the supply of large, high quality, castings and gearboxes, manufacturers of which can sell into other cyclical industries such as ship building, possibly at higher profit margins. 24. A complication of the wind turbine manufacturers having already full order books is a reluctance among some to invest in the high performance engineering required to ensure the levels of operability required for oV-shore deployment. Extremely high levels of operability are required because operators cannot guarantee access to oV-shore turbines to carry out maintenance. They are unwilling to lose the use of a turbine for a trivial mechanical or electronic failure if denied access to fix it for long periods of time due to weather conditions. However, if the manufacturer can maintain a full order book without meeting this standard there is no incentive to do so. 25. These industry based barriers to faster deployment of renewables cannot be overcome simply by use of economic instruments based on rewarding the generator exclusively.

On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables? 26. Investment in the GB electricity transmission system has been cyclical in the past with the last major tranche of investment occurring in the 1970s. The current system has been designed with centralised generation assets in mind, but this is not to say that the system cannot cope with a degree of decentralised generation in its current configuration. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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27. The current expansion of renewable generation will, however, impose strains on the electricity transmission and distribution systems, both in terms of the geographical location of the renewable generators and their likely intermittency. 28. There is already a flow of power from Scotland and the North to the South of the UK. Because of geography and historical decisions, the Scottish and English grids are substantially separate with two interconnectors handling a North-South flow of power. Conditions in Scotland are favourable for development of substantial amounts of on-shore wind power, so, planning processes not withstanding, the flow of power from North to South is likely to increase. The North-South flow of power from Scotland to England will be moderated by the planned closure of Hunterston B and Torness nuclear power plants in 2011 and 2023 respectively. Current Scottish planning policy suggests that these stations are unlikely to be replaced with new nuclear build, but ambitious Scottish targets for additional renewables, particularly wind, will mean that the interconnectors role will be of added importance to maintain grid stability in Scotland as well as for large scale power transfer. Investment in further interconnector capacity between Scotland and England is therefore of high strategic importance. 29. The Government expects the majority of its renewable energy targets to be met by oV-shore wind. Providing grid connection for oV-shore wind projects is expensive and even when factored into the planning of a project is still fraught with planning uncertainties. An example of this was the denial of planning permission for a sub-station at Cleve Hill for the London Array by Swale Borough Council in June 2006, overturned on appeal in August 2007. 30. Although planning processes are being streamlined courtesy of the Planning White Paper of May 2007, there will remain a “chicken and egg” situation with regard to provision of grid access for new projects. The cost of providing grid access to remote locations and the low rate at which planning consents are converted to active wind farms means that grid connection cannot be provided to sites speculatively. The high number of proposed sites also imposes logistical problems for the grid operator in providing connections as quickly as many developers would like.

How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations? 31. Each form of renewable energy will have its own associated external costs, although there may be a certain amount of overlap. Below is a summary of these costs for each of the main types of renewable energy. 32. Wind: The impact of on-shore wind farms on the environment is still being assessed. Clearly, their manufacture and installation will result in the expenditure of energy and hence carbon emissions. This can be particularly acute if the turbines displace peat bogs which are very eVective carbon sinks. Overall, it would appear that, in most cases, the carbon emitted by wind farms is recouped relatively quickly. In the case of oV- shore wind farms there are fewer examples from which to gather data. The increased complexity of installation will necessarily result in greater carbon emissions, but the expected increase in eYciency should counteract this. As more oV-shore turbines are installed a more informed picture will emerge, although it must be remembered that variations in the geography will mean that each installation will have its own unique characteristics. 33. On-shore wind has encountered diYculties in gaining planning permission because of local objections on the grounds that they can destroy areas of natural beauty and endanger bird populations. Balancing local concerns against national or global needs is diYcult but proposals in the Planning Bill to draw up national policy statements should help clarify this issue. 34. Solar: In the UK, solar photovoltaics (PV) rarely perform eYciently enough to repay the financial investment over the course of their lifetime, particularly in the case of micro domestic installations. As technological advances are made, this situation should improve, but it is unlikely that PV will ever contribute significantly to the UK’s renewable energy targets. Solar water heating systems, however, generally perform much better as the technology is relatively simple and there are few external costs. 35. Marine: Given that marine power technologies are still very much in their infancy, the full environmental eVects of their operation are still to be fully assessed. Clearly there will be a correlation between the size of the installation and the degree of impact. Thus large, one-oV projects such as a Severn tidal barrage will have a considerable eVect on the ecology and biodiversity of the Severn estuary. This would also be true for large tidal lagoons which would disrupt the currents flowing around them. However, the extent of the impacts are diYcult to assess and in some cases may even have associated benefits in terms of flood defences. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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36. Wave power is likely to have fewer environmental eVects as these devices tend to be less intrusive in terms of disrupting local ecosystems, although due to their low eYciency they are currently unable to provide significant amounts of electricity. With only a handful of pilot schemes operating, the full external costs of wave power are still very much an unknown quantity. 37. Biomass: Much has been written recently concerning the sustainability and carbon life cycle of biomass and liquid biofuels in particular. For example, the Royal Society’s report Sustainable biofuels: prospects and challenges gives a comprehensive review of these issues. In theory, any energy crop will absorb as much CO2 while it grows as is released when it is consumed. In practice, the energy used to process and transport the biomass can result in carbon emissions which render the biofuel almost pointless in terms of carbon savings. In addition, replacing indigenous species with single energy crops, such as oil palms replacing rain forest, can lead to soil degradation which is ultimately unsustainable and results in the loss of crucial carbon sinks. 38. Besides sustainability and life cycle concerns, the recent expanse in the biofuels market has also led to financial and social concerns. Global free market regulations mean that it is diYcult to restrict any specific biofuel even if it is known to be unsustainable. This has resulted in large agricultural businesses moving into the biofuels market at the expense of smaller, local farmers to the detriment of local economies. 39. In general, all forms of energy generation, be they renewable, nuclear or fossil fuel, will incur external costs to society and the environment. Accurately assessing the full life cycle in terms of greenhouse gases as well as their overall sustainability and social impact is notoriously diYcult. The Government must continue to support research in this field and take account of international best practice when developing its energy strategy.

How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? 40. The cost of generating electricity is notoriously diYcult to estimate as many aspects are covered by commercial sensitivities. A simple comparative approach allowing the calculation of indicative costs was developed by the Royal Academy of Engineering in 2003 and updated by PB Power in 2006, taking into account fluctuations in fuel prices and introducing other sensitivities such as discount rates, carbon prices and utilisation rates. 41. It should be remembered that the costs of generating electricity from particular technologies are only one influence on the price of electricity that consumers pay and do not dictate it. In general, one technology at any particular time, through dominant market position, will be the price maker in the market. In recent years in the UK electricity market this has been gas powered generation and has led to a situation where gas powered generators can, in eVect, pass on their fuel price risks directly to the consumer, meaning that even a wind powered generator, who has no exposure to gas prices in their operating costs, is exposed to gas price risk because it directly aVects the price the wind generator can get for the units of electricity generated. 42. The costs presented in the figure below are based on PB Power’s updated calculation of June 2006152 and as such do not reflect the recent increases in the price of oil and gas. While they allow a broad brush comparison of cost of generating electricity from diVering technologies, the actual costs vary on a project by project basis.

152 Powering the Nation, A review of the costs of generating electricity, PB Power, June 2006 Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Figure 1

COSTS OF ELECTRICITY GENERATION CALCULATED IN MARCH 2006

Range of Costs - All technologies Cost (p/kWh) 40.00 Cost of Generation - range 35.00 Costs of Generation - Central Case Electricity Price Apr 06 (12 month contract) 30.00 Electricity Price Apr 06 (12 month contract) Electricity Price Apr 06 (12 month contract) 25.00

20.00

15.00

10.00

5.00

- Wave Tidel Wind Biomass Wind Gas Coal Nuclear Gas Coal Coal (Ofshore) BFBC (Onshore) OCGT IGCC Cost CFBC PF

Technology

Taken from “Powering the Nation”, March 2006 © PB Power

How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? 43. The main aim of energy policy in the UK is to maintain a secure and aVordable energy supply while simultaneously reducing emissions of greenhouse gases. Domestic heating and transport play just as significant a role in this as electricity generation and as such cannot be ignored. Renewable energy can contribute to the goals across all sectors but it must not be forgotten that demand reduction and other forms of low-carbon energy are equally as important. 44. In domestic heating, renewable energy in the form of biomass boilers and solar water heating can be cost- eVective and provide significant benefits in terms of carbon savings and sustainability. Geothermal energy may also make a contribution in the future if given support. However, it is often the case that demand reduction measures such as better insulation and passive solar heating from south facing windows is equally cost- eVective. Other technologies such as heat pumps and district heating systems can also help reduce carbon emissions but these will not contribute to the UK’s renewable energy targets, thus highlighting potential conflicts within the UK’s overall energy strategy. 45. Transport has proved to be a particularly diYcult sector to deal with as there are few alternatives to the liquid fossil fuels on which it currently relies. Renewable biofuels can make a contribution but there are increasing concerns surrounding these which are discussed elsewhere in this response. Plug-in electric vehicles are becoming a more viable alternative, especially as advances are made in battery technology. However, if they are to make a contribution to lowering transport’s carbon emissions they will require the electricity to be supplied by low-carbon forms of generation. The same would be true for hydrogen vehicles as the hydrogen would need to be produced by low-carbon energy, otherwise the emissions would simply be transferred to a diVerent sector. Thus, it may be possible to utilise renewable electricity generation in the transport sector but the relative merits of doing so in terms of cost are diYcult to assess. In addition, it should again be noted that other measures such as increasing fuel eYciency and changing personal behaviour can also be eVective at reducing carbon emissions from transport. 46. What this does emphasise is the importance of developing an integrated energy policy across all sectors of the economy. Renewable energy cannot be treated in isolation and in the long-term should not be artificially favoured over other emissions reducing technologies or strategies simply to meet targets. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

452 the economics of renewable energy: evidence

If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? 46. It is forecast that most of the growth in renewables over the next decade and beyond will come from wind power, both on- and oV-shore. The main reason for this is that on-shore wind is the most mature of the various renewable technologies and the experience gained from on-shore wind, coupled with increased load factors expected oV-shore, should encourage the growth of oV-shore wind farms. This growth would seem sensible in the light of the UK’s natural abundance of wind energy. 47. It is also possible that tidal energy could provide a significant amount of renewable electricity if large projects in the Severn estuary or the Mersey are undertaken, although these may not come on line in time for the 2020 targets. 48. Biomass will continue to provide a large proportion of our renewable energy in heat, transport and electricity. Co-firing of biomass will be particularly valuable if fossil fuel prices continue to rise and emissions from power stations are increasingly restricted. It may ultimately be especially beneficial if coupled with carbon capture and storage systems in the future. 49. A note of caution is needed regarding forecasts of the increase of renewable electricity as predictions do not always translate into reality. The engineering practicalities of delivering such a large increase in renewable power must not be underestimated. Not only are there barriers in terms of the planning system, grid connections and the global procurement chain, there will also be a shortage of skilled engineers without adequate levels of investment in education and training. 50. The question of whether UK support for overseas projects should contribute to meeting targets is diYcult. On one hand, climate change is a global problem and the most eVective and economic solutions should be sought regardless of their geographic location. On the other hand, it is essential that the UK leads the way in decarbonising its own society while maintaining economic stability; this will not happen if all its eVorts are carried out abroad. It would therefore seem sensible that the UK is permitted a limited amount of overseas credits but that the bulk of the target is met by UK based renewables. Concerns over the accountability and additionality of overseas projects must also be addressed by Government along with international partners.

How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? 51. A strong carbon market would help renewables compete in the market with other forms of energy generation. What is needed is not just a relatively high price of carbon but a robust market which would allow industry to feel confident enough to make long term investments in low-carbon energy. 52. All markets are susceptible to fluctuations (as has been seen recently in the oil and gas markets) but the EU Emissions Trading Scheme in its first two phases has not performed as well as it was hoped. This was in part due to the fact that it was the first mandatory scheme of its type and teething problems were to be expected. As it moves into its third phase it should perform better and with a number of other trading schemes starting up around the world it is likely that the price of carbon will become more stable. 53. Ultimately this will help renewables but it must be remembered that trading schemes will make all low- carbon energy cheaper in relation to traditional fossil fuels. Given that the aim of trading schemes is to cap emissions of carbon this is as it should be but renewables will then be competing with other technologies such as nuclear power and carbon capture and storage which will also become relatively cheaper. 54. Additional subsidies may still be required for technologies in the early stage of development but in the long run any technology should be able to compete in the market on level terms with all the alternatives.

What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? 55. The basic advantage of liquid biofuels over their fossil fuel counterparts is that, while both emit carbon dioxide when burnt in an engine, the biofuel absorbs an equivalent amount of CO2 as the plants used in its production are grown. In theory, this means that over their life cycle biofuels are carbon neutral. In practice however, once agricultural methods, processing and transportation are taken into account, (ie a more detailed Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 453 life cycle analysis), the carbon mitigation benefits of various biofuels can diVer greatly with some proving to be little better than fossil fuels. 56. Another perceived benefit of biofuels is with regard to security of supply. Rather than using up irreplaceable fossil fuels which are often sourced from politically unstable regions, biofuels can be grown in any agricultural area and the crops are sustainable. Again, the reality of the situation is somewhat more complicated. Biofuels can indeed replace fossil fuels as a source of energy, but in doing so aVect agriculture and land-use. If land currently used to grow food crops is replaced with energy crops the price of food can increase—as occurred with world corn prices following US subsidies for bioethanol. If, on the other hand, non-agricultural land is converted to energy crops important carbon sinks can be adversely aVected—as can be seen in the case of Indonesian rain forest being cut down to make way for palm oil plantations. This can result in any carbon savings being totally nullified along with other serious negative eVects, such as decreased biodiversity. 57. One aspect where biofuels do have an advantage, on the face of it, is in replacing liquid fossil fuels in transport. Attempts to decarbonise the transport sector have always proved particularly problematic. Any advances in terms of fuel eYciency have been largely oVset by weight increases due to higher vehicle specifications as well as societies becoming ever more mobile. There are possible fuel alternatives such as hydrogen and electric hybrids, but these would require a radical overhaul of both road vehicles and the associated infrastructure and are a long way oV being in any way viable for sea or air transport. Biofuels, on the other hand, can simply be added to existing liquid fossil fuels and at low percentages require little or no changes to either the vehicles or the fuel infrastructure. 58. It is likely that the ease of adding biofuels to road transport fuel is one of the main reasons that governments here, in Europe and further a field have introduced targets for their introduction. However, as noted above, a more detailed analysis of their carbon life cycle, issues of land-use and negative social and environmental eVects can reveal that, in reality, the situation is often less than favourable. The main problem with the first generation of liquid biofuels is the amount of energy needed to process the raw material and the relatively low yield per hectare of land. Whether producing bioethanol or biodiesel, very little of the plant is actually converted into the fuel. Most of the plant is unable to be broken down and is therefore discarded. A second generation of biofuels is expected which will be able to utilise the tougher lingnocellulosic part of the plant and hence increase yields. While this would be an improvement, the question does need to be asked if processing biomass into liquid biofuels is the best approach when the whole plant can easily be broken down by burning either at large scale as co-firing in power plants or small scale in domestic boilers or CHP plants. Indeed, if carbon mitigation is the main driver it has also been shown that alternative approaches such as reforestation can be even more eVective. 59. What the above points do highlight is the fact that even though a certain technology can seem to oVer a number of advantages, governments should be wary of introducing sweeping regulations and subsidies before the full picture is understood. Biofuels can certainly oVer clear benefits in certain circumstances. In particular, local projects and ones using waste products can be very eVective. As is often the case, care needs to be taken when dealing with such a complex issue as climate change and energy. June 2008

Memorandum by The Royal Society of Edinburgh 1. The Royal Society of Edinburgh (RSE) is pleased to respond to the House of Lords Economic AVairs Committee Inquiry into “The Economics of Renewable Energy”. These comments have been prepared by a number of expert Fellows of the RSE. 2. It is hoped that the Inquiry will view renewable technologies in the light of an overall energy strategy. Partitioning of thinking with regard to technology options and choices should be avoided as there are interesting opportunities for making progress towards a much higher degree of sustainability. To prepare for the longer term, investment in the development of alternative sources and cleaner technologies is essential. 3. Displacing or supplementing fossil derived energy with renewable derived energy is a truly formidable challenge because of the scale of the problem, the incompatibility of infrastructures required and the complex interactions between technical, policy and economic aspects. The myriad supply and demand-side options require an integrated approach. Solutions need to be pursued at all scales. 4. Research, development and demonstration of projects are paramount and these aspects should be built-in to a programme and not treated in isolation to one another. The real benefit of full scale demonstrators is their potential to provide confidence in a technology. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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1. How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? 5. The majority of the UK’s natural resources in wind, hydro, marine and biomass energy are found in the north of the UK. In fact 50% of the UK renewable energy production is sourced from Scotland153. The Scottish Government has recently increased its challenging target for the proportion of Scotland’s electricity to be generated from renewables from 40% to 50% by 2020. However, it is important to note that abundance of resource does not necessarily result in its utilisation as that resource must be harnessed eVectively and economically.

6. The importance of renewable energy is that it reduces “whole life” CO2 emissions from overall electricity production and it increases the diversity of fuel resources and hence security of supply. It has a disadvantage in terms of its increased cost—which electricity consumers bear. The only mature renewable, apart from hydro- electricity, is onshore wind which now compares broadly in cost with conventional forms of generation. 7. The support for renewables internationally is typically given by one of two means: (i) a Renewable Obligation and renewable certificates as in the UK, and certain states in the US, which obliges electricity supply companies to derive from renewables a prescribed proportion of the electricity that they sell; (ii) a “feed-in tariV”, as adopted in many EU states, which runs contrary in important respects to the concept of a free market in electricity. Germany, Spain and Denmark have the highest penetration of renewables in the world and have feed-in tariVs. 8. The size of a country, its political ambitions, meteorological climate and existing electricity system will influence the way in which renewable policy is adopted. 9. The exploitation of renewable energy oVers significant opportunities for manufacture and export, as well as providing employment in site development, management and maintenance. At present there is a realistic prospect for the UK to develop a world-leading marine renewables industry, but this will only flourish if the right environment, including maximising bureaucratic eYciency, is provided: a substantial domestic market, with stable trading conditions to encourage steady growth. Initial costs will be high and technical risk significant. Both will reduce over time as the industry mature; the experiences of wind power exploitation are relevant here. A sizeable public investment is required in the early stages, with financial returns beginning to emerge after perhaps 10 years.

2. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? 10. Planning, public consultation and the democratic process generally, specifically in relation to onshore wind farms, form the greatest barriers to increased deployment of renewables. Grid connections and infrastructure, and the technical diYculties in maintaining quality of supply in remote areas, are other prominent factors. We understand that Ofgem and DBERR are conducting a Transmission Access Review to improve the transmission access regime. Bottlenecks due to delays, lack of technically-skilled human capital and competition for the supply of components are hindering deployment of renewable energy in the UK. 11. A consequence of the GB electricity transmission charging regime is that generators in Scotland face higher connection charges compared to generators elsewhere in GB because of their distance from centres of demand. This could act as a disincentive to renewable energy generation in Scotland. Although we understand there are plans to review the system of charges. 12. Renewables are typically small in scale and specific per-unit capital costs (£/kW of capacity) are thus higher than for conventional generation which may be 100–200 times larger in generator size. The economics are thus less attractive to developers when compared with conventional power sources, eg CCGT, unless there is significant support from third parties. 13. With regard to the deployment of oVshore wind, wave and tidal technology, ultimately, the gap between capital costs, expected operational costs and revenue still remains too large for substantial industrial commitment, without improvements in the ROC system. Basic research, eg into wave behaviour, needs to be enlarged, while development and implementation costs are mostly prohibitive. Uncertainty about real future costs, particularly the installation, operating and maintenance costs is a major problem. Turbine prices are increasing as global demand expands, reliability is uncertain and raw material prices are high. It is important that work take place to establish whether some of the above risks can be mitigated, by a regime of capital grants and adjustments to economic instruments. 153 The Energy Technologies Partnership, Expression of Interest in Support of the UK Energy Technologies Institute (February 2007) Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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14. At about 20% penetration, intermittent renewable generation eg wind may well increase system operating costs significantly from the running of flexible and part-loaded plant. Deployment of storage capacity would help to balance the grid, which would be operating with an increased proportion of variable, intermittent renewable generation. Although this also carries cost implications.

3. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 15. Please also see above. 16. We will need significant technical advance in all technologies (except perhaps onshore wind) before we could say that renewable energy is both reliable and economic. The scale of most technologies would have to increase enormously if costs are to be reduced. 17. In respect of policy to promote technological advance, UK R&D expenditure in the electricity supply industry has been at an all-time low in the years since privatisation and has not always been concentrated in the right areas. More publicly funded R&D could improve matters if carefully expended. Ironically, the rising price of oil and other commodities could alleviate the uncompetitiveness of renewables.

4. Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime? 18. The UK Government’s levers to shape the market to the national interest consist of taxation (frequently passed on to the consumer), subsidies (ultimately paid for by the consumer) or regulation. The various forms of support for renewable energy were discussed in 1 above. The ROC regime is designed to be technology neutral and encourage diversity of electricity generation. However, undiVerentiated ROCs will always lead to industry employing the lowest cost option. As a result, onshore wind turbines have become commercially viable, but this mechanism has not stimulated development of other renewable sources other than for local use. We note that the ROCs are set to continue to 2027. The RO scheme is forecast to cost UK business and domestic customers over £30 billion 154. 19. In order to bring forward emerging renewable technologies, “banding” of support levels for diVerent technologies has been proposed. This eVectively distorts the market still further, which, some would argue, is contrary to Government competition policy, and tends to encourage the “picking of winners” by those not competent to do so. This form of subsidy could also lead to the implementation of immature and ineYcient technology if providers decide to oV-set the costs of research and technical development by the subsidy received. Additionally, in Scotland a Marine Supply Obligation (MSO) was introduced in 2007 to provide additional encouragement for the development of wave and tidal sources located in Scotland. However, the MSO is currently set at zero because there is not eligible capacity availability which would enable suppliers to meet it. 20. In the case of wave technology, devices that have been developed and demonstrated are highly subsidised. The Pelamis project in Portugal is subject to a guaranteed price for its electricity for 15 years. 21. We have profound doubts about the rationale and validity of the ROCs system. As noted above, it is designed to be technically neutral at the point of production of renewables, but is not designed directly to stimulate the reduction of carbon emissions. It seems, in practice, that the mechanism provides technology- led outcomes rather than emissions reduction outcomes. We propose, therefore, that ROCs are replaced with a scheme targeted on the reduction of carbon emissions. Incentives and disincentives applied at the point of production, in direct support of objectives, leave the market to decide how best to meet the national requirements, are truly technology blind, and may encourage investment in research to find new and more eYcient means of meeting the objectives. There are various mechanisms which could be implemented to achieve this, such as trading schemes or levies. 22. We referred to R&D expenditure in 3 above, but specifically in terms of the average annual per capita R&D spending on renewables 1990–2005, it was a little over 0.3 Euros in the UK while in Spain it was about 0.5 Euros, Japan about 0.9 Euros and Germany almost 1 Euro.155 154 http://www.ofgem.gov.uk/Sustainability/Environmnt/Policy/Documents1/16669-ROrespJan.pdf 155 IEA energy R&D database (Euros based on 2005 prices) Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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5. On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables?

23. Wherever and by whatever means electricity is generated it must be delivered to the market. The transmission and distribution networks of the UK are essentially 1960s and 70s infrastructure and were originally built to take energy from source eg coalfield to load. The greater the diversity and distribution of generating plant the greater the need for investment in grid development and increased in-grid management costs. The significant sources of renewable energy tend to be remote from major demand centres and grid access points, thus requiring heavy investment in EHV grid extensions and consequential delays to connection. New technology and adaptation will be required for multi-directional flows of power in HV distribution systems where renewables are closer to load centres.

24. The network challenges for renewables are set out below. Each renewable generation technology will bring with if diVerent network configurations and challenges. Immediate term (1–3 years) Significant onshore wind connection with other technologies providing limited immediate challenge. Medium term (3–10 years) OVshore wind and increasingly distributed technologies Longer term (over 10 years) Distributed technologies Wave/tidal, photovoltaics, micro-GTs, fuel cells and energy storage

25. It is crucial that decisions for investment in the grid infrastructure are made timeously to lead the connection of renewable generation technologies and ensure coordination of construction activities to avoid stranded assets.

26. As an illustration of transmission line upgrade costs, the proposed route for the 400kV overhead electricity transmission line to replace the existing 132kV transmission line between Beauly and Denny in Scotland has a projected investment of circa £340 million.

27. Active management of the network will be required and Ofgem has been quite far-sighted by creating a range of incentives for further development and application, such as the Innovation Funding Incentive (IFI) and Registered Power Zones (RPZ) programmes. Short term diYculties in the areas of integration and network management are being solved through this route. There is on-going R&D activity in the electrical network technology field, including power electronics and active network management systems. University departments working in these fields are probably the principal repositories of expertise since the dismantling of the research base of the power utilities in the previous decades. The main concerns in this area surround the distribution system, particularly in light of increasing levels of distributed generation, which is generation connected directly to the distribution network. It is likely that small scale and distributed generation will become significant components of generating capacity. Under these circumstances, a “smart” or “intelligent” network able to accept distributed generation with multi-directional power flows, and with the flexibility to incorporate new technologies, is a priority.

28. Major research, development and demonstration in energy storage technologies is needed to meet the needs of increasing intermittent renewables in the system and to balance supply and demand. Pumped storage hydroelectricity is the only proven large scale energy storage mechanism and has been operating for decades using a relatively simple principle. Pumped storage oVers a crucial back-up facility at periods of high demand due to its flexibility and could be used to store power from intermittent generators at periods of low demand. There are a range of alternative energy storage technologies being considered such as flywheels, compressed gas, heat storage and electrochemical technologies.

29. With regard to the “rules of connection”, there may be scope for more flexible arrangements for the connection and operation of intermittent sources eg wind generation and allow the system operator to accept their output at more appropriate times in relation to the load on the network. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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6. How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations? 30. As we mention above, renewable energy by its nature tends to be produced in relatively smaller quantities and from a much larger number of geographically dispersed sites compared with conventional GW-scale power stations. Also, the significant sources of renewable energy tend to be distant from centres of demand and gird access points, therefore requiring extensive gird extensions. These aspects have implications for the external costs such as the impact on landscape, environment and areas of natural beauty. The RSE’s Full Energy Report156 sets out the environmental issues pertaining to the various forms of energy generation technologies and we recommend that the Committee takes this into account. 31. With the need for large-scale replacement of electricity generating plant in Scotland and the UK within ten years, decisions on the viable options are urgently needed. The choice between the sources has to be on grounds not only of economic costs but also of public acceptability, of security of supply of the raw fuel, the relative lifetime costs and the overall risk of individual technologies to society and to the environment. In terms of such developments impinging on communities, natural heritage and the environment, perhaps some form of compensation or reparation payment could be developed to ensure that the impact is kept to a minimum and those directly aVected can derive direct benefit. As an example, the Shetland Islands receive income from the North Sea oil revenues that has contributed to an improved economic state and infrastructure. 32. We referred to the Beauly—Denny overhead link in 5 above and this is understandably meeting fierce opposition. High capacity sub-sea cables down the west (and possibly east) coasts of the UK have been suggested as being more acceptable and more eVective. These would require massive investment but without major changes to the grid system renewable energy will be unable to make the contribution necessary to meet the UK’s long-term aspirations. 33. Whilst we recognise the importance of upholding the democratic process and enabling public engagement on issues of national importance we also realise that it is crucial that decisions can be taken. We suggest that once adopted, national policy should not be a subject for debate in local public enquiries, which should concentrate on local impacts rather than national need. 7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions? 34. In 2006 PB Power published a report entitled “Powering the Nation—A review of the costs of generating electricity”157 which sets out the costs of electricity generated by the diVerent technologies which are commonly available. We recommend that the Committee consider this report. The report showed that in relation to UK market prices current at that time, there were only a small number of commercially viable technologies: — Nuclear — Supercritical coal — CCGT 35. Although the wholesale price of electricity has increased since the publication of the report we are of the opinion that the above findings are still accurate. 36. Onshore wind is now considered to be a mature technology and many commentators believe that it can be economically viable without ROCs.

8. How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? 37. Much has been made of the potential of renewable supplies of energy for Scotland and the UK, but this has been unduly focussed on electricity with inadequate consideration of other higher energy-use sectors, particularly transport and heating. In Scotland, the Forum for Renewable Energy Development (FREDS) Renewable Heat Group has recently reported158 and identified recommendations for the key components of a Scottish renewable heat strategy, including the structure of the market, technologies review and mechanisms for supporting renewable heat. We recommend that the Committee consider the findings of the Report. 156 Inquiry into Energy Issues for Scotland (June 2006) 157 http://www.pbworld.co.uk/index.php?doc%528 158 Renewable Heat Group Report 2008: “Scotland’s Renewable Heat Strategy: Recommendations to Scottish Ministers” Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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9. If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? 38. To meet the EU 15% renewable energy target will be a significant challenge. It is important to understand that reductions in the UK’s total energy demand, both in terms of demand reduction and improved eYciency, will produce proportional reductions in the renewable contribution required. 39. Industry estimates of the proportion of electricity from renewables, if the UK is to meet the 15% of all energy target set by the EU, vary between 40% and 60%. The focus falls to electricity because fuel substitution for transport is seen as being more diYcult to realise within the timeframe. Given that renewables accounted for 4.6% of electricity generated in the UK in 2006159, the implications of the target are enormous. These implications include the human resources required and manufacturing capacity available, let alone the costs that the electricity consumer will have to bear. With respect to the question concerning support for overseas projects, there seems to be no reason why the UK should not support renewable projects elsewhere, particularly in the EU, and receive credit for that additional renewable capacity.

10. How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? 40. The cost of carbon is to a large extent fixed under ETS II. In 2013, an “auction” system is likely to be introduced which may allow a more eYcient market in carbon to develop; this could result in carbon prices increasing which, if loaded onto carbon intensive generation, could make renewables and cleaner fossil fuel technologies more financially attractive. Essentially, a higher price for carbon (or for that matter, a higher oil price) would make renewables more competitive. 11. What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? 41. The current status of knowledge means that cost estimates can be highly variable. Current biofuel (biodiesel, bioethanol) production is proven technology and therefore provides a basis for production of non- fossil transport fuels. The Renewable Transport Fuel Obligation places a requirement on transport fuel suppliers to ensure that 5% of their overall fuel sales is from a renewable source by 2010. The Royal Society of London recently published a comprehensive report160 on the science and technology prospects of delivering eYcient biofuels for transport in the broader context of environmental protection and sustainability. This report shows that biofuels are potentially an important part of the future although the existing policy frameworks and targets may not result in greenhouse gas reductions and wider environmental and social benefits. It is a very complex picture as diVerent biofuels have widely diVerent environmental, social and economic impacts. Whole cycle analysis is required for the diVerent biofuels to assist in determining these impacts. This is also a domain where decision-making is crucial and the (unintended) consequences have to be recognised eg clearing tropical rainforests to grow crops negates the intended future climate benefits. Future biofuels are likely to be produced from a much broader range of feedstocks, including agricultural by-products and domestic vegetable waste. Advances in the conversion process will improve the eYciency of producing biofuels. We urge the Committee to consider the Royal Society of London’s Report. Additional Information and References In responding to this consultation the Society would like to draw attention to the following Royal Society of Edinburgh responses which are of relevance to this subject: — The Royal Society of Edinburgh’s Inquiry into Energy Issues for Scotland (June 2006). — The Royal Society of Edinburgh’s submission to the Select Committee on Science and Technology Inquiry into Renewable Energy-Generation Technologies (July 2007). Any enquiries about this submission and others should be addressed to the RSE’s Consultations OYcer, Mr William Hardie. Responses are published on the RSE website (www.royalsoced.org.uk). June 2008 159 UK Energy in Brief July 2007; DBERR 160 Sustainable Biofuels: Prospects and Challenges; January 2008 Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Memorandum by Scientists for Global Responsibility

Summary The economics of renewable energy can only be judged in relation to energy from non-renewable sources. We give reasons why we believe the costs of fossil fuels will remain high, and that the security of supply of oil and gas is uncertain. On present prices, some renewables such as on-shore wind are already cost competitive, and the costs of many other types of renewable energy are falling rapidly. On the issue of integrating intermittent or variable renewables into the electrical network, it has been shown that the costs of integrating up to 20% of renewables into the system are quite modest. Above this, more stand- by capacity would be needed. However, with a wide geographic spread of wind and tidal power systems to minimise the likelihood of a very high proportion being unavailable at one time, the amount of time this standby capacity would be called on would be small, so the objectives of reducing CO2 emissions and reducing dependence on imported fuels would not be seriously compromised. There are many possibilities for greater demand side management, such as tariVs encouraging customers to avoid using power at times when the electricity grid is under stress. There are means of storing energy when there is a surplus of low-marginal cost, low carbon electricity available from renewables. A possibility likely to become more practical soon is use of electrical vehicles and plug-in hybrid (PIH) vehicles (which will be marketed soon), which can be charged at times of such surplus capacity. In the unlikely situation of a prolonged shortage of wind power, PIHs would be able to operate on petrol or diesel fuel. With fuels being more expensive, the economics of heating by carefully designed heat-pumps together with heat storage become more attractive, particularly if installed on a community or district scale. This would be another means of making optimum use of intermittent or variable renewables. The UK has a very large potential for oV-shore wind power and diVerent types of marine energy. Floating wind turbines making use of well developed technology for floating oil rigs, which can be positioned in much deeper water than fixed turbines, are being tested now. Because of the stronger and more consistent wind in the open sea and easier installation, the cost of power from these is predicted to be comparable with land-based turbines. This development could provide virtually unlimited energy in relation to the UK’s needs. We believe that on present policies the security and aVordability of energy supplies to the UK is in serious jeopardy, given the very high dependence on imported gas that will occur if the installation of new plant is driven purely by short term market considerations, and our balance of payments situation could become serious. This concern on energy security and aVordability reinforces the need for alternative energy sources and energy conservation required to meet the government’s targets on greenhouse gas reductions. A huge eVort to develop, manufacture and install a large capacity of renewables is needed urgently. This will need a major upgrading of skills at all levels. But above all, there is a need to reduce energy demand through a combination of energy eYciency and behavioural change. 1 1.1 How do and should renewables fit into Britain’s overall energy policy? Britain’s energy policy consists largely of aspirations on meeting a number of objectives—on greenhouse gas reductions, on energy reliability and security, on providing aVordable energy and promoting competitive markets in the UK and abroad. However, we consider that all these disparate objectives are such that it is unlikely that reliance on competitive markets alone will deliver all the desired outcomes. First of all, it is vital, to achieve the proportion of renewable energy required and to meet the other objectives of the government energy policy, that we improve the energy eYciency of all sectors. This is particularly so in the housing sector to help reduce fuel poverty. 1.2 We believe that the government’s assessment of the availability in the future of secure supplies of fossil fuels, in particular of oil and gas at relatively low prices, is misplaced. Government papers have consistently hugely underestimated future oil and gas prices. Input to the 2007 Energy White Paper used baseline prices for 2010 of $40 per barrel for oil and 33p/therm for gas (1). In relation to the current costs (see section 7.1), these seem likely to be unrealistic. Factors which we cover below lead us to believe that the aims of the UK’s policy for secure and aVordable energy are highly unlikely to be met with the present strategy of reliance on a global supply of fossil fuels being consistently available at reasonable prices. With the run-down of UK oV- shore oil and gas production and likely high energy import costs, the UK could suVer from major balance of payments problems. Developing the indigenous renewables industry will be important in maintaining a healthy UK economy. 2 Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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2.1 The main barriers to greater deployment of renewable energy in the UK are the planning system for on- shore wind developments and uncertainty in the return on capital on more costly renewables such as oV-shore wind because of the nature of the Renewables Obligation (See section 4). The shortage of skills at all levels— engineers, technologists and scientists as well as skilled craftsmen—is a major problem in expanding the UK infrastructure generally. The Ministry of Defence has objected to many wind energy schemes due to concerns about radar: these concerns are not an issue in other countries, in Germany for example. 2.2 As indicated below, in relation to technical limits, the amount of renewables the UK can absorb is high. However, this does require an integrated consideration of energy production with energy use. The total energy resource available from renewables, especially oV-shore wind (including developments outlined in section 7.4) is very high. 3. The cost of energy from most renewable energy technologies globally is reducing (2). There are likely to be technical advances in most types of renewables in the UK that will lead to lower costs. In relation to technology particularly relevant to large scale deployment in the UK, advances in oV-shore wind power should lead to significant reductions in costs (see section 7). R&D in oV-shore wind and marine technologies and other renewables should be given more support. The total UK budget for R&D on renewable energy is too small (£37 million in 2005) even with proposed increases in view of the challenges. 4 4.1 Government support for renewable energy has not been especially eVective in bringing on-line a significant proportion of renewable energy. The Renewables Obligation is not well targeted, giving more support for some technologies like on-shore wind than is now required, while being inadequate and insuYciently certain for some other technologies. We believe a well targeted feed-in tariV, in particular to support those technologies where the UK has potentially a large resource such as oV-shore wind and marine energy technologies, would give developers greater certainty in their economic assessments. 5 5.1 The national grid network would have to be strengthened to more remote parts of the UK where much of the renewables potential lies—for example to the west and north of Scotland for wind and tidal energy to be transmitted to areas of major demand. A proportion of embedded generation (ie local generation that does not feed outside the local distribution area) could reduce the demands on the transmission network. The current rules on connecting generating capacity to the network are generally very unfavourable to renewables, particularly for small systems. 5.2 There should be no problems in managing the proportion of intermittent renewables likely to be installed before, say 2020. The UK Energy Research Centre (3) following an analysis of a large number of international studies showed that the costs of coping with intermittency with 20% of such renewables would be 0.5 to 0.8p/ kWh, ie less than 1% on customers’ electricity costs. It should be noted that the seasonal variations in average wind energy match the seasonal variations in demand. Wide geographical dispersion of wind generation (and of tidal stream systems were these to be deployed—see para.7.5) would reduce the variations in total power output. The small individual units and this spread of output variations would not need additional spinning reserve (with its parasitic energy losses) required to take up sudden loss of generating capacity (currently sized to cope with the loss of 1200MW of Sizewell B reactor, the largest single unit on the grid). Tidal power systems output is variable but fully predictable, thus the need for any standing reserve can be planned for in advance. Tidal barrier systems (barrage or lagoons) can be built as multi-pool systems which allow the power to be dispatched when required, rather than purely in response to tidal movements. If required, pumped storage capability can be incorporated into tidal barrier schemes. In addition to the Dinorwig pumped storage scheme in N Wales, hydro-electric systems such as those in Scotland, with some modifications, could provide pumped storage capability. The price of electricity supplied to the grid varies hugely at diVerent times, so having more control over when power can be dispatched is very valuable. 5.3 There are a number of demand side management (DSM) methods to enhance stability of the grid. The use of interruptible tariVs (already widely used in industry) could be increased to include domestic customers, and tariVs with pricing structures to discourage electricity use at times of stress on the grid would ease the integration of intermittent renewables. Although significant standby reserve capacity would need to be maintained if we had a very high proportion of variable or intermittent renewables, much standby capacity already exists in many organisations, eg diesel generators which can be started remotely. However, the number of hours per year this standby capacity would be needed to operate has been shown to be low. Thus the objectives of reducing reliance on scarce fossil fuels and reducing CO2 emissions are not seriously compromised. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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5.4 Increased interconnector capacity with mainland Europe would further diversify the sources of supply and spread the times of peak load. There are a number of technologies which in the long term could allow the installation of a very large proportion of renewables, in addition to the demand side management measures outlined above. The introduction of a significant proportion of electric vehicles and use of heat pumps (in conjunction with adequate heat storage) could take power at times when there is surplus low marginal cost capacity on the grid system (see section 8). 5.5 While with some forms of renewables, there can be issues of variability or intermittency of output as discussed above, with nuclear power stations, if their capacity exceeds the “base load” on the system, being capital intensive, their economics would suVer as they would not be operated at full load all the time. 6 6.1 All major infrastructure installations will have some impact on the environment. The eVects of climate change on the natural environment are likely to be marked and permanent, so the visual impact of wind turbines must be seen in the context of the necessity of reducing the risks of major climate change. We believe, in common with many environmental groups (including the RSPB) that carefully sited wind farms taking account of bird migration routes should be accepted on this basis. 6.2 The external costs of fossil fuel generation on the environment have generally been borne by people other than the plant owners. Even where companies, under the European Emissions Trading Scheme, may have to pay for exceeding their emissions quota, this money does not go directly to people, often in poorer countries, now and in the future, who are likely to suVer from eVects of climate change. 6.3 For nuclear power, governments bear the risks of costs of accidents larger than that covered by the operators insurance: this is an externality associated with nuclear power. There is no way of guaranteeing that costs of final disposal of radioactive waste which will have to be borne many decades in the future will be adequately funded by the companies that benefit from the plants operation. Any assumption that a sinking fund will continue to produce a positive real return rests on the assumption of continued economic growth. The increase in the costs of energy, raw materials and particularly skilled workers required for final disposal of radioactive waste or spent fuel may well be greater than the real growth in the fund. Future generations may be aVected by radiation doses from radiological waste. The building of nuclear power stations in “developed” countries makes it not possible to restrict their use in any country, and this will lead to significant costs (financial and in security) in safeguarding against the misuse of fissile material. 7 7.1 The comparison of costs of renewables with conventional forms of energy depends on the cost of the latter. Recently the costs of energy derived from fossil fuels have escalated sharply. Crude oil has been trading at between $130 and $140 per barrel recently, compared with about $70 a year ago and about five times more than in 2001. Wholesale gas prices in the UK in late May 2008 were 57p per therm compared with 28p a year previously. Coal prices have also risen steeply due to strong demand on the international market. In late May 2008 the UK wholesale electricity price was x£70/MWh compared with £24/MWh a year previously. There are reasons to believe that high prices are likely to persist (although probably subject to fluctuations). The increase in oil prices reflect a rapid rise in demand from countries like China and India whose economies are developing rapidly, while output of oil has remained broadly constant. The production in a number of non- OPEC countries is declining (the reserves in many of these countries are becoming depleted or more diYcult to exploit), while major OPEC suppliers are not responding to the price increase by increasing production. This may reflect the fact that these countries will be paid more from a slightly lower volume of sales at a much higher price in a tight market than would result from increasing their output. Also, King Abdullah of Saudi Arabia has said of oil “Leave it in the ground …. Our children need it”. It is believed by many oil experts that there are technical diYculties in increasing production in some OPEC countries—for example, in Saudi Arabia, the world’s largest producer, their largest oil field, Ghawar, is suVering as a result of excessive water injection that has been used to drive out the oil after natural driving pressure declined. The International Energy Agency, previously bullish about the adequacy of future oil supplies to meet demand has recently indicated supply relative to demand will be tight (4). 7.2 The demand from China and India and other rapidly developing countries with a huge total population is likely to remain strong. As people’s income rises, the level of car ownership rises (currently three per 100 people in China compared with 77 in the USA) and in hot, humid countries, energy hungry air conditioning becomes more widely used. Although there may well be significant price fluctuations, the future generally is likely to be one of high energy costs, as even if “Western” economies contract, trade between energy exporting countries and the new major economic powers in Asia is likely to continue strongly. Whether or not one believes that peak oil is near, the balance between supply and demand is likely to maintain high prices. 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7.3 Further, many of the major suppliers of oil and gas are countries which are not especially well disposed to the West—such as some Middle Eastern countries which may be subject to instabilities due to fundamentalist pressures and Russia. China is buying oil rights in a number of African countries and elsewhere. On present trends, the UK would become even more dependent on gas, including imported Liquified Natural Gas (LNG), as coal fired power stations not fitted with pollution controls have to be shut down by 2015 under the Large Combustion Plant Directive (more than 20GW loss), nuclear plants reach the end of their life and North Sea production declines. Global gas supplies are becoming very tight. Saudi Arabia has no plans to export any of its large reserve, and Indonesia (the world’s second largest gas exporter) is defaulting on its export contracts with Japan and S Korea to satisfy its growing internal demands. The USA will soon become a major importer of LNG as its own and Canada’s gas resources decline. Russian gas supplies are limited by lack of investment, and Nigeria’s exports will be limited by increasing domestic. Some LNG tankers have to pass through potentially hazardous bottlenecks like the Straights of Hormuz. A major explosion at a LNG terminal could disrupt supplies elsewhere as the causes are ascertained. Overall the security of supply to the UK is uncertain. 7.4 There are large variations in cost estimates of renewables. Using 2007 actual wind turbine costs with 10% interest and 20 year life, 25% load factor, on-shore wind cost is just under £50/MWh which is competitive with conventional generation at its current prices. OV-shore wind, for which the UK has a huge potential, has higher costs currently, but these should reduce as increasing the size of clusters of turbines reduces the connection costs, and due to advances in technology. Floating wind turbines can be sited in much deeper water where the wind is stronger and more consistent, and would have reduced installation costs. This concept is being tested by StatoilHydro in Norway, who believe that the costs could be competitive with on-shore turbines (5). Given the greater depth at which these devices could be installed, the total energy potential is virtually unlimited in relation to UK energy demand. 7.5 Tidal barrier systems and tidal lagoons require no new technology but involve massive civil engineering works. There are environmental issues with barrage schemes, and due to the long construction time, the costs are very sensitive to the interest rate. Tidal stream systems are being developed—these are underwater turbines or other submerged devices to extract energy from tidal flows (6). These systems appear to have good prospects as part of a future diverse energy system, but the costs need to be confirmed in the light of experience with prototype installations. 7.6 The costs of carbon capture and storage (CCS) are still uncertain, and depend on the distance from and type of storage sites and the technology used. CCS requires additional energy input per unit of output. In a situation of likely high fossil fuel prices, this eYciency loss will be more significant than with low fuel prices. The size of eYciency loss varies with the type of CCS plant: Integrated Gasification Combined Cycle (IGCC) with pre-combustion removal of CO2 will suVer from a smaller penalty than post combustion CO2 removal. 7.7 The costs of nuclear power stations will not be known definitively until firm prices are quoted for new plant. The Olkiluoto plant in Finland is widely believed to have been sold at below cost as a “loss leader” and been given certain subsidies, so this does not give a clear guide as to nuclear plant costs. Both the Finnish plant and the Flammanville plant in France (the only nuclear plants in Europe currently under construction) have been delayed by some construction problems and there are cost over-runs. 7.8 Recent increases in the cost of wind turbines due to supply chain shortages in face of a rapid increase in demand and increases in material costs are likely to be mirrored by similar cost increases in other generation systems. There is already a waiting list for certain pressure vessel components for nuclear reactors. While the supply chain problems are likely to be resolved over time, all major infrastructure projects are likely to face increased material costs. 7.9 In terms of carbon emissions, current coal power stations have about twice the emissions of combined cycle gas turbine plants. The carbon footprint of wind turbines is very low. The footprint for nuclear power, taking account of energy used in construction, uranium mining and milling and enrichment is significantly lower than fossil fuel plants, but will increase when lower grades of uranium ore have to be used. 8 8.1 For heating, there is a limited role for biomass using UK sources: wood must be from sustainable forestry. Biomass can be used directly for heating (eg wood pellet boilers or domestic wood burning stoves) at low cost. Bio-gas can be produced by anaerobic digestion from biomass or municipal waste, and this can be used for heating—either locally or distributed via the gas mains. A particularly beneficial application is in combined heat and power. Solar heat has a valuable part to play in the energy mix. New buildings should be designed to make maximum use of passive solar energy by favourable orientation of windows, combined with variable shading to limit solar gain in hot weather: this represents an optimal use of renewable energy at virtually zero cost. All new homes should be fitted with solar hot water panels—large scale of production and installation at the time of building would radically reduce costs. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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8.2 Given the present high cost of gas, the economics of electrical heating using heat pumps are improved, the greater capital costs being oVset by the greater eYciency in the use of primary energy. In a building with a high area of heating surface relative to the heat load, ground source heat pumps can have a coeYcient of performance of up to four. Given that modern combined cycle gas turbine power plants have an eYciency of x60% and with a typical domestic boiler eYciency, the overall eVectiveness of using power from this source would be x2° times that of direct use of gas. In the medium to long term there could be a high proportion of a low-carbon power generation capacity with near zero marginal costs, such as wind and tidal systems: given suYcient controllable thermal storage in the heating systems, this could be used for heating. The thermal storage gives flexibility in when energy is needed, increasing the proportion of intermittent renewables that can be accommodated. Heat pumps and heat stores are cheaper for community and district heating schemes than for individual dwellings. Pipework for district heating should be incorporated into all new housing schemes, to allow a variety of eYcient energy sources (eg from combined heat and power, biomass or heat- pumps) to be used. 8.3 In the transport sector, the use of biofuels at the moment should be limited (see 11). Electric vehicles are now becoming practical for many uses with recent advances in battery technologies. For uses requiring a limited daily mileage, pure electric vehicles are likely to be suitable. For more general use, the plug-in hybrid (PIH), which has suYcient battery capacity charged from the mains supply for most daily use cycles, with a small internal combustion engine able to provide power on extended journeys is promising. PIHs are to be marketed by US and Japanese manufactures in the near future (7). Because of the high eYciency of electric drive, primary energy use and the cost of operation is less than with petrol or diesel, at present prices. The introduction of a significant proportion of electric or plug-in hybrid vehicles would provide a demand for electrical power all year round which can be supplied oV peak. Power supply to charging points where vehicles are parked for topping-up could be interrupted for a period if there is a risk of grid supply falling short of demand. In the USA, a trial is underway where in such conditions, if vehicles have adequate energy stored in their batteries, they can feed power into the grid. PIHs would be able to run on petrol or diesel fuel if there were a shortage of power for a number of days. The ability to take power at times most suitable to the electricity supply system would make this technology appropriate to system with a high proportion of intermittent wind or tidal power. 8.4 At current petrol or diesel prices (before tax), the much greater energy eYciency of electrically driven vehicles compared with internal combustion engines would make their operating costs significantly less than petrol or diesel vehicles even on the basis of relatively expensive renewable input to the system. Thus, in the longer term, a synergy between electric vehicles and renewable energy could have a major role in the UK energy scenario. 8.5 Other means of storing energy include production of hydrogen by electrolysis—as a fuel or as an input for synthesising other fuels or products. It has been proposed (8) that methanol or other liquid transport fuels (much easier to store and transport than hydrogen) could be synthesised from hydrogen and CO2 from power plant carbon capture by the CARNOL process. This process can produce eYciency synergies with carbon capture, and methanol fuel allows a significant increase in internal combustion engine eYciency relative to petrol. These proposals could, in the longer term, eVectively give inter-seasonal storage of energy, giving further flexibility in optimum use of intermittent renewables. Development of this process could be an incentive to China and other countries to use carbon capture, reducing their CO2 emissions. 9 9.1 As indicated in 8 above, although the majority of renewables generation for which the UK has a large potential is likely to be for electricity, there are possibilities for this to make a contribution to transport and heating. This would make it easier for the UK to meet a target of 15% of overall energy to come from renewables. Also, as mentioned in section 1, meeting a given proportion of renewables is easier if the overall energy consumption is reduced. A massive programme of home energy eYciency is needed, like the one in Germany where every home built before more stringent eYciency rules were imposed will be upgraded by a given date. In transport, modal shifts to more eYcient public transport, encouragement of walking and cycling as well as technical advances are needed. 9.2 Given the large potential the UK has for wind and marine power and other renewables, we do not think it would be reasonable to take energy generated with our support in other countries as more than a minimal contribution to our renewables target at this stage. 10. Under an eVective carbon emissions trading scheme the cost of fossil energy with its carbon penalty would converge with the marginal cost of renewables suYcient to meet overall emissions target. Given that the UK is well endowed with renewables, other means of support should not be needed for the more economical forms of renewable energy, but some support may be needed to encourage deployment of diverse, less fully developed systems. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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11. Some of the present generation of biofuels (eg ethanol made from food crops and sourced from places where forests are being destroyed) are clearly unacceptable, and some are not even eVective in reducing carbon emissions. Second generation cellulosic biofuels which can be made from a wide variety of biomass (including forestry waste, agricultural waste etc) are likely to be more eVective (using about 1/3 the land and needing lower amounts of other inputs that first generation biofuels). They are reckoned to reduce the CO2 emissions over the whole “well to wheel” comparison by x90% compared with fossil fuels. Development is taking place in Germany and elsewhere (9) The success in terms of environmental and economic benefits will only be certain when the technological developments are more complete. June 2008

References 1 The UK MARKAL-Macro model and the 2007 Energy White Paper— Dr Neil Strachan www.ukerc.ac.uk/ Downloads/PDF/07/0706ESMMARKALpresNS.pdf 2 The potential for renewable energy to deliver in large energy economies. Renewable Energy Network October 2007 www.egovmonitor.com/node/15294 3 The costs and impacts of intermittency: an assessment of the evidence on the costs and impacts of intermittency on the British electricity network. UK Energy Research Centre, March 2006 www.ukerc.ac.uk 4 Energy watchdog warns of oil production crunch. IEA oYcial says supplies may plateau below expected demands. N King & P Fritsh www.peakoil.org/discussion/node/1634 5 Floating turbine should capture more wind. Professional Engineering 11 06 08 6 Current tidal power. Ian Bryden Robert Gordon University, Aberdeen http://cohesion.rice.edu/ CentersAndInst/CNST/emplibrary/Houston.pdf 7 The Volt to jolt. P Eisenstein Professional Engineering 23 04 08 8 Fill up on alcohol J Pullin Professional Engineering 21 05 08 9 Shell and VW to look into cellulose biofuels Glover Automotive Engineer Vol 31 No 1

Memorandum by Scottish Power Limited

Summary 1. This memorandum is submitted on behalf of Scottish Power Limited and ScottishPower Renewable Energy Limited (together “ScottishPower”). Scottish Power Limited is a subsidiary of Iberdrola SA. It is an energy business that provides electricity transmission and distribution services, supplies more than 5 million electricity and gas services to homes and businesses across Great Britain (GB), and operates electricity generation, gas storage facilities and associated energy management activities in the UK. ScottishPower Renewable Energy Limited (the UK’s largest wind developer) is part of Iberdrola Renovables, which is 80% owned by Iberdrola SA. Iberdrola Renovables is the largest developer of renewables globally. 2. In summary, we would make the following observations: — Renewable energy can play a key role in the UK’s energy strategy. It can significantly reduce carbon emissions and reduce the dependence on imported fuels. — The main barriers to greater deployment of renewable electricity are speed of planning decisions, access to electricity grid connections and maintaining an incentive mechanism which covers the investment horizon of the projects. To date, grid problems have been about having the right capacity in the right place; they have not been about dealing with the variability of output. This will be the position for the foreseeable future; while ensuring grid stability could eventually be an issue, there are a number of actions which could be taken to mitigate it and the problem would only arise once we had achieved many times the current level of wind power utilisation. — Wave, tidal and biomass renewable technologies have great potential and policy should be improved to speed their development. We would suggest increasing band multiples for wave and tidal technologies or, alternatively, complementary capital funding. — We favour an early extension in the duration of the RO beyond the current end date of 2027 for new projects. Otherwise investment will soon dry up as the cut-oV date impinges on projects’ economic lifetimes. We believe that, with banding, the RO delivers the same economic eVects as a feed-in tariV support mechanism, without the very considerable complication of cost equalisation between Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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suppliers and the major disruption and uncertainty which switching to a wholly new mechanism would undoubtedly bring. — The current rules for connecting capacity are not suYciently supportive of renewables, we support changes to these rules such as the “connect & manage” and “TEC sharing” proposals which are part of the current Transmission Access Review. — Electricity generation will be the principal contributor to the proposed target of 15% overall renewable energy by 2020. With the necessary supportive policy measures we believe the UK can increase its renewable generation deployment to a figure in the range 90 to 120TWh (25% to 33% of projected UK power demand) by around 2020.

Responses to Specific Questions

1. How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries? 3. Renewable energy plays a significant and growing role in the UK’s energy strategy. As a low (near zero) carbon energy source, it makes a valuable contribution towards the UK climate change programme. The use of renewable energy reduces reliance on imported fuel products, which helps improve UK security of supply and increases the diversity of energy sources. Public and political opinion is also generally supportive of renewables, perhaps because in many cases they are low not only in carbon but also in other potential pollutants or environmental impacts. 4. For electricity, renewable generation fits into UK policy for the reasons given above. They are supported under the Renewables Obligation (RO)—a market based mechanism which has proved highly eVective in bringing forward investment projects. Proposed changes to the RO, with the concept of “banding”, will see a balance of renewable electricity from diVerent sources—helping meet the needs of achieving a diverse supply and the development of new industry sectors, especially in the oVshore and marine environment. 5. Our company has extensive experience in the United States where we are one of the leading new renewable developers (we have announced plans to invest $8 billion in renewable projects in the next three years). In the US, the drivers for policy development are also related to climate change, security (especially energy independence) and economic development. Incentives are provided via a combination of individual state-wide Renewable Portfolio Standards (RPS) and a Federal Production Tax Credit (PTC). For details of support schemes in individual states, please refer to the Database of State Incentives for Renewables and EYciency www.dsireusa.com 6. All EU Member States have support schemes for the promotion of new renewable electricity production. These vary between certificate schemes (such as the UK RO) and fixed feed-in tariV schemes (such as Spain or Germany). We think that the fundamental indicator of the eVectiveness of a support scheme is the level of support rather than the details of the mechanism. For onshore wind and a number of other renewable technologies, the RO has been eVective and suYcient in bringing forward investment; the delays to deployment have arisen almost exclusively from diYculties in obtaining planning permission and delays in getting grid connections, 7. For some other technologies, such as oVshore wind, deployment has been aVected by higher than expected costs and some performance issues. The banding of the RO is intended to increase support so as to help oVset these diYculties, though planning and grid issues are also diYcult oVshore.

2. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb?

Electricity generation 8. The main barriers to greater deployment of renewable electricity are speed of planning decisions, access to electricity grid connections and (increasingly) maintaining an incentive mechanism which covers the investment horizon of the projects. In common with other countries, the UK is also facing supply chain problems, with worldwide demand for wind turbines, the primary vehicle for delivering renewable energy targets, outstripping supply and leading to long lead times. The fact that the UK has little or no manufacturing capacity of its own tends to exacerbate this problem. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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9. Secondary barriers also exist. In the case of economically marginal projects, the high and unpredictable transmission charges from Scotland and the North (where the wind resource is mostly located) to the main load centre in the South have the potential to act as a barrier. There are also important issues such as civil and defence radar, which are linked to planning but need to be resolved by working the details through to ensure that aviation safety and defence are not prejudiced. 10. It is possible to amend the UK grid rules to allow better utilisation of existing physical infrastructure in the short term (up to 2012). In the medium to longer term (up to 2020) new grid (onshore and oVshore) will be required to capitalise on our rich renewable resource. 11. The electricity grid is a real time, balanced system. To guarantee continued operation requires eVective forecasting and sound operational balancing of supply and demand at all times. For this to occur, adequate plant margin must be maintained by the grid operating company. The nature of complementary non renewable plant will have to adjust in response to higher renewable resources on the grid. The precise nature of this will change over time, but a forecast of what this will look like is informed by the current technical work currently taking place by NGT as part of the SQSS review. There may also be a role for demand side management (including DS bidding) to optimise renewable electricity production. 12. As to technical limits on the amount of renewable electricity the UK grid can absorb, we agree that there is probably a level of input from wind power which can cause diYculty in maintaining system stability. But there are a number of steps that can be taken to mitigate this issue, including transmission reinforcement, sensible location of back-up thermal plant, and improvements to the design and control systems for wind turbines. 13. It is also clear that the level at which these issues could cause significant problems is many times the amount of wind power currently in place in the UK and well above the level likely within the foreseeable future. For example, in the last 10 years, renewable electricity production in Spain has increased from just over 2,500 MW (mostly hydro) to in excess of 15,000 MW (mostly wind) without any significant problems. We would not envisage that the wind power level of about 20% indicated in the Annex to this memorandum would present a significant problem in this regard.

Heat and Transport

14. For transport the mandatory target for bio-fuels will be extremely challenging, due to the intense competition for such fuels from other industries, as will the targets for heating and cooling (anticipated to be in the region of 10%) as large-scale development in these sectors is not so advanced. A separate renewable heat support mechanism may be required to develop this sector.

3. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances?

15. For existing renewable technologies such as wind, there are some benefits from technological advance and economies of scale to be achieved as turbine capacity increases. These advances, however, are currently being oVset by increased costs arising from supply/demand imbalance and the commodity price of raw materials. We expect that, even in the presence of a higher carbon price, a continued support mechanism will remain essential to attract renewables investment to the UK, at least in the medium term. Further progress in streamlining the planning process; ensuring cost eVective grid access options and encouraging UK based manufacturing (thus easing the supply chain issue) could all help reduce costs. 16. For new and fledgling technologies such as wave, tidal, biomass, etc—policy has only fairly recently sought to support these. All have significant potential and policy should be improved to speed their development and roll out. A good example is the considerable capacities achieved in Denmark and Germany given the right market and policy conditions, combined with Government support and leadership. We note the benefits arising from “banding” mechanisms to these technologies and wish to see the band multiples increased for wave and tidal technologies. Where this is not possible, Government should consider complementary capital funding, possibly achieved by revenues arising from ETS auction proceeds. It will only be after there is experience of rolling out these technologies at significant commercial scale, that cost reduction through learning will begin to be achieved. Processed: 17-11-2008 19:38:25 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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4. Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime?

17. The Renewables Obligation (RO) is the Government’s main support mechanism for the development of renewable energy in the UK. Under the RO over 2GW of wind power alone has been installed and available figures, up to the end of 2006,161 show that a further 2 GW from other renewable generation (comprising of hydro, co-firing, landfill gas, municipal solid waste combustion, sewage sludge digestion, and other biofuels and waste) has also been deployed. This achievement demonstrates that the RO is eVective in delivering significant levels of renewable generation. Our experience as a renewables developer has supported this view; the RO has to date been suYcient to support onshore projects. However, the years remaining in the current RO (which expires in 2027) are beginning to impinge on the investment lifetime of new projects, so investment will soon dry up unless there is an increase in the duration of the RO for new projects beyond that date. 18. The RO has not however generally been suYcient to date to support emerging technologies such as oVshore wind and dedicated biomass. This will be addressed through the introduction of banding, which enables the support amount to be tuned to the technologies concerned. We note there has been much debate regarding feed-in tariVs as a means of supporting renewables investment in the UK. However, the banding proposals for the RO deliver an almost identical set of economic signals, as support will be targeted based on the specific needs per technology, while the headroom principle controls the cost to the consumer in line with the actual level of deployment. 19. It is vital that investors have confidence in the returns they estimate at the time of investing. Industry and Government have worked closely to develop the RO into a robust and workable mechanism that supports investment. Furthermore, we believe that introducing a feed-in tariV support mechanism in the UK will be very complex, due to the need to equalise costs across suppliers. Accordingly, we consider that introducing a feed-in tariV for large renewable developments would not only introduce significant new complication to achieve cost equalisation but would bring major disruption and uncertainty through switching to a wholly new mechanism. This would undoubtedly slow development. We also doubt whether feed-in is the right solution for smaller generators; it would seem easier to have a simplified scheme which enables them to access the RO through their supplier with a higher band for smaller renewables if necessary (a 2-ROC band has already been proposed by BERR for the smallest micro-generators). 20. We should emphasise again that the support mechanism is not at present the major impediment for renewable investment in the UK. However, the levels of deployment, in any technology, will not advance unless grid, planning and supply chain issues are resolved.

5. On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables compared to other?

21. Renewable generation may require more investment in transmission and distribution networks per unit of output than other forms of generation for two reasons: (a) thermal or nuclear generation tends to operate at higher load factors, so a given capacity of connection will support delivery of more electricity; and (b) much renewable generation will require to be located a distance away from the main network and may also require main network reinforcement whereas thermal generation is likely to be located on or close to previous sites with suYcient network access. 22. Once the required network infrastructure has been provided to enable connected renewable generation to run then the network will be capable of dealing with the intermittency of renewable generation. The key however is the need to ensure there is suYcient thermal generation available to provide the necessary back-up for the intermittent renewable generation. 161 http://www.publications.parliament.uk/pa/cm200708/cmhansrd/cm080109/text/80109w0037.htm<080109104000073 House of Commons Hansard written answers for 9 January 2008. Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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23. The current rules for connecting capacity to the grid are not suYciently supportive of renewables and we support changes to these rules to facilitate connection such as the “connect & manage” and “TEC sharing” proposals which are part of the current Transmission Access Review. The former involves oVering generators a firm future connection date subject only to local connection without being required to wait for any deeper network reinforcement (with National Grid managing any constraints that arise), while the latter achieves a similar result through sharing of capacity by agreement between renewable and local thermal stations.

6. How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations?

24. All future energy scenarios have external costs—including development relating to nuclear facilities, new coal power plant, gas power stations, electricity sub stations, gas terminals, network connections as well as renewable energy development. It is important that policymakers and other stakeholders exercise a balanced judgement in matters of energy provision. 25. Some of the externalities, such as the cost of carbon, are now reasonably easily quantified. Others, like positive or negative impacts on security of supply are clearly very important but are diYcult to evaluate financially, as the cost depends on the scenario which might arise. But many of the impacts can only be addressed judgementally. This includes the visual impact of wind farms and pylons; the impacts of the fuel supply chain for thermal and nuclear stations; pollution from thermal plants; and nuclear safety and waste issues. These issues are all very diYcult to compare with each other. 26. Indeed, we would question whether such a comparison is meaningful. The essence of a diverse energy supply is that a variety of technologies and approaches is used. So long as the externalities in each case are appropriately minimised and brought to an acceptable level, we would place the importance of diversity above what must be a subjective ranking of the externalities. 27. All developers should show diligence in the need to minimise externalities (including visual intrusion). We have adopted a voluntary policy for Sustainable Windfarm Construction that seeks to include all stakeholders in the decision making process and avoids sites of high ecological value. It is right that appropriate assessment be made of all developments for their suitability in local landscapes. In doing so, the costs of doing nothing about climate change should be borne in mind when assessing planning priorities. So, for example, when a planning case gives consideration to the impacts to scenic beauty due to a proposed sustainable energy/low carbon development, it should also take account of the eVects that climate change may have for that landscape eg due to rising sea levels.

7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions?

28. At present, renewable generation technologies tend to be more expensive to deploy than either fossil fuel or modern nuclear plants. That is why it is necessary to have a support scheme, such as the renewables obligation, in order to ensure that deployment continues. Quantifying the diVerence depends on a number of factors, including: (a) the cost of the renewable technology, which varies from low cost approaches such as co-firing through mainstream technologies like onshore wind, to the more expensive projects such as oVshore wind; (b) fossil fuel and uranium prices; (c) the cost of capital; (d) for fossil fuelled plant, the cost or carbon or any abatement measures; and (e) in the case of nuclear, the details of the framework the Government is putting in place including the regime for waste and decommissioning, the outcome of the generic design assessment process; the speed of planning decisions etc. Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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29. These uncertainties make it hard to quote precise figures for the cost diVerence with any confidence. In relation to Carbon Capture and Storage (CCS) its operation as a complete process on a commercial basis is yet to be demonstrated. This further intensifies the uncertainty in any cost comparison, though our current view is that CCS, like renewables, will continue to need financial support (beyond that oVered by the EU ETS) for some time.

8. How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating? 30. We do not have comparable costs between the electricity and renewable heat or transport sectors.

9. If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK? 31. Electricity generation will be the principal contributor in making progress toward the UK target of 15% overall renewable energy by 2020, proposed by the European Commission. This is because the sector has the greatest potential for delivery. However, this said, significant eVort will also be required from the heat and transport sectors.

Electricity 32. For electricity generation, we believe there is scope to accelerate build significantly if the various obstacles, which are currently slowing deployment, (ie grid, planning and limited UK supply chain etc) can be addressed. The Ernst & Young report on the impact of banding the Renewables Obligation,162 predicts that current policies have the potential to generate up to 61 TWh pa of renewable electricity by 2020 (17% of projected UK power demand). 33. ScottishPower analysis, which builds on Ernst & Young projections, shows that supportive policy measures163 can deliver increased renewable deployment in the range 90 to 120TWh (25% to 33% of projected UK demand) by 2020. This is demonstrated in the table attached in the Annex to this memorandum. 34. In addition, the table also outlines some of the barriers that will need to be addressed, and the supportive policy measures which are required, to ensure that the potential for these technologies is maximised.

Heat and Transport 35. The heat sector is an area with the significant undeclared potential. To capitalise on this will require new incentive regimes and the creation of new facilitating infrastructure. We look forward to reviewing Government proposals for heat renewable due to be published during the summer. 36. Although there is some scope for the use of biomass in transport and selected heat applications, there are serious questions as to the extent of sustainable biomass supplies, given the competing demands of agriculture. Accordingly, we do not see large proportions of total energy demand coming from these sources.

Meeting the UK share of the EU target 37. We believe that as much as possible of the UK target should be derived from domestic sources, and that the RO can play a key role in achieving this, through its flexibility to target support, extend time frames to oVer suYcient support for new investments and increase targets in line with projected deployment (with headroom controlling costs). 38. However, we also see merit in allowing the UK (and other Member States) to meet its trajectory and mandatory targets via limited statistical transfers with other EU countries. Such transfers should be on the basis of agreed bi-lateral undertakings with other EU member states. This should enable stable cross border investment to occur where required. 162 Ernst & Young Report: Impact of Banding the Renewables Obligation—Costs of electricity production April 2007. 163 By supportive policy measures we mean suYcient grid infrastructure, long term support framework, planning reform and the development of a supply chain industry in the UK. Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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10. How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? 39. Directionally, it is clear that a higher cost of carbon would reduce the cost diVerence between renewable energy and fossil sources. However, we judge it unlikely that in the short to medium term the cost of carbon will rise to a level where it could replace the specific support which renewables currently need. In addition, the lower forward visibility of the cost of carbon (which depends both on the number of permits, now proposed to be set for eight years for 2013–20, and the demand to emit which depends on economic growth and social change) makes the CO2 price a more risky means of support than the RO.

11. What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? As an energy company, we have interests in biomass renewable energy and have announced proposals to develop energy crop biomass via willow coppice. We have no experience in the transport bio-fuels sector. Costs for biofuels will depend critically on the extent to which the food market competes for the same resources. June 2008 Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Annex Potential (% 90–120TWh 25–33% Potential (TWh) total demand) shore grid regime established V consultation Flexible grid access rules Flexible grid access rules Reformed planning process cient support to get started Reform of MRDFcient support to get started Reform of MRDF 3–5TWh* 3–5TWh* 1% 1% Y Y Limited turbine availabilityRadar objections Technical radar solutions Shipping conflictsinclude both SRC and perennial Early and rigorous shipping Major environmental issues.Slow planning. Weighting of need vs environmental impacts E&Y potential (17% demand) EFFECT OF SUPPORTIVE POLICY MEASURES ON RENEWABLES DEPLOYMENT ective. Slow planning Reformed planning process V Practical Potential by TWh by 2020potential and cost Barriers toe reaching greaterpotential (moreexpensive thanonshore) Lack of grid access LimitedLarge grid potential. capacityTechnology Limited at Transmission turbine early access availability overhaul stage. MoD objectionsLarge potential. EarlyTechnology and at rigorous early MoD O stage. by 2020 Limited RO grid duration, capacity cap, headroom consultation by 2020 Use of Limited NFFO/EU RO grid ETS duration, capacity. funds cap, headroom. Strengthen RO Use of NFFO/EU ETS funds Strengthen RO balances wind.Controllabilityadvantages. Lack of grid access. Slow planning. Transmission access overhaul Reformed planning process ** Not included in E&Y analysis. Potential production estimated by Severn Tidal Power Group, 2005 shore wind Very large—Strong 22TWh RO duration, cap, headroom Strengthen RO 36–40TWh* 10–11% V TechnologyOnshore wind 2020 Very large—StrongO 24TWh RO duration, Current cap, Policy headroom potential Strengthen ROWave Strong Supportive growth. policy measures 30–33TWh* Supportive Policies 1.2TWh Supportive Policies Insu 8–9% Notes: * Upper level as estimated by BWEA in their response to Our Energy Challenge, 2006 Biomass (inclCHP, dedicatedand co-firing) Large—Strong potentialATidal 9.4TWh Land use conflictsHydro Strong growth. Sustainability concernsTidal Barrage** Accreditation Limited of potential; imported material Very large potential. 1.4TWh RO energy crops Co-firing Insu definition support should external to RO Total 14–16TWh 3.1TWh RO duration, cap, headroom. — Lack of funding support. Strengthen RO 4% Funding support outwith RO 61TWh 0–17TWh 4–5TWh 0–5% 1% Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

472 the economics of renewable energy: evidence

Memorandum by the Scottish Sustainable Energy Foundation

Introduction SSEF is grateful for the opportunity to comment upon the questions posed in the briefing note of 25 April from the Clerk to the Committee. SSEF is a not-for-profit company limited by guarantee, in Scotland No. 315921. The company was formed on 5 February 2007. SSEF is a Scottish Charity Ref No. SC 038410. SSEF is unique in Scotland as it is independent of government, regulatory authorities, power companies and sustainable and renewable electricity and, or heat generation businesses. SSEF covers Scottish energy issues and UK and European energy policies as they aVect Scotland. The numbered paragraphs below refer to the questions posed. Thereafter there are some general comments which SSEF wishes to make.

Issues 1. Whilst renewables currently contribute over 4.5% of UK electricity generation in 2006, in Scotland the figure for renewables as a percentage of gross energy consumption was 16.3%. There are natural advantages in Scotland such as more prolonged periods of wind than in parts of the rest of the UK and there are tidal and biomass opportunities as a result of geography and topography and the forestry and agricultural assets in the country. It is very diYcult to compare the UK or Scotland with United States, Australia, Canada or other EU countries because their electricity systems are very much larger covering far wider areas and there is a greater diversity of weather patterns across continents than in the British Isles. Nevertheless it is clear that Scotland does have the potential for generation from renewable resources and the impetus to harness those resources is one which SSEF supports. Our concern has been to ensure that all appropriate technologies are employed rather than a concentration on one or two. The development of a broad range of technologies should provide a more predictable contribution from renewables to electricity requirements. SSEF is particularly interested in the combination of renewable technologies where they can reduce dependency on electricity from the grid and where energy can be stored for later use. Pump storage is a familiar concept but many of the hydro installations in Scotland were designed years ago for alternative uses such as meeting peak load rather than to provide base load. It maybe possible to re configure the use of Scottish hydro assets but there would inevitably be costs involved in such work. SSEF undertook some limited research in this area commissioning consultants. The outcome was scepticism about the use of current hydro resources to smooth peaks and troughs in generation from other renewables. We believe that there is considerable merit in progressing research into the creation of hydrogen from renewable electricity generation and we would be interested to see the UK or Scottish governments investing in pilot projects larger than those at a domestic level to assess the viability of such a form of energy storage. Some are sceptical of the cost eVectiveness of hydrogen production but SSEF advocates a detailed study to answer the economic point. There are concerns that renewable generation may produce electricity which is more expensive than from the current mix with an obvious impact on levels of fuel poverty. If the costs of a hydrogen cycle with a turn round eYciency of 30% is added thereafter, the end cost to the consumer may be prohibitive. Given the uncertainty it would seem unlikely that the market will deliver significant hydrogen production from renewable electricity at least in the short term. 2. The barriers to greater deployment of renewable energy are delays caused by the planning system, delays in obtaining grid connections, the grid infrastructure itself, the relatively remote nature of some sites and skills shortages in the workforce. Initial capital costs deter some micro projects where there is no community involvement and the finance required is beyond a reasonable outlay for an individual landowner or small estate. We understand from various discussions that there are problems of financing businesses beyond incubator stage up to a prior to generation stage. Scottish Enterprise should assess this phase of renewable generation businesses in order to target support to ensure more generation is achieved. The Planning (Scotland) Act 2006 is designed to speed up the entire system by extending permitted development rights, ensuring more Planning OYcer level decisions thereby de-cluttering Planning Committees to concentrate on more important applications and bigger issues. The Act is being implemented in stages and upon the completion of secondary legislation, should indeed reduce delays. A Scottish Government Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 473 consultation has just closed on the extension of permitted development rights for certain types of domestic micro generation. SSEF’s view is that there should be a presumption in favour of permitted development rights with a list of where planning permission is required rather than a presumption against and a list of where permission is not required as is proposed by the Scottish Government. SSEF understands that theoretically there are technical limits to the ability of the grid to cope with renewable electricity input. For example Scottish Power had a rolling reinforcement programme in place for some years notably after the collapse of the local distribution network in early 2001 in the Scottish Borders and Berwick upon Tweed after an ice storm. That revealed infrastructure dating from the 1930s. Our understanding is that replacement and re-inforcement work for current configurations may remain to be carried out in addition to upgrading for significant new sources of generation. The Committee will doubtless receive detailed evidence on this from the companies concerned and will have access to the Beauly to Denny power line Public Inquiry and discussion on sub-sea cables along both the east and west coast. SSEF is however aware that the companies’ evidence to the PI did not convince a number of knowledgeable people that there was a proven need for new line. The Committee may wish to take particular evidence on these points. 3. There are likely to be advances without specific government support. SSEF is aware of an experiment to combine wave power technology and oVshore wind turbines for example. Viable could be read to mean not only economic but of a reasonable life span. We understand that work is on-going for example to improve the durability of gearboxes in wind turbines especially given the potential diYculties of maintenance in a marine environment. Furthermore work on wind patterns is taking place with a view to a greater understanding by the companies concerned of when planned maintenance down time ought to be scheduled. This work should improve load factor. SSEF believes that government could use levers other than subsidy to provide support in the broadest sense. The production of hydrogen from renewable electricity generation could be stimulated by purchases of such hydrogen by UK, devolved and local government for its own use in buildings or vehicles. The Scottish Government could also for example refocus its central heating investment programme to provide ground source and geo-thermal heat pump systems in homes beyond the present gas network to replace existing electric night store heaters thus cutting fossil fuel use. Linked to micro wind turbines of domestic scale or solar panels, further cuts could in theory be achieved in fossil fuel use. Market stimulus should reduce the unit cost of installations over time. 4. SSEF distinguishes between direct government support and that which eVectively emanates from the consumer which is delivered through the ROC regime. ROC support has favoured the development of wind power and hydro power as these technologies are far enough advanced to deliver significant generation. We would pose the question as to whether a similar scale of investment in energy conservation might yield very significant benefits in lower consumption and better living conditions and thus health and thereby less cost to the NHS. Nevertheless we appreciate that investment decisions and business plans have been written on the assumption that ROCs will continue until 2027. It would therefore seem more sensible to retain rather than scrap the system for one of feed in tariVs. We note claims that feed in tariVs have been more successful in achieving generation from renewables based upon European experience. A possible hybrid regime might include an option for current ROC claimants either to remain on ROCs or to transfer to feed in tariVs whilst oVering a choice to new generators or restricting them to feed in tariVs. Whatever is decided, ROCs in Scotland should be reformed by means of banding. Included in banding should be consideration of load factor. Where load factor is low, say below 20%, we suspect that the market would create pressure for improved performance. SSEF believes that below a certain threshold less than one ROC should be payable to act as a form of incentive to better performance. SSEF is comfortable that emerging technologies should attract a higher ROC until a critical mass has been achieved. Setting that point would admittedly not be straightforward and we again express concern that renewable generation should be aVordable for the consumer. 5. SSEF appreciates that costs will be less if major developments of renewable sources of electricity are concentrated close to major centres of population. That is not however always practical as the location of potential natural resources is often remote. The present ultra shallow connection charge regime does help more remote sites but does not distinguish between technologies. Also if some renewables achieve a higher load factor in the north west of Scotland than generation further south, that better performance might be oVset by transmission losses. We believe that the Westminster and Scottish governments should obtain clarification Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

474 the economics of renewable energy: evidence from Ofgem and, or National Grid whether the issue of transmission losses is of critical or marginal importance in the end price to the consumer as that would set the issue into a perspective upon which future decisions could be taken. National Grid already of course addresses the optimisation of the costs. The Committee may choose to ask detailed questions about the cost of managing a large share of intermittent renewables on both the current and foreseeable transmission and distribution systems. However SSEF understands that management of transmission and distribution is technically possible for most but not all conceivable configurations. Costs could be prohibitive in certain circumstances. National Grid and SHETL could usefully be requested to assess possible cost scenarios and their impact upon consumers’ bills. 6. There are many concerns about the intrusion into the landscape of renewable electricity generation. (Renewable Energy Scotland) REDS research data which SSEF publishes on our website shows that some installations have poor load factors which can of course occur for a variety of reasons. It is regrettable if sacrifices in landscape terms are made only for local residents to find ineYcient generation sites in their midst. This could impact adversely upon public perception of renewable generation. Micro generation installations tend not to have the impact of larger sites and are more easily accommodated. Some technologies such as ground source or geothermal installations have negligible impact. There are potential environmental improvements with hydro power schemes. In this latter context, SSEF has identified and emphasises that hydro projects can help in flood attenuation, the creation of diverse habitats and the preservation or improvement of water quality for fish in times of drought by appropriate releases of water. SSEF believes that there is considerable scope for hydro power to be linked into river basin or catchment management plans. SSEF concurs with the British Hydropower Association’s evidence in this regard. It is diYcult to compare what is eVectively an existing grid network for fossil fuels and nuclear power when they on construction would have been considered as intrusive to the then landscape as new pylons and lines for renewables are now. Government could and should look to incentives to allow more under grounding of both existing and future cable networks. The cost of undergrounding at higher voltages is more expensive but recent developments in cable laying technology and experience of distribution renovation, upgrade and reinforcement suggest that costs at this voltage level at least may have been significantly overestimated in the past. 7. SSEF understands that renewable generation is generally more expensive than fossil fuel generation but does not have the expertise to comment in detail on the UK government’s document “The Future of Nuclear Power—The role of nuclear power in a low carbon economy—May 2007”. We do believe that the whole life costs of nuclear generation ought to be included in any comparisons. Whole life to us includes the cost of decommissioning and waste storage. Similarly the cost of removal of fossil fuel and renewables’ assets ought to be included in cost comparisons. In terms of carbon emissions, SSEF believes that carbon emissions during construction ought to be considered in choices about generation types in future. If carbon is to be costed the UK needs to employ a robust methodology and we would prefer that a European model was employed to avoid any artificial impact on competitiveness. 8. We welcome debate upon this general point. SSEF believes that renewed emphasis must be paced upon energy conservation. We believe that there is scope for progress in reaching the EU 2020 target through hydrogen power for vehicles and geothermal and ground source heat pumps for space heating. Cost comparisons are diYcult because of lack of commonality in the technologies and their application. However it is claimed that there are opportunities to use renewable electricity generation to create hydrogen. A hydrogen infra structure for transport will require investment but conversion of current petroleum retail facilities appears to oVer the opportunity of some cost savings. SSEF believes that the generation of renewable electricity at times when its use in the grid is not at a premium could be purposefully directed to hydrogen production. As regards heat pumps we believe that in Scotland, the Scottish Government has levers at its disposal through Housing Action Grants to housing association and its central heating programme to provide greater market demand for heat pumps. Increased production should bring down unit costs at least in the domestic market. Fiscal incentive might be employed in the commercial sector to encourage such technology in new build and renovations. Heat pumps are not a new technology but training is required amongst the workforce in terms of their installation maintenance and servicing. Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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9. SSEF agrees that in the absence of a marked rise in hydrogen powered vehicles and the far greater application of heat pump technology that the UK will have to meet the UK 2020 target by means of renewable sources in the electricity generation. This is a very significant challenge and can almost certainly not be met without a major contribution from oVshore wind if those resources can economically connected to the grid. Our REDS research shows that whilst renewables’ capacity may be adequate to meet the challenge actually delivery in terms of load factor is often very much less. We would therefore strongly favour increasing the eYciency and eVectiveness of renewable generation by discrimination within any ROC banding system and the encouragement of energy conservation to cut demand thus making the quantum of 2020 more attainable. In this latter connection SSEF would refer to the Scottish Parliament’s 2005 Report into Climate Change where it is claimed that “approximately 40% of energy could be saved, and half of the 60% C02 Scottish reduction target for 2050 could be achieved cost-eVectively by improved energy eYciency”:

Additional Matters SSEF is not in a position to contribute to the remaining questions. We would like to raise two related issues which we believe merit the committee’s attention. 1. It is our understanding from oYcial sources such as BERR and Ofgem that the UK will be increasingly reliant on gas imports especially after 2015. Most commentators agree that gas generation plant can be constructed relatively quickly. There is a secure gas transmission system and the availability of the relevant skills but even taking into account additional storage capacity is there not a case to promote further exploration for gas fields within the UK and the better exploitation of existing fields through means such as carbon dioxide injection? 2. Consumers react adversely to sharp increases in fuel bills. However security of supply is of greater importance to the great majority. SSEF urges that in any consideration of future renewables policy due regard is had to ensuring that past standards of numbers of winters of failure in 100 years are maintained. This used to be expressed as a failure to meet full demand after utilising allowable voltage and frequency deviations in three or four winters in one hundred years. 20 June 2008

Memorandum by Mr Alan L Shaw I am aged 91 with over 35 years experience (1946–81) as a Chartered Engineer in the large electrical power station design and construction industry, both fossil fired and nuclear. I served throughout World War 2 as an oYcer in the Royal Engineers (2/Lt to Major) the last three and a half years in units of No.1 Electrical & Mechanical Group, Corps of Indian Engineers, which included applications of small generating plant in primitive conditions. Since the Kyoto Conference I have taken a keen interest in the UK government’s energy policies relating to renewable energy. I have noted with concern the politicisation of choices in electricity generation. In particular I am worried about the degree of consultation thrown open to the general public and environmental groups whose knowledge and interest in various types of electricity generation is mainly based on emotion, not engineering knowledge. The result has been to encourage by large national subsidies the excessive growth of a form of renewable energy, viz: wind power, which is inherently uncontrollable in output, and apply it to public electricity generation which requires above all a demand responsive output of great flexibility. In the early 1950s the North of Scotland Hydro-Electric Board (with a social remit in its constitution) spent six years attempting to apply wind power to the electrification of remote highland and island communities centred on active operational research on a 100kW wind turbine-generator designed and built by John Brown’s of Glasgow. They then dismantled the machine and based developments of this type on full time diesel generation originally intended only for back—up during low-wind periods. Wind power was not only stated to be uneconomic but unpredictable. I submit that all that has changed is that windpower is now being subsidised to a level making it impossible for developers, and their shareholders, to resist the huge profits to be made out of a hugely over subsidised method of intermittent electricity generation. I mention intermittency because UK public electricity supply is continuous 24 hours per day, 365 days a year, instantaneously variable but within largely predictable limits. throughout the year. Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Until Kyoto UK public electricity was generated by fully controllable means from coal, oil, hydro and nuclear power stations, all of which can be brought on line or taken oV by the ability to control the rate of output. So how do windpower generators fit into this pattern? The answer is that they do not. Great Britain’s mainland electricity is provided by connecting nearly all controllable types of generation in the form of large power stations directly to the Supergrid (400/275 kV in England & Wales, 400/275/132 kV in Scotland. Controllable coal, oil, and nuclear fired and hydro-electric stations, all owned by a large number of private generating companies daily make computerised, competitive financial bids not less than a one hour (“gate”) before real time generation to the National Grid Electricity Transmission (NGET) at its Berkshire central control room. This is to generate blocks of electricity specified in timing and amount and if accepted self-dispatching. Once through the “gate” any shortfall in agreed terms is subject to financial penalties. NGET owns no generating plant of its own. Its functions are to control the output of large power stations on a second by second basis and balance demand by frequency sensitive responsive generation brought on or oV line byn themselves as honest broker. It has a duty to admit to Supergrid connection any generator which satifises the technical requirements of the Grid Codes. They have no part in the forward planning of types of generation mix. Since denationalisation of the UK public electricity in 1990 no one has that privilege and central electricity generation planning has long since passed out of the hands of the highly experienced class of electricity system engineer-managers who fulfilled that function for 40 years before. So where do the thousands of large wind turbines promised to we the public actually fit in? In the main, because of the economics of electrical generating plant they are connected downstream of the high voltage Supergrid and its Grid Supply Points (GSPs). There they generate uncontrolled according to the natural variations of wind power in the sub-Supergrid voltage Distribution Networks owned by the fourteen Distribution Network Operators(DNOs). Their combined variable outputs collectively form “Embedded Generation” and act as “negative demand” reducing, albeit instantaneously uncontrollable and unpredictable. This “negative demand” is not seen at national control. There the controlling, balancing parameter is system frequency which has by law to average 50 cycles/second annually and vary at any normal time by no more than plus or minus one cycle per second. So far, the percentage of national demand met by uncontrollable has been tooo small to put the stability of the national Supergrid / Distribution Network complex at risk of instability such was glimpsed a couple of weeks ago. I submit that the Select Committee on Economic AVairs should give very high priority to consultation with National Grid Electricity Transmission plc, its Operations Managers and their colleagues, to form an opinion on the operational and economic risks which will inevitably hazard in the near future the Balancing Mechanism of the Supergrid. 16 June 2008

Memorandum by Professor Peter F Smith, University of Nottingham The International Energy Agency has estimated that global energy demand will grow by 50% by 2030, despite improvements in energy eYciency. This would create a world market of x$$8 trillion for electricity by that time. This means there is a vital debate going on as to the future energy model and the technologies in which to invest. In another report the IEA states that the world will have to invest $45 trillion in energy in the coming decades to achieve massive cut-back in fossil fuels and the rapid expansion of renewable technologies and carbon capture and storage. Only this way will greenhouse gases be halved by 2050. This model assumes an average global economic growth of 3.3% between 2010 and 2050. (CNN Money June 2008) A start has been made with renewable energy technologies having grown into a global industry with its viability improving with every rising notch in the scale of uncertainty over supplies and reserves of oil and gas. Many countries have responded by improving the market situation for renewables, most notably through the introduction of feed-in tariVs (FiTs) which oVer subsidies above the market price for conventional energy.

Examples of FiTModels In the EU, 18 members operate a FiT regime, and world-wide, 46 nations and federal states have adopted the system. In the EU, Italy Sweden and the UK are the main absentees from the list. Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Germany Designed to be revenue neutral supported by x3% added to each electricity bill. The tariV for PVs is 59—62.4 eurocents/kWh depending on system size. The tariV for PVs reduces by x5% per year to compensate for the increasing benefits from economy of scale and the fact that the cost eVectiveness penalty compared with fossil fuels is decreasing as prices for the latter rise. One purpose was to develop the renewables industries, especially photovoltaics (PVs). The result is that Germany has 200 times the solar capacity of the UK. In 2006 it installed 950MWp. In total it has installed over 4GWp of solar capacity, the equivalent of 1.6 million domestic installations. Recently a German lecturer described the FiT as their “pension scheme”: 10 years to pay oV the low interest loan and 15 years pension contribution.

Industry impact The German energy companies took the government to court over FiTs and were defeated. However, they have come to realise they can gain, for example, by building large wind farms which are eligible for the FiT. Now the German renewables industry employs 250,000, expected to rise to 400,000 by 2020. In the UK the figure is about 7,000.

Spain The Real Decreto 661/2007 guarantees an 8% return on investment in PVs which translates to: PV '100kW: 40 eurocents/kWh or 575% of the regulated tariV PV (100kW: 21 eurocents/kWh or 300% of the regulated tariV Spain’s installed PV capacity is x255 MWp. It currently holds the record for the largest PV farm at 23MWp in Murcia, southern Spain. Renewable energy accounts for 7% of the country’s primary energy, and expected to reach 10% by 2010. Spain will reach its 20% target for 2020 according to the Spanish Minister for Industry.

Industry impact The Spanish Labour Union Comisiones Obreras claims that 190,000 jobs have been created by the renewables industry in Spain of which 90,000 are direct and 100,000 indirect.

Portugal Long term guarantees on price has meant that companies are expected to invest Euro10 billion in renewables by 2012 and up to Euro100 billion by 2020. In under three years it has quadrupled its wind generating capacity and is investing in its first wave farm using the Pelamis system developed in Edinburgh. Currently it is constructing the world’s largest PV installation comprising 2520 tracker panels set at 45 degrees. It is near the town of Moura and, when finished, is expected to generate 45MWp.

Global Industry Impact Studies have estimated that the renewables industry now employs over 2.2 million (Renewable Energy World May June 08 p156). The industry optimism has been boosted by the new EU Renewables Directive Proposal which stipulates that 20% of all energy must come from renewables by 2020. For electricity generation this translates to x40% of capacity. According to the European Commission there is abundant evidence that FiTs have fostered significant growth of renewables: “ ….well adapted feed-in tariV regimes are generally the most eYcient support schemes for promoting renewable electricity”, (Commission StaV Working Document: “The support of electricity from renewable sources”, Jan 2008). Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

478 the economics of renewable energy: evidence

With such compelling evidence of their success in promoting the installation of renewables and in generating a new industry, it raises the question as to why the UK government has been reluctant even to discuss FiTs until recently. According to one source, “It has not happened in the UK because of the powerful lobby of large energy companies and their very close relationship with government.” Even this relationship has not prevented Royal Dutch Shell from withdrawing its support for the London Array of wind turbines. It is diverting its funding to onshore windfarms in the USA because of “government incentives to deliver what we believe are competitive returns”. (extract from a report by Eurwen Thomas for Shell, Renewable Energy World May/June 2008 p 9) Rather than oVer subsidies, the UK government operates the mechanism of the Renewables Obligation which requires energy companies to generate increasing proportions of their energy from renewables: 10% by 2010 and 15% by 2015 with an aspiration of 20% by 2020. This ignores domestic micro-renewables and community mini-systems which the government’s own experts conclude could provide up to 40% of UK capacity.

Base Load Technologies The UK policy is to concentrate on wind power to meet most of its 2020 40% renewable electricity commitment under the Directive. Wind is deemed to be the renewable technology closest to cost eVective against fossil fuels. The ultimate UK government target is for x30 GW to be provided by wind power. Hugh Sharman is a wind energy consultant based in Denmark. He warns that “experience in Denmark and Germany shows that the UK will find it impracticable to manage much over 10 GW of unpredictable wind power without major new storage schemes or interconnectors.” (“Why UK wind power should not exceed 10 GW”, Hugh Sharman, Civil Engineering journal 156 Nov 2005, page 161) Windpower is a technology that carries particular financial risks due to its unpredictability (stochastic intermittence). West Denmark has a high proportion of that country’s wind generators. Most of that wind power “coincides with large power flows from the system. In other words, it is exported”. Figure 1. According to Sharman, it is able to support 24% of consumption because it has interconnectors with surrounding countries that can absorb its excess power and provide balancing power when necessary. However, this is often to its market disadvantage.

Figure 1

WIND POWER AND NET EXCHANGE IN WEST DENMARK IN JANUARY 2004. (DATA SOURCE ELTRA)

2 Wind Power

1

0

Power: GWh/h -1

Net power exchange -2 1 19 37 55 73 91 109 127 145 163 181 199 217 235 253 271 289 307 325 343 361 379 397 415 433 451 469 487 505 523 541 559 577 595 613 631 649 667 685 708 721 739

There is concern that excessive claims are made for wind power because they are based on peak output denoted by the nominal rating of machines. The load factor can appreciably change the economics of the technology. According to Sharman, “Typical load factors for UK wind farms are in the range 25%–35%. (op cit p 164) The latter relates to oVshore installations. (Load factor is the percentage of the peak output per year which is delivered to the grid). Processed: 17-11-2008 19:38:26 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Marine Energy The systems that are vulnerable to the vagaries of the market are mostly high capital cost, long life technologies which do not oVer quick returns on the investment. It is these that are most sensitive to discount rates. This applies especially to marine based systems. In a market-driven economy this is a major problem which was highlighted nearly two decades ago by Professor Michael Grubb in his book Energy Policies and the Greenhouse EVect (Volume One: Policy Appraisal, RIIA/Dartmouth 1990, p 79). He drew attention to the eVect of discount rate in 1990, pointing out that the Severn Barrage “Assessed at a 2% discount rate would be a bargain; at a market rate, it is hopelessly uneconomic”. He goes on to say that “the environment is clearly a limited and deteriorating resource…in environmental terms, our descendants will be considerably poorer than we are today. That being so, we should consider a negative discount rate (my italics) at least for valuing endangered environmental assets”. Since this was written the perceived consequences of climate change have grown by orders of magnitude. What this means today is that a public private partnership with a subsidized discount rate is the only chance for gigawatt scale tidal energy. There is also anxiety that an ambitious nuclear programme will undermine the chances for marine energy. Defence issues might well skew the cost-benefit analysis. It is mystifying that the government still relies on wind power to head its policy on renewable energy when its estuaries and surrounding coasts have the highest electricity generating potential in Europe. Apart from wave power, tidal currents and tidal estuaries provide predictable power. Varying peak tide times around the coasts reduce the peaks and troughs of intermittent supply. A variety of technologies for estuary tidal power are available apart from the traditional barrage. More economical modular systems constructed onshore are now possible either for a barrage system or for the tidal energy bridge or “fence” incorporating vertical axis rotors (Blue Energy Canada). Studies into the feasibility of a barrage across the Severn go back to 1925. The recent studies by the Sustainable Development Commission (October 2007) and the Royal Town Planning Institute’s briefing paper November 2007 oVer authoritative conclusions which should be helpful to the Committee. The Institution of Civil Engineers is forthright in its views. It recommends that Wales should commit to large- scale energy projects such as the Severn Barrage. “We have all the studies we could ever need on the prospect of a barrage but we need political commitment to act. This is a great chance for the Assembly to demonstrate its maturity by leading on that commitment.” The ICE Wales emphasizes that the time for action is now and that civil engineers have a role to play in designing and delivering solutions. (Agenda for Post-Election Wales, January 2007)

The Thames Estuary—a Special Case Sir David King has estimated the cost of a tidal surge over-topping the Thames barrage at £30 billion. (Ninth Zuckerman Lecture). DEFRA and the Met OYce have identified the Thames estuary as having the highest risk of storm surge inundation in the whole of NW Europe. The £30 billion should be set against the cost of an estuary barrage as an avoided cost. It would be partly oVset by the gigawatt scale electricity that the barrage could generate with both bulb and wind turbines. It would also create a transport link between Essex and Kent. A further justification is that the existing barrage will soon become obsolete.

Tidal pounds A feasibility study has been conducted along the North Wales coast into tidal pounds connected to the shore. (Ecostar 2006) These are distinct from tidal lagoons which are some distance oVshore. Shore-connected tidal pounds are considered to be more cost eVective than lagoons. As the price of fossil fuels continues to rise, tidal pound technology could soon break through the cost eVectiveness barrier.

Tidal streams The potential of tidal stream energy has been put at 58 TWh/y (ETSU 1993). It was then dismissed as uneconomic, mainly due to imposed discount rates. Since then the Marine Foresight Panel set up by the OST has supported the technology. Probably the most cost eVective technology has been developed by OpenHydro based in Dublin. Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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It consists of giant fans with blades connected to a rotor which spins inside the structure as water flows through. Electricity is generated as the rotor turns past a magnet generator on the outer rim of the structure. They are completely under water and therefore no hazard to shipping. A demonstration project numbering several 1MW units is being trialed in the Channel Island of Alderney and due to be completed in two years. If successful a full-scale project could generate 3GW from the Island’s extraordinary tidal race. It will mostly be for export. Guernsey will soon follow suit.

Electricity Storage The economics of intermittent renewable energy systems could be transformed by developments in electricity storage technology. One of the most promising is the multi-megawatt Redox Flow Battery which is basically a regenerative fuel cell that converts chemical energy into electrical energy and vice versa. A commercial version, the Vanadium Flow Battery, has been produced by VRB Power Systems of Canada. Fuel cell technology also has a high development priority. Marine systems could maximize market opportunities by producing hydrogen to enable fuel cells to feed the grid at peak times, either at slack tidal periods or to supplement capacity at peak tides when the market is opportune.

Conclusion Most of the arguments supporting a rapid expansion of renewable energy have focused on global warming and climate change. It is more than possible that the depletion of oil reserves and problems over access to gas will overtake climate change in persuading the UK vigorously to exploit its extensive range of renewable energy opportunities. 12 June 2008

Memorandum by Mr Paul Spare

Introduction 1.1 The House of Lords has initiated an enquiry into the costs of Renewables. This submission is made in response to their Lords’ request. I am a retired chartered engineer, having worked for Rolls-Royce for five years, gas industry for four years and almost 30 years in the nuclear field, from design to decommissioning. Since the privatisation, I have written many papers and letters warning of the danger of a short term energy policy and the adverse environmental eVects of renewable power sources. It discusses some costs, but concentrates on the engineering issues from which in time, cost estimates made be made. Many Renewables are so impractical that would render all investments at best profligate and at worst—pointless.

1.2 In March 2007, EU leaders accepted a proposal to utilise more renewable energy to reduce CO2 emissions—foolishly excluding nuclear generation, that is not only the largest carbon-free source of generation, but the largest source of electricity. They backed a mandatory cut in the EU’s CO2 emissions of 20% below 1990 levels by 2020. On 23 January 2008, Jose´ Barroso, the EC President, reiterated this position. All 27 European Union countries will be set targets for renewable energy use to ensure that 20% of EU energy comes from renewables by 2020. The UK’s renewables target is expected to be set at about 15%. (Note, this is stated as energy and not electricity).

1.3 Renewable energy schemes may not bring low CO2 emissions because, being intermittent, they must be backed up by reliable plants (Paul Golby, E.ON UK’s chief executive Ref 1). The lowest CO2 emissions are produced not by Denmark with its thousands of wind turbines, but by Sweden, France and Switzerland where electricity is derived from nuclear power and hydro-electricity. Per capita emissions in Denmark are twice as high as France. 1.4 The 2003 Energy White Paper (Ref 2) also proposed that renewable forms of electricity should generate 20% of UK electricity by the year 2020. The PIU ignored specialist engineering advice that, unlike conventional coal, gas or nuclear plants, where a 1,000 MW is scaled up from a 100 MW plant and is about the same size, renewable plants can only gather diVuse natural energy and must multiply in investment, pro rata to achieve increased output. They benefit little from “economies of scale”. 1.5 The remainder of this paper explains some of the adverse consequences of massive expansion of renewables to achieve 20% to UK electricity/energy supplies, presenting costings where possible. Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Electricity Generation 2.1 The EU plan requires Europe to generate 20% of energy/electricity from renewable sources by 2020. What quantity of energy does this represent? The annual review of energy consumption in the UK by the DTi states that the total amount of electricity generated in 2006 was 395/405 TWh (Ref 3 Table 5.2). Electricity consumption in the UK shows a growth of 1 to 2% per annum (typical for Europe) and has increased by 40% since 1980. If the trend continues (at 1.5%), electricity consumption in 2020 will reach 500 TWh. The DBRR recently projected that electricity generation will actually decline up to 2010 and increase in 2020 to only about 410 TWh. Such modest growth is based on hope, not recent evidence. 2.2 If it is assumed generously, that conservation measures/eYciency measures will reduce consumption, a lower output may suYce. The analysis below uses a compromise assumption—that growth of electricity will reduce, that generation will increase, but only to 450 TWh. A 20% renewables contribution would therefore be 90 TWh and ca 105 TWh if recent trends continue up to 2020.

Quantity of Renewable Energy 3.1 Section 4 of the PIU Review (Ref 4) contains the following statement concerning renewable options. The technologies with the largest potential in the UK are on- and oV-shore wind, wave and tidal stream, solar photovoltaics and biomass (energy crops and agriculture and forest materials), and large hydro—though most large hydro potential has already been harnessed. Smaller contributions are possible from a range of other technologies, such as small hydro and solar water heaters. A significant contribution could also come from large estuarine tidal barrages, most notably the Severn barrage. 3.2 Various combinations can be postulated for the mix of generation that would provide the 90 TWh of electricity, but one approach is to extrapolate from the current situation. The table below shows recent trends. DTi data gives the contributions to electricity in 2001 as hydro—1%; other renewables—2.5%. Data for 2005 adopts a slightly diVerent approach. Typically, the renewable contribution to energy supply is about 3.1 mtoe ie just over 1% of total UK energy consumption (240 mtoe). Renewables are shown with the following percentage split (also including minor non-electricity use for some fuels).

Fuel Type Percentage Contribution 2001 Percentage Contribution 2005 Landfill Gas 27 33.4 Waste combustion 31.5 10.8 Wood biofuels 16.6 28.1 Domestic and Industrial wood 15 6.7 Sewage gas 5.4 4.2 Wind and wave 2.7 5.9 All Hydro — 10.1 Small hydro 0.6 — Geothermal and active solar 0.4 0.7

3.3 The most important point is that two of the most significant contributors are landfill gas and waste incineration. These are excluded from the current list of acceptable “renewables”, as is large hydro. The current contribution to electricity from acceptable renewables in 2007 is only about 1%. The largest renewable contributor is conventional hydro, but new schemes are considered environmentally unacceptable. The 1,000! turbines produce less than 1% of UK electricity. The three largest contributors are thus to be discouraged; so that the expansion required from the acceptable renewables is even greater than might at first appear. 3.4 The suggested contributions given below for renewable electricity in 2020 are therefore of necessity, diVerent from extrapolating the current contributions, but the subdivision below is proposed as credible, using the small number of renewable options that are available and acceptable. 1. Wind power (on shore and oV shore) 50%—45 TWh. 2. Biomass 20%—18 TWh. 3. Solar 10%—9 TWh. 4. Wave power 10%—9 TWh. 5. Tidal 10%—9 TWh. Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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The implications of achieving these contributions from the selected renewables are considered below. Wind Power 4.1 Wind power is usually considered as the first choice renewable power source. For this reason, it is assumed in this study to provide the greatest share of supply in 2020 (45 TWh). There are already about 2,000 MW of installed capacity, with plans for more capacity both on land and oVshore. Growth year-on-year has been steady, with 7 GW of new capacity in the planning process. 4.2 The largest wind turbines have a maximum continuous rating of 3 MW. The 3 MW turbines are not acceptable at all sites, because of their massive height and base anchorage requirements. It is therefore prudent and conservative to assume an average machine size of 1.5 MW in calculating the number of machines required far into the future. A 1.5 MW turbine operating continuously for a year would produce 13,140,000 kWh and 3,290,000 kWh with a typical 25% load factor. To generate 45 TWh would require 13,700 turbines. If the average construction rate achieved in the last few years were to continue, it would take about 50 years to construct that number of turbines. 4.3 Although as industrial equipment, turbines should be built in industrial areas, developers prefer remote unspoiled areas because the wind blows at higher speeds. To obtain access to such sites involves costs for the quarrying and transport of hundreds of thousands of tons of aggregate for roads and bases. 4.4 If 10,000 were to be installed oVshore, it would require a rate of two per day over the next 13 years. Since bad weather will prevent construction oVshore in the winter, it will be necessary to erect at the rate of four per day. These construction rates look impossible with the small number of lifting barges. A 2.5 MW wind farm in the Baltic Sea, comprising five 500 kW turbines, 4 km oV the south western coast of Gotland, Sweden, took five months to complete (Ref 5). The Greater Gabbard OVshore Farm oV the Thames estuary, with 140 turbines, will not commence construction until 2009 and will take several years to complete—and average of about 1 per week (Ref 6). OVshore wind turbine costs must also be increased to include the removal of the 30 metre long piles that are driven into the sea bed to support them. These must not be left to corrode and pollute the coastal waters. 4.5 The UK power system is based upon a 400 kV Grid Transmission system, which delivers the large flows of power from some 100 large ((500 MW) geographically dispersed plants, through bulk supply points to the low voltage distributors. This historic practice has minimised infrastructure costs. There are often no HV grid connections where wind farms are to be constructed, so new power lines will also have to be erected, with transformers, switchgear and protection equipment. The north west coast of Scotland, being sparsely populated, has no high voltage (400 kV) supergrid lines. Complete new transmission systems would therefore need to be installed to transfer the power from the new wind farms. The Beauly–Denny link is forecast to cost over £300 million to bring power from the most northern wind farms. Wood Burning 5.1 Biomass plants (power stations burning firewood) are now being proposed for future power supplies. They can achieve higher load factor—65%—than many renewable energy sources and also generate heat rather than electricity. To generate 18 TWh per annum would require 3,160 MW of such plants. The calorific value of the coppice biomass material will be at best about 33% that of crude oil, even when dried. An electrical output of 1,000 MWe requires about 1.4 million tons of oil per year and 4.43 Mtoe to generate 3,160 MW. Therefore 13.3 million tons of wood would have to be burned to generate 3,160 MW. 5.2 The Forestry Commission has estimated the maximum production of wood from coppicing to be 6.8t/acre per annum—17t/hectare or 1,700t/km2. Hence 13.3 million tons of wood would require about 7,815 km2 to be harvested each year this is three times the area of an English county such as SuVolk. 5.3 The environmental damage is not restricted to the appearance. The transport of 13 million tons of wood would have very severe adverse eVects on the rural communities, agriculture, the roads and the wildlife. If there were 73 power plants rated at 50 MW, each would require 200,000 tons of fuel annually, or 100 lorry loads per day. The ash from wood burning may be a hazardous waste and require costly treatment before it could be sent to landfill.

Solar 6.1 Solar power in the UK can take two forms—direct heating of hot water as part of a pre-heat system or use of photovoltaic (PV) cells. Only PV cells are considered here. Solar power appears attractive because the output of the Sun will remain unchanged for thousands of years. That is correct, but there are long periods with little or no sun in the winter. PV cells produce no electricity at night, nor in cloud or fog, so that solar is worse than wind, since its output tends toward counter-correlation with demand. To generate the 9 TWh per Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 483 annum would require 6,860 MW of installed cells (assuming an optimistic 15% availability—that is about four hours per day average sunshine). 6.2 It requires an area of panels of 10,000 m2 to produce reliable power at the rate of 1 MW. For a house to generate 2 kW, requires panels with an area of 20m2. This is about the limit for the average modern house roof, supported on trusses. It would take 5,000,000 houses to generate the power required for the solar contribution. That is about 25% of the UK housing stock. 6.3 There will also be a severe problem with component disposal at the end of plant life. No process plants yet been designed to separate and dispose of the massive quantities of waste—100,000 tons per year (based on 25 year life). Landfill of the mixed wastes would conflict with sustainability policies. Unlike waste from the nuclear programme, the complex materials from solar panels do not decay. 6.4 To install 5,000,000 sets of panels in 13 years is a rate of almost 400,000 per year, or 1,600 per working day. With an average costs of £5,000, that would require expenditure of £25 billion to generate only 2% of UK electricity. To compare this scheme with a practical option, that same £25 billion could build a fleet of 25 1,200 MW PWRs, capable of supplying some two thirds of UK electricity demand at secure prices for 60 years, with minimal greenhouse gases.

Wave Power 7.1 Wave power has been proposed as being well suited for generating electricity in an island nation. The waves and tides appear extremely dependable. Schemes have been investigated with public funds since the 1970s, but have proved diYcult to scale up to industrial size. To generate 9 TWh per annum from wave plants would require 2,570 MW of plant (assuming an optimistic 40% load factor). 7.2 The former government agency ETSU has predicted an average energy potential of 1 MW per 30 m wave front around the UK coasts. In March 2002, the Professional Engineer journal included an item about Ocean Power Delivery (OPD) and their plant called Pelamis, of which an example design 150 metres long would produce 750 kW ie 1 MW per 200 metres. In April 2003, there was an item in the same journal reporting a new design of plant operating horizontally (Dragon wave power converter), claiming that a device 300 metres long could generate 7 MW. This equates to 1 MW per 45-metre wave front, a value between the other two. 7.3 Based on this third value, to replace a 2,000 MW coal station like RadcliVe or Ironbridge would require wave machines 90 km long (2,570 MW would require 115 km). This makes no allowance for spacing to permit access and ships to pass. If it weighed 100 tonne/metre, it would have a mass of nine millions tons. The environmental implications of such massive structures are frightening. Such structures are similar in size to oil platforms joined together. Oil platforms however, can be built in docks on dry land and are anchored with secure connections to the seabed. Wave machines would have to be assembled out at sea and would be moving at the mercy of the waves. The dangers of construction, operation and maintenance are huge, but are not publicised when these schemes are put forward. 7.4 Smaller plants have been tried. The 2 MW OSPREY wave plant lasted two days oV the coast of Scotland before being wrecked in 1995. Similar destruction has been seen before. In the 1944 Normandy invasion, one of the two Mulberry harbours weighing about 1.5 M tons was buVeted and wrecked in a summer storm in the English Channel after only 10 days use. 7.5 There are other ideas for using the energy in the waves, using much smaller (a fraction of a MW) flow- stream turbines. Three underwater turbines are to be installed on the seabed oV the coast of Alderney and Dorset. This is mentioned here, but is covered fully in the next section.

Tidal The Severn Barrage scheme has been under review for several decades and has been considered by the PIU. It would cost £12,000 million to build but would provide 7% of UK electricity (ca 25 TWh) and last for 120 years (Ref 7). The impact of this development would be enormous and would aVect up to perhaps 200 km2 of the Severn estuary and catchment area. There are other estuaries, but apart from the Mersey, the others have relatively little potential, because of their area or low hydraulic head. A river such as the Mersey or the Thames with substantial shipping traYc would require complex and extensive locks to maintain their port functions. The only major tidal power scheme operating anywhere in Europe is in the Rance estuary in France, where a barrage with 240 MW of turbines was completed in 1966. This produces less than 1 TWh per year, with a load factor up to 27%. To generate 9 TWh (without the Severn Barrage) would require almost every large river in the UK to be used—Dee, Morecambe Bay, Solway, Humber and Wash etc. Is it credible that all the suitable tidal sites apart from the Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Severn could be planned, designed, approved and constructed in a little over fifteen years? The consequences of changing any one of these could be irreversible environmental damage to substantial areas of the UK. It has also to be recognised that although tidal power is predictable, it is not continuous. Close to high and low tides, no water is moving and no power is generated. As this will often coincide with peak demand, other, more controllable power stations will have to be retained. Some underwater tidal flow turbines are being developed and their output is more reliable than wind turbines. Devices currently being tried have dimensions of 10 metre x 15 metre to produce 250 kW. Larger equipment may be developed, but it will require 5,000 to replace the Sizewell B nuclear station. Bio Fuels for Transport There have been many proposals in the EU for the proportion of transport fuels that are derived from natural grown species to be increased to 5 or 10% of all liquid fuel consumed. DEFRA have forecast that they will need 2.5–2.8 million tonnes of wheat to achieve the 5% contribution to UK transport fuels, allowing for waste in processing. DEFRA statistics show that average production of barley in the UK between 2000–04 was 6.293 million tonnes, from an average area during the same period of 1.112 million hectares. Ie 5.5 tonnes per hectare. To achieve the 5% contribution (assuming barley and wheat crop at the same rate) will therefore require between 454,000 and 510,000 hectares. That is about twice the area of a small English county. There are no such areas of new land, so other products have to be sacrificed Either we will have to replace 500,000 hectares of other cultivation, or the people who received the 2.5 million tons of wheat that has been exported in recent years will see their food supply disappear into our petrol tanks.

The 20% of Energy Supplies Conundrum The analysis above reveals the massive impact were renewables to provide 20% of UK electricity supply. When faced with the problem of generating 20% of energy, the problems become much worse. Only about one third of the energy used in the UK is used as electricity. The remainder is used in the form of natural gas, coal or petroleum products. Twenty percent of UK energy consumption is about 40 Mtoe ie about 450 TWh (1 Mtoe % 11.6 TWh). Most of the renewable energy sources can produce only electricity. For renewable sources to produce 20% of energy, they have to produce 450 TWh of electricity, then the numbers discussed above would have to be multiplied by about five. In fact renewables would have to produce more electricity than all current fuels in the present energy mix combined. They would in addition double the total quantity of electricity used. The present electricity transmission and distribution system would have to be strengthened through massive investment. Equally important, electricity would have to take over the role of natural gas and petroleum in many sectors. This will require the wholesale reconstruction of much of basic energy infrastructure. 13 June 2008

References 1. Guardian newspaper, 3 June 2008. 2. The Energy White Paper. Our Energy Future—Creating a Low Carbon Future Cm 5761, February 2003. 3. DTI Digest of UK Energy Statistics 2007 page 114. 4. The Energy Review. Cabinet OYce PIU—February 2002. 5. New Civil Engineer Journal 5 February 1998. 6. Energy World, April 2007. 7. Prof Ian Fells CBE, FREng, FRSE, FInstE, FIChemE, Institution of Mechanical Engineers Hawksley Memorial Lecture, 12 December 2001.

Memorandum by the Town and Country Planning Association

1. About the TCPA 1.1 The Town and Country Planning Association (TCPA) is an independent charity working to improve the art and science of town and country planning. The TCPA puts social justice and the environment at the heart of policy debate and inspires government, industry and campaigners to take a fresh perspective on major issues, including planning policy, housing, regeneration and climate change. Our objectives are to: Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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— Secure a decent, well designed home for everyone, in a human-scale environment combining the best features of town and country. — Empower people and communities to influence decisions that aVect them. — Improve the planning system in accordance with the principles of sustainable development. 1.2 The TCPA’s field of expertise lies mainly in the planning, housing, development and environmental fields, rather than the economics of renewable energy (RE). However, the TCPA consider the provision of measures to support the widespread deployment of RE to be largely dependent upon an eVective and responsive planning system. We work closely with industry experts to inform the Association’s policy justifications and feasibility of proposals. Our comprehensive publication database, including our climate change and sustainable energy policy documents, best practice guides and research are available for your reference on our website at www.tcpa.org.uk.

2. Summary of TCPA’s Views 2.1 The TCPA welcomes this inquiry into the costs and benefits of RE. It is essential that we meet the challenge of reducing our reliance on fossil fuels by improving the sustainability of large-scale power stations and focusing on the role that smaller scale decentralised energy and RE generation can play. A step change is needed in how we generate and supply electricity, making a transition to decentralised energy and power based on low and zero carbon technologies. 2.2 The TCPA believes that the UK urgently needs major and rapid expansion of RE if we are to meet our EU commitment of 20% RE by 2020. The Government needs a radical shift in energy policy, with the introduction of a feed-in tariV scheme, to rapidly accelerate deployment of RE at lower cost. A feed-in tariV based scheme would mobilise all RE options (not just those at near commercial stage such as large-scale wind, waste to energy and fuel crops), producing a diverse RE mix and reducing our dependency on conventional energy over time.

Questions 1–4 2.3 In order to answer questions 1 to 4 it is important to understand that the barriers and types of policy support required for renewable energy (RE) depends at what stage of the development the RE technology is along the innovation chain. Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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2.4 The stages of innovation [Research and Development (R&D) ] Demonstration ] Pre-commercial ] Supported Commercial ] Commercial] are illustrated in the conceptual s-curve graph below.

Market penetration (indicative) Self sufficient given taxation, regulations or trading

ROCs, fiscal incentives i.e. fuel duty relief Public procurement, capital expenditure Public & fiscal procurement incentives R&D & demo programmes grants & grants programmes & grants

R&D Pre-commercial Supported Fully Commercial Commercial

Technology maturity by ‘stage’

2.5 Historically in the UK Government has used market based models to drive innovation, however with the emphasis on obligations and fiscal incentives rather than public procurement and capital expenditure there is a vacuum in investment between the demonstration and supported commercial stages. As we have seen with the deployment of large-scale wind, energy from waste and energy crops in the UK, this type of economic model eVectively picks near market options. 2.6 The right mix of policies is essential. Innovation is driving forward, however working with and harnessing liberalised markets requires long term R&D and incentives for innovation. Table 1 describes the measures required at diVerent stages along the innovation chain.

Table 1

Measure Description Technology stages Public funding for R&D Direct state expenditure in public and private sector R&D research. Justified on standard economic grounds, as the social returns to innovation exceed the private returns. UK activity through Carbon Trust, Research Councils and BERR programmes. Public procurement Preferential public procurement policies for renewable From demonstration technologies may be used to develop initial niche onwards markets. This measure has had limited deployment in the UK. Direct state subsidy Targeting either capital investment in renewable plant, Most common at early or output where generators and/or suppliers receive a post R&D— subsidy based upon the quantity of renewable energy demonstration and supplied. Few countries continue to use public funds for pre-commercial stages direct subsidy of renewables. Fiscal incentives May either target capital investment in plant eg through Mostly used at pre Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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Measure Description Technology stages (i) electricity accelerated depreciation on investment, or be based on and supported the quantity of electricity supplied/ purchased from commercial stages. renewable generators. In the US they use a dedicated tax credit, in the UK and Denmark a rebate of carbon/ Measures targeted to energy taxes. capital costs may be of use at demo stage Fiscal incentives Fuel duty relief for biofuels and vehicle excise duty in Supported commercial (ii) fuels and eYciency the UK graded according to the vehicles emissions and engine size. Regulation Building regulations and planning guidance eg Code for Pre and supported Sustainable Homes and supplement to Planning Policy commercial—also to Statement 1 on Planning and Climate Change. encourage take-up at commercial stage TariV schemes Statutory obligations on Feed-in tariVs—where there is a fixed price and an Supported commercial electricity suppliers—this obligation on utilities to accept all renewable generated type of mechanism can power, provided technical criteria are met. Electricity take substantially producers are paid a guaranteed price, fixed by diVerent forms technology type—set by regulation and most often borne by the utility and passed on to consumers Competitive bidding or non fossil fuel obligation “NFFO” type schemes. Renewable energy developers are invited to bid for contracts to sell electricity at a fixed premium price for a fixed term. The premium price emerges from a competitive bidding process—in the UK this was funded by a levy on conventional generation. Renewable Portfolio Standards or Obligation based schemes. The Renewable Obligation, pioneered in the UK, places a mandatory requirement for UK electricity suppliers to source a growing percentage of electricity from eligible renewable generation capacity (currently increasing to 15% by 2015).

1. How do and should renewables fit into Britain’s overall energy policy? How does the UK’s policy compare with the United States, Australia, Canada, and other EU countries?

2.7 The drivers in the UK to move towards renewables have been three-fold:

1. tackling climate change by reducing carbon dioxide (CO2) emissions; 2. ensuring secure, clean and aVordable energy for all to alleviate fuel poverty; and 3. providing a diverse and secure energy mix as we become increasingly dependent on imported fuel. 2.8 Responding at the national level the Government has set out the following measures:

— A probable and legally binding commitment to reducing CO2 emissions by 60% against 1990 levels by 2050 (the TCPA supports that the Government is considering raising the current commitment of a 60% reduction to 80%, to be delivered through the forthcoming Climate Change Act). — An aspiration for 20% of our electricity to come from renewable sources by 2020. — Obligations and fiscal incentives such as the Renewables Obligation. — Building regulations to require zero carbon new homes by 2016, zero carbon schools by 2016 and non-domestic buildings by 2019. 2.9 European Union leaders have agreed on a binding target of 20% of EU energy consumption to come from renewable sources by 2020.164 164 http://www.defra.gov.uk/news/latest/2007/climate-0309.htm Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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2.10 As illustrated in Table 1 within the UK’s overall energy policy renewables require policy support at all stages of the innovation chain. For the necessary reductions in CO2 emissions to be made, with a greater deployment of RE, further investment (capital expenditure, public procurement and fiscal incentives) needs to be introduced.

2. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb? 2.11 Barriers: — commercial competition: barriers faced by new technologies competing with mature technologies, such as conventional power station (specifically undeveloped infrastructure and lack of economies of scale); — failure of the market to value the public benefits of renewables: Employment, fuel diversity, price stability, and other indirect economic benefits of renewables also accrue to society as a whole; and — market barriers: such as inadequate information about consumer choice, institutional barriers, lack of access to capital (small scale RE often incur high transaction costs for making small purchases). 2.12 A clear, stable and long-term policy framework is necessary to establish investor confidence in new energy infrastructure. 2.13 National Grid has worked hard with the renewables industry and Government to reduce the barriers to grid connections. However, despite this activity, further improvements in network capacity and availability should be targeted.

3. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances? 2.14 The Renewable Obligation (RO), discussed in further detail in question 4, has and continues to provide support for near-market technologies. The TCPA supports continuation of the RO. However, the RO was not designed to deliver targeted support to emerging technologies and is not the right means of achieving this policy goal. 2.15 Emerging technologies, such as marine energy projects, require targeted financial support in the demonstration and deployment phase.

4. Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK’s present Renewables Obligation Certificate (ROC) regime? 2.16 The graph below illustrates the rationale for the Government adopting a Renewables Obligation Certificate (ROC) regime rather than a feed-in tariV scheme. The market mechanism works upon the theory that the RO would create an RE market based upon high deployment and low price. Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

the economics of renewable energy: evidence 489

Price p/kWh Feed-in tariff – guaranteed high price, e.g. Germany

Theory of RO – create a market, high deployment Competitive and low price tender e.g. NFFO in UK

Deployment (MW)

2.17 While the RO has been a successful market mechanism in the deployment of near commercial technologies in the UK (large-scale wind, energy from waste and energy crops) it has not supported other technologies, nor has it led to the desired rate of deployment. 2.18 The UK urgently needs major and rapid expansion of RE to meet our EU commitment of 20% RE by 2020. The TCPA believe that a feed-in tariV policy, successful in Germany and now being introduced in several Mediterranean countries—Spain, Portugal and Italy—should be included in legislation for the UK to rapidly accelerate deployment of RE at lower cost. A feed-in tariV system would mobilise all RE options (not just those at near commercial stage mentioned above), producing a diverse RE mix and reducing our dependency on conventional energy over time. 2.19 By guaranteeing a long-term fixed price to be paid to electricity generators and giving priority access to the grid for the electricity they produce, 10 times more wind and 200 times more solar power has been installed in Germany165 than in the UK. This clearly demonstrates that the feed-in tariV policy is established, eVective and proven.

5. On top of the costs of building and running the different types of electricity generators, how much investment in Britain’s transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables? 2.20 The TCPA’s expertise has not focused on transmission and distribution networks to date, however the Association believe that RE must be aVorded the scope to develop on the existing distribution infrastructure without facing distorting network charging arrangements and without artificial cost pressures. 2.21 Private networks can provide a valuable local solution for on-site and near-site RE, however for back- up and larger-scale RE there will need to be access to mainstream existing networks. 2.22 A question that has recently arisen is whether permitting a monopoly for on-site energy provision contravenes European law. Current legislation in the UK allows an exemption for a monopoly for on-site provision for developments of less than 1MW (roughly 1,000 homes). However a recent ruling by the European Court of Justice involving Leipzig Airport in Germany, which permits a monopoly for its on-site generation, has found that the bar to third party operators in this particular case is contrary to European law.166 The UK energy regulator Ofgem and the DBERR have recently conducted a consultation into decentralised energy and are now reviewing the German case—the implications of which may reform the UK conditions for on-site connection and hold back the growth of the energy supply company (ESCo) market and level six of the Code for Sustainable Homes, which allow for on-site energy supplies that are exempt from UK competition law. 165 http://www.guardian.co.uk/business/2007/jul/23/germany.greenbusiness 166 Judges at the European Court of Justice at Strasbourg ruled in May 2008 that an on-site energy provision arrangement in Germany, which permits a monopoly when the energy supply is “located on a geographically connected operating zone”, contravenes directive 2003/54. The directive ensures an open energy market and national laws are only able to “derogate” from the principle on certain, unrelated circumstances. Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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6. How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations?

2.23 Placing a social cost to society of the merits of RE versus conventional power stations is subjective. However, if considering the cost of runaway climate change to society then the external costs of RE are minimal in comparison. The specific location of any power station should be decided according to the planning system. 2.24 Planning Policy Statements (PPS) set out Government policy on a range of planning issues. Of particular relevance to RE are PPS1 and PPS22. A working-draft best practice guidance to the supplement to PPS1 on Planning and Climate Change167 has recently been published. It sets out core planning objectives and details how policy and decision-making planning can promote low-carbon energy generation at the local scale. PPS22 describes how planning should be used to deliver RE. 2.25 Community involvement in planning for sustainable energy, whether RE or conventional power generation, can help foster support for, and improve the quality of development. It can raise awareness of the need for sustainable energy and help contribute to actual project delivery—the TCPA believe that is therefore crucial that communities and other stakeholders are there from the beginning. 2.26 To help developers and local authorities to start planning for communities powered by low and zero carbon technologies the TCPA, in partnership with the Combined Heat and Power Association (CHPA), have recently published “community energy: urban planning for a low carbon future”.168 Complimentary to the PPS1 best practice guide it highlights how local government can use planning and enabling mechanisms to deliver low- carbon local energy by working with strategic partners. 2.27 Planning is often perceived as a barrier to RE, however to address concerns about the timeliness of the planning process local authorities need far greater investment in resources and training.

7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of “greener” fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions?

2.28 The TCPA’s expertise has not focused on the costs of generating RE compared to conventional power generation to date and therefore we will not be answering this question.

8. How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating?

2.29 The TCPA believe that this is not an either/or situation—decarbonising transport and heat is as essential as decarbonising electricity. 2.30 Nearly half of the UK’s carbon dioxide emissions come from buildings, a quarter of these from our homes. When transport is factored in it becomes clear that energy demand and supply are heavily influenced by the built environment.

9. If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK?

2.31 The TCPA’s expertise has not focused on emissions trading to date and therefore we will not be answering this question. 167 http://www.communities.gov.uk/planningandbuilding/planning/planningpolicyguidance/planningpolicystatements/ planningpolicystatements/ppsclimatechange/practiceguidance/ 168 “community energy: urban planning for a low carbon future” http://www.tcpa.org.uk/press files/pressreleases 2008/20080331 CEG.pdf Processed: 17-11-2008 19:38:27 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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10. How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy? 2.32 The TCPA’s expertise has not focused on emissions trading to date and therefore we will not be answering this question.

11. What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects? 2.33 The TCPA’s expertise has not focused on biofuels to date and therefore we will not be answering this question. June 2008

Memorandum by the Two Moors Campaign I write on behalf of the Two Moors Campaign, a group set up to oppose the erection of wind turbines in one of the most sensitive landscapes in Devon. We have over 200 active supporters from the local area that is threatened by four separate planning applications for the erection of a total of 24 industrial wind turbine structures, along the southern fringes of Exmoor National Park, near the village of Knowstone. (At the time of writing none of these applications has yet been before a planning committee.) We are submitting this evidence to advise you of the costs of the government’s renewable energy policy, which is essentially a wind policy and one of the most expensive renewables policies in the world, to our rural community. The benefits under the current Renewables Obligation Certificate system are so lucrative that wind developers are keen to erect turbines even in the most inappropriate areas and do not let accuracy get in the way of a planning submission. Our experience has been that wind developers ignore government guidelines; some include deliberately misleading information within their newsletters and their planning applications; the planning applications are their supporting Environmental Statements are frequently incomplete and in some instances deeply flawed. (In one case an independent landscape assessment stated that: “I do not consider that the ES reaches the required level of accuracy for the local planning authority to make an informed decision.” Moreover the visuals provided within the applications, which is the publics’ main guide to the predicted view of the site, are not in accordance with best practice guidance and result, deliberately in my opinion, in dramatically minimising their visual impact. We have commissioned our own professional photomontages which are spectacularly diVerent from the developers images taken from the same positions and prove this point. Local authority planning oYcers have neither the time nor the resources to ensure that all the information put before them is accurate; there is no oVence for providing misleading information within an application. The cost to our rural community of combating these lies and inaccuracies, in landscape professional fees alone, to date has been over £26,000. This does not include the hours and hours of time put in by the community to examine the implications of these applications, the enormous stress involved and the personal commitment required.

Social cost to the community Community consultation by one company referred to “vociferous objectors”, they deny they are noisy, they have even publicly denied that the wind industry is subsidised, commitments on websites disappear overnight when challenged to fulfil them in public, one exhibition was held in a diVerent parish to the site and no photomontages available for the public to see once they got to the exhibition. Some developers have been relentless in their attempts to suppress the opposition to their proposals, blogging on local websites, letters to the papers failing to declare their vested interests, extending and exaggerating the hockey stick graph of climate change with their own lines showing an almost vertical increase in climate to frighten people into agreeing to their schemes. Processed: 17-11-2008 19:38:28 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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Proposals have pitted family member against family member, neighbours against neighbours, school children have fought over the issue.

One landowner has personally told me that the wind turbine developer raised the spectre of compulsory purchase during the discussions to persuade him to sign up.

Rural communities are being bullied, threatened and intimidated by ruthless multi-million pound developers all under the guise of saving the planet

Noise is one of the most worrying aspects of these developments. The Salford University report acknowledges that amplitude modulation from wind turbines cannot be predicted but the government has ignored its recommendation for further research. Research into Vibro Acoustic Disease as a result of wind turbines is becoming available but once again the government is ignoring the implications in favour of meeting targets. Government introduced preferred noise guidelines set out in ETSU-R-97 to allow wind turbine development which would have been prohibited under previous noise emission regulations. These guidelines were established when turbines were half the size of the present monsters and it was intended that the report be reviewed after two or three years. That review has never taken place and it is clear that the guidelines do not protect those living close to turbines from their noise and health implications.

Tourism. Farm diversification has been encouraged and in this area it is mostly into tourism. But this industry will be the most aVected by the introduction of massive wind turbines on the southern edge of Exmoor National Park. The Small Business Council Report places figures on the impact of industrial wind turbines on the tourism industry in Devon. Devon is a major tourist destination bringing in millions of pounds and employment to the rural economy.

(Following the closure of the Small Business Council, after its criticisms of government, the report can now be viewed at: www.moorsydeactiongroup.org.uk/dnload/SBCEnergyReport.pdf)

Property prices—The findings of local estate agents are backed by the 2004 Royal Institute of Chartered Surveyors Report, which found that wind turbines have a lasting negative impact on property prices. Property prices as the government recognises nationally are important to people. In the rural economy they may be more so because they provide many farmers with their retirement fund, now much reduced.

Community benefits?—It has been acknowledged by one developer that there is no immediate benefit to the community from these developments. Vague statements have been made about local contributions but none has been oVered.

Costs to the Landscape—Landscape has a value to both the appreciation of the natural environment and as a national asset. To those landowners whose incomes are supplemented to a large extent by outdoor pursuits the environment has a direct correlation to their business activity. The costs to these landowners and the country could be immense. Once lost the value of the landscape will be gone forever. These will become industrial sites and carbuncles on the landscape adjacent to one of the smallest National Parks forever, thereby diminishing the character of that National Park. And this is being repeated across the country.

Rural poverty: The rural community is being asked to bear the costs of wind turbines on their hillsides with the extra pylons for users at great distances from the point of generation, with no compensation or local benefits. The increased costs of this generation adds to the misery of low pay, high transport costs, lack of bus services and the prospect of closure of local post oYces already inflicted on the rural community.

Costs to Local democracy—government diktats to planning oYcials and quasi government bodies, such as Natural England and the Environment Agency, to support all renewable energy projects may mean that all town and parish councils within 10km of the site who have objected strongly to the planning applications may have the proposals foisted upon them nonetheless. At the same time wind developers are lobbying government to have their applications approved with more quickly! The rural voice is likely to be disenfranchised once again.

Costs to wildlife—this southwest sanctuary is a home to bats, otters, deer, badgers, hare and rabbits, foxes, dormice, slow worms, great crested newts, fritillary butterflies, starlings, golden plover, buzzards…. the list is huge as is the value of this rich ecosystem. And all is under threat from industrial wind turbine development. Processed: 17-11-2008 19:38:28 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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And for what? Costs to us as taxpayers and energy users: as stated by Deiter Helm on The Politics Show on 7 December “It is hard to think how you could design a renewables support policy which could turn out to be so expensive and indeed actually produce so little by way of capacity”. The concentration on wind power, an inherently intermittent source of energy, inevitably means that any power from this source must have back up for when the wind isn’t blowing, is not blowing enough or is blowing too much! As Eon have recently confirmed in an article in The Guardian on 4 June 2008, the planned growth in wind power will mean a massive expansion in fossil fuel generation to back this up. “E.ON said that it could take 50 gigawatts of renewable electricity generation to meet the EU target. But it would require up to 90% of this amount as backup from coal and gas plants to ensure supply when intermittent renewable supplies were not available. That would push Britain’s installed power base from the existing 76 gigawatts to 120 gigawatts.” This does not make economic sense. Paying most expensively for wind energy and paying again for the back up to be running ineYciently in the background is madness. Since we need fossil fuels anyway the concentration of our scarce financial resources should be aimed at clean fossil fuel energy production. Ofgem, the National Audit OYce and the Carbon Trust say that pound for pound we could be reducing our CO2 emissions by many more times than we are now through the current RO system. Most of the projected £30 billion of RO subsidy being spent on a renewable that won’t save the planet could instead be spent on finding technologies that will. Wind energy is a mature industry—subsidies should be directed to emerging new industries. We are surrounded by sea with predictable tidal currents and wave power yet projects like Pelmaris had to look abroad for further investment. Since government figures for wind turbines are recorded in their installed capacity, and not their load capacity or capacity factor, it is clear that the targets are unlikely to ever be met. This is particularly relevant when considering the growth in energy demand. (Note the average capacity factor for the country is around 30% of installed capacity).

The turbines constructed in the UK have had virtually no impact on CO2 emissions yet this is their very raison d’etre! Experience from Germany is clear that because their back up is provided by mostly old coal fired power stations carbon emissions there have gone up as a result of the introduction of large scale wind turbines. Yet Germany has accompanied this investment in wind energy with a massive investment to upgrade insulation within their housing stock, thereby reducing demand and carbon emissions. In Britain this invisible saving has been ignored in favour of the huge very visible, ineVective industrial scale wind turbine. In conclusion I must point out that the environmental cost to the countryside of trying to cover every hillside with wind turbines is immense and far too high a cost to pay for the pitiful emission savings. 12 June 2008

Memorandum by Wavegen 1. Wavegen, a wholly owned subsidiary of Voith Siemens Hydro Power Generation, is a company developing technology to generate electricity from ocean waves. The company is recognised as a world leader in this field and has developed and operates Limpet, the world’s first grid connected commercial scale wave energy plant. This plant has been in operation since 2000 and has given Wavegen unrivalled experience of operation of wave plant. Wavegen is currently contracted to supply 16 units for incorporation into a breakwater in Spain, with commissioning due in early 2009. In the UK Wavegen is working with npower renewables who have recently submitted a planning application fora4MWproject utilising Wavegen technology. 2. Wave power is today considerably more expensive than more established renewable energy technologies such as onshore wind. This is not at all surprising in view of the relatively early stage in the technology’s development. It is accepted that the world’s oceans are a vast untapped renewable energy resource and that while the technical challenges are considerable the opportunity justifies the risks and costs of development of the technology. The UK is recognised as a world leader in this field with a considerable opportunity to develop a new industry. The UK has a number of technology developers, of which Wavegen is one, which have either full scale demonstration plant in operation or are about to install plant. The development of early commercial projects, similar to that being planned by npower renewables and other utilities, will be an essential step in the movement of wave power from interesting research to commercial reality. Only after this step will it be possible to confirm the economic potential of wave power. Processed: 17-11-2008 19:38:28 Page Layout: LOENEW [E] PPSysB Job: 408616 Unit: PG10

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3. Currently the UK government, along with the devolved governments and the EU have support mechanisms in place to assist the development of renewable technologies. The Renewable Obligation Certificate regime has been a successful mechanism for assisting more established technologies, such as onshore wind. It has not assisted less developed technologies and based on the current proposals will continue to fail in this regard. The Marine Supply Obligation introduced by the Scottish Executive, and tariV based mechanisms oVered in a number of EU countries oVer the level of support that is essential for early arrays of devices. It is essential that similar support is available throughout the UK. Without such support, which is primarily revenue based and so supports success, we will never be able to confirm the opportunity oVered by wave power. Whether this support is based on an enhanced obligation regime (as is likely to be proposed in Scotland) or on a feed-in tariV is a detail. The important issue is the level of support. 4. Looking to the future it is, we believe, unrealistic to imagine that electricity from wave power will be as cheap as traditional fossil fuel sources. It will however be a vital component of the future energy mix and one which ultimately will have to complete with equivalent technologies such as oVshore wind. 13 June 2008

Memorandum by The Revd. John Wylam 1. I have attended some sessions of the Northumberland Public Inquiry into the proposed development of three wind farms, namely Green Rigg, Steadings and Rey which is on-going. 2. I write as an individual, but I am also vicar of the benefice of Chollerton which includes the parishes of Chollerton, Birtley and Thockrington. 3. Thockrington Parochial Church Council has concerns on the eVect of the wind turbines on the setting of Thockrington Church, a grade 2 star listed building as well as the eVect of noise and on wilderness and landscape 4. The problems caused by the proliferation of wind turbines has not been helped by the use of the “W” areas in the North East Regional Spatial Strategy c.2005 which indicates areas of least constraint. This has caused a stampede of developers who are intent on getting a foothold on areas, which are of high landscape value. However they have proved not to be areas of least constraint because of such matters as aviation security, cultural heritage and their proximity to the Roman Wall. 5. It has generally been felt that the huge subsidies have been the cause of the number of planning applications which would not have been envisaged by the North East Assembly when the RSS strategy was implemented. It would be interesting to know what eVect the subsidies have on energy bills. 6. It seems strange that no accommodation could have been agreed between BERR and Ministry of Defence. The MoD maintains that the granting of permission to install any of the three developments now comprising of 55 turbines would place the safety and security of aircrew and the public in jeopardy. 7. Newcastle International Airport and Air TraYc Control are also vigorously contesting the developments on the grounds of safety and security. 8. The provision of a mechanism to filter out some developments would have saved a great deal of public, corporate and private money. 9. Local Government has to hire in expertise, and there are limitatations on their budgets. The developers seem to have bottomless pit of money judging by the documentation which they produce and the size of their legal teams. 10. It seems incongruous that the MoD should be subjected to scrutiny in an area like Spadeadam Electronic Warfare Training Establishment which is so strategically important, and in an area which is an important route for low-flying military aircraft and civilian aircraft. My perception has been that the developers are determined to drive through their projects at all costs. 11. According to a witness for Air TraYc Control the quality of the appellants’ witnesses on the radar issues have been poor. It is clear that there is a limited pool of good quality consultants. 12. Wind-turbines may have a detrimental eVect on carbon emissions as aircraft may be forced to take longer routes with the consequence of more fuel burn. 13. Of concern is the fragmentation of local communities. The proposals do cause problems such as loyalty in families and communities. Processed: 17-11-2008 19:38:28 Page Layout: LOENEW [O] PPSysB Job: 408616 Unit: PG10

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14. There is also the problem of noise which is likely to become a larger issue as turbines increase in size. The ETSU formula does not seem sophisticated enough. The World Health Organization has suggestions about noise nuisance, and surely this should be used to inform decisions. Even then it appears that noise controls cannot be enforced. 15. Similarly it would appear that PPS 22 needs to give better guidance on the need to provide details of grid- connections. What is the point of permitting the development of wind-turbines if the grid-connections will fail the planning tests. 16. The public and media perception is that wind turbines are ineYcient. They do not operate when there is no wind, and even when wind is available they do not always turn—example Kirkheaton. The turbines still need to be supported by conventional power station back-up. The slowing of turbines to cut down noise means a lessening of energy generation, which in turn aVects energy production. 17. Tourism is an important economic factor in Northumberland. The County is valued by tourists for its landscape and wilderness characteristics. Studies show that wind-farms can have a detrimental eVect visitor numbers which has an eVect on the economy of the area. Tourism provides job opportunities in Tynedale. 13 June 2008

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