House of Lords Select Committee Report on the Economics of

By Michael Johnson,2014-03-30 21:43
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It seems timely, therefore, to examine the economics of renewable energy. ?Most of the increase in renewable energy in Britain is expected to come from

    House of Lords Select Committee Report on the Economics of Renewable Energy: Abstract, Recommendations and Conclusions

(for full report see


    The British economy will increasingly feel the impact of the Government’s

    commitment to reducing carbon emissions, including targets for greater use of energy from renewable sources. The Government describes its targets for renewables as challenging; others have suggested they are unachievable. In any event, the effort to meet them will come at a cost and, if not properly managed, risks distracting attention from other means of reducing emissions.

    It seems timely, therefore, to examine the economics of renewable energy. We take as a given the Government’s wish to reduce carbon emissions; we do not address how far such reductions are justified as a contribution to a world-wide effort. We note the following main points:

    EU targets have focused the spotlight on renewables rather than other means of reducing emissions such as energy efficiency or greater use of nuclear power. The EU is committed to a binding target that 20% of its energy consumption should be from renewable sources by 2020. Individual states’ contributions to the overall

    target are still only proposals and some remain a matter of dispute. The Government seems ready to accept the Commission’s proposal that the UK target should be 15% of energy from renewables by 2020.

    The expected UK target implies a dash from 1.8% renewable energy now to a near-tenfold increase in 12 years.

    Most of the increase in renewable energy in Britain is expected to come from electricity generation—although electricity represents only a fifth of the country’s energy consumptionwith an anticipated rise from 56% renewables now to 3040%

    in 2020.

    Most of the extra renewable generation is expected from wind turbines, which offer the most readily available short-term enhancement of renewable electricity at a relatively cheap base cost; but they produce electricity only intermittently and the scope in the UK for increases in more dependable supply from other renewable sourcesparticularly hydro-electric, domestic biomass and solaris limited, while

    tidal barrage and wave are still at an early stage of development in Britain. To make up for its intermittency, a significantly greater capacity of wind than of conventional or nuclear plant is needed for any given output of electricity; furthermore, in the absence of technological advances in electricity storage and of greater interconnection of the British and Continental transmission networks, back-up conventional plant will be essential to guarantee supply when required, to compensate for wind’s very low capacity credit (probable output of power at the time of need).

    Wind generation should be viewed largely as additional capacity to that which will need to be provided, in any event, by more reliable means; and the evidence suggests that its full costs, although declining over time, remain significantly higher than those of conventional or nuclear generation.

    The dash for intermittent renewable generation will coincide with, and be in addition to, the programme to replace substantial amounts of old coal and nuclear plant and to meet increases in demandamounting to about a quarter of current


    In short, the pursuit of a 15% renewables target will roughly double the requirement for new capacity for power generation that would otherwise be due in the UK between now and 2020; the scale and urgency of such investment is formidable. It is also subject to planning consents.

    The extra cost of electricity generation and transmission in Britain in 2020 with 34% renewables is likely to be ?6.8billion a year, an extra 38%. Most of this would be met by the consumer; about ?80 a year (at current prices) for the average household. There would be little investment in renewable electricity generation without Government support.

    Heating and transport each represent some two-fifths of the country’s energy

    consumption but have received relatively little Government support or attention by comparison with electricity generation.

    The UK has a poor record in meeting targets in this area and it must be doubtful whether a 15% EU target can be met under current policies. If it were met, it would mark a step change in the use of renewable energy but take Britain into a degree of dependence on intermittent renewables unprecedented elsewhere in Europe, with the attendant risks. Determination to meet the target may lead to over-emphasis on short term options, simply because they are available, rather than because they offer the most effective and economical means of reducing carbon dioxide emissions over the longer term.

    The Government rightly aims to ensure reliable and affordable energy supplies and is right to say that a portfolio of policies is needed if we are also to reduce carbon emissions. But, in pursuing its renewable energy target, to guard against the risk of power shortages it should look beyond the generation of electricity by intermittent means and encourage other economic and effective ways of reducing carbon emissions across all sectors, so that investment in them is not diverted by incentives for intermittent sources of supply. Specifically, the Government should: Give a firm lead and maintain a stable investment framework for large-scale, low carbon alternatives to renewable power generation. Nuclear is not intermittent; neither is fossil fuel generation with carbon capture and storage, if and when that becomes available.

    Emphasise and promote the opportunities for renewable heat as strongly as for renewable electricity generation.

    —Look afresh at the UK’s research effort into renewables and consider how to promote more, and more focussed, research leading to new, effective and economical ways to reduce carbon emissions; it should also consider offering a substantial annual prize for the best technological contribution.

    In particular, encourage research into energy storage technologies with a view to mitigating the disadvantage of intermittency in the types of renewable generation likely to prevail in the UK.

Recommendations and Conclusions

    232. We cannot consider renewable energy in isolation from the rest of the UK energy system and we support measures to include nuclear plants as an essential element of

    K’s energy mix (paragraph 74). the U

    233. The cost of electricity from onshore wind farms at good locations would only be comparable with that from fossil fuel generators when the prices of oil, gas and coal are very high or allowance is made for the price imposed for carbon emissions

permits (effectively a tax). It is more expensive than nuclear generated powerbase

    cost 7 pence per kWh, as opposed to around 4 pence per kWh for the other technologies. Offshore wind, biomass, wave and tidal power are even more expensive. And these estimates exclude the additional costs of integrating more renewable generation into Britain’s electricity grid (paragraph 74).

    234. Future developments depend upon many variable factors But it seems clear that the base costs of generation of electricity from onshore wind are likely to remain considerably higher than those of fossil or nuclear generation and that costs of generation of marine or solar renewable electricity are higher still (paragraph 85). We hope that the Energy Technologies Institute’s work will yield technological advance and lower costs. The Government should consider, perhaps in collaboration with others, offering a substantial annual prize for the best technological contribution to renewable energy development (paragraph 93).

    235. Although their declared purpose is to improve the environment, it is clear that renewable energy installations can also have adverse environmental impacts which the Government should bear in mind as it weighs the benefits and costs of expansion of renewable generation (paragraph 96).

    236. Fluctuations in wind speed lead to short term changes in electricity output from wind farms. Greater use of wind power and other intermittent renewable sources therefore requires more backup generation capacity to respond very quickly to, for example, reductions in the output of wind turbines when the wind drops. But the technical challenges and costs of backup generation on a scale large enough to balance an electricity system with a high proportion of intermittent renewable generation are still uncertain. Whereas the highest share of intermittent renewable electricity now being generated in Europe is 15% in Denmark, the UK is expected to reach a share of some 30%40%. We recommend that the Government should ensure

    that further work is carried out to clarify the costs and encourage development of technical solutions to deal with intermittency (paragraph 104).

    237. The need to part-load conventional plant to balance the fluctuations in wind output does not have a significant impact on the net carbon savings from wind generation (paragraph 105).

    238. If some 30 GW of additional (Ev Q 487) renewable capacity were required to meet the EU’s 2020 target for the UK a further 1419 GW of new fossil fuel and

    nuclear capacity will still be needed to replace plants due to close and meet new demand. The total new installed electricity generating capacity required by 2020 would thus be roughly double the level needed if renewable generation were not expanded (paragraph 111). Investment in renewable generation capacity will therefore largely be in addition to, rather than a replacement for, the massive investment in fossil-fuel and nuclear plant required to replace the many power stations scheduled for closure by 2020. The scale and urgency of the investment required is formidable, as is the cost (paragraph 112).

    239. A breakthrough in cost-effective electricity storage technology would help solve the problem of intermittency and remove a major stumbling block to wider use of renewable energy in the longer term. However, no evidence we received persuaded us that advances in storage technology would become available in time materially to affect the UK’s generating requirements up to 2020. We recommend that the

    Government should as a matter of urgency encourage more research, development and demonstration in energy storage technologies (paragraph 117).

    240. Our calculations suggest that the total extra annual cost of increasing the share of renewables in electricity generation from 6% to 34% in 2020 would be ?6.8 billion or

    an extra 38%the equivalent of an extra ?80 a year for the average household. Emissions of carbon dioxide would be reduced by 52 million tonnes a yearin 2007,

    the UK’s emissions were 544 million tonnes. This implies that the additional cost is about ?130 per tonne of carbon dioxide emissions avoided (paragraph 128). 241. Ofgem is required to use competition wherever appropriate. We are concerned that the use of competitive tenders implies a piecemeal approach to building the networks of wires and cables required to connect offshore wind farms to the electricity grid, and that as a result the programme could become overly complex and costly. We recommend that Ofgem implements the new system in a way that allows a coordinated approach for organising grid connections to offshore wind farms (paragraph 131).

    242. We welcome measures to organise better the queue of renewable generation projects awaiting connection to the electricity grid. They should reduce delays in connecting viable generation projects and push back schemes unlikely to get off the ground (paragraph 134).

    243. We consider that the current system of Transmission Use of System charges sends broadly appropriate signals of the costs of locating generators at different points on the system (paragraph 139).

    244. Greater interconnector capacity with the Continent would reduce, but not solve, the problems of intermittent renewable generation (paragraph 141).

    245. Harnessing renewable sources of heat is often cheaper than for electricity generation and offers a larger target area, as heat accounts for double the final energy demand of electricity. There is no intermittency problem with renewable heat. We recommend that the Government should lay at least as much emphasis on encouraging the development and use of renewable heat as on renewable electricity generation (paragraph 163).

    246. We share the concerns raised in the Gallagher Review about existing biofuels. Steps should be taken towards developing second generation bio-fuels as soon as possible. Until the costs of carbon emissions reduction through biofuels come down we recommend that the Government should not seek to increase further the use of biofuels (paragraph 173).

    247. It is clear that, although the cost of the technology for carbon capture and storage (if and when it becomes a practical possibility) is inevitably highly speculative, it will always be more expensive than large-scale carbon-based energy without CCS (paragraph 177).

    248. It seems clear there would be little investment in renewable energy without substantial Government support and that a 15% target would not be met without it (paragraph 183).

    249. We note the evidence that the cost per kWh of renewable electricity supported by the Renewables Obligation has been significantly higher than the amounts paid via feed-in tariffs abroad, and that much of the excess has been due to other differences in the environment for renewable generation, particularly in the planning system. However, given investors’ need for a predictable framework, it seems right to retain the Renewables Obligation, if it is desired to continue increasing generation of electricity from renewable sources (paragraph 189).

    250. We are not persuaded that the wish of concerned citizens to make their own contribution to emissions reduction is an adequate justification for a public subsidy for micro-generation (paragraph 198).

    251. The returns from micro-generated electricity look too small and uneconomic for the Government to support. But the gains from households using microgenerated heat

    look much more promising. Government policy should focus instead on households generating renewable heat and on schemes that use renewable heat on a larger scale, such as those covering a housing development, or group of public buildings (paragraph 204).

    252. On the evidence submitted to us, renewable electricity is clearly more expensive than fossil fuel-fired and nuclear generation and leads to higher energy bills for consumers and businesses. We estimate that a household which consumes the average amount of electricity will have to pay in 2020 about ?80 extra a year. The Government will need to take higher costs on board in framing its policies towards fuel poverty, noting the high correlation between fuel poverty and poorly-insulated homes (paragraph 208).

    253. We call on the Government to look afresh at the UK’s research effort into renewables and to consider what more might be done, in a global context, to promote more, and more focussed, research across a range of technologies leading to new, effective and economical ways to reduce carbon emissions (paragraph 213). 254. We recognise that power companies need a streamlined planning system to approve or reject projects more quickly. But local and national concerns about environmental degradation must also be addressed. It is important to ensure that the planning system adequately assesses the costs to local communities and the balance between national priorities and local decision-making. The Government should also examine how far local communities share in the economic benefits created by wind farm deployment and other renewable projects (paragraph 220).

    255. We endorse the Government’s objective of ensuring a secure, reliable and

    affordable supply of energy (paragraph 225).

    256. The Government is right in stating that a portfolio of policies is needed to achieve this objective, if we are also to bring about reduced carbon emissions. Against a background of developing technologies and uncertain costs, the Government will need to give a firm lead, with clear priorities and realistic objectives, while maintaining the stable framework needed by investors in the context of the long lead times needed by many energy projects (paragraph 226).

    257. We recognise that the Government has committed the UK to contribute to the EU target of 20% renewable energy by 2020 and that a target of 15% for this country is envisaged. But the bulk of the evidence presented to us casts doubt whether, under current policies and with current resources, it will be feasible to increase the share of renewable energy so much in the UK over the time available. This is especially so, as most of the growth is expected to occur in power generation, which represents only a fifth of the UK’s energy use, and that this growth will be largely in addition to the substantial replacement programme of old conventional and nuclear plant that has to take place over the same time period (paragraph 228).

    258. We are also concerned that determination to meet the target may lead to an over-emphasis on promoting short-term options, simply because they are available, rather than because they offer the most effective and economical means of reducing carbon dioxide emissions over the longer term (paragraph 229).

    259. We have a particular concern over the prospective role of wind generated and other intermittent sources of electricity in the UK, in the absence of a breakthrough in electricity storage technology or the integration of the UK grid with that of continental Europe. Wind generation offers the most readily available short-term enhancement in renewable electricity and its base cost is relatively cheap. Yet the evidence presented to us implies that the full costs of wind generation (allowing for

    intermittency, back-up conventional plant and grid connection), although declining

    over time, remain significantly higher than those of conventional or nuclear generation (even before allowing for support costs and the environmental impacts of wind farms). Furthermore, the evidence suggests that the capacity credit of wind power (its probable power output at the time of need) is very low; so it cannot be relied upon to meet peak demand. Thus wind generation needs to be viewed largely as additional capacity to that which will need to be provided, in any event, by more reliable means (paragraph 230).

    260. We consider that the Government, if it pursues a renewable energy target in addition to its targets for reducing carbon dioxide emissions across the board, should prioritise the development and promotion of the other effective and economic options, both to bring down carbon dioxide emissions and to achieve security of electricity supply. It will be important to ensure that incentives to promote those renewables which offer only intermittent supply do not divert attention from, and deter investment in, other low-carbon generation options and thereby risk power shortages. So far as reliability is concerned, the best options amongst renewable sources of generation are tidal barrage and biomass, which are problematic for other reasons, and hydro power, which is not, but is already near the limit of its potential in the UK. The most reliable low-carbon alternative to renewables is nuclear power (together with conventional fossil fuel generation with carbon capture and storage, if and when that becomes available) (paragraph 231).

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