National Audit Office publishes report on renewable energy

The NAO has today published its report presented to the House of Commons on public spending on renewable energy. The NAO reports that while the proportion of electricity generated from renewable sources is increasing, there are challenges to achieving the Government's 10% target for renewable energy by 2010. The Government aspires to double the target to 20% by 2020: however, the report emphasises that there are a number of challenges still to be overcome before the 2010 target itself is achieved. Further, meeting the targets entails significant cost; estimated at over £1bn a year by 2010, representing a 5% increase in the price of power.

The key mechanism for incentivising renewable energy is the "renewables obligation" (RO), in operation since April 2002 and which excludes some forms of plant that do not contribute to carbon emissions, such as large hydro and nuclear. The NAO notes that the RO is one among a number of policy tools being used by Government to reduce carbon emissions, and that the comparative cost of the RO is at present significantly higher than some other mechanisms (such as schemes for energy efficiency and emissions trading). However, these other schemes could not of themselves achieve the short term targets, or the long term aim of a 60% reduction in carbon emissions by 2050.

Key points to note in relation to the report are:

• The NAO notes that the RO provides financial support equally to eligible renewable projects irrespective of their economics, with the result that projects using better-established technologies such as onshore wind and landfill gas may receive more support than they need to be brought to market, and projects using less-well established technologies such as tidal and wave power receive insufficient support. The report acknowledges that the buy-out price and level of supplier's obligations will not be reopened by Government in its 2005 review, although it hints that this issue could not be ignored in the longer term.
• The inclusion of sites receiving funding from the Non-Fossil Fuel Obligation scheme in the RO would mean additional revenue for the Treasury of up to £1bn by 2010
• The cost of reducing carbon emissions through the RO is currently significantly higher than other policy mechanisms which incentivise energy efficiency (such as the EU Emissions Trading Scheme).
• The remote positioning of many renewable projects will require timely upgrades to electricity networks. Although funding is provided for in the most recent distribution network owner tariffs, this could remain a constraint to successful implementation of some new renewables plant.

Maintaining investor confidence in the support provided by the RO is a key objective, and will depend on, among other things, investor perception of regulatory risks in relation to the RO, as the value of RO certificates could be significantly affected by changes in the distribution of RO benefits among different types of renewable projects, and other similar Government policy shifts.

It is clear that these issues present challenges to the Government's bid to meet its 2010 target. However, the report acknowledges that any changes to the RO scheme will need to approached with caution: particularly with a view to maintaining investor confidence, which is clearly crucial to the RO scheme's success.

The NAO's report comes at a time when the Government is reviewing the UK Climate Change Programme more generally, the closing date for their consultation being 2 March 2005. It should therefore be noted that there may be a number of factors – in addition to the challenges highlighted by the report itself – that might impact on the Government's ability to reach its 2010 target. In particular, any changes to policy on new nuclear plant have the potential to significantly affect long-term policy on schemes to reduce carbon reductions.