Time to stop experimenting with UK renewable energy policy?

Dr Robert Gross, Imperial College

In the period since Britain’s electricity markets were privatised a variety of measures have been put in place to support the development of renewable energy. The non fossil fuel obligation (NFFO) of the 1990s featured auctions of requirements for renewable capacity and is generally judged to have been good at reducing costs but poor at project delivery. Whether the NFFO could have been made to work is a matter of some debate – now conjecture, since the scheme was shelved in 2002. The NFFO was replaced it with an obligation on suppliers combined with a green certificate trading system, the Renewables Obligation (RO). Since inception the RO has been modified and amended almost without a pause (changes have been made every year except 2003). By contrast, policies elsewhere have been remarkably stable, characterised in the vast majority of countries that have been successful at developing renewables by some form of fixed price/premium scheme; usually referred to as Feed in Tariffs (FiTs).

The relative merits of fixed price schemes and trading based systems like the RO have been explored extensively in the literature. Both have their own peculiar strengths and weaknesses and neither should be viewed in isolation from related provisions such as the rules related to grid access and planning policies. However, there is considerable consensus that fixed prices are more attractive to investors (both large/institutional and small/individual) and FiTs have been more effective than RO type schemes at delivering renewable energy. The UK’s RO is also ‘expensive’ relative to FiTs in mainland Europe, which have delivered wind power in particular in large volumes at lower premiums per MWh than the RO, despite the fact that the UK often has better wind speeds. In empirical terms there is a strong case in favour of FiT type arrangements. Why then has the UK government continued to defend the RO even whilst implementing a FiT for small scale generators and consulting on a ‘revenue stabilisation mechanism’ designed to make the RO behave like a (complicated) FiT? Why do large incumbent supplier-generators favour the RO and should the government listen to them? Finally, the British regulator, OFGEM has advocated a return to a form of capacity auction, akin to the NFFO . Is it right to start another experiment for UK policy?  The paper will attempt to answer all these questions, reviewing the history of UK policy, drawing on principles of economics, with particular attention to the needs of investors and the scale of the challenge the UK faces as a result of European targets. It will ask whether there is an obvious ‘way forward’ for the UK as it seeks to deliver huge expansions in renewables, in particular in offshore wind.

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