Ofgem is calling for the development of an alternative approach to the way the UK provides financial support to renewable generation, arguing that the current mechanism is a very expensive way of reducing carbon emissions compared to other alternatives. The cost per tonne of carbon saved under the RO is, at £184-£481 ($368 - $962), higher than the costs of other policy measures such as the EU Emissions Trading Scheme at £12-£70 ($24 - $140) a tonne, and the Climate Change Levy at £18-£40 ($36 - $80) a tonne.
While acknowledging that the existing support mechanism does provide strong financial incentives to build renewable generation, Ofgem says that consumers end up paying for capacity, even if renewable generation doesn’t get built, for example, if projects are delayed by planning problems. The current mechanism also fails to link the level of support to the price of electricity or the price of carbon emission allowances under the European Union Emissions Trading Scheme, Ofgem says.
With renewable generators benefiting from much higher electricity prices, this is leading to much higher returns for current renewable generators than investors expected or required, says Ofgem, asking instead for the government to consider an arrangement based on auctions of long-term contracts that offer renewable generators a fixed return and link the level of support to the wholesale electricity price. This could meet the government’s renewables targets at a lower cost to customers, the regulator adds.
“We support emphatically the government's aim of cutting carbon emissions and recognise that renewable generation has a part to play in achieving that aim. But we think that a review of the scheme could provide more carbon reductions and promote renewable generation at a lower cost to customers - who are already facing higher energy bills,” said Ofgem chief executive Alistair Buchanan.
The move comes as the UK’s Renewable Energy Foundation (REF), says that the RO encourages developers to pursue projects with poor wind regimes and which ultimately have such low load factors the developments are fundamentally uneconomic.
Projects with load factors of well below 10% have been developed in the UK which exploit the RO to boost revenue by as much as 60% or 70%, says Dr John Constable, a researcher at the REF. While this is good news for the companies concerned it makes little sense for the taxpayer. Constable argues that the RO incentivises construction where there is little or no wind at the expense of more challenging but far more productive offshore wind projects.
Although most sites were built on expected capacity factors of around 30%, results include a project at Barnard Castle, County Durham with just less than 9% while the best performing wind sites are in the north of Scotland, and on Shetland with capacity factors of over 50%.
Campbell Dunford, chief executive of the REF, said: “This important modelling exercise shows that even with best efforts a large wind carpet in the UK would have a low capacity credit, and be a real handful to manage. As a matter of urgency, for the planet’s sake, we need to bring forward a much broader range of low carbon generating technologies, including the full sweep of renewables. Wind has a place, but it must not be allowed to squeeze out other technologies that have more to offer.”
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