European legal framework favours green technology

22 January 2001

How the EU legal framework and UK legislation on environmental and energy issues favour renewable energy sources.

Nobody can ignore the potentially devastating economic and social effects of global warming, whether governments, or private individuals whose personal safety and welfare is being increasingly put at risk by bizarre weather conditions.

It is now widely accepted that greenhouse gas emissions have a major role to play in global warming. Indeed, in a draft report prepared by the UN Intergovernmental Panel on Climate Change, it was concluded that such emissions “contributed substantially to the observed warming over the last 50 years”.

The Panel also warned that unless this issue was properly addressed average temperatures could rise by up to 6 °C by the end of this century. In Europe, this could lead to increased flooding in Alpine regions, water shortages and desertification in the Mediterranean, and a general rise in sea levels of 20 - 30 cm.

Further, it has been estimated that the global demand for energy is likely to rise 65 per cent over the next 20 years and unless preventative measures are taken, the use of fossil fuel could increase significantly throughout this century. It is predicted that, should this happen, we could be emitting as much as 40 billion tonnes of CO2 into the atmosphere by the 22nd century.

What steps are being taken to address the problems of global warming associated with the use of fossil fuels? New environmental and energy legislation supports the use of energy from renewable sources (“renewables”) thereby switching the focus away from the use of fossil fuels for the generation of power.

The Kyoto Protocol

At the time of writing, the 6th Conference of the Parties (COP6) to the United Nations Framework Convention on Climate Change is taking place in The Hague to discuss the Kyoto Protocol.

The Kyoto Protocol came into effect in 1997 and is the centrepiece of the international community's efforts to combat global warming, aiming to reduce the level of greenhouse gases produced by industrialised countries to an average of 5.2 per cent below 1990 levels by 2008–2012. As a direct result of this Protocol, the EU has undertaken to reduce greenhouse gas emissions by 8 per cent below 1990 levels on the same schedule.

The Protocol differs from other international policy in that it is not backed by international legislation and countries do not have to sign it, the USA being a notable non-signatory at the time of writing. It is also unique in that it does not favour a particular method of emission reduction, leaving it up to individual countries to decide how best to reach their individual targets. The Protocol does, however, seek to encourage the attainment of its targets through the purchasing of emission credits. Countries that exceed their emission reduction targets will receive a corresponding number of credits that they can then sell (for hard currency) to a country which has failed to achieve its target.

Given their key role in emission reduction, all of this is favourable to renewables since, even if they are not adopted in one country, emission trading will encourage their adoption in another. Additionally, as the Protocol does not favour a particular type of renewable energy source, signatory countries are able to develop the method best suited for their own climate, for example wind in the UK and Ireland or solar in Mediterranean regions.

Another factor which could potentially have a positive impact on the development of renewables is the liberalisation of power markets in the EU, whereby electricity can now be sold outside a country's national boundaries to another member state. This in itself could aid countries such as The Netherlands, where over 90 per cent of the electricity supply is currently produced by fossil fuels. However, The Netherlands aims to reduce greenhouse gas emissions by 50 million tonne by 2010. In a liberalised market, therefore, not only can the Dutch purchase electricity from elsewhere but they can also purchase power generated from renewables, thereby further supporting this type of generation on an international basis.

A note of caution should however be introduced in relation to the ongoing debate as to whether land management practices should be taken into consideration. Countries such as the USA and Japan argue that areas of agriculture and forest absorb significant levels of carbon emissions. Although there is scientific uncertainty as to whether trees and soil can materially offset industrial emissions, if such a system is credited (either partially or fully) it will have serious implications for the development of the renewables industry as absorption could well be seen in many instances as the more economically viable option.

Government reaction in the UK

To coincide with COP6, the UK government reaffirmed its commitment to climate change and stated that “real cuts in emissions at home” were fundamental to combating global warming.

Under Kyoto, the UK government has a target of 12.5 per cent. Interestingly, it has also set itself a further domestic goal of reducing CO2 emissions by 20 per cent below 1990 levels by 2010 and believes it has sufficient policies in place to achieve an actual reduction of 23 per cent. As part of its Climate Change Programme, the UK government pledged £30 million to the support of the UK emissions trading scheme which will commence in 2001 and a further £89 million in capital grants to support offshore wind and projects relating to the conversion of biomass to energy including energy crop installations.

The Climate Change Levy

Earlier in 2000, the UK introduced the UK Climate Change Levy. As a result of the Finance Act 2000, legislation was provided to enact the Levy, a downstream tax concerning the sale of electricity. The Levy will be imposed on all business users from 1 April 2001 and all suppliers of energy products will be liable to pay the tax (although it is likely this will ultimately be passed onto the end user).

This Levy was introduced to aid the UK in achieving its Kyoto targets as, to date, business users account for approximately 40 per cent of UK CO2 emission levels. Certain exemptions are provided under the Levy, one being energy produced from renewables, in an attempt to stimulate the generation of electricity from these sources.

When considering this particular piece of legislation it is important to note that the Levy is based on the energy content and not the carbon content of fuels, its primary aim being to reduce CO2 emissions, not the promotion of renewables per se. Notwithstanding this, the UK government estimates that the impact of the Levy, along with additional energy saving measures, could be to reduce carbon emissions by more than five million tonnes a year by 2010. The majority of this will, probably, result from a switch to renewable forms of energy.

It is predicted that the Levy will raise in the region of £1 billion of revenue in the period 2001-2002, some of which the government plans to spend developing the renewables industry.

The Renewables Obligation

In July 2000, the Utilities Bill received royal assent. Under this act, the Secretary of State has the power to impose obligations on licensed electricity suppliers to ensure a proportion of the total supply of electricity is generated from renewable sources (the Renewables Obligation).

The Act makes a number of amendments to the Electricity Act 1989 which relate to the powers of the Secretary of State and the Gas and Electricity Markets Authority in relation to the Renewables Obligation. For example, orders may be made that suppliers ensure a certain proportion of the electricity they provide to consumers is generated using specified renewable sources for a fixed period of time. The Act also makes provision for tradable certificates, known as “green certificates”, which will count towards a supplier's Renewables Obligation which again will aid the development of this sector.

New Electricity Trading Arrangements

However, it is not all good news for renewables in the UK camp. As part of the Utilities Act, the government is proposing to introduce the New Electricity Trading Arrangements (NETA)1. These are not particularly supportive of renewables, since they are unlikely to favour small generators and those with less predictable levels of output. Additionally, renewables will also suffer as a result of the anticipated reduction in electricity prices since, at this stage in their life cycle, renewables do not have the economies of scale or sufficient technologies to be able to compete effectively in this new market. Again, this is detrimental to the development of renewables, as consumers will be less willing to purchase power from such a source on the grounds of economics.

Ironically, owing to lower prices, there is likely to be an increase in CO2 emissions as electricity consumption increases, a fact which environmental lobbyists should look to use to their own advantage.

EU policy

The EU acknowledges the role renewables have to play in the achievement of its Kyoto targets and a directive is currently under consideration regarding the promotion of electricity from these sources of energy. One aim of the directive is to increase consumption of electricity from renewables to 22.1 per cent by 2010, although it has recently been suggested that this should be increased to 23.5 per cent.

There is also debate concerning whether indicative or set targets should be imposed on each member. At this stage only indicative targets are proposed and should this directive come into force it will be interesting to see if the EU decides to take the bull by the horns and fix targets as requested by a growing number of political and environmental lobbyists.

The directive also aims to tackle the issue of network access as, if renewables are to be a viable option, they must have access rights to electricity distribution systems. Article 7 of the draft directive states that “Member states shall take the necessary measures to ensure that transmission system operators and distribution system operators in their territory grant priority access to the transmission and distribution of electricity from renewable energy sources”. Rules are also planned in relation to “the bearing of costs of technical adaptations ... which are necessary in order to integrate a new producer feeding electricity from renewable energy sources into the interconnected grid”.

Additionally, the draft begins to tackle the issue of grants and subsidies that are available to the renewables industry (according to the World Wildlife Foundation, subsidies for fossil fuels and nuclear energy can be up to 10 times those for renewables). It is, therefore, interesting to note that in November 2000 an EU approved subsidy of over £100 million was announced for the British coal industry – in the same week that the UK Government announced that £89 million of capital grants were to be made available to the offshore wind and energy crop sectors. Further discussion of this directive is planned for early 2001.

Climate control strategies

In order to reduce our current global dependence on fossil fuels it will be necessary to encourage national governments to develop effective climate control strategies. Energy from renewables has a vital role to play in the global energy model of the future but to be commercially viable, continued support is required from legislation until alternative energy solutions reach a point when they become competitive sources of energy in their own right.

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