Planning

58. Obtaining planning permission remains a major obstacle to the increased deployment of renewables. On­shore wind power offers the greatest potential in the short to medium term, but it has also proved to be controversial, with many objections being lodged by local groups and environmental organizations. The success rate of planning applications for renewable projects in England and Wales has to date been only in the order of 26 per cent.[86] Various organizations indicated that there was a particular problem in Wales, where the potential for wind energy is great but where many applications have been called in by the National Assembly for Wales despite approval at local level.[87] The length of the process can also be inordinately long, as highlighted in one recent project where planning approval was finally refused after some 8 years.[88]

59. By contrast, we found that the success rate of wind farm planning applications in Scotland was over 70 per cent over the last decade.[89] The Scottish Executive issued new strategic and technical planning guidance for renewables in 2000 and 2002—in marked contrast to the ODPM who have yet to revise the 1990 guidance for England and Wales —and they expected this to provide further impetus for promoting renewables within the planning process.[90] A survey commissioned by the Scottish Executive in 2000 showed that local public opinion became far more favourable to wind farms after they were built— demonstrating that initial worries and concerns were not in fact born out in practice.[91] In the absence of any equivalent research by the DTI, this study has been regularly cited by developers in subsequent planning applications in England and Wales as well as Scotland. We recommend that the UK Government should publicise widely the Scottish Executive research on public reactions to wind farms.

60. More generally, the ambivalence displayed towards renewable generators, particularly wind farms, even by environmental groups exemplifies the need for the Government to do much more to raise awareness and prompt real debate among members of the public. We have ourselves consistently highlighted this issue in previous reports. Public attitudes define the limits of what is politically possible—as we have already seen with the widespread protests about the level of fuel duties and the Government's abandonment of the fuel duty escalator. The success of European nations such as Denmark, Germany and Switzerland in achieving greater levels of sustainability than the UK—whether it is in waste minimisation, recycling, energy efficiency, or the promotion of renewables—reflects not only effective policy making and implementation but also the higher priority which ordinary members of the public accord to environmental objectives. Indeed, the PIU recognised the importance of such considerations in their Energy Review, and recommended that the Government should involve the wider public in the energy debate—perhaps through novel approaches such as the use of Citizens' Panels.[92] We see little evidence of this occurring. During our inquiry, the point was made to us that if we are going to see wind farms from most of the British coastline, and perhaps from many inland sites, the public should get used to the idea that wind farms are a good thing. The Government, together with local authorities, need to launch a sustained and hard­hitting campaign to raise the level of public awareness and understanding of these issues.

61. A specific issue raised by the Scottish Executive and a number of other organisations was the extent to which the development of wind power may be adversely affected by objections lodged by the Ministry of Defense (MoD).[93] On­shore wind power is vital for the achievement of the Government's 10 per cent renewables target. But large parts of Scotland and Wales are tactical training areas for low flying or are subject to possible restrictions relating to military airfields and radar stations, and in all these areas the MoD has the right to object. This issue has recently been brought into sharper public focus following a lengthy legal case in which a small renewable developer, Ecogen, lost an appeal to build an 80MW wind farm in Northumberland as a result of opposition from the MoD.[94]

62. We asked the MoD for data on the number of objections it had lodged, the process by which it lodged objections to planning proposals in excess of 50MW, and the criteria which it used to decide whether to object. From the data MoD provided, we found that the percentage of wind farm planning proposals which the MoD had objected to had risen steadily from 28 per cent in 1997 to 44 per cent in 2002, as the following table shows:[95]

In addition, we noticed that there were nearly 200 proposals pending in 2002 where the MoD had yet to decide whether or not to object. It seems clear to us that the scale of opposition from the MoD is such that it may seriously jeopardise the achievement of the Government's targets for renewables and the promotion of wind power. We urge the Government to set out publicly how it proposes to resolve this conflict.

Regional and National targets

63. On 6 March 2002, the DTI published a report commissioned to help the Government plan for its renewable energy target of 10 per cent electricity from renewable sources by 2010.[96] The assessments are intended to provide estimates of the renewable resource in each region and to lead to the agreement of regional renewable targets. The following figure shows the capacity identified in each region, Wales and Scotland as a percentage of the Government's 10 per cent target. It shows that the UK would meet its 10 per cent 2010 target (ie. 100 per cent of the target) on the basis of a favourable scenario (high target), but would only reach 6.6 per cent in less favourable circumstances (low target).

64. The figures have been compiled on the basis of individual studies in each region, and in Wales and Scotland. The summary report asserts that "the regional renewable energy assessments have been undertaken under consistent and reasonable assumptions of land­use and technical constraints". But worryingly it goes on to state that "the economic assumptions are generally reasonable, although not always fully disclosed and there is considerable reliance on biomass, which has uncertain costs".[97] Such a comment does not inspire confidence, not least because we fail to see how a reliance on biomass in the regional assessments can be reconciled with the DEFRA's evidence that biomass was unlikely to contribute significantly to the 2010 target.[98]

65. We are concerned about the lack of a consistent basis for the DTI's regional renewable energy assessments, and the resulting anomalies in the results. It is curious, for example, that Scotland should rank below the East of England and Wales under the high growth scenario, or that Wales should rank only sixth under the low growth scenario. Such anomalies may be partly explained by the fact that they do not in general take account of off­shore wind developments—though rather confusingly the assessment for the East of England does appear to do so. A number of organisations shared our concerns.[99] We are puzzled as to how the DTI are intending to take forward its work in setting regional targets and would urge the department to clarify its plans.

66. We also noted two of the conclusions of the DTI's summary report:

• The planning system may take several years to incorporate the regional targets into forward plans, and hence into development control decisions. Nevertheless there are actions that government can take which would have an immediate effect and which would also deliver improvements in the future.

• A more positive planning system would assist the achievement of the national target. It might place greater onus on local authorities to help deliver regional targets and more locational guidance on areas suitable for renewable energy, either in development plans or supplementary planning guidance.

If the DTI's regional renewable energy assessments are intended to influence planning, then they need to be incorporated in regional plans and RDAs need to be held to targets. We also consider that the ODPM need to incorporate in new planning guidance a presumption in favour of renewables. Furthermore, the relevant government departments need to be far more active in promoting public awareness of the importance of renewables and shifting opinion in favour of them.

67. The relationship between the devolved administrations and Westminster adds another layer of complexity to regional target setting. Except in the case of Northern Ireland, responsibility for energy policy is not devolved. However, the Scottish Executive confirmed that it has the power to set its own targets for renewable energy, and indeed is considering doing so.[100] The Economic Development Committee of the National Assembly for Wales is also consulting on renewables targets.[101] Given the huge variations between Scotland, Wales, and England in their potential for different types of renewable energy, we are concerned at the absence of any formal framework for allocating UK targets between the devolved administrations.

New Electricity Trading Arrangements (NETA)

68. The introduction of the New Electricity Trading Arrangements (NETA) represents a major barrier to the deployment of renewables.[102] NETA replaces the previous Electricity Pool system where the system operator matched bids from both suppliers and generators. Under NETA, electricity suppliers and generators are required to contract directly with each other, and penalties are imposed where demand exceeds contracted levels or generation falls short of it. The main reason for developing NETA was to put in place a more efficient system which would bring about further reductions in electricity prices for consumers.

69. NETA came into operation on 27 March 2001. Such was the concern about its impact on renewable generators that Rt Hon. Peter Hain MP, the then Energy Minister, almost immediately asked Ofgem to review the impact on smaller generators of the first three months of its operation. Ofgem's report, published in August 2001,[103] found that export prices achieved by smaller generators were 17 per cent below those achieved in the previous year, and that their output had fallen by 44 per cent. But the report argued that price reductions were smaller than those experienced by large generators, while the fall in output largely related to CHP and the recent increases in gas prices. Following this report, the DTI carried out a consultation on possible further changes to NETA to benefit smaller generators, but have come to the conclusion that it is too early to assess the effects.[104] Much now depends, as Mr Wilson confirmed in his evidence to us, on the full year report on NETA which Ofgem are due to carry out.[105]

70. We had concerns about various aspects of NETA, namely:

• the failure to take account of the environmental objectives set for NETA;
• the lack of consolidation services for smaller generators;
• economic aspects of NETA and liberalised energy markets; and
• the environmental impacts of market changes.

THE ENVIRONMENTAL OBJECTIVES SET FOR NETA

71. In commissioning NETA, the Government specifically stated that it wanted to ensure —inter alia—that the new system "would provide encouragement for CHP and renewables generators".[106] Concerns about the NETA proposals were raised by renewable generators at a very early stage during the long consultation process, but the DTI and Ofgem appear to have taken no account of these. The failure to carry out a thorough environmental appraisal of the proposals at the very start of the process was a material factor in the Government's failure to achieve its environmental objectives for NETA. It also dramatically exemplifies the effect of the failure to incorporate the promotion of sustainable development as one of Ofgem's key objectives. While an appraisal was belatedly carried out by the DTI in 1999, this was very much of a "bolt­on" and appears to have had little effect.

CONSOLIDATION SERVICES FOR SMALLER GENERATORS

72. Since the introduction of NETA, Ofgem have belatedly introduced some minor technical changes in an attempt to address the worst anomalies of the system and reduce the financial penalties generators might suffer. But it is clear that NETA—and in particular, participation in the Balancing and Settlement Code (BSC)—is a system for "big" players: small independent renewables generators cannot hope to take part because the financial consequences of even a smaller error in forecasting output can be disastrous. However, NETA does allow for the possibility of 'consolidation' ­ a process whereby a commercial company may act on behalf of a number of smaller generators, pooling the risks each individually would bear and participating on their behalf directly in NETA and the BSC.

73. We found no evidence of a growth in the provision of independent consolidation services. There was widespread agreement on this issue. Indeed, in December 2001 the DTI set up a Consolidation Working Group to look urgently at structural and regulatory obstacles to consolidation, and it concluded—inter alia—that there was currently a lack of independent consolidators.[107] Yet in their evidence to us, Ofgem stated that "almost all small generators are making use of a consolidation service".[108] We are concerned and astonished at this blatant attempt to redefine the concept of consolidation to encompass the ordinary contracts which renewable generators have traditionally made with the suppliers. Ofgem's attention now appears to be focussed not on promoting the growth of independent consolidation services, but on attempting to 'unbundle' embedded generation contracts by allowing generators to contract with any supplier—not just their local supplier.

74. The PIU energy review recommended that the DTI and Ofgem should prepare transitional arrangements for smaller generators under NETA to be ready to be implemented by January 2003, if necessary.[109] The DTI told us it was awaiting the outcome of Ofgem's full­year review of NETA to be published in the second quarter of 2002.[110] Ofgem appears able to set the terms of such reviews itself without reference to other bodies or any formal consultation. We consider this situation highly unsatisfactory in view of the importance of this review and the relatively low priority Ofgem accords to environmental objectives.

ECONOMIC ASPECTS AND COST­REFLECTIVITY

75. In reviewing evidence available to us on the economic effects of NETA, we were struck by a number of points:

• Ofgem claims that electricity prices have fallen significantly as a result of NETA, and clearly the reorganisation of the market has made a contribution. However, over-supply—currently running at some 30 per cent—is also likely to have been a significant factor. We note with interest the statement by DEFRA in its CHP strategy that electricity prices are expected to rise to near pre­NETA levels by 2005.[111]

• The system of dual cashout prices is not cost­reflective, and may even amount to a cross­subsidy from renewables to coal.[112] There has been considerable pressure from some organisations, including Innogy, to move to a system of single cash­out prices, but the DTI has rejected this.[113]

• The objective of NETA was to provide a range of markets ­ including long-term markets which would signal the need for investment and provide incentives for different generating technologies. It is unclear, however, to what extent such markets are developing, and therefore whether there are adequate price signals to prompt investment in appropriate technologies.

76. More generally, we were struck by the concerns voiced by some commentators on the failure of liberalised energy markets such as NETA to support long­term environmental objectives. In its report on resource productivity, one of the conclusions of the PIU was that "liberalised markets respond to commercial pressures—and without clear price and other signals, the direction of innovation in the liberalised market will not point towards a more resource productive future".[114] The Combined Heat and Power Association (CHPA) voiced the view that NETA was a system for the 1990s, while Dr Dieter Helm commented that "almost all environmentally benign energy technologies require long­term contracts to finance investment. New technologies need bankable contracts to cover their development. Liberalised energy markets do not easily support such contracts: it is for this reason that the Renewables Obligation takes the form of a compulsory long­term contract which suppliers must enter into".[115]

77. Closely related to this is the issue of falling energy prices and the conflicting signals which this sends out to the public. A recent report by the European Environment Agency highlighted the fact that falls in energy costs militated directly against improvements in energy efficiency and the development of renewable sources of power.[116] We have highlighted in previous reports this issue—how Government policies can frequently work against each other. We have also highlighted in our report on Water and the Environment our concern about the extent to which regulatory frameworks and competitive markets drives down long­term investment in infrastructure.[117] Similarly, the very low wholesale costs of energy, the impact of NETA, and the continued reliance on RPI­X as the basis of the regulatory price framework, may discourage investment in power generation and network infrastructure. The Government must acknowledge that in the medium and longer term, energy prices must rise significantly if we are to move to an environmentally benign energy system. Dr Dieter Helm commented that "it is practically inconceivable that such a transition could be achieved on the basis of 'cheap' energy, as the Prime Minister's Foreword to the [PIU] report indicates is a priority".[118]

78. There are also concerns about the relevance of NETA in relation to developments in European energy markets, where the prevalence of long­term take or pay contracts and the likely dominance of a few pan­European energy companies will present a radically different economic environment. The increasing dependence of the UK on imported energy may render NETA increasingly irrelevant in this context. Moreover, the fragmentation of the UK energy sector over the last ten years has made it particularly vulnerable to foreign takeovers and to vertical integration of supply and generation companies.[119]

ENVIRONMENTAL IMPACT OF MARKET CHANGES

79. Finally, we have significant concerns about the environmental impacts of recent market changes. Electricity from coal­fired generators rose by 15 per cent in 2000 and a further 8 per cent in 2001 (against a rise of 2 per cent in 2000 and a fall of 1 per cent in 2001 for gas­fired generation). This largely results from the increases in gas prices over the last 2 years. As a result, total carbon emissions from the electricity generating sector have increased by 3 million tonnes, from 41 MTc to 44 Mtc.[120] The DTI's important energy policy forecast, EP68, released in 2000, stated that the electricity generating sector was where most carbon reductions would occur.[121] However, the trend is going in precisely the opposite direction to the EP68 projection. The Minister for Energy, Brian Wilson, has himself warned that "for anyone who might have grown complacent, these figures demand that we must do more to address our environmental obligations".[122]

80. There is also some evidence that 'part­loading' of power stations has increased greatly under NETA, from 0.5 GW before NETA to about 4GW now. Part­loading has increased because generating companies do not want to be exposed to the large financial penalties which NETA creates. A recent—and conservative—calculation of the effects of part­loading is that it may increase emissions by 0.8 million tonnes of carbon a year. Given that the Renewables Obligation is meant to generate savings of 2.5 million tonnes of carbon, this means that NETA seems to have wiped out a third of the savings which the Obligation was meant to deliver.[123]

81. We asked Ofgem whether it had carried out any monitoring of the environmental effects of NETA. Ofgem denied that this was their responsibility.[124] We asked the DTI whether they had monitored the impact of NETA on targets for renewable energy and climate change. Its response ignored the recent increases in carbon emissions from coal generators.[125] We asked DEFRA whether they had revised their climate change forecasts in the light of various recent developments ­ including NETA. DEFRA stated that their most recent projections were contained in a document published in October 2001; and that there would be an interim review of emission projections in 2003 and a formal review in 2005.[126]

82. In view of the fact that electricity sector emissions are rising rather than falling, in direct contradiction to DTI predictions, there is an urgent need to examine the environmental impact of NETA and recent market changes. We are concerned that the DTI and Ofgem appear to have done nothing in this respect; and that DEFRA are not planning to carry out a formal review of emissions until 2005, while their interim 2003 review will be too late for it to influence the White Paper.

The Renewables Obligation

83. In principle we approve of the objectives of the Renewable Obligation. The DTI included an interesting summary of a comparative French study which highlighted the uniqueness of the UK approach.[127] Our main concern, therefore, is that the Government is introducing a new type of policy instrument, untried elsewhere in Europe, at precisely the stage when the UK needs to ensure that a huge increase in the deployment of renewables takes place. We hope the Renewables Obligation will be successful, but are concerned that it represents a rather indirect policy mechanism when compared to the very direct incentives which 'feed­in' instruments, such as those used in Germany and Denmark, provide.

84. By comparison with 'feed­in' instruments, the Renewables Obligation appears to us to have three main weaknesses:

• Feed­in tariffs provide differing levels of incentives for different technologies. In the Preliminary Consultation on the Obligations, the DTI made it clear that it had already decided against this approach on the grounds that specifying different levels of support would run counter to the market approach underpinning the Obligation. It therefore did not highlight this as an issue on which it was inviting views.[128] However, the need for an Obligation is in itself an admission of market failure, and it seems to us that the ability to provide different levels of market pull would allow for greater flexibility. At present, the Obligation is both relatively inflexible and economically inefficient: onshore wind farms on good sites will still potentially receive in excess of 5p/kWh even though they may be generating at 2p/kWh. We received much evidence to support the thesis that it effectively favours onshore wind as the cheapest renewable technology.

• The incorporation of a 'cap'— the buyout price of 3p per kWh—was intended to limit the price which suppliers had to pay to fulfil their renewables obligation, and therefore the costs which the consumer will have to bear. But it also limits the operation of market forces and, in so doing, fails to provide financial incentives for the provision of more expensive renewable technologies: suppliers will only buy renewable power which is cheaper than the buyout price plus wholesale cost. While we understand the reasons for incorporating a cap, the overall effect is to 'pick winners'—and indeed, it is widely accepted that wind power will be the main beneficiary.

• The buyout proceeds are to be recycled to suppliers in proportion to the number of ROCs which they present, rather than to the renewable generators which generated those ROCs. In our view, this places smaller independent renewable generators in a weaker position when negotiating contracts with suppliers, as the latter are in a stronger position to discount heavily the value of the electricity they are selling and not pass on the full value of the ROC.

85. More generally, the Renewables Obligation, together with the exemption from the CCL, has created new financial instruments which constitute most of the value of renewable electricity. With ROCs plus the recycling of the buyout proceeds contributing perhaps as much as 4p to 5p per kWh, and the CCL exemption 0.5p per kWh, the value of eligible renewable electricity to a supplier might be in excess of 5p per kWh.[129] This compares with a wholesale price for electricity from CCGTs of less than 2p per kWh. It should therefore provide a significant financial incentive for promoting renewable power.

86. The downside is that the value of renewable electricity may fluctuate greatly depending on a range of factors, including the amount of renewable energy available and the risk of significant changes to the Obligation (eg. from Government changes to targets, or from measures to create an EU market in tradeable certificates). To take an extreme example, if the 2010 target were to be achieved and no increased targets were set, the value of the ROC would fall to below the buyout price and tend to zero. In order to reach the 2010 target, therefore, it will be crucially important that the Government sets a target for 2020 and that that target is substantially higher than the 2010 target.

87. Financial institutions may therefore view ROCs with some scepticism and it may take some time for them to develop confidence in these new instruments.[130] One result of this is that it will be much more difficult for small independent renewable generators to obtain financial backing. The Obligation will tend therefore to favour larger companies which can finance projects through equity investment. A practical step that the DTI could take in these circumstances would be to allow banks to own ROCs as security against loans. At present they cannot.

Picking winners and capital funding

88. As indicated above, the DTI decided against different buyout prices for different technologies under the Renewables Obligation. It did so on the basis that the Government should not attempt to pick winners where the future market potential of competing technologies is unclear. This phrase has become something of a mantra in Government policy towards renewables. It is not something we necessarily share: picking winners would be eminently sensible if the Government could do it—it is backing losers which is the problem.

89. Moreover, it seems to us that the Government is deluding itself: it does indeed pick winners through the way it has designed the Renewables Obligation and through the choices it makes in the amounts of capital funding made available for different technologies. On­shore wind energy is the only 'winner' under the Renewables Obligation, as other forms of renewables as not yet commercially competitive—even with the benefit provided by the Obligation—and will require ongoing capital funding to support their development. Some witnesses commented that the UK historically had a good record in basic R&D but a poor record in developing market pull mechanisms to enable emerging technologies to compete in a competitive market.[131] We also noted that one of the findings of the Renewables Obligation preliminary consultation was that insufficient capital funding was seen as a major weakness by many respondents.[132]

90. The following table sets out the capital funding now available (excluding R&D)and where this money is being spent. It amounts to £200 million in total over a 3 year period (ie. about £70 million a year).

91. We would highlight a number of points in relation to this table:

• The amounts of funding available for certain technologies do not seem to correlate to their potential generation capacity. It seems curious, for example, that biomass is receiving over £70 million of the funding available when various studies (including the PIU Review) suggest that its potential contribution is limited; while by contrast wave and tidal energy is receiving only £5 million even though the accessible resource in the longer term is in excess of 700 TWh a year.

• It is a matter of particular concern that PV is receiving so little capital funding. In a working paper supporting their report, the PIU pointed out that PV was likely to become competitive in world markets by 2020, if not in the UK; and that even in the UK the accessible resource was 200 TWh a year and prospects for integrated PV systems (eg as roof tiles or cladding) were good. UK Government support for PV, at £10 million over 3 years, compares poorly with Germany where the Federal Government has provided _650 million in support of its 100,000 solar roof programme over the period 1999 to 2003 (in addition to the substantial tariffs available for PV electricity supplied to the grid).

• In our Second Report of 2001­02 on the Government's Pre­Budget Report, we included an analysis of central Government direct support for energy efficiency and renewables since 1999. We demonstrated that the total increase in Government funding was far less than it might initially appear.[133]

• We are concerned over the ad hoc nature of capital funding announcements over the last few years (much of which was reannounced in the DTI March 2001 press release) and the plethora of funding bodies now involved—25 according to evidence given to us by the Renewable Power Association (RPA).[134]

Embedded generation

92. Embedded (or distributed) generation is the term used for small scale generation which is connected to local distribution networks. Many renewable generators will be connected in this way, and the treatment of embedded generation will therefore be important if renewable output is to expand. Difficulties arise because the historical development of generation and networks in the UK over the last half century has been based on the provision of large remote power stations connected to the high voltage national grid. The lower voltage distribution networks have therefore been optimised for the one­way flow of electricity from the national grid and are not well suited to a more flexible pattern of generation and distribution within local areas.

93. In 1999 the DTI released a consultation paper on embedded generation and network access issues, and subsequently established a joint government/industry working group (the Embedded Generation Working Group) to consider technical, charging and information issues relevant to the likely increase in embedded generation. The Group reported in January 2001, and it set out a possible timetable of work including 14 milestones, ranging from Autumn 2001 to 2005, five of these milestones were due to be achieved by January 2002.[135]

94. The PIU Energy Review stated "A joint DTI/DETR/Ofgem Report of the Embedded Generation Working Group (EGWG) looked at this problem and explained why the DNOs do not have an economic interest in connecting embedded generation. It made a number of recommendations about how to develop a new approach to designing and operating the network. These recommendations should be implemented as soon as possible. Unless this occurs, distributed generation will continue to have problems in connecting to the grid. Changes may, however, have to wait until the 2005 Distribution Price Control Review. But any further delay would put the 2010 renewables and CHP targets in jeopardy".[136] We entirely endorse the comments of the PIU, and are concerned about the apparent delay in achieving any material progress.

95. We note that, in its response to this report, Ofgem considered the overall timetable to be 'challenging' and appeared to express some doubt about whether various aspects could be incorporated into the timescale of the next price review (due to be completed by 2005).[137] We asked the Energy Minister what progress had been made. He acknowledged that little or nothing had been done to help embedded generators.[138] Ofgem's response to the EGWG report appears to have been to set up a project with a timescale of 4 or 5 years, and yet another joint DTI/Ofgem working group has been set up to steer and monitor progress.[139] While we appreciate that some of the issues are technical and may require further work, we cannot but contrast the situation here with that in Germany where embedded generators, or indeed domestic households wishing to exploit PV, can already link in and sell surplus electricity to the network. Timescales are pressing. We note, for example, that MicroGen wish to launch domestic CHP in late 2003,[140] while any large scale expansion of PV to match progress in Germany and Japan will require substantial and rapid progress in these areas by Ofgem.

96. Ofgem's most recent consultation sets out some proposals to help embedded generation before the next price review.[141] Currently, embedded generators not only have to pay 'shallow' connection charges when they connect to the grid, but they also have to pay 'deep' connection charges for any reinforcement of the network which is required. Ofgem's main proposal is that the such generators might be allowed to spread the costs of connection charges over a number of years; and might be partially reimbursed if other embedded generators subsequently connect to that part of the network.

97. However, this still means that embedded generators would still be subject to 'deep' charges. In stark contrast, major generators connected to the transmission network only have to pay 'shallow' charges, the costs of any major transmission upgrades being recovered through charges on all major generators. There is therefore a significant inconsistency in the way in which Ofgem treats embedded generators compared to network generators. We questioned Callum McCarthy, the Director General of Ofgem, on this topic, and he was visibly surprised when our understanding of the situation was confirmed.[142] It is also worth noting that distribution network operators (DNOs) do not currently have any financial incentives to connect embedded generators. Ofgem will need to ensure that such incentives are incorporated within the next price review.

98. Ofgem is also proposing to introduce some form of proximity charging, whereby generators will pay more the further they are from population centres.[143] Yet if the UK is to meet its renewables targets, there will need to be a major increase in the deployment of wind generators, and many of the best sites will be in Scotland and Wales—relatively far from major population centres. We therefore find the timing of Ofgem's proposals somewhat ironic. It is a specific example of the failure to mainstream environmental objectives.

99. Ofgem's current approach to the issue of embedded generation is inadequate, especially in the light of the need to provide far greater incentives for embedded generation. At present, the playing field is not even level: it is tilted against renewables.

Network issues

100. The extent to which existing networks can cope with high levels of embedded generation is uncertain. Ofgem suggested that one of the reasons for a cautious approach was the need to avoid the difficulties which Denmark was now facing due to the inability to control wind generation where supply exceeded demand. Such an argument is unconvincing with regard to the UK. There is widespread agreement—including agreement by the system operator, NGC—that levels of up to 20 per cent embedded generation will not give rise to any significant network problems as the effects are masked by other system variables.[144] Given the current UK level of renewable generation, it will be a long while before we can expect to reach such levels.

101. With regard to the situation in Denmark, we found no evidence that the development of wind power was being seriously constrained by network management issues. We note that wind generation already provides 18 per cent of total electricity supplies. This is expected to increase to about 22 per cent by 2003 with the development of two large offshore wind farms in addition to those already in place. Together with other forms of renewables, Denmark has already exceeded its domestic targets, and is well on course to meet its EU indicative target of 29 per cent electricity from renewables by 2010.[145] In the light of these developments and changing political priorities, the new Government is planning to reduce the level of price support for wind, and this initially created some doubt about the future of three further offshore wind farms which were planned. However, the Danish Government appears keen to negotiate a level of reduced support which will allow these to go ahead.[146] In any event, we would not be surprised if Denmark were to lead in developing more advanced network management technologies which, together with future advances in large scale electricity storage, are likely to overcome any problems it is currently facing.

102. We accept that more intelligent network systems to regulate distributed generation will be required to achieve levels of embedded generation over 20 per cent. In addition, if much of our renewable energy is to be provided by large offshore wind farms—for example, off the coast of Scotland—significant investment in both local and national networks will be needed. The Energy Minister, Brian Wilson, initiated a study on the feasibility and costs of a West Coast inter-connector. But the Government will need to go further than this and develop a strategic approach to the nature of the investment which is needed and how it is to be financed.

The role of Ofgem

103. Ofgem plays a key role in many aspects of energy policy. It operates and regulates two systems of trading certificates (the Climate Change Levy Exemption Certificates and the Renewables Obligation Certificates). It is involved in approving NFFO projects, including current applications to transfer them to other locations. It was primarily responsible for developing and implementing NETA, and plays a key role in regulating trading arrangements. It is responsible for network management and charging through its five yearly review process. It has similar responsibilities for gas. We were told by Ofgem that it issues about a 100 documents a year—roughly an equal mix of consultations and decisions. We are at a loss as to how smaller independent generating firms can assimilate and comment on, where appropriate, such a large volume of material.

104. We asked Ofgem to respond to a number of questions about their remit and the priority accorded to environmental objectives. Despite their response, we remain unclear about the interpretation Ofgem places on key aspects of their remit—in particular their understanding of 'the interests of the consumer' and the need to take account of the interests of 'future customers'. It appears to us that there is some scope for Ofgem to interpret such phrases in a manner which gives greater weight to environmental objectives.[147]

105. We note that the intention of the House when discussing the Utilities Bill was that it would enable Ofgem to harmonise its approach with that of the Government.[148] We have already highlighted above some areas where Ofgem's approach seems to be at variance. Ofgem indicated in their supplementary memorandum that, had statutory guidance been issued, they would have taken specific action to consider its impact on their policies; and that, in its absence, they have not done so.[149] We note that the DTI has now, almost exactly one year after the draft guidance was issued for consultation, laid before Parliament the Social and Environmental Guidance. We are concerned that the Government has delayed for so long, and find it curious that it should choose to issue it now—before it has completed its consultation on energy policy. We are also disappointed that it does not appear to have published the results of its consultation on the draft guidance, and that the extent of the changes to the earlier draft are very limited.

106. In any case, we consider that statutory guidance to Ofgem is unlikely to be sufficient. The PIU Review recommends a new DTI objective which, if adopted, will place overriding importance on environmental objectives.[150] In the light of the evidence it gave to us, it is difficult to see how Ofgem can accommodate such an approach given its present statutory remit. The PIU Review also highlights the likelihood of further legislative Government interventions in the energy sector which would increase the difficulties the regulator faces. Ofgem's duties under the Utilities Act should therefore be amended to incorporate as a primary objective the need to promote sustainable development. Such an approach would harmonise with previous recommendations which we made in relation to Ofwat.[151]

107. More generally, Ofgem's approach to renewables and embedded generation issues places great importance on putting in place a regulatory framework in which 'renewables are not disadvantaged'—a phrase frequently used by Ofgem. Given that renewables constitute such a small proportion of existing generating capacity, we think there is a need to put in place short­term arrangements which provide positive encouragement for renewables.[152]

87   The DTI is the planning authority for all applications over 50MW in Wales. The first such application for a wind farm at Cefn Croes was approved earlier this year. For evidence on the problems of gaining planning approvals in Wales, see QQ 48-50, QQ 189-193, Ev 42. Back

88   Ev 186. Back

89   Ev 288ff.  Back

90   See NPPG6, Renewable Energy Development, (2000) and PAN45, Renewable Energy Technologies (2002) at www.scotland.gov.uk/planning. Back

91   Scottish Executive, Development Department Research Finding No. 93, Public Attitudes Towards Wind Farms in Scotland (2000). Back

92   PIU Energy Review, para 10.5. Back

93   Ev 185, 290. Back

94   Ev 185ff. Back

95   The table is based on our analysis of unpublished data provided by the MoD. Back

96   DTI, Regional Renewable Energy Assessments: Oxera Environmental, February 2002. Back

97   Ibid. pii. Back

98   See para 57. Back

99   Eg the RPA. See EV 68-69. Back

100   Ev 284ff.  Back

101   Ev 309-310. Back

102   Many of the memoranda we received raised issues relating to NETA. The PIU Energy Review also concluded that NETA was a major barrier to the development of renewables. See PIU Energy Review, para 7.66ff. Back

103   Ofgem, Report to the DTI on the Review of the Initial Impact of NETA and Smaller Generators, August 2001. Back

104   DTI, Government Response to the Consultation on NETA and smaller Generators (April, 2002). Back

105   Q 440. Back

106   DTI press release, 8 October 1998. Back

107   Report to the DTI of the Consolidation Working roup, February 2002. Back

108   Q 493. Back

109   PIU Energy Review, para 7.67. Back

110   Q 440. See also DTI, Government Response to the consultation on NETA and Smaller generators, April 2002, para 103. Back

111   DEFRA, CHP Strategy para 3.9. Back

112   Power UK, April 2002, editorial. Back

113   Government Response to the Consultation on NETA and Smaller Generators, April 2002. Back

114   PIU Making More with Less p31. Back

115   Ev 227. Back

116   European Environment Agency, Energy and the Environment in the EU, May 2002. Back

117   Seventh Report from the Environment Audit Committee, Session 199902000, Water Prices and the Environment, HC 597. Back

118   Ev 227. Back

119   Cf comments of Dr Dieter Helm, The Utilities Journal, March 2002, 28. Back

120   DTI. Energy Trends, March 2002, p33 and p39. Back

121   DTI, EP 68, p7, para 10. Back

122   ENDS March 2002, Rise in emissions threatens C0₂ target. Back

123   Power UK, April 2002, p18-20. Back

124   Q 497ff and EV 129, para 38. Back

125   Ev 103-104. Back

126   Ev 177. Back

127   Ev 107-108. Back

128   DTI, The Renewables Obligation Preliminary Consultation, para 2.11. Back

129   See para 46. Back

130   Ev 28, para 16. Back

131   Q 209 and Ev 69. Back

132   DTI, The Renewables Obligation Preliminary Consultation; Analysis of the Responses, March 2001, p1,11. Back

133   Second Report from the Environmental Audit Committee, Session 2000-01, Pre-Budget Report 2001: A New Agenda? , HC 363, paras 59-63 and Table 2. Back

134   Ev 70-71, Ev 75. Back

135   Ofgem, Response to the Embedded Generation Working Group Report, April 2001. Back

136   PIU Energy Review, para 7.135. Back

137   Ofgem, Response to the Embedded Generation Working Group Report, April 2001, para 2.7-2.8. See also Ev 256ff. Back

138   Q 430. Back

139   Ev 128, para 30. Back

140   MicroGen response to Ofgem consultation on Distributed Generation (released 26 March 2002). MicroGen is part of the British Gas Group.  Back

141   Ofgem, Distributed Generation: Price Controls, Incentives and Connection Charging, March 2002. Back

142   QQ 534-536. Back

143   QQ 538-547. Back

144   Ev 74-75. Back

145   Danish Wind Industry Association, press release, 5 March 2002. Back

146   Reuters, 18 June 2002. Back

147   QQ 447-449, Ev 253-254. See also Mr Wilson's comments at QQ 430-433. Back

148   Q 470. Back

149   Ev 254, para 3.1. Back

150   PIU Energy Review, para 3.37.  Back

151   Seventh Report from the Environmental Audit Committee, Session 1999-2000, Water Prices and the Environment, HC 597, para 220. Back

152   Cf the recommendation of the PIU Energy Review, para 7.67. Back