26. During the period of consultation leading up to the PIU report, one of the major issues was the size of the 2020 target which should be set for renewables. Indeed, the PIU review itself referred to this debate and whether it would be more appropriate to set a more ambitious target of 30% or a more conservative target of 20%.[36] It finally recommended the latter,[37] and the EAC endorsed this as a realistic approach. However, the Energy White Paper does not set an explicit target for renewables for 2020, stating only that "our aspiration is by 2020 to double renewables' share of electricity". [38]

27. The Energy Minister expressed some scepticism about the value of setting too many targets.[39] Notwithstanding his comments, we consider targets to be a vital aspect of any serious strategy—as indeed demonstrated by the seriousness with which both departments and the Treasury view those targets contained in Public Service Agreements. While there is a reference to the 20% carbon reduction target in the PSAs of both the DTI and DEFRA, in the DTI PSA it is appended to a target to ensure that the UK ranks in the top 3 most competitive energy markets in the EU and G7. In addition, the wording refers only to "moving towards" a 20% reduction.[40] Error! Not a valid bookmark self-reference. It should also incorporate the 20% renewables aspiration as a target in both Public Service Agreements.

28. The share of renewable energy which energy supply companies are required to purchase will rise to 10.4% by 2010, but will remain at that level until 2027. However, a rising profile after 2010 will be essential if financial markets are to have sufficient confidence to invest extensively in renewable projects. We are astonished that the Government has not taken the opportunity to build higher targets into the Renewables Obligation. The failure of the Government to do so is likely to dampen investment in these technologies by creating greater uncertainty about the Government's longer term intentions. This will also affect progress towards even the 2010 target.

29. The Energy Minister considered that it would be unwise to set statutory targets under the Obligation too far ahead—given the uncertainties arising from, for example, the development of the EU Emissions Trading Scheme (due to begin in 2005). He did, however, express some enthusiasm for the possibility of a rolling incremental target, a suggestion also made by others.[41] We can understand the Minister's concern in the light of evidence that the EU ETS may conflict with a number of UK policies and necessitate extensive modifications.[42] Error! Not a valid bookmark self-reference.

A portfolio of renewables?

30. While the Government has put in place a number of policy instruments to promote renewables, we remain unconvinced that this amounts to a coherent and robust strategy for achieving its objectives. The Government's approach still appears to rely too much on wind energy alone. Other forms of renewable energy—such as solar PV, biomass, and micro-CHP—will need to play a major role, and we have no confidence that sufficient incentives exist for developing them.

31. A substantial contribution from biomass, in particular, is widely seen as essential to the achievement of the renewable targets. We pointed out last year that DEFRA expected biomass to make only a limited contribution of 100 MW capacity to the 2010 target (in addition to biomass schemes undertaken under NFFO).[43] Since then, the flagship ARBRE project has gone bankrupt. We raised this with the Energy Minister and subsequently requested further information on the circumstances surrounding the bankruptcy and the steps being taken to rescue the project.[44]

32. The DTI expressed the hope that ARBRE will be brought into full commercial operation soon under new ownership. But the average price for gasification contracts under NFFO-3 was 8.65p/kWh.[45] If ARBRE did not prove economic at that price, it would certainly not be economic under the Renewables Obligation. The failure of the project therefore raises substantial concerns about the adequacy of the Renewables Obligation as the main vehicle for stimulating technologies which are less economically competitive than wind. It also raises questions about the role of capital funding. Despite the impression that significant amounts of capital grants are apparently available for biomass, ARBRE still failed and we note that no capital grants for bioenergy were apparently available in 2002-03.[46]

33. A similar situation exists with solar PV. We note that the Government committed itself in February 2001 to achieve a solar PV demonstration programme in line with those of our major competitors.[47] However, the current programme is worth only £20 million over three years and is forecast to deliver only 3500 roofs and 9MWp by 2005.[48] This contrasts with Japan, which had achieved 400 MWp by 2001, and Germany, which had achieved 200 MWp by 2002.[49] We noted the comment made by Solar Century that, in just one month (April 2001) more applications were approved under the German programme than the predicted total for the entire three year UK Major Demonstration Programme.[50] We welcomed the Minister's assurance that there would not be a funding gap after the three year Major Demonstration Programme.[51] However, the White Paper does nothing to help realise the Government's aspiration of rivalling our competitors' solar PV programmes.

34. The Government does not have a strategy for other renewables, including biomass and solar photo-voltaic, which adequately reflects the massive challenge posed by the objectives set out in the White Paper. In our view, this partly stems from the approach adopted by the Government in developing the Renewables Obligation as a "one-size fits all" incentive. The development of an implementation plan for renewables will provide an opportunity for the Government to set out how it intends to achieve its aspirations.

35. Planning still remains a substantial obstacle and we raised this issue with the Energy Minister.[52] We are glad to see further support from the parliamentary Renewable and Sustainable Energy Group (PRASEG) for our recommendation that there should now be a presumption in favour of renewables.[53] However, it is disappointing that there has been so much delay in issuing revised planning guidance on renewables (formerly PPG 22). We urge the Government to publish it as soon as possible. The Office of the Deputy Prime Minister (ODPM) should also consider what other measures need to be taken to supplement this guidance. These could include, for example, more comprehensive training for planning officers on renewable energy and the Government's strategy.

Energy Efficiency

Energy efficiency targets

36. The second major pillar of the Government's energy strategy is the emphasis placed on energy efficiency and the need to achieve a step-change in the annual rate of improvement here. We welcome this emphasis, as also we welcome the specific initiatives—including the promise to bring forward the revision of building regulations, and the commitments on industrial and consumer appliances, and on greening government operations. However, the White Paper contains relatively little in the way of radical new policy initiatives, while some of the measures it does contain—such as the review of building regulations—will only have a limited effect.

37. While we accept that there have been substantial improvements in energy efficiency in the UK over the last 30 years, to achieve the aspirations set out in the White Paper will require a step-change in the rate of improvement. Energy use will need to be decoupled still more from the overall growth in the economy, and absolute reductions year on year may be required. We are concerned that DEFRA could not point to any examples where this had been achieved, but we note the point made that the countries which had done best were those where the price of energy was high.[54] We trust that the implementation plan for energy efficiency will clarify how the required level of decoupling can be achieved.

38. The Energy White Paper does not include clear and specific targets for 2010 and 2020, though we do note the point made by DEFRA that the level of savings suggested was broadly similar to the 20% target for 2010 suggested by the PIU.[55] We are also concerned about the absence of sectoral targets, and asked the Energy Minister whether the table on page 33 of the White Paper represented targets. We noted with some surprise the confusion which ensued—with Brian Wilson first of all acknowledging that these were indeed targets, only to be corrected by a supporting official who pointed out that there was a typographical error in the printed copies of the White Paper.[56]

39. We are particularly concerned about the absence of targets for energy efficiency.[57] Given the importance of energy efficiency in a future energy strategy, the Government must include a clear overall target and specific sectoral targets within the energy efficiency implementation plan which it is developing.

Combined Heat and Power (CHP)

40. CHP offers significant gains in efficiency over traditional power generation by exploiting the heat produced which is usually wasted. Efficiencies of up to 80% can be achieved in contrast to the 40-50% which is normally associated with power generators. However, most modern CHP is gas-driven and its economic viability varies with the changes in the relative price of gas and electricity. For the last few years, falling electricity prices combined with higher gas prices have rendered most CHP uneconomic in purely commercial terms—despite its environmental benefits. As we noted in our Sustainable Energy report, this has had dire consequences on the industry—with major CHP developers axing or attempting to sell their development teams and businesses.

41. Furthermore, there is genuine concern in the industry that not only are CHP developments not going ahead, but that projects originally involving CHP schemes are in fact going ahead on a non-CHP basis. Supplementary information provided to us by the DTI suggested that, apart from the huge Conoco scheme, there is virtually no current interest in developing schemes: those cited by the DTI in their memorandum involve contracts signed several years ago when market conditions were very different.[58]

42. The Government has a long-standing target of 10GWe from CHP by 2010. Current installed capacity is about 4.7GWe. DEFRA is responsible for energy efficiency, and it released a draft CHP strategy last year which estimated on the basis of modelling work undertaken that the Government would reach nearly 10 GWe on the basis of present policies.[59] However, the CHP industry considers the Government's figures a flight of fantasy based on fundamentally flawed assumptions. We note that, in the face of such hostile criticism, DEFRA has agreed to work with the industry to reconsider its future forecasts and the assumptions on which they are based.[60]

43. The White Paper offers relatively little new for CHP other than the commitment that planning involving power generation must show that it has taken into account the possibilities of CHP. The Government's attitude seems to be that the current difficulties of CHP are due to market conditions, and that these will change for the better in due course. What this means in practice is that the Government expects an increase in energy prices to save the industry.[61] Yet this flies entirely in the face of its desire to maintain low energy prices, and indeed reduce them, due to concerns about fuel poverty and international competitiveness.

44. We are disappointed that the White Paper did not do more to promote the development of CHP. The Government's modelling of future CHP growth appears unrealistic, and we look forward to the results of further work in this area which DEFRA are undertaking in conjunction with the industry. We urge the Government to take into account the comments made on its draft CHP strategy and publish a final strategy as soon as possible.

Micro-CHP

45. Micro-CHP represents a further development of CHP whereby small domestic boilers will provide both heat and residual power. While the power generation capacity may not be enough for peak domestic loads, it would generally be more than enough for off-peak and could therefore supply power to the local network. Micro-CHP could deliver very significant savings in the order of 1.5 tonnes of CO₂ per household, and was identified by the PIU as one of the most promising ways of addressing fuel poverty in those homes which are hardest to heat.[62] We also note that micro-CHP will complement larger CHP schemes very well, with micro-CHP being particularly suitable for lower density housing.

46. In view of the large contribution which micro-CHP can make towards reducing both fuel poverty and carbon emissions, we are particularly surprised that the Government is not doing more to help promote rapid take-up of this technology. Take-up will depend on the extent to which the DTI and Ofgem overcome various barriers—including the provision of sufficient training to enable suppliers, when installing micro-CHP in domestic homes, to deal with both gas and electricity connections at the same time. It will also depend on the extent of Government support in order to trial the technology more extensively and bring about further cost reductions through mass production. The White Paper offers nothing to overcome such difficulties: the Government's approach here appears to be characterised by a marked lack of urgency.

47. One specific measure the Government could undertake is to reduce the rate of VAT on micro-CHP boilers. The position of the Treasury on this is reflected in a written response to those Members of the House who wrote to it on the topic of VAT. The Treasury appears to acknowledge that it is perfectly possible to reduce the rate of VAT on micro-CHP boilers but that it is not going to do so as it does not consider that this would constitute an energy saving measure.[63] We find this approach extraordinary. We recommend that the Treasury re-examines as soon as possible the possibility of introducing a reduced rate of VAT for micro-CHP.

37   The Energy Review, February 2002, Strategy Unit (Cabinet Office), paragraph 7.63. Back

38   The Energy White Paper, paragraph 4.11. Back

39   Ev5, Q21. Back

40   Spending Review 2002, Public Service Agreements White Paper. chapters 12-13.  Back

41   Ev10, Q66. Ev5, Q21, Q33. A rolling target was also suggested by the Renewable Power Association-see Ev89. Back

42   Back to the Drawing Board? SPRU (Sussex University), January 2003. Back

43   EAC, A Sustainable Energy Strategy? Renewables and the PIU Review, HC 582-I of session 2001-02, paragraph 57. Back

44   Ev6 QQ35, 36. See Ev18 for DTI's supplementary note on ARBRE. Back

45   Ev18. Back

46   Ev17. Back

47   Opportunities for all in a World of Change, DTI 2001. Back

48   The Energy White Paper, paragraph 4.56 Back

49   Ev103-104. Back

50   Ibid. Back

51   Ev7, Q46. Back

52   Ev2, QQ6-9. Ev6, QQ 40-45.  Back

53   PRASEG press release dated 8 July 2003.  Back

54   Ev10, QQ 66-77. Back

55   Ev9, Q62. Back

56   Ev9, QQ 61-62. Back

57   See also Ev20, response to question 15. Back

58   Ev15-16. Back

59   The Government's Strategy for Combined Heat and Power to 2010 - Public Consultation Draft, DEFRA, May 2002., paragraphs 3.6-3.7. Back

60   The commitment was made by DEFRA officials at a CHPA seminar held on 11 March 2003. Back

61   The Energy White Paper, paragraph 4.16, states for example that "a number of proposed new [CHP] power stations, which already have planning approval, are awaiting electricity price rises and/or gas price reductions before they go ahead." Back

62   The Energy Review, February 2002, Strategy Unit (Cabinet Office), paragraph 7.113. See also Ev53. Back

63   Letter from John Healey MP to Joan Walley MP dated 10 February 2003. The wording used is as follows: "A reduced rate is potentially available in these circumstances, but we have always made clear that our current policy is to restrict the relief to the installation of materials whose primary purpose is to save energy." Back