25 July 2012
Today my department is publishing the Government’s decision on the levels of financial support that will be available through the Renewables Obligation (RO) for large-scale renewable electricity generators from 2013-17. This follows a comprehensive, rigorous and evidence-based review of RO subsidies carried out over the last 18 months. We received nearly 4,000 consultation responses and substantial amounts of new evidence from a wide range of stakeholders as part of a public consultation process. We would like to take this opportunity to thank all those who submitted formal responses or took part in the review in other ways.
The UK needs a strong renewable energy sector. Renewable energy generation is a crucially important low carbon technology with a central role to play in helping us reach our carbon emission reduction goals. It is also essential to our economic growth and energy security. It reduces our reliance on imported fossil fuels, helps keep the lights on and our energy bills down. We have some of the best renewable resources anywhere in the world, and the Government is absolutely determined that the UK will retain its reputation as one of the best places to invest in renewables. We have also legally committed to ensure that 15 per cent of our energy will come from renewable sources by 2020.
Since 2002, the RO has been the mainstay of support for large-scale renewable electricity industry. It has helped to bring about a five-fold increase in renewable electricity generation, from 1.8 per cent of total electricity generation in 2002 to 9.7 per cent by the end of 2011. By the end of the first quarter of this year, renewable electricity capacity totalled 13GW, which is a 36 per cent increase on the same time last year. Since April 2011 alone, industry has announced over £11.3bn of investment in the renewables sector, potentially supporting around 22,000 jobs up and down the country, contributing to the Coalition Government’s objective to rebalance the economy and support economic growth. The changes in RO support levels that we are setting out today recognise the key role of renewables in the UK’s future and will maintain that momentum.
The Government’s decision provides certainty for developers and will ensure continuity of support as we transition towards the new Contracts for Difference to be introduced as part of our Electricity Market Reforms. It will help unlock generation and network capital investments worth around £20-25 billion in today’s prices in the period 2013-17, and deliver the kind of sustainable, long term growth and green jobs that we need to get the economy moving again.
Future support levels
It is not the Government’s policy to support renewables at any price. Our ultimate aim is for renewables to become competitive without the need for subsidy. Today’s package sends a strong signal to industry that we expect this to happen over time. To get this moving in the right direction, we are reducing support where it can be done while bringing on the deployment that we need from key technologies, such as offshore and onshore wind, to achieve our aims.
The level of support for offshore wind will be set at 2 ROCs/MWh in 2014-15, reducing to 1.9 ROCs in 2015-16 and to 1.8 ROCs 2016-17. This is consistent with our consultation proposals, and reflects our expectation that the costs of offshore wind will fall as mass deployment takes place and industry innovates. We are already working closely with key representatives from industry to reduce costs. The UK has some of the best offshore wind resources in the world and these will be key to the UK meeting its low carbon objectives. The new support levels will ensure that the UK remains its position as the leading location in the world for offshore wind deployment.
We can confirm that the level of support for onshore wind for the Banding Review period will be reduced to 0.9 ROCs, guaranteed until at least March 2014. However, we will undertake a call for evidence, starting in September and reporting in early 2013, which will re-assess onshore wind industry costs. If findings of the call for evidence identify a significant change in generation costs, the Government will initiate an immediate review of onshore wind ROC levels, with any new support arrangements for onshore wind taking effect from April 2014. Given the importance of maintaining investor confidence there will be full grandfathering and grace periods for projects already committed. As part of the call for evidence, we will examine how communities can have more of a say over and receive greater economic benefit from hosting onshore wind farms.
At the same time we are providing appropriate support for innovative technologies that can play a long term role in our energy future, such as energy from wave and tidal stream technologies and innovative processes for generating electricity from waste, such as Advanced Conversion Technologies.
The support levels we are announcing will keep us on track to meet our legally binding 2020 renewable target, delivering around 79TWh of renewable electricity each year by 2016-17. The detailed changes are set out in the Government Response to the consultation, copies of which are available in the Library and on DECC’s website.
The RO is paid for by consumers through their energy bills. For that reason, delivering the best possible deal for consumers has been at the heart of the RO banding review. In considering the final shape of the banding package, we have focused on the need to balance cost-effectiveness with the range of objectives that the RO must deliver. As we have sought to take account of the need to contribute to long-term energy security, to keep us on track to meet our carbon reduction objectives for the coming decades and act to drive investment in the UK renewable energy sector, this package reduces the lifetime subsidy cost of the Renewables Obligation per MWh of renewable electricity generated, by 11 per cent compared to current bands.
These proposals cost around £900mn less than implementing the consultation bands while driving a similar level of deployment. So, delivering more clean power at less cost to consumers. They will also will cut the cost of consumers’ energy bills by £6 next year and £5 in 2014/15 compared to the current subsidy regime, a total of £11 across the remainder of this Parliament. There will be a modest increase in bills of around £3 by the end of the banding review period as greater levels of generation come forward.
There are a small number of areas where we need to consult and re-engage with industry and wider stakeholders to ensure we have precisely the right evidence to fully implement our proposals. We will be consulting again shortly on the level of subsidy for large-scale solar PV generation. Analysis of the new evidence gathered as part of the separate comprehensive review of the Feed-in-Tariff scheme suggests that RO support rates should be set significantly lower than was proposed in the consultation. Because such a reduction in support would represent a significant departure from the consultation proposals and would be based largely on new evidence which was not published until the RO consultation had closed, we consider that it is appropriate to re-consult on this issue.
The consultation evidence also revealed greater interest in biomass generation. We will be consulting soon on a monitoring and review process for biomass co-firing and conversions to ensure effective cost control, and on a supplier cap for dedicated biomass generation.
Subject to Parliamentary and State Aid approval, the new subsidy levels will come into effect on 1 April 2013.
The Government has today also announced the introduction of a £500m field allowance for large shallow-water gas fields, to secure investment in marginal gas fields in the UK Continental Shelf.
Gas is currently the most important primary fuel in the UK, powering industrial processes, domestic and commercial heating and electricity generation. It is a lower carbon fuel relative to the current mix and will play an increasingly important and evolving role in helping the UK move towards a low-carbon future as coal power stations are closed.
We see gas continuing to play an important part in the energy mix well into and beyond 2030, while meeting our carbon budgets. Through the 2020s, and beyond if gas proves cheap, we expect it to continue to play a key role ensuring that we have sufficient capacity both to meet everyday demand and complementing an increasing amount of relatively intermittent and inflexible generation. We do not expect the role of gas to be restricted to providing back up to renewables, and in the longer term we see an important role for gas with CCS. The Gas Generation Strategy that we will publish in the Autumn will set out in more detail the role that gas generation will play and what Government will do to enable this.
We are committed to making the best use of UK energy reserves, including the proper development of unconventional gas subject to the appropriate safeguards being in place. This will help ensure that the UK gas market continues to play a key role as an important European gas hub which in turn promotes diversity of gas supply to the UK and Europe. We are committed to ensuring that if gas prices fall UK families and businesses will be able to benefit from lower bills. To meet these demands, we also need investment in UK gas supply infrastructure, including pipelines and potentially more storage, to ensure increased flexibility to respond to greater demand variability. We will be providing more detail on how we will ensure that investment in the development of our gas reserves, gas infrastructure, and gas generation plant takes place in the autumn.