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Renewable Energy in the United Kingdom

About The Author

Former Author (Assistant Editor)

Author is a King's College London Law graduate, currently working as a corporate paralegal for a firm based in South West England. Author is due to begin his BPTC at the University of Law in September 2015, having attained a scholarship from Middle Temple.

Concerns have been raised following recent reports that the National Grid faces an uphill struggle to keep the lights on over this winter as society becomes increasingly reliant upon electrical devices and damage to some of our largest power stations. Five of the major power stations, including four nuclear reactors owned and operated by EDF, which usually produce 4.3 gigawatts of power, have been closed due to fires and faults, leaving a gap in the energy market. Have sufficient investments been made into energy infrastructure to protect us from these scenarios?

Renewable energy production is promoted in the United Kingdom through two major schemes, the Renewables Obligation and Feed-in-Tariffs, which incentivise the growth of clean energy on a large and small scale. This article will firstly review the current approach to energy production and supply in the UK, and secondly whether the strategies for renewable energy have been properly implemented or whether more could be done. The government is planning to make major changes to the incentives for renewable energy sources to recognise their role within the UK energy market and also remove the Renewables Obligation that currently has to be adhered to by larger energy companies. 

UK Energy Production

According to Government figures, UK energy production has fallen by at least 4% for each of the last eight years, a fall which combined with an ever-increasing demand means that the energy sector is coming under huge pressure. In 2013, the UK was a net importer of energy and petroleum products for the first time since 1973, with net imports accounting for 47% of energy used across the UK. 

This is a very worrying trend, and, understandably, the government must take action to ensure that the lights are kept on whilst causing the least environmental and societal disruption. The options laid open to the government are limited but could be bracketed into four main strategies: increase reliance upon imports, invest in nuclear power, grow the renewable energy market, or a mixture of the three.

Reliance upon external sources for energy production would be a very damaging policy to pursue, especially in light of political instability both in the Middle East and in Russia who the UK rely upon heavily for fuel imports. Reliance upon external sources for energy also means reliance upon an inefficient system whereby energy is expended to transport raw materials into the UK, such as coal, before being used in our power stations. Taken in combination with the binding obligations upon the United Kingdom to reduce carbon emissions under the EU greenhouse gases regime, a greater emphasis on imports is clearly a folly.

The Nuclear Option

One must therefore turn to the question of nuclear power. The major selling point for nuclear power is that it has a very low carbon footprint and has the potential to generate a vast amount of energy, but there is the clear detriment of creating nuclear waste that has to be dealt with and stored for several thousand years. 

Nuclear power currently accounts for about a sixth of the United Kingdom’s electricity production and this is set to continue with the construction of four new reactors at Hinkley Point, and another ten reactors around the UK currently at their planning application stage. These additional nuclear power stations are, however, necessary, as some of the older power stations are closed down having reached the end of their usable life.

One obvious problem with nuclear power is the need to properly deal with spent nuclear fuel rods, something that the government has not hitherto produced a national policy on, although a national repository has been proposed in the past and in more recent times there have been calls for a multi-national approach. The Office for Nuclear Development, established in 2008, has made clear that it will not directly support the creation of new nuclear power sources through subsidies or tax relief but is attempting to facilitate the most efficient practices for the industry whilst ensuring safety at all times. Due to the extensive time which it takes for a nuclear power station to be built and become operational, nuclear power does not represent a short-term fix for the energy needs of the United Kingdom, but current trends would indicate that its significance will increase in the long-term as our reliance on fossil fuels is reduced. 

Due to the high-energy production levels that can come from nuclear power, nuclear power represents a consistent long-term part of the energy industry for the United Kingdom as it is far less reliant upon external market forces and also has a low carbon footprint.

However, whilst the nuclear question still remains very much open for debate, and undoubtedly forms part of the solution to falling energy production, there needs to be proper scrutiny of whether we should implement a system of national regulation or storage of nuclear waste.

Green Energy

Although recent announcements from the Conservatives have cast doubt upon their long-term commitment to subsidising renewable energy, the path is clearly set to continue to increase green investment through the major sources of wind, solar and hydroelectric power. 

Taking solar energy as an example, the Solar Trade Association have noted that generation capacity from solar is approximately 4.7GW, about 10% of total energy demand, which is a rise from 2.7GW 12 months ago.

A move towards a less carbon-reliant power base is a welcome policy, as it recognises the need to address the damaging effects that are being felt due to carbon emissions. In a recent article for Keep Calm Talk Law I discussed international climate change regulation, highlighting how difficult it can be to force nations and groups of nations to commit to reducing emissions and that any policy attempts to drive change must be welcomed. A further benefit of renewable energy is its ability to create jobs and make Britain a world leader in green technology through innovative practices in power generation.

The rise in renewable energy has been down to government support both at a national and local scale, but the regime is in the process of undergoing substantial change in recognition of the fact that green technologies are not only innovative and burgeoning industries, but additionally they are self-sufficient viable options for energy capacity which should be treated as such.

The government are seeking to redefine the way in which we deal with renewable energy sources, moving away from direct subsidy where possible and removing a Renewables Obligation on energy suppliers to be replaced with a market-based alternative. It will be interesting to see whether the proposed measures will have a positive impact or if they come too soon in the development of these industries. The approach to renewable energy in the United Kingdom focuses on two major elements that shall be discussed in turn: (i) large-scale commercial installations, and (ii) individual or local small-scale projects.

Commercial Energy

Until 2014, the government followed a system of direct subsidy for renewable energy developments which produced above 5MW of energy, helping both in the costs of constructing the installation and its ongoing maintenance.

Under the existing Renewables Obligation scheme, UK electricity suppliers come under an obligation to source a certain proportion of their energy from renewable generation. Installations that meet certain criteria relating to carbon emissions are accredited and given a number of Renewables Obligation Certificates (ROCs) relative to the amount of energy produced. At the end of each year, the suppliers have to surrender a sufficient number of ROCs to meet their obligations or pay a fine equivalent to the value of the shortfall. The suppliers are then rewarded for the use of renewable sources through payments on a pro-rata basis. 

This system is due to be replaced by a market-based system of funding known as ‘contracts for difference’ whereby providers will have to apply to an allocated fund based upon how much they will plan to charge for the cost of its energy. The transition period from the Renewables Obligation to the 'contracts for difference' model is due to be completed by March 2017, and is an attempt by the government to allow renewable power generation to compete on a free market basis with traditional fossil fuel sources by driving down costs.

However, during this transitional period the government has been subject to heavy criticism from the EU Commission for a perceived anti-competitive deal with EDF. In October last year the Commission stated that the UK may be in breach of State Aid rules contained within Article 107 TFEU in relation to a subsidy proposed to fund the creation of a nuclear power plant at Hinkley Point. 

The Commission stated that the plant would have been profitable without any direct subsidy in their initial assessment but have not yet published their final report on whether such subsidy constitutes a breach of EU law. One of the major concerns raised was that the proposed deal sought to provide a price guarantee for the energy produced by the plant, which goes completely against the free market principles that are to be introduced through ‘contracts for difference’. By allowing such a major energy provider to fix their price at a rate that is higher than commercial levels whilst also supporting the construction of the plant, serious doubts were raised by the Commission as to whether it should be permitted to go ahead.

The Commission are yet to produce a final report on this matter, but I sincerely hope that this financial support will be either removed entirely or substantially reduced to prevent a substantive unfairness that could destabilise the short to medium-term prospects of the energy market.

Contracts for Difference

Despite the concerns raised above about the transitional arrangements before the full implementation of contracts for difference, the scheme is unlikely to be challenged as it does represent a viable market for renewable energy that will promote a drive for more efficient energy production.

The ‘contracts for difference’ fund is divided into ‘established’ and ‘less established’ technologies, with £50 million and £155 million available respectively. The list of ‘established’ technologies includes onshore wind, solar, energy-from-waste and hydroelectric power. A total pot of £50 million for all of these industries does seem to be a particularly low sum if we are to see meaningful growth in these areas to make up for any shortfall in energy production through traditional carbon sources.

This market-based system accords with the UK free-market economic principles and follows the lead of other market-based systems that are in place across the EU, such as the extremely successful emissions trading scheme. This solution could be a beneficial step for the renewables industry as it is formal recognition that it has become a viable alternative to carbon-reliant energy production, and, more importantly, this change comes at the same time as renewed support is provided for minor installations. As with any scheme of this sort, though, the scheme relies upon there being sufficient competition within the market to drive the cost of energy down, and it will be interesting to note whether there will be enough new entrants to market with this system. One of the other problems with a focus on driving down cost in the renewables market whilst removing subsidies is that large infrastructure projects may go untouched, such as the oft-mooted tidal barrage of the River Severn

Some have raised doubts about the new system; it has been claimed by solar companies that the overall process is complex and off-putting. This has the effect of destabilising the long-term profitability of renewable energy generation and may impact upon the willingness of potential investors to get involved in the scheme. The benefit to consumers of the government approach is clear, increased competition between renewable and non-renewable energy production will drive down prices across the market, but if new installations are to be built entirely or almost entirely from private sources, there must be enough profit available to attract investors.

Grass-roots Green Energy

In combination with an altered approach to large-scale renewable energy developments, the government have noted that they will increase support for individuals and local schemes through the Feed In Tariff (FIT) regime as well as continuing Green Deal funding

The FIT regime is a system of payment by the government on two rates: a generation tariff and an export tariff. Taking solar again as an example, those installations of 4kW or less (the capacity of a typical family dwelling in England) receive a generation tariff of 13.88p/kWh provided that the house where the panels are situated meets certain environmental performance criteria under the EPC regime. The export tariffs are engaged when the energy being generated by these small-scale sites produces more than is required at source, at which point the national grid siphons off the excess to be used across the UK. This has the dual effect of providing a boon to national power supply as well as providing a direct economic benefit to individuals or the local area for investing in green energy.

Renewable energy schemes can also benefit from government funding through the Green Deal, which is a financing mechanism that pays for energy-efficiency improvements, and in Scotland there is the additional renewables loan scheme. This is an interest free loan from the Scottish Government that covers up to 75% of the cost of the installation, up to a maximum of £2,500. According to a Guardian report in June 2014, the above schemes have led to a major rise in solar energy production, with 530,000 installations across the UK currently in operation, 510,000 of these being small-scale domestic projects.

Community solar energy projects, which see communities fund an area of communal panels are now permitted to have a capacity of 10MW whilst remaining eligible for the FIT payments, and those who install the panels on the roofs of their homes will be paid a greater rate than ground-based installations. 

Conclusions

The UK strategy on energy is entering a new phase, with the government noting the benefits of renewable technologies whilst ensuring that they need to be taken seriously as a self-sufficient industry. The Renewables Obligation system of direct subsidy has undoubtedly served its purpose, it has ensured that sufficient investment has been made in developing more efficient energy production, but it has been determined that the time has come for the industry to start standing on its own two feet. The recent Commission statement regarding the relationship with EDF highlights that the system of direct subsidy may have even been maintained for too long, with the government too willing to accept requests for funding when they were not commercially required. 

The revelations of a potential payment of £17.6bn to EDF fuels the need for there to be change to the pattern of investment in energy in the UK; it will be interesting to see whether the competitive practices that are encouraged through the contracts for difference regime will in fact be taken on by energy suppliers.

There is a need to increase spending on our energy infrastructure, not only in the short-term but looking further into the future too. The government should shoulder some of the blame for not incentivising private investment sufficiently or making up the inevitable shortfall during the economic uncertainty of the mid-to-late 2000s. But private companies can also take blame for valuing short-term gains through government subsidy rather than acting in the best interests of the long-term viability of the energy infrastructure of the UK.

Nevertheless, the developments that have been made to promote the use and development of renewable energy should be applauded and used as a catalyst to spur increased investment on these viable alternatives to carbon-based energy production that have such a devastating effect on our environment.

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Tagged: Commercial Law, Environmental Law

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