Connecting the Future - Greenpeace UK

Connecting the future: 

the UK’s renewable 

energy strategy 

A report by Dr Bridget Woodman 

of the University of Exeter 

Commissioned by Greenpeace 

www.greenpeace.org.uk 

Canonbury Villas London N1 2PN 

+44 (0)20 7865 8100 

September 2008

Connecting the future: the UK’s renewable energy strategy 

 

FOREWORD 

INTRODUCTION 

1. ENERGY SYSTEMS 

1.1 The international context 

1.1.1 Germany 

1.1.2 Spain 

1.1.3 Conclusions: the international context 

2. UK TARGETS AND POLICY DELIVERY 

3. REDUCING ENERGY INTENSITY: EFFICIENCY AND DEMAND 

3.1 Business and industry 

3.1.1 Emissions trading 

3.1.2 Climate Change Levy and Climate Change Agreements 

3.1.3 Carbon Reduction Commitment 

3.1.4 Other measures 

3.2 Domestic energy efficiency and demand reduction 

3.2.1 Energy Efficiency Commitment and Carbon Emission Reduction Target 

3.2.3 Building regulations, Zero Carbon Homes and the Code for 

Sustainable Homes 


3.3 Conclusions: reducing energy intensity 

4. SUSTAINABLE ENERGY SYSTEMS 

4.1 Low-carbon electricity 

4.1.1 Renewables 

4.1.2 Green tariffs 

4.1.3 Microgeneration and the Low Carbon Buildings Programme 

4.2 Addressing heat 

4.2.1 Combined heat and power 

4.2.2 Biomass strategy 

4.3 Conclusions: sustainable energy systems 

5. BROADER SYSTEM ISSUES 

5.1 Planning 

5.2 Infrastructure 

5.3 Regulation and market design 

5.4 Social and institutional inertia 

5.5 Conclusions: broader system issues 

CONCLUSIONS 

REFERENCES 

GLOSSARY OF ACRONYMS 

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Cover: the ‘Arena’ concert hall in Berlin, Germany has a 

photovoltaic roof which supplies energy for floodlighting. 

©Langrock/Zenit/Greenpeace


Foreword 

 

Foreword 

Back in the summer of 2005 – just before the G8 summit at Gleneagles on 

climate change – Prime Minister Tony Blair brought together the world’s 

climate scientists in Exeter, to assess the latest climate science. Its conclusion? 

In order to avoid the worst effects of climate change, we need to stabilise 

global emissions within 10 years. At the end of 2007, the Intergovernmental 

Panel on Climate Change produced its latest assessment of the state of the 

world’s climate, broadly confirming the findings of the Exeter Conference. 

At the beginning of August this year the clock really started ticking. We now 

have just 99 months to prevent the tipping point of catastrophic climate 

change. If global emissions have not been stabilised and begun declining by 

the end of 2015, then our chances of keeping global temperature rise below 

two degrees – and therefore giving ourselves a good chance of avoiding 

catastrophic climate change – will be extremely remote. 

The need for a bold response from a nation that considers itself a world leader 

in tackling climate change has never been clearer, yet on too many fronts, 

the UK government seems intent upon repeating the mistakes of the past. 

From runways to new coal fired power stations, the government’s plans for 

resurrecting the icons that are the principle cause of climate change continue, 

despite the breadth of opposition marshalled against them. 

Within this context, the government’s consultation on a new renewable 

energy strategy for the UK stands as a promising beacon of light. After years 

of timidity and failure, this consultation shows some small but encouraging 

signs that the government might just be starting to recognise the scale of 

potential for renewable energy in the UK. The consultation proves that the 

ambitious target of generating 15% of the UK’s energy from renewable sources 

by 2020 (including electricity, heat and transport) is deliverable. It also shows 

though that in order to secure the enormous benefits this strategy could bring 

to the UK’s energy security, economy and the world’s climate, the government 

must put its money where its mouth is. 

As a contribution to the government’s consultation process, Connecting the 

future systematically catalogues the history of initiatives, obligations and 

mechanisms introduced by the Labour government over the last decade to 

encourage renewable energy in the UK, providing a comprehensive critique of 

Labour’s approach. It sets out clear recommendations for how the government 

can redress the missed opportunities over the last 10 years, and at last turn 

the UK into the renewable energy powerhouse it is so well placed to become, 

leading the world in showcasing the real solutions to the challenges of climate 

change and energy security. 

On efficiency, the report advocates a more aggressive demand reduction 

strategy as a tough approach to energy efficiency. But a more proactive 

approach is required than yet more voluntary schemes for which no one


Foreword 

 

volunteers. It is time to regulate minimum standards and force manufacturers 

and builders to only design and produce smarter products, buildings and 

vehicles that use energy more effectively. 

We should also be looking closer to home, following Germany’s lead and using 

our own UK based companies for manufacturing the parts and technologies 

that we need to meet our targets. Nurturing our domestic industry would mean 

we could get parts more quickly, more easily and with more benefit to the UK 

economy. Then, like Germany, we could export our industry expertise. Right 

now, the first commercial wave farm is being assembled near Porto in Portugal, 

using wave power technology developed in Scotland. This technology could 

have been deployed in the UK market if there had been the proper support 

mechanisms in place. 

The UK has the best renewable energy resources in the European Union yet we 

are near the bottom of the European league table when it comes to exploiting 

it. In 2007 Spain installed eight times more wind capacity than the UK, 

Germany four times and France double. The government’s renewable energy 

strategy consultation could provide a blueprint for a green energy revolution 

in the UK. It could slash emissions and meet the EU Renewable Energy Target. 

And its vision could put the UK back at the leading edge of technological and 

scientific innovation. But only if the government makes good on its proposals, 

follows through on the strategy and abandons its pursuit of new runways and 

coal fired power stations that will spell the end of the UK’s reputation as a world 

leader on climate change. 

“The need for a bold 

response from a nation 

that considers itself a 

world leader in tackling 

climate change has never 

been clearer…”

Introduction 

56 Tomlinson Grove is a self sufficient zero fossil fuel energy development. 

The residential block in Bow, London is fitted with a wind turbine and solar panels. 

©Davison/Greenpeace


Introduction 

 

Introduction 

In March 2007, the UK government signed up to an agreement that commits 

the EU to providing 20% of its energy from renewable resources and reducing 

its overall energy consumption by 20% by 2020. This is one of a series of 

measures designed to reduce the EU’s CO2 emissions and thereby contribute to 

the goal of limiting global temperature rise to a maximum of 2ºC above preindustrial 

levels (see Box 1) (European Council 2007). In January 2008, the 

Commission published proposals for the different contributions to be required 

from each Member State in order for the EU as a whole to meet the renewable 

energy target: the UK’s proposed share of energy from renewable sources by 

2020 is 15% (European Commission 2008). 

In March 2007 the EU Presidency reached 

the following conclusions: 

• ‘The European Council endorses an EU objective of a 30% reduction 

in greenhouse gas emissions by 2020 compared to 1990’ 

(depending on action in other countries). 

• ‘The EU makes a firm independent commitment to achieve 

at least a 20% reduction of greenhouse gas emissions by 

2020 compared to 1990.’ 

• The Presidency adopted an energy action plan based on proposals 

from the European Commission including the following targets: 

• ‘Saving 20% of the EU’s energy consumption 

compared to projections for 2020’ 

• ‘A binding target of a 20% share of renewable 

energy in overall EU energy consumption by 2020’ 

• ‘A 10 % binding minimum target to be achieved 

by all Member States for the share of biofuels in 

overall EU transport petrol and diesel consumption 

by 2020, to be introduced in a cost efficient way’. 

The UK government has repeatedly claimed a position of international leadership in 

the climate change debate and in efforts to reduce greenhouse gas (GHG) emissions. 

The publication of the government’s Stern Review on the economics of climate 

change was heralded as an international call to action. It argues that the impact of 

climate change will be equivalent to a loss in world GDP of between 5% and 20% if 

there is no concerted action to mitigate it. It concludes that ‘the benefits of strong 

and early action far outweigh the economic costs of not acting’ (HM Treasury 

2006, p vi). The Prime Minister has recognised the urgency of acting on climate 

change, and that effective action will require commitment and decisive ‘governing


Introduction 

 

not gimmickry’ (Brown 2007); while the Prime Minister’s Strategy unit has 

acknowledged that the UK’s international position in this field is heavily dependent on 

the commitment it shows to reducing emissions at home (Strategy Unit 2007, p 45): 

‘The credibility of the UK’s international position is founded on the 

strength of its own action and domestic performance.’ 

Strong policy action, clarity of vision and delivery on targets will all be necessary to 

ensure that the UK achieves its aspiration to be a global leader on climate change. 

Despite this rhetoric of commitment and urgency, however, the Department 

of Trade and Industry (DTI) and its successor the Department of Business, 

Enterprise and Regulatory Reform (BERR) have actively sought, during 

negotiations, to minimise the UK’s contribution to the overall EU target. A memo 

leaked from BERR in 2007 showed that officials were at that time producing a 

strategy to commit the UK to sourcing only 9% of its energy from renewables 

by 2020 (BERR 2007). Even now that the proposed national levels have been 

published by the Commission, the government continues to be equivocal about 

the final allocation: instead of accepting the 15% figure on the basis of the UK’s 

relative wealth and potential for developing its ample renewable resources, the 

government views it as a ‘good starting point for discussion’ within ongoing 

Council negotiations (BERR 2008a). At the same time, the government is trying 

to minimise the impact of whatever renewable energy target is finally agreed, for 

example by proposing that carbon capture and storage (CCS) projects attached 

to fossil fuel generating plants could be counted as contributing to the national 

renewables target (European Council 2008): 

‘As a means of incentivising support for these projects, we should like 

to see these projects taken into account in assessing Member States’ 

compliance with national renewables targets. Of course CCS is not a 

renewable, but this could need to be [sic] treated as a special case …’ 

Energy technology and infrastructure assets can last for decades, so if there 

is no national commitment to putting in place as soon as possible the assets 

needed to achieve the EU’s 2020 targets, then there will be little chance of 

the UK either meeting those targets, or having sustainable energy systems for 

years to come. There would be long-term environmental and economic costs 

to missing the targets: the longer the UK takes to shift towards a low-carbon 

system, the higher the costs of action and the greater and the more greenhouse 

gases will be emitted in total before emissions start to tail off (DTI 2005). One 

reason is that delaying action to update or upgrade infrastructure will result in 

missing opportunities to do so incrementally; instead it will need to be upgraded 

or replaced rapidly at the end of the target period, which will be more expensive 

and have negative effects on the wider economy. After years of hostility 

towards measures intended to reduce emissions, even the Confederation of 

British Industry (CBI) has come round to the position that delaying action will 

lead to higher costs in the long-term, and will also mean that the UK may lose 

out on the commercial opportunities offered by an international trade in


Introduction 

 

low-carbon technologies (CBI 2007a). The long term nature of energy 

investments and the urgent need for action mean that policy which emphasises 

the short-term cost effectiveness of individual measures is misplaced: what is 

needed is a strategy for achieving sustainable energy systems in the long term. 

The absolute level of renewable energy output in 2020 will be determined by 

the extent to which measures to improve energy efficiency and reduce demand 

are effective. If such measures are successful, the level of renewable energy 

output required to meet 20% of total energy demand will be lower than if 

energy use continues to grow. The relationship between energy efficiency and 

the deployment of renewable energy technologies is therefore vital to achieving 

the UK’s EU targets. This is where a long-term, strategic policy vision is required. 

Given that the UK’s commitment to the EU targets came at the time the 

government’s 2007 energy White Paper was being drafted, the need 

to develop a strategic approach to achieving the UK’s allocated 15% 

renewables target should have led at least to a reassessment of the policies 

being developed for the White Paper, or preferably to a reworking of the 

government’s overall approach to energy systems. But the government missed 

this opportunity, and the White Paper’s target for 2020 is for all renewables to 

supply only around 5% of the UK’s energy (DTI 2007). Less than a year after 

its publication, the government is therefore having to undertake a review of its 

overall renewable energy strategy. This is due to be published in Spring 2009, 

and may need to be supported by new legislation. 

However, even the development of this strategy appears to be flawed. The European 

targets address both energy consumption and the production of energy from 

renewable sources. Instead of trying to address both these targets simultaneously 

to maximise the effectiveness of the policy approach, the government is planning to 

address them in separate consultation processes, thereby missing the opportunity to 

exploit any natural links between policy areas in order to maximise the reduction of 

energy demand and the increase in the use of renewable energy sources. 

Notwithstanding this limitation, the revised renewable energy strategy must 

usher in a new commitment to achieving large-scale deployment of renewable 

energy technologies if there is to be any chance of meeting the EU target. 

With this in mind, the aim of this report is to outline the UK’s current renewable 

and sustainable energy policies and its performance, to date, in meeting both 

domestic and international targets, and to consider ways in which both policies 

and performance can be improved upon so as to increase the likelihood of the 

UK meeting its international responsibilities.

01 

Energy systems 

Win Pro Energy technicians working in the engine house 

of a 2.3 megawatt wind turbine at a height of 94 metres. 




10 

At the moment, policy makers tend to approach energy systems in a relatively 

short-term, simplistic way: for example, the main ways of ensuring security 

of supply are to build more generating capacity, and to secure greater supplies 

of fossil fuels. This is essentially the same predict-and-provide approach 

as has created the systems we have in place today: ensuring that demand 

is always met with sufficient supply, preferably at least cost. This approach 

would be understandable if policy makers’ only concern was the immediate 

security of supply, but it is inadequate both for dealing with the environmental 

problems caused by the energy industry – particularly climate change – and for 

encouraging new, initially more costly technologies to emerge and reach their 

potential. Moreover, the predict-and-provide model is based on the assumption 

of ever-growing demand, whereas new energy policies at both the UK and 

European levels are intended to limit or even reduce overall energy consumption. 

Encouraging the emergence of low-carbon energy systems will require a more 

sophisticated, dual approach, reducing energy use through increased efficiency 

and demand reduction, while at the same time putting in place the building 

blocks for a transition to a new style of energy system based around 

low-carbon technologies. In our current, fossil fuel based energy system, 

emissions can obviously be mitigated in the first instance by reducing how much 

energy we consume, and this encourages one-off policy initiatives which are 

often very cost-effective. So, for example, the decision to phase out old style 

light bulbs between 2008 and 2011 in favour of more efficient ones should 

deliver 1.2 MtC saving a year by 2020 (DTI 2006). However, this sort of 

one-off approach will not be enough in the longer-term, as we attempt to 

make the necessary permanent shifts in energy production and consumption 

to ensure long-term adoption of sustainable low-carbon energy systems. 

Achieving a deliberate change of system over a relatively short timescale 

will require determined action from policy makers, addressing the economic, 

regulatory, institutional and social barriers to technical change in a much more 

holistic way than has so far been the case. 

Many of the new low-carbon technologies do not conform to the characteristics 

of current energy systems. Often they are small-scale, use renewable forms 

of energy and may operate intermittently. In contrast, the energy systems 

currently prevalent are largely based on fossil fuels and are overwhelmingly 

devised to deliver bulk quantities of energy or fuel in response to ever growing 

demand and to exploit economies of scale. Regulatory standards, the workings 

of the market, the operation of the transmission and distribution infrastructure, 

technical standards and other factors are designed or have evolved to 

support these characteristics. Even large-scale forms of renewable electricity 

generation, such as offshore wind, do not conform to the overall characteristics 

of the system because their output is not necessarily constant. Renewable or 

small-scale low-carbon technologies thus have to operate in a system which 

either does not support them, or is actively hostile to their deployment and use. 

On the other hand, it is important to recognise that these technologies offer 

long-term advantages over traditional energy technologies. These advantages 

are not just environmental: they also include enhanced security of supply



11 

through reduced reliance on fuel imports, and a degree of investment flexibility 

for new generating plant because of the small-scale modular nature of many 

renewables projects. 

Because of the interrelated nature of the components of current energy 

systems, mechanisms to encourage the emergence and implementation of 

new technologies cannot merely concentrate on individual aspects, such as 

offsetting their higher costs with subsidies. They must also mitigate or remove 

the wider barriers associated with the risks posed by competitive energy 

markets, technical standards designed to support current system configurations, 

and inadequate institutional arrangements for supporting new technologies and 

practices. While new technologies will ultimately have to be able to compete 

economically, the system in which they are implemented needs to be sufficiently 

supportive for them to become the logical choice for investment. 

The government does show some signs of recognising the importance of these 

broader factors in its recent policy making. So, for example, the White Paper 

acknowledges that the current transmission system disadvantages renewable 

electricity: ‘The current technical, commercial and regulatory framework 

for transmission access will need to change to facilitate the cost effective 

integration of more diverse generation technologies into the electricity system.’ 

(DTI 2007, para 5.3.75). However, this awareness has not yet been translated 

into effective policy. So, for example, a recent review of distributed generation 

acknowledges the barriers and disadvantages faced by small-scale generating 

technologies in a system designed around large-scale, centralised generation, 

but fails to suggest any significant measures to overcome the problem (DTI/ 

Ofgem 2007). This could include, for example, allowing renewable generating 

technologies priority access to the electricity networks so that their output can 

displace that from fossil fuels stations. This measure is established in several 

other European countries, and is proving an effective means of reducing the 

risk of investing in new renewable technologies by ensuring that their output 

can find a market. 

If the UK is to achieve its share of the EU renewables target, the government 

must not only rethink the policies set out in the White Paper, but also revise 

the thinking behind the White Paper, which is based on a limited understanding 

of what renewables and small-scale, more efficient generation can contribute 

to energy systems if the conditions for their deployment and operation are 

suitable. This in turn will require a shift from the current modular, piecemeal 

approach to policy making and technologies – for example, having the 

Renewables Obligation to support more renewables generation, while at the 

same time refusing to allow the technologies priority access to the networks 

– to a more strategic whole-system approach that can overcome the lock-in of 

existing technologies. Because of the long lived nature of energy investments, 

decisions made now will have implications for decades to come, so a new 

approach needs to be adopted now if there is to be any chance of achieving 

low-carbon sustainable energy systems in time to meet the twin challenges of 

climate change and energy security.



12 

1.1 The international context 

The government has stressed how ambitious the EU renewable targets are, 

and how demanding it will be to meet the UK’s allocated share. It strongly hints 

that it will seek to negotiate down the UK’s allocation on the grounds that the 

country is starting from such a low base for renewable energy (BERR 2008c). 

So it is worth considering efforts in other EU states, which could provide 

lessons on how the UK can best meet its 15% allocation. 

1.1.1 Germany 

In Germany, under the 1990 Electricity Feed Act and the 2000 Renewable 

Energy Sources Act (Erneuerbare-Energien-Gesetz, or EEG), electricity 

suppliers are required to buy renewable output and pay a set price for it. This 

guarantees both a market for renewably generated electricity, and a price 

which allows an adequate rate of return on the financial investment in the 

project. The prices are set according to which renewable technology is used, 

the year the project was built and the size of the plant. Although the tariff for a 

particular project is set for 20 years, giving the developer certainty about the 

price they will receive per unit of output, the tariffs for a technology as a class 

generally declines over time to reflect the falling costs of that technology as it is 

developed and refined. The EEG was revised in 2004 to adjust the tariffs: while 

some were raised, notably for photovoltaic installations, others fell significantly, 

including that for onshore wind energy generation, to reflect the increasing 

cost effectiveness of the technology (Held, Ragwitz et al 2007). 

The EEG set a target of achieving 12.5% renewable electricity by 2010, and 

at least 20% by 2020. The target, however, has already been achieved, with 

renewables providing 14.2% of Germany’s electricity consumption in 2007. 

The cost of supporting renewably generated energy through the EEG is put 

at €4.3 bn in 2006 (€7.7bn minus € 3.4bn for energy companies’ avoided 

costs of purchasing conventional electricity) 1 . This translates to €1 ct/kWh, or 

around €1.45/month for a typical domestic customer (BMU 2008). 

The costs of the EEG should also be weighed against the broader socioeconomic 

benefits associated with the EEG. The Federation Ministry for the 

Environment, Nature Conservation and Nuclear Safety (Bundesministerium 

für Umwelt, Naturschutz und Reaktorsicherheit, or BMU) estimates that 

employment in the renewable energy sector in Germany grew from 160,500 in 

2004 to 249,300 in 2007 (BMU 2007). Turnover from the construction and 

operation of renewable energy projects in Germany was around €24.6 billion 

in 2007, and export markets have grown strongly, with Germany achieving a 

global market share in renewable technologies of around 15% (BMU 2007). 

German policy has also encouraged the emergence of a renewable heat 

sector, with biomass plants increasingly playing a role. Biomass plants receive 

tariffs based on the specific technology and size of plant, but also the plant’s 

efficiency and the type of fuel used. The efficiency bonus is awarded if the heat 

produced by burning the biomass is also used, this has created an incentive to 

invest in heat distribution infrastructure 2 (BMU 2008). In addition, small scale 

1 

These figures do not take into 

account downward effect on 

prices caused by renewables 

displacing the more expensive 

conventional generation (known 

as the merit order effect), nor 

avoided externalities associated 

with CO2 emissions. 

2 

The bonus is paid for the 

proportion of electricity which 

correlates to the heat used. This 

is calculated by multiplying the 

amount of heat used by the 

coefficient of the installation 

(BMU 2007a)



13 

renewable heat projects in the residential sector, and small and medium sized 

businesses have been eligible for grants and loans under the Market Stimulation 

Programme (Marktanreizprogramm, or MAP). The renewable heat sector 

expanded from 3.5% in 1998 to 6.6% in 2007 (BMU 2008a). 

16 

14 

Electricity production 

(% of total gross 

electricity consumption) 

12 

10 

Heating supply (% of 

total heating supply) 

% 

8 

6 

Fuel consumption (% of 

total road transport) 

4 

2 

Share of RES in total final 

energy consumption 

0 

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 

Figure 1.1 Renewable energy share of energy consumption in Germany. 

Source BMU (2008a) 

In 1998, renewable energy provided 3.1% of total final energy consumption 

in Germany. By 2007, this had risen to 8.5% (Figure 1.1), and the German 

government has recently announced ambitious plans for further expansion 

to 2020: 25-30% of electricity consumption, 14% of heat consumption and 

6.9% of transport fuel consumption (BMU 2007b). The rationale behind these 

plans is partly to reduce CO2 emissions, but is also aimed at driving innovation 

and expanding Germany’s role in the international market for renewable energy 

technologies. 

1.1.2 Spain 

As with Germany, Spain has developed renewable energy policies shaped both 

by environmental concerns and industrial ambition. It has a target of 12.1% 

renewable energy by 2010, with renewable electricity supplying 30.3% of 

consumption. These are both challenging targets, and it appears unlikely that 

they will be met: renewables supplied 18.8% of electricity consumption in 

2006, and 6.8% of primary energy (EREC 2008). 

The likely failure to meet the 2010 targets, however, does not mean that 

the expansion of renewables in Spain in recent years is not impressive. The 

wind sector in particular has grown significantly, from 2,235MW of installed 

3 

This has led to a revision to the 

tariff offered under the feed-in 

arrangements, which in turn is 

expected to slow future growth in 

the sector slightly.



14 

capacity in 2000 to 15,145 in 2007, the strongest growth rate in Europe 

(GWEC 2008). The growth of photovoltaics is also impressive, and installed 

capacity in 2007 exceeded the target of 400 MW set for 2010 3 . Like 

Germany, Spain also has a dual requirement for priority access to the national 

grid for renewables generation, and a feed-in tariff. The design of the feed-in 

tariff, however, differs from the German model: energy suppliers can chose 

between fixed tariffs for each technology, or one which pays a premium on 

top of the market price for energy. Renewable energy suppliers can therefore 

rely on a guaranteed market and a higher price for their output than that in the 

conventional power market. 

One of the results of this aggressive promotion plan is the emergence of 

a Spanish wind industry, spearheaded by Gamesa, which is increasingly 

competitive in the world market. 

1.1.3 Conclusions: the international context 

Compared to Germany and Spain, the UK’s performance in driving the 

deployment of renewable electricity technologies is unimpressive (Figure 

1.2). The reason for this can be directly attributed to the design of support 

mechanisms aimed at encouraging the development and implementation of 

new technologies (BMU 2008). While the RO is characterised by uncertainty 

about the prices that renewable generation will receive, the feed-in tariff 

provides a guarantee that energy suppliers will receive a premium price for their 

output, thereby compensating them for the additional risks they are taking by 

using new technologies. 

16000 

14000 

12000 

10000 

Germany 

Spain 

United Kingdom 

8000 

6000 

4000 

2000 

0 

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Figure 1.2 Renewable electricity production (1000toe)

Connecting the future: the UK’s renewable energy strategy Energy systems 15 

Any support mechanism for new technologies will cost money, and renewables 

are no exception. However, one of the results of a rapidly expanding renewable 

energy sector in Germany and Spain has been the emergence of domestic 

manufacturing industries, which are increasingly important on the world 

stage. Not only does this produce jobs domestically, the income generated 

compensates across the economy for the costs of the support mechanism. 

Ironically, although the RO was specifically designed to keep costs to consumers 

down, the mechanism works out as both more expensive than feed-in tariffs 

and less effective (Figure 1.3). This is all the more serious considering that no 

significant domestic manufacturers in the UK have emerged to counter the 

economic costs of the policy, so there have been negligible broader 

socio-economic benefits. 

Effectiveness Indicator 

25 

ES–MO 

20 

IE ES–FP 

15 DE 

% 

10 

LT AT 

AT 

5 

CZ–MO 

CZ–FP FR 

SE 0 

BE–Wallonia 

FL 

-1 0 1 2 3 

Expected profit (€ Cent /KWh) 

UK 

IT 

PL BE–Flanders 

4 5 6 7 8 

Feed in tariffs 

Quota/TGC 

Tender 

Tax incentives/ 

investment grants 

Figure 1.3 Efficiency of support for onshore wind: effectiveness indicator 

compared to the expected profit for 2006 

Source: Ragwitz, Held et al (2007) 

Giving investors the confidence to finance new renewable energy projects 

through the introduction of feed-in tariffs (a guaranteed payment per unit 

of heat for a specified period for the supplier) that reduces the financial risks 

would create greater opportunity for their deployment.

16 

02 

UK targets and 

policy delivery 

The federal chancellery building ‘Bundeskanzleramt’ in Berlin, 

Germany has a photovoltaics facility on the roof. 



UK targets and policy delivery 

17 

The UK has numerous targets for reducing emissions of both GHGs in general 

and CO2 in particular, as well as for demand reduction and the introduction 

of low-carbon technologies, as set out in Table 2.1. These targets appear in a 

number of policy documents, including the 2000 and 2006 Climate Change 

Programme, and two Energy White Papers, the first in 2003 and the second 

in 2007. It is striking that while there are targets for renewable electricity 

production and improvements in energy efficiency, there are as yet none for 

heat, despite CO2 emissions from the heating sector constituting nearly half 

of the UK’s total carbon emissions (BERR 2008), and only short-term targets 

for CHP. So while targets exist, at the moment they create an incomplete 

framework for driving the emergence of sustainable energy systems. 

The UK’s performance on meeting its domestic 2010 targets has been 

poor, although it will achieve its Kyoto commitment to reducing overall 

GHG emissions by 2008–12 (Figure 2.1). At the moment, CO2 emissions 

are projected to be only around 16% below 1990 levels by 2010 at best, 

as against the target of 20%, while both renewable electricity supply and 

CHP capacity are likely to be well short of their targets. In part, the 2007 

energy White Paper and the energy review which preceded it in 2006 were 

designed to address the failure of other policy initiatives to achieve these 

targets, and to put the UK back on track for its targets under the EU’s 2020 

commitments. These targets have superseded the UK’s domestic 2010 targets 

for renewable electricity and energy efficiency. As discussed earlier, the 

European Commission’s proposals in January 2008 allocated the UK a target 

of 15% of overall energy being supplied from renewable sources by 2020. In 

addition, they reaffirmed the aim of reducing European energy consumption by 

20% by 2020, and of reducing EU-wide GHG emissions by either 20% or 30% 

(depending on the global response) by the same date. The sectoral split for 

meeting this target is yet to be formally agreed, but to illustrate the significance 

of the EU target, the new target for the electricity sector is expected to be set 

at around 40% by 2020 – double the domestic UK target.



18 

Year 

Greenhouse 

gases 

(MtCe) 

CO2 (MtC) 

Renewables 

CHP Heat Energy 

efficiency/ 

demand 

reduction 

1990 

(baseline) 

209.9 [1] 161.5 [1] 

2000 

5GW of CHP 

installed 

capacity [2] 

2003 

2010 Kyoto 

commitment: 

12.5% below 

1990 levels 

by 2008-12 

20% 

reduction on 

1990 level 

5% of 

electricity 

sales [2] 

10% of 

electricity 

sales 

10% of 

generation [3] 

10GWe of 

‘good quality’ 

CHP installed 

capacity [2] 

2015 

2020 EU target Reduction to 

20% reduction around 110- 

(or 30% if with 120MtC (ie 

international 

action) 

26-32% cut 

from 1990 

level) [5] 

EU target to 

reduce 

emissions of 

industrial GHG 

emissions in 

non-Emissions 

Trading 

Scheme 

sectors by 10% 

from 2005 

level: UK 

share is 16% 

2050 60% 

reduction [6] 

15% of 

electricity 

sales 

Aspiration 

for 20% of 

electricity 

sales [5,6] 

EU target 

of 20% of 

energy from 

renewable 

sources: UK 

share is 15% 

30-40% of 

generation [5] 

EU target: 

9% average 

reduction 

in energy 

consumption 

from 2000 

level [4] 

EU target: 

20% average 

reduction 

in energy 

consumption 

from 2000 

level 

[1] Defra 2008 

[2] DETR 2000 

[3] EU Renewables Directive 

(NB the Directive’s definition of 

renewable generation differs from 

that in the Renewables Obligation) 

[4] EU Energy End Use and Energy 

Services Directive 

[5] DTI 2003 

[6] DTI 2007 

Table 2.1: UK climate change and energy targets



19 

900.0 

CO 2 

800.0 

All greenhouse gases 

700.0 

Kyoto GHG target 

Mt CO 2 

600.0 

500.0 

400.0 

2010 domestic 

CO 2 

goal 

2050 Climate Change 

Bill target upper limit 

300.0 

200.0 

2050 Climate Change 

Bill target lower limit 

100.0 

0.0 

1990 1995 2000 2005 2010 2015 2020 

Figure 2.1: UK greenhouse gas targets and actual emissions 

Source: Defra 2008 

In addition to its various targets, the government has proposed in the Climate 

Change Bill a binding legal requirement to reduce CO2 emissions. The bill 

proposals would commit the UK to reducing CO2 emissions by 60% below 1990 

levels by 2050, and by between 26 and 32% by 2020. 4 Emissions of CO2 in 

1990 are estimated to have totalled 161.5MtC. The Bill’s 2020 target therefore 

equates to between 110 and 119.5MtC by 2020. However, the projections 

accompanying the 2007 energy White Paper show that achieving this reduction 

would require both very successful implementation of all the policy proposals 

in the White Paper, and the full implementation of the EU Emissions Trading 

Scheme (ETS) 5 , including the UK buying a proportion of emission allowances 

from overseas (Table 2.2) (BERR 2008b). 6 Even under this Central Price, High 

Policy Impact scenario, the Climate Change Bill targets for 2020 could be missed 

by more than 9MtC. If energy prices are lower than projected, or there is a 

failure in performance of the policies, or if the carbon prices in the ETS are not 

high enough to drive emissions reductions, then the White Paper will fail to meet 

the targets in the Climate Change Bill. 

4 

The government has 

subsequently asked the 

newly formed Climate 

Change Committee to advise 

it on whether it would be 

more appropriate to have a 

commitment to reduce CO2 

emissions by 80% by 2050. 

5 

It is worth noting here that there 

can be a degree of confusion 

about what is included in 

assessments and projections of 

CO2 emissions in relation to the 

domestic 2010 target. When the 

target was overseas (Table 2.2) 

(BERR 2008b). 

6 

Even under this Central Price, 

High Policy Impact scenario, the 

Climate Change Bill targets for 

2020 could be missed by more 

than 9MtC. If energy prices are 

lower than projected, or there is 

a failure in performance of the 

policies, or if the carbon prices 

in the ETS are not high enough 

to drive emissions reductions, 

then the White Paper will fail to 

meet the targets in the Climate 

Change Bill.



20 

The emissions projections also make clear that even successful implementation of 

the new policies set out in the White Paper will not achieve the UK domestic target 

of reducing CO2 emissions by 20% by 2010 (ie to around 129.2 MtC). 

Achieving the 2020 target and putting the UK in a position to meet 

longer-term targets for additional emission reductions will require success in 

two separate areas: reducing energy intensity by increasing energy efficiency 

and reducing demand, and reducing the carbon intensity by decarbonising 

energy production. While reducing energy intensity can deliver fast, often 

very cost-effective reductions in CO2 emissions, in the longer term additional 

emission savings may well prove more difficult or less cost effective. So the 

development of less carbon intensive energy systems must be pursued just 

as aggressively. The following two sections look at the UK’s main mechanisms 

to address energy efficiency/demand reduction and to encourage more lowcarbon 

sustainable energy sources. 

Central prices, 

low policy 

impact 


central policy 

impact 


high policy 

impact 

Low prices, 


impact 

High prices, 


impact 

1990 

161.5 

161.5 

161.5 

161.5 

161.5 

2010 

145.2 

144.4 

143.4 

146.0 

144.9 

2010 full EU ETS [1] 

136.1 

135.7 

135.2 

137.2 

134.7 

2020 

135.7 

132.2 

122.9 

136.5 

136.6 

2020 full EU ETS [1] 

128.8 

126.5 

119.2 

130.7 

123.9 

2020 reduction from 

1990 (%) 

-20.3 

-21.7 

-26.2 

-19.1 

-23.3 

Climate Change Bill 

goal (MtC) 

109.8 – 119.5 

109.8 – 119.5 

109.8 – 119.5 

109.8 – 119.5 

109.8 – 119.5 

Carbon Gap 2020 

9.3 

7 – 16.7 

-0.3 – 9.4 

11.2 – 20.9 

4.4 –14.1 

Table 2.2 White Paper Projections (MtC) 

Source: BERR 2008b, table F1 

Notes: [1] These projections assume a carbon price of €20/tCO2 

in 2010 and €25/tCO2 in 2015–20.

21 

03 

Reducing energy 

intensity: efficiency 

and demand 

Nuon CHP plant provides electricity, heat and cooling for the and surrounding 

office buildings and 450 residential dwellings in Amstelplein, Amsterdam. 

©Reynaers/Greenpeace


Reducing energy intensity: 

efficiency and demand 

22 

The government recognises that ‘[u]sing energy more efficiently is the fastest 

and most cost effective way of cutting CO2 emissions’ (Defra 2007a, p5). This 

section sets out the main policy measures in place to reduce energy intensity in 

the economy. Many of the measures in the 2007 White Paper and earlier policy 

documents have been driven by EU legislation rather than being government 

initiatives. One of the key EU directives shaping the UK’s approach to energy 

efficiency is the Energy End-Use Efficiency and Energy Services Directive, 

which must be implemented by Member States by May 2008, and which 

requires the UK to reduce energy use by 9% by 2016. This directive and others 

which have influenced the creation of UK policy are outlined in Table 3.1. 

Directive 

Aims 

EU Energy Labelling Framework 

Directive (92/75/EEC) 

Energy Performance of Buildings 

Directive (2002/91/EC) 

Eco-Design of Energy-using 

Products Directive (2005/32/EC) 

Energy End-Use Efficiency and 

Energy Services Directive 

(2006/32/EC) 

Certain appliances should be labelled with their energy consumption 

to allow a comparison between products. 

Reduction of 22% in energy use in existing buildings by 2010. 

This is the basis for the UK’s Energy Performance Certificates. 

Minimum environmental performance standards for products. 

A 9% reduction by 2016 in the annual average amount of annual 

final inland energy consumption of all energy users within the scope 

of the directive, taking as a baseline the five-year period immediately 

prior to its implementation. The directive does not cover energy 

reductions in installations covered by the EU ETS, nor energy use 

in the armed forces[source given below]. The UK five-year average 

annual consumption is 1,517TWh, which gives a 9% reduction target 

of 136.5TWh. 

Table 3.1: EU directives driving UK energy efficiency policy 

Sources: Defra 2007a, Boardman 2007 

3.1 Business and industry 

The commercial and industrial sectors offer significant carbon abatement 

opportunities which could be implemented cost effectively. The Carbon 

Trust estimates that the opportunities offered by existing technologies and 

behavioural change measures are in fact more than cost effective, and could 

generate a rate of return on investment for business and industry of above 

15%, while reducing emissions from manufacturing processes by at least 

12% and from non-domestic buildings by at least 20% by 2020 (Carbon 

Trust 2005). Innovation and technical advances over that time period 

could offer even more cost effective improvements. Energy efficiency and 

demand reduction across business and industry therefore offer huge potential 

contributions to both the UK and EU 2020 targets.




23 

Set against this potential, however, is the fact that, despite recent rises, 

energy prices still make up a relatively small proportion of many organisations’ 

turnover, and that energy use may thus be seen as a relatively unimportant 

issue. Government measures to encourage improved energy performance will 

therefore have to attract the attention of company directors by addressing 

the bottom line of financial performance. Carbon pricing as part of the EU ETS 

is the government’s preferred option for doing this, coupled with improved 

information on energy saving and help to improve performance provided by 

the Carbon Trust. However, to bring about significant change in business and 

industry the price of permits for the right to emit carbon would have to be high 

enough to threaten companies’ financial performance, with a strong likelihood 

that this high carbon price would endure for long enough to drive investment in 

energy efficiency improvements. 

3.1.1 Emissions trading 

The EU ETS is the central plank of the government’s strategy to reduce 

emissions, and is projected to save up to 13.7MtC a year by 2020 (DTI 2007). 

The EU ETS requires Member States to set permitted emission levels in line 

with their Kyoto commitments, and to produce national allocation plans setting 

out limits for different industrial sectors. At the moment, the EU ETS covers 

around 46% of the UK’s emissions, although smaller emitters will be removed 

from the scheme from 2008, on the grounds that the high transaction costs of 

participation are not justified (Strategy Unit 2007). The first phase of the ETS 

ran from 2005 to 2007, while the second phase, designed to coincide with the 

Kyoto commitment period, runs from 2008 to 2012. The scope of the scheme 

is currently under review by the European Commission, and it may ultimately 

include new sectors, notably aviation. 

Under the ETS, allowances to emit CO2 are allocated to specific sectors on the 

basis of business-as-usual projections of their emissions. The results of the first 

phase show that the UK and other Member States over-allocated allowances 

to most sectors, with the result that most sectors had more allowances than 

they needed to cover their emissions. The one exception to this is the energy 

generation sector, which has greatly exceeded its allocated allowances and had 

to buy additional permits each year (see Table 3.2). Indeed, in each of the three 

years this shortfall more than cancelled out the excess allowances of the other 

sectors.




24 

2005 

2006 

2007 

Allocation of 

allowances (millions) 

1 allowance = 1 tonne CO2 

Total 

Energy sector 

Other sectors 

215.2 

135.7 

79.5 

217.3 

135.6 

81.7 

228.8 

136 

92.8 

Verified emissions 

(MtCO2) 

Total 

Energy sector 


242.3 

172.2 

70.1 

251.1 

181.5 

69.6 

256.4 

177.9 

78.5 

Excess or (shortfall) 

of allowances 

(millions) 

Total 

Energy sector 


(27.1) 

(36.5) 

9.5 

(33.8) 

(45.9) 

12.1 

(27.6) 

(41.9) 

14.3 

Table 3.2: Results from EU ETS, 2005–07 

Sources: Defra 2007 Table 3, Defra 2008a, Defra 2008b 

The theory of emissions trading is that by giving businesses choice as to 

whether and how to reduce their emissions, the required reductions will 

be produced in the most cost effective way (DTI 2007). This is entirely 

rational from an economic viewpoint as a way of correcting a market failure. 

The reality, however, is more complex. Any measure which increases the 

regulatory burden on companies will be unpopular, particularly if it increases 

their costs, and industry has lobbied vigorously to ensure that the limits set on 

permitted emissions are as high as possible to minimise any possible impact 

on competitiveness (see for example CBI 2007). This is true not just in the UK 

– governments in all Member States have experienced lobbying efforts from 

companies affected by the scheme. The outcome for the first phase of the 

scheme was a series of high emission limits, resulting in an excess of permits 

on the market and volatile prices for permits, which ultimately plummeted 

(see Figures 3.1 and 3.2). The UK was in fact one of the few Member States 

to attempt to use the first phase of the scheme as a tool to manage emissions, 

albeit only from the energy sector. While the economic theory may be sound, 

the reality so far has been that the ETS will always ultimately be shaped by 

political concerns, and businesses participating in the scheme have been 

reluctant to pay for their environmental externalities. The energy White Paper 

implicitly accepts this by hinting that it would guarantee carbon prices at a 

minimum level in order to provide greater certainty to investors (DTI 2007).




25 


Italy 

Poland 

France 

Germany 

Czech Republic 

Netherlands 

Finland 

Belgium 

Denmark 

Estonia 

Lithuania 

Hungary 

Slovak Republic 

Sweden 

Greece 

Portugal 

Latvia 

Malta 

Luxembourg 

Cyprus 

Slovenia 

Ireland 

Austria 

Spain 

-40 -30 -20 -10 0 10 20 30 40 50 60 

Figure 3.1 EU Member States’ surplus/deficit of carbon allowances (M) 

Source: Defra 2008a Figure 20 

Actual surplus/deficit 

2006 

Actual surplus/deficit 

2005 

Phase II (Dec 2008) price 

Price (£) 

35.00 

30.00 

25.00 

20.00 

15.00 

10.00 

5.00 

12 

10 

8 

6 

4 

2 

Volume traded (000,000) 

Phase I (spot) price 

Total volume 

0 

22 Apr 

2005 

26 Jul 

2005 

26 Oct 

2005 

27 Jan 

2006 

1 May 

2006 

1 Aug 

2006 

31 Oct 

2006 

1 Feb 

2007 

4 May 

2007 

0 

3 Aug 

2007 

Figure 3.2 EU ETS carbon prices 

Source: Defra 2008a Figure 17




26 

The volatility of carbon prices and uncertainty about future prices means 

that the ETS is unlikely to have driven any long-term investment projects so 

far; it may well have led to some short-term reductions in energy intensity, 

but not appear to have increased the take up of longer-term, more capitalintensive 

low-carbon technologies (Carbon Trust 2007). The problem does 

not appear to have been solved for the second phase of the scheme, with 

prices still volatile and as yet insufficient to drive investment in low-carbon 

energy. Forward prices for Phase II are between €15 and €20 per tonne of CO2, 

while the Carbon Trust estimates that a sustained price of around€20/tCO2 

is needed to encourage investment in low-carbon technologies (Carbon Trust 

2007). Without a degree of certainty about the level and stability of future 

carbon prices, there is little incentive to invest in potentially more expensive 

carbon reduction measures as there is no guarantee that the investment will be 

recouped. 

While the price signals have been insufficient to drive low-carbon investments, 

Phase I of the scheme has proved profitable for energy companies, who in 

theory have been hardest hit by the introduction of a price for carbon. At the 

moment, most allowances are allocated free to the participants in the scheme, 

but companies have chosen to pass the costs associated with trading the 

carbon permits between companies on to customers in the form of increased 

electricity prices. A recent report for WWF estimates that this practice could 

result in windfall profits for the energy sector of up to £12 billion during the 

second phase of the scheme (Point Carbon 2008). 

For Phase II of the ETS, national emissions caps have been tightened by 

the European Commission. However, the scheme also places an increasing 

emphasis on the ability of Member States to take international action to reduce 

their emissions through Kyoto Protocol mechanisms, in the form of either 

Joint Implementation (JI) or the Clean Development Mechanism (CDM). 7 At 

the moment, CDM/JI credits trade at around €8–10/tCO2e (REF), compared 

with €15–20 for Phase II ETS credits, making this an attractive alternative 

to investing in measures at home. There is a clear enthusiasm emerging in the 

UK for taking more international action of this sort (Strategy Unit 2007), and 

the Climate Change Bill allows for emission cuts made overseas to be counted 

towards the overall UK reduction target. 

From an economic point of view, it may well make sense for a company to buy 

the cheapest available allowances, although there are potential problems with 

the verification of the resulting emissions reductions which might undermine 

any assessment of the effectiveness of this approach. This concern has 

recently been highlighted by the National Audit Office, which reported that 

the Office for National Statistics is reluctant to count allowances purchased 

through overseas action as part of the UK programme to reduce emissions, 

because of the difficulties of verification (National Audit Office 2008). A more 

fundamental criticism, however, is that encouraging companies to make a 

significant or increasing proportion of their emissions reductions overseas 

diminishes the impetus to transform energy systems in the UK. It also reduces 

7 

JI allows industrialised (Annex 1) 

countries to take action to reduce 

emissions in other industrialised 

countries rather than at home. 

The CDM is similar, but allows for 

action in developing countries. 

Both mechanisms are aimed at 

allowing carbon reductions at 

least (or less) cost.




27 

demand for the relatively more expensive ETS allowances which in turn 

depresses the overall carbon price. Thus the short-term pursuit of economic 

efficiency threatens to undermine the UK’s efforts to reduce energy intensity 

and encourage longer-term investment in sustainable energy technologies. 

Nevertheless, the UK government is lobbying the European Commission to 

allow an even greater proportion of national targets to be met by overseas 

emissions reductions. 

The leaked 2007 BERR memo already mentioned, makes clear the tension 

between the government’s climate change and economic aspirations: it argues 

against the rapid expansion of renewables and the implementation of energy 

efficiency measures to meet the EU targets on the grounds that this would 

undermine the price of carbon within the ETS: ‘if the EU has a 20% GHG target 

for 2020, the GHG emissions saving achieved through the renewables target 

and energy efficiency measures risk making the EU ETS redundant, and prices 

to collapse.’ (BERR 2007, p1). This argument neglects the fact that prices 

for carbon credits are set by emissions limits, rather than the effectiveness 

of energy efficiency and renewables: if new technologies are succeeding in 

reducing CO2 emissions, the response should be to tighten the ETS’s limits to 

ensure that prices remain sufficiently high to drive the further deployment of 

those technologies. BERR’s statement, however, makes it difficult to avoid the 

impression that promotion of the EU ETS is the priority for BERR, rather than 

the rapid reduction of CO2 emissions. 

The stability of carbon prices and therefore of long-term investment signals 

may improve in subsequent phases of the ETS. The Commission has proposed 

that individual national allocation plans should be replaced by a single set of 

EU-wide rules for setting reduction targets and allocating or auctioning 

allowances, with individual Member States conducting auctions but permitting 

any company from any country to buy allowances. Although companies would 

still have access to cheaper CDM credits, the level would initially be limited 

to that used in the current ETS period (European Commission 2008a). These 

measures should remove some of the problems caused by national 

over-allocation of allowances, although the continued eligibility of action under 

the CDM risks limiting action at the national level. 

3.1.2 The Climate Change Levy and Climate Change Agreements 

The 2001 Climate Change Levy (CCL) is a tax on the use of energy by business 

derived from fossil fuels or nuclear power. The CCL was initially projected to 

reduce the UK’s annual carbon emissions by at least 2MtC by 2010 against 

business-as-usual forecasts. A later assessment of the scheme estimated 

that that actual impact was more likely to be a 3.7MtC reduction by 2010, 

although this was later revised down to 3.5MtC (Cambridge Econometrics and 

Policy Studies Institute 2005, National Audit Office 2007). 8 Even at this lower 

estimate, however, the projected impact of the CCL on carbon emissions is a 

significant part of the UK’s overall climate strategy. The CCL was meant to be 

revenue-neutral for business: when it was introduced it was accompanied by 

a 0.3% cut in employers’ National Insurance contributions (NICs). In the event 

8 

The revision to the 3.5MtC 

estimate came about because 

the Cambridge Econometrics/PSI 

report assumed that the rate 

of the levy would increase in 

line with inflation from 2005, 

whereas in fact it remained 

the same until 2007, thereby 

reducing its power as a driver 

for increased energy efficiency 

(National Audit Office 2007).




28 

the reduction in NICs, valued at £1.2 billion in 2004–05, has far outweighed 

the monetary impact of the CCL on business, and many less carbon-intensive 

businesses gain more from reduced NIC payments than they pay under the CCL 

(National Audit Office 2007). 

Despite the loss to the Treasury from the NIC rebate, the rate of the CCL was 

not increased between its introduction in 2001 and 2007. Given inflation rates 

and the increasing costs of energy over time, its power as a mechanism to 

improve the energy performance of business therefore declined between 2001 

and 2007, although this will be mitigated by future inflation-linked rises (see 

Table 3.3). Even so, the CCL will continue to represent a small proportion of 

overall energy costs for non-energy-intensive businesses, and its real impact 

as a driver will remain limited to companies whose energy costs form a 

significant proportion of their day-to-day operating costs (National Audit 

Office 2007). 

2001– 07 

2007– 08 

2008–09 

2009– 10 

Electricity 

0.43p/kWh 

0.441p/kWh 

0.456p/kWh 

0.470p/kWh 

Gas 

0.15p/kWh 

0.154p/kWh 

0.159p/kWh 

0.164p/kWh 

Coal and coke 

0.17p/kg 

1.201p/kg 

1.242p/kg 

1.281p/kg 

Liquified petroleum gas 

0.96p/kg 

0.985p/kg 

1.018p/kg 

1.050p/kg 

Table 3.3: Climate Change Levy rates 

Sources: HM Treasury (2006a), National Audit Office (2007), 

HM Revenue & Customs (2008) 

Climate Change Agreements (CCAs) were introduced alongside the CCL in 

2001, and allow energy-intensive companies an 80% discount on the CCL, 

provided that they agree and meet specified targets, set by Defra, for reducing 

their energy use by 2010. There are currently 51 different sectors with CCAs, 

covering around 10,000 facilities. The sector targets are set until 2010, but 

the CCA scheme itself runs until the end of March 2013. In other words, the 

facilities with CCAs will pay reduced CCL rates until 2013, provided they meet 

the 2010 targets. 

The targets that participants in the agreements must meet involve reducing 

their CO2 emissions either to an absolute defined level, or to a defined level 

relative to their output. In addition, they can trade allowances with other 

participants. Performance is reviewed every two years. CCAs were originally 

projected to reduce annual CO2 emissions by about 9.2 MtCO2 (2.5MtC) by 

2010 compared with a business-as-usual projection. However, the targets 

were revised following a decline in activity in the iron and steel sector, leading 

to considerable overachievement in the first target periods. CCAs are currently 

estimated to deliver a reduction of approximately 7 MtCO2 (1.9MtC) in annual 

emissions by 2010 relative to the business-as-usual projection (Defra 2007b).




29 

There continues to be an apparent overachievement in meeting interim targets 

in advance of the 2010 target (Table 3.4). The National Audit Office states that 

a proportion of the agreements ‘have not been as stringent as possible’ (NAO 

2007, p27) The reasons cited include the influence of industry in negotiating 

sector targets, and the fact that the levels agreed did not take account of 

efficiency savings that would have occurred anyway, even without the CCL 

and CCAs, as a result of businesses reducing their energy consumption in 

response to increased prices or as a result of technological change leading 

to greater energy efficiency. As a result, the scheme has failed to take full 

advantage of the apparently greater scope for companies to take meaningful 

emissions reduction action, without significant impact on business activity 

or competitiveness. Moreover, the overachievement of targets means that 

participants can bank surplus allowances for possible trading in subsequent 

periods of the scheme, even though the surplus may have come about as a 

result of undemanding targets rather than through concrete action to reduce 

emissions – thus further undermining the scheme’s effectiveness. 

Target period 

Actual CO2 emissions 

(MtCO2/year 

Target CO2 emissions 

(MtCO2/year 

Absolute saving from 

baseline (MtCO2/year 

Target period 1 

With adjusted steel target 

16.4 

6.0 

12.3 

10.4 

4.1 



14.4 

5.5 

9.3 

8.9 

5.1 



16.4 

9.1 

12.3 

7.3 

4.1 

Table 3.4: Climate Change Agreement results 

Source Defra 2007b 

3.1.3 Carbon Reduction Commitment 

The 2007 White Paper also sets out an additional mandatory emissions trading 

scheme for organisations’ direct and indirect energy use. The Carbon Reduction 

Commitment (CRC) is an auction-based cap-and-trade scheme which should 

be introduced in 2010; it will extend emissions trading to large, non-energyintensive 

private and public sector organisations not included in the EU ETS, 

including all central government departments – although organisations with 

more than 25% of their emissions covered by CCAs will be exempt. It was 

originally intended that organisations using at least 3,000MWhr/yr would be 

included, but the threshold was doubled in the White Paper to 6,000MWhr/yr. 

As a result, the projected CO2 emission reductions were cut from 1.2MtC a 

year in 2020 in the Energy Review to 1MtC in the White Paper (DTI 2006, 

2007). 

Although the scheme will be mandatory, participants will set their own 

reduction targets and will monitor, verify and report their emissions 

themselves. Organisations will be required to estimate emissions for the year 

ahead, and to buy sufficient allowances to cover them. Each phase of the CRC

Connecting the Future: the UK’s renewable energy strategy 

Reducing Energy Intensity: Reducing 

Demand through Energy Efficiency 

30 

is intended to last five years, allowing it to be synchronised with the ETS if 

participants wish to buy additional allowances. 

Emission allowances will be auctioned in January each year and the revenue 

generated will be recycled to participants on the basis of their average 

emissions since the introduction of the CRC. Organisations will also either 

receive a bonus in addition to the recycled payment, or be penalised by a 

reduction in this payment, according to their performance against three 

indicators: the carbon emissions reduction achieved, the carbon emissions 

reduction relative to their economic performance and action taken to 

implement energy saving measures. If an organisation fails to comply with 

the commitment, it will be charged £25/tCO2 during the introductory phase 

(2010–2013), and then £70/tCO2 in subsequent phases post 2013. In 

contrast, Defra estimates that CRC allowances will cost £8–16/tCO2. 

The scheme is yet to be implemented, so it is difficult to draw conclusions about 

how well it may work. However, the design of the measure is unambitious in 

view of the potential cost effective emissions savings to be made by reducing 

energy use in business – the Regulatory Impact Assessment for the CRC puts 

the present value of benefits in terms of savings on energy bills between 

£1,437 million and £2,726 million, depending on the type and level of discount 

rate that is applied (Defra 2007). Overall, moreover, the scheme seems 

unnecessarily complex: there will be interactions with both the ETS and CCAs 

that will make it difficult to predict the level of emissions reductions which the 

CRC will deliver. For example, anything between 0% and 20% of organisations 

and emissions could be excluded from the scheme because of the interaction 

with CCAs (DTI 2007d). Finally, it remains to be seen whether the system 

of self-monitoring and verification of emissions, combined with rewards for 

compliance, will be sufficiently stringent to act as a driver. 


Other measures to encourage the more efficient use of energy in business 

include Enhanced Capital Allowances as part of the CCL package, which allow 

businesses to write off the cost of investing in specified energy saving products 

against their taxable profits for that financial year. There is also an interest-free 

loans scheme to enable small and medium-sized enterprises to install energy 

efficient technologies. 

The emphasis of government action is clearly on reducing emissions from 

industrial processes and energy end use, driven by an enthusiasm for carbon 

pricing and trading, whether in the UK or EU. An area which has been relatively 

neglected in the business and industrial sectors is the energy performance 

of buildings, despite extensive action being planned to improve energy 

performance in both the public and domestic sectors. Commercial buildings are 

of course subject to building regulations, which provide some impetus towards 

energy efficiency; but it should be technically and economically possible 

for new non-domestic buildings to achieve significantly greater emission 

reductions in the next decade, and for many to be zero carbon with regards




31 

non-process-related emissions (Defra 2007a). The government has 

recently announced an ‘ambition’ for new non-domestic buildings to be zero 

carbon from 2019, although it is yet to set out its strategy for driving such 

improvements, and has merely committed to developing an action plan at 

some stage in the future (HM Treasury 2008). This hesitancy is missing an 

opportunity not just to improve the energy performance of existing commercial 

and industrial buildings, but to drive a longer-term shift to more sustainable 

energy production and supply through the provision of zero carbon facilities in 

both new and existing facilities. 

3.2 The domestic sector 

Domestic properties are responsible for about 27% of the UK’s CO2 emissions. 

Most domestic energy use (87%) is for space or water heating, with the rest 

used for lighting and appliances (DTI 2007a). However, energy consumption 

in lighting and appliances is growing and overall domestic energy demand is 

expected to grow by an average of 2.5% (0.85 MtC) a year over the next 10 

years (Communities and Local Government 2007, Defra 2007a). In the past, 

increases in domestic demand have been partly offset by increases in energy 

efficiency (historically, about 1% a year). Defra’s 2007 Energy Efficiency 

Action Plan states that the policies it outlines should improve the rate of 

increase in energy efficiency to the point where it will cancel out the growth in 

domestic energy demand by 2010. However, this is a relatively unambitious 

target – households could reduce emissions by around 25% using established 

technologies (Defra 2007a). 

3.2.1 Energy Efficiency Commitment and Carbon Emission 

Reduction Target 

The Energy Efficiency Commitment (EEC) scheme was run in two phases, 

2002–05 and 2005–08. It required energy suppliers to achieve targets 

for energy efficiency improvements in Britain. Suppliers tended to provide 

insulation, low-energy lighting and high-efficiency appliances or heating 

in order to meet their targets, and implemented the measures either with 

individual householders or through projects with social housing providers. 

50% of the suppliers’ energy savings targets had to be implemented in projects 

involving low-income customers. The EEC has proven to be a very cost 

effective measure, with the cost of complying with the targets estimated at 

no more than £9/customer/year (Energy Savings Trust 2007). 

The Carbon Emission Reduction Target (CERT) is the successor to the EEC, 

and will run from 2008 to 2011. Unlike the EEC programme, CERT includes 

microgeneration and other measures aimed at reducing consumption of 

supplied energy. The Climate Change Programme announced that the carbon 

reductions target to be met by suppliers under CERT would be roughly double 

that of the second phase of the EEC, with an aim of achieving emissions savings 

of 4.2MtC a year by 2011. However, most suppliers have already met the 

target set for the EEC and excess savings will count towards CERT, so the more 

stringent target is not as demanding as it might seem.




32 

CERT will in turn be succeeded by a Supplier Obligation, which will be 

maintained until 2020. The 2007 White Paper sets out an ambition to maintain 

year on year reduction targets under the Supplier Obligation at least at the 

same level as that stipulated for CERT. The shape of this programme is yet 

to be decided, but it could either take the form of a cap-and-trade scheme, 

where suppliers would be subject to a target for customers’ energy use or CO2 

emissions, which they could meet either by reducing customers’ emissions/ 

energy use, or by trading allowances; or it could be a purely measures-based 

scheme along the lines of the EEC and CERT (Defra 2007). The government 

will consult on its final form in 2008. As with CERT, action to meet the Supplier 

Obligation could involve the implementation of microgeneration or other 

measures aimed at reducing emissions while maintaining the level of energy 

service. 

Both CERT and the Supplier Obligation show a welcome shift towards 

mixing short term, efficiency-based measures with longer-term strategic 

development of more sustainable energy technologies. In addition, encouraging 

suppliers to adopt a more service-based approach to energy provision (ie 

selling light or heat, rather than just units of energy) should act as a driver for 

the implementation of measures which use input energy more efficiently while 

providing the same level of service. The 2008 Budget announced that the 

government would develop voluntary agreements with energy suppliers for the 

provision of energy services, although this seems to be directed solely towards 

businesses. Given the potential for developing an energy service approach, as 

implied by the CERT and the proposals for the Supplier Obligation, this intention 

should also be extended to the domestic sector. 

3.2.3 Building regulations, Zero Carbon Homes and the Code 

for Sustainable Homes 

A number of revisions to the building regulations since 2002 have significantly 

improved the energy performance standards of new homes: a house built 

today should be around 40% more efficient than one built before 2002 (Defra 

2007a). However, the extent of the impact of the new building regulations 

on new homes is difficult to verify, partly because of the difficulties of 

inspecting new buildings and ensuring compliance with the required standards. 

Despite long-standing concerns about this (see for example BRE 2004), 

the government did not introduce measures to simplify arrangements or 

improve training and awareness until 2006 (DTI 2007). Progress with the new 

measures will be reviewed in three years to assess their impact. 

The government has announced further tightening of building regulations to 

improve the performance of new homes, and has proposed that all new homes 

in England and Wales should be zero carbon by 2016 (Communities and Local 

Government 2006). In addition to the 2016 target, building regulations will 

be used to drive interim improvements in new-build carbon performance 

towards targets of a 25% reduction in 2010 and 44% in 2013 compared to 

the standards in the 2006 Part L building regulations (Communities and Local 

Government 2006). Achieving this target should save at least 15MtC a year




33 

by 2050, although the contribution to the 2020 target is predicted to be 

more modest (1.1–1.2MtC) (DTI 2007, Communities and Local Government 

2007). 

A policy statement in July 2007 confirmed these plans. The zero carbon goal 

is to be achieved both by improvements in the energy performance of homes 

and through the use of renewables and other low-carbon sources of energy, 

whether microgeneration in individual homes or low-carbon power supplied 

to an entire development. A development will be able to import electricity 

from the grid, as long as emissions from energy use across the development 

as a whole are zero over the year (ie any imports are offset by equivalent lowcarbon 

exports) (Communities and Local Government 2007). The definition 

of low-carbon imports to developments may prove problematic: it could 

include the use of district heating and/or CHP projects outside the limits of the 

development, which have clear efficiency advantages over traditional fossil fuel 

generation, but might presumably also include other ‘low-carbon’ sources such 

as nuclear power. One question yet to be resolved is how the ongoing carbon 

neutrality of a development will be ensured if power can be imported, given the 

principle of consumer choice in energy supply. It is not clear how consumers in 

the new developments will be obliged to import only low or 

zero carbon energy. 

The Zero Carbon Homes initiative is complemented in England at least by the 

Code for Sustainable Homes, which sets out voluntary standards for house 

design and construction beyond those required by building regulations. It 

encompasses water, materials, waste and ecology as well as energy. The code 

allows developers to gain a star rating reflecting a house’s environmental 

performance. There are six levels in the code, ranging from Level 1 – a 10% 

improvement in energy efficiency over the standards in the 2006 Building 

regulations – to Level 6, which denotes a completely zero carbon home. 

Levels 3 and beyond are likely to require some low- or zero carbon energy 

input, whether at the level of the individual home or across a whole 

development. The code came in to effect in April 2007 and became mandatory 

for all new homes from May 2008. 

Responses to the government’s Zero Carbon Homes proposals were 

overwhelmingly positive, although many questions about what may or may 

not constitute zero carbon remain to be resolved (Communities and Local 

Government 2007). In addition, many responses highlighted the fact that there 

is a relatively slow turnover in the housing stock, so that around 70% of the 

houses which will be standing in 2050 have already been built (Defra 2007a). 

It is important to emphasise that action to reduce emissions from new houses 

should not be at the expense of ongoing measures to improve the energy 

performance of the existing stock. 

Setting a target for zero carbon homes 10 years into the future may have 

understandable attractions for the government and the house building industry 

in terms of regulatory certainty, and this approach is in fact supported by the




34 

Home Builders Federation and other private developer organisations. However, 

the potential to build zero carbon homes already exists, and given the scale of 

emissions from the domestic sector and the potential for their rapid reduction, 

it would have been both feasible and desirable to introduce the standards 

at an earlier date (House of Commons Environment, Food and Rural Affairs 

Committee (2007). Having said that, the plan to integrate efficiency measures 

and low-carbon generation projects is a sensible approach to shifting the 

housing sector onto a more sustainable path in the longer-term. Similarly, the 

ambition set out in the 2008 Budget for all new non-domestic buildings 

to be zero carbon from 2019 (or 2018 for new public sector buildings) 

is welcome. However, setting this ambition 10 years in the future again 

seems unnecessarily cautious, given the potential for rapid reductions in 

the short-term. 

There has also been recent confusion over what the development of a zero 

carbon home policy for 2016 will mean for measures directed at new homes 

now. Attention has focused in particular on the future of the Merton Rule, 

which allows local authorities to set a target for the use of on-site renewable 

energy to reduce CO2 emissions from major new developments. 9 It has been 

reported that Communities and Local Government is considering removing 

the rule from a forthcoming statement on planning policy, meaning that 

local authorities may no longer be able to require renewable energy as part 

of a development (Guardian 2007). The department’s justification for this is 

apparently that the necessity for a specific rule requiring renewables will be 

removed by the requirement for zero carbon development. 

The Merton Rule has been criticised by some builders’ federations, in part 

because of the cost of installing renewable energy technologies and in part 

because it argues that energy efficiency is a better option for reducing CO2 

emissions (British Property Federation 2007). This argument misses the point 

on two levels: firstly, the degree to which a development is energy efficient 

reduces the level of renewable energy required to meet the target set. 

Secondly, the additional costs of installing renewable energy technologies in 

new developments should ultimately be offset by the savings on the occupants’ 

bills. The Merton Rule has led to the development of a market for small-scale 

renewables at the domestic level which is helping to establish the supply chain 

and expertise that will be required for the future much wider implementation of 

those technologies as part of the Zero Carbon Homes initiative. Abolishing the 

Merton Rule would thus overlook the vital role it is playing in helping to create 

a viable market for small-scale renewables by 2016. The potential for a supply 

chain gap in suitable renewable energy technologies has been highlighted by 

the Renewables Advisory Board, which has warned that sufficient capacity 

must be built up gradually if the 2016 target for zero carbon homes is to be 

implemented effectively (Renewables Advisory Board 2007). 


Other measures in the 2007 White Paper are largely aimed at increasing 

consumers’ awareness of the value of energy and the potential for using it 

9 

In October 2003, the London 

Borough of Merton adopted 

a policy specifying that all 

developments of 10 or more 

houses and ‘new non-residential 

development above a threshold 

of 1,000m2 will be expected to 

incorporate renewable energy 

production equipment to provide 

at least 10% of predicted energy 

requirements.’ Since then similar 

prescriptive policies have been 

adopted by numerous other local 

authorities 

(www.themertonrule.org).




35 

more efficiently. They include the introduction of the Energy Performance 

Certificates (EPCs). EPCs have been introduced for homes with three or 

more bedrooms and will be introduced for commercial buildings from April 

2008. They will be complemented by information on how to improve energy 

performance. Fiscal measures have also been set up, for example reduced 

VAT for insulation and some microgeneration and heating technologies, and 

incentives for landlords to improve the energy efficiency of their properties. 

The White Paper also proposed requiring suppliers to include information on 

comparative historic energy consumption on domestic customers’ bills from 

May 2008 and set out its expectation that smart meters (including real time 

electricity display) should be sited in all homes within 10 years. It also proposed 

requiring that all replacement meters installed by energy suppliers in existing 

homes, and all meters in new homes, should include real time electricity 

displays by May 2008, and that other households requesting a real time display 

should be provided with one between 2008–10. The intention was is to make 

consumers more aware of how they use energy, and so to reduce consumption. 

However, following consultation on the White Paper proposals, the government 

backed away from the plan to require real time displays, instead making 

this action voluntary for suppliers (BERR 2008d). This may not be a hugely 

significant shift in terms of overall carbon emissions, but the removal of the 

requirement for real time displays in favour of voluntary action, largely on 

cost grounds, demonstrates the difficulty the government has in balancing its 

environmental goals with business interests. 

The White Paper commits the government to concrete action on improving 

end-use efficiency, largely driven by the requirements of EU legislation. This 

includes potential improvements to the labelling of products to show their 

energy consumption, and a target to phase out incandescent light bulbs from 

domestic use by 2011. This is ahead of the date expected to be set by EU 

legislation, which is unlikely to be implemented until 2010, but the impact of 

the measure is mitigated somewhat by confining it to the domestic sector, and 

qualifying the intention by stating that the bulbs will be phased out only ‘where 

an efficient alternative exists’. 

3.3 Conclusions: reducing energy intensity 

Energy efficiency and demand reduction measures are intended to reduce 

the energy intensity of the UK’s economy. As well as reducing emissions 

overall, improved efficiency can have broader benefits, in particular in relation 

to industrial competitiveness. However, the measures in the 2007 White 

Paper are strikingly unambitious in comparison with the UK’s potential for 

cost effective improvements in energy efficiency. Greater reductions in 

emissions could be achieved relatively quickly and cheaply by increasing 

the impact of programmes directed at the industrial, business and 

domestic sectors. 

It is clear that there is still enormous scope to reduce emissions from business 

and industry cost effectively; but in order to maximise these,in the short term 

CCAs need to be tightened. Meanwhile, it is difficult to predict the likely impact


Reducing Energy Intensity: Reducing 

Demand through Energy Efficiency 

36 

on emissions of the CRC. While it promises to be a useful means of improving 

the energy intensity of business and the public sector, it looks likely that the 

scheme will entail a degree of crossover with both the ETS and the CCL/CCAs. 

Rather than having all these schemes running in parallel. It would be simpler, and 

possibly more transparent, to rationalise the existing schemes, and ultimately 

to incorporate those companies with CCAs into the new CRC scheme and make 

their targets mandatory rather than voluntary. The government consulted on 

this more integrated approach at the end of 2007, although it is yet to publish 

its final conclusions (Defra 2007f). 

The government has recognised the potential for cuts in emissions associated 

with commercial buildings, but has not yet set out its strategy for this work or a 

target date for its implementation. Energy efficiency improvements in existing 

commercial buildings should be driven, at least in part, by established policy 

mechanisms, but the government should also quickly establish its framework 

to require all new non-domestic buildings to be zero carbon. 

Turning to the domestic sector, the EEC scheme has had some success, 

although the ongoing level of early overachievement shows that the targets 

are not sufficiently demanding. Both the new CERT and the commitment to the 

Supplier Obligation in the longer-term need to be made more ambitious. This is 

particularly important given the slow turnover in housing stock and the sector’s 

overall contribution to CO2 emissions. 

The Zero Carbon Homes initiative is encouraging, although its implementation 

may prove complex given the current market framework and the emphasis on 

individual consumer choice in energy supply. zero carbon homes are feasible 

now, and the target date for implementation should be brought forward. In 

the meantime, the government needs to maintain the Merton Rule for new 

developments, whether in the domestic or commercial sector, as a way of 

maintaining and further encouraging the emerging renewable energy systems 

supply chains. 

In the longer term, it is clear that the government is beginning to appreciate the 

value that can come from an energy services approach to energy consumption. 

However, the shift towards an Energy Service Companies (ESCOs) industry 

needs to come about more quickly: by 2020, the government should explicitly 

aim to ensure that all energy supply companies have an ESCOs approach for all 

energy sales.

37 

04 

Sustainable energy 

systems 

The ROCA 3 combined heat and power (CHP) plant in Rotterdam-capellen 

provides electricity and heat to 400,000 homes. 



Sustainable energy systems 

38 

Reducing the UK’s reliance on carbon-intensive fuels is a longer-term approach 

to reducing overall emissions than the quick hits often offered by reductions in 

energy consumption. However, the technologies and infrastructure required 

to enable the development of sustainable energy systems must be put in place 

now if low-carbon energy is to be readily available in the longer term. Policy 

measures therefore need to incorporate a strategic approach to encouraging 

the development and deployment of low-carbon technologies, which are 

often newer and therefore riskier than conventional energy technologies. 

Without such a long term strategy, achieving the EU’s targets – or even moving 

significantly towards them – seems a remote possibility. This section outlines 

the UK’s main measures aimed at addressing the implementation of new 

technologies. 

4.1 Low-carbon electricity 

The definition of low-carbon electricity can be very broad, encompassing 

various conventional generating sources as well as newer renewable sources. 

Supposedly clean coal technologies, using more efficient combustion 

techniques and/or carbon capture and storage (CSS), have been labelled as 

low-carbon sources of electricity in the Energy White Paper, as has nuclear 

power. However, while the generation of electricity from these sources may 

produce relatively few carbon emissions in comparison with conventional 

fossil fuel plants, they entail other environmental impacts, such as the waste 

products associated with nuclear power generation. In the case of ‘clean coal’, 

moreover, there is uncertainty as to the commercial viability and technical 

applicability of CCS. The low-carbon options considered in this report are those 

which are either renewable or use fossil fuels at a much increased efficiency 

by providing both electricity and usable heat. As well as often involving 

relatively new technologies, these two approaches both face barriers within the 

established energy system, as their characteristics do not conform to those of 

conventional generating technologies. 

4.1.1 Renewables 

The Renewables Obligation (RO), introduced in 2002, is the main support 

mechanism for renewables generation in the UK. It is an obligation on electricity 

suppliers to provide a proportion of their supply from eligible renewable 

sources. The proportion is set to increase over time, from 3% in 2002 to 15.4% 

in 2015. The government has an ‘aspiration’ to achieve a 20% renewables 

supply by 2020, and is committed to raising the level of the RO after 2015 on a 

guaranteed headroom basis, where the level of the obligation for a given year is 

only raised if the level of renewables generation justifies it. So, although the RO 

could continue to increase after 2015, this will not necessarily deliver the 20% 

aspiration by 2020. 

Suppliers currently prove that they have bought the specified level of 

renewable electricity by presenting to Ofgem Renewables Obligation 

Certificates (ROCs), each of which represent one megawatt hour of output. 

These ROCs can either be obtained from a generator upon purchase of the 

corresponding output, or they can be bought and sold separately from the



39 

electricity itself. Alternatively, suppliers can also choose to pay a penalty 

buyout price to Ofgem if they choose not to source the ROCs through the 

means outlined previously. 10 The funds from buyout payments are recycled 

to electricity suppliers annually in line with the proportion of the RO they 

have met. The value of an ROC is therefore the level of the buyout price 

plus the expected income from recycling the buyout funds at the end of the 

year. The greater the shortfall in renewable supply compared with the overall 

annual target and the more buyout penalties suppliers have therefore had to 

pay, the greater the value of the buyout funds and therefore of an ROC. The 

redistribution of the buyout funds thus adds value to ROCs, although this would 

decrease dramatically if the annual target were met or almost met. 

So far, the annual targets for renewables generation have all been missed 

(Table 4.1). This is an almost inevitable outcome of the design of the RO: once 

the target is approached, the value of ROCs plummets as the additional value 

of buyout redistribution is reduced and as competition between renewable 

generators increases as the attraction of ROCs to suppliers declines. This in turn 

leads to the value of ROCs dropping near to the price of short-run marginal 

costs (Pöyry 2006, see Figure 4.1). This latter phenomenon removes the 

incentive to invest in generation projects, particularly if they entail high capital 

costs or a high level of investor risk. The 2007 White Paper proposes new 

arrangements to mitigate the risk of this cliff edge if necessary in the future. 

However, the trend of failing to meet the targets is expected to continue, with 

energy consultancy Oxera estimating that the RO in its current form will deliver 

only 8.1% of supply from renewables by 2010, 11.4% by 2015 and 11.5% by 

2020 (Oxera 2007). 

Target percentage of 

total electricity supply 

from renewables 

Achieved percentage 

of total electricity 

supply 

Percentage of target 

achieved 

2002 

3.0 

1.8 

60 

2003 

4.3 

2.2 

51 

2004 

4.9 

3.1 

63 

2005 

5.5 

4.0 

73 

2006 

6.7 

4.4 

66 

Table 4.1: Renewables Obligation performance 2002 – 2007 

Sources: HMSO 2002, DTI 2007a 

Notes: The RO runs from 1 April - 31 March each year, while the DTI figures on the 

percentages achieved uses data from 1 January - 31 December. However, the overall 

percentage should not differ significantly. 

10 

The buyout price for 2008– 

2009 is set at £35.76. The price 

is increased annually in line with 

the Retail Price Index.



40 

100 

90 

80 

70 

60 

50 

ROC values (£/MWh) 

for a £30/MWh 

buyout price 

40 

30 

20 

10 

0 

30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 

Figure 4.1 Renewables Obligation Certificate price cliff edge 

Source: Pöyry 2006, p6 

The RO was originally designed to be technology-blind – in other words, the 

value of ROCs would be equal for all eligible technologies, regardless of their 

degree of technological maturity. In order to maximise profits, suppliers would 

therefore seek to buy output from the lowest-cost generating projects, using 

the most developed, least risky technology. This has led to a rapid expansion 

of projects using the relatively mature technologies of onshore wind and 

landfill gas, sited in the places with the best resource, and of biomass 

co-firing in existing coal fired power stations, which does not entail capital costs 

and is therefore relatively risk-free (Figure 4.2). Less mature technologies 

– for example some biomass and marine generation technologies – have 

been relatively unattractive because of the greater level of risk associated 

with them. So while wind and landfill gas have benefited from the RO, other 

renewable technologies have been neglected.



41 

1,800,000 

1,600,000 

1,400,000 

1,200,000 

1,000,000 

800,000 

600,000 

400,000 

200,000 

Number of 

ROCs 

issued 

Co-firing with 

energy crops 

Wave power 

Sewage gas 

Photovoltaics 

Onshore wind 

Offshore wind 

Micro hydro 

Landfill gas 

Hydro 20 MW 

DNC or less 

Co-firing biomass 

with fossil fuel 

Biomass with waste 

using ACT 

Biomass 

0 

Apr 

2002 

Oct 

2002 

Apr 

2003 

Oct 

2003 

Apr 

2004 

Oct 

2004 

Apr 

2005 

Oct 

2005 

Apr 

2006 

Figure 4.2: Renewables output under the Renewables Obligation 

Source: Ofgem data on ROC allocation, www.ofgem.gov.uk 

Oct 

2006 

When the RO was introduced, the government rejected the idea of banding 

the mechanism to provide different levels of support to newer and to more 

established technologies on the grounds that it would be tantamount to 

orchestrating the market mechanism in favour of one or more particular 

technologies over others through regulatory intervention. However, the 

government has gradually recognised that the RO has failed to encourage a 

diverse or particularly innovative set of renewables technologies (DTI 2007c). 

In response to this issue, the 2006 Energy Review and 2007 White Paper 

put forward a plan to create a banding system for the RO so as to try and 

compensate for the difficulties faced by new technologies. Existing projects will 

continue to be allocated one ROC per megawatt hour, but after the proposed 

changes take effect new renewables projects will receive different levels 

depending on the degree to which the technology is seen as mature (see Table 

4.2). Instead of the RO being set in terms of a proportion of electricity supplied, 

once the new banding system is introduced it will be defined by the number of 

ROCs presented to Ofgem by suppliers. The level of the obligation will increase 

each year on the basis of guaranteed headroom, with the headroom set at an 

additional 8% of the number of ROCs expected during any obligation period. 11 

The demand for ROCs for the next obligation period will thereby become the 

driver for bringing new capacity on-line, up to the government’s 2020 20% 

renewables target. These changes are expected to come into force in April 

2009. However, even with the reforms, the RO is only predicted to deliver 

around 13.4% of electricity supply from renewables by 2015 and 14% in 2020 

– well short of the government’s 2020 ambition (BERR 2008c). 

11 

The concept of guaranteed 

headroom means that the level 

of the Obligation for each period 

will be set at a level based on 

expected renewables generation 

plus a further proportion 

– in this case, an addition 

8% of the ROCs expected 

to be issued in the relevant 

period. The guarantee of an 

obligation requiring more ROCs 

than generation in a period is 

designed to avoid the risk of 

ROC prices crashing as the gap 

between generation achieved 

and the obligation target is 

narrowed, with a consequent 

fall-off in the level of recycling 

of the buyout fund.



42 

Band 

Technologies 

Support (ROC/MWh) 

Established 1 

Established 2 

Reference 

Post-demonstration 

Emerging 

Landfill 

Sewage gas; co-firing of non-energy-crop biomass 

Onshore wind [1]; hydro; energy from waste with CHP; co-firing 

of energy crops; geopressure 

Offshore wind; dedicated regular biomass 

Wave and tidal stream; anaerobic digestion, pyrolysis and 

gasification; dedicated biomass burning energy crops; dedicated 

biomass with CHP; photovoltaics; geothermal; tidal impoundment 

(tidal lagoons and barrages)



43 

of ROC price. If it is too low, then the technology will not be deployed. A key 

criterion for the success of the RO should not simply be whether or not the 

target is reached, but how effective it is in encouraging the broad portfolio 

of renewable technologies that will be necessary to bring about a long term 

decarbonisation of the UK energy system. It is therefore imperative that the 

ROC banding results in a balanced renewable mix while meeting the quotas 

outlined as part of the obligation. 

The RO’s failure so far either to meet its annual renewables targets or to 

encourage a diverse set of technologies has arisen because of the lack of 

long-term certainty about ROC prices, which increases developers’ uncertainty 

regarding risky new technologies. Banding may well succeed in encouraging 

development of certain technologies by guaranteeing a reasonable value for 

ROCs and so decreasing that uncertainty. However, the other shortcomings of 

the RO will remain: although there may well be higher returns for technologies in 

the emerging technologies bands, the more certain returns will still come from 

the established technologies which generate at lower cost and benefit from 

relatively high levels of experience. Certainty is a key factor in a competitive 

electricity market like the UK’s. So even if the banding is set at the appropriate 

levels, while the reformed RO may drive more investment in new renewables 

technologies, the most established and therefore least risky technologies – such 

as onshore wind - may well dominate despite the banding of the RO. 

The burning of biomass fuels in coal plants (co-firing) has been allowed under 

the RO, although there is currently a cap of 10% on the proportion of any 

supplier’s obligation that can be met through co-firing. This reflects concerns 

that the practice might extend the life of existing coal plants and provide coal 

generators with additional income from ROCs without having to make any 

significant capital expenditure to merit it. In addition, much of the fuel used for 

co-firing is imported, and can therefore entail transport related CO2 emissions, 

particularly given that the largest proportion of biomass used in co-firing in 

2005 came from Indonesia and Asia (see Table 4.3). 

The 2007 review of the RO proposes removing the 10% cap on co-firing, on 

the grounds that an increase in co-firing will mitigate carbon emissions from 

coal plants that would be operating irrespective of whether they were using 

coal or biomass. However, under the same proposals co-firing will only be 

eligible for a reduced ROC level (0.25 ROC/MWh). These arrangements will be 

reviewed if co-firing ROCs make up more than 10% of the total RO; however, 

given that a generator will now have to generate 4MWh for every ROC earned, 

this will allow a considerable expansion of biomass co-firing before a review 

is triggered, provided it continues to be an economic option. 14 Whether this 

is desirable is arguable, however: on the one hand, these new arrangements 

may encourage the emergence of viable biomass supply chains in the UK 

- domestically sourced, sustainably produced biomass. On the other hand, 

the most efficient use of limited sustainable biomass resources is in dedicated 

biomass combined heat and power (CHP) generators, rather than inefficient 

coal fired power stations, producing electricity but wasting the heat. 

14 

There is now a clear distinction 

between general biomass and 

energy crops, which are defined 

as plant crops planted after 

1989 grown primarily for the 

purpose of being used as a fuel, 

or which are miscanthus, shortrotation 

coppice willow or poplar. 

Energy crops will not be subject 

to the 10% co-firing trigger, and 

will have a higher level of ROC. 

This reflects the government’s 

aim of encouraging a viable and 

sustainable domestic energy 

crop supply chain.



44 

Feedstock 

Quantity burned 

(tonnes) 

% of total 

quantity 

burned 

Likely 

country 

of origin 

Mode of 

transport 

Transport-related 

emissions (kg 

CO2/tonne) 

Energy stock (short-rotation 

coppice, granulated willow, 

miscanthus) 

4,306 

0.3 


Road 

1.7 

Shea residues (meal and 

pellets) 

5,420 

0.4 

Africa 

Road and ship 

55.4 

Sunflower pellets 

Sewage sludge and 

waste-derived fuels 

20,331 

49,155 

1.4 

3.5 

Romania 


Road and ship 

Road 

47.1 

3.4 

Cereal co-products and 

pellets 

102,246 

7.2 


Road 

1.7 

Tallow 

119,828 

8.5 


Road 

1.7 

Olive waste (residue and 

expeller) 

283,222 

20.1 

Greece, Italy, 

Spain 

Road and ship 

21.2 

Wood (sawdust, chips, 

pellets etc) 

377,956 

26.8 

UK, Canada, 

Latvia, 

Scandinavia 

Road and ship 

1.7 (UK) 

to 42.9 

Palm residues (palm kernel 

expeller, shell, pellets, oil) 

449,657 

31.8 

Indonesia, 

Malaysia 

Road and ship 

106.5 (Indonesia) 

to 107.4 (Malaysia) 

Total mass 

1,412,121 

Total energy (PJ) 

14.1 

Table 4.3: Feedstock used in the UK for co-firing, 2005 

Source: DTI/DfT/Defra (2007), based on Themba Technology report for DTI, 

September 2006 

In addition to its failure so far to encourage the deployment of a diverse set of 

renewable technologies, the RO has proved to be an extremely costly mechanism 

for the amount of new output it has delivered, in comparison with mechanisms in 

other EU countries such as Germany or Spain (European Commission 2005). 

This poor performance on cost is due to the competitive nature of the RO, 

and the lack of guarantee of ROC prices for generators make it hard to predict 

revenue over the life of a project with any certainty (Gross et al. 2007), 

discouraging investors and leading to higher financing costs for new projects. 

In contrast, mechanisms which guarantee a preferential price for different 

renewable technologies’ output for a guaranteed period (feed-in tariffs), or 

which guarantee that generators will be paid an amount in addition to the market 

price (market uplift) entail much lower risks for generators, making it easier to 

finance new projects, and lowering the level of subsidy required. This is discussed 

in more detail in 4.1.2. 

Ofgem has responded to the European Commission’s analysis by calling for 

the RO to be replaced, rather than reviewed and redesigned along the lines of 

the 2007 reform proposals (Ofgem 2007, DTI 2007c). It recommends any of 

several options: the creation of feed-in tariffs for renewables; arrangements



45 

based on the market uplift model outlined above; or the redesign of the ROC 

market to remove the reliance on the redistribution of the buyout fund to provide 

additional value. Each of these would provide a degree of additional certainty for 

generators and therefore reduce the costs of deploying increased levels 

of renewables. 

The proposals are likely to be unpopular with BERR, which has consistently 

argued against major changes to the RO on the grounds that the consequent 

regulatory uncertainty would undermine investor confidence, and has opposed a 

feed-in type mechanism on the grounds that it would be picking winners rather 

than theoretically maintaining its neutrality towards technologies. However, 

the RO has undergone several revisions since its introduction (in 2004, 2005, 

2006 and most recently 2007 (DTI 2007c)), so the argument that policy 

stability is key to investor confidence can carry little weight. In addition, the 

latest set of reforms encapsulate an approach so fundamentally different to the 

original technology-blind philosophy of the RO that, whether or not investor 

confidence has been damaged, the credibility of the mechanism itself has been 

undermined. Finally, by allocating separate ROC bands to different technologies, 

the government has in effect already adopted the principles of a feed-in tariff, 

without the advantages that that mechanism can offer in terms of overall cost, 

from which the consumer would ultimately benefit. 

As Ofgem has pointed out, the latest set of proposals for the reform to the 

RO have taken a relatively complex market-based system and made it even 

more complex, both to understand and to administer (Ofgem 2007). 

The government urgently needs to investigate ways in which it can rectify 

the key failure of the RO: the lack of certainty it provides to investors. 

Such measures might include extending well beyond its current timeframe 

of 2015, introducing feed-in tariffs to complement the existing RO as well 

as reviewing any banding modifications to assess their effectiveness at 

encouraging technologies that are further from commercial deployment. 

4.1.2 Green tariffs 

The environmental benefits offered by renewable electricity mean that it can 

attract a premium price from consumers eager to contribute to CO2 emission 

reductions. Under current arrangements, however, there is little consensus 

between electricity suppliers about what constitutes an acceptable scope for green 

tariffs. For example, should they include the use of energy 

from waste, even though the supplier who buys and provides such energy 

is only doing what it is legally obliged to do under the RO. There have been a number 

of critical analyses of the various green tariffs on offer from electricity suppliers and 

the confusion that the lack of transparency can cause for consumers (Boardman et 

al. 2006, Graham 2007). 

Ofgem is currently developing guidelines for green tariffs which will attempt to 

classify and rank the various sources of energy which could be marketed as 

low-carbon and/or green (Ofgem 2007a). At the moment, Ofgem is proposing 

that low-carbon tariffs should include technologies such as ‘good quality’ 15 

15 

The criteria behind the 

government and industry’s 

definition of ‘good quality’ CHP 

include issues such as the overall 

efficiency of generation and the 

fuel used. A full definition can be 

found at www.chpqa.com


Sustainable Energy Systems 

46 

CHP, clean coal and nuclear power as well as renewables, ranked according to 

environmental impacts and efficiency. Ofgem suggests that they could also 

be made to include the offsetting of carbon emissions. The concept of green 

tariffs could thus end up being extended to include a range of non-renewable 

technologies which may generate low-carbon power but some of which may 

bring other environmental problems. The guidelines for low-carbon tariffs are 

currently intended to be voluntary, with Ofgem having no formal enforcement role 

for the scheme. As it stands there is a risk that some suppliers may be less than 

transparent in revealing the exact technology mix in their low-carbon scheme 

and there is little that can be done to prevent this. This is particularly serious given 

the implicit blurring of the edges in the proposed classification of low-carbon 

offerings – between ‘low-carbon’ and ‘green’ supply. At the moment, this would 

allow nuclear power and fossil fuel power produced using carbon sequestration 

and storage to be marketed as ‘green’ despite the broader environmental problems 

associated with the technologies. Logically, if these guidelines are for green power 

rather than just low-carbon power, then these broader impacts – for example, the 

volumes and half-lives of nuclear waste – should also be listed. 

Central government departments have a commitment to source 10% of 

their electricity from renewable sources by March 2008. In June 2007, 

the government agreed a contract worth more than £1 billion for EDF to 

supply 1TWh of renewable electricity to government departments up to 

2011. This represents around a third of electricity currently supplied to central 

government (Office of Government Commerce 2007). The four year deal will 

cost no more than buying conventional power and paying the associated CCL. 

This is interesting in that it implies that the level of certainty offered to EDF by 

a long term supply contract has reduced the unit cost of the power – providing 

evidence in favour of long-term contracts and/or feed-in tariffs for renewable 

output. However, little information has been revealed about the details of the 

deal. So, for example, it is not clear whether EDF or the government will retire 

the ROCs associated with the energy supplied, which would create additional 

demand for renewables output over and above that required by the RO. 

UK demand for green energy currently outstrips supply, with companies 

reportedly planning to buy 34TWh of green electricity in 2007 while 

renewables output amounted to only 18.1TWh in 2006 (Datamonitor 2007, 

DTI 2007a). Under current proposals, this shortfall in renewable generation 

could be met with non-renewable energy sources labelled as low-carbon, or by 

other schemes such as offsetting which, while they may offer some emissions 

reduction benefits, are doing little to encourage a shift to lower-carbon energy 

systems in the longer term. The disparity between the supply of renewable 

energy and the demand from UK consumers demonstrates the failure of 

the government’s renewables policy to create the conditions necessary for 

renewables generation to expand at the rate required to meet public demand. 

The danger is that the demand for renewable power will contribute to a 

situation where low-carbon power is marketed as green regardless of its wider 

environmental impacts. Unless information on these broad impacts is also



47 

provided, nuclear power and fossil fuel generation should be excluded from 

green tariff scheme marketing. 

4.1.3 Microgeneration and the Low Carbon Buildings Programme 

There is no specific target for microgeneration. However, the Energy Savings 

Trust has estimated that microgeneration technologies could provide 30–40% 

of UK electricity demand and reduce CO2 emissions by around 15% from the 

household sector by 2050 (DTI 2006a). Microgeneration technologies benefit 

from a reduced rate of VAT of 5%, but the main mechanism aimed at encouraging 

greater deployment is the Low Carbon Buildings Programme (LCBP). This 

provides a maximum of £6 million a year, up to a total of £86 million in grants 

for the installation of microgeneration in households (phase one) and buildings 

belonging to the public sector and charitable organisations (phase two). 

The LCBP’s phase one household grant scheme was suspended in March 2007 

when, due to popularity, the month’s £500,000 funds ran out in less than an hour. 

Although the government claimed that the suspension came about because the 

microgeneration industry was finding it hard to meet demand, the industry has 

denied this (ENDS Report, May 2007). When the scheme was relaunched in May 

2007, there was no longer a monthly cap on the funds available, and a new rule 

had been introduced requiring applicants to have received planning permission for 

the installation before applying. In addition, grants for some technologies had been 

reduced. The revised scheme appears to have run in to trouble, with a significant fall 

in the rate of grants being awarded for all technologies (ENDS Report, April 2008 

– see Table 4.4). 

The level of LCBP grants may initially have been set too high, leading to 

oversubscription of the scheme, but the revision following the scheme’s 

suspension appears to have cut the grants by too much, reducing the incentive 

to invest in the new technologies and thereby leading to an underspend. 

Although the scheme was originally planned to end in mid 2008, BERR has 

now decided to extend it until 2010, it was originally planned to end mid 2008, 

so that all allocated funds can be spent, rather than reconsidering the level of 

available grants. 

There do not seem to be plans to extend or expand the scheme beyond 2010, 

risking a collapse in the microgeneration market after that date. This risk may be 

mitigated by the inclusion of microgeneration in the new CERT scheme for energy 

suppliers, although given the availability of short-term, cheaper energy efficiency 

measures through which suppliers can meet their obligations, it seems unlikely 

that they will install significant levels of microgeneration in the short-term.



48 

Before reform 

After reform 

Solar thermal 

Approved 

209 

129 

Paid 

168 

68 

Solar photovoltaic 

Approved 

56 

33 

Paid 

44 

17 

Wind 

Approved 

152 

17 

Paid 

41 

5 

Ground source heat pumps 

Approved 

28 

22 

Paid 

18 

3 

Total 

Approved 

445 

201 

Paid 

271 

93 

Table 4.4: Low Carbon Buildings Programme grants per month 

Source: ENDS Report February 2008, p7 

A key factor in driving consumer demand for some microgeneration 

technologies is the price that owners can receive from electricity suppliers 

for excess power that they export to the networks (Energy Savings Trust et 

al. 2005). Under the Climate Change and Sustainable Energy Act 2006, the 

government has the power to require electricity suppliers to pay a fair price 

for these exports. However, the definition of a fair price is unclear: a review 

by Ofgem of the various tariffs on offer from electricity suppliers showed a 

huge range, from 4.25p/kWh (Scottish Power) to 18p/kWh (Scottish and 

Southern Energy), all of which Ofgem considered to be fair on the grounds 

that exported microgeneration energy is worth between 0.1 and 5.9p/kWh 

to the suppliers depending on the technology deployed and fuel used (Ofgem 

2008). However, this does not include the value of ROCs that suppliers might 

receive together with the energy (currently around 4.5p/kWh), which would 

boost the overall value of any microgeneration export considerably. Given the 

disparity in prices and the exclusion of ROC values in Ofgem’s assessment, it is 

questionable whether all suppliers are offering a fair price for microgeneration 

exports. Despite this it appears unlikely that the government will pursue its 

powers under the Climate Change and Sustainable Energy Act to require them 

to improve on their offerings, instead leaving it to individual microgenerators to 

shop around to find the best available rate. As Ofgem notes, the inconsistencies 

in information provided by suppliers means that this task can be difficult 

and time consuming and so might discourage individuals from adopting 

microgeneration technologies. 

Notwithstanding its commitment to aggressive implementation of its 

Microgeneration Strategy, the government’s approach to supporting 

microgeneration is thus confused at best. Despite the long-term potential of 

the various technologies to contribute to emissions reductions, there is little 

short-term coherence in the policy approach to encouraging their adoption, 

with no apparent attempt to resolve the problems experienced by the LCBP 

since its relaunch, nor to ensure that suppliers approach the buying of energy



49 

exported from microgeneration installations in a consistent way. Both these 

shortcomings can be relatively simply rectified by the government reviewing 

and extending the LCBP and ensuring – using legal powers if necessary – that 

the prices paid for microgeneration exports are both consistent and fair. 

4.2 Addressing heat 

Emissions from heat make up a very considerable proportion of the UK’s total 

CO2 emissions (see Figure 4.4). However, until the 2007 White Paper there 

was little policy attention focused on the potential to reduce emissions from 

heat systems. As with electricity generation, there can be two approaches to 

reducing emissions from heat generation: decreasing either energy intensity or 

carbon intensity. Fossil-fuelled CHP plants can be used to generate both heat 

and electricity in areas with a suitable demand for heat (industrial sites with 

a high demand for heat, areas of high population density) and so contribute 

to emission reduction through the more efficient use of such fuels. Further 

reductions in carbon emissions can be obtained through the use of biomass as 

a substitute for fossil fuels, either in CHP plants or as a heat-only technology. 

Low-carbon heat is also provided by renewable sources such as ground source 

heat pumps and solar thermal arrays. However, modifying buildings’ existing 

heat systems to accommodate these technologies will entail considerable 

investment and a shift in attitudes to how heat is produced and used. Achieving 

this will require strong direction from government, making it clear that 

renewable and low-carbon heat is a necessary part of the UK’s goal of reduce 

its overall carbon emissions. 

Domestic heat 20% 

Services heat 7% 

Industrial heat 20% 

Other 53% 

Source: DTI 2007a 

Notes: Figures for heat 

include emissions from 

generation of electricity 

used in turn 

to generate heat 

Figure 4.4 Carbon dioxide emissions by energy use



50 

4.2.1 Combined heat and power 

CHP burns fossil fuels or biomass to generate both heat and electricity. Even 

with the use of fossil fuels, CHP can produce around 30% lower emissions 

than conventional electricity generation technologies (Defra 2007a). The 

government has two long-standing targets for CHP capacity: 5GW of ‘good 

quality’ CHP capacity by 2000, and 10GW of ‘good quality’ CHP by 2010. 

However, despite these targets, and the environmental benefits that CHP can 

provide, the technology has suffered from years of neglect in government 

policy, and there have only been relatively small increases in its use over the last 

few years. The 2005 target was missed, and it is certain that, barring a massive 

shift in attitudes and policies, the 2010 target will be too – in 2006, capacity 

was around 5.5GW and Defra currently estimates that despite there being the 

potential for 13.6GW by 2010, only around 7.5GW of capacity will actually be 

on-line by then (BERR 2007a, Defra 2007e). 

As with renewables, many CHP projects are relatively small-scale and most 

are connected to distribution lines. Larger plants are used to provide heat and 

power for industrial sites, but smaller plants can be used to provide all energy 

needs (heat, electricity and cooling) at the district level. Such plants are 

particularly suited to high-density urban populations (Royal Commission on 

Environmental Pollution 2007). 

New CHP projects face a number of hurdles among the most important of which 

is the capital cost of constructing the heat (and, where applicable, cooling) 

networks to distribute their output. The potential income from Levy Exemption 

Certificates (LECs) under the Climate Change Levy and ROCs (if the project 

uses renewable fuel) does not necessarily provide enough financial certainty 

to overcome the risk presented by these initial high construction costs. In 

addition, the cost of generating electricity in CHP plants is higher than that of 

conventional generation, which puts CHP at a disadvantage in a competitive 

electricity market. Although operators get some revenue from the heat they 

also supply, historically this has not been enough to offset the higher costs. 

It is clear from the 2007 White Paper and 2006 Climate Change Programme that 

the government recognises the potential importance of CHP at the industrial and 

district levels, but it has so far failed to produce policy measures to ensure that 

the technology is taken up more widely. The White Paper outlined the support 

schemes which could apply to CHP. These include the availability of some Enhanced 

Capital Allowances for equipment, exclusion from the CCL, partial exemption from 

business rates and recognition of the carbon savings associated with CHP within 

the UK’s allocation of EU ETS permits. However, these mechanisms are clearly not 

enough to overcome the barriers faced by CHP, in part because of the short lived 

nature of the CCL scheme, or uncertainty about their future prospects. Similarly, 

the requirement in building regulations to ‘consider’ the implementation of CHP 

schemes has proved ineffective because it is merely advisory. 

One way forward would be to establish some form of heat obligation on energy 

suppliers to require them to provide a certain proportion of heat from CHP



51 

plants to their customers. However, the design and implementation of such a 

scheme would be complex and possibly subject to the same flaws as the RO. 

An alternative would be to provide heat suppliers with a guaranteed payment 

per unit of heat for a specified period of time (ie a feed-in tariff). The level of 

support could vary according to the technology used (ie whether renewable or 

not) and the level of carbon savings it was able to achieve. 

Yet another approach would be to encourage energy suppliers to adopt a more 

adventurous approach to energy services than has been the case so far under 

the EEC. This appears to be occurring with the shift in emphasis towards ESCOs 

in the plans for the Supplier Obligation (see page 32), but the fact that this is 

only set to run until 2020 may undermine the prospects for projects entailing 

relatively high capital expenditure, which would include CHP. The Zero Carbon 

Homes initiative appears to offer more hope for the sector, given that it is 

whole developments that need to qualify as zero carbon rather than individual 

homes. However, this initiative will not contribute to the 2010 CHP target, and 

so the sector risks further stagnation in the intervening years. 

4.2.2 Biomass strategy 

The use of biomass and other renewables to provide heat services has declined 

in the UK since the mid 1990s (Figure 4.5). In 2006 Defra established the 

Bioenergy Capital Grants Scheme to encourage the deployment of biomassfuelled 

CHP plants (Defra 2006a). However, the available funds are a modest 

£10–15 million spread over five years, which means that the impact the 

scheme produces will be overshadowed by the continuing emphasis on the use 

of biomass fuels in co-firing. 

Understandably, therefore, hopes were raised when the 2007 White Paper was 

accompanied by a long-awaited biomass strategy intended to encourage the 

creation of sustainable supply chains for biomass crops and increase the use of 

biomass in UK energy production. 

Two years earlier, the government’s Biomass Task Force had estimated that, 

if encouraged by policies to stimulate the creation of supply chains and to 

reward the provision of low-carbon heat, biomass could provide around 3% 

of UK heat demand by 2010, and 7% by 2015, reducing annual emissions by 

0.9MtC and 2.7MtC respectively (Biomass Task Force 2005). However, when 

finally published, the biomass strategy came as a disappointment – particularly 

in terms of its lack of commitment to driving a biomass heat sector, given its 

recognition that, in comparison with other biomass applications, heat provision 

is the most cost effective way of reducing carbon emissions. The strategy 

estimates that existing UK biomass resources could save emissions of between 

4.88MtC and 5.1MtC a year if used to supply both electricity and heat (see 

Table 4.5), and an additional 1.88MtCe through avoiding emissions from 

landfill. Yet it offers no new measures to encourage greater use of biomass in 

the energy system, neither does it establish any targets for the future use of 

biomass in the UK (apart from biofuels) (DTI, DfT, Defra 2007).



52 

POTENTIAL CARBON SAVINGS (million tonnes C) ADDITIONAL CARBON 

Electricity only Heat only Heat and SAVINGS from avoided 

Biomass source electricity landfill (mtce) 

‘Dry’ materials 

Sawmill conversion products 0.23-0.27 0.38-0.44 0.46-0.54 

and arboricultural arisings 

Energy crops (short rotation 0.03-0.04 0.04-0.06 0.05-0.08 

coppice, e.g. willow / poplar 

and miscanthus) 

Cereal straw 0.40-0.48 0.65-0.80 0.79-0.97 

Paper and card [3] 0.13-0.34 0.21-0.55 0.27-0.71 0.59 

Garden / plant waste [3] 0.14 0.23 0.32 0.13 

Waste wood [3] 0.91 1.50 2.05 0.45 

Sewage sludge (dry solids) 0.05-0.07 0.08-0.11 0.10-0.13 

Poultry manure - meat / birds 0.15 0.25 0.30 

(60% DM) 

Sub total 2.04-2.40 3.34-3.94 4.34-5.10 1.17 

‘Wet’ materials 

Poultry manure - egg laying flock 0.03-0.06 0.04-0.08 0.05-0.10 

(30% DM) 

Dairy cattle slurry (10% SM) 0.15-0.16 0.19-0.20 0.24-0.26 

Pig manures (10% DM) 0.04 0.05 0.06 

Food waste [3] 0.09-0.16 0.14-0.26 0.19-0.33 0.71 

Sub total 0.31-0.42 0.42-0.59 0.54-0.75 0.71 

Total 2.35-2.82 3.76-4.53 4.88-5.85 1.88 

Table 4.5 Potential annual emission savings from replacing grid electricity 

and heating oil with biomass 

Data supplied by D.Turley, Central Science Laboratory 

except [3] provided by James Vause, Defra 

Biomass offers the possibility of compensating for the intermittency of other 

forms of renewable generation, while producing almost carbon-neutral energy 

(Biomass Task Force 2005). If the UK is to move towards more sustainable 

energy systems in the future, biomass will have an important role to play in 

ensuring their reliable delivery. Action to promote the expansion of a viable and 

sustainable biomass industry in the UK is therefore vital in the short-term if 

the necessary longer-term strategic shifts in energy systems are to take place. 

This will involve an urgent change of emphasis in government policy from the 

use of biomass for co-firing in conventional coal fired power stations to more 

local, smaller-scale CHP plants. And the establishment of viable supply chains 

between biomass producers and users. Given the range of players that would 

be involved, this will not be a simple task, but increasing the level of certainty



53 

for producers that they will find a long term, preferably local market for their 

produce could be started by actively seeking to promote biomass CHP through 

the RO (or preferably a feed-in tariff) and equivalent support mechanism for 

renewable heat 

Thousands of tonnes of oil equivalent 

900.0 

800.0 

700.0 

600.0 

500.0 

400.0 

300.0 

200.0 

100.0 

Geothermal amplifiers 

Municipal solid biodegradable 

waste combustion 

Straw combustion, farm 

waste digestion, short rotation 

coppice 

Wood combustion industrial 

Wood combustion domestic 

Sewage sludge digestion 

Landfill gas 

Active solar heating 

0 

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 

Figure 4.5: Renewable energy use for heat and electricity, 1996–2006 

Source: DTI 2007a, Chart 2 

4.3 Conclusions: sustainable energy systems 

As with action to reduce energy intensity, the mechanisms the government 

has so far put in place to reduce the carbon intensity of the UK economy show 

a remarkable lack of ambition and offer little prospect of the country meeting 

its provisional EU target of 15% of energy provided by renewable sources by 

2020, or the 26–32% cut in CO2 emissions proposed by the Climate Change 

Bill for the same date. The Renewables Obligation is the main mechanism 

intended to encourage the growth of renewable technologies, but it has so 

far failed to achieve its aims. The proposed revisions to the RO are unlikely to 

correct the failings in the mechanism completely because they do not address 

the fundamental lack of certainty for investors. The RO should therefore 

be abandoned for new projects and a feed-in tariff established in its place 

to provide improved investor confidence and so stimulate higher levels of 

deployment of both established and emerging renewables technologies. On 

the basis of European experience, a feed-in tariff approach would also reduce 

the costs to the consumer of encouraging renewable technologies. 

Another programme for encouraging renewables, the Low Carbon Buildings 

Programme, seems to have been successful in encouraging individuals and 

organisations to engage in small-scale renewables projects. In view of this 

success, the government should extend the scheme rather than allowing 

it to end in 2009. It makes no sense to discard the programme before the

Connecting the future: the UK’s renewable energy strategy Sustainable energy systems 54 

introduction of schemes aimed at encouraging energy suppliers to adopt an 

ESCO approach to their business, as this will leave a gap in the provision of 

incentives for building small-scale renewables. 

Of all the energy sectors, heat has been most neglected by the government, 

despite the fact that the sector is responsible for nearly half the UK’s CO2 

emissions. Combined heat and power systems offer either hugely improved 

efficiency in fossil-fuel use, or carbon neutral energy in the case of those 

that use renewable resources. However, the government has done little to 

encourage the technology. Concrete requirements to encourage the greater 

deployment of CHP in all new developments are needed, and there needs to 

be a clear presumption against any new fossil fuel power plant which does not 

provide heat as well as electricity. Additional drivers, such as carbon limits for 

new power plants, may also be necessary. 

The neglect of CHP is part of a wider lack of institutional support for heat 

related technologies. Responsibility for the heat sector is shared between 

BERR and Defra, but in practice seems to fall between the two, with neither 

department taking responsibility for example for encouraging the rapid 

deployment of CHP projects. Moreover, there is no real regulatory framework 

for the sector, which could provide a basis for encouraging development of heat 

provision. A heat sector regulator needs to be set up with the explicit intention 

of encouraging the more efficient provision of low-carbon heat. In addition, 

there needs to be a clear delineation between the responsibilities of different 

government departments and a binding target for the use of low carbon-heat 

should be introduced.

55 

05 

Broader system 

issues 

98% of the energy needs of this building in Malmö, Sweden 

and the offices within it, are met by renewable energy. 



Broader system issues 

56 

This section set out some of the broader system issues which have to be 

addressed if there is to be a shift to significantly lower-carbon energy systems. 

The implementation of new technologies is problematic because existing, 

conventional technologies are locked in by a variety of economic and social 

factors. These effectively exclude other technologies which do not conform to 

the characteristics of the conventional technologies. 

Traditionally, the electricity and heat sectors have been treated in policy and 

regulatory terms as entirely separate areas, with measures directed at encouraging 

technologies in one particular area. The RO (see section 4.1.1) is a good example 

of this sort of policy design, despite the fact that some renewables technologies, 

notably biomass, can offer heat services as well as electricity. Moreover, because 

the RO was designed to promote relatively large-scale renewable output, 

microgeneration technologies were effectively excluded from the scheme at the 

outset. Although this situation has subsequently been adjusted, it remains complex 

and difficult for householders to access ROCs under the RO). Heat providing 

renewables technologies – ground source heat pumps, solar thermal arrays – are 

excluded altogether, and do not have an equivalent mechanism to support their 

output. While this is perhaps understandable in that the RO was designed to 

promote renewable electricity supplies, nevertheless a more effective approach to 

improved efficiency and the longer-term shift to low-carbon energy systems could 

be provided by an integrated renewables support mechanism designed to maximise 

all the environmental benefits that renewables can offer, whether in electricity 

generation or in other energy systems. 

The increasing integration of energy systems will also require consideration of 

the environmental benefits that can potentially be offered by advanced fossil 

fuel technologies – in particular, the efficient use of fossil fuels in CHP plants, 

which produce lower CO2 emissions per unit of usable energy provided than 

plants producing only heat or electricity, and (in the case of smaller-scale local 

plants) offer improved efficiency in transporting electricity from the point of 

production to the point of use as a result of lower transmission and distribution 

losses. 

The need is therefore for a more integrated, holistic policy approach to 

minimising carbon emissions from the UK’s energy systems, which would 

involve explicitly considering and rewarding all technologies that can offer a 

reduction in emissions. This approach would set the UK more decisively on a 

path to achieving lower-carbon energy systems. 

Dealing separately with the various obstacles to the increased take up of 

renewables, and other low-carbon technologies, is to an extent artificial, in that 

such obstacles tend to be interrelated. For example, infrastructure problems 

can be connected to market conditions, planning issues, financial norms and so 

on. In other words, their extent and impact are to a degree influenced by other 

system components. With that proviso in mind, however, a review of some of 

the key regulatory and system obstacles to a low-carbon energy future in the 

UK follows.



57 

5.1 Planning 

The design of the RO and the risks entailed in participating in the renewables 

market are not the only reasons why renewables development has lagged 

behind the RO targets, and why the 2010 target will be missed. Another key 

issue is the planning regime, which has impacted on the development of both 

renewable generation projects and the network infrastructure that they require 

to export their power. At present, for example, it takes on average 21 months 

for a wind farm to get planning consent under the Electricity Act (DTI 2007). 

Of course, the planning process raises hurdles for all energy technology 

options, including delays in obtaining consent, the costs of participating in 

inquiry processes, and high degrees of uncertainty for developers and local 

communities about the prospects of any particular project proceeding. The 

problems can be particularly acute for renewables development because of 

the high number of relatively small projects which are often sited in remote, 

undeveloped areas. This can raise concerns over landscape issues and impacts 

on wildlife. Conversely, because projects are often sited on distribution 

lines rather than on the transmission grid, they may be less remote than 

conventional centralised generating plants. Their proximity to areas where 

people live brings advantages in improved system efficiency, but can also 

heighten public objections. This can be exacerbated by inconsistencies in 

different local planning authorities’ attitudes to various types of energy project. 

The 2007 White Paper put forward a range of measures intended to improve 

the planning context for renewables. These include a new Planning Policy 

Statement on Climate Change which emphasises the role that planning can play 

in achieving reductions in CO2 emissions, partly through increased levels of 

renewables development; and a proposal to encourage some microgeneration 

technologies by treating them as permitted development not subject to 

planning permission in certain circumstances (Communities and Local 

Government 2007b). 

More fundamental changes to the planning inquiry process were also considered 

during the White Paper drafting process and a separate White Paper – Planning 

for a sustainable future – was published in May 2007 (Communities and Local 

Government 2007a). The reforms in this White Paper are aimed at major 

infrastructure projects, including generating stations over 50MW and some 

transmission and distribution lines. Decisions on major infrastructure will be taken 

by a planning commission, with the context for its decisions set by national policy 

statements setting out the government’s position on particular technologies and 

their role in meeting national energy goals. 

Ruling out debate about specific technologies and national policy goals, which 

has played an important role in public inquiries in the past, is aimed at speeding 

up and simplifying the decision process about major new infrastructure 

projects. This should bring a higher degree of certainty for developers of new 

generating projects which fall within the remit of the new arrangements. 

However, these arrangements will remove the option for local communities



58 

to engage directly in debates about national policy in response to specific 

proposals, including the prospect of new coal and nuclear plants as well as large 

renewable energy projects. 

In addition, the new arrangements do not cover onshore developments under 

50MW or offshore projects over 100MW. Ministers will have some discretion 

as to how they approach smaller projects, allowing them to fall under the new 

major infrastructure arrangements if they are seen as of national significance, 

and a new Planning Policy Statement covering these smaller projects should 

be published for consultation later in 2008. However, until that new planning 

policy statement comes in to force, there is a risk that projects between the 

upper limit of microgeneration and the lower limit of major infrastructure 

may not benefit from the new planning arrangements. This risk is of particular 

importance for renewables projects, many of which are below 50MW (although 

in the case of onshore wind, recent proposals have tended to be larger in scale 

than earlier projects and the new arrangements in the Planning for a Sustainable 

Future White Paper may well encourage this trend). 

The proposed changes to the planning regime, then, acknowledge some of 

the difficulties that face large energy projects in the current arrangements. 

However, the advantages for renewables resulting from these changes in the 

planning regime are likely to be limited when compared to the benefits for 

conventional technologies for the following reasons: 

• The amount of time taken to secure approvals. 

• The scale of projects receiving individual approvals. 

• The fact that the arrangements will only benefit certain technologies 

(small scale wave and tidal power projects will see little benefit from 

these proposals). 

• The fact that almost half of all renewable energy potential in the UK is 

located in Scotland – and therefore under the jurisdiction of the Scottish 

Executive’s planning laws. 

5.2 Infrastructure 

The problem of existing infrastructure acting as a barrier to new technologies 

has been relatively well analysed in the context of the electricity system, where 

it is widely accepted that the rules of operation, the design of networks and 

the associated style of regulation have in particular discouraged generators 

from connecting renewables and small-scale generating projects to distribution 

networks (DTI 2001, Distributed Generation Co-ordinating Group 2005). In 

part these problems arise from the historic design of the electricity system: 

increasingly centralised generation has led to a greater reliance on transporting 

electricity through the high-voltage transmission network, while the 

lower-voltage distribution networks have become increasingly passive, 

required only to shift the electricity from the transmission network to the



59 

point of use, and have tended to be designed for one-way power flows. 

These passive characteristics had been enshrined in technical and operational 

standards, which do not make allowance for energy inputs from distributed 

generation. The upsurge of smaller-scale renewables projects requiring 

connection to these overwhelmingly passive networks therefore created 

problems for their operation. 

There has been some success with revising the technical rules governing 

the design and operation of distribution networks to allow them to become 

more active. However, despite the fact that the government recognises that 

distributed generation can offer advantages both in reduced CO2 emissions and 

improved system efficiency, institutional barriers still remain (DTI and Ofgem 

2007). These include a mismatch between the interests of project developers 

and those of the distribution network operator (DNO). The developer of a 

new project may face constraints as to where it can build, but the locations 

open to it may not coincide with the DNO’s plans for upgrading or renewing its 

network to allow more active operation. Certainly, respondents to the DTI/ 

Ofgem consultation on the barriers to greater levels of distributed generation 

felt that ‘DNOs do not approach the connection of distributed generators in a 

sufficiently positive way.’ (DTI and Ofgem 2007, p23). 

Ofgem has recently tried to encourage both more distributed generation and 

innovation in the design and operation of distribution networks, through two 

mechanisms: the Innovation Funding Incentive (IFI) and Registered Power 

Zones (RPZs), both of which were introduced in April 2005. However, only four 

RPZs have been approved since 2005, well below the maximum limit imposed 

by Ofgem of two projects per DNO per year. One of the main reasons for this 

is the mismatch between the interests of generators and DNOs mentioned 

above. In contrast, the IFI allows DNOs to invest in research and development 

activities to improve the effective operation of their networks. However, in the 

early stages of the IFI programme most DNO R&D expenditure was allocated to 

work on extending the lifetime of their existing assets, rather than investing in 

projects which would allow the networks to become more active and therefore 

more suited to higher levels of distributed generation. As regulated monopolies, 

DNOs are required to justify their expenditure on infrastructure to Ofgem, 

and despite the implementation of the IFI scheme, there is still not a driver 

sufficiently strong to encourage them to adopt a longer-term view of network 

design and operation that would enable greater levels of distributed generation: 

‘Sufficiently strong business drivers for DNOs to adopt ANM [active 

network management] solutions are not yet evident: the present 

regulatory regime gives little incentive for co-ordination and 

long-term strategic planning for ANM infrastructure or to adopt 

new technologies or operating practices. At present, it is difficult 

for DNOs to make the business case to adopt ANM solutions for 

generation connection applications even if they may pave the way 

for more efficient network operation in the long-term.’ 

(EA Technology 2006)



60 

The extent to which infrastructure issues are inhibiting the expansion of 

low-carbon (in particular renewable) technologies is perhaps even more 

marked in the case of transmission networks. The creation of a single 

British electricity market (known as BETTA – British Electricity Trading and 

Transmissions Arrangements) led to a rush of applications for onshore wind 

projects in Scotland, which has the UK’s largest wind resource. The developers 

of these projects were keen to export their electricity from Scotland into the 

rest of the British system (DTI 2007). However, the exporting of electricity 

is constrained by a limited transmission connection between Scotland and the 

north of England. This will need to be expanded before new renewables projects 

hoping to supply England and Wales can connect to the Scottish transmission 

network. As of 2007, more than 150 mainly renewables projects with a 

combined capacity of over 12GW were waiting for connection in Scotland 

(Ofgem and BERR 2007). 

The building of new transmission lines and the upgrading of existing ones are 

subject to planning approvals, which can take several years to be resolved. 

The last major investment in transmission lines, in the Vale of York, took 

nearly 15 years from the beginning of the project to delivery (AEA Energy 

and Environment 2007). The situation of the projects awaiting connection is 

further complicated by the fact that offers for connection – which dictate the 

place in the queue – are made on a first-come, first-served basis, and do not 

necessarily reflect the economic viability of the project nor its future prospects 

of operating. 

Most of the transmission capacity currently available is being used by 

conventional (ie coal, gas or nuclear) generation. This generation is therefore 

inhibiting the development and connection of more sustainable ways of 

generating electricity. An alternative approach, whereby renewables projects 

were granted priority access to the transmission network, and existing 

conventional generation was allocated spare capacity, would be more 

compatible with reducing CO2 emissions and encouraging the deployment of 

new technologies. It would also reduce the degree to which 

the annual RO targets are missed. This approach would be in line with 

transmission access arrangements in several other EU countries where 

renewables have experienced a rapid expansion in capacity. 16 

Beyond the question of access policy, however, the issues of distribution 

incompatibility and inadequate transmission capacity need to be viewed in 

the light of the fact that nearly 70% of the UK’s electricity network 

infrastructure is ageing and in need of replacement or upgrading (Energy 

Networks Association 2006). This situation clearly provides an invaluable 

opportunity to design a new network around the needs of low-carbon 

generating technologies, giving the UK the best chance of ensuring a truly 

sustainable energy system and a future of steadily falling emissions. At the 

same time, it raises the alarming prospect that, if this opportunity is not 

seized, the UK may find itself with a newly renovated infrastructure that is 

still incompatible with sustainable generation, setting back the country’s 

16 

For example Denmark and 

Germany. Priority access 

to transmission networks 

is permitted by the 2001 

Renewables Directive (Directive 

2001/77/EC), which states 

that Member States ‘may also 

provide for priority access to 

the grid system of electricity 

produced from renewable energy 

sources’ (Article 7).


Broader System Issues 

61 

low-carbon aspirations by several decades until the network is again in need of 

such a comprehensive overhaul. 

The issues may be less pronounced, or less well explored, in other energy 

systems. However, it is clear that there are significant infrastructure issues 

which limit the emergence of heat networks, which currently lack any real 

incentive towards investment given the competitive nature of energy markets 

and the perceived social preference for heating provision through individual 

boilers (AEA Energy and Environment 2007). 

So while the shortcomings of physical infrastructure are acting as a constraint 

on renewables deployment in energy systems, this situation has in part come 

about because of failings in other system components such as planning, 

incentivisation and market design. Until the broader problems are identified 

and corrected, infrastructure will continue to act as a constraint on sustainable 

energy options. However, in the case of the electricity system in particular, 

there is a real opportunity to act now to address the barriers in view of the 

imminent need to overhaul the network infrastructure. Depending on how 

it approaches this challenge, the government can choose either to enable 

the necessary investment to facilitate much greater levels of connection by 

sustainable generation, or to condemn small-scale and renewables projects to 

decades of further difficulties in connecting to the grid. 

5.3 Regulation and market design 

As well as regulating the monopoly network operators, Ofgem is also 

responsible for the design of the market for electricity trading. While it does 

not directly regulate the choice of generating technology, it does exercise 

an indirect influence by the structure of its trading rules and its emphasis on 

lowest-cost output. 

Current electricity market arrangements reflect the centralised nature of 

the electricity system, and were designed with the intention of ensuring the 

lowest possible energy costs for consumers. The characteristics of small-scale 

or renewable generation do not conform to the overall aims and design of the 

market. 

The conflicts arise in two particular areas. Firstly, engaging in the market entails 

high transaction costs because of the need to monitor prices and arrangements 

on a constant basis; smaller companies do not have the financial or staff 

resources to engage at this level. Secondly, the market rewards predictable, 

flexible generation, and penalises generation which is less predictable and 

flexible, like much renewable and CHP output. Generators are required to state 

in advance how much energy they will produce, and if they fail to meet this 

forecast they are penalised. This arrangement is meant to reflect the additional 

costs imposed on the system by the need to balance it at short notice to 

compensate for over or undersupply. However, the penalties have often 

outweighed the real costs of balancing the system, and in some cases have 

meant that wind generators are actually operating at a loss (AEA Energy and


Broader System Issues 

62 

Environment 2007). While there is a case for arguing that renewable and 

small-scale generators should pay if they complicate the operation of the 

system, there is no case for arguing that those costs should be higher than the 

real costs of compensating for their unpredictability. As it stands, the market 

designed by Ofgem acts as a barrier to the viability of sustainable generating 

technologies. 

Heat from renewable and CHP sources, on the other hand, suffers from the 

fact that there is as yet no overarching market structure within which it can 

be deployed. Measures such as a requirement that no fossil fuel plant can be 

built without a specified end-use for its waste heat could be used to drive an 

expansion of the CHP market, but until the Zero Carbon Homes plan and the 

ambition for zero carbon non-domestic buildings are implemented in 2016 and 

2019 respectively there is little incentives for individuals or small consumers 

to pursue renewable heat technologies or CHP. Setting a clear target for 

renewable heat, and expanding the CHP targets may kick start an expansion 

of the sector and establishing a feed-in tariff will create extra impetus by 

rewarding renewable heat in comparison with conventional fossil fuel sources. 

These sorts of measures will, however, have to be delivered in a framework 

which protects both consumers and producers from unrealistic prices while at 

the same time encouraging investment in infrastructure to produce and deliver 

low-carbon heat. If Ofgem – or another regulatory body – is put in charge, 

this sort of long-term strategic approach will need to be an explicit part of its 

market design. 

5.4 Social and institutional inertia 

A great deal of government action is aimed at informing the public about 

climate change, the advantages of energy efficiency and the potential of 

low-carbon generation. The intention behind such information is to encourage 

behavioural change. However, the level of any resulting change is extremely 

uncertain, and it may take years to emerge. So, for example, the costs of 

installing energy efficiency measures in the home act as a disincentive for some 

consumers, despite the financial benefits that can be realised in the longer 

term. Similarly, business is traditionally very wary about the imposition of new 

measures to increase energy efficiency – such as the Climate Change Levy 

– despite the fact that they are designed to encourage savings in the 

longer-term and may therefore improve businesses’ competitive advantage. 

Given the urgency of the need to reduce CO2 emissions, it may be necessary 

to introduce further measures to force change, rather than placing too much 

reliance on voluntary action on the basis of improved information. The need for 

a broader approach, including regulation to force social change or changes in 

business practice, has been identified by the Prime Minister’s Strategy Unit: 

‘We need to strike the right balance between the state, market 

mechanisms and individual and community action. The solution lies not 

in any one by itself, but in the right combination. Carbon cap-and-trade, 

for example, is a very sophisticated mechanism because it guarantees 

achieving the outcome while allowing maximum flexibility. But this must



63 

be supported by an active state. Behaviour is driven by a number 

of factors, not just by financial costs and benefits. The state has to 

provide additional incentives, regulation and information. Leaving it 

all to a vague notion of social responsibility will not reduce emissions.’ 

(Prime Minister’s Strategy Unit 2007, p4) 

Institutional inertia can also act as a barrier to the implementation of 

sustainable energy technologies. The rules governing how institutions behave 

have a significant impact on policies and measures designed to govern the 

operation of energy systems. Ofgem’s design of the electricity market, 

discussed above, is a good example of this. Ofgem’s role is defined by a series 

of duties which are set out in the Utilities Act 2000 and the Energy Act 2004. 

Its primary duty is to ‘protect the interests of consumers, present and future, 

wherever appropriate, by promoting effective competition between persons 

engaged in … the generation, transmission, distribution or supply of electricity’ 

(Ofgem 2007b, p45). It also has various secondary or subsidiary duties (see 

Figure 5.1). The Energy Act added a secondary Duty on Ofgem to carry out 

its functions in the manner which it considers will best contribute to the 

achievement of sustainable development. 

Principal objective: 

Protect the interests of present and future consumers, 

wherever appropriate by promoting effective competition 

In meeting the principal objective, Ofgem 

must have regard to: 

• Ensuring that all reasonable demands 

for electricity are met 

• Ensuring that licence holders are able to 

finance their obligations 

• Protecting the interests of certain 

groups, including the sick and elderly 

and those on low incomes 

It must also have regard to: 

• The effect on the environment 

of the generation, transmission, 

distribution and supply of electricity 

• Ensuring that regulatory principles 

are transparent, accountable, 

proportionate, consistent and targeted 

• The social and environmental guidance 

issued by the Secretary of State 

Subject to the above, Ofgem must carry out 

its duties in the way it considers is best calculated to: 

• Promote efficiency and economy 

• Protect the public from dangers 

• Secure a diverse and viable long-term electricity supply 

• Contribute to the achievement of sustainable development 

Figure 5.1: Ofgem’s duties 

Source: Ofgem 2007b 

The government has issued guidance on how Ofgem should approach the 

need to balance its duties. Within its framework of primary and secondary 

objectives, Ofgem is free to exercise a significant level of discretion in weighing 

up issues and making decisions (Ofgem 2006). In addition, the sustainable 

development requirement is open to a high level of interpretation, in terms both



64 

of what Ofgem considers to be sustainable development, and of the means in 

it may or may not consider appropriate to achieving it. Designing regulatory 

measures requires Ofgem to balance its economic role with a broader, long 

term consideration of its social and environmental impacts. However, both 

its sustainable development duty and the regard it must have to social and 

environmental guidance leave a great deal of latitude as to how Ofgem chooses 

to balance them within its principal objective – most fundamentally in its design 

of electricity market arrangements which reward large scale, centralised, often 

fossil fuel plants at the expense of smaller scale renewable generation. The 

Sustainable Development Commission has recently reviewed Ofgem’s role and 

has recommended that its duties should be revised in order to achieve a more 

balanced approach between the short-term goal of ensuring the lowest possible 

costs to consumers and the longer-term need to encourage the development 

of more sustainable energy systems (Sustainable Development Commission 

2007). An alternative approach would be to strengthen the guidance issued by 

BERR on how Ofgem should balance its duties to make it explicit that it must 

contribute directly to achieving the government’s policies on renewables. 

The role of government departments in enabling or inhibiting a shift in 

energy systems should also not be underestimated. For example, the lack 

of specific departmental responsibility for the heat sector is an institutional 

barrier. At the moment, the responsibilities are split between BERR and Defra, 

although there is no clear definition of how they are to be shared between 

the two departments. Without a clear outline of who does what, and no 

departmental champions to build up the profile of the heat sector within the 

more general policy debate about reducing CO2 emissions, it is very difficult 

to ensure accountability for delivery of policies. The Sustainable Development 

Commission has also identified the need for a heat sector regulator to ensure 

a stable framework to drive the development of more sustainable heating 

systems (Sustainable Development Commission 2007). Creating a heat sector 

regulator would complement departmental responsibility for heat by ensuring 

that there was a broad spectrum of institutional interests aimed at encouraging 

sustainable heat networks and helping to make it commercially attractive for 

companies to invest in them. 

5.5 Conclusions: broader system issues 

The revision of planning procedures will help large infrastructure projects, 

while the new Planning Policy Statement on climate change should encourage 

microgeneration, providing it is applied properly by local authorities. Many 

renewable projects, however, will fall between these two initiatives – too big 

for microgeneration, but too small to be covered by the measures aimed at 

large infrastructure projects. It remains to be seen whether planning policy 

guidance aimed at encouraging more renewables will prove effective, but the 

government must ultimately ensure that new renewables projects are explicitly 

supported by the planning system and that they are dealt with in a timely way. 

Network infrastructure also needs urgent attention if it is to allow a transition to 

a sustainable energy system, particularly in view of the imminent requirement to

Connecting the future: the UK’s renewable energy strategy Broader system issues 65 

replace or upgrade some 70% of the network, which offers on the one hand an 

opportunity for radical change and on the other a threat of long-term stagnation. 

Distribution networks must be adapted to facilitate distributed generation, and 

transmission networks also need to offer much better access to sustainable energy 

technologies. Both of these shifts will necessitate a change in Ofgem’s approach to 

the regulation of networks. Firstly, it should require all upgrades or new distribution 

infrastructure to allow networks to be actively managed. Secondly, given the 

difficulties in expanding the transmission system to allow renewables to connect, 

it must grant them priority access so that they are no longer prevented from 

connecting by the ongoing operation of conventional fossil fuel plants. 

As yet, there are few heat networks in the UK. The problems of investing in 

heat networks are the same as for any high capital cost investment, and in a 

competitive market there is no real guarantee of recovering an investment, as 

consumers can choose to source their heat from elsewhere. However, some 

environments are more compatible with the construction of heat networks 

than others. For example, district heating can be incorporated in social housing 

schemes and other new developments. At the moment, there is little pressure on 

developers to do this, and while the Zero Carbon Homes initiative may ultimately 

bring about some heating networks, the proposed deadline for all new homes to 

be zero carbon is still eight years away. In the meantime, the government should 

set up a capital grant scheme for new developments, or provide a source of 

low-interest funding to help cover the costs of installing heating networks. 

In addition, there needs to be some form of institutional arrangement to 

promote heat policies. This could include a heat sector regulator. It may make 

sense that this should be Ofgem, or it may be more appropriate to create a new 

regulatory body with responsibility for driving CO2 reductions across the board, 

including by using heat more sustainably. Whichever option is chosen, there 

needs to be an explicit institutional driver to promote sustainable heat and to 

require its deployment. 

Overall, the government needs to be less fixated on the market as the 

answer to every question. Market forces can of course drive prices down for 

consumers, and market failures can to an extent be corrected by the imposition 

of market-based mechanisms such as the EU ETS. However, the emphasis in 

markets is on the short term, and a long term vision is needed in order to bring 

about a wholesale shift to sustainable energy systems. The government needs 

to set a framework for the market to 2020 and beyond. Merely announcing 

targets will not achieve this – as has been shown by the failure to meet 

renewables and CO2 targets so far. A stronger framework needs to be set, and 

this may well require regulation to force companies to act in good time. The 

Zero Carbon Homes initiative is an example of a regulatory framework being 

used to drive innovation and emission reductions, and the government needs to 

have the courage to extend this approach to other players as well to ensure that 

opportunities to drive renewable heat and power are coupled with improved 

energy efficiency and demand reduction in a more strategic way.

66 

Conclusions 

A technician welds parts of a wind turbine in 

Vesta’s factory in Campbeltown, Scotland. 

©Davison/Greenpeace


Conclusions 

67 

This report has outlined some of the main policies put in place by the UK 

government to reduce CO2 emissions. It has been written in the context 

of the UK’s commitment to a number of EU targets, including reducing 

energy consumption by 20% and increasing the level of renewable energy 

generation to 20% by 2020. It has also been written in the light of innumerable 

government statements about the immediate threat of climate change and 

the need to take rapid and decisive action to reduce emissions, both through 

improving energy efficiency and encouraging the deployment of low-carbon, 

sustainable energy options. Overall, this report has argued that the UK 

government is failing to grasp the opportunity offered by the EU targets, to set 

up a business and regulatory environment which will encourage the emergence 

of viable low-carbon energy systems in the longer-term. 

Achieving the EU’s targets will be challenging because of the degree of policy 

effort and system change that they imply. Effective mechanisms to encourage 

the diffusion of renewable energy technologies and their integration in energy 

systems will need to be established quickly in order to achieve them. There are 

some important initiatives in the UK’s current programme, including the shift 

towards energy services companies (ESCOs) implied by CERT and an ongoing 

supplier obligation. However, these are as yet unambitious and face delays in 

their implementation. Other measures are less impressive, particularly those 

aimed at reducing the carbon intensity of the UK economy by encouraging 

the deployment of new, low-carbon technologies. The RO in particular is 

an example of an ineffective mechanism, with the government persisting in 

preserving it despite more effective, less costly alternatives. 

The EU targets are undoubtedly challenging, and will require a shift in how 

energy is produced and used across the economy. However, whether they 

are challenging or not, the targets are not an end in themselves but rather 

the first step in the journey to create sustainable energy systems and allow 

the necessary reductions in CO2 emissions. If the mechanisms to enable a 

substantial shift in energy systems by 2020 are not put in place now, there 

is little if any chance of the necessary longer term shift to low-carbon, 

sustainable energy production and use. Other EU countries – notably Germany 

and Spain – have demonstrated how to initiate such a shift, with well designed 

policies put in place, backed up with political will. The rate of renewable energy 

adoption in Germany, and the deployment levels of renewable electricity 

technologies in Spain would, if replicated in the UK, put this country firmly on 

the right track for meeting its 2020 commitment.


Conclusions 

68 

An evaluation of the main policies in the Climate Change Programme and the 

2007 Energy White Paper shows a heavy emphasis on market mechanisms to 

achieve the necessary cuts in emissions. The problem with this approach is that 

it establishes short-term drivers to improve efficiency, but does not establish a 

long-term investment environment to encourage the implementation of 

low-carbon technologies. The uncertainties inherent in the ETS – relatively 

short periods for action, reliance on equal action in other member states, and 

the volatility of the price of carbon – mean that action with short-term, or 

even positive financial paybacks are logically more attractive for businesses than 

investment in new technologies which may be risky and are more expensive. 

It is clear that not only is the ETS central to the UK’s approach to reducing 

emissions, it is the only approach to reducing emissions. The leaked 2007 BERR 

memo argues that achieving the renewables target is undesirable because it 

might threaten the price of carbon in the ETS, this misses the point that the ETS 

is a means of achieving cost effective CO2 reductions, not an end in itself (BERR 

2007). The price of carbon will be set by the permitted level of emissions, not 

by the availability of low-carbon technologies – if the price is threatened, the 

permitted limits should be tightened, rather than abandoning a commitment 

to sustainable energy technologies. This exposes a fundamental problem with 

the government’s approach to reducing emissions: its ideological commitment 

to market mechanisms over and above any other way of driving the necessary 

change is not just inadequate, it also risks actively undermining the new 

technologies and approaches which are needed. 

The government’s approach is astonishingly short sighted. Reducing emissions 

will of course involve improving energy efficiency, but it will also require a 

change in the ways that energy is produced. The nature of energy systems 

themselves will have to change to be able to incorporate low-carbon, often 

renewable generating technologies. Given the length of time that energy 

assets remain in place – typically decades – this shift has to begin in earnest 

now if there is to be a chance of meeting the required levels of CO2 emissions 

reduction up to 2050. If the UK misses the opportunity presented by the EU 

targets to begin meaningful development of new systems now, it will face an 

enormous struggle to meet the longer term targets.


Conclusions 

69 

Any new approach, which is urgently needed, will have to incorporate a 

much more sophisticated treatment of energy systems, innovation and 

technical change. It is not enough to put support mechanisms in place for new 

technologies and then expect them to automatically perform. The conditions 

in the broader system environment – such as planning, infrastructure, 

institutional and social attitudes – have to be supportive, or at least not hostile, 

to the new technologies. Without this, they will forever remain marginal to the 

current, unsustainable system configurations. In some cases, the government 

is beginning to address these broader issues, while in others it continues to fail 

to recognise the importance that they play. This is particularly apparent in the 

ongoing debate about the role of Ofgem, which has a significant influence over 

both the design of the market and therefore the economic performance of new 

technologies, and also the infrastructure which they rely on to deliver their 

output. 

The time has come for the government to recognise that it cannot aspire to 

reduce emissions while also allowing Ofgem to construct market and regulatory 

arrangements which condemn new technologies to failure. 

Overall then, the government must adopt a broader approach to energy 

systems and the mechanisms it employs to drive the necessary change. Its 

overwhelming preference for economic efficiency through market mechanisms 

may drive short-term gains, but will fail to put a longer-term strategic 

framework in place. It is, and will remain, an ineffective approach in enabling the 

emergence of sustainable energy systems. Instead, the government needs to 

set out a long-term strategic vision for energy systems with ambitious targets 

and a long-term policy framework with clear commitments to decisive action, 

whether this involves market mechanisms or more traditional, ‘command and 

control’ regulatory measures. Its priority should be on creating a framework 

whereby investors have a degree of certainty about their investments in new 

technologies if they are to have the necessary confidence to begin a shift to 

sustainable energy systems. 

Changing existing measures or introducing new ones could, of course, 

contribute to an improvement in the UK’s performance. This could include: 

• A one off increase in the level of the Climate Change Levy above the 

rate of inflation to re-establish its revenue neutrality for business, by 

bringing it back in line with the cut in National Insurance Contributions. 

• Bringing forward the target dates for both Zero Carbon Homes from 

2016, and establishing an aggressive timetable for zero carbon nondomestic 

buildings rather than pursuing an ‘ambition’ aimed at 2019. 

• Maintaining the Merton Rule so that it continues to help create a viable 

market for new developments, small-scale renewables and emerging 

renewable energy supply chains, whether domestic or commercial.


Conclusions 

70 

• Increasing the levels of carbon and energy savings for the Supplier 

Obligation which will succeed CERTs, given that this can contribute to 

the government’s fuel poverty and energy security agendas as well as 

the need to reduce carbon emissions. 

• Ensuring that all energy supply companies have an energy service 

company (ESCO) approach for all energy sales. 

• Recognising that the RO is not an effective mechanism, either in terms 

of deployment or cost to the consumer. While it might be unfeasible 

to abandon the RO as a model for existing projects, the government 

should establish a feed-in tariff mechanism as a support option 

for new projects to provide them with the financial certainty that is 

necessary to drive rapid deployment. 

• On the same grounds, the government should also recognise that 

setting up RO-like mechanisms for renewable heat is unlikely to 

produce sufficient levels to meet the respective targets. The 

government is yet to establish a mechanism for renewable heat, and it 

should avoid replicating the RO’s failure. A support mechanism based on 

a feed-in tariff for renewable heat fuels is much more likely to drive the 

sector. 

• One of the main barriers to the development of heat networks 

– renewable or not – appears to be the willingness of operators to 

invest in high capital infrastructure in a market where a return on 

investment is so uncertain. A mechanism of capital grants would 

go some way towards addressing these concerns, and this sort 

of aid is explicitly allowed under the European Commission’s new 

proposals for permissible State Aid. The government should support 

these proposals, and implement a scheme of capital grants for heat 

networks. This in turn could act as a driver for the deployment of more 

combined heat and power. 

• Microgeneration technologies offer significant potential for carbon 

reductions in the long term. However, the Low Carbon Buildings 

Programme for supporting their deployment is confused and 

ineffective. The government needs to reassess the level of grants 

available, and extend the scheme to build up sufficient momentum 

in the sector to allow it to contribute to the achievement of other 

targets, in particular the Zero Carbon Homes target.


Conclusions 

71 

These specific measures should act as a driver to encourage the use of more 

efficient or renewable technologies. However, they will not in themselves be 

sufficient to drive the required shift to meet the 2020 targets and put the UK 

in a position to move beyond them. This will require an intellectual shift on the 

part of policy makers and a broader approach to energy systems as a whole. The 

technical, regulatory and market environment in which sustainable technologies 

are deployed has a fundamental effect on their performance and therefore on 

their economics. 

Instead of continuing the current, short-term approach to the economics of the 

system, market design, regulation and system infrastructure should be judged 

against longer-term, more strategic criteria aimed at enabling a shift to a more 

sustainable energy system. This could include: 

• Requiring the use of active network management technologies as part 

of any distribution network infrastructure upgrade. 

• Ensuring that renewable and CHP projects have priority access to 

transmission networks. 

• Promoting the expansion of a viable and sustainable biomass industry 

using smaller-scale localised CHP, as opposed to the existing emphasis 

on co-firing in conventional coal fired power stations. 

• Reassessing the role of Ofgem, to ensure that its duties are geared 

specifically towards enabling a shift to a sustainable energy system, 

including considering the impact of market design on smaller 

generating projects and reducing the emphasis it places on short term 

competition. 

Without a fundamental shift in the UK’s approach to policy and regulation, 

the government will fail to encourage the emergence of sustainable energy 

options and will fail to establish the conditions necessary to drive a shift 

to a low-carbon economy. The forthcoming review of the UK’s renewable 

energy strategy offers the opportunity to guard against this possibility by 

implementing the new approach outlined in this report.


References 

72 

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Glossary of acronyms 

77 

Glossary of acronyms 

AEE 

ANM 

BERR 

BETTA 

BMU 

CBI 

CCA 

CCS 

CDM 

CERT 

CHP 

CLL 

CO2 

CRC 

DE 

Defra 

DETR 

DfT 

DNO 

DTI 

DUKES 

EEC 

EEG 

EPA 

EPC 

EREC 

ESCO 

ETS 

EU 

EU ETS 

GDP 

GHG 

GWEC 

IFI 

JI 

LCBP 

LEC 

MAP 

NIC 

PPS 

R&D 

RIA 

RO 

ROC 

RPZ 

SDC 


UKERC 

WWF 

ZCH 

Spanish Wind Association - Asociacion Empresarial Eolica 

Active network management 

Department for Business, Enterprise & Regulatory Reform 

British Electricity Trading and Transmissions Arrangements 

Federation Ministry for the Environment, Nature Conservation and 

Nuclear Safety – Bundesministerium für Umwelt, Naturschutz und 

Reaktorsicherheit 

Confederation of British Industry 

Climate Change Agreements 

carbon capture and storage 

Clean Development Mechanism 

Carbon Emissions Reduction Target 

Combined heat and power 

Climate Change Levy 

Carbon dioxide 

Carbon Reduction Commitment 

Decentralised energy 

Department for Environment, Food and Rural Affairs 

Department of the Environment Transport and the Regions 

Department for Transport 

Distribution network operator 

Department of Trade and Industry 

Digest of UK Energy Statistics 

Energy Efficiency Commitment 

Renewable Energy Sources Act – Erneuerbare-Energien Gesetz 

Emissions Permit Allowance 

Energy Performance Certificate 

European Renewable Energy Council 

Energy Service Company 

Emissions Trading Scheme 

European Union 

European Union Emissions Trading Scheme 

Gross Domestic Product 

Greenhouse gas 

Global Wind Energy Council 

Iinnovation funding incentive 

Joint Implementation 

Low Carbon Buildings Programme 

Levy Exemption Certificate 

Market Stimulation Programme – Markantanreizprogramm 

National Insurance Contributions 

Planning Policy Statement 

Research and development 

Regulatory Impact Assessment 

Renewables Obligation 

Renewables Obligation Certificate 

Registered power zone 

Sustainable Development Comission 

United Kingdom 

UK Energy Research Centre 

World Wildlife Fund 

Zero Carbon Homes

Connecting the Future - Greenpeace UK

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