- The Renewables Obligation (RO) replaced NFFO in 2002. Most of the supporting analysis assumed that governments would set the level of the obligation at roughly the level that the market would deliver, aligning the cost with the buy-out price and obligation level. We believed (and advised in consultation) that not only would ministers not be able to anticipate correctly the level of deployment, but that the incentives of the RO would discourage investment if compliance levels were expected to be high. The effect would be that the value of the RO to participants would be higher than expected, as would the cost to consumers (who funded the mechanism) per unit of energy delivered. We invested accordingly and very profitably, when the discrepancy between the levels of obligation and compliance exceeded even our expectations.
- Like NFFO, the RO was initially designed to be technology-neutral but was quickly modified (“banded”) to allow ministers to skew the incentives in favour of more expensive technologies and against cheaper technologies. It is obvious that such a modification increases the cost per MWh delivered, but that was evidently a secondary consideration for ministers, intent on pursuing their industrial policy through an unsuitable mechanism. (The worst way to encourage R&D is through revenue support, as that does little to mitigate the risk that is one of the primary purposes of industrial policy.) We argued against “banding”, but were a voice in the wilderness. Not for the first or last time, we collided with a coalition of interests between:
- politicians (who want magic bullets),
- bureaucrats (whose existence is justified by micro-managing policies),
- academics, consultants and pressure groups (whose influence is maximised by advising governments on ways to supposedly do better than the market), and
- rent-seekers (for whom skewed government incentives are useful insulation against competition).
- Landfill-gas power stations like ours converted gas to electricity at around 40% efficiency. The rest was wasted as heat through the exhaust or radiators.
- We looked for opportunities to utilise the waste heat. It was never economic, because the substantial investment to recover the heat was not justified by the value of the heat plus the value of the carbon displaced by substituting for fossil-fired heating. Policy did not treat the carbon benefit of this form of energy equally to electricity, and consequently low-carbon heat was treated as though it had zero carbon benefit.
- Indeed, the low rate of VAT on domestic energy acted as an effective subsidy for fossil-fired heating in that sector. We argued for technology-neutrality in that regard (which effectively meant a carbon price) as well as between renewable-electricity technologies, but again found no interest in government or elsewhere. The energy went to waste. The UK made almost no progress on decarbonising heat.
- Meanwhile, Sweden decarbonised two-thirds of its heat and half of all its energy, with a carbon tax as its main policy lever. UK governments continued to pat themselves on the back for decarbonising at great expense a few percent of the 20% of our final energy consumption that takes the form of electricity.
- Focusing myopically for two decades on renewable electricity through NFFO, RO and Feed-in Tariffs (FiTs) had taken UK renewables to a magnificent 4% of our energy by the early 2010s. Yet the Office for Budget Responsibility projected a cost of around £10bn/year for environmental levies (mainly costs of renewable electricity) by 2020.
