The UK has probably the best overall renewable energy potential of any country in the European Union (EU) – conservative estimates indicate that up to 67% of the country's electricity supply could in theory be renewable by 2050 (see table 1). And yet at present the nation trails behind almost every other EU country in the renewables league tables and in terms of targets for the future.

Table 1
Table 2

This is still the case even if we remove hydropower, which is the main renewable source of electricity for some of the EU leaders (see table 2). When we look at total energy – electricity, fuel and heat – the situation is even more dramatic. In 2005 only Malta and Luxembourg had lower renewables contributions and the UK's still-to-be-confirmed 15% target for 2020 is amongst the lowest of the EU targets (table 3).

Table 3

Competitive pricing

So what might explain this poor showing? The UK has adopted a competitive market approach to simulating the take-up of renewables. This is based on a renewables obligation (RO) on energy suppliers. Introduced in 2002, the obligation is expanded in stages to a target or quota of 10% of the suppliers' electricity by 2010, 15% by 2015 and up to 20% by 2020.

Within this framework, prices are determined by the competitive market. Incentives are provided by the ability to trade in the Renewable Obligation Certificates (ROCs) that are allocated for each eligible megawatt hour (MWh) of renewable energy supplied.

The extra cost of meeting the RO is passed on to electricity consumers. By 2006 this had amounted to around £500m. It is expected to reach around £1bn by 2010, adding 5.7% to average consumers' electricity bills above 1990 levels. The RO system was actually devised so as to avoid adding too much to consumers' bills by the inclusion of a "buy out" price, initially set at 3 p/kWh. This allows supply companies to escape their RO by paying, in effect, a fine; the revenue from the "fine" is distributed to companies who do comply. The buy-out price also sets a ceiling for how much extra companies will pay for renewable energy. If green energy costs more than 3 p/kWh than the price of conventional energy, then it is cheaper to pay the buy-out fine, or to buy in ROCs from companies who have an excess, thus creating a market for ROCs.

Within this arrangement, it is up to each company to decide how to meet the targets/quotas. Given the competitive market framework, they have naturally chosen the cheapest options – initially sewage gas and landfill gas, but increasingly wind power. Opportunities for significant further expansion of the waste-biogas options are relatively limited but, even so, wind projects are still in the minority. For example, wind only supplied around 20% of the electricity traded in the RO system by 2005, although this will change when and if larger on-land and offshore projects come online.

Winds of change

The relatively slow progress of wind power and the other renewables in the UK seems mainly to be the result of the highly competitive market created by the RO arrangements. In particular, under the RO system there is no certainty as to the future value of the ROCs, which makes it hard to get investment capital at reasonable interest rates for new projects. Those projects that have gone ahead have had to charge higher prices to balance the uncertainty about future income. Given that one of the ostensible aims of the RO was to ensure that capacity was built with low prices, something has clearly gone amiss.

By comparison, Germany and many other EU countries have adopted a direct subsidy, guaranteed price approach, which has proven to be far more successful than the competitive price/quota system. For example, by 2004 the UK had only managed to install about 600 MW of wind generation capacity, while Germany had installed over 12,000 MW – more than 20 times more. And this in a country with much lower average wind speeds than the UK.

How was this done? Germany's system, initially called the "Renewable Energy Feed-in Tariff" (REFIT), provided a guaranteed fixed price for renewables. The supply companies have to buy in and pay fully for every MWh of renewable energy offered. That created a secure investment climate for expansion. As a result, not only has more capacity been installed, but electricity prices have fallen below those needed under the RO system.

For example, one comparison of EU wind projects showed that in 2003 the UK's RO was delivering electricity at 9.6 euro cents/kWh. Meanwhile in Germany the REFIT scheme – or rather the revised version adopted in the Energy Law of 2000 – was running at 6.6–8.8 euro cents/kWh. The REFIT-type schemes in the Netherlands, France, Portugal, Austria and Greece were also delivering at less than the RO. And the figure for Spain, which is fast becoming a wind leader, was 6.4 euro cents/kWh (Grotz and Fouquet 2005).

Despite REFIT involving many more wind projects, in areas with generally much lower wind speeds than in the UK, the final extra cost to consumers under the REFIT scheme has also not been excessive. For example, the German Federal Environment Ministry has claimed that the system only adds around 1.6 euros to the average consumer's monthly electricity bill. Overall calculations show that the German system has added around 3% to household electricity costs (Stern 2007).

What's more, in terms of overall project costs, the subsidy per kW of installed capacity provided by Germany's REFIT may actually be around 30% lower than that delivered by the RO in the UK so far (Toke 2004). Another study has suggested that this imbalance is likely to remain the case over the medium term (Butler and Neuhoff 2004). The most recent comparison, by UK consultants Ernst and Young, found that in 2005/6 the RO cost consumers 3.2 p/kWh, whereas in 2006 the German Feed In Tariff only cost consumers 2.6 p/kWh (Ernst and Young 2008).

Promoting wind

The UK's poor performance has been compounded by planning disputes over wind farms, some of which can be traced back to the competitive market approach. Certainly there has been far less opposition to wind in most of the rest of the EU. The competitive approach has meant that companies have located projects in upland areas with high wind speeds, where they will be more profitable but are often perceived as more environmentally invasive. This is one reason for the local backlash against wind projects, which has slowed deployment dramatically and added to investment risk and cost (Elliott 2003).

Helping the backlash against wind is the fact that, under the RO, all projects get one ROC/MWh regardless of their location. So wind farms in good locations can get more subsidy than they need, soaking up money that could have gone to other projects. Similarly, sewage gas and landfill gas energy projects can also get more than they require. UK energy regulator OFGEM has calculated the total excess payments between 2002 and 2005 as £740m.

In contrast, the German feed-in tariff system avoids this problem as prices are set at different levels for each type of technology and are reduced in stages by a pre-set percentage "degression" formula. This reflects the "learning curve" improvements expected as renewables technology develops and the market expands. The UK government now plans to introduce technology bands into the RO to try to reduce the excess payment problem. But, although it has proposed reduced support for sewage gas and landfall gas, on-land wind projects will still get the same as before – 1 ROC per MWh.

Meanwhile, under the feed-in tariff, Germany has installed 22 GW of on-land wind capacity to date. That compares in the UK to only about 2.2 GW of on-land wind, plus a mere 400 MW of offshore wind. These UK offshore wind projects have had the benefit of direct state grant aid, on top of the RO, in recognition of the fact that the RO did not provide enough investment security.

The UK government nevertheless insists that the RO is the best way ahead. To try to keep things moving, under the proposed new banding arrangements future rounds of offshore wind development will get 1.5 ROCs/MWh. And the next set of promising technologies – wave and tidal current projects – will get 2 ROCs/MWh. Whether this will be enough to enable the UK to meet the 15% renewable energy by 2020 target is far from clear.

What is clear is that the 18 EU countries that have adopted feed-in tariffs have done much better than the UK. In 2005 France had a low contribution from wind power. Since then it has adopted a feed-in tariff and has now overtaken the UK for wind onshore electricity. The same holds for other technologies. For example, Germany has installed 200 times more photovoltaic (PV) solar than the UK. There is talk of considering a feed-in tariff in the UK just for micro-generation projects such as PV solar, but the government remains adamant that the RO will stay for bulk supply grid renewables. It's true that a change over at this late stage would be disruptive, but surely that's not a good enough reason to stay with an ineffective, inefficient and costly approach?

Interestingly, with feed-in schemes proving so successful in the EU, there is now pressure to adopt similar schemes in the US, at both local and national level. California has already introduced one, so has the province of Ontario in Canada, and there are proposals for such a scheme in Australia. China has also seen pressure to adopt feed-in tariffs as an alternative to the tendering process currently used for most projects. It is argued that, if China is to reach its target of getting 15% of its primary energy from renewables by 2020, then it will have to adopt a feed-in tariff approach.

Butler, L and Neuhoff, K. 2004. Comparison of Feed in Tariff, Quota and Auction Mechanisms to Support Wind Power Development. Cambridge University, Department of Applied Economics.

Ernst and Young. 2008. Renewable Energy Country Attractiveness Indices. Available online.

Elliott, D. 2003. Energy, Society and Environment. Routledge, London.

Grotz, C and Fouquet, D. 2005. Fixed prices work better. New Energy 2. See also Grotz, C and Fouquet, D. 2005. Fixed Prices Work Better. German Wind Energy Association. Available online.

Stern, N. 2007. The Economics of Climate Change. Review for HM Treasury by Sir Nicholas Stern, Cambridge University Press.

Toke, D. 2004. Are green electricity certificates the way forward for renewable energy? Paper to fourth International Conference on Business and Sustainable Performance, Aalborg, Denmark.