Watchdog urges overhaul of green energy scheme

Developers of renewable energy schemes such as wind farms are profiteering from the Government's drive to curb carbon emissions by making customers pay more for their electricity than is necessary, the energy regulator Ofgem warned yesterday.

Publishing figures which reveal that the cost of the so-called "renewables obligation" is at least eight times greater than other schemes designed to combat climate change, Ofgem called for a wholesale shake-up of the current arrangements.

The obligation works by requiring energy suppliers to buy a certain proportion of their electricity from renewable sources or buy certificates to cover the shortfall. The cost of this is then passed on to the end customer.

Ofgem calculates that since the obligation was introduced in 2002 customers have been overcharged by £740m. The scheme adds £7 to the average annual bill at present, but by 2015 this will have risen to £20. At present, 5 per cent of the UK's electricity comes from renewable sources, but this is due to rise to 20 per cent by 2020.

The regulator said the way the scheme worked meant that customers paid more even if renewable generation projects did not get built or were delayed, for instance by planning problems.

It also said that because the level of subsidy under the scheme was not linked to the wholesale price of electricity or the market price of carbon, developers were benefiting at customers' expense, as electricity prices rose. "This is leading to much higher returns for current renewable generators than investors expected or required."

The regulator calculates that it costs between £184 and £481 to cut a tonne of carbon under the renewables obligation. This compares with a cost of between £12 and £70 under the European Union's emissions trading scheme and £18 to £40 under the Climate Change Levy.

The Department for Trade and Industry last night rejected Ofgem's criticisms, saying: "The Renewables Obligation is here to stay." However, it is proposing changes to the obligation so that subsidies are banded according to the type and cost of technology involved.

Ofgem said this did not go far enough, and called for a new scheme under which the level of subsidy is linked to the wholesale electricity price and long-term contracts are auctioned to guarantee renewable developers a fixed return.

Alistair Buchanan, chief executive of Ofgem, said: "We think that a review of the scheme could provide more carbon reductions and promote renewable generation at a lower cost to consumers who are already facing higher energy bills."