DATAMONITOR: UK green energy outlook still grey

London, Oct 25, 2004 M2 PRESSWIRE

BT has signed the UK's largest green electricity contract with RWE npower and Centrica. The deal represents an important step forward and a strong piece of PR for the environmental lobby. However, as Datamonitor's Alex Solomon explains, recent Datamonitor research indicates that just 15% of industrial and commercial companies have a set target for procuring green energy.

British Telecom (BT) has publicized the contract as the world's largest purchase of green electricity, with the volume (2.1TWh) set to cover almost all of BT's UK demand over three years. In recognizing the importance of the deal for the green power sector, the UK government has described it as "globally significant". While clearly a step forward for the renewable lobby, the move does not mask the fact that British companies still have a long way to go in terms of both setting and hitting targets on green energy and carbon emissions.

BT, one of the UK's largest companies, has an impressive history in the area of environmental responsibility, having reduced energy related CO2 emissions by 80% since 1991 through investment in energy management and more energy efficient equipment. The contracts secured with RWE npower and Centrica, for 1TWh of renewable power and 1.1TWh of energy from CHP (combined heat & power) will see a further reduction of 325,000 tons of carbon dioxide emissions per year - the equivalent of taking 100,000 cars off the road.

No guarantee of further renewable capacity

The agreement is certainly a landmark deal and represents a powerful PR opportunity for both BT and the wider green lobby. However, the contracts do not mean that the amount of green power generation in the UK will see a corresponding increase. Although RWE npower has some small interests in wind and hydropower, together with CHP these sources still accounted for less than 10% of its 2003 production. Centrica currently has no renewable generation, although it has committed GBP750 million to new renewable projects over the next three years.

This means that in reality the companies, particularly Centrica, will be sourcing the power through the use of renewables obligation certificates (ROCs), which allow suppliers to purchase green electricity produced by renewable generators through a traded system. As a result, there are no guarantees that the BT contract will increase the total renewable generation capacity of the UK as a whole, although it is likely to drive further liquidity in ROC trading.

Just 15% of Icenergy buyers have a green target

However, despite this positive news for advocates of renewable energy, recent research indicates that British companies still have a long way to go to emulate BT's achievements in this area. During July and August this year, Datamonitor completed in-depth interviews with senior energy buyers at over 1,500 industrial and commercial companies spending over GBP20,000 per year on power from around the UK. The buyer research included detailed questions across a range of subjects, including contracts, sites and switching, customer service performance and product & service needs. As part of the study, respondents were questioned on attitudes to green energy.

Just 15% of those questioned stated that their company has a target for procuring energy from green sources, with only 3% making this target public and 12% keeping it as an internal objective. In an era in which corporate responsibility is becoming an increasing priority, particularly for those companies with established B2C relationships, these figures are surprising. Of those that do have any sort of target, 27% are aiming for 6-10% of power to come from renewable sources, and 14% for between 0-5%. Around 1 in 10 of these respondents are aiming to source all their energy from green sources.

4 of 10 with targets don't currently source green energy

Of those that do have a green energy target, external or internal, only 59% of them are currently sourcing a proportion of their energy needs from green sources. This illustrates the fact that even for those who have a green target, 4 out of 10 have yet to actually start sourcing this power. While this does show that take-up of green energy has not yet fulfilled its full market potential amongst those companies amenable to it, it also highlights a gap between intentions and reality which must be a cause for concern in the green energy lobby.

The pricing of green energy contracts has long been a reason why it has not achieved greater penetration in the UK, due largely to the high costs and unpredictability of the output associated with some renewable technologies.

Although no details of the relative cost of the contract to BT have been released in this latest case, Datamonitor's research indicates that of those who procure green power for at least some of their energy requirements, just 49% think that they should pay a premium for it. Although this may be to do more with buyer perceptions than reality, green energy contracts may well start to become more price competitive in comparison with conventional "gray" electricity, particularly at a time when UK wholesale energy prices are driving the cost of Iccontracts significantly higher.

UK trails European counterparts

The future for green energy in the UK is clearly mapped out. The government's target under the Renewables Obligation is that 10% of all sales by electricity suppliers will be generated from eligible renewable sources by 2010. However, the UK lags far behind European counterparts such as Spain and Germany, where renewables already make up over 10% of the installed generating capacity.

Clearly the UK has much further to go in meeting this level. Contracts like that agreed between BT and its energy suppliers are very significant, both in terms of the deal itself and the publicity it generates. However, with just 15% of energy buyers admitting to having any sort of green energy procurement target, penetration of wider industry remains very low. This should serve as the clearest indication yet that more needs to be done in facilitating the development of a real green energy market in the UK Icsector.

Notes for editors

Alex Solomon, Datamonitor Energy Analyst and report author is available for comment

Datamonitor plc (DTM.L) is a premium business information company specialising in industry analysis. We help our clients, 5000 of the world's leading companies, to address complex strategic issues. Through our proprietary databases and wealth of expertise, we provide clients with unbiased expert analysis and in-depth forecasts for six industry sectors: Automotive, Consumer Markets, Energy, Financial Services, Healthcare, Technology. Datamonitor maintains its headquarters in London and has regional offices in New York, San Francisco, Sydney, Tokyo, Frankfurt, Shanghai and Hong Kong. See www.datamonitor.com for further details.

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