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Blair's missing the point on financing renewables: fossil volatility costs more

Tony Blair's call on British businesses to take the moral lead on climate change is laudable and his encouragement to the UK renewable and low-carbon energy industry is welcome. But by tying renewables so closely to climate change, we are in danger of undervaluing them.

Renewable and low-carbon energy are not just the long-term solutions to climate change. They are indispensable today if we are to cushion the British economy against volatile oil and gas prices and the impending peak in world oil production - not least the dwindling reserves in the North Sea.

Thanks to the 1990s switch from coal to gas for electricity generation, the UK is better placed than most countries to meet its emissions reductions targets, agreed to under the Kyoto Protocol.

This success on the issue of climate change has come at the cost of reduced diversity in energy sources. The UK is becoming a net importer of gas - and on current trends it will be importing three-quarters of its primary energy supplies by 2020.

Faced with this problem, the nuclear power industry senses a new lease of life.

Newspapers that campaign against wind farms on the grounds that they destroy the countryside are apparently keen to see nuclear power stations sprout across the gardens of England.

It is difficult to foresee the Treasury paying the billions required for new nuclear power stations and nearly impossible to see the money coming from private finance.

To be commercially viable, generation technologies should be fast to build and come in small increments so as to maintain the balance between demand and supply - especially where demand growth is weak.

Currently available nuclear designs fail on both counts. They take five years or more to build - let alone plan - and come in chunks of 600 to 1,000 megawatts.

Smaller scale forms of renewable generation, such as onshore and offshore wind, solar, wave and tidal, offer a more practical solution. They can be built quickly, are smaller in scale and - with the right government support - will be commercially competitive with fossil fuels within the next few years.

You do not have to look far to see the fruits of such an approach.

Denmark's 1970s diversification into alternative energy sources, most notably wind, has put it at the top of European league table for the deployment of renewable electricity generation and has resulted in the pre-eminence of Danish manufacturers in the international wind industry.

Denmark's experience is all the more encouraging for the UK - which has better renewable resources, not just in wind but also in wave and tidal power.

The best short-term strategy for reducing greenhouse gas emissions is for the government to encourage increased energy efficiency in housing. Installing lagging in British lofts will have an immediate impact on emissions. However, it will do nothing to ensure the country is not held hostage by high imported oil and gas prices in the future.

New government policies must therefore be worked out to encourage greater investment in renewables and low-carbon energy so that the UK's energy diversity is widened.

This means broadening the scope beyond the renewables obligation, which increasingly appears something of a one-trick pony. Though the obligation has been effective in stimulating deployment of wind power, it provides little incentive to other emerging renewable technologies, which offer the prospect of genuine diversity in the medium term.

Furthermore, the obligation's exclusive focus on power generation avoids obvious opportunities to utilise renewable energy sources in other markets, most notably heat and transport fuels.

Given it is the oil price that lies at the heart of many security concerns and that the fuel crisis still looms large in the political psyche of this government, a sustained programme of support for biofuels in road transport is long overdue.

Government encouragement and support to renewables on the grounds of security is an increasingly prudent course of action.

Any complaints about the cost of subsidising renewables should be set against the likely pain that both industry and consumers could face in the long term - with continued volatility in oil and gas prices and an eventual peak in oil production.

· Dr Tony White and Graham Meeks are respectively head and director of Policy and Markets Analysis at specialist merchant banking firm Climate Change Capital

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