Select Committee on Environmental Audit Memoranda


Memorandum from Powergen


  Powergen has been developing renewable energy sources since 1990 and currently has investments in over 120 MW of renewable capacity including over 70MW of wind power schemes in operation or under construction and a 56 MW hydro-electric plant at Rheidol in mid-Wales.

  Through Powergen Renewables, a joint venture with the Abbot Group, we are pursuing further onshore wind power projects which are at various stages of development (including over 200MW of projects with power purchase agreements or planning consents), and offshore wind development, including the Blyth Offshore Wind Farm. This is the first offshore wind farm to be built in UK waters and comprises two 2MW turbines, built in a joint venture consisting also of Shell, Nuon and AMEC Border Wind. Other offshore schemes at Scroby Sands, off Great Yarmouth (supported by the EU) and a potentially larger capacity project in the Irish Sea are also under development.

  Powergen is also a leading purchaser of renewable generation from a range of producers and is one of the UK's largest suppliers of green energy to industrial and domestic customers.


  Powergen supports the promotion of renewable sources of electricity generation as a key component of the Government's strategy to achieve CO2 reduction targets. We recognise that any mechanism introduced must provide adequate, reliable and sustainable incentives to support development of new renewable resources in the longer term. As part of this, Government support for emerging technologies, beyond that delivered through the Renewables Obligation, is key to the cost-effective development of renewables over time. We very much welcome the recycling of funds from the Climate Change Levy to support emerging renewable technologies.


  The development of the UK's renewable industry has been slow and we lag behind many of our European competitors. The UK's existing capacity needs to quadruple if the UK is to meet the Government's target of 10 per cent of electricity generation from renewable sources by 2010. At the industry's current rate of growth the UK will not install enough capacity to meet this target. Last year did see a step change in the commissioning of new wind projects with three times more capacity commissioned than the year before. However, this still lags behind the speed of development of other EU countries with Germany commissioning four times the UK's total capacity in 2000 alone.

  Offshore wind generation received a significant boost with the construction and opening of the UK's first offshore wind farm at Blyth. Powergen Renewables will use the skills, expertise and knowledge gained through the construction and operation of these turbines in the challenging conditions of the North Sea to help our development of other offshore schemes. The potential contribution of offshore wind technology is considerable as the UK has over 30 per cent of the EU's total wind capacity—a resource that is relatively untapped.

  Powergen believes the Government's 10 per cent target is challenging and will not be met unless the industry is given further support as detailed in the following sections.


  Powergen broadly welcomes the principle of the Renewable Obligation and has responded to the consultation document. However, any approach to support development of new renewable resources should avoid imposing costs on consumers beyond those needed to achieve the renewables targets. We support the introduction of an efficient mechanism that encourages competition between renewable energy producers to supply energy at lowest cost, and the inclusion of a buyout option as a safeguard to prevent an excessive cost burden on consumers, as proposed in the Government's Renewables Obligation consultation paper.


  The Renewables Obligation will help the renewable industry's development as it will encourage new build and allow developers to plan activity within a stable market framework. It is important that the obligation is introduced, as planned, in October 2001 and we would encourage the Committee to press the Government and regulator for further clarification on timing. There are two reasons for this;

    —  The sooner the obligation is introduced the sooner we will see increased development of the renewables market and the installation of extra capacity.

    —  The proposed October 2001 introduction date for the Renewables Obligation will have an impact on suppliers' contracting strategies in the April 2001 contracting round. It is therefore essential that suppliers have some degree of certainty on whether, and in what form, the Obligation will be introduced from October 2001.

Energy from waste

  Powergen agrees that large hydro schemes should be excluded on the grounds that they are already commercially viable. We believe that a blanket exclusion on energy from waste would both exclude schemes that are environmentally beneficial but no longer commercially viable with lower electricity prices, and limit development of emerging energy from waste technologies, such as pyrolysis and gasification, which will not attain commercial viability without additional support.


  Powergen acknowledges that, in order to achieve the targets for renewables development, the Obligation must be testing to provide a positive incentive to invest in new renewable energy schemes. However, the rate of increase assumed in the first five years of the Obligation appears to be based on assumptions on the delivery rate of projects currently contracted under NFFO schemes 3,4 and 5. These assumptions may be overly optimistic. If NFFO schemes are not delivered, then achievement of the Obligation in the initial years would be extremely difficult. The Government should actively facilitate delivery of the outstanding NFFO schemes, for example with regards to planning consents or through reasonable flexibility of projects eg location.

Buyout price

  Powergen supports the inclusion of a buyout option as a safeguard for consumers in limiting price rises resulting from the Obligation. Clearly, the setting of this buyout price reflects a trade off between the additional support required for new renewable schemes to be developed and price rises for consumers, and Powergen believes that 3p/kWh is a reasonable base level at which to set the buyout. However, the Government will need to review continuously the effectiveness of the Obligation in delivering renewables, and may feel it appropriate to increase the level of the buyout in the future, subject to consultation with consumers. Powergen supports the linking of the buyout price to the Retail Price Index as a suitable mechanism for maintaining the value of the Obligation in the future. This (or a similar firm escalation arrangement) is essential to attract lenders to finance new renewable energy projects.

Consistency with Scotland

  It is important that the arrangements in England & Wales and Scotland are consistent, to enable a market in Renewables Obligation Certificates to operate across Great Britain free from distortions. Similarly, we believe that arrangements for promoting renewable development within the EU could have a significant impact on the functioning of the Obligations within Great Britain. In order to give certainty to potential renewables developers, the Government should seek to ensure that the schemes in the UK are not diluted by action at an EU level.


  Powergen strongly supports the introduction of the New Electricity Trading Arrangements and has been working hard with the Government and OFGEM to ensure the new system is ready for introduction before the end of March. We recognise that the new market presents a number of challenges to renewable generators as it will reveal the fundamental costs of generating and providing a constant supply of electricity to customers. Renewable generators who are less able to predict/control their output (i.e. wind and wave schemes) may secure less income from the sale of energy under NETA and this may act as a dis-incentive to renewable generation.

  To resolve these difficulties the sound, fundamental market structure of NETA should not be altered and instead renewable generation should be supported through some sort of subsidy (i.e. the Renewables Obligation). The introduction of the Renewables Obligation will mitigate some of the problems surrounding NETA and unpredictable generation. Powergen believes that the 6-month period between the introduction of the new electricity trading arrangements (spring) and the introduction of the obligation (autumn) is crucial to determining the effect on the renewable industry. The Government should be ready to review the level of support for the renewable industry if NETA can be demonstrated to have had a serious detrimental affect through either an increased buy out price in the Renewables Obligation, increased grant aid or enhanced capital allowances.


Capital grants

  Powergen supports the Government's decision not to introduce a banded Renewables Obligation, but is concerned that a buyout price of 3p/kWh may not be sufficient to bring emerging renewable technologies to commercial operation, and may not deliver the required technology diversity. Therefore, additional support in the form of capital grants will be essential if technologies such as offshore wind and biomass are to become commercially viable. Key questions are how much support will be required to bring these technologies to commercial viability, whether the value of capital grants proposed will be sufficient to achieve this, and whether future support for currently unknown technologies will be available as these are developed.

  The process of awarding grants should not become over cumbersome and should not introduce unnecessary delays that prevent projects in an advanced stage of development from proceeding. To avoid this, the Government may wish to consider two separate programmes for the allocation of grant funding, an early programme for projects in advanced stages of development and a later programme for those still at the conceptual stage of development.

Enhanced capital allowances

  In addition to the provision of grants, consideration should be given to the provision of enhanced capital allowances for such projects. Introducing this mechanism will increase the value of the grant fund and allow more projects to be developed, in particular those technologies that have large initial development costs.

  Enhanced capital allowances are already being made available for good quality CHP and these should be made available to off shore wind energy. The provision of enhanced capital allowances for off shore wind energy developments will help to relieve pressure on grant aid to deliver additional capacity. Indeed such a tax treatment can be used post grant aid through a transitional period to ensure a continuing flow of projects.

  For clarity of tax treatment, all works below the high water mark for off shore wind farms should be considered to be "plant & equipment", drawing a parallel with the oil sector.

Encouraging UK manufacturing industry

  Powergen also believes that the UK wind industry would benefit from an indigenous renewable manufacturing industry. This would reduce the costs of components for wind turbines, approximately 10 per cent of which is transport costs from the country of manufacture. Such an industry would also utilise the engineering and manufacturing skill base in the country and provide thousands of new economy jobs. A manufacturing industry would, of course, only be viable with a strong home market for its goods.



  Powergen welcomes the steps that have been taken by the Crown Estates and the Government to streamline the planning process for offshore wind projects. We would urge the Committee to press the Government and the authorities to continue this positive approach and move quickly to a "one-stop-shop" approach so that offshore projects are not unnecessarily held up by the approval process.

  While the Crown Estates leasing system has been received positively and is designed to ensure that only serious projects apply for leases, Powergen believe that restricting each consortia to one application only is limiting and not an effective way of increasing competition in the industry. We would prefer to see a "first come first served" approach to encourage competition from serious players. The safeguards already put in place by the Crown Estates to ensure only serious and committed players apply for leases (deposits etc) will work to ensure the "first come first served" approach delivers real competition for sites.


  Powergen's experience of the planning process for onshore wind farms is characterised by inconsistency and uncertainty. The national benefits of renewable generation are often not taken into account alongside the potential local environmental consequences. We believe it is essential for Government energy policy to be further integrated into the planning process so that renewable energy receives the support it needs.

January 2001

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 9 May 2001