APPENDIX 1
Memorandum from Powergen
1. BACKGROUND
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.
2. GENERAL PRINCIPLES
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.
3. LEVEL OF
ACHIEVEMENT AND
RATE OF
PROGRESS
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.
4. RENEWABLE
OBLIGATION AND
COSTS TO
THE CONSUMER
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.
Timing
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.
NFFO
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.
5. IMPACT OF
NETA
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.
6. R&D—COMMERCIAL
VIABILITY
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.
PLANNING
Offshore
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.
Onshore
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
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