Memorandum from Innogy plc
1. Innogy plc is market leader in renewable
generation and quality cogeneration. We welcome the opportunity
to contribute to the Committee's inquiry. Through our subsidiary
National Wind Power Ltd we own and operate some 40 per cent of
current UK wind power capacity. We also operate nearly 50 MW of
hydro capacity at eight sites. Innogy has a continuing strategy
of developing and investigating in renewable energy projects.
In recent years this has included several substantial wind farm
schemes in the USA.
2. The following comments relate principally
to wind power since this is the technology expected to make the
greatest contribution to the Government's renewable energy targets
this decade. Innogy is particularly well placed to comment and
we welcome the opportunity to take part in the Committee's inquiry.
As market leader we have invested more than £120 million
in the UK wind market, have developed, built and operate 11 wind
farms and continue to develop projects both onshore and offshore.
We are very familiar with the barriers to development of renewable
3. Over the past decade Innogy has successfully
developed 147 MW of wind projects using the Non Fossil Fuel Obligation
(NFFO) support mechanism. However we still hold a further 600
MW of undeveloped NFFO contracts, which have proved difficult
and in some cases impossible to bring to completion. Finance has
been available and the project economics show an adequate rate
of return on paper. The difficulty has in all cases been inability
to gain planning consent.
4. Innogy's experience has been typical
for the UK wind industry as a whole. In the past five years we
have applied for consent to build 11 wind farms of which just
two have been successful. Earlier concerns about noise have been
overcome by technology improvements; the principal cause for objection
today is visual impact. However there are increasingly difficult
issues being raised by radar operators such as MOD and CAA; it
is notable that this latter issue does not appear to constrain
wind development in Germany, Denmark or Spain.
5. In order to achieve the Government's
target of 10 per cent renewable electricity by 2010, using the
DTI's central scenario for wind development, the rate of build
will need to accelerate by a factor of four. Is this achievable?
There are two potential sources of new capacity; existing, undeveloped
NFFO contracts; and projects built under the proposed Renewables
6. The cost of producing wind energy is
fundamentally determined by capital cost and the local windspeed.
The NFFO process, seeking lowest cost energy production, forced
developers to seek the very windiest sites for their projects.
These tended to correlate with places of high visual amenity such
as hill tops in the wilder areas. There has been increasing opposition
from consultees, though frequently not the public, to development
of any kind in such areas.
7. The industry has asked for flexibility
in re-siting wind farms with existing NFFO power purchase contracts.
This is economically possible since the capital cost of wind turbines
has fallen since NFFO contracts were made, allowing projects to
be moved to less windy but, hopefully, more consentable locations.
Re-locating NFFO contracts is currently not permitted. If, as
has been suggested, secondary legislation were used to allow "NFFO
portability" this will immediately release several hundred
megawatts of potentially economic wind projects for immediate
development. NFFO contracts are attractive to financiers since
there is little market risk in their 15-year firm index linked
prices. Without NFFO portability we see little prospect for a
short-term acceleration of capacity.
8. We support the market-led Renewable Obligation
(RO) mechanism in principle, and believe it is a sound basis on
which to build in the medium and long term. However, to be effective,
it must contain several essential features:
the indexed 3 p/k Wh "buy out"
price is the minimum which can hope to induce the volumes of new
projects needed to meet targets;
investors will need to be confident
that the mechanism is durable and not subject to political risk;
the so-called "green smear"
is an effective mechanism for kick-starting the RO, and encouraging
rapid development of new projects;
financial backers will need assurance
that the profile of annual targets will be sufficiently demanding
to keep RO Certificate values close to the buy-out price;
the RO mechanism must be ring-fenced
a key criterion of the Government's
renewables policy is the acceptability of the cost to the consumer.
Given the distribution of both renewable resource and population
in the UK, it is essential that both the UK Government and the
Scottish Executive implement the Renewables Obligation on a similar
basis. This is required to ensure full access to the national
renewable resource and the development of a GB-wide market, leading
to supply of renewable electricity to the consumer at optimum
it is recognised that some near market
technologies, including offshore wind, will need kick-start capital
grants to fund a short-term technology-proving phase.
9. We believe the income which should be
achievable under the RO (if the above conditions are met) will
allow projects to be developed on sites with windspeeds lower
than those required to win NFFO contracts in the past. Our assessment
indicates that the search area for potentially economic wind generation
has increased in size several-fold. It should include sites already
used for industrial and other purposes, which already have visual
impact; time will prove whether these are more easily consentable.
10. We support the principal of an Obligation
on supply companies. Sadly, recent evidence indicates that the
vast majority of consumers are currently unwilling to pay a premium
for green electricity. If the Government is to meet its renewables
targets we see no alternative to an element of obligation in the
market. There is good reason for a campaign to inform the public
about the drivers behind renewable energy; our perception is that
there is a general public sympathy for the idea of renewables
but little understanding.
11. The New Electricity Trading Arrangements
(NETA) undoubtedly disadvantage less predictable forms of generation
such as wind. The penalty is potentially high and the industry
has argued for consolidation mechanisms, which go some way to
mitigate these penalties. Finalisation of these mechanisms has
received low priority in the NETA development programme and we
urge the allocation of necessary resources into this area. Similarly
we support the current initiatives to address the issues surrounding
embedded generation on the distribution systems.
12. Despite all the above we believe that
the single greatest barrier to development of renewable energy,
and wind in particular, will continue to be planning consent difficulties.
We are far from confident that the current policy of requiring
regional planning authorities to assess their capabilities to
accommodate renewable capacity will be successful, since:
there appears to be no mechanism
to ensure that the sum of the regional contributions will equal
the national 10 per cent target; and
there is no evidence that regions
have been given guidance on the relative economics of different
forms of renewable technology. For instance, it is conceivable
that regions will propose that they host large quantities of possibly
uncontroversial, but very expensive, photovoltaics. It is doubtful
that the consumer would be willing to fund such costly developments.
13. We believe that central government should
be more prescriptive in its guidance to regions on their targets
for renewable energy. We commend to the Committee the regional
targets for wind energy recently proposed by the British Wind
Energy Association, and encourage the other renewable technologies
to propose their own regional targets.
14. Offshore wind energy is in its infancy
but has an enormous global potential, and especially in the UK.
There is a real possibility of developing a high growth indigenous
industry using skills and resources already present in the UK.
In Germany and Denmark more than 20,000 jobs have been created
in the onshore wind industry; a similar opportunity exists in
the UK for the offshore industry, particularly in the manufacturing
sector in areas of traditionally high unemployment.
15. The capital cost of the first offshore
projects will be perhaps 20 per cent above that required to be
economic under the RO, but we believe that later projects will
be market-convergent. There is a need to prove the technology
in hostile UK waters. The DTI are proposing capital grants for
the first round of offshore projects and we support this principle.
However, we are concerned that the proposed mechanism for allocating
these grants will be lengthy and will delay construction of the
first projects until 2004, more likely 2005. Other countries are
proceeding right now and it is likely that the UK will trail our
EU partners in a market where we could take a lead, given our
national competitive advantages.
Innogy is also actively pursuing the development
of small hydroelectric schemes. Hydroelectricity has a small but
significant role to play in meeting the Government's targets and
we expect to retain our leading role in developing such schemes.
Hydroelectric schemes have very high capital costs which are offset
to an extent by their long operational lives (40 years plus).
As with wind the 3 p/k Wh buyout level, for 25 years, is the minimum
that will support further small hydroelectric schemes. In terms
of planning permission hydroelectric schemes have green relatively
successful, although the measures proposed above would help. We
are however concerned about the water abstraction licensing process
in England and Wales and consider that the proposals to allow
only shot term licences (12 or 15 years) in the draft Water Bill
would deter future investment. In addition we would like the Environment
Agency to be given a statutory duty to assist renewables (they
already have such a duty with respect to recreational use of water)
and for them to be given guidelines which enable them to take
into account the wider environmental benefits of a hydroelectric
scheme (eg reduced CO2, NOx, SOx emissions etc) in
considering abstraction license applications.
17. The Committee has asked for views on
the cost of renewables to the consumer. The targeted growth in
renewables will occur during a period of increasing competition
in the electricity market leading to expected reductions in mainstream
prices. From the view of the customer the relatively small increase
predicted for renewables support would be more than offset by
the reductions in the market as a whole. Care will need to be
taken to protect the fuel poor.
18. The less predictable nature of energy
sources such as wind can, in sufficient volume, present potential
problems in balancing electricity supply and demand. Energy storage
technologies will play an increasingly important role in such
markets. Innogy's innovative Regenesys regenerative fuel cell
technology has the potential to become the market leader in this
area. We encourage the Government to support the development of
energy storage technologies as a component of their overall renewables-related
research and development programme.