Select Committee on Environmental Audit Memoranda


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 projects.


  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 Obligation mechanism.


  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 against leakage;

    —  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 cost; and

    —  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.

January 2001

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