Annex A
WILL THE POLICY ACHIEVE THE RENEWABLES TARGETS?
Table D of the Consultation Document sets out
the required contributions from both Eligible and Non-Eligible
Renewables to achieving the target. The requirements are summarised
in the table below.
Table 1
REQUIRED OUTPUT FROM ELIGIBLE AND NON-ELIGIBLE
RENEWABLES
| |
Non-Eligible TWh | Eligible TWh
|
| 1999 | 6.0
| 4.3 |
| 2003 | 7.0
| 11.0 |
| 2010 | 13.0
| 25.0 |
NON-ELIGIBLE
RENEWABLES
The output of Non-Eligible Renewables in 1999 was 6.0 TWh.
The Consultation Document suggests that this output will fall
to 5.9 TWh in 2000 and then rise continuously from 2001 to 2010.
1. Hydro
At present, the largest sector of renewable generation is
large-scale hydro. Most or all of these plants were built many
years ago by the nationalised electricity industry and although
some major work has been done since privatisation to upgrade or
re-power existing units, no new large-scale units are expected
to be brought on line. Large hydro plants have high capital costs
and despite having free fuel, investment in new hydro stations
would have very long payback periods at the electricity prices
now current. In addition, most of the available sites for large
schemes have either already been developed or are in locations
that would make obtaining planning consent very difficult. Thus,
although existing hydro plant probably does not require support
to stay in production it is unlikely that any new capacity could
be brought on line without very large subsidies.
The table below shows the output of energy from waste plants
and hydro plants above 5MW from 1994 to 1999. The output from
hydro plant varies considerably from year to year reflecting variations
in rainfall rather than changing amounts of capacity. The output
in 1999 at 5.1 TWh was at the highest level during the six year
period and represents the output from a high rainfall year. The
average output during the period was 4.5 TWh and this may be more
representative of the expected output of this type of plant. Consequently,
the long-term expectation could be for an output level 0.6 TWh
lower than in 1999.
Table 2
OUTPUT OF NON-ELIGIBLE RENEWABLES
| | Energy from Waste TWh
| Hydro above 5MW TWh
|
| 1994 | 0.71
| 4.94 |
| 1995 | 0.75
| 4.67 |
| 1996 | 0.78
| 3.28 |
| 1997 | 0.93
| 4.01 |
| 1998 | 1.35
| 5.03 |
| 1999 | 1.36
| 5.12 |
The definition of large hydro used in the Digest of United
Kingdom Energy Statistics is plant over 5MW and the definition
used in the Consultation Document is plant over 10MW. Thus, it
is not possible to match precisely the published statistics with
those set out in the Consultation Document. However, given that
the output of energy from waste plant was 1.36 TWh, it would not
be unreasonable to assume that of the 6.0 TWh of Non-Eligible
Renewables in 1999 some 4.65 TWh were from large hydro. As discussed
above, this output might be expected to fall in a year of more
normal rainfall, and assuming that the reduction from large plants
is proportionate to the total reduction, would give an estimated
output of approximately 4.2 TWh.
2. Energy from Waste
The energy from waste plants that have been built to date
have tended to be large scale and based on mass burn incineration.
The economics of these plants are crucially dependent on the large
size of the plants and projects have been either regional facilities
or serving very large conurbations. The most recent plant to gain
planning permission is at Allington in Kent with a capacity of
500,000 tonnes per annum of waste. Waste incineration plants need
to be big to be economic, but large plants are strongly opposed
by the public and many local authorities and it is very difficult
to gain planning permission in any reasonable time. Project development
costs are, therefore, high and there are very significant risks
of not achieving a planning consent.
There are a number of reasons why large energy from waste
plants have been difficult to consent and build that are summarised
below:
(1) In most cases, waste must be transported to the plant
over long distances causing increased numbers of lorry movements
with attendant high costs and increased pollution.
(2) The plants occupy a large area of land and have very
large buildings and chimneys. Consequently, there are a limited
number of sites where such plants may be suitably located.
(3) Technical limitations have meant that operators of
existing plants have sometimes failed to meet existing emissions
standards and emission standards will tighten substantially when
the recently adopted Directive on Waste Incineration Plant is
put into effect. Even where standards are met, local populations
remain concerned about emissions—particularly of dioxin.
(4) Normally, little is done in plant design to ensure
that recycling is maximised before the waste is combusted.
(5) The efficiency with which mass burn designs convert
energy into electricity is low.
(6) The technology is best suited to regional facilities
because its unit costs are high at small scale; it does not comply
with the proximity principle.
(7) Disposal of the ash has proved difficult in some cases.
(8) Generally take a long time to design and build such
projects.
(9) Local authorities have been resistant to contracting
for these plants because of local opposition and because they
perceive them to be much more expensive than putting waste in
landfill. This perception of high cost is reinforced by industry
forecasts that suggest thermal treatment of waste could be twice
as expensive as disposal in landfill.
The risks, high costs and long lead times associated with
obtaining planning consent reduce the willingness of investors
to pursue energy from waste and hence increase significantly the
cost of capital.
Since it is not envisaged that there will be any significant
growth in the capacity of large hydro plants, the forecast output
for Non-Eligible Renewables, as set out in the Consultation Document,
implies that the output from energy from waste will need to be
as set out in the table below.
Table 3
REQUIRED OUTPUT FROM ENERGY FROM WASTE PLANTS
| | 1999
| 2000 | 2001
| 2002 | 2003
| 2004 | 2005
| 2006 | 2007
| 2008 | 2009
| 2010 |
| Output TWh | 1.36
| 1.70 | 2.10
| 2.50 | 2.80
| 3.30 | 3.80
| 4.80 | 5.80
| 6.80 | 7.80
| 8.80 |
Cost of Electricity
|
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The most recent market evidence on electricity prices available
from energy from waste plants comes from NFFO 5. Twenty two projects
were contracted. The average size of projects was 19MWe. The average
contract price was 2.43p/kWh (1998 prices indexed to RPI—equivalent
to 2.52p/kWh at 2000 prices), which is approximately 40 per cent
above the current market price for electricity of around 1.8p/kWh.
However, more important than the average price is the price of
the marginal contract at 2.49p/kWh, since to increase the amount
of energy from waste it would be necessary to pay in excess of
this level. The highest priced contract for energy from waste
using CHP was 2.90p/kWh (equivalent to 3.0p/kWh in 2000 prices).
None of this information suggests market convergence.
Prospects Post NFFO
Eligibility for exemption from the Climate Change Levy will
be helpful to energy from waste projects but its importance should
not be overestimated and it will not be as effective as the NFFO
system at enabling energy from waste plant to be built. First,
in a market the value of the levy exemption must be shared between
the generator, the supplier and the customer. Generators are likely
to retain between 50 per cent and 80 per cent of the value of
the levy. Even if the full levy benefit were retained by the generator,
this would still leave energy from waste plants with lower electricity
prices than were contacted under NFFO 5. Second, the new trading
arrangements that are being introduced are widely acknowledged
to increase commercial risks, particularly for small generators.
This will increase the cost of capital, especially where a technology
is unproven. Third, since there is no certainty as to the levels
of the CCL or even whether it will exist in a few years, it is
difficult to base a long-term investment on this benefit. Finally,
it is difficult to obtain long-term contracts for electricity
and, a fortiori, very difficult to obtain long term contracts
for small quantities of electricity with creditworthy counterparties.
The Obligation forces suppliers to enter into contracts with small
renewable generators but it is difficult to envisage suppliers
even bothering to have discussions with the developers of small-scale
Non-Eligible Renewables unless they are prepared to accept prices
well below the current market rate. Without long-term off-take
contracts the developers of projects will have great difficulty
in raising long term finance.
New Technology
New technologies that involve building modular small-scale
plants to a standard design and which improve significantly on
the environmental performance of existing plant have the potential
to overcome many of the problems experienced by large scale energy
from waste based on incineration, but these new technologies are
regarded as unproven and the cost of capital is, therefore, higher
than for incineration.
Local Waste Solutions is active in the waste markets today.
Our experience suggests strongly that although there are a small
number of areas that have particular problems and where waste
gate fees might be high enough to enable low cost energy from
waste plants to supply electricity at market prices, this is not
generally true. In most circumstances, gate fees would need to
be very much higher than at present to support the establishment
of energy from waste plants. Thus, it will not be possible to
build a sufficient number of plants using the new technology to
achieve the contribution towards the Renewables Targets that is
envisaged in the Consultation Document unless energy from waste
is included in the Obligation.
Plant Efficiency
One further matter is worthy of consideration. The developers
of energy from waste projects have a choice in the type and the
quality of the generation equipment that they build into the plant
design. To date, plants have had low electrical efficiency. The
Digest of UK Energy Statistics shows in Table 5.5 the fuel use
and output of biofuel generators, which suggests an efficiency
of approximately 22 per cent. It is possible to achieve higher
efficiencies but if waste gate fees are the main form of income,
developers have a strong incentive to minimise capital and operating
costs rather than maximising the electricity produced from each
tonne of waste processed.
Achieving the target for 2003 implies a relatively modest
success rate of 14 per cent of non-operational energy from waste
projects contracted under NFFO/SRO becoming operational in the
four years to 2003. However, although this is a small percentage
of the contracted capacity it implies that the amount of capacity
commissioned increases at more than twice the rate achieved in
the previous four years.
Achieving the target for 2010 implies a rate of growth in
capacity between 2005 and 2010 that is triple the rate expected
to be achieved between 1999 and 2003 and six times the rate actually
achieved between 1995 and 1999. This rate of growth seems to be
unlikely unless there is a fundamental shift in the application
of the planning process or unless energy from waste plant can
be made much more acceptable to local communities. New energy
from waste technologies may potentially achieve planning consent
more easily, but these technologies are not included in the NFFO
contracts and hence will receive little or no support if they
are outside of the Obligation. The Government cannot expect these
new technologies to be built unless they are included within the
Obligation.
While it is true that the Landfill Directive will force local
authorities to seek alternatives to landfill from 2006, it is
by no means clear that they will pursue energy from waste as an
option and the Government cannot rely upon the Landfill Directive
to force substantial growth in renewable generation. Further,
even where local authorities choose some form of thermal processing
they will seek the lowest cost means of disposing of waste rather
than the most efficient way of generating electricity. At current
electricity prices it is not economic to increase capital and
operating costs in order to maximise the output of electricity
from any given quantity of waste. The energy contained within
waste will continue to be used inefficiently unless there is some
support for increasing the output of electricity. This support
can only come from including new energy from waste projects in
the Obligation.
Achievement of Non-Eligible Renewables Targets
There seems to be widespread agreement that new energy from
waste plants must receive support if the Renewables Targets are
to be met. Table D of the Consultation Document forecasts that
the increase in Non-Eligible Renewables would be 7.0TWh between
1999 and 2010. As was noted above, it is most unlikely that any
increase in Non-Eligible Renewables will be obtained from new
large-scale hydro because of a dearth of suitable sites and planning
difficulties. Indeed, the output of hydro may be expected to fall
significantly since 1999 was a year of high rainfall. The effect
of returning to more normal rainfall levels could reduce output
by more than 0.5TWh. Therefore, all of the increase must come
from energy from waste without it being in the Obligation.
Energy Sustainable Development Ltd in its recent report "Going
to waste" considered it appropriate to assume that no further
energy from waste projects from NFFO3, SRO1 and SRO2 would be
built and that only 20 per cent of the energy from waste capacity
from NFFO4, NFFO5 and SRO3 would be built by 2010—some 155MW
equivalent to around 1.2TWh at 90 per cent load factor. It states
"Based on both the current and projected output under NFFO/SRO
contracts, the total energy from waste output in the year 2010
is likely to be around 3.0TWh." This output level would be
an increase of less than 1.7TWh from the output in 1999. They
go on to conclude that no new energy from waste projects would
be developed outside of NFFO/SRO absent external factors such
as the Landfill Directive.
The ETSU report, R-122 (March 1998), which was published
as a technical Annex to the DTI's initial consultation on renewable
energy policy, estimated that the maximum output from energy from
waste in the UK during 2010 would be 6.4TWh, based on an 8% discount
rate, and that this maximum output would fall to 2.2TWh if a discount
rate of 15 per cent were applied.
Based upon the ETSU analysis, the Association of Electricity
Producers has recently estimated in an internal document that
a price of 4.5p/kWh would be required to bring forward 4.70TWh
of electricity from energy from waste plants by 2010.
The forecast in Table D of the Consultation Document for
Non-Eligible Renewables implies that the output from energy from
waste in 2010 would be around 8.8 TWh. This forecast would appear
to be very optimistic.
Conclusions for Energy from Waste
If energy from waste is excluded from the Obligation there
will still be some small number of projects completed, but it
is unlikely that the amount of new capacity will match the requirement
set out in the Consultation Document. It is doubtful whether large-scale
mass burn technology is capable of delivering the targeted output.
Independent estimates suggest that the maximum output of energy
from waste plants in 2010 will be in the range 2-5TWh, but output
of nearly 9TWh would be required to meet the target. New, smaller
technologies may be able to overcome the planning problems that
have beset energy from waste projects, but these will require
both support from the Obligation and a more favourable planning
climate.
The conclusion of this analysis must be that the forecasts
for the growth of Non-Eligible Renewables set out in Table D of
the Consultation Document are likely to prove to be hopelessly
optimistic and, that on the basis of the policies set out in the
Consultation Document, the Government will not achieve its Renewables
Targets. However, if energy from waste is included in the Obligation,
then it is possible that the targets will be achieved.
ELIGIBLE RENEWABLES
The Consultation Document states that the increase in Eligible
Renewables required to satisfy the Obligation during the period
2001 to 2003 is little more than might be expected to be provided
by NFFO contracted capacity. However, evidence of the historic
success rates of NFFO/SRO contracted capacity would suggest that
the output set out in the Obligation may be difficult to achieve.
The output of Eligible Renewables was around 4.2TWh in 1999. The
output of these existing projects might reasonably be expected
to fall by 2003 for two reasons:
(a) the high rainfall in 1999 made this a peak year for
the output of small hydro;
(b) some of the existing landfill gas sites may be becoming
depleted of gas by 2003.
A reasonable assumption for the output of existing Eligible
Renewables in 2003 is 3.9—4.0TWh. Consequently, to achieve
the Obligation, a further 7.0TWh of output must be produced by
new capacity. The most successful projects with NFFO/SRO contracts
have been those for landfill gas and, assuming that virtually
all of the contracted capacity becomes operational, the new projects
would produce a further 2.0TWh in 2003. Most of the remaining
5.0TWh needed to meet the Obligation would need to come from on-shore
wind projects, which account for by far the majority of the contracted
capacity for Eligible Renewables that is as yet not operational.
To have a reasonable chance of achieving the output required in
the Obligation from NFFO/SRO contracted projects it would be necessary
for more than 80 per cent of contracted on-shore wind capacity
to become operational by the beginning of 2003. Only 11.9 per
cent of contracted wind projects were operational by the end of
1999. The success rate for NFFO 2 (1991) was 64 per cent and the
success rate for NFFO 3 (1995) was only 26 per cent after more
than four years. Around 40 per cent of the non-operational contracted
capacity is part of NFFO 5 and SRO 3 (1998) and by the beginning
of 2003 these contracts will have been in place for less than
five years. Thus, to achieve the output required for the Obligation
in 2003 will require that a larger proportion of contracted capacity
becomes operational and does so more quickly than historically
has been the case. As such, current official targets appear heroic.
Achieving the level of output suggested for the Obligation
in 2010 would require an even higher rate of growth in Eligible
Renewables between 2003 and 2010 than is implied in the period
to 2003. The most promising energy source is wind power. However,
we have already noted the difficulties that have been faced by
onshore wind projects and offshore projects are at an early stage
of development. The higher costs of offshore projects have been
recognised by the Government in suggesting that early projects
might benefit from capital grants as well as the benefits of being
in the Renewables Obligation. It is too early to forecast the
eventual costs of offshore projects, or the rate at which they
can be developed. This would suggest that the forecast rate of
development for Eligible Renewables in the period from 2004 is
highly speculative.
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