Annex B
THE LOGIC OF CREATING DIFFERENT CATEGORIES
OF RENEWABLES
Paragraph 2.4 of the Consultation document states
that large hydro and energy from waste "are already commercially
viable, well established in the market and can compete with electricity
from fossil fuels. For this reason, the Government considers that
these two renewable energy sources . . . should be excluded from
the Obligation." This Annex tests each of these hypotheses
in turn and hence tests whether the Government is correct by its
own logic to exclude large hydro and energy from waste from the
Obligation. It then examines other factors that may be relevant
to the policy of excluding large hydro and energy from waste from
the Obligation.
COMPETITIVE WITH
FOSSIL FUELS?
The most recent market evidence on electricity
prices available from energy from waste plants comes from NFFO
5. No energy from waste plants are currently planned to be built
outside of the NFFO system. The average price for projects in
NFFO 5 was 2.43p/kWh in 1995, indexed to RPI, which is equivalent
to 2.52p/kWh today. The NFFO contract volumes are variable with
the output of the plant up to the maximum capacity contracted,
ie they are non-firm. The current price for medium term electricity
contracts is 1.8p/kWh for firm capacity, with no indexation. Thus,
the NFFO 5 contract price is currently 40 per cent above the market
price, delivers a less reliable product and the price difference
is diverging rather than converging. It is notable that for additional
capacity to be built the required price would be even higher.
None of the NFFO 5 capacity has yet been built. It is also notable
that only 32 per cent of the capacity contracted under NFFO 3
in 1995 at an average price of 3.84p/kWh (equivalent to 4.34p/kWh
today) had been commissioned by the end of 1999.
It is not correct to state that electricity
from energy from waste plants is price competitive with electricity
from fossil-fuelled plants.
There is no recent evidence in the UK of the
cost of establishing new large-scale hydro plants since none have
been built in recent years. This is in large part because of the
difficulties of obtaining suitable sites and also gaining planning
permission at those sites. The capital costs of each hydro plant
will be very site specific and it is not possible to generalise
about a level of cost per kWh. However, capital costs tend to
be relatively high and hydro should not be expected to be competitive
with electricity from fossil fuels on a fully costed basis. The
average cost of small hydro in NFFO 5 was 4.08p/kWh.
It is not correct to state that electricity
from large hydro plant is competitive in the UK on a fully costed
basis with electricity from fossil fuels.
COMPARATIVE COSTS
There is some evidence from the NFFO contracts,
that energy from waste is closer to market convergence with large
scale fossil-fuelled generation than other renewables, but in
the majority of cases the difference is not significant, and the
deliverability of energy from waste at these prices has yet to
be proven. Further, approximately 73 per cent of sewage sludge
digestion capacity and 12 per cent of landfill gas capacity operating
in 1999 had not received support from NFFO/SRO. This suggests
that in some circumstances, these Eligible Renewables may be competitive
with fossil fuels.
The capital costs of an energy from waste plant
are intrinsically higher than the capital costs of plant utilising
landfill gas or energy crops. Further, the complexities of handling
municipal waste suggest that energy from waste plants will have
higher on site electricity demand and, hence, lower net electrical
efficiencies than plant utilising either landfill gas or energy
crops. The reason why energy from waste projects have been able
to bid lower contract prices in NFFO is the price of fuel. Energy
from waste plants are paid to take their fuel whereas other biomass
renewables must pay for theirs. It is notable that it is the practice
in the industry for landfill gas generators to pay landfill operators
for the landfill gas despite the fact that landfill operators
would otherwise need to incur costs to flare the gas.
Fuel for each of these technologies is supplied
within competitive markets and the price can vary in just the
same way as fossil fuels. Landfill gas plant operators must pay
for their fuel because there is a limited supply of landfill sites
that are suitable for locating renewable generators and the NFFO
payments have ensured that generators can afford to pay for the
gas rather than be paid to dispose of it. There are no competing
uses for landfill gas and, in normal circumstances, this would
suggest that as a waste product, it would be given away. Thus
it can be argued that supporting landfill gas generation has increased
its unit costs by increasing the price of fuel.
Energy from waste plants compete for their fuel
with other forms of waste disposal; the main competitor for this
fuel is landfill. By including plants utilising landfill gas in
the Obligation, the Government is reducing the price that landfill
operators need to charge for waste disposal and decreasing the
price that energy from waste plants can charge to take waste.
Even without this support to landfill operators, landfill is already
cheaper than energy from waste as a means of waste disposal in
most areas. If energy from waste is excluded from the Obligation
the Government will be encouraging more waste to be sent to landfill.
To assert that the Government knows the relative
costs of each of these technologies implies the assumption that
the Government knows both the current and future prices for the
disposal of waste. It also implies the assumption that the Government
knows the relative levels of technology and planning risk associated
with each of the technologies. Such assumptions are implausible.
Additionally, energy from waste operators will be expected to
achieve much higher environmental standards in future and it is
not clear that these have been reflected in the contract prices
observed to date.
DELIVERY OF
NFFO PROJECTS
It is also instructive to examine the relative
success rates of projects contracted under the NFFO rounds. According
to the latest Digest of UK Energy Statistics, the relative success
rates achieved by the end of 1999 for landfill gas and energy
from waste projects contracted in each NFFO round were as set
out in the table below.
Table 1
SUCCESS RATES OF NFFO/SRO PROJECTS
| |
Projects Contracted
| Number of Projects Completed
| Percentage of Projects Completed
| Percentage of Contracted Capacity Completed
|
| Landfill Gas | Number
| MWe |
| |
|
| 1990-NFFO1 | 25
| 35.5 | 19
| 76.0 | 86.7
|
| 1991-NFFO2 | 28
| 48.5 | 26
| 92.9 | 95.7
|
| 1995-NFFO3 | 42
| 82.1 | 42
| 100.0 | 100.0
|
| 1997-NFFO4 | 70
| 173.7 | 43
| 61.4 | 59.5
|
| 1998-NFFO5 | 141
| 313.7 | 11
| 7.8 | 5.3
|
| 1994-SRO1 | —
| — | —
| — | —
|
| 1997-SRO2 | —
| — | —
| — | —
|
| 1999-SRO3 | —
| — | —
| — | —
|
| Total | 306
| 653.5 | 141
| 46.1 | 42.7
|
| Energy from Waste |
| |
| |
|
| 1990-NFFO1 | 4
| 40.6 | 4
| 100.0 | 100.0
|
| 1991-NFFO2 | 10
| 271.5 | 2
| 20.0 | 19.4
|
| 1995-NFFO3 | 20
| 241.9 | 6
| 30.0 | 32.0
|
| 1997-NFFO4 | 16
| 241.2 | —
| — | —
|
| 1998-NFFO5 | 29
| 485.7 | —
| — | —
|
| 1994-SRO1 | 2
| 3.8 | 2
| 100.0 | 100.0
|
| 1997-SRO2 | 9
| 56.1 | 3
| 33.3 | 12.0
|
| 1999-SRO3 | 3
| 2.0 | —
| — | —
|
| Total | 93
| 1342.8 | 17
| 18.3 | 11.9
|
The lower success rates for energy from waste projects may
simply reflect longer lead times but, given that the NFFO 2 contracts
were awarded in 1991, this seems unlikely. What is more likely
is that even at the prices contracted in the NFFO rounds there
are fundamental economic and administrative problems that will
prevent the large scale construction of energy from waste plants
but that landfill gas projects are fully economic and deliverable
at the contracted prices.
COMMERCIAL VIABILITY
It has been demonstrated above that there is no evidence
to suggest that either energy from waste or large hydro are price
competitive with electricity from fossil fuels in normal circumstances.
To the extent that commercial viability means something different
than price competitiveness with fossil fuels, the commercial viability
of large hydro and energy from waste is a very difficult hypothesis
to test; there is no absolute way of measuring commercial viability.
Some aspects of commercial viability are discussed below.
(a) Suitability for the Market
One aspect of commercial viability is the suitability of
the produce for the market for which it is intended. To illustrate
the point by example, hand building motor cars is not commercially
viable in the mass car market but is commercially viable within
niche markets. This example demonstrates two things. First, that
what may be considered commercial as a component in one product
would not be commercial for another product. Second, that a product
may be considered fully commercial at a high price if it is aimed
at a particular small market but would not be commercial for the
mass market unless the price were much lower.
To illustrate the practical significance for renewable energy
of what may seem to be an esoteric argument, there are renewables
that in some circumstances may be considered to be commercially
viable. Photovoltaics are used in many commercial applications
from pocket calculators to garden fountains, railway signalling
and remote telephone boxes. Many of these applications compete
cost effectively with grid connected fossil-fuelled generation
for locational reasons (ie, the cost of delivering the electricity
in small quantities to where it is needed). Thus, in some markets
renewable technologies are market convergent and clearly commercially
viable but the technology is not generally cost competitive for
large-scale generation.
In the context of the Government's policy on renewables the
ability of the Non-Eligible Renewables to provide the expected
contribution towards the Renewables Target is fundamental to the
concept of commercial viability. However, as has been noted in
Annex A, although there may be special circumstances in which
energy from waste plants may be built, it should not be expected
that such plant will be built in large numbers and, therefore,
the Government should not expect to achieve the Renewables Targets.
Thus, it is not correct to state that energy from waste is commercially
viable. In some ways the same is true of large hydro since it
would not be possible to increase cost effectively the amount
of capacity that is available today.
(b) Proven Technology
One other aspect of commercial viability is the degree of
risk that is involved with bringing the product to market. A product
is only normally thought of as being commercially viable when
we know that it works reliably. Photovoltaics are an example of
a reliable technology. Certain types of energy from waste may
be regarded as proven technology, but there are other technologies,
that should achieve improved environmental performance and energy
efficiency, that are not proven at full scale. Gasification or
pyrolysis of waste are examples of technologies that need to be
proven at full scale and in a commercial environment. Simply because
one technology that utilises a certain fuel is regarded as proven
does not imply that all technologies that utilise that fuel are
proven, and hence, it is not correct to state that all technologies
utilising that fuel are commercially viable. There is no reason
to exclude all technologies that utilise that same fuel from support.
For example, by the perverse logic implied by excluding energy
from waste from the Obligation, there would be no need to support
clean coal technology because conventional coal-fired power stations
have been operating commercially for many years. Also, there would
be no need for capital grants to offshore wind projects because
onshore wind projects do not require those grants to be viable.
The policy is inconsistent and discriminatory in its treatment
of different renewables.
Other forms of renewable may be regarded as proven technology
but require support because for the majority of consumers they
cannot match the unit costs of electricity produced from fossil
fuels—frequently because of the cost of the fuel that they
utilise. The renewables that fall into this category are energy
crops, agricultural waste, on-shore wind, landfill gas, photovoltaics
and small hydro. Even offshore wind is regarded as proven technology
in other countries but has not been demonstrated in the UK for
commercial reasons. Many of these other forms of renewable use
technology that is fundamentally the same as that used for the
incineration of waste with energy recovery.
There are no grounds to discriminate against energy from
waste on the basis that such technology is proven. Other types
of renewable are equally proven and frequently use similar technologies.
ESTABLISHED IN
THE MARKET?
Large hydro is the single most important renewable in the
UK, accounting for almost 46 per cent of renewable output in 1999.
Most of the plants are long established and in some cases there
have been plants at the same location for more than a century.
It should be expected that with some spending on refurbishment,
the existing capacity can be maintained or slightly increased
during the foreseeable future. Thus large hydro may be regarded
as well established in the market. However, it is unlikely that
any new large hydro stations will be built.
Small hydro has also been used for generating electricity
for a very long time in the UK. A number of the smaller plant
projects that are going ahead are likely to be refurbishment of
disused privately owned small hydro units. One hundred and thirty-five
small hydro projects were contracted as part of the NFFO/SRO and
47 of these had been commissioned by 1999. Most small hydro capacity
operating in 1999 had been built without NFFO/SRO support.
Thus, both large and small scale hydro are well established
in the electricity market, the difference being that small scale
hydro appears to have some potential for market growth. Therefore,
it is difficult to understand why the policy set out in the Consultation
Document should distinguish between the two types of plant.
In 1999, the output of energy from waste plants was 1.3TWh
and the output of wind turbines was 0.9TWh. There are a further
76 waste schemes with 1183 MW of capacity and 235 wind turbine
schemes with 1003 MW of capacity contracted under the NFFO/SRO.
Both types of renewable have experienced difficulties in obtaining
planning consent on the contracted sites, with, in each case,
only 11.9 per cent of the contracted capacity operational by the
end of 1999. Both types of technology have been used to provide
energy commercially in various ways for many years. The technologies
used in the existing schemes are proven for both wind and waste.
As a source of energy, both wind and waste may be said to be well
established in the market but to be facing difficulties in expanding
because of problems with consents.
The electricity prices contracted in NFFO 5 were higher for
wind than for waste but not significantly so and both sets of
prices are well above the prices in the current contract market.
The difference in price is not large enough to justify different
treatment for the two technologies.
Perhaps the major distinguishing feature is that there are
non-energy factors from the Landfill Directive that could lead
to an increase in thermal processing of waste. However, because
energy from waste is more expensive than landfill, progress towards
reducing the amount of landfill has been very slow and it is not
expected that any major shift will occur until at least 2006.
Landfill gas projects are also well established in the market,
with output in 1999 of 1.7TWh and 165 further projects totalling
374MW contracted under NFFO/SRO. Producing electricity from landfill
gas is a profitable way of dealing with the gas which landfill
operators would otherwise need to gather and flare. More than
10 per cent of the landfill gas capacity operating in 1999 had
not been supported by NFFO/SRO. Thus, the support for this renewable
through the NFFO/SRO has, at least in some cases, enabled windfall
payments to be made to landfill operators.
The use of gas engines is a well-established technology,
but some of the early landfill gas schemes suffered from technical
problems created by contaminants in the gas stream. Manufacturers
of gas engines have now made machines designed for the landfill
gas market and appear to have overcome the technical problems.
Electricity generation using landfill gas should also be considered
to be well established in the market.
To conclude, although large hydro and energy from waste may
be considered to be established in the market, this is equally
true of small hydro, onshore wind, sewage sludge digestion and
landfill gas schemes. Consequently, the policy is inconsistent
and discriminatory in excluding large hydro and energy from waste
from the Obligation.
MARKET SEGMENTATION
The Consultation Document states explicitly that a banded
approach to buy out prices has been rejected because this would
involve the Government in "choosing which specific technologies
should be used to meet the obligation". By establishing the
category of Non-Eligible Renewables the Government is, in fact,
introducing banding. Thus, the Consultation Document is not internally
consistent and neither is the policy.
DEFINITION OF
RENEWABLES
There is some discussion within Europe about whether energy
from waste should be excluded from the Renewables Targets. There
is no logic in excluding energy from municipal and industrial
waste but including landfill gas and energy produced from waste
products produced by agriculture and forestry. Recovering energy
from waste wood or waste paper, where both have been derived from
managed resources, is environmentally little different from growing
trees to use as the fuel for a biomass plant. Part of the argument
seems to be that energy from waste prevents recycling but this
argument is not sound. It is perfectly possible to specify recycling
targets such that what is left to go into energy from waste plants
cannot sensibly be recovered in any other way. Further, energy
from waste can be set up in a way which enhances the recycling
of items such as glass and metals. Setting such targets for recycling
is a matter for waste management policy not energy policy. The
alternatives to energy from waste for many waste products are
landfill and composting, both of which release greenhouse gases.
All forms of renewable using combustion technology release greenhouse
gases at the point of combustion and many require the use of fossil
fuels, either in harvesting and delivering the renewable fuel
to the plant, for flame stabilisation or converted chemically
into fertiliser. However, despite these imperfections, they offer
a significant improvement over fossil-fuelled power plants. Energy
from waste, like other renewables, offers the same significant
improvements.
SUNK COSTS
AND WINDFALL
GAINS
Although not explicitly stated in the Consultation Document,
the Government may wish to ensure that existing renewables generators
that have sunk costs and are able to continue operating without
support should not receive windfall gains. This is a sensible
policy objective because it minimises the cost to the consumer,
but this aim should not be allowed to prevent the development
of new projects. Failure to aid projects that need some support
but that are potentially lower cost than some other technologies
will simply prevent the achievement of the Renewables Targets
at reasonable cost. If the Government wishes to prevent windfall
gains then all renewables projects that exist today should continue
to benefit from the existing arrangements but should receive no
benefit from the Obligation. The Government has partially adopted
this policy for projects with NFFO 3, 4 and 5 contracts, but will
allow projects that have had NFFO/SRO contracts to gain further
benefits once those contracts have expired. Thus, wind projects
that were financed on the basis of NFFO 1 contracts, and that
have largely repaid debt and have no fuel costs, will also receive
further support by being part of the Obligation. However, municipal
waste plants that also had NFFO 1 contracts but which may require
further capital expenditure to comply with new stricter emissions
limits, will receive no further support because they are excluded
from the Obligation. There is no logic or equity in a policy that
allows some renewables projects, that have largely repaid capital
costs using income derived from NFFO/SRO contracts, to receive
further support for a period of 10 years or more following the
end of those contracts, but to exclude other renewables from the
Obligation because the Government believes them to be commercially
viable.
Excluding whole categories of renewable by fuel type from
the Obligation is a very imperfect policy instrument to be used
to prevent windfall gains. If the Government wishes to prevent
windfall gains it should pursue an explicit policy that targets
this objective rather than biasing the system against particular
forms of renewables.
COST TO
CONSUMERS
The policy as described in the Consultation Document is market
based and generally non-discriminatory. Such a policy is designed
to achieve the aim of increasing the amount of renewable generation
at least cost to the consumer. However, by establishing the category
of Non-Eligible Renewable the Government is introducing a degree
of discrimination and consequently ensuring that the target is
not met at minimum cost to the consumer.
SECURITY OF
SUPPLY
One of the broad objectives of energy policy is security
of supply. Security of supply involves diversity of fuel type
and reliability of electrical capacity at times when it is needed
to generate. Some types of renewable achieve very low load factors:
25-30 per cent in the case of wind. This low load factor reflects
the inability of the capacity to generate on demand and the reliance
on external factors to determine the level of generation. Similarly,
hydro output, although generally more predictable in the short
term, is difficult to predict over the course of a year because
it depends on the amount of rainfall. The load factor of hydro
in 1999 was 38.5% but in 1996 the load factor was only 25.4 per
cent because of lower rainfall. As increasing amounts of unpredictable
generation come on to the system, two things will need to happen.
First, capacity of other types must be built or retained on the
system to cover for the possibility that plant may not be available
at times of high demand. Second, plant that is capable of being
dispatched must be kept in readiness to generate at short notice.
Thus, to maintain the same degree of security of supply, additional
costs must be incurred. These costs have not been explicitly considered
in the cost benefit analysis set out in Annex A of the Consultation
Document. Generally speaking, the thermally based renewables do
not suffer from this problem. This is an additional reason why
energy from waste should be included in the Obligation.
CONCLUSION
Excluding large hydro and energy from waste from the Obligation
is not consistent with any of the Government's stated policy objectives.
However, there may be an unstated objective to prevent windfall
gains. This objective would be consistent with minimising the
cost to the consumer of meeting the renewables targets. If the
Government wishes to achieve this objective, it should introduce
a policy specifically targeted at excluding windfall gains to
existing plant using any fuel source.
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