Select Committee on Environmental Audit Memoranda

Annex B


  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.


  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.


  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.


  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

Projects Contracted
Number of Projects Completed
Percentage of Projects Completed
Percentage of Contracted Capacity Completed
Landfill Gas
Energy from Waste

  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.


  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.


  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.


  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.


  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.


  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.


  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.


  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.


  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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