APPENDIX 25
Memorandum from the Association of Electricity
Producers
1. The Association of Electricity Producers
(AEP) is the UK trade association representing electricity generators.
It has over 100 members; many of them have interests in renewable
generation. Annex 1 lists the Association's members.
2. For several years the Association has
described an obligation on suppliers to source a defined percentage
of their sales from renewable energy as a means to encourage further
renewable energy development. It is very pleased that now the
Government is suggesting this route forward. The AEP has written
to the DTI several times in the past about how such an obligation
could be structured.[47]
We would be happy to provide the Committee with copies of our
submissions to the DTI.
3. This response draws heavily on the paper
we sent to the DTI last December for its consultation on renewable
energy.
ARE THE
GOVERNMENT'S
RENEWABLES TARGETS
PROPERLY FORMULATED
AND ACHIEVABLE?
4. There are a number of key points we wish
to emphasise:
— There are three key drivers on suppliers
to ensure the success of the Renewables Obligation:
— the method of recycling any buy
out receipts.
The buy out price should be at least 3.5p/kWh. The
profile should be challenging and as high as possible as early
as possible. It is extremely important that the size of the demand
for Renewable Obligation Certificates (ROCs) set by obligation
remains well ahead of the supply. Any buy out funds should be
recycled to reward those who comply with the Obligation.
— Whilst a market mechanism is welcomed,
it could be rendered useless if non-market barriers are not removed
or eased. The difficulties in obtaining planning permission could
undermine the Obligation and make the Government's target hard
to meet. The industry wants to deliver, but cannot if there are
insurmountable barriers.
— The methods used to incentivise how
networks operate are crucial.
— The Obligation should be simple.
— An efficient secondary market in
ROCs will provide price discovery and increase confidence for
long term planning and Power Purchase Agreements. Any barriers
to such a market developing should be avoided.
— The early take-up of funds in the
announced capital grants could be maximised through separate sequential
competitions for the different streams of funding, together with
the introduction of enhanced capital allowances.
— The Government should consider providing
additional funds to encourage investment in community-based renewable
energy projects.
LEVELS OF
ACHIEVEMENT SO
FAR AND
THE CURRENT
RATE OF
PROGRESS
5. The difficulties of obtaining planning
consent have been the greatest impediment to the uptake of NFFO
and SRO contracts.
6. See comments below about planning.
EXPECTATIONS OF
THE PROPOSED
RENEWABLES OBLIGATION
AND THE
DEFINITION OF
ACCEPTABLE COSTS
TO THE
CONSUMER
7. The Association is very concerned about
the bias that might be applied to different renewable technologies.
The potential exclusion of energy from waste is hard to comprehend.
8. The argument seems to stem from a view
that output from energy from waste can cost less than output from
other renewable plant. Output that is converging faster with prices
of output from non-renewable plant should not be penalised.[48]
9. Through the NFFO, SRO and the associated
Fossil Fuel Levy payments, consumers' funds have helped to bring
online new plant and facilitate price convergence. If owners of
such plant can agree contracts for output at a price lower than
other technologies or fuels, this will mean the amount of money
earmarked by Government as an acceptable cost on consumers (see
below) can buy more power. Consumers should benefit through their
past and future expenditure, through provision of as much green
energy as possible.
10. It would seem rather churlish to exclude
energy from waste, for example, from the Obligation, possibly
from the CCL exemption too, yet keep it as part of the Government's
renewable energy 10 per cent target. Exclusion of technologies
seems inconsistent with the statement in the DTI's recent document
New and Renewable Energy, Prospects for the 21st Century, The
Renewables Obligation, Preliminary Consultation, that involving
Government in choosing which specific technologies should be used
to meet the Obligation "runs counter to the market led approach
that has been designed to ensure that suppliers will meet their
Obligation by the most economic means. The Government does not
want to segment or unduly distort the marketplace, or to send
out the message that some renewables are more important to the
UK's target than others. Instead, it believes that competitive
forces should be the drivers that shape the industry that emerges
as a result of the introduction of the Obligation." It continues,
that a policy with a banded Obligation "would require Government
making firm and irrevocable decisions as to which technologies
should be used to meet the Obligation. This would fail to take
future technological and market developments into account, and
perhaps lead to resources being directed to areas of least need.
The Government's preferred approach is sufficiently flexible to
accommodate both changing circumstances and future developments,
which are inevitable over the period of the Obligation. The Government
will keep its policy under review while maintaining a dialogue
with stakeholders."
11. First, there seems to be a failing throughout
the DTI's document to distinguish clearly, when appropriate between
resources and technologies. In attempt to clarify this, the Association
has produced Annex 2: Biomass and waste terminology.
12. Second, the Government states that it
does not wish to choose between technologies.
13. Energy from waste has not converged
in price with the market price of non-renewable output. In particular,
ROCs are needed for new small and medium-sized plant, which otherwise
have fragile economics, yet which meet the "proximity principle"
in the DETR's Waste Strategy 2000.[49]
In addition, energy from waste acts as baseload renewable energy
output, and as such makes a significantly more reliable contribution,
to the percentage of electricity from renewable energy than might
seem. If energy from waste is excluded from the Obligation, the
Government will not be on course to meet its target, and is likely
not to realise its ambitions in Waste Strategy 2000.
14. Section 2.6 of the DTI's consultation
paper states that ROCs will only be issued in respect of energy
that is "supplied by a licensed electricity supplier in Great
Britain". This excludes on-site renewable energy projects
where the energy is supplied to the host on a licence-exempt basis.
Given the income from ROCs, on-site generation represents an economically
attractive possibility, as the energy supplied to the host is
not subject to Distribution Use of System charges. This type of
development also has some significant "plus points"
from the DTI's viewpoint. First, the investment and ongoing employment
occur in the UK. Second, these projects have the potential to
reduce energy costs for UK businesses. And third, projects are
likely to be outside `sensitive' areas. Therefore, the Association
has urged the DTI to consider carefully the impact of its proposals
on the development of on-site renewable energy projects, and on
projects where the energy is supplied to customers over private
networks. We asked the DTI to consider the possibility of allowing
ROCs to be issued in respect of energy that is supplied by licence-exempt
suppliers in Great Britain, as well as energy supplied by licensed
suppliers.
15. There are concerns that energy from
waste could be excluded from CCL exemption status; this would
reduce the amount of power valid for exemption from the CCL, and
contribute to Levy receipts. The size of the receipts should not
be the policy driver.
16. Annex 3 argues for the value of energy
from waste being included in the Obligation.
17. Extensions or improvements to large-scale
hydro should also be included in the Obligation.
18. The rules for inclusion should be the
same across Great Britain, to facilitate trading.
Effect on the Fossil Fuel Levy
19. There will be an auction of power as
part of the NFFO Saving Arrangements. Whilst the replacement NFFO
contracts assured generators that they will be paid the same as
they are currently, the discussion about what is a valid renewable
technology does have an effect. It will affect the price that
suppliers are willing to pay for the output in the auction, and
thus the amount that will have to be "topped up" via
the Fossil Fuel Levy (FFL) to fund the replacement NFFO contracts.
20. In all the comments the DTI makes about
the effect on consumers, the possible effect of an increase in
the FFL through exempting certain fuels or technologies from the
Obligation, and possibly the CCL exemption, is not mentioned.
21. It might be argued that there is no
difference between having the associated price increase through
exempting potentially cheaper output being paid for via increased
bids in the auction for the power, or via the FFL. However, the
effect would not be the same. The FFL is placed on all consumers,
including the domestic sector. As it is a percentage on final
bills, domestic consumers will pay more per kWh than industrials.
Political decision
22. If the only benefit from renewable energy
were the measurable offsetting of carbon emissions associated
with the electricity that the renewable output displaces, then
a carbon market would deal with the added value of renewable generation.
The Government, however, recognises that there should be acknowledgement
of further benefits (also currently not valued, or undervalued
by the market) related to the environment, sustainability and
diversity: the Government's target and the percentage obligation
aims to take these into account.
23. The decision about the balance between
the environmental and other benefits and cost to the consumer
is a political one. The route that attempts to achieve the targeted
balance is a judgement based on a view of economics and politics.
Government assumptions on cost
24. In New and Renewable Energy, Prospects
for the 21st Century, The Renewables Obligation, Preliminary Consultation
there is an assumption that the buy out price will become
the marginal price at which all generators or developers will
price their output. This cannot be substantiated, and many market
players (generators and suppliers) are convinced this will not
be the case. The assumption has a large effect on the details
on the Obligation.
25. When considering the balance between
output and cost to consumers in the document, the constraint is
the politically-acceptable percentage by which electricity prices
as a whole can rise. The cited amount, 3.7 per cent, is then translated
into an amount of funds ("around £600 million in 2010
. . . on 1998 electricity prices"); a calculation is then
performed to see how much renewable energy this can buy.
26. Two further assumptions seem to be included
at this stage: the amount of electricity that will be needed from
the percentage obligation; and the contestable assumption mentioned
above, that all generators and developers will be able to sell
their ROCs at the buy out price.
27. Although the possibility of suppliers
paying a fine (the buy out price) rather than buying green power,
is mentioned earlier in the DTI's document, when discussing costs,
the paper fails to mention the associated effect: prices to consumers
could increase, and the associated funds might not be used to
buy renewable power, rather, they might go to a buy out fund.
If the buy out receipts are paid to other suppliers who then fund
renewable energy projects, consumers of a non-compliant supplier
(who had paid into the buy out fund) might accept the outcome.
Consumers might find it harder to accept paying for a supplier
to pay a fine that goes into the general business of another supplier.
28. The Association would stress that it
cannot be stated with certainty that generators will be able to
contract ROCs at the buy out price, and that the assumptions in
the DTI's document about cost of the Obligation, are incorrect.
It is particularly important at this stage to tackle this issue,
not least because one implication of this assumption seems to
be the potential exclusion of energy from waste.
Level of the buy out price
29. The DTI document New and Renewable
Energy, Prospects for the 21st Century, The Renewables Obligation,
Preliminary Consultation assumes that there will be a buy
out price. The rationale for this is that it will protect consumers,
particularly the fuel poor, from potentially unreasonably high
electricity prices. The buy out price will act as a cap on the
price that is paid for renewable energy.
30. The level of any buy out price is very
important. Although it is described as enabling suppliers to pay
an agreed amount if they fail to fulfil the obligation that is
imposed on them, in reality, suppliers can choose to pay this
price rather than buy renewable energy. Therefore the level at
which the buy out is set will directly influence the amount of
renewable energy that is seen to be economic and viable.
31. The Association is pleased that the
Government has acknowledged the constraint on output of a buy
out price, and that the paper suggests a buy out level higher
than the indicative figure in earlier publications. We recognise
that the buy out ensures that all suppliers are engaged in the
process of bringing electricity from renewable sources online.
32. However, it should be pointed out that
although a buy out price of 3p/kWh might support some renewable
output, it is not high enough to secure output from other plant,
including offshore wind and biomass.
33. The value of ROCs should be determined
in the market place, but the buy out price should be as high as
possible, to strengthen the hand of generators as they negotiate
contracts. The Association suggests the buy out price should be
at least 3.5p/kWh.
34. The Association would point out that
were the buy out price to be set at 3p/kWh, generators would not
receive (1.8-2.5 plus 3)p/kWh as suggested in the DTI's document.
Past experience shows that the value of any extra benefits conferred
by renewable generation over and above output from other sources
of power, will be split between the suppliers, who can realise
the value, and the generators who produce it. It is likely that
a buy out price will mean suppliers and generators will settle
on a ROC price that is a discount to the buy out price.
35. Much will depend on competition between
suppliers, however, contracts for ROCs covering debt repayment
periods for major capital projects (10-15 years), which will be
a requirement for longterm bankable Power Purchase Agreements,
will most likely be discounted. A higher buy out price would help
balance this effect.
36. We support any buy out price being linked
to the Retail Price Index, as suggested by the DTI.
NFFO Saving Arrangements
37. The Association is pleased that the
new arrangements aim to disrupt the generators' situation as little
as possible.
38. The price that comes out of the NFPA's
auction is very important: not only will it proscribe the level
of the FFL, but it will act as a benchmark price for output outside
the NFFO process.
THE IMPACT
OF ALL
THE GOVERNMENT'S
REFORMS OF
THE ELECTRICITY
MARKET, INCLUDING
NEW TRADING
ARRANGEMENTS FOR
ELECTRICITY GENERATION,
ON THE
PROSPECTS FOR
NEW RENEWABLES
CAPACITY
NETA
39. The Association has expressed, on a
number of occasions, its concern about the effect of the New Electricity
Trading Arrangements (NETA) on small producers in the open market,
including renewable energy projects which are not the subject
of NFFO contracts. Such schemes will be at a considerable disadvantage
in a market which favours plant with larger and more predictable
output. (The situation will be a particularly problematic until
the Renewable Obligation takes effect.) There is considerable
concern among renewable energy companies at the way in which the
DTI/Ofgem programme has responded so slowly to the problem. The
Association has explained the difficulties facing smaller companies
to the Energy Minister, Ofgem and the officials involved. Only
recently has a solution been put forward—only a few weeks
before NETA are due to take effect—and unfortunately, it
appears to be far too complex and expensive for smaller players.
Discussions on this matter are continuing.
Embedded generation
40. A large growth in the number of renewable
energy projects will have a significant impact on the operation
and function of electricity distribution systems. The present
regulatory incentives on Distribution Network Operators need to
be reviewed and revised with these changes in mind. Without change,
the cost of network access will severely constrain the development
of renewable energy projects. In July 1998 the Association published
in July 1998 a policy document which drew attention to the issues
involved. The Association welcomes the report of the DTI/Ofgem
Working Group on Embedded Generation and looks forward to helping
develop its proposals.[50]
THE LEVEL
OF GOVERNMENT
SPENDING ON
RENEWABLES-RELATED
R&D
41. We would hope this would increase. See
comments below.
THE LEVEL
OF GOVERNMENT
SUPPORT FOR
NON-FOSSIL
FUELS FOR
ELECTRICITY GENERATION
OVER TIME
42. The requirement on suppliers to fulfil
the Obligation is a key driver behind this mechanism. The buy
out option has weakened this element of force. The Association
believes that a challenging profile, particularly in the early
years of the Obligation, is paramount as a clear message to suppliers
that the mechanism is robust and that the Government is serious
about its intent to meet its target of the UK having 10 per cent
of electricity from renewable sources by 2010.
43. A challenging "profile" would
encourage suppliers to offer early long-term bankable power purchase
agreements to developers who are looking to install the newer
technologies.
44. We are surprised that in the DTI's recent
document there was no reference to the target to have 20 per cent
of electricity from renewable sources by 2025, despite references
being made to Shell's assertion that by the mid twenty-first century,
40 per cent of the world's energy needs will come from renewable
sources of power. The Association has asked that the Government's
longer-term goal be clarified.
45. In addition, an indication now of the
size and shape of the augmenting profile from 2010 would help
the market to develop.
46. The projected regime and rules need
to be stable to help establish a good secondary market for ROCs.
47. The size of the profile should be altered
to take account of including energy from waste projects in the
Obligation (and removing them from the "non eligible"
element).
The proposed capital grants for offshore wind
and energy crops
48. The Association welcomes the announcement
of the opportunity for capital grants from revenues from the Climate
Change Levy (CCL), via the Carbon Trust, (£39m) as planting
grants from the Ministry of Agriculture, Fisheries and Food (£12m)
and from the lottery-funded New Opportunities Fund (£50m).
49. It also welcomes the announcement by
the Prime Minister that he has asked the Performance and Innovation
Unit "to undertake a comprehensive study into the future
of renewable energy, with a view to increasing substantially our
long-term investments".[51]
We hope this will include funds for Research and Development projects,
as well as additional support for generation projects.
50. However, none of these options adequately
addresses the issue that production costs of, say, offshore wind
and biomass, are very different. Whilst offshore wind is a capital
intensive technology that should benefit from the offers of capital
grants, biomass's costs relate much more to ongoing fuel costs.
Indeed only biomass and some landfill gas projects pay for their
renewable fuel. The Association has two suggestions which might
help.
51. The first suggestion is very simple:
a lower gate fee or rate of landfill tax could be applied to the
final residues from biomass plants that are required to dispose
of their ash to landfill. Some 5-8 per cent of the fuel used in
biomass combustion is left as residue. This can be higher if fluidised
bed combustion is used. A lower disposal rate for landfilling
this residue (possibly related to providing evidence that some
effort has been made to recycle) could be applied. For example,
it could be exempted from the Landfill Tax.
52. A second suggestion that could be considered,
is an "agricultural certificate" that could be granted
through a bidding system to developers who offer to produce lowest
priced output from biomass. Once allocated, the developer would
only be able to redeem the certificates' value when the plant
was up and running, and the output, and the related ROC, were
redeemed by the purchasing supplier.[52]
The value of the agricultural certificate (p/kWh) could be announced
at the time of the bidding.
53. Whilst the capital grants are welcomed
it should be remembered that the cost of developing a wind farm
is large: current projections are around £1m/MW installed.
The announced grants should be seen as a first phase; it should
be stated that the Government will consider further grants to
facilitate continued industry growth.
54. The grants would be more valuable if
they were coupled with enhanced capital allowances. This type
of assistance is being given already to combined heat and power
projects and energy efficiency schemes, and as such has been recognised
as a potentially valuable tool. The Association would suggest
that similar enhanced allowances be given to renewable energy
projects. The availability of one hundred percent write-down in
the first year would be of substantial benefit to most developers.
This could also enable the capital grants to be spread more thinly
over a larger number of projects.
55. The period between the closing date
for capital grant applications and the date when the grants will
be announced seems unnecessarily long. To allow companies to know
which have been successful and to allow those to progress their
projects, this period should be shortened.
56. In addition, we question whether it
is encouraging the best use of a company's resources to have all
the necessary consents in place when bidding for a capital grant.
Achieving such consents can be time-consuming and costly, and
will invariably delay the award of initial grants.
57. There could be separate, rolling competitions
for the different sources of funds. This would help maintain momentum
in project development and enable early moves to implement projects
as soon as possible. The stop-go nature of the NFFO process was
universally disliked amongst developers, many of whom are no longer
in business because of the cost of delays.
58. Additional grants to community-based
schemes could be initiated. Projects could include solar. Such
grants would encourage community interest in renewable energy
developments, and could, for solar in particular, help stimulate
an industry base.
59. In general, whilst it has been recognised
that biomass and offshore wind are needed to contribute to the
Government's targets, other technologies including low head hydro,
PV and tidal should not be excluded as they will become more competitive,
in cost terms, over the period of the Obligation.
Guaranteed markets?
60. The Association welcomes the Government's
acknowledgement, in the DTI document, of the value of providing
certainty; this seems to have instigated the proposal that the
Obligation lasts until 2026. Certainty helps the financing of
projects: the sentiments behind the statement about duration of
Obligation are appreciated, although the reality might be different
due to potential changes of Government throughout the next quarter
century.
61. However, we would point again to the
buy out option and the way in which it reduces certainty for producers,
by giving suppliers an alternative to purchasing renewable energy.
62. The current discussion about exclusion
of technologies is also, as mentioned above, very unhelpful.
THE INTERACTION
OF THE
PLANNING SYSTEM
AND THE
DEVELOPMENT OF
RENEWABLE SOURCES
OF POWER
GENERATION
63. Gaining planning permission continues
to be the greatest barrier to developing renewable energy projects
including the realisation of NFFO and SRO contracts.
64. The Association welcomes the DTI's recent
recognition that "non technical barriers" exist and
its stated commitment to address them.
65. The DTI is aware that the situation
is now arising where some projects that gain local planning permission
are being called in for further planning scrutiny at a regional
level. Clear guidance should be given from Government to regional
and local planning departments, emphasising the UK target.
66. Further thought needs to be given as
to how regional planning guidance might be given effect locally
to help bring more renewable energy projects on line.
67. If planning consents are not forthcoming,
existing NFFO and SRO contracts will not be able to come online
and contribute to the Government's target, and many potential
new projects will not be realised.
68. We are pleased that the Government has
been working, with Ofgem and the NFPA, to allow the movement of
NFFO contracts to new development sites, to give schemes a higher
probability of coming to fruition.
FURTHER COMMENTS
69. The Association would welcome the opportunity
to discuss these proposals further with the Committee.
January 2001
47 For example AEP responses to the DTI's consultation
on New and Renewable Energy: Prospects for the 21st Century, AEP
responses (summary and detailed response), May 1999. More recently
"Response to DTI's consultation: New and Renewable Energy,
Prospects for the 21st Century, The Renewables Obligation, Preliminary
Consultation", December 2000. Back
48
The assumption that reducing prices in past rounds of NFFO can
continue in a similar trend is flawed. Many sites and potential
projects (using each technology) have been "cherry picked",
leaving, for the future, sites that will be potentially more expensive. Back
49
The fixed costs of small and medium-sized plant (total costs
c£25-30m) are similar to larger plant and as such a larger
part of the costs, making the economics unattractive to project
financiers. Although it is unlikely that banks would see ROCs
as a certain income flow (to be secured against lending), ROCs
would provide a welcome revenue stream for equity investment. Back
50
The DTI/Ofgem Embedded Generation Working Group was tasked to
consider "Possible measures for ensuring that distribution
companies, in managing distribution networks economically, compare
embedded generation on an equitable and transparent basis as an
alternative to any proposed network augmentation." Back
51
Prime Minister's Speech to the Green Alliance/CBI Conference
on the Environment, Tuesday 24 October 2000. Back
52
It might be administratively simple for the generator to sell
the agricultural certificate to the supplier who purchased the
ROC, and for both certificates to be redeemed simultaneously. Back
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