Letter to the Clerk of the Committee from
D J Lewis, Local Waste Solutions
Further to my submission to the Committee dated
31 January 2001,
I wish to submit additional and updated evidence on behalf of
Local Waste Solutions Limited (LWS) and LWS (CHP) Limited.
LWS was established in 1999 to provide waste
disposal alternatives to landfill and to produce renewable energy
from small plants. LWS is seeking to establish its first plant.
LWS (CHP) Limited was established in 2001 to
own and operate small-scale combined heat and power solutions
for customers in the leisure industries. LWS (CHP) Limited is
constructing its first unit which is expected to begin production
in March 2002.
I also write from the perspective of an elected
industry member of the Balancing and Settlement Code Panel and
as one who has been intimately involved with the establishment
of liberalised electricity markets.
My previous evidence related to the proposals
set out in the Government Consultation on Renewable Energy dated
5th October 2000. In this letter I supply evidence on:
the effect of the New Electricity
Trading Arrangements (NETA) on renewable generators and CHP;
the further Consultation on Renewable
Energy dated August 2001 and the revised draft order dated 24
January 2002; and
The problems created by the New Electricity
Trading Arrangements (NETA) for small and renewable generators
and CHP plant are real and significant. At the behest of the Government,
Ofgem has reviewed the input over the first few months of NETA
operation on small generators. it is unfortunate that the Ofgem
review does not appear to give due weight to the problems created,
nor to recognise that the problems have, in large part, been created
by flaws in the design of NETA.
(a) Causes of the problem
The NETA arrangements tend to favour large vertically
integrated companies and also to favour those generators that
are most able to predict their output. The tendency of renewable
and CHP plants to be within smaller companies and, particularly
in the case of wind turbines, to be less able to predict their
output has meant that the deficiencies of NETA have hit those
sections particularly hard.
The problems created for small and renewable
generators following the introduction of NETA arise from four
Fundamental problems with the NETA
design, most of which have some impact on all parties in the market,
but which affect small and unreliable generators most significantly;
Significant matters relating to the
implementation of NETA;
Reduction in market prices brought
about by increased competition amongst generators, reflecting
further divestment of plant and changes to operating constraints
on other plant; and
A change in the balance of market
power between small generators and the rest of the industry, both
as a result of the requirements introduced by NETA and because
of further vertical integration and the concentration of supply
businesses within a small number of large players. The vertical
integration and consolidation of the industry was itself a response
to the anticipated introduction of NETA.
The fundamental NETA design problems are discussed
in Annex A to this letter, implementation issues are discussed
in Annex B and Annex C looks at the potential changes to the NETA
design raised in the Consultation Document.
The main conclusion of the analysis set out
in Annexes A to C are as follows:
1. NETA has enhanced the market power of
large players and reinforces the natural tendency in the production
and delivery of electricity towards monopoly provision of services
because it enhances the economies of scale. Additionally, NETA
has imposed a large overhead of administrative costs that weigh
very heavily on small players.
2. The disadvantages for renewable generators
and CHP plant within NETA are associated with aspects of the arrangements
that are central to the design. Major changes are required to
the design of NETA in order to solve the problems. Tinkering at
the edges is not enough.
3. Balancing Mechanisms prices are not cost
reflective and the situation is made worse by the use of dual
cash out prices. The level of total imbalance charges within NETA
is related more to the structure of the electricity industry than
to the costs incurred by NGC in achieving energy balancing. The
Government's acknowledgement that effective consolidation services
need to be developed itself proves the case that the costs of
NGC's actions to correct imbalances are not being targeted on
the parties causing those imbalances and, consequently, that NETA
is failing in one of its fundamental objectives. However, consolidation
of itself does not go far enough to solve the problems created
It is not clear how imbalance charges could
be made fully cost reflective within the current structure, but
they could probably be improved significantly. The replacement
of dual cash out prices with a single cash out price is vital
in the longer term to the success of small and renewable generators
and the competitive entry of smaller suppliers.
4. Small players tend to have larger imbalances
than larger players because of the inherent increased difficulty
in forecasting, the high costs of maintaining a trading function
and lack of liquidity in the traded markets for small volume trades.
5. The current NETA design uses dual cash
out prices in an attempt to force parties to balance in a way
that is neither sensible nor economically justified, Small players
suffer most from this and large players may actually benefit from
the losses of small players
6. The Consultation Document has proposed
that changes are made to allow effective consolidation services
for small players to be put in place. Effective consolidation
services may be helpful for small generators, but it is likely
that the majority of the commercial benefit created by consolidation
would be captured by the consolidator. Other more fundamental
changes, such as single cash out price and ex-post trading, are
required in order to assist small and renewable generators.
7. Generally, it is not sensible to pursue
changes to NETA that are targeted at small players, but fundamental
changes are required to address the root cause of the problems.
8. There are matters relating to the way
in which NETA has been implemented that should also be addressed
(see Annex B).
(b) Implementation of changes
The introduction of changes to NETA that are
designed to assist only small generators, renewable generators
or CHP would be very difficult without first changing the Applicable
Objectives of the Balancing and Settlement Code. There would appear
to be no ready means whereby a change to the Applicable Objectives
could be achieved. However, modifications that improve the operation
of NETA can and should be pursued.
Neither Ofgem nor the BSC Panel have sufficient
vires to be able to bring forward the full range of required changes.
This would require an initiative from a party to the BSC. This
should be expected to occur provided that the Authority signals
that it will give consideration to any modifications brought forward.
However, up to now, the Authority has given very strong signals
that it would reject the required modifications.
The timing of implementation is more difficult.
Any proposed modification would need to go through the normal
procedures under the BSC before going to the Authority for decision.
Unless very early decisions can be made, it is unlikely that system
changes could be in place to give effect to the modifications
before the end of 2002 and a more likely period for the implementation
would be mid to late 2003. In the light of the likely delay in
implementation, the Government may wish to consider temporary
support for small generators outside of the NETA system.
It is too early to attempt to measure the long-term
impact of NETA on the output of existing renewable plant and even
more difficult to gauge the effect on the amount of renewable
generation that will be built. The severe problems caused by very
low and frequently negative System Sell Prices that initially
occurred within NETA have latterly been ameliorated by changes
in bidding behaviour and increases in electricity demand. Very
high System Buy Prices have become less of a problem as rule changes
designed to eliminate price spikes have been introduced and have
taken effect. Consequently, it is probably no longer the case
that wind generators would need to pay rather than be paid in
order to generate (this perverse situation did occur at the start
of NETA), but the average prices received by wind generators are
still very low.
There are many factors, such as problems with
achieving planning permission, which have restricted the growth
of renewables. Much has been done to encourage renewables, not
least the introduction of the Renewables Obligations. However,
the introduction of unnecessary aspects in the design of NETA
have unambiguously made life more difficult for renewable generators
so that the Renewables Obligation will be more difficult to meet
and, if met, will be met at a higher cost to the consumer. It
should be stressed that this commentary on the effect of NETA
on small generators is independent of any impact that NETA may
have had on general price levels, and simply refers to those elements
of NETA that unfairly disadvantage small and renewable generators.
It is likely that these unnecessary and unfair elements of NETA
offset around one third to one half of the value of Renewable
Obligation Certificates (ROCs).
At the time of writing the PIU Review has yet
to be released into the public domain. Consequently, it is difficult
to comment in any detail. However, from the elements of the report
that have been leaked, it would seem that the report has been
helpful to renewable generation by suggesting that the Renewables
Obligation might be increased to 20 per cent by 2020. The fact
that the Review does not signal any major shifts in policy is
also helpful, since a stable Government policy is an important
element in encouraging the development of assets with very long
useful lives. It has been further suggested that the PIU Review
will focus on those elements of NETA that are unfairly disadvantageous
to small generators. If this is correct, the Review could be a
very welcome spur to fundamental changes to NETA.
The Renewables Obligation is a major step towards
encouraging renewable generation in the UK. The policy is set
out in the revised draft order dated 24 January 2002. This document
responds to concerns that were raised in response to the first
consultation document dated 5 October 2000 and the first draft
order dated August 2001. It is a particularly welcome feature
of the revised policy that advanced technologies utilising mixed
waste as a fuel have been included in the Obligation. This should
ensure a significant improvement in the probability that the renewables
targets will be met.
However, it is still uncertain whether the Obligations
will lead to the achievement of the renewables targets. The main
remaining barriers to the achievement of the renewables targets
are the planning system, the New Electricity Trading Arrangements
and uncertainty over the level of renewables targets after 2010.
It would be possible to remove the barriers related to NETA relatively
quickly, but the other barriers are longer term and may prove
to be intractable.
The matters raised in this letter are complex
and difficult to encapsulate. Should you require clarification
of any of the points raised, I would be pleased to supply further
41 See p 46, HC 334, 00/01. Back