Examination of Witnesses (Questions 180-189)
MR CHRIS
SHEARS, MR
MARCUS RAND,
DR GORDON
EDGE AND
MR DAVID
MILBORROW
25 OCTOBER 2005
Q180 Mr Caton: But there have been those,
including the Public Accounts Committee of this place, who think
now that the way the Renewables Obligation works is actually that
it is very good for onshore wind and, therefore, all the effort
is going into onshore wind and actually it is a disincentive perhaps
to some of those other alternatives, including offshore. How do
you respond to that?
Mr Rand: Well, all I was going
to say is that the Government has set up the RO which is a technology-blind
mechanism, a market-based mechanism and it could have gone for
something else. It could have gone for feed-in tariffs where it
decided to pick the price and award it and to a certain extent
banding is a kind of halfway house in between. Our view is that
what you do not want to do is send a sort of concern, as Chris
said, or shockwaves through the investor community that the Government
might go in and suddenly transform the RO and completely change
it, so we were as concerned about banding, not because we do not
want to support offshore and not because we do not want to support
wave and tidal or any other renewable, but because we are concerned
about the undermining it might have on investor confidence and
that is our concern. That is why we have always argued that the
way to do it is to provide additional support on top, as it were,
of the RO and that is what we are engaged with government in at
the moment about trying to find a solution to the offshore economic
gap. Round one offshore projects, through which we think there
will be about 1,000 megawatts delivered by 2010, they are being
supported through capital grants and nobody seems to have a problem
with that, but that is additional support to the RO. We are supporting
1% of our nation's electricity supply currently by additional
measures, but nobody is jumping up and down about that, and I
presume that is because everybody thinks that is the right thing
to do. The logic of that argument is that we think there is some
logic in applying that to some of the round two developments and,
likewise, applying that logic to other renewable technologies.
I note that the Biomass Task Force yesterday also came out with
some recommendations of applying additional support to help biomass
as well.
Q181 Mr Hurd: I would like to ask about
wave and tidal which would appear to be a technology where Britain
has some natural advantages. You have painted a picture of it
effectively taking over from wind as we strive towards these longer-term
targets, but it clearly needs to accelerate down the cost curve.
Your memorandum talks about an intriguing project called Npower
Juice Path to Power. Unfortunately we cannot wait until May 2006,
so is there anything you can tell us today about what that project
is aimed for and some of the policy implications you expect to
come out of it?
Dr Edge: Unfortunately it has
only just started in that we are interviewing particular players
in the market. In the first stage we are looking at where you
might go and how you might consent the projects. The bit about
how much it will cost and the sort of monetary values involved
will come in the last part of the project, so unfortunately I
will not be able to talk about that today. This is a project which
is very kindly funded by the Juice Fund that Npower run on the
back of their Juice Tariff where they have put some money aside
for these kind of projects and we are looking to find a way of
building on the experience of offshore wind in working its way
through the consenting system, where, with the Grid issues, if
you are going to be building a lot of offshore wind power off
the west coast of Scotland, you need to be talking about putting
a Grid infrastructure there, for instance, and then also what
the implications are in terms of bringing those extra costs down
the cost curve to where offshore wind is today. I cannot really
say much more than that because the project has not yet got much
further on than that.
Q182 Mr Hurd: So do you have any sense
of the kind of government funding that may be required to bring
this technology down the cost curve?
Dr Edge: Certainly we would anticipate
that the £50 million that the Government announced in August
last year is just a down-payment.
Q183 Mr Hurd: What sort of multiple would
you put on that in terms of what you think might be required?
Dr Edge: I think the order of
magnitude will be ten times that over the next sort of 10 to 15
years.
Mr Rand: The Carbon Trust are
also doing quite a lot of work on this, about how much money needs
to go in to move the technology from a relatively high cost down
to compatibility with the RO, and I think they are going to be
publishing their work quite shortly.
Q184 Colin Challen: I have heard what
you say about the Renewables Obligation and I have also heard
what one or two people in the anti-wind movement have said about
the way that the onshore wind farms are generating wind millionaires
and that is yet another reason to oppose the development of wind—a
curious argument, I have to say. If there were any truth in the
belief that onshore wind is generating good profits for those
developers, are they recirculating money to less viable schemes,
offshore for example? Is there any truth in the allegation to
start off with, that the onshore people are making huge amounts
of money?
Mr Shears: Clearly there are different
returns on different projects and some are doing better than others
under the RO. I will not repeat the structure of the RO, but the
point is that, certainly speaking with my company hat—a
Renewable Energy Systems hat on, we have a portfolio of projects
across the whole of the UK, some of which are in relatively low
windspeed areas which, in our forecasts of what prices we can
get in the market on a long-term power purchase contract, just
get those projects over the line, and then we have upland sites
in Scotland which have higher winds perhaps, but a lot more expensive
Grid connections, higher transmission charges, et cetera. Therefore,
it is not as simple as saying, "You've got a very windy site,
so you are going to be making millions of pounds". Clearly
we are investing and we have about 1,500 megawatts of projects
which we are developing at the moment, and again this is with
a RES hat on, we hope to build somewhere around 50 megawatts of
capacity a year, so we need to show a return to our shareholders
and have a sustainable business model going forward. I think we
do have to look at it in the round and look at it from a portfolio
point of view. One of the key reasons for the RO being set up,
from my recollection of when that process was happening, was to
offer a way of getting a geographic spread of projects around
the country which it has now successfully been able to do to get
away from the previous mechanism, the non-fossil fuel obligation,
which did drive developers to go to the very windiest locations
which were perceived to be those which had the most difficulties
in planning.
Q185 Colin Challen: Would you agree that
the feed-in tariff systems in Spain and Germany perhaps have been
more successful than the Renewables Obligation in generating new
schemes?
Mr Shears: In simple terms, yes,
if you look at the delivery which is taking place. If you look
at Germany, I think there is now 17,000 megawatts of wind energy
installed and Spain has got 8-9,000 megawatts, but I think if
you look below the headline, those systems have been in place
for a good number of years and the reason for that delivery is
in part due to a far more friendly, shall we say, planning system
for the delivery of those schemes, so I think there is a decoupling
between the commercial framework, if you like, and the institutional
barriers to the development of the technology.
Q186 Colin Challen: You have pointed
to the urgent need to address the funding gap for round two of
offshore. How large is that funding gap and have you had any signals
at all recently from the Government regarding that issue?
Mr Rand: Before I ask Gordon to
come in on the funding gap, I will just give you a bit of context.
We believe that this offshore issue is as significant an issue
as the debate about the future of nuclear and the reason for this
is because if we want to get 20% of our nation's electricity needs
from nuclear, we can go away and change systems and do things
and intervene, but there is that resource there from offshore,
that amount of capacity that is there ready for this nation to
utilise if we want to. So that is the background, that we see
this decision in terms of the next five to 10 years as one of
the most important decisions the Government can make in terms
of carbon-free power delivery. In terms of the gap, well, Gordon?
Dr Edge: At the moment if we are
looking at onshore wind, in David Milborrow's evidence you have
seen the costs. Offshore, we are looking at somewhere in the region
of £1.3 million a megawatt in terms of investment cost, capital
cost. That is somewhere in the region of £300-400 per kilowatt,
too much. You need to be in the region of £1 million a megawatt
for it to fly under the RO. At the moment that is where we are
at. To put a little bit of context to this as well, I think you
need to be clear that there is only 700 megawatts of offshore
wind anywhere in the world as opposed to a total installed fleet
of 52,000 megawatts of wind power. It is very early days and the
costs have not been well defined up to now. What we are finding
in the UK, as in our pioneering programme of offshore wind, is
that we are actually discovering the difficulties and the costs,
so those initial costs have not come down as we had hoped from
those first round one projects, but we are hopeful that they will
come down over time as long as those initial round two projects
are supported adequately. In terms of what signals we have had,
it is clearly a very tight government Spending Round at the moment
and we are not getting a lot of hopeful messages in terms of direct
funding from the Government. There are other ways that the Government
can underwrite or otherwise support new generating projects and
we are hopeful that we can get a different plan in order to do
that, but at the moment we are currently very engaged with the
Government in trying to find different routes as opposed to necessarily
a straight capital grant as part of that.
Q187 Colin Challen: Clearly there is
a lot of hope involved here, but the hope that one had at the
beginning of round one, obviously that was looking in the dark
a little bit and not knowing some of the circumstances, so in
round two the hopes may be more accurate based on the past experience,
but it still seems to me very hopeful. Can you really pin down
what you need with any accuracy? The Government might be thinking,
"Hang on here, this is going to cost us a lot more, so let's
just go with something else".
Dr Edge: When it comes to costs,
historically in the wind industry you find that with a doubling
of overall global capacity, you get a reduction in the costs of
maybe about 8% in terms of output. We are only at 700 megawatts
of offshore wind and we are talking about doubling that number
in UK waters alone in the next five years, so we should get that
learning experience in the UK, but the UK has to invest in order
to get it because no one else is doing it at the moment. A lot
of other countries have plans, and particularly Germany has very
grandiose plans, but they will not be putting it in in significant
quantities in the next five years and we will.
Q188 Colin Challen: Why are they not
doing it? Are they waiting for us?
Dr Edge: Well, the cynical attitude
is that they have done the heavy lifting onshore and they are
waiting for us to do it offshore.
Mr Milborrow: That is not totally
true. There is a tender out at the moment for a couple more offshore.
Dr Edge: But that is only two
200 megawatt projects you are talking about.
Mr Milborrow: And we are hopeful
that some of the large German projects which have been floating
around for some time will move to fruition in the next few years.
There are a number of citations in my paper as to projections
of future costs from very respected experts.
Q189 Chairman: I am afraid we have got
to end this session now, but I am grateful to you for your time.
We may, if it is okay, drop you a line with a couple of questions
that we have not had time to ask you today. Thank you very much
indeed.
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