Select Committee on Environmental Audit Written Evidence

Memorandum submitted by the Renewable Power Association

  The Environmental Audit Committee seems to be re-opening the review already undertaken in the lead up to the Energy White Paper (EWP). If as much effort had been expended in implementing the EWP recommendations, rather than reviewing them, much more progress would have been made.

  In our view, the questions posed, in the most part, are too wide-ranging and the enquiry would have benefited from more focus. The line of questioning seems to centre on whether new-build nuclear is required in order to "keep the lights on". Given that renewables and energy efficiency were the two main planks of the EWP, the slow deployment of renewables is inevitably used to justify asking if new nuclear build is necessary[345]. However the renewables programme was never intended to replace existing nuclear output. If that were the case, the targets would have needed to be twice as ambitious.

  We have therefore chosen to focus this evidence on the slow deployment of renewables, and what should be done about it, and to comment on the mounting criticism of the Renewables Obligation (RO) most recently from the PAC.


  Renewable electricity generating deployment is clearly not occurring as rapidly as it should. In most cases the current market value for renewable generation is greater than the generation cost; so what is the problem?

  There are a number of factors—

    —  grid constraints[346];

    —  planning constraints; and

    —  lack of availability of long term contracts at sufficient prices (for all but onshore wind energy and the limited amount of remaining landfill gas capacity).

  All three of these factors are within the Government's sphere of influence. Even if the first two constraints are removed, the final one will remain, as it is a factor inherent in the design of the RO. It is this factor that we focus on in this response.

  Whilst the current market value of renewable electricity generation is high, as illustrated in the table below, the prices available to generators on a long-term basis are significantly lower. This is because suppliers discount the future values of ROCs significantly—due to the risks inherent in the RO.


  Banks do not regard ROCs as a secure income stream against which to lend project finance. Therefore generators must seek fixed price contracts with suppliers. However suppliers are reluctant to give long term contracts at fixed prices, because they fear they may be left having to pay out prices which reflect historical ROC values which have since fallen significantly or at worst are worth nothing as the obligation has been fulfilled or potentially even withdrawn due to policy change.

  Measures which would reduce these perceived risks are:

    —  Raising the RO quota from 2015-16 onwards—to keep the cliff edge further away[347]

    —  Implementing the "ski-slope" solution described by Ilex Energy Consulting[348] (this lessens the risk that the value of any particular ROCs will fall to zero, as if the obligation is met, the price of ROCs is smoothed evenly across all market participants thereby falling below the buy-out price, but in a predictable way).

  Another approach would be to have an intermediary body that operates between electricity suppliers and renewable generators. The RPA has been advocating this approach, as described in its "pre-ROC proposal" since November 2003. It is described in significant detail on the RPA website[349], but outlined in the text below.


  The RO is criticised for being poorly targeted, as those generators whose plants have already been commission and are no longer subject to fixed price NFFO contracts are able to access the short term (high) value for their output, whereas new-build generators, who need a larger revenue stream in order to finance the capital costs—are only able to access the heavily discounted price.

  If renewable power is sold on a short-term basis its value is based on the value of the electricity and the level of shortfall anticipated in the current obligation period. If it is traded on a long-term basis, the value assigned to the ROC is reduced considerably, as described above. For the purposes of project financing, a fixed price contract with a creditworthy counterparty is required. If an agency were to act as an intermediary—purchasing output from renewable generators on a long-term fixed price contract, whilst selling it to electricity suppliers on a short-term basis, this would greatly assist generators to obtain finance (or cheaper finance) and realise more of the value of their power.

  For biomass, wave and tidal projects the fixed price contracts on offer are not sufficient to make project commercially viable. This scheme could be self-financing, as the amount needed to pay some types of generators (eg wind, landfill gas or small hydro) would be lower than the amount received from selling their power on a short-term basis. The extent to which the scheme could be self-financing depends on the relative levels of cheaper and more expensive projects participating in the scheme, as well as the level of shortfall in the ROC market.


  In the RPA's view Government should put more effort into bringing down the barriers to renewable deployment and following through on its other climate change policies. The EWP, in leaving the nuclear question open, has resulted in a tendency to re-examine whether the overall energy policy is correct, to the detriment of moving forward with the drive for renewables and energy efficiency.

  The investment climate for renewables has suffered, in particular from the regular questioning of the Renewables Obligation, most recently by the Public Accounts Committee report, and prior to that by the National Audit Office.

  It is most disturbing that the RO is being criticised for features that were inherent in the design of the policy, and which the Government entered into knowingly.

  It is self-evident under a "technology blind" policy that the cheaper technologies may be remunerated to an extent over the minimum required to make projects economically viable. It is self-evident, too, that projects which have already been commissioned would be able to command a higher price than new-build projects seeking project financing.

  If the Government had wanted to ensure that renewable projects received only just enough remuneration to stimulate their development and no more; if it wanted a policy that delivered a broad range of technologies and kept the cost of financing low, then it could have introduced a set of feed-in tariffs.

  Feed in tariffs were not chosen, despite having been adopted widely elsewhere in Europe, as the Government wanted to limit the potential cost to consumers. The Renewables Obligation sets the target volume of renewable electricity required and sets the overall cost of the policy, and the market determines how much volume is delivered for that cost. In contrast under a feed-in tariff policy, Government would set the price, and the market would determine how much volume is delivered. The greater the volume, the higher the total cost to consumers. When the Government introduced the Renewables Obligation, the cost was deemed to be acceptable, and there was cross-party consensus on that issue. A legitimate question is the value being achieved in terms of the volume of renewable output being delivered for that cost. Instead the fundamental principles of the policy are being questioned, and the Government (DTI) is doing nothing in response.

  The scrutiny of the RO from the NAO and PAC should be directed at how the policy can be made more effective, rather than questioning whether five years ago the right policy was chosen. We are where we are, and changing the Renewables Obligation now would be extremely problematic.

  If investors begin to lose faith in the Renewables Obligation (for example as a result of the NAO and PAC criticisms and the absence of a robust rebuttal from the DTI) then a vicious circle ensues. Less money is invested in new renewables capacity, the shortfall in achievement of the obligation is widened, which increases the price of ROCs, intensifying the political pressure to change the policy. The DTI should be defending its choice of policy robustly. Instead it seems willing to cave in. An example is its proposal to reduce ROC support to landfill gas, in a misguided response to the NAO report. It has also failed to address the need to set increasing targets beyond 2015-16 as part of the 2005-06 Review of the RO. This in itself is known to lead to a tailing off of investment.

  Finally to return to the question of new nuclear build; Government would have to set an extremely secure policy framework if private money is to be encouraged to invest in new nuclear build. It would be profoundly unfair if, in recognition of this, Government put in place a framework in which nuclear could be made to work, whilst it left renewables to fail because it was not prepared to provide a similarly secure framework to encourage investment in renewables.

20 September 2005—20005.pdf?wtfrom=/ofgem/index.jsp—default—view.fcm?section=1&articleid=1313

345   Interestingly the lack of progress in energy efficiency seems to merit less attention. Electricity consumption has been growing consistently for many years by around 1.5% per year, with no sign of slowing. Back

346   Ofgem has recently issued an Open letter on the potential for offers under standard licence condition C8 of the electricity transmission licence to be issued within longer timescales than those set out in the licence Back

347   This is explained in document found on Back

348   This can be obtained from the RPA website; Back

349 Back

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