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.
SLOW DEPLOYMENT
OF RENEWABLES
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—
— 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.
REASONS FOR
SUPPLIERS' DISCOUNTING
THE VALUE
OF ROCS
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 RPA'S
PROPOSAL FOR
AN AGENCY
OFFERING BANKABLE
PPAS
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.
CRITICISM OF
THE RO
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
http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/12310—20005.pdf?wtfrom=/ofgem/index.jsp
http://www.r-p-a.org.uk/article—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 http://www.r-p-a.org.uk/content/images/articles/cliffedge2.pdf Back
348
This can be obtained from the RPA website; Back
349
http://www.r-p-a.org.uk/article-default-view.fcm?section=1&articleid=681 Back
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