Memorandum by Airtricity
Airtricity is a leading renewable energy company
in the UK and Ireland, specialising in the development, ownership
and operation of onshore and offshore wind farms, in addition
to being a leading retailer of green energy in Northern Ireland.
Airtricity has nearly 200MW of operational onshore wind farms,
with some 200MW under construction and 800MW of onshore wind farm
capacity in the Scottish planning system. In January 2002, Airtricity
was awarded an offshore lease permitting the development of a
520MW wind farm on the Arklow Bank off the east coast of Ireland.
The first 25MW phase of this development is now operational. In
December 2003, Airtricity, together with its partner Fluor Corporation,
was awarded a 500MW site known as the Greater Gabbard, as part
of the second round of allocation of offshore wind sites by The
Crown Estate and DTI.
We are actively seeking to develop opportunities
throughout the UK and are currently both developing and evaluating
a number of potential projects. We believe that the Energy Review
provides a singular opportunity to address areas which are constraining
the effective deployment of renewables, and thus better facilitate
the achievement of government energy and climate change objectives.
I hope that you find this submission useful.
Please do not hesitate to contact me if you require further information
UK Regulatory Affairs Manager
17 March 2006
The Trade and Industry Select Committee has
invited submissions to first of its inquiries into significant
aspects of energy policy, arising from the terms of the Government's
energy review. Specific areas that the Committee has requested
information on are:
the "particular considerations
that should apply to nuclear" new build (Question 3 of the
"the implications of increasing
dependence on gas imports" (Question 2 of the review); and
the capacity of micro generation
to meet a substantial proportion of UK electricity demand in the
medium- and long-term.
This submission concentrates on those areas
highlighted by the Committee and additional issues which need
to be considered in the Energy Review. In particular, we believe
that the Renewables Obligation (RO) continues to be an effective
means of facilitating the Government's targets for renewable generation.
2. NEW NUCLEAR
Detailed information concerning the costs, benefits
and timescales associated with new nuclear build will be provided
from many sources including those with specific recognised expertise
in nuclear issueswe are not intending to make reference
to specific data with regard to new nuclear build in our submission.
However, we wish to emphasise the following
The timescales associated with nuclear
plant buildthe historic record of significant delays. An
"unfettered" nuclear new build programme would take
around 10 years including licensing, tendering and construction.
The uncertainty with regard to costs
of any nuclear projectthe record of cost overrun both in
design and operation.
The need to factor in technology
riska new generation of nuclear build would use largely
unproven technologyexperience shows that this has a high
risk of underperformance, cost escalation or both.
The need to properly account for
full lifetime costs in any estimation of prospective nuclear projects,
ranging from the environmental costs of uranium ore extraction,
refinement, through operation, plant decommissioning and long-term
Pay back periods for nuclear projects
are longer than for other energy sources. It is important that
nuclear costings are done on an equivalent basis to other technologies,
taking account of back end costs and discount factors. Total project-life
costs should also take account of environmental and efficiency
criteria eg energy units generated and carbon emissions.
And the following concerns:
Nuclear capacity is supposedly characterised
as a high capital cost, low operating cost option. The minimum
incremental capacity addition (plant size) is usually large (approx
500-1,000MW). The technology requires virtually continuous (baseload)
operation for reasons associated with the physics of nuclear generation.
High, sustained output is also necessary to maximise economic
returns. The level of incremental capital investment is therefore
large. This limits the number of individual market participants
who are capable of financing new nuclear build. Given that it
is highly unlikely that this would not be their technology of
choice for new plant build under present market structures and
mechanisms, it is likely that significant changes would be required
to market and regulatory structures, market mechanisms and support
mechanisms (including any levies, quotas or obligations). This
would increase regulatory, government and market risk for the
non-nuclear components of the energy mix and could deter investment
in renewable projects.
An integrated power system requires
a balanced mix of plant types and capabilities. When the level
of inflexible nuclear plant on a system increases, other
flexible plant has to regulate in order to ensure that supply
and demand are dynamically matched. Variable output plant, such
as renewables, also requires complementary flexible plant. The
flexible plant which is displaced by nuclear, is exactly the same
plant required to balance the system when a reasonable level of
wind penetration is achieved. Thus nuclear plant can, in certain
circumstances, act as a cap on the level of wind (or other variable
output renewables) that a system can accept.
2.1 Investment options for electricity generating
Investment options are driven by the needs of
the market in the UK. Companies currently in the market, and those
seeking to enter, assess the most effective way for them to meet
the demands of their customers, given the relevant regulatory,
environmental and market structures and the overall objectives
of Government policy, which in turn shapes the above. It should
therefore be a decision by the market, within an appropriate and
consistent framework of incentives, to decide upon the options
for capacity. Renewables form a key part of the Government's strategy
to address climate change issues. Renewable generation now contributes
a significant proportion to the UK generation mix and can contribute
further. This has been achieved within the context of a stable
and consistent set of policies. Any form of prescription or intervention
with regard to particular generation technology choice is likely
to increase the perception of market risk, result in inefficient
investment decisions and lead to undesired or sub-optimal outcomes.
2.2 The impact of a major programme of investment
in nuclear on investment in renewables and energy efficiency
The impact would depend on exactly how the programme
was implemented. There are many variables that would need to be
considered. The key driver would be to ensure that the net impact
on renewables and energy efficiency was at worst neutral and at
best positive. If a private company, with no government incentives
or subsidy, initiated a major programme of nuclear investment,
they would bear the total risks (and any rewards) of the programme.
Any government facilitation, intervention or subsidy in favour
of new nuclear build would require the place of renewables and
energy efficiency in the overall energy portfolio to be properly
reviewed and equivalent additional support measures to be put
in place in order to ensure a level playing field in the energy
2.3 Comparing the nuclear option with a major
programme of investment in renewables, micro generation, and energy
All the major renewable technologies, wind,
wave, tidal, solar and energy efficiency have shorter timescales
for implementation than nuclear. New nuclear reactors take at
least 10 years to build, but renewables capacity can be generating
in one to three years, provided that planning and consents processes
are implemented effectively. Any small scale measures, such as
micro-CHP, can be installed in much shorter timescales.
Worldwide demand for gas, in common with all
fuels and many other commodities, is likely to rise significantly
over the medium term. This is largely driven by the growth of
major economies such as China and India, with the associated rise
in energy demand. UK electricity security is projected to go from
being the best in the G8 grouping to the worst, within two decades.
base case projections of electricity generation for 2020, suggest
that 68% of electricity demand may be met by gas fired generation.
This level of dependency on any one technology, particularly one
which will rely for its primary source of supply increasingly
on imports, represents a significant risk to UK security of supply.
Renewables, micro generation and energy efficiency
have many benefits over increasing dependency on imported gas:
Renewables can deliver reliably.
Renewables do not require fuel importation
and as such increase security of supply.
Renewables are not dependent on world
fuel prices and therefore provide a more stable price environment.
Wind is a proven technology.
The minimum incremental capacity
addition is an order of magnitude smaller than gas fired (and
nuclear) power stations.
Energy efficiency is a lower cost
option than new gas plant build.
Micro generation could significantly
improve overall energy efficiencyit requires the right
incentives to be put in place.
4. MICRO AND
Distributed generation can make a significant
contribution to meeting future UK electricity demand. It has a
number of important characteristics:
Reduced transmission and distribution
network infrastructure costs.
Micro-CHP installations have a higher
overall efficiency than large combined cycle gas turbine plants,
thus acting to reduce gas consumption and dependency on imported
Generating electricity nearer to the point of
use reduces both the use of existing network capacity (constraints
and losses) and defers or avoids the need for additional network
infrastructure. It also releases network capacity for those technologies
which need to make use of the transmission network due to locational
constraints, such as renewables.
The projected level of investment in transmission
and distribution networks is a significant issue for the UK. The
majority of electricity demand growth over the next 20 years is
forecast to be in the residential and commercial sectors, and
predominantly in the south of the country. If all new generation
capacity is centrally connected (eg new CCGT), this will require
major expenditure on both transmission and distribution systems
in order to ensure that supply and demand can be balanced. This
investment in transmission and distribution assets does not contribute
directly to energy efficiency, security of energy supply
or climate change objectives and could be more effectively utilised
by being directed at clean energy provision or demand reduction
5. THE RENEWABLES
Investment in renewables is a long-term commitment,
and uncertainties need to be minimised. Investors are now committing
significant resources into the market. This is on the basis of
the stability of the current framework provided by the Renewables
Obligation (RO). Continued confidence in the stability and consistency
of the RO framework are key elements in its further success.
The stability of the RO ensures that the development
of projects is open to a broad cross section of commercial enterprises,
thus ensuring the greatest potential realisation of the resource
available. Any loss of confidence in the framework of the RO would
differentially affect those developers who do not enjoy the benefits
of a substantial balance sheet upon which to base the financing
of projects. The willingness of financial institutions to participate
in this sector of the energy market is directly related to expectations
regarding the stability of the RO and its development in future.
Any loss of market confidence would act as a strong disincentive
to entrepreneurial players both entering and remaining within
the renewables sector and driving forward its development.
We understand that the Government has a responsibility
to ensure that the support to the renewables industry is targeted
as effectively as possible and that it considers that it will
be necessary to amend the Obligation over time to reflect the
position of lower cost renewables. The Government has suggested
an approach in which ROC eligibility rights are time or output
limited for future projects in certain technology areas, which
it believes offers the best available balance between the interests
of developers and investors in renewable energy projects and the
interests of the Government and consumers. As noted above, confidence
in arrangements made under the RO is a key element of any project.
As such ROC eligibility rights within the Obligation would need
to guaranteed at the time that the investments were made and supported
by appropriate "grandfathering" arrangements.
With respect to onshore wind, there is a wide
variability in project economics for different sites. In order
to maximise the exploitation of available wind resource, careful
consideration would need to be given to any amendments to the
Obligation. Project economics for onshore wind do not depend exclusively
on average wind speeds, but are also influenced by grid connection
and transmission costs, development costs and the effectiveness
of the planning process.
The potential of offshore wind to contribute
towards government objectives is significant. The DTI has already
consulted regarding the options for the regulation of offshore
transmission; suitable grid access and charging arrangements,
together with appropriate incentives to support emerging offshore
wind technology, are key requirements to stimulate development
in UK waters. The DTI needs to put in place a long-term framework
for the award of offshore sites, preferably on an annual basis
as in the offshore oil and gas industry, in order to maintain
developers' interest and provide the confidence for the necessary
investment by the supply chain.
Achievement of the targets set for 2010 is dependent
on a numbers of factors. Growth in renewables capacity faces significant
hurdles which need to be urgently addressed. Some of the principal
issues affecting rates of renewable build and the likelihood of
meeting these targets are:
Planning processes and timescales.
Aviation requirements and concerns.
Grid investment, queue management
and connection timescales.
Resolving these issues should be a priority
for the both the UK government and the Scottish Executive, working
6. GRID ISSUES
We have already briefly mentioned the impact
on achieving Government targets, of available grid capacity. As
an example, we have been notified by NGC that a connection to
the Grid, for one of our major projects in Scotland, will not
be available until 2013. This illustrates the urgent need for
a new approach to the "Grid Queue" in Scotland and the
need for more innovative solutions to expedite connection of renewable
capacity. Ofgem are currently facilitating the development of
potential options and this process needs to produce tangible results.
National Grid need to be directed to reconsider the appropriateness
of current transmission access and charging arrangements for Scotland.
The objective must be to implement reforms that better enable
connection of renewable generation in Scotland.
Grid issues are not confined to Scotland. Wales
has a significant wind resource, which can only be properly developed
if the necessary Grid infrastructure is put in place in a timely
manner. The Welsh Assembly has promoted the development of wind
resource in Wales through the use of Strategic Search Areas, defined
by TAN 8. However, the potential wind energy in these areas is
not matched by the available Grid capacity.
The co-ordination between Agencies, different
levels of Government and planning processes acts as a major determinant
of progress for the development of renewable energy projects and
should not be overlooked when considering the barriers to achieving
the objectives of the Energy Review.
1 DTI Energy White Paper. Back