Select Committee on Trade and Industry Written Evidence


APPENDIX 2

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 or clarification.

UK Regulatory Affairs Manager

17 March 2006

1.  INTRODUCTION

  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 review);

    —  "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 BUILD—ISSUES AND CONCERNS

  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 issues—we 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 high-level issues:

    —  The timescales associated with nuclear plant build—the 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 project—the record of cost overrun both in design and operation.

    —  The need to factor in technology risk—a new generation of nuclear build would use largely unproven technology—experience 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 waste management.

    —  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 capacity

  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 arena.

2.3  Comparing the nuclear option with a major programme of investment in renewables, micro generation, and energy efficiency

  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.

3.  INCREASING DEPENDENCE ON GAS

  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.

  The DTI's[1] 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 efficiency—it requires the right incentives to be put in place.

4.  MICRO AND DISTRIBUTED GENERATION

  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.

    —  Reduced power losses.

    —  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 gas.

  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 measures.

5.  THE RENEWABLES OBLIGATION

  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.

    —  Transmission charging.

    —  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 in partnership.

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


 
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