Memorandum 17
Submission from RWEnpower
EXECUTIVE SUMMARY
1. RWE npower welcomes the opportunity to
respond to the Science and Technology Committee inquiry into renewable
energy technologies. We feel that the inquiry is timely, particularly
given the recent publication of the government's energy white
paper, "Meeting the Energy Challenge". Consumers,
industry and government face difficult choices in responding to
the need to provide secure and sustainable energy supplies for
the UK. RWE npower are committed to engaging with government on
this issue, and to playing a key role in helping to deliver against
government targets for renewables.
2. Our written evidence submission provides
detail on the current state of research and development (R&D)
in, and deployment of, renewable technologies. In particular we
highlight barriers to the large scale deployment of existing renewable
technologies, namely UK supply, planning and grid.
BACKGROUND
3. RWE npower, part of the RWE Group, owns
and operates one of the largest and most diverse portfolios of
power generating plant in the UK with over 10,000 megawatts (MW)
of large gas, coal and oil-fired power stations, cogeneration
plant and renewables facilities.
4. Our renewables division, npower renewables,
is an award winning renewable energy business at the forefront
of the British renewables sector. We are committed to developing
and operating onshore and offshore wind farms and hydroelectric
power stations, producing clean and sustainable electricity for
use in UK homes and businesses. We are also working with companies
that are developing technologies to harness the power of our marine
environment (waves and tides). To date, our projects' combined
operating portfolio has the ability to generate approaching 500
MW of clean electricity, and we have many more projects under
development and construction. A number of our conventional power
stations also co-fire biomass.
5. RWE's retail arm in the UK is npower,
one of the UK's leading suppliers of electricity and gas with
over seven million customers. Serving the residential, small to
medium enterprises and industrial and commercial sectors, npower
delivers competitive, advanced solutions for its customers. npower
also supports R&D into renewable technologies through its
100% renewable electricity tariff, Juice.
UK RESEARCH AND
DEVELOPMENT IN,
AND DEPLOYMENT
OF, RENEWABLE
TECHNOLOGIES
6. The table below sets out the renewable
technologies which are supported through the Renewables Obligation
(RO) and the Non Fossil Fuel Obligation (NFFO). The table also
shows RWE npower's position with regards to each of these technologies,
as well as the key barriers to overcome in achieving large scale
deployment.
|
| Technology1 | Installed
Capacity
(MW): UK2
| Installed
Capacity
(MW): RWE
npower
| Key Challenges / comments
|
|
| Onshore wind | 1,844
| 341 | Supply; Planning; Grid
|
| Landfill gas | 815
| None | Limited opportunities for growth.
|
| Hydro <20MW DNC | 601
| 59 | Limited opportunities for growth
|
| Offshore wind | 304
| 60 | Supply; Economics; Grid
|
| Co-firing of biomass | 2,723
| 26 (c.10%)4 |
Supply chain |
| Biomass | 181
| None | Economics; Supply chain
|
| Sewage Gas | 69
| None | Limited opportunities for growth
|
| Biomass and waste using ACT | 5
| None | (No comment—not close to RWE npower activities)
|
| Waste using ACT | 2
| None | (No comment—not close to RWE npower activities)
|
| Marine (wave and tidal power) | 1
| None at present | Full scale testing; Economics; Planning; Grid
|
| PV | 0.3 |
None at present | Economics
|
| Total | 4,094
| 486 |
|
|
1 Source: Ofgem list of stations accredited for the Renewables Obligation and Climate Change Levy
http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=27&refer=Sustainability/Environmnt/RenewablStat
2 Source: Ofgem list of stations accredited for the Renewables Obligation and Climate Change Levy
http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=27&refer=Sustainability/Environmnt/RenewablStat
3 Ofgem estimation calculation: ROCs are only issued for the percentage of electricity generated from eligible renewable sources. This qualifying percentage changes on a monthly basis for each station. This estimate of capacity is based on the number of ROCs issued in the latest month.
4 Calculated using Ofgem methodology.
|
Wind
7. Npower renewables is a leading developer and operator
of onshore and offshore wind farms. We currently operate 18 onshore
wind farms and 1 offshore wind farm with a total generating capacity
of over 400MW; equivalent to almost 20% of UK installed wind capacity.
8. Built in 2003, our North Hoyle project was the UK's
first major offshore wind farm. We are also committed to building
our second offshore wind farm, Rhyl Flats. This 90MW wind farm
will produce enough renewable electricity to meet the needs of
around 56,000 homes. In addition, we hold options to build two
further major offshore wind farms (each of approximately 1,000MW)
as part of the second round of offshore licenses that were granted
and we are working to develop these options further. We also have
a strong portfolio of onshore wind farms in development and under
construction.
Co-firing of Biomass
9. RWE npower co-fire biomass at a number of conventional
power stations including Didcot, Tilbury and Aberthaw and have
been a major contributor to co-firing under the RO.
Hydro
10. We also operate hydroelectric power stations at 15
sites with a combined capacity of 59MW. We are committed to continuing
to develop small hydroelectric power schemes.
Marine renewables
11. We are currently investigating the potential for
a wave scheme to be located near the village of Siadar on the
Isle of Lewis. The scheme is a joint project between npower renewables
and Wavegen, a wave power company based in Inverness. The scheme
would involve building a new breakwater similar to those used
around our coastline for the provision of harbour facilities (thus
also providing some protection for harbour facilities in the local
community) and could generate up to 3MW of electricity, enough
to supply around 1,500 homes.
12. We also support research and development of marine
renewables through the npower Juice fund, created in 2003. Juice
is npower's domestic 100% renewable electricity tariff, which
is offered to customers at no extra cost compared to their standard
electricity. Npower makes an annual contribution to the Juice
fund of £10 for every customer that stays with Juice. In
2006, npower's contribution was over £500,000 and the fund
is expected to grow to £1 million within the next three years.
To date, the Juice fund has supported two major projects in addition
to a number of smaller projects; namely the Regen South Wave project
and The Path to Power report, in conjunction with the BWEA.
Microgeneration
13. npower also promotes a range of microgeneration technologies
to residential customers, providing advice on micro wind devices,
ground source heat pumps and photovoltaics. npower have recently
launched a photovoltaics (PV) product, npower solar, which provides
information and advice about solar panel installation through
an appointed installation contractor. The product encompasses
a service whereby npower collects and passes through to the consumer
the value of environmental certificates and enables customers
to sell back excess electricity generated by the solar panels.
Research and Development
14. In addition to the npower Juice fund, which supports
research and development into marine renewables, RWE has also
committed significant investment into the research and development
of low carbon technologies and renewable technologies notably
clean coal technology. In 2006, RWE committed to spend just under
£34 million on R&D, including £21 million on research
into clean coal technologies and £1.7 million on renewable
technologies.
Key challenges in research and development in, and deployment
of, renewable technologies: Regulatory certainty
15. Investors are sensitive to political risk and regard
frequent changes to policy as a source of significant uncertainty.
As such, clear commitments from government and stable support
mechanisms have a real role to play in the deployment of renewable
technologies.
16. RWE npower supports the RO and believes that it has
to date created a positive economic environment for growth in
renewables in the UK and indeed has the potential to ensure that
strong investment in renewables continues. We are supportive of
the some of the proposals announced in the recently published
consultation document, the Reform of the RO; recognising the need
for structural changes to the RO mechanism such that it i) targets
support where it will deliver large scale deployment of renewable
generation capacity (principally offshore) ii) provides good value
for money for consumers in terms of CO2 saved per £
paid into the RO.
17. It is our view that the current level of reform is
appropriate but the graph below demonstrates influence of political
risk on deployment rates, clearly showing the hiatus that occurred
during the transition from NFFO to the RO.
18. In particular, we believe that the following are
important in maintaining investor confidence during the current
reforms:
— Delivering on grandfathering promises
19. The government outlined a commitment to the principle
of grandfathering in the 2005 Review of the RO. With the exception
of co-firing, any reduction in support applies only to future
projects (operational after the date of implementation of proposed
changes, 1 April 2009). We support the principle of grandfathering,
but note that the proposed approach to banding risks reducing
ROC values. As such, grandfathering does not protect existing
investments, as only the volume of ROCs are protected and not
their value.
20. Further, in the May 2007 RO consultation, the government
have introduced an entirely new proposal (not outlined in any
RO consultation or energy review documentation to date), which
proposes to limit grandfathering to 20 years. Noting that not
all projects are financed on the basis of a 20 year life, for
example hydro, we are concerned that amendments to principle of
grandfathering at such a late stage in the consultation process
risk damaging confidence in government commitments.
— Providing certainty as to the frequency and nature
of future reforms
21. The proposed banding of the RO necessitates that
technology bands are reviewed in future to ensure that the level
of support is appropriate and in line with changes in technology
costs and electricity prices. Given that regulatory reform weakens
investor confidence, we feel that it is important to provide confidence
as to the logic and timing of future reviews. We therefore support
the proposal to pre-set independent reviews in statute at five
yearly intervals (in line with the EU ETS timetable), and to limit
the circumstances which can lead to an ad hoc ("emergency")
review, thereby providing clarity as to the frequency and nature
of future reforms.
22. Further, we believe that the need for consistency
and stability in support mechanisms currently rules out early
harmonisation of support mechanisms across EU.
COMMERCIALISATION (FEASIBILITY,
COSTS, TIMESCALES,
PROGRESS, RELIABILITY,
CARBON FOOTPRINT)
Costs
23. The DTI have recently published their working assumptions
on the relative capital and operating costs of a range of renewable
technologies in a report published alongside the Reform of the
RO consultation[15].
This report represents the most up-to-date study available of
the costs of renewable technologies. We broadly agree with the
cost assumptions contained within this report, with the following
notable exceptions.
24. We believe that the cost of biofuels has risen since
this work was undertaken such that the "blended" biomass
fuel cost of £3.70/GJ is lower that current cost of most
biofuels. We would similarly comment that, since the DTI work
was undertaken, our direct experience of the costs of building
offshore wind indicates that there has been no let-up in the trend
of increasing offshore construction costs. These costs have now
broken the £2M/MW mark, so the DTI range (£1.37M to
£1.71M/MW) does not capture the costs currently being experienced.
The published capital costs for onshore wind appear to capture
the correct range of costs (£1M to 1.4M/MW for <10MW sites
and £0.88M to £1.2M/MW for >10MW sites), but we would
add that our recent experience has tended to the upper end of
these ranges.
25. The work undertaken by Ernst and Young should aid
government in ensuring that banding is effective in providing
sufficient support to encourage further deployment of "post-demonstration"
technologies, namely offshore wind and dedicated biomass.
26. However, the RO was designed as a "near to market"
technology support mechanism and we do not believe that it should
be used to fully support emerging technologies, primarily because
it is unlikely to provide sufficient revenue to support them without
distorting the mechanism.
27. It is our view that emerging technologies should
be supported through appropriately structured R&D funding,
be it in the form of capital grant funding or revenue support.
Further, proceeds from environmental taxes should directly fund
R&D. We therefore welcome the proposal to use the Environmental
Transformation Fund (funds generated from Carbon Auctions under
EU ETS) in addition to the use of funds such as the MRDF to support
emerging low carbon and renewable electricity technologies and
energy efficiency measures. The proportion of auction revenues
made available through the Environmental Transformation Fund will
have an important bearing on the future direction of R&D into
renewable technologies.
28. Whilst most studies focus on pre-tax costs, the corporate
tax reliefs available to renewable generation projects, or the
lack of them, are an essential part of assessing the overall economic
feasibility of various technologies. Subject to additional specific
comments below on R&D, we are concerned generally that the
recently announced changes to capital allowances (including the
abolition of Industrial Buildings allowances) could operate significantly
to reduce the viability of certain renewable technologies. We
have in the past[16]
been assured, in the context of investment in renewable energy
sources, that the government would remain committed to retaining
a mechanism for delivering specifically targeted incentives. We
therefore believe such incentives should be actively considered
as new forms of renewable technology emerge.
Timescales and Progress
29. Whilst we are reassured that that primary Reform
of the RO proposals (namely, the continuation of RPI indexation
post 2015 and banding up of "post demonstration technologies")
will go some way to addressing economic challenges encountered
by renewable technologies, other significant barriers remain which
impact on the speed at which renewable technologies can be deployed.
30. Wind developers in the UK must compete for turbines
in a competitive international environment. Demand for turbines,
in particular, has risen dramatically over recent months and has
contributed to rising project costs for both onshore and offshore
wind. The aforementioned DTI report acknowledges that capital
costs of wind projects have risen by circa 25% over the previous
12-24 months. Further, the costs of turbines, towers and blades
are expected to increase in real terms until around 2010 as a
result of supply / demand issues and rising steel costs.
31. RWE npower takes its role as a buyer very seriously.
As such we actively seek to engage with manufacturers to develop
opportunities in the UK. For example, npower renewables recently
co-sponsored (with Business Link North East) "Meet the Buyers—Wind
Energy". This trade fair in Northumberland aimed to bring
together turbine suppliers, the construction industry and local
contractors in order to build relationships between local and
international suppliers. We support the development of voluntary
approaches to developing opportunities for UK manufacturers that
can be adopted by the industry as a whole and contribute positively
to UK GDP.
32. The availability of grid connections for renewable
projects remains a major barrier to deployment of most renewable
technologies, particularly wind and marine renewables. Designed
for conventional forms of generation, physical grid access and
the grid code inhibit, hence slow, connection of renewable assets
to the grid. Further, UK grid code obligations are more onerous
than in other European countries, and hence impact upon the technical
requirements of turbines and impose unnecessary costs.
33. In the short to medium term, the constraints associated
with grid queue management need to be addressed to enable timely
connection of new generation. In the medium to long term, appropriate
strategic investment in infrastructure will be necessary to prevent
the transmission and distribution grids constraining current and
future generation, and to provide for the changing nature of generation
to include more distributed and embedded generation, in addition
to existing centralised generation. Delivering additional renewable
capacity will necessitate new grid infrastructure, which will
need to include overhead lines. The UK government has a responsibility
to ensure that local impact and cost issues associated with new
infrastructure do not cause further delays. We are supportive
of recent proposals to include necessary infrastructure in the
planning process.
34. The lengthy planning and consenting regime has slowed
deployment of renewable technologies, in particular onshore wind.
The UK government's energy review process recognises that the
current process burdens participants with uncertainty, delay and
sometimes significant upfront cost.
35. RWE npower generally welcome the proposal to replace
Section 36 and 37 consent processes in England and Wales with
an Infrastructure Planning Commission (IPC). We believe that this
will provide a more efficient and predictable approach to planning
and consenting. It is of note that projects below 50MW will be
unaffected by the IPC and therefore the proposal does not address
slow progress of many onshore wind projects. Further, as planning
is a devolved matter these proposals will not impact upon devolved
administrations.
GOVERNMENT ROLE
IN FUNDING
R&D
36. Generally RWE npower are supportive of government
involvement to date in funding R&D, for example through the
work undertaken by bodies such as The Carbon Trust.
37. We believe that government can play a role in encouraging
and facilitating technology and or knowledge transfer, for example
in identifying synergies between industries (eg offshore wind
and oil) or opportunities for knowledge transfer by publishing
industry specific information.
38. We also support the government's commitment to raising
the profile of research and development and trying to tackle the
severe skills shortages in renewables R&D (and elsewhere).
We look to the government to assist with funding mechanisms which
will bring forward technology development and deployment.
39. We would encourage the government not only to maintain
current corporate tax reliefs for R&D, but where necessary
to broaden those allowances to ensure that they will apply to
the development and commercialisation of early stage sustainable
technologies, including carbon capture and storage as well as
renewable energy geneation. Our concern is that the existing reliefs
are either framed or interpreted in too narrow a way, such that
they may have negligible effect on stimulating R&D and investment
in this area.
OTHER POSSIBLE
TECHNOLOGIES FOR
RENEWABLE ENERGY
GENERATION
40. We believe that the UK government has been effective
to date in identifying and supporting the most viable and cost
effective renewable technologies. Those technologies currently
supported through R&D funding programmes, the Renewables Obligation
and the Climate Change Levy represent those which demonstrate
the greatest potential for large scale deployment, through which
government targets can most efficiently be met. There remain significant
barriers to the deployment of existing renewable technologies
which the UK government must address. In doing so, it should be
acknowledged that consumers will face difficult choices, for example
in planning consent of wind farms.
41. Finally, whilst it is important that there is "blue
sky" research into new renewable and low carbon energy solutions,
we feel that the UK government should focus on tackling barriers
to the deployment of existing renewable technologies, namely supply,
planning and grid.
July 2007
15
Department of Trade & Industry, Impact of banding the Renewables
Obligation-Costs of electricity production, April 2007. This report
was commissioned by the DTI and prepared by Ernst & Young
LLP. Back
16
Letter from HMPG, 2 February 2004. Back
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