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Memorandum submitted by the Small Hydro Company (LCT 46) 1 Introduction
1.1 The small hydro company (SHC) received a request from Dr Gregory Offer, the Committee Specialist on 22 October 2009 to provide evidence to the Select Committee on Energy and Climate Change on Low Carbon Technologies in a Green Economy, with particular emphasis on hydroelectric power.
1.2 On 23rd October 2009, SHC confirmed to Dr Gregory its intention to submit such evidence as requested. This memorandum and its attachments constitute that evidence.
2 Company Background
2.1 The SHC is a business, which is actively operating the UK renewable energy sector designed to develop the low head[1] hydroelectric generation market. It currently enjoys the financial support of Climate Change Capital, through its Ventus Funds, having arrangements in place to provide the financial capacity to underpin the SHC's investment plans. In addition it has established an experienced supply chain of JN Bentley (Civil Engineering Contractors), Mott MacDonald (Engineering Consultants), Jacobs Engineering (Environmental Consultants) and Ossberger (Turbine Suppliers and Manufacturers).
2.2 There are three important aspects that emerge from the SHC's business model:
· Firstly, SHC acts as a developer of hydroelectric installations and generator of electricity. It expects to take normal developer risk in obtaining statutory consents and providing capital investment, and generation risk in terms of electrical output and revenue;
· Secondly, its business model relies on the ability to invest in a portfolio of installations at any one time in order to realise the economies of scale SHC has developed with its supply chain, and to make effective use of the limited natural resource of head and flow to maximise electrical output. This serves to make our business proposition both economically and commercially viable;
· Thirdly, SHC requires no direct grant funding to support its investment plans.
2.3 SHC has recently announced a partnership arrangement with British Waterways, which has created the platform for the Company to deliver (with its supply chain) sufficient renewable electrical supply to 45,000 households (equivalent to 2.5 eco-towns). This level of investment will meet most if not all of the Government 2010 Renewable Targets for hydro as defined in the various Regional Spatial Strategy statements.
2.4 SHC has 25 sites in the development stage, which when completed will represent the single largest investment in run of the river low head hydro seen in this country to date.
2.5 The founding Directors of the SHC (of which the witness is one) have recently embarked on the commercialisation of a Tidal Turbine developed by Oxford University.
3 The development of Hydropower within the context of a Green Economy
3.1 In comparison with the rest of Europe, hydropower in the UK is underdeveloped as a source of renewable energy; infact perversely when studies demonstrate that the UK has probably the greatest hydro power potential in Europe.
3.2 The main reasons for this underdevelopment are economic and the fact that the UK had sufficient natural fossil fuel resource to stimulate and underpin its economic growth in the past. This clearly is not the case going forward.
3.3 In providing the evidence, its conclusions and recommendations, SHC has concentrated on those issues that serve, as barriers to delivering the renewable energy assets the UK economy will require. Not all the questions asked are relevant to the company's experience and I have indicated where I believe this to be the case.
4 Energy and Climate Change Select Committee Specific Questions 4.1 What opportunities exist for the creation of a green new deal whilst pursuing a low carbon economy? 4.1.1 The concept of a "Green New Deal' relies, we believe, upon three fundamental issues: · How to transfer the energy usage of the UK economy from a fossil fuel and unsustainable base to a renewable and sustainable base?
· How to finance the transfer without creating economic and/or social instability and/or energy poverty?
· How to encourage wider economic benefits for the UK through encouraging establishment of supply chains within the UK and reducing reliance on imported skills, equipment and technology?
4.1.2 Part of the answer to the first question relies on the creation of assets, which provide renewable energy and would be the foundation of any "Green New Deal". Without the conditions in place to support asset creation it is difficult to envisage any form of "Green New Deal" being successful. Against the background of the Stern Review that concluded the later interventions are made, to reverse the effects of Climate Change, the more expensive those interventions become; the conditions required to invest now are economically priced capital[2], and a simple, unambiguous and consistently administered framework for obtaining Statutory Consents. There is no doubt that there are numerous opportunities in the hydro sector to construct viable generating plants and develop new technology which will have a net economic benefit to the UK. However the current regulatory attitude and administrative barriers to the developer are disjointed, inconsistent, unhelpful and unreasonably high, requiring significant 'at risk' investment that is unnecessary and drives up the risk cost of capital. I shall return to this theme in more detail later in this evidence. 4.1.3 At present there is without question a problem with the financial sector. There is a shortage of available capital and the cost of it is high, even though interest rates are low, as the Banks are being required to recapitalise. This is not supportive of economic growth. Although this may well be a short-term issue in relation to the 30-year investment cycle in renewable energy, it does highlight a very practical problem: · If the cost of capital is too high (as it is presently) then the financiers take too much of the available revenue and this will dissuade existing companies and entrepreneurs from investing time and money in the process of asset creation because their returns are insufficient for the effort and risk involved.
· If the market price for electricity is allowed to absorb the high financial costs then energy poverty will be a real social issue. 4.1.4 A solution to the provision of economically priced finance could be provided by the State on agreed senior debt commercial terms (not grant funding so the taxpayer is not burdened) directly to renewable owner/operator companies such as the small hydro company. 4.2 Which technologies have the biggest potential? 4.2.1 In terms of hydroelectric power the technological development is limited to tidal turbines and improvements in generator efficiencies, both of which have obvious potential but SHC is not in a position to compare hydro technology against other emerging renewable technology, which appears to be the context of this question 4.3 Has the Government done enough in its stimulus package? 4.3.1 The Government is in a very difficult position because it has to balance the need for investment to take place in renewable assets, most of which are capitally intensive[3], at a time when the market conditions have yet to stimulate the need because the price of oil is still relatively too low. The need for investment is driven by immediate environmental concerns and in the longer term the requirement for the UK to be energy self sustainable, rather than purely economic necessity, although given that fossil fuel resources are finite, this may be simply a question of time. 4.3.2 The problem with the stimulus package is that the Government is undermining its efforts by increasing the administrative burden[4] in terms of both cost and time. The significance of this can only be understood when it is realised that the electrical output from any proposed renewable asset is finite, equally in a regulated environment, so in turn is the expected revenue. That revenue will only support a fixed amount of capital investment. If the capital costs increase (through non-productive administrative burdens) the risk is the revenue will not support the required debt arrangements and no investment will be made. The focus should therefore be on ensuring capital costs are driven down by reducing regulatory burden and development risk and by encouraging the establishment of domestic supply chains. 4.3.3 A couple of examples will illustrate the issue: · SHC has proposed a modest Hydro Electric Plant (HEP) at Linton-on-Ouse. We approached the Designated Network Operator (DNO), Central Electric, for a cost of connection, which has been estimated at £800,000. Our contractors (who are qualified to carry out such works on behalf of a network provider) have costed the required work at £400,000. This is significant on a scheme where the total capital investment is £4 million. In terms of site viability there was an HEP Installation operating from 1920 to the late 1950's. The reason that the original HEP Installation ceased to operate was that turbines became obsolete and could not economically be replaced.
· SHC submitted a planning application to construct an HEP Installation at Gunthorpe on the River Trent. The Environment Agency and SHC asked for an extension of time during the determination period to complete some detailed hydraulic analysis as part of the Flood Risk Assessment. Both parties considered that the outstanding issues were able to be resolved and time estimates were given to the Local Planning Authority (LPA) for their resolution[5]. The LPAs refused the extension, the reason given being that determination targets had to be met (although these targets are, of themselves, not mandatory) and refused the application because the Environment Agency's assessment on Flood Risk could not be completed in time. SHC is left with the appeal process but the application costs increase from £60,000 to £200,000 as a consequence, for the sake of a 4 weeks extension. Even if the additional costs do not make the proposed scheme now unviable, the implementation will be delayed by at least 12 months, for no good reason.
In addition, Natural England withdrew their objection to the proposed development after SHC had addressed their concerns, however their letter withdrawing the objection arrived after the determination, because the LPA had brought forward the date without notifying any of the parties concerned.
4.3.4 The first example is a demonstration of regulatory inconsistency, which has the effect of increasing the cost burden to developers of renewable assets, particularly at the 1MW to 5MW electrical rating level.
4.3.5 There is a regulatory argument to support the premise that all providers of renewable energy should have free connection access to the existing electrical grid and not be burdened with the cost of reinforcement or accelerated renewals. At present the cost or price paid by the developer for input and output electrical connections to the electrical grid are not regulated. Given that the generating price for renewable energy is to be regulated, not regulating the charging regime for input connections will only serve to either prevent investment in small-scale renewable schemes (because of disproportionate cost of connection), or delay implementation because of the disproportionate weight of commercial negotiation in favour of the network provider without effective recourse to arbitration and thus allow DNOs to profiteer from Government backed electricity pricing contracts.
4.3.6 A more economically sustainable approach may be to allow the DNOs to recoup the costs through the normal tariff regime (DUoS) over time, spreading any additional capital investment from the DNOs across all generators. 4.3.7 The second example is simple unreasonable administration and inconsistency in the application of the existing Planning Regulations serving only to burden the developer with unnecessary cost. I shall come back to this point later in the evidence. 4.4 How realistic are the Committee on Climate Change's projections for the use of different types of new technologies? 4.4.1This is not a subject that SHC is in a position to respond to or provide evidence on. 4.5 What is needed to achieve the development and deployment of them? 4.5.1 There are two principle issues that hinder the development and deployment of Renewable Assets apart from the issue of cost of capital referred to in Section 4.1: · In terms of deployment, there is currently an endemic failure by statutory bodies to administer regulations correctly and consistently, exercise their duty and operate within the law, which is leading both to a significant time delay and cost burden to developers. This risk is becoming one which developers cannot reasonably be expected to take, because the assessment of consent applications is becoming subjectively based and irrational, rather than objectively based and reasoned.
· In terms of development, the stimulus the Government has offered in the form of the Carbon Trust programmes has not considered appropriately the equity risks in the development process, and how to structure a commercial proposition to the market to significantly reduce these risks and encourage investment from the markets.
Issues with Deployment 4.5.2 In dealing with the first point SHC has made Planning Applications to the appropriate LPA and associated Licence Applications to the Environment Agency (EA) for five sites. The evidence I am submitting is mainly concerned with the Planning Applications, but it is worth noting that the Licence Applications were made at the same time, and in 4 months the EA has yet to acknowledge these applications. The issues that will be discussed are technical in nature and I am not asking the Committee to comment on or consider any of these technical aspects, as this would be inappropriate. However, how these technical issues are being dealt with does highlight the administrative deficiencies that are having such a negative impact on deployment. 4.5.3 Taking our proposal at Gunthorpe as a working example ("Items" are attached to this memorandum) although the issues are consistent across the five separate application made todate[6]: 4.5.3.1 Item 1 is the first letter of objection by the EA dated 15 July 2009 and Item 2 is SHC response dated 16 July 2009. The first issue is that it is clear that the EA simply had not read the documentation presented to them. This was confirmed by the EA at our meeting of 8th September 2009 to discuss the issues raised by them where the Agency explained that it did not have the time to fully consider the application. The second issue is that the EA is clearly actively promoting an alternative scheme it wishes to see (the Archimedean Screw) rather than acting as a Regulator, and evaluating the proposed scheme before it. This is significant because Government Targets cannot be met with the sole use of this technology at the weir sites along the length of the River Trent. The first is a failure in duty and the second is an example of a Regulator operating outside of its legal jurisdiction. 4.5.3.2Taking some of the technical issues by raised by the EA illustrating the lack of reasoned assessment and inconsistency of approach: 4.5.3.2.1 Weir Pool Morphology: Item 3 is an extract from DEFRA recent consultation on the Modernisation of the Salmon and Fresh Water Fisheries Legislation associated with the Water Framework Directive. DEFRA is quite clear that although Weir Pools can make a contribution to the diversity of fish within a river, the impact on river ecology and biodiversity of prohibiting fish access to breeding, feeding and nursery grounds caused by the Weir structure is far greater than the loss of a Weir Pool habitat caused by the removal of the Weir. In arguing the significance of Weir Pool Morphology in their response to the proposed scheme, the EA have ignored SHC's proposed mitigation to provide an all species fish pass, which, taking account of DEFRA's position, will have a greater beneficial contribution to the overall ecology and biodiversity of the river than the existing Weir Pool is capable of. This is a clear example of the EA not assessing properly the proposals before them in terms of impact and mitigation, and of the Government having inconsistent views on the significance of ecological impacts, given that this issue is offered as a reason for objection. 4.5.3.2.2 Fish Screening: Item 4 is SHC letter dated 20 September 2009 addressed to DEFRA and copied to DECC. There are three important issues arising from this: 4.5.3.2.2.1 Firstly, if the EA is issuing guidelines, then it should have reasonable data and evidence to support those guidelines; it is not the role of a developer to underpin the cost of providing that data, which is in effect what SHC, has to do. This particular debate on screen design and guidelines has been on going for at least five years between DEFRA, the British Hydro Association and DECC (DTI), although SHC has not been a part of these discussions. It took SHC two weeks to organise the tests and is costing the company £50,000. In the context of the government resource and support for the EA and the length of time these issues have been in debate, the intransigence of the EA in not supporting the necessary research can only be described as wilful. 4.5.3.2.2.2 Secondly, the EA has a duty to define the desired outcome of any screen design, not to specify how this is to be achieved. In not defining the Scheme Passage Rate[7], the EA is leaving the developer in a position where the required effectiveness cannot be demonstrated. One cannot pass a test if a test is not set. 4.5.3.2.2.3 Thirdly, in giving itself consent at Romney Weir on the River Thames for a HEP Installation, the EA is clearly acting in a prejudicial manner, because it is not asking the SHC to meet similar standards. This is an abuse of a statutory position for commercial gain (the EA is the Landlord owning both the existing flood gates at Romney and the land upon which the HEP Installation is to be built). Interestingly at sites where SHC has proposed to use Archimedean Screw Turbines, as the EA are proposing to do at Romney Weir, the issues of Scheme Passage Rates and Weir Pool Morphology have never been the raised as issues of objection, even though weir crest heights are being raised, and the Scheme Passage Rates and percentage exceedance flows through these turbines are comparable with those sites where SHC is proposing Kaplan Turbines. 4.5.3.3 One of the reasons for refusal at Gunthorpe was that an EIA (Environmental Impact Assessment) was required. This is relevant because, firstly, SHC did submit an Environmental Statement; secondly, no screening was carried out by the LPAs nor was any additional information requested by the LPAs; and thirdly, if the need arises for an EIA after the planning application has been submitted, consideration of the application should be suspended pending submission of an Environmental Statement (regulation 32(2)(b) of the Town and Country Planning (Environment Impact Assessment)(England and Wales) Regulations 1999) and this was not done. 4.5.4 One additional example arises from the SHC Planning application for a proposed HEP Installation at Linton-On-Ouse: 4.5.4.1 Item 5 is the EA second Letter of Objection dated 3rd September 2009 and Item 6 is SHC response dated 17th September 2009. This second letter (which raised new concerns) was issued by the EA very late in the process and followed their first letter dated 31 July 2009 where the original concerns had been dealt with, SHC having responded on the 14 August 2009. There are two issues (besides the tardiness of the Agency's response) that arise out of this exchange. The first is: why the EA is asking SHC to conduct surveys on habitat that the proposals do not affect and on species that the habitat will not support? The second is: Why is the EA misrepresenting known and well-recorded behavioural aspects of migrating fish? They suggest that it is flow which acts as a stimulus to behaviour when it is well understood in fish pass design that it is the differential velocity of flow that is the prime stimulus. This suggests that there is a lack of experience and expertise being applied to the assessment of SHC's application, which only has the effect of prolonging the determination periods unnecessarily. SHC and the LPA still are awaiting a response from the EA to our letter of 17th September 2009. 4.5.5 Item 7 is a copy of a response by the EA to a request for information by SHC under the Environmental Information Regulations 2004, in which SHC requested the data and supporting evidence that underpin the guidelines mentioned above. It is self evident that this response does not address the request. After two months SHC is still awaiting the requested information. 4.5.6 SHC has concluded that the various Planning Laws and Regulations of themselves are not unreasonable and would not over burden developers if the relevant Statutory Authorities administered them effectively with consistency. To the detriment of our economy this is not the case: 4.5.6.1.1 Statutory bodies on occasion have little or no understanding of their duties under Law and what a reasonable person may expect of them. (Reference should be made to Sections 4.5.3.3, 4.5.3.2.2, 4.5.3.1) 4.5.6.1.2 Statutory bodies are not adequately assessing applications, by in particular not taking mitigations into account when reviewing local impacts. (Reference should be made to Section 4.5.3.2.1) 4.5.6.1.3 There is a lack of experience and knowledge (and in some cases adequate numbers of qualified staff) in dealing with the technical aspects of renewable applications. (Reference should be made to Sections 4.3.3, 4.5.4) 4.5.6.1.4 The EA is not performing its duties or functioning correctly. It has a propensity for stating the inadequacy of mitigation without stating what is adequate, and for acting without giving due quantifiable justification. (Reference should be made to Section 4.5.3). The EA default position is to try and preserve the status quo. 4.5.7 One observation that SHC would offer is that relevant Authorities (in particular the EA although this is not exclusive in our experience) appear to work in silos and as a consequence have no perspective on their overall Authority objectives or can offer a reasoned "integrated" response taking account of both the impacts and mitigations of a proposal. The "experts" in fisheries provide a fisheries view, those in flooding provide a drainage view and the ecologists do the same, while the Planning Liaison Officer merely collates the views and produces an often fragmented and disjointed response leaving the developer in confusion over the importance and sometimes relevance of the issues being raised with respect to the proposed scheme. If a judgement or impact and mitigation analysis is required evolving more than one technical discipline this simply produces paralysis within the Authority or between Authorities, as the problem is too complex to be solved by them. At this point the developer is simply left with an Appeal to an Inspector who is required to make such judgements. The cost and time of this cannot be justified. 4.5.8 SHC would like the Energy and Climate Change Select Committee to consider the following simple recommendations to better facilitate the deployment of Renewal developments through the Statutory Consent process: 4.5.8.1 The establishment of "informed advisors" from DECC, DEFRA and DCLG that can act as mentors and quasi arbitrators between the renewable developer and the LPAs and other Statutory Consultees, with a view to transfer knowledge, to guide both parties through due process fairly and efficiently. 4.5.8.2 Changing the burden of proof on renewable planning applications where local planning committees, if a refusal is to be the determination, have to provide written evidence to the Regional Assemblies (which are responsible for defining the renewal targets within a Regional Spatial Strategy) as to why the local interest must prevail over the national interest. A Planning Inspector appointed by the Regional Assembly could make a recommendation that would be considered material in any Appeal by the developer. 4.5.8.3 Removing the LPA determination period targets for renewable energy schemes as this is clearly becoming counter productive. 4.5.8.4 Mechanisms for compensating developers for additional costs of appeal where it is demonstrated that the original LPA decision to refuse was legally incorrect. Issues with Development 4.5.9 In dealing with the second issue of development the government needs to be more flexible to the approaches made by the Private Sector. To illustrate this issue, the founding directors of SHC recently approached Crown Estates to enquire about obtaining a land option for a commercial tidal electric generating installation. To develop a tidal turbine will require £10 to £15 million for full sea trials. This is a relatively small sum compared with the investment levels of a commercial field. However the Crown Estates' position was that once the turbine had completed its sea trials this would then allow SHC to compete for designated areas. There are two issues with this: · There is no legal requirement (Procurement Law) to instigate a competitive tender for bare lease agreements and Crown Estates is not a Contracting Authority, therefore strictly Procurement Law does not apply.
· The risk profile to the investor is now significantly higher because even if the tidal turbine proves it can deliver the right capital cost per KWh output, the investor may not get a return because there is no certainty on deployment.
4.5.10 This is particularly nonsensical because the "tender process" described by Crown Estates was in fact a risk on revenue analysis which the developer would be required to perform as part of its funding arrangements. In other words the commercial position of Crown Estates is exactly the same as the developer would be. Simple conditions precedent[8] on an Option for Lease arrangement could provide for certainty for both sides and allow a flow of investment from the market to occur. 4.5.11 A change of emphasis by Government from treating investment in Renewables as a procurement to a collaboration with the Private Sector may better reap the results Government is seeking and deliver the most electrical output for the least capital investment over time while reducing investment risk for both parties in doing so. 4.6 What are the most important drivers, nationally and internationally, for a low carbon economy in the UK? To what extent does the outcomes of the international negotiations at Copenhagen matter? 4.6.1 SHC is not in a position to really comment on this. However it is fair to say that the majority of people we speak to at public consultations do not understand the implications of Climate Change and cannot relate to the need to act now. Sadly they are generally more interested in what they can receive from any renewable scheme rather than any benefits it has to offer to our children. 4.7 How important is it to the UK economy that it becomes a leading developer and exporter of low carbon technologies? What Government policy needs to be in place to do this? 4.7.1 This is not strictly a SHC area of expertise; however based on SHC experience and our evidence I would offer the following observation. To export anything you need to have developed a product or service and at present funding by Government is limited (Carbon Trust) and Government facilitation of the conditions required for investment in development and deployment, within the UK which would always be the proving ground, is at present ineffective (refer to Section 4.5). It is not policy we need but concerted action. 4.8 Are we seeing impacts of a downturn on demand and investment in low carbon technologies? If so, how can this be addressed given the need to meet long-term targets? What obstacles to investment are there? 4.8.1 The contribution of hydropower to meet the overall power demands of the UK could be significant. The technology to achieve this cannot be regarded as strictly new, in terms of the application of new engineering principles, but it is applying existing well understood engineering principles and creating new engineered forms. This means that there is more certainty of the output from an investment in hydropower than with a lot of new technologies. 4.8.2 The issue is not whether there is a downturn or not but are there sufficient investment levels being maintained to meet existing targets? 4.8.3 SHC's investment plan will meet existing Government targets in hydropower defined in the various Regional Spatial Strategies, to date SHC has invested approximately £1 million in trying to develop hydropower. This investment is not achieving the desired outcome not because the engineering does not deliver the required output, but because Statutory Authorities under Central Government control, cannot define an acceptable level of local ecological impact against the threat of Climate Change (with all the potential for serious economic instability) and administer its own regulations correctly. While this persists there is an abundance of other more profitable investments that can be made in preference to Renewables. This position has to fundamentally change and quickly (by that I mean today not next month or after an election) if Government wishes to maintain and encourage investor confidence. 4.9 What is the potential role for public procurement and policies such as the 2016 zero carbon homes target in driving investment, development and job creation? 4.9.1 SHC is not in a position to comment. November 2009 [1] To generate hydroelectric power there are two required components, a differential head of water and a flow of water. The power output relationship between these components is: power = differential head times flow times a factor; thus, the lower the head the more flow through the turbine is required for the same power output. Low head is defined as 1m to 5m of differential head of water between the inlet and outlet of the turbine. It is typically found in "run of the river" and tidal schemes. [2] Economically priced finance means in this context a price of capital which of itself does not inhibit investment and growth.
[3] High initial capital outlay with relatively long pay back periods [4] The process by which a developer obtains the necessary Statutory Consents. In the case of Hydropower this is usually concerned with Planning Consent and various Licences under the Water Resources Act. [5] The proposed HEP Installation crosses the boundary between adjacent LPAs and therefore requires two separate but simultaneous applications. [6] Further evidence can be provided on specific site locations, should the committee request it. [7] The measure of impact an HEP Installation will potentially have on fisheries is known As the Scheme Passage Rate (SPR), and is an assessment of the potential for fish to Pass undamaged through a stretch of river with an HEP Installation operating. It is expressed as a percentage value, the higher that value the less impact the HEP Installation can be said to have. [8] A Condition Precedent is an agreed set of conditions, which have to be satisfied before an Option can be called. In effect these would represent the quantifiable requirements of Crown Estates to satisfy their perceived risk on revenue. |