HC 742 Electricity Market Reform

Memorandum submitted by the Renewable Energy Association (EMR 13)

 

1. Introduction

1.1 The Renewable Energy Association is the largest renewable industry body in the UK, with over 650 corporate members. These companies are active across the range of renewable electricity, heat and transport technologies. The core membership we seek to represent is renewable energy producers, fuel providers, energy equipment manufacturers, installers and project developers. We also have many corporate members with interests in these areas, but whose core business lies elsewhere.

1.2 We are grateful for the opportunity to give evidence to the Environment and Climate Change Select Committee. We have not addressed each issue in turn. Most of our focus is on the Feed in Tariff Contracts for Difference proposal, but we also comment to a limited extent on the capacity mechanism and the need to harmonise with Europe in the context of paying for networks.

1.3 Due to government’s consultation only having been published on 16th December, we have not had time to consult our members on the proposals and the members have had limited opportunity to comment on this written evidence.

2. Objectives of the Electricity Market Reform Project

2.1 We welcome government seeking a secure, low carbon and low cost energy future. The UK has been a laggard in deploying renewable energy and our uncertain policy environment has increased costs to the consumer. Government needs to set out a clear path to a decarbonised power sector by 2030 and end the discrimination against investment in efficient local electricity generation. The transition and maintaining investor confidence is all important in any proposed reforms.

2.2 From the renewables perspective, the main objective of the EMR should be ensuring that the contribution from renewable electricity is sufficient for the UK to meet its overall target of 15% of energy from renewable sources by 2020. This is a legally binding target and forms the UK’s share of the overall EU-27 20% renewable energy target. The previous government and the coalition government anticipate a contribution of around 32% of renewable electricity is required [1] .

3. Revision of the Renewables Obligation and the Feed-in Tariff system

3.1 The Renewables Obligation is the main mechanism for increasing deployment, and this has been relatively successful since its introduction in 2002. It has undergone significant changes since then, and is currently facing a particularly challenging period in the run up to the first review of banding levels . Banding was introduced in April 2009, and prior that each MWh of electricity earned 1 Renewable Obligation Certificate. From April 2009, different technologies have been placed in bands which earn more or fewer ROC s per MWh according to their estimated levelised electricity generating costs. DECC employed consultants to advise on banding levels initially, and consultants are now looking at whether these need revising according to a set timetable of review every four years.

3.2 The intention is that new bands will come into effect on 1st April 2013. Many generators are experiencing difficulty financing their projects at present, due to uncertainty about future banding levels.

Transition

3.3 A transition away from the Renewables Obligation to a system of Contracts for Difference for Feed-in Tariffs is a dramatic change, and whilst the industry has had some months to come to terms with the concept, which was announced in the coalition agreement, there is considerable wariness.

3.4 The concept of a stable 20-year contract for difference for renewable generators is not unattractive. Indeed it has a great deal of merit, both for generators and for the public. DECC's reasons for wanting to make this move are commendable. The REA’s concern is how the change is implemented. Project developers must have certainty in the process leading up to the awarding of these contracts as well as in the contracts themselves. Indeed it is the difficulty of achieving the process certainty rather than the contract certainty that concerns us more.

Feed-in Tariff Contracts for Difference proposal

3.5 The Government’s lead option is for a feed-in tariff with a contract for difference (CfD) on the electricity price. There are a number of design and implementation issues which need further consideration. If the proposal is to deliver the benefits set out in the document getting the detail right will be essential.

3.6 The proposed feed-in tariff is a move towards general low carbon generation support, as opposed to specific renewable support mechanism. It is vital that a banded and wider technology based view is maintained, in order to ensure delivery of the 2020 renewables target.

3.7 Under the proposals set out in the EMR, either the contract prices are to be set by competitive tendering (auctioning) or will be fixed by government (seeking the advice of consultants). The auctioning approach is favoured by Chris Huhne. Under either method process certainty for developers is essential. We outline below issues that must be taken into account.

Process certainty if CfD prices are fixed through consultation

3.8 Some Renewables projects take 3 – 5 years (occasionally more) to develop. Once a price is set, Project developers need to have confidence that the process will see them right through the period to commissioning and that the goalposts will not be moved before they get there. If prices are reviewed on a timetable that does not allow projects sufficient time to be confident of commissioning, the support regime will be totally ineffective.

3.9 We are beginning to see this problem now with the Renewables Obligation (RO). The RO has been in place for 8 years and not one year has gone by without it being tinkered with. We enclose a paper on "grandfathering" that sets out the particular problem faced by generators with long lead times.

3.10 The Government has acknowledged this and has brought forward the timetabled review of banding levels for technologies under the RO, so that the results will be known by summer 2011. If developers are confident that the prices signalled next summer will become reality in April 2013, then they will have a window to develop their projects lasting from July 2011 to 2017, which should be sufficient. Given previous experience of the Obligation, however, may lead them to be more cautious and wait until the legislation is actually in place, which gives only a 4 year window.

Process certainty if CfD prices are fixed through auction

3.11 Prior to the RO, the policy for the deployment of renewable electricity generation was the Non-Fossil Fuel Obligation (NFFO). This was a competitive tendering regime, having many similarities with the new proposals. It ran from 1990 to 1998, during which there were five tendering rounds in England and Wales and three in Scotland. Many of the REA’s members have experience of tendering for contracts under the NFFO.

3.12 The climate was very different in the 1990s:

· We did not have the benefit of a large, legally binding renewables target to meet;

· There was no sense of being on a trajectory whereby renewables are set to become a mainstream component of the electricity market; therefore

· Each round of the NFFO felt to the participants that it might well be the last.

3.13 Despite this, the NFFO gives some very important lessons on auctioning contracts, some of which are outlined below.

· Auctions must be frequent and regular, with a timetable stretching out years - preferably decades - in advance.  And generators need to be confident that the regime will be stable.

· The pre-conditions need to be set out clearly.  If the rules require projects to have all consents in place prior to bidding, (i.e. only those that are ready to go can enter) then companies will only engage in the auction if they are confident of winning a contract in due course.  If little is needed in advance, then there must be mechanisms in place to clear out speculative bids that have no likelihood of reaching fruition.

· If the projects do need to be well advanced prior to bidding, there is the danger that there would be few of them participating in the early rounds, which could lead to price distortion.

· It would be unworkable to also have penalties for non-compliance, as funders would not be willing to accept additional risk of penalty for non-delivery on the contracts.

· If bidding took place in bands, eligibility would have to be wide in order to not stifle innovation, yet precise in order that any competition is fair.

· Developers would need to know that the band they are bidding in to be likely to award enough capacity for them to feel it worthwhile bidding. 

· A mechanism would have to be found to prevent speculators, or those with the malicious intention of sterilising the process, who have no intention of building projects, flooding the bidding.

· The mechanism would have to cater for a wide range of technologies, at very different stages of commercialisation.  The needs of established technologies are very different from emerging technologies.  The mechanism would need to span innovative marine renewables, where devices are still being developed (and where the UK has a lead which must be nurtured) to mature renewables such as onshore wind.  This would be challenging.

3.14 It is essential that the lessons of the NFFO are heeded, if the UK is to return to a competitive tendering process for the allocation of contracts.

4. Capacity Mechanism

4.1 Government is consulting on introducing a capacity mechanism to explicitly reward the provision of capacity, this mechanism should also be designed to reward demand - side response.

4.2 Firstly, the renewable element of the value stream is likely to be of significantly more value than the capacity payment, and secondly there is very little detail in the consultation document. Therefore our comments are limited.

4.2 We support renewable generators having access to capacity payments, and we would expect them to benefit to the extent that they can control their generation. Those that are flexible and can choose when they generate will benefit more. With the exception of biomass projects, most renewable generators are limited in their extent to do this, those that depend on variable energy sources cannot be relied upon beyond a statistical degree to be able to generate at any particular moment; those that generate electricity from wastes streams can usually be relied upon to generate, but have limited flexibility as they will have a continual stream of material that they must deal with. We would support cost-reflective capacity payments, and want to see those renewables that can benefit from them, doing so.

5. European context

5.1 In order to facilitate the transition to a low carbon energy future and to achieve this at reasonable cost, it is widely acknowledged that increased interconnection throughout Europe is desirable.  In addition the EU objective of a common European energy market is making progress and a number of European Codes covering all aspects of the electricity and gas markets will be developed over the next few years. 

5.2 It is therefore extremely important that UK electricity trading arrangements are compatible with whatever common arrangements emerge throughout Europe.  If the European dimension is ignored there is a risk of giving unfair advantage to low carbon generation in elsewhere of Europe at the expense of those in the UK, where the natural resource may be better.

5.3 An example of the systematic disadvantaging of generation in Great Britain compared with most other parts of Europe is the proportion of the network costs that are borne by generators as opposed to demand customers.  When considering all network related charges (including Transmission Network Use of System Charges, Distribution Network Use of System Charges, connection charges, charges for transmission and distribution losses and Balancing Services Use of System charges) it is clear that the charges in Great Britain are on average considerably higher than elsewhere in Europe. This systematically disadvantages generators in Great Britain and renewable generators in particular.

January 2011


[1] Renewable Energy Strategy, DECC, July 2009 ( http://www.decc.gov.uk/en/content/cms/what_we_do/uk_supply/energy_mix/renewable/res/res.aspx )