Memorandum submitted by the Renewable
Energy Association |
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
1.3 Due to government's consultation only having
been published on 16 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.
2.1 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.
3. REVISION OF
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
ROCs 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
3.2 The intention is that new bands will come
into effect on 1 April 2013. Many generators are experiencing
difficulty financing their projects at present, due to uncertainty
about future banding levels.
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
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
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
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
- 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, (ie 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 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.
4.3 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.
8 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)