Memorandum submitted by RenewableUK|
reform is needed to reflect the challenges of security of supply,
decarbonisation and affordability; we are not sure that Government's
proposals live up to this challenge.
are disappointed that the benefits of policy continuity in support
of renewable generation have not been given any weight in DECC's
thinking; we believe that change brings disruption and a potential
hiatus in delivery. This risks the UK's ability to establish a
thriving renewable manufacturing base.
key issues of immediate concern regarding the proposals set out
by Government have been raised by RenewableUK members, and these
must be urgently addressed; these are reduction in incentive on
suppliers to buy renewable power, the role of auctions in setting
support levels, and the proposals for change to the Renewables
Obligation system in 2013.
RenewableUK is the leading trade association for
the renewable energy industry, with over 650 corporate members
from right across the wind, wave and tidal stream sectors. Our
membership will be key in delivering the investment required to
meet challenging renewable and climate change targets.
The combination of about one-quarter of our generating
capacity being due to retire in the next decade and the need to
decarbonise the electricity sector by 2030, as recommended by
the Committee on Climate Change, is providing the drive for market
reform. RenewableUK agrees that one of the key priorities is the
need to massively increase investment in new low-carbon generation,
but it is also the case that such investment is only encouraged
through the whole policy environment being supportive. Government
must not let efforts to make planning consents simpler, and grid
connections affordable and timely, be given lower priority while
it turns its attention to the market arrangements.
When approaching major reform of the market, it is
beneficial to look at the elements of the current policy mix that
are working, and consider whether it is best to continue these
or move to alternatives. Consequently, RenewableUK and its members
are frustrated that Government is not considering retention of
the Renewables Obligation (RO) as a serious option. The RO has
been responsible for massive developer activity, particularly
in wind power on- and offshore: over 20GW of onshore wind projects
have entered the planning system since 2002, and high developer
appetite offshore has driven award of 48GW of sites by Crown Estate.
Any failure to translate this activity into more capacity in the
ground or water should be blamed on difficulties in gaining planning
consent and grid connection. Even so, the UK leads the world in
offshore wind deployment and is also a significant market for
onshore wind. Consequently, renewable energy is the only low-carbon
generation sector that has current delivery that could be disrupted
by major policy change. Greater care must be taken with our technologies
to ensure that the confidence of current players to invest is
not damaged in pursuit of new investors.
One of the justifications used by DECC for this major
reform is to make investing in the UK power sector more attractive
to new entrants. Given that the most successful part of the current
policy mix in bringing new players to the UK is the RO, including
private equity and some institutional investment, it seems somewhat
perverse to sweep it away without attempting to understand in
depth what drives existing investors and how these may be kept
on board while reaching out to new sources of money. Despite making
these points to Government, however, DECC has opted to propose
completely new systems of support, and we discuss some initial
points about them now.
Given the radical nature of the changes that DECC
is consulting on, It will take some time and the clarification
of key details before RenewableUK can come to a fully considered
position on the proposals as a whole. In particular, there are
many questions that need to be answered about the Contract for
Differences (CfD) proposal for support of low-carbon generation.
Consequently our views and those of our members are likely to
evolve as the key questions are answered. There are some key issues
that we are concerned about, however.
First amongst these is power offtake risk under the
new arrangements. Under the RO, suppliers are incentivised to
sign power purchase agreements (PPAs) with renewable generators,
as they wish to secure the Renewable Obligation Certificates that
go with this electricity. Under the CfD, or the premium feed-in
tariff that is DECC's back-up option, there is no such direct
driver for suppliers to buy renewably-generated power: the contract
for support is signed with a third party tasked with paying generators
additional financial assistance, not with buying the power itself.
With no other reform, the risk that projects may not be able to
secure PPAs could deter investment in development, thus threatening
targets. Alternatively, PPAs may be available but with much greater
discounts to the market price than PPAs under the RO, which would
impact on the financing terms available to such projects. If other
action to increase wholesale power market liquidity is successful,
then these risks may be offset to a greater or lesser extent,
but this could require substantial changes and presents a significant
challenge in its own right. It is at the moment unclear if the
work that Ofgem has in train on this issue will result in enough
additional liquidity to reduce offtake risk sufficiently. If this
work on market liquidity is unsuccessful, then the reform process
would have increased this key risk for developers. It is
vital that this issue is addressed.
The second key issue that RenewableUK members have
identified is the proposal to set the level of support under the
new, single mechanism through an auction or tender process. The
experience of the renewable sector in the 1990s should give Government
pause for thought. A great deal of the wind capacity contracted
under later rounds of the Non-Fossil Fuel Obligation system never
materialised due to the failings of that tender process, and we
do not wish to see that experience repeated. We believe that auctions
could have an important deterrent effect on companies investing
in the development phase of projects: before entering an auction,
there would be no clarity on the economics of the projects and
thus investing in development would be riskier.
Trying to run a process that includes both large
organisations bidding in nuclear stations and small developers
trying to build a handful of wind turbines could also be difficult,
given different capabilities and attitudes to risk: for instance,
significant penalties for non-fulfillment of a contract may deter
developers of smaller projects at a time when more of the onshore
wind capacity that needs to be delivered going forward is likely
to come from such developments. We also see it to be almost inevitable
that auctions will require Government to be specifying volumes
of capacity to be supported in each bidding round. This seems
incompatible with any idea of free markets being able to bring
forward appropriate mixes of power from the decisions of multiple
players as opposed to ministers making judgments on limited information.
At this time we would much prefer reward levels under
the new support system to be set by an open, evidence-led process,
as the banding levels for the RO are set now, and would need much
persuasion that any auction or tender process could be better.
Thirdly, any transition from the RO to a new system
of support needs to be handled with extreme care if delivery is
not to be disrupted in the short term. Such disruption would be
extremely damaging to the ability of the UK to capture the manufacturing
industry for the UK in offshore wind, and the jobs and economic
development that would result. It is important to note that delay
would not mean that investment in the UK happens later, it will
instead go to other countries such as Germany, and the significant
economic benefit of the UK's offshore wind programme will be felt
elsewhere. In putting in place grandfathering provisions and other
transitional measures, it is not just the level of support under
the RO that needs to be protected, but the overall position of
projects, and in particular the contracting terms of existing
or near-term projects. Other parts of the EMR package could result
in deterioration of the terms available for the power side of
the contract, and this is not reflected in the grandfathering
principles set out by DECC.
In this vein, we find the proposal from DECC to move
the RO into a system of "fixed ROCs" in 2013 difficult
to understand, since it risks precisely the hiatus in short-term
delivery that DECC purports not to want. Any project seeking financial
close now for delivery after April 2013 may have to be suspended
until the details of this proposal are worked out and/or it is
rejected, as it is essentially a new system that needs to be fully
understood before investment decisions can be made. Moving the
RO to a fixed version also risks significant disruption of existing
contracts with a consequent diversion of management time to making
good existing project positions. This will militate against new
In order to avoid the risk of hiatus in the short
term, DECC may have to remove this option from the table immediately.
It is possible that such a proposal could be implemented in 2017,
when the RO is closed to new entrants, which would avoid the immediate
disruption that earlier introduction would cause. There would
still be difficulties in terms of lack of supplier incentive to
sign PPAs as noted above, as well as disruption of existing agreements.
Another area of high interest to RenewableUK members
is the consultation around security of supply issues, and in particular
proposals for a capacity mechanism. It is important that new arrangements
here are fully transparent to participation by the demand side,
enabling all the possibilities opened up by smart grid functionality
to be exploited commercially. This will be vital as the proportion
of variable renewable generation in the mix increases.
Another key tool in managing the UK power system
in future will be much larger amounts of interconnection with
the rest of Europe. The consultation has relatively little to
say on this subject, which is puzzling, given the large changes
being introduced in the management of cross-border power flows
and trading that the EU's third power liberalisation package mandates.
We would urge DECC to consider strongly how the Electricity Market
Reform proposals will work in the European context.