Supplementary memorandum submitted by
Electricity Market Reform and Distributed Generationa
supplementary memorandum from Good Energy
Good Energy has stated throughout its previous written and oral
evidence, we are supportive of the Government's desire to use
its Electricity Market Reform project to bring about a major shift
in the way electricity is generated in the UK.
after further consideration of the project's proposals, we are
now seriously concerned that these to do not offer a serious and
credible approach to encouraging the growth of decentralised generation,
such as through community scale energy projects.
believe that the proposals take a "one size fits all"
approach which are focused on a centralised solution using large
scale nuclear and CCS technology. They then try to apply the same
solution for smaller sites without consideration of the different
environment in which they are funded and operated.
short, supplementary paper explains why the Government's proposed
course of action will not support decentralised and community
scale energy projects. Based on our experience in working with
micro, small and medium sized generators we offer a more credible
approach to how the Government should do so, based on the use
of different incentives for different sized projects.
A BRIEF OVERVIEW
Energy sources the vast majority of its customers' supply needs
from a network of 2,000 distributed renewable energy generators.
We have run our own FIT scheme (HomeGen) since 2003 and consider
ourselves to be the market leader in FIT supply services. We also
own a small (9.6MW) wind farm in North Cornwall, and we plan to
invest in 50MW of similar-sized projects over the course of the
next five years. With this in mind, we have unique in the depth
of experience and knowledge in distributed generation.
of the current political focus is on the benefits of more centralised
solutions, such as offshore wind, nuclear and CCS. However the
reality is that the UK's future energy needs will need be met
by a diverse mix of generation technologies to effectively manage
supply and demand, and to use the advantages of some sources of
generation to hedge against the disadvantages of others.
generation can cover a range of projects, connecting individuals,
businesses, communities and whole towns to their energy source.
This includes micro level generation, for households and small
businesses, through small scale generation, for smaller community-sized
projects, to larger, more medium scale projects up to 50MW in
one of these groups has its own set of skills and needs from whatever
financial mechanism supports it. It is for that reason we believe
that a one-size-fits-all approach, based on a complex mechanism
such as FIT CFD, risks undermining the expansion in capacity that
the UK needs at this level.
generation reduces the amount of energy lost in transmitting electricity
because the electricity is generated near where it is used, also
reducing the need for extensions to power lines. Our experience
shows that decentralised schemes are more efficient and require
lower levels of expertise and maintenance that traditional sources
of generation. Perhaps most importantly, these schemes are able
to connect households, people and businesses to their source of
generation. At a micro and small scale level, this connection
is proven to improve energy efficiency and demand side management
as the link between usage and generation is clear.
The EMR consultation document asks for respondents'
views on three models of FITs. Our views are as follows:
current FIT in operation in the < 5MW market is in effect a
Premium FIT where the generator is assured an income on total
generation, and is then paid market price for export (which, for
larger sites, generation = export). This is generally understood
and has led to significant investment interest in renewable generation
because it offers a reasonable return combined with simplicity,
although the recent decision to implement an early review of FIT
shows that policy risk is arguably higher than has been seen with
the RO. This also works well where a significant amount of power
is used on site, so that the FIT payment and the power payment
are delinked. We think the threshold of this scheme should be
FIT, whilst providing certainty of price, is insupportable in
the longer term for generation above a certain size. As a single
purchaser model it doesn't work well for customer/investors who
are seeking to fix long term prices and use significant amounts
of electricity onsite. It will work successfully for micro-generation
(typically < 4kW), and will also encourage on-site energy efficiency
and as households realise that the maximum benefit is derived
from onsite usage. In the longer term, combined with smart metering,
it could create a market for DSR as micro-generators can be optimised
to switch from onsite use to exporting via dynamic price signals.
FIT with CFD provides security of price, but is extremely complex
and needs careful hands on management. This means that it is only
really suited to major market players making significant investments.
Probably multi-national utilities working in conjunction with
merchant banks will be able to manage this type of risk. It would
seem that if this is created effectively to allow new participants
to invest, then it could create better liquidity in the market
place due to more market entrants.
believe that in the long term ROCs should be phased out. Currently
they are to appear on the Government's balance sheet, but we also
pay the existing major utilities to borrow against their balance
sheet roughly 10% of the value of a ROC. However, we believe that
ROCs should be available in the short-medium term for projects
between 20-50MW, but then phased out after a FIT CFD mechanism
is bedded in. Whilst ROCs have not been without their problems,
those problems are widely understood by generators of this size,
and are therefore manageable, as are any issues around FIT CFD
once they are understood.
addition to these points, the Government's overly simplistic approach
extends its proposals for a capacity mechanism. That mechanism
is very much focussed on the need to respond to peak demand, rather
than managing a system with large amounts of intermittent and
inflexible generation. What is required is with the increased
use of renewable generation, an availability mechanism to address
to reality that there will times of surplus generation, and times
of insufficient generation and managing both supply and demand
by load shifting rather than building expensive carbon-based flexible
Having broken decentralised generation into four
categories, the below table summarises our suggested approach:
|Micro (< 4 KW)||Fixed FIT
|Small (4KW-20MW)||Premium FIT
|Medium (20MW-50MW)||RO, moving to FIT with CFD
|Large (> 50MW||FIT with CFD
on our experience in working with our community of nearly 2,000
micro, small and medium sized generators, we believe that a Fixed
FIT would work best to support small scale systems up to 4kW,
and from 4kW to 20MW a Premium FIT is the better support mechanism
as outlined. This would be in line with the Government's stated
ambition to encourage more community schemes, and help businesses
who invest in onsite supply, but do not want to become energy
20MW there should be a two phased approach with sites below 50MW
remaining on the RO until the FIT with CFD is proven for sites
above 50MW. Once FIT with CFD is settled in, then the level at
which the FIT with CFD can be lowered and the RO vintaged. Our
experience of the electricity market and the introduction of new
mechanism is that there are always unintended consequences, so
we propose a time lag for the FIT with CFD for the smaller sites
as the risk will be that those sites just won't get built until
the risks related to the mechanism is minimised.
increasing the diversity the renewable energy mix, not only through
utilising different technologies but also through a wider mix
of geographical locations with different wind, hydro and solar
resources, decentralised energy has a vital role to play in mitigating
the intermittency of renewables by spreading this risk. However,
the Government's capacity mechanism needs to recognise this, and
ensure that it rewards those generators exporting surplus electricity
back to the grid, at a time when others elsewhere face a shortfall.
conclusion, the Government's proposed one-size-fits-all approach
to its EMR project risks severely undermining efforts to expand
decentralised energy projects in the UK. It does so in its failure
to take in to account of the differing levels of resource and
management skills amongst those responsible for schemes below
therefore believe that the Committee should recommend that the
Government should revisit its lead option of a FIT CFD with this
in mind, and consider taking a more flexible approach which will
support a more diverse range of generators and help its energy
policy realise the benefits of greater use of distributed generation.