Electricity Market Reform - Energy and Climate Change Contents


Supplementary memorandum submitted by Good Energy

Electricity Market Reform and Distributed Generation—a supplementary memorandum from Good Energy

INTRODUCTION

—  As 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.

—  However, 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.

—  We 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.

—  This 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 OF DISTRIBUTED GENERATION

—  Good 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.

—  Much 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.

—  Decentralised 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 size.

—  Each 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.

—  Distributed 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 GOVERNMENT'S PROPOSALS

The EMR consultation document asks for respondents' views on three models of FITs. Our views are as follows:

—  The 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 raised 20MW.

—  A Fixed 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.

—  The 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.

—  We 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.

—  In 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 plants.

GOOD ENERGY'S PROPOSALS

Having broken decentralised generation into four categories, the below table summarises our suggested approach:

Generator size Scheme
Micro (< 4 KW)Fixed FIT
Small (4KW-20MW)Premium FIT
Medium (20MW-50MW)RO, moving to FIT with CFD
Large (> 50MWFIT with CFD

—  Based 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 market players.

—  Above 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.

—  By 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

—  In 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 50MW.

—  We 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.

March 2011


 
previous page contents next page


© Parliamentary copyright 2011
Prepared 16 May 2011