Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by the Banks Group Ltd

1. Summary

1.1 The Banks Group is a private company operating in both coal and renewable energy sectors and is concerned that the arrangements in the draft bill/EMR and future policy announcements1 will:

Lead to a second dash for gas that will undermine the carbon reductions targets and investment in low carbon technologies.

Create significant uncertainty for IPP’s, such as Banks, developing new renewable capacity which will result in a reduced investment appetite for new projects because the Coalition Government consistently sends out mixed messages about its commitment to renewable policy and then introduces the EMR which creates a framework for frequent government intervention. This is most acutely apparent through:

Uncertainty in the CfD strike price setting mechanism, and the frequency that prices can be amended.

The introduction of volume targets for different renewable technologies that could change significantly during the typical five year development/investment cycle for a wind project, without any clear mechanism to ensure lowest cost renewable options that attain planning are prioritised over more expensive technology options.

An environment where there appears to be little incentive on suppliers to enter into PPA’s at reasonable rates for IPP’s.

Lead to higher cost forms of renewable energy, such as offshore wind being placed ahead of the lowest cost and most proven technology- onshore wind, at a significant higher cost to the consumer.

Not protect valuable jobs, skills, assets and much needed existing generating capacity in the coal sector.

2. Banks Group Overview and Approach

2.1 Banks are a medium sized business based in Durham, founded in 1976 employing c360 and operating in three key divisions

Surface Coal Mining.

Renewables—Onshore Wind.

Property.

2.2 A supply chain of over 1,000 suppliers is associated with the business.

2.3 Wherever possible our supply chain is locally sourced and the benefit to the local economy cannot be underestimated. During the construction of our Marr windfarm near Doncaster in 2011, of the £32 spent on material supplies during construction we used 16 materials suppliers, with the majority being within the immediate Doncaster/Barnsley area, and all from the Yorkshire region. Similarly 12 jobs were directly employed on site during construction.

2.4 Our business model is based on identifying projects for sustainable development, bringing local communities along with us, and being able to secure planning permissions for large scale developments using our Development with Care philosophy.

2.5 During the period Sept 09 to Sept 15, Banks Renewables is planning to invest some £65 million in new onshore wind farm projects, from inception through planning and consenting to financial close. Our portfolio totals just under 1GW of capacity. We are intending to construct some 250MW in the period to 2015 with an investment of £332 million and have planning permission and consents in place on a further 564MW. This demonstrates the significance of our forward investment plans, both in economic terms in the areas where our sites are based, but also the ability for onshore wind to deliver now.

2.6 We are a north east private company looking to make major investment in the UK in long term infrastructure assets. An archetypal company for what the UK economic recovery needs to look like. We are prepared to place significant risk capital in new developments throughout the UK currently having a portfolio of 60+ projects.

However:

We are only willing to invest so long as we can see there will be an appropriate equity return for the risks we take.

The equity return needs to take account of the cost of planning & development failures.

If the combination of energy policy and planning policy results in an unacceptable risk framework for continued investment—we will not invest in the UK.

2.7 Banks are concerned that the Draft Energy Bill, and associated policy overview on EMR will have a significant negative impact on both our onshore renewables and coal mining businesses, at a time when we are investing considerable capital in new projects development work of circa £10 million pa and over £50 million in new plant and equipment in our mining business This investment is helping to secure and creating new jobs across our energy business streams.

3. General Energy Policy Comments

The Bill significantly increases the level of complexity and risk of government intervention—making it more difficult for independent developers to assess the risk to their programmes.

We would encourage the government to work much harder with European Governments to deliver a carbon cap and trade scheme which would price the cost of carbon more effectively—and then let markets, not government interventions, determine effective capacity solutions.

The Bill provides no real guidance on the future of “Opted in” Coal Plant, policy seems only certain to deliver closure of coal plants and no guarantees that sufficient thermal and intermittent will be constructed to replace it.

The recent announcements from RWE and EON indicate just how difficult the decision is to develop nuclear capacity.

The market is signalling that gas plants are not economically viable.

With dark spreads at currently levels, Opted Out coal plant will be closing sooner than expected.

A number of the “Big Six” generators have constrained balance sheets and a preference for investing capital in other global markets. Is there sufficient capital in the debt markets to fund the proposed modernisation of European generation capacity.

The debt markets for IPP funding are getting tougher, in part reflecting energy policy uncertainty, as well as the wider challenges and stresses of the European banking system.

4. Coal

4.1 The key areas of concern are as follows:

Coal is an important part of the energy mix and should remain so. The Draft Energy Bill provides no positive view on the continued use of this indigenous energy resource. Whilst the bill and EMR policy refers to CCS equipped plants as being a key part of the mix, the exemption of new gas fired generation from being CCS equipped is signalling clear policy towards an uneven playing field which any new coal generation linked to CCS would have to operate, and will lead to 2030 and 2050 targets being missed.

We suspect that failure in government policy outlined in section 3 now requires it to develop yet another option to incentivise a second “dash for gas”, as signalled by George Osbourne in his budget statement. This reflects concerns over the looming capacity crunch and a CCGT build programme is now potentially the only option left to government to mitigate a failed energy policy.

However:

we fail to see why the EPS requires a 450g/kwh level until 2045; and

we fail to see how the government can comply with its carbon reduction targets if it encourages a second unabated dash for gas.

The bill should recognise the importance of coal and indigenous suppliers to the energy security and generating mix in the foreseeable future. There needs to be a mechanism to allow coal fired generation to continue during the transitional period until CCS is fully established in order to maintain current capacity and avoid premature closures which will increase the risk and scale of an energy supply gap.

5. Renewables

Current issues affecting IPP’s and developers

5.1 The issues affecting development of onshore wind developer s such as Banks at the current time are:

A costly ,long and lengthy development process to get to planning with a low industry success rate (35%), the average cost of a planning permission c£1,000,000

Even after achieving a planning permission there can be a number of conditions that will either delay or prevent build out ,eg. aviation and grid constraints.

A general lack of project finance funding in the market for small—medium scale wind farms.

The terms and conditions of funding packages have grown more onerous since the economic crisis 

Increase in the equity contribution required so putting pressure on our balance sheet.

There are increasing lead times on critical path items as components are competed for globally.

A lack of appropriate labour skills in the UK.

The PPA market is very limited with little competition and minimal interest from the Big 6 suppliers, and therefore terms are increasingly onerous.

Implications for IPP’s—the move from RO to EMR CfD

5.2 Our overall assessment of the draft bill, is that by moving from the arrangements under the RO scheme to the new EMR arrangements, there are several key investment drivers under the RO scheme that would be lost, and would consequently inhibit or prevent investment for IPP’s. The issues are:

Certainty in the CfD strike price.

Introductions of technology related volume caps into the EMR.

There appears to be no significant incentive for suppliers to provide PPA’s to IPP’s.

5.3 Original Renewable Obligation Scheme

Under the original ROC regime, key features included:

Long term certainty of ROC prices.

Penalties for suppliers if they did not procure sufficient ROCs.

No ROC Banding for different technologies.

Features of this scheme included:

The deployment of the most efficient forms of low carbon energy occurred first—ie Onshore Wind.

No significant deployment of other forms of low carbon energy was possible because the ROC subsidy was too low.

The difficulty in securing planning permissions for onshore wind, the lack of alternative forms of economically viable renewable energy and the effect of penalties on suppliers for not securing sufficient ROCS encouraged the major utility companies to enter into long term offtakes with IPP’s.

Utilities were prepared to underwrite IPP projects by taking the imbalance risk associated with the intermittency of Wind Farms in exchange for securing long term ROCable energy.

This enabled the development of an IPP model within a non recourse project debt framework.

This framework provided an appropriate risk/reward framework for The Banks Group to invest significantly in onshore wind development.

For an IPP the key features included:

A ROC regime sufficient to underwrite onshore wind.

A framework that encouraged suppliers to procure IPP energy.

Key points

The original ROC regime provided sufficient certainty to an IPP developer that:

onshore wind was economically viable;

it could compete fairly with alternative low carbon energy; and

there would be a byer for the energy and the supplier would take imbablance risk in exchange for ROCS at an appropriate price discount.

The original ROC banding did not provide sufficient low carbon capacity quickly enough.

5.4 Introduction of ROC Banding

5.5 The government recognised that the difficulty of securing planning permissions for onshore wind combined with the price levels for one ROC prohibiting more expensive forms of renewable energy, meant the UK was way behind in delivering its low carbon targets.

5.6 Creating ROC banding was designed to ensure significant progress could be made towards this target.

5.7 However a consequence of this has been:

As Offshore Wind became economically viable through a doubling of the subsidy level for offshore energy, the “Big 6” Utilities focussed increasingly on offshore wind.

“Boutique” to “Industrial” is the phrase used by one utility.

Natural barriers to entry exist for non utilities due to technology risks/financial scale.

Significant offshore capacity is being developed at twice the cost of onshore capacity.

5.8 The “Big Six” now see they are more likely to be able secure the ROCs they need through their own offshore capacity. Consequently we have therefore seen a significant withdrawal of willing buyers of onshore wind energy through the IPP model.

5.9 There is no certainty that sufficient off shore capacity will be built by 2020 due to lack of liquidity in the financial markets coupled with technical and construction risk and constraints.

5.10 The Banks Group has continued to invest in Onshore Renewables under this revised regime on the basis that:

There was no constraint in terms of targeted capacity by individual technology.

Onshore wind being the most affordable of the low carbon technologies should be the most robust to changes in the electricity market.

Onshore wind still was able to secure the same financial rewards as under the original ROC regime.

Non Big Six Offtakers emerged as willing offtakers (Statkraft/Smartest).

The market has become significantly harder in recent years for small-medium sized wind farms.

Funding packages have become more onerous—in part reflecting wider macroeconomic issues.

Lead time for equipment/components have increased.

PPA market lacks competitive tension.

Key points

The revised ROC regime provided enough certainty to an IPP developer that:

onshore wind was economically viable;

it could compete with alternative low carbon energy; and

there would be a buyer for the energy the revised ROC banding saw big six utilities significantly shift their focus to offshore wind to the detriment of the onshore IPP market.

   Market conditions are tougher and PPS’s becoming more difficult to secure.

5.11 IPP’S need certainty from a framework to continue to invest. The banks group do not feel the proposed changes from RO to EMR provide certainty because:

The level and frequency of government intervention possible from the draft Energy Bill creates significant uncertainty for any developer. This will no longer be a market subject to market forces.

Developers need long term certainty that trading arrangements will remain in place over development life cycles that can be 10 years or longer prior to securing planning.

The Bill gives Governments the ability to amend capacity volume targets and strike prices raising concerns that capacity mix targets and value propositions could change significantly every five years with the election cycle and therefore put significant investment at further risk.

The incentives for the suppliers to purchase power under PPA’s from IPP’s have been lost under EMR.

5.12 The following must be addressed in the drafting of the energy bill:

Measures to ensure onshore wind continue to be an economically viable proposition—as the subsidy to the taxpayer is significantly lower than alternative technologies.

Ensuring onshore wind is able to compete fairly with alternative low carbon generation.

Ensuring there is a buyer for the energy and imbalance costs associated with the intermittency of wind.

5.13 Conclusions and matters to be addressed in the final energy bill and EMR policy.

There is uncertainty in respect of ROCs in the forthcoming review and depending on the level that it is set at will have a impact on the investment we will place in this sector in the future.

Lack of clarity for CfD price setting now, means we cannot assess the returns on new and existing sites we already have that will fall into the new regime, five years is not a long time in the lifecycle of a wind farm development.

The proposals for the CfD arrangement under EMR for CfD contracts to be awarded using a “technology/renewable sector” related series of “caps” using parameters set by government will have a significant negative impact on investment decisions to commence new projects, particularly if there is bias or discrimination against new onshore wind.

A simple value proposition is needed, that makes it clear the returns and criteria that developers will receive under the new CfD arrangement. Similarly if the CfD pot is carved into a series of technology specific caps that creates further uncertainty about whether a consented project will be able to gain CfD support in the future. The ability to bring forward onshore wind projects, that represent the lowest cost form of renewable generation, will be seriously compromised. How can an IPP secure finance with the uncertainty of a subsidy tap that turns off when required to meet Government interventions—based on new, policy, budgetary or political objectives?

The EMR does not make it clear that the focus is about developing the lowest cost forms of renewable energy first,—ie onshore wind, and this should be a key part of the EMR proposals to deliver renewables capacity in the most cost effective manner for the consumer.

The above creates a lack of clarity in respect of whether there will be sufficient CfD allowances in the future and will also impact on new investment decisions on starting what is a long and costly development process for new renewables projects.

A key issue at the present time is the difficulty of being able as an IPP to secure PPA agreements. The original unbanded ROC regime provided a “stick” for electricity suppliers to contract with IPP’s (in the form of financial penalties if suppliers were short of their ROC targets).

The introduction of ROC Banding, enabling the “Big Six” to focus on large offshore windfarm developments (with twice the subsidy level of onshore) has diluted the need for the “Big Six” to contract with more efficient onshore wind IPPs—and consequently the IPP market has become much harder in recent years. Under the CfD regime, the stick appears to be removed completely, and it is difficult to see why any supplier would contract for intermittent power from an IPP at anything close to the CfD reference price. IPP’s will simply not be able to get PPA arrangements, and therefore will not be able to invest or get finance to deliver needed energy capacity.

We would encourage a system that also permits the system operator the ability to grant CfDs from one technology pool to another if that transfer can result in a lower CfD strike price being procured.

We would encourage a system of transparency that requires the system operator to publish an annual report based on government proposals for CfD volumes that discloses the planned level of subsidy by technology, so that customers can see how much they are being asked to fund for relative technologies. There is very little liquidity in the market and therefore EMR needs to set out what transitional measures will be used to incentivise PPA liquidity and allow IPP’s to invest?

There is a perception that cost of finance is a critical aspect in determining cost and attractiveness of the investment. At current levels of cost and certainty this is not a critical issue, however the following are far more important considerations.

Availability of Funds.

Equity requirements.

Term of funding.

PPA attractiveness.

Lack of clarity on CfD price setting and a cumbersome process full of government intervention which may or may not be transparent and efficient.

Cost of turbines.

High risk of securing planning permission.

Availability and cost of grid connection.

No political drive to ease the “selective engineering” and lack of resources of the MOD to remove technical constraints on investment.

There is a lack of detail about how EMR will be rolled out in the devolved administrations.

June 2012