Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Vestas Wind Systems
Vestas secured planning consent for a proposed offshore wind turbine manufacturing facility at Sheerness in Kent. On 22 June 2012 we announced that we would, however, not be taking forward the project. The comments provided in this evidence are in no way related to the decision regarding the Sheerness project.
Summary of Comments
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Introduction
1. Vestas is the world’s largest manufacturer of wind turbines. We have supplied over 50GW of wind capacity worldwide, a total of 46,000 turbines, over the last 30 years. This is almost 20% of every turbine sold across the globe. In 2011 around 60% of the onshore turbine orders announced in the UK were for Vestas machines. Vestas is a pure wind player; we manufacture wind turbines and anything else. Vestas employs around 600 people in the UK in service, R+D, sales and other functions. We have a research and development centre on the Isle of Wight at which the blades for the prototype of Vestas’ V164–7.0MW offshore dedicate turbine.
2. We would like to submit evidence to the Committee’s pre-legislative scrutiny of the Energy Bill as it will shape the future deployment of the wind sector in the UK. We have worked closely with Government and industry colleagues on the Electricity Market Reforms to date. The reforms, the proposed Contracts for Difference (CFDs) will be crucial to the future of the wind sector in the UK. This evidence will focus on the proposed CFDs as that is the part of the Bill most relevant to Vestas and the wind sector.
Objective of the Bill
3. We welcome the objective of the Bill. We welcome measures that make the UK a more attractive place for people to invest in wind and believe that the Bill attempts to do this. We have, however, serious concerns over whether the measures to be introduced by the Bill will deliver a robust and workable solution in the timeframe set out.
Contract Strike Prices
4. The indicative timeline included in Annex B suggests the Government will publish strike prices by the end of 2013. The confirmation of contract prices is a crucial step in the introduction of the CFD; it is vital that this date does not slip. Developers currently planning projects need to be able to proceed with confidence. Without visibility of the strike prices they could expect to secure, it is difficult for them to justify continued expenditure of tens of millions of pounds on development.
5. The indicative timeline suggests auctions will be introduced only once the new capacity covered by the contract cannot be delivered in time to contribute towards the 2020 targets. The draft Bill (5.2.c), however, suggests that strike prices could be set via a combination of administered and competitively set prices. The draft Bill does not, however, clarify at what date such a hybrid approach could be taken. The point at which a hybrid approach could be taken would be the effective date of auctioning contracts. The Bill should be clarified to state that a dual approach to price setting will only be introduced once the new capacity covered by the contract could not contribute to the 2020 targets.
6. If developers are not able to guarantee they will receive the administered price, because the price has been set via a combination of administered and competitive processed, then the publication of the strike in late 2013 would not give the required confidence to investors. If prices could be set via a combination of administered and competitively set processes, the point at which developers have certainty over prices be delayed until the competitive process has concluded, presumably at the end of the first allocation round.
Potential for Development Hiatus
7. We are already seeing a delay to the market for offshore wind in the UK, largely as a result of the uncertainty surrounding the market reforms. The point of hiatus does not occur at the point of financial close, but well ahead of that point. Developers need to be able to demonstrate financial viability throughout a project’s development, not just at the point of financial close. They therefore need visibility of the support scheme throughout a project’s development.
8. There are a number of factors which risk exacerbating the already emerging development hiatus, including:
Further slippage of the legislative timeline.
Delay to the establishment of robust solutions to the unresolved issues.
Increased complexity in the arrangements leading to financiers needing more time to fully understand the risks within the market.
The potential for strike prices to be set via a combination of administered and competitive means, delaying the date at which final strike prices will be confirmed.
9. The deployment rate of offshore wind is already required to rapidly increase in the years leading up to 2020. An investment hiatus now, caused by the uncertainty surrounding EMR could delay the ramp up in deployment. This could seriously threaten the achievement of the UK’s 2020 renewable energy targets.
10. Whilst we recognise the attempt to avoid a hiatus through the introduction of investment instruments they appear unlikely to offer considerable additional comfort. If they will not be available until the Bill is enacted, then they offer little comfort in the intervening period.
Extend 2017 Deadline to Renewables Obligation
11. We consider that the 2017 deadline for entry into the Renewables Obligation must be extended. Every wind project under development must have a viable option for support. Many offshore wind projects reaching financial close around mid 2013 will not be built in time to become accredited under the Renewables Obligation. They will be too early for a CFD or an investment instrument. This support gap must be bridged. Coming at a time when the supply chain is beginning to gather momentum it is important that companies looking to make a move into the renewables sector are not put off by such an immediate and obvious difficulty.
Allocation of Contracts
12. The system for allocating contracts will be vital to the successful deployment of projects. Annex B states that “the allocation is designed to give developers certainty about their ability to obtain CFDs”. It is difficult to see how the proposed allocation process gives developers certainty sufficiently far ahead of actually signing the CFD.
13. The allocation process needs to be clear about what will happen to projects that are not awarded a contract in any particular allocation round. The potential for such projects to be left in limbo, ready to be built buy without any form of support is a considerable risk.
14. There is a risk that the six monthly contract allocation process could create a stop/start deployment profile. This could create short term supply chain bottlenecks which could increase costs.
Significant Details still to be Resolved
15. There are still some fundamental issues to be resolved, such as which body bears the ultimate financial liability for the scheme, the financial status of the contracts, and the legal enforceability of the contracts. Until these details are resolved it is difficult for investors to have sufficient confidence that the mechanism will work to make finance available.
16. It is important that the legislation is introduced quickly but this should not undermine the quality of the legislation. The need to get the primary legislation passed should not mean that significant details are left to be established in the secondary legislation. It is important for investors to have clear visibility of considerable detail from the primary legislation. They need such visibility ahead of when secondary legislation could be passed.
17. It remains unclear whether the CFDs will be considered financial derivatives or not. We understand there is on-going debate within Government on this issue. If contracts are financial derivatives, it could have a considerable impact on suppliers. It would also fail to address the issue of suppliers not having sufficient balance sheets to support such a significant amount of liability.
Levy Control Framework
18. It remains unclear whether the “cost” of the CFD would be the amount paid out or the full strike price of the contract. If it is the amount paid out this makes the cost potentially very volatile if electricity prices become volatile. However, if the cost is considered to be the full strike price then this would clearly over-value the cost as not all of the strike price would be a cost to the consumer. It would also not take account of the potential for the strike price to be below the wholesale power price.
19. The separate spending envelopes for nuclear, CCS and renewables create the risk that money that could be used to finance renewables projects is tied up in the nuclear and CCS envelopes on projects that might not ever be delivered.
20. Vestas considers that the spending envelopes should be based on a capacity basis rather than a production of percentage of demand basis. A capacity basis, assuming reasonable capacity factors, would be transparent, reduce volume risk and would give greatest certainty to the supply chain.
Independents’ Position in the Market
21. The position of independent generators needs to be properly considered in the reforms. The market is not, at present, sufficiently liquid for independent developers to secure finance without a PPA with a utility. We welcome DECC’s intention to gather evidence.
22. Most of the new forms of finance the Government is hoping to attract to the market by the reforms will effectively be operating as independents within the market. If independents do not have a viable position in the market new sources of financing will not be attracted into the UK.
Development Plans
23. The Government has not decided whether to base development plans on capacity, percentage of demand or TWh. We firmly believe that development plans should be based on capacity. This removes unnecessary risk over the outturn electricity demand and load factor of the UK’s generating portfolio. A MW basis is simple and transparent and would give greater certainty to the supply chain.
Development of the Reforms
24. Vestas has serious concerns over the Government’s handling of the introduction of the reforms. It appears that the complexity of the reforms was not fully appreciated when initially proposed. The subsequent difficulties experienced in establishing the details of the scheme and the interactions with other Government departmental requirements undermined the industry’s confidence in the Government’s ability to achieve its objective.
25. There appears to be a lack of oversight of the EMR process within DECC. The lack of an objective, strategic and joined up approach risks undermining industry’s confidence in the ability of the Government to deliver the reforms.
June 2012