Energy and Climate ChangeWritten evidence submitted by REG Windpower
1. Introduction
1.1 REG Windpower is delighted that the Energy and Climate Change Select Committee have chosen to undertake an inquiry into local energy. Whilst REG Windpower welcomes the Government’s stated desire to increase the amount of energy generated from renewable sources, we are concerned that its commitment to certain technologies, including onshore wind, is currently seen as uncertain by investors. This is making it difficult to fund small and medium-sized renewable projects and create the green jobs necessary for the country’s low carbon future. In particular, there continues to be a lack of clarity around future support for wind power through the Renewables Obligation as well as in regard to the Electricity Market Reform proposals which is currently being taken forward in the Energy Bill, further hindering investment by wind farm developers and preventing the growth of this vital sector.
1.2 With the low carbon goods and services sector employing 939,600 people in 2010–11, and the green economy estimated to be worth £122 billion, around 9.3% of the overall economy last year, the need for a stable regulatory and policy environment for investors in the renewables sector is vital for the UK’s economic recovery. REG Windpower and others in the onshore wind sector would like to see the Government set out a firm commitment to support the growth of the sector to help create the green jobs needed for the economic recovery.
1.3 Our submission makes the following policy suggestions that we would like to see the Energy and Climate Change Select Committee consider as it undertakes this inquiry. Our recommendations include:
To maintain market certainty and investor confidence, there should be no reduction in the 0.9 ROC tariffs set out for onshore wind in the Renewables Obligation Banding Review earlier this year. Any further reduction would make it extremely difficult to developers to raise finance for projects.
There should be a commitment to maintain the Renewables Obligation concurrently within the EMR until the Contract for a Difference (CfD) Feed-in-Tariffs have demonstrated that they can act as a suitable replacement.
The Government’s Energy Bill should confirm that the 15 year rate of return on CfDs should be extended to at least 20 years to bring the incentive in line with other EU mechanisms and provide the longer-term rate of return that is needed to attract investment in renewable projects.
Differentiate the cost of capital assumed for onshore wind investment between those investors willing to take development and construction risk, and those investors who will only invest in operating projects.
2. Background to Onshore Wind
2.1 Onshore wind is the UK’s most proven and cost-effective form of renewable energy generation. Government data has shown that the central levelised cost estimates for onshore wind was one of the lowest, at £90MWh for onshore wind 5MW projects starting in 2011 in comparison to £123MWh for similar offshore wind projects, and the additional cost to the consumer from onshore wind in 2010–11 was only £4.68 on the average bill—approximately 9p per week. Onshore wind has the potential not only to deliver the Government’s objectives for a diverse mix and sustainable energy supply, but is helping to create jobs and deliver manufacturing innovation and technological skills training in a highly specialist part of the economy.
3. Is there any evidence that medium-scale energy projects are more likely to be accepted by local communities?
3.1 REG would argue that our size helps us build positive relationships with local communities and get them on board for our projects. Unlike, some of the larger organisations we feel close to the local communities and we view community engagement as a core part of any of new development project and are committed to public consultation in acknowledgement of the fact that there can be strong feelings amongst local people about where new developments are located. REG believes it is important to emphasise that there is an extremely rigorous site selection process in place to ensure that wind farms are only placed in the right location and that they respect the local environment, and it is proud of its record in creating jobs and delivering investment in wind farm construction, operation and maintenance, and through the supply chain, to the local economy.
3.2 REG offers an industry-leading £4,000 or more per MW of installed capacity community benefit package for all its projects; some four times greater than the £1,000 per MW advised in the industry protocol for projects in England of greater than 5MW. REG works with the local community to identify the priority projects and initiatives in the area that could most benefit from the fund and this often involves “front-loading” of the community fund payments to bring greater benefits.
3.3 REG believes that local people are best placed to decide who benefits from its community funding packages. This is why we establish community liaison groups in all or our development sites, to enable us to work closely with the local community and identify the priority projects and initiatives in the area that can be supported through our funds. As such, our funds have supported a wide range of projects depending on local need, from improvements to local assets to an increasing focus on providing lasting social benefits through addressing routes into employment for young people in deprived areas.
4. What are the barriers to medium-scale energy projects in the UK?
4.1 Despite the success of the Renewables Obligation in promoting an expansion of wind technology over the past few years, we would like to raise concerns that the policy environment has in the last six months become highly uncertain for investors. All investments rely on a “no surprise” regulatory regime. However, recent statements by ministers that the Government is not minded to support any further expansion of wind farms, and speculation that the Treasury was pushing for a reduction in support through the RO despite a robust, evidence based approach having been taken through the Banding Review, have severely damaged confidence in the sector. We were pleased to see the Government’s final response to the Renewables Obligation Banding Review confirm the level of ROCs for onshore wind at 0.9 ROCs/MWh as initially proposed by the Department for Energy and Climate Change (DECC) based on reputable economic analysis. However, we are concerned that this level of support has only been guaranteed until 2014 with a further consultation this year on whether support levels should be reduced further.
4.2 Across the industry we are aware that this is discouraging investors from putting up the capital needed to get projects off the ground and means that finance has become more expensive or difficult to obtain, with the result that some schemes have now stalled or are on hold. This is particularly short-sighted at a time when the Government is trying to encourage alternative sources of funding, such as pension investments, into the renewables sector. As the CBI report, The Colour of Growth: Maximising the Potential of Green Business, found uncertainty over the level of subsidy for wind projects has been critical to undermining investor confidence as to the long-term feasibility of onshore wind projects.
4.3 The cost of onshore wind for developers is often underestimated and based on our experiences of operating and maintenance costs for onshore wind developments we see absolutely no justification for any proposal to reduce the level of support for wind power to below 0.9 ROCs. Indeed, a reduction to 0.85 or 0.75 ROCs would be disastrous for the industry as it would mean the difference between the long term viability of many schemes, and the ability of developers to raise sufficient capital finance to get projects off the ground. We would urge the Committee to recommend that the Government urgently confirm future levels of RO support for the industry, and set out its commitment to support the expansion of wind power generation.
4.4 We would also like to highlight concerns about the lack of certainty around the details of the Electricity Market Reform (EMR) Contract-for-a-Difference (CfD) Feed-in-Tariff, which will replace the RO for new renewables schemes from 2017, as well as emphasise the need for a smooth transition process to ensure investors are not discouraged by the uncertainty surrounding the move to the new mechanism. Whilst REG welcomes proposals for an overlap period between mid-2014, when the new CfD scheme first becomes available, and the end of the RO in March 2017, there is a significant risk of a “cliff-edge” point in 2015 where the CfD will not yet be proven but it will be too late to choose between the mechanisms in time for the 2017 switchover.
CfD Feed-in-Tariffs Uncertainty
4.6 The onshore wind sector is particularly concerned about the continued lack of clarity about how the new CfD FiT mechanisms will work in practice which is again hindering investment and the growth of the industry. The EMR White Paper contained little information about classification, timescales, counterparties for the scheme, and how it is to be rolled out, and the Government’s Energy Bill fails to provide much further clarification on these issues.
4.7 Of particular importance is how tariff levels will be set and allocated. While the Energy bill notes that National Grid Electricity Transmission Plc will allocate CfDs in line with agreed objectives, it also states that competitive price setting for CfDs could be adopted in the longer term once “market conditions allow”. This lack of clarity around whether and when competitive price setting will be used contributes to the already uncertain investment climate. It also appears that during the transitional period to 2017, there will effectively be competition for CfDs given the proposal for limiting the number of CfDs issued under the cost controls outlined in the Bill—an auction or tender process to set tariff levels would act as a huge barrier to investment, increasing price volatility. This would also place independent developers at a significant disadvantage compared to the major utility companies.
4.8 The CfD proposals are also unappealing to investors due to the short 15 year rate of return, compared to the 20–25 years offered in other countries, meaning that projects beyond 2017 are currently unattractive prospects compared to those in other sectors which offer a similar rate of return. Longer term tariffs would permit lower cost of capital investment in projects, due to the added certainty this would bring, thus allowing projects to be owned and operated by investors at the lowest cost to consumers. For example, in Canada, tariffs for onshore wind are awarded for periods of 25 years, which allows public and private sector pension funds to play a major role in funding these projects.
4.9 During scrutiny of the Energy Bill, REG would like to see the Government announce that the new CfDs will be set independently on a long term basis with absolute certainty that projects ready to build will be eligible for the CfD. The Government should extend the 15 year rate of return on CfDs to at least 20years to bring the incentive in line with other EU mechanisms and provide the longer-term rate of return that is needed to attract investment in renewable projects.
Planning
4.10 Finally, the difficulties set out above are further exacerbated by problems developers have in obtaining consent for onshore wind farms, with many local authorities often throwing out applications for reasons which prove undefendable at appeal, and which are then over-ruled by the inspectorate. This not only delays projects from coming on stream and adds to the start-up costs, but ultimately costs the taxpayer more owing to the large number of planning cases overturned at appeal, with the considerable legal costs this entails.
4.11 We welcome the announcement from the Department for Communities and Local Government that it will shortly undertake a wholesale review of planning guidance and would like to see the Government take greater measures to increase transparency and accountability in the planning sector. As part of this review, we would like to see planning appeals being made more available for public disclosure, with a requirement that information about the costs incurred by local councils as a result of any planning appeal be published alongside the Planning Officer’s report, to enable local residents to see the costs of planning appeals to the tax payer and encourage greater accountability at local authority level.
5. How effective are current Government policies in encouraging local and medium-sized energy projects? Could they be improved in any way?
5.1 We believe that the Government’s current energy policy is not supporting local and medium-sized energy projects and not fulfilling the great potential in this area. In our sector the policy uncertainty deterring investors and hindering the UK’s ability to realise the full potential of wind power which can deliver up to a third of all renewables generation by 2020, as well as the investment in innovation and skills necessary to create the jobs that will be essential in a high-tech and value added green economy.
5.2 We believe the Government needs to allay this uncertainty by stating its commitment to the growth of the sector as part of its wider strategy to deliver economic recovery. In particular, we would like to see the Government confirm the level of ROCs for onshore wind beyond 2014 and set out more detailed plans to provide stability to investors during the transition between the phasing out of the RO and the introduction of new CfD FiTs. At a time when the UK is in recession, schemes which have been shown to promote investment in wind farms and other renewables must be maintained and clear signals given that the Government will support wind power over the long-term to reassure developers that their investments will not undermined by unexpected changes in the policy environment. Given the long time frames involved in wind farm development, the Government also needs to introduce measures to support longer term investments over a 20–25 year period through the CfD FiT mechanism, to ensure wind power can continue to contribute towards the decarbonisation of the electricity market and create the green jobs necessary for the growth of the low carbon economy.
6. What types of financing model are most suitable for small and medium-scale projects? Do these differ from the financing models used for larger-scale projects?
6.1 At present the ability for independent onshore wind developers to raise bank finance is severely constrained, with fewer than five banks’ lending to projects <20MW in size, making financing for new projects both more difficult and more expensive. In addition, the absence of any real competition in the power purchase market has resulted in generators being forced to accept large discounts (typically around 15%) to market prices in order to secure bankable offtake agreements. This means the non-utility wind sector has, in effect, already been receiving 0.9 ROCs/MWh for a number of years.
6.2 The cost of onshore wind is often underestimated, which we believe is largely due to a tendency for policymakers to focus only on the cost of building and operating consented wind farms, rather than recognising the significant at-risk expenditure incurred in developing projects from greenfield sites through planning. Whilst turbine prices in Euro terms did reduce slightly following the global recession and credit crunch in 2009, and have remained largely unchanged since then based on actual prices paid, conversely, the cost of other capital items (BOP, grid etc) have increased, resulting in overall Sterling project costs which are largely unchanged in the past five years.
6.3 Our experience of operating and maintenance costs shows that costs increased by some 20–30% (in real terms) over the past five years, owing largely to increased land rents, business rates and community funding costs.
6.4 REG would therefore like to see the cost of capital assumed for onshore wind investment take account of development and construction risk, as well as the operational risks.
7. About REG Windpower Ltd
7.1 REG Windpower is a subsidiary of the £60m AIM-listed renewable energy company Renewable Energy Generation. The company has around 30 staff based in Bath, Guildford and Truro and has more than doubled in size over the past two years. The REG team now contains the necessary expertise to develop, build and operate our growing portfolio of sites, which includes 57.5MW of operational capacity, with approximately 900MW in development.
7.2 Through its experience in developing, financing, building and operating wind farms over the past seven years, it has established an in depth knowledge of the true cost of onshore wind across the full project lifecycle, including decommissioning. Our wind farms generate clean, safe, renewable electricity which is used to supply nearby towns and villages through the local distribution network. We use a rigorous site selection process is designed to create the right scheme in the right location—generating much-needed renewable electricity while respecting the local environment that hosts our projects. We are committed to public consultation and always aim to meet local residents to seek their feedback before we submit our proposals.
April 2013