Energy and Climate ChangeWritten evidence submitted by Verus Energy Limited
In response to your call for evidence on Local Energy, we would like to make the following points:
1. What appetite is there among private sector organisations in the UK to invest in their own medium-scale energy projects?
1.1 In our experience private sector organisations outside of the energy industry have little appetite to invest in energy generation projects, as 1) the required and available returns on their capital exceed those available from energy projects and (2) the skill set in developing, constructing, and operating the asset is different to the core business.
2. What appetite is there among UK local authorities to invest in their own medium-scale energy projects?
2.1 In our experience local authorities have little capacity to invest in power generation or energy saving projects.
3. What are the barriers to medium-scale energy projects in the UK?
3.1 Developing medium-scale energy projects involves carefully assessing the level of expenditure appropriate to the residual risk in the project. High-cost requirements during the early high-risk phase of a project are significant barriers to projects.
3.2 DNO grid connection offers have a window of validity of between 60 and 90 days, which is too short. In order to gain comfort that the grid capacity is available and to attract external stakeholders to the project, a grid connection offer is required many months or even years before it can be accepted and the capital drawdown made available to pay for the connection. The current DNO grid connection process is not suited for the timescales to develop medium sized projects. A longer validity period of 12–24 months, available at a modest cost, would help projects to secure sufficient visibility of a grid connection offer to reach construction start.
3.3 Removal of the Renewables Obligation will leave developers of small to medium power at a significant disadvantage against the “Big Six” licensed power suppliers when negotiating Power Purchase Agreements. The lack of a multitude of credit worthy potential power purchasers means that the sale price of power from such plants is likely to be significantly discounted, with the purchaser citing transaction and balancing costs as reasons to reject prices closer to the industry standard power price. Among potential solutions to this market failure are maintenance of an obligation for renewable power, a carbon tax for non-renewable power and the creation of a more liquid power purchase market.
4. How effective are current Government policies in encouraging local and medium-sized energy projects? Could they be improved in any way?
4.1 Historically the RO scheme has been effective and has encouraged new businesses to prepare a potential fleet of local and medium-sized energy projects. However, the development has been difficult to due uncertainty in the level of support, in particular during the last banding review in 2011–2012. However, as the timescales to develop and build medium scale plants is measured in years rather than months, the lack of visibility on the transition to the EMR has widely discouraged the start of new development stage projects.
4.2 Given the long timescales involved in power plant developments, government incentive schemes should be improved by making the periods for which incentive levels are set longer in duration.
April 2013