Energy and Climate ChangeWritten evidence submitted by Good Energy
Introduction
Good Energy is the UK’s only dedicated 100% renewable electricity supplier. Built around a unique energy supply model using power generated from around 500 small and medium sized renewable generators, we have over 86,000 electricity, gas and Feed-in Tariff customers.
As one of the UK’s most innovative energy companies, Good Energy has long championed the transition towards a decarbonised energy sector as an opportunity to create more open, transparent and accessible energy market.
As well as being a renewable electricity supplier, Good Energy plans to develop 110MW of new renewables capacity by 2016. We also own Delabole Wind Farm, the UK’s first commercial wind farm and the first in the country to offer a discounted local electricity tariff linked to the farm.
Juliet Davenport OBE, founder and CEO of Good Energy, recently sat on the Ministerial Distributed Energy Contact Group, Chaired by Greg Barker MP.
Summary
Good Energy believes that local energy projects can make a significant contribution to achieve the UK’s energy policy aims.
A variety of different ownership models for local energy projects have emerged but with a common theme that they are independently owned. This brings a number of notable and significant market-wide benefits.
Medium-scale local projects often use fixed-price Power Purchase Agreements to sell their electricity to the market. The proposed Feed-in Tariff Contract for Difference will disrupt this relationship and should be replaced with a simple FIT for projects up to 50MW in capacity.
There has been a notably lack of emphasis in involving community interests in the development of projects to date.
Current market arrangements are challenging for small and medium-scale projects but if reformed have the potential to improve their ability to sell electricity, reducing the need for Government support.
The contribution of medium-sized energy projects (5–50MW) to the UK’s climate change, energy security and energy affordability objectives
1. The contribution that renewable energy projects of this size could be significant, particularly since the opportunities for the development of onshore renewable sites larger than 50MW in capacity are increasingly limited due to a lack of suitable sites.
2. As an overall comment it is worth noting that in those European countries with higher levels of renewables deployment there is a tendency towards the decentralisation of generation in order to maximise renewable energy resources, both in terms of size and of technology appropriate for a given location.
3. The contribution of medium-sized projects can make to the UK’s objectives can be broken down into the following areas:
(i)
(ii)
Independently owned medium scale projects are already making a contribution to retail market competition. Unlike larger energy suppliers, smaller, newer retailers often struggle to grow both as a result of an inability to access the quantities of power suitable for their small customer bases due to low levels of liquidity, and because of significant cash-collateral requirements necessary to trade in the market place. Good Energy’s experience is that small and medium scale projects offer a long-term, permanent solution to this problem.
(iii)
4. Whilst there is Ministerial interest in this contribution, DECC our assessment is that currently lacks the intention or resources to investigate it properly, with a preference to focussing on large-scale, centralised plant instead.
Different models of ownership for medium-sized energy projects in the UK, and the appetite of private organisations and local authorities to invest in their own medium-scale energy projects
5. Good Energy strongly agrees with the Committee’s assessment that “New technologies….have opened up new opportunities for different forms of ownership…This has the potential to tap into new sources of investment.”
6. As deployment of small and medium sized projects has increased in recent years, a number of different ownership models have emerged. There has been a significant increase in the number of private individuals, landowners, businesses, community groups, social housing and professional developers developing and owning medium-sized projects. The common theme is their independent ownership.
7. Since the current FIT was introduced in 2010, the amount power Good Energy buys through new Power Purchase Agreements (PPAs) with these generators each year has more than doubled. In 2010, Good Energy provided Feed-in Tariff administrative support services to around 2,000 small and medium sized generators. At the end of 2012, it provided these services to over 46,000 of those generators. Those generators come from the full range of backgrounds, as described above.
8. The Renewables Obligation has and does continue to play an important role for projects up the capacity scale. The Renewables Obligation Certificate (ROC) acts as an asset that helps create a route to market for these projects, in guaranteeing an income stream that supplements the power price agreed through a PPA or metered export.
9. In the agricultural sector, medium-scale projects have become an increasingly popular means of providing additional income for farms seeking to diversify away from food production. The size and scale of these projects tends to be determined by the energy and land resources that are available, combined with the cost of connection to the grid, meaning that there is clear potential for projects to be developed right up the capacity scale. In many cases farming of arable crops or livestock can continue on land used that is for projects, allowing the farmer to gain an additional usage from their existing assets.
10. The social housing sector has also seen a significant increase in generation projects, not just at small-scale level but at a medium, utility scale level too. Warwick Council’s installation of 5MW of solar panels on social housing properties is notable in this respect. These projects not only help reduce the cost of electricity bills for tenants who are more likely to be affected by fuel poverty, but also provide additional revenue that can be reinvested in energy efficiency measures in housing association properties.
11. All of these developments bring a number of important benefits for the wider energy market. First, in terms of attracting new sources of investment, but also, second, in terms of its contribution to an improvement wholesale liquidity in a market that is notorious in its reputation for opacity and illiquidity, That has helped deliver retail market competition, as well as improving transparency in relation to project finance, reducing the cost of any investment that later follows.
12. These new entrants have been attracted to the market by the ease of deploying renewable technology, especially when compared to existing energy technologies, combined with the simplicity of mechanisms like the existing Feed-in Tariff and the structure of the Renewables Obligation which, through ROCs provides a tradable asset that gives an incentive for suppliers to purchase power from sites whilst providing certainty of revenue for the project owner.
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?
13. Based on our experience, the smaller a project is, then the higher the likelihood that the owner will be a new market entrant or an individual or business for which the generation of electricity is a non-core activity. This, in turn, informs the financing arrangements for those projects.
14. Finance for smaller scale projects still tends to be on a conventional personal or commercial loan basis, with a limited number of specific financial products available from those lenders that have sought to specialise in financing them.
15. Projects developed by commercial organisations can also be financed through the leveraging of existing assets. The agriculture sector is perhaps the best example of this, where a combination of assets and the space to deploy technologies means that there has been a substantial amount of interest in developing projects.
16. PPAs between a generator and a supplier are key to the financing of medium-scale projects. They become increasingly important as the capacity of a project increases, and so the risks associated with it. Good Energy typically puts in place a PPA for projects over 130KW in capacity.
17. A PPA provides comfort to financiers that project revenues are reasonably secure and that the risks associated with them will be managed correctly. They allow project developers to transfer those risks away to other organisations who are more able to manage those risks. In the case of renewable generation projects these risks include, the imbalance of when electricity is generated vs. when the grid requires it, wind or solar forecasting risk, and availability of biomass fuel.
18. For medium-scale projects in particular, the PPA market allows projects to fix the price they receive for the power they generate for a given period, often at a seasonal “peak” and “off-peak” rate. This is important for the generator for whom generating and selling renewable electricity is an ancillary activity to their day to day business [see Paragraph 6 above], as it allows them to generate revenue from a project in the most straightforward and simple fashion possible. Larger projects tend to access the market via a PPA where the price varies, as they tend to be developed by those with the expertise to manage the market risk that entails.
19. However for the medium-sized generator, the ability to fix the price of electricity generated for both the generator and the electricity supplier through a contract agreement helps ensure that an equitable route to market exists for the generator in the first place. This is because the supplier gains the advantage of being able to fix their wholesale power costs, leaving them to focus on when a project will generate electricity based on weather forecasting. This becomes all the more important as a supplier manages power generated from a wider range of different sites, sited at a number of disparate locations using a diverse range of renewable technologies.
20. Under the proposed Electricity Market Reforms, however, the supplier will lose the ability to do so via a fixed-price PPA. This is because the structure of the planned Feed-in Tariff Contract for Difference (FIT CFD) will mean that generators will need to use a PPA that tracks the same market index that the Government uses to calculate how much the “top-up” payment will need to be to reach the desired Strike Price (the combination of the PPA price and the top-up payment) that is necessary for a project to be financially viable. At present, the Government proposes that a day ahead index be used, meaning that the PPA price will have to vary on that basis.
21. Therefore whilst the generator will still be able to fix the price they require to develop a project through the FIT CFD, the supplier loses the advantage of being able to buy power at a fixed rate via the PPA. As a result they will pay the generator less for their electricity, because of the additional risk that they will have to manage. Whilst the generator will still receive certainty of income, they will fail to capture the full amount of revenue intended by the FIT CFD.
22. In short, medium-scale projects, which are currently able to use fixed PPAs to strike a balanced agreement with electricity suppliers to achieve a good price for their electricity, are likely to be particularly affected by the proposed FIT CFD regime. This is because they are likely to fail to capture the full amount of revenue that the FIT CFD is mean to provide for, undermining efforts to make a project viable for investment.
23. Good Energy believes that EMR should introduce a simple FIT (ie either Fixed or Premium) scheme targeted at projects between 5MW and 50MW to resolve this problem. Should the FIT CFD go ahead for projects at this scale, then the Green Power Auction Mechanism is a preferable alternative to a FIT CFD with a day-ahead reference price.
Community ownership of medium-scale energy projects
24. Good Energy believes that a wider failure at a national level to fully incorporate community interests into the development of new projects is one of the main reasons why developers often face significant local opposition when proposing new projects. We believe that there is significant appetite for greater community ownership of medium-scale energy projects in the UK, whether it is as a wholly owned community entity or in partnership with a commercial developer.
25. In December 2010, Good Energy launched its Development Charter, based around a commitment to the following five principles:
To engaging fully and openly with those communities closest to any proposed site and, where possible, considering alternative suggestions for the size, layout and presentation of that site.
To offer a discounted, local electricity tariff to those households closest to any onshore wind farm we develop that is over 4MW in capacity. The local tariff will be 20% cheaper than Good Energy’s standard tariff. If the site performs well, an additional discount may be offered to reflect that.
To ensuring that any site we develop acts as a vehicle for community investment, whether it be through independently administered community investment funds, direct investment from Good Energy or a combination of both.
To exploring opportunities to deliver community ownership of the sites we develop so that the greatest possible number of people are able to benefit from that development.
Around all of our projects we will look to develop exciting bio-diversity action plans to create, enhance an improve habitats, restoring ecosystems and allowing wildlife to thrive for years to come.
26. Greater community ownership of medium-scale energy projects can deliver a number of market-wide benefits. Aside from securing additional new sources of investment, greater independent ownership of sites can help improve market liquidity and so competition.
27. In the UK, policy currently treats communities as an affected stakeholder rather than being central to the delivery of renewable energy projects. This is in part symptomatic of its concentration on encouraging investment on large-scale, centralised projects as a matter of priority. Community energy projects all too often seem to be treated as a “nice to have” extra element of energy policy, rather than an integral part of delivering renewable infrastructure.
28. Nevertheless, there has been a notable increase in the number of community owned projects in the UK since the introduction of the Feed-in Tariff in 2010. These projects have developed right up to utility-scale developments, such as the 5MW Westmill Community Solar Farm, near Swindon. The simple and straightforward nature of the Feed-in Tariff scheme has been key to this development, along with the ability for these projects to achieve good market price for the electricity they produce through the fixed PPA market.
29. Existing legal structures could arguably limit the growth of larger-scale community owned projects. Wholly owned community projects tend to follow a Co-operative or Community Interest Company approach, which naturally restricts access to the debt finance necessary to develop sites. At Westmill Community Solar Farm, the project was initially privately funded and then refinanced through a community share offer.
30. As part of its Development Charter, Good Energy has pledged to explore options for community ownership of the sites it develops, where possible. We believe that more can and should be done to explore how commercial projects can create new opportunities for communities to invest and own a proportion of developments.
Current and future market arrangements for medium-scale energy projects in the UK
31. As the scale of a project increases, then so does its exposure to the energy market place and the risks that entails. Those risks clearly need managing and from a project financing point of view, the financier needs to have confidence that they can manage that relationship to achieve expected revenue. See Paragraph 17 regarding the role of PPAs.
32. The current UK market conditions can make managing these risks difficult. A lack of wholesale market transparency and the predominance of six large energy suppliers owning their own plant, therefore having little interest in buying their power, creates a perception of a hostile environment for new entrants. This is in part the consequence of retaining a market based around centralised, fossil fuelled plant.
33. Medium sized generations can struggle to achieve a good price for the power they produce as they have to compete with large-scale fossil-fuelled plant, which can generate power in larger quantities at defined times of the day. Therefore there is little incentive for larger suppliers to purchase electricity from them. For smaller suppliers, however, the UK’s growing medium-scale generation community has provided a significant contribution to improving market liquidity in a permanent fashion.
34. The absence of accommodating market arrangements increases the importance of supplementary revenue from schemes like the FIT and the Renewables Obligation in order to ensure that projects at this scale are built in order to decarbonise the energy market. However, conversely addressing the wider market arrangements has the potential to reduce this reliance and so the cost of those schemes.
35. Electricity Market Reform is, in our assessment, likely to make existing market conditions more difficult for medium-scale generators. As described in Paragraph 21, the FIT CFD is likely to introduce new power price discounts for medium-scale generators. At the same time, it will remove the ROC as a tradable asset that as well as providing project revenue provides a route to market for medium-sized generators owning to the Obligation it places on large suppliers to buy their power.
36. We believe that a simple FIT should replace the FIT CFD for projects up to 50MW in scale for these reasons. As well as providing certainty of income, at allows a more balanced approach in terms of PPA arrangements, where by both the generator and the supplier can fix the price of the power generated, reducing the need for an additional discount. Should the FIT CFD go ahead for projects at this scale, then the Green Power Auction Mechanism is a preferable alternative to a FIT CFD with a day-ahead reference price.
37. Current Government policies to small and medium-scale generation have been successful, though arguably they need to do more in order to create a truly decentralised marketplace. In Good Energy’s opinion, EMR could present a retrograde step in this respect, as outlined above.
38. On a wider scale, Government policy is currently lacking any focus on the needs of medium-scale projects. There has been no assessment of their role in the reformed market place, and there has been an almost myopic concentration on the needs of large-scale transmission connected plant.
39. At the same time, policy fails to adequately address what role smaller projects supported by the existing FIT scheme will play in a reformed market place.
Conclusion
40. Good Energy believes that local energy projects can make a significant contribution to achieve the UK’s energy policy aims, mirroring the experience of other European countries at a more advance stage of renewables deployment.
41. Following the introduction of the current Feed-in Tariff and the establishment of the Renewables Obligation, a variety of different ownership models for local energy projects have emerged but with a common theme that they are independently owned. This brings a number of notable and significant market-wide benefits.
42. Medium-scale local projects often use fixed-price Power Purchase Agreements to sell their electricity to the market. These Agreements provide an equitable arrangement for both the generator and the electricity supplier. However the proposed Feed-in Tariff Contract for Difference will disrupt this relationship, with the most likely impact being a reduction in the price paid for the power generated from projects at this scale.
43. There has been a notably lack of emphasis in involving community interests in the development of projects to date. Capitalising on popular interest to ensure that communities are better involved in projects will become increasingly important as renewables deployment and the use of distributed energy increases.
44. Current market arrangements are challenging for small and medium-scale projects but if reformed have the potential to improve their ability to sell electricity, reducing the need for Government support.
45. Good Energy believes that EMR should introduce a simple FIT (ie either Fixed or Premium) scheme targeted at projects between 5MW and 50MW. Should the FIT CFD go ahead for projects at this scale, then the Green Power Auction Mechanism is a preferable alternative to a FIT CFD with a day-ahead reference price.
April 2013