Memorandum by Lawrence Graham LLP
INTRODUCTION
LG is a leading London-based law firm with a
recognised and expanding renewable energy group, combining the
firm's recognised strengths in capital raising, corporate advice,
real estate development, planning, entrepreneurial growth services
and environmental law. Our clients include corporates, promoters,
investors, entrepreneurs, government agencies, developers and
contractors, covering a wide spectrum of renewable technologies
including wind, wave & tidal, biomass, energy from waste,
biofuels, carbon trading and recycling. As a result we have a
good understanding of the issues which companies and investors
see as the key barriers to increased investment and productivity
in the renewable energy and low-carbon sectors.
BARRIERS TO
GREATER USE
OF RENEWABLE
ENERGY
If the government is committed to reaching its
target of 15% of electricity from renewable sources by 2020 (as
mentioned in the following section this will actually need to
be significantly higher than this to satisfy the energy gap that
will have developed by 2020) and 60% by 2050 then barriers to
the funding, construction and connectivity of renewable energy
projects need to be addressed as a matter of urgency. In our experience
the presence ad extent of these barriers means that many renewable
energy companies and investors believe that that UK is significantly
less attractive than many other jurisdictions for the development
of such projects.
LG attended the two day All-Energy conference
in Aberdeen in May, and we noted that many speakers felt that
if the current "business-as-usual" approach continues
then is unlikely that electivity from renewable energy sources
will be more than 10% of all energy produced by 2020.
ENERGY MIX
As you will be aware, all but one of the UK's
nuclear power stations will have been decommissioned by 2020.
In addition a number of large fossil fuel plants will also have
to close or significantly reduce capacity by 2015 to meet restrictions
under the Large Combustion Plants Directive (2001/80/EC).
The earliest that new nuclear power stations
could come online is expected to be from 2020 as it takes around
a decade to build a nuclear plant. Demand for electricity is set
to continue to rise, however even without an increase in forecasted
demand for electricity there will be a significant energy gap
by 2020. Many commentators believe that renewable energy can play
a crucial role in meeting this demand. We understand that if increased
use of renewable energy alone was used to satisfy the energy deficit
then by 2020 the electricity from renewable energy sources would
need to account for over 40% of all electricity generation.
Due to issues such as planning and connectivity
(as discussed below) it often currently takes many years for a
renewable energy facility to start producing renewable energy.
As a result of these delays, if the government is committed to
the targets it has announced then it is imperative that the current
barriers and hurdles to development are reduced and/or simplified
as soon as practicable.
PLANNING
The planning process can take an unacceptably
lengthy time for companies investing in renewable energy projects,
and the outcome is often viewed as highly uncertain. For example,
Shell has recently declared its wish to dispose of its 30% stake
in the London Array scheme, which would amount to the largest
offshore wind farm in the world. Condemned by politicians and
environmentalists for being greedy and irresponsible, Shell said
that costs at the London Array had soared by 45%. since work commenced.
At a renewable energy conference which members of our firm attended
in Aberdeen last month, Dermot Grimson (Head of UK Government
Relations at Shell International) confirmed that Shell's decision
was based on many factors including lengthy delays in the project,
spiralling production costs and that, in a global market, Shell
could invest the capital committed to the London Array project
in other projects in different jurisdictions which would see a
quicker return on investment.
Planning is a key constraint, both in terms
of time and complexity. For example, in 2007 the target time period
for consenting for onshore wind farms was three months. However
the average timeframe was 10 months in England, 27 months in Wales
and 14 months in Scotland. Currently only 5% of wind farm projects
are being consented in the 16 week target period. For major, or
highly controversial projects, the timescale can be significantly
longer, which compares unfavourably with other countries.
In our view there are strong grounds for making
renewable energy projects a "special case" and to fast
track them through the planning system (in a similar way to mobile
telephony in the past) and for reviewing potentially obstructive
case law which is proving unhelpful in the commercial uptake of
renewable energy.
Special case for renewable energy
Our view, based on discussions with companies
across the renewable energy sector, is that the government could
address current unease over planning in the UK in two ways:
(a) first, by lowering the threshold at which
strategically important projects (such as in the renewable sector)
can be considered by the new Infrastructure Planning Commission
(the IPC) and so be fast-tracked. The 50 MWh (100MWh offshore)
threshold for a renewable energy project equates, for example,
to a large wind farm and many organisations such as the British
Wind Energy Association had lobbied for the threshold to be set
at lower levels for renewable projects; and
(b) secondly by making the renewable energy sectors
a "special case" to promote faster growth, a precedent
which was set in the UK with a similar approach for mobile telephony.
This could be achieved by extending permitted development rights
and/or specific planning policy statements.
By making renewables a "special case",
the government might perhaps also re-consider another common issue
faced, namely of objections to proposed projects on the assumption
that wind farms interfere with MoD radar systems. For example,
E.On recently submitted plans to build one of the largest ever
wind farms in the country, but the project will need to overcome
objections form the Ministry of Defence, which fears that the
83 turbines to be situated five miles off the coast of East Yorkshire
will interfere with radar defences. E.On had hoped to begin building
the £700 million wind farm in 2010 with production of up
to 300MW electricity in 2012.
Review of the Merton Rule
The so-called "Merton Rule" which
requires that use of renewable energy on site to reduce carbon
dioxide emissions is now being widely invoked by local authorities
when planning permission is sought on commercial developments
in urban centres. The effect of the rule is to oblige retailers
and other large businesses to generate 10%. or more of their energy
requirements for a particular development through renewable energy
generated ON SITE.
In our experience, whilst most businesses are
in theory very happy to use a higher proportion of electricity
generated from renewable energy, the practical difficulties of
generating this on site are considerable. It would make more sense,
in our view, to free businesses from the obligation of generating
renewable energy on site but raise the total amount they are required
to buy in from renewable sources. We believe that, even were the
threshold to be raised, this change would be welcomed by the business
community.
This proposal would also lead to the more efficient
production of renewable energy as energy would be produced from
larger plants and sources and this in turn would be attractive
to third party investors as costs of energy production would be
lower.
OFFSHORE PROJECTS
Offshore wind farms (together with the more
developed onshore wind farms) is the most important form of renewable
energy production if the UK is to significantly increase production
of green electricity over the next decade (on the assumption that
the Severn Barrage may not be built). A significant and increasing
number of renewable energy projects involve offshore development
which, in the past, was particularly difficult due to the lack
of a single body taking responsibility for the marine estate.
To some extent, the government is addressing this broader issue
in the Marine Bill, currently out to consultation, which will
simplify the current system and create a new overseeing body,
The Marine Management Organisation (MMO). These developments are
broadly welcomed.
However, LG is concerned about the impact of
the Marine Bill on the renewable energy sector, as the Bill appears
to do little to help independent operators, or those with necessarily
smaller, innovative or exploratory projects.
Whilst larger offshore and onshore renewable
energy projects would fall under the auspices of the new IPC (created
in the Planning Bill) offshore projects generating less than 100
MWh will still fall under the current consenting regime of the
Electricity Act combined with the new system of marine licences
issued by the MMO outlined in the Marine Bill. The Planning Bill
does enable the Secretary of State to "promote" developments
which otherwise fall below the IPC thresholds into the IPC regime
if he considers that they are nationally important, but we suggest
that given the imperative of increasing renewable energy capacity
all but the smallest offshore project should automatically be
able to benefit from the regime.
The IPC will have the overriding objective of
prioritising strategically important projects in what are recognised
as key sectors, including energy. In contrast, the MMO will have
wide-ranging responsibilities, not just in relation to licensing
but also nature conservation, spatial planning and enforcement,
and concerns have already been expressed as to whether it will
also have the resources necessary to handle applications for the
more complex developments in any sector. Any perception that as
a result the operators of smaller offshore projects may be subject
to a less favourable consenting process is likely to make it harder
for them to raise capital and may well discourage innovation and
more experimental developments offshore. This could in turn hold
back development in the sector. It is worth noting, by way of
illustration perhaps, that a more favourable regime encouraged
independent operators to play a key role in developing North Sea
oil—where they often proved more willing than larger players
to experiment in new fields and technologies.
MARINE ENVIRONMENTAL
CONSIDERATIONS
The Marine Bill ironically could also have the
effect of putting increased hurdles into the planning process
for the offshore projects that fall within its remit (ie those
under 100 MWh), through the introduction of Marine Conservation
Zones (MCZs).
The need for thorough Environmental Impact Assessment
(EIA) for developments forms an important part of what is often
seen as the delay inherent in applications for consent for onshore
development: for example, there may be a need to undertake particular
surveys over specific time periods which are often seasonal. The
processes associated with conducting an EIA are slowly improving
as more data as to onshore biodiversity interests is collected
but there is currently very little equivalent data which can be
used in relation to offshore projects and the costs to the developer
of obtaining it can be high. MCZ's will add an extra dimension
to this and we are concerned that the effect will be to further
discourage potential development of smaller renewable energy projects
offshore.
Potential offshore developers may be surprised
to realise that MCZs are not intended merely to protect the "best"
areas in terms of conservation/biodiversity value, but more to
create a wide ranging network of protected sites simply representing
the diversity of particular interests. The criteria for their
creation and the subsequent control of activities in them reflect,
in slightly less stringent terms, the approach of the Habitats
Directive, including the precautionary principle in relation to
potential environmental damage (pursuant to which it will be for
the proposed developer to demonstrate that the project will have
no or very limited impact on the marine environment) and the need
for it be demonstrated that there are no practical alternatives
to the development, that public interest outweighs any damage
that might be caused and that the developer will provide suitable
compensation. The implementation of the Habitats Directive in
the UK initially brought significant uncertainties—both
for developers and conservation bodies—concerning the basis
of the selection of sites, the criteria against which assessments
should be carried out and the meaning of the no alternatives/public
interest/compensation requirements. If similar uncertainties are
not to act as a deterrent to smaller renewable energy projects
offshore and to those who might fund them, it will be critical
that the whole industry participates fully in the designation
process and the setting of clear conservation objectives for sites
that are selected.
GRID AND
CONNECTIVITY ISSUES
The fact that a large proportion of new renewable
generation capacity is often located in geographically remote
locations, often with intermittent output, means that there are
questions as to whether the current transmission regime is fit
to achieve the Government's current renewables targets.
We recently hosted a renewable energy dinner
the focus of which was the barriers to funding in the sector.
The debate was chaired by Lord Moyniham. One of the many issues
which our clients and contacts felt was a significant barrier
to investment was the lengthy delays involved in renewable energy
and conventional generators connecting with the transmission network.
These delays were seen as being primarily due
to:
— The scale of demand for new generator
connections—at the moment the National Grid operates a first-come-first-served
approach to connecting generation without reflecting the status
of projects in the queue for connection. With the re-banding of
the Renewable Obligation, demand for connection is only set to
increase;
— Existing generators have limited
incentives to release or sell transmission capacity in the short
term; and
— Limited information is made available
between transmission licensees and generators.
Various ideas have been put forward to try and
release the queue for Grid connectivity. One issue is whether
to adopt fundamental change (for example charging electricity
suppliers to invest and connect to the Grid) or incremental change
revolving around queue juggling. The organisations which are controlling
the Grid queue system are not geared up for seismic change therefore
this issue cannot be left to the Grid companies alone and public
body involvement is required.
Other factors which could assist would be linking
Grid connectivity access to planning consent. We understand that
this is contemplated in respect of the fast-track large infrastructure
projects which is welcome news. However consideration also needs
to be given to smaller power generators.
At a recent speech given by the British Wind
Energy Association (BWEA), it stated that if the consenting process
for onshore wind farms was reduced to nine months, this in itself
would have a minimal impact on wind farm development and output
going forwards. In their view, the key limiting factor is Grid
connectivity and if these issues were resolved then this would
have a highly marked impact on the output of energy from renewable
sources. This is even more marked when considering offshore wind
farms since the establishment of an offshore grid is in its infancy.
On 31 January 2008 OFGEM and DBERR published
an interim report to the Secretary of State on its findings so
far in its review of transmission access. One of its key findings
is that stronger commercial incentives could be placed on the
transmission companies to deliver on time firm connection dates
to developers who have made an appropriate financial commitment.
The current Energy Bill includes provisions
to assist in implementing a new regime that will provide the infrastructure
to transmit electricity from offshore renewables to the onshore
electricity supply network. At present, existing offshore connections
are owned and operated by the generator-developers. A new offshore
transmission regime, to optimise existing and future offshore
connections by requiring that they be owned and operated by a
separate licensed entity, is being implemented under the Electricity
Act 1989 and the Energy Act 2004. The Bill gives additional powers
to enable GEMA (Gas and Electricity Markets Authority) to run
a tender process for licensing connections of large scale offshore
renewables projects to the onshore electricity network. These
proposals are broadly welcomed by the industry.
REGULATORY REGIME
AND FINANCIAL
INCENTIVES
A common theme expressed by many of our clients
and contacts in the sector is that a stable regulatory and economic
regime is required over the medium term to provide investors with
the confidence that they will obtain an acceptable return on their
investment over say a five to 10 year period.
The re-banding of the Renewable Obligation from
1 April 2009 has been broadly welcomed by investors and renewable
companies alike. However, there are calls for the banding to be
increased for certain of the emerging technologies which require
almost prohibitively high levels of capital expenditure to research,
develop, test and deploy these technologies. We feel that the
government should consider raising the banding in certain sectors
even further to ensure a significant continued inflow of investment
into the various renewable energy generation sectors.
In addition the Renewable Obligation is due
to be reviewed by Government every five years. In order to aid
investor confidence (which will be looking for medium to long-term
stability) we would suggest that the Government should commit
to an upwards only re-banding at any such review.
We note that prior to the implementation of
the RO, the Government did consult on various methods of incentivising
investment in the industry, including the use of feed-in tariffs.
Whilst the Government has decided that a green certificate such
as the ROC is the preference in the UK, there is still much debate
over whether the subsidy system developed by the feed-in tariff
principle is actually more lucrative for renewable power generators
and therefore more attractive to investors.
The investors involved with medium to large
scale renewable energy projects are sophisticated and are often
not constrained to solely investing in the UK. The costs of developing,
installing and maintaining a renewable energy plant in the UK
(in terms of both time costs and capital expenditure for R&D,
construction costs, professional fees and ongoing maintenance)
are high compared to other jurisdictions. In our experience the
more sophisticated renewable energy companies are often choosing
to establish operations outside the UK. One example would be our
client Clipper Windpower plc which is a UK company listed on AIM
which constructs wind turbines—to date its entire wind farm
portfolio is established in the US rather than the UK. There are
many reasons for this including ease of planning consent in US
states, accessibility of skilled engineers and scientists and
the monetary exchange rate.
It goes without saying that the more incentives
(such as tax breaks and grants) which central or local government
can provide to entities involved at each stage of the development
and implantation of renewable energy projects the better. The
establishment of the Energy Technology Institute in December 2007
has been welcomed. This is a 50:50 partnership between the Government
and various leading companies and which provides grants for the
funding of testing of prototype renewable technologies. The Government
should encourage the development of more organisations of this
kind.
GENERAL MOOD
WITHIN THE
INDUSTRY
As previously mentioned we recently held a dinner
for 50 clients and contacts in the renewable sectors (both companies
and investors). The theme of the dinner was the hurdles to investment
in renewable energy projects and we held a round table discussion
chaired by Lord Moynihan. Members of our firm have also recently
attended the two day All-Energy conference in Aberdeen.
At both of these events we detected a very strong
feeling of frustration with the amount of red tape, delays and
other hurdles which renewable energy companies need to overcome.
The individuals leading these companies are passionate about their
technologies and processes and demonstrate huge drive and determination
to ensure that their businesses are successful.
The government on the one hand is claiming that
it is committed to producing certain levels of renewable energy
within certain timeframes and on paper these are impressive targets.
However, within the industry there is resignation and extreme
frustration at the hurdles which the industry needs to overcome
to be able to produce energy from renewable resources. Examples
include the complexity of the planning approval system and non
joined up thinking between different government departments and
tiers of government. Processes urgently need to be streamlined
and simplified as we are in danger of many such companies seeking
to establish their renewable energy technologies and business
overseas rather than in the UK.
16 June 2008
| 
