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United Kingdom

LEAST COST VERSUS DIVERSITY

The Office of Energy Regulation (OFFER) recommends that bids for contracts under the third Non Fossil Fuel Obligation should be chosen either purely on the basis of price or by setting different marginal price bands for each technology. Wind will gain little by either approach. The British Wind Energy Association (BWEA) objects to the OFFER suggestions, claiming they do not take into consideration the government's aims with NFFO-3 to increase diversification of energy supplies, reduce pollution and encourage competitive UK renewables industries. BWEA also suggests that smaller wind energy projects be judged separately due to their different cost structures.

Nearly 200 final bids for wind projects with a total capacity of 660 MW have been put forward for contracts in the latest round of support for renewable energy schemes in Britain. However, if the government follows advice from the electricity regulator, Stephen Littlechild, and awards contracts only to those putting in the lowest bids, no more than four wind farms might be built, even though their bids were lower than expected.

In the Office of Electricity Regulation's (OFFER) advice to Energy Minister Tim Eggar on the setting up of the third Non-Fossil Fuel Order (NFFO3), Littlechild says there have been 520 final bids for 2464 MW of capacity across a range of renewable energy technologies. Renewable generators are competing for a share of the 300-400 MW of contracts available under the third NFFO order set by the government to stimulate development of renewables until they are able to compete in the market.

Littlechild says that projects could be selected at prices nearly 30% below those in the previous order (NFFO2), but they would still be 50% above future competitive market prices.

He sets out two ways of choosing projects. The first is based on selecting only the lowest priced schemes. "The most economic way of meeting the order would be to select about 70 projects using landfill gas, waste combustion and wind technologies at prices of nearly £0.041/kWh," he says. "This would give a total qualifying capacity of 400 MW which might result, after allowing for some projects failing to go ahead, in an effective capacity of somewhat over 300 MW."

If the government were to adopt this purely economic criterion for selecting projects, waste and landfill gas would emerge clear winners. Twenty-four waste and 42 landfill gas schemes with capacities of 303 MW and 82 MW respectively could be awarded contracts. Only four wind projects with a total capacity of 15 MW would qualify in spite of bid prices that are lower than most British wind industry observers predicted.

The alternative method proposed by Littlechild for selecting projects is more realistic and takes account of separate technologies by setting different marginal price bids for each technology. The aim is to give a more steady convergence from NFFO2 band prices towards the market price of electricity. Under this system wind would gain a larger slice of the cake with the number of contracts rising eight fold to 32, or 133 MW. Landfill gas schemes would increase to 67 while the number of waste schemes would be halved.

Under both methods hydro, energy crops and agricultural and forestry wastes emerge as the outright losers with not a single contract between them. These technologies are all too expensive, says Littlechild. "Given that there is already considerable hydro capacity in Great Britain, it is difficult to see a case for further support at the prices presently offered," he explains. "The diversity or other value of energy crops technology would have to be very considerable to warrant requiring electricity customers to pay the level of prices at which such projects are presently offered. It may be that lower prices and better value could be achieved in the next order." The government is likely to be disappointed at the relative uncompetitiveness of energy crops since it had hoped to give a substantial commitment to coppicing under this round of contracts.

Littlechild puts the additional cost to customers of NFFO3 over and above market prices at no more than £343-489 million over 20 years depending on pool prices and also on which criterion is used for selecting projects. However, his use of the "pool selling price" -- currently £0.026/kWh -- as the market price is believed by some to be an unfair yardstick against which to measure the cost of renewables. This is because the vast majority of electricity is sold in "contracts for differences" at prices higher than the pool price.

In his approach to selecting schemes Littlechild appears keen to be seen to champion electricity consumers' interests by keeping NFFO costs to a minimum. "In view of the burden on electricity customers and the potential distortion to competition, it is important to achieve the aims of the renewables policy in the most economic way," he says. However, his critics argue that he has completely missed the point of some of the government's other aims in setting the NFFO order, namely to increase diversification of energy supplies, reduce pollution and encourage competitive UK renewables industries. As one wind industry commentator says: "He sees his remit in very narrow terms -- so narrow it is just not true." Others are prepared to be more charitable: "We have to understand what his remit is. It is probably to get the cheapest deal for the customer. On those terms maybe he has done a good job."

The British Wind Energy Association has taken up this issue with the government. In a letter to Tim Eggar, BWEA director Michael Harper protests that OFFER has "failed to follow important aspects of government policy in respect of securing diverse and internationally competitive renewable energy industries capable of providing sustainable energy supplies and reducing the emission of pollutants." Littlechild's methods of selecting schemes fail to reward wind's progress towards economic viability, Harper adds. He points out that Eggar has already stated that projects should be judged on their environmental acceptability and their economic viability. "By not rewarding such significant progress in price convergence there is a danger of distorting the signals being given to the market."

Harper also points out that OFFER's advice does not consider smaller-scale projects and their different cost structures. He calls on the minister to look at smaller wind energy projects separately.

Developers are now waiting to see how closely the government follows Littlechild's advice. The Department of Trade and Industry expects to announce results of NFFO3 contracts in early December.

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