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United Kingdom

MANY BIDS FAR LOWER THAN EXPECTED

Bids from wind power developers for tcontracts under the third British Non Fossil Fuel Obligation have been surprisingly low. Some argue that such low bids constitute a dubious background for the growth of a healthy wind industry. The British Wind Energy Association, however, welcomes the low prices and states that by granting contracts to wind energy projects the government could stimulate diverse and internationally competitive renewable energy industries.

The aggressiveness of bidding by wind power developers -- revealed in a report by the Office of Electricity Regulation (OFFER) into the UK's third renewables order under its Non Fossil Fuel Obligation (NFFO) legislation -- has taken many in Britain's wind industry by surprise. In England and Wales bid prices ranged from the lowest at around £0.04/kWh up to £0.12/kWh, with an average of £0.055. An impressive 250 MW declared net capacity (580 MW installed capacity) was bid in at less than £0.05/kWh. In Scotland, where wind speeds are higher, bids were even lower than in England and Wales -- beginning below £0.04/kWh and averaging £0.049/kWh.

Some within Britain's wind industry have greeted these prices with dismay. "It was all doom and despair here last week when we saw those figures," says a developer. He summed up the worries of many by doubting whether such low bids can lead to the growth of a healthy wind industry: "The industry has cut its own throat. Can those prices actually be sustained long-term?" he asks. "It is good to have low prices, but only if low prices are sustainable."

Initial rumours were that the low bids had been submitted by foreign newcomers, predominantly from the US. But it appears that at least one British developer is well represented among the low bids. Nonetheless, many hopes are pinned on the government introducing some diversity when awarding wind power contracts. "Otherwise the majority of people involved in projects under NFFOs 1 and 2 will not be involved in NFFO3," says an industry veteran. "The government should look at developers who already have a track record of building good schemes in this country."

Many believe the lowest-priced bidders will be hard pushed to complete their schemes as finance will be difficult to find at such low rates of return. "It will not be beneficial to the industry if a high proportion of schemes do not come to completion," says another developer. "It could go against wind in future NFFO rounds if there is a poor success rate in this one. "The banks' views would seem to support the fear that financing could be a problem. "I was surprised to see these figures," says a spokesman for a bank which has invested in projects built under NFFO2 contracts. He has recently been looking into finance for some NFFO3 schemes. "We have run through some preliminary numbers, but the prices were materially higher than those quoted in the report. I cannot quite see how those numbers pan out," he says. "The spread of terms for debt finance is not enormous. Something else has to give -- either on capital costs or on equity returns. Unless developers have got exceptionally favourable capital costs and equity investors willing to accept substantially lower rates of return, I have some difficulty seeing how the projects will be financed."

The BWEA, however, welcomes the competitiveness of the bids. "Everything considered, it is really quite healthy for the wind industry to demonstrate that it is possible to bring in schemes at such low prices," says Michael Harper of the British Wind Energy Association. "Some 800 MW has been bid in to the orders in England, Wales and Scotland at below £0.05 per unit. It is an extremely positive sign that the industry can deliver on its promises." In a letter to energy minister Tim Eggar, Harper urges that the industry be rewarded for the large number of competitive bids it submitted. "The final submissions are considerably more competitive than was foreseen earlier in the year. This presents you with an excellent opportunity for stimulating proportionately more wind energy development at the same overall cost to the consumer," he stated.

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