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United Kingdom

Finance house warns UK renewables industry

Prospects for new renewable technologies in the United Kingdom, particularly offshore wind energy, are looking increasingly bleak, according to finance house Impax Capital Corporation. Its assessment is based on an examination of new proposals for the future of renewables support being considered by the UK government. Two developments have led to the gloomy outlook: the Department of Trade and Industry's analysis of responses to its renewable energy review, and publication in August of proposals for new electricity trading arrangements.

Both areas of concern have been drawn to the attention of renewable energy trade associations by Impax's Adrian Lloyd. He has reported Impax Capital's concerns to the Confederation of Renewable Energy Associations after speaking with individuals from within industry and government. The British Wind Energy Association (BWEA), however, has publicly stated that it does not necessarily endorse the views expressed.

Simple obligation

The proposed renewable energy support mechanism that appears to be finding most favour among economists in the Department of Trade and Industry (DTI) and at the Treasury is a simple obligation on electricity suppliers to buy a percentage of their needs from renewable sources. Support systems, such as the Non Fossil Fuel Obligation (NFFO), which impose costs on electricity consumers-through a levy or other means-but which also afford protection to less competitive technologies, appear out of favour among government officials.

According to Lloyd, Treasury and DTI officials are considering the input of the Green Alliance to the government's consultation exercise above all other submissions (page 43). The Green Alliance's proposal for a two part mechanism-a percentage obligation coupled with a system of long term contracts-was adopted by the BWEA and British Biogen in their own responses to the review. This has been taken by the Treasury and DTI to mean that the policy proposal has the backing of most renewable energy industries.

But instead of adopting the whole of the Green Alliance's complex proposal, government officials are considering only the arguments for a broad percentage obligation with no technology divisions, says Lloyd. "This stance is allegedly justified by the weight of the other submissions calling for a percentage obligation," he says. The fear is that without careful regulation and without the development of market for trading renewable energy credits, such an obligation on suppliers will not stimulate the desired growth. "There is allegedly no plan as yet to base the percentage obligation around any form of tradable certificate or fines for non compliance," warns Lloyd.

No more NFFO

"This approach has great attractions for the Treasury as an unbanded obligation is simple and it requires no levy of any sort," he adds. What is more, a percentage obligation does away with the end of the NFFO system-whether for onshore or offshore wind energy.

"Despite much comment about the NFFO process, it seems that only a handful of representations specifically called for the continuation of NFFO," he says. Instead, government officials are apparently content wait for the development of wave, small hydro, small wind, offshore wind and energy crops until such time as they can survive without support. Explaining this apparent government approach, Lloyd says: "As the other renewable energy resources are used up, suppliers will be forced to turn to these technologies to meet their percentage obligation."

Even if the government could be persuaded to grant further NFFOs, the time scale for legislation rules out any call for tenders before September 2000, resulting in a long period of no activity on the renewables front as contracts would be unlikely to be awarded until autumn 2001. What's more, the Non Fossil Fuel Purchasing agency (NFPA) points out that the Electricity Act will convey only broad enabling powers for renewables support. The finer detail will be contained in secondary legislation, which risks further delays in implementing the new support measure. The NFPA currently contracts with NFFO generators on behalf of the major public electricity suppliers.

Lloyd fears a future with no mandated long term NFFO-type contracts, but just free-form contracts negotiated directly between generators and consumers. He asks whether companies would be able to finance their projects in a regime where wholesale electricity prices are falling, long term contracts are not available and where projects are exposed to imbalance charges under new electricity trading arrangements. "Would companies-which are lucky enough to be able to finance off-balance sheet-be able to continue to meet their risk and return requirements?" he questions.

If renewable energy industries wish to see NFFO continue, or support for offshore technologies and energy crops, or tradable green certificates, they must clearly and unequivocally state it-preferably with one voice, says Lloyd. He calls on the industry to start lobbying "any politician who will listen."

The BWEA's Nick Goodall says he too has heard rumours that government officials are considering cherry picking the percentage obligation from the Green Alliance's submission. He points out that the BWEA sponsored the alliance proposal to bring together a broader range of trade associations, and insists it has to be considered as a complete package.

Nonetheless, he is less pessimistic about the future than Lloyd, even though agreeing that "the end effect might be an unacceptable delay for offshore wind and a slow down in building onshore wind." To minimise the risk, however, the BWEA and other trade associations united in the Confederation of Renewable Energy Associations (CREA) are to draw the attention of energy minister Helen Liddell to "this so-called nightmare scenario which could unwittingly impede the development of renewable energy in the UK," says Goodall.

Working group

Since his rallying call to the renewable energy industry, Lloyd, who is a BWEA council member, states that some progress has been made towards the industry getting its act together. He reports that a small working group is now being drawn up which will consist of three industry representatives and two paid consultants-one each from consultancy companies Caminus and Ilex-to be funded by the DTI. "They will be developing a response to the new electricity trading arrangements which will be circulated to the memberships of CREA for their comment prior to a submission on September 10. At the same time, the industry recognises that the government has yet to make up its mind on how renewables will be supported in the future, and so it is working to produce a further submission to government on what it wishes to see," he says.

Lloyd concedes that not all members of BWEA necessarily agree with his views. "However, I cannot overstate our concerns about the effect that these new arrangements may have on the confidence of financiers to the detriment of renewable energy projects," he says.

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