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United Kingdom

United Kingdom

EXPLOITED AND OUTDATED

The bids for the third round of the British Non Fossil Fuel Obligation (NFFO-3) seem promising at first sight. But the question is whether the low bid prices can hold or whether they were used as a device by some companies to crowd competitors out of the running for contracts. National Wind Power is involved in almost half of the projects, raising the spectre of a market monopoly. As wind energy is now cost competitive, the NFFO might have outlived itself.

At first sight, the news that contracts have been offered for some 490 MW of wind plant in the latest UK renewables orders is encouraging. Contract prices under the third round of the Non Fossil Fuel Obligation (NFFO-3) -- averaging just 4.3 pence a kilowatt hour -- are much lower than those in the last round and arguably lower than most fossil fuel electricity prices. On closer scrutiny, however, warning bells ring.

First, a consensus is emerging among a wide range of experts that projects with contracts at the lower end of the price range are only marginally economical, if it all. They would require an exceptionally favourable combination of project costs, interest rates and wind speeds to be viable today. The danger is that wind energy will fail to deliver at the prices it has promised -- and wind's opponents will have a field day as a result. There were probably three types of bid: those which speculated on a continuing downward trend in costs so that by 1999, when bids expire, the project would be viable; those based on the 30% higher bids accepted in the earlier Northern Ireland NFFO; and those from developers anxious to start soon and based on 1995 costs. Some of the less speculative developers in the two latter categories may now disappear -- even two of the UK's most successful to date secured only a handful of projects between them. They were squeezed out by predatory bidding, aided by a mechanistic process which has rather poor capabilities of discrimination.

And so tolls a second warning bell. With so many squeezed out, wind power development in the UK is now dominated by just one company, National Wind Power. It is involved in projects representing nearly half the total amount of capacity to be developed under NFFO-3. The programme's vulnerability to manipulation is nothing new. Some time ago, one of the more successful developers told a parliamentary committee looking into wind energy, "[there are] organisations who will play the economics the way they choose, actually scooping the pool." The realisation that this fear of a market monopoly was about to become a reality under NFFO-3 was recognised by the UK government when it put a cap on the number of projects awarded to National Wind Power. A handful of others was thus allowed onto the scene, but it is a patchwork remedy to a fundamental flaw. Ironically, one of the arguments for introducing NFFO was to create diversity in power supply.

Another undesirable feature of NFFO, considerably exacerbated by the latest order, is its concentration of projects into such a relatively few regions. Because the NFFO process is driven by cost, the geographical planning of wind energy is totally subordinated. As a result, enormous resources are wasted in putting together bids for projects which fail to obtain building permits; many good but less windy sites more likely to win approval are dismissed because the low prices engineered by NFFO makes them uneconomical; and, worst of all, the citizens of Britain are scared stiff by the industry's apparent determination to pick on every upland site in the country.

Dangerously low prices, a market monopoly, the lack of co-ordinated physical planning. These are not problems inherent to wind power, but contrived problems brought about by NFFO. There are more of them, too: NFFO projects can be easily abandoned without risk of penalty, so silly bids harm only the innocent; the level of technical and financial scrutiny to which bids are subjected is limited; NFFO red tape is horrendous and causes excessive expense; there is no encouragement for domestic manufacturers, which politically harms the whole market; and the position of utilities is ambiguous, with them scrutinising bids on the one hand while their generating companies submit competing bids on the other.

NFFO has done great things for wind energy in the UK. It has been admired and emulated for creating a dynamic market almost overnight when introduced in 1990. But its ambitions to control as well as stimulate a market have laid it wide open for abuse -- NFFO's weaknesses have been relentlessly sought out and thoroughly exploited. It is time to acknowledge that NFFO is not so much fundamentally flawed as well past its sell-by date. If another round is allowed to proceed, the government would be shooting in the dark. Not only does a question mark hang over whether the downward trend in bids can continue, the final outcome of the latest round would still be unknown, requiring timescales to be set and projects to be filtered before the poor performers had come to light. Wind energy is now so cost competitive that NFFO can be pensioned off and replaced with a simpler system. By including green credits as part of a kilowatt hour tariff, wind could finally be unleashed onto the open market.

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