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United Kingdom

United Kingdom

GETTING READY FOR FULL COMPETITION

The problem for renewables when the UK power market is fully deregulated in April 1998 is that only two of the four pricing components of the business will have been opened to full competition. The Association of Electricity Producers.has been working to create a more favourable climate for renewable and other small generators, such as getting the value of local generation acknowledged in government and inviting discussion of environmental credit. Coinciding with liberalisation, comes the expiry of contracts awarded to renewables developers under the first two rounds of subsidies under the Non Fossil Fuel Obligation -- NFFO-1 and NFFO-2.

As full liberalisation of the British electricity market in April 1998 draws nearer, generators are looking forward with anticipation to the opportunities it presents. In the third and final step towards full competition throughout the supply industry, all producers of electricity will have access for the first time to some 23 million customers requiring less than 100 kW. At present the 14 public electricity suppliers in England, Wales and Scotland have a monopoly over this mainly domestic market in their franchise areas, and competition is confined to customers of more than 100 kW.

For the renewable energy industry, the lead period up to 1998 ought to be a time for optimism. But the great fear is that unless some issues are resolved to allow effective competition with more polluting forms of energy, renewable generators could lose out. One organisation that has been working busily behind the scenes to bring about a more favourable climate for renewable and other small generators is the Association of Electricity Producers. Chief executive David Porter is well aware of the obstacles still to be overcome.

"Nineteen ninety-eight means full liberalisation of the supply market and that really ought to mean that there would be no more obstacles to renewable energy other than having to compete on price," he says. "But of course nothing is ever as simple as that."

Recognising value

One of the AEP's priorities is to lobby the government and the Office of Electricity Regulation, OFFER, for a fair price for renewable energy in recognition of the benefits it brings. Getting the value of local generation acknowledged is, Porter believes, vital to ensuring that renewables and small-scale generation can compete against other forms of energy. Power generated locally does away with the need to transmit it long distances, considerably reducing transmisson losses. At present savings on losses to local distribution systems and savings on pool charges brought by embedded generation largely go unrewarded.

"What the association is arguing for is that generators ought to get full recognition of the economic value of embedded, or decentralised generation. That can amount to useful fractions of a penny," he says. Yet he warns that the benefits of embedded generation, can well be dictated bygeography. "You can choose to put your wind farm in a terribly inconvenient place. The REC [Regional Electricity Company] is not going to give you benefits for something that is causing it a problem."

Porter is optimistic that the government and OFFER are warming to the idea of rewarding local generation. "The arguments about embedded generation are going our way. We are more than half-way there already." One of the reasons for his optimism is the outcome of a case brought before OFFER for determination last year involving a small generating scheme in the north of England. The electricity regulator, Stephen Littlechild, determined in favour of the operator claiming that the scheme should get credit for the savings it brought to the local REC.

Another reason to be hopeful of a fairer reward for local generation concerns TRIAD charges. These are the peak demand charges levied by the National Grid Company on electricity taken from the high voltage grid by the RECs for use in their franchise areas. They are calculated on peak demand consumption -- usually at a time when wind farms embedded in the local distribution network are working at high capacity, thereby making a useful saving for the REC. According to Porter, not all RECs reward embedded generators for TRIAD savings. "We have taken that matter up with OFFER and the NFPA [Non-Fossil Purchasing Agency]. One of the difficulties is that some of the RECs acknowledge that saving fairly readily, but others do not." However, he says OFFER now believes that RECs ought to consider sharing the savings with embedded generators.

External costs remote

While rewards for embedded generation look a distinct probability, he admits that the likelihood of getting the British government to agree to an economic value for savings on pollution is more remote. "If the government can give thought to ways of acknowledging the environmental benefits then we would be very pleased to discuss it with government officials," he says, adding: "I acknowledge that that is not straightforward." So far the government has yet to accept the AEP's invitation to discuss an environmental credit. "There has been no response yet but we will be encouraging them. Not least because 1998 is beginning to worry some of our members."

Turning to the climate that renewable generators are likely to face in the newly liberalised market, Porter foresees that the price of competing types of generation will be -- if anything -- lower than they are today. "In the 1998 market, prices are going to come down and there is every reason to think that pool prices will remain low for what you might call natural reasons." He believes the main factor to exert downward pressure on prices will be increased competition in generation. He points out that there are now more players on the generating scene; the larger generators are being required to sell off 6000 MW of plant to competitors; gas prices are down; and government-brokered coal contracts expire in 1998. "For the first time there will be complete freedom for the power companies to buy coal. They will drive down coal prices," he predicts.

Contracts expire

He points out that coinciding with liberalisation, comes the expiry of contracts awarded to renewables developers under the first two rounds of subsidies under the Non Fossil Fuel Obligation -- NFFO-1 and NFFO-2. "They set out on NFFO expecting to earn a relatively high income until 1998 from premium prices and to earn at least a market price from 1998." The more prudent would have assumed market price to be no more than pool price -- in line with Littlechild's definition, he says. But when those earlier contracts were granted, forecasts for pool price were higher than they are today. "So some of those project owners are now worrying about what they are going to earn after 1998." This problem is compounded for some by delays in commissioning caused, typically, by difficulties in obtaining planning consent -- leaving them less time in which to earn a premium price, he says.

"Initially our members saw 1998 as a serious opportunity for renewable energy. If they can get recognition for the benefits discussed earlier then some of them may be able to compete effectively." But he complains that a problem for any generator is that only two of the four components of the total electricity price paid by the consumer are open to competition. "Generation is competitive, supply is competitive, but the transmission and distribution charges are in the regulated market and there is not much the generator can do about that."

However, if the renewable generator can negotiate with the REC to share any savings the utility earns on system charges, that could put it in a competitive position on the customers doorstep. Moreover, if the renewable generator still finds it difficult to compete on price, it has one further advantage over its more polluting rivals, says Porter. This is its ability to offer the customer "green" electricity. This would have to be done by setting up a separate supply business, he says. But Porter envisages a scenario where several different renewable generators group together to offer a credible greener alternative to conventional electricity. "There is a strong debate going on at the moment over whether people would pay more to buy from a particular supplier. We are still a long way from the real world situation where people have seen what exactly is going to happen to electricity prices," he says. "But we think there are enough people around who will say they want greener electricity. After all, they don't have to take the cheapest supply."

The AEP sees its role in this process as encouraging open thinking about the developing market. "We would want to see anyone that had innovative, workable ideas given a chance to put them into effect," Porter concludes.

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