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United Kingdom

Price picture not crystal clear

Impressive price reductions of 28% -- or even 30% if inflation is taken into account -- are revealed in the wind bids competing for the most recent round of renewables contracts just announced. Compared with the third round of the Non Fossil Fuel Obligation (NFFO) in England and Wales and the first Scottish Renewables Order (SRO), bids into NFFO-4 and SRO-2 reveal that 500 MW of wind power could have been secured for about £0.036/kWh, compared with £0.05/kWh in the previous orders (fig 1).

Some observers, however, are already querying if the bids are realistic. There are several reasons to suppose they might be, but a crystal ball of far greater clarity than that currently available is needed for a definitive answer.

With developers allowed up to five years to secure planning permission -- and the option to specify commissioning dates as late as 2001 -- prices which seem unrealistic today may be achievable by then. Wind prices tend to fall faster than expected, as the UK wind farms built between 1992 and 1996 reveal. A projection to the year 2000 (fig 2) indicates that today's bid prices may yield sensible returns by that time. Other reasons for low bid prices are high wind speeds (especially in Scotland), while some bids may be for wind farm extensions, where the infrastructure is already built. Another reason why the published bids may not be a true reflection of wind energy prices in England and Wales is that they do not have to be realistic: reckless bidders do not get penalised if some of their many bids are too low -- they simply withdraw. But this "dandelion seed" approach allows them to spread bids over a wide range, in the knowledge that at least some projects will be accepted.

A further complication on the pricing front is the differing financing approaches for large and small developers. Large developers, often backed by utilities awash with post-privatisation buckets of surplus cash, do not need the same (higher) rates of return as smaller developers on their (borrowed) money. To cater for this need, NFFO-4 again includes a "small projects" band. Here the price differential of over £0.01/kWh compared with the band for larger projects reflects both the higher costs of construction and of money at the small end of the scale.

The squalid saga of who gets the benefits of savings in capacity charges made by The National Grid Company -- the so-called "triad benefits" -- also muddies the price picture. Triad benefits are savings made by the regional electricity companies (RECs) on grid charges for use of the transmission system. Any generation embedded in the REC's own system -- such as a wind plant -- reduces its use of the grid, saving it money. Currently triad benefits are worth about £0.002-0.004/kWh and are mostly pocketed by the RECs. They argue that these savings help them keep the overall cost of NFFO down. Wind plant owners, however, argue that the savings more rightly belong to the perpetrator of them. Recently the electricity regulator, Stephen Littlechild, showed signs of leaving his position on the fence in this controversy and siding with renewable generators. As a result it is likely that some wind generators will have included triad benefits when framing their bids, while others will not. Meantime Littlechild is recommending no more than that future contracts be clearer on the issue.

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