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Uncertainty crippling future financing -- Government says it is listening

Research by the British Wind Energy Association (BWEA) shows that urgent government action on financing is needed if wind energy is to help meet the UK's 10% target for renewables. The research was undertaken over three months through interviews with potential financiers of large-scale wind projects. It shows that uncertainty over the value of wind energy after 2010 is making it difficult for projects planned for later this decade to find finance. The uncertainty stems from the present structure of the Renewables Obligation (RO), the government's system of renewables support.

Wind is expected by government to meet the lion's share of the 10% renewables target, with around 8 GW of wind by 2010 representing 8% of UK electricity. This will demand some £6 billion of investment. But the investor community is unwilling to provide financing on this scale unless action is taken now to provide greater certainty on the price of wind and other renewables beyond 2010, says BWEA. Recent volatility in the market for renewable obligation certificates (ROCs), caused by the failure of insolvent electricity retailer TXU to pay £23 million it owed to the ROCs buy-out fund, only strengthens the BWEA's case.

The research considers some solutions, including an extension of the RO, a new target for 2020 to allow the renewables mandate to continue to rise beyond 2010, and introduction of the "vintage ROC," requiring electricity retailers to source a proportion of their electricity from renewable plant built before certain dates.

Results of the BWEA research were released in evidence to a House of Lords Select Committee. In its evidence the association also highlighted the need for action on other fronts, including grid connections, planning and aviation issues that still present barriers to development of the industry.

The BWEA's Marcus Rand says the research gives government an opportunity to act quickly to maintain the excellent momentum of the last few years. "Obtaining finance is critical for the wind industry; without it projects, CO2 savings and new jobs won't be realised on the scale that the government and the British public wants."

The government, meantime, insists it has heard and is responding to the concerns of the industry and investors. At a conference in London last month organised by the Renewables Power Association (RPA), energy minister Stephen Timms and officials in the Department of Trade and Industry (DTI) were urged repeatedly by speakers and delegates to act quickly to reassure the financial market.

Most speakers identified the lack of a firm renewables target beyond 2010 as stifling investment. Philip Wolfe from the RPA claimed that without the incentive of a target beyond 2010, renewables will not reach the existing 10% goal until 2022-12 years later than the target date.

From Ernst & Young, Jonathan Johns explained that for more expensive technologies such as offshore wind to succeed under the renewables obligation, they will need ROC prices of over £0.05/kWh. This means that they will depend on a shortage of ROCs to push up the value of the "recycle benefits" that are shared among compliant suppliers. The "renewables target paradox" is that if projects are to be built, the Renewables Obligation target must not be met, as only then will the recycle benefits remain high, he said.

Cheapest way

Catherine Mitchell from Warwick Business School called on the government to set a firm 20% target for 2020 rather than its current "aspiration." Increasing the target to 2020 would produce enormous confidence very quickly and it would be the cheapest way of getting to the 10% target," she said.

Iain Todd of the DTI said the government has heard the industry on the need for higher targets beyond 2010. "It is an area the DTI are looking at very carefully; we are listening," he said. He insisted the government was well aware that it needs to maintain a gap between supply and demand of ROCs in order to drive the effectiveness of the renewables obligation. The purpose of the review of the obligation -- slated for 2005-06 -- was to set target levels for the decade after 2010 to maintain the effectiveness of the obligation, said Todd.

Pressed about the timing of the 2005-06 review of the Renewable Obligation's progress, Todd left delegates with the firm impression that the DTI was receptive to bringing the review forward, conveyed more by his tone of voice than by his words. "We are considering the many representations we have had on that subject, and we will be looking hard at that subject," he promised.

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