United Kingdom

United Kingdom

Financial footwork not philanthropy -- Working around NETA

A groundbreaking deal between a relative newcomer to wind power, Hainsford Energy Limited, and giant American-owned power marketer TXU is providing a route for small wind generators to consolidate their output before offering it to the market. The tactic allows them to avoid the penalties of the UK's new electricity trading arrangements (NETA) as a result of "unscheduled deviations" in their supply of electricity to the grid.

Hainsford has entered into a power purchase agreement (PPA) to supply TXU with 20 MW of renewable energy over the next ten years, with an option to increase its supply up to 100 MW. The power will come from Hainsford's existing wind generating assets and further projects the company intends to acquire, plus output from small generators who will be able to take advantage of the long term PPA and supply electricity through Hainsford. "The power purchase agreement makes the wind farm developments planned by Hainsford bankable," says the company's Charles Rose.

The strategic relationship with TXU not only guarantees Hainsford an agreed price from a strong trading partner, but it also avoids exposure to the trading risks of NETA. The UK's electricity trading rules require power retailers to balance generation and demand by stating ahead of time the amount they intend to put into the system; a generator must compensate for any shortfall in predicted output by buying power -- usually at a premium -- while an oversupply is sold at rock-bottom prices. Wind generators are particularly hard hit by NETA since they cannot reliably predict what their output will be four hours ahead of time.

Umbrella

The PPA allows Hainsford to act as an umbrella and consolidator in the industry by aggregating electricity output from a number of small wind generators and including it in TXU's generation portfolio, so avoiding some of the NETA imbalance penalties. TXU, meantime, benefits from the arrangement by counting the renewable capacity towards its Renewables Obligation; this requires electricity retailers to supply a proportion of their power from renewable sources, starting at 3% from April 2002, rising to 10% in 2010.

"With TXU taking the NETA risk and the imbalance charges, we have created something that the small generator can fit into," explains Rose. "Using the flexibility of the PPA, we can deliver a ten year deal to anyone with a project that qualifies for ROCs [Renewables Obligation Certificates]."

Hainsford has so far acquired two wind projects: a 3 MW Nordex turbine at Burgar Hill, Orkney, that it bought from TXU, and 3 MW at Caton Moor in Lancashire that it acquired in 2000 when it bought out former owner New World Power. According to Rose, the company intends to increase its portfolio of wind generation. He explains that Hainsford -- which has a background of consolidation in the aggregates sector -- is primarily interested in wind from a financial viewpoint. "That is by seeing how we can best position ourselves to develop a portfolio of assets to maximise value through gearing and equity," he says. "What we have now with this PPA is the ability to raise further funds and further bank finance to buy projects." He is not interested in development. "I am coming at this more as a financial player and less as a missionary."

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