A cold wind of reality swept through the British wind industry's annual conference this year as it faced up to the realisation that it can no longer take its charmed status in government circles for granted. The spectre of nuclear power is shaping up to be a serious rival in the "clean" energy stakes and the ground is being prepared for a battle between wind and nuclear for government attention and support. Britain's impending review of national energy policy cast its shadow over the 27th British Wind Energy Association event (BWEA27), held October 18-20 in Cardiff. All energy options for the UK -- including nuclear -- are to be considered in the review, which is to take place in 2006. It was announced by prime minister Tony Blair the month prior to the conference.
BWEA chairman Chris Shears urged the industry not to underestimate the risk to wind from the review. "In a grown up world we would be able to get away from the wind versus nuclear debate so loved by the media, but that will play out and it is crucial that we fight our corner." He added: "Somehow, we have still not made the case that renewables have real value against the intoxicating allure of large lumps of firm power."
Energy minister Malcolm Wicks claimed to have an open mind on the "controversial" nuclear question. "But in looking at the issue, I remain absolutely clear that there is no single solution to our future energy needs, to tackling emissions or fuel poverty. There is no one silver bullet." The government remains firmly committed to renewables, he said. "We are working hard towards the 2010 ten per cent target, and beyond to our 2020 20 per cent aspiration, which given the rate of progress over the last few years remains very much within reach."
The energy review is the big unknown for the wind industry, added BWEA's Gordon Edge. As well as nuclear, renewables will be included. "In exactly what form we don't know." But the review also presents an opportunity. "It is not just a threat; this could be where we turn that 2020 aspiration [for 20% of electricity from renewables] into a firm target. It could also be where we set post 2015 targets, and it could be where we build a case for extra resources not only for wind but for wave and tidal in the next comprehensive spending review in 2007."
Despite 2005 already proving to be a record year for new installed wind capacity, there was less cheer and backslapping at the conference, and more examination of the issues that have prevented the expected greater numbers of megawatts being built. As Shears pointed out: "The UK is one of the few global markets where wind is underperforming against targets." The industry cannot afford to be complacent, he warned. "We forget at our peril we are only here but for the grace of government," he said. "We need to continue to engage in constructive dialogue which proffers solutions and doesn't simply amount to a series of demands."
The wind community is starting to deliver results and repaying government for its confidence in the sector, he said. Maintaining the integrity of the Renewables Obligation (RO) is key to success in getting close to the UK's renewables targets. "The best way to get value out of the mechanism is to consent and facilitate projects -- there is no shortage of them out there so let's get on with it!"
But consenting procedure is one of the two major obstacles preventing the UK from delivering at least 1 GW of onshore wind a year, Shears added, the other being the grid. Indeed, getting wind power to the customer, "is the biggest strategic issue that we face and the most complex." Some progress is being made on grid reinforcement, in particular the Beauly to Denny upgrade which would allow large quantities of wind to be connected in the Highlands of Scotland. But Richard Ford from the BWEA claimed the case for further grid reinforcement is "overwhelming."
The queue for grid connection offers in Scotland is a source of frustration, as demonstrated by many speakers and delegates. The unprecedented number of applications for connection -- some of which are competing for limited line capacity -- has caused a backlog for National Grid to process. Moreover, much of the 10 GW of wind projects hoping to connect to the system will have to wait for grid upgrades.
Some projects have applied too soon for connection, said Simon Cocks of National Grid. They may still be in the consenting process -- or may be speculative -- but they are holding up viable projects that would otherwise be ready to proceed. "What is frustrating is that there are some real projects further down the queue which are fighting to get a connection."
A way of prioritising the applications to deliver the government's renewables targets needs to be found, said Jeremy Sainsbury of Fred Olsen Renewables. "We do have to address that as an industry; we do have to work with the National Grid to bring forward real projects; we do have to find a mechanism to do so, which is fair to everybody in the queue," he said. "We need to ask whether we can address these issues together, and if the industry does play its responsible role, whether it can be met halfway by National Grid and at the end of the day try to influence the regulator because I believe the regulator is the stumbling block."
Energy regulator Ofgem recognises "the deep frustration in the industry," said Ofgem's David Gray. "We are open to suggestions." But changes to the queuing system cannot be achieved quickly on a whim. "There is a risk that any change will benefit a favoured few, but that leads to another risk that any change will be challenged by those who aren't recipients of that benefit. So the solution is not obvious."
Ford suggested a different approach. The current system of "invest and connect," under which the system is upgraded before connection permission for new generation is granted, could be replaced by "'connect and manage," he said. "New generation would be allowed to connect to the system and the grid operator would seek ways of managing resulting power flows." This could include infrastructure upgrades, but only when an upgrade is the most economic solution. "The connect and manage approach would provide a better balance between facilitating a new connection and providing market signals for the development of the transmission network."
He noted that National Grid argues that management of constraints -- ordering generators to constrain their output when the lines are overloaded -- is difficult and costly and would not be workable. But the grid company is already using the approach in the south of Scotland to avoid extra costs and constraints on their interconnector circuits with England, he pointed out. "If they can do it for projects connecting in the south of Scotland, I see no reason why they can't do it for anywhere else in the UK."
Offshore wind power proved to be a dominant theme of the BWEA27 conference. Lack of progress on the first round of licensed offshore projects and the funding gap that stands in the way of the second round of larger projects further out to sea were two major preoccupations.
Shears gave a reality check for the industry, which had expected to build 4 GW of offshore wind by 2010 -- meeting 4% of the UK's electricity demand. The evidence shows, he admitted, that 4 GW by 2010 looks increasingly improbable. "Times have changed and as an industry we need to look very quickly at what is a realistic build forecast for round one and round two projects up to 2010 and beyond to 2015, and subsequently how we link this to the additional structural support we need," he said. "It is increasingly clear that there is unlikely to be significant additional money forthcoming from government and we must therefore look urgently at alternative funding solutions which provide sufficient confidence to investors and government."
Wicks called the poor progress on the first round of offshore projects "disappointing." With the spate of recent setbacks, the next wave of projects is unlikely to be commissioned before 2007, he said. The government, under its forthcoming Climate Change Programme review, is looking at ways to tackle the market barriers now causing difficulties in the economics of round two projects. "But everyone here has a part to play in finding a way forward and I look to industry to move forward quickly on round one. In terms of winning influential hearts and minds, that is crucial," he warned.
Shears explained that construction issues, contract structures and a tight global supply chain have caused costs to rise substantially, resulting in delays to round one projects. The industry must look closely at where it can make cost savings in offshore construction, he said.
Views differ among project developers and supply chain companies on the potential for reducing costs, with some arguing that 20-30% savings could be made. "Others disagree," he said. "We must interrogate very closely how we are doing things offshore and accept that we need to learn lessons." Recent difficulties with round one projects provide the industry with an opportunity to revisit its contracting structures, he said, referring to disillusionment with the engineer, procure and construct (EPC) approach, which has tended to leave single companies responsible for failures throughout an entire project structure. The EPC versus multi-contracting discussion was continued a week later at Copenhagen Offshore Wind (page 53).
A decision on future support for round two wind farms is to be taken by government within weeks, reminded Shears. This is expected to take the form of a regulatory regime for the offshore transmission lines and could be delivered under the Climate Change Review, due to be announced before the end of the year. Without a decision to provide support -- at least in principle -- within the Climate Change Review, there is a risk that the future of offshore wind could get pushed into the lengthy and controversial energy review process, he warned.
The conference revealed a number of different views among project sponsors on how to bridge the economic gap that has recently opened up for the larger round two sites. The published cost of the 90 MW Kentish Flats project off the south-east coast of England, completed in the summer, was £1167/kW, but according to Sue Wheeler of energy company Centrica, distilled industry wisdom puts the cost of round two offshore wind at £1500/kW. She said that for a project to be viable, installed costs must come down by £300-400/kW. Centrica is currently constructing the 90 MW Barrow project from round one and is sponsoring a further four UK wind stations.
If costs do not come down, compensation for project owners needs to go up. Capital grants, capital allowances, spreading grid costs among all system users and further rises in the percentage of green power required under the Renewables Obligation (RO) beyond 2015 -- the date at which it plateaus -- were all options put forward by different offshore players.
Shears stressed, however, that additional money from government is not a realistic option. Kevin McCullogh from npower renewables agreed. The Department of Trade and Industry (DTI) was not unwilling but incapable of giving the sector any more money than is available under the RO, he said. "We need to park the arguments very quickly about what it takes to make offshore wind work. There is no silver bullet, there is no holy grail in terms of the funding gap or the extra mile that we are expected to go. It is not government's problem; it is our opportunity."
The offshore wind industry has to recognise the limits of its ability, said McCullogh. The slow start to building round one sites with only three operational so far makes it difficult to take a begging bowl to the DTI and ask for more cash, he said. "Credibility is the number one ingredient in our experience as a utility player. If you go to government and ask for support you'd better be damn sure you know how to deliver. To date as a sector we have not quite achieved that."
The supply chain's ability to meet demand was a cause for concern among several offshore wind developers. Bottlenecks will arise as a result of 15 round two sites and a few round one sites being developed in parallel, warned Centrica's Wheeler. "Are there enough contractors out there to be able to install all this capacity at once? Are turbines going to be available?" she asked. "In the same way as developers are having to make certain leaps of faith with ploughing resources into these projects, the same is going to be required of the supply chain."
Peter Clutterbuck from offshore services company Seacore pointed out that at least some of the industry is ready and waiting: "The supply chain has made this investment; we are waiting for projects to come forward. We have made our move; it is up to you to make your move," he said.
Plenty of finance
Finance for wind power -- at least onshore -- is available, said Shears. Unprecedented volumes of investment are flowing into the development of projects. "By my rough calculations at least £100 million in the last couple of years for onshore projects and perhaps the same again in offshore development." And around £500 million has been allocated this year to new construction projects, he added. "Funds, banks and utility investors are hungry for projects."
Richard Slark from ILEX Energy Consulting added: "Wandering around the conference I have seen a lot of equity people with chequebooks looking for consented projects. There are a lot of developers who would have loved to be in that position two or three years ago."
The UK is competing against other countries for investment, warned Jonathan Johns from Ernst and Young. "Flows of capital are international, and increasingly so. We are seeing infrastructure funds enter the UK market, but a large number of the deals they are doing are in other markets such as Germany, Spain and Italy," he said. "As an industry we need to be conscious of that in our discussions with the DTI about the future of the ROC regime." Johns was referring to the need to maintain investor confidence in the market for Renewables Obligation Certificates (ROCs) after 2015.
Here to stay
Increasing the proportion of green power mandated by the RO beyond 2015, even by a token 1%, would make it clear that ROCs are here to stay, he said. It makes utilities more comfortable with writing long term power purchase agreements, which increases the price that generators receive and, paradoxically, reduces the short term price of ROCs, he said. "As an industry we have to be careful that once short term prices hit the £100 an hour level we are going to get a much bigger political risk as the detractors of wind will say the price paid for green power is too high. It is a big issue for the industry."
The wind community needs to decide how long it is going to need support from the RO, said Slark. "As an industry we need to decide whether we're campaigning that our costs are coming down and we can compete with nuclear and gas, or whether we need to be campaigning that we need renewables support mechanisms for a long time," he said. "Maybe we need to define a threshold for wholesale prices combined with the value of carbon; at which point you can agree with DTI that onshore wind doesn't need support above that level." The level could change over time, depending on costs, he said. It cannot be presumed they will continue to fall every year. "We have seen the effect steel prices can have when they rise. And we have got to be aware we are moving into more marginal onshore sites."
From developer Renewable Energy Systems, Mike O'Neill says the cost of wind farm construction on land is rising and currently stands at around £750 per kilowatt before margins or grid costs. "We are facing real challenges in the market where turbine suppliers, because of capacity constraints, are seeing their costs rise and passing that on to developers and investors," he said. "But we all have a part to play to ensure that we tighten our belts and push wind forward as a low cost alternative to fossil fuels."