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United Kingdom

United Kingdom

Fix fails to relieve investor uncertainty -- Five year extension to Renewables Obligation not working

The quick end-of-year fix of Britain's Renewables Obligation made by energy minister Stephen Timms in December is failing to provide the market certainty needed to make renewable energy projects an attractive investment. A new survey of investors and investment advisers in London's financial district, the City of London, reveals that uncertainty is still the biggest barrier to investment by far.

More than half those questioned believe the country will fail to meet the government's targets of 10% of electricity from renewables by 2010 and 15% by 2015. The survey cites three main reasons: insufficient renewables activity at present; logistical problems, particularly the planning process and limitations on offshore construction; and shortfalls in investment and incentives, the result of an "underdeveloped" Renewables Obligation (RO) mechanism that makes project investment beyond the immediate future highly uncertain.

The survey, conducted by Gavin Anderson and Company for the government's Department of Trade and Industry, reveals that the investment community wants to see the government demonstrate a truly long term commitment -- a market without the cliff edges inherent in the RO's targets.

The news will come as a blow to energy minister Stephen Timms. In December, he raised the level of the RO to 15% by 2015 -- from its previous level of 10% by 2010 -- to settle the same concerns about lack of investor confidence still being expressed today. Despite the five year extension of the investment horizon, the doubts and questions have a familiar ring: what will happen post-2015? What will be the impact of future policy or government changes on investment returns?

The survey results were released in advance of a seminar on April 26 in London to persuade the financial community of the benefits of investing in renewables. Timms may be encouraged to know that 74% of investors surveyed said they were "definitely interested" in investing in renewables, with a further 23% "possibly interested." Investment advisers were more cautious, with only 38% definitely interested in recommending renewables investments, and 45% possibly interested.

a patch needed

What is needed, they say, is a clearer role for Ofgem, the energy market regulator, and work to repair the inadequacies in the market for Renewables Obligation Certificates (ROCs). A suggested amendment to the RO, to give investors the certainty of "bankable" projects, was put forward at the British Wind Energy Association's annual conference at the end of last year. It was not taken up by Timms, despite rumours that Treasury officials supported it -- and despite advice from a consultant to the British Wind Energy Association that an extension of the RO to 2015 would not work (Windpower Monthly, December 2003).

Other flaws in the trading system for ROCs continue to exercise policy analysts. David Toke, research fellow from the University of Birmingham, warns that the market dominance of the five or six major electricity retailers is working against reaching government targets. Under the RO, says Toke, the price received by retailers for ROCs declines as the obligation is met. The big retailers have the market power to agree to limit the renewable energy generation they put online. "They will want to opt out of supplying more than around two-thirds of their renewable obligation to hedge against the possibility that the obligation will be achieved and the price of ROCs will crash, he says."

The Renewable Power Association (RPA) has long argued that the RO acts as a cap, not a goal. "The nearer you get to it, the less likely you are to ever achieve it," says the RPA's Gaynor Hartnell. She too is concerned about the market power of the major retailers. The RPA has called for other players to be able to redeem ROCs, not just retailers, to curb their market power.

More liquidity

The RPA's contention is that forecasted ROC prices show that electricity retailers who sign up to long term power purchase agreements (PPAs) are likely to make a profit of at least £20 per certificate (one certificate is issued for each megawatt hour of renewable electricity). "This is clearly an inefficient market largely brought about by market power," the RPA says. "It is this same market power which by offering derisory long term PPAs will only facilitate a small proportion of the generation needed on wafer thin IRRs [internal rates of return]. By delaying development, the companies who stand to benefit the most are ensuring a shortfall in renewable generation and in the process increasing the value of ROCs which (under the present system) only they can cash in for the full value."

Allowing new players to buy and redeem ROCs-such as equity funds, lenders, traders and end users-would create more liquidity in the market. "Most importantly the market power [of the big suppliers] would be eradicated at a stroke and the market value of the certificate would reflect the genuine short run margin cost of the last renewable electron," states the RPA.

It adds that the change is again just an amendment to the RO and would not require primary legislation, merely a reworking of the statutory order and Ofgem's regulatory procedure. "This is a small price to pay for a free market," it says.

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