United Kingdom

United Kingdom

Wizards at work

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Misguided pursuit of a supposedly simple solution to the failings of Britain's Renewables Obligation (RO) is threatening to send the wind power business down yet another blind alley. Having been there once with the Non Fossil Fuel Obligation, the last thing needed right now is a repeat of that fruitless exercise. Coming up against a brick wall does irreparable damage to market continuity, as do the major reversals of policy required to extricate markets from dead ends.

Nudge any sleeping member of the British industry and ask him what he wants for Christmas and the knee-jerk mumble will be: "Extend the RO for another ten years, please." But extending a policy that is not working as it should is tying the industry to a set of rails heading for the buffers at the end of the line. The RO as it stands has a series of inter-linked failings that have resulted in a most peculiar anomaly: prices have been driven artificially high, yet without releasing the financing needed to get projects into the ground. A failure of market economy if ever there was one.

Come 2005, the European Commission is to review all the renewable energy policies of the EU members. A lot is at stake. The point of the exercise is to pick the best policy and require or suggest that countries failing to meet their EU renewables targets adopt it. Obligations for purchase of renewable energy, backed by certificate trade, have arguably by far the greatest potential for not only meeting targets at least cost, but for fully integrating wind power into the power systems of tomorrow. No other system has so successfully proved that when done right it can combine strong stimulation of demand with a strong incentive for market efficiencies. Yet on current evidence, the Commission is likely to fail the RO out of hand. That would be a travesty.

The RO today requires 10% of electricity to come from renewables by 2010 and government policy aspires to double that by 2020. It is the 2010 target that industry players are clamouring to have extended, in the belief that an extension will lock-out political uncertainty and lock-in long term power purchase agreements (PPAs). But while an extension might provide short term relief of financing constipation, it does not lock a long term price mechanism into the structure of the RO. Without that, the industry can continue to whistle for its PPAs and the financing that follows them.

What is needed is neither a new target, new legislation, or even new policy. On the contrary, the answer lies not in big gestures, but in the details of the RO's financing and incentive structures. Or as James Glennie from the British Wind Energy Association puts it, "The challenge we have is not to go back to the government and ask for more money, but to take the money that is there and make it more bankable."

Glennie is one of a small team of financial wizards who for several weeks have been working on a way to do just that. What the wizards come up with is Vintage ROC 'n' Roll (page 52). At first glance it looks complex. At second glance, it shines through as a model of astounding simplicity and effectiveness. In comparison, an extension to the RO is fraught with problems, not least the expectation that government will continue to support a system that costs the consumer a bomb while not achieving its aims.

Vintage ROC 'n' Roll is not an idea dreamt up in the bath tub and scribbled down on the back of an envelope. Its author, Ian Temperton, has canvassed literally dozens of peers in the financial world for opinions on what has to happen for the RO to fly. Government officials have been consulted too. From a variety of models discussed, Vintage ROC 'n' Roll floated to the surface as the best solution to the key failings of the RO: high prices and lack of finance. By opening a secure route to longer contract periods, the concept reduces risk, allowing finance to flow. Less risk means cheaper finance, leading to lower wind prices and cuts in the overall cost of the RO. Lower cost will encourage government to firmly back the policy in the long term, adding more market certainty to reduce costs further. As prices fall to those of gas generation, the RO fades away having achieved its purpose.

Uncharitable thoughts

Surprisingly, having commissioned Temperton in the first place, the BWEA is not championing his concept. Such sitting on the fence -- in a month when energy minister Stephen Timms has indicated he will announce some kind of fix to the RO -- seems odd. The suspicion is that not all corporate members of the association are far sighted enough to put securing the long term future of the market above the opportunity for grabbing the extra profits that continuing inflated prices provide.

Casting aside such uncharitable thoughts in the season of goodwill to all men, the other reason for the lack of industry enthusiasm seems to be that people have failed to understand the essence of Vintage ROC 'n' Roll -- that it permanently removes renewables out of a high priced ghetto before government cuts off support as a total waste of time and money. And it does that without rocking the market and risking further uncertainty. Wind power in Britain has won great political and financial commitment from government. Continually asking for more risks squandering that goodwill. As Temperton says, the industry needs to earn the right to grow.

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