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United Kingdom

United Kingdom

Shaping a market for long term stability

A major opportunity to influence the structure of Britain's wind power market has been opened up by government. It is inviting all stakeholders to participate in a wide ranging consultation on a package of measures to reform the country's renewable energy support mechanism, the Renewables Obligation (RO). The measures, outlined in a recent energy policy paper are aimed at bringing forward new renewable technologies, including offshore wind, boosting investor confidence and improving value for money for consumers.

The British government's proposals for market reform include raising the overall target for renewables to achieve long term market security, but its plans are also highly interventionist, making industry more nervous than ever about what might happen next

A major opportunity to influence the structure of Britain's wind power market has been opened up by government. It is inviting all stakeholders to participate in a wide ranging consultation on a package of measures to reform the country's renewable energy support mechanism, the Renewables Obligation (RO). The measures, outlined in a recent energy policy paper, The Energy Challenge-Energy Review Report 2006, are aimed at bringing forward new renewable technologies, including offshore wind, boosting investor confidence and improving value for money for consumers (Windpower Monthly, October 2006).

The most contentious issue is whether to introduce separate targets and support for the different renewable energy technologies, by "banding" the RO, instead of requiring the technologies to compete for Renewable Obligation Certificates (ROCs). Banding would allow more support for emerging technologies and avoid over-subsidising the more economic technologies. Views are also sought on plans to extend the obligation on electricity retailers from its existing target of 15.4% in 2015 to 20% (as soon as the industry can reach it), freeze the price at which retailers can "buy out" of the obligation at its 2015 value by removing its link with the Retail Price Index, and introduce a measure to ensure that prices for ROCs glide gently down the slope after the 20% target is exceeded, rather than falling steeply off the "cliff edge," as it is known in renewables circles.

ROC bands

The consultation by the Department of Trade and Industry (DTI) offers two approaches to banding the RO: multiple ROCs or multiple obligations. Multiple ROCs would award more than one ROC per MWh hour to renewables that need more support and less than one ROC/MWh to the more commercial technologies. Multiple obligations would create separate obligations for different technologies -- each with their own targets and buy-out prices.

Multiple obligations is the model currently being consulted on by the Scottish Executive, which hopes to create a separate obligation for "marine" technologies (tidal stream and wave) in Scotland, where those fledgling industries have a strong base. But the DTI favours the multiple ROC approach, which leaves it to the market to decide what generation mix is appropriate rather than requiring government to "pick winners."

Under the banding proposal, the total number of ROCs demanded of electricity retailers (suppliers) at the end of the year would be the same as it would under a non-banded obligation. This means that the measure would not involve increasing the cost of the RO to the consumer. Bands could be set for separate technologies, or even for sub-sets of technologies, such as different bands for small and large wind.

Although the industry will not know for sure what the bands will be until legislation is passed, the DTI proposes giving an early indication of likely bands soon after the consultation ends. Projects in technologies which are to be "banded down" (receive fewer ROCs), will be "grandfathered" so that reduced support will only apply to capacity that comes online after the banding is introduced.

Creeping target

The other main question concerns the plan to extend the obligation to a maximum of 20% by keeping the level of the obligation just above the level of renewables actually installed so that developers continue to have an incentive to bring projects forward. This "guaranteed headroom" approach reduces the waste in the present system where, with the lack of available renewable capacity, electricity retailers have to buy out of their obligation -- pay penalties for not meeting it. Since the cost of the buy-out system is ultimately paid by consumers, it means they are effectively paying for renewables power that is never produced. The DTI proposes setting the headroom at 1%.

The British Wind Energy Association (BWEA) promises to engage with the DTI to get the policy right. The association's Maria McCaffery says that protecting the current growth of onshore wind, while increasing revenue for emerging technologies such as offshore wind, will be "a tough balancing act." Gordon Edge from the association adds that following the proposed merger of BWEA and the Renewables Energy Association (REA), the new lobby group will be looking for a consensus across the renewables community. "We need a single position, otherwise we will not have credibility."

But a consensus will be difficult to achieve with many conflicting views, even from among the BWEA's membership. The debate is most polarised between onshore developers, who fear a lower returns through being banded down, and offshore wind developers who welcome the prospect of additional support.

The issue was hotly debated at the BWEA's October conference. Willie Heller from independent developer Falck Renewables pointed out that with 4000 MW of onshore wind needed by 2010 and 10,000 MW through to 2020 to meet the government's targets (Britain will have about 2000 MW in total by the end of the year), developers will have to look at smaller sites, sites with lower wind speeds and sites that are more remote from the grid. These will be less economic and could be threatened if onshore wind is banded down.

"The government are moving towards a greater degree of certainty," said Heller. "If you take the headroom concept, the ski slope concept and banding you end up with a quasi feed-in tariff," he said, referring to a fixed wind power purchase price, a market structure best known from Germany. The government also wants to deal with mature technologies and emerging technologies within that single quasi-market solution, he said. "My concern is that we are trying to do too many things with a single mechanism."

The difference between the RO market structure and a market based on fixed prices is that with one you set a quota volume of megawatt hours you want and let market forces settle the price, while with the other you set the price and let delivery run free, but have no control over public spending, explained Gaynor Hartnell of the REA. The proposal in the consultation document is trying to do both things, to set the price and also to set the quota that is actually delivered, she said.

"That causes problems. The industry feels that government is always going to be coming in and fiddling around at the margins with multiples in a way that you don't know in advance." It only really matters for onshore wind, she said. "Everything else is likely to be ROCed up. Onshore wind really needs to deliver; that is where there is most scope for progress in the near term. The worst thing we could do is undermine investors' confidence in that technology. If we just had an assurance that one ROC per megawatt hour is what is intended for wind in the longer term, many of our concerns would go away."

The government view

From the DTI, Kristian Armstrong denies the government intends to jeopardise onshore wind's ability to deliver. "Government is greedy for more renewables so why would it stymie onshore wind?" The DTI is well aware that capital costs of wind have increased in recent years, he said. "We do not believe the fluff out there that onshore wind developers are multi-millionaires in waiting." He believes that initially, banding down co-fired power stations -- not onshore wind -- will pay for offshore wind. "If we lose momentum in onshore wind, how could the investment community have confidence to invest in other renewables?" he says.

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