United Kingdom

United Kingdom

From a commercial perspective

An oft repeated plea at the Renewables 2000 Summit in London was for governments to resist the temptation to retain subsidised control of renewables and instead facilitate their entrance as fully fledged members of commercial power markets. Only in this way will their full potential be realised. This report covers the summit in detail -- it was surprising that few members of the wind industry chose to attend.

The emergence of renewable energy from its various subsidised niches and into the newly opening world of commercial power markets became the dominant theme of a series of European conferences over the past six weeks. This ongoing transition can be tracked in the conference reports on the next eight pages, including updates on the latest regulatory developments in Brussels. Together the reports provide a fascinating overview

An oft repeated plea at the Renewables 2000 Summit in London was for governments to resist the temptation to retain subsidised control of renewables and instead facilitate their entrance as fully fledged members of commercial power markets. Only in this way will their full potential be realised

Market based competitiveness is key to renewables' success in energy markets as long as the right legislative and regulatory framework is in place to allow them to compete on an even footing with other energy sources. This was the pronouncement time and again of some of Europe's leading renewable industry players, government officials and commentators at a conference in London on the commercial opportunities in renewable energy.

The tone of the "Renewables 2000 Summit," held October 9-11 at the Cafe Royal, was set by Torsten Böger from PricewaterhouseCoopers Corporate Finance in Germany. "The legal framework is the most important factor in the development of renewable energy," he stated. In that light, it was surprising -- at such a well organised event with considerable potential for influencing the framework -- that so few members of the wind industry chose to attend.

In an unwitting illustration of the truth of Böger's statement, Luc Werring, head of renewables at the European Commission's Energy and Transport Directorate, DG Tren, reported how delays in introducing European legislation are impeding progress on increasing renewable capacity. In 1995, renewables' share of energy consumption in the European Union was 9.5%. By 1998 it was still only 9.8%. It was clear that if Europe continued at that pace it would not reach its 12% target for energy from renewables by 2010, and that additional action was needed, Werring said. Wind's doubling of capacity in the last three years was an exception, he added.

Prospects for reaching the target continue to look dim as member states drag their heels over the commission's efforts to introduce a directive to promote renewables. "Maybe it is time to tell the truth to the world that we are not going to reach this 12%," said Werring. He explained that countries have resisted both binding national targets and harmonisation of national renewables support, both aimed at creating a single strong market with cross border trade through green certificates. Nonetheless, the directive will demand a "mutually recognised guarantee of origin" to accredit renewable energy. "That is not a green certificate but it is a basis for trade." He believed it would afford a head start to countries with support systems which are compatible with cross-border trading.

Meanwhile, he promised that energy and transport commissioner Loyola de Palacio has made a strong case to competition commissioner Mario Monti for continued support for renewables to reach Europe's targets. "By putting the directive forward before the state aid guidelines are agreed within the commission, we already have set out our stall, and that will help to make the case for renewable energy." Werring added that he would like to see avoided external costs given to renewables as a subsidy. This would be along similar lines to the precedent setting support already allowed to the Danish railways.

He warned against promoting renewable energy only in the context of Europe's Kyoto commitments, as this was a far from stable path; the EU has a whole range of measures to meet its Kyoto targets. He reminded delegates of some of its other advantages, like jobs and the importance of fuel diversity -- highlighted by the recent oil crisis.

Non green advantages

Several speakers noted that the volatility of fossil fuel prices made renewables a more attractive investment by comparison. Renewable energy has higher capital costs, but more predictable revenues, explained Brian Count, chief operating officer from Innogy, the UK company to be formed from the demerger of National Power PLC. The opportunities for renewable energy are huge, he pointed out. Some £10 billion of investment in renewables will be needed in the UK to meet its domestic target of 10% of electricity from renewables, he said, £100 billion of investment could be required in Europe and £400 billion worldwide. To meet that level of investment, markets will need to be free from political risk. "Grandfathering" rights -- to ring-fence contractual agreements against future risk -- could be an ideal way to achieve this, he believes.

Turning to the UK's new renewables support mechanism, Count welcomed the government's proposed percentage obligation and called for market solutions wherever possible. "We should always look at the most cost effective means of meeting targets," he said. Market players should also be free to choose between technologies rather than have technology quotas imposed by government.

This demand was echoed by Karen de Segundo, chief executive officer of Shell Renewables. "Technology choices must be left to the market, otherwise resources could be channelled into dead ends." She also called on the renewables industry to adopt a broader, less ideologically driven approach to allow renewables and hydrocarbon mixes.

Sights on the long term

Anna Walker, the top civil servant for energy at the UK's Department of Trade and Industry agreed with both Count and de Segundo. Referring to Britain's planned renewables obligation she said: "We do believe government needs to set a framework program, but it should let the market take the decisions. We wanted to put in place a system in this country which did not rely on government subsidy and was therefore going to be a long term program."

Meanwhile, Isabel Kuhn from the Centre for European Economic Research in Germany, warned of the continued lack of harmonisation. Countries like the UK, Denmark and Netherlands are pressing ahead with different tradable credit schemes which could well be incompatible and defeat the objective of a single market. "As the schemes are now envisaged, it will lead to competitive distortions in the market," she said.

Even if renewables were wholly competitive with traditional generating technologies, existing regulatory barriers would still prevent them coming to the market, warned Catherine Mitchell of Warwick Business School. "The single energy market in theory promotes competition, but it really promotes competition only down to the divide between transmission and distribution -- it rarely gets down to distribution." In the UK, distribution network operators (DNOs) have no price incentives to connect "embedded" -- or distributed -- generators to the grid. Quite the opposite, she says. It is against their economic interests. "The system is positively supportive of centralised power and discriminates against embedded generation," she says. "Unless we have full competition the whole way through, embedded generators won't stand a chance of making it into the market." If renewable energy targets are to be met, it must be competitively, in the least-cost way with regulatory barriers gone. "What you want is for DNOs to want the services that embedded generation can provide because that will bring the overall costs of the system down and make it much easier for renewables."

Enabling financing

From Fortisbank, Gary Griffiths observed that there were not many bankers at the conference. He added that there were not that many banks in renewable energy financing, which was reflected by the lack, so far, of sufficient finance for renewable energy projects. "What we are trying to do is develop that market, create that liquidity to enable financings to go forward." He pointed out that banks' acceptance of risk varies in different countries and markets. But they are all very conscious of technology risk. If wind projects do not perform to budget, it is always the fault of poor turbines rather than poor wind. "There are too many prototypes," he said.

On the other hand, project innovation -- taking a tried and tested technology onto another plane -- is the best way of capturing wealth and enhancing bankability, advised Jonathan Johns from Ernst & Young. He claimed that new models were being developed to manage risk involving inflation, hedging, cross-border arbitrage and green credit trading. "Risk is becoming an opportunity, not just a threat," he said.

"But it is not just about risk, it is also about size," maintained Luuk Veenstra of NIB Capital Bank in London. He emphasised the importance of "creating size" to attract finance. Usually banks are not interested in projects of less than EUR 50 million. Developers can overcome this by packaging their project with several other small projects, or join up with another developer in a joint venture, he said.

Big players needed

Integral to the future of renewables is the involvement of larger players, said some speakers. Böger noted that established power companies were almost totally missing from the business of renewable energy development. They are needed to achieve the successive substitution of old fossil fuel plants with renewables, he said.

One such company, Shell, has channelled a very small percentage of its total investment into renewables, conceded de Segundo. But she explained that Shell Renewables is at an experimental stage of trying out business models. "If we want to have a real impact, we are going to have to find ways of multiplying a successful model." De Segundo foresees future markets being consumer led rather than technocrat driven. Sustainable energy companies will have to focus increasingly on the customer who will be better informed and have more power and voice than ever before, she said.

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