United Kingdom

United Kingdom

Green power marketers face two edged sword

Sellers of green power know the climate change levy will make their product more attractive, but they can only stay in business if there is enough green stuff to go around once all suppliers are obliged to buy renewable

One element of Britain's new electricity legislation with positive implications for renewables is the Climate Change Levy (CCL), a tax on the business use of energy, which kicks in next April. The effects of the levy, coupled with the renewables obligation, on the price green electricity is a subject of intense debate, not least among marketers of green electricity. While the obligation will create a rush of demand from Public Electricity Suppliers for green certificates -- and thus a likely dearth of green kilowatts for marketers to buy and sell -- the CCL will make businesses far keener to buy.

For businesses not buying all their electricity from a green source, the CCL will add £0.0043 to the cost of electricity from fossil fuels and nuclear. Power from new renewables and "good quality" combined heat and power (CHP) will be exempt. Energy intensive industries are granted relief through an 80% discount from the levy in exchange for negotiated energy efficiency targets. Revenue raised by the levy will be recycled back to business.

According to Bill Richmond of generator and supplier TXU Europe Power, levy avoidance is already a big issue. "There is no shortage of customers waiting to be supplied after April next year." Some are looking for a renewable supply, others are interested in installing on site generation -- usually small scale CHP, he explains. Richmond is enthusiastic about the prospects for renewables under both the levy and the renewable energy obligation. "We see a lot of opportunities in there, but we still need to see the detail." The likely shortage of renewables supply means that some are beginning to discuss reasonably long-term deals, he says.

A domestic casualty

But Richmond predicts that one casualty could be domestic supplies of green power. As incentives like the CCL and renewables obligation take effect, renewable generation is likely to find higher profit margins in sales of electricity to business customers and electricity suppliers rather than to the domestic market for "green" electricity, he believes.

The UK green power market is small, but most of the major electricity suppliers offer renewable tariffs to customers, nearly all of which are accredited by the Energy Saving Trust's "Future Energy" badge. Most of the power sold at a green rate comes from the facilities built under Non Fossil Fuel Obligation (NFFO) contracts of the 1990s.

Juliet Davenport of Unit[e], one of only two independent green suppliers in the UK, also sees difficulties for green traders. Sheer uncertainty is the major concern at present, she says. While prices under the renewables obligation are as yet unknown, they are nonetheless likely to be higher than those currently paid by green suppliers for renewables generation. And the impact of the New Electricity Trading Arrangements on renewable energy prices (previous story) has yet to be seen.

Under these conditions, suppliers will find it difficult to know how to price bids for contracts in the first auction of power from already existing NFFO capacity that is due to take place next month, she explains. If power from the former NFFO-1 and NFFO-2 contracted plant is not granted green certificates, this 300 MW of capacity will continue to be available to the green tariff market at cheaper prices -- currently negotiated at around £0.03/kWh.

Artificially high

Dale Vince from green market leader Ecotricity agrees that the renewables obligation will push prices "artificially high." Ecotricity prides itself on selling electricity without a premium -- "green for the price of brown." In future, this will involve building merchant renewable plant with companies that are prepared to take a longer-term view of electricity prices on the basis that they will fall significantly over the life of the project.

The company has just announced a deal to build Britain's first "merchant" wind plant in Glasgow with giant supermarket chain J Sainsbury. Ecotricity's associate company, Next Generation, is to install a 600 kW Enercon E40 machine at Sainsbury's distribution centre in East Kilbride, Scotland. Sainsbury's will buy the output -- enough to meet one-third of the centre's demand -- but the turbine will be owned and operated by Ecotricity. The deal is a step towards Sainsbury's targets of 10% of electricity from renewables by 2010, and a 10% reduction in CO2 by 2005. Next Generation is already assessing additional sites for Sainsbury's with a view to building more turbines for the company.

Vince is confident his merchant wind power concept will be popular with the commercial sector. "Sainsbury's are thinking long term about the environment and their energy needs ... Organisations can make long-term cost savings with green power for the price of brown." Sainsbury's Ian Coull says the deal allows the supermarket chain to investigate the potential of wind electricity without relying on government subsidy and without paying extra for its power. "That's good for business and the environment."

Outspoken optimism

Vince is not alone in planning new projects to take advantage of the emerging market. Several wind companies are prospecting for sites to develop under the renewables obligation. The first off the starting blocks is ScottishPower, which is building a 13 MW wind farm at Hare Hill in Ayrshire to help provide its quota of green certificates. With wind speeds of over 9 m/s at the site, ScottishPower expects it to be viable whatever the price generators eventually get in the new market.

The emergence of merchant plants are signs of confidence, although not everyone is as outspokenly optimistic as Vince about the prospects for renewables. "The market conditions are improving," he says. "The fact that we have an obligation on suppliers, targets and climate change levy exemptions, linked to regional planning for renewables and a growing awareness among consumers, is fundamentally good news."

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