While 1998 presents generators with the unique opportunity to exploit fresh markets, most new renewable ventures are still looking to the Non-Fossil Fuel Obligation (NFFO) -- the UK government's competitive system of financial support for renewable energy -- as holding out the prospect of a more secure income. But no-one knows whether there will be any more rounds of NFFO following the fifth tranche, scheduled for 1998. Bidding in the forthcoming two rounds of contracts will be fierce, with many schemes likely to lose out in the competition for contracts by the narrowest of margins. Some who find themselves outbid by mere fractions of a penny may opt to develop their schemes in the hope of finding customers for their output in the newly liberalised market.
Viewed from today's perspective 1998 presents an uncertain prospect for small and renewable generators. Many issues connected with trading in the free market are still to be resolved -- such as the pool trading arrangements and supply licence conditions. But there are more substantial barriers to be overcome before renewable energy can compete on a level playing field against conventional generation without the prop of a NFFO subsidy.
Having encouraged renewable technologies this far down the road to competitiveness through its NFFO programme, the government's Department of Trade and Industry would be reluctant to see them founder in the uncharted waters of 1998. Through the work of its renewable energy commercialisation programme -- implemented by the Energy Technology Support Unit (ETSU) -- it is helping renewables tackle the barriers that remain. Ken McAnulty, head of ETSU's renewable energy commercialisation section, stresses that his team's strategy is to work towards a fair commercial environment for renewable energy. "We don't have a commission to go and shape the market or to change the rules, but we do try to help people who have got a commercial interest in developing their case."
Recognising hidden value
One of the newer areas of focus for ETSU's programme is the value of renewable generation embedded in the electricity distribution network. "We are trying to improve access to the market and the electricity network for renewable and embedded generators as a whole," explains McAnulty. It is an issue that has been occupying Britain's renewables industry for some time. At present there are no hard and fast rules as to whether the price paid to generators should reflect avoided costs associated with transmission and distribution losses, network reinforcement and uplift charges as well as triad benefits. Unless generators can negotiate a better deal, all these savings pass automatically to the local regional electricity company (REC).
As McAnulty points out, the value of embedded generation -- electricity generated close to the consumer -- was not envisaged when the present electricity system was developed. "Renewable energy doesn't fit the pattern of central generation and distributed consumption. Hence there are difficulties in fitting the requirements of gathering renewable energy and distributing it with the requirements of the existing network."
Geoff Scrivener, co-ordinator of the ETSU section's electricity studies, reports that a study on the value of embedded generation is in progress. "Embedded generators clearly bring a lot of benefits -- and can add disbenefits -- to the distribution network," he says. "But it is a matter of negotiation as to how these are shared." To help renewable generators master the new art of negotiating a better deal with the RECs, ETSU has commissioned several projects to clarify the issues they need to take into account. A guidance document is planned for September. Later in the year, Scrivener, in co-operation with the Association of Electricity Producers, has organised a seminar on embedded generation on December 10. "Our objective is to try to bring together the two sides -- the RECs and generators -- so both have a better understanding of how they fit together."
Business development is another of the newer tasks to be tackled by the commercialisation section's team. As 1998 approaches, this area of the programme's work is assuming a high profile. Suzanne Evans, who looks after business development, explains: "We are really looking to show [renewable companies] how they can enter into the market, what means there might be of trading and what opportunities there might be for niche markets solely trading green energy," she says.
Although the mechanics of energy trading in the free market would appear an area of prime concern to renewable generators, McAnulty believes that so far most have hardly given it a thought. "The fact that NFFO is still there is occupying a lot of people. The only people who are really starting to think about it are those whose NFFO contracts are terminating." He points out that the framework is already in place for anybody wishing to trade electricity. Generators have several trading options open to them. These are:
¥ sale of electricity to the local regional electricity company (REC);
¥ sale to an independent wholesale supplier -- known as a second tier licensee;
¥ sale direct to customers;
¥ and sale to the electricity pool.
McAnulty predicts that many RECs will be keen to incorporate renewables in their portfolio of energy options on offer to their customers. "Some of the RECs will almost certainly start trading with a green tinge to them. They will want to have some kind of green badge to sell to a number of consumers who want either all or part of their power to be green. So they will buy up production from renewable facilities and sell it on." They might even absorb the additional costs of renewable energy themselves and sell it to the consumer at no extra price for the sake of having a green badge on their business, he prophesies.
Sale to a wholesale supplier could, however, prove an attractive alternative to trading with a REC. Since April 1996 generators have, for the first time, had this option too. And with the domestic market up for grabs from 1998, the emergence of supply companies trading solely in clean energy to tempt the consumer away from its local REC appears a safe bet. To shed some light on the complexities of second-tier trading, the DTI is funding three projects -- each looking at a different new sales mechanism.
The first project involves a small independent company supplying renewable electricity. The Renewable Energy Company in Gloucestershire has been trading since early 1996 (Windpower Monthly, May 1996) and is concentrating its efforts within its local area. It is buying output from renewable sources -- at the moment exclusively landfill gas sites -- and selling to a small number of customers. In common with all second-tier wholesale suppliers, the Renewable Energy Company is limited until 1998 to supplying customers using more than 100 kW.
The second project is the Green Electron Company which is to be launched in early September. This is a joint venture between the Southwest's regional electricity company, SWEB, and agricultural merchant Sydney C Banks. A nine month pilot trial began on July 1 to supply commercial customers in south west England with electricity from renewable sources. Through the involvement of the REC, the new company has the advantage of an existing electricity supplier's infrastructure.
The third study is pursuing a different tack for trading renewable electricity. The Green Pool project -- jointly funded with the European Union's Altener programme for promotion of renewables -- is looking into a trading mechanism to allow renewable generators to pool their output and sell it on to consumers. This would involve renewable generators as shareholders -- and it would have a key aim of encouraging the development of further new generation. The project is being developed by Ian Pope Associates and Orix Financial Services.
According to Suzanne Evans, the common aim of the three studies is to develop a portfolio of renewable supply options that will overcome the peaks and troughs of individual supplies to produce a consistent base-load supply that more closely matches consumer requirements. Reports from all three studies are expected in early 1997.
McAnulty also foresees that niche markets will provide valuable and varied opportunities for enterprising suppliers from 1998. "You can think of all these green scenarios; somebody who doesn't mind interruptible power like a greenhouse, or someone with a heat load or a process that just needs to be kept warm -- that is the sort of niche market idea." As people become expert at supplying these markets, they will become more aware of further opportunities, he believes.
Ensuring green is clean
By whatever method the renewable generator eventually chooses for selling output come 1998, clean power will still have to compete against traditional forms of generation. As yet in Britain the environmental costs of pollution are not realised in the price paid for electricity from fossil fuels and nuclear power -- except in small part through the fossil fuel levy. The clear advantage of renewables lies in their appeal to the environmentally conscious customer.
But how can the customer be assured that the energy is "green" ? "If you are in the business of selling renewable energy, the customer has a right to ask, 'how do I know that is what I'm getting?'" comments Ken McAnulty. "One solution is to get some organisation to provide certification or approval to say 'this is green energy'. We are at the early stages of trying to put together a certification scheme of some sort, so that anybody marketing green energy would have a way of convincing the purchaser that it really was green."
Removing the roadblocks
Since the inception of the commercialisation programme in 1991, an important target has been the removal of financial and legal barriers to renewable energy to help it compete against more established and familiar forms of electricity generation. "The initial focus we had was trying to get the lending community interested in renewables," explains Peter Chappell, financing co-ordinator of the ETSU special section. A programme of seminars and visits to bankers helped address the financial community's early ignorance of renewable energy. "That was successful in getting it on to the agenda. It certainly meant that business plans submitted to them from renewable developers were not thrown in the bin immediately; they were at least considered."
The initiative would appear to have paid off and financing for renewable projects is now easier, Chappell claims. "In the last few months it has become clear that leasing turbines is becoming popular in wind projects. That has the prospect of offering lower cost finance than the long term debt finance which the lenders are offering. It is really quite competitive now with loans up to 13 years duration -- even for small projects. That is almost as good as the conventional power generators get. So we have achieved a fair amount of convergence on the financing front compared with major generators." He does not pretend that ETSU's efforts have been the only reason for the improvement, "but I think we have helped oil the wheels."
As well as targeting the financial community, the commercialisation programme's early resources were directed to helping planners overcome their unfamiliarity with renewable development. But as Tony Duffin, land use planning co-ordinator, says, the emphasis is now on encouraging authorities to consider playing a more supportive role in renewable development. "Local authorities are more and more interested in sustainability. Clearly they have a role in planning, but they also have interests in ensuring employment and business opportunities, for council housing and waste management. When you combine all those together and assess what it is that local authorities are actually about, you conclude that they are potentially developers and they are also potentially promoters of renewables." He believes there are huge opportunities for local sustainability by matching the renewable resource with the area's energy needs. This field of study has attracted additional funding under the EC's Altener programme.
For most of its studies, however, the DTI shares the costs with the companies undertaking the projects. "We like people to think of commercial opportunities and use the programme as a resource to fill out their knowledge, and possibly as a source of funds to kick off what, in other terms, might not be quite commercial enough to get their own money behind 100 per cent," says McAnulty. He is keen to consider new project initiatives that could shed light on the problems or opportunities afforded by the opening up of the free market. "We want people who are sitting there in the middle of the industry, aware of all the nooks and chinks that open up commercially, to try to open these up for renewables.
"Each technology has a different perspective. And I do think that once the people who think they can make a business out of this just turn their mind to it, there will be some who do very well indeed out of renewable energy," McAnulty prophesies.