It is an irony that the country with the best wind resource in Europe should lag so far behind its neighbours in providing a suitable political and economic climate to exploit its riches to the full. UK wind energy developers have long looked wistfully at the favourable policies and government attitudes towards renewables enjoyed by their counterparts in Germany, Denmark and Spain. Despite ambitious renewables targets and ministerial rhetoric about the need for sustainability, the UK government's progress on a package of policies for renewables has been painfully slow. Consultations have dragged on for three years -- ever since Labour swept to power in 1997. The outline of a policy framework -- and of the electricity market in which it must fit -- is taking shape, but consultations over the finer details are more fevered than ever. Exactly how the overall picture will look remains to be seen when so many key pieces of the jigsaw have yet to be slotted into place.
Dictating the protracted length of the process has been the upheaval in the British electricity market as a whole, which is virtually unrecognisable from its pre-election state. The UK seized the nettle of freeing the market to full competition earlier than most and by the end of 1999 all electricity customers could choose their supplier. The legacy of liberalisation continues. An important milestone was passed on July 28 when the Utilities Bill got royal assent, paving the way for the New Electricity Trading Arrangements (NETA), the separation of existing electricity utilities' supply and distribution businesses and, most significantly for renewables, an obligation on suppliers to buy a proportion of their power from renewable sources.
Consultation on consultations
Since the Department of Trade and Industry (DTI) unveiled outline plans early in 2000 for a renewables obligation to replace the much abused Non Fossil Fuel Obligation (NFFO), it has been seeking the renewables industry's views. The obligation will require public electricity suppliers (PESs) to secure a proportion of their power, rising over time to 10%, from renewables. This they will do by buying "green certificates," which will be issued to renewable generators for their output and may be traded separately from the physical electricity.
The next stage is a further consultation document to be published on October 5. But it heralds merely a "preliminary" consultation, to be followed by a statutory consultation in 2001. The DTI hopes the bulk of views will be exchanged during the preliminary stage, allowing it to "fast track" the process during the statutory stage. But as consultation succeeds consultation, the renewables obligation will not be in place before October 2001 at the earliest, while most commentators think 2002 -- or even 2003 -- more likely.
As yet, the jury is still out on how much the obligation will benefit renewables. "It is too blunt an instrument to do all that is expected of it," says Gaynor Hartnell from the Confederation of Renewable Energy Associations. The wind business is more enthusiastic. "It's probably going to work," says Nick Goodall of the British Wind Energy Association (BWEA). "Once it beds down, and when the new planning process [regional targets for renewables] has groaned into action, I think we will say yes, it's much more worthwhile than NFFO." Alan Moore from National Wind Power says that if the obligation delivers the prices suggested in the DTI's February policy document, pressure will be taken off the windiest sites. "If we can get four pence per unit or thereabouts we can double the search area for wind farms compared with the areas that have been competitive in NFFO."
Buy out or cop out
The proposals, however, contain a key element of uncertainty: retailers of electricity, the "suppliers," will be given the option of "buying out" of their obligation to purchase green certificates at a price which as yet is unknown. That will effectively place an arbitrary cap on what suppliers will pay for green certificates, instead of allowing the price to follow market forces. The government apparently fears that competition among renewables generators will not be enough to prevent prices being pushed sky-high by the demand its legislation will create. The DTI initially suggested an indicative buy-out price of £0.02/kWh for suppliers who fail to secure their allotment of green certificates.
Another bone of contention is that proceeds from buy-outs will be recirculated back to suppliers, but the big question remains: will all suppliers receive this reward, including those who bought out of their obligation as well as those who complied with it? Renewables generators will probably only get a proportion of the buy-out revenues. They will, however, in all probability also receive some value from the new Climate Change Levy. All elements considered, the value of electricity under the renewables obligation looks as if it will fall in a range between £0.03/kWh and £0.04/kWh (table).
The uncertainty over prices is preventing new renewables from being developed, argues Colin Palmer of small developer Wind Prospect. "There is no point in doing preparatory work for an environmental statement when we do not know what prices are going to be. Until the buy out price is fixed, we do not even know which areas of the country we should look at in terms of wind speeds."
Offshore high and dry
The BWEA's main gripe with the proposal is that it does nothing to encourage offshore wind. The £0.04/kWh price is too low to support either offshore wind or energy crops. To bridge the gap the DTI has proposed capital grants from a £50 million fund drawn from proceeds of the Climate Change Levy. This suits capital intensive offshore wind, but only £13 million a year for three years, to be shared with energy crops, was made available from the government's spending review in July.
This will not kick start a substantial UK industry, says David Still from Amec Borderwind, which is building the UK's first offshore wind project near Blyth, Northumberland. "If you give me £20 million of capital grants I can build 100 MW offshore. It is not really significant enough." UK companies and UK jobs will be the losers, he warns. "The focus should be on getting three, four or preferably five large demonstration projects in. We are only going to see the beginnings of a substantial offshore industry when we have several large companies being innovative."
While the renewables lobby argues fiercely for a higher buy-out price, the DTI's attempts to make the limited pot of money go further appear more desperate than ever. One of its latest rumoured ideas is a separate higher buy-out price band for offshore and energy crops. The concern is that with limited funds overall, cheaper technologies -- including onshore wind -- would be short-changed. "The gap in price between wind on land and offshore wind can best be bridged by capital grants, as long as it is supported under the umbrella of the renewables obligation, and provided the buy-out price is set at a level that is workable," comments one wind farm developer.
Kicked out in the cold
Another idea being floated by the DTI is to not grant green certificates for power from waste incineration. This would be popular with environmental groups and conform with the European draft renewables Directive which excludes energy from waste and landfill gas. The DTI argues that waste's exclusion from the obligation would release money to allow a higher buy-out price for more expensive technologies, making the capital grants go further.
But Hartnell wants to see landfill gas remain within the renewables obligation. It provides environmental benefits by reducing methane emissions and some 150 MW of landfill gas will not otherwise be developed, she says. The issue could split the renewables industry.
Green power plant that have already been subsidised through the first and second rounds of NFFO also look set to be excluded from the renewables obligation. These account for nearly half the operational renewable capacity in Britain and their output is mostly contracted to green power marketers. Two arguments support the proposal not to grant them green certificates: projects should not be seen to be subsidised twice over; and the obligation's purpose is to encourage new capacity, not to support existing output. Peter Edwards from Windelectric, who built the UK's first wind farm and today sells his output to green power supplier Unit[e], disagrees. "There is no justification for it at all." He says that outside the obligation, renewable generators could only expect to get around £0.015/kWh under new trading arrangements. This will not be enough for some schemes which were built late and did not have sufficient time at the high NFFO rate to pay off their debt. "We are one of the fortunate ones who have paid off everything. We can go ticking on until the day a mechanical problem comes along," he says. "NFFO 1 and 2 projects are producing nearly half of all green electricity at the moment; to put them in jeopardy is not a clever thing to do."
Not a NETA way
The wind industry still has opportunity to influence the ultimate shape of the renewables obligation in the ongoing consultation process. No such obvious opportunity presents itself for making changes to the unfair electricity trading arrangements under which wind power generators will have to operate; or to the country's cumbersome physical planning process -- so democratic at grass roots level that small vocal minorities are jeopardising the entire nation's policies for a cleaner energy future. These are two areas in which the wind lobby is a minnow among whales. But if the government is serious about increasing the minnow's stature to that of a whale, it will have to amend the New Electricity Trading Arrangements (NETA) and make special provision for wind plant in planning policy.
A three month period of testing NETA's IT systems and services began in August leading up to the target date for "go live" on November 21 -- though many in the industry doubt that the electricity regulatory office (OFGEM) and the DTI will be able to meet this date. NETA replaces the electricity pool with a series of bilateral markets: these are a long-term forwards market, short-term power exchanges, a balancing mechanism close to real time and a settlements process. The government expects, against a background of growing scepticism, that competition under NETA will drive down wholesale electricity prices by 10%. While lower prices would put the squeeze on wind, there seems to be little evidence to suggest the government is right. OFGEM has apparently done no modelling to support the 10% claim and analysts who have, say prices could increase, not least because NETA will require more spinning reserve on the system for its trading rules to work than is actually necessary to cover demand. Meantime, to add to the confusion and market uncertainty, forward prices for new baseload plant have fallen by 25% since the announcement of NETA, and even steeper price drops have hit unpredictable smaller plant.
More than the impact of such depressed prices, however, the wind industry fears the inequities of the balancing charges system central to NETA (Windpower Monthly, May 2000). Balancing charges are paid on the difference between the contracted position of a plant at gate closure -- three and a half hours before the trading period -- and the actual metered volume. What is a major unknown factor is the level of the imbalance charges for wind generation. At a London conference in July, Alan Moore pessimistically predicted that NETA penalties could be from £0.003/kWh or as high as £0.01/kWh. Andrew MacDonald of Concert Energy adds that imbalance charges will disproportionately be paid by smaller players. "Whereas larger players are already planning to avoid these charges by using their risk management tools, the tools provided for embedded generators have simply not materialised in the market."
To mitigate the impact of balancing charges, renewable generators can aggregate their output under a consolidator to even out the peaks and troughs of intermittent generation. Consolidators will usually be large existing suppliers who have a portfolio of conventional plant. As well as reducing balancing charges, consolidation also spreads the costs of taking part in the new market and retains the "embedded" benefits of distributed generation.
Planning is the biggest stumbling block for wind. The localised power of communities to grant or refuse building permits for any significant new structure -- and the long and protracted appeals process -- has prevented many wind plants from being built. Unless the rate of building consents improves, the country will not achieve its 5% target for renewables by 2003.
In the short term, hopes for getting more wind plant through the eye of the planning needle are pinned on "portability" of NFFO contracts, that is to say transferring contracts for sites that failed to secure consent to locations more acceptable to the planners. "Portability is the big issue at the moment," says Chris Shears of developer Renewable Energy Systems. "That would be the real shot in the arm that the UK industry needs in the short term in order to get some capacity built over the next year or two."
The DTI is keen to see portability introduced, although it wants contracts to remain within the same planning authority area so that developers work with planners to find alternative sites rather than engage in speculative "planner hopping" that could harm the industry. The fly in the ointment is OFGEM, whose lawyers have argued that transferring the site-specific contracts to different locations is illegal. OFGEM has now engaged a new set of lawyers to re-examine the issue.
In the longer term, regional targets for renewable energy, coupled with the renewables obligation, could be a long-term solution to the planning impasse. Palmer is optimistic that the government's policy of regional planning for renewable energy will at last make planners take wind energy seriously. "It is no longer viable for local people to simply say we do not want wind turbines. But they can have a say in where they want them to be located." By apportioning shares of the overall target around the regions, the amount of wind energy needed in any one area will be shown not to be the nightmare scenario that people fear, he says. "The DTI targets imply around another 3000 wind turbines overall which would be nowhere near the density of wind turbines in other parts of Europe."
Palmer points out that the renewables obligation will also allow developers to be more flexible in their siting and project development plans, because there are not the "remorseless deadlines as under NFFO." Moore agrees. He says the obligation will permit more local involvement than the closed, competitive nature of NFFO. "The new process will allow us to talk to local communities much sooner."
By the time the regional planning policy for renewables and the obligation on suppliers to buy green certificates take effect, they will be too late to assist Britain in meeting its interim target of 5% of the nation's electricity from renewables by 2003. The DTI argues that the UK is on course for meeting the target from new capacity contracted under NFFO-4 and NFFO-5. By that time it should become clearer whether it will achieve the leap to the 10% target by 2010, or whether the UK is still destined to be the poor man of Europe when it comes to generating electricity from renewable sources.