In a body blow to the wind industry, Britain's energy regulator has advised the government that its renewable energy policy should encourage forms of generation that are more reliable than wind. Callum McCarthy, who heads the Office for Gas and Electricity Markets (Ofgem), points out that electricity output from wind is unpredictable. Under the UK's new electricity trading arrangements (NETA), he says, reliable plant commands a premium as the majority of electricity consumers want a reliable source of supply.
"For green as for other generation, there should be an incentive for reliable and predictable generation." Reliability -- a cornerstone of the new arrangements -- will continue to be a feature of electricity generation and supply. "In terms of the government achieving its targets for green energy there is therefore great advantage in encouraging those forms of generation which are predictable and reliable," he says.
McCarthy's comments were made to energy minister Brian Wilson and accompany the findings of a review on the initial effects on small generators of the new trading arrangements. The review confirms the wind industry' fears that wind is particularly hard hit by NETA, which penalises intermittent generation. Over the first two months of the new rules, wind generators saw a drop both in the price they receive for their power and in their level of electrical output. Prices fell by 27% -- more than for any other form of small generation. The average fall in prices for small generators was 17%.
McCarthy calls the reduction in prices for small generators, "Somewhat more favourable than the overall position on generation prices." As a result of NETA, average wholesale prices for all types of generation are 20-25% below those which the previous power pool system of trading electricity would have produced. Since the prices -- both for smaller and for larger generators -- were set in contracts struck before the new arrangements were introduced, they may change as NETA beds down, he states.
The balance pendulum
The new market-based trading arrangements are designed to keep the system in balance at all times and are based on bilateral trades between generators, suppliers, traders and customers. Generators have to submit final offers for the amount of electricity they will supply 3.5 hours ahead of time. If their actual output does not match their offer they are "out of balance" and are charged or paid depending on the amount they have under or oversupplied. Generators who do not supply enough to fulfil their contracts are charged more for "top-up" under NETA's balancing mechanism, and those who "spill" on to the system after over-producing, receive a lower price than under a contract entered into in the forwards market.
Penalised for feeding the grid
At times during the first few volatile months of operation renewable generators have even had to pay to "spill" electricity on to the system because of the system operator's high costs in balancing the market. As an intermittent form of electricity generation, wind energy is particularly liable to penalties for being out of balance.
In the first two months of NETA, sales of wind-generated output fell by 13%. The Renewable Power Association (RPA) points out that the fall in output, taken with the 27% reduction in price, results in a drop of 34.8% in overall income for wind. It criticises Ofgem for not stating in its report the reduction in income for renewable generators. This should have been one of the review's key findings, says the RPA. David Byers from the RPA also points out that the report compares renewable prices with publicly traded wholesale contracts -- not the 90% of electricity traded bilaterally.
"NETA makes wind much less attractive," confirms Matt Britton from PowerGen, which operates a handful of wind farms whose output it sells to electricity suppliers. Because of the variability of wind and the risk on the balancing market, PowerGen's purchasers discounted the risk in the price they negotiated for wind generated output, he says. He does not share McCarthy's optimism that prices will rise now that NETA is operational. "I get the impression that current energy prices are even more discounted than they were earlier on."
No portfolio approach
Ofgem now admits that the hoped for consolidation of different types of generation -- a key provision to help small and intermittent generators -- has not worked so far. It had hoped that use of consolidators' services would allow small generators to aggregate their output with other generators to minimise their imbalances. But according to the review, only very limited consolidation services are available so far.
But McCarthy claims that Ofgem, which was instrumental in setting up NETA in the form it is today, is now powerless to make any significant changes to help small, particularly intermittent, generators. And he urges the government that any action to give additional help to green energy should not set at risk the "wide benefits" of NETA's more competitive regime and its lower prices. "In particular, it should not harm a central feature of NETA, namely that costs fall on those who give rise to them." He apparently ignores the fact that wind is being charged for costs it is not imposing on the system (Windpower Monthly, June 2001).
Renewables industry groups had repeatedly voiced their fears about the potential devastating effects of NETA while it was in the development stage. Now they claim the new arrangements threaten the government's target for 10% of electricity to come from renewables by 2010.
"Ofgem have verified long-held concerns that NETA is incompatible with the UK renewables and CHP targets," says Nick Goodall of the British Wind Energy Association. "The NETA process is damaging existing renewable energy projects and sending out the wrong signals to industry increasingly investing in future sustainable energy."
The review of NETA's effect on small generators was called for by the previous energy minister, Peter Hain. Yet despite the concern voiced by industry groups, only 106 questionnaires were returned out of more than 500 that Ofgem sent out to organisations -- and a mere 40 contained the complete year on year data that Ofgem had requested. This reflects the apparently lack of interest in the issue of wind generators, claims Goodall. "Some companies do not appear to be fussed," he says. "The reason is that either they do not believe it's a problem for them, or they do not understand it and are burying their head in the sand, or they think it will all sort itself out in the long run."
One glimmer of light on the horizon is the Renewables Obligation, due to come into effect on January 1. This will require electricity suppliers to secure a proportion of their electricity from renewables through purchase of renewables obligation certificates (ROCS) -- either direct from renewable generators or from third parties such as power traders. Many hope the renewables obligation will compensate for the negative effects of NETA.
Wind, however, will still continue to be penalised compared with other renewables. Already, in contracts being negotiated with suppliers wind is commanding a lower price than other renewable technologies, says Britton. "The Renewables Obligation is not going to level the playing field for wind compared to other renewables." He adds: "We have to think about what is going to happen in the longer term in the balancing market. If the market smoothes out, purchasers will be able to balance the risk of wind compared to other forms of generation. But if the price for imbalance volume falls, purchasers will need to adopt a portfolio approach."
McCarthy on wind
Ofgem continues to claim that overall, the new arrangements have worked well in their first three months. But McCarthy warns Wilson that because of NETA's success in driving down wholesale electricity prices, the government will need to give renewables a higher level of subsidy to enable it to meet its renewables target.
McCarthy's warning concerns the "buy out price" which suppliers will have to pay if they want to buy out of their renewable obligations and which therefore will set the price which they will be prepared to pay for electricity from renewable sources.
In a further dig aimed specifically at wind he adds: "If, for wider environmental reasons, the government wishes to encourage particular forms of renewable energy which are relatively less predictable or reliable this will give rise to additional costs, which should be recognised."
NETA eradicates obligation
David Byers from the RPA welcomes Ofgem's recognition that the government should give renewables a higher level of support through the renewables obligation to meet its targets. "If no improvement is made to NETA, then the early evidence suggests that the buy out price is incompatible with market, technology and political conditions. A balance must clearly be sought between consumer cost and a desirable end result, but the impact of NETA suggests that the development impetus established under the Renewables Obligation may have been substantially eradicated," he says.
But in a report by the Confederation of Renewable Energy Associations (CREA), concerns are expressed at compensating for the failings of NETA by giving renewables more subsidies. "I would prefer to see NETA adjusted to be less harsh on small, unpredictable generation," says one wind power generator. "This is perhaps a presentation point, but the higher the buy out, the higher the perceived subsidy."