Select Committee on Environmental Audit Memoranda


APPENDIX 17

Memorandum from Local Waste Solutions

ENVIRONMENTAL AUDIT COMMITTEE: ENQUIRY INTO RENEWABLE ENERGY

  Local Waste Solutions is a company that was established in 1999 to produce renewable energy from small scale plants that meet local needs for waste processing and achieve significantly higher environmental standards than are capable of being met by traditional energy from waste plants. To date, establishing waste processing plants to meet local needs has not been possible because of the high unit costs of mass burn incineration plants when constructed at small scale. Further, improved environmental standards have been difficult for energy from waste plants to achieve because of the limitations of the available technology. Local Waste Solutions is in a position to solve both of these problems by building standardised plants based on a design licensed exclusively from Enron Corp. The design is ready for construction but no full-scale plant has been built to date. Local Waste Solutions has already obtained contracts for the disposal of municipal waste. However, no further progress can be made on building these plants because of the uncertainties created by the Government's Consultation Document on the Renewables Obligation issued on 5 October. The policy described in the Consultation Document treats energy from waste as a renewable form of energy, but excludes it from the Renewables Obligation.

  This evidence focuses primarily upon the impact that the draft policy has upon the achievability of the renewables targets and whether those targets are properly formulated.

ACHIEVEMENT OF RENEWABLES TARGETS WITH PROPOSED POLICY

  Achievement of the Renewables Targets requires a growth of renewable output from 10.2 TWh in 1999 to 38 TWh in 2010. The Consultation Document on Renewable Energy, issued on 5 October 2000 (the Consultation Document), split the targets into two categories—Non-Eligible Renewables (large hydro and municipal and commercial waste) and Eligible Renewables (all other forms of renewables).

1.  Non-Eligible

  The output of Non-Eligible Renewables is forecast in the Consultation Document to increase from 6TWh in 1999 to 13 TWh in 2010, despite receiving no support from the Renewables Obligation. In principle, this could be achieved from projects that have received Non-Fossil Fuel Obligation (NFFO) or Scottish Renewables Order (SRO) contracts, but have yet to start operation. However, in practice, this seems highly unlikely. There are no plans to build new large hydro plants and, because hydro generation is dependent on rainfall, the output from existing plants might on average be expected to be lower than in 1999. Thus, all of the increase must come from energy from waste. Annex A examines in some detail the prospects for the output of large hydro and the consequent implications for the output of energy from waste plants of the renewables targets. The table below is reproduced from that Annex.

Required Output from Energy From Waste Plants

  
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Output TWh
1.36
1.70
2.10
2.50
2.80
3.30
3.80
4.80
5.80
6.80
7.80
8.80


  Achieving the target for 2003 implies the apparently modest requirement that 14 per cent of those projects contracted under NFFO/SRO, that were not operational in 1999, become operational in the four years to 2003. However, although this is a small percentage of the contracted capacity it implies that the amount of capacity commissioned increases at more than twice the rate achieved in the previous four years (see Table 2 in Annex A). The success rate of all NFFO/SRO supported energy from waste projects was only 11.9 per cent at the end of 1999.

  The most likely cause of the failure of NFFO/SRO supported energy from waste projects to move into production is the problem of obtaining planning consent. Most of the NFFO/SRO supported projects have been large, in order to achieve competitive pricing, but large-scale plants using mass burn techniques have a number of disadvantages that make them unpopular with both local people and planners. The issues associated with such plants are listed in Annex A, but in essence, the problem is that plants that are large enough to be cost effective are at a scale that is disproportionate to what is perceived as acceptable to solve a much smaller local problem.

  Achieving the target for 2010 implies a rate of growth in capacity between 2005 and 2010 that is triple the rate expected to be achieved between 1999 and 2003 and six times the rate actually achieved between 1995 and 1999. This rate of growth seems to be unlikely unless there is a fundamental shift in the application of the planning process or unless energy from waste plant can be made much more acceptable to local communities. Further, because of the timing restrictions imposed on NFFO/SRO contracts, it is unlikely that any projects being constructed after 2004 could be funded using the existing NFFO/SRO support mechanism. Contrary to the Government's assertion that energy from waste plants are "already commercially viable, well established in the market and can compete with electricity from fossil fuels", the more recent evidence on the costs of energy from waste plants suggests that electricity from such plants costs 40 per cent more that the cost of electricity from fossil fuelled plant and that the gap is getting wider. (See Annex B). Thus, it is most unlikely that any new capacity would be built after 2004 without some form of support.

  New smaller scale energy from waste technologies may potentially achieve planning consent more easily, but these technologies are not included in the NFFO contracts and hence will receive little or no support if they are outside of the Obligation. The Government cannot expect these new technologies to be built unless they are included within the Obligation.

  While it is true that the Landfill Directive will force local authorities to seek alternatives to landfill from 2006, it is by no means clear that they will pursue energy from waste as an option and the Government cannot rely upon the Landfill Directive to force substantial growth in renewable generation. Further, even where local authorities choose some form of thermal processing they will seek the lowest cost means of disposing of waste rather than the most efficient way of generating electricity. At current electricity prices it is not economic to increase capital and operating costs in order to maximise the output of electricity from any given quantity of waste. The energy contained within waste will continue to be used inefficiently unless there is some support for increasing the output of electricity. This support can only come from including new energy from waste projects in the Obligation.

  A number of independent forecasts have been made of the output of energy from waste plants in 2010:

    —  Energy Sustainable Developments Ltd., in its report "Going to Waste", suggested that the output of energy from waste plants in 2010 would be around 3 TWh.

    —  ETSU, in a report published as a technical annex to the DTI's initial consultation on renewable energy policy, estimated the output in 2010 to be 2.2 TWh if a discount rate of 15 per cent were used, rising to 6.4 TWh if a discount rate of 8 per cent were applied.

    —  The Association of Electricity Producers, in an unpublished paper, estimated that a price of 4.5p/kWh would be required to bring forward output of 4.7 TWh in 2010.

  There is little in these forecasts to suggest that the output of energy from waste plants would exceed 5 TWh in 2010, yet to achieve the Government's target for renewables, an output of 8.8 TWh is required.

  The conclusion of this analysis must be that the forecasts for the growth of Non-Eligible Renewables set out in Table D of the Consultation Document are likely to prove to be hopelessly optimistic.

2.  Eligible

  The output of Eligible Renewables is targeted to increase from 4.2 TWh in 1999 to 25 TWh in 2010. Included in this total are 7 TWh of output from projects that have received NFFO contracts, but have yet to start operation. The Consultation Document suggests that this output will be available by 2003. In principle, this output is achievable from NFFO contracts. However, the majority of such projects currently classified as Eligible are for on-shore wind. The planning difficulties faced by on-shore wind projects are well known; to date less than 12 per cent of NFFO contracted capacity is in operation. Achieving the renewables target for 2003 would imply a success rate for the remaining projects in the region of 80 per cent. Such a success rate seems implausible. The implied growth in capacity between 2003 and 2010 is significantly higher than that implied for the period to 2003. Further details on the prospects for Eligible Renewables are set out in Annex A.

  It is likely that the Renewables Obligation will enable renewables projects to be developed more quickly and with a higher chance of success than under NFFO/SRO. Changes in the planning system may also be helpful to renewables. However, we can only surmise about the effect of these changes and how quickly beneficial results will occur. What is clear, is that a step change is required in order that targets may be met.

  It is always dangerous to speculate about the rate of technological progress, but it seems likely that the primary resource from which new Eligible capacity could be produced is wind power. We have already noted the difficulties that have been faced in completing onshore wind projects. Offshore wind projects are at an early stage of development and still require grant funding in addition to the incentives available through the Renewables Obligation. Therefore, it is difficult to envisage the required growth rates for Eligible Renewables being achieved, particularly over the next five years.

3.  Conclusion

  Annex A demonstrates clearly that the contribution from Non-Eligible Renewables will not be forthcoming based upon the policy set out in the Consultation Document. The volume of Eligible Renewable generation set out in the Obligation will only be achieved if the new policy is significantly more successful than NFFO/SRO and is probably heavily dependent on the success of off-shore wind projects. If the Government wishes to have a reasonable probability of achieving its 10 per cent target, new and advanced methods of producing electricity from waste must be included within the Obligation.

RATIONALE FOR THE POLICY

  There are few people who would dispute the need to encourage more renewable generation and many who would applaud the introduction of the Renewables Obligation as an effective, market based solution to replace the NFFO/SRO system. The main questions seem to relate to the choice of projects to be included in the Obligation. There are two issues that need to be addressed; whether it is correct to exclude from the Obligation certain technologies and fuels that are recognised as renewable for the purpose of the targets; and, whether it is correct to include existing projects or projects that may be built in the future, but receive other forms of support.

1.  Exclusions of Some Forms of Renewable

  The Consultation Document states that the Government does not wish to try to pick winners and that delivering the Obligation at minimum cost is best achieved by the market, but nevertheless, the draft policy still excludes energy from waste and large hydro plants (stations with more than 10 MW capacity) from the Obligation. The only rationale offered for this decision is set out on page 16 of the Consultation Document. It asserts that energy from waste and large hydro should be excluded from the Obligation because they are "already commercially viable, well established in the market, and can compete with electricity from fossil fuels". It further asserts that "This will allow resources to be targeted more effectively on those renewables needing continued support". These assertions are fundamentally flawed. Each of these assertions are discussed in Annex B and the conclusions are summarised below.

(a)  Competitive with fossil fuels?

  There is no evidence to suggest that either large hydro or energy from waste projects are competitive with fossil fuels on a fully costed basis. The average price for contracts in NFFO 5 for energy from waste plants was 40 per cent above the current price for medium term electricity contracts.

  The true commercial disadvantage of energy from waste projects is worse than suggested by the simple price comparison, because market prices are for firm power, whereas there are no penalties in NFFO contracts for failure to supply at a uniform rate. The New Electricity Trading Arrangements will emphasise this difference.

(b)  Lower cost than other renewables?

  Energy from waste projects have been contracted at lower prices than other renewables within NFFO. However, these price differences are not large enough to justify removing energy from waste from the Obligation. Further, the delivery of contracted capacity for energy from waste plants has been very low. On the other hand, there is evidence to suggest that in some significant number of cases Eligible Renewables projects have been able to proceed without support from NFFO contracts.

(c)  Forecast output

  Independent forecasts suggest that the expected output from energy from waste plants will be significantly below the level implied within the Consultation Document in 2010. (See Annex A)

(d)  Commercial viability

  Many renewables are competing commercially in niche markets, but cannot compete at the scale required to achieve the Renewables Targets. Energy from waste and large hydro are no different in this respect. Further, a large number of renewables may be regarded as utilising proven and reliable technology.

  Commercial viability is not a factor that distinguishes large hydro and energy from waste from other renewables.

(e)  Established in the market?

  Many renewables have a long-standing place in the energy markets and have been successful in contracting large amounts of capacity in NFFO. Some of these renewables have been easier to bring into operation than energy from waste.

  The Government has rejected a banded approach to buy out prices because this would involve the Government in "choosing which specific technologies should be used to meet the obligation". This is precisely what has happened by classifying some renewables as Non-Eligible. The creation of a category of Non-Eligible Renewables is, in essence, the Government picking winners rather than allowing the market to deliver the most economic solution. The policy is inconsistent and discriminatory, and is certain to increase costs to consumers unnecessarily. It will also prevent new renewables technologies being established and prevent the achievement of the Renewables Targets.

2.  Inclusion of Existing Projects and Projects with Other Forms of Support

  Although not stated explicitly in the Consultation Document, there is a strong implication that part of the rationale for excluding energy from waste and large hydro plant from the Obligation is to prevent windfall payments being made to renewables that would exist irrespective of the Obligation. For example, hydro is the largest element of existing renewables, but excluding large hydro plant from the Obligation is likely to have little practical impact on the output of renewables, because existing plant with fully written down capital costs can continue to operate in competition with fossil fuels, but no new capacity would be likely to be built, even if support were offered, because of problems in identifying suitable sites and obtaining planning permission.

  The policy of identifying Non-Eligible Renewables has the potential to prevent windfall payments, but fails to achieve this policy objective because it defines Non-Eligible Renewables by technology band rather than considering whether, for example, the projects already exist or may get support from other sources, such as the NFFO.

  By creating a separate category of Non-Eligible Renewables which includes energy from waste and large hydro, the Government has prevented windfall gains on approximately 5.6TWh of renewable generation each year. The saving to the consumer of this policy would be up to £168 million per annum. However, the Government has failed to prevent windfall gains as follows:

    (i)  Approximately 2.2TWh of Eligible Renewables currently operating without NFFO subsidy, at a cost to the consumer of up to £66 million per annum for windfall payments (11 per cent of the estimated cost of the policy in 2010);

    (ii)  An additional 1.5TWh of output from Eligible Renewables that are currently receiving support under NFFO contracts. Those renewables will receive windfall payments from the end of the NFFO contracts, until at least 2026, and the cost of those windfall payments will be up to £45 million per annum index linked; and

    (iii)  The Consultaton Document assumes that an additional 7.0TWh will each year be produced by Eligible Renewables with NFFO 3, 4 and 5 contracts that are not yet operating, but that are expected to be commissioned in future and which would normally be expected to amortise capital costs over the lives of the contracts. These projects will receive windfall payments after the NFFO contracts terminate. This level of output would imply additional windfall payments of up to £210 million per annum from the end of the NFFO contracts until 2026.

  The costs discussed in (ii) and (iii) above have been ignored by the cost benefit analysis in Annex A of the Consultation Document because this considers only the costs in 2010. Thus, the policy is likely to cost the consumer around £321 million per year in windfall payments once NFFO contracts have terminated. There is also the potential for this sum to increase as existing renewables on mainland Europe will have the opportunity to obtain windfalls by selling Renewables Obligation Certificates into the UK. By 2018, the true percentage increase in consumers' bills will be 5.3 per cent rather than 3.7 per cent.

  By excluding certain types of renewables from the obligation rather than addressing the problem of windfalls directly, the policy as stated in the Consultation Document is increasing the cost to the consumer by perhaps 12 per cent in 2010 and 60 per cent in later years.

  An alternative definition of Eligible and Non-Eligible Renewables is described in Annex C. The definition includes large hydro and energy from waste within Eligible Renewables, but excludes all existing plants and any plant that are to be built and receive support from NFFO/SRO contracts. The size of the Obligation has been adjusted to take account of the revised definition.

  The effect of the change is to reduce the size of the Obligation and hence the cost to the consumer, but to achieve the same level of targeted output for renewables. By including energy from waste in the Obligation, it enables support to be made available to new technologies that have a better chance of obtaining planning consent, but which have been excluded from NFFO contracts. Thus, not only does it reduce the cost to the consumer, but it also significantly enhances the probability that energy from waste plants will be built and that the renewables targets will be achieved.

COST TO THE CONSUMER

  There are two aspects to the policy that unnecessarily increase costs to the consumer. First, by failing to target successfully windfall gains to existing projects and projects that will be supported by NFFO, the cost to the consumer will be increased by £66 million (12 per cent) in 2010 rising as the NFFO Contracts expire to £320 million (60 per cent) by 2018. Some of these costs have not been included in the analysis of costs and benefits set out in Annex A to the Consultation Document. (See Annex C to this letter.)

  Second, limiting the scope of renewables that can be used to satisfy the Obligation and, in particular, excluding those which are most likely to achieve commercial viability will increase the price at which Renewables Obligation Certificates trade and increase costs to consumers. The function of the market mechanism that is at the heart of the policy on the Obligation is to reduce the price of certificates when the costs of renewables fall. The buy out price should be a cap rather than a target. This cannot happen effectively unless markets are allowed to operate without undue regulatory interference.

  Although the Consultation Paper states that the average burden for consumers has been calculated to be modest (3.7 per cent), it will fall disproportionately on large industrial energy users who could face increases in bills of around 12 per cent by 2010 and greater amounts thereafter.

  The cost benefit analysis in the Consultation Document assumes that renewable generators will be paid the buy out price of £30/MWh and calculates the cost to the consumer to be £595 million pa in 2010. As has been noted above, this understates the cost of the policy in later years, and the cost could easily rise to £850 million pa (in real terms) by 2018.

  The cost of the policy has been presented as the cost of achieving the 10 per cent Renewables Target, but this is not the correct cost/benefit analysis. If the Renewables Target is to be achieved with the proposed policy, the additional output will consist of three elements; construction of capacity without any form of support; construction of capacity supported by NFFO/SRO contracts; and construction of capacity supported only by the benefits accruing through the Obligation. The policy is responsible only for the additional capacity indicated in the third category and it is to this additional capacity that the costs of the policy should be compared. On this basis, the additional cost (ie excluding the market price of non-renewable generation) of additional output is £42.50/MWh in 2010 and £60.71/MWh in 2018. In other words, by 2018 achieving the additional output will cost the consumer over twice as much per unit as is suggested by the level of the buy out price. Looked at another way, one third of payments made by consumers in 2010 and half of payments made by them in 2018 will produce no additional benefit.

  The policy does not achieve the right balance between achieving the targets and cost.

LEVELS OF ACHIEVEMENT AND RATE OF PROGRESS

  The success rates of the renewables that have been offered support through the NFFO/SRO system have been very variable. Measured as the level of contracted capacity, the three main types of renewables are energy from municipal and commercial waste, landfill gas and on-shore wind. At the end of 1999 the percentage of contracted capacity that had been commissioned was 11.9 per cent for municipal and commercial waste, 42.7 per cent for landfill gas and 11.9 per cent for on-shore wind. The differences in the success rates may easily be explained by the uneven impact of the planning process on the technologies. In the case of landfill gas, there is an expectation that the success rate could rise to 80 per cent or more as much of the capacity had been recently contracted at the time the data were collected. The success rates for onshore wind and municipal and commercial waste may also rise as recently contracted capacity is brought on stream, but historic evidence would suggest that the eventual success rates would not exceed 30-40 per cent.

NEW TRADING ARRANGEMENTS

  There is a great deal of uncertainty as to the magnitude of the effect that the New Electricity Trading Arrangements (NETA) will have on renewables projects. However, for projects that do not have NFFO/SRO contracts, it is unambiguous that NETA will increase the level of risk faced by renewable generators. The main factor is the need for generators to be able to forecast their output and match this in each half hour to their contractual obligations. Failure to balance exactly physical output with notified contract sales exposes the generator to unpredictable imbalance prices which will be higher for buyers than for sellers. This could be a particular problem for generators with uncertain energy sources, such as wind power.

CONSISTENCY WITH OTHER POLICIES

  The introduction of a small scale and very efficient new clean technology for producing energy from waste is fully consistent with European policies on the environment and waste disposal and also consistent with Government policies on encouraging British industry to development and sell new technologies throughout the world. By discouraging new energy from waste plants but including plants utilising landfill gas in the Obligation, the Government is encouraging more waste to be sent to landfill. This is inconsistent with its policies on waste management. The Government is also discouraging entrepreneurs from developing new, more efficient and cost effective forms of generation using waste as a fuel.

January 2001


 
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