Select Committee on Environmental Audit Memoranda


Memorandum from the Association of Electricity Producers

  1.  The Association of Electricity Producers (AEP) is the UK trade association representing electricity generators. It has over 100 members; many of them have interests in renewable generation. Annex 1 lists the Association's members.

  2.  For several years the Association has described an obligation on suppliers to source a defined percentage of their sales from renewable energy as a means to encourage further renewable energy development. It is very pleased that now the Government is suggesting this route forward. The AEP has written to the DTI several times in the past about how such an obligation could be structured.[47] We would be happy to provide the Committee with copies of our submissions to the DTI.

  3.  This response draws heavily on the paper we sent to the DTI last December for its consultation on renewable energy.


  4.  There are a number of key points we wish to emphasise:

    —  There are three key drivers on suppliers to ensure the success of the Renewables Obligation:

      —  the buy out price;

      —  the profile; and

      —  the method of recycling any buy out receipts.

The buy out price should be at least 3.5p/kWh. The profile should be challenging and as high as possible as early as possible. It is extremely important that the size of the demand for Renewable Obligation Certificates (ROCs) set by obligation remains well ahead of the supply. Any buy out funds should be recycled to reward those who comply with the Obligation.

    —  Whilst a market mechanism is welcomed, it could be rendered useless if non-market barriers are not removed or eased. The difficulties in obtaining planning permission could undermine the Obligation and make the Government's target hard to meet. The industry wants to deliver, but cannot if there are insurmountable barriers.

    —  The methods used to incentivise how networks operate are crucial.

    —  The Obligation should be simple.

    —  An efficient secondary market in ROCs will provide price discovery and increase confidence for long term planning and Power Purchase Agreements. Any barriers to such a market developing should be avoided.

    —  The early take-up of funds in the announced capital grants could be maximised through separate sequential competitions for the different streams of funding, together with the introduction of enhanced capital allowances.

    —  The Government should consider providing additional funds to encourage investment in community-based renewable energy projects.


  5.  The difficulties of obtaining planning consent have been the greatest impediment to the uptake of NFFO and SRO contracts.

  6.  See comments below about planning.


  7.  The Association is very concerned about the bias that might be applied to different renewable technologies. The potential exclusion of energy from waste is hard to comprehend.

  8.  The argument seems to stem from a view that output from energy from waste can cost less than output from other renewable plant. Output that is converging faster with prices of output from non-renewable plant should not be penalised.[48]

  9.  Through the NFFO, SRO and the associated Fossil Fuel Levy payments, consumers' funds have helped to bring online new plant and facilitate price convergence. If owners of such plant can agree contracts for output at a price lower than other technologies or fuels, this will mean the amount of money earmarked by Government as an acceptable cost on consumers (see below) can buy more power. Consumers should benefit through their past and future expenditure, through provision of as much green energy as possible.

  10.  It would seem rather churlish to exclude energy from waste, for example, from the Obligation, possibly from the CCL exemption too, yet keep it as part of the Government's renewable energy 10 per cent target. Exclusion of technologies seems inconsistent with the statement in the DTI's recent document New and Renewable Energy, Prospects for the 21st Century, The Renewables Obligation, Preliminary Consultation, that involving Government in choosing which specific technologies should be used to meet the Obligation "runs counter to the market led approach that has been designed to ensure that suppliers will meet their Obligation by the most economic means. The Government does not want to segment or unduly distort the marketplace, or to send out the message that some renewables are more important to the UK's target than others. Instead, it believes that competitive forces should be the drivers that shape the industry that emerges as a result of the introduction of the Obligation." It continues, that a policy with a banded Obligation "would require Government making firm and irrevocable decisions as to which technologies should be used to meet the Obligation. This would fail to take future technological and market developments into account, and perhaps lead to resources being directed to areas of least need. The Government's preferred approach is sufficiently flexible to accommodate both changing circumstances and future developments, which are inevitable over the period of the Obligation. The Government will keep its policy under review while maintaining a dialogue with stakeholders."

  11.  First, there seems to be a failing throughout the DTI's document to distinguish clearly, when appropriate between resources and technologies. In attempt to clarify this, the Association has produced Annex 2: Biomass and waste terminology.

  12.  Second, the Government states that it does not wish to choose between technologies.

  13.  Energy from waste has not converged in price with the market price of non-renewable output. In particular, ROCs are needed for new small and medium-sized plant, which otherwise have fragile economics, yet which meet the "proximity principle" in the DETR's Waste Strategy 2000.[49] In addition, energy from waste acts as baseload renewable energy output, and as such makes a significantly more reliable contribution, to the percentage of electricity from renewable energy than might seem. If energy from waste is excluded from the Obligation, the Government will not be on course to meet its target, and is likely not to realise its ambitions in Waste Strategy 2000.

  14.  Section 2.6 of the DTI's consultation paper states that ROCs will only be issued in respect of energy that is "supplied by a licensed electricity supplier in Great Britain". This excludes on-site renewable energy projects where the energy is supplied to the host on a licence-exempt basis. Given the income from ROCs, on-site generation represents an economically attractive possibility, as the energy supplied to the host is not subject to Distribution Use of System charges. This type of development also has some significant "plus points" from the DTI's viewpoint. First, the investment and ongoing employment occur in the UK. Second, these projects have the potential to reduce energy costs for UK businesses. And third, projects are likely to be outside `sensitive' areas. Therefore, the Association has urged the DTI to consider carefully the impact of its proposals on the development of on-site renewable energy projects, and on projects where the energy is supplied to customers over private networks. We asked the DTI to consider the possibility of allowing ROCs to be issued in respect of energy that is supplied by licence-exempt suppliers in Great Britain, as well as energy supplied by licensed suppliers.

  15.  There are concerns that energy from waste could be excluded from CCL exemption status; this would reduce the amount of power valid for exemption from the CCL, and contribute to Levy receipts. The size of the receipts should not be the policy driver.

  16.  Annex 3 argues for the value of energy from waste being included in the Obligation.

  17.  Extensions or improvements to large-scale hydro should also be included in the Obligation.

  18.  The rules for inclusion should be the same across Great Britain, to facilitate trading.

Effect on the Fossil Fuel Levy

  19.  There will be an auction of power as part of the NFFO Saving Arrangements. Whilst the replacement NFFO contracts assured generators that they will be paid the same as they are currently, the discussion about what is a valid renewable technology does have an effect. It will affect the price that suppliers are willing to pay for the output in the auction, and thus the amount that will have to be "topped up" via the Fossil Fuel Levy (FFL) to fund the replacement NFFO contracts.

  20.  In all the comments the DTI makes about the effect on consumers, the possible effect of an increase in the FFL through exempting certain fuels or technologies from the Obligation, and possibly the CCL exemption, is not mentioned.

  21.  It might be argued that there is no difference between having the associated price increase through exempting potentially cheaper output being paid for via increased bids in the auction for the power, or via the FFL. However, the effect would not be the same. The FFL is placed on all consumers, including the domestic sector. As it is a percentage on final bills, domestic consumers will pay more per kWh than industrials.

Political decision

  22.  If the only benefit from renewable energy were the measurable offsetting of carbon emissions associated with the electricity that the renewable output displaces, then a carbon market would deal with the added value of renewable generation. The Government, however, recognises that there should be acknowledgement of further benefits (also currently not valued, or undervalued by the market) related to the environment, sustainability and diversity: the Government's target and the percentage obligation aims to take these into account.

  23.  The decision about the balance between the environmental and other benefits and cost to the consumer is a political one. The route that attempts to achieve the targeted balance is a judgement based on a view of economics and politics.

Government assumptions on cost

  24.  In New and Renewable Energy, Prospects for the 21st Century, The Renewables Obligation, Preliminary Consultation there is an assumption that the buy out price will become the marginal price at which all generators or developers will price their output. This cannot be substantiated, and many market players (generators and suppliers) are convinced this will not be the case. The assumption has a large effect on the details on the Obligation.

  25.  When considering the balance between output and cost to consumers in the document, the constraint is the politically-acceptable percentage by which electricity prices as a whole can rise. The cited amount, 3.7 per cent, is then translated into an amount of funds ("around £600 million in 2010 . . . on 1998 electricity prices"); a calculation is then performed to see how much renewable energy this can buy.

  26.  Two further assumptions seem to be included at this stage: the amount of electricity that will be needed from the percentage obligation; and the contestable assumption mentioned above, that all generators and developers will be able to sell their ROCs at the buy out price.

  27.  Although the possibility of suppliers paying a fine (the buy out price) rather than buying green power, is mentioned earlier in the DTI's document, when discussing costs, the paper fails to mention the associated effect: prices to consumers could increase, and the associated funds might not be used to buy renewable power, rather, they might go to a buy out fund. If the buy out receipts are paid to other suppliers who then fund renewable energy projects, consumers of a non-compliant supplier (who had paid into the buy out fund) might accept the outcome. Consumers might find it harder to accept paying for a supplier to pay a fine that goes into the general business of another supplier.

  28.  The Association would stress that it cannot be stated with certainty that generators will be able to contract ROCs at the buy out price, and that the assumptions in the DTI's document about cost of the Obligation, are incorrect. It is particularly important at this stage to tackle this issue, not least because one implication of this assumption seems to be the potential exclusion of energy from waste.

Level of the buy out price

  29.  The DTI document New and Renewable Energy, Prospects for the 21st Century, The Renewables Obligation, Preliminary Consultation assumes that there will be a buy out price. The rationale for this is that it will protect consumers, particularly the fuel poor, from potentially unreasonably high electricity prices. The buy out price will act as a cap on the price that is paid for renewable energy.

  30.  The level of any buy out price is very important. Although it is described as enabling suppliers to pay an agreed amount if they fail to fulfil the obligation that is imposed on them, in reality, suppliers can choose to pay this price rather than buy renewable energy. Therefore the level at which the buy out is set will directly influence the amount of renewable energy that is seen to be economic and viable.

  31.  The Association is pleased that the Government has acknowledged the constraint on output of a buy out price, and that the paper suggests a buy out level higher than the indicative figure in earlier publications. We recognise that the buy out ensures that all suppliers are engaged in the process of bringing electricity from renewable sources online.

  32.  However, it should be pointed out that although a buy out price of 3p/kWh might support some renewable output, it is not high enough to secure output from other plant, including offshore wind and biomass.

  33.  The value of ROCs should be determined in the market place, but the buy out price should be as high as possible, to strengthen the hand of generators as they negotiate contracts. The Association suggests the buy out price should be at least 3.5p/kWh.

  34.  The Association would point out that were the buy out price to be set at 3p/kWh, generators would not receive (1.8-2.5 plus 3)p/kWh as suggested in the DTI's document. Past experience shows that the value of any extra benefits conferred by renewable generation over and above output from other sources of power, will be split between the suppliers, who can realise the value, and the generators who produce it. It is likely that a buy out price will mean suppliers and generators will settle on a ROC price that is a discount to the buy out price.

  35.  Much will depend on competition between suppliers, however, contracts for ROCs covering debt repayment periods for major capital projects (10-15 years), which will be a requirement for longterm bankable Power Purchase Agreements, will most likely be discounted. A higher buy out price would help balance this effect.

  36.  We support any buy out price being linked to the Retail Price Index, as suggested by the DTI.

NFFO Saving Arrangements

  37.  The Association is pleased that the new arrangements aim to disrupt the generators' situation as little as possible.

  38.  The price that comes out of the NFPA's auction is very important: not only will it proscribe the level of the FFL, but it will act as a benchmark price for output outside the NFFO process.



  39.  The Association has expressed, on a number of occasions, its concern about the effect of the New Electricity Trading Arrangements (NETA) on small producers in the open market, including renewable energy projects which are not the subject of NFFO contracts. Such schemes will be at a considerable disadvantage in a market which favours plant with larger and more predictable output. (The situation will be a particularly problematic until the Renewable Obligation takes effect.) There is considerable concern among renewable energy companies at the way in which the DTI/Ofgem programme has responded so slowly to the problem. The Association has explained the difficulties facing smaller companies to the Energy Minister, Ofgem and the officials involved. Only recently has a solution been put forward—only a few weeks before NETA are due to take effect—and unfortunately, it appears to be far too complex and expensive for smaller players. Discussions on this matter are continuing.

Embedded generation

  40.  A large growth in the number of renewable energy projects will have a significant impact on the operation and function of electricity distribution systems. The present regulatory incentives on Distribution Network Operators need to be reviewed and revised with these changes in mind. Without change, the cost of network access will severely constrain the development of renewable energy projects. In July 1998 the Association published in July 1998 a policy document which drew attention to the issues involved. The Association welcomes the report of the DTI/Ofgem Working Group on Embedded Generation and looks forward to helping develop its proposals.[50]


  41.  We would hope this would increase. See comments below.


  42.  The requirement on suppliers to fulfil the Obligation is a key driver behind this mechanism. The buy out option has weakened this element of force. The Association believes that a challenging profile, particularly in the early years of the Obligation, is paramount as a clear message to suppliers that the mechanism is robust and that the Government is serious about its intent to meet its target of the UK having 10 per cent of electricity from renewable sources by 2010.

  43.  A challenging "profile" would encourage suppliers to offer early long-term bankable power purchase agreements to developers who are looking to install the newer technologies.

  44.  We are surprised that in the DTI's recent document there was no reference to the target to have 20 per cent of electricity from renewable sources by 2025, despite references being made to Shell's assertion that by the mid twenty-first century, 40 per cent of the world's energy needs will come from renewable sources of power. The Association has asked that the Government's longer-term goal be clarified.

  45.  In addition, an indication now of the size and shape of the augmenting profile from 2010 would help the market to develop.

  46.  The projected regime and rules need to be stable to help establish a good secondary market for ROCs.

  47.  The size of the profile should be altered to take account of including energy from waste projects in the Obligation (and removing them from the "non eligible" element).

The proposed capital grants for offshore wind and energy crops

  48.  The Association welcomes the announcement of the opportunity for capital grants from revenues from the Climate Change Levy (CCL), via the Carbon Trust, (£39m) as planting grants from the Ministry of Agriculture, Fisheries and Food (£12m) and from the lottery-funded New Opportunities Fund (£50m).

  49.  It also welcomes the announcement by the Prime Minister that he has asked the Performance and Innovation Unit "to undertake a comprehensive study into the future of renewable energy, with a view to increasing substantially our long-term investments".[51] We hope this will include funds for Research and Development projects, as well as additional support for generation projects.

  50.  However, none of these options adequately addresses the issue that production costs of, say, offshore wind and biomass, are very different. Whilst offshore wind is a capital intensive technology that should benefit from the offers of capital grants, biomass's costs relate much more to ongoing fuel costs. Indeed only biomass and some landfill gas projects pay for their renewable fuel. The Association has two suggestions which might help.

  51.  The first suggestion is very simple: a lower gate fee or rate of landfill tax could be applied to the final residues from biomass plants that are required to dispose of their ash to landfill. Some 5-8 per cent of the fuel used in biomass combustion is left as residue. This can be higher if fluidised bed combustion is used. A lower disposal rate for landfilling this residue (possibly related to providing evidence that some effort has been made to recycle) could be applied. For example, it could be exempted from the Landfill Tax.

  52.  A second suggestion that could be considered, is an "agricultural certificate" that could be granted through a bidding system to developers who offer to produce lowest priced output from biomass. Once allocated, the developer would only be able to redeem the certificates' value when the plant was up and running, and the output, and the related ROC, were redeemed by the purchasing supplier.[52] The value of the agricultural certificate (p/kWh) could be announced at the time of the bidding.

  53.  Whilst the capital grants are welcomed it should be remembered that the cost of developing a wind farm is large: current projections are around £1m/MW installed. The announced grants should be seen as a first phase; it should be stated that the Government will consider further grants to facilitate continued industry growth.

  54.  The grants would be more valuable if they were coupled with enhanced capital allowances. This type of assistance is being given already to combined heat and power projects and energy efficiency schemes, and as such has been recognised as a potentially valuable tool. The Association would suggest that similar enhanced allowances be given to renewable energy projects. The availability of one hundred percent write-down in the first year would be of substantial benefit to most developers. This could also enable the capital grants to be spread more thinly over a larger number of projects.

  55.  The period between the closing date for capital grant applications and the date when the grants will be announced seems unnecessarily long. To allow companies to know which have been successful and to allow those to progress their projects, this period should be shortened.

  56.  In addition, we question whether it is encouraging the best use of a company's resources to have all the necessary consents in place when bidding for a capital grant. Achieving such consents can be time-consuming and costly, and will invariably delay the award of initial grants.

  57.  There could be separate, rolling competitions for the different sources of funds. This would help maintain momentum in project development and enable early moves to implement projects as soon as possible. The stop-go nature of the NFFO process was universally disliked amongst developers, many of whom are no longer in business because of the cost of delays.

  58.  Additional grants to community-based schemes could be initiated. Projects could include solar. Such grants would encourage community interest in renewable energy developments, and could, for solar in particular, help stimulate an industry base.

  59.  In general, whilst it has been recognised that biomass and offshore wind are needed to contribute to the Government's targets, other technologies including low head hydro, PV and tidal should not be excluded as they will become more competitive, in cost terms, over the period of the Obligation.

Guaranteed markets?

  60.  The Association welcomes the Government's acknowledgement, in the DTI document, of the value of providing certainty; this seems to have instigated the proposal that the Obligation lasts until 2026. Certainty helps the financing of projects: the sentiments behind the statement about duration of Obligation are appreciated, although the reality might be different due to potential changes of Government throughout the next quarter century.

  61.  However, we would point again to the buy out option and the way in which it reduces certainty for producers, by giving suppliers an alternative to purchasing renewable energy.

  62.  The current discussion about exclusion of technologies is also, as mentioned above, very unhelpful.


  63.  Gaining planning permission continues to be the greatest barrier to developing renewable energy projects including the realisation of NFFO and SRO contracts.

  64.  The Association welcomes the DTI's recent recognition that "non technical barriers" exist and its stated commitment to address them.

  65.  The DTI is aware that the situation is now arising where some projects that gain local planning permission are being called in for further planning scrutiny at a regional level. Clear guidance should be given from Government to regional and local planning departments, emphasising the UK target.

  66.  Further thought needs to be given as to how regional planning guidance might be given effect locally to help bring more renewable energy projects on line.

  67.  If planning consents are not forthcoming, existing NFFO and SRO contracts will not be able to come online and contribute to the Government's target, and many potential new projects will not be realised.

  68.  We are pleased that the Government has been working, with Ofgem and the NFPA, to allow the movement of NFFO contracts to new development sites, to give schemes a higher probability of coming to fruition.


  69.  The Association would welcome the opportunity to discuss these proposals further with the Committee.

January 2001

47   For example AEP responses to the DTI's consultation on New and Renewable Energy: Prospects for the 21st Century, AEP responses (summary and detailed response), May 1999. More recently "Response to DTI's consultation: New and Renewable Energy, Prospects for the 21st Century, The Renewables Obligation, Preliminary Consultation", December 2000. Back

48   The assumption that reducing prices in past rounds of NFFO can continue in a similar trend is flawed. Many sites and potential projects (using each technology) have been "cherry picked", leaving, for the future, sites that will be potentially more expensive. Back

49   The fixed costs of small and medium-sized plant (total costs c£25-30m) are similar to larger plant and as such a larger part of the costs, making the economics unattractive to project financiers. Although it is unlikely that banks would see ROCs as a certain income flow (to be secured against lending), ROCs would provide a welcome revenue stream for equity investment. Back

50   The DTI/Ofgem Embedded Generation Working Group was tasked to consider "Possible measures for ensuring that distribution companies, in managing distribution networks economically, compare embedded generation on an equitable and transparent basis as an alternative to any proposed network augmentation." Back

51   Prime Minister's Speech to the Green Alliance/CBI Conference on the Environment, Tuesday 24 October 2000. Back

52   It might be administratively simple for the generator to sell the agricultural certificate to the supplier who purchased the ROC, and for both certificates to be redeemed simultaneously. Back

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