Select Committee on Environmental Audit Minutes of Evidence


Supplementary memorandum from the Renewable Power Association

PLANNING ISSUES AT REGIONAL AND LOCAL LEVELS

1.  What specific improvements would you like a new PPG22 to contain?

  We appended our written response to the DTLR on PPG22, and the RPA would be happy to put forward individuals to work with its officials on the revision.

  The most significant change would be for PPG22 to strongly advise Local Planning Authorities to incorporate positive policies for renewable energy in their plans. The whole tenor of the guidance should be more in tune with this Government's strong support for renewable energy.

  More positive guidance does make a difference. The Scottish Executive recognised that the regional and global benefits were not being given sufficient weight when they revised their planning policy guidance for renewables NPPG6. This guidance has been very effective in stimulating growth in renewables capacity by helping stakeholders address local issues in the context of regional and global benefits.

  The RPA suggests the Department of Transport Local Government and the Regions (DTLR) be invited to revise PPG22 using NPPG6 as a model. Similarly, the Welsh Assembly should be invited to revise Technical Advice Note 8 along similar lines.

2.  Is the establishment of regional targets for renewable energy going to be enough? Is there a need to implement stronger mechanisms to ensure that the planning system discriminates positively in favour of renewables? What might these be, and where should responsibility be located?

  Targets alone are not enough. The 7-fold increase in deployment rate if the Government's targets are to be met demands urgent action on planning. Action needs to be taken on a range of fronts to deliver the necessary planning framework. The RPA recommends:

    —  Action in the short-term to clarify the status of the Government's targets for renewables. Planning authorities and many stakeholders see these targets as aspirational. We propose that DTLR provides an unequivocal statement that national targets for renewables apply regionally. That the issue for planning authorities is not whether these targets should be met but where and how they will be met. Such a statement is consistent with the aims of the Government's planning Green Paper for renewables projects subject to an agreed national policy.

    —  That PPG22 should be revised as soon as possible, as elaborated in the answer to question 1.

    —  In the longer-term a planning regime which shares some of the characteristics of the minerals planning regime should be adopted for renewables. The parallels are clear—there is a national requirement that needs to be weighed against local concerns. The RPA is examining this issue in more detail.

3.  How can disparities between availability of renewable energy and local needs for energy be reconciled?

(Cf 4239)

  Renewable energy resources can generally be exploited only where they exist. Waste is generally more available in urban areas, whereas wind and biomass are more available in rural areas. At a regional level there are broadly similar high levels of renewable energy resource in all regions, although the mix may vary. This was confirmed by the regional energy assessments referred to in question 4. Consequently, at the relatively low levels of resource deployment envisaged by the Government's targets the national targets are capable of regional application. This is relevant to our answer to question 2.

  Furthermore we all consume energy as individuals both directly and indirectly through the energy embodied in the goods and services we use, and therefore all contribute to global climate change. It is this that makes deployment of renewables essential. However, few people make this connection particularly when faced with planning applications for renewables projects near where they live or in areas that they visit. Hence the importance of the urgent action outlined in our answer to question 2.

4.  Are the figures in the DTI regional energy assessment report published on 6 March 2002 produced on a consistent basis? Can they form the basis for meaningful regional targets? If not, what more do you think the DTI will have to do to produce such targets? (cf 4246)

  No, the figures in the original regional assessments, which were drawn together in the report published in March 2002, were not produced on a consistent basis. The objective at the time was to encourage a "stakeholder buy-in approach" so that the regions felt greater ownership and responsibility towards the targets.

  Whilst a nice idea, the result has been a collection of assessments which has been difficult to draw together into a meaningful picture. In retrospect clearer guidance at the outset would have been helpful.

  Renewable resources differ in their cost and resource base. A logical approach for landfill gas, which is cheap but constrained by the size of the resource, would be to utilise as much as possible of the available resource. For technologies which are neither cost constrained, nor limited by the overall size of the resource available, eg wind, it makes sense to decide on the total amount of resource to be exploited and then to disagregate down to the regions. Obviously the disaggregation should take account of relative differences in the wind regime and constraints on land use between the regions. Any follow up work will take time to complete. It would be an essential component of the long-term work referred to in response to question 2.

5.  Do you have any other comments or documents relating to the environmental impact of wind farms—in terms of both landscape issues and biodiversity—which might be useful to the Committee (4218-219 and 4239)?

  The study volunteered by Keith Pitcher during the oral evidence session has been sent to the committee. For any further comments or documents we suggest that the Committee contacts the BWEA for more information.

  It is worth noting that difficulty with obtaining planning permission is not confined to wind energy. All renewables, with the exception of landfill can experience significant problems.

POLICY INSTRUMENTS

6.  In the oral evidence which RPA gave, a view was expressed that UK governments had been successful at developing "technology push" incentives, but rather less successful at developing "market pull" incentives. It would be helpful if the RPA could elaborate on this and set out in what ways current "market pull" mechanisms could be improved.

  The Government's "technology push" initiatives have worked well in bringing technologies to the point where they can be deployed on a large scale by "market pull" initiatives. The evaluation of the NFFO and supporting programme recently published by DTI[12] provides some good examples of this process. However the Renewables Obligation will inevitably result in the deployment of the cheaper renewables until the accessible resources of those renewables is exhausted. Only then will the market deploy the less mature and initially more costly technologies.

  The RPA believes that each of these less mature technologies should have an appropriate entry strategy. An example of an entry strategy for Energy Crops is described in answer to question 9. The strategies are likely to vary, as each of these technologies is at a different stage of maturity. Most other countries have policies that provide incentives for renewables matched to their need for support and consequently exploit a wider range of renewables than is likely under the Renewables Obligation in the UK. The RPA is examining a number of ideas, but these are not yet at a stage where they are sufficiently developed for formal presentation. We will keep the Committee informed of our thinking on an informal basis as the ideas progress.

  The only effective way of reducing the costs of new and emerging technologies is to deploy them in numbers and "learn by doing". This is exactly the lesson shown by Denmark and Germany where "market pull" support over the past 10-15 years enabled a large number of turbines to be installed during which time their efficiency improved and costs progressively fell. Whereas Danish market pull support allowed the first 50kW turbines to be commercially viable, the UK approach was to concentrate on a technology push programme to develop a 3,000kW turbine without parallel market deployment. Ultimately the Danes were successful with market support leading to the progressive development of larger and more efficient and reliable turbines through a steady process of learning by doing, such that today 750-2,000kW turbines are being produced whilst at the same time the cost of electricity produced has fallen fivefold. Over half of the world's wind turbines are now manufactured in Denmark, supporting a $5 billion per year industry and 15-20,000 jobs).

  The effects of this are shown in the graph below which shows the capital costs of various technologies[13] (ie fuel costs for gas turbines are excluded), and how costs of these have dropped as installed capacity has increased—firstly through an initial deployment and deployment phase (typically characterised by a learning rate of 20 per cent) then latterly through a commercialisation phase (typically characterised by a learning rate of 10 per cent:


  The Government's mechanism for addressing those technologies currently not likely to be sufficiently stimulated by the Renewables Obligation the different stages of development of different technologies is through Capital Grants. These are given to reduce the capital costs of a project and hence the cost of electricity produced.

  This is in contrast to other countries such as Germany which offers a fixed price tariff for PV of 30p/kWh and Portugal, which is proposing to offer wave power a fixed price tariff of 13-14p/kWh. It is likely that these countries are seeking to emulate the Danish example and obtain the maximum industrial benefits from creating indigenous industries in those areas. Whilst from a purely financial perspective, capital grants or premium prices can amount to the same thing, difficulties arise because the means of accessing the government's capital grants on a project by project basis is not clear, nor is it clear how much work needs to be undertaken in advance on a particular project site before becoming eligible for a capital grant.

  If the UK wishes to capitalise on its undoubted lead in a number of new energy technologies to secure the major industrial opportunities then market pull support is required in addition to technology push. Whatever the type of mechanism employed to address this, a goal of the government's policy must be to offer a clear and unambiguous route to commercial installation of these new technologies.

  The RPA recommends that the process by which capital grants are made available is made clear as soon as possible in order to permit the early deployment of newer technologies and bridge the gap between initial costs and prices available under the RO.

  The RPA recommends an early formal review within two to three years in which the effectiveness of the Obligation as a means of stimulating both the cheaper and the more expensive renewables is evaluated. This review should determine what if any entry strategies are required for the more expensive technologies.

7.  Can you provide details of the 25 sources of funding to which you refer in both your memo and in oral evidence (4234)? What kind of difficulties does the multiplicity of funding sources cause?

  Annex 1 lists just over 25 separate measures, some of which are being brought together, a move that the RPA welcomes.

  The multiplicity of funding sources can have a number of undesirable effects. These include:

    —  The diversion of developers' management time to the identification of relevant grants and application for them. They can also delay projects if the project has to wait for the result of the grant application. The RPA would prefer developers to be focussed on devising projects that are environmentally acceptable and capable of attracting finance under the Renewables Obligation and not be distracted by a need to respond to a multiplicity of funding sources.

    —  The transfer of the risk of poor performance from those best able to manage it, the developer and its supplier, to the Government. This makes projects less attractive for third party finance.

    —  The obscuration of the true cost of renewables and thus the cost of carbon abatement. We believe national policies for renewables should be based on transparency of costs.

    —  The distortion of the market for renewables under the Renewables Obligation by only some developers obtaining grants and thus being at a competitive advantage over those that do not. We believe in competitive markets.

  The RPA recommends that these undesirable effects are addressed by the aggregate value of the capital grants for some technologies (not already too advanced in the process of allocation) being commuted into alternative entry strategies as described in answer to question 6.

  Such an approach would avoid all the undesirable effects of the present arrangements and give the market the opportunity to deploy the full range of renewables relevant to the UK.

8.  Mr Byers suggested that a European model for capital grants might be preferable (cf 4234). Could you elaborate on these comments and highlight in what way such a model would address deficiencies in the current systems?

  The RPA believes that grants should be available to provide an initial commercial scale demonstration of the technology, gain experience and ultimately help reduce the costs of replication. Another common European practice is to bridge otherwise unfundable projects. Clearly, the UK Carbon Trust has a programme along similar lines.

  Our major point is that, from experience, many EU Renewable Energy grants are made prior to financial closure, and delivered in tranches that assist in development, with additional tranches based on performance and project completion. Too much of UK grant funding is potentially awarded to projects that must effectively be financially viable in the absence of the grant. This makes the capital grant approach poor value for money when compared to the market based approach.

  The RPA suggests that major banks be consulted on this issue, as clearly several large lenders take a very sceptical view of the volume and style of grant structures available in the UK.

  Consequently, we propose that the provision of capital grants is restricted to the initial commercial scale demonstration and that the balance of the available funding is used to stimulate the market as recommended in our responses to questions 6 and 7.

9.  Dr Pitcher referred to Rural Development Certificates (4204 and 4214). What are these and what is their policy context? It would also be helpful if Dr Pitcher could provide more information on the Arbre project

  Biomass features strongly in all the future UK and European renewable energy targets. DEFRA has an energy crops programme in place to establish 25,000 ha in the period up to 2007 and have stated targets of 100,000-150,000 ha needed by the end of the decade. Only 2,000 ha of short rotation coppice have been grown in the UK, with the majority (1,500 ha, to provide one third of the total fuel requirement) for the ARBRE project.

  Biomass is the one sector that has an ongoing fuel cost, and that cost is a significant percentage of the cost of delivered electricity. At present both the technology and the fuel supplies are in their infancy. The Renewables Obligation has set a limit to the price of electricity that will be paid by suppliers. New sectors have been offered capital grants to help support the technology. However due to the price limit and the immaturity of the sector there is need to provide support for energy crops. This will enable biomass projects to be developed and kick-start the supply of energy crops. DEFRA has stated it wants to see a transition from the existing support to food crops to the Second Pillar of agriculture (ie sustainable/environmental farming) and this is an excellent opportunity. Rural Development Certificates are the industry's name for this type of support—it must be provided on an annual basis to growers to ensure projects are bankable, and to reduce the cost of energy crops to levels that are economic for such projects under the RO. It is anticipated that the need for energy crop support will decrease through development and operation of relevant projects. Rural Development Certificates also acknowledge the other benefits that arise from energy crops, including the boost to the rural economy of enabling farmers to grow a new non-food crop and gains in biodiversity. As the sector becomes mature the level of support will reduce accordingly.

  Details of the ARBRE project are attached (see Annex).

10.  Currently the implementation rate of NFFO 4 and NFFO 5 is extremely low—not least because the contract prices were so low and have now become uneconomic in the light of the Renewables Obligation. Do you expect any serious further interest in the development of NFFO 4 and 5?

  We expect to see serious further interest in both NFFO 4 and 5 projects and projects under the Renewables Obligation.

  It is not true to say that NFFO contracts have now become uneconomic in light of the Renewables Obligation, although some may now be less attractive to their owners than a similar project developed under the RO. Although contract prices for many NFFO 4 and 5 projects are less than prices which might be expected under the Renewables Obligation, the majority of these projects are still attractive for developers, not least because of the relative ease by which they can be financed. The tables below contrast average current NFFO contract values against the prices achieved in the latest NFPA auction. The latest auction prices reflect the full value of the ROC and CCL exemption. Although some NFFO projects may appear unattractive in comparison, the bankability of the contract has a value, although it is not easy to translate into pence per kilowatt-hour.

Technology
NFFO4 bid prices adjusted for inflation Lowest
Average
Highest
NFPA auction price
Wind >0.768 MW dnc
3.42
3.88
4.18
6.31
Wind <0.768 MW dnc
4.50
5.03
5.45
6.31
Hydro
4.18
4,68
4.84
6.40
Landfill gas
3.08
3.31
3.52
6.74
Waste combustion
2.93
3.03
3.08
2.27
Waste combustion CHP
3.07
3.55
3.74
2.27
Biomass gasification or pyrolysis
6.04
6.06
6.37
6.52
Anaerobic digestion of Ag wastes
5.61
5.72
5.69
6.52
Technology
NFFO5 bid prices adjusted for inflation Lowest Average
Highest
NFPA auction price
EfW with CHP
2.49
2.80
3.09
2.27
Energy from waste
2.54
2.59
2.65
2.27
Hydro
4.10
4.34
4.63
6.40
Landfill gas
2.76
2.90
3.09
6.74
Wind large
2.59
3.06
3.30
6.31
Wind small
3.62
4.45
4.89
6.31


  The RPA wishes to see obstacles removed as far as possible to enable the renewables industry to deliver the Government's targets. This means sympathetic treatment by Ofgem with regard to flexibility of NFFO contracts, both those which need amending (see questions 11 and 12) and in termination of those NFFO contracts which are genuinely uneconomic.

THE ROLE OF OFGEM

11.  You state that a number of NFFO projects have not proceeded because Ofgem has determined against them in one respect or another. Could you elaborate on the role of Ofgem here, and the reasons why it has blocked projects?

  RPA members are under contract to use "reasonable endeavours" to generate under their NFFO contracts. Generally the NFPA, the counter party to these contracts, are sympathetic to changes that the generator could not have foreseen when the original contract was signed. Some of the contract conditions are fundamental and have their origin in the statutory instrument and thus cannot be changed—ie the technology, fuel, contracted capacity and price. Some contract conditions are incidental—eg the location and voltage of the grid connection, the size of particular generators etc—for which the contracting parties see no good reason why changes cannot be made.

  Ofgem needs to be satisfied that the contract continues to be what is termed a "qualifying arrangement" and thus able to attract support from the fossil fuel levy. Ofgem claims to operate strictly to its interpretation of the legal remit, which can result in Ofgem declining permissions on technicalities. Without such permissions projects become unbankable. This can mean developers having to develop the project under the Renewables Obligation at a higher cost to the consumer. This clearly detracts from the achievement of governmental objectives and is perverse given Ofgem's role in minimising the cost to the consumer.

  We propose Ofgem agrees technical changes to contracts that are incidental to the main purpose of the contract, ie securing the renewable energy capacity required by the original statutory instrument.

12.  You also suggest that Ofgem will have an important role in evaluating contract changes when NFFO schemes are moved. What are your concerns here? What kinds of changes to contract conditions might be involved? Would these include changes to contract prices?

  The position is largely as described in our answer to question 11. Again where the contracting parties agree the project should be re-located we see no reason for Ofgem to object to such a contract amendment or to consequential amendments that leave the fundamental contract conditions (including price) elaborated above unchanged. Furthermore, where two NFFO projects are to be re-located onto the same site it would be perverse for Ofgem to require, as has been suggested, two totally separate power stations to be built. This would undermine the whole point of allowing re-location to give developers the flexibility of making their projects more environmentally acceptable.

  The issues of aggregation of NFFO contracts and the definition/classification of biomass fuels as waste under the Climate Change Levy general regulations are two current examples of Ofgem's continued intransigence.

  We propose Ofgem agrees technical changes to contracts, including their re-location, that are incidental to the main purpose of the contract, ie securing the renewable energy capacity required by the original statutory instrument.

13.  The PIU report suggests that environmental objectives should be given priority in energy policy. What practical ways do you think this should be reflected in Ofgem's approach to regulating the industry? Is the existing draft guidance issued by the Secretary of State on Ofgem's social and environmental duties adequate?

  The regulator has made it clear in the context of the damaging effect that NETA has had on small generators that environmental objectives are not a high priority for an economic regulator. Our view is that such objectives need to be achieved through policy instruments for which there is Parliamentary scrutiny and accountability. It seems unlikely that the existing guidance on social and environmental duties will have the desired effect, particularly where higher costs on consumers might be the result.

  The RPA recommends that Ofgem's duties as elaborated in the Utilities Act be expanded to enable it to give environmental considerations preference as recommended by the PIU Energy Review.

CO-ORDINATION OF GOVERNMENT POLICIES

14.  To what extent are you concerned about the multiplicity of funding sources available for renewable projects, and the growing number of organisations involved in this area? What practical difficulties do these create?

  This is largely covered in our answer to question 7.

15.  Are you concerned about the growing number of policy instruments in the energy area? Is there any scope for rationalisation here?

  Firstly, there is a danger of assuming that "one size fits all"—equivalent to trying to use a golf putter in a deep sand bunker. The main plank of government policy is now the Renewables Obligation which is much welcomed, but the deficiencies well recognised in the system lead to "policy tinkering", which is often eschewed or patched up for fear of undermining the stability of the system.

  It must be recognised that different technologies, which may contribute in the short, medium and long term, have different characteristics. Each has a resource limited ceiling, an "economically achievable" threshold of delivery given realistic constraints, and a cost curve, weighted to capital or operating, dependent upon volume and risk.

  The plethora of instruments and sources of funding is a natural result of confronting a complex industry. Knowledgeable policy advisors have created "fixes" and short term discretionary (and therefore unbankable) support to alleviate the "putter in the bunker" scenario.

  The many sources of funding listed in Appendix 1 in aggregate add up to less than one-off payments to Railtrack shareholders or a typical grant to keep a single factory open in a threatened closure in a marginal constituency.

  Scale of support is one issue, given the need to prove technology and encourage a volume marketplace, but diversity is another. Programmes are administered by a number of bodies including the DTI, DEFRA, NOF, the Inland Revenue, Customs and Excise, the Energy Savings Trust, the Forestry Commission and the Carbon Trust.

  Navigation of this bureaucracy is, for small and medium sized companies, a tedious and expensive process. Furthermore, the greatest reported anxiety is when the requirement doesn't quite fit any single category or pigeonhole. In these circumstances one simultaneously deals with two different agencies, different criteria, rules and sometimes competing political agendas.

  The RPA therefore thoroughly endorses the PIU recommendation that a single co-ordinating body be established for sustainable energy. It approves of continued vigilance in proper allocation of funds. A more co-ordinated and empowered (not necessarily centralised) agency to administer support to the Renewables Sector would be a step forward.

  The RPA proposes that the Carbon Trust is the most obvious candidate to administer technology "push support". The "market pull" support from policy instruments will of course continue to be the preserve of a Government department. We need to see how the reorganisation of DTI progresses to be able to take a view on where renewables policy is best managed within Government.

OTHER

16.  Further information on the comparative costs of PV, and in particular the cost of embedded PV cells in cladding materials, would be useful (4236). What changes would you like DTLR to make within current planning regulations to promote greater uptake of PV cells?

  We would like to see building regulations used as a tool for promoting renewables. Some energy efficiency measures (such as cavity wall insulation) are obligated by building regulations. Regulation is necessary as there is little economic incentive for housebuilders to incorporate energy efficiency measures in buildings as they add to the capital cost of the house, whilst the benefit accrues to the householder.

  Building regulations can increase the reliance of buildings on self-generated renewable energy by requiring a proportion of the building envelope to incorporate active photovoltaic or solar thermal devices. For example it could be required that a certain proportion of a housebuilder's homes should incorporate active photovoltaic material on at least 50 per cent of all roof area inclined to face within 60 degrees of true South. For typical domestic houses this could provide typically 8 per cent to 30 per cent of electricity consumed. The RPA appreciates that the case must be strong if renewable energy requirements are to be incorporated in building regulations and it is intending to do more rigorous analysis in this area.

  Just by way of an example Intersolar Group has developed a solar roof slate which is architecturally indistinguishable from standard roofing slates. Analysis by PricewaterhouseCoopers shows that at present prices the payback time for this product is 27 years (half that of imported solar tiles), but reduces to six years with the subsidy programmes now planned by DTI. We anticipate future payback will come down to under five years—similar levels to those now accepted for the fitment of double glazing, for example.

17.  Could Mr Byers provide the reference for National Grid's view that up to 20 per cent renewables would not create any significant network problems (4226)?

  The following extract is from the National Grid Companies initial response to the PIU Energy review.[14] It states it has no concerns in respect of being able to continue to balance the electricity system securely at the levels of intermittent renewable energy envisaged in the Government's current targets for 2010 and then goes on to say that even at those levels advocated by the Royal Commission on Environmental Pollution (ie "well beyond 10 per cent of electricity supplies to cover a much larger share of primary energy demand"). . .do not present insoluble issues relating to transmission operation and intermittency.

    Intermittency of Renewable Sources

    27.  Intermittency in operation is an inherent characteristic of some (but not all) renewable energy sources. While existing generators are not available 100 per cent of the time, requiring outages for both routine maintenance and breakdown, the availability of some renewable generators, eg, wind, will, inevitably, be weather dependent. Our current modelling data indicates that the availability of wind generators at times of system peak is about half that of CCGT stations and a wind generator is likely to be available in a typical year for about a third of the time. Intermittency will also mean that while, with conventional power stations, the timing of their coming on and off the system will be determined largely by commercial factors, ie whether or not they have a contract or whether their services have been purchased in the balancing mechanism, the ability of wind generators to come on and off the system will also be weather related.

    28.  This gives rise to two issues. The first (lower operating availabilities) means that the plant margin (ie, the difference between installed capacity and system peak demand) is likely to look very different with respect to operating security in the longer term. The second issue means that consideration has to be given to the effect on management of the system of an increasing proportion of energy sources where availability is determined by the weather as well as by technical and commercial considerations. We have no concerns in respect of being able to continue to balance the electricity system securely at the levels of intermittment renewable energy envisaged in the Government's current targets for 2010. However, developments more in line with those put forward in some of the Royal Commission on Environmental Pollution scenarios, would most likely give rise to the need to develop new market approaches to system balancing, but do not present insoluble issues relating to transmission operation and intermittency. We are undertaking further analysis and will make a further submission to the Review this autumn.

  In the NGC supplementary submission to Energy Policy Review, it observed

    "sufficient fast response and reserve services will be available for a situation in which the entire 2010 renewables target is met by wind".

FURTHER ADDITIONAL COMMENT

  The RPA takes issue with suggestion that Renewable Energy is forever going to be expensive. Even the PIU analysis draws conclusions about extra costs in the long term, which are challengable. An informal correspondence from David Milborrow is attached (Appendix 2) which disputes the validity of long run cost arguments used in the report.

April 2002




12   Evaluation of DTI support for New and Renewable Energy under NFFO and the Supporting Programme. Final Report to the Department of Trade and Industry by Frontier Economics and Byrne O Cleirigh. Main Report. December 2001. DTI Evaluation Report Series, No. 5. Back

13   Sources: OPD and "Global Energy Perspectives" 1998, IIASA/WEC, www.iiasa.ac.at. Back

14   http://www.piu.gov.uk/2001/energy/submission/National. Back


 
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