Select Committee on Environmental Audit Appendices to the Minutes of Evidence


Letter to the Clerk of the Committee from D J Lewis, Local Waste Solutions

  Further to my submission to the Committee dated 31 January 2001[41], I wish to submit additional and updated evidence on behalf of Local Waste Solutions Limited (LWS) and LWS (CHP) Limited.

  LWS was established in 1999 to provide waste disposal alternatives to landfill and to produce renewable energy from small plants. LWS is seeking to establish its first plant.

  LWS (CHP) Limited was established in 2001 to own and operate small-scale combined heat and power solutions for customers in the leisure industries. LWS (CHP) Limited is constructing its first unit which is expected to begin production in March 2002.

  I also write from the perspective of an elected industry member of the Balancing and Settlement Code Panel and as one who has been intimately involved with the establishment of liberalised electricity markets.

  My previous evidence related to the proposals set out in the Government Consultation on Renewable Energy dated 5th October 2000. In this letter I supply evidence on:

    —  the effect of the New Electricity Trading Arrangements (NETA) on renewable generators and CHP;

    —  the further Consultation on Renewable Energy dated August 2001 and the revised draft order dated 24 January 2002; and

    —  the PIU Review.


  The problems created by the New Electricity Trading Arrangements (NETA) for small and renewable generators and CHP plant are real and significant. At the behest of the Government, Ofgem has reviewed the input over the first few months of NETA operation on small generators. it is unfortunate that the Ofgem review does not appear to give due weight to the problems created, nor to recognise that the problems have, in large part, been created by flaws in the design of NETA.

(a)  Causes of the problem

  The NETA arrangements tend to favour large vertically integrated companies and also to favour those generators that are most able to predict their output. The tendency of renewable and CHP plants to be within smaller companies and, particularly in the case of wind turbines, to be less able to predict their output has meant that the deficiencies of NETA have hit those sections particularly hard.

  The problems created for small and renewable generators following the introduction of NETA arise from four main factors:

    —  Fundamental problems with the NETA design, most of which have some impact on all parties in the market, but which affect small and unreliable generators most significantly;

    —  Significant matters relating to the implementation of NETA;

    —  Reduction in market prices brought about by increased competition amongst generators, reflecting further divestment of plant and changes to operating constraints on other plant; and

    —  A change in the balance of market power between small generators and the rest of the industry, both as a result of the requirements introduced by NETA and because of further vertical integration and the concentration of supply businesses within a small number of large players. The vertical integration and consolidation of the industry was itself a response to the anticipated introduction of NETA.

  The fundamental NETA design problems are discussed in Annex A to this letter, implementation issues are discussed in Annex B and Annex C looks at the potential changes to the NETA design raised in the Consultation Document.

  The main conclusion of the analysis set out in Annexes A to C are as follows:

  1.  NETA has enhanced the market power of large players and reinforces the natural tendency in the production and delivery of electricity towards monopoly provision of services because it enhances the economies of scale. Additionally, NETA has imposed a large overhead of administrative costs that weigh very heavily on small players.

  2.  The disadvantages for renewable generators and CHP plant within NETA are associated with aspects of the arrangements that are central to the design. Major changes are required to the design of NETA in order to solve the problems. Tinkering at the edges is not enough.

  3.  Balancing Mechanisms prices are not cost reflective and the situation is made worse by the use of dual cash out prices. The level of total imbalance charges within NETA is related more to the structure of the electricity industry than to the costs incurred by NGC in achieving energy balancing. The Government's acknowledgement that effective consolidation services need to be developed itself proves the case that the costs of NGC's actions to correct imbalances are not being targeted on the parties causing those imbalances and, consequently, that NETA is failing in one of its fundamental objectives. However, consolidation of itself does not go far enough to solve the problems created by NETA.

  It is not clear how imbalance charges could be made fully cost reflective within the current structure, but they could probably be improved significantly. The replacement of dual cash out prices with a single cash out price is vital in the longer term to the success of small and renewable generators and the competitive entry of smaller suppliers.

  4.  Small players tend to have larger imbalances than larger players because of the inherent increased difficulty in forecasting, the high costs of maintaining a trading function and lack of liquidity in the traded markets for small volume trades.

  5.  The current NETA design uses dual cash out prices in an attempt to force parties to balance in a way that is neither sensible nor economically justified, Small players suffer most from this and large players may actually benefit from the losses of small players

  6.  The Consultation Document has proposed that changes are made to allow effective consolidation services for small players to be put in place. Effective consolidation services may be helpful for small generators, but it is likely that the majority of the commercial benefit created by consolidation would be captured by the consolidator. Other more fundamental changes, such as single cash out price and ex-post trading, are required in order to assist small and renewable generators.

  7.  Generally, it is not sensible to pursue changes to NETA that are targeted at small players, but fundamental changes are required to address the root cause of the problems.

  8.  There are matters relating to the way in which NETA has been implemented that should also be addressed (see Annex B).

(b)  Implementation of changes

  The introduction of changes to NETA that are designed to assist only small generators, renewable generators or CHP would be very difficult without first changing the Applicable Objectives of the Balancing and Settlement Code. There would appear to be no ready means whereby a change to the Applicable Objectives could be achieved. However, modifications that improve the operation of NETA can and should be pursued.

  Neither Ofgem nor the BSC Panel have sufficient vires to be able to bring forward the full range of required changes. This would require an initiative from a party to the BSC. This should be expected to occur provided that the Authority signals that it will give consideration to any modifications brought forward. However, up to now, the Authority has given very strong signals that it would reject the required modifications.

  The timing of implementation is more difficult. Any proposed modification would need to go through the normal procedures under the BSC before going to the Authority for decision. Unless very early decisions can be made, it is unlikely that system changes could be in place to give effect to the modifications before the end of 2002 and a more likely period for the implementation would be mid to late 2003. In the light of the likely delay in implementation, the Government may wish to consider temporary support for small generators outside of the NETA system.


  It is too early to attempt to measure the long-term impact of NETA on the output of existing renewable plant and even more difficult to gauge the effect on the amount of renewable generation that will be built. The severe problems caused by very low and frequently negative System Sell Prices that initially occurred within NETA have latterly been ameliorated by changes in bidding behaviour and increases in electricity demand. Very high System Buy Prices have become less of a problem as rule changes designed to eliminate price spikes have been introduced and have taken effect. Consequently, it is probably no longer the case that wind generators would need to pay rather than be paid in order to generate (this perverse situation did occur at the start of NETA), but the average prices received by wind generators are still very low.

  There are many factors, such as problems with achieving planning permission, which have restricted the growth of renewables. Much has been done to encourage renewables, not least the introduction of the Renewables Obligations. However, the introduction of unnecessary aspects in the design of NETA have unambiguously made life more difficult for renewable generators so that the Renewables Obligation will be more difficult to meet and, if met, will be met at a higher cost to the consumer. It should be stressed that this commentary on the effect of NETA on small generators is independent of any impact that NETA may have had on general price levels, and simply refers to those elements of NETA that unfairly disadvantage small and renewable generators. It is likely that these unnecessary and unfair elements of NETA offset around one third to one half of the value of Renewable Obligation Certificates (ROCs).


  At the time of writing the PIU Review has yet to be released into the public domain. Consequently, it is difficult to comment in any detail. However, from the elements of the report that have been leaked, it would seem that the report has been helpful to renewable generation by suggesting that the Renewables Obligation might be increased to 20 per cent by 2020. The fact that the Review does not signal any major shifts in policy is also helpful, since a stable Government policy is an important element in encouraging the development of assets with very long useful lives. It has been further suggested that the PIU Review will focus on those elements of NETA that are unfairly disadvantageous to small generators. If this is correct, the Review could be a very welcome spur to fundamental changes to NETA.


  The Renewables Obligation is a major step towards encouraging renewable generation in the UK. The policy is set out in the revised draft order dated 24 January 2002. This document responds to concerns that were raised in response to the first consultation document dated 5 October 2000 and the first draft order dated August 2001. It is a particularly welcome feature of the revised policy that advanced technologies utilising mixed waste as a fuel have been included in the Obligation. This should ensure a significant improvement in the probability that the renewables targets will be met.

  However, it is still uncertain whether the Obligations will lead to the achievement of the renewables targets. The main remaining barriers to the achievement of the renewables targets are the planning system, the New Electricity Trading Arrangements and uncertainty over the level of renewables targets after 2010. It would be possible to remove the barriers related to NETA relatively quickly, but the other barriers are longer term and may prove to be intractable.

  The matters raised in this letter are complex and difficult to encapsulate. Should you require clarification of any of the points raised, I would be pleased to supply further information.

January 2002.

41   See p 46, HC 334, 00/01. Back

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