Memorandum from Cory Environmental Ltd
1. Cory Environmental, a subsidiary of Exel
plc, is one of the UK's leading waste management companies. As
such we have extensive interests in those aspects of renewable
energy policy that are related to municipal waste management.
Specifically, these are incineration or gasification with energy
recover and the recovery and combustion of landfill gas.
2. Cory Environmental takes an active part
in the work of a number of relevant trade bodies, including the
Energy from Waste Association, the Environmental Services Association,
the Association of Electricity Producers and the Green Power Producers.
We have contributed to and support the submissions made by those
organisations. Consequently, our submission is confined to a short
commentary on specific issues about which we have particularly
3. This inquiry comes at a most opportune
time. Successive governments have said much about the importance
of encouraging the development of new and renewable energy sources.
For some time, there has been public subsidy (principally in the
form of the Non Fossil Fuel Obligation (NFFO)) for renewable energy
4. NFFO has had some success in bringing
forward new projects, though after 10 years or so of operation
renewable energy sources still contribute only about 3 per cent
of the UK's total electricity output. For some technologies, particularly
landfill gas, NFFO has had a very high level of success in terms
of the numbers of contracted projects actually coming to fruition.
However, for other technologies, such as energy from waste and
wind, success rates are much lower because they face substantial
barriers, for example in obtaining planning permission. Until
these barriers are addressed, there will be no significant increase
in new renewable energy capacity among the technologies that have
the greatest potential to make a substantial contribution to meeting
the government's targets.
5. The government now has a target of achieving
10 per cent generation of electricity from renewable sources by
2010. This is a laudable objective, and its attainment would contribute
to a number of important policy objectives. It has proposed a
new support mechanism, the Renewables Obligation. We broadly support
the concept of the Obligation as a mechanism for facilitating
the development of renewable energy projects.
6. However, we see two fundamental problems
with the scheme as proposed in the recent DTI consultation.
7. First, it will give long term windfall
gains to owners of former NFFO 1 and 2 generating projects. This
will do nothing to bring forward additional capacity.
8. Second, the government's plans envisage
a central role for energy from waste (EfW) in meeting the 10 per
cent target. The amount of new energy from waste capacity envisaged
is significantly greater than required in the context of the government's
waste strategy and well beyond the capability of the industry
to deliver. Notwithstanding arguments over whether or not EfW
should attract support under the obligation, this means that a
significant element of the government's strategy for renewable
energy is impractical.
9. Overall, therefore, we are concerned
that the government's renewable energy strategy is in some disarray.
There are inconsistencies between departments about the extent
to which particular technologies should be relied upon. There
are significant questions to be asked about the economic rationale
for excluding EfW from the proposed Obligation, when other technologies,
with even more favourable underlying financial positions, are
included. It seems to us that the government's projections for
the amount of new capacity that will be delivered under the Obligation
are very optimistic, to the point of being unreal.
Are the government's targets properly formulated
10. From the foregoing paragraphs, it will
be clear that we have severe doubts that the government's targets
have been established on the basis of intellectually defensible
assumptions. It follows that we do not think that 10 per cent
renewable electricity production can be achieved by 2010.
11. We would illustrate this simply by referring
to the position of EfW within the government's strategy. The role
of EfW is recognised in the recent consultation document, where
the contribution from "non-eligible" renewables is shown
to rise from 5.9TWh in 2000 to 13TWh in 2010. Since large-scale
hydro is not expected to show significant growth, the bulk of
this must come from EfW. This in turn implies an additional 880MW
of new EfW capacity, which would require new capacity capable
of handling some 11 million tonnes of municipal waste a year.
12. There is currently only one EfW plant
under construction in the UK, with a capacity of about 135,000
tonnes per annum, capable of generating 12MW of energy. Given
the obstacles of planning consent, IPPC licences, waste contracts
and funding, and a typical gestation period for such projects
of eight to 12 years, it is stretching credibility to suggest
that even a fraction of the EfW capacity assumed by DTI will come
forward within the timescale envisaged.
13. Exclusion of EfW as an eligible source
of green power under the Obligation will guarantee that the potential
shortfall from this source alone will be close to 7.1TWh by 2010.
This point is argued fully in our response to
the DTI consultation.
Levels of achievement so far and the current rate
14. Despite government policy commitment
and the existence of NFFO, in recent years an average of only
about 100MW of new renewable capacity has been brought on stream
each year. To achieve the government's 10 per cent target would
require the average to be lifted to about 300MW a year for every
year from 2001 to 2010.
15. As noted above, there is no sign that
any significant new capacity in one of the key sectors that DTI
is relying upon (EfW) is likely to come on stream in the next
few years. Other key sectors such as wind face similar difficulties
in securing the necessary development consents. Most potentially
viable landfill gas schemes have already been developed and so
we expect that as new landfill sites come on stream, their contribution
will be largely offset by declining yields from completed sites
which no longer receive waste.
16. The reality is that very little new
capacity is likely to come on stream before 2005, making the task
of meeting the target even more difficult. It is doubtful that
the key sectors have the capacity to develop projects on the scale
necessary in the five years from 2005 to 2010.
Expectations of the proposed Renewables Obligation
and the definition of "acceptable costs to the consumer"
17. The concept of the Obligation is sound,
and properly formulated it could be expected to boost significantly
the prospects for developing new projects. However, as we have
pointed out above, there are serious reasons for doubting that
the structure proposed by DTI in the recent consultation document
is the right one. The exclusion of EfW is perverse, both in terms
of the economics of the energy market and in terms of supporting
a key sector.
18. Equally importantly, providing as support
for existing NFFO 1 and 2 projects undermines the Obligation.
Cory Environmental takes the view that no NFFO 1 and 2 projects
should be eligible since they have already enjoyed substantial
support under often very generous terms. These projects are now
fully amortised and additional support of up to 3 pence per kilowatt
hour would simply deliver windfall gains to companies that do
not need them. For example, our own ex-NFFO 1 3.2MW landfill gas
plant at Mucking could benefit from a windfall gain of up to £800,000
per annum under the present proposal. We consider that this support
would be far better going to new projects to bring on stream new
19. In our view the estimated cost of the
Obligation to consumers is reasonable only if it genuinely facilitates
the development of new capacity. It will be clear from what we
say here that we do not believe that, as currently proposed, the
Obligation will achieve anything like as much new capacity as
is required. It will not be efficient or cost-effective and therefore
we do not think that, in its current form, it represents "acceptable
costs to the Consumer".
Again, these points are described in more detail
in our response to DTI.
The impact of energy market reforms on the prospects
for new renewables capacity
20. A key objective of government policy
in recent years has been to reduce costs to consumers. This is
rather at odds with a policy of promoting renewable sources, most
of which are currently, and will be in future, uncompetitive with
21. In practical terms, the continuing fall
in energy prices has rendered inaccurate the economic modelling
upon which key assumptions about how the Obligation should operate
depends. For example, the recent consultation paper justified
the exclusion of EfW from eligibility on the grounds that it had
converged economically with conventional generation plant. The
reality of course is that energy prices have fallen by some 10
per cent compared to the reference date of 1998 used for that
exerciseand they are projected to fall by a further 10
per cent by 2010. The costs involved in developing EfW projectsand
therefore the electricity price necessary to make them viablehas
not fallen in this period, and is unlikely to do so in future.
22. Therefore, the government's reformsor
rather policy decisions about support for renewable energy which
have failed to take account of changes in the marketare
working directly against the need to develop key renewable technologies.
The interaction of the planning system and the
development of renewable sources of power generation
23. We have alluded above to the difficulties
that EfW projects encounter in securing planning permission. Generally
these problems arise because of intense local opposition, much
of which is ill-founded in terms of the understanding of the real
potential for local environmental impacts etc. This tends to make
the process long, unnecessarily drawn out and costly.
24. The costs of course have a direct impact
on viability and the need for support. More importantly perhaps,
this means that the lead-time for new EfW projects can be 10 years
or more. Other renewable technologies also encounter significant
problems with the planning system.
25. For this reason alone, the planning
system is likely to be among the biggest barriers to attainment
of the government's targets. The system needs urgent reform to
enable projects that are clearly in line with key national policy
(and often statutory) objectives to obtain a more streamlined
passage through the system. Developers are unlikely to bring forward
significant numbers of new projects unless they can do so with
greater confidence of success at a reasonable cost and within
a reasonable timescale.