Government to cut subsidies for community wind power?

Despite being acclaimed as being a low cost carbon source even by the nuclear-friendly Committee on Climate Change, onshore wind is due to have its subsidies cut in a Government review of the Renewables Obligation (RO). This will ensure that many community wind power schemes cannot be built.
See
http://scotlandonsunday.scotsman.com/news/Cut-looms-for-wind-turbines.6826574.jp

PLEASE WRITE TO YOUR MP TO ASK FOR INCENTIVES FOR ONSHORE WIND POWER TO BE MAINTAINED AT THEIR CURRENT LEVELS RATHER THAN SPENT ON NULCEAR POWER

The Renewables Obligation is the system that currently funds renewable development through renewable developers being able to sell 'renewable obligation certificates' (ROCs) to the electricity suppliers who have to achieve an increasing obligation to supply renewable energy, or pay a penalty. It is the electricity consumers who effectively pay a levy to support this of course. But the Government is under pressure from its own backbenchers who do not want the windfarms in their constituencies, and so a good way of stopping the windfarms is to cut the subsidies.

This has nothing to do with costs, or efficiency, as the Government claim - since onshore wind on even the less windy sites is still very cost-effective (and likely to receive much less subsidy than will be given to nuclear power in various forms). It is to do with meeting demands of anti-wind farm groups who do not want the landscape to be graced by the sight of windfarms. Also, by coincidence, of course, cutting subsidies for windfarms will enable such subsidies to be transferred to nuclear power from 2017.

The Government is considering cutting the number of ROCs that are awarded to onshore windpower. Currently it is 1 ROC per MWh generated. The Government is considering cutting this to 0.75 ROCs or even 0.5 ROCs. Community wind power schemes tend to be established on the lower wind power sites and thus will be the most likely to be the schemes that are prevented from going forward.

In addition to this the Government proposals for a 'contract for differences' feed-in tariff (to be introduced from 2017) are likely to mean that independent generators will receive at least 30 per cent less income per unit generated than the stated feed-in tariff rate, the bulk of this money going to the major electricity suppliers. See the recent post on this blog about this 'Give feed-in tariffs to renewable energy not electricity suppliers!' (August 1st).
You can see information about Community Windfarms projects in the UK from the following websites:
http://www.westmill.coop/westmill_home.asp
http://www.energy4all.co.uk/projects.asp

New Statement from Committee on Climate Change

I have had a further message from the Committee on Climate Change, as below, saying that I have got things wrong, and asking me to clarify the position. I thus print below the relevant communications. I do not want to be accused of misrepresenting their position, so I reproduce the letter in fulll. I must say however, that I do not understand what they are saying now.................I certainly do not see how nuclear power 'appears' to be the most cost-effective low carbon source given the arguments and data so far generated.

To see my original argument you will have to scroll down to the end of this post. My original complaint was addressed to Professor Mike Grubb, who I thought was on the Committee, but who I learned later had left the Committee in April, just prior to the publication of the Committee's 'Renewable Energy Review'.


From: Barrs, Alice (CCC)
Sent: Tuesday, August 23, 2011 5:50 PM
To: David Toke
Cc: Thompson, Mike (CCC)
Subject: RE: criticism of Climate Change Committee

Dear David –

Having just read your recent blog article, and following on from your comments below, I think you have misunderstood my previous response. I would like to clarify our position on this so that you understand the Committee’s position and so that you can ensure your post is accurate (which currently we don’t think it is).

The CCC have not changed our position from the one set out in the Renewable Energy Review published in May.

The conclusions of that review (as set out on the first page of the executive summary) in relation to electricity were that:

·         ‘there is scope for significant penetration of renewable energy to 2030’

·         ‘The optimal policy is to pursue a portfolio approach with each of the different technologies playing a role.’

·         ‘new policies are required to support technology innovation and to address barriers to uptake in order to suitably develop renewables as an option for future decarbonisation’

See also the summary box on the second page:

·         “A range of options exists for delivering decarbonisation of the power sector by 2030 at reasonable cost. This includes renewables, nuclear and CCS

·         A portfolio approach to technology support is therefore appropriate”

This was based on analysis set out on the third and fourth pages of the executive summary (some of which was discussed in the earlier e-mail exchange). Note that the bullets there discuss costs under the heading ‘Current uncertainties’, where we noted that key factors include ‘the ability to build nuclear to time and cost’.

We pointed out that nuclear ‘currently appears to be the most cost-effective of the low-carbon technologies’, but also that ‘full reliance on nuclear would be inappropriate, given uncertainties over costs, site availability, long-term fuel supply and waste disposal, and public acceptability’. We went on to state that ‘Given these uncertainties, a portfolio approach to development of low-carbon technologies is appropriate’. In the detailed analysis in the full report (and further reported in the technical annex) we consider discount rate as one of the factors contributing to cost uncertainty (p.62-63).

There was no intention in the previous e-mail correspondence to imply a different analysis and I hope it is clear that the CCC’s position and evidence base is unchanged from the one set out in the review. Further to that, we would be grateful if you could clarify this on your blog, which currently misrepresents our position.

We aim to be open in our analysis and up-to-date in our evidence base, and are very aware of the difficulties in estimating costs and applying discount rates. As such we’d be happy to arrange a teleconference with analysts in the team, or arrange a meeting at our offices in London should you be in town.

Kind regards

Alice


From: David Toke [mailto:d.toke@bham.ac.uk]
Sent: 09 August 2011 11:55
To: Barrs, Alice (CCC); d.toke@bham.ac.uk
Subject: RE: criticism of Climate Change Committee

Dear Alice,

Many thanks for the time you have taken to enable a reply to be made. I shall study the additional calculations made by the CCC to which you refer with interest.

I note that you say:

‘Whilst we think it is likely that nuclear will be cost competitive, consideration of the uncertainties demonstrates why it is inappropriate to base policy on a conclusion that nuclear (or onshore wind, or offshore wind...) is “the” cheapest option.’

This is clearly different to the substance in the RER itself which reads e.g. on page 12 in the Executive Summary:

‘Nuclear power currently appears to be the most cost-effective of the low carbon
Technologies’

I am very grateful for this correction being made. This may restore some lost faith in the Committee, although this will not reverse the publicity that attended the publication of the Report in May which focussed heavily on the ‘nuclear is most cost effective’ claim.

Best Wishes,

David Toke

From: Barrs, Alice (CCC)
Sent: 09 August 2011 11:41
To: d.toke@bham.ac.uk
Subject: RE: criticism of Climate Change Committee

Dear David,

Emily passed on your query to me.

In looking forward to the 2020s and 2030s for the appropriate mix of low carbon generation technologies, it is clear that there are considerable uncertainties. They impact each of the technologies, including new nuclear build. We set out the considerations in the review.

Whilst we think it is likely that nuclear will be cost competitive, consideration of the uncertainties demonstrates why it is inappropriate to base policy on a conclusion that nuclear (or onshore wind, or offshore wind...) is “the” cheapest option.

Rather, given uncertainty over future costs, as well as constraints on resource and technical considerations, the key conclusion in the review was a portfolio approach is appropriate, with nuclear, carbon capture and storage (CCS) and a portfolio of renewables.

In relation to required rates of return, the CCC commissioned Oxera to look at the appropriate discount rates for various low-carbon technologies. They identified a number of risks faced by generators, and that mature technologies (such as gas CCGT) face lower rates than less mature (e.g. offshore wind). In the Renewables Review, we use a commercial cost of capital of 10% - frequently used in comparative analysis of this kind - whilst also considering sensitivities at lower rates (7.5% and 3.5%).

We have subsequently published further analysis looking at current costs based on a wider range of discount rates, including 9% and up to 13% for nuclear, 10-14% for offshore wind, and 7-10% for onshore wind (see our website<http://www.theccc.org.uk/reports/renewable-energy-review/technical-annexes>). In the ‘real world’ the required return for an investor may well be higher or lower than this range. However, under a supportive policy environment (for example, long-term contracts under new market arrangements) and technology development there are good reasons to believe that the cost of capital may fall.

The possibility of rates differing between technologies increases the uncertainty involved in assessing in relative costs. The analysis further demonstrates the overlapping ranges of cost estimates for different technologies, depending on assumption, and supports the key conclusion to follow a portfolio approach.

Kind regards,

Alice


Dear Professor Grubb,

I am writing to express my concern and dismay at the way the Committee on Climate Change handled relative costings for renewable energy and nuclear power in its ‘Renewable Energy Review’ published in May. At the time I was annoyed to see a series of bases for costings of wind power and nuclear power using criteria which, while supporting a conclusion that ‘nuclear is cheaper’, seemed not to pay much attention to the fact that the criteria, in particular the discount rate criteria, bear little relation to judgments made by financial markets. My annoyance at this has increased now that reports from city analysts are being made confirming my own thoughts that pension funds etc will apply rather higher discount rate tests to proposed nuclear investments than they would even with offshore wind power, and certainly compared with onshore wind.

Discount rates of 15-20 per cent (for debt and equity elements combined) are the ‘real world’ tests being applied to nuclear power investments while the rates applied to onshore wind, for example will be much less than this . If you had a windfarm proposal about which there were as many cost and performance uncertainties as with new nuclear, then such higher discount rates would apply to them. But they don’t; wind power technologies, certainly onshore, and to a growing extent, offshore,  are, as the Government’s own White Paper now points out, mature technologies, whilst nuclear power seems to be ‘un-maturing’.

I rather suspect that even in the case of offshore wind at the moment, if you offered a pension fund a prospect of a) building an offshore windfarm or b) a nuclear power station at a long term contract price of 15 p/KWh they would choose the offshore windfarm. Such issues are in addition, of course, to the arguments about how far nuclear construction costs can escalate.

In short the contention that nuclear power is the cheapest low carbon source is highly tendentious in the case of onshore wind, and somewhat debateable even in the case of offshore wind power. The ‘long term’ assessment using a ‘social discount rate’ of 3 per cent on energy investments used by the CCC, (and prominently displayed in the Executive Summary) is nothing short of fantasy given that it can only be realised if the electricity system is taken back into public ownership and it has access to Government borrowing terms. Even EDF does not have this facility for French power plant any more.

The CCC ought to have been a great deal more circumspect about pronouncements about which low carbon options are ‘cheapest’. Its faith in nuclear power over wind power is, well, merely faith. Of course we can be charitable and say that the CCC’s analysis is no less partial than one funded, for example, by Greenpeace (except coming to different conclusions of course). But then, if the CCC is to be regarded as just another interest with its own opinions, does it deserve much attention?

Best Wishes,

David Toke

Committee on Climate Change in Nuclear Costs Climbdown

The Committee on Climate Change, which said in May[1] that nuclear power was currently ‘the most cost effective of the low carbon technologies’, has now effectively abandoned that claim. A Senior Analyst of the Committee told Dr David Toke of the University of Birmingham  earlier today that: ‘Whilst we think it is likely that nuclear will be cost competitive, consideration of the uncertainties demonstrates why it is inappropriate to base policy on a conclusion that nuclear (or onshore wind, or offshore wind...) is “the” cheapest option.’

The new story from the Committee on Climate Change emerged in response to a complaint by Dr Toke about the way that the Committee had analysed relative costings of nuclear power and renewable sources such as onshore and offshore wind power. Dr Toke argued that ‘the contention that nuclear power is the cheapest low carbon source is highly tendentious in the case of onshore wind, and somewhat debateable even in the case of offshore wind power’.

In his letter Dr Toke argued that the real world attitudes of the financial markets to uncertainties about nuclear power station costs and performance were not taken sufficiently into account by the Committee in their calculations. Onshore and even offshore Windpower involve rather less financial uncertainty. Hence investors and banks will require higher rates of return for investments in new nuclear power stations compared to investments in wind power. Alice Barrs, the Committee Analyst who replied to Dr Toke, maintains that ‘The possibility of rates differing between technologies increases the uncertainty involved in assessing in relative costs. The analysis further demonstrates the overlapping ranges of cost estimates for different technologies, depending on assumption, and supports the key conclusion to follow a portfolio approach.’

Dr Toke commented: ‘This response restores some faith in the Committee in that they concede the points made by me criticising the notion that nuclear is the cheapest low carbon technology. The Committee now need to re-examine their portfolio approach, including their view, also made in its Renewable Energy Review in May, that there ought to be a limit of no more than 13 GW of offshore wind being installed by 2020. Making this sort of judgement implies that there is some sort of trade-off in investment between nuclear power and renewable energy. In re-examining its portfolio approach The Committee on Climate Change ought to consider whether subsidies from electricity consumers should be reserved solely for renewable energy rather than offered also to nuclear power, as is planned by the Government in its proposals for Electricity Market Reform.’

---

[1] Committee on Climate Change (2011) Renewable Energy Review, http://www.theccc.org.uk/reports/renewable-energy-review

Give feed-in tariffs to renewable energy not electricity suppliers!

I have just written to the Environmental Audit Committee asking them to launch an inquiry into the Government's proposals for a renewable energy feed-in tariff which appear in the Government's recently published 'Electricity Market Reform' (EMR) White Paper. Essentially, rather than use the well tried and tested German system of feed-in tariffs they are adopting a scheme that will be used by electricity suppliers to earn windfall profits and heavily penalise all but the very largest renewable energy developers. The Government's proposals will, according to an analysis written by a Cambridge Economics Professor, lose the electricity consumer upwards of £250 million a year compared to a scheme which involves a German-style 'fixed' feed-in tariff .

See my letter below, written to the Chair of the Environmental Audit Committee, Joan Walley MP:

Dear Joan,

I am writing to encourage you to press for the Environmental Audit Committee to study the issue of feed-in tariffs for renewable energy as discussed in the EMR White Paper. I fear the Government is about to get it wrong on renewable incentives yet again and, according to an independent analysis, waste over  £250 million of electricity consumers’ money every year (and rising as offshore wind is connected) for the likely amount of renewable energy generation output. In addition, medium sized renewable developers (under 100 MW) are likely to lose at least 20 per cent of their income to electricity suppliers.

Essentially the Government is sidelining the well trodden continental style so-called ‘fixed’ FIT idea for silly political reasons and adopting a 'contract for differences' (CFD) proposal that will simultaneously increase consumer costs, reduce the income stream for developers (especially ones under 100MW) and (yet again) hand windfall profits to the electricity majors. What is described (in the EMR White Paper) as a ‘fixed FIT’ is a tried and tested system used on the continent (such as Germany), and this can be adapted to British conditions without undue difficulty to produce much lower costs for the consumer than what the Government is proposing. This judgement is supported by an independent analysis performed by a leading Cambridge Economics Professor, a copy of which a copy of which can be seen at

http://www.eprg.group.cam.ac.uk/wp-content/uploads/2011/07/EPRG1120_Complete.pdf

I do know a lot about feed-in tariffs, and also about the loss of income that developers who cannot, unlike electricity suppliers, trade on wholesale electricity markets, will suffer. I ran the British end of an EU project on CHP and electricity wholesale markets and looked at the pitfalls for smaller generators (by ‘small’ I mean here anything up to 100 MW). Of course I also was the person who helped to open up the discussion originally in 2007 on feed-in tariffs in the UK (working with the World Future Council) which led to the system of feed-in tariffs for the smallest generators. Unfortunately, under the EMR proposals, it is the small to medium sized generators who will fall into a rather big crack in between the electricity suppliers themselves and the small FIT that has now been established.

I would certainly look forward to making a submission to the EAC on the subject. There is also the issue of auctions for FIT contracts of course, although there are signs that the Government is accepting that these are not a good idea to start off with at least. As already mentioned, Prof David Newbery has produced a paper on FITs - I agree with his conclusions on this issue (that a fixed FIT is better) - and the independent analyst Nigel Cornwall believes that a fixed FIT is necessary at least for projects under 100MW. He knows that you need to be a big company with a high credit rating and also employ people specifically to trade on the markets, which is mainly viable for only for electricity suppliers and large power stations.

In fact a fixed FIT is very simple to operate. A body, say the System Operator, can issue contracts at a fixed price according to the technology, and the electricity that is produced then becomes the property of the System Operator who sells it on to the electricity markets. This saves consumer’s money compared to the Government proposals because, put simply, it is much more cost-effective to balance fluctuating wind power output on a national basis than it is for individual renewable energy developers to buy what is known as ‘imbalance’ risk. This requires a Fixed FIT, not a CFD FIT as espoused by the Government. In their analysis the Government simply assumed that in the case of a fixed FIT the monetary value of electricity generated to was lost to the markets - it may be with the current small FIT scheme, but in fact it does not have to operate this way, and certainly should not be the case in a scheme organised for medium to large scale renewable energy projects.

The Government's proposals have definitely lost the plot, in pursuit of some idea of making it difficult to tell where subsidies are going (to renewables or nuclear) in a system supported by electricity majors who will be able to earn a premium themselves. Part of the problem is that historically, OFGEM, in a desire to incorporate a FIT system into market trading arrangements, have overlooked the fact that it is relatively simple to devise a system whereby a fixed FIT system can reclaim the market value of the electricity generated by renewable electricity schemes – as Professor Newbery outlines in his paper on the subject. Indeed this is a much more cost effective way of organising a FIT system. In doing so, upwards of £250 million a year will be saved for electricity consumers compared to the scheme that the Government are proposing.

I am sure lots of independent renewable companies will support the fixed FIT idea when they realise what is going on. An inevitable danger with the Government’s proposals is that anti-windpower campaigners will seize upon the inefficiencies of the system to support their position. So the EAC could be ahead of the game here and save the system a lot of wasted time, money and argument by helping to get it right from the start. We ought not to repeat the experience with the Renewables Obligation and realise some years later that a badly designed system is leading to electricity consumer’s money going into the hands of the electricity majors rather than the developers.

Best Wishes,

David Toke, Senior Lecturer in Energy Policy, University of Birmingham