- Email: [email protected]
Renewable energy in the UK: Financing options for the future
Energy PolioT. Vol. 24, No. I, p. 125. 1996 Copyright (c) 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0301-4215/96 $15.00 + 0.00
ELSEVIER 0301-4215(95)00153-0
Book review Renewable Energy in the UK: Financing Options for the Future Catherine Mitchell
Council for the Protection of Rural England, 1995 As far as renewables go, the UK government's Non-Fossil Fuel Obligation (NFFO) was more of a lucky strike than anything else. Its original intention was undoubtedly to ring-fence the nuclear industry during privatization of the electricity supply industry; a kind of rearguard action inspired by undignified admissions that nuclear electricity was after all more expensive than fossil fuels. Surprise though this may have been to us all, it can hardly have been more of a shock than the one suffered by the government. Only a few years previously they had slashed R&D support for renewables, and suddenly they found themselves committed to financial subsidies. But the logic was incontrovertible, as environmental organizations and windpower manufacturers rushed to point out: nuclear oranges are not the only non-fossil fuel. Given its accidental conception, it was perhaps predictable that the first three NFFO Orders for renewable energy have not been unequivocally successful. As CPRE's report Renewable Energy in the
UK: Financing Options .[or the Future notes, for instance, the premium price agreed for generators in the first two Orders was inflated more by the choice of an arbitrary 1998 end date than by anything related to the full social costs of different energy technologies. Investors paying off capital at market rates of return over a six to eight-year contract period needed buyback rates that might be more than double those required under level playing field conditions (Jackson, 1992). Critics have pointed out that this gives a false impression to the public of the cost-effectiveness of renewable energy. That is bad, certainly. More shocking is the realization that favourable returns on private capital and secure payoffs for indi-
vidual investors were paid for from a relatively public purse. The premium price afforded to non-fossil electricity comes from the fossil fuel levy which amounts to around 10% of the price consumers pay for electricity. Admittedly, most of this money (around 95% of it) goes to prop up the increasingly expensive nuclear industry. All the same, principles of equity do not invite enormous sympathy for this kind of cross-subsidy. It is not altogether surprising then that early NFFO experience exhibits the telltale signs of fickle opportunism: a host of private investors seeking to develop cheap wind technology (for example) in high altitude (ie extremely visible) sites under contracts that gave them secure premium rates and the ability to pay off capital in a quarter of the plant lifetime. Not surprisingly, projects selected in the first NFFO Order achieved a 94% completion rate. The second and third NFFO Orders were both significantly oversubscribed. But the backlash was swift. The haste with which investors sought planning permission for new projects generated an altogether understandable public concern. The completion rate of the second NFFO Order was less than 50%. Most of the abandoned projects were windfarms and incinerators. It is too early to judge whether the third NFFO Order will meet with greater success. As Dr Mitchell recognised, some of the crucial drawbacks to the earlier orders were amended for the third. In particular, contract periods for NFFO projects were extended to 15 years, close to the lifetimes of some of the technologies concerned. This certainty contributed significantly to a dramatic fall in the premium price accorded to renewable electricity. CPRE argues that this is still not enough to encourage investment in technologies such as hydropower (or wave power) which are financially viable only over very long timescales. Mitchell highlights two broad areas in which the NFFO should be amended in
the future. In the first place, she argues for an 'increase in certainty' within the system. Many of the specific recommendations for changes in the procedures which will effect this 'increase in certainty' are simple and unassailable. For instance, the author calls for simpler and shorter application procedures, more frequent orders and clear guidance on eligible technologies. More complex, and perhaps more debatable, are some of the suggestions relating to the treatment of financial uncertainty. A 'pool of capital' paid for by electricity consumers for the purpose of insulating the RECs against financial insecurity is not only unlikely to find favour with a government firmly opposed to hypothecation; it also smacks of regressive protectionism. The second broad area in which the CPRE report calls for action is the better coordination of NFFO procedures with planning. It is clear from experience that this is vital. But hidden within this obvious call is a potentially devastating critique of the NFFO. The report concludes that 'good practical planning outcomes are more difficult to obtain within a support mechanism based on competition and tranches. Planning is clearly easier within a rolling system which has no capacity cap, where applications require planning permission and where the price is deemed to reflect the benefits of renewable generation'. Oh dear. But then we know all along, I suppose, that the Non-Fossil Fuel Obligation was only loosely related to the unfamiliar concept of a carefully premeditated, long-term energy policy.
7~mJackson Centre for Environmental Strategy University of Surrey Guildford, UK
Reference Jackson, T (1992) Energy Policy 20 (9")861
ELSEVIER 0301-4215(95)00153-0
Book review Renewable Energy in the UK: Financing Options for the Future Catherine Mitchell
Council for the Protection of Rural England, 1995 As far as renewables go, the UK government's Non-Fossil Fuel Obligation (NFFO) was more of a lucky strike than anything else. Its original intention was undoubtedly to ring-fence the nuclear industry during privatization of the electricity supply industry; a kind of rearguard action inspired by undignified admissions that nuclear electricity was after all more expensive than fossil fuels. Surprise though this may have been to us all, it can hardly have been more of a shock than the one suffered by the government. Only a few years previously they had slashed R&D support for renewables, and suddenly they found themselves committed to financial subsidies. But the logic was incontrovertible, as environmental organizations and windpower manufacturers rushed to point out: nuclear oranges are not the only non-fossil fuel. Given its accidental conception, it was perhaps predictable that the first three NFFO Orders for renewable energy have not been unequivocally successful. As CPRE's report Renewable Energy in the
UK: Financing Options .[or the Future notes, for instance, the premium price agreed for generators in the first two Orders was inflated more by the choice of an arbitrary 1998 end date than by anything related to the full social costs of different energy technologies. Investors paying off capital at market rates of return over a six to eight-year contract period needed buyback rates that might be more than double those required under level playing field conditions (Jackson, 1992). Critics have pointed out that this gives a false impression to the public of the cost-effectiveness of renewable energy. That is bad, certainly. More shocking is the realization that favourable returns on private capital and secure payoffs for indi-
vidual investors were paid for from a relatively public purse. The premium price afforded to non-fossil electricity comes from the fossil fuel levy which amounts to around 10% of the price consumers pay for electricity. Admittedly, most of this money (around 95% of it) goes to prop up the increasingly expensive nuclear industry. All the same, principles of equity do not invite enormous sympathy for this kind of cross-subsidy. It is not altogether surprising then that early NFFO experience exhibits the telltale signs of fickle opportunism: a host of private investors seeking to develop cheap wind technology (for example) in high altitude (ie extremely visible) sites under contracts that gave them secure premium rates and the ability to pay off capital in a quarter of the plant lifetime. Not surprisingly, projects selected in the first NFFO Order achieved a 94% completion rate. The second and third NFFO Orders were both significantly oversubscribed. But the backlash was swift. The haste with which investors sought planning permission for new projects generated an altogether understandable public concern. The completion rate of the second NFFO Order was less than 50%. Most of the abandoned projects were windfarms and incinerators. It is too early to judge whether the third NFFO Order will meet with greater success. As Dr Mitchell recognised, some of the crucial drawbacks to the earlier orders were amended for the third. In particular, contract periods for NFFO projects were extended to 15 years, close to the lifetimes of some of the technologies concerned. This certainty contributed significantly to a dramatic fall in the premium price accorded to renewable electricity. CPRE argues that this is still not enough to encourage investment in technologies such as hydropower (or wave power) which are financially viable only over very long timescales. Mitchell highlights two broad areas in which the NFFO should be amended in
the future. In the first place, she argues for an 'increase in certainty' within the system. Many of the specific recommendations for changes in the procedures which will effect this 'increase in certainty' are simple and unassailable. For instance, the author calls for simpler and shorter application procedures, more frequent orders and clear guidance on eligible technologies. More complex, and perhaps more debatable, are some of the suggestions relating to the treatment of financial uncertainty. A 'pool of capital' paid for by electricity consumers for the purpose of insulating the RECs against financial insecurity is not only unlikely to find favour with a government firmly opposed to hypothecation; it also smacks of regressive protectionism. The second broad area in which the CPRE report calls for action is the better coordination of NFFO procedures with planning. It is clear from experience that this is vital. But hidden within this obvious call is a potentially devastating critique of the NFFO. The report concludes that 'good practical planning outcomes are more difficult to obtain within a support mechanism based on competition and tranches. Planning is clearly easier within a rolling system which has no capacity cap, where applications require planning permission and where the price is deemed to reflect the benefits of renewable generation'. Oh dear. But then we know all along, I suppose, that the Non-Fossil Fuel Obligation was only loosely related to the unfamiliar concept of a carefully premeditated, long-term energy policy.
7~mJackson Centre for Environmental Strategy University of Surrey Guildford, UK
Reference Jackson, T (1992) Energy Policy 20 (9")861