sou · GWB313d2 · 2009-01-01 00:00:00 — In addition to these longer term changes, the consultation document contained proposals for a small number of more limited and detailed changes to the Renewable Obligation legislation which have partly been included in a draft 2007 Amendment Order which is still sub- ject to Parliamentary approval.95 Currently, the main focus of the discussion is around branding the Renewable Obligations (different 90http:///energy/whitepaper/page39534.html 91http:///Networks/Trans/ElecTransPolicy/tar/Documents1/070816_Ex _TAR%20Call%20for%20Evidence_FINAL.pdf 92For details see Gen.aspx 93http:///consultations/page34162.html and whitepaper/consultations/renewables-obligation/page39555.html 94http:///files/file34470.pdf 95http:///files/file34450.pdf number of ROCs for different technologies), which is supposed to start in 2009.96 The Government has announced that transmission networks offshore should be licensed on the basis of a competitive approach. , an initial proposal for a licensing and regulatory framework that will apply to offshore electricity transmission networks was developed.97 The new regulatory arrangements are expected to be in place by 2008. The key parts of the current proposals are:98 An Offshore Transmission Owner (OFTO) would have the re- sponsibility for designing, , financing and maintaining the offshore transmission network required to connect an offshore generator. The OFTO would be selected by competitive tender and awarded a transmission license which enables the OFTO to receive a regulated revenue stream from the network user (the off- shore wind farms) in return for meeting its license obligations for a predetermined regulatory period (20 years), and would be in- centivised to achieve specified performance requirements during this period. The proposal for the OFTO tender process suggests a compe- titive tender process that includes an annual tender application window and which starts all the qualifying tenders simultaneously for coordination purposes. Bidders would not need to be pre- licensed to operate in the offshore area before being entitled to bid. Instead, any company meeting the pre-qualification criteria could tender for the right to design, build, finance and maintain an offshore generator connection, in return for pre-defined com- mercial arrangements. The tender process would be triggered by a generator connection application to the onshore network. Ofgem will manage a tender process and select the successful project, 96http:///files/file39497.pdf; and 97http:///energy/sources/renewables/policy/offshore-transmission/page40532. html and, %20Scoping%20Doc%202006.pdf, and 98http:///files/file40629.pdf which results in the award of an offshore transmission license to the winning OFTO. There is no clarity regarding the future procedure for already existing connections between an offshore generator and an onshore distri- bution network using a transmission voltage of or lower. Currently, 132kV connections between an offshore generator and an onshore distribution system are classed as medium voltage lines. Onshore distribution licenses have been treating offshore generators seeking connections to the onshore distribution system as distri- buted generator connections. When the new proposed offshore transmission arrangements are introduced, 132kV circuits between offshore generators and onshore distribution systems will be classed as high voltage lines. This would require the owner to hold a trans- mission license. However, a framework for this issue and the general connection of offshore wind farms to distribution networks is still under development. to the large demand for grid access of renewable energy installa- tions in , Ofgem currently reviews options to speed up the installation of new transmission lines.99 Today the exiting trans- mission network license holder in the area is the responsible for new transmission lines. A new option discussed would be to allow a new party to apply for a license which would allow the party to build, own and operate a section of a line to the main transmission network (similar to the interconnection between and ). Under this option, no regulated revenues would be provided to finance the connection, the investor would have to enter into negotiations with the user of the line in order to determine the user fee. Another option would be to tender the rights to build a connec- tion and to obtain a regulated revenue. Under this option the win- ning party would receive the right to build a transmission line and Ofgem would allow the party to apply transmission network use of system charges for using the line. Ofgem currently favours this app- roach as it results in the lowest-cost connection solution. 99 20the%20Islands%20of%20Scotland.pdf The regulator Ofgem is responsible for licensing and regulating the distribution and transmission network companies. To qualify for a license, the relevant company must meet the criteria set out in the Guidance Documents.100 For distribution net- work companies, the license requires, among others, that the electri- city distributors: develop and maintain an efficient, co-ordinated and economical system of electricity distribution, and facilitate competition in the supply and generation of electricity. An electricity distributor also has, for the purpose of enabling elec- tricity to be conveyed, a duty to provide a connection between its own distribution system and any premises, when required to do so by: the owner or occupier of the premises, or an authorised supplier acting with the consent of the owner or occupier of the premises. Ofgem regulates the transmission and distribution companies through five-year price control periods. Distribution network companies are regulated through incentive based RPI – X price control schemes that control prices, not pro- fits, with the retail price index – the rate of inflation – as its bench- mark and subtracting X – an efficiency factor – from it.101 The price control approach provides incentives for improving efficiency (reducing losses); improving quality of service; 100http:///Licensing/Work/Documents1/9777-Electricity%20distribution %20handbook.pdf 101See 26504.pdf as well as Documents1/Revenue%20Rigs%20V3.12(for%20publication).pdf responding to the challenge raised by the Governments objec- tives for renewable energy, for instance, by connecting renewable distributed generation. Transmission network companies are regulated through revenue cap regulations, i.e. the controls set the maximum amount of revenue which transmission network owners can receive through charges they levy on users of their networks to cover their costs and earn a return in line with agreed expectations. The users in this case could be electricity generators that are connected to the network, retailers or end . For the 2007 to 2012 price control, Ofgem has approved an in- vestment of £5 billion for transmission networks that want to replace ageing assets and for helping to connect renewable generators in northern and Scotland.102 In addition, Ofgem has introduced an innovation funding incentive to encourage transmission network companies to invest 0.5 per cent of their revenue in research and development for programs targeted on environmental improvement. This equates to a minimum of £500,000 per year for each company. In addition, the transmission licenses explicitly include special expenditure allowances for for Renewable Generation (TIRG), i.e. in order to speed up the process of transmission lines for renewable energy, the TIRG mechanism pro- vides funding to connect a large volume of renewable generation that was not forecast at the time the relevant price controls were set for the transmission licensees.103 The Offshore Transmission networks are expected to be subject to the same price control approach used for onshore distribution net- works.104 102http:///Networks/Trans/Offshore/Oteg/Documents/FP%20Press%20 Release%20Suatainability_56.pdf 103http:///Networks/Trans/ElecTransPolicy/TIRG/Pages/TIRG.aspx 104http:///files/file40629.pdf and Trans/Offshore/Oteg/Documents/Offshore%20Scoping%20Doc%202006.pdf Privately-owned unlicensed networks may operate within existing distribution networks. Advantages include exemption from some license charges and reduced energy loss in transmission. Ports and large industrial users often operate with private wire networks. Studies have shown that private networks incorporating local generation can be used to cut emissions in urban areas. However, there is con- cern that on a private network are vulnerable, since they cannot switch suppliers if prices increase, or complain to a regulator. Government is consulting on how to protect and pre- serve competition if private networks continue to expand.105 4.1.5Development of the Sector in the UK106 The first commercial wind farm in the UK was commissioned at Delabole in Cornwall in 1991, comprising 10 turbines with a project capacity of 4 MW. Throughout the 1990s, there was a slow and steady delivery of 50 new wind farms, and by 1999 the installed operational capacity was 344 MW, averaging 38 MW of new ope- rational capacity per year. During this period the Non-Fossil Fuel Obligation (NFFO) was introduced, which provided premium pay- ments for renewables-generated electricity over a fixed period, with contracts awarded to individual generators. It took a further five years for the UK to reach an installed capacity of 1,000 MW, or 1 GW, of wind power in ; 890 MW of which was from onshore installations (107 projects) and 124 MW was offshore (3 projects), see also Figure 4-7. Figure 4-8, shows the geographical location of the wind farms. It can be seen that most large wind farms are built in Northern or . Following the achievement of the UKs first GW of wind energy in 14 years, the second GW took just 20 months, compri- sing 1,696 MW onshore and 304 MW offshore developments. 105http:///activity/policy/Publications/file_21079.pdf 106All data for the UK in this Section include Northern . Figure 4-7: Year-on year-existing and forecast onshore wind farms to 2010, by country By 2007, had 395 MW wind power installed onshore and 244 MW offshore; had 300 MW onshore and 60 MW offshore and had 1082 MW onshore. In total, , and had 2,081.19 MW wind power capacity in- stalled (2,203 MW including Northern ). Figure 4-8: Map (). Only turbines above 225kW are shown as this is the lower limit of large scale wind. 4.1.6Future Plans and Possible Barriers for the Further Development of It is anticipated that offshore wind will make a significant contri- bution of 1,000–1,500 MW equivalent to of UK supply by 2010, gearing up to a potential installed capacity of up to 11,500 MW by 2020. Onshore wind is expected to make the largest single contri- bution to the 2010 target. In order to deliver a total 6,000 MW to the 2010 target, estimates that an additional 2,000 MW of wind power is needed to receive permits before the end of 2007.107 This additional necessary capacity, plus the already operational or consented capacity, would meet about half of the UK 2010 renewable electricity target (of UK supply), and would result in the installation of approximately 3,500 turbines in total (about twice the current number installed). Figure 4-9: Expected onshore wind installation by 2010. A key problem, however, is the rather slow approval rate of applications as well as limited transmission capacity in parts of the country, in particular between the very windy Scottish locations and the Southern part of the UK. At present nearly 8 GW of capacity are held up in the onshore planning system, equivalent to nearly of potential UK electricity supply. A further 9 GW from offshore projects is awaiting decision or due to be submitted for consent. In 2006 it took local authorities an average of 16 months to decide on wind farm applications – even though the statutory time period for decisions is 16 weeks. Furthermore, in the past only a few offshore wind farms were installed as they had to deal with low ROCs prices and technical diffi- culties, hence the realization of offshore wind farms in the rather harsh offshore environment around the UK was very difficult and came almost to a standstill 2 years ago. With increasing ROC prices and more suitable wind turbine technology the interest in offshore wind power picked up again. However, due to the high world-wide demand of wind turbines, on- and offshore, it is rather difficult to find wind turbine suppliers that are interested in delivering wind turbines for large offshore wind projects in the UK. 107 and http://www. /energyreview/ and 4.1.7Payment Scheme for Renewable Energy Sources The following section discusses the old scheme of non-fossil fuel obligations as well as the main current scheme, i.e. renewable obliga- tions and its future development. Non Fossil Fuel Obligations (NFFO) Before 2002 the renewable energy policy in and was based on Non-Fossil Fuel Obligations (NFFO).108 Under NFFO, potential project developers for renewable energy projects were in- vited to submit offers for new projects. The developers bid under different technology brands, e.g. wind power or solar, for a feed-in tariff or for the amount of financial incentives to be paid for each kWh fed into the grid by renewable energy systems. In total five NFFO Orders were made, of which the first in 1990 was set for a total of 102 MW declared net capacity (DNC). This first order resulted in contracts for 75 projects for 152 MW DNC. The second Order, made in late 1991, was set for 457 MW DNC. This resulted in 122 individual contracts (for a total of 472 MW DNC) between the generators and the (). For landfill gas, sewage gas and waste-derived generation, contracts were awarded at around 6p/kWh, while for wind power a price of 11p/kWh was established. These prices reflected the limited period for the recovery of capital costs. The third Order covers the period 1995 to 2014; this was for 627 MW DNC of contracted capacity at an average price of 4.35 p/kWh. The lower bid prices reflect the longer-term contracts, which are now available together with further developments that have led to improvements in the technologies. Taking into account factors such as denied planning permissions, it is estimated that about 300–400 MW DNC will finally be commissioned. The fourth Order was announced in February 1997. The contracts comprised 195 projects with a total DNC of 843 MW, at an average price of 3.46 p/kWh. In the fifth and largest Order, which was an- nounced in , contracts included 261 projects with a total DNC of 1,177.1 MW, at an average price of 2.71 p/kWh. Table 4-3, on the following page, sets out the technologies and capacities of schemes in all five NFFOs and Figure 4-10 provides an overall overview of the development of NFFO 1 to 5. As at the end of , 86 projects in the third Order were opera- tional, with a total capacity of 351 MW DNC. There were also 88 pro- jects with a capacity of 241 MW DNC commissioned from the fourth Order projects and 93 projects totalling 188 MW DNC from the fifth Order. Figure 4-10: Renewable generating capacity from NFFO and former NFFO con- tracts (including equivalents in and Northern ) and capacity outside of NFFO. to the changes in regulations, only the price development be- tween the last three bidding processes can be compared. It is sum- marised in Table 4-4. Biomass projects have not been included into NFFO5 as none of the successful biomass projects in NFFO3 and NFFO4 was commissioned. Table 4-4 shows that NFFO has lead to significant cost reductions, with the notable exception of biomass. A comparison between the 1997 (NFFO4) and 1998 (NFFO5) ave- rage successful bid prices shows a price reduction (calculated in 1998 prices) in large wind power bidding prices. Surprisingly, the average price of all renewables for NFF05 is 2.71 British pence (p)/ kWh (or 0.038 / kWh) while the average price at the and spot market was between 3 and 3.5 p/kWh (0.042–0.049 / KWh) in 1998. Table 4-3: Overview of Non-Fossil Fuel Obligations in & and operational capacity 2006.109 Live projects operational at Municipal and industrial waste (late 1991) Municipal and industrial waste Energy crops and agricultural and forestry waste – gasification Energy crops and agricultural and forestry waste – other Municipal and industrial waste NFFO-4 (1997) Municipal and industrial waste – CHP Municipal and industrial waste – Anaerobic digestion of agricultural Energy crops and forestry waste NFFO-5 (1998) Municipal and industrial waste Municipal and industrial waste – CHP 1) Sites that have been closed and sites that are not currently using renewables as fuel have been excluded. Table 4-4: Successful NFFO bidding prices in British pence/ kWh.110 Exchange rate 2007: = 0.7 £ In , the first Scottish Renewable Order (SRO) in 1994 in- cluded approximately 76 MW DNC of new capacity and comprising 30 projects. At the end of , 19 schemes were com- missioned with a capacity of 40 MW DNC. A second SRO was launched in 1995, and in 1997, it comprised 114 MW DNC 110 Source: Fifth Renewable Order for and ; Office of Electricity Regulation, UK, . of new capacity within 26 schemes. Under this Order, at the end of 2006 there were 13 commissioned projects with a capacity of 50 MW DNC. A third SRO for 145 MW DNC of new capacity comprising 53 project was submitted to Parliament in February 1999. Under this Order, at the end of 2006 there were 16 commissioned schemes with a capacity of 34 MW DNC. Table 4-5 sets out the technologies and capacities of projects in all three Scottish Orders. Table 4-5: Overview of Scottish Renewable Orders (SRO) and operational capacity 2006.111 SRO-1 (1994) SRO-2 (1997) SRO-3 (1999) () was set up in 1990 by the twelve (RECs) in and as their agent for the purpose of purchasing the output from NFFO generators in & at the contract price and of selling the electricity suppliers via on-line auctions into the market. Contracts for the first two Orders, 1990 and 1991, have now terminated. Contracts under the remaining three Orders will continue for many years with the last of these contracts not terminating before 2018. , presently NFPA conducts green power auctions bi- annually. These auctions are for electrical output that will be pro- duced by NFFO generators during a six-months period (starting or 1 October) following the end of the auction. The auction prices are for electrical output together with – depending on the generation technology – Climate Change cates (LECs) and Renewables Obligation Certificates (ROCs). The latest on-line auction of green electricity was completed on 27 2007. It covered contracts from both NFFO (& ) and SRO (), amounting to 299 projects with a total of some 861 MW of capacity having been auctioned. The auction began on Tuesday, 24 2007 and contracts were finally awarded to a total of 10 successful bidders. The contracts are for electricity produced between 1 October 2007 and 31 2008. The results of the latest auction, and the 4 auctions held before, are given in Table 4-6. The average price of the 2007 auction, at 9.31p/kWh (13.33 c/KWh), was about lower than the very high levels of the 2006 auction, which is the equivalent auction covering a period and returned an average price of 10.35p/kWh (14.82 c/KWh). The previous auction covering a period was held in February 2007 and produced an average price of 7.20p/kWh (10.31 c/KWh). Table 4-6: Overview of NFFO Auction Results. (Exchange rate Sept 2007) C. Renewables Obligation The first Renewables Obligation Order in & came into force in , as did the first Renewables Obligation Order ().112 These Orders were subject to review in 2004, 2005 and 2006. These Orders place an obligation on licensed elec- tricity suppliers in and as well as in to source an increasing proportion of electricity from renewable sources. In order to provide a stable and long-term market for renewable energy, the Obligation will remain in place until 2027. Yearly targets have been set up until the 2015/2016 period. In 2002–03 the target was set at , 2005–06 it was 5.5 per cent in and and and will increase annually to reach by the year 2015/16 and then remain at this level until 2026– 2027.113 Currently eligible renewable generators receive Renewables Obli- gation Certificates (ROCs) for each MWh of electricity generated. The Renewable Obligation scheme is currently defined as a techno- logy-neutral instrument, i.e. each generator gets the same number of ROCs for the same amount of energy (MWh) produced. , the scheme is designed to promote the most economic forms of re- newable generation. The eligible generators are: wind, wave, tidal stream, PV, landfill gas, sewage gas and biogas from anaerobic digestion unless they were built before 1990; Biomass is only eligible as long as the fuel is less than conta- minated by fossil fuels (and various other restrictions). The bio- mass fraction of waste gets ROCs, provided that an advanced technology is used, i.e. gasification or pyrolysis. hydro qualifies whatever its size if built after 1990, and if it is refurbished and under 20MW; all micro-hydro plants, independent of date, receives ROCs if they are 1.25MW or less. The certificates can be sold separately from the electricity to which they relate, i.e. suppliers can purchase these certificates in order to fulfill their obligation. This allows for open trading of certificates. 112http:///acts/acts2000/ukpga_20000027_en_8#pt4-pb8- l1g62 113An increase to on a headroom base is discusses, see also files/file39497.pdf (Chapter 5). To fulfill their obligation, suppliers can either present enough certi- ficates to cover the required percentage of their output, or they can pay a buy-out price for any shortfall. The Buy-Out price was set at £30.00 per MW/h in 2002/03 and increases each year by the Retail Price Index (RPI). The period 2005/06 had a buy-out price of £32.33, the price for 2007/08 is £34.30 per megawatt hour (MWh). All payments are back-channeled to suppliers in proportion to the number of ROCs they present. ROC trading is administered by the (). The fixed buy-out price is often referred to as floor price for ROCs,114 however, the buy-out price is not the same as a floor price. A floor price guarantees a minimum price for ROCs in case of over- supply of ROCs, while the buy-out price actually does not guarantee such a minimum price. However, no oversupply of ROCs is expected to occur until 2015 or so, hence in principal it can be assumed that the ROCs price will not drop below the buy-out price until around 2015. For the time after this, the government currently develops a mechanism that is intended to stabilize Renewables Obligation Certi- ficate prices in a situation with ROC oversupply.115 The government aims at implementing this new approach in the legislations by 2009. The current proposal focuses on the introduction of a headroom, i.e. after 2015 the number of ROCs requested by the government should always be higher than the expected production of ROCs for a particular year. The ROCs have increased the profitability of renewable energy generation as the certificates have an additional value over and above the price of electricity itself. This is especially true for wind power. Furthermore, the renewable obligation scheme has delivered consi- derably more renewables than the previous support mechanism of the Non-Fossil Fuel Obligation (NFFO). Table 4-8 shows how suppliers complied with their obligations in and . It can be seen that due to the redistribution of the collected buy-out price to all parties with ROCs, suppliers had an incentive to pay ROCs prices significantly above the actual buy- out price. 114http:///article_faq_list.fcm?section=2&subsite=1 115http:///files/file39497.pdf How suppliers complied with their obligations in & Total Obligation (MWh) 8,393,972 12,387,720 14,315,784