The Environmental Audit Committees Inquiry into Renewable Energy

Memorandum from Innogy plc

1. Innogy plc is market leader inrenewable generation and quality cogeneration.Through our subsidiary National Wind Power Ltd we own and operate some40% of current UK wind power capacity.We also operate nearly 50 MW of hydro capacity at five sites. Innogy has a continuing strategy ofdeveloping and investing in renewable energy projects. In recent years this has included severalsubstantial wind farm schemes in the USA.

2. The following comments relateprincipally to wind power since this is the technology expected to make thegreatest contribution to the Governments renewable energy targets thisdecade. Innogy is particularly well placedto comment and we welcome the opportunity to take part in the Committeesinquiry. As market leader we haveinvested more than 120m in the UK wind market;have developed, built and operate eleven wind farms and continue to developprojects both onshore and offshore. Weare very familiar with the barriers to development of renewable projects.

Levels of Achievement

3. Over the past decade Innogy hassuccessfully developed 147 MW of wind projects using the Non Fossil FuelObligation (NFFO) support mechanism.However we still hold a further 600 MW of undeveloped NFFO contracts,which have proved difficult and in some cases impossible to bring tocompletion. Finance has been availableand the project economics show an adequate rate of return on paper. Thedifficulty has in all cases been inability to gain planning consent.

4. Innogys experience has been typicalfor the UK wind industry as a whole. In the past five years we have applied forconsent to build eleven wind farms of which just two have been successful.Earlier concerns about noise have been overcome by technology improvements; theprincipal cause for objection today is visual impact. However there are increasingly difficult issues being raised byradar operators such as MOD and CAA; it is notable that this latter issue doesnot appear to constrain wind development in Germany, Denmark or Spain.

5. In order to achieve the Governmentstarget of 10% renewable electricity by 2010, using the DTIs central scenariofor wind development, the rate of build will need to accelerate by a factor offour. Is this achievable? There are twopotential sources of new capacity; existing, undeveloped NFFO contracts; andprojects built under the proposed Renewables Obligation mechanism.

NFFO Portability

6. The cost of producing wind energy isfundamentally determined by capital cost and the local windspeed. The NFFOprocess, seeking lowest cost energy production, forced developers to seek thevery windiest sites for their projects.These tended to correlate with places of high visual amenity such ashill tops in the wilder areas. Therehas been increasing opposition from consultees, though frequently not thepublic, to development of any kind in such areas.

7. The industry has asked for flexibilityin re-siting wind farms with existing NFFO power purchase contracts. This is economically possible since thecapital cost of wind turbines has fallen since NFFO contracts were made,allowing projects to be moved to less windy but, hopefully, more consentablelocations. Re-locating NFFO contracts is currently not permitted. If, as has been suggested, secondarylegislation were used to allow NFFO portability this will immediately releaseseveral hundred megawatts of potentially economic wind projects for immediatedevelopment. NFFO contracts are attractiveto financiers since there is little market risk in their 15-year firm indexlinked prices. Without NFFO portabilitywe see little prospect for a short-term acceleration of capacity.

Renewables Obligation

8. We support the market-led RenewableObligation (RO) mechanism in principle, and believe it is a sound basis onwhich to build in the medium and long term.However, to be effective, it must contain several essential features:

- The indexed 3p/kWh buy out price isthe minimum which can hope to induce the volumes of new projects needed to meettargets

- Investors will need to be confidentthat the mechanism is durable and not subject to political risk

- The so-called green smear is aneffective mechanism for kick-starting the RO, and encouraging rapid developmentof new projects

- Financial backers will need assurancethat the profile of annual targets will be sufficiently demanding to keep ROCertificate values close to the buy-outprice

- The RO mechanism must be ring-fencedagainst leakage.

- A key criterion of the Government's renewables policy is theacceptability of the cost to the consumer.Given the distribution of both renewable resource and population in theUK, it is essential that both the UK Government and the Scottish Executiveimplement the Renewables Obligation on a similar basis. This is required to ensure full access tothe national renewable resource and the development of a GB-wide market,leading to supply of renewable electricity to the consumer at optimum cost.

- It is recognised that some near markettechnologies, including offshore wind, will need kick-start capital grants tofund a short-term technology-proving phase.

9. We believe the income which should beachievable under the RO (if the above conditions are met) will allow projectsto be developed on sites with windspeeds lower than those required to win NFFOcontracts in the past. Our assessment indicates that the search area forpotentially economic wind generation has increased in size several-fold. Itshould include sites already used for industrial and other purposes, whichalready have visual impact; time will prove whether these are more easilyconsentable.

10. We support the principle of anObligation on supply companies. Sadly, recent evidence indicates that the vastmajority of consumers are currently unwilling to pay a premium for greenelectricity. If the Government is to meet its renewables targets we see noalternative to an element of obligation in the market. There is good reason fora campaign to inform the public about the drivers behind renewable energy; ourperception is that there is a general public sympathy for the idea ofrenewables but little understanding.

NETA

11. The New Electricity TradingArrangements (NETA) undoubtedly disadvantage less predictable forms ofgeneration such as wind. The penalty is potentially high and the industry hasargued for consolidation mechanisms, which go some way to mitigate thesepenalties. Finalisation of these mechanisms has received low priority in theNETA development programme and we urge the allocation of necessary resourcesinto this area. Similarly we support the current initiatives to address theissues surrounding embedded generation on the distribution systems.

Barriers to Development

12. Despite all the above we believe thatthe single greatest barrier to development of renewable energy, and wind inparticular, will continue to be planning consent difficulties. We are far fromconfident that the current policy of requiring regional planning authorities toassess their capabilities to accommodate renewable capacity will be successful,since:

- There appears to be no mechanism toensure that the sum of the regional contributions will equal the national 10%target.

- Thereis no evidence that regions have been given guidance on the relative economicsof different forms of renewable technology.For instance, it is conceivable that regions will propose that they hostlarge quantities of possibly uncontroversial, but very expensive, photovoltics.It is doubtful that the consumer would be willing to fund such costlydevelopments.

13. Webelieve that central government should be more prescriptive in its guidance toregions on their targets for renewable energy. We commend to the Committee theregional targets for wind energy recently proposed by the British Wind EnergyAssociation, and encourage the other renewable technologies to propose theirown regional targets.

GovernmentSupport

14. Offshorewind energy is in its infancy but has an enormous global potential, and especiallyin the UK. There is a real possibility of developing a high growth indigenousindustry using skills and resources already present in the UK. In Germany and Denmark more than 20,000 jobshave been created in the onshore wind industry; a similar opportunity exists inthe UK for the offshore industry, particularly in the manufacturing sector inareas of traditionally high unemployment.

15. The capital cost of the first offshoreprojects will be perhaps 20% above that required to be economic under the RO,but we believe that later projects will be market-convergent. There is a needto prove the technology in hostile UK waters. The DTI are proposing capitalgrants for the first round of offshore projects and we support this principle.However we are concerned that the proposed mechanism for allocating thesegrants will be lengthy and will delay construction of the first projects until2004, more likely 2005. Other countries are proceeding right now and it islikely that the UK will trail our EU partners in a market where we could take alead, given our national competitive advantages.

Small Hydro

16. Innogyis also actively pursuing the development of small hydroelectric schemes.Hydroelectricity has a small but significant role to play in meeting the Governmentstargets and we expect to retain our leading role in developing such schemes.Hydroelectric schemes have very high capital costs which are offset to anextent by their long operational lives (40 years plus). As with wind the 3p/kWhbuyout level, for 25 years, is the minimum that will support further smallhydroelectric schemes. In terms of planning permission hydroelectric schemeshave been relatively successful, although the measures proposed above wouldhelp. We are however concerned about the water abstraction licensing process inEngland & Wales and consider that the proposals to allow only short termlicenses (12 or 15 years) in the draft Water Bill would deter futureinvestment. In addition we would like the Environment Agency to be given astatutory duty to assist renewables (they already have such a duty with respectto recreational use of water) and for them to be given guidelines which enablethem to take into account the wider environmental benefits of a hydroelectricscheme (eg reduced CO₂, NOx, SOx emissions etc) in consideringabstraction license applications.

Costto the Consumer

17. TheCommittee has asked for views on the cost of renewables to the consumer. Thetargeted growth in renewables will occur during a period of increasingcompetition in the electricity market leading to expected reductions inmainstream prices. From the view of the customer the relatively small increasepredicted for renewables support would be more than offset by the reductions inthe market as a whole. Care will need to be taken to protect the fuel poor.

R&DSpend

18. The less predictablenature of energy sources such as wind can, in sufficient volume, presentpotential problems in balancing electricity supply and demand. Energy storagetechnologies will play an increasingly important role in such markets. Innogy'sinnovative Regenesys regenerative fuel cell technology has the potential tobecome the market leader in this area.We encourage the Government to support the development of energy storagetechnologies as a component of their overall renewables-related R&Dprogramme.