Renewable Energy Policy Outside the United States
Part 4: United Kingdom— | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
When the UK deregulated the electricity utility industry, it faced the very difficult question of how to deal with the nation's nuclear power plants.17 Private investors appeared ready to buy coal-fired power stations on the open market. Yet several factors dampened enthusiasm for the nuclear plants, such as the lack of a fund to pay for inevitable decommissioning. Unable to privatize nuclear power, the government instead sought to subsidize it in a way that would complement the market system and—above all—not conflict with the European Union's prohibition against subsidizing forms of energy other than renewables. The government solved this by selling the coal plants but imposing on the Regional Electricity Companies (RECs) an obligation to buy a certain quantity of non-fossil power. If the non-fossil power cost more than fossil-derived electricity, a tax imposed on coal-derived electricity would make up the difference. The European Commission approved this subsidy of "non-fossil" electricity for eight years; the initial subsidies terminated at the end of 1998. This system came to be known as the Non-Fossil Fuel Obligation, or NFFO. Although initially designed to support nuclear energy, it has stimulated the rapid growth of renewable electricity, which in this case includes wind power, hydropower, municipal and industrial waste, energy crops and agricultural and forestry waste, and sewage gas. Since 1990, the price of renewable energy purchased by the RECs has fallen markedly—although it is not clear whether the NFFO itself is the cause or if instead market developments and subsidies in other nations have brought down industry prices worldwide. The government placed five successive "orders" for non-fossil electricity between 1990 and 1999. NFFO-5, the largest order so far, was announced in September 1998. If all the 261 new projects are successful, this will provide some 1,177 MW of energy from landfill gas, waste, hydro, and large and small wind farms. It is also the cheapest NFFO so far. The average price of power expected to be generated is only 2.71 pence (4.3¢) per kWh (compared with the electricity pool price of 2.67 pence (4.2¢))—down from 4.35 pence (6.7¢) per kWh under NFFO-3. Details of the NFFO Because some renewables (such as wind and solar) are intermittent, the orders are expressed in terms of delivered net capacity (DNC) of electricity, which equates roughly to that same amount of thermally generated power. That is, a DNC of 50 MW of wind roughly equals 50 MW of natural-gas-fueled electricity in terms of the amount that is ultimately delivered. Thus the nameplate capacity of an intermittent renewable facility is higher than its DNC. Although the initial target was for 1,500 megawatts, orders for over 3,271 megawatts of DNC have actually been entered into in NFFO-1 through NFFO-5. Competition for orders occurs within technology "bands," so that wind competes against wind, nuclear against nuclear, and so on. The law does not define "non-fossil" electricity, nor does it set shares for specific technologies. It merely provides that the government may "by order oblige" suppliers to accept electricity. These blanks are filled in by the Department of Trade and Industry, which merely declares a technology—chicken litter, for example—eligible or ineligible as non-fossil fuel. The payments to NFFO electricity generators are funded through a mechanism known as the "fossil fuel levy," which despite its name is a tax on all electricity, not just that generated by fossil fuels. The levy is recalculated annually to raise the amount of money required for the previous year's obligation. Each regional electricity company (REC) pays a sum directly proportional to the amount of electricity that it supplies. That is, an REC that accounts for 25% of the national electricity total would pay 25% of the fossil fuel levy.18 The winning offers are selected by the Non-Fossil Purchasing Agency (NFPA), a wholly owned accounting agency of the 12 RECs, based solely on bid price. The lowest bidder within a technology band wins. The winners receive long-term contracts to supply electricity to the grid. The NFPA reimburses the RECs for the difference between the average monthly pool selling price and the premium price, using the fossil fuel levy on electricity bills, which cost around £95 million (about $151 million) in 1995/96. (See Table 1.) Similar mechanisms exist in Scotland (the Scottish Renewable Order) and in Northern Ireland (the Northern Ireland NFFO).
When the original NFFO program expired at the end of 1998, many interests vied for favorable treatment under any extension. The direction that the new Labour government would take was unclear. It was obvious that the NFFO had succeeded both in bringing renewable technologies to market and in driving down the price of renewable electricity. NFFO-5 confirmed that success, and thus seems to have guaranteed not only continuation but expansion of the program. When he unveiled the results of NFFO-5, Energy Minister John Battle also announced a new government review of its policy on renewables, saying that "from work undertaken so far it seems that the achievement of 10% of the UK's electricity from renewables by 2010 would almost certainly require bringing forward technologies in addition to those supported under NFFO-5, including offshore wind energy and energy crops." Battle was particularly interested in offshore wind energy, and announced a government consultation on including a specific band for it in future NFFOs. The minister was "impressed by the extraordinarily low price bid, reflecting the seriousness of the bids, and the imminence of onshore wind energy competing in the open market."19 Keys to NFFO Success NFFO success to date can be traced to three key factors. First, awards have been been made in rounds over time, from 1990 through September 1998. This has allowed the technologies, as well as the bidding mechanism, to mature, with each round incorporating improvements from lessons learned in earlier phases. Second, NFFO contracts are awarded as a result of a competitive bidding process within technology "bands" so that a landfill gas project is considered against other landfill gas projects, and so on. This has allowed each technology to progress at an appropriate pace rather than forcing it to compete against dissimilar technologies. In addition, it allows the development of altogether new bands or technologies, such as gasification of animal waste. Third, NFFO contracts have been granted with long enough payment periods to allow reasonable financing of projects. Although NFFO-1 and NFFO-2 had contracts until the end of 1998, NFFO-3, NFFO-4 and NFFO-5 have 15-year contracts with 5-year grace periods, allowing projects to develop without time pressure. The result of these strategies has been a steady decline in the price of renewable electricity. In NFFO-4, for example, winning bids were awarded an average price of 3.46 pence per kWh (about 5.8¢) from 840 MW DNC of projects. This is comparable to the average selling price of the current grid mix. It is also, however, higher than the projected selling price of around 2.5 pence per kWh (about 3.9¢) of new combined-cycle gas turbines (CCGT). By NFFO-5, however, the average price for winning bids had dropped again, this time reaching a new low of 2.71 pence per kWh (about 4.3¢)—still higher than a CCGT, but just barely. Weaknesses of the NFFO The NFFO has been an innovative solution to the policy problem of how to implement renewable energy, and it has achieved some unique successes, discussed above. There have been some noted drawbacks to the NFFO, however: the NFFO's intense competition has favored large, deep-pocketed companies. It has therefore discouraged small investors, independent developers, and the domestic renewable energy manufacturing industry. Small investors, independent developers, and domestic manufacturers form strong lobbying coalitions for renewables in other nations. By contrast, in the UK, developers have tended to be large energy companies with little inherent interest in the success of renewables versus other energy technologies. These large developers have also built projects against stiff local opposition to siting, producing ill will toward renewables in some communities. (In Denmark, this problem is mitigated by a strong tradition of local cooperative ownership of renewables.) Furthermore, the lack of a domestic renewable manufacturing industry is a serious impediment to reaping the economic development benefits that renewables can provide. Most significantly, the ability of the NFFO to commission actual projects, rather than awarded contracts, is still somewhat unknown. As discussed above, for NFFO3 through NFFO5, the contracts for projects were made much more favorable to the financing needs of renewable developers by lengthening contract terms and allowing for a 5-year period before projects must be commissioned. NFFO3 contracts were awarded in 1994, NFFO4 in 1997, and NFFO5 in 1998, thus, commissioning of these projects is not required until 1999, 2002, and 2003, respectively. Because bid-winning developers may opt out of the contracts at any time without penalty, it is difficult to predict the likely rate of commissioning for the current contracts. It is conceivable that developers are waiting as long as possible before commissioning projects, in order to capitalize on lower prices for renewable energy equipment. Price reductions for this equipment are likely in the next few years, while the payments made to the developers under the contract are fixed. These last three rounds represent 2,647 MW (out of 3,271 MW total) of NFFO contracts, and because only approximately 200 MW of contracts from the last three rounds have been commissioned, it is premature to evaluate the overall success of the NFFO in commissioning renewables. The NFFO Cost Question Historically, the first major renewable energy implementation policies in Europe were fixed higher payments to generators. The UK's NFFO became the most visible alternative to fixed higher payments, and since its implementation, an active discussion has taken place about which system produces renewables most cheaply. The NFFO has been touted for its ability to cut costs of renewables development, and within the UK the contract prices awarded have indeed fallen significantly since 1990. But it is important to separate the concepts of price, or the amount of money customers pay, and cost, or the amount of money suppliers pay to deliver a product to the customer. The NFFO's competitive aspect is thought to be the key to its price reductions. In nations with fixed higher payments, such as Germany and Denmark, developers do not need to reduce prices to win contracts over their competitors. By contrast, UK developers must propose a bid price lower than competitors to win a contract. For example, in Germany, the price paid to wind energy generators hardly varied from 1991 (.1661 DM/kWh-9.5¢/kWh) to 1999 (.1652 DM/kWh-8.8¢/kWh). During roughly the same time period, the price for award-winning wind bids in the NFFO went from 10.0 p/kWh (18.9¢/kWh) to 2.71 p/kWh (4.3¢/kWh). While the NFFO has brought down prices, has it brought down costs? There are reasons to believe that falling costs in the UK are not solely due to NFFO-driven competition. At least part of the cost decline is due to technological improvements in a burgeoning worldwide renewable technology market strongly driven by nations with fixed-payment incentives.20 Also, even under fixed higher payment systems, developers—or firms in charge of installing projects—are still motivated to reduce costs to increase profits. And data indicates that costs to developers are similar worldwide, as prices charged by developers tend to be between 4-6¢/kWh in nearly all competitive situations.21 Another factor in the cost debate is the competition among manufacturers of renewable equipment. For example, there are today at least a dozen major manufacturers of wind turbines. Given that equipment typically represents about 70% of the cost of a renewable project it is fair to say that even with fixed higher payment systems (that are sometimes referred to as "non-competitive"), a reasonable amount of competition exists de facto, and is helping to drive costs downward.22 This competition is a result of wind turbine manufacturers vying to win bids from developers who purchase the turbines and install them in the electricity grid. Naturally, what a developer and manufacturer sees as price is seen as cost to society, which is paying the premium for the renewables. It appears that the NFFO has cut costs to society through lower prices paid to developers (in conjunction with falling costs for renewables worldwide). It is much less clear that the NFFO has produced cost reductions from the perspective of the developer, because much of the renewable technology implemented under the NFFO is imported, frequently from Denmark and Germany. NFFO cost reductions likely come at the expense of profits to the renewable industry. This has produced low-cost renewable implementation in the UK, as well as some of the problems discussed above in the UK section. By contrast, renewables have been more expensive to implement in the fixed higher payment nations, which are sometimes paying twice as much for implementation today compared to current NFFO prices. But their renewables industries are much stronger, and their implementation rates much higher. The combination of industry maturity in nations with fixed payments, and lower prices in nations relying on competition, may be causing a re-examination of the fixed payment systems: Denmark's new renewable portfolio standard incorporates elements of both competition and fixed payments. Also, the European Commission, seeking more competition in renewables, is beginning to put pressure on Germany to reduce its level of support for wind energy.23 Ultimately, the ability of the NFFO to cut costs will be seen within a few years as the later NFFO contracts are actually commissioned. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Renewable Energy Policy Outside the United States |
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