Consultation on Competitive CfD Allocation Response from the Renewable Energy Association

Transcription

1 Consultation on Competitive CfD Allocation Response from the Renewable Energy Association The REA represents a wide variety of organisations involved in renewable energy in the UK, including generators, project developers, fuel and power suppliers, investors, equipment producers and service providers. Members range in size from major multinationals to sole traders. There are over 1,000 corporate members of the REA, making it the largest renewable energy trade association in the UK. The REA s main objective is to secure the best legislative and regulatory framework for expanding renewable energy production in the UK. The Solar Trade Association is affiliated to the REA. Summary of REA View The allocation of CfDs is a very complex issue, crucial to the renewable power industry in the UK. Allocation arguably heralds a wholesale shift for the industry as it moves into a world in which funding for individual large-scale renewable power projects is no longer guaranteed. Although there has always been a de facto limit on renewables spending in the UK, the limit has never been breached and therefore no allocation or rationing system has been necessary. As deployment reaches ever more significant levels, applications for the Levy Control Framework funds are very likely to exceed available resources and a system of allocating support is therefore essential. In effect, the published strike prices are of reduced significance in this situation and allocation becomes the primary concern for the industry. This requires early and consistent engagement across technologies as companies shift to a fundamentally different policy environment. There are multiple competing priorities in the process, which can be summarised below: Issues to resolve when allocating CfDs - Allocating scarce resources most efficiently without picking winners - Ensuring all technology developers are as content as possible with the process - Complying with State Aid guidelines, without which the policy may not receive clearance and therefore risks being severely delayed or being subject to wholesale change - Providing industry with certainty that they will receive a minimum level of support to avoid cliff-edges in deployment and provide long term stability Competing priorities Any solution has to meet DECC s priorities: 25 Eccleston Place Tel: Victoria, London SW1 9NF

2 - Compliance with EC s State Aid guidelines (these are currently being consulted on and may therefore change, however the current proposals are significant and therefore worth stating): o Technology neutral allocation of support for deployed technologies o Cost-competitive allocation of support for deployed technologies - Coalition government priorities: o o Reducing the cost of energy bills Meeting economic and strategic industrial targets, eg offshore wind supply chain/industrial strategy objectives (as per the offshore wind industrial strategy) - Compliance with binding European 2020 renewable energy targets (within the timescale of the first EMR Delivery Plan) Industry s priorities (these are diverse, but need to encompass the following): - Certainty of some level of support for every technology, in order to provide investor certainty and enable long term decisions on jobs and investment - An approach which is as fair and transparent as possible - An approach which is as simple as possible Consistent support is essential A world in which support cannot be guaranteed for every technology is not an entirely new situation. The NFFO process included the need to distribute finite support to a number of technologies. One of the key lessons of the time was that stop-start support was enormously damaging to the industry, especially those at an early stage or with immature UK supply chains. Industry values a consistent message and a reliable base level of support. This enables long term planning and investment decisions, which should also over time deliver more cost effective energy as efficiencies are developed and implemented. Consistent, visible support is important as a basis for securing bank finance as a funder can be reassured that at least some deployment will be supported by Government, rather than being asked to finance a project with no guarantee of state support. Such certainty is especially crucial for early stage technologies such as marine and ACT, for which early deployment is vital to provide a pathway to subsequent cost reductions. the risk of an early stage cut off in support would prevent such technologies from reaching their potential and delivering cost reductions. Cost-efficient distribution of support is of course also essential and should support lower cost forms of energy wherever possible. In some respects, the policy should take cost-effectiveness as a starting point and ensure that funds are not at risk of being sterilised, while supporting low cost generation while providing assured support for each technology. The REA s proposed approach: There are essentially two possible alternatives: 1. An application basis purely based on cost competitive technology neutral allocation. In this case many technologies may lose out but the cheapest technologies are deployed. 2

3 2. Ensure every technology gains some deployment by setting minima, which could be based on a percentage of expected deployment able to be adjusted to meet budgetary requirements and unused funds recycled for use by other technologies. We currently believe the latter represents the better option for the industry as a whole. The EU s State Aid guidelines stipulate a different approach for different technologies, based on current levels of deployment on a European scale (interpreted by DECC as established and non-established technologies). We disagree with the definition proposed and are addressing these concerns to the EC directly. For Established technologies- - The proposed State Aid guidelines state that allocation of support to such technologies cannot be on a discriminatory basis, however some technologies are very concerned they will miss out in auction allocation process on a purely price basis. - As an added point, it is worth noting that a literal approach to this cannot be correct as it would imply un-banded support for each technology, therefore possibly over-rewarding certain technologies with different hurdle rates (and severely under-compensating others). - Proposal: set the same capacity minima for each technology in the category, at a level below the expected-deployment levels to enforce competitive allocation for capacity applications above the minima level (and overcome sufficient scarcity concerns in the auction process. Minima could be set to the same percentage of expected deployment (ie 40% of each technologies expected 2020 deployment) rather than on a fixed MW basis (ie 200MW for every technology) 1. - Capacity applications exceeding the minima enters technology-neutral, cost competitive auction process in line with State Aid requirements. - We argue that maxima on established technologies would not be necessary, as the suggested minima would ensure some deployment for every technology and spare funds would then go to the cheapest technology - therefore protecting budget for other technologies, with the same net effect. - Capacity in technology specific minima that is not utilised should be recycled to be available to other technologies via the auction process within the respective financial year. This is important as underspend in the LCF cannot currently be carried over to future years. - Auctions should be run on a six-monthly basis as a minimum to provide projects more than one opportunity to apply for support over the Delivery Plan period and level opportunities for faster-deploying technologies. This would 1 We understand minima will be subject to further consultation, and the exact details of how they operate can therefore be discussed further at that point. There are different ways in which minima could be set requiring consideration of numerous factors, for example setting minima in installed capacity (ie MW) terms across technologies may not be the most effective approach, as different respective load factors mean that project sizes (and the payments made on generating hours) will differ. For this reason, one approach could be to set the level in terms of MWh generation, and then if possible translate this back into MW of capacity based on load factors. The MW capacity figures would vary, but the MWh of generation would be identical therefore meeting the technology neutral distribution requirements of the State Aid guidelines. 3

4 also allow projects to return to the process with lower bids and therefore improve value for money for energy consumers. Non-established technologies- - In the current proposed category or grouping of technologies, which we refer to as a pot of technologies, offshore wind sits alongside emerging technologies such as geothermal and ACT. However offshore wind has ten times the minimum deployment potential of all other technologies in the pot combined, therefore many technologies may not receive support if offshore wind dominates allocation. - Proposal: minima are allocated to each individual technology in the pot, on a technology-specific basis (as opposed to the uniform minima applied to technologies in the established technologies pot). - Offshore wind is an important industry to the UK and worthy of support, therefore we do not in principle oppose its inclusion in the non-established technologies group. However due to the differences in deployment potential and costs within the non-established pot, we do not believe offshore wind will require a minimum. This is because even if all other technologies were to meet their full deployment potential, the pot would be set at a level at which offshore wind would then be expected to be able to access significant funding. - Wave and tidal projects already have a proposed minimum of 100MW of capacity (a proposal we strongly support), therefore there is precedence for minima in the process. - It is essential that capacity in technology specific minima that is not utilised should then be made available to other technologies via the competitive allocation process. We propose that in this pot funds would first be recycled to the non-established pot, and then be made available to the established pot. This would prevent sterilised funds and offer more opportunities for the most cost-competitive technologies. How this approach might meet the necessary objectives: - Compliance with State Aid guidelines: ( established technologies pot only)- as each technology would receive identical minima under the proposal, the approach would be non-discriminatory, and - As any minimum would only be sufficient to account for part of any technology s expected deployment over the Delivery Plan period, and the remainder of the budget allocated via cost-competitive, technology neutral auction, the approach would be cost-competitive. - DECC Priorities: the auction format should reduce costs and introduce greater competition. - Economic and industrial priorities supported by providing minima for each technology. - Minima can be set to ensure 2020 targets are met - Industry Priorities: the approach would guarantee deployment for every technology (albeit below the maximum possible level), - Minima provide certainty to support investors and long term decision making 4

5 Illustrated examples: Established / Deployed Technologies Established Technologies CfD Allocation *Illustrative figures Technology Minima Capacity applications succesful in auction Unsuccessful in auction Capacity Minima identical Tech. A Tech. B Tech. C Tech. D Tech E. Tech. F Technology In the established/deployed technologies pot, all technologies meet their minima capacity and then enter the cost-competitive auction process once their minimum capacity has been allocated. These projects compete against each other for support and contracts are allocated on a cost competitive basis, as per DECC s intentions resulting in some technologies gaining more capacity than others in a cost-efficient process. Non-established / Non-deployed Technologies Non-established Technologies CfD Allocation *Illustrative figures Capacity Technology Minima Capacity applications successful in competition Capacity Unsuccessful Tech. A Offshore Tech. C Tech. D Tech E. Tech. F Wind Technology Minima varies In the non-established/non-deployed technologies pot, the minima vary based on technology-specific deployment rates as the approach does not need to be 5

6 technology-neutral. Any extra capacity applications enter a cost-competitive allocation process. Offshore wind is able to enter allocation and should have access to support from the pot but all other technologies receive guaranteed capacity minima. Bi-annual auctions In both technology pots, auctions take place on a six-monthly basis as a minimum so that faster deploying technologies can compete with projects with longer lead-in times and there are multiple opportunities to apply. The alternative would mean removing opportunities to apply for support following an initial auction and therefore a hiatus in the industry for several years. Running more frequent auctions would also allow technological cost reductions of faster deploying technologies in later years to be factored in, leading to cost savings. Consultation Questions 1. Do you agree with the Government s proposed list of established and less established technologies? We acknowledge the difficulties Government faces in setting lists of technologies, and believe the proposed lists have two major flaws. Firstly, offshore wind is included in the same category or pot as emerging technologies such as ACT, geothermal and marine. The respective predicted deployment rates indicate that offshore wind may deploy over ten times the capacity of all other technologies in the pot combined. Therefore without some form of minima or maxima in the non-established pot, the other technologies risk being excluded at the expense of offshore wind. This reinforces the argument for minima to prevent this scenario derailing new and innovative technologies in which the UK has a leadership position at present. See the proposal above. It is also unclear whether technologies can move categories as they reach the 1-3% EU electricity production deployment threshold for established technologies- as offshore wind is currently producing around 0.7% of EU electricity and is likely to exceed 1% before 2018, will the technology move categories? Secondly, the application of the definition creates short term problems for solar PV, as an interim price control measure applied at an EU level until 2016 will make solar PV projects les cost competitive against other established technologies. This technology is, at a utility-scale, still very new in the UK, therefore further cost reductions could be seen (including from the 50% of costs not accounted for from international equipment costs, but rather localised suppliers and processes). Biomass Conversions We further note that biomass conversions and Scottish Island projects are not categorised and that this will be subject to a standalone consultation. We would however like to make the following points in relation to biomass conversion: Deployment of the technology is some way from the 1-3% of EU energy production/consumption figure classed as deployed, and on an EU level is very unlikely to reach this level in the timeframe of the First Delivery Plan. 6

7 Government has effectively categorised biomass conversion as a transitional technology by limiting the duration of CfD and RO support to a hard end date of As such there is limited scope for cost reduction, and the hard end date will make later projects more difficult to deploy. The technology involved in converting large scale coal units to biomass is immature and not yet well understood, specifically the impact of a completely new fuel type on the components of decades old combustion plants, and as such has characteristics much closer to an emerging technology. Biomass conversion projects are strictly limited in number. Only a small portion of available (existing coal plant) capacity could be converted. We note that only Drax, Eggborough and Lynemouth applied for Investment contracts under the FiDeR process. There are a number of factors to consider therefore regarding the classification of biomass conversions. The above factors indicate that biomass conversion is not an established technology. It should therefore either be added to the less established category, but with an appropriate cap; or alternatively, it could be considered as a separate category alone. There are pros and cons to each of these, and we welcome engaging on this matter further in the future. Biomass conversions represent a small number of relatively large projects, providing excellent value and stable, baseload power (which is crucial for future supplies to the grid as intermittent power supplies increase). The UK could therefore benefit considerably from biomass conversions and deployment will depend on a small number of big decisions. For this reason the probability of any impact on budgets will be very hard to predict, therefore there is a need to ensure that; there is definitely budget available for such projects and that, if such projects do not go ahead, other technologies are able to access the unused funding. Dedicated biomass The classification of technologies and allocation methodology provides an opportunity to reconsider the merits of sustainably sourced dedicated biomass. If cost-effectiveness is a major plank of the policy, biomass can provide considerable capacity at low cost, with the added benefit of providing deployable, baseload power which can be scaled up or down quickly in the same way as conventional fossil fuel generation. Dedicated biomass plant therefore provides a like-for-like fossil fuel replacement that can deploy at a rate that is fast enough to tackle the expected 2016 capacity crunch in UK power generation. 2. Do you agree that the established list of technologies should be subject to competition from the outset of an allocation process as part of helping to manage the LCF and delivering value for money? Please see our proposed approach as set out above, we recognise that the European level State Aid guidelines as currently drafted and constraints within the LCF budget and political context make such an approach necessary, although clearly have concerns about the methodology to be implemented. We are therefore supportive of measures to amend the EU s proposals to better reflect the UK s situation and note that while such issues must therefore be addressed at this level, the UK has also historically gone further than other EU member states in interpreting and enforcing EU guidance and therefore some discretion may be possible. 7

8 In essence, the industry is completely supportive of value for money as short term support for renewables will lead to longer term cost reductions for all, and this longer term target should not be lost sight of in the current short term political context. Supplementary question: We would welcome comments from respondents on whether and how they would amend their responses to the questions asked in this consultation if, in light of those factors, the Government was also required to amend the RO for more established technologies as a result. As the REA have, alongside other trade bodies, repeatedly made clear to Government, any change to the RO would severely damage investor confidence in the UK (and EU) renewable energy market and therefore be of great concern to the industry. Therefore no such changes should be made to the RO- and even the publication of consultation proposals would risk undermining confidence in the RO and have knock on risks for perceptions of CfDs. If it were necessary to make such changes, any proposals would have to, as a bare minimum, protect the value of investment decisions taken before any changes were proposed. Renewable Energy Association 12 February