The Observer: UK lags behind on eco energy

The British government says it is committed to renewable energy and has signed up to the latest EU generation target for 2020 – but countries across the world are doing better. Tim Webb explains how lack of investment is holding us back

Tim Webb
Sunday February 24 2008

Almost two years ago, cranes loaded three red ‘Pelamis’ wave machines – named after a species of sea snake – on to container ships in the Orkneys. Their destination: the coast of Portugal. Nothing could be more symbolic of how the UK has fallen behind in the race to embrace renewable energy.

The bizarre-looking devices, developed by Edinburgh-based Pelamis Wave Power, use the force of the sea to generate renewable and clean electricity. They are the product of Caledonian engineering and innovation, having been designed in Edinburgh, tested in the Orkneys and built in Scotland.

Yet Pelamis Wave Power will soon launch them into the sea off the coast of Portugal, not the UK, to create the world’s first commercial wave farm. Unlike those offered by the Portuguese, the paltry subsidies available from the UK government were not enough to make the new technology economic.

It’s a story repeated throughout the renewable and clean energy sector in Britain. Despite all the talk from the government about being a world leader on climate change – not to mention all the wind and waves at the UK’s disposal – its track record on delivering on these promises is not so impressive. Max Carcas, business development manager of Pelamis Wave Power, says: ‘It was not our choice where we put the technology, it was the customer’s. The customer has to get a return which is competitive. The UK talks a good game, but the action to deliver has been lacking.’

It’s not only in marine energy where the UK is falling behind. According to the European Wind Energy Association, at the end of last year, the UK had the sixth-largest wind farm capacity in Europe, with 2,400 megawatts installed, enough to power two-and-a half cities the size of Birmingham when the wind is blowing. That amounts to about 2…#8239;per cent of total UK generation capacity, far behind the top two countries in Europe, Germany and Spain, which have installed 22,200MW and 15,100MW respectively, despite having less coastline off which to install turbines. Globally, the United States, China and India are all far ahead too.

The UK is even further behind on solar power, with installed capacity of 16MW at peak times, compared with 3,800MW in Germany.

Yet the government insists it is committed to renewable energy. Last month, it signed up to a European Union target of about 15 per cent of energy consumed from renewable sources by 2020. Because it is much harder to get cars and planes to run on renewable energy, much of the burden will fall on electricity generators to meet the target. Some estimates say that about 40 per cent of electricity will have to come from renewable sources to meet the target.

In almost all cases, renewable energy is more expensive than conventional forms of electricity generation, such as coal and gas. This means that if the government is serious about renewable energy targets, it must subsidise, directly or indirectly. Yet UK governments do not tend to hand out large direct grants compared with those in Europe. Last year, Westminster awarded grants to help meet the cost of installing solar photovoltaic systems to just 270 households, compared with the 130,000 fitted by the Germans. And even this paltry amount is drying up: last month no awards were granted after the government cut the overall funding pot last year.

In the 1990s, the Danish government handed out huge subsidies to develop a domestic renewable energy industry. As a result, it now boasts the world’s largest wind turbine manufacturer, Vestas. Germany and Japan are the world’s largest generators of solar power for the same reason. As Bruce Jenkyn-Jones, director of investments at specialist environmental fund manager Impax Asset Management, says: ‘There are very few UK companies really leading the way. The UK government is not prepared to put in big subsidies – it’s just not the way we do things here.’

James Cameron, chairman of specialist investment bank Climate Change Capital, says the government’s blinkered approach to subsidies is a missed opportunity: ‘On solar, for example, I’ve had conversations with government people here saying “Japan and Germany have already done solar, they’re better at it than us and it’s expensive anyway, so we won’t concern ourselves with it”. I find these kinds of argument unacceptable when we have so much to contribute to design, implementation and application of the technology, and when there is so much growth left in the market.’

As well as providing bigger grants to developers, European governments also favour offering guaranteed higher fixed tariffs for renewable generators. In Germany for example, some wind farms receive £110 per megawatt hour (MWh), more than double the wholesale price of electricity and about a fifth more than wind farms currently earn in the UK.

Instead, the British government has favoured more market-based incentives. Rather than dole out big grants to companies to build wind farms, it introduced the ‘renewable obligation scheme’. This requires suppliers to source an increasing amount of electricity from renewables.

Under the scheme, generators must get a 10th of their electricity from renewable sources by 2010, rising to a fifth by 2020. To do this, they must amass sufficient ‘renewable obligation certificates’ (Rocs), which renewable generators sell together with the electricity they provide.

A Roc’s value varies depending on how many certificates suppliers need: if there is a shortage in the market, the price is higher. Under current prices, a wind farm may receive about £40 for each MWh it generates based on the wholesale price of electricity. On top of that it receives about another £45 for the Roc it can sell on.

The problem with this system is that developers do not know how much a Roc will be worth from one year to the next because the value fluctuates according to supply and demand. While it is possible to estimate how much it will earn, it does not offer the same level of certainty that fixed feed-in tariffs do overseas. As Jenkyn-Jones says: ‘Rocs are less bankable than a feed-in tariff.’ As a result of the higher risk, it costs developers more to raise the money to build the wind farms – costs which are ultimately passed on to the consumer.

Carcas adds: ‘From an academic point of view, such a market-based mechanism sounds very nice and pure. But in reality it’s not the most efficient way of bringing forward emerging technologies.’ Indeed, the renewable obligation scheme is certainly not cheap. Energy regulator Ofgem says it has cost £1.7bn in its first five years, on average £7 per year per household.

The renewable obligation scheme was introduced in 2002, since when four energy ministers have come and gone. The current minister, Malcolm Wicks, has even admitted it is a ‘blunt instrument’. What he is referring to – and what has irked the likes of Pelamis – is its one-size-fits-all nature. Until the rules change later this year, the scheme does not differentiate between different types of renewable generators. This means onshore wind farms receive the same funding as more expensive offshore projects. That’s great for onshore developments: costs of building and operating them are £50 per MW or lower. Since they can sell their green electricity for as much as £90 per MWh, developers are making a tidy windfall.

Yet in Portugal and Spain for example, wave farms receive more than twice as much for their electricity than cheaper wind farms – which is why Pelamis is about to be deployed in Portugal, not Scotland.

The one-size-fits-all approach is also partly to blame for the slow roll-out of riskier and more expensive offshore wind farms. Of the 2,400MW of operational wind farms in the UK, only a fifth are offshore. Another 2,500MW of offshore wind projects have received planning permission but not yet been built. Many developers are concerned that their offshore projects are no longer economic. Costs have almost doubled in the past five years as a result of higher steel prices and a shortage of turbines and tugs to fix them to the seabed.

One such project hanging in the balance is the London Array development off the Kent and Essex coast, which at 1,000MW would be the world’s largest offshore wind farm. Developers Shell and Eon will decide this spring whether or not to go ahead.

Matthew Clayton, fund manager at Triodos Renewables, explains the risk facing investors of such projects: ‘If you are buying a gas turbine from Rolls-Royce, the company can demonstrate millions of hours of running time. Sticking a wind turbine in 30 metres of seawater is a different proposition.’

The government has belatedly agreed to introduce a banding system for renewables this year. This means offshore wind will receive 1.5 certificates for each MWh generated and marine power will get two. Ironically, this may be too little too late for the likes of London Array because the changes may not be enough to offset developers’ spiralling costs.

Even research commissioned by the government suggests that the extra support for marine energy will not be enough to make a big difference. An Ernst & Young study recommended that marine energy – which currently does not operate commercially in Britain – would initially need three times as much support as onshore wind, the cheapest renewable. If marine energy received such backing, Ernst & Young projected that 1,000MW of capacity could be deployed. But when the government opted to grant only two, rather than three, Rocs for marine energy, Ernst & Young slashed its estimates about how much capacity would be installed by 90 per cent, to a paltry 100MW.

‘Roc banding is great,’ Carcas says. ‘But what is disappointing is that it has not been set at the right level for marine energy. What is the point of setting the banding at a level where nothing ever happens?’

Planning is also a huge issue. Figures from the British Wind Energy Association seen by The Observer show that the approval rate of planning applications for wind farms has plummeted to less then two-thirds, a record low. This is partly because many of the easier sites have already been taken, while developers also report that the Ministry of Defence – which complains that the turbines interfere with its radar – has become more obstructive. As a result, the number of new applications being submitted has slumped.

Clayton of Triodos Renewables says: ‘There has been a shift for the worse from the Ministry of Defence in the past six months. It is standard that it will say “no” to your application, but then you don’t get a timely response when you ask why or for further information. It’s also typical for the MoD to bring in objections at the last minute as part of its strategy to block projects.’

The government is passing a planning bill that is supposed to make it easier to build infrastructure projects such as wind farms, but investors are not convinced how much difference it will make in practice.

Cameron from Climate Change Capital also points to the absence of regional development banks in the UK, which, on the continent, invest in wind farms. If you add together planning issues and bureaucracy, the UK is not the most attractive places to invest, he says. ‘Our guys work really hard to put relatively small amounts of money to work in the UK. It’s harder to do the deals than in other countries.’

The UK has a lot of catching up to do, but there are some grounds for optimism. Companies involved in energy efficiency and waste management are promising targets for investment. And the political momentum over tackling climate change is getting stronger and stronger. This year, the government will launch another consultation on how to meet its new EU renewable energy targets. The big question for investors and the industry is whether it can now deliver on its promises over subsidies and planning.

Clayton from Triodos Renewables adds: ‘There is confidence that the government will be supportive of renewables and climate change in general. But an element of doubt creeps in over how this will play out and whether the government gets it right’.

Efficiency: a bright idea

Energy efficiency and waste treatment, which conjure up images of energy-saving light bulbs and rubbish dumps, may not be subjects to set most people’s pulses racing. But clean-tech investors, particularly in the UK, are getting excited about these rather unglamorous sectors.

The UK, as with much related to clean tech, is lagging behind the rest of Europe, and no more so than in waste treatment. Only Greece and Portugal dump more rubbish in landfill than the UK. But the number of available sites for new dumps is fast running out.

So the government has introduced new rules forcing local authorities and companies to recycle and treat more waste instead, providing fertile ground for investors to develop and build the facilities to do this.

The government is also trying to promote greater energy efficiency in the home, with mixed success. But with utility bills rocketing, it makes financial and environmental sense to find ways to cut down on energy use. As Bruce Jenkyn-Jones, director of investment at specialist environmental fund manager Impax, says: ‘Energy efficiency may not be as glamorous or photogenic as renewables, but it’s going to be a big growth area. Energy efficiency is also subsidy-free – one of the big risks with renewables is that the subsidies will be withdrawn.’

Policymakers are also starting to cotton on to the fact that it is easier to cut energy demand in the first place rather than build more renewables.

James Cameron, chairman of Climate Change Capital, adds: ‘We are far too obsessed with supply when we should also focus on demand management and energy efficiency.’

This article appeared in the Observer on Sunday February 24 2008 on p4 of the Business news & features section.

http://www.guardian.co.uk/business/2008/feb/24/greenbusiness.waveandtidalpower