UK CARBON TRUST LIKES WIND, LIKES FEED-IN TARIFF

British Prime Minister Gordon Brown has courageously staked much of the success of his government on resolving both rising UK energy demand and rising world global climate change concern with wind power.

Offshore wind power: big challenge, big opportunity; Maximizing the environmental, economic and security benefits, a new paper from Carbon Trust, the UK’s climate change watchdog, says Brown’s government can get there if it pushes hard, acts smart and is willing to pay the price.

From the report: “While the [29 gigawatts of offshore wind] target is extremely challenging, it is technically feasible: sufficient sea floor is available for deployment even allowing for severe constraints on where the wind farms can be sited; the grid can accommodate this amount of wind power if grid capacity is shared and the services that balance supply and demand are increased; and the technology is commercially available or in development.”

But, the report goes on, the challenges and costs are huge: “…29GW of offshore wind power is an immense deployment challenge and requires total investment of up to £75bn, equivalent to the peak decade of North Sea oil & gas development. Currently the risk/return balance for offshore wind is not sufficiently attractive and regulatory barriers would delay delivery…”

Though UK power costs will likely go up, making the right moves could significantly cut the cost burden: “The onshore and offshore wind power required to meet the EU renewable energy target could result in a net addition of 8% to retail electricity prices and less than 20% to wholesale electricity prices by 2020. The actions in this report could reduce the net addition to 1% on retail electricity prices and 3% on wholesale electricity prices. Indeed if gas prices remain above 90p/therm then wind power could reduce electricity prices.”

The report recommends 6 actions: Government must (1) Reduce costs; (2) Provide developers sufficient returns with an efficient incentive policy; (3) Remove regulatory barriers; (4) Provoke industry response; (5) Obtain UK economic benefits; and, (6) Lead the change.

Unfortunately, the report’s optimistic outlook has been undercut this week by a decision from BP, one the UK’s biggest energy companies and a significant investor in UK offshore wind, to concentrate its resources on the U.S. market.

Given what’s at stake, many are calling on the Brown government to rethink its policy on the report’s action #2, providing higher and more certain returns for developers through a feed-in tariff (FiT).

From the report: “…the Government has rightly proposed that to deliver sufficient renewable electricity whilst improving value for money to consumers the current incentive mechanism, the Renewables Obligation, needs to be expanded and extended. The level of support needs to be periodically reduced as renewable technology costs fall and be modified to compensate for high, fluctuating electricity prices. Alternatively, new renewable capacity could be incentivised by a feed-in tariff. The required adjustments to the RO will bring it closer to a feed-in tariff in any case. The Government should choose the option that minimises disruption for industry.”

The feed-in tariff (FiT) has generated tremendous New Energy growth in Germany, France, and Spain.

A FiT guarantees New Energy developers an above-market fixed rate of return on the power they produce over an extended period of time, often 20-to-30 years.

Britain’s Renewables Obligation (RO) works much like the Renewable Electricity Standards (RESs) implemented in many U.S. states, requiring power producers to obtain a specific percent of their electricity from New Energy sources by a specific date. The British process is more formalized. UK companies are required to obtain and/or trade in Renewables Obligation Certificates (ROCs). ROCs verify the companies met the goals or paid for not meeting them.

An FiT, the report points out, would much more simply and successfully guarantee long-term returns to New Energy developers: “A feed-in tariff would be simpler than applying additional modifications to the RO, which is already a complicated mechanism. In addition it provides greater certainty to investors by reducing market and political risk.”

The report also acknowledges the difficulty inherent in an FiT, the reason many governments shy away from it: “…setting the appropriate level of funding requires a deep understanding of the underlying costs and risks of the renewable energy generation technologies and therefore the required levels of return and support levels.”

One thing is clear. The Brown government’s commitment to wind development is threatened by new economics in a credit-constrained world and new competition from the U.S. as the UK’s bigger, younger cousin finally wakes up to a carbon-constrained world.

The right FiT could win back Britain’s share of world wind development.

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Britain’s Carbon Trust Says FITs Simplest
Paul Gipe, November 5, 2008 (Wind-Works)
and
BP drops plans for UK wind farms
Eric Onstad (w/Gary Hill), November 7, 2008 (Reuters)

WHO
The Carbon Trust; The UK government, led by Labour Prime Minister Gordon Brown

WHAT
- In Offshore wind power: big challenge, big opportunity; Maximizing the environmental, economic and security benefits, the UK’s Carbon Trust
assesses challenges to deployment of offshore wind in the UK and prescribes solution that will get the UK to 29GW of offshore wind power by 2020.
- Among its policy recommendations is the use of a feed-in tariff to incentivize development.

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WHEN
- The Carbon Trust was created in 2001 to accelerate Britain's move to a low-carbon economy and to develop low-carbon technologies.
- The report concludes administrators are unlikely to make changes away from the Renewable Obligation in the short-term.
- Problems could delay deployment adequate offshore wind development “well beyond 2020.”

WHERE
- Feed-in tariffs have bee used successfully – albeit with complications – in Germany, France, and Spain.
- BP has pulled out of plans to build a UK onshore wind farm at the Isle of Grain in Kent and will not bid for any offshore licences.
- BP Alternative Energy says it has also decided to suspend its wind power business in Asia and has pulled out of a partnership in a wind farm project with China's Goldwind Science & Technology Co, China's largest maker of wind turbines.

WHY
- The Carbon Trust report finds the FiT is simpler to administer, provides greater certainty to investors, and costs less than Renewable Obligation Certificates (ROCs).
- Though the FiT has been demonstrated to be more efficient, policy makers chose the RO to minimize uncertainty and deployment disruption.
- Though more predictable, the RO is more complex and could have unknown unintended consequences.
- The Carbon Trust report likes a simple FiT with a degression plan because the RO, already complex, requires additional, significant modification.
- The Carbon Trust report empahasizes that the New energy industries need to be part of the FiT vs. RO debate.
- Actions required:
(1) Public/private partnerships to cut costs up to £30bn (40%) by 2020 by (a) making the most economic wind farm sites available (saving up to £16bn.) and cut technology costs with up to £0.6bn of public and £1.2bn of private RD&D funding (saving up to £14bn.)
(2) An efficient incentive mechanism by expanding the Renewables Obligation and/or considering a feed-in tariff.
(3) Regulatory reforms in grid and planning can avoid £2bn in grid transmission network upgrades and cut lead time 2-5 years. EU interconnection must also be streamlined and simplified.
(4) Government commitment via a clear, long-term signal, backed with robust, integrated policies including supply chain manufacturing investment of £3.8-5.1bn by 2020.
(5) Make sure the investment delivers maximum economic growth and job creation (70,000 jobs and £8bn in annual revenues).
(6) Strong Government leadership and clear accountability

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QUOTES
- Carbon Trust report: “Without urgent action there is a risk that little additional offshore wind power will be built by 2020 beyond the 8GW already planned or in operation.”
- Carbon Trust report: “…offshore and onshore wind deployment at scale will make the UK less reliant on imported gas, reduce its carbon emissions by 14% and will allow the UK to become a leader in a growing global market for offshore wind.”
- BP spokesman: "The best place to get a strong rate of return for wind is the U.S. …"