Community wind power financing and the renewable obligation
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| The Government's Renewable Obligation (RO), which began in April 2002,
penalises electricity suppliers if they do not supply their proportion of
renewable electricity to meet the RO target. The RO target increases up to
10.4 per cent of UK electricity by 2010 and 15 per cent by 2015. The
electricity suppliers demonstrate their progress towards meeting their
share of the RO by buying 'renewable obligation certificates' (ROCs) from
the renewable generators who are automatically awarded the ROCs by the
system. |
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| Each ROC is now worth £32, this price being set by the £32/MWh penalty
that the electricity suppliers have to pay if they do not acquire their
requisite of ROCs. If there is an undersupply of ROCs relative to the
target at any one time, then the penalties that are paid for undersupply
are 'recycled' to the ROCs that have been supplied. This increases their
value, the theory being that this will encourage more renewable
electricity. In the RO targets are not likely to be fulfilled for
several reasons. One reason is that income levels for renewable
generators must remain quite high to allow the electricity suppliers to at
least break even on the investments they have made in relatively expensive
offshore windfarms. Another reason is that the electricity suppliers, who
have investments in these and other renewable energy schemes, do not want
to risk there being a crash in the prices of ROCs on the market if the RO
is over-subscribed in any given year. |
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| The renewable targets are likely to be under-fulfilled for various
reasons, including the fact that electricity suppliers have an interest in
ensuring that the RO is not over-subscribed leading to a crash in the
market value of ROCs (thus devaluing their own renewable energy
investments). This means that, so long as the RO remains in its present
form, and the RO targets are not met, then the ROCs and their recycled
value will be worth more than £32 per MWh. When you take into
account other incentives like the spot market price of electricity (around
£20
per MWh) and the fact that renewable electricity schemes do not have to
pay the climate change levy (£4.3/MWh), over £50 per MWh is available,
in theory, for renewable electricity generators. |
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| In fact, a large part of the incentives will never go to the renewable
energy developers because they are swallowed by the electricity suppliers.
This is because most conventional wind power developers have to borrow
from banks who insist on long term contracts being obtained from
credit-worthy big electricity suppliers. The renewable generators sell
their ROCs to electricity suppliers, but this in itself does not guarantee
any income in the long term future. Hence the developers must sign them away to the
suppliers in advance over the long term in return for the long term contracts.
The electricity suppliers use this need for a long term arrangement to
take a big cut in the value of the ROCs. Wind
power developers are currently being offered around £50 per MWh for a 15
year contract. BUT community wind power schemes are financed by
share offers to large numbers of (mainly local)people who will not insist on cast
iron long term contracts as in the case of large banks. Hence the community wind power
co-operatives can (if they so decide) forsake the need for long term contracts with
electricity suppliers. Instead they can obtain much better terms from electricity suppliers in annual contracts that
will give them almost all of the incentives available from ROCs, spot
market electricity price and climate change levy refund. From May 2005
renewable generators will be able to take part in auctions for the value
of their ROCs and electricity organised by the Government-backed Non-Fossil
Purchasing Agency. Such auctions of ROCs that have been organised so
far have yielded high prices for ROCs. |
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| Hence projects organised by companies that do not need to borrow money
from banks (which will include community windfarms financed by share
offers) can receive higher
income streams because such schemes can
trade on the annual ROCs market or obtain good terms from electricity
suppliers. On the other hand, of course, the absence
of a long term contract means that there are no 'bankable' guarantees of
good income levels in the long term. Yet, analyses made by bodies such as
the Renewable Power
Association suggests that the Renewable Obligation targets are likely
to be only around two thirds fulfilled in the long term leading to, for
example, 7 per cent of UK electricity being supplied from renewable energy
by 2010 and 10 per cent by 2015 (as opposed to the targets of 10.4 per
cent and 15 per cent respectively). This projection would suggest that ROC
prices (including the recycled element) could be over £40 per MWh. When
the likely income from the spot market value of electricity and the
climate change levy exemption is added, the amount of money available (in
this scenario) to schemes which do not need long term contracts from
electricity suppliers currently (end of 2004) approaches £70 per MWh, and may remain at least £60 per MWh. Certainly, the amount of
money available at the moment to schemes which do not need long term
contracts is quite high. In this sense there is an argument for saying
that the Renewable Obligation can actually FAVOUR community windfarms (organised
by share offers) compared to conventional schemes financed mainly by bank
loans. |
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- State-of the-art machines are now 2 MW machines - say 80 metre diameter
blades at a hub height of 67 metres. With grid connection costs at about
10 per cent of capital costs and no special requirements for major civil
engineering or other works, a 2 MW project might cost around £1.6
million. A 2MW scheme at a 7 m/s
site (windspeeds at or approaching this are fairly widely available in the
UK) might generate around 5200 MWh per year (assuming 95 per cent
availability of plant). Annual charges for insurance,
maintenance and other items may amount to about £30,000 per MW. The
standard level of royalty payable to the landowner is 2 per cent
of gross income. PLEASE NOTE THAT THE FIGURES
DISCUSSED IN THIS SECTION ARE MERELY INDICATIVE EXAMPLES AND CANNOT BE
TAKEN TO REPRESENT SPECIFIC PROJECTS. CAREFUL INDIVIDUAL PROJECT
EVALUATION IS REQUIRED BEFORE FIRM PROJECTIONS CAN BE MADE.
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| To work out the corresponding figures for 4 MW and 6 MW schemes then
multiply the above figures by two or three respectively. The UK's ethical
investment market is extensive. There is a large well of support for
investment in community wind power, so share offers for these sizes of
projects are very practicable. Cost-effective commercial onshore wind
power schemes will cost in the £800-£1000 per installed KW range. At a
capital cost of £800 per KW (£1.6 million for a 2 MW project) the
project could be viable at a mean average windspeed of 6.5 metres/second
(m/s) or above (assuming typical wind distribution patterns). The
higher the capital cost, then the higher will the wind speed need to be to
assure project viability. If we assume that total investments needed for, say, a 4 MW scheme may be of
the order of £3.2 million then this sum could be raised, for example, by
2000
investors buying an average of £1600 worth of shares each. In making the
share sales preference would (in a genuine community windfarm) be given to local investors in order to ensure a high, hopefully 100
per cent, ownership by people at least in the county where the scheme is
sited. This is not very much compared to what
happens in Germany. Recently over 10,000 investors have put down their
names down in an initial list of people who would be prepared to fund what will be Germany's first (240 MW) offshore windfarm. -
All financed by the German version of community -
co-operative wind
power!
Maybe this can happen in the UK someday! |
