Steven Vass
Deputy Business Editor, Sunday Herald
CORRIEYAIRACK Pass, a couple of miles south of the base of Loch Ness, has
seen an unusual flurry of activity lately.
The tranquillity in this thoroughfare between the Great Glen and Strathspey
since the days of the Jacobites has been disturbed by a team of engineers
putting up a rather significant electricity tower.
It is the 267th such connection in the Beauly-Denny power line, marking the
halfway stage of utility SSE’s majority share of the work.
This milestone in the controversial £600 million project was deemed worthy
of a press announcement due to the line’s importance. Beauly-Denny will
provide the backbone to the Scottish electricity transmission network that
will make it possible to carry substantial amounts of wind, wave and tidal
energy from the Highlands and Islands to the rest of the UK, linking up the
country’s greatest natural resources with the big population bases further
south.
Whether there will ever be much need for it is another matter altogether,
unfortunately. Despite this promising progress, the green energy industry
has been going through the ugliest of periods.
First, the UK Government brought out a series of proposals for the green
subsidy system in the summer that are far short of what the industry says
it needs to finance future projects; while also indicating that it
anticipates far fewer offshore wind farms than before.
Labour leader Ed Miliband pledged to freeze electricity prices for 18
months if he wins the 2015 General Election. Together with growing signs
that a nuclear deal between the Government and French utility EDF is
finally close to completion, there are concerns that they could do further
damage to nuclear subsidies.
Then, last month, the Court of Session in Edinburgh jeopardised the future
of renewables in Shetland and Scottish wind power in general with a
decision that turns accepted practice on its head.
Meanwhile, SSE, the most pro-renewables of the “big six” power companies,
began U-turning on plans for wave and tidal power and postponing future
investment decisions in offshore wind. For good measure, new chief
executive Alistair Phillips-Davies called for a debate over whether it was
time to retreat from the country’s decarbonisation ambitions.
Put it all together and it is no exaggeration to say that Alex Salmond’s
great green hope of generating 100% of electricity from renewable sources
by 2020 has rarely looked more uncertain.
The UK Government is changing the rules for green subsidies through the
electricity market reform (EMR) process. Under EMR, the existing so-called
renewable obligation (RO) system is being replaced by another called
contracts for difference (CFDs).
Under the new system, green power is subsidised by allocating a strike
price to each technology, which the generator will be paid instead of the
market rate for electricity. So if the market rate is £50/megawatt hour
(MWh) for onshore wind but the strike price for the technology is £100, the
generator will receive double the market rate for each MWh. Equally, if the
market rate rises above the strike price, they have to pay back the
difference. This subsidy will come out of consumers’ bills to the tune of a
maximum of £7.6 billion a year by 2020.
Setting the right strike price is essential to determining whether
developers will go ahead with projects. For renewables, the biggest issues
surround offshore wind, which is seen as having most potential for helping
the UK meet its 2020 target to produce 30% of green electricity (against
around 11% now). It is also at the heart of the Scottish Government’s goal
of creating a substantial turbine-manufacturing industry around Scottish
ports such as Leith, Methil, Dundee and Ardersier. The reason offshore wind
matters so much is that onshore wind is becoming harder to get through
planning – and that was before the Viking upheaval (see panel) – and
because other technologies such as wave, tidal, and carbon capture and
storage are too immature to boost the numbers any time soon.
The problem for offshore wind is that it is still incredibly expensive, and
the deeper, further offshore projects that are planned off Scotland will be
pricier still. The proposed EMR strike price of £155/MWh – about triple the
market rate for electricity – falling incrementally to £125/MWh by the
mid-2020s is seen by the industry as too low to make projects viable.
Industry association Scottish Renewables (SR) told the UK Government
recently the deal on the table could “profoundly limit the growth of UK
offshore wind and the supply chain”, and would be “particularly
challenging” for the deeper/further offshore projects that are
“particularly relevant to projects in Scottish waters”.
In short, at the proposed strike price, the five Scottish offshore projects
would be first against the wall. The industry (and Scottish Government) has
until roughly the end of November to persuade the UK Government, including
the renewables-sceptic Conservative Party, to agree more.
SR chief executive Niall Stuart says the UK Government’s error has been to
base its cost calculations on the existing shallower-water projects off
England.
He says: “Also, a while ago we were looking at 25GW by 2020. That would
have delivered significant cost savings and allowed support to come down
pretty sharply over the decade. We’re now looking at 13GW or 14GW, which
won’t deliver the same level of cost reduction. So we are saying that
support starts too low and goes down too fast.”
There have also been jitters around the fact the EMR proposals mostly
contained scenarios with only 8GW of offshore wind by 2020, but Stuart
points out they were mostly National Grid estimates and could be remedied
by a more ambitious statement of intent from the Government.
One major difference between the RO and CFD systems is that nuclear will
now receive subsidies under the system too, which has done nothing to ease
jitters. This won’t make much difference in this decade because nuclear
stations take about 10 years to build, but it will potentially make a big
difference in the 2020s.
The Government is in advanced negotiations with EDF and China General
Nuclear Power Group over a deal to build the first new nuclear station
since the 1990s at Hinkley Point in Somerset for £14bn, including £10bn in
loan guarantees and a strike price rumoured to be much higher than the
Government’s supposed red line of £80/MWh.
Dr David Toke, an energy specialist at Aberdeen University, fears this will
be at the expense of offshore wind et al as other nuclear projects develop
in its wake.
He says: “In the 2020s, it looks likely that the pot of money for
renewables will be sucked into a nuclear black hole if Hinkley C goes ahead.”
Martin Wright, chairman of the Renewable Energy Association, is less
convinced that nuclear will win out because it comes with such a big and
uncertain investment tag. More likely, he fears, a poor EMR deal will see
developers concentrating on building a new generation of gas-fired power
stations instead. This would be on the hope, which he thinks ill conceived,
that indigenous shale gas and imports of liquid natural gas would keep the
price of the fuel at attractive levels.
Either way, both believe the EMR looks very troubled. Wright says: “The
utilities don’t really have the circumstances in EMR that enable them to
make a long-term commitment in a generating asset.”
Toke adds: “The renewables lobby need to mount a much more vigorous
campaign than they have done up until now. Without a big upswing, I don’t
see much changing.”
Into the midst of this has come SSE. With wave energy already struggling
and tidal not favoured enough by the EMR either, according to SR, SSE’s
withdrawal of development funding from its four projects in the Pentland
Firth has damaged sentiment. Ditto postponing new investment decisions on
offshore wind until after the 2015 election, albeit the company is
stressing nothing is set in stone and has only two projects (including
Beatrice in the Moray Firth) that could potentially face delays.
Alistair Phillips-Davies’ comments about decarbonisation also raised
eyebrows, although his main intention seems to have been to start a
campaign to move green subsidies from electricity bills to general tax.
This would prevent green energy being stigmatised as the reason for rising
bills, which some observers suggest might lead to more such projects going
ahead rather than fewer.
On this reading, the SSE boss might actually be trying to help the
industry, though Martin Wright is one who thinks it was more about the
“true colours” of the utilities and their sole money-making priority coming
to the fore.
Stuart of Scottish Renewables comes to the defence of one of his leading
members (and paymasters): “He was very consistent with what the industry
feels, which is that there are a lot of unanswered questions about the EMR
framework and whether the government is striking the right balance between
keeping bills down and giving industry the appropriate investment case.”
He is more optimistic than some about where EMR is headed, saying the
industry has been so consistent in its opposition to the Government
proposals that he is “confident” it will get what it wants.
In two months, we will see whether this is proven right. If so, much of
this period might be seen as a temporary wobble. If not, many green energy
supporters will be left wondering where they go from here.
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