Ill and Fair Winds for U.K. Power

Government Plans for Renewable Energy Face Hefty Obstacles

By SELINA WILLIAMS
LONDON -- The U.K.'s ambition to be a leader in offshore wind power got a boost last week with the award of 10 new sites to companies to develop more than six gigawatts of electricity in waters off Scotland.
But analysts and utility executives said attaining such a position will depend on whether the government can ensure the planning and consent process runs smoothly for the construction of the wind farms and the grid infrastructure that is needed to carry the power to consumers.
"The U.K. is a great opportunity because of the wind conditions, but they have to act quickly to get the utilities to commit once the licenses are granted," said Dean Cooper, head of clean technology at stock brokerage and consultancy Ambrian Partners Ltd.
Although the U.K., with its strong financial incentives for investors, is currently the biggest producer of offshore wind power, it faces stiff competition from continental European countries such as Germany and the Netherlands, where the grid-connection process is more straightforward.
Reuters
Wind turbines stand in the Irish Sea at the North Hoyle offshore wind farm near Prestatyn, North Wales in 2006. The U.K. government last week awarded 10 new sites to companies to develop electricity in waters off Scotland.
Under German law, grid companies are obliged to ensure that the onshore and offshore grid connections are in place in time for the commissioning of wind farms. In the U.K., the construction of new grid links to offshore farms in Scotland has to go out to tender.
New grid connections and upgrades are crucial because the offshore wind farms in Scotland are in northern areas that are far from the U.K.'s main power-consuming regions in the south. Currently, the grid links in Scotland aren't sufficient to cope with the expected output from planned wind farms.
Meanwhile, a proposed upgrade of the main Beauly-Denny power-transmission line in Scotland has been mired in planning since 2005.
"The Beauly-Denny line is critical, and more upgrades of a similar size and scale will also be needed," said Alan Mortimer, head of policy at ScottishPower Renewables, a U.K. subsidiary of Spain's Iberdrola SA and one of the companies to win a site in the Scottish licensing round.
The U.K. government's new planning bill intends to speed up the approval process for new grids and offshore wind farms through an Infrastructure Planning Commission. Yet the process has come under some criticism because the National Policy Statements that the IPC will rely on to make its decisions about the construction of renewable-energy projects are still more than a year away from being approved.
And with the wind farms from the Scottish licensing round due to be commissioned starting in 2015, the timing is tight.
Gordon Edge, director of economics and markets at the British Wind Energy Association, said more financial incentives are necessary to keep the momentum going on projects that are coming up now, so the supply chain and expertise is there for the longer-term wind projects.
The investments needed for offshore wind projects range between £2.5 million and £2.8 million ($3.6 million and $4 million) per megawatt hour, or double that of onshore wind projects.
Investors in the Scottish round are likely to be partly shielded from the current credit crisis because they probably won't seek project financing before 2012.
Companies that are developing offshore projects for commissioning over the next two to three years are finding it tougher and more expensive to get project financing in an environment where U.K. power prices have more than halved in recent months and component costs are still high.
Last month, E.ON U.K. Chief Executive Paul Golby told the Financial Times that the economics of the U.K.'s flagship 1,000-megawatt London Array offshore wind farm were "on a knife edge." London Array suffered a blow last year when Royal Dutch Shell PLC pulled out of the project because of rising costs. Shell instead chose to focus on onshore wind power in the U.S.
Mr. Edge said the need to get projects such as London Array up and running is likely to prompt the industry to seek additional help in the short term, possibly in the form of tax breaks. Another option would be a fixed price or floor for Renewable Obligation Certificates, the support mechanism to reward a company for each megawatt hour of electricity it produces from a so-called green energy source, he added.
The U.K. is counting on offshore wind to help it meet a binding European Union target on cutting greenhouse-gas emissions and boosting renewable-energy use by 2020. The proportion of renewable energy in the total mix needs to rise to 15% from about 2% now.
Write to Selina Williams at selina.williams@dowjones.com