Take from the dirty and give to the clean to help wind power

Sunday Times
April 5, 2009
Sam Laidlaw

Investors in offshore wind farms in this country are battling against an increasingly strong headwind. A combination of high construction costs, soft electricity prices, higher financing costs and weak sterling are blowing an increasing number of projects off course.
All this has dampened the mood of optimism we saw last summer, when the government unveiled its ambitious renewable-energy blueprint. The target is a tenfold increase in the percentage of all energy coming from renewables, aiming for 15% by 2020.
The issue of climate change has not gone away – it forced its way back on the agenda at last week’s G20 summit. The question for Britain is, can we get back on track?
I believe the answer is yes. But only if the investment conditions can be improved, and rapidly.
We are at a watershed. A new round of offshore wind projects could lead to the creation of a healthy British supply chain with diminishing costs over time. Bain Consulting estimates that 50,000 new jobs would also be created along the way.
Conversely, a downturn in British projects now could be fatal for this fledgling industry. Turbines, control systems, undersea cables and specialist installation barges are in short supply in this country.
If we do not build this capability in Britain, manufacturers and suppliers will flock to those countries that are forging ahead with renewables, such as Germany and the United States, where President Barack Obama has pledged to invest billions of dollars in new wind farms.
Last June, the then business secretary John Hutton said that achieving the 2020 objective would require investment of £100 billion and create a new generation of green-collar jobs. He was right.
However, companies and investors will only commit the funding if they are confident they can achieve adequate returns. At present the returns are insufficient.
That is why we at Centrica, among others, have had to put our offshore wind projects on hold even though we obtained planning consent last October to build the 250MW Lincs wind farm off the Lincolnshire coast. We have another 1,120MW of offshore projects in the pipeline.
The problem is the very high cost of building offshore wind farms. At present they are nearly four times the capital cost of a gas-fired power station. The building cost per mega-watt is even higher than for a nuclear power station.
We are keen to build Lincs, but we need to see the economics improve. Other companies are making similar decisions, reducing the probability of meeting the 2020 target. To achieve this, the proportion of electricity from renewables would need to rise from 4.5% today to about 35% by 2020. These are worrying delays.
So what can be done? To expect direct support from the government, given all the other calls on taxpayers’ funds, would be unrealistic and is unnecessary.
A simple way in which the economics can be improved is to increase the incentive given to developers of offshore wind farms under the government’s Renewable Obligation Certificates (ROC) regime. This scheme rewards the producers of renewable electricity with additional funding paid for by those energy suppliers who emit more carbon dioxide from fossil fuels. It is effectively a Robin Hood-style redistribution mechanism, taking money from the “dirty” to pay the “green”. It is not a government subsidy.
Producers of renewable power receive one ROC, entitling them to additional funding support, for every megawatt-hour of electricity produced. As from this month, offshore wind generators are receiving 1.5 ROCs per megawatt-hour, but to make construction of new projects economic offshore, we believe that this needs to rise further to about two ROCs in the absence of other assistance.
Such assistance would not need to remain in place indefinitely. Once the current logjam of projects has been released, the UK renewables supply chain would grow rapidly and create a momentum of its own as we get into construction of the giant Round 3 offshore projects, involving thousands of turbines, for which the Crown Estates has just taken bids.
If this materialises in the way we might expect, we should then see the supply chain start to grow and become more mature, thus helping to put downward pressure on manufacturing costs. This would, of course, improve the economics of construction and reduce the need for assistance for future projects.
Last October Britain overtook Denmark as the world’s largest operator of offshore wind farms, but it is a fragile crown based on small volumes of power production. Britain now has it in its hands to turn the headwind into a tailwind and give this country a real leadership position. It is an opportunity that must be taken soon. Sam Laidlaw is chief executive of Centrica, the integrated energy company