SEMINAR PROCEEDINGS

Session 1

Benchmarking the Renewable Energy Strategy: current matters in Review, and issues of deploymentMichael Rutter - Deputy Director Delivery, Office of Renewable Energy Deployment, DECC

Review of financing and investment market across the UK’s renewable energy sectorsMark Henderson - Director, Greencoat Capital

Financing themes across EuropeAdrian Scholtz - Head of Renewables, KPMG

The Importance of Stable & Transparent Government Policy for Investor ConfidenceDr. Nina Skorupska - CEO, Renewable Energy Association

Session 2

Chair Graeme Cooper, Executive Director, Fred Olsen Renewables Ltd.

Market risks comparison: UK v. international opportunities in 2014+Ilesh Patel - Partner, Baringa Partners

INDUSTRY DEBATE: Uncertainties for developers in the UK: how erratic is energy policy deployment? David Handley - Director, RES Advisory UK Offshore market dynamics and supply chain challengesMike Griffith - Director of Business Development, Alstom Biomass conversion update and supply chain challengesDavid Love - Director, DRAX

Review of UK Renewables Policy & Delivery

Seminar 87 - 8th MAY 2014

2

Benchmarking the Renewable Energy Strategy: current matters in Review, and issues of deployment

Michael Rutter - Deputy Director Delivery, Office of Renewable Energy Deployment, DECC

Michael Rutter, Deputy Director of Delivery, Office of Renewable Energy Deployment, DECC, stated that the Energy Act of 2013 had provided a legal, financial and political framework offering the incentives and stability necessary to attract investment into low carbon energy developments in the UK. Under the Levy Control Framework (LCF), the support available to low carbon technologies had tripled. However, work was still needed in reducing the cost of renewable energy to a level competitive with fossil fuels.

The UK renewables sector was currently experiencing major growth, and capacity in this sector had more than doubled since 2010. Furthermore, over £34 billion of private sector investment in large scale renewable electricity had been announced since 2010. DECC aimed to achieve a smooth transition to EMR while operating within the LCF budget to ensure effective management of consumer bills. The Department would foster competition to drive down the costs of more established renewables technologies, and cost reduction could also take place through efforts to encourage open and competitive supply chains and the development of skills in renewables sector. The rate of investment in renewables generation and networks had been increasing since 2004; between 2012 and 2013, new build asset finance for renewables rose by 59% to £7.3 billion, placing the UK third in the world behind only the US and China.

In April of 2014, the government had announced that contracts had been offered to eight major renewable electricity projects under the Final Investment Decision (FID) Enabling process for renewables, the first contracts to be introduced under the EMR programme. These contracts were vital in order to provide investors with the confidence necessary to finance the upfront costs of major new infrastructure projects. The UK was currently benefitting from significant levels of foreign direct investment into the renewables supply chain; an example of this was the partnership recently announced between Seimens and the Associated British Ports for the production of turbine blades and the assembly of offshore wind turbines.

Offshore wind technology had the potential to contribute significantly to the UK’s decarbonisation goals. DECC estimated that there was scope for 25 30% reduction in the central costs of this technology by 2030, yet this figure could be higher depending on deployment levels in this period. Government subsidies to the offshore wind industry were decreasing in anticipation of these cost reductions; support levels under the Renewables Obligation (RO) would fall by 10% between 2014 and 2017, and strike prices under the EMR system would also fall over time. As of January 2014, the installed operating capacity from offshore wind in the UK was 3.6 GW, yet the EMR delivery plan had set out a clear pathway to increase this to 10 GW by 2020, with higher levels of deployment if costs fell more rapidly than expected.

With regards to onshore wind, DECC’s ambition was to achieve 11 13 GW of capacity from this technology by 2020. Onshore wind farms would only receive planning permission if their impacts on local communities and heritage sites were kept to acceptable levels. By law, wind farm developers were now required to consult with local communities before submitting planning applications. The onshore wind industry had last year signed up to a new voluntary agreement to provide community benefit funds worth at least £5000 per MWh per year. Developers were working with communities to encourage the innovative use of these funds in areas such as energy bill reduction and local energy efficiency schemes.

The government continued to believe that biomass, when sourced sustainably, could provide a cost effective, low carbon and renewable source of energy. Support for this technology was informed by the sustainability principles included in DECC’s 2012 Bioenergy Strategy. Conversion of existing coal fired power stations to biomass plants was a transitional and low cost means to rapidly reduce the carbon intensity of the electricity grid. In August, DECC had published details of sustainability standards that had been introduced into the RO; these had previously been voluntary but would become mandatory from 1 April 2015. It was DECC’s intention that CfDs awarded for biomass projects would in future operate under similar sustainability criteria.

Last month DECC had launched the UK’s first Solar Strategy, setting out the Department’s ambitions regarding the growth of this sector. The Department aimed to shift the focus from large solar farms to the utilisation of rooftop space across the UK, and recognised that solar PV offered efficient and cost effective on site generation opportunities for businesses and domestic consumers. DECC anticipated that 10 12 GW of capacity from solar PV could be achieved by 2020. The UK was currently a world leader in wave and tidal technologies, and it was essential to proceed with the first commercial projects utilising these technologies to ensure the realisation of future economic benefits.

Chris Lambert asked whether the representation of renewable energy in the media was currently in line with the UK’s position as a world leader in this area. Michael Rutter answered that the broad public support that renewable energy currently enjoyed was not reflected in the media coverage of the industry. There was a risk that negative attitudes towards the industry in the media would persist in the run up to the 2015 general election, which would lead to a more challenging political environment for renewable technologies.

Continued.

3

Benchmarking the Renewable Energy Strategy: current matters in Review, and issues of deployment

Michael Rutter - Deputy Director Delivery, Office of Renewable Energy Deployment, DECC

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Sarah Carr, Public Affairs Manager, Good Energy, enquired whether DECC was planning a further announcement in relation to solar energy in the next few weeks. Michael Rutter replied that there was a strong likelihood that an announcement regarding solar energy would occur in the following week.

Chris Anastasi, Head of Government Affairs, Policy, and Regulation, GDF Suez Energy UK Europe, asked what DECC’s views were on the importance of electricity storage technologies for the development of renewables in the UK. Michael Rutter responded that DECC had a team focused on innovative technologies such as this, and recognised the importance of developing electricity storage capabilities for UK renewable energy.

4

Mark Henderson - Director, Greencoat Capital

Review of financing and investment market across the UK’s renewable energy sectors

Mark Henderson, Director, Greencoat Capital, remarked that in order to transition to a low carbon economy by 2020, it was estimated that £450 billion of funding would be required; however, a large funding gap was currently projected. Considering the growth expected from the UK economy and the number of power plants nearing the end of their lifespan, there was a risk of power shortages if investment in capacity did not increase. Another £64 billion of investment in renewables would be necessary for the UK to meet its 2020 decarbonisation target. The solar sector was an area with high growth potential, and it was predicted that an investment of £3 billion per annum into this sector would be required in order to reach the 2020 target. Although this appeared challenging, the growth of the solar sector in Germany demonstrated that high levels of investment could be attracted to the market if a predictable tariff existed.

A convergence of need existed between investors, the government, and utilities, all of which would benefit from the development of the UK renewable energy market. Investors, and particularly pension funds, preferred to enter markets that were predictable and where Net Asset Value (NAV) growth could be achieved over the long term. Utilities were currently experiencing issues with their ratings due to high debt levels; as a result, they needed to recycle capital while at the same time adding to their capacity. The solution was to work with investors in order to reduce the financial burden of projects without compromising their energy supply. To secure continued investment, governments should maintain a consistent approach to energy policy. Even if politicians thought they were introducing positive changes to the market, the uncertainty caused by such changes would be viewed as negative by investors; therefore, it was essential to keep any changes as small as possible and to signpost these changes adequately.

In terms of the various renewables sectors, there had thus far been mixed results. Project financing in the offshore wind sector was continuing to grow, and five CfDs had been agreed in this sector to date. The onshore wind sector was also continuing to develop, although the rate of this development had fallen and the size of individual projects was decreasing. There had been negative statements from the current government regarding onshore wind in the UK, which had discouraged many potential investors from entering this sector. With regards to biomass, a number of projects were reaching financial close. However, banks were still finding it difficult to invest in biomass ventures, preferring instead to finance sectors with more predictable revenues. For this reason, funding for biomass projects would need to be obtained from equity investors. Some uncertainty remained over whether biomass could legitimately described as a low carbon method of generation, creating the risk that public support for the growth of the sector could potentially be withdrawn in future. Finally, solar energy was presently attracting record amounts of project financing, and creative financing options such as project finance bonds had emerged in this sector. On the other hand, George Osborne had stated in the most recent budget that the tax benefits relating to EIS and VCT schemes would be discontinued, which would reduce the volume of equity investment into solar.

The funding available to renewables projects could be divided into two categories, debt and equity. In the case of debt, the level of project financing was increasing, and banks were beginning to explore this area. On the negative side, there was a continuing use by lenders of mini perm structures, under which companies were offered long term loans yet were required to renegotiate the terms of these loans mid way through their duration; this type of structure would increase the level of uncertainty for developers. Furthermore, the Co op Bank had halted its lending activities after running into financial difficulties, which had left a gap in the market for small to medium sized projects that had yet to be filled. With regards to equity, a new category of listed equity funds known as ‘yield cos’ had emerged in relation to the renewables sector. In the period from March 2013 to March 2014 five yield cos had been listed, raising over £1 billion for renewable energy projects. Crowdfunding had also appeared as a new option in terms of project financing, yet this type of funding currently operated on a relatively small scale and had been subject to regulatory issues. The outlook for equity financing was not wholly positive, as there were concerns that the £1 billion raised by yield cos had saturated the market. Additionally, pension funds had not yet entered into the equity market to the degree that had been predicted.

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Adrian Scholtz, Head of Renewables, KPMG

Financing themes across Europe

It was noted by Adrian Scholtz, Head of Renewables, KPMG, that prior to the emergence of yield cos there had been over 10 dedicated renewables funds raised in the last decade. The management of these funds had reached a high level of sophistication; rather than taking investment decisions based on the latest subsidy offered by government, fund managers were now seeking to optimise the long term cost of energy in order to tap into the merit order of power generation. Financing for renewables projects could also come from infrastructure funds, which were able to spread their risk by simultaneously investing in other asset classes. The typical strategy for these funds was to buy renewables assets that had been operational for between one and three years, to enable more informed comparisons to be made between portfolios. However, with regards to the purchasing of highly performing portfolios, infrastructure funds faced competition from local funds, retail funds, property funds and municipal utilities. The proportion of local sources of finance in the UK market was increasing; so far, five capital markets vehicles (CMVs) predominantly focused on UK projects had been raised. Alongside these CMVs, retail and tax driven funds were displaying interest in small to medium sized renewables projects.

In recent years there had been an increasing amount of interest in UK renewables from Asian investors. In the past three to four years attempts had been made by Chinese investors to enter into the UK renewable energy market, driven by the wish to gain access to European technology and to provide a route into Europe for Chinese technology. However, these investors had often been unable to conclude transactions, and Chinese technology had not yet achieved widespread penetration in Europe. Japanese investors for the most part preferred infrastructure investments, and the five largest Japanese trading houses had all invested relatively heavily in European renewable energy. Investors from Japan often chose to partner with utilities and large developers, and tended to invest into projects that were already operational.

For investors seeking to deploy capital, one option was the European utilities sector. Although there had been attempts by utilities to reduce their renewables portfolios due to a lack of capacity or to frustration with the government’s energy policy, it was unlikely that utilities companies would fully exit the renewables market. Most utilities across Europe were recycling capital, and a number were seeking to fully consolidate their assets. In some cases this would involve the utility selling up to 75 80% of its assets; however, it would often continue to operate these facilities and would retain the option to buy power on a long term basis through Green Certificates. Furthermore, utilities that removed assets from their balance sheets would benefit from greater flexibility with regards to the financing structure for these assets.

With regards to the situation in various European countries, there had in recent years been a lot of negative news from the Spanish renewables market. On the other hand, the country contained several high quality assets with strong sponsors, and there was potential for the situation to improve as the Spanish market adapted to the introduction of new regulations. Italy was currently benefitting from a flow of finance into renewables projects, despite the recent uncertainties that had been experienced in this market. The core markets of Germany, France and the UK were experiencing a healthy level of financing for operating assets, yet challenges remained around securing funding for new build assets; this was particularly the case in the UK.

Chris Lambert sought clarification on the key messages that DECC needed to send to investors in the run up to the general election. Adrian Scholtz replied that in terms of renewables, the country risk for the UK was currently being compared by investors with that of emerging markets such as India; therefore, a vital task for DECC would be to regain investors’ trust ahead of the general election campaigning period.

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Dr Nina Skorupska, CEO, Renewable Energy Association (REA)

Dr Nina Skorupska, CEO, Renewable Energy Association (REA), explained that the most important objective for REA members was to gain an understanding of the direction of future government policy, thereby increasing investor confidence. At the end of 2012, the UK had ranked 25th out of 28 EU member states regarding the progress that had been made towards achieving its 2020 renewable energy target. In order to meet this target, the rate of renewables deployment would need to increase significantly; however, growth in certain sectors of the renewables industry had recently slowed due to an absence of clear and stable policy making from government.

In 2009, it had been recognised that in order to meet the UK’s 2020 target, the amount of renewable energy used across electricity generation, heat, and transport would need to increase by 16% per annum. Renewable power capacity had increased by an average of 20.3% per year from 2009-13, due in part to the falling costs of clean technology. Renewable energy technologies tended to be relatively small in size and capable of being deployed in volume, which provided an excellent opportunity to hone technologies and bring down costs. This was vital, as renewables would in future be required to compete fairly and without subsidisation with more traditional generation methods.

While substantial progress could be seen in the use of renewable energy for electricity generation, the data for heat generation was less clear due to the difficulty of measuring the actions taken by individual households. The UK government had taken an innovative policy approach in introducing the Renewable Heat Incentive, which was unique in Europe. For the approximately two million households not currently linked to mains gas supplies, this offered a significant business opportunity. The other major area of energy usage for the UK was transport; however, to date the government had failed to demonstrate clear support for renewables deployment in this area. Due to governmental inaction four projects had so far been cancelled, and investment had left the UK for countries such as the US that more clearly understood the need for renewable energy in transport.

Although the use of biomass for electricity generation would be vitally important for reaching the UK’s 2020 target, uncertainty remained over the sustainability of this generation method. The industry had potentially disadvantaged itself in claiming biomass to be 100% renewable, and should instead emphasise its sustainability benefits compared to fossil fuels such as coal. An average of 18% growth in renewable heat generation per annum would be necessary in order for the UK to reach its 2020 target, the majority of which would come from biomass and heat pumps. The REA intended to work with the UK government to move the debate forward on indirect land usage change (ILUC), which was seen in Europe as a cause for concern.

The renewables industry had seen a fall in employment from 110,000 in 2010 11 to 103,000 in 2012 13; this had occurred as a result of drop in the feed in tariff for solar energy. Questions remained about whether this tariff had previously been too high, leading to excessive profits in the sector, yet the way government had managed the change in tariff had led to the closure of a number of solar operators and developers. The loss in employment had been partially offset by a growth in the wind energy sector, and it was expected that in future the rise of the anaerobic digestion industry would provide a further boost to employment. Analysis conducted by PwC had revealed that £27.7 billion had been invested in UK renewable electricity generation and £1.4 billion in renewable heat from 2010 to 2013, while only £0.7 billion had been invested in renewable transport fuel production. There was a risk that unless investment in renewable energy for transport increased dramatically, the UK would not be able to meet its 2020 target; however, in order for investment in this sector to increase, a clearer and more stable policy landscape would be required.

The Importance of Stable & Transparent Government Policy for Investor Confidence

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Market risks comparison: UK vs international opportunities in 2014+

Ilesh Patel, Partner, Baringa Partners

From the perspective of Ilesh Patel, Partner, Baringa Partners, European energy policy was currently undergoing a fundamental change in priorities, as the key concern for governments had moved from decarbonisation to affordability and security of supply. European renewables developers and investors would in coming years encounter a new set of risks, rights, and responsibilities as a result of three main shifts in the market. Firstly, there would be increased competition for the allocation of support between renewables technologies, resulting from affordability concerns on the part of governments. Secondly, there would no longer be a guaranteed route to market through TSOs, and incentives for institutional offtake would be reduced. Furthermore, balancing costs would no longer be borne solely by customers through offtake, following efforts by governments to better allocate the new risks associated with a low carbon economy across the value chain of developers, investors and consumers. The final shift related to grid integration; this would become more challenging as the scale and penetration of renewables projects increased, leading to risks of potentially uncompensated constraints on operation. New licensing arrangements would be required in order to provide the necessary capital for grid improvements.

With regards to the allocation of support to renewables, this would no longer happen on a first come first served basis but would instead take into account price and volume factors, with a shift towards competition between projects and technologies occurring in both the UK and Germany. Although this would lead to an increased level of support risk, this risk could be understood and quantified. In order for developers and investors to accurately assess the support risk for a planned project, it would be necessary to analyse the costs, stage of completion, and placement in the renewables merit order of all currently existing projects. Once an understanding had been gained of the projects that could potentially be deployed, these could be compared against allocation guidelines published by DECC in order to predict where CfDs would be awarded.

In both Germany and the UK, generators were now required to engage in the self marketing of power and to take responsibility for balancing costs, although backstop arrangements were in place in both countries. The risks associated with these new requirements could be divided into five categories. Firstly, basis risk existed as generators could be required to sell power for a lower price than had been underwritten in their support mechanism. Secondly, the risks of day ahead wind forecast errors, solar forecast errors, or output errors were present in the wind, solar and biomass industries respectively. Thirdly, an imbalance risk existed due to the potential for incurring imbalance charges. Fourthly, liquidity risk would occur when companies were required to trade power on the markets. Finally, there was a risk that trading and setup costs would be incurred by those needing to trade power.

Imbalance costs for renewable energy generation were rising, and it was estimated that for a typical offshore wind farm these costs could reach a level of roughly 12% under one scenario. However, this figure was lower discounts currently seen in 15 year PPAs; this could be explained by appropriate risk premia for long term risk being taken on, margins, or liquidity in the marketplace.

Challenges around grid integration had increased in recent years, leading to higher risks for developers in this area. These included delivery risk based on the activities of TSOs; interface risk arising from the need to co ordinate on infrastructure with other developers; increasing reliance on onshore reinforcements to achieve grid connections on time; and increased risk of curtailment without compensation. Financial and commercial complexity was increasing around the delivery of grids, and issues existed around the regulation of new asset classes such as interconnectors.

A convergence of market risk profiles could be observed across Europe, with support risk and route to market risk in the UK and German markets trending towards further alignment. Historically, portfolio developers and investors looking to spread their risk had benefitted from a diversity of risk profiles across European markets, yet with greater convergence it would potentially become more difficult to hedge renewables investments. On the other hand, a higher consistency of risks across markets could make it easier for pan European developers to manage their portfolios.

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INDUSTRY DEBATE:

David Handley, Director, RES Advisory, Mike Griffith, Director of Business Development, Alstom and David Love, Director, DRAX

Graeme Cooper, Executive Director, Fred Olsen Renewables Limited, introduced himself as the chair of the following panel. Mr Cooper noted that it would be difficult for developers and TSOs to time the entry of projects into CfDs to achieve the best possible terms, as they were hampered by the need to build physical infrastructure. Ilesh Patel agreed with this, adding that developers seeking to bring forward the date of completion for projects would face additional challenges around securing a grid connection earlier than had originally been specified.

Uncertainties for developers in the UK: how erratic is energy policy deployment?David Handley, Director, RES Advisory, began by highlighting the mixed messages that had been sent by the coalition government with regards to the Carbon Price Floor (CPF). The CPF had been touted as a way to provide investor confidence, and in 2011 it had been announced that prices would rise from £16 to £30 per tonne by 2020; however, it had subsequently been revealed in the budget speech in March 2014 that the price would be capped at £18 for the rest of the decade. This was damaging to those who had made investments on the basis of the CPF, and would undermine investor confidence in future. Uncertainty had also been created around the RO re banding process, as a result of political infighting that had occurred during the consultation period for this process. The situation was also complicated by rumours stating that a further review of re banding would take place.

Ministers and senior civil servants had in a 2011 EMR white paper emphasised the need for investment into UK renewables in order to close the energy gap. However, when the LCF had been introduced in 2013, the expected rate of delivery for renewables technologies had been substantially lower than the rate suggested by the white paper, further harming investor confidence. The introduction of a competitive process for auctioning was potentially an effective way to bring down costs; however, this introduction had been rushed, leading to a situation where developers were required to bid for contracts without being aware of the PPA prices or financing costs for projects. This would lower the chances of individual projects delivering successfully, which would in turn affect the overall perception of the auctioning process as a practical way to lower the cost of low carbon technologies. In order to rebuild investor certainty, it would be necessary for the government to set and uphold long term targets, and to provide a stable direction of travel with regards to energy policy.

UK Offshore market dynamics and supply chain challengesA view on how government policy had affected the supply chain for offshore wind would be provided by Mike Griffith, Director of Business Development, Alstom. Over the past two years the generation share for low carbon technologies had increased by 3.9%. 21% of low carbon electricity generation currently came from offshore wind, and the UK remained the market leader in this technology globally, with more installed capacity than the rest of the world combined. Average generation from offshore and onshore wind combined had increased rapidly over the past two to three years, yet a degree of volatility could be seen in generation figures. However, there had in the past 12 months been at least 5 GW of attrition in terms of future capacity. This had in part been due to issues during the consenting process, and a failure of some projects to meet technical requirements; a greater level of realism was now being experienced as developers came to terms with the post EMR landscape.

Under EMR, the strike price for wind would fall over the next few years. This decrease had been staggered according to the time of project completion, yet would more usefully be correlated to increases in volume in order to reflect cost savings in the industry. In terms of the 2015 19 budget for low carbon generation, headroom was limited; if the upcoming CPF freeze was taken into account, this would further restrict the available budget for all renewables technologies. The projected UK total capacity final implementation plan issued by DECC included a range of possibilities for offshore wind generation capacity, yet the most likely scenario in this plan included 10.2 GW by 2020, which was modest compared to earlier forecasts. Overall, the situation under EMR differed significantly from that under the RO system, and a significant recalibration of industry expectations was required. With no budget certainty beyond 2020, it was expected that further attrition would be seen in the project pipeline for offshore wind, especially for projects in deeper water and further from the shore.

CfDs would only be awarded to developers with a supply chain plan, which meant that selecting the right supply chain partners was of critical importance to the success of projects. The challenge for the offshore wind supply chain was around cost reduction, as this industry remained at a high point on the cost curve. There was a need to improve standardisation and industrialisation; although the best way to achieve this was through competition, a critical mass was required in order for such competition to flourish. An early definition of, and commitment to, the post 2020 market for offshore wind would encourage investors to finance new supply chain facilities that could significantly lower costs for the industry.

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INDUSTRY DEBATE:

David Handley, Director, RES Advisory, Mike Griffith, Director of Business Development, Alstom and David Love, Director, DRAX

Biomass conversion update and supply chain challengesDavid Love, Director, DRAX, explained that DRAX currently operated five large coal units in Yorkshire, and intended to progressively convert these into biomass units. Biomass conversions were an important element of the UK’s ability to meet its 2020 target, and DECC viewed these conversions as a transitional technology that would aid in the achievement of further targets in 2030 and beyond. DRAX had successfully converted its first coal unit to a biomass unit in April 2013 under the RO process, and a second Enhanced Co-Firing (ECF) unit had recently become operational. Further R&D work was planned around the fuel envelope that could be used in coal boilers, and trials would be conducted on SNCR and low-NOx burners with the aim of curtailing NOx emissions going forwards. In 2015, the ECF unit would be converted to a biomass unit, although uncertainty remained over whether this would take place under a CfD or under the RO process. DRAX had been awarded a CfD for the conversion of a third coal unit to biomass at the end of 2015, and had plans to similarly convert a fourth unit in 2016, depending on budgetary constraints and whether a CfD could be obtained. A government funded CCS project was also scheduled to take place at one of DRAX’s units co firing coal and biomass. If this was successful, it could lead to the construction of biomass fuelled CCS plants at the power station.

The most challenging element of biomass electricity generation was ensuring that fuel supplies were economical, of a high enough quality and sustainable. DRAX had contracted for the delivery of four million tonnes of biomass for 2014 15, which represented a large portion of the global supply; further pellet supplies existed, yet it was unclear whether they met DRAX’s sustainability standards and whether they would be compatible with the power station’s boilers. DRAX was therefore engaged in the development of its own pellet supplies in the US, along with port and rail facilities for transporting these pellets. DECC were introducing mandatory standards for the sustainability of biomass, which would contribute to a robust and independently audited supply chain and thereby foster public confidence in the sector.

Nina Skorupska remarked that although the UK government had set greenhouse gas targets of 40% for 2030, it had refused to support binding national renewable energy targets. Ms Skorupska asked for the panellists’ views on the importance of setting binding UK renewable energy targets for 2030. Mr Handley stated that this was absolutely essential; the setting of sector specific targets had played a large role in the development of the renewable energy industry to date, as they were more effective than general carbon reduction targets at facilitating deployment. Mr Griffith agreed that it was important to set sector specific targets, as manufacturing facilities required significant investment that could only be secured if certainty was present. Mr Love commented that binding carbon reduction targets, with a fully functioning carbon market, would enable the market to best decide how resources were allocated; however, in the absence of such a fully functioning market, there was a role for renewables targets to play.

Conrad Purcell, Senior Associate, Norton Rose Fulbright LLP, suggested that the move to an auctioning process would be inevitable in the UK, and asked whether the panellists believed that steps could be taken to identify and mitigate the potential risks involved in this transition. Mr Handley noted that the decision to introduce both CfDs and the auctioning process simultaneously could have an adverse effect on the ability of developers to accurately price their bids. Mr Griffith agreed that the UK was currently in a transitional period, and added that some developers may have engaged in significant capex without realising the degree of competition that would be required under EMR. The benefits of EMR would only emerge in the long term, when the market had been able to adjust to the introduction of CfDs and the auctioning process. Mr Love suggested that auctions should initially be conducted within the different technologies, before a more technology neutral process was introduced. Mr Cooper stated that one of the challenges involved with securing a CfD was to ensure an appropriate cap on costs in order to minimise downsides such as financing and market risk. There was a potential that developers could decide to avoid these risks by postponing or cancelling projects, which would lead to power shortages in future. Difficulties also existed around grid connection; the importance for developers of securing a connection at the appropriate date had not yet been fully recognised by the regulator or by National Grid, and was not reflected in the auction process.

Leigh Hackett, General Manager, Capture Power Ltd, sought the panellists’ views on whether CCS would have large role to play in the UK energy market in coming years. Mr Love remarked that towards the mid 2020s and beyond, UK generation would be dominated by an intermittent and inflexible nuclear dominated plant mix, creating the need for low carbon technologies that could easily respond to changes in demand. As a replacement for traditional coal generation plants, CCS would be an important feature of the future UK energy market. Mr Cooper stated that work was needed on understanding how market and system tools such as CCS could help to maximise the grid’s ability to respond to critical events. Mr Handley noted that in a situation where investors lost confidence in the low carbon agenda, further out technologies such CCS were likely to encounter challenges with financing.

Continued.

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David Handley, Director, RES Advisory, Mike Griffith, Director of Business Development, Alstom and David Love, Director, DRAX

INDUSTRY DEBATE:

Mr Griffith added that CCS had a long term role to play in the UK energy market, due to the high proportion of generation currently provided by coal plants. However, in order to occupy a place in the market, CCS would need to be seen as an affordable technology; this would only be the case if long term political certainty existed with regards to the carbon market. Ilesh Patel stated that the CCS industry was presently receiving a lot of interest and had made significant progress in recent years, with the potential for rapid deployment of some assets. Mr Cooper highlighted the role that Demand Side Response (DSR) and smart meters could perform in reducing the stresses on networks.

Nina Skorupska asked the panellists whether they saw the potential for growth in the UK’s community energy sector, considering that half of Germany’s renewable energy delivery came from community based projects. Mr Cooper replied that he would expect a substantial uptake of solar PV by households in coming years as energy costs rose and panel prices fell. Challenges existed for developers seeking community investment in commercial renewable energy generation, as larger investors such as banks would usually have first call on any revenue arising from projects. For this reason, it was often preferable for developers to provide a community fund rather than offering investment opportunities to local communities. Mr Handley remarked that developers were currently under significant pressure to promote community energy ownership; this approach would function effectively in some cases yet should not be applied across all projects. In some instances, communities may not be able to invest in local projects and could instead be offered benefits such as lower energy bills. Mr Love noted that the UK could not be compared to Germany in this regard as it did not have the same history of community energy schemes. Ms Skorupska commented that there was increasing political interest in community energy generation in the UK, yet stated that at present the requirement to develop an offering for communities seemed to relate only to renewable energy developments and not to other energy sectors. Mr Cooper agreed with this, and added that communities often found it difficult to decide on the best uses for community funds. The creation of NGOs that could advise communities on how these funds could be spent would be preferable over the direct involvement of developers in this decision making process.

Ali Raza, Director, Power and Infrastructure Finance, Investec Bank, suggested that a recent increase in the amount of activity regarding renewables projects had been the result of developers attempting to deliver projects under the RO process rather than through a CfD. Mr Raza suggested that concerns existed in relation to the ability of the LCF budget to cover this increase in activity. Mr Handley agreed that many developers would attempt to deliver projects under the RO process, as this was a scheme that they understood. Although DECC had worked hard to explain the system under EMR and to ensure that measures such as offtaker of last resort were present, a large learning gulf still remained for developers. Whilst this gulf existed, developers would continue to attempt to deliver projects under the RO rather than EMR system, which would challenge the ability of the LCF to cover these projects.

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LEAD MEMBER ORGANISATIONS