It's not an ill wind

Yorkshire Business Insider, January 2001

The introduction of the climate change levy provides a solid financial reason for choosing electricity from renewable sources. So much so that demand will exceed supply unless ambitious new schemes find funding. Tim Chapman reports on the growth of green energy

It should one of the basic tenets of business - you're better off funding your running costs from revenue rather than burning up your limited capital.

But when it comes to energy, the logic isn't followed through. Our continuing dependence on fossil fuels is eating into an increasingly scarce resource. Advocates of renewable sources argue that the cost of extraction, processing and delivery doesn't reflect the replacement cost of this natural capital.

By contrast, renewable energy sources are unlimited so long as the sun shines, the wind blows and the tides swell. The main barrier is the capital cost of the plant needed to tap into the natural revenue of these energy sources, and the production costs to keep the plant running. These costs will fall as the technology becomes established but can form a significant hurdle for new projects.

The UK currently generates around 2% of its total energy requirements from renewable sources, mostly large-scale hydroelectric projects. Last year, the government announced a target of increasing the contribution of electricity from renewable sources to 5% by 2003 and 10% by 2010.

The 5% target should be met by existing capacity and projects already in development. To spur energy suppliers to reach the 10% target, the government is introducing a new mechanism called the Renewables Obligation in October 2001. All licensed electricity suppliers will be obliged to supply a specified proportion of electricity from renewable sources, or pay a premium.

The policy is driven by the government's desire to cut greenhouse gas emissions, especially the carbon dioxide produced by burning fossil fuels - the same reason that it is introducing the controversial Climate Change Levy this April. The Levy will be charged to business users at 0.43p/KWh, an increase of up to 15% on energy costs, although intensive energy users will be able to claim exemptions of up to 80%.

Electricity generated from renewable sources will be totally exempt from the Levy, however. And while the basic cost of green electricity is still slightly higher than that from traditional sources, its exemption means it will work out cheaper for most business users.

In mid-1999, Yorkshire Electricity was one of the first suppliers in the country to offer users the option to buy green electricity. The green scheme currently costs around 8% more than other tariffs, but Yorkshire Electricity promises that it does not make any profit from the premium.

The scheme was originally marketed as a way for customers to meet their own environmental targets, and was mainly taken up by public sector organisations including Leeds Metropolitan University, Kirklees Metropolitan Borough Council and South Yorkshire Police.

"Interest from the general business community has been relatively small," says business sales manager Dave Woodall. "But as soon as there's a financial incentive the take up will increase - we're already seeing it. There's going to be a major problem because the demand will far outstrip the supply."

Unit[e], the UK's first independent power trading business dealing exclusively with green electricity, is already taking a cautious approach to signing up new customers because of the limited supply. The cost of the green electricity from the Wiltshire-based company can be as little as 2% over traditional suppliers. But according to commercial director Juliet Davenport, prospective business customers will need to show a greater commitment than just wanting cost savings.

"What we have to do is supply to the market as long as we have enough renewable generation," she says. "If businesses are keen to sign up to a green tariff and they're doing it for more than just savings reasons, they might want to look at it."

In principle, the UK has among the world's largest resources of wind, wave and tidal energy - and as anyone who has survived a few winters here knows, Yorkshire has more than its fair share. According to the Network for Alternative Technology and Technology Assessment, a multidisciplinary group based at the Open University, the UK could produce up to 20% of its electricity from turbines in the windiest parts of the countryside, and up to 50% with offshore wind turbines. Devices designed to harvest the energy of waves in deep water could provide another 20% of requirements, and tidal barrage systems could provide a further 20%. Geothermal sources could add a further 10%.

"There are sufficient renewable resources in the UK to power the whole of the UK, but we do have to deal with the storage problem," says Davenport. Unlike fossil fuel generation, renewable sources can't always guarantee a constant, steady supply of electricity. The answer is to store energy in fuel cells similar to those being developed for electric vehicles but on a massively larger scale. National Power is currently developing a 12MW fuel cell - big enough to power some 9,000 homes.

The price of renewables generation is falling rapidly - the production costs for energy from inland wind turbines and photovoltaic solar cells have both fallen by around 70% in the past decade. Wind turbines have become a familiar site along the Pennines, and Yorkshire Electricity sources much of its green electricity from the wind farms at Ovenden Moor, above Halifax, and Royd Moor, near Penistone. Both these sites are operated by Yorkshire Windpower, a joint venture between PowerGen and First Renewables, a subsidiary of the Kelda Group.

First Renewables also holds a 85% stake in Arbre, the pioneering biomass generation plant being constructed at Eggborough, south of Selby. Arbre will be the first commercial plant to generate power from purpose-grown willow coppice. Although its operation is closer to that of fossil fuel plants than other renewable sources, biomass generation of this kind is neutral in terms of carbon dioxide emissions. Such innovative projects must be classed as high risk by investors, however. Having been caught out on building modern gas-fired stations which are now being hit by rising gas costs, financial backing is hard to find for energy projects which may have a 15-year payback period. The increasing demand for renewable energy alone is unlikely to spur the necessary investment.

The government is offering £50 million grants - recycled from the Climate Change Levy - to bridge the gap between research and commercial development in the less developed, but potentially more rewarding, areas of offshore wind farms and energy crops. The renewables industry has obviously welcomed this money, but some suggest that the pot will need to be at least three times as large to have any real impact.

Revenues from the Renewables Obligation will also be recycled to provide a boost to the renewables industry while minimising the overall impact on consumers. Electricity suppliers which fail to meet their renewables target will pay a fixed premium of a proposed 3p/KWh. These buy-out receipts will be pooled and paid back to suppliers who did meet their targets.

Woodall predicts that it will take at least two or three years after the introduction of the Renewables Obligation before there is enough renewable capacity in the UK to satisfy demand from the suppliers. "It's supply and demand. We've already seen the premium being increased in the market," he says. "The prices are going up as people realise it's a scarce commodity. The customer is not going to be bothered if we're going to have that on their behalf, until it diffuses back into the overall costs of energy itself."

Green gas from coalfields

The abandoned coalfields of Wakefield and Castleford will soon play host to a new environmentally-friendly energy generating technology based on the remains of the old. But although it can significantly reduce greenhouse emissions, it is not yet approved as "green" under the new energy regime.

Mansfield-based Alkane Energy is pioneering the extraction of coal mine methane for use in electricity generation and industrial processes. The gas, naturally emitted from disturbed coal seams, is otherwise vented to the atmosphere. Using it to generate electricity reduces its global warming potential by 87%, as methane is a much more potent greenhouse gas than carbon dioxide.

Alkane is currently running three pilot plants in the Nottinghamshire/Derbyshire coalfield. The company, which is backed by venture capital house Apax Partners, raised £30m in an IPO in December, which it will use to fund an aggressive five-year roll-out programme of over 100 projects. The firm has planning consent for Wheldale Colliery near Castleford, and Monkton works, and has submitted outline planning permission for a project at the Millennium Village development of Allerton Bywater. Other potential sites include Glasshoughton and Nostell Colliery.

As well as converting a hazardous gas into an effective source of energy, Alkane's plants can also help attract other investment into near-derelict areas. The10MW plant at Shirebrook, a former pit town north of Mansfield, will be the cornerstone of a new industrial park. "We've demonstrated it's still a viable place to invest in," says Alkane project engineer Alan Nickless. "We've changed this brownfield site into an industrial space."

Whether the technology can reach its full potential depends on whether it is classed as a green source under the Renewables Obligation. Winning renewables status would allow Alkane to open plants on many smaller mines that would not otherwise be economically viable. Alkane executive chairman Cameron Davies is leading the lobby to win full approval for coal bed methane. "At the moment it's exempt from the Climate Change Levy if the gas is used in an industrial process, for example if it's sold to a gasworks," he says. "Crazily, if electricity is generated, it's not exempt."