Written evidence from the Department for Energy and Climate Change

Q21- 26 – Levelised costs

DECC collects a wide range of evidence to inform its assumptions on the generation costs of potential new projects across all the main electricity generation technologies, including wind, solar, biomass, waste fuelled technologies, marine, hydro, geothermal and nuclear as well as abated and unabated gas and coal technologies. DECC’s latest estimates on the levelised cost of electricity were obtained following the extensive consultation on the Electricity Market Reform (EMR) Delivery Plan.[1]

This process took into account information from not only industry stakeholders, but also independent economic and engineering consultants’ assessments, commissioned by DECC and other entities (including National Grid), and has undergone significant scrutiny and peer review.

Existing evidence

Prior to the EMR Delivery Plan, DECC had already established an evidence base for the levelised cost of many renewable technologies which had been most recently updated as part of the consultation on the Renewable Obligation Banding Review (ROBR).[2] As part of this process, DECC commissioned ARUP, an independent consultant, to review the generation costs and deployment potential of renewable electricity technologies in the UK.[3] Furthermore, as part of the ROBR consultation, DECC received many responses and other new evidence (including external reports). These were also considered by DECC, leading to several changes in the final assumptions for the ROBR.

New evidence collected for the Draft Delivery Plan

At the beginning of the EMR Delivery Plan process National Grid launched a Call for Evidence in May 2012 to ensure that the most recent and relevant technology costs were reflected in subsequent analysis by DECC and National Grid.

Baringa, an independent consultant, was engaged by National Grid to analyse and assess the submissions. This involved cleansing of the responses, assessing the quality of the data, providing summary statistics of quantitative responses by technology, interpreting the data and summarising qualitative data and comments.[4]

Following this the Government finalised its levelised cost assumptions for the Delivery Plan consultation. This entailed scrutiny by an Analytical Steering Group jointly chaired by DECC and the National Grid and attended by Ofgem, as well as by DECC’s independent Panel of Technical Experts (PTE).

As part of this process DECC also commissioned KPMG to conduct a review of effective tax rates for renewable technologies.[5]

The PTE also informally reported to the Analytical Steering Group, making some suggestions for the Government and the National Grid to consider.

New evidence and arriving at final generation cost estimates

After reviewing a range of responses from industry and non-industry stakeholders as part of the EMR Delivery Plan consultation,[6] DECC made changes to some modelling assumptions (including technology costs), as detailed in Annex H to that consultation.[7] This process also included commissioning independent consultancy analysis from NERA to strengthen the evidence base on specific technology-by-technology changes in hurdle rates due to the shift from the Renewables Obligation to a Contract for Difference regime.[8]

This collated evidence was again subject to scrutiny from DECC’s independent Panel of Technical Experts. The final report from the PTE is published on the DECC website.[9]

DECC’s latest estimates were then published as part of the DECC Electricity Generation Costs Report (December 2013), which is also available along with associated documentation on the DECC website.[10]

Q43 – List of projects that walked away

We undertook to provide information on projects that ‘walked away’ in response to the structure and strike prices that were put in place.

In terms of the FID Enabling for Renewables process, there were three projects that withdrew:

• SSE’s Forth Energy biomass conversion with CHP project withdrew in September 2013.  They qualified in Phase 1 but did not submit an application for Phase 2 (please note that Phase 1 applicants have not been publicly named)
• GDF Suez’s Beinn Mhor onshore wind project withdrew in early 2014 (before the deadline for submitting binding applications)
• Ecotricity’s Heckington Fen onshore wind project withdrew in March 2014 (before the deadline for submitting binding applications)

In addition, following the publication of final strike prices on 4 December 2013:

• On 12 December 2013 Centrica announced the sale of the Race Bank project to DONG Energy[11]
• In January 2014, SSE announced a "wide-ranging review" of its offshore wind development portfolio. In March 2014, following the conclusion of the review, SSE announced that it had decided to significantly narrow the focus of its near term development plans for its offshore wind development portfolio. SSE announced it intends to continue to invest in Beatrice (which has been awarded an investment contract through FID Enabling for Renewables) but would not take beyond the current phase of development its interest in the Galloper project because SSE “does not currently believe the costs of constructing and operating Galloper, and the revenue likely to be earned from it once built would provide a return on SSE’s capital investment that will enable the project to compete successfully against other projects in SSE’s wider investment portfolio over Galloper’s planned construction timeline”[12].

Other developers have also looked across their portfolios and decided to prioritise the projects they consider to be the best ones:

• On 26 November 2013, RWE announced it would not continue to develop the Atlantic Array site and it would hand back the seabed rights to The Crown Estate. RWE cited ‘technical challenges making the project uneconomic at current time’ and said they would ‘focus on progressing more technically and economically viable offshore projects’.[13]
• In December 2013 Scottish Power Renewables announced they would not proceed with the Argyll Array scheme following technical and environmental site studies.  In addition to environmental challenges they stated that “…the Argyll Array project is not financially viable in the short term.”[14]

Q53-54 Offshore wind costs

Developers put significant sums at risk when developing an offshore wind projects to the point of either entering the FID Enabling for Renewables process or being able to enter the CfD allocation process.

The Forewind consortium (SSE, RWE, Statoil, Statkraft) said publicly that by June 2013, they had spent around £45 million on surveying the Dogger Bank zone[15]. None of the Dogger Bank projects have yet received development consent so this money has been spent at risk. The Crown Estate, which tracks development expenditure through its contractual agreements with the offshore wind developers, has confirmed that £300 million has been spent to date on development of Round 3 collectively[16], with only one Round 3 project (Hornsea) having so far received support through an Investment Contract.

For projects who applied to FID Enabling for Renewables, the expenditure at the point of application varied by project. At the lower end, one project told us that they spent around £20 million at the point they applied. Towards the higher end a second project (who was further ahead in the development process) told us they had spent around £48 million.

For projects applying for CfDs there will also be a variation in spend by projects at the point of application, and the sums cited above would not be unusual with larger sums likely for larger projects.

The amount spent by individual projects can vary, due to factors such as:

• Size of the project. For example, a 1,000MW site will require more work in terms of environmental surveys and geophysical studies than a 300MW site because the area to be surveyed is larger.
• Project specific factors. For example, a project may experience bad weather for a week meaning that its survey vessel (hired at a daily rate) sits in harbour all week and then has to be hired for another week to carry out the work.
• Amount of studies carried out. One developer may decide to put more development expenditure at risk and carry out extensive geophysical or geotechnical surveys to inform the development consent application and the further work they intend to carry out to reach a final investment decision in anticipation of receiving development consent. Another developer might choose to carry out geophysical or geotechnical surveys only to inform the development consent application and carry out further work only once the development consent is granted.

To be eligible to enter the enduring CfD allocation process, an offshore wind project is required to hold development consents or permissions for all the infrastructure for which the developer is responsible for delivering. This means a project will have been through the planning process and hold development consent/planning permission for onshore works and offshore works.

To enter the FID Enabling for Renewables process, an offshore wind project was required to have begun its public consultation which is a key step towards submitting the development consent application. All eleven of the offshore wind projects who applied for FID Enabling for Renewables were actually further ahead in the development process than this:

• Three projects (Race Bank, Galloper, Dudgeon) already had development consents in place when they applied
• The other eight projects (Beatrice, Burbo Bank Extension, Hornsea, Inch Cape, Moray Firth, Neart Na Goithe, Seagreen Alpha and Bravo and Walney Extension) had all already submitted applications for development consent when they applied

To get to the point of submitting for development consent, projects will have carried out environmental surveys, public consultation, studies on wind speeds, geophysical surveys and geotechnical work.

A Crown Estate study[17] set out approximate costs for various elements of development based upon a typical 500MW windfarm[18]. BVG Associates carried out the study and took views from both developers and supply chain companies.

11 July 2014

Q198 - Jobs supported by contracts awarded through the FID Enabling for Renewables process

FID Enabling for Renewables project developers were asked to provide information on jobs as part of their Phase 2 applications.

We did not set out a methodology for calculating job numbers and therefore we took the information provided by projects and considered it alongside information the department holds more broadly on jobs supported by these renewables projects so that we could provide an aggregate figure for use in media material. 

We were clear when we published the number that it was an industry estimate compiled by DECC.

The figure of 8500 jobs being supported by the successful projects that have received an investment contract includes the following jobs:

• Construction
• Direct operations
• Indirect other
• Temporary

It was based on:

• Figures provided in project applications
• Information held by DECC following discussions with industry outside of the FID Enabling for Renewables process
• Departmental estimates on ‘other support jobs’ on sites which applications had referred to but no figures were given
• The mid-point of estimates

These figures have not been disaggregated into those inside and outside of the UK.  We will be able to monitor this as projects are developed.

We have not provided a breakdown of jobs by project as this was provided to DECC on a commercially confidential basis.

Final job numbers will be monitored as part of the evaluation of the FID Enabling for Renewables process in liaison with BIS and UKTI as well as with project developers.