The UK Renewable Energy Innovation System - Essay Example

?ANALYSIS OF U.K. RENEWABLE ENERGY INNOVATION SYSTEM WIND POWER Table of Contents 0 Background 2.0 Fast Market Growth of the Wind Power Sector 3.0 UK Case Study 3.1 Government Schemes and Consumption Methods 3.2 Economic Opportunity and Commercial Concerns 3.3 Market Development Schemes 4.0 Global Competition and Scenario 5.0 Conclusion 6.0 References Analysis of U.K. Renewable Energy Innovation System – Wind Power   1.0 Background   The U.K. has the formidable challenge of achieving low or zero carbon energy supply. The target is to achieve 80% reduction in Carbon emission by 2050 and this calls for an extreme make over in the production, transmission and use of energy from the present  situation. Short term goal for 2020 is to achieve a 15% renewable energy component in the over all energy mix in the country. Replacement of existing facilities with import substitution and self reliance, and de-carbonizing the atmosphere to ward off extreme climatic changes are among other priorities. These goals for 2020 and 2050 can be met better by Offshore Wind Power Projects. The option to go for increased production of renewable energy sources will also help curtail the dependence on fossil fuels, and help meet the government’s goal of energy security and reliability. U.K.’s predominant position in the World as a major off shore producer of renewable energy will further facilitate this change. Export Income (GBP 8Million) and local employment generation (up to 70,000) are by-products of this initiative, (Connor, 2003). At the same time, a stable regulatory regime is a must for the fulfillment of these expectations. Support to investors in the prevailing uncertain economic conditions is another prerequisite.   Awareness of the potential of the Offshore Wind Power Resources to serve the Environmental  goals and the thrust towards developing these has to be tempered with a concern for its impact on the other users of the Sea and Coastal environment and for the purpose of sustainability. The existing capacity of 8GW energy production of Wind Energy in the country was sought to be raised by 25GW in 2007. The impact of this policy was reviewed later through a Strategic Environment Assessment (SEA) and concerns about adverse impacts on other energy systems addressed through mitigation measures, (Connor, 2003). Incentives for investment and innovation underpin these efforts in the energy sector. Consistent with the findings of the SEA review referred to above, the UK government has now decided to go  ahead with Round 3 to grant leases for locations for Wind Power facilities in the Territorial  Waters and Economic Zone of U.K and Wales. There is no denial that the work in this segment is good for the Environment and Economy of  the U.K.   2.0 Fast Market Growth of the Wind Power Sector   From the days of tiny wind power units in farms, to the current stage of giant wind farms with utility level capacity for massive energy generation, the development of wind energy technology has helped bring down the cost of production. The cost in areas with good wind speeds compare well with the cost of  generation  in new plants using other conventional generation methods, (Porter, 1998). At this rate, within this decade wind power is poised to become the cheapest energy source. Further reduction in costs will call for massive increase of capacity and a corresponding  growth of this particular energy market. New large capacity generators are being installed in Germany, Denmark, Spain, U.K., India, China and the United States.           3.0 UK Case Study   Following its acceptance of the European Union target of achieving a 20% renewable energy component in the overall energy consumption as power and heat, and in transport, U.K. is committed to enhance its production of offshore wind energy. From consultations made by the U.K. Government in 2008, numerous measures have been initiated to achieve the goal. On shore and off shore wind energy will make up 30-35 % of the over all increase in production. Hydro and Biomass power will fill the rest of the demand. As mentioned earlier. There was a Strategic Environment Review  ordered in 2007 and its  findings were released in January 2009.The review confirmed the scope and viability of expansion of Wind Power capacity by additional 25GW or existing 8GW and further assessed the scope as equivalent to 5000 to 7000 Turbines to be installed off shore. (Connor, 2003).   As per the industry reports, wind energy generation exceeded the hydro power generation and became the largest renewable source of energy generation in the U.K., thereby supplying  a total of 2.2% of country’s electricity requirements. A major share of this electricity comes from the on-shore wind resource generation plants. With promising forecasts for the future as well, U.K. has already overtaken Denmark and has become the leading country for the highest offshore energy generation. The government and the private sector are planning various projects in the sector, and the experts hope that this development persists for a longer time, along with market favoring conditions like reducing cost of electricity generated through wind energy, less security threats and the imperative worldwide call for reducing CO2 emissions to avoid weather change.   3.1 Government Schemes and Consumption Methods   Electricity has to be consumed concurrently with production. Installing high capacity generators will entail marketing the surplus power to the Continent or near by regions, which will not be a cost effective proposition. Thus UK has preferred localized production and consumption with the bare minimum of transmission network, to redistribute local surpluses within the National territory. This section studies some proposed schemes on effective and consistent usage of electricity generated from wind energy. The main aim of the UK government behind setting up these schemes is to promote the wind power energy sector. ?         Hot water was being efficiently produced as a co-product at CHP (Combined Heat and Power) units. However since much of the power generation was being done through the subsidized production scheme, regulators were in favour of shutting down the plants for some periods when the demand for wind energy was low. They also imposed a requirement for larger utilities with capacity above 5MW to produce some power at the market oriented production mode, (Connor, 2003). This has prodded them to move away from subsidies and go for commercial production under free market conditions. The smaller wind generation units are also following their lead. ?         Excess wind power was directed to be used to substitute the use of coal oil and gas, to reduce dependence on these external resources for heating water. Opportunistic use of wind power for this purpose has now been mandated for both centralized and district heating purposes. Taxation issues have now been sorted out and now the new arrangement is poised to facilitate predictable and more even supply level for power during the winter months. With marginal surpluses, reduction in carbon emissions has been a bonus, (Connor, 2003). ?         Recharging of batteries of electric cars has been another possibility that emerged from the above scenario, where wind power surpluses has been put to effective use with the help of the government bodies and other organizations, . That will go a long way in the direction of reducing carbon emission and will also address the surplus production at wind power generators.   3.2 Economic Opportunity and Commercial Concerns   The projected expansion of off shore wind energy translates into a huge economic opportunity for U.K. in terms of manufacturing capacity, and employment avenues. The growth in employment is projected by the carbon trust as 70,000 jobs by 2020. It would cover on-shore jobs from capacity expansion on shore as well as spin off from export. However, reservations are expressed by investors from Europe on account of the inadequate port facilities in U.K.. Manufacturers from continental countries are also apprehensive of delay in delivery of equipment made by them to the off shore sites in U.K. if the port deficiencies persist, (Elliott, 2005). Such hitches are bound to affect project completion schedules and cost projections for the wind farms and may eventually impact the carbon capture and storage plans for U.K.   In order to ensure efficient manufacturing capacity and related logistics for the proposed expansion in wind energy capacity by the target date, U.K. will need to have at least one port or ports with dedicated infrastructure for meeting the needs of the industry and a related commercial land in order to facilitate the import and assembly of the equipments, (Toke, and Elliot, 2000). Absence of such infrastructure will make it very difficult to realize the planned expansion of capacity and Continental ports with such facilities will have an edge in competition.   There are adequate locations in the U.K. which can measure up to the needs of the industry. They can redeploy existing facilities or provide Brown field / Green field development. By itself, the market is unlikely to provide the complete port requirements in the given time frame without active involvement of  the U.K. Government to help materialize the expansion. Port related costs account for approximately 1% of the wind farm expenses This means an opportunity for U.K. ports to get business worth GBP150 Million per year at the least, when peak installation rate, aggregating to GBP 800 Million up to 2020.With the eventual addition of O&M costs, this revenue figure can touch GBP 1 Billion.   Unlike in the continent, ports in the U.K. are mostly privately owned, with a small group of large owners controlling these major ports, which are well utilised. Port industry is commercially run, but they had only recently taken note of the potential for earning from the capacity expansion in off shore wind power energy, (Connor, 2003). Some of the Port owners are well into making their ports part of the off shore wind power story and are falling in line, marketing their sites in tandem with the regional and other devolved authorities. The number of such sites suitable for the industry are small at present. There is heavy competition from several established Ports from the Continental Europe to take up the Construction  of Offshore Wind Power Projects in U.K waters, many of them  with credible track records.   Investment in Port Development for the Wind Power Industry will depend on the perception about U.K. Government’s continued commitment to its declared policy for expansion, the willingness of investors, port owners and the Wind Power industry owners to share the risks involved in the development of the required facilities and the continuing role the U.K. Government plays in sustaining awareness about the need for the Port facilities for the Power Projects.   As stated earlier, Ports in the U.K. are generally owned privately and a few large owners have dominant control of the major ports. Market forces drive the Port Industry in U.K. and Governmental policy or regional priorities do not influence decisions of the Ports, (Elliott, 2005). Initiative for developing the ports for a specific purpose will have to come from the Private Sector, and government initiative to can help facilitate that decision. The development function in U.K. is carried on through the regional development bodies in England and the administrations of Scotland, Wales and Northern Ireland and several other similar local authorities entrusted with enabling powers. These bodies can play a definite role in identifying and marketing suitable ports that meet the needs of the wind power industry for off shore facilities and also facilitating or supporting the development of required additional facilities at such ports.   3.3 Market Development Schemes   In the early 1990’s there was a policy thrust given by the Government, by subsidizing the setting up of  new wind turbines to the extent of 30% for developing the market. This was tapered down progressively to zero by 2010, (Musgrove, 2010). A number of market schemes have been initiated by the government of UK. Some of them are briefly discussed below.   ?         Pricing of Wind Energy produced by the Independent Producers Power Companies buying power from the Wind Power Units are required to pay them 85% of the average retail price payable by domestic consumers which effectively allows them a mark up of 17.6 % to the consumer, (Connor, 2003). Up to 20000KWH of wind power gets sold in this manner.   ?         Partial Refund of CO2 and Energy Tax Households are charged a very high price in the U.K. for the electricity consumed. This is in sharp contrast to the fact that cost of producing electricity in that country is one of the lowest in Europe for wind energy plants. This is done through a deterrent indirect tax regime. It is sought to be justified on the ground of need to reduce pollution and conserve energy. Green Taxes are easier accepted by the citizens, (Connor, 2003) .   ?         Special Rules for Private (Individual or Co-operative) Owners   Wind Turbines under private ownership (individuals, firms or co-operatives)  are given a refund on Electricity Tax. While this is an incentive to sustain renewable energy production, the fact that some of the utilities at most favourable sites have been extremely profitable has now exerted pressure to make adjustments in this policy for such areas, (Connor, 2003) .  ?         Tax Treatment of Wind Turbine Investments Wind Turbines are treated like machinery, with annual depreciation @30% allowed. There is  an alternative taxation option, under which Turbine owners may opt for a flat tax of 60% of sales turn over in excess of $3000/year.without any depreciation or any deduction of costs, (Musgrove, 2010). This gives an indirect advantage to those who own just a few shares in a Co-operative Wind Turbine firm  since they are exempt from taxes on their income from the Turbine.   4.0 Global Competition and Scenario   There is a high degree of concentration of offshore wind turbine industry in neighbouring Denmark and Germany. The ownership by local authorities in those countries make for faster decision making and effective competition to secure business. Ports like Esbjerg, Bremerhaven and Cuxhaven have made determined efforts to project themselves as attractive locations for manufacturing of wind turbine and their off shore installations, while U.K’s ports were a relatively feeble presence of Harland & Wolff at the Husumberg Wind Exhibition, to project the U.K. Renewable Energy efforts, (Elliott, 2005).   A perception is gaining ground within the wind power industry that continental ports can provide better scope for inward investors to develop the manufacturing facilities for the emerging needs of the off shore wind power industry than U.K Ports. They are sure of leveraging regional arrangements to make this happen. France and Holland, being immediate neighborer to the Southern Ports and North Sea Ports are in effective position to do this, in a viable way.   The Danish example - Wind Power development in Denmark is fairly spread across the country, even though some concentration exists in the highly windy parts.  The pattern for siting is mostly single units or clusters, (Nielsen, 2004). Very large Wind Parks are rare, due to the planning policy which encourages single and cluster patterns in preference to large facilities. National policy of ownership restriction also favors the sector. It is not surprising therefore that 80% of Denmark’s wind power generation is owned by individuals or Co-operatives. The other 20% is owned by Utility Companies. From the heavy dependence on Imported Oil in the 1970’s Denmark deliberately moved towards stringent energy conservation in the eighties and then rigorously pursued a policy of promoting Renewable Energy resources as a measure of sustainable economic  development, (Krohn, 1998). The country has set its planning horizon at Year 2030 in its Policy Document Energy 21. This is a strategy to assure the market actors of a steady scenario in which the policy will operate and favours the flow of capital into the Renewable Energy segment. Plant and Equipment (Generators, Transmission lines and Towers, transformers etc) in the Electricity Sector have long lifetime and policy consistency is necessary for encouraging investment. The policy frame work now ensures that the future development will take to accommodate Renewable Energy outputs. In spite of its very small size, Denmark has made a significant stride in the World market for Power Turbines. Around 20000 persons of its population (5.4 Million) are employed in this line. Such dedicated development of expertise has brought economic progress to  those employed and to the Country itself, (Vestergaard, Brandstrup and Goddard, 2004).   5.0 Conclusion   UK possesses an immense opportunity to capitalise on the wind power industry. With the help of a sturdy  framework of policies, initiatives, economic support, investment funding, unambiguous consenting dealings and appropriate access to grid, the wind power industry will generate a sheltered investment setting for the future, thereby offering the country a genuine prospect to develop into an international leader in the wind power generation.   6.0 References Jens Vestergaard, Lotte Brandstrup and Robert D. Goddard, (2004), “A Brief History of the Wind Turbine Industries in Denmark and the United States” , Academy of International Business (Southeast USA Chapter) Conference Proceedings, November 2004, pp. 322-327 Porter, Michael (1998): “The Competitive Advantage of Nations”, MacMillan, London Elliott .D ,(2005)‘Comparing support for renewable power’ in V. Lauber (ed) 'Switching to Renewables’ Earthscan, London pp 219-227. Krohn, S.,(1998) “Creating a Local Wind Industry Experience from Four European Countries”Managing Director, Danish Wind Turbine, Manufacturers Association, (1998) Gerdes et al (2006), “Case Study:European Offshore Wind Farms - A Survey for the Analysis of the Experiences and Lessons Learnt by Developers of Offshore Wind Farms – Final Report Peter Musgrove, Wind Power, (Cambridge: Cambridge University Press, 2010) p.108 Nielsen, S., 2004: “The Danish Wind Power Experience”, The Utilities Journal, OXERA. May Edition, 22-23 Connor, P., “UK renewable energy policy: a review” (Coventry: Centre for Management under Regulation, Warwick Business School, Warwick University, 2003 Toke, D., Elliot, D., 2000. A fresh start for wind power? International Journal of Ambient Energy 21 (2), 67–76 Read More