Blog post – DECC review has missed the point of hydro

Mark Mathieson, CEO, Green Highland Renewables

Published on 27 January 2016

The recent review of the feed-in tariffs for hydro energy has been a shock to the system.

In the last few years the small-scale hydro sector has delivered more than 100MW of new schemes in Scotland, whilst contracting firms across the Highlands of Scotland are currently building out dozens more.
Now however, thanks to radical reductions in feed-in tariffs announced by the UK Government before Christmas, we will see next to no new schemes coming forward and by 2017 the sector will be very much diminished from what we see today. Eighty per cent of all hydro jobs will be gone by the decade’s end.

This is bad news for the sector – but also underlines, in my view, a fundamental misunderstanding of the important role hydro energy plays in the GB energy mix.

To expand on the point, we first need to look at how we have arrived here today.

Late last year the UK Department of Energy and Climate Change announced a long-awaited review of the feed-in tariffs for a range of renewable technologies, notably solar, wind and small-scale hydro with a view to reducing tariff levels and the overall impact on consumer bills.

Although the review was conducted at break-neck speed, the hydro industry saw this as a good opportunity to work alongside government and achieve a new settlement which would allow hydro to continue make a decent contribution to our green energy goals.

Limited data

DECC’s original proposal (based on limited data) set out the costs of building and operating a hydro scheme, and on the back of this proposed a tariff of 9.78p per kWh (for a typical 100-500kW project) in order to deliver an expected 9.0 percent rate of return – widely accepted as what is need to draw investment into the sector.

A quick analysis of these numbers, led by the British Hydro Association, showed that: a) the data set was pretty small and b) a lot of project costs, such as insurance, planning and environmental surveys had not been included.

In response to this, and with the express blessing of DECC, the BHA commissioned a new independent study by Pöyry (available here) which pulled in data from 154 schemes across the UK (compared with 53 in the original analysis).

This data set was accepted by DECC, and allowed us to maintain good and open dialogue with officials as we awaited the final review.

It was therefore with some shock we read the results, released (on the favoured day for hiding bad news) the day when Parliament broke for Christmas.

Despite the evidence provided, DECC officials managed to radically decrease the tariffs available to hydro (for example from 9.78 pence to 6.14 penc in the 100-500kW band) and yet claim overall returns would increase to 9.2 percent – clearly impossible unless the information we provided has been misused.

This came as a hammer blow to the industry. DECC had clearly not taken account of the revised evidence, and we have no doubt their proposals will kill off the vast majority of new schemes coming forward to be built from 2017 onwards.We have written to Amber Rudd the Minister for Energy and Climate Change highlighting this and a number of other specific points we would like officials to address.

Policy bias

Just as worrying, I believe the FIT review has betrayed a fundamental misunderstanding by DECC of the role hydro plays in the GB energy system, producing despatchable (on-demand) energy when it is needed most: in the evening, in winter, when capacity margins are low; something no amount of solar energy will address.

On the face of it, solar energy looks cheap. One of the great drivers of UK policy is what is called ‘grid parity’ – or subsidy-free energy.

This however is an over-simplistic view, and is driving a policy bias towards solar. Whilst solar PV is indeed reaching grid parity, it does not make any contribution to the winter peak – cold evenings in mid-winter – where the UK margins are very tight.

During these so-called ‘capacity crunches’ National Grid has to buy in short-term power – including high cost Diesel generation – with additional ‘last resort’ gas power being bought at prices as high as £2500 per MWh (nearly 50 times the usual cost), the costs of which are borne by consumers.

Factor in these costs over the year and solar does not look so clever.

Officials have also failed to note that hydro already produces grid parity power. Hydro schemes last 50 years at least, and many of our historic hydro power stations are today delivering subsidy free-green energy right through the winter – exactly when it is required.

Roll forward another 20 years and all of the hydro schemes we have seen built in the last few years will be subsidy-free, producing cheap green power at a time when we’ll all be paying 1 billion a year to the foreign owners of the Hinkley Point C nuclear plant.

An opportunity lost?

Overall though, there is a real feeling of disappointment that an opportunity has been lost.

Hydro energy has been a part of the GB energy mix for more than a century and is the most popular of any form of energy in the country. It supports thousands of local jobs in remote areas and has an almost wholly UK supply chain.
Hydro produces energy when we need it most, and plant built today can be guaranteed to be subsidy-free for many decades to come.

We believed that our collaborative and transparent approach would be recognised by DECC as evidence of a sector that recognises the challenges that government faces in reducing consumer bills, whilst at the same time providing the levels of support to ensure a healthy future for hydropower – and not resign it to the renewables scrap heap.

Despite this disappointment we would still welcome the opportunity to work with government to achieve an outcome which will support new hydro energy developments.

After all, what other form of power can guarantee subsidy-free, year-round green energy for consumers for many decades to come?

http://www.theguardian.com/business/2015/nov/05/national-grid-spent-more-2-5m-prevent-power-shortages

http://www.theguardian.com/business/2015/nov/04/national-grid-issues-urgent-call-for-extra-power