Shell lands heavy blow on UK¡¯s renewable energy plans

LONDON (Gulf Times)-- Royal Dutch Shell decision on Thursday to pull out of the UK¡¯s flagship wind power project makes government renewable energy targets look increasingly unattainable.

Soaring costs, coupled with what critics say are weak and inefficient government policies promoting renewable energy, are slowing existing wind projects and making future investment in the sector less attractive, said industry experts.

The UK has some catching up to do. It generates only 4% of its electricity from renewable sources, compared with 14% in Germany. Missing this target would also hinder the UK¡¯

s carbon-dioxide emissions-reduction goals, which would be politically embarrassing for a government that regularly names climate change as the greatest threat the world faces.

¡°This is a wake up call for the challenge the UK faces,¡± said Dieter Helm, Professor of Energy Policy at the University of Oxford.

The London Array is the highest profile offshore wind project in the UK Project partners, Shell, E.ON UK, a subsidiary of German utility EON AG and Denmark¡¯s Dong Energy were planning to place 346 large turbines in the River Thames Estuary in southeast England, providing 1,000MW, or enough electricity for 75,000 homes, a quarter of those in Greater London.

Shell spokeswoman Eurwen Thomas said the decision was ¡°part of our ongoing review of project and investment choices,¡± and the company will instead be investing in onshore wind projects in the US.

¡°We regret Shell¡¯s decision and we are now going to sort out the consequences of it with E.ON,¡± said Dong spokesman Andreas Krog.

E.ON reaffirmed its commitment to the scheme, but the chief executive for the UK unit admitted doubts.

¡°Shell has introduced a new element of risk into the project,¡± said Paul Golby, chief executive of E.ON UK ¡°The current economics of the project are marginal at best.¡±

When it recently signed the European Union¡¯s Renewable Energy Directive, the government committed the UK to generating 15% of all energy, not just electricity, from renewable sources by 2020, a sevenfold increase from current levels.

¡°To get anywhere near its 2020 target, the government needs to see somewhere in the region of 30,000 to 40,000MW of wind capacity built,¡± said Peter Atherton, a London-based utilities analyst at Citigroup.

¡°The vast majority of this will need to be offshore,¡± because of the limited number of suitable sites onshore, he said.

If experienced operators like Shell, Dong and E.ON struggle to make the economics of large offshore projects work, reaching the UK¡¯s target looks increasingly difficult.

¡°It will be a challenge to build out the large government renewables target,¡± said Centrica spokesman Andrew Turpin.

Centrica is already starting to build a small 180MW wind farm off the Lincolnshire coast and plans several other projects, but the price tags have risen 50% to GBP3bn in the last three years. Building the largest projects on the drawing board will be challenging, Turpin said.

¡°Rising steel prices, bottlenecks in turbine supply and competition from the rest of the world are all moving against us,¡± said E.ON¡¯s Golby.

The growth of developing economies like China and India has driven up the prices of all kinds of raw materials, while the push for renewable energy in the developed world has driven up prices for wind turbines that are made by a relatively small number of companies.

The current cost of offshore wind is around GBP2bn per gigawatt of capacity, three to four times more than it costs to build a gas-fired power plant, Turpin said.

The UK¡¯s complex subsidies system doesn¡¯t give adequate incentives to produce new wind farms, according to Helm at Oxford.

The government gives energy companies incentives called Renewable Obligation Certificates, or ROCs, for each megawatt hour of clean energy they produce. Those that don¡¯t meet government targets have to pay into a fund distributed to those who do. Helm said the ROCs give bonuses to wind-farm operators, simply because other energy suppliers have failed to build new ones.

¡°The idea that the UK could achieve the EU quota is implausible...the existing Renewables Obligation will not deliver that outcome,¡± Helm said.

The government is amending the Renewables Obligation to give extra support to offshore wind and will consult again with industry this summer on additional support, said government spokeswoman Phillipa Heap.

But critics say a more radical change in policy is needed.

Direct subsidy schemes that pay wind farm operators for each megawatt they produce, like those used in other parts of Europe attract more investment, according to Dean Cooper, head of alternative energy at consultancy Ambrian.

¡°The right framework needs to be in place to attract investment from the majors such as Shell,¡± Cooper said. Without that, ¡°France and Germany are likely to be the European leaders in offshore wind.¡±