UK - Wind power is key to green economy

The Government sees offshore wind as a key component for meeting both the EU imposed target of achieving 15% of energy from renewable sources by 2020 and the domestically set carbon budgets.

Meeting these targets will require a massive increase of renewable electricity, from around 5% of current generation mix to 30% in 2020.Offshore wind is expected to make up a large part of this increase.
An increase of this size is certainly significant and would bring economic opportunities along with it. Estimates of how many jobs might be created vary quite considerably but most studies have forecasted employment in the region of several tens of thousands. Given that only around 700 people are employed in the industry at the moment, this indicates a phenomenal increase in jobs over the next decade.

One of the reasons that the estimates vary so much is that it is not yet clear how many supply chain jobs will be located in the UK. At the moment, the vast majority of the components for the UK’s offshore wind farms are imported with the only manufacturing done in the UK at Skykon’s tower manufacturing plant in Scotland. However, there will be other jobs in the supply chain too, including consultancy, installation, operation and maintenance and legal and financial services.

The industry could generate significant revenues too – the Carbon Trust estimates up to £8bn in annual revenues by 2020. Of course, if the UK is able to build up a manufacturing base, there may well be export opportunities as other countries follow the UK’s lead and expand their offshore wind capacity. The Institute of Public Policy Research (IPPR) carried out a study in early 2009 to learn what the barriers were to realising these potential benefits. The research highlighted three general problem areas: market uncertainty, a lack of incentives and a lack of skills.

Uncertainty about the size of the future market and likely returns on investment is a major factor in investment decisions. Even though the Government has set ambitious targets to reduce carbon emissions and increase renewable energy, this in itself is not sufficient to inspire confidence in private investors.

A major problem has been the economic support mechanism – the Renewables Obligation – which does not provide a guaranteed level of return, unlike the feed-in tariffs that have been used widely on the Continent. In addition, the number of Renewable Obligation Certificates (ROCs) awarded per kilowatt hour was set for many years at the same level for all types of renewable electricity technology, regardless of their level of maturity. This resulted in more mature technologies, such as onshore wind and landfill gas, being favoured over those that were less well developed, like offshore wind.

The Government has responded to this problem by introducing a banding system, where newer technologies are given additional support. Although it was originally proposed that offshore wind should receive 1.5 ROCs KW/h, the Chancellor announced in the Budget that the Government would consider increasing this to 2 ROCs for projects placing new orders in 2009-10 and 1.75 ROCs for the following year.

The second problem area is around whether the incentives to invest in manufacturing of components offered to potential investors by the Government are sufficient to encourage them to set up in the UK. Countries like Denmark, Germany and Spain have employed a range of different measures to encourage local manufacturing of wind turbines, including subsidies and tax benefits, grants and ‘soft’ loans, provision of facilities and infrastructure, and in some cases, the use of local content requirements. It is clear that incentives will be necessary in the UK too if we are to compete successfully.

Although some fiscal incentives are available, they have tended to be spread thinly across a wide range of institutions, which can make it difficult to access large amounts of money. There is also a need to upgrade critical infrastructure, such as test sites and port facilities, to enable the development, assembly and installation of new turbines. IPPR has recommended that the Government should introduce a new ‘offshore wind investment scheme’ which would draw together existing funding streams into one place to make them easier to access as well as helping to upgrade vital infrastructure.

In July, the Government announced that it had earmarked £120m to help develop the offshore wind industry through providing funding for manufacturing facilities, test facilities and demonstration projects. It also committed to supporting the development of port facilities in appropriate locations. Although this perhaps does not overcome some of the difficulties around the number of organisations providing funding, it should help to send a signal that the Government is serious about building up a UK-based industry.

The final problem area is skills. There is a perception, particularly from companies based overseas, that the UK has a small manufacturing and engineering skills base. This deters companies from setting up new manufacturing plants in the UK, as they believe it will be difficult to recruit the necessary staff particularly when other countries, like Germany, are known to have a strong workforce in this area. This is the area where more action from the Government is still required. Although the Strategy recognised the need to identify skills gaps and to take an active approach to providing training, we will have to wait until later in the year, when the Government will publish a Skills Strategy, to see how far they are willing to go to solve this particular difficulty.

Offshore wind offers good opportunities for the UK and in its National Strategy for Climate and Energy, the Government has taken steps in the right direction to ensure that the UK is able to maximise the benefits from the switch to renewable energy. Although this is a good start, there is still a long way to go before jobs will begin to materialise. The Government will need to keep a weather eye on new processes to ensure they keep on track and only time will tell whether the £120m investment announced in July will be sufficient to draw in private investment and boost the domestic green economy.

For more information please contact Trevor Sievert at ts@windfair.net