An ill wind blows away renewables optimism

AS ENERGY minister Ed Miliband made his way to Whitehall Place last Monday, he was one of few Cabinet members who still had a spring in his step. Morale at the Department of Energy and Climate Change was high after the renewable energy measures Miliband lobbied hard to include in the Budget went down a storm with industry.

While colleagues at the Treasury were in damage control mode after a weekend of pessimistic headlines, Miliband's men were in celebratory mood.

Measures which included an extra 525m for offshore wind projects were regarded among the Budget's few highlights.

But Miliband's bubble was burst on Tuesday morning, when an announcement issued from Aarhus on the east coast of Denmark reached his desk. Danish wind energy giant Vestas was about to deal a hefty blow to his vision of building thousands of jobs and new businesses around the "low carbon" economy. Vestas chief executive Ditlev Engel revealed the company was axing 625 jobs in Britain and planned to close its manufacturing plant on the Isle of Wight.

Although the City has become almost blas about such announcements during the recession, the surprise statement knocked policymakers sideways as it meant jobs were being lost in an industry which had been viewed as Britain's next great industrial hope.

Engel said demand was already falling in the UK and unveiled plans to divert investment into the US and China. He echoed earlier concerns from Spanish firm Iberdrola, which is building Europe's biggest wind farm at Whitelee in Scotland, about the UK's bureaucratic planning system.

The announcement sent both policymakers and energy analysts into a spin. Both Westminster and Holyrood have made a heavy political investment in the green energy sector. But with one major company already reducing capacity, questions are now being asked about whether the UK wind industry is doomed, barely after it has begun.

Renewable energy lobby groups tried to dispel the pessimism, pointing out that most of the wind turbine blades manufactured by Vestas on the Isle of Wight were exported to the US and China. They said the decision to potentially close it did not therefore reflect on the health of the UK market. Chris Tomlinson, director of programmes strategy at the British Wind Energy Association, said: "They (Vestas] were making a strategic investment decision. The UK is still a very buoyant market for wind energy. We have got 12.5GW which is already operational, under construction or under planning consent. We have another 8GW in the planning system at the moment."

The BWEA argues that onshore and offshore wind energy will meet the lion's share of the UK Government's target to source 20% of electricity from renewable sources by 2020. With only around 3.5GW currently installed, it says there is still an "enormous" emerging market in wind.

In Scotland, Alex Salmond's Government has set even more ambitious targets. It intends to source 50% of electricity from renewables by 2020 with an interim target of 31% by 2011. Organisations such as the Scottish Council for Development and Industry (SCDI) estimate that wind farms in the Scottish Highlands will fulfil a large proportion of both the SNP's and Westminster's quotas. "We're still very bullish about the prospects for wind power here," said Niall Stuart, spokesman for the SCDI.

But energy analysts are yet to be convinced. They argue that both the UK and Scotland are unlikely to meet their green energy targets because there is little incentive for companies to invest in the UK. Chris Davenport, an analyst with McKinnon & Clarke, says unpredictable planning laws render the UK a risky investment as it can often take more than double the time to secure permission for planning here compared with other countries – if permission is granted at all.

Although the Government has set up various schemes to encourage renewable energy generation, such as the Renewables Obligation Certificate (ROC), Davenport says they pale in comparison with incentives in countries such as Germany. For several decades, the German government has offered "feed-in tariffs", whereby companies that supply renewable energy to the grid receive above market-rates. The extra cost is met by the electricity user but is a "virtually unnoticeable" sum on individual bills.

Davenport says: "If a similar system of feed-in tariffs was introduced then the UK could really advance its renewables generation and do so quite quickly. At the moment it is very difficult in the UK market to make wind energy a viable prospect. The problems come when the operators start to hit the bottlenecks of the planning system. That's the big thing that turns off potential investors. The financial payback can be lengthy any way but the problems with the planning system extend it even more."

Analysts point out that Vestas is not the only company withdrawing from wind and other forms of renewable energy generation. In March, oil giant Shell also pulled the plug on wind, solar and hydro as it deemed them economically unviable.

But industry insiders suggest that the withdrawal of some firms is simply a reflection of the market becoming more competitive. While some companies find they are unable to make a profit out of their particular brand of technology, others are experiencing a boom in orders.

Insiders also point out that the recession has hampered growth as lenders are reluctant to back long-term projects which bear some degree of risk. "Given the credit crunch, some of the onshore developers were struggling to secure project finance," admits Tomlinson of the BWEA.

REPower, the third largest wind turbine supplier in the UK, remains optimistic about the market's prospects. The German firm, whose UK headquarters are in Edinburgh, recently disclosed it has won four contracts worth ?160m. Henning von Barsewisch, managing director for REPower UK, argues there is plenty of growth left in the UK market as both Westminster and Holyrood strive to reach their targets.

"We are confident we have the right turbines and the right technology and that we can do well here," he says. "To meet UK targets there are about 22GW to go. For one GW you need around 200 turbines. On average that means around 2,000 turbines a year."

However, von Barsewisch admits there are major issues that need to be addressed if ministers want to accelerate growth. He says there are not only problems with planning but also with the National Grid. There is serious concern about how electricity generated in remote locations can be transported to households, and the Government has been slow to commit to grid upgrades. In Scotland, renewable energy groups are still awaiting a decision on the Beauly-Denny power line.

Von Barsewisch says these problems must be sorted out as a matter of urgency if the industry can prosper here. "When you think of Beauly-Denny, it's absolutely outrageous how slow and difficult that process is," he says.

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