Laying down the law for hydro power14 December 2000
What does the future hold for hydro power? Using examples from the UK and the European Union, Mark Raymont and Peter Cassidy assess the effects of energy policy on the development of hydroelectric schemes
GLOBAL warming is high on the international agenda. In turn this has led, not only to growth in the renewable energy industry, but also to a marked increase in legislation both in the UK and internationally.
Hydroelectric schemes were originally considered to go a long way to solving the problem of exhausted fossil fuel supplies and greenhouse gases. But the future development of this source of energy is not without its problems. The debate over recent years has focused on whether the negative effects of hydro power outweigh its benefits.
Legislation covering hydro power falls into two areas: energy and the environment. Before looking at some of the issues faced by the hydro power market with respect to legislation, we shall set the scene by looking at the Kyoto Protocol.
In 1997, at the United Nations Framework Convention on Cli-mate Change in Kyoto, Japan, an agreement known as the Kyoto Protocol came into effect. The purpose of the agreement is to reduce the level of greenhouse gases produced by industrialised countries. The European Union (EU) has undertaken to reduce greenhouse gas emissions by 8%, in relation to 1990 levels, by 2008-2012.
The Protocol differs from other international policy, as it is not backed by international legislation and countries do not have to sign it; the US being a notable non-signatory at the time of writing. The Protocol is also unique by way of the fact it does not favour a particular method of emission reduction — leaving it up to individual countries to decide how best to reach their individual targets.
One way to achieve target is by purchasing emission credits. Each country exceeding its emission reduction target will receive a corresponding number of credits. These can then be sold to a country which has failed to achieve its own target. In theory, this practise is favourable to hydro power, as it has traditionally been seen as a ‘green’ source of energy. But is this actually the case?
A recent report from the World Commission on Dams (WCD) introduced the possibility that large scale hydro schemes can actually add to the greenhouse effect. For example, it is suggested that the high quantities of rotting vegetation induced by large scale damming projects produce significant amounts of methane, a gas which is 20 times more damaging to the environment than carbon dioxide (CO2).
To put this into some kind of perspective, in cooler climates the level of greenhouse gas produced by a large scale hydroelectric scheme could be 10% of the amount produced by an equivalent sized thermal power station. However, the results could be rather more alarming in hotter countries. The WCD report suggested that in Brazil dams can produce levels of greenhouse gases on a par with more traditional power stations. The findings of the WCD report obviously need further investigation. But if they are proved to be conclusive they could have a serious impact on the long term global development of hydro power under the Kyoto Protocol, as such schemes could no longer be seen as a viable means of reducing global warming in industrialised countries. Moreover, hydro power schemes require massive levels of funding and if their contribution to the greenhouse effect is proven, developing countries may find themselves unable to raise funding, particularly from the West.
One country which would be greatly affected by this is Turkey. With its numerous hydroelectric schemes, either planned or under development, Turkey is not only a formal candidate to join the EU but is also considering signing the Kyoto Protocol.
A further twist comes from the US. It is proposing a system which would credit countries for their land management practices, as it estimates the US’ own forest and agricultural land is removing in the region of 310 metric tons of carbon equivalent from the atmosphere each year. Although there is scientific uncertainty as to whether trees and soil can offset industrial emissions, if such a system is credited (either partially or fully) under the protocol, this again could have a serious impact on the development of large hydro schemes. It would be yet another reason to oppose the widespread flooding of rural and agricultural land.
UK Climate Change Levy
In the UK, the Finance Act 2000 recently provided the legislation to enact the Climate Change Levy, a downstream tax concerning the sale of electricity. The Levy will be imposed on all business users from 1 April 2001 and all suppliers of energy products will be liable to pay the tax (although it is likely this will ultimately be passed onto the end user).
The purpose of the Levy is to comply with the Kyoto Protocol, whereby the UK is committed to reducing CO2 emissions by 12.5% on 1990 levels by 2008-2012 (the UK has also set itself a further domestic goal of reducing CO2 emissions by 20% of 1990 levels by 2010). To date, business users account for approximately 40% of the UK CO2 emission levels. The Levy does provide for certain exemptions, one being energy produced from renewables. Energy produced from hydroelectric schemes, however, is not exempt. Hence there is no incentive for this type of electricity to be either produced by the supplier or selected by the consumer under the Levy.
This decision was taken in an attempt to stimulate the generation of electricity from less developed sources of renewable energy, such as solar or wind. But does this mean that the UK does not see hydro power as having a role to play in the UK climate control programme and, therefore, does not wish to promote either the development or use of this type of energy? This question is particularly pertinent when the Royal Commission on Environmental Pollution published a major report in June 2000, recommending the Levy should be replaced by a tax on fuels that give rise to carbon dioxide emissions, thereby encouraging a shift to low carbon or non carbon energy sources.
In July 2000, the UK Utilities Bill received Royal Assent. Under this Act, the Secretary of State has the power to impose obligations on licensed electricity suppliers to ensure that a proportion of the total supply of electricity is generated from renewable sources (the Renewables Obligation).
The Act makes a number of amendments to the Electricity Act 1989 which relate to the powers of the Secretary of State and the Gas and Electricity Markets Authority in respect of the Renewables Obligation. For example, orders may be made that suppliers ensure a certain proportion of the electricity they provide to consumers is generated using specified renewable sources for a fixed period of time. The Act also makes provision for tradable certificates, known as ‘green certificates’, which will count towards a supplier’s Renewables Obligation. Section 62 of the Act amends section 32 of the 1989 Electricity Act by inserting new provisions relating to the Renewables Obligation. This includes a provision that renewable sources shall include ‘sources of energy other than fossil fuel or nuclear fuel, but includes waste of which not more than a specified proportion is waste which is, or is derived from, fossil fuel’.
Such a definition is certainly wide enough to include hydro power. However, as noted above, provision is also made (see in particular section 63 of the Act) for orders to be made that only electricity generated using specified descriptions of renewable sources will count towards discharging the Renewables Obli-gation. At the time of writing, no orders have been made regarding these provisions.
It is difficult to predict the government’s likely approach in relation to the question of whether hydro power will count as a source of energy which can be used for the purpose of fulfilling a supplier’s Renew-ables Obligation. Some guidance as to the Secretary of State’s likely attitude is given in conclusions published by the Depart-ment of Trade and Industry (DTI) following public consultation on the Renewables Obligation. These suggested that UK hydro power schemes with installed capacity exceeding 10MW ‘may’ be excluded as an eligible renewable source. Further clues may also be found in The Water Programme section of the Annual Plan for 1999/2000, issued as part of the DTI’s New and Renewable Energy Programme.
In the mid-1990s, the Water Programme included amongst its aims ‘encouraging the uptake of hydro power’. By December 1998, some 40 different hydro power schemes generated 31MW of electricity (with a further 5MW expected to be onstream by the end of 2000). Since 1995, however, the Water Programme has increasingly focused on encouraging an internationally competitive hydro power industry to develop. At the time the 1999/2000 programme was issued, its priorities were to support export initiatives led by the small (under 10MW) hydro power industry in the UK and to encourage the initiation of projects that address the environmental issues faced by hydro power.
If the treatment of hydro power in relation to the UK Climate Change Levy and in the two DTI documents identified above, is reflected in the approach adopted by the Secretary of State in relation to the Renewables Obligation, it may well be the case that hydro power will not be included as a renewable source for the purposes of the Renewables Obligation. This would, once again, pose questions as to the long term future of hydro power (in particular, large scale projects) in the UK.
The EU acknowledges the role renewables have to play in the achievement of its Kyoto targets and a directive is currently under consideration regarding the promotion of electricity from these sources of energy. One of the directive’s aims is to increase consumption of electricity from renewables within the EU to 22.1% by 2010. Further discussion of the proposed directive is planned for December 2000 and full terms are likely to be announced in 2001.
It is proposed that large hydro schemes (above 10MW) will be eligible for contribution towards the achievement of national targets. They will not, however, receive any additional financial support under the directive as they are deemed to be an established means of generation that are competitive in their own right. It will be interesting to see how future development will be affected if the EU, which has often provided funding in the past, does not provide any further subsidies.
proposed eu directive
The proposed directive also raises an obvious issue, whereby it appears to contradict the UK’s Climate Control Levy by the fact it allows large scale hydro schemes to contribute to national renewable targets. It is also interesting to note that the guarantee of origin certificates proposed by the directive must state whether the hydro scheme is in excess of 10MW capacity, as a further objective is to increase total EU power consumption without large hydro schemes to 12.5% by 2010. It would not be surprising if large hydro schemes are excluded from any future EU green certificate trading arrangements that come into effect under this directive.
So far, the energy policies discussed have been geared towards meeting environmental objectives. In recent years energy legislation has also dealt with commercial issues, such as liberalisation of the EU power market in 1996. The aim of this policy is to open up electricity markets and increase competitiveness by giving all consumers the right to choose which supplier they use. This has led, and will continue to lead to, falling electricity prices (eg by one-third in Germany). This leads to reduced profit margins for suppliers, which in turn will make investment in hydro schemes less attractive.
In a fully liberalised market, it will also be possible for a supplier in one country to sell its hydro electricity to consumers in another country. Over 90% of The Nether-lands’ electricity supply is currently produced by fossil fuels — the country also aims to reduce greenhouse gas emissions by 50M tonnes by 2010. In a liberalised market, should Dutch consumers wish, they can purchase their power from a more sustainable source of energy, outside their own national boundaries. This, therefore, widens the potential market for hydro power. Although, as the open power market supports trade as opposed to a particular source of energy, hydro schemes will only be successful under this legislation if they are competitive. The EU is set to propose by the end of 2000 that all EU power markets are required to be fully open by 2006.
Environmental issues are not only influencing the choice of electricity generation, but are also having a more significant impact on energy legislation than purely commercial issues. Hydro power does have a role to play in the modern power model but in order to fully maximise its potential, organisations involved in the generation and promotion of schemes must consider the wider environmental impact of their activities. Additionally, they must confirm and affirm the role they have to play in the promotion and adoption of renewables, and actively seek to aid the development of international legislation.