A report suggested yesterday that two large-scale projects aiming to add enough renewable energy to power a million UK homes by channelling water from the Scottish Highlands may be entangled by government red tape, and it may be until 2024.

Drax Group Plc and SSE Plc need approval for their revenue-sharing model before building hydropower plants that would turn local lakes into giant storage batteries, able to supply the grid when consumption jumps.

The stations could generate as much as two gigawatts of clean power to help satiate demand while the UK electrifies its economy.

According to The Nationalnews, the companies propose spending as much as £2 billion ($2.4 billion) combined and are said to have submitted financing applications to the Department for Business, Energy and Industrial Strategy.

The UK government intends to make a decision by 2024, the report quoted an unnamed spokesman. Given that construction may take six years, the extra capacity wouldn’t be online until at least 2030.
 “We’ve got an energy emergency here, and we need to get cracking on these things,” said Alex Campbell, head of research and policy at the International Hydropower Association, an industry group. “This is a chance to show the UK can think seriously about these long-term, difficult challenges.”

The model at issue is called cap and floor. It guarantees a minimum annual income, even if taxpayers have to contribute, and caps the maximum that can be earned before profits are shared with the government treasury.

The mechanism gives confidence to investors by ensuring they’ll see a return for financing construction.
“It protects consumers and allows us flexibility,” said Ian Kinnaird, Drax’s Scottish assets director. “We need the support to de-risk it for our investors.”

The Selby, Britain-based company wants to double the capacity of its existing station in a dynamite-blasted cavern at Ben Cruachan, a mountain overlooking a 90-metre-deep lake. Drax will spend £500 million and take as long as six years to build Cruachan 2. The current plant opened in 1965.

SSE may spend as much as £1.5 billion on its larger Coire Glas project, 137 kilometres north of Cruachan. It was approved by the Scottish government after the producer took such steps as tagging local golden eagles to study the potential impact on their behaviour.

Scotland has consistently called on the UK to adopt a financing mechanism that would encourage hydropower, a Scottish government spokesman said.

Given the fever in energy markets and the unpredictability of demand, it will be challenging for the government to set income parameters. Once the arrangement is in place, companies earn profits even when plants are offline or only used sporadically.

“It puts all the risk on to the taxpayer,” said Emma Woodward, a project leader at Aurora Energy Research Ltd. “It’s quite an attractive business case to investors.”

Britain’s economy is being pummeled by Russia’s decision to throttle natural gas exports. Inflation hit a 41-year high, and Chancellor of the Exchequer Jeremy Hunt said the nation is already in recession. The government is spending billions of pounds to help Britons cope with soaring energy bills.

That should be sufficient motivation to increase renewable generation and mirror the energy flexibility of hydro powerhouses Norway and Austria. The UK’s power demand is set to soar 50 per cent by 2035, according to McKinsey and Co

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