Policy News

Thursday 05 November 2009

On October 15, the government closed a three month consultation on Feed-in Tariffs (FiTs) - a proposed new renewable energy subsidy. Set to be introduced in April 2010, FiTs will run alongside the current renewable energy financial incentives scheme, the Renewables Obligation - involving the supply of Renewable Obligation Certificates (ROCs).

This article by Rachael Meredith aims to shed some light on the two schemes and look at the benefits and drawbacks of each.

Renewables Obligation and ROCs

What are they?

The Renewables Obligation (RO) obligates suppliers to source an increasing amount of energy from renewable sources and suppliers can comply with their obligations by presenting Renewable Obligation Certificates (ROCs), making a buy-out payment, or through a combination of both.

In order to meet their RO, suppliers buy ROCs off renewable energy generators. If a supplier does not buy enough ROCs and so does not meet its obligation, it has to pay a buy-out fee.

This diagram illustrates the movement of ROCs and renewable electricity in the market

This buy-out payment is made at a particular price per ROC. The buy-out price was £35.76 for the 2008-09 obligation period and £37.19 for 2009-10.

In relation to the average market value of ROCs, which stood at £45.52 in October 2009 according to online ROC auction site e-ROC, the buy-out payment is the cheaper option. However, the money paid into the buy-out fund is collected by Ofgem each year and then re-distributed to the suppliers who did meet their RO, which incentivises suppliers to buy the certificates rather than simply pay the buy-out fee.

Essentially, the RO is a market mechanism.

Renewable Obligation Certificates (ROCs) are tradable certificates issued by energy regulator Ofgem to an accredited generator for eligible renewable electricity generated within the United Kingdom and supplied to customers within the United Kingdom by a licensed electricity supplier.

Generators are awarded ROCs for all units of renewable energy they produce using an eligible renewable energy technology. This includes energy used on-site as well as that sold back to the grid.

Generators can make money by selling their renewable energy to suppliers and also selling the certificates - as suppliers have to prove they have sourced enough renewable energy to meet the RO by presenting a certain amount of ROCs to Ofgem at the end of the year.

Since April 1 2009 there have been some changes to the ROC scheme, including:

• The obligation changed from a percentage to an obligation to present a number of ROCs per 100MWh supplied. In 2009-10 this will be 0.097 ROCs per MWh in England & Wales;
• The Renewables Obligation is now stated as the number of ROCs to be presented per MWh of a supplier's sales (rather than as a percentage of their sales as was previously the case);
• Suppliers will be able to present ROCs to the Authority to comply with their obligations up to and including 1 September (previously they had to do this before 1 September). If they are making a buyout payment to meet part or all of their obligation, they must still do this before 1 September.

Energy suppliers are increasingly generating their own renewable energy and in turn receiving ROCs directly. This way, suppliers can trade in ROCs by producing more renewable energy than is required by the RO and then selling on the excess ROCs to suppliers who have not met the obligation.

Some agents trade in ROCs and derive an income from this.

Agents can register as the operator or administrator of a generator and claim the renewable obligation certificates on their behalf, before going on to sell the certificates at a higher premium to energy suppliers who have not fulfilled their RO.

History

Renewable Obligation Certificates were introduced in April 2002. The RO is being extended beyond its current end date of 2027 to 2037 for new projects, to give project developers confidence to invest in projects right up to 2020 in the hope of reaching the UK's renewables targets.

RO banding came into force in April 2009, meaning that different technologies now get a different number of ROCs per MWh generated. Under the new banded system, onshore wind is seen as a reference technology that will continue to receive one ROC per MWh. Less established technologies including marine energy, advanced gasification and dedicated biomass with CHP will now qualify for two ROCs per MWh, while offshore wind will now be eligible for 1.5. See table of ROC banding below.

There is set to be a review of banding by 2013.

Projects that started to generate before 26 June 2008 will receive RO support until 2027. Projects beginning generation after this date will receive support from the RO for 20 years from first generation (but only up to 2037 at most - regardless of whether this is 20 years or not).

UK Renewable Energy Strategy and the RO

The Renewable Energy Strategy, published in July 2009, outlines the ‘headroom' approach to the RO, which was introduced by the government in April this year.

While the government sets annual obligation levels, rising to 15.4 ROCs/100 MWh of electricity by 2015, it believes this level should be a minimum obligation, as opposed to a fixed level, in order to encourage greater deployment of renewables.

The Strategy states: "Under headroom, the obligation will be set before the beginning of each year at a set percentage (currently 8%) above the expected number of ROCs to be issued that year."

The government is currently consulting over whether to increase headroom from 8% to 10% by 2014-2015. It is also considering a ROC floor price "as an alternative way to address a crash in the ROC price if the headroom level we set is exceeded".

Advantages

The British Wind Energy Association (BWEA) notes that one of the main advantages of the RO system is that it requires little government intervention, unlike the proposed Feed-in Tariffs, as ROC prices are dictated by the market.

It also argues that the RO has not impacted consumers in a substantial way and that it has encouraged the installation of around 15GW of onshore capacity since they were introduced in 2002.

The association believes stability is important in energy policy to avoid confusion and therefore the obligation should be maintained.

Disadvantages

Some disadvantages of the obligation include the fact that because it is a market-based mechanism, prices for ROCs vary and have no guaranteed price. This means that there is less certainty for generators.
This can provide little incentive to those considering financing a renewable energy project.

One of the most notable problems with the scheme is that it is very confusing. The complex nature of the RO could, and does, put off potential generators.

This point was outlined in the Renewable Energy Association's (REA) response to the Renewable Electricity Financial Incentives consultation: "We strongly feel that the continuous change to, and mounting complexity of the RO, is undermining investor confidence in the scheme.

"In order to deliver the 2020 renewable target the industry needs to have confidence in the continuation of the mechanism in a form that is clear and that it understands."

Feed-in Tariffs

What are they?

The Feed-in Tariff (FiT) is the latest financial incentive scheme from the Department of Energy and Climate Change (DECC) aimed at encouraging the development of renewable energy.

It is a renewable energy subsidy offering a fixed payment per kilowatt hour of renewable energy generated, varying across technologies. It also has a proposed guaranteed minimum payment of 5p per kWh of energy exported to the grid.

Under FiTs, electricity suppliers will be obligated by law to buy energy from renewable generators at above-average prices, with this extra cost then spread over each consumer's energy bill.

There is a proposed cap of 5MW for projects eligible for the subsidy, meaning that the scheme will only benefit micro through to medium scale generation.

The Department of Energy and Climate Change (DECC) has proposed to set FiTs at a level which will offer projects a 5-8% return on investment.

Feed-in Tariffs are set to be offered for a 20 year period, with the exception of solar PV projects for which the period will be 25 years.

Technologies due to be included in the scheme include:

• Wind
• Solar PV
• Hydro
• Anaerobic digestion
• Biomass Combined Heat and Power (CHP)
• Non-renewable microCHP

Support levels will be reviewed periodically, with decreases in line with expected technology cost reductions. This is known as the degression rate and it is intended to account for lower costs as production volumes increase. However, projects will continue to receive the tariff level offered at their initial registration, meaning a continued level of support throughout the 20/25 year lifetime of the FiTs.

Who qualifies?

Under the consultation proposals, renewable projects up to 5MW installed after the scheme is introduced in April 2010 will be eligible for the full subsidy.

Those generating between 50kW and 5MW will have a one off choice of FiTs or RO, with installations with a capacity of less than 50kW qualifying for FiTs from introduction.

Also eligible, and with the same options, would be projects installed in the interim period between the announcement of FiTs (July 15 2009) and the start of the scheme (April 2010), although these would be subject to some conditions on the support period.

Operators who installed a generator accredited under the Renewables Obligation (RO) before July 15 2009 with a capacity of less than 50kW will automatically transfer to FiTs.

However, it is proposed that these projects will only be eligible for generation payments of 9p/kWh, regardless of technology.

This is in contrast to projects installed in the first year of FiTs (2010 - 2011), where tariff's will be technology dependent and proposed rates are up to four times higher than those offered to early investors - peaking at 36.5p/kWh for retrofit solar PV installations with a total capacity of less than 4kW. Only new biomass projects of less than 50kW capacity will receive a rate as low as 9p/kWh.

Generators with a capacity between 50kW and the FiT maximum of 5MW installed prior to the announcement of the scheme will have to remain in the RO, as do those with a capacity above 5MW.

Government help

As it stands, DECC's consultation document states that central government will not be providing up-front capital schemes to finance FiTs installations in the majority of cases, but it goes on to say that local authorities may offer such schemes at a local level.

This has led to renewable energy experts fearing the scheme will only benefit those who can afford to commit the up-front capital required to install generators, meaning the intentions of some potential generators to help boost renewable energy generation could be quashed due to monetary issues.

Advantages

One advantage of Feed-in Tarfiffs is that operators will be guaranteed a long-term tariff rate, with the subsidy remaining at the same level offered at registration throughout the 20/25 year lifespan.

Also, this financial incentive scheme is relatively simple as the government aims to make sure all generators fully understand the model so as to encourage take-up and prevent potential energy providers from being put off by complexities - an issue which has plagued ROCs.

It is also arguable that FiTs could encourage more people and communities to produce their own renewable energy as they stand to make money from it.

In a BWEA ‘Real Power' article, Labour MP for Nottingham South, Alan Simpson, claimed FiTs could also make people care more about conserving energy, pointing out that if they know they can be making money by preserving energy and selling it back to the grid they would be less likely to leave lights on. He also believes that people would respond more to seeing how renewable energy is benefiting them directly by having a wind turbine supply their community, for example.

Disadvantages

Some of the responses sent in to DECC's Feed-in Tariff consultation outline areas where some respondents consider the scheme falls down.

Many companies and individuals who had already invested in renewable energy generators prior to the announcement of the FiTs are incensed that they are set to either lose out on the subsidy entirely or only be offered significantly reduced rates.

The gripes of these ‘pioneers' are backed by some large energy bodies, including Scottish and Southern Energy and Regen SW, who believe that early investors should not be penalised by the scheme.

Other issues with FiTs surround the proposed tariffs levels. The REA has expressed the opinion that the rate of return should be equal across all technologies, while others, including Alan Simpson MP, are calling for the 5MW capacity limit to be lifted to allow larger scale generators to benefit from the subsidy.

As previously mentioned, the government is not planning on providing any up-front capital schemes to assist investment in renewable energy generators, which could potentially disable plans for installing generators for those who cannot raise the initial capital and lead to only more financially secure people being able to benefit from the scheme.

Conclusion

The British Wind Energy Association argues that ROCs have worked by increasing renewable generation and so why change a model that works?

However, the association also said that: "the FiT will have a very valuable and welcome role to play in stimulating small systems deplyment.We think of both mechanisms as tools designed to do different jobs: the RO is good for large installations and FiT for small systems. The two support mechanisms can complement each other."

Feed-in Tariffs have proven to be very successful in Europe, particularly Germany, in boosting renewable energy generation and so the UK could learn from their mistakes to produce an efficient and successful model.

In order for the RO to continue, the Renewable Energy Association (REA) argues that the scheme needs to be simplified in order to boost investor confidence.