Great hopes for the Renewables Obligation

The Renewables Obligation is now in force, requiring electricity supply companies to work towards obtaining 3% of their power from renewable sources by 2003 and 10% by Jan 2011.

Earlier this year, Energy Minister Brian Wilson has predicted that 2002 would be "the year of renewables" in which the potential contribution of power generated from clean sources will finally be recognised in the UK. Clearly he has great hope for the Obligation. But he warned that it was pointless to set over-ambitious targets. "I certainly want to see us aiming higher than ten per cent in the years beyond 2010. However, the reality is that we are starting from a low base it will take a lot of commitment, not least by government itself, to reach the 10%".

In particular, the Government would try to ensure that renewables projects are treated fairly by the planning system. ‘This may involve a challenge to the integrity and consistency of some environmentalists. They cannot, on the one hand, say that the future lies with renewables but, on the other, that they will object to just about every specific project that comes forward’. He added "there also has to be a sensible balance between encouraging renewables and recognising that, in the short term at least, this is going to increase the cost of electricity. That is a factor which cannot be ignored if public support is to be maintained."

He stressed that investment in infrastructure will be necessary if the full potential of renewables is to be realised. ‘We have inherited a distribution system which was built for a coal and steel economy. That has to be updated so as to strengthen the National Grid in those parts of the country which have the greatest potential in, for instance, wind and wave power. The current feasibility study, commissioned by the DTI, into a sub-sea cable along the western seaboard of the UK is a major step in that direction’.

Finally, Wilson stressed that renewables can become the basis of a substantial manufacturing sector. ‘It should never be forgotten that we had world leadership in wind power 20 years ago but did next to nothing with it. The Danes took a different view and now have a £4 billion per year manufacturing industry. I am determined that the same thing should not happen with wave power, biomass and other technologies in which we are well placed to lead the world.’

The RO is expected to increase electricity consumers bills by around 5% by 2010, raising up to £780 m p.a.

See: www.dti.gov.uk/renewable/ro_order2002.htm

RO: no banding

The Renewables Obligation applies to all eligible renewables, without the special ‘technology bands’ that existed in the Non Fossil Fuel Obligation,allowing for extra funding for selected newly emerging technologies. As Brian Wilson has made clear at the launch of the RO, competition is seen as a vital part of the RO. 'We are pursuing a market led approach to encourages competition amongst the different technologies. This will keep costs down, making it a good deal for industry aswell as the environment.' But that could well result in the same problem that emerged with the NFFO - good price convergence, but not much installed generating capacity. The Government’s views on ‘banding’ were set out in their Preliminary Consultation on the RO as follows:

‘Some technologies such as large scale hydro are already commercially viable, while others remain at a much earlier stage in their development, and require varying degrees of assistance to advance further to a stage where they could be commercially deployed on a large scale. A ‘banded’ Obligation would address these differences by setting different buy out prices for different technologies, with those in need of the greatest incentive having the highest buy out price. Banding would impose an obligation on suppliers to supply a specified amount of electricity from specified renewable sources.

The Government... is proposing to reject this approach. It takes the view that it would involve Government in choosing which specific technologies should be used to meet the Obligation. This runs counter to the market led approach that has been designed to ensure that suppliers will meet their Obligation by the most economic means. The Government does not want to segment or unduly distort the marketplace, or to send out the message that some renewables are more important to the UK’s targets than others. Instead, it believes that competitive forces should be the drivers that shape the industry that emerges as a result of the introduction of the Obligation. It believes that, to help bridge the gap between initial demonstration and commercial viability, early offshore wind and energy crops projects should instead be supported through capital grants. In addition, a banded Obligation would amount to an unacceptably long term and inflexible commitment by Government to particular technologies. To implement such a policy would require Government making firm and irrevocable decisions as to which technologies should be used to meet the Obligation. This would fail to take future technological and market developments into account, and perhaps lead to resources being directed to areas of least need. The Government's preferred approach is sufficiently flexible to accommodate both changing circumstances and future developments, which are inevitable over the period of the Obligation.’

Isn’t the purpose of government these days to intervene when markets aren’t working well? No, it seems, now that’s up to the companies. For example, Brian Wilson has set up a new ‘Consolidation working group’, co-ordinated by OFGEM, to consider how smaller generators can co-operate together better in order to compete in NETA