Extracts from the Nov-Dec 2002 edition of Renew
These extracts only represent about 25% of it

6. OFGEM tries to be Green

...but the CCL and RO face problems

OFGEM, the energy regulator, has been the butt of many criticisms recently (not least from the Environment Audit Committee- see later), given that it is responsible for operating the NETA trading arrangements, which have blocked renewables and CHP. However that may be a little unfair since Ofgem was set up by the government with tightly defined rules as to how it was to operate and with its main aim being set as enhancing competition, in the belief that this would reduce consumer prices. Environmental considerations were added as something of an extra. Thus the main formal statutory objectives is ‘to protect the interests of consumers, wherever appropriate by promoting effective competition’. In pursuing this objective, Ofgem must, amongst other things, ‘have regard to the effect on the environment of the activities of electricity and gas licensees’.

Ofgem have developed Environmental and Social Action Plans to take account of the sustainable development aspects of their work, including fuel poverty and environmental issues. The most recent notes that Ofgem is responsible not just for NETA, but also for issuing ROC’s, the Renewable Obligation Certificates awarded to energy companies for compliance with the Renewable Obligation, and LEC’s, the Levy Exemption Certificates, issued to energy using companies who get exemption from the Climate Change Levy by using power from renewable sources.

In the first year of operation of the Levy, Ofgem gave out LEC’s for around 6.8TWh of electricity- 2TWh of hydro, 0.776TWh of wind and nearly 4TWh of other (mostly landfill gas). This accounts for most of the renewable electricity available at present in the UK- under 3%. But even so, according to a survey by London Electricity, of the 57 companies that responded, only 37% said they had taken action to save energy as a result of the climate change levy. So there are clearly going to be problems if more companies try to get exemption- there just isn’t enough renewable energy capacity in place yet.

The Renewables Obligation is meant to help with that. However, according to a new study by the Renewable Power Association and Platts, the energy information provider, planning delays could inhibit progress. Under the RO, energy supply companies are required to buy in increasing amounts of power from renewable sources, thereby earning Renewable Obligation Certificates (ROC’s). Alternatively they can buy the equivalent ROC’s from suppliers with excess (if there are any). But if there is not sufficient power to go around, the RPA/Platts say, the price of obtaining ROC’s is likely to soar, possibly reaching 6p/kilowatt hour by 2006-07. Given that conventional power only costs around 2p/kWh, and the fine for non-compliance with the RO is only 3p/kWh, companies may decide it will be cheaper just to pay it and carry on using conventional power, possibly passing on the fine to consumers. So we would have the worst of all world- no green power, but higher costs. Even under the most optimistic scenario,the RPA/Platt review suggests, "where all green projects with planning permission are built and start on time the value of certificates is estimated to be still worth around £40 MWh by 2006-07." i.e. 4p/kWh and still more than the 3p/kWh fine.

For its part, Ofgem says it is trying to deal with the problems created for renewables by NETA, and has been supporting work on ways to help distributed generation prosper: see ‘Only Connect’ below. Even so, given the competitive market ethos it operates in, the room for manoeuvre is limited. Interestingly, in its response to the Trade and Industry Select Committee, whose very critical report on Energy Security we reviewed in Renew 138, the government pretty much ‘straight bats’ the criticisms, or deflects them into the upcoming White Paper on Energy. Markets can ensure security of supply and there is no need for intervention, it says, other than some tinkering with NETA, and the continued operation of the RO, CCL system.

See ‘Third Special Report Security of Energy Supply: Government Reply to the Second Report of Session 2001-02 from the Trade and Industry Committee’ 7 March 2002 Report HC 884 Downloadable from:

http://www.parliament.the-stationery-office.co.uk/pa/cm/cmtrdind.htm OFGEM’s report is at:www.ofgem.gov.uk/docs2002/42eap.pdf

Only Connect...

OFGEM has come up with some proposals designed to make it easier for new generators to compete within NETA- based on new, fairer ways of charging smaller projects seeking to be connected to the 14 local electricity distribution networks throughout the country. Distributed generators, typically combined heat and power generators or renewable generators such as wind, solar or hydro power, and some have clearly found it difficult and expensive to connect and operate on the distribution networks which were not originally built to accommodate them.

Under the current arrangements, a new generator that connects to a new part of the network is charged in full for the work needed to connect them. Generators who subsequently connect to the same part of the network may only pay a fraction of the charge, as the first generator has already met the bulk of the initial cost of the engineering work. Under Ofgem’s proposals, the generator that initially pays for the connection will receive some of that money back each time a new generator connects to that part of the distribution network.

Ofgem’s Managing Director of Customers and Supply, John Neilson said: ‘The current connection policy can deter distributed generators from connecting to the distribution network. These proposed changes should enable more renewable generators to connect to the system and make it easier for new entrants in the market to compete. Subsequent connections will no longer be able to ‘free ride’ on the investment of the initial scheme.’

Certainly, judging by Neilsons presentation at this years PRASEG conference, Ofgem do seem to be trying to help distributed generation get going, even if the basic competitive aims of NETA are, it seems, still set in stone.

See www.distibuted-generation.com

"Electricity (Connections Charges): A consultation document" (41/02) is on the Ofgem website: www.ofgem.gov.uk/docs2002/41elec_reg.pdf

Tel: 0116 277 2617 or by email: distribution@ofgem.gov.uk