7. More RO squabbles

The consultation on the future of the Renewables Obligation (RO) led to some interesting interventions from different perspectives. For example OFGEM came out against the RO (see below), as did wave energy company OPD (see below) while the British Wind Energy Association and the Renewable Energy Association were both relatively happy with it, and disliked some of the DTI’s proposed changes, especially in relation to the ‘buy out’ price.

Funds available for projects operating to meet the RO are dictated by the buy-out price which suppliers must pay if they do not meet the RO requirements: basically it sets the price at which companies will be prepared to buy in renewables- if the additional cost is more than the buy out cost then its cheaper just to pay that. So far the government has increased the buy-out price in line with inflation. However last year, it indicated that it intended to freeze the price in 2015, allowing it to decline in real terms, while still expecting the level of the RO to increase- up to 20% by 2020. However, the BWEA and REA say that by freezing the buy-out price, government wishes to get this rise to 20% for the same cost as 15%. Moreover the government intend to introduce ‘technology bands’ which the BWEA/REA say will mean that, in order to reach the 20% target, capacity will have to be included that is more expensive than would be brought forward by an unreformed system. ‘Government is attempting to get a third more renewable power with a mix that includes significant quantities of technologies that are not economic under the current system, for the same amount of money. This is unrealistic.’ Worse still the proposed ‘net neutral banding’ arrangement would mean cheaper projects would be squeezed in order to pay for more expensive projects, with some projects only getting fractional ROC’s (Renewable Obligation Certificates) while others would get multiple ROC’s for each MWh.

The BWEA say that there was no real need to modify the RO- the main problem is planning delays. They note that there are currently 7,700 MW of onshore wind projects being considered for planning consent, some of which have been in the system for four years. 1,660 MW of onshore wind was operational (now 2GW), 640MW is under construction and 1,500MW has received consent.

By contrast, REF, the Renewable Energy Foundation thinks the RO is a big problem- in that it says it provides support mainly for on-land wind, rather than other renewable options which REF would prefer- including offshore wind & biomass. REF warn that the UK’s renewables targets will not be met ‘unless other forms of power are given greater attention and investment’. See our Groups and Reviews sections of Renew 167 for more on REF’s views

RO so far: Wind is actually still in the minority in terms of projects getting RO support. During 2004-05, landfill gas generation attracted 34% of total ROCs issued, with co-firing receiving 20%, hydro (<20 MW) 18%, onshore wind 16%, biomass 8%, offshore wind 3%, sewage gas 2% and others (including micro hydro, wave and solar) received 0.5% of total ROCs issued. In 2002-03, landfill gas accounted for 48%, onshore wind for 20%, biomass 11%, small hydro 9%, offshore wind 0%. But the BWEA note that 300 MW of offshore wind capacity was generating, with 100MW under construction. In Dec. 1.3MW more got approval- for the Thames.

OPD on the RO

Ocean Power Delivery, the UK wave energy company that developed the Pelamis generator, shipped its device to Portugal last year, saying that it was hard to operate in this country. Although the Scottish executive has now come to the rescue- see earlier- that’s no thanks to the RO. OPD’s Max Carcas, said: ‘The scheme has succeeded in bringing forward renewable generation, but it has plucked the lowest hanging fruit on the tree. The scheme at the moment is one size fits all. It does not look to the UK’s strengths. Otherwise, we might have had our first project taking place in the UK, not overseas.’
Independent 28th Jan.

OFGEM opposes RO

In a surprising last-minute intervention, just before the White paper was expected, Ofgem, the energy regulator, claimed that the Renewables Obligation was a very expensive way of delivering carbon savings, and pressed the government to extend its consideration of possible reforms for the RO beyond its current proposal that the support for green generation should be banded to give better returns to specified technologies. Ofgems Chief Executive Alistair Buchanan said: ‘We do not think banding fundamentally addresses many of the issues that have been raised’.

Instead Ofgem suggested that a system based on ‘auctions of long-term contracts that offer renewable generators a fixed return and link the level of support to the wholesale electricity price’. This it says will cut the cost to consumers and make the system more cost effective. Ofgem says that ‘the cost per tonne of carbon saved under the RO is, at £184-481, higher than the costs of  other policy measures such as the EU Emissions Trading Scheme at £12-70 a tonne, the Climate Change Levy at £18-40 a tonne and the Energy Efficiency Commitment which ranges from bringing a benefit to a cost of £60 a tonne’.

Ofgem suggest two reasons for the RO’s extra cost. Firstly it claims that ‘the way RO operates means that customers end up paying even if renewable generation doesn’t get built, for example, if projects are delayed by planning problems- which is frequently the case’. This sounds a little odd- surely supply companies don’t make contracts with generators until the latter can supply power. But Ofgem nevertheless insisted that planning bottlenecks ‘increases the price per tonne of carbon saved under the RO. This is because the RO is set as a percentage of total supply and suppliers who do not meet their RO with electricity from renewable generators pay a buyout price for the shortfall. So where planning delays block renewable plant development the shortfall increases and so does the price for each tonne of carbon saved.’

Ofgem also say that the RO ‘fails to link the level of support to the price of electricity or the price of carbon emission allowances under the European Union Emissions Trading Scheme’ which it says means that ‘existing and future renewable generators will benefit, at customers’ expense, from much higher electricity prices. This is leading to much higher returns for current renewable generators than investors expected or required.’

It is certainly true the RO costs more than it should. Ofgem conclude that by contrast in their proposed system ‘Under long-term contracts the customer pays only for electricity generated by renewable plant so they get more real carbon savings for their money compared to the RO.  The contracts would link the level of support to the wholesale price of electricity.  So if the price of electricity rises- for example because of rising fossil fuel prices or carbon prices under future phases of the European Union Emissions Trading Scheme, the level of support would fall.  This sort of contracts scheme would provide greater certainty on returns for investors and can include penalties for failure to deliver contracted green output.’

Wouldn’t REFIT be better?

Ofgem’s approach seems very similar to the ‘competitive tendering’ arrangements and capacity auctions under the old Non Fossil Fuel Obligation, and arguably would face the same problems as the NFFO- and the RO. Basically they are all attempts to impose tight competitive pressures on developments. Surely it would be much better to switch over to the Renewable Feed-in Tariff (REFIT) system used so successfully by most other EU countries? That has prices defined in advance and ‘degressed’ (i.e. reduced in stages) to take account of improvements over time- so you don’t get the excess payment to mature projects as with the RO. And it creates a stable climate for investment- so that the prices have fallen below those needed to support projects under the RO. That is because UK developers need higher returns to cope with the less certain investment climate created by the RO- with there being no certainly about future ROC prices. And finally REFIT leads to much more capacity being installed- as has happened in Germany- e.g. 20GW of wind so far, compared to only 2GW in the (much windier) UK.

One thing you could say about the OFGEM proposal is that it would be a way to make a transition from the RO with all its problems, to EU-ETS support, which is what the UK government and the European Commission want in the end. But it seems likely that, for the moment, the White paper will stick with the DTI’s proposals for a modified RO technology bands. We’ll have to wait to see.