Reform of the Renewables Obligation

Professor Robert Lee | 12 years ago

The industry subsidy system for renewable energy was revised with effect from 1 April 2009 with the commencement of the Renewables Obligation Order 2009 (SI 2009/785), which revoked and now replaces the Renewables Obligation Order 2006 (SI 2006/1004).

The Renewables Obligation was introduced in 2002 to encourage the electricity-generation capacity using renewable energy sources. The obligation requires licenced electricity suppliers to ensure specified amounts of the electricity they supply are from renewable sources. For 2007/08, this level was 7.9 per cent, and this rises to 15.4 per cent in 2015/16. Because most forms of renewable energy struggle to compete with non-renewable sources, the Obligation is underpinned by substantial financial and non-financial support and assistance. This seeks to encourage industry to develop renewables, thereby increasing their ability to compete with other sources of energy.

The Obligation attempts to engender new, renewable generating capacity, in order to deliver on the Government’s target of 20 per cent of electricity generation from renewables by 2020. It is hoped that this will drive reductions in carbon-dioxide emissions. The new, ambitious target is a major reason for the revision of the regulations.

The 2009 Order, which is applicable in England and Wales only (Scotland and Northern Ireland have legislated separately) resets the terms of the Renewables Obligation and its subsidy mechanism. The major change in the regulations is to band Renewables Obligation Certificates (ROC) according to the technology employed. It also sets the level of obligation placed upon consumers of energy. The Order should be read alongside new guidelines on the on ROCs system published in late March by Ofgem.

Under the old system, all eligible renewable-energy plants were able to issue one ROC per MWh of power generated, without reference to the mode of generation. With the coming of banding (above) the Order introduces bands into the ROC system based upon the renewable technology used for generation. More established technologies gain fewer ROCs per MWh of renewable power, compared with newer, less established technologies.

When the renewables’ generator supplies the power, it also sells the ROC. In the hands of energy suppliers, the ROCs provide proof of renewable electricity within the provision of power to customers. This serves two purposes. It acts as a verification of renewable supply for the purpose of meeting Government’s annual targets for renewable energy supply. However, it also provides the basis of the issue of levy exemption certificates (LECs), which attract exemption from taxation under the Climate Change Levy.

Within the revised system, onshore wind provides a baseline, in that it will continue to receive one ROC per MWh. Marine energy, advanced gasification and dedicated biomass with CHP then qualify for two ROCs per MWh, and offshore wind for 1.5. Meanwhile established technologies such as landfill gas and sewage-gas power generation fall to 0.25 and 0.5 respectively.

An argument has developed between Government and those businesses interested in generating their own renewable energy onsite. As things stand, such businesses cannot claim their own electricity as ‘zero carbon’ if they are also claiming renewable energy subsidies on the power. The Government regards this as double counting. But it leaves business with difficult choices about whether to forgo their ROCs and, without these, such (usually local) schemes may not be viable.

The other major change in the 2009 Order concerns the stability of ROC pricing, amid fears that if ROCs are too readily available the consequent drop in price would eliminate any incentive in investment. The 2009 Order attempts to protect the price of the ROC, by the introduction of eight per cent ‘headroom’. In effect, this means that the level of the Obligation is set, from the outset, above that which is anticipated for the year (since levels vary from year to year in accordance with annual targets). The headroom creates a figure that is rather higher than the expected level of actual renewable electricity generation for that financial year.

The 2009 Order may be short-lived or, at least, may require early revision. The Chancellor announced an extension of the Renewables Obligation scheme to 2037 in the budget statement in November 2008. This 10-year extension of the scheme has not found its way into the new Order. This is because of the need for a consultation exercise. It was decided not to delay the 2009 Order so as to allow for this. A consultation will now take place over the summer, with a view to a revision of the Order in 2010, since it seems, from the Chancellor’s statement, that an extension of the scheme is needed to create greater certainty for investors in renewable energy.

About the author

Professor Robert Lee

ERIC Director and Head of Birmingham Law School, Professor Robert Lee was co-director of the publicly funded Centre for Business Relationships, Accountability, Sustainability and Society at Cardiff University (BRASS). He is an expert on regulation, including environmental regulation and regulation of biotechnology and biomedicine. He previously worked for two top 10 UK law firms, and remains a professional-development consultant to one of the largest law firms in Europe, working on pan-European delivery of legal services.