Preliminary consultation on the 2005/6 Review of the Renewables Obligation
At the end of March, the Department of Trade and Industry (DTI) published its preliminary consultation on the 2005/6 review of the Renewables Obligation. The Government committed to a review of the obligation following its third year of operation in its 2003 White Paper. In fact there have already been two 'technical' reviews resulting in the 2004 amending Order and the recently enacted Renewables Obligation Order 2005 (the RO).
The current review looks certain to lead to a fourth Order in five years coming into force on 1 April 2006, but (happily for most) the 2006 Order appears likely to contain few significant changes. That is not to say that the consultation does not consider a number of significant issues, but the current DTI steer appears to be that these will not find their way into the 2006 Order.
In this briefing note we will explore some of the more significant consultation topics.
Energy from mixed wastes
Under the RO, generating stations fuelled by waste are not eligible renewable sources unless the waste is 98% biomass or has been manufactured into a fuel by means of advanced conversion technologies.
The consultation seeks views on whether Renewables Obligation Certificates (ROCs) should be issued in respect of the biomass element of energy from waste generation irrespective of technology, given that:
- the Government considers energy from waste to be a valid part of a sustainable waste management strategy;
- the current favouritism of advanced conversion technologies is arguably inconsistent with the RO as a whole; and
- landfill gas is eligible under the RO.
Alternatively, is a reduction in the 98% biomass threshold appropriate?
However, the DTI's current thinking appears to suggest that no changes will be made to allow eligibility of a broader range of energy from waste schemes, for the following reasons:
- The Institute of Legal Executives (ILEX) study commissioned by the DTI suggests that other regulatory developments in waste management (such as increases in landfill tax) will be sufficient to incentivise energy from waste without the support of the RO.
- The DTI acknowledges that, in order to maintain ROC values, any widening of ROC eligibility to accommodate all energy from waste technologies would need to be accompanied by a corresponding increase in the level of the renewables obligation. However, the value-neutral increase required would be hard to predict accurately, and any increase would place a greater cost on consumers.
- The 98% rule would need to be altered significantly (and therefore by an unacceptably large amount) to capture energy from waste projects.
Lower cost renewables technologies
The RO is a market-based mechanism that, broadly speaking, places an equal value on all ROCs (regardless of technological source) and therefore incentivises the most economic renewable technologies and schemes more than the less economic. The DTI maintains that this remains a fundamental Government principle. However, in response to National Audit Office comments, the DTI is considering whether the RO currently gives any technologies more support than is necessary. In particular, landfill gas and onshore wind are placed in the spotlight, and the consultation asks whether these technologies could prosper without the support of the RO.
Given that commissioned renewable capacity is currently behind Government targets, and that onshore wind and landfill gas have been major contributors to the capacity commissioned to date, any suggestion that eligibility for ROCs be reduced was bound to be met with resistance. Industry participants duly made the DTI aware of their grave concerns at the launch event.
The DTI was at pains to confirm that all existing ROCeligible projects would remain ROC-eligible at the end of the review, and that any future changes would be notified well in advance and apply only to projects which are commissioned after the notified date. This appears inconsistent with the DTI's consideration of time limits on eligibility for individual projects, and the alternative proposal of a maximum volume of output that could be eligible for each project.
In fairness to the DTI, consideration will at some point need to be given to how the RO's focus can be moved away from technologies that have become economic in their own right. Furthermore, the RO's treatment of large hydro schemes and co-fired stations sets a precedent for such an exclusion or phased exclusion of technologies. In the final analysis, is there any reason why consumers should continue to subsidise generators with low operating costs, whose capital costs have already been met through the non-Fossil Fuel Obligation (NFFO) or RO schemes?
However, to consider these topics now, after only three (fairly eventful) years of the RO's operation, seems premature. This point of view is likely to be accepted by the DTI, particularly in light of its stated commitment to encouraging investor confidence.
Combined Heat and Power (CHP)
Unsuccessful amendments were proposed during the Energy Bill's progress through Parliament that would have discounted electricity generated by good quality CHP from a supplier's annual supply totals for the purpose of setting its renewables obligation. The DTI has agreed to consider these proposals further as part of its review.
CHP is an efficient form of generation that should have a part to play in the Government's energy and environmental policies. But, is legislation concerned with incentivising renewable generation the right vehicle with which to promote the use of CHP? The DTI appears to think not for the following reasons:
- The proposed amendment would mean that, as the level of the renewables obligation increased, so would the worth to suppliers of supplying CHP electricity. It seems perverse that renewables legislation should, over time, create an increasing incentive on the use (albeit efficiently) of a fossil fuel.
- Although the proposed change would have a positive impact on the viability of CHP, it is likely to be insufficient on its own to stimulate construction of new projects.
- In order to maintain current ROC values, it would be necessary (as discussed with energy from waste above) to increase the level of the renewables obligation. The level of the increase required would be very difficult to calculate given the uncertainties regarding electricity generation from CHP stations, which is dependant on the industrial host's steam requirements. The DTI's initial analysis seems sensible and the proposal is unlikely to find its way into the 2006 Order. However, much of the thinking is premised on the Government making tailored proposals to promote CHP. It is hoped we see these soon.
Obligation levels beyond 2015/6
One issue which may lead to legislative change is whether the Government should legislate for the level of the renewables obligation in the period beyond 2015/6. The DTI acknowledges that such a step would give a strong signal to the market and would assist projects that require long term financing. However, it appears concerned by the implications of a Government being required to legislate now for a period so far in the future – especially in light of the gap between 2.8% (the current percentage of electricity derived from renewable sources) and 15.4% (the percentage that would currently apply after 2015/6 if no further legislation was introduced).
The DTI has suggested that the mechanism by which the obligation is set could be altered, either to a rolling annual increase or a mechanism that set it a certain amount higher than that achieved in the previous year. The implementation of any such changes would require primary legislation.
A number of more technical issues are also considered in the preliminary consultation, including:
- Removing the ROC revocation risk – instead of revoking a wrongly issued ROC, generators would not receive a ROC for a future MWh of electricity.
- Allowing non-suppliers to present ROCs. This would be a fundamental change to the RO, which is based on a supplier obligation.
- The creation of an organisation (separate to Ofgem) to oversee the operation of the RO. This is something certain parts of the industry have been calling for, but the DTI appears in need of further persuasion.
- An appeals mechanism. As was experienced during the passage of the Energy Bill, the Government does not seem inclined to extend appeals processes beyond the scope given by judicial review.
- Bringing forward ROC issue by a month. If feasible, generators would welcome the cash flow benefits that would result from such a development.
- Allowing smaller generators to appoint ROC agents, who could then handle accreditation on behalf of the generator and amalgamate the output of several generators. This would seem a positive step from the perspective of smaller generators and may also be seen as desirable by all generators if its application were extended.
The preliminary consultation closes in June 2005. The DTI then proposes to set out its proposed position in a statutory consultation document accompanied by a draft Order in late 2005. If all goes to plan, draft legislation will go before Parliament in early 2006. The Scottish Executive and the Department of Enterprise, Trade and Investment in Northern Ireland have also invited comments in relation to the separate Scottish and Northern Irish Orders.
At this stage, it appears further significant changes to the operation of the RO are unlikely.
This alert may contain information of general interest about current legal issues, but does not give legal advice.