Memorandum submitted by Renewable Energy Association (EN 13)

 

Introduction

The UK must increase its use of renewable energy more rapidly over the next 12 years than any other EU Member State. We are already falling behind on our 2010 targets and are unlikely to reach the trajectory necessary to meet our new 2020 targets without urgent action. The current suite of government policies will deliver just 5% renewable energy by 2020, whereas the proposed Renewable Energy Directive requires 15%.

The Energy Bill provides the next opportunity to bring forward the following measures to help us to reach the required trajectory:

to encourage on-site renewable electricity generation through feed-in tariffs (whilst retaining the Renewables Obligation for larger scale plant),

to stimulate the production of renewable gas and to encourage purified biomethane to be fed into the natural gas distribution network,

to reward the production of renewable heat, through a tariff-based mechanism, and

to mandate the priority connection of renewable electricity generation capacity.

Feed in tariffs

Enabling powers to bring in a 'feed-in tariff' (production tariff) for onsite renewables

It is likely that a 15% renewable energy target will require a 40 - 45% contribution from the electricity sector.

Meeting 40+% of our electricity needs from renewables will require that we make use of as many potential renewable sites as possible. At the moment, renewable power stations are encouraged through the Renewables Obligation. The specialist project developers, who bring such projects forward, are well acquainted with the complexities of the RO.

However, we also need developments at a smaller scale, such as at commercial and public sector sites such as industrial estates, hospitals, waste management and water treatment facilities. Such sites may often be brownfield locations, where planning permission might be expected to be easier. We also need to expand renewable energy production at the household level. These types of on-site renewables applications are initiated not by specialist renewables project developers, but by parties for whom power station development is not their core business. They are not equipped to deal with the labyrinthine complexity of the Renewables Obligation and the administrative requirements that flow from it. Something simpler is required if we are to stimulate widespread investment in on-site renewables across the country.

There have been some changes to help micro-generation (i.e. sub 50kW) generators to access the RO more easily, but in the REA's view the Obligation was never designed to cater for household-scale and on-site generation nor should it be compromised in order to do so. A simple tariff-based scheme should be implemented for this type of activity instead.

The feed-in tariff scheme has been shown to be successful at doing this in many European member states[1], and has been particularly supportive of SME enterprise in Germany. A feed in tariff only pays for kWhs exported onto the grid, but we believe it should pay for all renewable kWhs generated - (i.e. a production tariff).

The scheme is also conceptually simple and relatively easy to administer. The REA would like to see enabling powers introduced in the Energy Bill for the Secretary of State to establish a Renewable Production Tariff regime, which we believe should be established for onsite renewables following consultation.

A tariff arrangement which only caters for sub 50kW plant will miss the point. That may assist with household-scale onsite, but not with the very important commercial on-site sector.

For the avoidance of doubt, we reiterate - the retention of the RO for merchant power production is essential in order to safeguard investor confidence and ensure industry stability.

 

A tariff mechanism for renewable heat

It is now acknowledged that a mechanism to encourage the uptake of renewable heat is also required. BERR published its "Heat call for evidence" consultation document at the end of January in which it sets out various options, including the mechanism favoured by the REA - a production tariff approach, which it terms a "feed-in tariff".

REA favours this option for two reasons. Firstly, because of its simplicity in comparison with a policy modelled on the Renewable (Electricity) Obligation. Secondly, a far lower evidence base is required for its introduction than a tradable mechanism. In short, a means of raising a fund to pay renewable heat providers needs to be put in place, and a tariff level agreed. In contrast, if a tradable obligation system akin to the RO is introduced the target level of renewable heat needs to be decided and the buyout sum decided upon. Setting the target level would have to be given careful consideration, as the combination of target level and buy-out would influence the price, and if progress is slow - as it has been under the RO - customers would end up paying for renewable heat which they are not getting. Furthermore, they may end up paying the cost of competing demands for biomass.

Where installations are too small for metering to be cost-effective, e.g. household solar panels or ground source heat pumps, output could be estimated and the premium given in the form of an up-front capital grant.

Measures for renewable gas - "biogas"

Biogas is produced by gasifying biomass through the process of anaerobic digestion. It is a highly efficient means of extracting renewable energy from wastes which are often problematic to manage, e.g. wet, putrescible food and agricultural wastes. Biogas is a mixture of methane and carbon dioxide. The CO2 can be removed, to leave methane, which is chemically identical to natural gas.

There are two approaches that could be taken to stimulate the production of renewable gas (biogas). It could be made easier for it to access existing mechanisms such as the Renewables Obligation and the Renewable Transport Fuel Obligation - through the principle of equivalence, described below. Or a straightforward payment could be made to biogas producers for each KWh of purified biomethane that they feed onto the natural gas distribution network. In other words, a gas feed-in tariff, in the true sense of the concept.

Either way, primary legislation is required. Biogas only qualifies under the Renewables Obligation if fed directly into an engine. If the gas distribution network is used to convey the equivalent amount of gas to a remote engine, it would not qualify for ROCs. Similarly, when the Renewable Transport Fuel Obligation begins in April, vehicles would have to be filled with purified biogas to qualify. Certificates could not be claimed for an equivalent quantity of gas conveyed over the network.

This is because the UK, unlike some other member states, does not recognise the principle of equivalence for biomethane.

 

The principle of equivalence

It should be possible to feed-in a certain amount of biomethane to the grid at one location, and extract that same amount elsewhere to provide heat, power or transport fuel. It is a well-established principle for renewable electricity. For example, power can be fed into the grid from a Welsh wind farm, and the equivalent amount of renewable electricity consumed under contract, by a customer elsewhere. The customer still regards it as renewable electricity.

By allowing the separation of the production-site (such as a pig farm in a rural location), from the final user much more efficient use can be made of the renewable gas. If it were used to generate electricity on the pig farm, there would probably be no use for the waste heat. Whereas if it could be notionally transported to a final site where a premium use could be made of it - such as in a CHP or fuelling a fleet of low-emission gas vehicles - then far more environmental benefit could be delivered.

 

Equivalence is recognised abroad

There are no technical barriers to putting bio-methane into the grid. All that is required is that the CO2 is removed; the calorific value boosted by the addition of some propane, and an odour is added to give the gas its characteristic smell.

It is in increasingly common practice in Austria, Germany, Switzerland and Sweden for biomethane to be injected into the gas grid for environmental and energy efficiency reasons as often there is no use for waste heat at the location where the biogas was produced. In Germany, the focus is on using the biomethane for CHP and district heating with the gas grid used as a buffer to link the production site and the end use. In Switzerland the driver has been vehicle use. Switzerland has a holistic approach with domestic waste separated at source, converted into biomethane in anaerobic digesters and used to fuel cars, vans and delivery trucks. By linking 'waste' to 'transport fuel', very high recycling rates are achieved and the market is growing by 50% per annum. Sweden does not have a system of premium prices for electricity from biomethane and as a result, vehicle use and heating are major uses for this fuel.

The RO legislation would need to be amended to accommodate biogas produced remotely and transported through the gas mains, but enabling legislation would also be required to establish the principle of equivalence.

Section 32(8) of the Electricity Act (as amended) 124 of the Energy Act 2004 would need to be amended. We understand that an amendment may be tabled to achieve this objective.

 

Or a gas feed-in tariff...

An alternative approach would be to have a gas feed-in tariff, whereby a set payment could be made to biogas producers for each kWh of bio-methane fed into the gas distribution network.

This would merely incentivise the production of biogas, irrespective of the final end use. It would be simpler to administer, but would lack any incentive for the final end user to be as energy-efficient as possible.

A tariff would have to be agreed for biomethane injection fed onto the network, and a fund put in place to make the payments.

 

Either approach would be better than the current situation, but there are quite distinct differences between the two approaches, summarised in the table below.

 

Feed-in tariff

Equivalence

Secondary legislation would need to be developed to implement a feed in tariff

Existing secondary legislation would need to be amended, to implement equivalence

New funds would need to be raised to make the payments

No new funds would be needed, as the premium would be derived from the RO / RTFO.

The tariff operates irrespective of the end use put to the gas

There would be an incentive for the efficient end use of the gas

 

It would also lack the involvement of the entire market, unless some tracking systems were to accompany it. There is consumer interest in purchasing renewable electricity, and this is to be welcomed, provided it is accompanied by robust and accurate reporting. There is no reason why this should not also be the case with renewable gas and the link between domestic and commercial waste disposal and fuel is a compelling one, offering an attractive solution to the organic waste problem, that will also assist with the UK's balance of payments as we move to being an oil importer in the next 5 years.

The UK (along with Germany) produces the most biogas in the EU. In the UK, most of this comprises landfill gas, used almost exclusively to produce electricity at an average fuel efficiency of 30 - 40%. There is little scope for boosting fuel efficiency through using the waste heat, as there is little demand for heat in the vicinity of landfill sites. Whilst there may be some demand for heat at sewage works (the next most prolific source of biogas) even then it is often not used as efficiently as possible.

It is sometimes not possible to connect the desired scale of generation plant to the electricity distribution network, as there is insufficient capacity to accommodate the output on the network. In addition it is sometimes flare biogas when the electricity generation plant is not working. Improving the overall efficiency of biogas utilisation will assist with meeting the EU renewable energy target and the injection of biomethane into the gas grid is the way to achieve both

 

Priority connection for renewable electricity projects

At the moment, thousands of megawatts of renewable capacity is seeking connection to the network, but cannot get access, as there is insufficient capacity in many parts of the grid to accommodate the maximum output of all these prospective generators. As a result many projects are being held in a waiting list. Their position in the list can mean they have to wait over 10 years for connection.

Most of the new generation which cannot connect is renewable whilst most of the existing generation, which is continuing to generate on an unconstrained basis, is fossil fuel fired.

Under the present approach, connections will only be made when there is sufficient grid capacity to accommodate the full level of output from the prospective new generation. "Sufficient" grid capacity in this context means enough to accommodate all the generation that the new generator wants to export to the grid without there being a restriction on the output of existing generation.

National grid has initiated various approaches to alleviating the problem, and currently a Transmission Access Review is taking place across BERR and Ofgem, expected to report in March this year.

This review has considered whether a move to an alternative model whereby renewable generation would not have to wait, but would be connected as soon as it were built. This model is referred to as "connect and manage" as opposed to the current "invest and connect" situation.

"Connect and manage"

Under this model, the grid operator would be obliged to connect all capacity that wishes to connect, and where necessary constrain the generation delivered to the network to the level which it can accommodate on a day to day basis. This is referred to as a "connect and manage" approach. If this approach were adopted, the connection of renewable generation would not have to wait until after the entire infrastructure required to allow unconstrained operation of all connected plant had been built.

We believe this would be more economically efficient in the longer term as there would be less risk of excess transmission capacity being built. There is probably a much larger volume of connection applications than will be built in practice, but it is hard to judge which projects will be delivered and which will not. The transmission owner currently assumes that all will progress, and builds the infrastructure to accommodate that. In practice some of the existing fossil fired and nuclear plant will come off the system, making space for renewables to use the vacated capacity. However the system operator does not plan on this basis unless the fossil fired generation has given formal notice to the System Operator that it intends to close.

 

The new Draft Renewable Energy Directive goes further and states that Transmission and distribution system operators shall provide priority access to the grid. (Emphasis added). It is important that this is adopted and implemented promptly in the UK with the interpretation that priority access means priority access over all non renewable generation i.e. both other generation that is waiting to connect and existing generation. In other words if new renewable generation can be connected but only if on occasion existing fossil fuelled generation has to be prevented from generating then that is what should happen

We understand that implementing this approach is likely to be in conflict with Ofgem's regulatory remit under the gas and electricity legislation and also with at least some elements of National Grid's transmission licence. We would like to see measures taken under the Energy Bill to enable this problem to be overcome.

 

Ofgem's duties

The unprecedented extent of change required to our energy system and the rapidity with which it must happen, together form the most compelling argument for re-casting Ofgem's duties and remit.

We meet less than 2% of the UK's energy needs from renewable sources now, after 17 years of effort[2]. We need to reach a target of 15% within the next 12 years. This target must be allocated between the electricity, transport and heat sectors, but could entail a contribution from electricity of over 40% - a tenfold increase on the present day contribution.

In general we feel that Ofgem's principal statutory objective - to protect consumer interests, wherever appropriate by promoting competition - is both overly restrictive and inappropriately focused in the context of the requirement to move towards a more sustainable energy system. Some recasting of that objective and of the duties that support it will be needed to facilitate the achievement of the new carbon reduction and security of supply objectives of UK energy policy.

In the context of current energy policy, the promotion of competition within the energy supply industry is a secondary objective to that of meeting environmental objectives. This is not to say that market-based mechanisms won't remain the predominant policy paradigm.

Such change of emphasis cannot be achieved with full and enduring effect without timely amendment of Ofgem's remit. Against that background, we believe that the Energy Bill is the right vehicle for making appropriate changes to Ofgem's statutory objectives and duties in the regulation of the gas and electricity industries. In particular, the legislation should:

Impose a new principal statutory objective for Ofgem. This would be to regulate the industry with a view to securing the development of a secure and sustainable energy system operating for the benefit of the citizens of the UK within greenhouse gas emission limits under the Climate Change Act 2008.

Move the promotion of competition from its current primacy as the principal objective and relocate it alongside other factors of at least equal importance in support of the principal objective, such as public safety, investment requirements, the efficiency and economy of the industry's operations and its financial viability.

It might be thought necessary to specify the weighting to be given to the secondary considerations, or to place them within a hierarchy on the face of the statute, to demonstrate the parliamentary and public expectation of how Ofgem should strike the regulatory balance for the purpose of furthering the principal objective.

 

A less radical course would be to amend sections the Gas and Electricity Acts in order to enable the government to give formal specific guidance to Ofgem on the exercise of its regulatory functions for the purpose of contributing to the achievement of security and sustainability objectives in UK energy policy. This would require both a clarification and expansion of the meaning to be given to the concept of social and environmental guidance under those sections.

This would, however, leave Ofgem's current principal objective untouched. This problem could be mitigated to some extent by amendments to require Ofgem to act in accordance with the government's guidance, rather than merely to have regard to it.

The REA favours the more radical approach and we believe that without it the UK will remain hampered in its progress towards the Energy White Paper's objectives and our new 15% renewable energy target under the EU Renewable Energy Directive.

February 2008



[1] http://europa.eu.int/comm/energy/res/biomass_action_plan/doc/2005_12_07_comm_biomass_electricity_en.pdf

[2] The Non-Fossil Fuel Obligation, introduced in 1990, marked the onset of concerted effort to increase renewable generating capacity.