House of Commons - Innovation, Universities, Science and Skills

Select Committee on Innovation, Universities, Science and Skills Fifth Report

5 THE RENEWABLES OBLIGATION

130. The Renewables Obligation (RO) is the Government's key policy for encouraging new renewable electricity generation. Introduced in 2002, the RO requires licensed electricity suppliers to source a specific, and annually increasing, percentage of the electricity they supply from renewable sources. The current level is 9.1 per cent for 2008-09, rising to 15.4 per cent by 2015-16. The RO will remain flat between 2015-16 and the end of the Obligation in 2027.

RENEWABLE OBLIGATION CERTIFICATE

131. Electricity suppliers meet their Obligation by presenting Renewable Obligation Certificates (ROCs) as evidence of renewable generation or by paying the 'buyout' price, or a combination of the two. A ROC is a tradable certificate issued to an accredited generator for renewable electricity generated, and supplied to customers, within the UK. One ROC is issued for each megawatt hour (MWh) of eligible renewable output generated by a licensed supplier. If suppliers fail to accrue sufficient ROCs, they pay the buyout price, equivalent to £35.76 per MWh in 2008-09. The buy-out fund is redistributed to electricity suppliers as a proportion of ROCs presented at the end of the 12-month Obligation period.

REFORM OF THE RENEWABLES OBLIGATION

132. The Government has conducted two recent consultations on potential reforms to the RO.[139] We consider here two of the proposed reforms. First, the Government recommends extending the obligation to a maximum level of 20 per cent on a headroom basis. This would result in the RO becoming a moving target. RO levels would be maintained above renewable generation, up to a level of 20 per cent of supply, in order to give investors long-term confidence in the support mechanism.

133. The second reform is to 'band' the RO. This will mean that a ROC will not necessarily be equivalent to one MWh of renewable electricity; it could be more, or less, depending on the technology. Banding the RO would permit differential levels of support to be provided to established and emerging technologies (Table 6). To protect current investors, the Government have guaranteed the continued receipt of ROCs at the current rate, even after the reform of the RO ('grandfathering').

Table 6. Proposed 'banding' of the Renewables Obligation
Band	Technologies	ROCs/MWh
Established	Sewage gas; landfill gas; co-firing of non-energy crop biomass.	0.25
Reference	Onshore wind; hydro-electric; co-firing of energy crops.	1.0
Post-demonstration	Offshore wind; dedicated regular biomass.	1.5
Emerging technologies	Wave; tidal stream; advanced conversion technologies (anaerobic digestion, gasification, pyrolysis); dedicated biomass burning energy crops; dedicated regular biomass with CHP; photovoltaics; geothermal.	2.0

Source: Ev 282

134. Changes to the RO will require new primary legislation and so will not be introduced until April 2009 at the earliest. Once implemented, the RO bands would be reviewed in 2013.[140]

Banding the RO and picking winners

135. In line with the Government's policy of not 'picking winners' in the technology arena, the RO was intended to be technology-neutral. It is crucial that any public subsidy is carefully analysed to demonstrate the benefit to the taxpayer. There are concerns that the current structure may have distorted the market against certain renewable technologies.[141] The Government has admitted that the RO's neutrality meant that it has "proved less successful in bringing forward development of the more emerging renewable technologies".[142] Mr Wicks explained that, by reforming the RO, the Government hoped to reverse this trend:

143

136. We welcome the proposed reforms to the Renewables Obligation (RO) and the additional support it will provide to emerging technologies. We believe that the reformed RO will be a more flexible instrument.

SUPPORTING TECHNOLOGY DEPLOYMENT

137. Introduced in 2002 as a 25-year instrument, the RO will end in 2027. One advantage of the fixed-term nature of the RO is that it provides investors with a stable policy arena within which to operate. However, although this mechanism will remain in place for the next 19 years, the BWEA told us that it will fail to incentivise the deployment of renewable technologies post-2012:

The sudden end of the RO in 2027/28 will begin to deter investment in new generating capacity from about 2012 onwards, starting with more expensive technologies, particularly offshore wind. This is because the period under the RO that investors will be able to recoup their outlay will become progressively shorter: there will come a point where the income under the RO will not sustain investment, and new build will stop.[

144

138. We put the concerns of the BWEA to Mr Duggan, BERR. He accepted that "an instrument which ends in 2027 will start to run out of impact between the 2010 and 2015 period".[145] This is backed up by the Government's own models which show new capacity build peaking at about 15 per cent of total supply in 2012-13 and dropping away to zero by approximately 2020.[146] While this would meet the National Target for 15 per cent renewable electricity by 2015, it would, at best, provide only half of that required to meet the proposed EC Mandated Target of 15 per cent renewable energies by 2020.

139. When we pressed Mr Duggan, BERR, on the Government's progress in developing a framework for supporting the deployment of renewable technologies post-2027, he reported that:

147

140. The potential for extending the RO beyond 2027 was also raised by Mr Wicks:

148

141. We are pleased that the Government has recognised the need to develop a mechanism for supporting the deployment of renewables post-2027. However, we are concerned by the apparently narrow focus of the Government's considerations. In addition to the potential for modifying the RO, we believe that BERR should give serious consideration to the introduction of an alternative support mechanism, the 'feed-in' tariff.[149]

FEED-IN TARIFFS AND THE GERMAN EXPERIENCE

142. In 2006, Germany generated 11.8 per cent of its electricity from renewable sources.[150] In the same year, electricity sourced from renewables accounted for 4.55 per cent of all electricity generated in the UK.[151] Sigmar Gabriel, Federal Minister for the Environment, Nature Conservation and Nuclear Safety, has announced ambitions for 27 per cent of Germany's total electricity consumption to be produced from renewable energy sources by 2020, rising to 45 per cent of supply by 2030.[152]

143. Germany's success in deploying renewable technologies is often attributed to their use of feed-in tariffs.[153] In brief, the Renewable Energy Sources Act 2000 (Erneuerbare-Energien-Gesetz [EEG]; Box 1) obliges grid system operators to purchase all electricity generated by renewable installations, and to pay a fee per kWh to the electricity generator in accordance with fixed rates.

144. Fluctuations in electricity prices expose electricity generators to a source of revenue risk. If prices are volatile, revenue risks may discourage investment in renewable electricity-generation technologies.[154] The fact that German consumers pay fixed prices for electricity under the EEG, however, means that developers are guaranteed a set return for electricity generated, and that consumers bear the costs of changing electricity prices.[155] By contrast, under the RO, the revenue risk associated with electricity-generation is borne by developers.

145. Although the feed-in tariff is hailed as the impetus for the large-scale deployment of renewable electricity devices in countries such as Germany and Spain, we note that it is only one part of a much broader policy landscape. For example, the EEG obliges grid operators to purchase and transmit all electricity from renewable generators as a priority. Consequently, Germany's success in deploying renewable technologies should be attributed not only to the feed-in tariff but also to the coherence and consistency of their renewables policy.

A UK SUPPORT MECHANISM

146. We heard repeated praise for the efficacy of the feed-in tariff from a number of organisations including the BWEA and UKERC.[156] When we asked BERR whether they would consider introducing a feed-in tariff as successor to the RO we received mixed messages. Sarah Rhodes, BERR, assured us that feed-in tariffs "are not off the agenda, they are firmly on the agenda"[157], whereas Malcolm Wicks was more guarded:

158

147. Electricity generators such as RWE npower and EDF Energy also underlined the importance of long-term consistency of policy in maintaining regulatory and investor certainty.[159] We agree that maintaining investor confidence is key to the health of the renewable electricity industry. However, it should not be the only factor used to decide on the optimal mechanism for supporting the deployment of renewable technologies in the UK.

148. We believe that, in consulting on policies to support the deployment of renewable technologies after the end of the Renewables Obligation in 2027, detailed consideration should be given to the full range of potential support mechanisms, including the introduction of a feed-in tariff.

149. Several of the submissions we received expressed concern that the case for a feed-in tariff in the UK has not received appropriate consideration to date. Professor Keith Barnham, Imperial College London, told us that "the second [Energy White Paper] in May 2007 briefly mentions that other European countries have such schemes but dismisses them in a few lines".[160] We note that the merits of the feed-in tariff were debated in April 2008, in the context of the Energy Bill. A motion to commit the Government to developing a framework for the introduction of a feed-in tariff for renewable electricity generators was voted down.[161]

150. Irrespective of the policy mechanism, or mechanisms, selected to support the deployment of renewable electricity technologies post-2027, we recommend that the Government provide a full and transparent account of its decision process and the reason for rejecting or adopting possible options.

Microgeneration and the Renewables Obligation

151. Specific arrangements exist under the RO for microgenerators (installations of 50kW or less) to be issued with ROCs. To be eligible, the installation must be accredited by Ofgem and the output meter, which records the electricity generated, needs to be on the Ofgem list of approved meters. Just like any large-scale electricity generator, one ROC is awarded for every MWh of electricity produced. Once issued with a ROC, the microgenerator can either sell it direct to an electricity supply company or to an agent. The threshold for claiming 1 ROC is the generation of 0.5MWh over a year.

152. Speaking to the Committee in March 2008, Dave Sowden, Micropower Council, stated that:

The process which a customer needs to go through in order to register as eligible for ROCs and subsequently to claim them is quite a torturous process […] in their current form ROCs do not work for microgeneration customers.[

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153. The Government has recognised that current arrangements under the RO are insufficient to support microgeneration and, in Budget 2008, committed to consulting on an appropriate form of support.[163] This commitment was reaffirmed by the Minister:

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The Government will consider future support mechanisms for microgenerators as part of consultations on the new microgeneration strategy, to be conducted in Autumn 2008.

154. We welcome the Government's forthcoming consultation on mechanisms to incentivise the deployment of microgeneration technologies, and recommend that a feed-in tariff for microgenerators be introduced urgently.

139 DTI, Reform of the Renewables Obligation and Statutory Consultation on the Renewables Obligation Order 2007, October 2006; DTI, Renewable Energy: Reform of the Renewables Obligation, May 2007 Back

140 HM Treasury, Meeting the Energy Challenge, Cm 7124, May 2007, p 155 Back

141 http://www.timesonline.co.uk/tol/news/environment/article3257728.ece, The Sunday Times, 27 January 2008 Back

142 DTI, Reform of the Renewables Obligation and Statutory Consultation on the Renewables Obligation Order 2007, October 2006, p11 Back

143 Q 375 Back

144 Ev 259 Back

145 Q 73 Back

146 Reform of the Renewables Obligation: What is the likely impact of changes? Report by Oxera for DTI, May 2007. URN 07/949 Back

147 Q 74 Back

148 Q 403 Back

149 Note that several European countries, such as Germany, the Netherlands and Spain currently operate feed-in tariffs. Back

150 Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Development of renewable energies in 2006 in Germany, February 2007 Back