The Economics of Renewable Energy - Economic Affairs Committee - Contents


APPENDIX 9: THE RENEWABLES OBLIGATION

A number of mechanisms are used to support renewable energy. Renewables Obligation Certificates (ROCs) are the most direct. The Renewables Obligation requires electricity suppliers to deliver a set proportion of power from renewable sources—9.1% was set for 2008-09.[66] Generators receive one ROC for every 1,000 kWh of electricity generated, and can sell these to suppliers. A supplier unable to surrender ROCs equal to the set percentage must pay £35.76 for each missing certificate into a buy-out fund which is then redistributed amongst the suppliers who surrendered ROCs, in proportion to the number given up. The market price of ROCs rises above the buy-out price if a shortfall is expected, for each ROC allows the holder not only to avoid paying the buy-out price, but also to share in the money paid in by those with a shortfall. The Renewables Obligation covers Great Britain, while the Northern Ireland Renewables Obligation runs on a similar basis but with a lower target (3.0% in 2008/9).

The design of the Renewables Obligation effectively means that the total payment to renewable generators, over and above the market price they receive for their power, should be fixed. In 2006-7, the amount of electricity covered by the Obligation in the UK was 21.6 TWh (6.7% of electricity supplied) and the buy-out price was 3.32 pence per kWh. If no ROCs had been submitted, suppliers would have paid £720 million to the buy-out fund. In fact, they submitted 14.6 million ROCs, and paid £233 million to the fund. This was then redistributed to the suppliers who had submitted ROCs, giving them £16.04 per ROC submitted. With hindsight, the overall value of the ROC to the supplier was thus £49.28 (£16.04 plus £33.24). If market prices had reached this level (in 2007, they were actually slightly below it), the total value to generators would have been £720 million: 21.6 TWh × 3.32 pence per kWh. The same result would hold for any level of renewable generation below the obligation level. The figure below shows this result.

Payments under the Renewables Obligation


Before the Renewables Obligation, renewable (and nuclear) generation was supported through a Non-Fossil Fuel Obligation (in England and Wales) and the Scottish Renewables Obligation. The electricity regulator and the Non Fossil Purchasing Agency organised a series of tenders to buy power from renewable generators, mostly for 15 years, and recovered the cost from a percentage levy which suppliers had to add to consumers' bills. Many of the tenders were from generators that had not yet received planning permission, and not all of the contracted generation was delivered. The early contracts have expired, and almost all of these generators are now involved in the Renewables Obligation—the Agency resells the power and ROCs for generators with current contracts.

If renewable electricity is to supply 32 per cent of electricity demand, to take the number in the Government's Renewables Consultation, and all of this is to be supported by the Renewables Obligation, it would have to be set at a much higher level. Although the Government has announced plans for a feed-in tariff for some small scale generation technologies, we will calculate the cost of support for these "as if" it was still given through the Renewables Obligation. Ignoring the effects of banding, which will give more ROCs to technologies such as offshore wind, a Renewables Obligation for 32 per cent of electricity would add 1.14 pence per kWh to the price of electricity—that is, 32 per cent of 3.576 pence per kWh (the 2008-9 buy-out price). This would add £50 to the average domestic consumer's annual electricity bill. On top of this, the system integration costs shown in Table 4 would add a further 0.65 pence per kWh, or another £30 a year.

If we take account of the impact of banding, which gives some technologies more ROCs per MWh generated, and others less, the number of ROCs required to reach 32 per cent renewable generation will change. Since much of the additional renewable generation would come from offshore wind, which will receive more than 1 ROC per MWh (1.5 ROCs per MWh for the next few years), the number of ROCs required is likely to exceed 32 per cent. If it reaches 37 per cent of electricity supplied, the cost of the Renewables Obligation would be £60 per year for the average household.



66   Ofgem, Renewables Obligation-Interim total obligation levels for 2007-08, August 5, 2008, available at: http://www.ofgem.gov.uk/Sustainability/Environmnt/RenewablObl/Documents1/Renewables%20Obligation%20-%20Interim%20Total%20Obligation%20Levels%20for%202007-08.pdf Back


 
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