The UK's Department of Energy and Climate Change (DECC) has published a Call for Evidence on Renewable Energy Trading, seeking views on the practicalities of how the flexibility mechanisms in the Renewable Energy Directive (RED) can be used to facilitate trading in renewable energy between EU Member States and support joint renewable energy projects. Use of the flexibility mechanisms is likely to become increasingly prevalent as the integration of European energy markets progresses and the 2020 renewables target deadline approaches.

Participants in the renewable energy sector should follow developments closely so that they are well positioned to take advantage of any opportunities that could arise should the UK Government, or the Governments of other Member States, pursue the use of such mechanisms. Interested parties may also wish to respond to the Call for Evidence to ensure that their views are heard.

Flexibility mechanisms under the RED

The RED assumes that the EU Member State in which renewable energy is generated owns the "credit" or "value" attached to it so that it counts towards the achievement of that Member State's renewable energy target (even if the energy is consumed elsewhere).

The RED contains three broad types of flexibility mechanism that can be used by Member States to transfer or obtain additional renewable "credit" to help them achieve their targets:

  • statistical transfers - trading of renewable "credit" between Member States;
  • joint projects - collaboration between two or more Member States (or between a Member State and a non-EU country) on renewable energy projects with the "value" being shared between them; and
  • joint support schemes - two or more Member States co-operating on incentives for renewable energy production and sharing the "value".

While the RED creates these mechanisms, Member States are responsible for putting in place the detailed practical arrangements to make them work in practice.

DECC is not aware of any examples of statistical transfer or joint projects that have taken place, and therefore considerable uncertainty surrounds how the mechanisms could work in practice. DECC is however aware of emerging evidence of a joint (certificate based) support scheme between Sweden and Norway, which was introduced in January 2012.

The UK is currently involved in a number of strands of work with other Member States, the British Irish Council, and through the North Seas Countries' Offshore Grid Initiative, to better understand how the flexibility mechanisms could be used in practice.

Statistical transfers

Statistical transfers allow an EU Member State to buy or sell a renewable energy "credit" from another Member State without having to physically transfer that unit of energy. Similar mechanisms involving "virtual" credits exist already (the EU ETS, and the Clean Development Mechanism under the Kyoto Protocol), but not specifically for renewable energy. The Member State selling the credit would be expected to be able to demonstrate that the transfer would not affect its ability to meet its 2020 target. DECC states that the UK could either buy or sell credits.

DECC believes that implementing a statistical transfer should be relatively straightforward and would simply require an agreement between the Governments of two or more Member States to buy or sell their renewable energy "credits" (DECC does not anticipate any private sector involvement), and for transfers to be notified to the European Commission.

DECC expects the 2013 reporting against the first interim renewable energy target to act as a trigger for Member States to start considering trading in renewable energy more seriously, at which point the potential for a market to develop will become clearer. DECC notes that currently there is no market or platform for trading renewable energy "credits" and that it remains to be seen whether if a market develops, this would be a buyers' or sellers' market (if there is an overall shortfall against the 2020 EU renewable energy targets sellers may be able to request a price above the cost of producing the energy, or if there is an overall surplus the price sellers can command may be low).

DECC notes that a disadvantage of using the statistical transfer mechanism could be the risk of non-compliance with the 2020 targets: for example, if a Member State buys a credit from another Member State that is subsequently unable to deliver that credit then either or both Member States could be in breach of their 2020 targets. The Call for Evidence does not elaborate on precisely what scenario DECC is contemplating in this case, but one possibility is that the Government is alluding to a situation where "credits" are sold by a Member State which expects to have a surplus, but then does not (and could in fact have a deficit), for example because planned renewable energy projects are not delivered, or do not generate as much renewable energy as anticipated. DECC believes that this risk could be allocated by negotiation between the relevant Member States and reflected in the terms of the sale and purchase agreement for the credits.

Joint projects

The RED allows new renewable energy projects (onshore or offshore) located in one Member State to be financed jointly with another Member State and the "renewable value" of the renewable energy generated to be split between them. This form of trading may take place without any accompanying physical flows of energy (but if there is no physical flow DECC believes that the transfer would be more likely to take the form of a statistical transfer). Joint projects can also occur between a Member State and a non-EU country (including Crown Dependencies such as the Channel Islands Jersey and Guernsey, and the Isle of Man) but only if the renewable energy produced from a project located in a non-EU country is imported into the EU.

DECC contemplates joint projects being longer term arrangements than statistical transfers (which could be made on a one-off basis). Participants in the European renewable energy market should be note that DECC also believes there is a role for the private sector in delivering joint projects, which could result in commercial opportunities.

For joint projects involving a non-EU country, DECC suggests that the UK would agree to acquire all (or part) of the renewable energy "credit" attached to that project to count toward its 2020 target. In that case, an amount of renewable energy (produced from the project, or elsewhere in the non-EU host country) equivalent to the amount of "credit" purchased would need to be delivered to the EU.

DECC acknowledges that there are legal and regulatory issues that would need to be addressed for such projects (including agreement on the applicable regulatory regime, rules for the audit of renewable energy generation and consumption, and the potential for over-compensation of State Aid). The precise nature of such issues will vary according to the location of the joint project, the type of renewable technology deployed, and whether the renewable energy produced is consumed by the country hosting the project, an importing state or a mixture of the two (ie, shared).

Joint support schemes

Joint support schemes involve two or more EU Member States agreeing to co-operate on all or some of the support schemes they use to incentivise the deployment of renewable energy and sharing the "renewable value" between them.

While DECC is aware of one such scheme (between Sweden and Norway), the UK Government does not believe it is appropriate to look into joint support schemes further at the moment. DECC's view is that it is important for the UK to retain control over the domestic support mechanisms for renewables because they are partially funded by UK consumers through tax or levies on energy bills.

DECC seeks views on how the mechanisms could be used

While the flexibility mechanisms in the RED permit trading in renewable energy, DECC's Call for Evidence suggests that it is currently unclear how trades could be made, how much surplus renewable energy "credit" there is to be traded in the run up to 2020 and beyond, and how traded renewable energy would be priced. These matters, and the practicalities of any trading arrangements that could be introduced, are not proscribed in the RED and are left to Member States to determine. DECC's analysis of the National Renewable Energy Action Plans submitted to the European Commission by Member States in 2010 show that only a limited number of countries forsee a need to trade (as a result of having either a surplus or deficit in the amount of renewable energy required to meet their 2020 target).

DECC's Call for Evidence therefore seeks views to help the Government to understand:

  • the availability and potential for trading renewable energy with other EU Member States (and non-EU countries), including the ability to export renewable energy or renewable energy "credits";
  • the potential costs, benefits and risks to the UK of using the flexibility mechanisms in the RED to trade renewable energy;
  • the issues and barriers that will need to be addressed to facilitate trading in renewable energy.

DECC states that it is particularly interested in receiving views on the potential for the UK to be involved in joint renewable energy projects outside of the UK, and requests thoughts on the possible locations for such projects, the renewable technology types that could be deployed, the level of capacity that could be generated, and likely the capital and operating costs for such projects.

Why is DECC considering using the mechanisms?

The UK Renewable Energy Roadmap, published in July 2011 (see our briefing on the Roadmap for more details), gave three potential reasons for the UK to collaborate with other European countries on renewable energy deployment:

  • cost effectiveness: if domestic costs do not come down as the Government hopes and cheaper alternative opportunities arise in other countries, the UK could benefit from these by "trading" in renewable energy;
  • commercial opportunities: the UK has some of the best offshore wind resources in the world and could "export" energy generated to neighbouring countries; and
  • contingency: there is ongoing uncertainty regarding future levels of energy demand, the availability of sustainable biofuels and the wider impacts of "certain technologies" (the Call for Evidence does not state what these technologies are), and the ability to "import" renewable energy could help the UK to manage these risks and ensure compliance with renewable energy targets.

The Roadmap also set out the Government's intention to import and export renewable energy using the flexibility mechanisms in the RED for the benefit of the UK. As well as meeting this previously declared intention, DECC states that its present Call for Evidence is also should also be seen within the context of wider work to create an integrated EU energy market, mandated by existing European legislation, including the EU Third Energy Package (for more information on the Package see our European Energy Handbook).

In the Call for Evidence DECC states that recent analysis demonstrates that the UK can meet its legally binding target of sourcing 15% of its energy consumption from renewable sources by 2020 "entirely through domestic action". However, the Times recently reported that research commissioned by Greenpeace suggests that the UK will not meet its target given current rates of investment. While the Government will be hopeful that its plans for Electricity Market Reform (see our bulletin on DECC's Electricity Market Reform Technical Update for more information) will incentivse sufficient investment to prove the doubters wrong, the flexibility mechanisms in the RED could provide a handy safety net as well as presenting commercial opportunities for the UK.   

Next steps

Interested parties should consider responding to the Call for Evidence (available here) before it closes on 11 June 2011 to make sure their views are heard. Responses should be submitted by email to tradingresponses@decc.gsi.gov.uk, and DECC has requested that respondents seek to address the specific questions posed in the Call for Evidence.

DECC has undertaken to consider the responses it receives carefully before reaching a policy decision on which flexibility mechanisms the UK should use, and in what manner. DECC will then look to introduce primary and secondary legislation as soon as possible (subject to parliamentary time being available, and the will of Parliament), and will continue to liaise with counterparts across the EU to monitor developments.