Summary and Implications

On 15 July 2009, DECC announced their Consultation on Renewable Electricity Financial Incentives. The consultation seeks views on two mechanisms to provide financial incentives for the generation of low-carbon and renewable electricity; the Renewables Obligation (RO) and feed-in tariffs (FITs).

Renewables Obligations

The RO is currently the main financial support scheme for renewable electricity in the UK. In order to ensure that the RO stimulates deployment of new renewable generation to the extent needed to meet the 2020 target for renewable energy, the Government plans to make certain changes to the RO by means of the next Renewables Obligation Order (ROO) which will come into effect on 1 April 2010.

The structural changes needed to enable the Renewables Obligation (RO) to deliver the required level of generation to meet our 2020 targets are:

  • extension of the life-time of the RO to at least 2037 as announced in the Pre-Budget Report in November 2008 and set out in the Renewable Energy Strategy. The intention is that this will provide investors with the confidence to bring forward projects right up to 2020;
  • introduction of a 20 year limit on support under the RO. This will ensure that support is not provided for longer than is necessary; and
  • removing the current limitations that exist in the RO that would restrict the ability to meet targets imposed by the Renewables Energy Directive.

The RO will be opened up to renewable generating projects outside the UK that meet specific criteria and the Government are consulting on how this might be implemented in practice. The Government is also seeking views on the introduction of a revenue stabilisation scheme to improve the effectiveness, efficiency and stability of the RO, which would be implemented over the longer term.

Feed-In Tariffs

The 2008 Energy Act contains powers for the introduction of FITs in Great Britain to incentivise renewable electricity installations up to a maximum capacity of 5 MW. Where the RO has mostly succeeded in encouraging investment from professional energy companies in large-scale renewables projects, a new system of FITs will provide support aimed at small low-carbon generators. The aim is to open up low-carbon electricity generation beyond the traditional energy companies, making it more cost effective for communities and householders to take part.

The consultation sets out how the FITs scheme is intended to work, including the proposed tariff levels. These proposals have been developed with input from energy industry trade associations, energy suppliers, Ofgem and NGOs. The key FIT design aspects proposed are:

  • a fixed payment from the electricity supplier for every kilowatt hour (kWh) generated (the “generation tariff”);
  • a guaranteed minimum payment additional to the generation tariff for every kWh exported to the wider electricity market (the “export tariff”);
  • encouragement of on-site use: the Government propose that where generators use the electricity they generate on-site they will be able to offset this against electricity they would otherwise have had to buy;
  • support for the following technologies from 2010: wind; solar PV; hydro; anaerobic digestion; biomass and biomass combined heat and power (CHP) and non-renewable micro CHP; and
  • design of the FITs as a simple and user-friendly system in order to maximise take-up.

From 1 April 2010 installations under 50kW installed capacity which are eligible for FITs will only get the option of receiving FITs. However it is proposed that larger installations (with installed capacity of between 50kW to 5MW) will retain the right to choose between the RO and the FITs.

Transitional Arrangements

The Government wants to ensure that projects can start building with confidence before FITs become operational. The Government will ensure a smooth transition by continuing to fund existing grant schemes in the interim period, particularly through £45 million of new funds for the Low-carbon Buildings Programme. Small-scale renewable electricity installations will, during the interim period, still be eligible for support under the RO. In particular microgeneration is now entitled to double the previous support level – 2 Renewable Obligation Certificates (ROCs) per MWh.

Any eligible installations, built during this interim period, will benefit from FITs as if they had been installed on the start-up dates of the schemes, although some exceptions will apply where installations first receive ROCs under the RO and then switch to the FITs.

The deadline for responses to this consultation is 15 October 2009.