On 15 July the UK Government presented to Parliament its Renewable Energy Strategy as part of a package of documents forming a Low Carbon Transition Plan which also includes separate strategies for industry and transport.

In addition to confirming key policies set out in last November's consultation on the Renewable Energy Strategy - including the introduction of Feed-in Tariffs for installations up to 5 MW by April 2010 and a Renewable Heat Incentive by April 2011 - a consultation paper on financial incentives for renewable energy issued alongside the Strategy confirms that further measures are to be taken to enhance the key mechanism which supports renewable electricity generation, the Renewables Obligation, including the potential use of contracts for differences (CfDs) to offer certain renewable generators a "stabilised" price for their power output.

The measures confirmed in the Renewable Energy Strategy could to add an additional 15% to electricity bills and 23% to gas bills by 2020 (rising to 30% for non-domestic gas bills) although if energy efficiency measures set out in the Low Carbon Transition Plan are implemented, Government estimates that the average impact on domestic bills will be a 6% increase. The measures are expected to reduce the UK's overall fossil fuel demand by 10% and gas imports by 20-30% against what they would have been in 2020.

Effort has been made to avoid stalling the small-scale renewable electricity and heat markets by giving assurances that early action will be recognised under the new Feed-in Tariff and Renewable Heat Incentive schemes once they come into force. The prospect of additional significant changes to the Renewables Obligation alters the landscape once again for those looking to finance or secure long term contracts for larger projects.

In this bulletin we comment on the key proposals set out in the Renewable Energy Strategy and the consultation on financial incentives for renewable electricity. Please click the links below for details of:

The full suite of documents can be obtained through the DECC website.

Onwards and upwards for the Renewables Obligation

The Renewables Obligation is undergoing a series of changes to introduce more of the features of the feed-in-tariff regimes that have operated successfully elsewhere in Europe. From April this year, the scheme and the mirror schemes for Scotland and Northern Ireland have provided varied levels of support for different technologies, with the ability for Government to adjust the "bands" of support under a four yearly review process, or earlier if certain criteria are met. These ad hoc review powers have now been invoked to implement an increase in the banding for certain offshore wind projects, based on significant increases in costs for offshore wind generators, although this remains subject to the outcome of the financial incentives consultation.

The extension of the England & Wales obligation from 2027 to 2037 for new projects (announced in November 2008) will be implemented in the next Renewables Obligation Order (from 1 April 2010), which will also place a 20 year cap on eligibility under the scheme for new projects. The level of the obligation is expected to increase in line with a “headroom” mechanism from as early as 2013; the mechanism is designed to ensure that the demand for certificates under the scheme (ROCs) will outstrip supply by a certain margin, with the aim of stabilising ROC prices. It is proposed that the margin should increase from 8% to 10% by 2014.

From 1 April 2010, electricity suppliers will also no longer have the comfort of a cap on the ultimate level of the obligation, which is currently set at 0.20 ROCs/MWh in line with UK’s original target of achieving 20% renewable electricity under the obligation. The Renewables Obligation is now expected to contribute more than this in order to meet the overall "20% by 2020" renewable energy targets established for the EU by the Renewable Energy Directive, which includes energy used in heating, cooling and transport as well as electricity. It is recognised that projects such as the Severn Barrage would need to remain outside of the scheme; and while certain direct imports from other Member States may qualify for ROCs post April 2010, the scheme will not form part of a pan-European green certificate trading scheme.

Government is considering the level, and potential removal, of the current cap on co-firing of "regular" biomass with fossil fuels but early indications are that the cap will remain.

Proposals to remove wholesale price risk for some renewable generators

The Government is proposing a contract for differences (CfD) mechanism to remove some of the electricity wholesale market price risk for new renewable generation projects in the hope that this will give a further boost for independent developers.

The system would involve an annual top-up payment to the generator if average power market prices fell below a fixed level (or strike price) and require a payment from the generator if average prices exceeded the strike price. A variation that includes a lower and upper threshold (cap and collar) is also under consideration. The use of CfDs has also been announced to be Government's preferred support mechanism to remove the carbon market price risk for the development of carbon capture and storage projects.

Government is inviting views on this approach, and in particular how a centralised market price should be calculated, and the need to differentiate the "strike price" for different types of projects. There is a suggestion that CfDs could be used to provide ROC price stabilisation in the future instead of the "headroom" approach described above.

Feed-in Tariffs

The Renewable Energy Strategy confirms that it is Government's intention that the new Feed-in Tariff regime for small-scale low carbon generation will be in place for 1 April 2010. Further details of the proposals have been released in the financial incentives consultation document that accompanied the Renewable Energy Strategy. This includes proposals that:

  • the Feed-in Tariff regime will apply up to the maximum permitted under the Energy Act 2008 (5 MW);
  • all eligible generation will receive a generation tariff (even if used on site) with an indicative range of between 4.5p/kWh for larger wind, hydro and biomass installations, up to 36.5p/kWh for small-scale (less than 4kWh) retrofitted solar power installations;
  • an additional payment will be made for exported power (an indicative price of 5p/kWh is cited);
  • not all renewable technologies will be included in the scheme, those that are not included will remain eligible for the Renewables Obligation; and
  • tariff levels are expected to ramp down over time but once an eligible project has qualified for a tariff the level of the tariff will not be adjusted for that project.

The scheme will be funded by all licensed electricity suppliers, and ultimately by electricity consumers through increases in electricity bills. Only the larger suppliers will be required to offer Feed-in Tariffs, with the cost being shared between all licensed suppliers in proportion to their market share through "levelisation" payments.

Renewable Heat Incentive

Powers were included in the Energy Act 2008 to implement a Renewable Heat Incentative. Government has confirmed that it is working towards introducing the scheme in April 2011, and that the scheme will cover all scales of installations from large industrial sites down to the domestic level. As regards biomass - a key fuel for heat production - Government expects to use the sustainability criteria applicable to biomass used for renewable electricity generation under the Renewables Obligation. A further consultation document is due to be issued towards the end of 2009.

Renewable Transport Fuel Obligation

The Renewable Transport Fuel Obligation (RTFO) operates in a similar way to the Renewables Obligation. Suppliers of road transport fuel (mainly petrol or diesel) on which excise duty is payable are required to produce certificates to demonstrate that a certain percentage of the fuels that they supply are derived from a renewable source, or pay a "buy-out" price. Certificates are issued to the producers of renewable fuels to be sold by them to the purchaser of the renewable fuel, or separately traded with retailers subject to an obligation.

A market in certificates under the scheme has started to develop following some initial issues and corrective measures taken in relation to the calculation of the level of the obligation on fuel retailers in its first year of operation (April 2008 – April 2009). Government has said that it will amend or replace the RTFO scheme to take into account the increased targets for renewable transport and greenhouse gas savings set out in the Renewable Energy and Fuel Quality Directives, including increased support for electric vehicles and advanced biofuels. Government expects to consult on the legislation required to implement these changes in early 2010, to take effect in December 2009.

Grid issues

Access to, and development of electricity grid infrastructure remains a key issue for the sector:

  • Government has confirmed that it will use powers under section 84 of the Energy Act to implement grid access reforms with measures to be effective from June 2010;
  • the National Policy Statement to take effect under the Planning Act 2008 relating to grid infrastructure is expected to be released for consultation in the Autumn alongside the Energy and Renewables National Policy Statements;
  • a vision for a "smart grid" will be published later this year; and
  • further work is being carried out on offshore grids to connect non-UK offshore projects to the UK grid.

Government does not have all the answers

The Strategy admits that Government does not have all the answers, and policies confirmed in the Strategy (including those for which powers were included in the Energy Act 2008) are still subject to State Aid clearances and parliamentary approval of the detailed measures. The energy regulator, Ofgem, will also have a key role to play. Further adjustments to Ofgem's duties will be made to expressly refer to security of supply and the reduction of carbon emissions.