The 2009 vintage of the Renewables Obligation (RO) for England & Wales, Scotland and Northern Ireland became law this week. Even by the standards of the RO – which has been revised more-or-less annually since its inception – the most recent legislation represents a new era for the RO and therefore for renewable electricity generation in the United Kingdom.
Basics of the Renewables Obligation
The RO is designed to encourage the generation of renewable electricity.
The nature and requirements of the RO have changed somewhat – from an obligation to source a certain amount of electricity from renewable sources, to an obligation to submit a certain number of Renewables Obligation Certificates (ROCs).
In practice though, it always was an obligation to submit ROCs, and the fundamentals remain unchanged.
Those licensed to supply electricity (whether in Great Britain or Northern Ireland) are required to submit (or, in the statutory language, produce) a certain number of ROCs in respect of each year. For these purposes, a 1 April to 31 March year is used – an Obligation Period.
The number of ROCs that each supplier is obliged to submit in respect of each Obligation Period represents a percentage of the total electricity supplied by that supplier in that Obligation Period. The applicable percentage for each Obligation Period is calculated in accordance with the Order – see calculating the level of the RO below.
Separate Obligations apply to each of (1) England & Wales, (2) Scotland and (3) Northern Ireland, so the supplier is obliged to submit a particular number of ROCs in relation to the amount it has supplied in those three jurisdictions.
The ROCs to be submitted in respect of an Obligation Period must be submitted by the 1 September following the end of the Obligation Period. They are submitted to Ofgem (acting as an agent of the Northern Ireland Authority for Utility Regulation (NIAUR) for Northern Ireland).
The consequence of the RO is that suppliers need to obtain ROCs. ROCs are issued to those who generate renewable electricity but can subsequently be bought by, and sold to, anyone. Suppliers are therefore encouraged either to generate their own renewable electricity, or to purchase ROCs from others who generate renewable electricity.
However, the RO is designed with the intention that there will never be enough ROCs in existence to allow all suppliers to entirely satisfy their obligation to submit ROCs. As an alternative to submitting ROCs, suppliers can "buy-out" their obligation by paying a fee to Ofgem for each ROC it was obliged to, but has not, submitted. This fee – referred to as the "buy-out price" - is currently £37.19, and will increase in future years inline with inflation (RPI).
All the money received by Ofgem by way of buy-out price payments is aggregated together to form a "buy-out fund". The money in the buy-out fund is then paid back to those suppliers who submitted ROCs in proportion to the number of ROCs they submitted – this is sometimes referred to as the "recycling payment". There are actually separate buy-out funds for each of the three jurisdictions, but the recycling payments from each fund are distributed on a UK-wide basis.
The buy-out price and the recycled payment (or at least participants' estimates of the recycled payment) determine the market value of ROCs, as suppliers can either chose to (1) pay the buy-out price or (2) buy ROCs and benefit from the recycled payment.
Banding generally (including grandfathering)
The focus of the RO has been radically altered – no longer technology neutral, it is intended to give increased incentives to developing technologies.
Referred to as "banding" – because the technologies in some bands receive more certificates per unit of generation, while those in others receive less – the significance of this change in focus cannot be overstated.
Having said that, many will not experience any practical change as a result of banding (at least for the time being). Most existing plants have the benefit of grandfathering, which preserves its entitlement to the same level of support previously enjoyed. While the banding applied to onshore wind – the most prevalent technology of the past few years – represents no change from the previous regime.
Technologies such as biomass, waste, offshore wind and wave will benefit from the introduction of banding. However, some of the rules are complex – see banding for waste and biomass (including the advanced conversion technologies, co-firing and combined heat and power) - while for other technologies, such as wave, the introduction of banding alone will not be sufficient to significantly increase development.
Of course, where there are winners, there must also be losers – sewage gas, landfill gas and particularly co-firing of non-energy crops. A detailed breakdown of eligibility by technology is set out below:
To view table click here.
However, microgeneration is treated differently – all microgeneration projects will receive 2 ROCs per MWh regardless of technology. Also, projects that benefit from banding must return any capital grants awarded prior to 11 July 2006.
Furthermore, the above table does not apply in respect of "grandfathered" landfill gas, sewage gas, offshore wind, wave or solar photovoltaic, all of which will continue to receive 1 ROC per MWh. The principle of grandfathering means that:
- projects using those technologies that received full accreditation prior to 11 July 2006 will continue to receive 1 ROC per MWh; and
- projects using those technologies that did not have full accreditation by that date, but which obtain preliminary accreditation by 1 April 2009 and full accreditation by 31 March 2011 will be no worse off than under the current regime – where the technology is banded up, they will be banded up; where the technology is banded down, they will retain 1 ROC per MWh.
The principle of grandfathering does not, however, apply to additional capacity – which will be treated as if it were a new project (the output from which can either be metered separately, or pro-rated on the basis of capacity).
The banding of technologies has been a complicated exercise. The Government maintains that the winners and losers will balance one another out, so that the overall number of ROCs, and therefore the recycling payment and market price of ROCs, is maintained. It will be interesting to see how prices are affected in 2009/10.
Banding for waste and biomass (including the advanced conversion technologies, co-firing and combined heat and power)
The most complicated aspects of banding (and indeed the RO generally) relate to the incineration, or the advanced conversion to electricity, of plant/animal matter.
The eligibility of fuels derived from plant/animal matter depends upon:
- the technology used (incineration, anaerobic digestion, gasification, pyrolysis);
- whether the plant is a qualifying combined heat and power (CHP) station;
- the proportion of the energy content derived from plant/animal matter as opposed to fossil fuels;
- whether the plant/animal matter is an energy crop; and
- whether the fossil fuel is waste (and, if it is, if it is solid recovered fuel).
Assessments of energy content and fuel mix are applied to the period of one month. In assessing eligibility, fossil fuel used for permitted ancillary purposes (for example, ignition and emissions control) is not included.
Also, as set out in banding generally, the level of eligibility described below does not apply to microgenerators, to grandfathered landfill gas or sewage digestion plants, or to those who do not return grants.
Advanced conversion technologies
In the case of anaerobic digestion, gasification and pyrolysis (referred to as advanced conversion technologies), generators will receive the following number of ROCs for each MWh of electricity attributable to the renewable energy content of the fuel:
- anaerobic digestion earns 2 ROCs (unless it is landfill or sewage, in which case it earns 0.25 ROCs or 0.5 ROCs respectively);
- pre-banding gasification or pyrolysis earns 1 ROC (this is gasification/pyrolysis that does not meet the requirements of standard gasification/pyrolysis, but which had preliminary accreditation before April 2009 and is accredited by April 2011);
- standard gasification or pyrolysis earns 1 ROC (this is gasification/pyrolysis that meets the requirements of standard gasification/pyrolysis as set out in schedule 2 to the Order); and
- advanced gasification or pyrolysis earns 2 ROCs (this is gasification/pyrolysis that meets the requirements of advanced gasification/pyrolysis as set out in schedule 2 to the Order).
In the case of the advanced conversion technologies, the inclusion of CHP does not improve eligibility.
Nor is the concept of co-firing relevant in the case of advanced conversion technologies. The burning of fossil fuel derived gases alongside gases produced from advanced conversion technologies does not generally diminish the eligibility of the electricity attributable to the renewable sources (though, of course, no ROCs are earned in respect of the fossil fuel energy content).
The position in respect of straight incineration is (even) more complicated. Generators will receive the following number of ROCs for each MWh of electricity attributable to the renewable energy content of the fuel:
- if the energy content of the fuel attributable to plant/animal matter is 90% or more (regardless of whether there is a single fuel stream or a number of fuel streams, some of which may be waste) the fuel is classed as biomass, which:
- ordinarily earns 1.5 ROCs; but
- gets 2 ROCs for the proportion attributable to energy crops;
- if the energy content of the fuel attributable to plant / animal matter is less than 90%, the generator falls into the co-firing category, which:
- is ordinarily eligible for 0.5 ROCs; but
- gets 1 ROC for energy crops; and
- no ROCs if the fuel mix includes any waste (save where the only waste is solid recovered fuel (SRF), as defined in the Orders, in which case the renewable energy content of the SRF is ignored).
Incineration with CHP
The position is, however, altered with the inclusion of CHP (provided the fossil fuel and biomass are burned in separate boilers). The qualifying power output (the good quality element) of the CHP-generated electricity will receive the following number of ROCs for each MWh of electricity attributable to the renewable energy content of the fuel:
- in the case of biomass (whether or not it is from energy crops), 2 ROCs; and
- in respect of co-firing, 1 ROC (save where energy crops are used, which will receive 1.5 ROCs).
Furthermore, a CHP station can earn ROCs for waste incineration (regardless of whether or not the waste is SRF). Such energy from waste stations will earn 1 ROC per MWh for the plant/animal related energy content of the waste; provided that the waste must have a renewable energy content of at least 10%.
Measuring renewable content of fuel (particularly for municipal waste)
Establishing the proportion of a fuel's energy content that comes from renewable sources is important in two regards:
- first, the banding that applies may depend upon the energy content – the distinction between 90% plant/animal matter (biomass), and 89% plant / animal matter (co-firing or waste) is particularly significant;
- secondly, of course, ROCs will only be issued in respect of the renewable energy content.
The fuel measurement and sampling requirements have always been a matter of contention, and have been regarded as particularly onerous in the case of mixed waste streams - with the, oft-quoted, result that no ROCs have been issued in respect of CHP waste since it became eligible in 2006.
It is in respect of municipal waste that the biggest change has occurred: it is now open to the generator to use published data to satisfy Ofgem that the renewable energy content is likely to be 50% or more, in which case a 50% energy content can be relied upon without further sampling or measurement.
Otherwise, the Orders do not go into much practical detail as to how the energy content of fuel is to be established. Nevertheless, a number of useful statements regarding fuel measurement and sampling were made by Department of Energy and Climate Change (DECC) (and its predecessors) during the long consultation process, and these have largely been reflected in Ofgem's Fuel Measurement and Sampling guidance document.
Of course, this is only guidance and Ofgem will consider each generating station on a case-by-case basis, but it is to be hoped that measurement and sampling becomes less problematic. The new approach to municipal waste should be particularly helpful.
Reports on the origin of biomass (sustainability reporting)
A further requirement particular to biomass generation is the new sustainability reporting requirements. There is no obligation to ensure that the fuel is sustainable; merely an obligation to report on its type, history and origin.
Generators are now required to submit reports providing information on each "consignment" of fuel used in an Obligation Period. Reports are to be submitted annually by the 31 May following the end of the Obligation Period.
The term "consignment" was a cause for some concern during consultation, but DECC assured participants that it would be applied leniently. The Ofgem guidance also attempts to reassure, but declines to offer any definition - or even an example - of what "consignment" means. Generators will therefore have to apply the term as they see fit.
It is very important that the reports are submitted. Where they are not, Ofgem is entitled to withhold a number of ROCs commensurate with the number that the generator received in respect of electricity generated from the consignments in question. The actual ROCs are not revoked, but an equal number of future ROCs is instead foregone.
Calculating the level of the RO
The RO is now an obligation on licensed suppliers to submit to Ofgem a certain number of ROCs in respect of each Obligation Period. That number of ROCs is determined as a percentage of the amount of electricity supplied by the supplier during the Obligation Period in question.
Originally, the applicable percentage was set out on the face of the Orders. Schedule 1 still contains percentages, which increase incrementally from the current level of 9.7% to 15.4% in 2015/16, but then remain at 15.4% until 2026/27. However, these are now minimum levels.
Subject to these minimum levels, the percentage will be set prior to the start of each Obligation Period at 8% above the number of ROCs that DECC expects to be issued in respect of that period.
This mechanism is intended to give long-term assurance that the demand for ROCs will be sufficient each year to maintain ROC values, without setting it too high (which would place an undue cost on consumers).
There is, however, also a cap on the level of the RO. The percentage cannot increase above 20%.
The cap on the proportion of a supplier's RO that can be met with co-fired ROCs
The RO has always contained a limit on the proportion of a supplier's obligation that can be met by submitting ROCs issued in respect of co-firing. This limit was originally intended to reduce over time, thereby phasing out co-firing as an eligible renewable source.
The cap has now been set at 12.5%, though 10% has been retained for the 2009/10 Obligation Period. There is no provision for the cap to reduce in future, and indeed it is unlikely to do so as the rewards for co-firing can now be controlled through banding.
The co-firing of energy crops and the co-firing of biomass with CHP does not, however, count as co-firing for these purposes.
Broadening the concept of "permitted ways" (private wires)
Originally, ROCs could only be issued in respect of electricity supplied by a licensed supplier. This was logical, given that the RO was an obligation on licensed suppliers to source a proportion of the electricity they supply from renewable sources.
Over time, however, the classes of electricity in respect of which ROCs can be issued has been broadened – electricity that has been used in "permitted ways".
For the past few years, generators who supply electricity to themselves (whether for consumption at the generating station or at other on-site facilities) have been able to claim ROCs.
Following the 2009 Order, it is now possible for generators to claim ROCs in relation to electricity they supply directly to third parties. This option is only available to generators with a declared net capacity of 10 MW or less, and the electricity must be conveyed only along private wires (and not along licensed distribution or transmission networks).
The deduction of Ofgem's costs from the buy-out funds
The increasing level of complexity is likely to increase the costs Ofgem incurs in administering the RO. On the other hand, some procedures for microgenerators have been simplified, and the expected feed-in tariff for small generators will ease the burden for Ofgem further.
In any event, Ofgem's costs will no longer be met from its general budget, and will instead come out of the buy-out fund. This will clearly reduce the recycled payment and therefore the market price for ROCs.
DECC has estimated that the reduction will be in the order of seven pence per ROC.
History of changes to the RO
The RO has gone through a number of changes since its inception in 2002. Some of these can be charted through our previous notes on the subject:
- Government response to Renewables Obligation consultation
- Energy White Paper: Banding proposals
- Banding of the renewables obligation
- (Further) Reform of the renewables obligation
- DTI's final decisions for the Renewables Obligation Order 2006
- Preliminary consultation on the 2005/6 Review of the Renewables Obligation
- Mutualisation of the Buy-Out Fund: Securing the Renewables Obligation
- NFFO sterilisation - reversing the process