Structure of proposed changes

The Energy Bill contains (at clause 36) substantial changes to sections 32 to 32C of the Electricity Act 1989, which will enable the Government to bring forward its intended changes to the Renewables Obligation Orders.

These changes are significant (for example banding at the proposed section 32D), but only tell half the story. The remainder will not become clear until we see the proposed changes to the Orders. However, the accompanying response paper provides a detailed overview of the Government's intentions for the Renewables Obligation.

The Government intends that the Energy Bill will become law by this summer. Once this has been achieved, it will bring forward the proposed changes to the Renewables Obligation Orders. The Government intends to make the changes in time for them to become effective by the start of the Obligation Period commencing on 1 April 2009.

Of course the Renewables Obligation Orders for Northern Ireland and Scotland are devolved matters, but it is hoped that the approach remains consistent throughout the UK.

Banding – level of support

The most significant proposed change remains that to 'band' the Obligation by technology. The concept remains largely unchanged from that outlined in the May 2007 consultation.

However, there are some changes – not least to the number of Renewables Oligation Certificates (ROCs) per MWh to be received by sewage gas and 'non-energy crop' co-firing. Each such technology will now be eligible for 0.5 ROCs per MWh (rather than 0.25) but the cap on a proportion of a supplier's obligation that can be met by presenting co-fired ROCs is to be retained at 10%.

The level of support proposed for each technology is now as follows:

You will note that 'tidal impoundment' technologies are to receive 2 ROCs per MWh (rather than the 1 ROC they would previously have received as 'not specified'), but that schemes of over 1 GW will be excluded from support under the Renewables Obligation.

Microgeneration is also to be treated differently – all microgeneration projects will receive 2 ROCs per MWh regardless of technology, and regardless of when they were accredited.

Banding – grandfathering

The principle of grandfathering remains:

  • Projects that received full accreditation prior to 11 July 2006 will continue to receive 1 ROC per MWh.
  • Projects 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.
  • Projects that do not have preliminary accreditation by 1 April 2009 and/or do not obtain full accreditation by 31 March 2011 will be banded up or banded down as the case may be.

There are, however, exceptions:

  • Microgeneration will not be subject to grandfathering – so all projects will receive 2 ROCs per MWh regardless of accreditation date, but all projects may suffer in the future if microgeneration is banded down.
  • Similarly co-firing will not be subject to grandfathering – so all projects will receive 0.5 ROCs or 1 ROC per MWh dependent on biomass type but regardless of accreditation date, and all projects would be subject to any future banding up or banding down of the technology.
  • Additional capacity – which will be treated as if it were a new project.
  • Projects in receipt of capital grants – which will only be able to take advantage of any banding up where they repay those grants.

The Government has said that it will further consider suggestions that pre-2006 biomass generators and anaerobic digestion plants should be banded up, in light of suggestions that they will be at a disadvantage in competing for fuel.

The Government has indicated that no limit will be placed on the period of support that projects can receive – though the Government makes no commitments beyond 2027.

Headroom and ski-slope

Proposals remain to introduce a mechanism by which the level of the Renewables Obligation is subject to automatic annual adjustment by reference to expected renewable generation. However, the Government is now suggesting 'headroom' of 8% (rather than 6%).

The Government has also said that it is still considering any need for a 'ski-slope' mechanism to avoid the 'cliff-edge' scenario (where ROC prices fall to zero due to over supply). There are some indications that the Government feels the issue less pressing given the proposed 'headroom' mechanism. This may well be something that the Government chooses not to implement in 2009 – it considers that it has the necessary powers to introduce a 'ski-slope' mechanism without further primary legislation in any event.

Energy from waste – biomass content

The Government still intends to introduce a deemed level of biomass content for waste. However, the Government now proposes to introduce a higher level of deemed biomass content – 50% rather than 35%.

The 50% figure will reduce over time to reflect the Government's expectation that the biomass content of waste should decrease over time as the use of separate collection and treatment processes increases.

Operators will be entitled to prove that their waste has a higher biomass energy content than that which would otherwise be deemed. Similarly, Ofgem will have powers to withhold ROCs where there is reasonable doubt that the biomass energy content reaches the deemed level.

The Government also proposes to allow operators to co-fire biomass with waste as well as fossil fuel, and still receive ROCs in respect of the biomass element.

Private wire networks – end to sale and on-sale?

The Energy Bill proposes changes to the definition of 'permitted way' in section 32B of the Electricity Act. The additional 'permitted way' refers to electricity supplied by an unlicensed supplier through a private wire network.

This change may allow those with 'on-site' generating stations that supply a 'host' consumer to qualify for ROCs without the need to involve a licensed supplier.

Other matters

There are a number of other matters covered in the response paper including:

  • Costs of administering the Renewables Obligation – Ofgem's costs are currently met through licensing fees. The Government proposes that Ofgem's costs of administering the Obligation should be met from the buy-out fund. Consequently, the money recycled to suppliers from each year's buy-out fund will be reduced by an amount equal to Ofgem's administrative costs for that year;
  • Biomass CHP efficiency – it is proposed that the overall efficiency criterion under the Obligation for energy from waste CHP and biomass CHP stations over 25 MW should be reduced to 35% of the gross calorific value.