A response to the Renewables Obligation consultation – June 2005
Produced by members of the Energy Institute, led by Dr Tony Day CEng FEI
The Renewables Obligation (RO) is the foremost support mechanism in the UK for renewables. A common complaint about this mechanism is that it only values electricity, while ignoring heat from renewable and energy efficient sources. It is disappointing that moves to redress this are not highlighted in this consultation. The RO is therefore only a renewable electricity obligation, and it would be welcome if the government made its intentions clear about low and zero carbon technologies in the round. Green heat certificates have been mooted, while support for combined heat and power in the main comes via the Climate Change Levy. The RO should therefore be set in the context of UK energy policy as a whole, and a clear expression of how it integrates with other energy sources and end uses would be welcome.
Impact of the Obligation
While there is evidence that the RO has encouraged an expansion of particular technologies, the picture is difficult to assess across the industry as a whole. A breakdown of capacity into Non-Fossil Fuel Obligation (NFFO) and RO eligible projects would have been more helpful in this respect. It is a little surprising that this data is unavailable, and without it, it is impossible to provide a full assessment of the success of the RO. Those technologies that have benefited most are those with the most attractive returns prior to the introduction of the obligation. The RO has therefore not encouraged greater diversification, nor directly affected the take-up of less profitable technologies.
However, it is operating broadly as expected in respect of those technologies that it currently assists. As a replacement to the NFFO, it must be seen as an improvement since some of the constraints of that system have been removed. NFFO encouraged lowest cost developments while severely constraining capacity, and was heavily influenced by government intervention. The RO, on the other hand, has allowed greater expansion for those technologies that cost less than the buy-out price. However, the RO offers nothing to more expensive and, particularly, embedded private generation. The latter can offer a significant contribution to carbon reductions, but have little support (apart from limited grants) from what must be seen as the headline support mechanism for renewables. While hailed as technology neutral the RO is uneven in the way it adds value to renewable electricity; for example it does not account for the value of avoided costs of alternatives, particularly if future ROC price volatility affects current investment decisions.
The analysis that ROC price will become unstable as obligation capacities are approached is a cause for concern as it suggests RO targets will never be reached via this mechanism alone. Given the above comments that some technologies and generators are effectively excluded from the mechanism, this highlights a pressing need to augment the RO. Whatever is put in place must be transparent, simple and accessible to a wider number of players. Strengthening and further expansion of future targets may help mitigate this problem, by shifting the emphasis in market responses from those concerned with the immediate target alone, to those plus future targets.
Private and embedded generation
Technologies such as domestic (or even commercially) mounted PV were not originally designed to benefit from the RO (except perhaps by association with the renewables industry). However, there is growing interest and uptake of these technologies to the extent where a true value must be placed on the energy produced.
ROCs are only eligible against electricity traded through a licensed supplier, which is currently causing a major obstacle for micro-generators. The infancy of sale and buy-back agreements means that the lack of experience in this area is a serious impediment to development of this market. Procedures for setting up arrangements between micro-generators and licensed suppliers must be streamlined and simplified, and we support the proposal in 8.23 to remove the obligation for sale and buy-back agreements. The current arrangement forces small generators to unnecessarily share some of their income with licensed suppliers. We do not believe that the intended purpose of this part of the legislation i.e. to guarantee that the electricity has been generated and supplied in the UK, is really required for small embedded generators who are clearly adopting a local direct sales approach.
If sale and buy-back agreements are to be retained, the proposals for allowing agents to act on behalf of micro-generators (8.21 and Q54) may help the situation, but maintains a level of complexity and administrative cost that will still disadvantage this type of generation. It would be even more straightforward if suppliers could offer integrated supply contract packages that incorporate renewable generation. It is important that the entire output from domestically embedded systems are paid the full ROC value.
Currently there are only a few suppliers offering sale and buy-back agreements, which is probably due to the existing complexity and perceived low value of the service to the suppliers. There is an opportunity for the process to be simplified in order to properly and fairly stimulate this significant potential source of renewable energy. Unless this sector is addressed on even terms with larger scale generators, in terms of the value of electricity generated, then it will always be seen as the indulgence of a minority.
Energy from Waste (EfW)
The ILEX report examines the subject very fully and we agree with its conclusions; rising electricity, fuel and landfill costs probably mean that EfW could be a viable commercial proposition in the near future, if there was a means of obtaining long-term contracts for the power. We would suggest that one possible innovative solution would be for the waste authorities to buy the electricity themselves. Selling the power into the local retail market would considerably improve the economics and by-pass the NETA barrier.
Independent research verifies that income from the gate fee is by far the most important income stream even for 100% waste biomass feed stocks. While ROC income would assist these new conversion technologies to some degree, the level of support would be significantly less for mixed wastes. Given the other factors contained in the ILEX analysis, it would appear that no significant changes to the rules are necessary in this area.
The proposals in section 3 on energy from mixed wastes taken together with the current rules and proposals on co-firing with biomass do seem a little muddled. Energy from mixed waste is a form of biomass co-firing. In a typical incinerator 40% of the energy might come from the fossil fuel plastics and 60% from the biomass element. It therefore seems inconsistent to propose restricting the ability to claim ROCs for co-fired biomass and whilst at the same time relaxing the rules on co-firing of biomass waste. Where would a scheme where “waste” cooking oil is co-fired with “non-waste” natural gas in a dual fuel CHP engine
sit in this proposal? (A real scheme which is currently under development in London.) In light of this we would also seek better clarification on the definitions within the term “biomass”. In
addition, mixed wastes are (at present) entirely locally-sourced, unlike much of the biomass which has been used for co-firing, which has been imported, for example from Asia. Whilst it
is essential to ensure that international trade in waste is not encouraged, the present definitions clearly breach the „proximity principle‟ for sourcing of low density materials.
One further concern is the analysis that any increase in the obligation would lead to extra costs to the consumer (paragraph 3.17). While we do not believe the obligation should be increased to account for mixed EfW ROC provision, there is a point of principle that the level of the obligation is being restricted on grounds of overall energy price constraint. If energy prices are to reflect the true environmental value of generation then the government and OFGEM should be prepared to allow the market to find this true value. Restricting the obligation on grounds of cost is, in effect, a strong intervention that limits the development of some renewables.
Combined Heat and Power (CHP)
This is a hugely important area. The experience of Energy Institute members who are developing CHP schemes is that the fundamental problem is the low wholesale price of electricity. An evolution of the RO that would allow gas CHP generators to claim a higher price would certainly be welcomed.
However it is not clear how the proposal in 6.1 would actually achieve this in practice. We would support a separate obligation for CHP. Though we would request that this be moved forward quickly as we recognise that this introduction of new legislation would have lengthy lead in times and the need to support CHP is pressing. If in the interim the RO were adapted to provide additional support as an interim measure we would welcome this.
Again if this 6.1 mechanism were used and only CHP generated electricity sold to licensed suppliers qualified this would clearly disadvantage those schemes pioneering the “direct sales” approach - which is currently the only way of making small embedded CHP schemes commercially viable.
The Impax study suggests a majority of CHP operators and stakeholders do not favour these proposed changes to the RO. The analysis that such a proposal could not meet the government‟s target for CHP gives further weight to the argument that alternative support mechanisms outside the RO should be looked at. Adjusting the RO, increasing its complexity, and introducing uncertainty into ROC price stability (through the intervention of setting some arbitrary cap for CHP), may have adverse impacts that are not able to be fully predicted.
The proposal once again concentrates on the value of electricity – heat value is only
accounted for by proxy through the CHPQA (Quality Assurance for CHP). It also only accounts for electricity exported onto the system, and therefore provides no incentive to smaller scale CHP. As the Impax study points out, a large number of small scale systems can have equal environmental benefit as a few large scale ones, and it is essential that they are given equal support. A piecemeal approach to CHP support would be overly complex and incoherent.
There is the additional issue of CHP supplied by bio-fuels (either bio-diesel, anaerobic digestion gas or others). Such schemes may be eligible for ROCs, but this depends upon whether they export or not. Small scale schemes and those with private customers can only benefit from ROCs via sale and buy-back agreements. Where private wires are used even this possibility is removed. As the environmental benefit is the same whatever the contractual selling arrangements it is important that such schemes are allowed to receive the same benefits as other renewables.
Such small scale renewable CHP schemes have the additional environmental benefit of renewable heat generation. There is no Climate Change Levy benefit as the fuel does not attract CCL in the first place. The environmental value of this renewable heat is therefore not recognised under current arrangements. While CHP from bio-fuels has a very high environmental value there is currently no support mechanism that can effectively deal with
such systems. Support for CHP should therefore be comprehensive and be able to reward the true environmental benefits, whatever the technology. Given the reality of the economics of embedded CHP, the statements in 6.7 showing concerns that a subsidy could attract criticism if it causes the market for CHP to actually take off, seem unwarranted.
Fossil fuel generating stations with dedicated renewables generating sets Proposals in 8.26, 8.27 and 8.28 would have a real impact on planned schemes in London. Broadly speaking we welcome the proposal to allow dedicated renewables generating sets using biomass fuel to qualify for ROCs. However the practicalities of this are complex and the proposal may create perverse incentives leading to sub-optimal environmental outcomes.
For instance the smallest size of CHP engine that can burn both gas and
biodiesel/conventional diesel is around 5.6MWe. Below this size, engines are either dedicated gas engines or dedicated diesel engines. In small embedded CHP schemes serving district heating where this might be the largest size that the district heating network would allow, the 8.26 proposal would create an incentive to use a number of small engines with one dedicated specifically to biofuels. This smaller engine would then be forced to use conventional diesel as a backup fuel should the supply of biofuels be interrupted by the price rises or whatever. Given that diesel has higher carbon content than gas and smaller CHP engines are less efficient, this is clearly not the best outcome, environmentally or economically.
If the impact of the co-firing regulations is to prevent existing large coal fired power stations incorporating small amounts of biomass in their fuel mix and thereby adversely impacting the ROC market, it may be appropriate to change the definition of co-firing to specifically disqualify this element (from 2009)? Or perhaps a separate target could be created for this particular sector on similar lines to the proposal from CHP in section 6? Biomass is a renewable source and something which should be encouraged, whatever method is used to transform it into electricity.
It is difficult to fully assess the success of the RO without a more comprehensive breakdown of renewable energy contracts. However, the evidence gathered by the Energy Institute indicates a pressing need to address those sectors that are currently excluded from the RO. This includes improved support for embedded and micro-generation, CHP, and innovative supply arrangements. Some of the proposals would introduce further complexity, with the danger of imposing unnecessary administration costs. There should be an overall move towards streamlining and simplifying many of the current arrangements, which would lead to greater transparency and improved access to the energy market for new entrants.
We acknowledge that this is a preliminary consultation and that we have submitted our points in summary to assist. If you would like further information or detail on the content of this submission, please contact:
61 New Cavendish Street
London W1G 7AR
t: +44 (0)20 7467 7173
f: +44(0)20 7255 1472