UK: Changes To The Renewables Obligation

Last Updated: 27 July 2009
Article by Munir Hassan and Juliet Stradling

On 15th July 2009, the Department of Energy and Climate Change ("DECC") published, in addition to The UK Low Carbon Transition Plan and The Renewable Energy Strategy, a public consultation on financial incentives for renewable electricity. The consultation covers changes to the renewables obligation (the "RO") and the implementation of the new feed-in tariffs. It does not cover renewable heat, potential subsidy mechanisms for a Severn Tidal Power Scheme or renewable transport, which will be the subjects of future consultation papers.

The deadline for responding to the consultation is 15th October 2009.

To view the article in full, please see below:




Full Article

On 15th July 2009, the Department of Energy and Climate Change ("DECC") published, in addition to The UK Low Carbon Transition Plan and The Renewable Energy Strategy, a public consultation on financial incentives for renewable electricity. The consultation covers changes to the renewables obligation (the "RO") and the implementation of the new feed-in tariffs. It does not cover renewable heat, potential subsidy mechanisms for a Severn Tidal Power Scheme or renewable transport, which will be the subjects of future consultation papers.

The deadline for responding to the consultation is 15th October 2009.

Key Changes That Would Take Effect On 1 April 2010

  • Extension To 2037 And 20-Year Participation Limit: In order to ensure that the development of new projects is encouraged, the consultation confirmed that the RO would be extended until 2037 for new projects (being those accredited on or after 26 June 2008), but in order to ensure that new projects do not receive support for longer than necessary, a 20-year participation limit has been introduced. Projects receiving accreditation on or after 26 June 2008 and any additional capacity added to existing projects would be treated as "new projects".
  • Removal Of Cap On Obligation Level Without Replacement: One of the original design features of the RO was the "scarcity signal", meaning that the wider the gap between the actual level of renewable generation and the level of the renewables obligation, the higher ROC prices would be. This was intended to provide a stronger incentive to build renewable generation when levels of deployment were low. It is, however, now thought that this feature has had little practical effect in increasing deployment levels (which are affected principally by planning and grid constraints) and has resulted in "excessive" ROC prices. Therefore, DECC is not including fixed obligation levels in the extended RO, but is allowing headroom to determine the obligation level. It is also removing the current cap of 20 ROC/100MWh on the obligation level and not replacing it, reflecting the flexibility around the extent to which renewable electricity contributes to the UK's 15% renewable energy target by 2020 (or perhaps the belief that there is no real danger of levels of renewable generation exceeding 30% of total generation).
  • Level Of Headroom: There has been a concern that setting the obligation level at just 8% above the expected level of ROCs in any obligation period is insufficient to avoid the possibility of the number of ROCs exceeding the obligation level - circumstances which could trigger a price crash. Predicting the number of ROCs a year ahead involves predicting total electricity use and the amount of renewable generation in different technology bands, which means there is considerable uncertainty involved in setting the obligation level. A mechanism would be introduced to increase the level of headroom to 10% by 2014 through a series of incremental increases. This is the level of headroom that a number of bodies, including the REA, originally argued for.
  • Generating Stations Outside The UK: Although the paper reiterates that the Government is aiming to meet the 15% target domestically as far as possible, it states that it is open to the participation in the RO of renewable projects outside the UK on a case-by-case basis and subject to certain conditions, including that the electricity is physically imported into and consumed in the UK. The examples given of potential projects are windfarms in seas adjacent to the UK and geothermal electricity imported from Iceland via a new interconnector. It will be interesting to see whether the draft order to be published in September sets out the detailed conditions of projects' eligibility or whether a significant degree of discretion is retained for the Secretary of State to decide on any project's eligibility.
  • Early Review Of Banding For Certain Offshore Wind Farms: In the April 2009 Budget, the Chancellor announced an early review of the banding for offshore wind, proposing that projects achieving certain milestones in the next couple of years would be "banded up". This will be implemented in April 2010 provided that the banding review and the consultation confirm the evidence received to date. Wind farms would be eligible for 2 ROCs per MWh where:
    • no firm contract for the delivery of wind turbines has been entered into before 22 April 2009
    • a firm contract for the delivery of wind turbines is made no later than 31 March 2010
    • a copy of that contract is sent to Ofgem, or otherwise made available for audit and
    • at least one foundation for the installation of a wind turbine is completed to above the surface of the sea no later than 31 December 2011.
  • Wind farms would be eligible for 1.75 ROCs per MWh if they meet the same conditions a year later (except for the first condition, which must be met by 1 April 2010).
  • No Limit To Be Introduced On Use Of Tallow At This Stage: There have been concerns that demand for tallow created by the RO could lead to the supply of tallow for the oleo-chemical industry being restricted, potentially resulting in that industry using palm oil (which has sustainability concerns) instead. In spite of this, the use of tallow within the RO will not be limited at this stage. This decision reflects the possible closure of the only oleo-chemical producer currently using tallow in the UK and the pending clarification of the application of the Waste Incineration Directive to burning tallow. There may also have been a desire not to pre-empt the European Commission's report on biomass sustainability which is due by the end of the year.

Longer Term Change: Revenue Stabilisation Mechanism

  • Background: There has been a concern that the RO subsidy has been excessive in a period when wholesale electricity prices have been high, with the result that the RO has been unnecessarily expensive. This, coupled with a desire to reduce the uncertainty of future income streams (and hence financing costs) for renewable generators, has led to the proposed introduction of a mechanism that would result in generators receiving more stable revenues. DECC's proposed solution is a mechanism whereby renewable generators would neither receive the full benefit of extra revenue when wholesale electricity prices rise nor bear the full risk when wholesale electricity prices fall.
  • Contracts For Differences: The most likely way of implementing this would be through contracts for differences which would operate alongside the RO. This would involve the Government determining a reference price for wholesale renewable power, set at a level which, together with the revenue from the RO, would enable investors to cover their costs and return on investment. In years when the chosen wholesale price index exceeds the reference price, generators would pay back the difference to the relevant Government agency; and in years when the chosen wholesale price index is lower than the reference price, generators would receive the difference.
  • Compulsory From April 2013: It is implied that this mechanism would be compulsory for projects that start generating on or after 1 April 2013, with projects that start generating between the date of the consultation (15th July 2009) and the start of the scheme having a one-off option of joining it. Due to their potential exposure to fuel prices which drive wholesale electricity prices, the mechanism is unlikely to apply to co-firing generators. It also may not apply to biomass generators if a link is shown between biomass and fossil fuel prices.
  • Reference Price: Little is said in the consultation about how the Government would determine the reference price, but it seems likely that, as is the case with ROC banding, it would be fixed for a project's lifetime. It is worth noting here that in the Renewable Energy Strategy consultation paper published in June 2008, it is stated, "the current RO was designed on the basis of wholesale prices fluctuating around a relatively stable level of £40/MWh", which may give an indication of the Government's thinking.
  • Wholesale Price Index: The consultation paper does recognise the difficulties of choosing a wholesale price index and the risk that it will not reflect the actual price received by many renewable generators. This would mean that renewable generators would need to take steps to hedge this risk.
  • RO vs FITs: Following yet another debate on the relative merits of feed-in tariffs and the RO in the Renewable Energy Strategy consultation, the Government decided to retain the RO as the principal renewable support mechanism for large-scale renewable generation. If a compulsory revenue stabilisation mechanism is introduced to the RO, however, whilst the structure of the RO will be maintained, the differences between the RO and the feed-in tariffs will be few - particularly following the introduction of banding in April. In spite of this, maintaining the structure of the RO is, in itself, important and will help to prevent investor uncertainty at a critical time.
  • Commercial Considerations: When the revenue stabilisation mechanism becomes compulsory, generators and suppliers entering into power or ROC purchase agreements will need to consider whether any of the upside or downside of the mechanism should be allocated to the supplier. Generators and suppliers entering into long-term agreements now should consider whether the possibility of the generator opting in to the mechanism should be catered for and whether change of law/industry change clauses should be amended. Equity investors will need to consider carefully whether the benefit of reduced volatility is outweighed by the loss of the upside from wholesale market spikes.

A further consultation on key aspects of the scheme is expected in 2010.

Other Issues

A number of other issues are discussed in the consultation paper, including:

  • proposals to reduce the uncertainty arising from Ofgem's recent change in policy on the revocation of ROCs after they have been presented by suppliers
  • whether there is a case for the co-firing cap to be changed
  • whether there is a case to revisit the banding for wave and tidal stream technologies
  • how to make the predictions required to calculate the level of the RO in each obligation period and
  • how to take into account transmission losses in cases where an offshore generator's export meter is not located at the grid entry point.

Feed-In Tariffs And Transitional/Cross-cutting Issues

The consultation paper also sets out the Government's proposals with respect to the design of the feed-in tariffs for generators with installed capacities below 5MW. These are to take effect from 1 April 2010.

The paper also covers a number of issues arising as a result of the transition period and the interaction between the RO and the FITs.

Further Information

To view the consultation paper, please click here

To read our previous Law-Now on the Renewable Energy Strategy, please click here

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 24/07/2009.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.