DTI invites comments on proposed changes to the Renewables Obligation

The DTI has published its consultation paper on the proposed amendments to the Renewables Obligation Order 2002 (as already amended by the Renewables Obligation (Amendment) Order 2004) in advance of the 2005/06 review of the Renewables Obligation. The consultation paper, on which responses are invited by 1 December 2004, is available on DTI's website.

What is the Renewables Obligation?

The Government relies on the Renewables Obligation and its Scottish equivalent as its main policy instrument to encourage increased production of electricity from renewable sources. A review of the Obligation is to be carried out in 2005/06. The Renewables Obligation requires all licensed electricity suppliers to provide evidence (through the presentation of Renewables Obligation Certificates, also known as ROCs, or the Scottish equivalent, SROCs) that a specified and growing proportion of the electricity they supply (currently 4.9%) has been generated from renewable sources. As an alternative to presenting ROCs/SROCs, suppliers can meet the obligation by paying the "buy-out price", currently £31.39/MWh. The proceeds from payments of the buy-out price are recycled to all licensed electricity suppliers in proportion to the extent to which they have presented ROCs, which provides a powerful incentive to satisfy the Renewables Obligation by redeeming ROCs/SROCs rather than paying the buy-out price. The Renewables Obligation is to be extended to Northern Ireland in 2005.

What are the proposed changes outlined in the Consultation?

The DTI's consultation paper seeks comment on a number of issues, including measures that will mitigate the impact on the renewables sector of any further shortfalls, following the failure of TXU, in the buy-out fund. It is proposed that suppliers be required to make payments to Ofgem to cover at least a proportion of any shortfall above a minimum size (10% or more of the total value of the buy-out fund but only up to 50%). The precise details of this arrangement - known as mutualisation – are likely to generate considerable comment, particularly in relation to whether each supplier's shortfall contributions should be based on the supplier's market share in the year of recovery of the shortfall or at the time the shortfall arose. The latter approach is the one preferred by the DTI, but others argue that it would disproportionately affect suppliers whose market share has decreased since the time when the shortfall arose, and that this could increase the chances of those suppliers failing in turn, making the shortfall worse.

The DTI's consultation paper also outlines several other areas of change:

• Single recycling mechanism for buy-out funds: A single recycling mechanism for the buy-out funds of England and Wales, Scotland and Northern Ireland may be introduced, aimed at ensuring that the value of recycled payments for each ROC presented will be the same throughout these countries. This raises the question of whether the mutualisation process should also be merged (so that mutualisation is carried out across all three Obligations when any of the buy-out funds suffers a sufficiently large default). Unless this or some other solution is found, if a shortfall were to occur in one of the buy-out funds and the failed supplier did not supply customers in the other two markets, then a single recycling mechanism could lead to ROC holders in those other markets suffering losses.
• Surcharges on late payments: Changes to the Obligation (last year) provide for late payment into the buyout fund (as a result of the TXU experience). In this round of changes, to provide a deterrent to suppliers making late payments into the buy-out fund, it is proposed that a late payment period would run for three months prior to the commencement of enforcement action, during which surcharges would be levied at 5% over the Bank of England base rate, accruing on a daily basis.
• Extension to 2015/16: The proposed amendments include extending the level of the Renewables Obligation beyond 2010/11 to 2015/16. The target proportion of electricity supplied from renewable resources would raise from 10.4% in 2010/11 to 15.4% in 2015/16 and would be held there until 2026/27.
• UK-wide system of tradable certificates: In line with the expected introduction of the Northern Ireland Renewables Obligation from 1 April 2005, the proposed changes to the Renewables Obligation Order 2002 will also permit the recognition of Northern Ireland ROCs (NIROCs) in England and Wales as part of the move towards a UK-wide system of tradable certificates for eligible renewables electricity. This mutual recognition will allow NIROCs to be used to comply with the Renewables Obligation in England and Wales (and similarly, through separate legislation, Scotland), and will enable generating sites located in waters around the coast of Northern Ireland to be eligible for support under the Renewables Obligation.
• Flexibility for small generators: Small generators (of up to 50kW Declared Net Capacity) have to date been limited to claiming ROCs on an annual basis. It is proposed that this will be amended to allow small generating stations to claim on either an annual or monthly basis.

Timetable

Responses to the consultation must be received by 1 December 2004. It is envisaged that the proposed changes to the Renewables Obligation will take effect from 1 April 2005.

If you would like more information or require advice about the Renewables Obligation, please contact Amanda Seaton at [email protected] , or Donovan Ingram at [email protected].