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United Kingdom

United Kingdom

Many a weed in the nursery green market

Such are the perceived profits to be made from marketing "green" electricity in Britain that there is not enough clean generation to go around. Only green power generated without a government subsidy can be accredited green--and most of it is tied to Non Fossil Fuel Obligation power purchase contracts. But is green marketing the way to go? There are those who believe renewables are being sidelined into a niche with no long term growth potential.

Organic vegetables and environmentally friendly shampoo are among the items firmly established on the shopping list of consumers in search of a healthy lifestyle. But now, with the full liberalisation of the British power market, they can go one step further and have a say in one of the most important environmental issues of all-how their electricity supply is generated. Since the end of May, all electricity customers in Britain have been able to shop around for their power supplies. And already thousands have used their newly found purchasing power to switch to a "greener" source of electricity, albeit many of these are public institutions and green minded groups.

The UK's electricity companies are not slow to take advantage of what is still a very small niche market. All the main electricity supply companies either have a "green tariff "up and running-a green electricity product selling at a special rate-or are developing plans to launch one. For the discerning customer, however, the choice of green offerings is bewildering. The chief determining factor may be the size of the premium. This can vary between 5% and 12.5%, or be a fixed annual payment; some tariffs are available nationally while others are offered only to customers in the supplier's local area; some are targeted exclusively at the business sector, others at domestic or all customers; and some offerings include advice on energy efficiency as part of the "green" package.

Perhaps most important of all, the customer will have to choose between two very different types of tariff: a renewable energy supply where the supplier matches customers' electricity demand by purchasing from renewable sources-usually over a year; or a renewables fund, with customers paying into a trust fund to be invested in new renewable energy projects with, in most cases, customers' payments into the fund supplemented by the supplier.

Green or not so green?

To help consumers make an informed decision when choosing their electricity supply, a new scheme to accredit electricity from renewables has been launched by the Energy Saving Trust (EST). Just as the Soil Association stamp on organic products is proof of their wholesomeness, so EST's "Future Energy" logo aims to give confidence that electricity suppliers' green products live up to their promises. The accreditation system was developed with funding from the Department of Trade and Industry, which has committed £200,000 over three years to support EST's work. "Future Energy will enable both domestic and business customers to make a conscious decision to help the environment," says Eoin Lees of EST. He claims the system will help stimulate the market for renewable energy and increase the proportion of electricity from renewables nationally-currently around 2%.

Future Energy will recognise electricity from solar, wind, hydro, wave, tidal, biofuels and energy from waste. But already the accreditation has run into controversy; Friends of the Earth (FoE) objects that it supports waste incineration, which, according to FoE's Mike Childs, releases almost as much carbon dioxide as gas-fired power stations. "Frankly, the government's new green energy scheme is rubbish and Friends of the Earth will be working to promote a better alternative," he says.

Another attack comes from the Renewable Energy Company (REC). It complains that its "Ecotricity" product has been "snubbed" by the Future Energy system. REC is the UK's longest running and leading supplier of electricity from renewables, commanding around 33% of the market. REC's dispute hinges on EST's insistence that Future Energy will only accredit renewable energy supply products which consist of 100% renewables, rather than partial tariffs such as Ecotricity. Dale Vince from REC dubs the EST scheme "a commercial straight jacket" which will ensure that customers pay a premium and therefore reduce the number of organisations that take part. "Ultimately this approach will restrict, not promote, market growth," he says. EST defends its stance, reasoning that when it launched Future Energy it needed to convey a clear message about the quality of the offerings accredited under the scheme. "We want to give the customer confidence that they are getting 100% renewables," says EST's Sam Armstrong.

REC, meanwhile, points out that Friends of the Earth endorsed its green credentials when the company was singled out in 1998 as the best choice for the environmentally conscious consumer in the FoE Guide to Buying Green Energy. The company says it lobbied for the introduction of an accreditation scheme since it was first established in 1995, but is now disappointed at the "failings" of this first attempt.

Two systems

Nonetheless, 11 electricity suppliers are now signed up with EST to ensure that the environmental credentials of their products are verified through an annual audit. Future Energy will accredit both types of green tariff-renewable energy supplies and renewable energy funds. Under the scheme, suppliers offering funds must introduce "significant" new renewables capacity within five years of accreditation. Supply based tariffs must contain 100% renewable energy, but supply can be matched by renewable purchases over three years as long as they meet at least 90% of demand in any year. For companies entering the market specialising only in renewables, however, EST will allow the proportion of renewable generation to be as low as 70% in the first year.

Future Energy will accredit any renewable capacity as long as it is not currently receiving a subsidy. It will accept large scale hydro-but only if it accounts for less than half of the energy supplied under a green tariff. It also accepts output from projects that have been supported under the first two rounds of the Non Fossil Fuel Obligation, but are no longer receiving a premium rate. At the end of 1998 all NFFO-1 and 2 contracts expired, releasing 312 MW of renewable capacity onto the open market. The sale of most of this ex-NFFO generation was negotiated on behalf of renewable operators by the Renewable Generators' Consortium, which secured a renewable premium for its members' output. In some quarters it is being argued that asking green consumers to pay a higher price for existing capacity that they, along with all other electricity consumers, have subsidised once, is a dubious practice.

Even the British Wind Energy Association seems less than clear on the issue. On the one hand the BWEA's David Still maintains: "We want to see tariffs effectively promoting new clean renewable generating capacity so that the difference between the normal selling price and the tariff price is actually used to develop new renewable energy projects." Yet he refuses to condemn tariffs that use ex-NFFO generation. Projects now outside NFFO need to get the best sales price possible, he says.

No honey pot

"There is no honey pot, but we do have to ensure that existing output remains viable." Indeed, he believes the market price for ex-NFFO generation is currently too low. "We have a market in transition; these projects expected a much higher sales price at the end of their contract period, but in the meantime pool price has been manipulated down because energy policy has been to get electricity prices as low as possible rather than to encourage a cleaner mix of generation for the benefit of the environment," says Still.

The companies offering supply based tariffs echo Still's argument that for some ex-NFFO projects, a premium above pool price is essential to their survival in the open market. John Slater from PowerGen, which secured a sizeable chunk of the ex-NFFO output, says: "Those projects genuinely do need some additional support for them to operate successfully." He points out that some plants supported under the first two rounds of the NFFO were late in getting built and so had a shorter contract period in which to recoup their costs.

The Renewable Energy Company challenges the received wisdom that electricity from renewables should cost the consumer more and therefore only be available to more affluent citizens. In the United States this anomaly has led to green power being dubbed "Gucci power." REC insists that it can sell renewable electricity supplies at prices competitive with electricity from fossil fuels and thus make it available to all.

The company began trading its power at market prices with a base of non-subsidised electricity from landfill gas. Subsequently, it competed last year for former NFFO contracted output, securing some 90 MW-nearly a third of total ex-NFFO capacity-with a mix of landfill gas, waste to energy, sewage gas, wind and small hydro. The company claims it is able to offer "green electricity at brown prices" by selling local power to local users, avoiding the costs associated with use of the national transmission network and pool trading. "A premium creates a niche market," says Dale Vince. "We are more interested in creating a mass market for renewables, but you will never do that with a premium product."

John Slater from PowerGen counters: "We need to incentivise people to go out there and build new projects-and that needs a premium attached to it." He denies there are big bucks to be made at present from this young market. The premium reflects the higher cost of buying and selling renewable capacity compared with electricity from fossil fuels. "We feel it would be wrong to enter the market selling it at the same price when it is a more expensive commodity." As well as costing more to buy, he explains that the resource input adds to the expense-particularly for such a very small niche market. "As the market grows, that will reduce, but you cannot ignore it to start with."

Grave doubts

Not everyone within the industry shares Slater's confidence that consumer led demand for green electricity will by itself lead to an overall increase in the number of renewable projects being built. Gaynor Hartnell from the Confederation of Renewable Energy Associations is cautious: "If green tariffs lead to new capacity, and if that new capacity is additional to existing government targets for renewables then that is great," she says. But she fears that green consumers could merely end up part-subsidising the rest of society. "Green tariffs should not mean that we do not need some additional form of support for renewables such as NFFO or a reduction in mandated capacity." She argues that consumers who choose to buy electricity from renewables want to make a difference. "They do not want to buy green electricity so that next door's electricity can be browner."

Researcher and consultant Alexi Clarke also questions the fairness of expecting the moral minority to pay a higher price for helping to meet the country's obligations. He points out that unlike organic produce, where the benefit falls directly on the consumer who pays the premium, an individual's purchase of renewables benefits everybody. He maintains that individual action is no substitute for government action; the government should ensure that the financial costs of a cleaner environment are spread across all consumers.

Clarke stresses he is not opposed to the increased choice offered by green tariffs, but he questions the need for anything more than a marginal hike in price. He points to experience in the United States which shows that the price to the green electricity consumer does not necessarily have to be very much more than the standard tariff. "The whole area in the UK needs stronger regulation to prevent profiteering. I am not against profit making, but I am against exploitation of a green image." Clarke adds, moreover, that the cost of renewables is steadily decreasing. "They can only get cheaper with economies of scale and technical improvements. But asking a small minority to pay for that is a bit of a cheek. The costs should be borne by everybody." In the meantime, pushing green energy into a costly niche market is unlikely to lead to a substantial increase in renewables. "In the UK we have a scarcity of renewable electricity; you do not want to make it more expensive."

Newcomer

Yet a new supply company is poised to enter the UK market with plans to boost renewable capacity by setting up a generation arm to build renewable projects. WRE Ltd is a joint venture between WRE AG of Germany and the UK's ESD Ventures Ltd. Unlike most of the participants in the electricity market, it plans to sell energy generated solely from renewable sources-and it was the only non-public electricity supplier to be accredited under the EST scheme. According to WRE's Brian Swindells, the company intends to launch its renewable product in the autumn, but will be choosy about the sources of energy it uses; initially these will be wind and small hydro. "We will be responding to what our customers want," he says. "Our market research tells us that most potential customers would not be in favour of waste incineration."

Although WRE has plans to capture an eventual 30-40% of the green market, Swindells acknowledges its immediate target will have to be more modest since most available renewable capacity has already been snapped up by existing players. He points out that WRE's UK generating company-WRE Generation Ltd-has plans to develop new projects but, with a shortage of available capacity in the meantime, WRE UK is keen to talk to anyone who is developing renewable projects with a view to contracting to sell the power.

Companies like WRE are confident that sufficient numbers of UK consumers will be prepared to pay for a green source of power. Indeed, several opinion polls support this view. The first significant survey, by MORI, found that 21% of people asked were prepared to pay more for electricity from renewables. More recent polls indicate even more favourable attitudes toward buying green power. Research by EST while developing the Future Energy system indicates that 71% of homeowners would be interested in buying electricity from renewables, a respectable 45% are prepared to pay a premium, and nearly 20% said they would pay a premium of as much as £5 a quarter.

Saying is not doing

But it is another matter entirely to translate good intentions into action. This is illustrated by the experience of some of the longer established green product offerings. PowerGen was one of the first companies to dip its toes into the water by marketing renewable output to its industrial and business consumers. "We have been offering green electricity for over 18 months, but the take-up has not been good," admits Slater. "In the commercial and business sector what comes through most strongly is the drive to keep down costs." But he points out that the market is still evolving and will take off as more people become involved.

While PowerGen's tariff is supply-based and available only to large customers, Eastern Energy, which offers its fund-based EcoPower tariff to the domestic sector, is similarly finding that demand is slow to grow. Eastern launched EcoPower in October 1997 and describes its customer base as still "in the hundreds." The company's Clare Bacon is defensive: "It has been quite a small uptake but we have always recognised this is a niche market," she says.

Yet several companies are simply not putting much effort into marketing their green products. The reason in some cases is entirely pragmatic. "We do not want to push it too much in case demand exceeds supply," explains Deborah Yewdall from Yorkshire Electricity, whose tariff supplies nearly 1000 customers with a mix of ex-NFFO output from wind and biomass.

Even though the green market may be slow to take off, the indications are that supply companies recognise its growth potential. When the sale of the bulk of ex-NFFO 1 and 2 electricity was negotiated by the Renewable Generators Consortium at the end of 1998, the amount of generation up for sale was over-subscribed by a staggering 800 MW. Moreover, like WRE, several other companies offering supply based green tariffs are eager to deal with prospective renewable developers.

The dilemma for such companies is that no significant quantities of non subsidised renewable energy are likely to be seen on the horizon for several years. Non-NFFO capacity could take years to get built. And contracts let under the third tranche of NFFO are not due to expire until 2009 at the earliest; with most NFFO-3 capacity becoming available no sooner than 2010.

A possible solution, however, is put forward by the Non-Fossil Purchasing Agency (NFPA) which contracts with NFFO generators on behalf of the public electricity suppliers. In its response to the government's consultation on the future of renewable energy, the NFPA suggests that output contracted under NFFOs 3, 4 and 5 could be taken out of the obligation altogether before their contracts expire and made available to the green market. This would have the knock-on advantage of freeing levy funds to create a new round of NFFO contracts. In the current government climate such a move could be prudent. The Treasury and the DTI are known to be at loggerheads over the Chancellor of the Exchequer's refusal to ask the electricity consumer to foot the bill for any new renewables support. The NFPA's option may therefore prove to be a vital means of providing a subsidy for less mature technologies-such as offshore wind-that are not yet ready to make the leap into the green market.

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