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United Kingdom

UK Reveals good and bad in green pricing, Critics of the concept of green pricing are having all their worst fears fulfilled in Northern Ireland.Here the utility is putting its own interpretation onto

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As the debate rages over the best mechanisms for helping renewable energy to survive and flourish in the liberalised UK electricity market after 1998, several of Britain's public electricity suppliers are already developing systems of higher tariffs for selling renewable electricity. These will test the consumer's readiness to pay more for a clean source of supply, they claim. But with the bewildering number of tariffs likely to be on offer, consumers could just end up being confused about -- and suspicious of -- the whole concept.

The big question is whether green tariffs will lead to more renewable projects. Some argue it will be an inevitable outcome of creating a demand for greener power. Others fear that environmentally conscious consumers could find themselves subsidising both their less concerned neighbours and projects which would have been built anyway. Nowhere is this dilemma illustrated as starkly as in Northern Ireland where utility Northern Ireland Electricity (NIE) is shortly to launch a green tariff which threatens to be a polluter's subsidy.

NIE plans to offer its customers renewable electricity at a 15% premium above a domestic price that is already relatively high. At first, green electricity will be supplied from renewable capacity already on line. There are 30 MW of renewable projects whose output NIE has contracted for under Northern Ireland's Non-Fossil Fuel Obligation (NI-NFFO). NIE claims the premium will go to meet the cost of NFFO. In effect this means it will help reduce prices for all its electricity users.

What the company aims to do, in fact, is sell to the green consumer, at a massive mark-up, electricity which it is already obliged to take, effectively subsidising the rest of its customers using more polluting sources. Joe Doyle from NIE admits the tariff is less than perfect and agrees the premium will amount to a "slight subsidy" for the company's customers. By contrast with other green pricing schemes planned in Britain, the impetus behind NIE's idea came not from the utility, but from Douglas McIldoon, the province's electricity regulator. McIldoon pressed NIE to develop a green tariff to meet his objectives of increasing customer choice and stimulating a market for renewables. Now, his Office of Regulation of Electricity and Gas (OFREG) has a number of concerns about NIE's proposals which need resolving before the tariff is approved.

premium Too high

OFREG is unhappy about the high level of the proposed premium. It appears close to giving in on this particular issue, but warns that NIE is leaving itself open to competition from other renewable suppliers who do not have the same burden of fixed costs. NIE denies the premium is too high. "We have tried to see what in Northern Ireland is a realistic price for renewable generation," says the company's Alan Gaston. Green tariff customers, he says, can choose to take all or just some of their demand from renewables at a rate of £0.015/kWh above the normal price. If a consumer chose to receive only renewables electricity, £1.0 a week would be the extra cost; if he chose to meet just 10% of demand with renewables, it would cost just £0.10 extra. "You have to ask yourself if that is very significant for the domestic consumer," he says.

In NIE's defence Bobby Clulow from OFREG points out that electricity prices in Northern Ireland are higher than elsewhere in the UK. "It is not the same situation over here as in England and Wales because there is no real competition," he says. NIE's difficulty is a legacy from electricity privatisation and the need to cover what in the US are termed "stranded costs." Prices for fossil fuel generation in the province are artificially inflated by high priced long term contracts for capacity agreed with generators at the time of privatisation. Whether or not the stations run, their capacity charges still have to be borne by all NIE's customers. This means that the price of electricity is around £0.045/kWh, when it should be only £0.03, says Clulow. Renewables electricity at around £0.04/kWh under NI-NFFO 2 contracts is therefore cheaper. But he argues that if renewable electricity was charged at its actual cost to NIE, there would be a massive shift to the green tariff. "You would then be left with the fixed cost of fossil fuels which still has to be paid," he comments.

Clulow views philosophically the likelihood of customers balking at paying an extra 15%. "If it does not kick off immediately, there might be some reconsideration of the size of the premium," he says.

Future contracts

OFREG also wants NIE to put in place arrangements for contracting for future renewables generation outside NFFO. But NIE says it wants to test customer uptake for green power before committing itself. "Lets introduce an environmental tariff, warts and all, to see if there is a demand out there. Lets take one small step at a time," pleads Doyle. He says if there is a sustainable demand, the company hopes to bring in new sources of supply. But -- and here is the rub -- it is not allowed to contract for further capacity under its existing licence and market structures. Changes planned by McIldoon will remedy this, but they are not expected before 1998.

NIE has lined up its first customer -- renewable energy developer B9 Energy. Michael Harper from B9 believes the price premium is too high but says the tariff is a start. "What it will do is begin the process of raising people's awareness of renewable energy sources," he says.

So far, the only green tariff in operation in the UK remains South Western Electricity's Green Electron scheme. It began this pilot project last July in its franchise area in the south west of England. A nine month trial, involving one of its large customers, Stroud District Council, is now complete. Stroud's electricity consumption was matched by an equivalent supply of power from renewables.

The pilot established the structures to supply and bill customers for renewables power. With those in place, South Western Electricity says it is now looking at the domestic and small business sector. "We have proved the systems side of things. We are now gearing ourselves up to offer it to domestic customers," says the utility's Neil Humphreys. The company has kept the scheme deliberately low key until it can be launched wholeheartedly. Electricity supplied under the Green Electron scheme, at a 10% premium, comes from a mix of landfill gas and hydro plants, but the utility aims to promote new generation.

Nonetheless, South Western has already found that the 10% premium has lost it a customer to another green supplier. At the end of its trial, its pilot customer, Stroud District Council, was lured away to close rival, the Renewable Energy Company. "We were pleased to be involved in the Green Electron scheme, but there was never any doubt that we would have to go out to tender in April for our electricity supply contract," says the council's Melanie Watson. "The Renewable Energy Company is based in Stroud and basically it came up with the cheapest price."

The Renewable Energy Company, which began trading in early 1996, prides itself on being able to compete at market prices. All of its 11 customers are supplied from landfill gas -- one of the cheapest renewables. The company's Karen Lane concedes that to compete in the 100 kW market it had to use cheaper sources. But she believes that if the benefits of electricity "embedded" in local grids -- as wind energy is -- were reflected in its price, other technologies would be able to compete. She describes embedded generation as "the key issue for us." The company is opposed to a premium because it could lead to a niche market. "What we want is a market where everyone can participate and choose green electricity, so that demand outstrips supply. If that happened the pressure would be on government and suppliers."

Another of the company's boasts is to contract only for new renewable energy. Lane disagrees strongly with tariff schemes being supplied from projects contracted under the UK's Non-Fossil Fuel Obligations. At the end of 1998, contracts awarded to projects under the first two rounds of NFFO expire and more than 320 MW of renewable capacity will become available. Some green tariff schemes will undoubtedly sign up this capacity. Yet one of the compelling criticisms of green pricing in the UK is that the electricity consumer has already paid for NFFO projects through the Fossil Fuel Levy. Lane agrees. She adds that electricity that has already been subsidised under NFFO does not lead to development of new capacity. "It sends all the wrong messages and confuses the customer."

In support of premiums

Despite the loss of Green Electron's flagship customer, Neil Humphreys from South Western Electricity defends its 10% premium charge. " We do see it as a premium service. That premium is there to support renewable generators who find it difficult to compete in the open market," he says. "If we can build a portfolio of generation that people want to buy, we can use the premium to bring in generators who cannot supply at existing market prices."

Humphreys agrees the premium prevents green electricity consumerism being more than a niche market, but points to research that shows that without a premium, two thirds of customers would prefer to buy electricity from renewable sources. This demand would be impossible to satisfy. "We have to be very careful about raising a level of expectation which just cannot be fulfilled," he says.

A different approach is planned by ScottishPower, which is poised to announce its green tariff within the next few months. The utility's Fred Dinning indicated at a conference in London, organised by Friends of the Earth, that it would supply its customers exclusively from its own portfolio of renewable generating plant. Unlike most other public electricity suppliers, ScottishPower is both an electricity generator and a distributor. Moreover, it already has a strong renewable energy presence. Hydro electricity accounts for some 5% of its output, and the company is one of the UK's largest wind generators with wind farm interests in Scotland, Wales, England and Northern Ireland as well as Ireland.

From the outset, it is understood that the price premium charged for its green energy will be earmarked to fund development of new renewable sources. But at first, ScottishPower will have to supply its green tariff customers from its existing capacity -- this will be hydro since all its wind output is covered by Non-Fossil Fuel Obligation contracts. Dinning explained the aim of the tariff is to bring on line renewable capacity that would otherwise not be built.

More plans for green customer choice are being developed by Eastern Electricity. It hopes to unveil them in October, but meanwhile, claims it is too soon to say much about its scheme. "Everything is in the melting pot," says Eastern's David Betteridge. "We want it to be something different, something innovative, but also something that people who are knowledgeable think is worthwhile." He says the utility will plan its scheme based on outside input. "We are consulting with all sorts of parties that have an interest in this issue so that we come up with something that is workable but will also appeal to customers," he says.

Lukewarm enthusiasm

Although more of the UK's public electricity suppliers will no doubt be following the lead of these utilities, some in the renewable industry are lukewarm towards green pricing. "It should be facilitated, but should be an add-on -- not a substitute for a policy for renewables," says Gaynor Hartnell from the British Wind Energy Association. She fears the government could view green consumerism as a longer term solution to funding renewable energy. "It could weaken our case for a NFFO-type mechanism."

Others are worried that it passes the burden for cleaning up on to the green consumer. "Green power is helping everybody, so it is questionable whether some people should be paying for a measure that is helping the wider community," comments Catherine Mitchell from Sussex university's Science Policy Research Unit (SPRU). But she welcomes the increased customer choice it offers.

It remains to be seen just how willing the UK consumer will be to pay extra for renewable energy after 1998, when the market is set free. Last year, an opinion poll found that one in five people would be prepared to pay more. This amounts to a potentially healthy demand, but there is a wide difference between words and deeds.

Meantime, opinion is divided over just how many new renewable megawatts green trading can deliver. Hartnell is sceptical. "Experience has shown that elsewhere the uptake of such schemes has been low," she says. This point is reinforced by SPRU's Mitchell. "It is a myth to say that green tariffs have been successful around the world. The amount of money they make is very small."

While Mitchell believes that green tariffs should lead to more of a market for renewables than there would otherwise have been, she is worried that its potential has been over hyped. Continued support for renewables along the lines of the NFFO will do more than green pricing to help the government meet its 10% target for renewable generated electricity by 2010, she claims. "It has to be seen as one of several tools to achieve their target."

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