A severe shortage of renewables generation is already putting a premium on the sources available. Retailers who fail to buy enough ROCs will have to pay £0.03 for each kilowatt hour they fall short of their obligation. In other words, they can "buy out" of their obligation. This buy-out money will be recycled to suppliers (retailers) who have complied with the obligation in, a mechanism dubbed the "smearback."
Renewables currently account for over 2.8% of UK electricity. However, a sizeable proportion is powered by waste incineration and large scale hydro (above 20 MW). Neither are eligible technologies for ROCs. This leaves about 1.6% of total generation available -- about 50% of the total capacity needed by all suppliers to meet their obligations.
Derek Scally from LE Group says suppliers overall will not meet their obligations. "There is simply not enough renewables to go round, but certain suppliers will do better than others. I would like to think that we will do well, but we will not be achieving our target," he says. There is too much market uncertainty, he adds. "It is a new market and we are trying to value a new product. The only market indices that are public information are the values that we have seen from the auction of NFFO capacity," he says, referring to the government's abandoned Non-Fossil Fuel Obligation. These indices need to be treated with extreme caution, he warns. "The market will settle but in the meantime there is a two-way learning curve."
Electricity generator and retailer TXU Europe hopes to meet more than half of its obligation from contracts for renewable output, states the company's Ashley Turner. TXU's contracted renewables supplies include a number from the auction of NFFO output and long term power purchase deals with renewable energy companies Hainsford Energy and Novera. The high prices that were seen in the auction (Windpower Monthly, March 2002) cannot be sustained, Turner believes. They reflected the short term nature of the contracts and market uncertainty. Furthermore, he adds, bidders were taking a punt on the value of the recycled buy-out monies -- the "smearback."
TXU's 10-15 year deals are the first indication that retailers are moving towards a long term market for renewables. Turner outlines TXU's three-prong strategy: "We will build new renewables projects with partners, but we will also buy a lot of capacity and we will trade when the market reaches a level of compliance and a spread of ROCs."