The obligation is a major plank of the government's policy to generate 10% of the UK's electricity from renewable sources by 2010. Suppliers will be able to meet their obligation either by buying power from renewable energy plants, by buying green power certificates, which will be issued to renewable generators who can trade them independently of the actual power, or by paying a penalty to "buy out" of their obligation.
In a welcome development from its earlier plans, the Department of Trade and Industry (DTI) now proposes an increased "buy out price" of £0.03/kWh compared with the £0.02/kWh suggested in a previous consultation document. This will increase the overall price that renewable generators can expect to be paid -- and incentivise suppliers to contract for renewables supplies rather than pay the buy out. But at the same time, the buy out price sets an effective cap on how much a green generator can sell power for.
Buy out price promise
The DTI pledges it will not reduce the buy out price over time, but will link it to the retail price index to take account of inflation. It calculates that if the three pence buy out price becomes the price that renewables electricity fetches on the market, the cost to consumers of the renewables obligation will peak at around £600 million in 2010 -- a 3.7% increase on electricity prices. The government insists on the buy out price -- or cap -- which it believes is necessary to keep down costs to consumers. Apparently it feels that market forces will not achieve that, despite the competitive nature of the obligation.
Anna Walker, the director general of energy at the DTI, defended the buy out price one week later at the Renewables 2000 summit in London. "If we did not have the price cap, the renewable industry would charge the sky for their products." She added that the Treasury would not allow the DTI to remove the cap, although if competition among renewables generators later proves that it is unnecessary, the government could "revisit it."
Proceeds from buy out payments are to be recycled to suppliers who have fulfilled their obligation by buying renewable electricity or certificates.
Bowing to pressure from environmental groups, Byers is excluding energy from waste incineration from the obligation, thus eliminating a strong competitor to wind power. Large scale hydro is also excluded. "We are proposing to focus support on the renewables that need it most," said Byers. "I am also aware of the strong views held about energy from waste incineration." In common with other renewables, energy from waste is to benefit from exemption from the Climate Change Levy, but Byers is seeking views on whether it should also count towards the UK's 10% renewables target.
For offshore wind and energy crops, extra government support is needed. Capital grants will allow them to compete with more established renewables under the new obligation, said Byers. He expected to announce details of the grant funding before the end of October.
Energy regulator Ofgem is to administer the obligation and monitor suppliers' compliance through renewables obligation certificates (ROCs). Suppliers will be able to "bank" excess certificates for use in later periods, and will also be able to borrow a limited number of certificates from other suppliers.
The DTI expects the first obligation period to run for 18 months from October 2001 to end of March 2003, and then for yearly periods up to 2026. "The proposals outlined offer the renewable energy industry a market worth up to £1 billion a year for at least the next ten years," said Byers. The consultation closes December 5 and the DTI hopes for approval from Brussels, which needs to make sure the obligation complies with EU rules on state aid for the environment, in February 2001.
The British Wind Energy Association (BWEA) welcomes the consultation paper. The indicated buy out price is likely to see satisfactory levels of onshore wind being developed provided proposed regional planning targets are successfully implemented, says the BWEA's Nick Goodall. But there are still significant unknowns, he warns. "We do not know what the full impact of NETA (new electricity trading arrangements) will be. It appears increasingly likely that its effects may be fatal for smaller independent and community schemes."