The domestic energy market will be opened to full competition next April, allowing more than 20 million consumers to buy electricity from any licensed supplier.
Deregulated markets in Australia, the USA, the Netherlands and Germany have encouraged suppliers to offer consumers the choice of buying "green" electricity at a premium price. Renewable energy developers in the UK are now asking whether this approach could complement existing support under the non-fossil fuel obligation (NFFO).
Two companies have already been set up to trade green power in the commercial and industrial markets, and hope to make inroads into the domestic market. Gloucestershire-based Renewable Energy Company began trading in 1996 (ENDS Report 254, p 27 ), and now supplies a dozen customers with energy from landfill gas projects - one of the cheapest renewables.
Director Martin Alder says that cheap power prices in the industrial and commercial market "make it very hard for renewables to get a look in," but is "very optimistic about the domestic market". The company hopes to sell electricity at the current market rate - giving an effective "green premium" of up to 10%, depending on how average bills fall once full competition is established.
The second scheme, Green Electron, was set up last summer as a pilot by South Western Electricity and agricultural firm SC Banks. Green Electron sold energy from small-scale hydroelectric and landfill gas schemes at roughly a 10% premium - but in April it lost its main customer, Stroud District Council, to the cheaper Renewable Energy Company.
Neil Humphries of SWEB says that the company hopes to revive the scheme in the domestic market. "All the research bears out that consumers are prepared to pay a premium if they can see the benefit," he says. "But we're under no illusion - the marketing will be the key to success."
An alternative approach has been put forward by Orix Corporate Finance and energy consultancy Ian Pope Associates. Orix hopes to set up the Green Pool, a non-profit making co-operative of operators of existing renewables schemes to trade power directly to consumers. However, negotiations with 15-20 generators are still ongoing.
Scottish Power is also planning to launch a green tariff in the domestic market with a price premium of around 5-10%. It plans to channel the income towards new wind farms outside NFFO. Eastern Electricity plans to launch a green tariff in October, but has not disclosed details of the scheme.
The size of the potential market remains highly uncertain. A MORI poll carried out last year for the Parliamentary Renewable and Sustainable Energy Group suggested that over 20% of consumers would be prepared to pay higher bills for power from "green" sources. However, many observers believe that in practice far fewer consumers will opt for green tariffs - particularly in the light of confusion over the operation of the liberalised market, and competition from other suppliers offering reduced electricity bills.
In the Netherlands, a green tariff scheme independently audited by the Worldwide Fund for Nature attracted about 1% of domestic consumers in its first year. Dutch suppliers are obliged to supply a certain proportion of their power from renewable sources - but WWF's scheme is designed to support wind power capacity over and above this obligation.
In the UK, WWF worked with Green Electron in a pilot project to develop criteria and auditing systems for certifying green electricity. According to Merylyn McKenzie Hedger, WWF's Climate Change Policy Coordinator, "consumers will only be prepared to buy green electricity at a premium price if they feel confident it is indeed green."
WWF is now aiming to take forward the certification scheme, with initial funds from the DTI's Energy Technology Support Unit (ETSU). The group hopes to assist in the development of a "type of eco-label", modelled on its involvement in the certification of sustainable forestry by the Forest Stewardship Council (ENDS Report 241, pp 30-31 ).
The first challenge facing a certification scheme is to determine what is considered green. Some renewables, including waste-to-energy plants and wind farms, are vulnerable to criticism over their environmental impacts. Ms Hedger suggests that standards should be set to screen out schemes with unacceptable local impacts.
WWF also warns that "it will be necessary to ensure that consumers don't pay twice" for renewable capacity which is already supported under the NFFO or any future obligation on suppliers. Indeed, the Renewable Energy Company has suggested that power generated under 15-year NFFO contracts should be made available for sale "to the people who want to receive it."
The end of 1998 sees the end of the first two tranches of NFFO contracts - which subsidise 145 renewable schemes with a total capacity of 320MW. Because of commissioning delays, several of these projects have not fully paid off their additional costs and may struggle to compete with conventional generators (ENDS Report 265, pp 15-17 ). Green trading could help to ensure that small generators are not squeezed out of the market once NFFO contracts expire.
However, renewables developers agree that green electricity trading will only prove of real value if it leads to the construction of new generating capacity. Green tariff schemes may need to fund new sources in order to surmount supply constraints, says Ms Hedger of WWF. She also points out that packaging and selling existing renewable power to green consumers will merely "leave the dirtier resources to their neighbours, who express no preference."
This perverse situation has already arisen in Northern Ireland, where Northern Ireland Electricity is on the point of launching the UK's first green tariff at a 15% premium. The impetus for the scheme came from the province's electricity regulator Douglas McIldoon, who is keen to stimulate a market for renewables.
NIE wants the premium to replace the province's NFFO levy, currently paid by all consumers to support 30MW of renewables capacity. A spokesman told ENDS that the levy is "inherently unfair" on poorer customers, and that renewables developers in Northern Ireland had won NFFO contracts at "an inflated price." But unless the regulator intervenes, there is a danger of green consumers in effect subsidising the rest of the population.