Banding of renewables obligation favours wind

The DTI proposed banding the renewables obligation (RO) last year to make it more efficient (ENDS Report 381, pp 42-43 ) and to give emerging technologies more renewable obligation certificates (ROCs) per megawatt-hour than others.

Renewables trade bodies criticised the proposal, saying it would undermine investor confidence and make meeting renewables targets harder (ENDS Report 385, p 42 ).

More damning was energy regulator Ofgem’s response that setting bands accurately would be difficult (ENDS Report 385, p 42 ). Setting the bands too high would lead to an excessive number of projects coming forward, while setting them too low would hinder development, it said.

"We do not think that the proposals have been rigorously analysed," it said. "We advocate a more fundamental rethink before proceeding further."

In spite of this, the DTI issued detailed proposals alongside the Energy White Paper in May (see pp 40-42  ). The consultation runs until 6 September. Following primary legislation, the DTI hopes the changes will be in place for 1 April 2009.

There will be four bands based on technology development. These build on reports into the cost of renewables by consultancies Oxera, and Ernst and Young.^2,3

Established band: Established renewables technologies like landfill gas and biomass co-firing will receive 0.25 ROCs/MWh.

Reference band: Technologies that are "relatively mature but require heavy capital investment" will receive 1 ROC/MWh. This includes onshore wind power and energy-from-waste plants with combined heat and power. It also includes co-firing of energy crops - in recognition that the supply chain is underdeveloped - and "tidal impoundment" technologies like tidal barrages and lagoons.

The DTI dismisses claims that onshore wind is being over-subsidised, saying a tight market for turbines has increased generation costs by more than 20% over the past two years.

Post-demonstration band: Offshore wind and dedicated biomass plants will receive 1.5 ROCs/MWh.

Emerging technologies: Technologies that "need to show much greater reductions in costs" to be competitive, such as wave and tidal stream plants, will receive 2 ROCs/MWh. This band also includes emerging waste treatment technologies such as anaerobic digestion, pyrolysis and gasification. The British Wind Energy Association said this was not high enough for marine renewables.

To reflect this change, electricity suppliers would have to provide evidence that they supplied a specific number of ROCs, rather than the amount of electricity.

With banding, the UK will generate 13.5% of its electricity from renewables by 2015, the DTI says. This is higher than the 11.4% that would be achieved without banding, but still below the government’s 15% target.

According to a regulatory impact assessment accompanying the consultation, banding will make the RO more efficient and reduce its "deadweight" cost - the difference between the subsidy and the cost of the technologies - from £9.1 billion to £5.7 billion.

Banding will not affect existing projects. These will continue to receive 1 ROC/MWh until the obligation ends in 2027. But the DTI asks for views on whether this is too generous.

Bands will be reviewed every five years so that changes occur in line with the start of future EU emissions trading scheme (EU ETS) phases - on current expectations, 1 April 2013 and 2018. "The support levels required for renewables will...be increasingly dependent on the carbon price under the EUETS," it says.

Earlier reviews will only occur in "extreme cases", for example a "significant change" in the grid connection and transmission regimes or the cost of an individual technology, or if there was over-compliance with the RO.

An independent committee will set the bands. The DTI suggests the Committee on Climate Change proposed in the draft Climate Change Bill could be suitable (ENDS Report 386, pp 5-6 ).

Changes will be announced 18 months before they are introduced.

The consultation includes new proposals for extending the RO beyond 2020. It will still increase to 20%, but each year’s obligation will be based on predicted capacity plus headroom equivalent to 6% of total ROCs. This reduces the likelihood of a ROC oversupply, the DTI says. As a result, there is less need for a "ski-slope mechanism" to prevent a ROC price crash.

The buy-out price will also no longer be frozen at 2015.

The consultation includes several other proposals largely concerning biomass:

Biomass co-firing: The 10% cap on the proportion of a company’s renewables obligation that can be met through biomass co-firing will be removed.

Sustainability: Companies claiming ROCs for burning biomass will have to report annually on their feedstock’s sustainability. Reports will initially include details of the biomass used, whether it meets quality standards and whether its growth leads to land use change. If operators fail to provide these details, Ofgem can refuse to issue ROCs. The requirement will only apply to users above a certain threshold, but this has yet to be decided.

Biomass content of waste: The DTI is proposing to ‘deem’ the biodegradable content of municipal waste for the purpose of claiming ROCs. Current regulations make waste sampling "complex and prohibitively expensive", says the DTI’s consultation document.

The DTI suggests a level of 35%, which can be achieved if a large proportion of recyclable materials is removed from municipal waste. "This reflects the government’s aspirations for much higher levels of recycling and is felt to be suitably conservative to address… potential concerns," the consultation says.

Companies can still sample waste to determine its biodegradable content or they can use international standards for the biomass content of refuse-derived fuels, which are being developed.

Refuse-derived fuel: ROCs cannot currently be claimed for co-firing biomass if the power station also burns waste. This restriction will be removed for refuse-derived fuels - a move long called for by electricity companies (ENDS Report 386, p 17 ).