Narrow terms of reference for renewables obligation review

In a bid to maintain investor confidence in the renewables industry, the Government has published narrow draft terms of reference for its forthcoming review of the renewables obligation.1 However, support for some cheaper technologies - potentially landfill gas and onshore wind - could be reduced or withdrawn.

The renewables obligation was intended to be a novel market mechanism to encourage investment by both private equity investors and utilities. However, financiers' confidence was dented by a shortfall in the obligation's "buy-out" fund when two suppliers went into administration (ENDS Report 345, p 13 ), and by tinkering with the rules to encourage biomass co-firing (ENDS Report 342, pp 24-27 ).

Further jitters have been caused by concerns that the review of the obligation, due in 2005/06, could lead to significant changes.

In a bid to provide early reassurance, the Department of Trade and Industry has now set out the draft terms of reference. It concludes that the obligation "appears to be meeting the original policy intent well, with developers and suppliers bringing forward significant projects."

The review will look at the operation of the obligation to 2020, but the DTI "has no pre-judged view" on whether it will be necessary to make decisions about its level beyond 2015/16. Under the current rules, the obligation reaches a plateau from this date until its end in 2026/27.

The review will address "the relationship between obligation levels and the Government's 2010 target for renewables". A House of Lords Committee recently warned that if renewables are to contribute 10% of UK electricity generation by 2010, the obligation will need to be set at a significantly higher level (ENDS Report 354, pp 38-39 ).

The consultation rules out the more drastic options such as moving to a "feed-in" tariff, reducing the index-linked "buy-out price" and further changes to the co-firing rules.

A growing number of commentators are complaining that the obligation is boosting onshore wind, but is failing to direct support for other less-developed technologies. However, the DTI insists that the principal purpose of the obligation is to "achieve our renewables objectives at minimal cost", and does "not anticipate bringing forward changes which would impact in a material way on this aspect of the obligation."

However, the review will consider whether certain renewables could "over time" become commercially viable with a lower level of support, or none at all. Such a move could spell trouble for onshore wind and landfill gas in particular.

So as not to frighten the horses, the DTI promises that all operational projects will continue to qualify for the obligation. Moreover, "substantial" notice of any changes will be given to allow projects under construction, with planning permission or "at earlier stages of development" to qualify.

The Government is resisting calls from the waste industry to make mass burn incineration eligible for the obligation. However, it will consider whether burning refuse-derived fuel meets its waste policy aims and merits inclusion.

There have been calls for the Government to introduce additional revenue-based support for technologies such as wave, tidal and biomass (ENDS Reports 350, p 32  and 352, p 13 ). The DTI will consider this separately "over the coming months." The Government will also consider calls for a renewable heat obligation in parallel with the review of the existing renewables obligation.

The DTI will also consider whether combined heat and power should be exempted from the obligation - an assessment which was forced on it by the new Energy Act. Maintaining investor confidence and minimising the cost to customers will be "critical considerations" here.

However, the DTI rules out making coal mine methane eligible for the obligation because it cannot be defined as renewable under the terms of the renewables Directive (ENDS Report 312, p 43 ).

The review will also assess the effect of the EU emissions trading scheme on the renewables markets. This scheme is due to start on 1 January - less than a year before the end of the obligation review. Work will therefore flag up emerging policy issues rather than proposing immediate policy changes.

The Government aims to finish the review by December 2005 and implement any changes from 1 April 2006. The Scottish Executive will undertake a parallel review.

The DTI will also consider "more immediate steps" to merge the buy-out funds of the Scottish and Anglo-Welsh obligations to reduce complexity and improve market efficiency. It will issue a separate statutory consultation "shortly", and aims to introduce the changes from 1 April 2005.