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Renewables Obligation (RO) The RO is the oldest of the current UK financial incentives, having started in 2002. It obliges electricity suppliers to source a proportion of their electricity from renewable sources. Renewables Obligation Certificates (ROCs) are awarded to renewable generators, who then sell them to suppliers. Support lasts for 20 years, but the actual value of ROCs depends on the outcome of commercial negotiations rather than being fixed by the policy. When introduced, all renewable electricity
received the same level of subsidy, regardless of the technology used. This changed in 2009, when ‘banding’ was introduced – meaning that support varies depending on the cost of the technology. The RO will close to new participants
in 2017.
Electricity Market Reform (EMR)/ Contracts for Difference (CfDs) EMR covers a package of measures including a carbon floor price, an emissions performance standard to rule out new coal generation and a capacity mechanism to try to ensure the system has sufficient back up capacity. Contracts for Difference are the new mechanism to replace the RO – although they will also be available for nuclear and carbon capture and storage. Most policies give a more or less fixed income to renewable generators but leave them free to sell the power itself on commercial terms. One drawback of this is that, if market prices go up then the total income for the generator will be higher than expected and they may be over-rewarded – and therefore the impact on consumer bills will be higher than it should be. By the same token, falling power prices would see generator income and consumer bills being lower than expected.
CfDs seek to address this by setting a
figure for the total income for a project – i.e. both the renewables subsidy and the value of the electricity. This total figure is called the ‘strike price’. The Government caps the maximum price it is prepared to give to each technology, with the actual strike prices set by auctions. Government will also take a market average for the power price, known as the ‘reference price’. Rather than being a fixed price, the subsidy paid to the generator will
www.r-e-a.net
be the difference between the strike price and the reference price. In theory, this gives the best of both
worlds, as the generator has certainty over total income and the subsidy – and therefore the impact on consumers – is no higher than necessary. Lower risks to generators should result in reduced costs of financing, and therefore improve the value for money of the electricity delivered.
The Government caps the maximum
price it is prepared to give to each technology, with the actual strike prices set by auctions. Government will also take a market average for the power price, known as the ‘reference price.’
The first auction was run in early 2015 and there are a number of concerns over the way this works for the full range of technologies and business models. Deciding how to shape this policy further will be a key set of decisions for the next government.
Feed-in Tariff (FIT) The FIT started in April 2010. It supports anerobic digestion, wind, hydro and solar PV up to 5MW, as well as small scale fossil CHP. Building on successful policies elsewhere, the FIT aims to be much simpler for the end user than policies such as the RO. It pays a fixed income on all generation with no need to enter into complex commercial negotiations. The FIT also gives a guaranteed minimum income for electricity not used on site – although projects are free to seek better prices elsewhere.
In 2011/12 solar PV was the major beneficiary, overshooting the estimated budget by a large margin. Cost control mechanisms have been introduced for both
RENEWABLE ENERGY VIEW 2015
Policy Overview
the FIT and the RHI for all technologies, in which tariffs reduce for new entrants to a scheme if deployment reaches particular levels. Although the PV market is more stable, tariff reductions for the other technologies happened for the first time in 2014, and are likely to lead to severe market disruption.
Renewable Heat Incentive (RHI) The RHI builds on a similar approach to the FIT, although it is available at all scales. Unlike electricity, excess heat generation cannot usually be exported onto a grid, so the policy aims to ensure that only useful heat is supported.
The RHI opened in November 2011,
initially only for ground source heat pumps, biomass, solar thermal, small-scale biogas and injection of biomethane to the gas grid. Single domestic installations were not included. To date, the vast majority of deployment has been biomass boilers and biomethane injected to the grid. Rapid growth has seen reductions in tariffs, and further reductions are likely in 2015. A number of tariffs and technologies were either adjusted or included for the first time in 2014. These include a sister scheme for individual households. Unlike the renewable electricity policies - which are funded by consumer bills - the RHI is paid for out of general taxation. The budget is fixed to the end of March 2016, with further funding to be set after the general election.
Renewable Transport Fuel Obligation (RTFO) The RTFO was introduced in April 2008. It is similar in principle to the RO, in that it obliges fuel suppliers to replace a proportion of supply with renewable fuels. Targets were scaled back in 2009. The
Government has yet to set out a trajectory for meeting the binding 2020 targets contained in the Renewable Energy Directive, and has made this conditional on EU-level resolution of controversy over sustainability. This has severely undermined confidence in the sector. This is particularly frustrating as UK-produced fuels have an excellent sustainability record, significantly exceeding expectations in environmental protection and greenhouse gas savings.
REview Renewable Energy View 2015 9
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