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Energy Act 2008

Summary and Background

104.This Part of the Act deals with the changes proposed to the Renewables Obligation. The Renewables Obligation (RO) was introduced in 2002 to stimulate growth of electricity generation from renewable sources. The support currently provided under the RO does not differentiate between renewable technologies. It is the main policy measure for supporting the development of renewable electricity across Great Britain and Northern Ireland. In Great Britain the RO operates under the Electricity Act 1989 (c.29) with separate orders in England and Wales (the Renewables Obligation Order 2006 (SI No 2006/1004), as amended by the Renewables Obligation (Amendment) Order 2007 (SI No 2007/1078)), and in Scotland (the Renewables Obligation (Scotland) Order 2007 (Scottish SI No 2007/267)). These, together with a parallel measure in Northern Ireland (the Renewables Obligation Order (Northern Ireland) 2007 (S.R.2007/104), made under Articles 52 to 56 of the Energy (Northern Ireland) Order 2003 (S.I. 2003/419 (N.I.6))) provide for consistent Obligations in all three jurisdictions.

105.Under the existing regime, licensed electricity suppliers in the relevant part of Great Britain have a “renewables obligation” to produce to the Gas and Electricity Markets Authority (“the Authority”), before a specified day, certain evidence regarding the supply to customers in Great Britain of electricity generated by using renewable sources. The evidence required is in the form of renewables obligation certificates (“ROCs”) currently issued by the Authority to renewable electricity generators on the basis of 1ROC/MWh of renewable electricity. The generator can then sell these ROCs to suppliers with the electricity or separately. The Renewables Obligation Order in England and Wales and the one in Scotland set out the proportion of the electricity supplied by an electricity supplier that must be sourced from renewable sources.

106.As an alternative to providing ROCs, electricity suppliers may discharge their renewables obligations (either fully or partially) by making buy-out payments to the Authority. Payments made into the buy-out fund are redistributed at the end of the obligation period to suppliers who have produced ROCs, on a pro-rata basis. The obligation level has been deliberately set higher than the expected amount of renewables generation to be deployed in order to ensure there is a market for ROCs. This will mean some suppliers pay the buyout price for at least some of their obligation. The redistribution of the buyout fund in this way is intended further to promote competition between suppliers in supplying more electricity from renewables sources, and therefore to promote further investment in renewables generation.

107.The existing legislation also provides for suppliers who do not comply with the RO by the specified day to be treated as having subsequently discharged the RO if they make late buyout payments, together with escalating interest into a late payments fund.

108.It also makes provision for requiring suppliers to make payments to the Authority to cover some or all of an un-recovered shortfall in the buy-out fund caused, for example, by the insolvency of a supplier with an obligation who cannot make payments into the buyout fund. Where this occurs, additional sums are then required from the remaining electricity suppliers to cover the amounts that would have been paid by the insolvent supplier. This process is known as mutualisation.

109.As already mentioned, Northern Ireland has enacted legislation which is analogous to the provisions of the Electricity Act 1989 creating the RO. That legislation requires Northern Ireland suppliers to produce, as evidence, Northern Ireland Renewables Obligation Certificates (“NIROCs”) issued by the Northern Ireland equivalent of the Authority, the Northern Ireland Authority for Utility Regulation. ROCs issued in Northern Ireland are also recognised in Great Britain and can be used by GB suppliers to discharge their obligations. Similarly ROCs issued under the two GB orders can be used by suppliers to fulfil the Northern Ireland RO.

110.The Government’s proposed reform of the RO in Great Britain in the Act is designed to bring forward more renewables generation by increasing the effectiveness of the RO. The proposals enable the Secretary of State to increase support to some forms of renewable generation, while reducing subsidy to others.

111.The proposals will:

  • Allow the Renewables Obligation to be banded to provide different levels of support for different technologies based on their cost and other considerations specified in the Act.

  • Change the obligation to one in which suppliers must present a specified number of renewables obligation certificates (ROC), rather than supply a specified percentage of their electricity from renewable sources.

  • Maintain the rights of most existing generating stations to claim 1ROC/1MWh once banding is introduced.

  • Provide for the bands to be reviewed periodically or where a specified condition triggers a review.

  • Provide for a mechanism to prevent a price crash in the event of an anticipated oversupply of ROCs.

  • Require biomass operators to provide information to the Authority on the source of biomass fuels and what steps they have taken to ensure its sustainability.

  • Allow generating stations using both fossil fuel and renewable sources (e.g. energy from waste plants) to claim ROCs only for the proportion of electricity generated by the renewable source.

  • Enable the Authority to recover the costs of administering the RO from the buyout fund.

112.The Act transfers the functions of the Secretary of State under section 37 to the Scottish Ministers. In the past, the RO has been executively devolved to the Scottish Ministers by an Order in Council under section 63 of the Scotland Act 1998. In order to maintain the current devolution settlement, the new powers taken in relation to the RO need to be transferred to Scottish Ministers in so far as they apply to Scotland. This transfer of functions on the face of the Act has the same effect as if the powers had been transferred to the Scottish Ministers by an Order under section 63 of the Scotland Act 1998.

113.The detail of the changes will be covered in secondary legislation made under the new sections 32 to 32M of the Electricity Act 1989. The orders will be subject to a statutory consultation process.

114.Since the RO was first introduced in 2002, there have been a number of subsequent changes to the primary legislation (made by the Energy Act 2004 and the Climate Change and Sustainable Energy Act 2006) intended to improve the way that the RO works. However as has been indicated by the Committee of Public Accounts(2) and by the Government Review of the RO(3) there is scope for further increases in efficiency of the RO as a mechanism. The reforms proposed in this Act are intended to restructure the way the RO works while maintaining its overall aims. In practice there will continue to be an obligation on suppliers to present certificates to the Authority or to pay a penalty. The buy-out fund will continue to be recycled in order to promote competition in the renewables market. As there have been a number of previous changes to the primary legislation, the Government has also taken the opportunity through the Act to recast the existing legislation so that it is easier for the reader to follow.

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