Designing a framework for transparency of carbon content in energy products

On 16 August 2021, the UK government Department for Business, Energy & Industrial Strategy (“BEIS”) published a consultation to kick-start design of a new framework to ensure transparency of carbon content in energy products (the “Consultation”). The consultation seeks input from a broad range of stakeholders – including suppliers, generators, regulators and consumers – and asks broad ranging questions primarily focussed on customer expectations and greenwashing.

In this article, we provide an overview of some of the key points and questions arising from the Consultation.

The rise of green tariffs

As noted in the Consultation, the production of “green” electricity has seen a significant increase over the last two decades, and increased by 500% since 2010 alone. Today, renewables account for over 40% of all electricity generated in the UK.

Government intervention has been integral in the rapid deployment of green technologies, with a series of subsidy regimes, funded by every consumer via their energy bill[1], supporting investment in renewable generation infrastructure in the UK.

Alongside the “green revolution” in electricity generation, the number and type of green tariffs offered by electricity suppliers has also dramatically increased (see Figure 1 from the Consultation included below).

Having historically been a more expensive option, the pricing of green tariffs is now almost on a par with their standard counterparts.

Renewable Energy Guarantees of Origin

A green energy tariff operates by the supplier guaranteeing that some or all of the electricity purchased by the consumer is “matched” to renewable generation[2]. Integral to this are Renewable Energy Guarantees of Origin or “REGO” certificates. REGO certificates are issued by Ofgem to generators of renewable energy, with one REGO certificate being issued for every megawatt hour of eligible electricity produced. An electricity supplier needs to “match” REGO certificates to the electricity it sells in order to claim that such electricity is “green”.

Suppliers can purchase electricity for onward supply to consumers in a number of ways:

1. Owned generation – the energy supplier owns a renewable generation facility which produces electricity that the supplier then sells directly to its consumers. The supplier will claim REGO certificates issued to the generation station to evidence renewable supply to green tariff customers.
2. Power Purchase Agreement – the supplier enters into an agreement with a renewable energy generator, pursuant to which the supplier purchases renewable electricity generated by that facility. Subject to the commercial terms of the PPA, the supplier will also take the REGO certificates which it will use to evidence renewable supply to green tariff customers.
3. Wholesale Market Trading – the supplier will purchase electricity from the wholesale market, and separately purchase REGO certificates (which can be sold on by renewable generators on the secondary market) to evidence renewable supply to green tariff customers.

Expectation vs reality

While noting the popularity of green tariffs amongst customers – 62% of which it states claim to be more likely to purchase a sustainable service – the Consultation is critical of a lack of transparency, ranging from failure to meet customer expectations to so-called “greenwashing” – the practice of making a business’ products or policies seem more environmentally friendly than they are.

The Consultation notes that consumers may not be able to properly engage with green tariffs or understand the make-ups of the different options available, in some cases preventing them from buying what they expect to receive. The Consultation draws the distinction between those willing to “pay a premium for sustainable energy” and those who want to “do their bit” for the environment, but are primarily driven by price.

One example of the current lack of transparency is around the REGO system. While REGO certificates are attributed to the electricity supplied under a green tariff, these may derive from the output of, for example, a windfarm generated at any time over the preceding year[3]. The Consultation states that the REGO scheme “may continue to foster confusion and distrust from consumers who are aware that renewable generation is not always available when their electricity consumption occurs”, while noting that customer confidence is “vital”.

Time granularity

The lack of time granularity (reflecting the time energy was generated or consumed) under the REGO scheme may also pose challenges to a truly “flexible” system capable of giving consumers sufficiently clear information to enable electricity use at times when there is a lot of renewable energy on the system, and even the sale of surplus electricity (e.g. from a fully charged electric vehicle) back to the grid for a profit. BEIS note that a joint publication with Ofgem setting out their vision for this area will be “published shortly”.

Additionality and Transparency

Where a supplier makes a claim that an environmental benefit is as a result of a customer choosing to purchase a particular green tariff, and not solely brought about by government subsidies or similar, they are obliged to substantiate this claim. Where a supplier cannot substantiate the claim, they must publish a clear statement to the effect that purchasing the tariff will not produce the claimed environmental benefit. This is regulated by condition 21D.4 of the Electricity Supply Licence.

Nevertheless, the Consultation states that greenwashing and poor information is still an issue. It notes that the Competition and Markets Authority is developing principles to prevent misleading information, including in the energy industry. The guidance, which will focus on (i) how environmental claims are made, (ii) whether they are supported by evidence, (iii) whether they influence consumer behaviour, and (iv) whether consumers are misled by an absence of information about environmental impact, is expected “later this year”.

Other low-carbon solutions

The Consultation notes that while renewable energy accounts for over 40% of the UK’s electricity mix, electricity itself still only accounts for about 17% of final energy use, with fossil fuels accounting for just over 79% of UK energy supply in 2019.

The Consultation therefore notes that in addition to renewable electricity, the future energy system will need to account for other low-carbon technologies such as nuclear, carbon capture, usage and storage (“CCUS”) (including bioenergy with CCUS), combined heat and power, hydrogen and green gas (see here for our update on CCUS clusters and here for our key takeaways from the government’s hydrogen strategy).

Comments

The Consultation proposes further changes to an energy system which is already under significant review following BEIS and Ofgem’s joint energy code governance reform consultation (see our commentary here) and consultation on addressing supplier payment default under the Renewables Obligation (our commentary on BEIS’ Renewables Obligation supplier default consultation is the subject of a separate law now). The Consultation aligns with government’s approach of increasing accessibility and transparency for energy system users and consumers. It notes that the underpinning framework was implemented almost 20 years ago, and that as the system has moved on so must the framework governing it.

However, as the Consultation notes, many consumers aren’t interested in receiving detailed information about their electricity tariffs. Given the Consultation’s focus has customer interests at its heart, it will be important for any new system to combine sufficient detail and transparency with usability. Ensuring that the investment is worth the cost, for suppliers and the rest of the sector, will be crucial.

Read all our commentary on Energy &Climate Change policy in the UK here.

[1] Energy bills are formed of 6 main components - wholesale energy costs, network costs, supplier costs and margins, infrastructure investment policy funding, social policy costs and value added tax.

[2] In order to claim that electricity is “100% renewable” or “green”, suppliers must adhere to the requirements of standard licence condition 21D, which requires them to match the volume of energy supplied to their green tariff customers with energy generated from renewable sources.

[3] This is due to the retrospective granting of REGO certificates. The REGO system was implemented 20 years ago and was not designed to create strong links between production and consumption within the existing system for tracking renewable energy.