Renewables obligation and emissions trading commence
April brings with it the start of two new climate change mechanisms. The order implementing the Renewables Obligation came into effect on 1 April 2002, and trading in the UK Greenhouse Gas Emissions Trading Scheme is also due to start this month.
The Renewables Obligation applies to licensed electricity suppliers. It requires each supplier to provide evidence to Ofgem that of the total amount of electricity supplied to its customers in Great Britain each year, a specified percentage is electricity generated from eligible renewable sources. This percentage will rise from 3% in the first 12 month period to 10.4% for each 12 month period commencing on 1 April 2010 until 31 March 2027. Whether the obligation continues in its current form until then is uncertain.
Licensed electricity suppliers can comply with the Obligation in two ways:
- By producing Renewables Obligation Certificates (ROCs) to Ofgem. ROCs are tradeable certificates issued by Ofgem to generators of electricity from eligible renewable sources.
- By paying a buy-out price to Ofgem. The price is £30/MWh for the first year, and is indexed in line with the RPI after that.
Ofgem will return the proceeds from the buy-out to suppliers, in proportion to the number of ROCs that each supplier presents in discharging its obligation compared to the total number of ROCs presented. This mechanism provides a powerful incentive to satisfy the Renewables Obligation by redeeming ROCs rather than paying the buy-out price.
Suppliers and generators have spent the last 12 months preparing for the implementation of the Renewables Obligation. Generators of electricity eligible to earn ROCs need to undergo accreditation procedures with Ofgem. For suppliers, Ofgem’s proposals for administration of the Renewables Obligation – particularly its power to revoke ROCs after they have been transferred away from the generator to which they are initially issued – have raised commercial issues, not all of which have been satisfactorily resolved.
The Department of Trade and Industry estimates that the Renewables Obligation will increase the cost of electricity to consumers in Great Britain by around 0.5% each year until 2010 – an increase of a little under 5% in total. This is equal to about £780 million by 2010/11.
There may be some competition for ROCs from participants in the UK Greenhouse Gas Emissions Trading Scheme (UKETS). The UKETS allows ROCs to be converted into emissions allowances at the rate of 0.43 allowances for each ROC. Each allowance in the UKETS represents 1 tonne of carbon dioxide equivalent (tCO2e). The UKETS rules allow ROCs to be converted into emissions allowances at a rate of 0.43 allowances for each ROC. The trade is one way – emissions allowances cannot be converted into ROCs.
Already, 34 organisations have entered the UKETS as direct participants by taking on a voluntary emissions reduction target in return for an incentive payment from the Government in an auction conducted in March 2002. The UKETS rules also allow participants to join as group participants or trading participants. Many more participants are expected to join the UKETS, as the nearly 6,000 companies with Climate Change Agreements can use the UKETS to meet their targets or, within certain limits, sell any over-achievement. Approved emission reduction projects will also generate credits that may be sold into the UKETS.
Trading under the UKETS rules is due to commence on 2 April 2002, although businesses have been undertaking bilateral trades in anticipation of the UKETS coming into effect for some time.
For further information about the Renewables Obligation or the UKETS, please contact Amanda Seaton (on +44 020 7367 3454 or at amanda.seaton@cms-cmck.com) or Donovan Ingram (on +44 020 7367 2844 or at donovan.ingram@cms-cmck.com).
