Caught between a ROC and a hard place2 March 2002
Schemes that require electricity suppliers to use a proportion of renewable energy offer hydro and other renewable suppliers a ready market. The associated tradeable certificates will provide a new income stream but the efficiency of such schemes is compromised by inconsistencies that discount cross-border trade. Janet Wood reports
Following consultation during 2001, the UK's renewables obligation is currently being signed into law. It will require wholesale electricity suppliers to obtain a proportion of their supply from renewable sources. Electronic renewable obligation certificates (ROCs) will be used to track the proportion of renewable energy. The ROCs will have a unique number and will detail the generating station, renewable source used and the period in which the electricity was generated.
The type of hydro sources that can qualify for ROCs in the UK expanded somewhat during the consultation period for the scheme. It now includes all hydro schemes rated at less than 1.25MW, all hydro stations of less than 20MW built after 1990 or have been refurbished since 1990, and all hydro schemes built after the date the legislation comes into force.
ROCs have been designed as separate tradeable instruments. The intention is that renewable energy developers will have two separate income streams - from supplying electricity and ROCs - which will help overcome the previously intractable problem of providing incentives to develop renewable energy. In addition the problems of bearing high operating and capital costs can be solved by using ROCs as a continuous additional income stream, or by forward selling them into the market to create capital investment. Two income streams should also allow such projects to reduce financing costs from lenders.
The UK's ROC scheme is not the first to start up in Europe. At least seven are at various stages of development or implementation, and this parallel development raises questions over whether it might be possible to trade ROCs or their equivalent across the continent. Certainly the long term aim in Europe is to develop such trading schemes.
A trading simulation held in the UK in 2001 considered trading of billions of Euros-worth of certificates over a ten-year period, and while it met its limited aims, it highlighted the problems inherent in developing an international scheme. Chris Crookall-Fallon of Energy for Sustainable Development, which ran the simulation, explains. 'We set out to do a simulation with modest aims: not to accurately model what might happen in an EU-wide trading system, or to carry out mathematical or economic modelling,' he says. 'It was a way to introduce people to the concept of trading.'
The simulation involved around 145 companies from 18 countries, using a trading website supplied by M-Co, which manages the comparable Green Energy Market in Australia. It used blind trading, where traders do not know the name of their counterpart, but simply post up bids to buy or offers to sell, giving quantity and price for the different products.
The simulation was operated successfully but Crookall-Fallon was clear that its application to the real world is currently limited. 'If we don't have unified rules it creates barriers and distortions,' he says. 'There are already a diverse range of schemes in seven European countries. The underlying principles are the same but they vary greatly in detail and in how the policy translates into the market.'
A comparison of existing schemes makes some barriers to cross-EU trade immediately apparent. For example the certificate lifetime varies, there are different regulations on the types of generation included, and imports are allowed in some countries but not others. The UK scheme specifically excludes imported electricity and Crookall-Fallon says that is to stop the scheme being overwhelmed from overseas.
'In the Dutch scheme import happens, but the government has put a blanket restriction on hydro power imports, and in fact has restricted all hydro power, even that generated in Holland. That's because they could see a likely huge influx of Scandinavian hydro at a low price.'
Although, Crookall-Fallon says large hydro is mainly excluded from the schemes, he says small hydro is classified differently and some countries could amass enough to overwhelm the Dutch scheme. 'The Dutch scheme is in danger of being overwhelmed by small hydro from France, for example - and so was the UK's scheme until ROCs were blocked from imported power.' He says that while the UK has excluded imports, 'the Danish scheme has dealt with this by having a very marked disincentive for import, using a price multiplier'.
Crookall-Fallon adds that despite the problems of cross-border trade, ultimately it would ensure that renewable energy could take advantage of the most economic sites. 'The simulation had unrestricted trading,' he said, but in the real world 'unless it is on a consistent Europe-wide footing then all the advantages of liquidity, and benefits of siting in resource-rich places are lost. Or at least, they are restricted to within single countries.'