ROCs set to roll
The system of renewables subsidy in this country is a little complicated. In essence, the idea is straightforward, if not uncontroversial - low carbon power generation is good for the planet and what's more introduces a more diverse generation mix, which helps keep the lights on. But renewables are expensive and in a competitive market need a 'leg up' if they are to compete with coal and gas; hence the subsidy.
This is a gross simplification, of course, and assessing the relative economic (and environmental) merits of coal, gas and renewables, never mind nuclear, is fraught with difficulties.
But things get much worse when the areas becomes heavily politicised.
Recent events in Whitehall provide a good illustration.
The backdrop is the ongoing battle, often played out in public, between DECC and the Treasury. With an eye on our low carbon targets, DECC is anxious to drive between £20 billion and £25 billion of private sector investment in renewable energy over the next 5 years. George Osborne, with an eye on the public finances and seemingly not persuaded by the green economy arguments, has his priorities elsewhere.
The trigger was the latest round of renewables subsidy cuts, announced on 25 July. These don't involve the feed in tariffs, which are available to projects under 5MW and most notably were cut for solar PV in a clumsy fashion (and after 3 court hearings) earlier in the year. This time around, the cuts are to the other main subsidy regime, which typically supports the larger renewable projects, the Renewables Obligation (RO).
This announcement came out after some delay, apparently due to a spat over the level of onshore wind subsidies. This would appear to relate to a leaked letter from George Osborne to Ed Davey, the energy and climate change minister, which spelt out the cost of Treasury support for the proposals, notably including a clear signal of support for gas as a central part of the generation mix to at least 2030, indeed support for the idea of the UK as a gas hub.
This has upset the green lobby, not least because the statement of support finds its way, almost verbatim, into the DECC's press notice. It has to be said it's hard to see a place for unabated gas on this scale if we are serious about meeting our decarbonisation targets.
This debate will rumble on, and if nothing else proves that the question of subsidy levels and affordability will never be far from controversy.
Putting aside all the politics and the contrasting longer term visions for our power sector emanating from the coalition government, this latest round of changes to renewable subsidy levels is significant.
The RO is a 'quota system', which requires electricity suppliers to source an increasing percentage of their supplies from renewables sources. They do this by acquiring quantities of Renewable Obligation Certificates (ROCs) - either direct from renewable generators or in a secondary market. The ROCs are issued to the operators of qualifying renewable generating plant by regulator Ofgem, which administers the scheme.
The RO is set to be replaced in 2017 (for new projects) with a new variety of feed in tariff 'contracts for differences'. This new subsidy regime is a central plank in the government's fundamental overhaul of our power sector in what is called the Electricity Market Reform (EMR), which is where the big political battles are likely to be played out in terms of future generation mix and government support over the medium to longer term.
But for now, the RO is the main game in town. It is not technology neutral (although it used to be). Under complex 'banding' rules, different quantities of ROCs are awarded for a plant's output, dependent on technology type and the level of subsidy required (so the theory goes).
This latest announcement from DECC is all about the new bands to apply from next April 2013.
Perhaps most controversially given the Chancellor's intervention, the uncertainty continues for onshore wind. Hot on the heels of a 20% reduction in feed in tariffs for small wind systems (up to 100kW), announced earlier in the month, ROC levels for onshore wind will reduce by 10% to 0.9, but they will be reviewed again early next year with the prospect of removing altogether (for new projects) from April 2014 if costs have reduced significantly.
Furthermore, there was no announcement on new ROC levels for solar PV, on grounds that further consultation is apparently needed on both costs and interaction with the recent FITs review. So uncertainty persists for the solar industry too.
As expected, we will see the ROC level for offshore wind remain initially at 2 ROCs, and then to 1.9 and 1.8 in subsequent years.
However, good news elsewhere, with ROC levels for certain marine technologies more than doubling in an attempt to kick start investment, and there will be new support for existing coal plant converting to sustainable biomass fuels.
Energy from waste projects with combined heat and power will also attract higher ROC levels than expected. ROCs for anaerobic digestion (AD) will remain initially at 2 ROCs, and then to 1.9 and 1.8 in subsequent years. In addition, from April 2013 AD will be closed to new small scale projects and will be subject to the feed-in-tariff regime.
So what does all this mean?
Well, we can perhaps expect a rush of small-scale wind, solar and AD projects over the next few months as developers try and get in before the changes.
Beyond that, the future is uncertain. What is most troubling about this latest announcement is the underlying rift between DECC and the Treasury, and the harm being caused by George Osborne's apparent hostility to low carbon development.
Investors need a stable long-term framework, relatively free of political risk, and that continues to seem some way off.