1. Learning from experience? The UK Renewables Obligation Bridget Woodman University of Exeter Cornwall Campus b.woodman@exeter.ac.uk

2. The Renewables Obligation Obligation on electricity suppliers to source a growing proportion of their supply from renewable sources Each MWh of renewable electricity awarded a tradable RO certificate (ROC) – ‘Technology neutral’ Suppliers could not meet the RO and pay a penalty price (the buyout) instead – Buyout funds recycled at the end of the year in proportion to the level at which suppliers had met the obligation – Creates an incentive to maximise recycled buyout cash Issues ROCs GeneratorsSuppliers Brokers Ofgem Sells ROCs Buyout penalty ROCs Sells ROCs Recycled buyout fund Sell output Sell ROCs

3. Key characteristics Unlike a Feed in Tariff mechanism, the RO design is founded in the belief that a competitive, market based mechanism would encourage renewable generation at the lowest cost to the consumer – Encourages suppliers to source the cheapest output Developers faced a number of risks: – Price – no guaranteed price for any technology, no obligation to take output – Balance – directly or indirectly exposed to balancing costs in the electricity market – Volume – annual target imposes an upper limit on generation qualifying for the premium... and uncertainty about ROC prices Investments required high rates of return The ROC price ‘cliff edge’

4. Performance

6. Why does it matter? The game has changed since the RO’s introduction: – Increasing concerns about security of supply – EU level renewable energy targets (20% by 2020 UK: 15% renewable energy by 2020 – Climate Change Act: legal obligation for 80% CO2 reductions by 2050 Electricity sector will play a vital role in any low carbon future for the UK

7. Changing the nature of the RO Changes increasing challenge the fundamental principles of the RO – Technology neutral – Competitiveness Last NFFO order RO first proposed Formal RO proposals RO begins Revision: co-firing, small generators Revision: Increases to 2015/16 RO Review Energy review: Changes to co-firing Banding proposed Revision: Extension to 2037 FITs >5MW Guaranteed headroom Banding introduced Contracts for Differences?

8. Addressing risk PriceBalanceVolume Guaranteed headroom Intended to address the ROC price ‘cliff edge’ by guaranteeing that the RO target for a period is set at a level higher than expected generation Extension to 2037 The RO (and therefore ROC trading) will be in place until 2037 ? ? BandingDifferent technologies receive different numbers of ROCs for their output. Less developed technologies receiving more ? FIT for small generation <5MW Guaranteed price and access for very small scale generation Stabilising revenue Under discussion. Some sort of price guarantee for renewable generation (and other low carbon sources?) ?

9. Have we learnt anything? Recognition that very competitive mechanism will not encourage the development of new technologies Cost to consumers is a function of financial risk as well as market based design Evolution of the RO shows policy flexibility – but not yet sufficient – Key elements of market risk remain – Still no guarantee that output will be taken (unlike a FIT)