Regulatory Impact Assessment for the Renewables Obligation…

       Regulatory Impact Assessment for the
 Renewables Obligation Order 2006 (Amendment) Order
                        2007


1.    Title of Proposed Regulation

1.1   Renewables Obligation Order 2006 (Amendment) Order 2007.

2.    Purpose And Intended Effect Of Measure

Objective
2.1   The objective of the Amendment Order 2007 (2007 Order) is to
      simplify some of the processes which participants in the Renewables
      Obligation (RO) currently have to follow and to extend the financial
      benefits available to some generators, in particular small generators
      and energy crop co-firing generators. This will be achieved through
      some limited changes to the existing Renewables Obligation Order
      2006.

2.2   The proposals will affect all licensed electricity suppliers, all RO eligible
      electricity generators and Ofgem who administer the RO.

Background
2.3   The Renewables Obligation was introduced in 2002 and is the
      Government's main policy measure to encourage the development of
      electricity generation capacity using renewable energy sources in the
      UK. It is underpinned by a substantial package of financial and non-
      financial supporting mechanisms and active assistance to the industry
      to develop its competitive potential. The Obligation has already
      provided, and will continue to provide, an impetus for the new
      renewable generating capacity that will be needed to meet the UK's
      current 10% by 2010 target for electricity produced from renewable
      energy sources and as a basis for further reductions in carbon dioxide
      emissions.

2.4   The details of the Obligation are contained in the Renewables
      Obligation Order 2006 in England and Wales, the Renewables
      Obligation (Scotland) Order 2006 in Scotland, and the Northern Ireland
      Renewables Obligation Order 2006. RIAs were produced for the
      implementation of the Obligation in England & Wales and Scotland in
      2002; the amendments to the Obligation in 2004; the new powers set
      out in the Energy Act 2004; the Consolidated Orders in 2005 and 2006;
      and the new powers in the Climate Change and Sustainable Energy
      Act 2006.



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2.5   The Renewables Obligation is a key part of the Government's policies
      to reduce CO2 emissions and tackle climate change. The Obligation
      requires licensed electricity suppliers to ensure that specified and
      increasing amounts of the electricity they supply are from renewable
      sources. For 2006/07, this level is 6.7% and under current legislation
      rises to 15.4% in 2015/16. Without the financial support provided by
      the Obligation, most forms of renewable electricity would not be
      economic and the Government would not achieve its targets for
      increasing the supply of electricity from renewable sources. The
      Government believes that, through the support of the Obligation,
      renewable sources of electricity will play an increasing part in the
      Government's efforts to reduce carbon emissions and address climate
      change.

Problem to be addressed
2.6   Where Government becomes aware of simplifications or changes to
      the RO which will make it easier for generators and suppliers to
      participate it will aim to implement them. The individual proposals for
      change and the reasons behind them are addressed in Section 3
      below.

Regulatory Burdens & Compensatory Simplification
2.7   The major regulatory burden imposed by the Renewables Obligation is
      that, in order to provide additional support for the generation of
      electricity from renewable sources, costs to all electricity consumers
      are increased. These costs are capped by the level of the Renewables
      Obligation and the level of the "buyout" price in the RO. The previous
      RIAs referred to in paragraph 2.4 above considered the costs and
      benefits of the introduction and subsequent extension of the
      Renewables Obligation at the time that those measures were
      introduced.

2.8   Aside from issues of costs to consumers, the Renewables Obligation
      imposes some regulatory burdens on renewable generators and the
      electricity supply industry in relation to the administration that is
      required to benefit from and comply with the scheme. The
      amendments in the 2007 Order will include a small number of detailed
      changes that will make it easier for renewable generators to benefit
      from the Obligation. This will reduce the regulatory burdens on
      business and reduce the administrative processes for microgenerators
      who can be individuals as well as businesses. In the short-term there
      will be an increased administrative burden on Ofgem while they adjust
      their processes to take account of the changes, however this may be
      offset in the longer term by the deregulatory nature of the changes
      being introduced.

2.9   In total, these changes aim to improve the operation of the scheme
      and its effectiveness in meeting the Government's renewable energy


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      targets. Some of the changes are deregulatory in nature and seek to
      reduce administrative costs for the administrator of the RO, Ofgem,
      renewable energy generators and electricity suppliers.

3.    Options, Costs and Benefits

3.1   It is proposed to make amendments to the RO in the following areas:

      ·   Allowing agents to act on behalf of small generators (50kW DNC or
          less) in all aspects of RO participation
      ·   Requiring agents, for the purposes of claiming ROCs, to
          amalgamate the electricity generated by two or more small
          generators (50kW DNC or less)
      ·   Removal of the requirement for a sale and buyback agreement for
          all generators
      ·   Changing the rules on co-firing to remove the cap on co-firing of
          energy crops and a minor amendment to the definition of an energy
          crop.
      ·   A change to the definition of biomass so that where more than one
          fuel which are not fossil fuels (as defined in Article 8 of the RO
          Order) are used in a power station, as long as 90% of the total
          energy content of those fuels is derived from biomass then those
          fuels will be treated as biomass fuels for the purposes of
          establishing ROC eligibility.

Administrative arrangements for smaller generators

What are the proposals?
3.2   The Government proposes to introduce measures that will make it
      easier for small generators to benefit from the Obligation (in this
      context small generators are those with a declared net capacity of 50
      kW or less).

3.3   Two changes are proposed:

      a) allowing agents to act on behalf of smaller generators in seeking
         accreditation and claiming of ROCs and that these ROCs are then
         issued to the agent; and
      b) allowing ROCs to be issued to agents; and allowing agents to
         amalgamate the output of smaller generators for the purposes of
         claiming ROCs.

Why is it being proposed and what are the benefits?
3.4   In 2005, as part of the RO Review, the Government held two
      consultations ­ a preliminary consultation and a statutory consultation.
      In both these consultations, the Government included the proposals to
      allow agents to act on behalf of small generators and to also allow



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      agents to amalgamate the output of small generators. These proposals
      received strong support from those who responded to the
      consultations on these issues. Although many of the proposals in the
      RO Review were implemented from 1 April 2006 in the Renewables
      Obligation Order 2006, this was not possible for the small generator
      changes, as they required primary legislation. The Government has
      now secured the primary legislation needed through the Climate
      Change and Sustainable Energy Act 2006 and now intends to
      implement the proposals in the secondary legislation from 1 April
      2007.

3.5   There are concerns within the microgeneration sector that there are
      significant barriers to microgenerators being able to access the
      benefits of the RO due to the administrative requirements of the
      scheme. This can affect their ability to obtain ROCs in the first
      instance and then sell these on in the second. In its response to the
      2007 Order statutory consultation the Micropower Council state that
      "... a supplier has indicated that it currently applies for ROCs for only
      ~1% of its eligible microgeneration customer base."

3.6   The changes that allow agents to act on behalf of generators should
      reduce administrative burdens on small and micro-generators ­ and
      provide them with the option of an easier route to obtaining the
      benefits of ROC eligibility. It would also mean that ROCs could be
      issued direct to agents and so arrangements for trading of ROCs
      would pass to the agent rather than lying with the generator.

3.7   In terms of amalgamating generation, there are additional benefits.
      Under current rules, where a small generator is only generating very
      small amounts of electricity they may not even reach the threshold
      required to claim one ROC. Alternatively, although they are generating
      enough to be able to claim a small number of ROCs, the numbers
      involved do not make it worthwhile going through the accreditation
      and other administrative processes required. Amalgamating generation
      will allow economies of scale in the administrative processes for small
      generators. It will also allow small generators who may not otherwise
      be generating enough to claim ROCs to combine their output with that
      of others and so access the financial benefits of the RO. An example
      is set out below.

3.8   Scenario 1 ­ using existing rules: Generator A generates 0.3MWh
      annually; Generator B generates 0.4MWh annually; Generator C
      generates 0.5MWh annually; and Generator D generates 0.6MWh
      annually. Under existing rules generators can only claim ROCs for
      generation of 0.5MWh and over which for the purposes of issuing
      ROCs is rounded up to 1MWh. Anything below 0.5MWh is rounded
      down. This means that Generators C and D will receive 1 ROC each.



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       Generators A and B do not meet the 0.5MWh threshold and so will not
       be able to claim any ROCs.

3.9    Scenario 2 ­ using proposed rules: As before Generator A generates
       0.3MWh annually; Generator B generates 0.4MWh annually; Generator
       C generates 0.5MWh annually; and Generator D generates 0.6MWh
       annually. All four generators decide to use the same agent who will be
       required to amalgamate their output. The amalgamated output equals
       1.8MWh which when rounded up will result in 2 ROCs being issued.
       This means that where before only 2 generators were able to benefit
       from the RO now all 4 generators will have access. Whilst Generators
       C and D are no longer benefiting from the rounding rules to such an
       extent they may feel the administrative advantages of using an agent
       outweigh this loss.

3.10   Scenario 3 ­ using proposed rules: As before Generator A generates
       0.3MWh annually; Generator B generates 0.4MWh annually; Generator
       C generates 0.5MWh annually; and Generator D generates 0.6MWh
       annually. Generators A and B decided to use the same agent who will
       be required to amalgamate their output. The amalgamated output
       equals 0.7MWh which when rounded up will result in 1 ROC being
       issued. Generators C and D act independently of an agent and so
       receive 1 ROC each as in Scenario 1. Generators C and D will be able
       to receive the same benefits as they do under existing rules whilst
       Generators A and B will also be able to claim a ROC and so benefit
       from the RO which they are not able to do under the existing rules due
       to the 0.5MWh threshold for claiming ROCs.

What are the costs?
3.11 These changes will operate in parallel with existing rules. There will be
      no compulsion to use an agent so although for generators using an
      agent there may be transaction costs those generators not wishing to
      use an agent will be able to continue as they do under current rules.
      Moreover, trade associations and smaller generators consider that the
      proposals have the potential to reduce costs and administrative
      burdens for smaller generators and increase access to the financial
      benefits of the RO. In the short term there will be an increased
      administrative cost to Ofgem while they put in place new systems to
      accommodate these changes.


What are the alternative options?
3.12 Do nothing. This would go against previous Government
      announcements to take forward this policy. In addition, the benefits in
      terms of reduced administrative burdens for small generators will not
      be achieved with this option.




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Removal Of Sale And Buyback Agreements
What is the proposal?
3.13 That the necessity for generators to have a sale and buyback
      agreement to enable the electricity which they generate and consume
      to be eligible for ROCs is removed.

Why is it being proposed and what are the benefits?
3.14 In 2005, as part of the RO Review, the Government held two
      consultations ­ a preliminary consultation and a statutory consultation.
      As part of these consultations, the Government included a proposal to
      remove the necessity to enter into sale and buyback agreements for
      small generators who consume the electricity which they generate and
      also asked whether it would be appropriate to extend this proposal to
      all generators. The proposal to remove sale and buyback for small
      generators was strongly supported, with more mixed support for its
      removal for all generators.

3.15   Although many of the proposals in the RO Review were implemented
       from 1 April 2006 in the Renewables Obligation Order 2006, it was not
       possible to do this for the removal of sale and buyback agreements, as
       this required primary legislation. The Government has now secured the
       primary legislation needed through the Climate Change and
       Sustainable Energy Act 2006 and intends to implement this proposal in
       the secondary legislation from 1 April 2007.

3.16   During previous consultations on this issue, it has been argued that it
       is not just small generators who experience administrative burdens
       and difficulty in obtaining sale and buyback contracts with suppliers,
       but that it is a problem that extends to larger generators as well. We
       are keen to encourage deregulatory measures within the RO where
       possible, and view sale and buyback agreements as an unnecessary
       administrative burden.

What are the costs?
3.17 The purpose of sale and buyback agreements is to allow generators to
      claim ROCs for electricity they consume themselves. The primary
      legislation has been amended so that generators, who have generated
      their own electricity will, when claiming ROCs, no longer have to
      demonstrate supply by entering into sale and buyback agreements.
      ROCs will be able to be issued if the electricity generated has been
      consumed by the generating station. The removal of a requirement for
      sale and buyback agreements means that electricity generated and
      sold and purchased back in this way will no longer form part of any
      supplier's obligation so in effect making the size of the obligation
      smaller whilst the number of ROCs in the market is likely to stay about
      the same or increase. Analysis suggests that this could have a very
      small impact on ROC prices. However, the amounts of generation
      currently included under sale and buyback agreements, termed `non-


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       billed supply', is very small (see para 3.18) and so the impact on ROC
       prices is likely to be minimal and will remain so unless growth in
       generation for self consumption is significantly greater than the overall
       increase in the level of the RO.

3.18   The table below sets out data on electricity generation covered by sale
       and buyback agreements, termed `non-billed supply', in absolute and
       relative terms. This is taken from the information suppliers submitted
       to Ofgem for compliance purposes. Non-billed supply also includes
       supply made through an exempt distribution network (i.e. non-article
       10 supply, representing supply made to customers independent from
       the operator of the generating station but through a licence exempt
       network).

                                           Total non-billed     Proportion of total
                                           electricity sales    electricity sales
                                           (MWh)
2003/04             Eng & Wales                       1,768,470                0.61%
2003/04             Scotland                             23,823                0.08%
2004/05             Eng & Wales                         618,663                0.21%
2004/05             Scotland                             12,760                0.04%
2005/06             Eng & Wales                         711,073                0.24%
2005/06             Scotland                             43,657                0.15%
2005/06             Northern Ireland                     18,278                0.22%

What are the alternative options?
3.19 Do nothing. This would go against previous Government
      announcements to take forward this proposal. In addition the
      deregulatory benefits would not be gained.


Co-Firing Interim Changes
What is the proposal?
3.20 To allow co-firing of energy crops outside the current cap on co-firing
       in the Obligation and to make a minor amendment to the definition of
       an energy crop.

Why is it being proposed and what are the benefits?
3.21 The Government's proposed long-term approach to co-firing is to allow
      unlimited co-firing within a banded RO but at a reduced support level.

3.22   This approach is contingent on the introduction of a banded Obligation.
       However, allowing co-firing of energy crops outside the cap in the
       interim would allow co-firers to progress contracts with energy crop
       planters without concerns about restrictions on co-firing arising from
       the cap. The Government believes that the impact of this change on
       other renewables should be small, as there are unlikely to be
       significant volumes of energy crop co-firing in the interim period prior


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       to the introduction of banding, and there should be no impact on other
       biomass-using industries.

3.23   As energy crop co-firing will be allowed outside the caps, we propose
       to remove the minimum requirements on energy crop co-firing that
       currently apply from 2009 onwards. The Government believes this is a
       lighter touch regulatory approach, incentivising companies to use
       energy crops but not requiring them to do so.

What are the costs?
3.24 The Government does not consider there are any significant costs
      associated with this proposal. It is not our expectation that the co-firing
      of energy crops outside the co-firing cap should have a significant
      impact on ROC prices in the interim period. Current levels of planting
      and contracting for energy crops suggest that any impacts will be very
      limited. Nonetheless, we will monitor this, and if evidence were to
      emerge that energy crop co-firing was impacting negatively on the
      wider market then we would consult further on the case for any
      additional actions to reduce this impact.


What are the alternative options?
3.25 Raise the cap on co-firing. This would allow a greater amount of co-
      firing and could potentially benefit the energy crop market. However,
      the amount of co-firing permitted under the RO already stands to
      increase by around 40% by 2009/10, because of the rising level of the
      Obligation, and changing the cap could have some negative effects.
      These could be:

       ·   A significant loss of investor confidence and financial damage to
           other renewable projects and technologies.

       ·   A significant increase in support for the cheapest technology in the
           RO, in direct contrast to the Government's policy of reducing any
           over-subsidisation over time.

       ·   Potential damage to other biomass-using industries.

3.26   Do nothing. This would reduce the incentives on co-firers to progress
       contracts with energy crop planters prior to the introduction of
       banding.


Fuel to be Treated as Biomass
What is the proposal?
3.27 Where more than one fuel that are not fossil fuels (as defined in Article
       8 of the RO Order) are used in a power station, as long as over 90% of



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      the total energy content of those fuels is derived from biomass then
      those fuels will be treated as biomass fuels for the purpose of
      establishing ROC eligibility.


Why is it being proposed and what are the benefits?
3.28 Under existing rules, if a power station burns two fuels for example,
      one where 94% of the energy content derives from biomass and the
      other where 88% of the energy content derives from biomass the
      station is unlikely to be eligible for ROCs (except, for example, where
      the generating station was a qualifying combined heat and power
      generating station as defined in the ROO). Under the proposed
      amendment, allowing the total energy content of both fuels to be
      considered, ROCs could be claimed based on the total energy content
      of the two fuels as long as over 90% of the total energy content of
      those fuels is derived from biomass. This approach will allow burning
      of a wider range of biomass fuels by these generators, that for
      example might have otherwise gone to landfill.

What are the costs?
3.29 There are no additional costs to Government or industry associated
      with this change. Companies affected by the change would benefit
      financially as they would be able to claim more ROCs than is the case
      under the current legislation.

What are the alternative options?
3.30 Do nothing. Power stations could continue to have single fuel
      streams measured for ROC eligibility purposes, however, this
      approach discourages generators from using more diverse biomass
      fuel streams and therefore does not maximise electricity generation
      from biomass fuel.


4.    Business Sectors Affected By The Renewables Obligation
Including Small Business

General
4.1   The main business sectors affected by the Renewables Obligation are
      companies involved in the generation of renewable electricity and
      companies involved in the supply of electricity to all electricity
      consumers. As of January 2007 there are 1094 generators eligible
      under the RO and of these 195 are small generators of 50KW and
      under. In 2005/06 there were 35 licensed suppliers with a renewables
      obligation. Users of biomass materials for non-energy generation
      purposes may be affected through increased competition for these
      materials.




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4.2   The proposed changes will ease the administrative burden on
      companies who benefit from or must comply with the Renewables
      Obligation.

Small Business
4.3   The major regulatory impact on the large majority of small businesses
      arising from the Renewables Obligation comes from the increased
      costs of electricity that affect all electricity consumers. These changes
      are of a limited and technical nature and should not give rise to further
      increases in electricity costs, for small businesses or any other
      consumers of electricity.

4.4   A much smaller subset of small businesses active in the generation of
      renewable energy and/or the supply of electricity to customers in the
      UK and producers of energy crops are likely to be more affected by the
      changes to the RO. Prior to the publication of the consultation the DTI
      has held meetings with many relevant stakeholders, companies and
      trade associations in the renewable energy sector.

4.5   The range of administrative simplifications have also been welcomed
      by smaller generators of renewable electricity ­ which in many cases
      will also be small businesses. Allowing agents to act on behalf of small
      generators and to amalgamate generation will achieve economies of
      scale in the administrative processes involved as well as allowing small
      generators who may not have previously felt it worth their while to
      participate in the RO to now benefit. The removal of sale and buyback
      agreements and changes to the definition of an energy crop removes a
      further administrative complication and, again, allows easier access to
      the benefits of the RO.

4.6   Removing energy crops from the co-firing cap should further stimulate
      the market for the small businesses that supply these crops, as there
      will be no restrictions on the amount of ROCs produced from this
      source. ROCs from co-firing have recently been traded at prices below
      regular ROCs (Non Fossil Purchasing Agency ROC Auction 24 October
      2006), uncapping energy crops should therefore allow small business
      access to a higher price for the energy crops they supply relative to
      other co-fired materials.


5.    Equity and Fairness

5.1   The Renewables Obligation is a market-based mechanism whose rules
      apply in a non-discriminatory way to its participants. The Government's
      intention is that this will remain the case with all the proposed
      changes.




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6.    Competition Assessment

6.1   The Renewables Obligation is a market-based instrument that
      operates in a competitive market for electricity. The rules of the RO
      apply in a non-discriminatory way to all participants in the renewables
      industry and electricity sector. The Government's intention is that this
      will remain the case with all the amendments in the 2007 Order.
      However, we do propose that where a small generator is using an
      agent they can generally only change that agent at the start of an
      obligation period. If their agent is also an electricity supplier then this
      may introduce an additional layer of complexity if a generator wishes
      to switch electricity supplier. However, this restriction needs to be
      balanced against the administrative burden which would be placed on
      Ofgem, the generator concerned and the agents, if generators were
      able to switch agents as often as they wished to. Removing energy
      crops from the co-firing cap and proposals to band technologies within
      the RO to provide differentiated levels of support, should serve to
      increase the energy crop market in the long-term relative to other
      biomass sources such as those used in other industries.


7.    Enforcement And Sanctions, Compliance & Monitoring

7.1   The Renewables Obligation Orders are administered and enforced by
      Ofgem. Non-compliance with the Obligation is considered as a breach
      of a `relevant requirement' of a supplier's licence and Ofgem may
      impose appropriate sanctions. Ofgem reports annually on its
      administration of the Obligation and conducts regular technical audits
      of generators as part of its fraud prevention strategy. The DTI is
      responsible for monitoring the impact of the Obligation on the
      development of renewable energy and collects detailed information on
      growth in renewable energy generation and projects under
      development.

7.2   There are no changes to the RO that will increase the burdens on
      business through imposition of additional enforcement or inspection
      measures. Nor are there any new powers of sanction proposed. A
      number of proposals are being brought forward to ease the process of
      benefiting from or complying with the Renewables Obligation for users
      of energy crops and small generators.



8.    Consultation

8.1   The changes affecting small generators and proposing the removal of
      sale and buyback agreements for all generators have already been the


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       subject of two consultations as part of the RO Review which were
       carried out in 2005. Although there was support for these changes,
       they required new primary legislation through the Climate Change and
       Sustainable Energy Act 2006 to enable the secondary legislation to be
       changed. The Government has now secured the necessary legislation
       and a further statutory consultation took place between October and
       December 2006 on the implementation of these proposals.


9.     Post-Implementation Review

9.1    The Government will continue to monitor the performance of the
       Renewables Obligation and liaise closely with Ofgem on issues
       relating to the administration of the Obligation and compliance with it.


10.    Summary And Conclusion

10.1   The changes contained in the 2007 Order represent relatively limited
       amendments to the Renewables Obligation and are deregulatory in
       their content.

10.2   The major regulatory impact of the Renewables Obligation arises from
       the increased costs it imposes on electricity consumers ­ in return for
       stimulation of the development of renewable energy sources for
       power generation. The Government considers that these relatively
       limited changes will have benefits in terms of increasing renewable
       generation from co-firing and simplify some of the administrative
       processes relating to the Obligation. The 2007 Order does not contain
       any increases in Obligation levels or any changes to the buy-out price,
       and there are no other changes proposed for the 2007 Order that will,
       or have the potential to, create additional costs for electricity
       consumers.


12.    Ministerial Declaration

"I have read the Regulatory Impact Assessment and I am satisfied that the
benefits justify the costs."


.............................................
Lord Truscott, Parliamentary Under Secretary of State for Energy


13.    Contact Point



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Nicola Barber
Renewables Obligation Team
Bay 2106 1 Victoria Street
London SW1H 0ET

E-mail: Nicola.barber@dti.gsi.gov.uk
Tel: 020 7215 2651



URN 07/1624




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