The proposal of a FIT CfD regime in the market reform White Paper gave rise to the immediate concern of how the existing system under the Renewables Obligation (RO) will interact with the new payment regimes, with the Government and industry both concerned to ensure that there is no hiatus created through uncertainty in how the RO will be phased out in the period after 2017 when FIT CfD becomes the only choice for renewable generation. The Energy Bill (at Clause 35) sets out some of the arrangements to enact the White Paper and the Technical Update issued in December 2011 for the RO Transition regime.
It is hard to consider the Energy Bill without bearing in mind the Technical Update. Under the terms of the Technical Update, there is coverage of both a Transition Period (2014 – 31 March 2017) and a Vintage Period (1st April 2017-31st March 2037).
New renewable generators will have a one-off choice between the RO and the new FIT CfD, with RO accredited generators who add additional capacity that is greater than 5 MW having a one-off choice of mechanism (FIT CfD or the RO) for the additional capacity (the original accredited capacity will continue to be supported by the RO). Existing RO accredited generation will continue to be supported under the RO and will not be permitted to transfer to the FIT CfD scheme. Specific proposals were also made in respect of Non-Fossil Fuel Obligation contracts. During the transition period, the level of obligation under the RO will continue to be calculated annually on the same basis as it is presently.
There will be some limited grace periods for generation that was due to be accredited on or before 31 March 2017 but has been delayed by factors beyond the generator's control. Such events may include delay in grid connection instigated by the transmission or distribution operator or delay in the planned installation of radar necessary to satisfy planning conditions for wind generation projects.
- The Vintage Period - 1 April 2017 – 2037
Only projects receiving RO support by 1 April 2017 will continue to do so, subject to the maximum 20 years support and the 2037 end date. The RO will not be extended beyond 2037.
From 1st April 2017, it is expected that Ofgem will issue ROCs to generators in the usual way. ROCs issued by Ofgem may be sold and purchased between 1st April 2017 and 2027 in the same way as now. For the final ten years of the ROC regime (2027 – 2037), a Fixed ROC Institution will purchase the ROCs from generators at a set price based on headroom plus 10% (which will be inflation linked over the ten-year phase and the 2027 base price will be the 2027 buy-out price plus 10%). The Fixed ROC Institution will recoup the cost (subject to certain adjustments) through a quarterly levy on suppliers (with the rate of the levy set annually by the Government). The cost will be spread between suppliers in accordance with their market share. All technologies grandfathered in 2017 will remain grandfathered.
A major advantage for generators of there being a Government backed institution which is compelled to pay a set price for ROCs is that the risk of a ROC price crash in the twilight years of the scheme is removed. This chosen model ought to therefore promote greater financial certainty amongst investors and developers who are looking at the period from 2027-2037 for existing or pipelined ROC-supported projects.
Energy Bill 2012
The Energy Bill introduces enabling drafting for the mechanism set out in the Technical Update. The mechanic anticipates that OFGEM or the newly-created body purchasing agency is issued with a Certificate Purchase Order by the Secretary of State, obliging OFGEM/purchasing agency to purchase ROCs for a fixed price (which can vary for indexation and by different values for different periods of time). The mechanics for the payments and other important elements are left to the details of the purchase order issued by the Secretary of State, with only the Technical Update giving colour to the anticipated mechanics.
At present, the enabling legislation is very broad - there will need to be confidence that the Government's stated policy approach in the Technical Update is not diluted. Precise provisions for the purchase price of ROCs in the period after 2017 may be required to give the certainty that funders and investors will need, notwithstanding that DECC had already recognised that it did not expect to provide this detail in the Energy Bill.
Impact on Investors, Funders and Suppliers
The Energy Bill itself has done little to advance the knowledge of the Transitional Arrangements. The lack of certainty created by a reliance on technical proposals rather than legislative provisions may deter investors and funders from bringing forward proposals, yet this is precisely what Government is seeking to avoid. There also remains the risk that the proposals trigger change in law mechanics in existing PPA arrangements.
Return to our Energy Bill update.