Why is it so difficult for renewable energy to increase its contribution to the power market? Heather Staley, chief executive of the Energy Efficiency and Conservation Authority, answers the question for New Zealand: “We have biomass potential, we have some of the world’s best wind sites with good wind patterns, and we have huge solar and geothermal resources. But the economics of the market holds it back. Wind power, for example, typically costs NZ¢7/kWh (¢2.99/kWh), but the current electricity price is NZ¢2.5/kWh.”
That may all change when a new energy strategy, currently in the consultation phase, is finalized by the New Zealand government in October 2001. It will include mandatory requirements for renewable energy and choose a methodology for reaching the target.
“The renewable energy target has still to be determined,” says Alistair Wilson of the New Zealand Wind Farm Association. But he notes that the strategy document offers five potential methodologies:
- Negotiated agreements
- A mandatory quota imposed on retailers (as was introduced this year in Australia)
- A mandatory quota imposed on generators (as in the UK)
- A levy on consumers to pay for renewables (as in Germany)
- Tradeable fossil fuel electricity generation permits to control the oil, gas and coal used in electricity generation.
Alistair Wilson says his industry is lobbying hard for the Australian model. “The government preference is probably for negotiated agreements,” he says, “but it is unlikely to deliver in a short time. There is no compulsion, and no regulator. If there is a quota imposed on the generators we are not solving for the least cost generation, and it will give generators too much market power. We could get gaming in the market.”
He believes that emissions trading is unlikely to be the solution as it would mean the system would have to include the transport sector – something the government is not ready to get to grips with.
There is also speculation over the renewable energy target that will be set. Wilson says, “We are arguing that the target should be set so that we don’t slip back below our current level of renewables.” Thanks to the hydro stations and contribution from wind the levels of renewables is now over 60 per cent, but as new gas stations come on line that figure will decrease.
“There should be a debate over this,” Wilson adds, “but we should make sure renewables hold their own. So the target would be set each year. At the moment it would be 700 GWh per year, but as the total increases it will also increase each year.”
The government’s solution will be published this month (October 2001). Chris Livesy of the Ministry for the Environment says the assessment has “brought into focus whether [the solution] would apply across the whole energy sector, or across different parts, e.g., domestic water heating, industrial heating or transport,” but he refused to be drawn on the likely outcome.
Staley was equally unwilling to make any statement on renewables targets, or methodologies for managing the market. “It is about what is physically feasible, technically feasible, economically feasible,” she said. “What would companies pay, and what burden could be imposed on the economy.”
Wilson looks to the Australian model, which was introduced to stop the shrinking of the renewables sector there because of the easy and cheap availability of coal.
“Because there was no growth, renewables have a diminishing market share,” says David Rossiter, installed as the first Renewable Energy Regulator this year. “Now [the proportion] is nearer 9.5 per cent simply because of the growth of the market.”
To respond to this shrinking market share it was announced in 1997 that electricity retailers would be required to buy part of their supply from renewable sources, and an innovative market has been developed.
The cost of renewable energy compared to coal is holding back the new market for renewable energy in Australia
Australia’s so-called Renewables Energy Requirement was signed into law in January this year and went into operation on 1 April. “The renewable energy target requires all major wholesalers on grids above 100 MW (and independent generators who are effectively also wholesalers) to introduce a growing renewable energy component into their portfolio,” says Rossiter, whose organization regulates the scheme.
The requirement will increase each year (see Table 1) and will ultimately reach 9500 GWh – approximately two per cent of electricity produced annually between 1994 and 1997. It is administered by the creation and surrendering of Renewable Energy Certificates (RECs): for each qualifying MWh generated by a renewable energy source.
At the end of each financial year all retailers must surrender to the Office of the Renewable Energy Regulator (ORER) the requisite number of certificates, from their own or other renewable energy generators. For each REC that is lacking, a fixed penalty of A$40 ($20.82) must be paid.
There was debate about the size of the target: “The Greens argued it should be more like five per cent,” says Rossiter, “but in passing the legislation most of the debate was about the size of the penalty. It was originally set at A$100-150 but that was reduced to appease the aluminium industry.
“Now it is a sensible and achievable target, and because it is in place until 2010 new sources built in the next five years will have at least 15 years to recover their investment.” A review of the targets has been planned for 2003.
The result has been that a market has quickly developed in trading RECs. Some are simple two-party trades but markets such as the Green Energy Market (GEM) allow RECs to be traded between a number of parties. The GEM was developed by
M-Co, part of the company that operates the New Zealand energy market, along with investment from 19 ‘charter members’ – who invested in 12 months development of the market. Trading in the market began on 21 June.
The market in RECs will be a big benefit to potential renewable energy suppliers, Rossiter says, because it offers a second income stream to those seeking financing. “When a project, such as a wind farm, is looking for financing a bank will ask about forward cash flow. The project will now have cash flows for two commodities – electricity and RECs – so financing becomes cheaper.”
Trading ROCs in the UK
Many countries have examined Australia’s pioneering REC market; and the first to develop its own version is the UK.
The UK scheme is known as the Renewables Obligation and it places a requirement on all electricity suppliers to prove that in each year they have “produced a specified proportion of their supply from renewable sources, or another supplier has done so”, with renewables (see Table 2). The scheme is due to complete the final stages of consultation in October 2001 and go into operation at the start of 2002, and it will last until at least 2027.
Within the UK, targets for Scotland may be set separately (although initial requirements cover the whole of the UK) and Northern Ireland will become a full part of the scheme when its link to the rest of the UK is completed.
Each ROC year in the UK will begin on 1 April and run until 31 March, although the first accounting period will be longer, running from the start of the scheme, planned for January, to March 2003.
As in the Australian system, the generation and allocation of renewable energy is tracked by means of electronic Renewables Obligation Certificates (ROCs), which will be administered by the UK regulator Ofgem, but the two schemes differ in some respects. Australia’s ORER tracks certificates throughout their lifetime, while Ofgem will not monitor trading in ROCs (although it requires an ‘adequate audit trail’ and may carry out checks at any time).
But ROCs will have shorter lifetime than RECs: while RECs do not expire, and can be used at any time during the life of the scheme, in the UK electricity suppliers must meet 75 per cent of their obligation with certificates generated in the same period.
Other differences arise in defining which sources of energy are renewable, and these reflect priorities outside the energy industry. In Australia, for example, the issue of
retaining native woodland is very important and the scheme excludes all such wood, even as waste, from the scheme. Commercial wood sources are allowable and indeed encouraged in an attempt to slow down the speed of deforestation.
In the UK, in comparison, most woodland is a farmed resource and the issue is one of encouraging the development of new combustion technologies such as pyrolysis, gasification and anaerobic digestion. All energy from plant and animal sources is therefore eligible, regardless of the method of conversion, and mixed waste is also allowable, once any part of the waste derived from fossil fuels has been discounted. Energy generated from peat is not allowed.
Some stations require fossil fuels occasionally for example for startup, and the UK scheme takes account of this – stations may employ up to ten per cent fossil fuels, although this is discounted in calculating the number of ROCs allocated for the station.
Stations that use more than ten per cent fossil fuels are regarded as co-fired. These are eligible for the scheme at present but must use energy crops for 75 per cent of their fuel by 2005 and will be removed from the scheme entirely by 2011. In addition, electricity suppliers can only employ co-firing to meet up to 25 per cent of their obligation.
One form of generation that has won concessions as the UK scheme has been developed is hydropower. Hydro stations up to 20 MW that are being refurbished are now included, compared to 10 MW in the original draft, and all existing hydro plants of 1.25 MW or smaller are now eligible. Existing hydro plants over 20 MW are excluded, on the grounds that they were built using public finance, but all new hydropower plants will be included.
The UK scheme differs most markedly from the Australian scheme in allowing the requirements and costs in the scheme to vary from year to year. The Australian economy’s reliance on energy-intensive industries pushed its renewable energy target to a fixed value for the life of the scheme and required a government review of the scheme to alter its fixed ‘buyout’ penalty. – In the UK, all energy from plant and animal sources is eligible for the renewable energy scheme
In the UK, in contrast, an electricity supplier’s obligation is stated as a percentage – starting at three per cent and rising to 10.4 per cent by 2010 – of their electricity sales. The fine or ‘buyout’ value has been set at £30 ($44.08) per MWh for the first year (in the final consultation document) and will rise with the retail price index (a measure of inflation) for the life of the scheme.
The UK estimates the indirect and direct cost of the ROC scheme to be £877 million. It will ultimately save emissions of some 2.5 million t of carbon each year at a cost of £312 per t.
Proceeds from the ROCs will be recycled back to the generators on a pro rata basis and this is likely to be classed by the European Union (EU) as state aid, so the scheme cannot go ahead without EU approval. This is expected to be granted late this year.
The EU is currently working on a directive on renewable energy, also likely to become law late this year, and the UK scheme has been developed in harmony with drafts of the directive. This parallel development raises questions over whether the EU might introduce a similar trading scheme across the continent.
The UK scheme specifically excludes renewables generated outside the UK. But the certification approach is serving as a model for other countries looking to increase their renewable energy commitment and in fact the GEM model has already been used by the EC as the basis of a trading simulation. “In two weeks we simulated ten years trading between 16 nations,” says GEM’s Alistair Walton.