The Energy Regulation and Markets Review - Stikeman Elliott

United Kingdom
traders, particularly banks, has fallen considerably. Ofgem has had concerns about
market liquidity for several years and in 2008 it launched its energy supply probe to
investigate the subject. In February 2012 it set out proposals whereby the big six will be
required to sell a range of specific key trading products designed to improve liquidity at
auction, on a regular basis. The current proposal is that 25 per cent of each party’s annual
generation is to be sold this way. The consultation closed on 8 May 2012. Ofgem is due
to put forward a final decision later in the year.
The government is currently undertaking a major project in the electricity market
under its electricity market reform (‘EMR’) process. Broadly, EMR will introduce a
capacity market, a feed-in-tariff with contract for difference (‘FiT CfD’) for renewable
and nuclear generation, a carbon price floor, which will take the form of an input tax
on fuel for electricity generation, and an energy performance standard, which will limit
the carbon output of new plant, effectively preventing the building of any further coal
plant that is not fitted with carbon capture and storage capability. These measures will
sit alongside existing market arrangements. The possible impact of EMR is discussed in
greater detail in Section VII, infra.
V
RENEWABLE ENERGY AND CONSERVATION
i Development of renewable energy
Renewable technologies have benefited from government support since the early 1990s
when the Non-Fossil Fuel Obligation (‘the NFFO’) came into effect. The NFFO was
replaced by the current Renewables Obligation (‘the RO’) in 2002. The RO places an
obligation on suppliers to source a minimum percentage of the volume that they supply
each year from renewable sources. 24 At the end of each year suppliers must submit
sufficient renewable obligation certificates (‘ROCs’) to Ofgem, or they can pay the
‘buyout’ price 25 as set out in the relevant Renewables Obligation Order (‘ROO’) 26 to
the extent that they have a shortfall of ROCs. A ROC represents a volume of electricity
generated by an accredited renewable generator. Initially, one ROC was issued for 1MWh
of electricity; however, in order to incentivise the development of new, but riskier and
more expensive technologies, banding was introduced in 2009. A further banding review
was instigated in 2011, which proposed more granular banding. The final outcome of
that review is due shortly and the final proposals will apply from April 2013. ROCs are
issued to accredited generators by Ofgem and generators then sell them on either to
traders or suppliers. Buyout payments paid to Ofgem go into a buyout fund, which is
distributed among suppliers in proportion to the number of ROCs they have presented
against the total number of ROCs in that compliance period. ROC support is available
for 20 years for eligible projects. As a result of the EMR process, ROC accreditation will
not be available after 1 April 2017. From that date renewables support will be delivered
24 Currently 15.8 per cent (compliance period 2012–2013).
25 Currently £40.71 per ROC (compliance period 2012–2013).
26 The Renewables Obligation is implemented in a slightly different form in each of England and
Wales, Scotland and Northern Ireland, so there are separate orders for each jurisdiction.
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