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Regulatory Impact Assessment

Draft Regulatory Impact Assessment for the Renewables Obligation (Scotland) Order 2006.

PURPOSE AND INTENDED EFFECT OF MEASURE

The Objective

1. The overall objective of the Renewables Obligation (Scotland) (the ROS) Review has been to ensure that it continues to work as cost effectively as possible in stimulating the development and generation of renewable electricity, thus helping to reduce carbon emissions and support economic development. The statutory consultation document prepared for the review of the Renewables Obligation (but which applies also to the ROS, available from http://www.dti.gov.uk/consultations ) sets out proposals for a limited number of changes in the following areas:

i) Eligibility rules in the area of energy from mixed wastes. The changes here aim to deliver additional renewable generation from biomass and mixed wastes without undermining the wider operation of the ROS.

ii) Treatment of lower cost renewable technologies within the ROS (in particular landfill gas). The changes here aim to improve the cost effectiveness of the ROS over time.

iii) Processes relating to the administration of the ROS. The changes here aim to improve the administration of the Obligation and reduce regulatory burdens on companies that benefit from or are required to comply with the Obligation.

2. The purpose of this Regulatory Impact Assessment ( RIA) is to assess the impact of the proposed changes to the Renewables Obligation ( ROS) set out in the Statutory Consultation document and the draft Renewables Obligation Order 2006. The RIA begins with some relevant background on the ROS, how it is administered and the current Review. Subsequent sections discuss the individual proposals in the Statutory Consultation document in more detail.

Part 1 - Background to the ROS and General Issues

3. The ROS is the Scottish Executive's main policy measure to encourage the development of electricity generation capacity using renewable energy sources. It is underpinned by a range of financial and non-financial supporting mechanisms both in Scotland and across the UK. The ROS has already provided and will continue to provide, an impetus for the new renewable generating capacity that will be needed to meet Scottish Ministers' target that 40% of electricity generated in Scotland to meet demand by 2020 should come from renewable sources.

4. The details of the ROS and its UK counterparts are contained in the Renewables Obligation (Scotland) Order 2005 in Scotland (available from http://www.opsi.gov.uk/legislation/scotland/ssi2005/20050185.htm ), the Renewables Obligation Order 2005 in England and Wales (available from http://www.opsi.gov.uk/si/si2005/20050926.htm ) and the Northern Ireland Renewables Obligation Order 2005 (available from http://www.opsi.gov.uk/sr/sr2005/20050038.htm ).

5. The ROS requires licensed electricity suppliers to ensure that specified and increasing amounts of the electricity they supply are from renewable sources, rising to 15% in 2015/16. Without the financial support provided by the ROS, most forms of renewable electricity would not be economic and the Scottish Executive would not achieve its targets for generation from renewable sources. The Scottish Executive believes that, through the support of the ROS, renewable sources of electricity will become progressively more economic over time and will play an increasing part in efforts to reduce carbon emissions and address climate change.

6. The ROS was introduced in 2002, and the Scottish Executive consulted in the summer of 2004 on the terms of reference for this Review (arising from a commitment given in the 2003 UK Energy White Paper). These were finalised in November 2004, and a preliminary consultation document was published in April 2004 (available from http://www.scotland.gov.uk/Topics/Business-Industry/infrastructure/19185/200506ROSCons ). A 12 week period of consultation and discussion with stakeholders followed. Following the analysis of consultation responses and liaison with stakeholders here and across the UK, the Statutory Consultation now brings forward a range of specific proposals for amendments to the ROS and its UK counterparts and consults on their implementation.

REGULATORY BURDENS AND COMPENSATORY SIMPLIFICATION

7. The ROS is existing legislation which was introduced in 2002, with subsequent amendments in 2004 and 2005. The major regulatory burden imposed by the ROS 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 set by the level of the ROS, and outlined in previous RIAs accompanying the Order. The current statutory consultation document does not contain any proposals for further increases in Obligation levels, and there are no other proposals considered in this RIA which will create additional costs for electricity consumers.

8. Aside from issues of costs to consumers, the ROS imposes some regulatory burdens on renewable generators and the electricity supply industry in relation to the administration which is required to benefit from and comply with the scheme. The statutory consultation document contains a number of detailed proposals which will make it easier for renewable generators to benefit from the ROS and electricity suppliers to comply with it. This will reduce the regulatory burdens on business. The detailed proposals in question are:

i) Making the ROS neutral to waste (see para 22)

ii) Reducing the 98% rule (see para 22)

iii) Amending and simplifying a range of detailed rules on Renewables Obligation Certificate ( ROC) issuing and revocation (see paras 38-46)

iv) Introduction of a pre-accreditation system for new generating stations. Amending a number of detailed rules relating to the claiming and issuing of ROCs (see paras 47-50)

v) Shortening the timescale for supplier compliance with the ROS (see paras 51-54)

vi) Simplifying requirements for renewable generators using biomass in relation to the evidence they need to submit to claim ROCs (see paras 55-59)

vii) A number of changes aimed at making it easier for smaller generators to benefit from the ROS (see paras 60-67)

viii) Some minor changes to the rules governing input electricity (see paras 68-71).

9. In total these changes will help to ease the burden on companies who are involved in either benefiting or complying with the ROS. Some of the changes proposed have the potential to increase costs for Ofgem, the administrator of the Obligation, and any such additional costs would be passed on to the electricity industry through increased licence fees. However, where such changes are proposed it is because they have the potential to reduce burdens (and thus costs) for companies operating within the Obligation framework. Moreover, many of the changes proposed should reduce administrative costs for both Ofgem and companies. There are no changes being brought forward within the statutory consultation document which will materially increase the administration or compliance costs for companies or organisations involved in benefiting from or complying with the ROS.

BUSINESS SECTORS AFFECTED BY THE RENEWABLES OBLIGATION

10. The main business sectors affected by the ROS are companies involved in the generation of renewable electricity and companies involved in the supply of electricity to all electricity consumers. Users of biomass materials for non-energy generation purposes may be affected through increased competition for these materials. Large consumers of electricity may be particularly affected given that the ROS increases the cost of electricity.

11. As noted above, the consultation document does not propose any changes, which would further increase the cost of electricity to consumers. A considerable number of changes are proposed which will ease the administrative burden on companies who benefit from or must comply with the ROS (see para 7 above). Reduction of the 98% rule for the definition of biomass (see para 22) should increase supplies of biomass fuels eligible for the Renewables Obligation and may therefore ease competitive pressures for some industries active in this area.

ISSUES OF EQUITY AND FAIRNESS

12. The ROS is a market-based mechanism whose rules apply in a non-discriminatory way to all participants in the renewables industry and electricity sector. This will remain the case with all the changes proposed in this document.

CONSULTATION WITH SMALL BUSINESS: THE SMALL FIRMS' IMPACT TEST

13. The major impact on small businesses from the ROS arises from the increased costs of electricity, which affect all electricity consumers. There are no proposals in this statutory consultation document which will give rise to further increases in electricity costs, for small businesses or any other consumers of electricity.

14. None of the other proposals in the statutory consultation document give rise to specific issues likely to be of concern to small businesses. The range of administrative simplifications referred to in paragraph 7 above will be of considerable benefit to smaller generators of renewable electricity - which in many cases will also be small businesses.

COMPETITION ASSESSMENT

15. The ROS is a market-based instrument, which operates in a competitive market for electricity. The rules of the ROS apply in a non-discriminatory way to all participants in the renewables industry and electricity sector. This will remain the case with all the changes proposed in this document and there are no proposals, which will be likely to have any material impact on competition in the electricity market.

ENFORCEMENT AND SANCTIONS, COMPLIANCE & MONITORING

16. The ROS (and its counterparts) are administered and enforced by Ofgem. Non-compliance with the ROS 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 ROS and conducts regular audits in relation to compliance with the ROS. The Scottish Executive is responsible for monitoring of the impact of the ROS on the development of renewable energy and does so through the collection by the Department of Trade and Industry of detailed information on growth in renewable energy generation and projects under development across the UK.

17. There are no proposals in this statutory consultation document, which 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 brought forward to ease the process of benefiting from or complying with the ROS.

OTHER REGULATORY IMPACT ISSUES

18. This statutory consultation document brings forward a number of limited proposals for changes to the operation of the ROS. We do not consider that any of the proposals give rise to any negative impacts in relation to health, the environment or race equality issues. There are no proposals likely to have a material impact on the rural economy.

POST-IMPLEMENTATION REVIEW

19. While there are no fixed plans at present for a further full-scale review of the ROS, the Scottish Executive will continue to monitor the overall performance of the Obligation and liaise closely with DTI, Ofgem and other stakeholders. In addition, Scottish Ministers have recently confirmed their intention to examine whether an amendment might be made to the ROS to provide additional support for output from wave and tidal energy devices. Work will commence shortly to examine just how such a change might be made, along with ways in which the effects of such a change on wider market participants could be limited.

PART 2 - CONSIDERATION OF SPECIFIC PROPOSALS

Summary of costs and benefits of proposals

20. The proposed changes to the ROS considered in this RIA are quite complex in detail but, overall, represent relatively limited change to the overall regulatory framework created by the Renewables Obligation. The individual changes are considered in more detail below. The table below presents a summary assessment of the major costs and benefits of the amendments proposed.

21. Further detailed information on each amendment and the alternative options considered during the Review is given below.

Energy from Mixed Wastes.

What are the proposals?

22. Three relatively limited changes to the ROS eligibility rules in the area of mixed wastes are proposed:

i) Making the ROS neutral to waste - this would give generating stations additional flexibility to burn mixed wastes without losing eligibility for pure biomass fuels burned in the generation station

ii) Reducing the definition of biomass from fuel , which is over 98% pure biomass to a lower figure. A figure in the range of 90-95% is suggested though the consultation invites views on the precise figure.

iii) Extending eligibility to mixed waste plants using good quality Combined Heat and Power ( CHP)

Why are they being proposed and what are the benefits?

23. "Making the ROS neutral to waste" is a deregulatory measure which will offer additional flexibility to developers of generating projects using a mixture of biomass and wastes. It removes a current constraint in the ROS that means biomass and mixed wastes cannot be burned together in the same plant. The impact on the ROS of this amendment is likely to be limited as no new "waste ROCs" would be issued. However, over time, the amendment may encourage some additional renewable generation from biomass sources.

24. Reducing the 98% rule to a lower figure will allow a wider range of fuels which are very largely biomass in content to be used to generate renewable energy - in particular waste woods which are 90% plus biomass in content but do not easily meet the 98% threshold. The Waste Recycling Action Programme ( WRAP) estimates that around 5-7 million tonnes of wood waste is currently generated per annum. Of this, around 1.4 million tonnes were recovered in 2004. WRAP consider that an additional 1.5 million tonnes of high quality waste wood and around an additional 2-3 million tonnes of contaminated waste wood could potentially be recovered - though it would be likely to take many years to build up the infrastructure necessary to divert such large additional volumes of waste wood from landfill. Actual demand from the power sector for such waste woods is also likely to be constrained by a range of other factors, including alternative competing uses for the material, the difficulties of developing secure supply chains, issues of contamination and the application of the Waste Incineration Directive ( WID).

25. In relation to extending ROS eligibility to mixed waste plants using Combined Heat and Power, the UK Government has commissioned additional work undertaken by ILEX Energy Consultants (and published alongside this document). This suggests that energy from waste projects utilising CHP would offer net environmental advantages over conventional electricity only plant but also face additional costs which would justify offering such projects the support of the Obligation. ILEX's work suggests that, even with ROS support, the development of new energy from waste projects utilising CHP would be heavily constrained by a range of factors - in particular the limited number of sites and locations with suitable heat loads and other factors which will influence decisions on the location of energy from waste plants. While there is uncertainty over potential take-up ILEX present a range of scenarios in which the number of additional ROCs generated could be between 2 and 4% of the UK Obligations in the period 2011-2015, potentially rising to 3-5% of by 2021.

What are the costs?

26. The Scottish Executive does not consider that the limited changes proposed will require an increase in the level of the ROS, and there would therefore not be any increase in costs to electricity consumers. Consultation with relevant industry and stakeholders has highlighted some concerns about the potential impact on the supply/demand balance for ROCs from changes in this area - however, the relatively limited nature of the proposed changes means that their impact on the ROC market is also likely to be limited. The consultation process has not so far indicated that there are any other financial or hidden costs associated with these proposals.

What are the alternative options?

27. Do nothing. This option would offer some benefits in terms of market confidence in the stability of the ROS but would mean that the additional renewables generation and flexibility offered by the proposed changes would not be brought forward.

28. Make much more broad changes to eligibility rules in this area, allowing the large majority of energy from mixed waste projects to be eligible for ROCs. Analysis by ILEX Energy Consultants suggests that the majority of new energy from mixed waste projects will not need the support of the ROS to be economic. While some doubt has been expressed by one or two stakeholders as to whether this would be entirely replicated in Scotland, it does appear that this option would be vulnerable to the criticism that the Scottish Executive was providing unnecessary subsidies, at a cost to the electricity consumer. This option could also give rise to unpredictable but potentially large volumes of new ROCs, with a potentially negative impact on market confidence in the ROS and the economics of other renewable energy projects. Removing any negative impact would require an increase in the level of the ROS, which would impose significant additional costs on electricity consumers.

Low Cost Renewable Technologies

What is the proposal?

29. The Scottish Executive is proposing that, after 2009, support for new landfill gas projects within the ROS should be reduced - with ROC eligibility being limited to a fixed number of years or a fixed volume of output. The statutory consultation invites views on what the appropriate support level should be - analysis is being published by OXERA alongside the consultation document to support that discussion. The consultation also invites views on issues relating to the smallest of new landfill gas projects, which OXERA's analysis suggests would be more economically marginal with reduced ROC support.

Why is it being proposed and what are the benefits?

30. The change is being proposed because the Scottish Executive considers that the majority of future landfill gas projects will not need the full and permanent support of the ROS to be economically viable in today's energy market. This conclusion has been supported by independent analysis from Enviros and OXERA which was published as part of the preliminary consultation document. By reducing the support that the ROS provides to landfill gas projects, the Scottish Executive can seek to ensure that deadweight within the ROS is reduced over time and that the support available is targeted most effectively at those projects which need it.

31. The mechanism proposed for reducing support for landfill gas may over time be applied to other low cost renewable technologies (such as onshore wind). An approach of this kind has the potential to reduce the need to raise the level of the ROS in the future and thus contain the costs to electricity consumers of supporting the development of renewable energy.

What are the costs?

32. There are no additional costs to electricity consumers arising from the proposal - indeed, as noted above, the approach adopted will help to contain the costs of the ROS to consumers over time.

33. There is some risk that, by reducing support for more economic renewable technologies such as landfill gas, there will be a reduction in the confidence of the renewables industry to develop new projects. This risk will be mitigated as far as practically possible through a) seeking to ensure that future support levels remain sufficient to allow sound projects to be developed and b) adopting a "grandfathering" approach which means that ROC eligibility rights are preserved at the time that investments are made.

What are the alternative options?

Do Nothing.

34. This option would mean that future landfill gas projects continued to benefit from the full support of the ROS. This option would have the benefit of simplicity and retaining the full confidence of investors and developers active in the area of landfill gas. However it would not address the issues of potential over-subsidy through the ROS and the potential benefits to consumers from targeting support more effectively over time.

Identify a different mechanism for reducing support for more economic renewable technologies within the Obligation

35. Views on and proposals for alternative options were consulted on within the preliminary consultation. While the Scottish Executive remains open to considering alternative approaches which appropriately balance the interests of consumers of electricity and investors in and developers of renewable energy projects, the consultation process has not so far brought forward clear and worked up alternatives to the mechanism proposed.

Obligation levels post 2015/16

36. No changes are proposed.

Combined Heat and Power

37. No changes are proposed.

Administration of the Renewables Obligation

38. A number of detailed amendments and simplifications of administrative processes related to the ROS are proposed. These are considered individually in detail below.

ROC Issuing

What are the proposals?

39. The proposal is to allow renewable generators to submit late applications for ROCs one month later than the current legislation allows.

Why is it being proposed and what are the benefits?

40. The proposals will offer some limited additional flexibility to renewable generators in relation to late applications for ROCs.

What are the costs?

41. There are no significant costs associated with this proposal.

What are the alternatives?

42. Do Nothing. This option would not deliver the flexibility for renewable generators outlined above.

Other simplifications for claiming of ROCs

What are the proposals?

43. There are two proposals:

i) Allowing generators to submit the Article 4(10)c declaration, which confirms that renewables electricity on which ROCs are claimed has been supplied to customers in the UK, to be submitted on an annual basis as opposed to monthly.

ii) Allowing generating stations to only be required to notify Ofgem when input electricity exceeds 0.5% of gross output or exported electricity.

Why is it being proposed and what are the benefits?

44. Both proposals will ease administration burdens for both generators and Ofgem, making the process of claiming and issuing ROC easier.

What are the costs?

45. There are no costs associated with these proposals.

What are the alternatives?

46. Do Nothing. The benefits in terms of reduced administrative burdens will not be gained with this option.

Pre-Accreditation for ROCs

What is the proposal?

47. The proposal is to introduce a system of pre-accreditation for ROC eligibility. This system will allow developers of renewable energy projects to have certainty that their developments will be eligible for the support under the ROS prior to the financing and construction of such projects.

Why is it being proposed and what are the benefits?

48. At present, for some renewable technologies (eg generation from mixed wastes using advanced conversion technologies) in some situations, there can be uncertainty as to whether a particular design of project or scheme will be eligible under the ROS. This uncertainty can inhibit the development and financing of new renewable projects, or lead to additional costs.

What are the costs?

49. The proposal may result in some additional work for Ofgem in determining whether specific proposals will be eligible for the support of the ROS prior to construction. The Scottish Executive considers this an acceptable cost given the clear benefits in relation to potential new renewable energy developments, but agrees that Ofgem should also have the scope to charge an appropriate fee for this service.

What are the alternatives?

50. Do Nothing. This option would not resolve the uncertainties mentioned above.

Timetable for supplier compliance with the ROS

What are the proposals?

51. The proposal is for electricity suppliers to notify DTI and Ofgem simultaneously by 20 June of their electricity sales levels for the previous Obligation period ( e.g. by 20 June 2007 for the Obligation period 2006/7).

Why is it being proposed and what are the benefits?

52. The proposed change to the timetable for supplier compliance will speed up the time between the end of an obligation period and the recycling of buyout payments. This should in turn increase the cash flow to ROC holders and decrease the risk of supplier default impacting upon the size of the buyout fund. It would also help to reduce the administrative burden on industry by eliminating the need to submit two separate sets of data to DTI and Ofgem at different times.

What are the costs?

53. There are no significant costs associated with this proposal. Minor adjustments to existing procedures will be required of electricity suppliers and Ofgem - however it is considered that the costs of these will be vastly outweighed by the benefits of the proposal in terms of a faster and simpler process for recycling of the ROS buy out funds.

What are the alternatives?

54. No change to the current timetable for supplier compliance. This option would not deliver the benefits outlined above.

Measurement of fuels

What are the proposals?

55. The Scottish Executive proposes a number of measures to reduce the administrative burden on users of biomass fuels. Firstly, by allowing Ofgem to reduce the frequency of requirements to submit sampling data where biomass generators can demonstrate past evidence about the calorific value and biomass purity of a fuel, and secondly to allow Ofgem to accept a declaration from generators in lieu of certain supporting paperwork relating to claims for ROCs generated from biomass. This approach is consistent with our wider policy of reducing the overall regulatory burden on industry, focusing instead on a risk-based model of enforcement.

56. The Scottish Executive is also amending the legislation to clarify that off-site measurement of biomass fuels can be acceptable as the basis for claims for ROCs, where Ofgem can be satisfied that the measurements in question are robust and will accurately reflect the calorific value and biomass content of the fuels which are used to generate electricity.

Why is it being proposed and what are the benefits?

57. The first two proposals will reduce the burden on both generators and Ofgem. This will help make the process of claiming and issuing ROCs easier. The use of off-site measurements may allow generators of biomass to develop more efficient processes for the supply of biomass to their plants.

What are the costs?

58. There are no costs associated with the first two proposal. Assessing the robustness of off-site measurements of biomass is likely to give rise to some additional work for Ofgem. At the same time the use of such measurements has the potential to reduce costs for industry.

What are the alternatives?

59. Do nothing: the benefits in terms of reduced administrative burdens will not be achieved with this option.

Administrative arrangements for smaller generators

What are the proposals?

60. The Scottish Executive proposes to introduce measures that will make it easier for small and micro-generators to benefit from the Obligation (in this context small generators are those with a declared net capacity of 50 kilowatts). Two changes are proposed:

i) allowing agents to act on behalf of smaller generators in seeking accreditation and claiming ROCs, and allowing ROCs to be issued to agents; and

ii) allowing agents to amalgamate the output of smaller generators

Why is it being proposed and what are the benefits?

61. These proposed changes should reduce administrative burdens on small and microgenerators - and provide them with the option of an easier route to obtaining the benefits of ROC eligibility. The proposals also has the potential to reduce administrative burdens on Ofgem over time.

What are the costs?

62. The consultation process has not indicated that there are any costs associated with the introduction of this proposal. Moreover trade associations and smaller generators consider that the proposals have the potential to reduce costs and administrative burdens for smaller generators

What are the alternatives?

63. Do nothing: the benefits in terms of reduced administrative burdens and encouraging small generators will not be achieved with this option.

Sale and buyback agreements

What are the proposals?

64. The Scottish Executive proposes to remove the requirement for a sale and buyback agreement for all generators ( i.e. large and small). The current legislation requires that, in order for a generator to claim ROCs, their electricity must be supplied to the Grid. Thus, before consuming their own electricity, generators have to sell it to a supplier and then buy it back for their own consumption.

Why is it being proposed and what are the benefits?

65. The removal of this requirement will reduce burdens on generators by simplifying administrative requirements. The main benefits will flow to small generators as there is some evidence that this requirement acts as a barrier to small generators since some small generators have found it difficult to obtain a sell and buyback agreement.

What are the costs?

66. There are no costs associated with this proposal.

What are the alternatives?

67. Do nothing: the benefits in terms of reduced administrative burdens and encouraging small generators will not be achieved with this option.

Input electricity

What are the proposals?

68. The Scottish Executive proposes to amend the definition of input electricity to avoid the position where electricity generated from hydrogen which is itself produced from electricity generated from renewable sources in effect receives ROCs twice (once from each process). This is a potential problem as we are not aware of any ROCs being claimed from use of hydrogen.

Why is it being proposed and what are the benefits?

69. The proposed change will close a potential loophole under which electricity consumers would be paying a double reward to some forms of renewable generation.

What are the costs?

70. There are no costs associated with this proposal.

What are the alternatives?

71. Do nothing: the potential loophole would remain open under this option.

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