The Scottish Government

Renewable Energy

Introduction of Banding to the Renewables Obligation (Scotland)

Preliminary Consultation - April 2008

A printable version of this document is also available. If you wish to respond with this, please also enclose a completed Respondent Information Form with your reply.

Ministerial Foreword

Scotland has long been synonymous with energy production, innovation and industry. The infrastructure and expertise which has risen and grown around the oil and gas sector, and the value of these activities and businesses to our economy, are testament to that. However, the need to secure more of our power from sustainable and natural sources has become firmly established over recent years. Renewable energy is and will remain a vital part of our efforts to reduce the emissions which can cause climate change.

The Renewables Obligation (Scotland), or ROS, is fundamental to increasing renewables capacity across Scotland, and achieving our target that 50% of Scottish electricity demand should be met from renewable sources by 2020. The ROS has led to significant increases in renewable output across Scotland since its introduction in 2002. In order for it to remain effective, we need to ensure that support under the ROS is targeted appropriately. New powers enabling the banding of the Renewables Obligation mechanism will allow us to do just that.

I have made clear that I welcome banding in principle. However, it is vital that it is introduced in a way that delivers our ambitions for the renewables sector in Scotland.

I believe in particular that banding has the potential to kick start capacity building in the wave and tidal power sector - areas where Scotland has huge potential and which the Scottish Government has identified as a priority. But if this is to happen, we need to ensure that the levels of support are sufficient and appropriate.

This preliminary consultation examines this issue more closely. I do hope that you will respond to it and help us ensure that the ROS continues to play its part in delivering a renewable future.

Jim Mather MSP,

Minister for Enterprise, Energy and Tourism.

Background

i) The Renewables Obligation (Scotland), or ROS, came into force on 1 April 2002, and is the key means through which the Scottish Government is pursuing its renewable energy objectives. It operates by obliging electricity suppliers to ensure that a specified proportion of any electricity which they supply to customers in Scotland comes from eligible renewable resources. The ROS works alongside almost identical Obligations (although see paragraph iii below) covering suppliers in England and Wales, and in Northern Ireland, all of which act to create a UK market for renewable electricity and ROCs. The Scottish Government works closely with colleagues in the Department of Business, Enterprise and Regulatory Reform (BERR) and the Department of Enterprise, Trade and Investment in Northern Ireland (DETINI) on matters relating to the UK Obligations.

ii) Since this legislation was first introduced, we have conducted a number of consultative reviews with stakeholders examining the ways in which the ROS is structured and the effectiveness of its performance. In the main, these reviews have led to a series of relatively minor amendments to the ROS.

iii) In 2006, the Scottish Government examined whether the powers available under the ROS might be used to provide more direct support to emerging technologies. This resulted in the introduction from April 2007 of a Marine Supply Obligation (MSO), designed to provide a long term signal of support and commensurate returns for wave and tidal generation located in Scottish waters. The MSO is consistent with and pre-dates the proposed introduction of banding across the UK Obligations, and its future is one of the key issues covered here.

iv) In May 2007, BERR published a consultation paper outlining significant changes to its Renewable Obligation. These proposals have since been clarified further via the issue of a Government response to that consultation. The main element is the proposed introduction of banding - the grouping of different technologies into separate bands offering different levels of support. There is also consideration given to a range of related matters including grandfathering, arrangements for review, headroom etc. The introduction of banding is subject to certain changes being made to the primary legislation. A draft Energy Bill delivering new powers in these areas is currently before the UK Parliament; should that Bill receive Royal Assent, then these amended powers will be executively devolved to Scottish Ministers.

v) The Scottish Government has already agreed in principle that banding should be introduced to the ROS; however, there are certain elements of the package proposed by BERR which do not fully accord with Scottish Ministers' vision for the sector and where there may be scope for a different approach to be taken in Scotland. This preliminary consultation is intended to highlight these areas and to give respondents a chance to respond to our emerging proposals.

vi) As with previous consultations on the ROS, this paper focuses only on those areas where the Scottish Government is minded at the outset to take a different approach to that proposed by BERR. While this can be taken to mean that we do not intend at this time to act differently with respect to those areas not covered by this document, such as on headroom or grandfathering, for example, this should not prevent respondents from raising these or other issues as part of their response.

vii) Responses to this consultation paper should be sent by Friday 4th July to the following address:

James P Thomson
Renewables and Consents Policy Unit
2nd Floor
Meridian Court
5 Cadogan Street
GLASGOW
G2 6AT

Telephone: 0141-242-5895
Email: James.Thomson.ETLLD@scotland.gsi.gov.uk

viii) We recognise that there is a great deal of interest in how banding is introduced in Scotland, and a number of questions which recipients may wish to discuss with us directly. We plan to engage as fully and as openly as possible with all our stakeholders during this consultation period, and are happy to be approached directly at any time.

ix) We would be grateful if you could indicate clearly in your response which questions or parts of the consultation paper you are responding to as this will aid our analysis of the responses received. This consultation, and all other Scottish Government consultation exercises, can be viewed online on the consultation web pages of the Scottish Government website at http://www.scotland.gov.uk/consultations. You can telephone Freephone 0800 77 1234 to find out where your nearest public internet access point is.

Handling your response

x) We need to know how you wish your response to be handled and, in particular, whether you are happy for your response to be made public. Please complete and return the Respondent Information Form as this will ensure that we treat your response appropriately. If you ask for your response not to be published we will regard it as confidential, and we will treat it accordingly.

xi) All respondents should be aware that the Scottish Government are subject to the provisions of the Freedom of Information (Scotland) Act 2002 and would therefore have to consider any request made to it under the Act for information relating to responses made to this consultation exercise.

Next steps in the process

xii) Where respondents have given permission for their response to be made public (see Annex A), these will be made available to the public in the Scottish Government Library and on the Scottish Government consultation web pages. We will check all responses where agreement to publish has been given for any potentially defamatory material before logging them in the library or placing them on the website. You can make arrangements to view responses by contacting the SG Library on 0131 244 4565. Responses can be copied and sent to you, but a charge may be made for this service.

What happens next?

xiii) Following the closing date, all responses will be analysed and considered along with any other available evidence to help us reach a final position on the issues identified within this paper. This will lead later in the year to a formal statutory consultation and draft Order containing our proposed amendments to the ROS, which (subject to the following paragraphs) we plan to bring into force on 1 April 2009.

State Aid Position

xiv) In accordance with State aid rules, the current UK renewables obligation scheme was notified to the European Commission in July 2000 for its approval.

xv) A State Aid is defined under Article 87(1) of the EC Treaty as any public resource given selectively to an undertaking that could potentially affect competition and intra-community trade. The Commission considered that the redistribution of buy-out funds to electricity suppliers, as under the Obligations at present, constituted State aid to electricity producers and potentially also to electricity suppliers. However, as the scheme met the criteria for green certificate schemes set out in the Commission's environmental guidelines, it was approved: United Kingdom Renewables Obligation and Capital Grants for Renewable Technologies - N504/2000. A number of amendments have since been made to the scheme, all of which have been notified to and approved by the Commission.

xvi) The changes outlined in this document, plus related and wider changes proposed in BERR's initial consultation and response document are likely to require the approval of the Commission.

Comments and complaints

xvii) If you have any comments about how this consultation exercise has been conducted, please direct them to us using the contact details at paragraph vii.

Introduction / background

1. Scotland's potential for the production of electricity from renewable sources is huge. Earlier studies have quantified this potential at around 60 GW, which is several times the peak domestic demand for power. Alongside existing, established hydro generating capacity, the main areas of potential are in onshore and offshore wind, wave and tidal power, plus (to a lesser extent) biomass and energy from waste.

2. The Scottish Government is committed to promoting as wide a range as possible of renewable energy sources. Ministers announced last year the adoption of a new target - 50% of electricity generated in Scotland (as a proportion of whole demand) to come from renewable sources by 2020, with an interim target of 31% by 2011. As well as reducing emissions and thus helping to mitigate climate change, increased generation from renewable sources to meet demand both at home and abroad could lead to significant economic benefits for Scotland - particularly if emerging technologies like wave and tidal can be successfully developed.

3. In 2006, Scotland generated around 16% of the electricity required to meet whole domestic demand from renewable sources. Our initial estimate is that around 8 GW of installed renewables capacity will be necessary to meet the 2020 target (the figure currently stands at around 2.6 GW). While we expect that much of the additional capacity will come from onshore and offshore wind, Ministers are determined to provide sufficient support to wave, tidal and biomass to enable them to make as large a contribution as possible.

The Renewables Obligation (Scotland)

4. The ROS was first introduced in 2002, alongside an equivalent and identical Order covering England and Wales, and is the main policy instrument for promoting renewables in Scotland. There is no question that the ROS has been instrumental in pushing up installed capacity and output from renewables in Scotland during the past few years, and that it will be equally fundamental in moving Scotland towards the ambitious target that Ministers have set for 2020.

5. The ROS has been subject to review several times since its introduction. In the main, the resulting changes have been limited in scope and effect, often technical in nature and not amounting to any fundamental change to the way in which the Obligation works. More importantly, the ROS has always remained virtually identical to the Obligation covering England and Wales (and more recently, the Obligation covering Northern Ireland).

6. This changed with the introduction to the ROS in April 2007 of a Marine Supply Obligation (MSO). The result of detailed consultation, and brought into force with the consent of the Scottish Parliament and European Commission, the MSO was introduced to provide the required level of support for wave and tidal generation located in Scottish waters. It does so by requiring suppliers to meet a fixed proportion of their Obligation by securing energy from wave and tidal devices or by paying a suitably higher buy-out price (set at £105/MWh for tidal and £175/MWh for wave). In the event, and in line with our commitment not to activate the measure unless there was eligible capacity available which would enable suppliers to meet it, the MSO is currently set at zero.

7. The future of the MSO mechanism, given the imminent introduction of banding, is a key issue in terms of this consultation.

Banding

8. The Scottish Government's introduction of the MSO acted as a forerunner to a wider debate on reform of the Renewables Obligation mechanism. This debate, lent weight by the Energy White Paper, recognised that there are constraints affecting the deployment of the cheaper and more established forms of renewable generation, and that to meet longer term targets and ambitions for output from renewables generally will require a considerable increase in the contribution from the more expensive, emerging technologies. The debate was taken forward by BERR's consultations in 2006 and 2007 and the associated proposals to band the RO in England and Wales to provide differentiated levels of support for different technologies.

9. Briefly, the main principles advanced by BERR are as follows:

• That different technologies should receive multiple or fractional ROCs for each MWh of output;
• That the obligation be amended so that suppliers are required to present a specified quantity of ROCs rather than electricity (or pay the buy-out price);
• That the bands should be based upon groupings of particular technologies;
• That measures be introduced to increase the obligation above the current maximum level of 15.4% (if justified by actual and forecast levels of generation);
• That additional measures should be introduced concerning the provision of independent advice to help inform future changes, arrangements for review, and grandfathering.

A table summarising BERR's proposals is attached at Annex A. BERR's response to the May 2007 consultation is available here.

10. Banding requires significant amendments to primary legislation (the Electricity Act 1989). A draft Energy Bill containing these changes is currently before the Westminster Parliament. Subject to the Bill's passage into law, there will have to be statutory consultation on the subsequent detailed delivery of any changes to the secondary legislation (i.e. the Obligations themselves). Changes to the obligation in Scotland will also require the agreement of the Scottish Parliament.

Scottish Government Position on Banding

11. It is undeniable that the RO has acted as a powerful incentive to date for the advancement and construction of new renewable generating capacity. In Scotland, generation from renewable sources as a proportion of whole demand has risen from 12% in 2000 to over 16% in 2006.

12. Welcome as these increases in output and capacity are, they are , however, restricted to a small number of technologies - namely onshore wind, landfill gas, energy from waste and co-firing, as well as a small amount of new hydro capacity. The Scottish Government, in setting its 50% target for renewable electricity generation, has stated clearly that it wishes to support generation from as wide a range of technologies as possible. Increasingly significant contributions from sources such as wave, tidal, offshore wind and biomass will be pivotal in meeting future targets both here in Scotland and at the UK level, particularly in light of the EU's new target of 20% from all renewable sources by 2020. As such, the Scottish Government agrees fully with the principle of banding, and supports its introduction across the UK Obligations.

13. The Scottish Government acknowledges and understands that consistency and the related transferability of ROCs between the UK Obligations is viewed as a matter of particular importance by many stakeholders. In fact, the ROS has stayed generally in line with the RO (and latterly the Northern Ireland equivalent) since its introduction in 2002.

14. This changed to an extent with the introduction of the MSO in 2007, a mechanism designed to use the power of the Obligation to help encourage and support new capacity in an area where Scotland has huge potential. The MSO's introduction and the debate surrounding it reflects the existence of executively devolved powers in this area, which, by definition, allow for a degree of variation in approach to be taken by the Scottish Government where there is benefit in doing so.

15. With that in mind, and for ease of understanding, the remainder of this consultation concentrates solely upon those areas where Scottish Ministers are minded at this stage to differ in terms of the support levels advanced by BERR, or where they believe the case exists potentially to do so.

16. The absence of comment on or proposals in a given area should be taken as an indication that the Scottish Government sees no case at this stage to act differently to the rest of the UK with regard to that particular aspect of banding. However, we understand that some of these wider issues will contain aspects of importance to some stakeholders. As such, respondents to this consultation should feel free to comment upon specific elements where they believe that the relevant existing proposals are flawed and / or where they believe that there is a pressing need for a different approach in Scotland.

17. We are in the process of commissioning work aimed at modelling the potential effects of certain changes to the ROS. Although we don't expect the effects of any difference in approach within the ROS to be significant, it is important that both we and stakeholders can see what these effects might be. The work that we are commissioning will look in particular at costs, on the effects on overall capacity and progress towards targets, ROC numbers / prices as well as CO2 emissions, of scenarios involving higher levels of support for wave and tidal power in Scotland. However, it will also consider the potential effects of changes in other areas which are not raised specifically within this consultation. We anticipate completing this work by the summer and for it to be used, in conjunction with responses to this paper, to inform specific proposals for change which will be contained within our statutory consultation during the autumn.

Wave / Tidal Stream Support

18. The scale of Scotland's potential wave and tidal stream resource is well established, and represents a huge opportunity. Exploiting that resource is proving extremely challenging, but success in doing so is vitally important - for device developers and investors, for the environment, in terms of reduced emissions from existing fossil fuelled plant, and for the economy, given the potential for job creation, diversification and transfer involved in device manufacture, installation and supply chain activity.

19. Equally important, however, is the contribution that a vibrant marine energy sector could make towards Scotland (and the UK) meeting our renewable electricity targets and playing a key role in our future energy mix.

20. The sector has received a great deal of valuable support in recent years. The inclusion of three wave energy projects under the third round of the Scottish Renewables Obligation (from which support Wavegen's LIMPET project on Islay is a result) and increases in research and development funding and activity across the UK have been followed in recent years by the introduction of capital and revenue funding. BERR's £50 million Marine Renewable Deployment Fund (MRDF), introduced in 2004, remains in place and ring-fenced for the support of wave and tidal capacity. Meanwhile, the Scottish Government's £13 million Wave and Tidal Energy Scheme (fully allocated) is supporting nine projects around Scotland.

21. Almost all of the projects receiving support from the Scottish Government are to be located at the European Marine Energy Centre ( EMEC) in Orkney. EMEC is a unique and world class testing facility where full scale wave and tidal stream device prototypes can connect to the grid and prove their performance in real sea conditions.

22. The £16 million funding necessary for EMEC's construction and evolution to date has come from a strong public sector partnership including the Scottish Government, Highlands and Islands Enterprise, BERR, Orkney Island Council and the Carbon Trust. EMEC is a testament of the faith and support being invested in wave and tidal energy, and underlines the Scottish Government's belief that the sector can make a major contribution to the future security and sustainability of power supplies in Scotland and beyond.

Marine Supply Obligation (MSO)

23. The Scottish Government's MSO (see paragraph 6) presaged the introduction of banding by establishing the promise of long term returns at sufficiently high levels for wave and tidal stream generation. The MSO mechanism (essentially, a separate Obligation in respect of wave and tidal output) came about because the powers to award multiple ROCs to wave or tidal generators did not exist at the time - a situation which will change subject to the expected introduction of banding at a UK level. A key question for the Scottish Government is whether or not, therefore, the MSO should continue once the powers to award multiple ROCs are in place.

24. It is fair to say that, had the powers to award multiple ROCs under the ROS been available at the time of its introduction, the MSO approach would not have been favoured. This is because the MSO will require over time careful and potentially difficult forecasts on an annual basis of eligible market capacity for each subsequent period. This capacity figure would then itself be subjected to a fairly complex calculation, involving a number of assumptions - for example, the factoring in of estimates regarding down time for maintenance and repair of any machines forming the basis of any tranche of eligible capacity during the period in question - in order to arrive at an estimated output figure. This latter would need finally to be translated into a percentage obligation on suppliers.

25. The MSO, as designed, also increases the cost of the Obligation to consumers. This is because the theoretical cost to the consumer of the UK Obligations is capped during any given period at the level of the Obligation for that period multiplied by the buy-out price for that year (on the assumption that if no supplier presented ROCs against their Obligation, they would have no option but to buy-out their Obligation level in full). Although the MSO is designed to mitigate any such increases (by forming part of the overall Obligation level in any given period rather than adding to it), consumers would still face additional costs once the mechanism is activated due to the higher costs faced by suppliers in meeting or buying out their obligation under the MSO.

BERR's Proposals for Wave / Tidal Stream Banding

26. BERR has stated that, under its approach to banding, wave and tidal stream technologies should fall under the "emerging technology" band, meaning that output from such schemes would receive support at 2 ROCs per MWh. This is based in part on the fact that the technologies are thus far unproven and that their contribution to future power supplies is, as a result, uncertain. It also reflects BERR's view that the emerging technology band should be set at a level which provides a target level of costs that can thus be aimed for by developers via cost reductions.

27. BERR's proposals for banding as a whole are underpinned by two separate studies - one, by Ernst and Young, into the costs of renewable electricity production, and the second, by Oxera, modelling the impact of different banding scenarios and ROC multiples and their effect (along with variations across a range of background parameters such as underlying power prices and the link between the buy-out price and RPI) on the RO as a whole.

28. The Ernst and Young work establishes a series of levelised costs across a wide spectrum of renewable technologies. Its findings with respect to wave and tidal stream are that these costs will be high in the short to medium term - £196 and £177 per MWh respectively by 2010; by comparison, the equivalent cost estimates for large scale onshore wind are in the range £65-77/MWh, while offshore wind is estimated at £92/MWh.

Scottish Government View

29. The MSO's introduction and inclusion within the ROS has, despite being to date unactivated, sent a clear and strong signal to marine renewable developers and potential investors regarding the Scottish Government's commitment to support these technologies and determination to help ensure maximise exploitation of the huge potential that exists around Scotland. Equally, the Scottish Government has always made clear that, subject to the introduction of banding and powers to award multiple ROCs, the MSO could be terminated (but with any existing capacity protected).

30. For the reasons set out in paragraphs 23-25, the Scottish Government is proposing to discontinue the MSO, with effect from April 2009, and replace it with a banded / multiple ROC mechanism.

31. However, the Scottish Government does not believe that BERR's banding of wave and tidal stream, at the level proposed, represents an adequate replacement for the MSO. It is true that the sector is still at a very early stage and that the technologies are largely unproven. It is therefore the case, borne out by the Ernst and Young study, alongside similar reports such as that from the Renewable Advisory Board, that the technology costs are extremely uncertain (the RAB report found costs rising markedly as technologies moved through the different stages of research and development).

32. The study which informed our MSO ( AEA Technology / Poyry) focused solely on wave and tidal technology, and examined the level of market support that might be required through a revenue-only mechanism in order to stimulate marine energy development across a range of different marine energy devices. It concluded that, in addition to the revenues received through the existing Obligation, levy exemption certificates and brown power price, the support required to provide rates of return attractive to investors could range from £210/MWh for wave to £105/MWh for tidal in the early stages.

33. The Scottish Government believes that, for banding to replace the MSO whilst protecting the position of developers currently progressing plans to develop in Scotland, there must be continuity in the levels of support available and that higher levels of support are thus necessary. Taken together with the available evidence around the forecast early costs of wave and tidal stream (although these are clearly uncertain), this tends to support the case for higher ROC multiples for these technologies. The work referred to in paragraph 17 will consider the necessary scale of such multiples, along with their effect on the Obligation as a whole as well as other factors.

34. At the same time, BERR's decision to maintain wave and tidal stream within the emerging technology band at 2 ROCs/MWh is based on the view that this level of support will be sufficient, when coupled with capital grant support from the MRDF or Scottish Government scheme, to pull through early capacity. Thus, in the event that a higher multiple is introduced in Scotland, it could be stipulated that access to support at that higher level is restricted to operating stations which have not received any capital grant support under these specific programmes.

We would welcome consultees' views on our proposal that wave and tidal stream output should receive support at a higher level than that proposed by the UK Government.

We would welcome feedback and views on the levels at which this support should be set.

We would also welcome consultees' views on the suggestion that developers be allowed the choice between support at a higher level or at a lower level coupled with capital funding support from a UK grant scheme.

Energy from Waste (EfW)

35. There are very few energy from waste plants in Scotland, despite support having been available since 2002 under the ROS for stations using advanced conversion technologies (anaerobic digestion, pyrolysis or gasification) and, since 2006, for regular EfW plants fitted with good quality combined heat and power (CHP). The council run CHP facility in Lerwick, which uses over 20,000 tonnes per annum of household wastes collected from the northern isles and which provides heat for over 800 domestic and commercial customers across the town, is a notable and successful exception.

36. BERR is proposing that EfW with CHP should continue to receive support within the reference band at 1 ROC/MWh. Advanced conversion technologies, meanwhile, whose costs remain particularly high, are included within the emerging technology band and would receive 2 ROCs/MWh.

Waste Policy in Scotland

37. The Scottish Government has reaffirmed recently its policy that Scotland should move towards zero waste, with a much greater emphasis on waste prevention and a substantial expansion in the areas of recycling and composting. A recent study by the Scottish Environment Protection Agency (SEPA) on the environmental impact of a range of waste management options, which found that a mixture of recycling at 70% with energy from waste capped at 25% offered the best outcomes in relation to managing climate change emissions and non-renewable resource depletion.

38. The Scottish Government agrees that energy from waste has a role to play in moves towards a zero waste society, and can be a sustainable alternative to landfill. However, Ministers are opposed to large and inefficient EfW plants. The Cabinet Secretary for Rural Affairs and the Environment, Richard Lochhead, outlined the Government's policies on waste in his statement to Parliament on 24 January: http://www.scotland.gov.uk/News/This-Week/Speeches/Greener/vision-for-waste/ To complement its aims that at least 70% of municipal waste should be recycled by 2025 and no more than 5% landfilled, the Scottish Government is proposing that, by 2025, a maximum 25% of municipal waste should be diverted by EfW.

39. Ministers also have a strong preference for EfW plants that deliver a high level of efficiency through combined heat and power or district heating. As such, and to ensure that energy and waste policy are rightly integrated, we are proposing that stations fitted with advanced conversion technologies should only become eligible for ROCs at the higher multiple where the plants in question are also fitted with good quality CHP / meet an established efficiency standard.

Do you agree with our proposal that EfW stations using advanced conversion technologies should have their qualification for the higher band linked to good quality CHP fitment / minimum efficiency standards?

What advantages / problems do you foresee linked to this approach?

Island Wind

40. Scotland's potential to generate from wind extends to its islands, with proposals active in the Western Isles, Orkney and Shetland. Under the existing proposals, stations built in these areas would be classified as onshore wind, and thus receive 1 ROC/MWh under the reference band.

41. However, stakeholders have raised an issue with us regarding the suitability of this definition, on the grounds that the capital costs involved in constructing a wind farm in these locations are notably higher than on the Scottish mainland. The situation becomes more pronounced, it is contended, when the higher costs of transmitting power from these locations under the proposed methodology for transmission use of system charges are taken into account.

42. Allied to the potentially high costs of connecting such capacity (owing to the required investment in subsea links and related infrastructure), it has been suggested that the economics of such projects can be closer to offshore wind than onshore, and that projects in these locations should be awarded support at the higher band (1.5 ROCs/MWh).

43. While aware that there are separate challenges facing the development of the wind resource in these areas, the Scottish Government is keen to receive evidence concerning the true nature of the costs facing such projects. If the combination of high infrastructure costs and system charges is sufficiently high to warrant consideration of a higher level of support, then we will need to consider carefully the effect that any such change would have on the rest of the market and renewable output as a whole.

We would be grateful to hear the views of stakeholders on this subject, and happy to consider any evidence for or against a higher level of support for wind capacity on the Scottish islands.

ANNEX A - BERR'S PROPOSED BANDS AND LEVELS