The UK's target of reducing CO2 emissions by 60% by 2050 is an ambitious target. However, the UK is in a relatively sound position to meet at least its first target of a 12.5% CO2 emission reduction by 2010 (RCEP, 2000). This is primarily as a result of the 1990s 'dash for gas' which has resulted in CO2 intensive coal electricity generation being replaced by less intensive gas electricity generation.
The UK government in its 2003 Energy White Paper proposed two solutions for how to reach its 60% CO2 reduction by 2050. Either by focusing on increasing renewables and energy efficiency; or secondly by focusing on increasing renewables, energy efficiency and nuclear power (EWP, 2003). Both identify that to achieve the long term greenhouse gas emission reductions of 60% by 2050, the UK will need to replace significant amounts of current carbon intensive energy sources with renewable energy sources. This is especially true if as is true under current proposals, current nuclear power plants scheduled for closure are not replaced with new nuclear plants (Helm, 2000). These are estimated to currently account for nearly 20% of electricity generation in the UK (DUKES, 2007) and since they emit very low levels of CO2, their closure will mean that even if green electricity accounts for 20% of UK production by 2050 it will only substitute for that lost by nuclear and not in a net contribution to CO2 reduction targets. This is part of the reason why the UK has set itself such ambitious targets for renewable electricity generation of 10% by 2010, and 20% by 2020.
2.1 Policies Promoting Renewable Generation in the UK
Renewable electricity generation, primarily due to its greater cost than conventional types of electricity generation needs protection in a liberalised market where it has been shown that price is rated as the most important factor for choosing supplier, and also the main reason for switching (Batley, 2001). Renewable sources of electricity cost more, and although 60% of individuals in a consumer survey by the WWF (2007) stated that they would be willing to pay a premium for a renewable electricity supply, the majority will stay with that supplier who offers the cheapest supply, green or not. Because of this, for the renewable electricity generation uptake to be successful in the UK electricity market, it needs direct government subsidy, or subsidy from consumers so that it is priced into the market. A capitalist market cannot be left on its own to deal with environmental problems (Helm, 2003) and literature portrays that the UK government has currently had a relatively hands off approach to promoting renewable energy in the market.
The UK government has implemented a number of policies though in an attempt to meet its renewable generation and subsequently its CO2 reduction targets. Most notably there are three; the Renewable Obligation, the Climate Change Levy and the European Union Renewables Directive, all of which are administered by Ofgem. An explanation of each of the three policies follows before further discussion continues.
2.1.1 European Union Renewables Directive
The EU Renewables Directive (RD) is the main means of supporting and promoting renewable electricity across the EU. The RD was implemented in 2001, setting out guidelines which require each state to commit to specific targets for renewable electricity generation. This collectively results in a target of total renewable electricity generation in the EU of 22% by 2010. How member states meet their targets is left up to them to decide. The RDs quota of this for the UK was that the UK should achieve 10% renewable electricity generation by 2010. The Directive also requires member states to ensure that guarantees of origin are issued in respect of all electricity generated from renewable energy sources (BERR, 2007). These Renewable Electricity Guarantees of Origin (REGOs) are issued by Ofgem for every MWh of accredited renewable electricity produced in the UK. It is in light of these requirements by the RD that the UK government in April 2002 implemented the Renewable Obligation and the Renewable Obligation Scotland.
2.1.2 The Renewable Obligation
The Renewable Obligation (RO) and the Renewable Obligation Scotland (ROS) are financial support schemes for renewable electricity generation, which came into force in April 2002, and are set to run until 2027 (BERR, 2007). They both have the same requirements and therefore when the term RO is used it is referring to both the RO and the ROS. The RO requires licensed electricity suppliers to supply a given, but growing proportion of their electricity supply from renewable sources thereby encouraging the development of renewable electricity generation. Table 2.1 shows the percentage of supply the RO requires suppliers to source from renewable sources, raising from 3% in 2002/2003 to 15.4% in 2015/2016 which it will then remain at until 2027 when the RO ends.
Electricity suppliers meet their obligation either through acquiring Renewables Obligation Certificates (ROCs), which are issued by Ofgem to electricity generators which are accredited as producing from a renewable source and then sold on to suppliers. Or if a supplier fails to provide enough ROCs to cover their quota, then they must 'buy out' the remainder of their obligation which is currently 35.78 per Megawatt hour (MWh) (BERR, 2007). Any money raised from these 'buy outs' is paid into an account administered by Ofgem, which is then used to provide commercial support for investment in renewable electricity generation. The RO is set at a higher level each year than available supply, meaning it is not possible for all suppliers to obtain enough ROCs to fill their quota and therefore ensuring an increased price for renewable electricity. This is essential for the expansion of renewable electricity generation as it allows it to be competitive with conventional forms (Helm, 2006). The RO is paid for by as well as industrial and commercial consumers, with each household currently contributing about 10 a year compulsorily through their electricity bills (Ofgem, 2007b).
2.1.3 The Climate Change Levy
The Climate Change Levy (CCL) which was introduced in April 2001 is a tax on commercial electricity consumers in the UK, and an attempt to promote energy efficiency and reduce CO2 emissions (Boardman, 2006). The CCL requires non- consumers to currently pay 0.43 for every kilowatt hour (kWh) of electricity they consume. However if they can prove that the electricity they use is from a renewable source, then they are exempted from the tax (Ofgem, 2002). Commercial consumers prove this by buying Levy Exemption Certificates (LECs) issued by Ofgem to eligible generators. This means that commercial consumers are enticed to buy electricity from renewable resources to avoid the CCL and will result in a greater demand for renewable electricity, encouraging its growth.
There is a complication though as the definition of renewables under the RD is broader than that under the CCL and the RO; definitions are summarised in table 2.2. The European Parliament Directive on promotion of electricity produced from renewable energy Article 2(a) states, renewable energy sources shall mean renewable non-fossil energy sources (wind, solar, geothermal, wave, tidal, hydro-power, biomass, landfill gas, sewage treatment plant gas and biogases). Article 2(b) goes further to define biomass as meaning, the biodegradable fraction of products, wastes and residues from agriculture (including vegetal and animal substances), forestry and related industries, as well as the biodegradable fraction of industrial and municipal waste (EU, 2001).
The RO has a narrower definition of renewable sources excluding a number which qualify under the RD. These include existing hydro plants which are over 20MW; all plants using renewable sources built before 1990, unless they have been refurbished; and energy from mixed waste combustion (BERR, 2007). Generation stations outside the UK are also excluded. A summary of the definitions for what qualifies as renewables under the RO, CCL and RD is shown in table 2.2.
Given that the RD has a broader definition of renewable electricity than the RO, in the UK in 2006 the total renewables generation on a:
The difference is not significant but it needs to be noted as it may still result in problems when renewable electricity is supplied, or claimed by a supplier. Figure 2.1 shows that although there has been a marked increase in renewable generation levels since the introduction of the RO, it is still far from meeting its targets.
For the same kWh of electricity generated from renewable sources, generators can receive 0.33/kWh from ROCs or 0.43/kWh from LECs (Ofgem, 2007). Electricity suppliers who purchase renewable electricity from generators therefore have an incentive to sell into the commercial sector, where they can charge a premium due to commercial consumers seeking to avoid the CCL. This though may have the negative impact of reducing that available for the consumer.
These policies show that appropriate incentives such as the CCL have been successful at promoting commercial uptake of renewable electricity production. Looking at figure 2.1 the increased rate of uptake of renewable electricity since 2002/2003 when the RO and CCL were introduced can clearly be seen. A number of authors (Batley, Boardman and Helm) have criticised how there is currently no such scheme to promote the market. This is resulting in a lack of uptake of renewable electricity, and a similar scheme to the CCL would greatly increase the uptake of renewables. It is due to this that attention now turns to assessing the current state of the electricity market.
2.2 The Green Electricity Market
Since April 2002, consumers who want to purchase renewable electricity can do so through any supplier which offers a green supply offering. These 'green supply offerings' are referred to as Green Tariffs; being defined by Ofgem (2002) as any contractual arrangement between an electricity supplier and a consumer where it is claimed that the supply will give rise to environmental benefit. There are currently three distinct types of green tariff on the UK electricity market; Energy based green tariffs; Contribution based green tariffs; and carbon offsetting tariffs.
- 'Energy-based green tariffs' refer to those where there is a direct relationship between the electricity supplied to the consumer and the electricity purchased by the supplier. Normally this involves the supplier stating that it will match all, or a fixed percentage of a consumer's energy supply with purchases of electricity from renewable sources (Graham, 2007). These fixed percentages can range from 10-100% meaning that a consumer on a green tariff could still be receiving 90% of their supply from non-renewable sources.
- 'Contribution-based green tariffs' refer to those where the supplier makes a monetary contribution on behalf of the consumer to a fund which aims to bring about environmental benefit. These funds depending on their size can be used to build new renewable generators, research into renewables, or for teaching and education. The contributions are either a fixed regular payment or may be linked to consumption levels; with some suppliers matching their consumer's contributions.
- 'Carbon offsetting green tariffs' refer to those where the supplier offers to offset between 10-100% of the carbon emissions that are produced when generating the consumer's electricity (Graham, 2007). This is done by the supplier investing in a wide range of carbon offsetting schemes such as planting trees.
Analysis of the electricity market at present has shown that there are 33 different electricity suppliers; however out of these only 11 offer forms of green tariff (See Appendix 1 for a full list). This combined with the fact that only 300,000 households in the UK (just over 1%) are signed up to a green tariff suggests that self regulation of green tariffs has proved ineffective. The WWF (2005) identifies that this may be due to green electricity products still being a recent phenomenon, and therefore the voluntary market for green tariffs and knowledge of their presence are still evolving; a view which will be explored during this investigation.
In 2002, Ofgem published a set of guidelines for electricity suppliers offering green tariffs in the market. They set out the features of what constitutes green tariffs, and the claims that can be made about them. The guidelines state that green tariffs must be transparent and offer consumers additional environmental benefits. Any claims made must be transparent and verifiable (Ofgem, 2002) The Ofgem guidelines focus on three issues; transparency, additionality, and verification.
- 'Transparency' refers to the need for suppliers claims for renewable electricity to be accompanied by a clear definition of where it is sourced from; and an explanation is needed to account for how any premium customers are paying is used.
- 'Additionality' refers to the need for suppliers who claim that their green tariff is resulting in an environmental benefit to prove that there is such benefit, and that any such benefit is beyond their legal obligation and therefore additional.
- 'Verification' refers to the need for suppliers to produce evidence when requested in the support of the claims they make to any accreditation scheme. These include the contracts they have with renewable generators and the numbers of green tariff consumers they have.
Ofgem does not enforce the guidelines it published, and since they are voluntary it is difficult to assess which suppliers abide to them; leading to widespread consumer confusion and mistrust. The Energy Saving Trust ran an accreditation scheme up until 2002 for green tariffs called Future Energy. The scheme accredited and rated green tariffs, allowing consumers to choose suppliers with some degree of confidence. However the scheme was discontinued in 2002 and since then suppliers have regulated their own tariffs (Energywatch, 2008).
Friends of the Earth produced a league table between 2000 and 2004 attempting to rate electricity suppliers in terms of their green tariffs. The aim of which was to give consumers information so that they could make informed decisions. However due to both the long length of time needed to achieve this, and funding constraints; Friend of the Earth discontinued their league table in 2004. This means that since 2004 there has been no accreditation scheme, either voluntary or public for the UK electricity market (EnergyWatch, 2008).
A wide range of literature has documented how this lack of any form of accreditation body for the electricity market may be resulting in consumers misunderstanding and mistrusting suppliers and green tariffs in general. Consumers can be confused by spurious claims, misleading use of statistics and at worst mis-selling, either via advertising or direct marketing (Boardman, 2006). The truth behind whether there is a lack of confidence in the system and if so, whether this is contributing to the current poor uptake of green tariffs by consumers needs to be assessed.
Helm (2006) puts this point in context by identifying how consumers need full, constant and accredited information to ensure market confidence. If the electricity market doesn't offer validated information consumers won't switch to green tariffs, even if they feel strongly about decreasing their environmental impacts and addressing climate change. To ignore this issue, would therefore miss the opportunity of using green electricity markets to help achieve the UKs renewable energy and CO2 reduction targets.
The reason for the large difference between those in surveys who state they are interested in switching to a green tariff and those that actually do is a gap in the literature which is in need of assessment. To achieve the UK's RO and CO2 reduction targets requires a far greater uptake of green tariffs by consumers. Academic literature (Helm, Batley and Snell) has proposed that the CCL has potentially undermined the market for green electricity by making it more profitable for suppliers to sell to commercial consumers due to the greater price they can charge. Whether this view is true, and the reason behind the lack of green tariff uptake is in need of assessment. From this it can then be decided whether the green electricity market in the UK is able to exist successfully, or, if changes are needed. It is the aim of this study to carry out these investigations.
