EMR update: Parliamentary Committee report is highly critical of the draft Energy Bill

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1 ECCC Report EMR update EMR update: Parliamentary Committee report is highly critical of the draft Energy Bill Yesterday the Energy and Climate Change Committee (the ECCC) published a highly critical report following its prelegislative scrutiny of the Government's draft Energy Bill. Alongside the report Tim Yeo, Chairman of the ECCC, issued a frank warning to the Government in an article published in the Financial Times, "We believe it is still possible to make the Government's energy policy work. If DECC and the Treasury do not fix these problems before the energy bill is debated in the autumn, my committee will seek to amend it in Parliament. The legislation is too important for Britain's electricity industry and for the wider economy to mess up." Electricity industry participants should consider the ECCC's report, its potential impact on the Government's electricity market reform (EMR) proposals and implementation timetable, and ensure they keep track of any formal response issued by the Government. Key criticisms and recommendations of the ECCC The ECCC's report (available here) contains the Committee's detailed criticisms from its condensed pre-legislative scrutiny of the draft Energy Bill (our briefing on the draft Bill is available here). Share with a colleague 24 July 2012 London Contact Mark Newbery Partner Julia Pyke Partner Jennifer Bell Partner Related links Herbert Smith website Herbert Smith energy and natural resources homepage Herbert Smith energy and natural resources publications Herbert Smith publications Herbert Smith news The Committee's 51 recommendations are distributed throughout the report but are also listed on pages 64 to 71 for ease of reference. The summary to the report sets out the Committee's headline criticisms of the draft Energy Bill and recommendations, which include: Criticism Recommendation A lack of specific outcomes means there is uncertainty about what the Government is hoping to achieve through its EMR proposals. The Bill should make an express reference to the carbon budgets and the ECCC should be made a statutory consultee on the delivery plan. The Government is focusing too closely on the supply side of the energy system and is neglecting the Demand-side response should be given a higher priority in the Bill. Page 1

2 ECCC Report EMR update contribution that demand-side response could make to security and climate change issues. The Government's plans for feed-in tariffs based on contracts for differences (FiT CfDs) have become so complex they are unworkable: there are genuine concerns regarding whether the multiparty payment model using a "statutory contract" between all suppliers and generators would be legally enforceable, which also means the model is unlikely to be bankable; "rationing" FiT CfDs under the Treasury's levy cap will increase development risk, driving up costs to consumers and possibly meaning that the project pipeline could dry up; and the removal of an obligation on electricity suppliers to buy renewable energy could compromise the ability of independent generators to take part in the market, decreasing competition and leading to higher levels of vertical integration. The Government should abandon the multi-party payment model for the FiT CfDs and revert to a single counterparty model. The ECCC believes that a single counterparty underwritten by the Government would be the best way to reduce the cost of capital. However, if the Government decides not to underwrite the FiT CfDs it must specifically assess the impact of this decision in a new impact assessment. Consideration should be given to introducing a two stage registration process for allocating FiT CfDs to strike a balance between awarding a contract to all developers seeking support (which may lead to underdelivery if planned projects are not completed) and waiting so late in the development process to award a FiT CfD that the risk of a developer not being allocated a contract becomes unacceptably high. The eligibility threshold for the small scale feed-in tariff regime (currently set at a maximum of up to 5 MW) should be increased to 10 MW, or potentially 50 MW, to allow smaller scale generators and community owned schemes to continue to operate. DECC should also consider introducing a "buyer of last resort" or an incentive to source energy from low carbon generation to ensure that there is a route to market for independent generators. There is a lack of transparency in the process for agreeing the strike price for the FiT CfD for nuclear power, and the negotiation of the early investment instruments that may be offered to developers of new nuclear projects. A committee of independent experts should be appointed to oversee the negotiations. The Government's proposals to introduce a capacity mechanism appear to be causing an investment hiatus. More clarity is needed on the circumstances in which a capacity mechanism would be deployed. The Government should carry out a more rigorous analysis of the problem the capacity mechanism is intended to address, giving specific consideration to the impact of introducing a large volume of intermittent generation capacity into the system. As currently proposed the Government's plans for the emissions performance standard would be "at best pointless", and at the worst the decision to grandfather the initial level until 2045 may undermine the achievement of long-term carbon targets. The length of the grandfathering period should be reduced. Page 2

3 ECCC Report EMR update The ECCC does not believe it is appropriate for a private company (National Grid) to act as the EMR delivery body and fears that this choice may lead to unnecessary additional costs for consumers. National Grid should be replaced by a new independent not-for-profit company. The Government's EMR proposals are not well developed and the importance of delivering the reforms in a timely fashion cannot be overstated. It is vital that DECC's timetable does not slip. Concerns over the relationship between DECC and the Treasury The report implies that the ECCC fears that conflict between DECC and the Treasury could hamper the Government's proposals, stating: "The perceived conflict between DECC and HM Treasury on some aspects of EMR is also contributing to uncertainty among the investor community. We sincerely hope that these two departments can in future develop a better working relationship than they have demonstrated to us during the course of our inquiry. We hope that all departments will present a clear, consistent and united message as the Bill passes through the House." Investors awaiting the results of the Renewable Obligation Banding Review will sympathise; it has been reported that disagreement between DECC and the Treasury regarding the level of support for onshore wind has delayed the announcement of the results (which were expected last week). Our briefing on the proposals that were included in DECC's Banding Review consultation is available here. Next steps The Government currently plans to introduce the Energy Bill to Parliament in autumn. It is clear from the ECCC's report that DECC has a substantial amount of work to do if its EMR timetable is to remain on schedule. Electricity sector participants should follow developments, and any formal response to the ECCC's report, closely. Subscribe to other publications update my details To unsubscribe from this e-bulletin, please click here. The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication. Herbert Smith LLP 2012 This message is sent by Herbert Smith LLP, Exchange House, Primrose Street, London EC2A 2HS, United Kingdom, Tel: :Exchange House, Primrose Street, London EC2A 2HS, United Kingdom, Page 3

4 2012/05/24 - Draft Energy Bill Sample The draft Energy Bill 2012: A framework for EMR On 22 May 2012, the Department for Energy and Climate Change (DECC) published a draft Energy Bill (the draft Bill) which includes provisions intended to incentivise investment in low carbon electricity generation (ie, renewables, fossil fuels with carbon capture and storage, and nuclear), ensure security of supply and help the UK achieve its emission reduction and renewables targets. Interested parties should consider submitting their views on the draft Bill to the Energy and Climate Change Committee, which will be scrutinising it and publishing a report before Parliament's summer recess in July Electricity Market Reform The draft Bill establishes a framework for the Government's Electricity Market Reform (EMR) proposals, which include the introduction of feed-in tariffs based on contracts for differences (FiT CfDs), a capacity market and an emissions performance standard (EPS). Alongside the draft Bill, DECC also published an EMR Policy Overview which provides an update on how DECC intends to implement its EMR proposals. The EMR Policy Overview only makes brief reference to the Government's recent Call for Evidence on the role of gas in the electricity market (see our e-bulletin for more information). Herbert Smith will be hosting a breakfast seminar on 14 June 2012, looking at the implications of EMR for conventional power generation. To register to attend the seminar please contact Siew-Ching Leong. Other key provisions The draft Bill also: seeks to make Ofgem's role in delivering Government policy more transparent; sets out the role and remit of the Office for Nuclear Regulation in statute; enables offshore wind generators to construct and commission transmission infrastructure without requiring a transmission licence; and facilitates the sale of the Government Pipeline and Storage System for aviation fuel by enabling the transfer of certain access rights to private bodies. Share with a colleague 24 May 2012 London Contact Mark Newbery Partner Julia Pyke Partner Jennifer Bell Partner Matthew Warren Associate Hannah Roscoe Associate Related links Herbert Smith website Herbert Smith energy and natural resources homepage Herbert Smith energy and natural resources publications Herbert Smith publications Herbert Smith news More information Our e-briefing summarising the key provisions of the draft Bill and the EMR Policy Overview is available here. Useful links Page 1

5 2012/05/24 - Draft Energy Bill Sample The full text of the draft Bill is available here. A diagram setting out an indicative timeline for the delivery of the Government's EMR proposals can be found on page 23 of the EMR Policy Overview, available here. Subscribe to other publications update my details To unsubscribe from this e-bulletin, please click here. The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication. Herbert Smith LLP 2012 This message is sent by Herbert Smith LLP, Exchange House, Primrose Street, London EC2A 2HS, United Kingdom, Tel: :Exchange House, Primrose Street, London EC2A 2HS, United Kingdom, Page 2

6 October 2011 The Renewables Obligation Banding Review Yesterday the Department of Energy and Climate Change (DECC) launched a consultation on proposed new levels of financial support for renewable technologies for the period 2013 to As recent speculation suggested, and amid highly publicised discussions on how to deal with rising energy bills, the Government proposes to reduce the levels of support for some technologies. Not all of the cuts will take effect from 2013; some, including those planned for offshore wind, dedicated biomass and dedicated energy crops, will operate incrementally. Under the proposals new bands would be introduced for fossilfuelled plant which is converted to exclusively fire biomass and for plant which generates over 15% of gross output from biomass. Wave and tidal technologies would receive more than double the current level of support, subject to the imposition of a 30 MW cap beyond which the current level is retained. Developers of renewable projects and those trading Renewable Obligation Certificates (ROCs) should be aware of the impact the proposals would have on their businesses. The Renewables Obligation Banding Review The proposals 2 Onshore wind 2 Offshore wind 2 Hydro-electricity 3 Wave and tidal stream 3 Tidal range 3 Geothermal and geopressure 3 Solar PV 4 Biomass 4 Energy from Waste with CHP 6 Anaerobic digestion 7 Advanced conversion technologies7 Landfill gas 8 Sewage gas 8 Renewable CHP 8 Energy crops 10 Next steps 11 Impact by generation technology 11 Contacts 14 Chris Huhne, the Secretary of State for Energy and Climate Change, said that he hopes the proposals will "provide industry with the certainty needed to make investment decisions and will overall mean a lower impact on consumer bills, without reducing our level of ambition". The Government's proposals will attract significant interest from industry, not only because of the changes to the bands and the levels of support that are put forward, but also because the levels applicable on 31 March 2017 will be grandfathered when the Renewables Obligation (RO) is "vintaged" as part of the reform of the electricity market. Our briefing on the policy proposals contained in the Electricity Market Reform White Paper, including details of the transitional arrangements for the RO until the scheme ends in 2037, is available here. In line with the Government's Renewable Energy Roadmap (our client briefing on the Roadmap is available here), the new banding proposals offer most support to the renewable technologies that the Government considers can make the greatest contribution to achieving the UK's target of meeting15% of energy demand from renewable sources by 2020, and to fledgling technologies that need support to reach commercial-scale deployment. Offshore wind provides the benchmark against which the other bands are set. The Government proposes to take an innovative approach to encourage the deployment of biomass, which would involve the introduction of two new bands and allow generators to switch between bands. If the Government decides to proceed with this approach following conclusion of the consultation there will be practical complexities that Ofgem, generators and purchasers of ROCs will need to deal with. Related links Herbert Smith website Energy and natural resources homepage Energy and natural resources publications Environment homepage Environment publications Herbert Smith news Herbert Smith LLP 1 10/ _1

7 The proposals This briefing summarises the Government's main proposals, informed by the Renewable Energy Roadmap, a report from Arup providing cost and deployment data and Pöyry's models of the ROC markets using that data, for the following technologies: onshore wind; offshore wind; hydro-electricity; wave and tidal stream; tidal range; geothermal and geopressure; solar PV; biomass; energy from waste with CHP; anaerobic digestion; advanced conversion technologies; landfill gas; sewage gas; renewable CHP; and energy crops. The table at the end of this briefing provides an overview of the proposed changes to the level of support for each type of technology supported under the RO. Onshore wind The Government proposes to decrease the level of support for onshore wind from the current level of 1 ROC/MWh to 0.9 ROCs/MWh from 1 April 2013 as the modelling it has carried out suggests that this would not significantly decrease deployment during the period 2013 to 2017 (the Review Period). Offshore wind The Government considers offshore wind to be the most expensive technology that needs to be deployed to enable the UK to meet its 2020 targets. The incrementally decreasing levels of support proposed for offshore wind are therefore used as the upper benchmark against which support levels for other technologies are struck (with the exception of wave and tidal stream technologies which are discussed further on the next page). The Government considers that the deployment costs for offshore wind can be brought down during the Review Period and therefore proposes to keep the band for offshore wind at 2 ROCs/MWh for new accreditations (and additional capacity added) in 2014/15 before decreasing support to 1.9 ROCs/MWh for 2015/16, and again to 1.8 ROCs/MWh during The Government hopes that decreasing support in this Herbert Smith LLP 2

8 way will not have a significant impact on deployment levels, but project developers will have to reassess the economics of projects in the pipeline to determine the precise effect of the cuts. The Government plans to continue its policy of allowing phased commissioning of turbines, meaning that the band applicable at the time of accreditation would apply to all subsequently commissioned turbines forming part of the accredited level of capacity (see our e-bulletin dated 3 August 2010 for further details on phased commissioning). Hydro-electricity The Government plans to cut the level of support for hydro-electricity from 1 ROC/MWh to 05.ROCs/MWh because it believes the reduction in support will not have a serious impact on the level of deployment during the Review Period and because other renewable technologies have much greater deployment potential. Wave and tidal stream The Government considers that wave and tidal stream technologies have great potential for deployment in the UK, and that the sector needs help to move from the research and development phase to the demonstration of small arrays, leading up to full commercial-scale deployment in the period to The Government also committed to supporting the development of marine energy in its Coalition Agreement (see our e-bulletin dated 12 May 2010 for more information). While support to date has been provided through grants (such as DECC's 22 million Marine Renewables Proving Fund), the Government feels that further support is needed to generate rates of return which will attract investment from utilities and large industrial organisations. To promote deployment on a scale that will make a significant contribution to the amount of renewable electricity generated by 2020, the Government proposes to provide an enhanced level of support for initial demonstration arrays. Projects with a generation capacity of up to 30 MW would be eligible to receive 5 ROCs/MWh. This level of support would only be available for capacity that is installed and operational prior to 1 April Support for any additional capacity over and above the 30 MW cap would be provided at a level of 2 ROCs/MWh. To ensure value for money to the consumer the Government will keep deployment levels under review. The normal conditions for reviewing any band or level of support (including unexpected changes in costs or deployment rates) would continue to apply. Tidal range The Government considers tidal range technologies to be mature. The RO includes support for two different types of tidal technology: "tidal impoundment tidal barrages"; and "tidal impoundment tidal lagoons". Both currently receive 2 ROCs/MWh. The Government does not believe that any commercial scale tidal range projects will come on stream before 2020, and on that basis proposes to retain the current tidal range banding level of 2 ROCs/MWh for projects with a generation capacity of less than 1 GW. The level of support would decrease to 1.9 ROCs/MWh for new accreditations and additional capacity added in 2015/16, and again to 1.8 ROCs/MWh for Geothermal and geopressure There is one existing geothermal plant in the UK, a heat only facility in Southampton. The Government believes that several gigawatts of geothermal power could be deployed by 2050, but believes that high costs, especially drilling costs, and uncertainty over quantifying the risk of first borehole failure have made it difficult for developers to secure investment. To encourage the deployment of geothermal power the Government proposes to maintain the current level of support, 2 ROCs/MWh, until 31 March The level of support would decrease to 1.9 ROCs/MWh for 2015/16 and again to 1.8 ROCs/MWh for Herbert Smith LLP 3

9 The Government is not aware of any evidence that any geopressure projects will be deployed during the Review Period, and therefore plans to maintain the current level of support of 1 ROC/MWh for such projects. Solar PV Support for solar PV is currently provided through the RO and, since April 2010, through small-scale feed-in tariffs (FITs) for installations with a generation capacity of up to 5 MW. The Government acknowledges that cost is the most significant barrier to the deployment of solar PV in the UK. DECC is investigating the costs associated with solar PV projects with a capacity of 5 MW or less as part of its Comprehensive Review of FITs. Evidence gathered during that review process, along with responses to the Banding Review consultation, will be used by the Government to set the level of support under the RO. The Government believes that solar PV should not receive a greater level of support than offshore wind. As such it is proposed that solar PV would continue to receive 2 ROCs/MWh until 31 March 2015, decreasing to 1.9 ROCs/MWh for new accreditations and additional capacity in 2015/16, and again to 1.8 ROCs/MWh in Biomass Sustainability criteria The RO applies sustainability criteria to all biomass (apart from solid waste, gaseous waste, landfill gas, sewage gas and microgenerators using solid and gaseous biomass). Generators are required to provide annual sustainability reports on the feedstock they use to Ofgem. From April 2011, bioliquid generators will need to meet the sustainability criteria to be eligible to receive ROCs. Similarly, from April 2013, for generators with a capacity of 1MW or more, the Government intends that only solid biomass and biogas meeting the criteria will be eligible for support. Some generators have suggested that existing capacity should be exempt from any future changes to the sustainability criteria. They argue that this "grandfathering" of the sustainability criteria would enable them to sign long-term feedstock contracts in the knowledge that these supplies would meet the sustainability requirements, and would help to develop a robust supply-chain both in the UK and globally. The Government does not propose to "grandfather" the sustainability criteria for biomass, but seeks views on this decision. The Government is mindful that the European Commission is still considering the issue of sustainability criteria for solid and gaseous biomass and will report back towards the end of 2011; the Government may need to implement any further measures or recommendations made by the Commission. The Government is also keen to maintain a level playing field for buyers and sellers of biomass feedstock. Purity threshold Under the RO, the definition of "biomass" requires at least 90% of the energy content of the fuel to be derived from plant or animal matter. The Government has received conflicting representations from industry on the adequacy of this threshold. Some in industry have indicated that this threshold is too high and is preventing materials, such as waste wood, from being used as fuel. Others have suggested that the threshold is satisfactory and is often exceeded. The Government does not propose to change the purity threshold, but invites evidence and comments on whether this level is still appropriate. Biomass conversion and enhanced co-firing The Government is keen to promote the conversion of existing coal-fired plant to burn biomass as it provides a transitional technology which contributes to the UK's 2020 renewables target and helps to build the supply chain needed for the development of large-scale dedicated biomass generation. With this in mind, the Government proposes to introduce two new bands: one for former fossil fuel generating stations (including cofiring stations) which convert to firing biomass only; and one for enhanced co-firing generators using biomass to generate at least 15% of their gross electrical output. Herbert Smith LLP 4

10 Support under the biomass conversion band would be provided at a level of 1 ROC/MWh from 1 April Stations converted prior to that date would receive the current level of support for dedicated biomass, 1.5 ROCs/MWh, until 1 April From that date onwards they would transfer into the newly created "biomass conversion" band, and receive the lower level of support; the Government does not propose to grandfather support for biomass conversions completed before 1 April 2013 at a level of 1.5 ROCs/MWh, but at a lower level of 1 ROC/MWh from 1 April If a plant were to revert to co-firing biomass with fossil fuels, the level of support received would change to that applicable for enhanced co-firing or co-firing (provided the eligibility criteria were met). The RO does not currently distinguish between electricity that is generated for own use (by "auto-generators") as opposed to onward supply. The Government's proposed new biomass conversion band would therefore also be open to auto-generating fossil fuel stations converting to biomass. The Government acknowledges that the investment case for conversion for auto-generators may be different to that for generators selling on their output, and seeks evidence on costings and how conversion can be made economically viable for autogenerators. The Government sees enhanced co-firing as a stepping stone towards burning only biomass, and therefore proposes to provide support at a level of 1 ROC/MWh for generators using biomass to generate at least 15% of their gross output. This threshold could be achieved through converting whole units to fire biomass, co-firing in individual boilers, or a combination of the two. The threshold would be applied on a monthly basis. If the threshold was not met for a particular month, support would revert to the level provided for the standard cofiring of biomass. The Government proposes to grandfather support for enhanced co-firing, but if a generator reverts to standard co-firing the level of support would decrease accordingly. Similarly, if an enhanced co-firing plant were to convert to firing only biomass during the Review Period it would be eligible for the level of support provided under the biomass conversion band. The Government is considering whether generators should be able to switch between bands after 1 April To support an anticipated increase in the levels of biomass co-firing, the Government also plans to remove the 12.5% co-firing cap (currently suppliers are only permitted to meet up to 12.5% of their annual obligation under the RO with co-fired ROCs) from 1 April Standard co-firing Support for standard co-firing will be available for generators that do not satisfy the criteria for enhanced cofiring as they generate less than 15% of their gross output from biomass. Given expected improvements to the economics of co-firing biomass relative to burning coal due to the introduction of a floor price for carbon from 1 April 2013, and the Government's desire to incentivise enhanced co-firing of biomass and full conversion to biomass, the Government proposes to maintain the current level of support for co-firing biomass at 0.5 ROCs/MWh. Unlike enhanced co-firing of biomass and biomass conversion, the Government does not plan to grandfather support for the standard co-firing of biomass. Dedicated biomass The Government is keen to support dedicated biomass, and acknowledges that projects may require more support than projects that involve co-firing biomass or converting existing fossil-fuelled plant to run on biomass. At the same time, the Government wants to promote cost efficiency and avoid technology and feedstock lockin. With these aims in mind, the Government proposes to retain the current level of level of support of 1.5 ROCs/MWh until 31 March From 1 April 2016 onwards, support will be reduced to 1.4 ROCs/MWh for new accreditations and additional capacity. Bioliquids Bioliquids are currently supported under the RO through the dedicated biomass and co-firing bands. The Government anticipates that bioliquids will play a limited role in electricity generation in the period to 2020, and is of the opinion that the use of liquid fuels should be prioritised in other sectors, such as transport. However, the Government accepts that some bioliquids may be best suited to deliver renewable electricity and Herbert Smith LLP 5

11 combined heat and power (CHP). The Government proposes to continue to support bioliquids under the dedicated biomass and standard co-firing bands. From 1 April 2013, bioliquids will also be eligible for support under the new enhanced co-firing and biomass conversion bands. The same levels of support will apply to fossil-derived bioliquids, including FAME (fatty acid methyl ester) biodiesel. Generating stations using bioliquids to generate electricity under the dedicated biomass, biomass conversion and enhanced co-firing bands will benefit from grandfathering of the level of support for these bands in the same way as solid and gaseous biomass. As the Government's analysis indicates that there are limited sustainable bioliquid resources, the Government proposes to introduce a cap on the number of ROCs suppliers can submit to meet their annual obligation under the RO. The cap will be set at 4% of a supplier's annual obligation. The Renewable Electricity Directive (RED) imposes sustainability criteria on bioliquids. These requirements have been transposed into national law by the Renewables Obligation (Amendment) Order Information submitted to Ofgem by generators using bioliquids must be independently audited to verify that the generator has complied with the sustainability criteria. In a decision of the European Commission issued in January 2011, the Commission set out specific information that a generator must submit for each consignment of bioliquids used: a) whether the consignment has been certified or accepted as fulfilling the requirements of a voluntary scheme that has been recognised by the Commission as containing accurate data on measures taken for soil, water and air protection, the restoration of degraded land, the avoidance of excessive water consumption or to take into account the issues referred to in the second subparagraph of Article 17(7) of the RED; b) if the consignment has been certified or accepted as fulfilling the requirements of a voluntary scheme, the name of the voluntary scheme; c) whether a restored degraded land bonus (referred to in Annex V, part C, points 7 and 8 of the RED) has been used for the purposes of the greenhouse gas emissions calculation; and d) whether a factor for emissions savings from soil carbon accumulation via improved agricultural management (referred to in Annex V, part C, point 1 of the RED) has been used for the purpose of the greenhouse gas emissions calculation. The information referred to in (c) and (d) above is not required for bioliquids derived from waste or residues. The Government plans to amend the RO legislation to clarify that this information must be included in bioliquid sustainability audit reports. Energy from Waste with CHP For the purposes of the RO, energy from waste with CHP refers to electricity which is generated from the combustion of waste (excluding fuels derived from anaerobic digestion, gasification or pyrolysis) in a generating station using a CHP configuration, and which has been accredited under the CHP Quality Assurance Standard. Support is currently provided at a level of 1 ROC/MWh. Where the waste burnt has less than 10% fossil fuel contamination the generator may be eligible for support under the dedicated biomass band. Energy from waste without CHP is not currently supported under the RO. While the Government's analysis suggests that energy from waste with CHP could be economically viable without support under the RO, the Government is keen to encourage development and remove some of the cost barriers projects face. The Government is therefore proposing to support energy from waste with CHP at a level of 0.5 ROCs/MWh from 1 April 2013 onwards. As at present, energy from waste with CHP plant which is accredited under the RO will not be eligible for support under the Renewable Heat Incentive (RHI) for its heat output. Generators that choose not to be accredited under the RO may receive support for their heat output under the RHI (subject to the terms of the RHI scheme). The Government intends to consider support for energy from waste with CHP further during the second phase of the RHI which is expected to be introduced from 2012 onwards. Herbert Smith LLP 6

12 When waste comprised of both fossil-derived and renewable materials is used to generate electricity, the percentage of the fuel comprising renewable materials (known as the "qualifying percentage") needs to be determined to calculate the renewable output of the plant. Generators using fuel which satisfies the definition of Municipal Solid Waste (MSW) are able to benefit from the qualifying percentage being deemed to be 50% (alternatively, if the qualifying percentage of the fuel used is over 50% the generator can propose fuel measurement and sampling to enable them to benefit from the higher qualifying percentage). Following a request from the European Commission, Defra broadened the definition of MSW to include additional commercial and industrial waste which has a similar composition to MSW. The Government adopted this broader definition for the purposes of the RHI, and intends to apply it to the RO (through updates to Ofgem's RO guidance). The Government is considering whether the deeming approach used for MSW could also be used for other fuels such as solid recovered fuel or refuse derived fuel for which Ofgem requires the qualifying percentage to be determined monthly through fuel measurement and sampling. The Government seeks views on the use of deeming for fuels other than MSW, and on the level of qualifying percentage that should apply if such an approach was adopted. Anaerobic digestion One of the stated aims of the coalition Government is to increase the deployment of energy from waste through anaerobic digestion. While the Government does not want to encourage the use of crops for anaerobic digestion at the expense of food production, it acknowledges that use of some crops such as maize, grass silage or whole-crop cereals may be required to improve the efficiency of digesters. The Government intends to monitor the use of crops for anaerobic digestion and will, if usage is high and results in a change of land use, consider excluding large scale crop use for anaerobic digestion from support under the RO. The Government considers that anaerobic digestion technology is under-developed due to relatively high capital costs. To encourage development, the Government proposes to retain the current level of support of 2 ROCs/MWh until the 31 March 2015, before reducing it to 1.9 ROCs/MWh for 2015/16, and again to 1.8 ROCs/MWh for Advanced conversion technologies Advanced conversion technologies (ACT), such as gasification and pyrolysis, treat waste and biomass fuel to produce syngas or liquid fuels which can be used to generate electricity. Deployment to date has been limited and the use of gasification and pyrolysis to treat waste biomass and mixed municipal waste is considered to be emerging technology due to technical issues such as achieving the intended throughput and meeting air emissions standards. Under the RO both gasification and pyrolysis are supported, with two bands for each, standard and advanced. The differentiation is based on the calorific value of the syngas or liquid fuel produced. Standard gasification or pyrolysis currently receives support at a level of 1 ROC/MWh and advanced gasification or pyrolysis receives 2 ROCs/MWh. The Government proposes to replace the current bands with two new bands: the standard ACT band; and the advanced ACT band. The new bands will be differentiated not on the basis of the calorific value of the fuel itself, nor the process by which it is derived, but by the type of combustion engine used to generate electricity from that fuel. The standard ACT band would support ACT which does not generate electricity using internal combustion engines, including Rankine cycles. The Government is proposing to provide support at a level of 0.5 ROCs/MWh from 1 April 2013 onwards, and has called for evidence on the costs, gate fees and deployment potential for generating plant falling within the new band. The advanced ACT band would support ACT which generates electricity using an internal combustion engine, such as a gas turbine. To drive efficiency, the band would also support electricity generated using the waste heat captured from the internal combustion engine (which could be achieved by using the same configuration as for a combined-cycle gas turbine). As the costs for advanced ACT are expected to be much higher than for standard ACT, the Government proposed to provide support at a level of 2 ROCs/MWh from 1 April 2013 until Herbert Smith LLP 7

13 31 March For 2015/2016, support would decrease to 1.9 ROCs/MWh, and for 2016/17 support of 1.8 ROCs/MWh would be provided. Given the small size of the ACT sector, the Government has called for evidence on the deployment potential of ACT and the costs involved, including gate fees. The Government has also sought evidence on the nature and scale of actual or potential air emissions from generating electricity using pyrolysis oil. Landfill gas The Government considers landfill gas to be a mature and cost effective renewable technology, and analysis suggests that the sector has peaked, or is close to peaking. Arup's report suggests that generation capacity from landfill gas will more than halve over the next 10 to 15 years. The Government takes the view that landfill gas is cost efficient and has a role to play in the short term. Landfill gas currently receives support of 0.25 ROCs/MWh. Arup's report suggests that new landfill gas captured from sites that are currently operational or that closed after 2001 can be commercially viable without support under the RO. The Government therefore proposes to remove support for landfill gas with effect from 1 April 2013 for generating stations which are not accredited prior to that date. The Government has also called for evidence on new technologies that could increase the potential of landfill gas in the UK, particularly gas from older landfill sites that closed before 2001 and are not legally required to capture gas emitted. Sewage gas Sewage gas is a mature renewable technology that uses biogas produced from the anaerobic digestion of sewage sludge. As the Government sees sewage gas as a cost-effective way of generating renewable electricity it is keen to bring forward the remaining deployment potential, and therefore proposes to maintain the current level of support, 0.5 ROCs/MWh, from 1 April 2013 onwards. The Government has also called for evidence from industry on new technologies that could increase the technical potential for sewage gas in the UK, for example cogeneration. Renewable CHP The RO provides an uplift of 0.5 ROCs/MWh to the level of support that would otherwise be available where a CHP configuration is used in conjunction with the following technologies: the co-firing of biomass; the co-firing of energy crops; dedicated biomass; and dedicated energy crops. A cap applies such that the total level of support, including the CHP uplift, cannot exceed 2 ROCs/MWh. Generators which would otherwise be eligible for support under the RHI cannot receive support under that scheme if they use solid biomass to generate heat and electricity and are, or have been at any time, in receipt of support through the CHP uplift under the RO. The introduction of the RHI allows support for electricity to be provided separately from support for useful renewable heat. Generators could receive support under the RO for electricity generated, and support under the RHI for useful heat output. The Government considers that it would be prudent to split support in this way, but acknowledges that removing the CHP uplift from 1 April 2013 could disrupt projects being developed on the basis of receipt of the current level of support. The Government therefore proposes to retain the uplift and the 2 ROCs/MWh cap on the total level of support. The requirement for generators to be certified under the CHP Quality Assurance Standard in order to benefit from the uplift will continue to apply. A transition period, running from 1 April 2013 to 31 March 2015 would give developers seeking accreditation or adding new capacity during that period a one-off choice between support via the CHP uplift under the RO and support under the RHI. Generators that elect to be supported through the CHP uplift will not be eligible for support under the RHI. Stations accredited prior to 1 April 2013 that already receive the CHP uplift will not be able to switch to support under the RHI. The Government also proposes to grandfather the CHP uplift from 1 April 2013 for stations accredited prior to that date, and from 1 April 2015 for stations accredited or adding capacity prior to that date that elect to receive support through the Herbert Smith LLP 8

14 CHP uplift. From 1 April 2015 onwards, the CHP uplift will not be available for newly accredited stations or additional capacity, support will only be provided through the RHI. From 1 April 2015 onwards, generators in receipt of the CHP uplift will be eligible to receive it until However, the current cap of 2 ROCs/MWh on the total level of support (including the uplift) will be decreased to 1.9 ROCs/MWh for 2015/16, and to 1.8 ROCs/MWh for Dedicated biomass with CHP The Government proposes to retain support for this band at the current level of 2 ROCs/MWh for stations accredited prior to 1 April 2015, from which point no further applications for accreditation or additional capacity will be accepted. The CHP uplift will be grandfathered as set out on the previous page. Dedicated energy crops with CHP The Government proposes to retain support for this band at the current level of 2 ROCs/MWh for stations accredited prior to 1 April 2015, from which point no further applications for accreditation or additional capacity will be accepted. The CHP uplift will be grandfathered as set out on the previous page and the decreasing CHP uplift cap dovetails with the decreasing levels of support for dedicated energy crops (see the next page for details of the Government's proposals on energy crops). Standard co-firing of biomass with CHP The Government proposes to retain support for this band at the current level of 1 ROC/MWh for stations accredited prior to 1 April 2015, from which point no further applications for accreditation or additional capacity will be accepted. The 0.5 ROCs/MWh CHP uplift will be grandfathered from 1 April 2013 (as the Government is not proposing to grandfather support for co-firing biomass only the CHP uplift would be grandfathered). Standard co-firing of energy crops with CHP The Government proposes to retain support for this band at the current level of 1 ROC/MWh for stations accredited prior to 1 April 2015, from which point no further applications for accreditation or additional capacity will be accepted. The 0.5 ROCs/MWh CHP uplift will be grandfathered from 1 April The 0.5 ROC/MWh energy crop uplift will also be grandfathered from 1 April 2013 (see the next page for details of the Government's proposals on energy crops). As the Government is not proposing to grandfather support for cofiring biomass only the uplifts would be grandfathered. Biomass conversion and enhanced co-firing with CHP The Government considers it unlikely that biomass conversion or enhanced co-firing of biomass with CHP will be developed prior to 1 April 2015, at which point the CHP uplift will not be available for stations that are not already accredited, but seeks views on whether the uplift should be available until the cut-off date. ACT and CHP The Government has invited views on whether the CHP uplift should be made available for ACT technologies and called for evidence on costing and deployment potential. Herbert Smith LLP 9

15 Anaerobic digestion with CHP The Government does not plan to introduce a new band for anaerobic digestion with CHP as anaerobic digestion receives, and under the proposals will continue to receive, the same level of support as the benchmark technology, offshore wind. Energy crops Under the RO, energy crops currently benefit from a 0.5 ROCs/MWh uplift over dedicated biomass and the cofiring of biomass. This uplift is not currently grandfathered, but the Government proposes to grandfather the total level of support for the energy crop bands, including the uplift, from 1 April At the same time, with effect from 1 April 2013, the Government proposes to narrow the definition of "energy crops" which will reduce the scope of the uplift. Currently, any crop planted after 31 December 1989 which is grown primarily for use as fuel is eligible for the uplift (to date the vast majority of crops used have been perennial crops such as miscanthus and willow). The Government considers there to be a risk that food crops could be grown specifically for use as fuel to benefit from the uplift, and therefore proposes that the uplift should only be available for the following non-food crops: short rotation coppice of the following species: o o o o o o o o o alder (Alnus); birch (Betula); hazel (Corylus avellana); ash (Fraxinus excelsior); lime (Tilia cordata); sweet chestnut (Castanea sativa); sycamore (Acer pseudoplatanus); willow (Salix); poplar (Populus); and perennial grasses of the species Miscanthus, Pancium or Phalaris. In addition, to benefit from the uplift these crops must have been planted after 31 December 1989 and grown primarily for use as fuel. This is a further tightening of the eligibility criteria for Miscanthus giganteus, Salix and Populus. Dedicated energy crops The Government proposes to provide the same level of support for dedicated energy crops as for offshore wind: 2 ROCs/MWh for the period 1 April 2013 to 31 March 2015, decreasing to 1.9 ROCs/MWh for 2015/16, and again to 1.8 ROCs/MWh for As set out above, support will be grandfathered at the level applicable on accreditation from 1 April 2013 onwards. Standard co-firing of energy crops The Government proposes to retain the current level of support of 1 ROC/MWh from 1 April 2013 onwards. The 0.5 ROC/MWh energy crop uplift would be grandfathered from that date (as the Government is not proposing to grandfather support for co-firing biomass only the uplift would be grandfathered). Herbert Smith LLP 10

16 Biomass conversion and enhanced co-firing The Government is minded to extend the energy crop uplift to the two new bands, but seeks evidence on costing and deployment to inform its decision-making. Next steps Developers of renewable projects and those trading in ROCs that may be affected by the proposed changes to the support levels should consider responding to the consultation to make sure their views are taken into account. DECC has requested responses by 12 January The consultation, Arup's report, and a consultation response form are available here. Impact by generation technology The table below summarises the impact of the policy measures on different generation technologies. Renewable technology Current level of support (ROCs/MWh) Proposed level of support (ROCs/MWh) Other changes Advanced gasification 2 2 from 1 April 2013 to 31 March 2015; 1.9 in 2015/16 and 1.8 in Advanced pyrolysis 2 2 from 1 April 2013 to 31 March 2015; 1.9 in 2015/16 and 1.8 in Combined with the other gasification and pyrolysis bands and split into two new ACT bands. Combined with the other gasification and pyrolysis bands and split into two new ACT bands. Anaerobic digestion 2 2 from 1 April 2013 to 31 March 2015; 1.9 in 2015/16 and 1.8 in Biomass conversion Currently supported as dedicated biomass at a level of New band. Co-firing of biomass Changes proposed to add fossil-derived bioliquids. Co-firing of biomass (enhanced) Currently supported as standard co-firing at a level of New band. Co-firing of biomass with CHP 1 1 Changes proposed to add fossil-derived bioliquids, exclude enhanced co-firing, and to stop accepting accreditation applications from 1 April Herbert Smith LLP 11

17 Renewable technology Current level of support (ROCs/MWh) Proposed level of support (ROCs/MWh) Other changes Co-firing of energy crops Co-firing of energy crops with CHP 1 1 Changes proposed to the definition of "energy crops" and to exclude enhanced cofiring Changes proposed to the definition of "energy crops", and to stop accepting accreditation applications from 1 April Dedicated biomass until 31 March 2016; 1.4 from 1 April 2016 Changes proposed to exclude biomass conversions and to add fossil-derived bioliquids. Dedicated energy crops Dedicated biomass with CHP Dedicated energy crops with CHP Energy from waste with CHP 2 2 from 1 April 2013 to 31 March 2015; 1.9 in 2015/16 and 1.8 in 2 2 from 1 April 2013 to 31 March from 1 April 2013 to 31 March Changes proposed to the definition of "energy crops", and to exclude biomass conversion. Changes proposed to add fossil-derived bioliquids, exclude biomass conversion, and to stop accepting accreditation applications from 1 April Changes proposed to add fossil-derived bioliquids, exclude biomass conversion, and to stop accepting accreditation applications from 1 April Geothermal 2 2 from 1 April 2013 to 31 March 2015; 1.9 in 2015/16 and 1.8 in Geopressure 1 1 Hydro-electric Landfill gas Microgeneration 2 2 from 1 April 2013 to 31 March 2015; 1.9 in 2015/16 and 1.8 in Herbert Smith LLP 12