Renewable energy trading within the EU: DECC issues a Call for Evidence

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1 DECC Call for Evidence re. EU Renewable Energy Trading Sample Renewable energy trading within the EU: DECC issues a Call for Evidence The UK's Department of Energy and Climate Change (DECC) has published a Call for Evidence on Renewable Energy Trading, seeking views on the practicalities of how the flexibility mechanisms in the Renewable Energy Directive (RED) can be used to facilitate trading in renewable energy between EU Member States and support joint renewable energy projects. Use of the flexibility mechanisms is likely to become increasingly prevalent as the integration of European energy markets progresses and the 2020 renewables target deadline approaches. Participants in the renewable energy sector should follow developments closely so that they are well positioned to take advantage of any opportunities that could arise should the UK Government, or the Governments of other Member States, pursue the use of such mechanisms. Interested parties may also wish to respond to the Call for Evidence to ensure that their views are heard. Flexibility mechanisms under the RED The RED assumes that the EU Member State in which renewable energy is generated owns the "credit" or "value" attached to it so that it counts towards the achievement of that Member State's renewable energy target (even if the energy is consumed elsewhere). The RED contains three broad types of flexibility mechanism that can be used by Member States to transfer or obtain additional renewable "credit" to help them achieve their targets: statistical transfers - trading of renewable "credit" between Member States; joint projects - collaboration between two or more Member States (or between a Member State and a non-eu country) on renewable energy projects with the "value" being shared between them; and joint support schemes - two or more Member States co-operating on incentives for renewable energy production and sharing the "value". While the RED creates these mechanisms, Member States are responsible for putting in place the detailed practical arrangements to make them work in practice. DECC is not aware of any examples of statistical transfer or joint projects that have taken place, and therefore considerable uncertainty surrounds how the mechanisms could work in practice. DECC is however aware of emerging evidence of a joint (certificate based) support scheme between Sweden and Norway, which was introduced in January Share with a colleague 30 April 2012 London Contact Mark Newbery Partner Silke Goldberg Senior 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 Page 1

2 DECC Call for Evidence re. EU Renewable Energy Trading Sample The UK is currently involved in a number of strands of work with other Member States, the British Irish Council, and through the North Seas Countries' Offshore Grid Initiative, to better understand how the flexibility mechanisms could be used in practice. Statistical transfers Statistical transfers allow an EU Member State to buy or sell a renewable energy "credit" from another Member State without having to physically transfer that unit of energy. Similar mechanisms involving "virtual" credits exist already (the EU ETS, and the Clean Development Mechanism under the Kyoto Protocol), but not specifically for renewable energy. The Member State selling the credit would be expected to be able to demonstrate that the transfer would not affect its ability to meet its 2020 target. DECC states that the UK could either buy or sell credits. DECC believes that implementing a statistical transfer should be relatively straightforward and would simply require an agreement between the Governments of two or more Member States to buy or sell their renewable energy "credits" (DECC does not anticipate any private sector involvement), and for transfers to be notified to the European Commission. DECC expects the 2013 reporting against the first interim renewable energy target to act as a trigger for Member States to start considering trading in renewable energy more seriously, at which point the potential for a market to develop will become clearer. DECC notes that currently there is no market or platform for trading renewable energy "credits" and that it remains to be seen whether if a market develops, this would be a buyers' or sellers' market (if there is an overall shortfall against the 2020 EU renewable energy targets sellers may be able to request a price above the cost of producing the energy, or if there is an overall surplus the price sellers can command may be low). DECC notes that a disadvantage of using the statistical transfer mechanism could be the risk of non-compliance with the 2020 targets: for example, if a Member State buys a credit from another Member State that is subsequently unable to deliver that credit then either or both Member States could be in breach of their 2020 targets. The Call for Evidence does not elaborate on precisely what scenario DECC is contemplating in this case, but one possibility is that the Government is alluding to a situation where "credits" are sold by a Member State which expects to have a surplus, but then does not (and could in fact have a deficit), for example because planned renewable energy projects are not delivered, or do not generate as much renewable energy as anticipated. DECC believes that this risk could be allocated by negotiation between the relevant Member States and reflected in the terms of the sale and purchase agreement for the credits. Joint projects The RED allows new renewable energy projects (onshore or offshore) located in one Member State to be financed jointly with another Member State and the "renewable value" of the renewable energy generated to be split between them. This form of trading may take place without any accompanying physical flows of energy (but if there is no physical flow DECC believes that the transfer would be more likely to take the form of a statistical transfer). Joint projects can also occur between a Member State and a non-eu country (including Crown Dependencies such as the Channel Islands Jersey and Guernsey, and the Isle of Man) but only if the renewable energy produced from a project located in a non-eu country is imported into the EU. DECC contemplates joint projects being longer term arrangements than statistical transfers (which could be made on a one-off basis). Participants in the European renewable energy market should be note that DECC also believes there is a role for the private sector in delivering joint projects, which could result in commercial opportunities. For joint projects involving a non-eu country, DECC suggests that the UK would agree to acquire all (or part) of the renewable energy "credit" attached to that project to count toward its 2020 target. In that case, an amount of renewable energy (produced from the project, or elsewhere in the non-eu host country) equivalent to the amount of "credit" purchased would need to be delivered to the EU. DECC acknowledges that there are legal and regulatory issues that would need to be addressed for such projects (including agreement on the applicable regulatory regime, rules for the audit of renewable energy generation and consumption, and the potential for over-compensation of State Aid). The precise nature of such issues will vary according to the location of the joint project, the type of renewable technology deployed, and whether the renewable energy produced is consumed by the country hosting the project, an importing state or a mixture of the two (ie, shared). Page 2

3 DECC Call for Evidence re. EU Renewable Energy Trading Sample Joint support schemes Joint support schemes involve two or more EU Member States agreeing to cooperate on all or some of the support schemes they use to incentivise the deployment of renewable energy and sharing the "renewable value" between them. While DECC is aware of one such scheme (between Sweden and Norway), the UK Government does not believe it is appropriate to look into joint support schemes further at the moment. DECC's view is that it is important for the UK to retain control over the domestic support mechanisms for renewables because they are partially funded by UK consumers through tax or levies on energy bills. DECC seeks views on how the mechanisms could be used While the flexibility mechanisms in the RED permit trading in renewable energy, DECC's Call for Evidence suggests that it is currently unclear how trades could be made, how much surplus renewable energy "credit" there is to be traded in the run up to 2020 and beyond, and how traded renewable energy would be priced. These matters, and the practicalities of any trading arrangements that could be introduced, are not proscribed in the RED and are left to Member States to determine. DECC's analysis of the National Renewable Energy Action Plans submitted to the European Commission by Member States in 2010 show that only a limited number of countries forsee a need to trade (as a result of having either a surplus or deficit in the amount of renewable energy required to meet their 2020 target). DECC's Call for Evidence therefore seeks views to help the Government to understand: the availability and potential for trading renewable energy with other EU Member States (and non-eu countries), including the ability to export renewable energy or renewable energy "credits"; the potential costs, benefits and risks to the UK of using the flexibility mechanisms in the RED to trade renewable energy; the issues and barriers that will need to be addressed to facilitate trading in renewable energy. DECC states that it is particularly interested in receiving views on the potential for the UK to be involved in joint renewable energy projects outside of the UK, and requests thoughts on the possible locations for such projects, the renewable technology types that could be deployed, the level of capacity that could be generated, and likely the capital and operating costs for such projects. Why is DECC considering using the mechanisms? The UK Renewable Energy Roadmap, published in July 2011 (see our briefing on the Roadmap for more details), gave three potential reasons for the UK to collaborate with other European countries on renewable energy deployment: cost effectiveness: if domestic costs do not come down as the Government hopes and cheaper alternative opportunities arise in other countries, the UK could benefit from these by "trading" in renewable energy; commercial opportunities: the UK has some of the best offshore wind resources in the world and could "export" energy generated to neighbouring countries; and contingency: there is ongoing uncertainty regarding future levels of energy demand, the availability of sustainable biofuels and the wider impacts of "certain technologies" (the Call for Evidence does not state what these technologies are), and the ability to "import" renewable energy could help the UK to manage these risks and ensure compliance with renewable energy targets. The Roadmap also set out the Government's intention to import and export renewable energy using the flexibility mechanisms in the RED for the benefit of the UK. As well as meeting this previously declared intention, DECC states that its present Call for Evidence is also should also be seen within the context of wider work to create an integrated EU energy market, mandated by existing European legislation, including the EU Third Energy Package (for more information on the Package see our European Energy Handbook). In the Call for Evidence DECC states that recent analysis demonstrates that the UK can meet its legally binding target of sourcing 15% of its energy consumption from renewable sources by 2020 "entirely through domestic action". However, the Times recently reported that research commissioned by Greenpeace suggests that the UK will not meet its target given current rates of investment. Page 3

4 DECC Call for Evidence re. EU Renewable Energy Trading Sample While the Government will be hopeful that its plans for Electricity Market Reform (see our bulletin on DECC's Electricity Market Reform Technical Update for more information) will incentivse sufficient investment to prove the doubters wrong, the flexibility mechanisms in the RED could provide a handy safety net as well as presenting commercial opportunities for the UK. Next steps Interested parties should consider responding to the Call for Evidence (available here) before it closes on 11 June 2011 to make sure their views are heard. Responses should be submitted by to tradingresponses@decc.gsi.gov.uk, and DECC has requested that respondents seek to address the specific questions posed in the Call for Evidence. DECC has undertaken to consider the responses it receives carefully before reaching a policy decision on which flexibility mechanisms the UK should use, and in what manner. DECC will then look to introduce primary and secondary legislation as soon as possible (subject to parliamentary time being available, and the will of Parliament), and will continue to liaise with counterparts across the EU to monitor developments. 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 4

5 Energy and Environment e-bulletin 22 July 2011 The UK Renewable Energy Roadmap Last week, alongside its Electricity Market Reform White Paper (see our briefing for more details), the Government published the UK Renewable Energy Roadmap. The Roadmap sets out the Government's plans to encourage the deployment of eight types of renewable technology that the Government believes have the greatest potential for use in the UK by Our briefing on the Roadmap is available here. To subscribe or unsubscribe To enquire about further publications, or to unsubscribe from this e-bulletin, please us, or visit the Herbert Smith website 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, Gleiss Lutz and Stibbe are three independent firms which have a formal alliance. Herbert Smith LLP 2011 Contacts Mark Newbery Partner Henry Davey Partner Louise Moore Partner Silke Goldberg Senior associate Sarah Hopkins Associate Related links Herbert Smith website Energy and natural resources homepage Energy and natural resources publications Herbert Smith environment homepage Herbert Smith environment publications Herbert Smith news Page 1

6 This new guide provides an in-depth survey of current issues in the energy sector in 41 European jurisdictions The review includes a summary of each legal and regulatory energy framework and analyses issues such as industry structure, Third Party Access, the framework applying to use of system both at the transmission and distribution levels, market entry, nuclear power and cross border interconnection. Special attention is given to the status of transposition and implementation of the Third Energy Package and the Climate Change Package into national law. Although most elements of the Third Energy Package and Climate Change Package have now entered into force, they are slow to find their way onto national statute books. The Commission has highlighted its intention to prioritise the implementation the applicable energy market legislation and has commenced numerous infringement proceedings in this respect. Whilst these packages are not yet fully implemented in all EU member states, further European measures have been announced and or adopted: The European Commission has been busy over the last twelve months and has put forward key initiatives for the European energy market, including in relation to the safety of offshore oil and gas operations, the improved co-ordination of the EU's external energy policy, and the strengthening of Europe's energy networks. As 2012 will also see the coming into force of the unbundling provisions of the Third Energy Package, we can expect further lively debate and changes in the European energy sector in the year ahead. If you would like to obtain a chapter, in Acrobat pdf format, please complete the details below and press 'submit'. Your feedback If you have any comments or feedback please contact: Mark Newbery Partner, London Silke Goldberg Senior associate, Paris Related links European Union European Union (in Russian) Albania Austria Belgium Bosnia and Herzegovnia Bulgaria Croatia Cyprus Latvia Lithuania Luxembourg Former Yugoslav Republic of Macedonia Malta Montenegro The Netherlands Norway Poland Herbert Smith website Energy and natural resources homepage Energy and natural resources publications Data privacy Please note: if you request Herbert Smith publications and other information, your details will be added to our contacts database and will be treated as confidential.

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8 Energy e-bulletin 16 December 2011 Electricity Market Reform: Technical Update Yesterday the Department of Energy and Climate Change (DECC) published a Technical Update to the Electricity Market Reform White Paper published in July 2011 (see our briefing for further details on the White Paper). The Update, which Government had committed in the White Paper to releasing "around the turn of the year", reveals that the electricity transmission system operator, National Grid, will be responsible for administering both the feed-in tariffs based on contracts for differences (FiT CfDs) and the capacity mechanism, which will take the form of a marketwide capacity market. While the involvement of National Grid in the capacity mechanism is unremarkable given its role as system operator, its selection to deliver the FiT CfDs was less predictable. The Update also provides further detail for developers on the eligibility criteria and process for negotiating transitional arrangements, which the Government hopes will prevent an investment hiatus while the legislative framework for the reforms is put in place, and gives further detail on how the Renewables Obligation will function from 2027 onwards, when the price of a Renewables Obligation Certificate (ROC) will be fixed. The Update is, as Chris Huhne, Secretary of State for Energy and Climate Change, said "a milestone in delivering the reforms", but it is also clear that it is but one of many. Institutional framework The delivery body will be National Grid Contacts Mark Newbery Partner Julia Pyke Partner Lynda Schlich Professional support consultant Hannah Roscoe Associate Related links Herbert Smith website Energy and natural resources homepage Energy and natural resources publications Herbert Smith environment homepage Herbert Smith environment publications Herbert Smith news The White Paper set out a number of options for delivery of the FiT CfDs and the capacity mechanism, including the use of a new Executive Agency or Non- Departmental Public Body, an existing public body, a new public corporation or an existing private sector body. The Government has concluded that the transmission system operator, National Grid, best meets the criteria set out in the White Paper, which included appropriate levels of accountability, independence, creditworthiness, skills and value for money. Roles and responsibilities The Government will set the policy approach and objectives, take final decisions on key rules and parameters, and monitor National Grid's performance against the objectives set for it. National Grid will provide independent, expert advice to the Government on key rules and parameters and will administer both the capacity market and the FiT CfDs. Ofgem may also provide advice to the Government and will continue in its role as the independent regulator of the electricity sector, including monitoring generator Page 1

9 and supplier compliance with any licence conditions or industry codes that may be used to deliver the reforms. The legislative framework Primary and secondary legislation and licence changes are likely to be used to establish and govern the functions of National Grid. Provisions will be made allowing objectives, methods and principles to be set so that National Grid can exercise its functions and adminster the FiT CfDs and the capacity mechanism. Once the key rules and parameters of the FiT CfDs and the capacity market have been established, the Government will set these out within a legislative framework, including the publication of a delivery plan, which will be reviewed, and could be revised, for example, on a five yearly basis. The plan could comprise several documents, including a separate document for the FiT CfDs and the capacity market, but the Government has stressed that any interaction between the two mechanisms would be taken into account. National Grid will report to the Government annually on its performance against the delivery plan and may advise on whether changes to elements of the design of the FiT CfDs or the capacity market are required. The delivery plan will include the Government's vision and objectives, enduring design elements of the FiT CfD and capacity market mechanisms (such as eligibility criteria, rules and parameters governing changes to the detailed contract terms of the FiT CfDs, and the auction procedure for the capacity market), and design elements that may be revised regularly (but would not apply retrospectively, such as how much capacity to contract for under the capacity market). Reconciling data and managing FiT CfD payments To ensure creditworthiness of the FiT CfDs, the Government will establish a "robust and stable legal framework" which will adhere to the following principles: There should not be any unilateral changes to the terms of the FiT CfDs once signed, except where the circumstances for doing so are explicitly defined in advance: The Government intends to provide the same level of safeguards as would be available under any contract. Further details on the circumstances in which changes could be made to the contractual terms will be set out in the technical detail on the FiT CfDs when this is published in early 2012, but the Government envisages the circumstances including changes necessary to take account of changing market conditions, such as amending the reference price. Given the critical importance of the reference price to the revenue flows under the FiT CfDs, and therefore the commercial viability of the projects they support, developers are likely to take great interest in how the Government will be able to change the reference price. Payments will flow from the counterparty (or counterparties) to generators (or vice versa) as defined in the FiT CfD. These contractual rights will be supported by primary and secondary legislation and generation and supply licences: The Government believes this will provide a strong basis for investments, but this is likely to depend on the extent to which licence conditions and codes can provide an acceptable level of regulatory certainty for investors given that under the current regulatory regime they can be modified by Ofgem, which is subject to additional duties under EU law by virtue of its role as the National Regulatory Authority for Great Britain. The system will limit exposure to default through a settlement mechanism prescribed in law and a timely process for the transfer of obligations in the event of counterparty or supplier default: The certainty that this mechanism could provide for developers is likely to be welcomed, but further detail on the Government's proposals will be needed before the effectiveness of the credit protection afforded can be assessed. The Government anticipates that the cost of delivering the FiT CfDs will be borne by suppliers, who will be free to pass these costs on to consumers. Further details on the payment models will be published in early 2012, but the Government has suggested that there may be a role for Elexon, a subsidiary of National Grid plc, the Balancing and Settlement Code Company. Monitoring compliance and enforcement National Grid will be accountable to the Government through the delivery plan, annual reports and performance review meetings. Ofgem will regulate National Page 2

10 Grid's costs to ensure that they are efficient and provide value for money for consumers. Ofgem may integrate the regulation of National Grid's role in delivering the FiT CfDs and the capacity market into the regulatory framework that governs National Grid in its role as the transmission system operator. Ofgem will also provide advice on how any potential conflicts of interest arising by virtue of National Grid's existing functions and businesses (including its role as transmission system owner for England and Wales, its subsidiaries involvment in interconnection and offshore transmission, and its potential role as a carbon capture and storage (CCS) infrastructure owner) can be mitigated. Responsibility for ensuring that suppliers and generators meet their obligations may rest with National Grid or Ofgem "as appropriate". The Government has stated that obligations under the FiT CfDs will be principally enforceable as contracts, but Ofgem will contine to be responsible for monitoring and enforcing licence conditions to the extent that these are used to implement the arrangements. Ensuring security of supply The Government expects that tighter capacity margins and the expected increase in the proportion of intermittent generation in the UK's energy mix will lead to more volatile wholesale electricity prices. The Government is concerned that this will make it less certain that generators will be able to secure revenue to pay for capacity through the price received in the electricity market and thinks that this could lead to market failure as a result of a lack of investment in flexible plant. Against this backdrop, the capacity mechanism is intended to interact with other proposed non-generation measure (such as demand side response) to secure UK electricity supply. The Government was considering various models for the capacity mechanism and has decided on a capacity market. The capacity market is intended to ensure security of supply by enabling providers of capacity to receive a steady income from "availability payments" in addition from income received through the market. The Government thinks that this will incentivise the required investment in reliable capacity. The capacity market will be based on the following principles: the Government will determine the volume of capacity to be contracted (based on advice from National Grid and possibly other technical experts). The Government envisages that determinations may need to be made some years ahead in order to enable delivery of new capacity; capacity will be auctioned some time in advance of the delivery year; providers of capacity offer the quantity of reliable capacity available at auctions run by National Grid, the System Operator; successful bidders receive availability payments during the delivery year for providing reliable capacity. Any failure to provide the contracted capacity will result in penalties; and costs of capacity will be shared among suppliers and ultimately passed on to consumers. The Government hopes that the capacity market will have little impact on prices that consumers will have to pay because it will result in the stabilisation of wholesale electricity prices. Key issues that have not been fully addressed in the Technical Update include: incentives to deliver and rules on auction participation: the Government is considering a range of options from reliance on the financial penalties only to act as an incentive to ensure that the contracted capacity is provided, to a central determination of how much capacity providers can offer based on a physical demonstration of the ability to deliver. Feedback at stakeholder events run by DECC in August and September 2011 suggested a general preference from industry for the commitments to be physically backed in some way; whether the auction process will treat new and existing capacity differently; interaction with other mechanisms such as demand side response, interconnected capacity and storage, low carbon support mechanisms and short term balancing; and the detailed terms on which generators will commit to providing capacity. The Government plans to progress the legislative framework and detailed rules for the capacity market now so that it is ready for delivery when required. However, Ministers will set the date for the first capacity auctions at a later stage based on estimates of future security of supply. Page 3

11 Transitional arrangements Developers meeting the eligibility criteria set out in the Technical Update will be able to apply for some form of enabling 'product' or arrangements ahead of the implementation of FiT CfDs. These transitional arrangements are intended to enable developers to take early investment decisions so that project development is not delayed while the reforms are being implemented. The Technical Update is very short on detail regarding the form that these arrangements will take. Indeed, developers are cautioned not to proceed on the basis that are particular form of comfort that they may seek will ultimately be made available. Options will be considered further by Government and there will be a separate update on the form of transitional arrangements in spring Projects eligible for comfort (in whatever form that eventually takes) are those that: are capable of benefiting from the proposed FiT CfDs; have a real prospect of cancellation, significant risk or delay without some form of comfort from Government; plans to start generating after 2016; and are not eligible for the Renewables Obligation or are not likely to be accredited to receive ROCs by Nuclear, large scale biomass projects, and very large scale renewables projects are likely to be the principal forms of generation that will meet these eligibility criteria. Separate requirements may be detailed for early stage CCS projects as part of the Government s communications on its CCS programme selection process. Developers of eligible projects do not, however, have any certainty that transitional arrangements, in the form desired by the developer or otherwise, will be granted. The final decision of whether to offer such arrangements to any particular developer will rest with Ministers. The timeline for putting in place the transitional arrangements will be clarifiedin a further update which will be published in spring The Technical Update makes it clear that transitional arrangements will only be offered after new primary legislation has come into force, with such legislation expected to be ready for Royal Assent by spring 2013, subject to Parliamentary time and the "will of Parliament". The Renewables Obligation post 2027 The Government recognises that significant investments have been made under the current Renewables Obligation and sets out details of the Government's proposal for transitioning those arrangements. The Government proposals set out a process to "vintage" the Renewables Obligation and move to a fixed ROC system between 2027 and The proposals are intended to: give investors certainty over ROC income up to 2037; enable more regular access to income from ROCs; and provide confidence about the level of income from ROCs in the period Consistent with previous statements, the Government proposes that renewable generators will be able to choose between accreditation under the Renewables Obligation and support via a FiT CfD until After 2017 there will be a period of transition to the fixed ROC system in order to minimise the impact on existing Power Purchase Agreements (PPAs) (the majority of which expire before 2027). The Government's proposed transition process is that: from 2017 the Renewables Obligation will be closed to new generators; all technologies benefitting from grandfathering as at 31 March 2017 will be grandfathered in the "vintaged" Renewables Obligation; between 2017 and 2027, the Government will calculate the level of the supplier obligation by reference to headroom only (the Government will estimate the expected renewables generation each year, use this figure to derive the number of ROCs that will be issued and add headroom of 10%); and in 2027 the price of a ROC will be fixed, based on the 2027 buyout price. Page 4

12 The fixed ROC price will remain in place to 2037 subject to indexation linked to inflation. The Technical Update gives new details on the payment model that will be used for the fixed ROC system. The Government has decided to use a supplier levy which will be administered by a "Fixed ROC Institution" (which could be Ofgem or an alternative institution appointed by the Secretary of State). Under this model, generators will have the choice of selling their ROCs to a third party or to the Fixed ROC Institution. The Fixed ROC Institution will have a legal obligation to buy ROCs offered to it by generators at the fixed price (subject to certain conditions to be specified). The Fixed ROC Institution will recoup its costs through a levy on suppliers. The levy will be payable by suppliers each quarter and spread across suppliers in line with their share of the market. The Government's choice was based on the following factors: stability: a supplier levy model removes the risk of ROC price crash and will enable generators to realise the full value of the ROC; transition: it will be simple to move from the current Renewables Obligation system to the new model; administrative burden: There will be administrative burdens for generators, suppliers and Government (particularly smaller suppliers used to 'buying out' once a year who will now be levied more frequently). However, generators will have the option of dealing with a single ROC buyer; and investment impact: the Government hopes that maintaining the market will make it more likely that PPA and finance structures can continue to be used by renewable generators. The Government points out that as generators can sell to third parties if they choose the 'portability' of the current ROC will be maintained. This should allow generators to maintain a monthly income from selling ROCs either to a supplier or a third party aggregator. It is also intended that there will be provisions for mutualisation where there is a shortfall in the levy due to a supplier becoming insolvent. Detailed regulations for the fixed ROC scheme will be put out for consultation and the arrangements remain subject to State aid and Parliamentary approval. Next steps Annoucement of the outcome of Ofgem's liquidity review - December 2011/January 2012 Publication of the Government's response to the Renewables Obligation banding review consultation - Spring 2012 An update on the technical details of the FiT CfDs and the emissions performance standard - Early 2012 Introduction of primary legislation and publication of an EMR policy update Spring 2012 Completion of DECC's assessment of electricity demand - Summer 2012 Publication of an initial electricity system policy document - Summer 2012 Electricity Market Reform legislation to reach the statute book - Spring 2013 The Technical Update, page 45 of which includes a diagram showing an indicative timeline for implementation of all the reform and transition proposals, is available here. To subscribe or unsubscribe To enquire about further publications, or to unsubscribe from this e-bulletin, please us, or visit the Herbert Smith website 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, Gleiss Lutz and Stibbe are three independent firms which have a formal alliance. Herbert Smith LLP 2011 Page 5

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