Cheat Sheet: ROCs

BusinessGreen takes a microscope to the government's labyrinthine renewable energy subsidy scheme

Rocks?
No, ROCs. Renewable Obligation Certificates.

What are they then?
They are basically an incentive or subsidy mechanism for the UK's renewable energy sector.

Why do they need incentives? Doesn’t everyone want green energy?
Well, yes demand for clean energy is both booming and significantly exceeding supply, but it is currently much more expensive to develop energy from renewable sources than it is from burning coal and gas. Hence the energy sector needs to be subsidised if it is to invest in these technologies.

So how do these certificates work?
Under the Utilities Act 2000 the government has the power to issue a Renewable Obligation Order requiring electricity suppliers to supply a certain proportion of their energy from renewable sources. To prove they have got their energy from renewable sources they have to buy ROCs, which are issued to generators of renewable energy, alongside any renewable energy they source.

How does that work as an incentive?
Bear with me, anyone who has anything to do with ROCs admits it is a pretty labyrinthine system. According to OFGEM, the electricity suppliers have to buy both the energy at the market price and the ROC, so a coal-fired power station can sell a mega-watt hour for about £30, but a wind farm operator can sell the unit of electricity for around £30 and the accompanying ROC, which sells for around £40. As a result they can make between £70 and £80 per megawatt hour, making green energy much more commercially viable.

How much energy are suppliers obliged to get from renewable sources?
The first order was issued in 2002 requiring suppliers to source three per cent of their electricity from renewables and the proportion has since risen each year. For 2007-2008 the target is 7.9 percent and it is set to climb through until suppliers are obliged to generate 15.4 percent of energy from renewable sources by 2015.

What happens if suppliers don't hit their targets? Fines I presume.
Not exactly. If you don't have the requisite number of ROCs you have to make up any shortfall by paying £33.24 for each ROC you are missing into a buyout fund. The fund is then divvied up between the suppliers in proportion to how many ROCs they had; so if a company submitted five per cent of all ROCs presented to OFCOM they get five percent of the buy out fund back, providing an extra incentive for them to hit their ROC targets.

Right, I think I've got it. So is it working?
Well, if the measure of success is the industry meeting its renewables obligation targets then no, it's not working. In England and Wales in 2005/06 only 76 per cent of the obligation was met by ROCs, while in Scotland 86 per cent of the ROC's target was met. However, Ofgem insists this is not a problem as the targets are deliberately tough in order to ensure there is a shortfall and that suppliers are forced to pay into the buy out fund, creating a greater incentive for investment in renewable energy.

So the ROCs are working?
They are certainly driving investment, but they are not particularly well-liked and there are calls for changes. Ofgem wants a more flexible scheme that ensures suppliers, and hence customers, no longer have to pay so much for ROCs when electricity prices are already high, a situation that has given many renewable generators a greater windfall than expected. Meanwhile, many clean tech firms want a more sophisticated scheme providing tiered support for different technologies. Currently, onshore wind farms have benefited hugely from ROCs despite the fact they are fast approaching commercial-viability regardless of any incentives, while offshore wind farms and tidal and wave energy, which boast the potential to generate more energy have struggled to take off and require more financial support. Others argue the German feed-in tariff (FIT), where suppliers pay a higher price for renewable energy fed into the grid, would provide a more effective subsidy covering both large scale renewables projects and micro-generation.

Are we going to see changes then?
The new energy bill means so-called wet ROCs for wave and tidal energy will increase in price. However, more radical changes such as a shift to a FIT approach appear unlikely with the government maintaining that the industry needs a degree of stability and further changes to the incentive system would be counterproductive. It looks like ROCS will remain with us for some years to come.