Uncertainty over UK ROCs damages investor confidence

Recent changes to the allocation of Renewable Obligation Certificates by the UK DECC has left industry participants wary about their long-term value, finds Katie Holliday

In December 2009 the UK government’s Department of Energy and Climate Change (DECC) confirmed that the UK’s Renewable Obligation (RO) scheme would be extended to 2037, but concerns over regulatory risk in the UK renewables market could lead to project cancellations, say experts.

The RO is the government’s principal incentive scheme to generate renewable energy in the UK and was first introduced in 2001. Under the RO, renewable producers are issued with Renewable Obligation Certificates (ROCs) for electricity produced from eligible sources. Since April 2009, all UK electricity suppliers must show that 9.1% of their electricity has been produced from renewables.

However, the ROCs market has been criticised in recent years for allowing renewable generators to make excessive profits from both the sale of electricity and ROCs combined, particularly when the price of electricity is high.

In response, DECC has drafted plans for a potential price stabilisation mechanism, designed to ensure the price of ROCs stay within a specific range. But whether or not this mechanism will be introduced was not addressed in DECC’s most recent response to the 2009 consultation on the RO and an absence of clarity is making industry participants nervous.

According to Tom Murley, head of the renewables team at private equity firm HgCapital, industry participants are worried that a price stabilisation mechanism could damage the market. “Everyone I talk to opposes this, and thinks it would essentially turn the RO into a feed-in tariff,” says Murley. “I think it would be a bad signal to the market in terms of regulatory stability,” he adds.

And a lack of regulatory clarity in the market is deterring investors, according to Tim Warham, assistant director at global accountancy firm Deloitte. “The whole scheme is deliberately being changed to resemble a feed-in tariff and project developers are worried about whether their projects will receive the ROCs they were entitled to under the scheme when they are constructed,” Warham says.

According to Warham, uncertainty over the format of RO regulation could even lead to project cancellations. “If this doubt is not resolved, then all sorts of projects are going to be cancelled because they have no security about the ROC revenue they will receive in the future,” he says. “There’s a perceived regulatory risk that at any moment the rules could be changed and suddenly your ROCs are worthless or your project is worthless. People need stability,” he adds.

In addition to extending the RO to 2037, DECC has given new projects 20 years of support and also increased ‘headroom’ from 8% to 10%, with yearly increments of 0.5%. Headroom ensures that there is a sufficient gap between the anticipated amount of ROCs generated and the demand from utilities. There had been concerns that a lack of a sufficient gap between supply and demand would cause the price of ROCs to crash.

One ROC is issued for each megawatt hour (MWh) of renewable electricity that is produced. In April 2009, the government introduced banding, which changed the ROC allocation to give more expensive renewable technologies, such as offshore wind farms and biomass plants, an increased amount of ROCs per MWh. Offshore wind now receives 1.5 ROCs per MWh, while biomass combined heat and power plants receive two ROCs per MWh.