Green Energy – Generators, Tariffs And Suppliers

[Derek_Parkinson]

Greater efficiency will only get us part of the way to a low carbon economy. To make the progressive cuts in carbon emissions we need while laying the foundations for future economic prosperity something more is required – low carbon energy supplies. In this article we will look at the supply options available today for large companies.

Such organisations will typically be customers of the so-called “Big Six” suppliers - EDF, British gas, E.ON, npower, Scottish and Southern energy, and Scottish power. These are all mandated by government to include a proportion of energy from renewable sources in the overall mix delivered to customers.

Under the Renewables Obligation, as a bare minimum the Big Six must derive 8% of their energy from these sources, or pay penalties. They prove this by holding Renewables Obligation Certificates (ROCs), which are tradeable and so can be bought and sold on the open market as required. All well and good, except that the original policy framework for certifying renewable energy allowed and perhaps encouraged poor practices. In the simplest scenarios, suppliers were able to badge supply contracts as “green tariffs” when their energy mix was no better than the minimum required for any regular supply contract. Accounting procedures were flawed too and suspicion grew that suppliers were able to sell renewable energy “twice over”.

“It was a bit of a muddle. I think it's fair to say that some suppliers were less than honest about what they were doing,” says Virginia Graham, an advisor to Global Action Plan, and author of a book on this topic. “The system of certification is somewhat arcane, but I expect that legitimate green tariffs on offer will increase once there is greater clarity.”

“This issue of repackaging was raised by Virginia Graham a few years ago and we have been working with the industry on new guidelines. In particular we have been working on improving accreditation, and also additionality – being able to demonstrate an offset over and above what is required – for green tariffs,” an Ofgem spokesperson told Low Carbon Board Report.

Independent players emerge

Meanwhile, demand for green tariffs is likely to increase. “A benefit for businesses would be that if you can demonstrate that you are using renewable energy you could get exemptions from the Climate Change Levy,” says Graham. Introduced in 2001, the Climate Change Levy is automatically added to the energy bills of commercial users, and although there is no legal requirement to do so, it often appears as a separate item on bills.

Some entrepreneurs have seen this and other incentives as opening a market for independent suppliers. At present, the most notable operators are Ecotricity and Good Energy, the latter being the only UK supplier committed to 100% renewable sources. As impressive as these efforts undoubtedly are, many independents are focused on serving the domestic and small business market rather than large companies.

For these, a new breed of business partner such as Utilyx may be an option. The company, which describes itself as an energy management consultancy, brokers power purchase agreements on behalf of FTSE 100 companies such as Sainsbury's and Tarmac. In effect, Utilyx can cut out the traditional supplier, bringing the end user and the generator of renewable together to agree a long-term supply contract.

In the case of Sainsbury's this meant a ten-year deal to buy energy from A7 Lochhead Ltd, an independent wind farm developer based in Glasgow. The agreement, finalised in 2008, was the first time a UK organisation of this size had made a deal directly with a generator rather than a traditional supplier. Last month, Utilyx brokered an agreement for Tarmac to become the first business in its sector to sign a similar agreement, under which it will buy discounted renewable energy directly from Nuon Renewables – now part of Vattenfall Wind Power UK – and sell it back to its agreed retailer, npower.

“There are different business benefits from doing this, depending on which sector a company is in,” says Utilyx Commercial Director Ashley Daffin. “For companies that are already committed to greener energy it enables them to say where their energy comes from and it can become part of their marketing message – putting pictures of the windfarm on brochures and promotional material, and so on.”

“But often it's more than that. It's also about concerns over the security of supply – long-term price stability and the future of power generation in the UK. For Tarmac, yes it was partly about protecting the brand, but there is a lot of concern in this space about the cumulative effect of carbon pricing, extra levies and regulatory levers on the all-in energy price,” he says.

As well as spotting a gap in the market, Utilyx also claims to have spotted a gap in organisations. “For example the board will try to set targets that can be achieved by tactical projects. But there is a middle ground between the two where companies are left asking 'How do we bridge that gap?' So we have developed a decision framework which helps directors decide which way to go and provides them with measures that they can take back to shareholders. The difficult bit for them is to get the level of detail needed to make a decision, and that is where we can help,” Daffin says.

The policy picture

So, switching to a greener energy source can help a company to protect its reputation, secure affordable energy over the long-term, and fulfill its Corporate Social Responsibility commitments. It should also reduce the regulatory burden on a company in terms of Climate Change Levy exemptions, but what of the CRC Energy Efficiency Scheme – formerly known as the Carbon Reduction Commitment?

“Organisations that import renewable electricity via the grid will have to include and report this electricity at the grid average emissions factor. This is consistent with the approach taken under UK Emissions Trading Schemes and CCAs [Climate Change Agreements] – and is consistent with the focus of CRC on actions taken by the end user organisation,” the Department of Energy and Climate Change told Low Carbon Board Report.

“Moreover, Government wishes to ensure that the carbon savings from CRC are additional to those that will be delivered by the Renewables Obligation. Therefore opting for a green supplier will not affect the position in the league table,” it says.

However, DECC's position is subtly different for companies that generate their own renewable energy. “The Government’s existing Renewables Obligation and forthcoming Clean Energy Cashback [Feed in Tariffs] programmes provide financial incentives for renewable energy generation. As an energy efficiency scheme, CRC will not provide additional incentives for renewable generation. In CRC, if you generate and use renewable electricity and claim ROCs, you must report the electricity generated as electricity consumption at grid average emission factor,” says DECC.

However, it goes on to say: “The CRC league table will reward those who reduce their energy use from any form of energy whether renewable or other fuel. However, Government intends to publish data alongside the existing league table which will provide details of the carbon savings made by organisations as a result of increases in onsite renewable energy generation. This will provide some public recognition of organisations’ efforts to increase renewable energy generation.”

So, with its new focus on efficiency over clean energy, CRC will acknowledge a company's use of renewables but not formally reward it. That said, there are still significant business benefits to be had from choosing a green energy option. “Big companies could do worse than keep an eye on the new guidelines on tariffs being finalised by Ofgem. The final draft should be out in a few months,” suggests Rebecca Willis, Vice Chair of the Sustainable Development Commission.

Key questions:

* How are we addressing security of supply in our energy strategy?
* What are our predictions for the all-in cost of our energy requirement?
* Is there a business case for looking at alternative supply options?