Wednesday, 28 September 2011

Expensive ROCks

I thought I would post about a slightly wider national issue - it affects most major wind farms in the UK. The subject is Renewable Obligation Certificates or ROCs. ROCs, are effectively tradeable commodities. ROC trading is administered by the Non-Fossil Purchasing Agency Limited (NFPA) in England and Wales, and by its sister company, NFPA Scotland Limited in Scotland. Although this may sound a dry topic, it is in reality where significant money can be made and adds an interesting little twist to the whole wind farm debate.

The basic legislative framework for Scotland in terms of ROCs is set out in The Renewables Obligation (Scotland) Order 2009. The 2009 order was amended by The Renewables Obligation (Scotland) Amendment Order 2010. In essence, the legislative framework requires electricity suppliers supplying customers in Scotland to prove that a fixed portion of the electricity they supply comes from certain, recognised renewable sources. Now for each MegaWatt hour of electricity generated by an acceptable method by a generator participating in the ROC scheme, a ROC is issued. The ROC is a digital certificate that shows how each unit of electricity was generated, who generated it and who bought it. It is also worth noting that the renewable obligation (ie, the requirement to supply a fixed proportion of electricity from recognised renewable sources) is on the supplier not the generator.

The principle of ROCs is similar throughout the United Kingdom (UK), so I will not differentiate between ROCs and SROCs (Scottish Renewable Obligation Certificate) since it is the broad principle I wish to explain.

Now, the generators are paid for the electricity they generate and feed into the National Grid. However, the suppliers need to demonstrate that they have met their renewable obligation - and this is where the ROCs come in. A supplier who does not hold enough ROCs to cover the proportion of electricity that has to be shown to be generated through acceptable renewable sources (or in other words, hasn't bought enough 'green energy' from the generators in relation to how much electricity it has supplied in total), has to buy the requisite additional ROCs from the generators, and this is done through a bidding process, or pay into a shortfall fund - which is then shared back out amongst all the suppliers based upon how many ROCs each supplier has presented. Not many suppliers will want to line the pockets of their competitors via the shortfall fund if they can avoid it, so those ROCs need to be obtained - perhaps not at all costs but certainly to the extent that the price of a ROC can be inflated quite significantly by suppliers outbidding each other to ensure they obtain sufficient ROCs to demonstrate their obligation compliance.

There is a very complex inter-realtionship between supply and demand here and I do not pretend to fully understand it. however, the price of ROCs fluctuates. This page gives an idea of such historic fluctuations. Ultimately, the cost of demonstrating obligation compliance - ie, obtaining those ROCs is passed on to the consumer and for me, I see a real conflict here. The generators receive a rate for generating the electricity - which the National Grid is obligated to take, and then they can just sit back and let the suppliers outbid each other for the ROCs they need to make up their short-fall. Talk about win-win.

The original idea of ROCs was good but since they are effectively commodities, a huge new investment market has opened up and the reality is that they have and will continue to become a significant money spinner for wind farm operators. Finally, we should not lose sight of the fact that some wind farms operators - under certain conditions, can receive constraint payments for NOT generating electricity. I think the win-win just became win-win-win for the wind farm operators at least. If we are going to do the renewable energy thing right (and we need to) - can't we do it without watching the industry drive the whole process, wreck vast tracts of landscape and make quite considerable profits along the way? Surely the cart is before the horse here - shouldn't the industry be responding and not driving?