The issue of low carbon energy has been brought into sharp focus recently by everything from the questionability of renewable products to the opportunities presented by the new nuclear debate. For businesses wishing to make informed energy buying decisions that meet their carbon and sustainability needs, the one point of agreement at the moment is that the situation is, at best, confused.
Andris Bankovskis, a green energy specialist at British Energy plc, believes that the future growth of the UK’s green and low carbon energy generation capacity lies in a flight to a more rational, transparent approach that enables businesses to more easily quantify their environmental impact across the whole supply chain.
Businesses are becoming more conscious that their electricity carries a carbon content, while more and more power contracts require a percentage of the supplied energy to be green in order to satisfy CSR and carbon footprint commitments.
In an increasingly complex and interconnected power market, where a great deal of our grid electricity is imported, the challenge facing business is in ensuring that the low carbon energy they are buying has come from low carbon sources. The question is how do you know you are really buying low carbon energy?
If you are an industrial or commercial energy buyer, your primary option for ensuring the provenance of the low carbon power you are buying is to buy green power that is tracked by LECs. At the moment, at least, most other low carbon energy sources such as nuclear do not have similar certification schemes. Although the jury is still out on the proposed new Ofgem accreditation schemes currently in consultation, it can only be a good thing that the importance of nuclear power in reducing carbon emissions as part of a balanced energy mix may, at last, gain recognition.
Six years ago the Government introduced incentives to stimulate business into using green energy with the introduction of the Climate Change Levy. This established a tax on businesses that use fossil fuel and nuclear based energy. Those companies using green energy can receive levy exemption certificates (LECs) that act like a proof of purchase.
LECs are issued and administrated by Ofgem and effectively ‘tag’ green energy from its source to its purchase. At British Energy, the green energy we sell, as part of a balanced energy mix, is all LEC certificated, so customers can be sure they are buying green electricity that has only been sold once.
I make the point about the power only being sold once because with other certification programmes it’s harder to be certain that you aren’t buying green power that hasn’t been sold before.
One of the issues many of our customers are facing is sourcing enough low carbon energy to satisfy their CO2 and CSR commitments. Currently four per cent of the UK’s energy comes from renewable sources, not enough to satisfy much higher demand.
In an effort to encourage more investment into renewable energy the Government launched the Renewables Obligation (RO) in 2002. The RO is aimed at suppliers like us and places an obligation on buying and/or supplying a certain amount of power from renewable sources. We can satisfy our Renewables Obligations by buying Renewable Obligation certificates (ROCs) or by paying a buy out charge. Again, Ofgem administers the scheme but where it differs from LEC is that the energy itself is not tagged.
In fact, the ROC isn’t designed to label electricity at all; it has been designed as a
tradable, investment instrument. To put it simply, ROCs are a way of transferring subsidies from consumers to generators via power suppliers. Ownership of a ROC does not require the acquisition of any renewable energy whatsoever. It’s a great idea that should certainly boost the flow of investment activity but, as a method of certificating that the power has come from renewable sources, it does have shortcomings.
The reason for this is that ROCs are entirely separate from the renewable power they originated from and are not tagged to the electricity you are buying. This means that ROCs can be bought and sold many times over the course of their annual life cycle. This is great for investment in renewable power; however, it doesn’t deliver a meaningful picture of how much green energy a company has really bought.
European Union Emissions Trading Scheme Allowances (EUAs) have apparently been used to claim a reduction in carbon. Unlike LECs or ROCs, which are issued in respect of actual generation, EUAs are essentially allowances to emit carbon.
Companies buy EUAs to match carbon emissions, which are capped within the scheme. Carbon emitters can choose whether to reduce their emissions to rema
in within their cap and to sell excess EUAs to the market, or to buy EUAs from the
market and exceed their cap. The UK actually played very fair when setting national targets, which are among the more challenging in the EU.
The first phase of the scheme was intended to get trading up and running in Europe
before the Kyoto commitments bite from 2008. There is now a surplus of EUAs with some of our European neighbours setting higher caps on emissions in their own markets than necessary.
A practice has emerged where some companies have been advised to buy and then cancel EUAs. The alleged benefit of this practice is to reduce the number of EUAs in the market and therefore reduce the amount of carbon that can be emitted, which
subsequently drives up the price of certificates and the price of carbon. This plays to the argument that by making it more expensive businesses will be forced to take action to reduce emissions.
However, there are plenty of flaws in this approach. Cancelling an EUA doesn’t mean the carbon has gone away. Also, in a market in which EUAs remain in surplus, the cancellation of EUAs will have no effect in reducing carbon output. Even if the market has a shortage of EUAs, some serious questions would remain about the impact of this approach on output and the competitiveness of European industry.
Phase two of the EU Emissions Trading Scheme is underway, with prices currently reflecting a perceived EU-wide shortfall of EUAs, which should result in genuine carbon reductions, but this is by no means guaranteed until the end of the phase.
Compared with the more ornate RO and ETS schemes, LECs can seem a bit one dimensional and some businesses think that by buying LEC power they are only buying current output - not investing in additional green or renewable supply. However, since LEC green energy is tagged, businesses choosing to buy LEC power are applying market dynamics that will lead to further investment and growth in Good Quality Combined Heat and Power (CHP) and renewable generation.
For the time being at least and until a new broader low carbon certification, or other, scheme is developed, LEC power is the best option for major energy users wanting to tell customers with any degree of certainty what percentage of their power comes from low carbon sources.
With only four per cent of the UK’s energy coming from renewable sources, giving customers the opportunity to choose their low carbon sources of power will help stimulate the addition of further, additional low carbon capacity.
Andris Bankovskis is a green energy specialist at British Energy plc, the UK’s largest producer of electricity, generating around one-sixth of the nation’s needs and making a powerful contribution to the country.www.british-energy.com