Third-Party Cost Focus: Renewables Obligation (RO)

In the first of our series of Third Party Cost (TPC) guideline articles, we focus on the Renewables Obligation.

The majority of costs now incurred in a business energy bill are not through gas or electricity consumption but by Third Party Costs (TPCs), or Non-Energy or Non-Commodity Costs, as they are often referred to.

Given the rate of increase in TPCs in recent years, it won’t be long before the percentage of the overall bill attributed purely to power usage is down to a third. At present, the split is weighted around 60:40 in favour of TPCs.

A wide variety of schemes are classed as TPCs. Some are government-led, in the drive towards a more sustainable future, while money raised from others contribute towards the maintenance of the National Grid and the supply of electricity in the system.

TPCs can change every year and with energy demand plummeting during the height of lockdown, 2020 was anything but immune to fluctuations in how businesses were charged.

Renewables Obligation (RO)

First set up by the government in 2002 to encourage and support large-scale renewable energy generation as part of the ongoing action against climate change, the Renewables Obligation for new contracts came to an end on 31 March 2017 and was replaced by Contracts for Difference (CfD). However, existing RO contracts will continue to run until 2027.

The RO places an obligation on UK electricity suppliers to source an increasing proportion of the electricity they supply from renewable sources, such as wind, solar and hydro.

The suppliers fund the cost themselves but can recoup that investment through charges passed on to the customer, either as a pass-through cost or as part of a consolidated bill. Both these options are available to Half-Hourly (HH) and Non-Half Hourly (NHH) customers.

Consumers who qualify for an Energy Intensive Industries exemption (EII), by obtaining certificates from the Department for Business, Energy and Industrial Strategy (BEIS), can receive up to an 85% exemption at source from the RO, Feed in Tariff (FiT) and CfD schemes.

The RO is forecast to account for roughly a fifth of overall business energy bills in 2020/21.

More information on the RO can be found on Ofgem’s website, or you can talk to one of our consultants about any questions you have relating to TPCs.

Full ‘Green’ ahead for HS1 train line

London Underground’s District Line won’t be the only green line running through the capital in the near future, according to a recent article in Business Traveller magazine.

The English section of HS1, the high-speed rail network connecting London and France via the channel tunnel, is set to become the first train line in the UK to run entirely on renewable energy.

Green Gateway

In an attempt to become the ‘green gateway of Europe, HS1 aims to reduce the carbon footprint of every passenger by 25 per cent and cut energy per train journey by 10 per cent.

Memories of steam locomotives billowing pollutants into the skies are long gone through the switch to diesel around half a century ago, followed by electrification. But this move promises to make HS1 the cleanest and greenest rail line yet as electricity will be generated purely from solar and wind sources.

Reducing the carbon footprint

“HS1 is the Green Gateway to Europe. The UK’s only high-speed railway already delivers phenomenal environmental benefits to the UK and beyond. We are helping consumers reduce their carbon footprint while still enjoying safe, fast and reliable travel at home and abroad,” commented Dyan Crowther, CEO of HS1 Ltd.

“As we recover from the Covid crisis, environmental challenges will move further up the political and public agenda, and HS1 can provide a lasting solution to sustainable travel.”

Going green

As Mr Crowther attests, green business energy is proving more popular than ever as businesses set out a procurement energy strategy that is aligned to sustainability as well as cost.

While not all businesses have the capacity to generate their own energy on site, and therefore place the national grid under less pressure, green energy contracts are widely available, although the percentage of energy sourced from renewables can vary.

Please get in touch if you would like to explore your green energy procurement options further, by calling us on 01225-867722

World Energy Outlook sets out a vision for the future

covid-19

World Energy Outlook 2020 has shown how the response to the Covid-19 crisis can reshape the future of energy.

Amid deep disruption and uncertainty caused by the pandemic, the 464-page publication states a surge in well-designed energy policies is needed to put the world on track for a resilient energy system that can meet climate goals.

But whether this upheaval ultimately helps or hinders efforts to accelerate clean energy transitions and reach international energy and climate goals will depend on how governments respond to today’s challenges.

Pivotal period

The World Energy Outlook (WEO) 2020, the International Energy Agency’s flagship publication, focuses on the pivotal period of the next 10 years, exploring different pathways out of the crisis.

The new report provides the latest IEA analysis of the pandemic’s impact: global energy demand is set to drop by 5% in 2020, energy-related CO2 emissions by 7%, and energy investment by 18%.

The WEO’s established approach – comparing different scenarios that show how the energy sector could develop – is more valuable than ever in these uncertain times.

In the Stated Policies Scenario, which reflects today’s announced policy intentions and targets, global energy demand rebounds to its pre-crisis level in early 2023.

However, this does not happen until 2025 in the event of a prolonged pandemic and deeper slump, as shown in the Delayed Recovery Scenario at the bottom of this article.

Slower demand growth lowers the outlook for oil and gas prices compared with pre-crisis trends. But large falls in investment increase the risk of future market volatility.

Starring role for renewables

Renewables take starring roles in all our scenarios, with solar centre stage. Supportive policies and maturing technologies are enabling very cheap access to capital in leading markets.

Solar PV is now consistently cheaper than new coal- or gas-fired power plants in most countries, and solar projects now offer some of the lowest-cost electricity ever seen.

In the Stated Policies Scenario, renewables meet 80% of global electricity demand growth over the next decade. Hydropower remains the largest renewable source, but solar is the main source of growth, followed by onshore and offshore wind.

“I see solar becoming the new king of the world’s electricity markets. Based on today’s policy settings, it is on track to set new records for deployment every year after 2022,” said Dr Fatih Birol, the IEA Executive Director. “If governments and investors step up their clean energy efforts in line with our Sustainable Development Scenario, the growth of both solar and wind would be even more spectacular – and hugely encouraging for overcoming the world’s climate challenge.”

Weak linkThe WEO-2020 shows that the strong growth of renewables needs to be paired with robust investment in electricity grids. Without enough investment, grids will prove to be a weak link in the transformation of the power sector, with implications for the reliability and security of electricity supply.

Fossil fuels face varying challenges. Coal demand does not return to pre-crisis levels in the Stated Policies Scenario, with its share in the 2040 energy mix falling below 20% for the first time since the Industrial Revolution.

But demand for natural gas grows significantly, mainly in Asia, while oil remains vulnerable to the major economic uncertainties resulting from the pandemic.

“The era of global oil demand growth will come to an end in the next decade,” Dr Birol said. “But without a large shift in government policies, there is no sign of a rapid decline. Based on today’s policy settings, a global economic rebound would soon push oil demand back to pre-crisis levels.”

The worst effects of the crisis are felt among the most vulnerable. The pandemic has reversed several years of declines in the number of people in Sub-Saharan Africa without access to electricity. And a rise in poverty levels may have made basic electricity services unaffordable for more than 100 million people worldwide who had electricity connections.

Green shoots

Global emissions are set to bounce back more slowly than after the financial crisis of 2008-2009, but the world is still a long way from a sustainable recovery.

A step-change in clean energy investment offers a way to boost economic growth, create jobs and reduce emissions. This approach has not yet featured prominently in plans proposed to date, except in the European Union, the United Kingdom, Canada, Korea, New Zealand and a handful of other countries.

In the Sustainable Development Scenario, which shows how to put the world on track to achieving sustainable energy objectives in full, the complete implementation of the IEA Sustainable Recovery Plan moves the global energy economy onto a different post-crisis path.

Nuclear momentum

As well as the rapid growth of solar, wind and energy efficiency technologies, the next 10 years would see a major scaling up of hydrogen and carbon capture, utilisation and storage, and new momentum behind nuclear power.

“Despite a record drop in global emissions this year, the world is far from doing enough to put them into decisive decline. The economic downturn has temporarily suppressed emissions, but low economic growth is not a low-emissions strategy – it is a strategy that would only serve to further impoverish the world’s most vulnerable populations,” said Dr Birol.

“Only faster structural changes to the way we produce and consume energy can break the emissions trend for good. Governments have the capacity and the responsibility to take decisive actions to accelerate clean energy transitions and put the world on a path to reaching our climate goals, including net-zero emissions.”

A significant part of those efforts would have to focus on reducing emissions from existing energy infrastructure – such as coal plants, steel mills and cement factories. Otherwise, international climate goals will be pushed out of reach, regardless of actions in other areas.

Detailed new analysis in the WEO-2020 shows that if today’s energy infrastructure continues to operate in the same way as it has done so far, it would already lock in a temperature rise of 1.65 °C.

Despite such major challenges, the vision of a net-zero emissions world is increasingly coming into focus. The ambitious pathway mapped out in the Sustainable Development Scenario relies on countries and companies hitting their announced net-zero emissions targets on time and in full, bringing the entire world to net-zero by 2070.

Drastic action

Reaching that point two decades earlier, as in the new Net Zero Emissions by 2050 case, would demand a set of dramatic additional actions over the next 10 years.

Bringing about a 40% reduction in emissions by 2030 requires, for example, that low-emissions sources provide nearly 75% of global electricity generation in 2030, up from less than 40% in 2019 – and that more than 50% of passenger cars sold worldwide in 2030 are electric, up from 2.5% in 2019.

Electrification, innovation, behaviour changes and massive efficiency gains would all play roles. No part of the energy economy could lag behind, as it is unlikely that another would be able to move fast enough to make up the difference.

The different pathways in the WEO-2020

  • The Stated Policies Scenario (STEPS), in which Covid-19 is gradually brought under control in 2021 and the global economy returns to pre-crisis levels the same year. This scenario reflects all of today’s announced policy intentions and targets, insofar as they are backed up by detailed measures for their realisation.
  • The Delayed Recovery Scenario (DRS) is designed with the same policy assumptions as in the STEPS, but a prolonged pandemic causes lasting damage to economic prospects. The global economy returns to its pre-crisis size only in 2023, and the pandemic ushers in a decade with the lowest rate of energy demand growth since the 1930s.
  • In the Sustainable Development Scenario (SDS), a surge in clean energy policies and investment puts the energy system on track to achieve sustainable energy objectives in full, including the Paris Agreement, energy access and air quality goals. The assumptions on public health and the economy are the same as in the STEPS.
  • The new Net Zero Emissions by 2050 case (NZE2050) extends the SDS analysis. A rising number of countries and companies are targeting net-zero emissions, typically by mid-century. All of these are achieved in the SDS, putting global emissions on track for net-zero by 2070. The NZE2050 includes the first detailed IEA modelling of what would be needed in the next ten years to put global CO2 emissions on track for net-zero by 2050.

Source: iea.org

PM’s green energy industrial revolution

During the Covid-19 nationwide lockdown, wind farms accounted for a larger percentage of the UK’s overall power generation than before.

And following Prime Minister Boris Johnson’s Conservative Party address today, that seems to be an irreversible trend.

The PM pledged on Wednesday to spend £160m to upgrade ports and factories for building turbines to help the country “build back greener”, with the aim of creating 2,000 construction jobs and support 60,000 more.

He vowed that the UK would become “the world leader in clean wind energy” and that every home would be powered by wind alone within the next decade.

Mr Johnson said the government was raising its target for offshore wind power capacity by 2030 from 30 gigawatts to 40 gigawatts.

By placing his faith in wind energy and reducing coal-fired power, greenhouse gas emissions would be dramatically slashed.

“Far out in the deepest waters we will harvest the gusts, and by upgrading infrastructure in places like Teesside and Humber and Scotland and Wales, we will increase an offshore wind capacity that is already the biggest in the world,” he proclaimed.

Oil giant feels effects of Covid-19

BP has announced a $6.7bn quarterly loss after global demand for oil slumped during the height of the Covid-19 pandemic.

Oil prices fell dramatically as a result of the economic slowdown and turned negative for the first time in consumer history in April.

In the short-term, BP said it expected demand for oil could be up to nine million barrels per day lower compared to last year.

Shareholder dividends have been halved with forecasts for a challenging future ahead, while 10,000 jobs are to be cut – with around a fifth of the redundancies expected to be in the UK.

In response, BP said it wanted to move away from being a traditional oil company and reinvent itself as an integrated energy company by focusing on renewables and bioenergy as well as hydrogen and carbon capture and storage technology.

Renewable investment not keeping pace with green energy progress

According to a recent report from Imperial’s Centre for Climate Finance & Investment in collaboration with the International Energy Agency, renewable power is outperforming fossil fuels in US and European markets.

Over the last decade, it was found that renewables have offered a significantly higher return on investment than fossil fuels over the same period. Yet, the report reveals that levels of investment in clean energy are still well below that needed to seriously combat climate change.

These findings and the obstacles to putting the world’s energy system on a more sustainable path were recently discussed in the latest webinar of the series entitled Imperial Future Matters. It involved a virtual audience of industry leaders, students, alumni and journalists

Dr Charles Donovan, Executive Director of the Centre for Climate Finance & Investment at the Business School said:  “We are in the midst of a clean-tech miracle—in particular with regards to solar power. We are 10 to 15 years ahead of schedule due to a revolutionary set of changes. If there’s any problem, it’s that solar power is too cheap today. There’s real momentum gathering behind renewable power, based purely on their economic advantage. Our results show that renewable power is outperforming financially, but has still not attracted sizable support from listed equity investors.”

Following the presentation, industry figures offered their thoughts on the key issues. Zoe Knight, Managing Director, Global Head, HSBC Centre of Sustainable Finance at HSBC Holdings PLC said: “In emerging markets, one way to improve things post-COVID is to help liberalise the energy sector in order to bring in either direct investment on a national basis or foreign direct investment from corporates that are operating globally and have made pledges to deliver 100% of their power needs from renewables. This will help to attract the capital that the country needs and in turn decarbonise and create different jobs as we exit COVID.”

IEA report on Covid-19 impact

Beyond the immediate impact on health, the current Covid-19 crisis has major implications for global economies, energy use and CO2 emissions.

Analysis of daily data through to mid-April by the International Energy Agency (IEA) shows that countries in full lockdown during this period experienced an average 25% decline in energy demand per week and countries in partial lockdown an average 18% decline.

Daily data collected for 30 countries until 14 April, representing over two-thirds of global energy demand, show that demand depression depends on duration and stringency of lockdowns.

Global energy demand declined by 3.8% in the first quarter of 2020, with most of the impact felt in March as confinement measures were enforced in Europe, North America and elsewhere.

At the start of 2020, it was forecast that global energy investment would grow by 2%; instead, it has fallen by 20% – a fall in spending of $400billion.

Covid-19 impact: the IEA’s sector-by-sector energy breakdown (for the first quarter of 2020)

  • Global coal demand was hit the hardest, falling by almost 8% compared with the first quarter of 2019. Three reasons converged to explain this drop. China – a coal-based economy – was the country the hardest hit by Covid‑19 in the first quarter; cheap gas and continued growth in renewables elsewhere challenged coal, and mild weather also capped coal use.
  • Oil demand was also hit strongly, down nearly 5% in the first quarter, mostly by curtailment in mobility and aviation, which account for nearly 60% of global oil demand. By the end of March, global road transport activity was almost 50% below the 2019 average and aviation 60% below.
  • The impact of the pandemic on gas demand was more moderate, at around 2%, as gas-based economies were not strongly affected in the first quarter of 2020.
  • Renewables were the only source that posted growth in demand, driven by larger installed capacity and priority dispatch.
  • Electricity demand has been significantly reduced as a result of lockdown measures, with knock-on effects on the power mix. Electricity demand has been depressed by 20% or more during periods of full lockdown in several countries, as upticks for residential demand are far outweighed by reductions in commercial and industrial operations. For weeks, the shape of demand resembled that of a prolonged Sunday. Demand reductions have lifted the share of renewables in the electricity supply, as their output is largely unaffected by demand. Demand fell for all other sources of electricity, including coal, gas and nuclear power.

Public appetite for renewables remains strong

A quarterly poll issued by the Department for Business Energy and Industrial Strategy (BEIS) shows that the public appetite for renewable energy remains very high.

The overwhelming majority of the people questioned (82%) in the Public Attitudes Tracker, commissioned by an independent research company, back the transition away from oil and gas to greener sources of energy. Only 2% opposed the shift.

Plenty, however, remain to be convinced by the validity of fracking as a potential energy source moving forward, with a new high of 45% against the extraction of shale gas.

Just over three-quarters of those polled said they were concerned about climate change.

Net-zero target

Quoted in an article on the Energy Voice website, Renewable UK’s deputy chief executive Melanie Onn said: “Even while we face the unprecedented challenges posed by Covid-19, the public supports continued action to avoid the worst the impacts of climate change and make our economy more sustainable.

“Investment in new renewables, which is supported by 82% of people, will stimulate growth and employment as the economy recovers from the impacts of the virus.

“Renewable energy capacity will grow rapidly this decade and beyond to meet our net-zero emissions target, and our industry will be investing tens of billions of pounds and creating much-needed jobs across the UK.”

For public sector bodies looking to reflect the mood of the pubic and reduce their carbon footprint, our Green Energy Framework could provide answers in terms of green energy procurement and a host of other areas.

The GEF includes a shortlist of green energy suppliers who have been chosen based on the following criteria: tariff competitiveness, billing accuracy, green certification and the most favourable terms and conditions.

All change for the energy industry as emissions hit a record low

Global emissions are set for unprecedented fall this year as a direct result of the coronavirus pandemic, according to a report in Bloomberg Green.

As less oil, gas and electricity is consumed due to the slowdown in industrial activity across the globe, and renewables take up a larger share of the energy market, global emissions will fall by 8% (2.6 billion metric tons) in 2020 – the largest fall in history.

“The energy industry that emerges from this crisis will be significantly different from the one that came before,” Fatih Birol, the International Energy Agency’s (IEA) executive director, said in a statement released from the organisation’s headquarters in Paris on Thursday.

Even though overall energy demand has decreased by as much as 6% this year, renewables in many countries get first priority to feed electricity into the grid.

While fossil-fuel generators shut down to prevent a system overload, there is nothing to stop solar, wind and hydro power producers selling all their output.

Unseasonably warm, yet windy, weather throughout April has also been favourable for solar and wind farm owners and the dominance of green energy in the overall market is only set to continue with low-carbon sources set to be responsible for 40% of global electricity generation.

It’s not all a breeze for renewables

Renewables are still facing challenges of their own, however. In the wake of Covid-19, renewable energy has been rocked by global supply chain disruption and heightened part costs.

Around 11% of the world’s wind turbines were shut this week because of the virus, according to Bloomberg, while work on constructing new wind farms has been delayed by restrictions on the movement of workers and regulatory processes.

With the big oil players all having significantly invested in renewable energy, an article in Power Technology says they are expected to respond to the record slump in oil prices by cost-cutting and shifting focus away from their clean energy commitments in the short term.

All things considered, this could lead to a slowdown in new renewable energy projects coming online this year.

Demand for renewables growing quicker than supply in Europe

The pricing of green energy may need rebalancing if growth in demand for renewables across the European market continues to outpace the growth in supply.

According to figures published in a report from the Association of Issuing Bodies (AIB), demand for renewable energy in Europe – that is tracked and documented with guarantees of origins (GOs) – grew at a rate of 11.7% in 2019, an increase of 61TWh from 2018 levels.

ECOHZ managing director Tom Linberg said: “The growth in the supply of renewable energy tracked and documented with GOs during the same period is estimated to be only 3.5%, resulting in a significantly smaller surplus in 2019 than previous years.”

Spain has the highest growth in GO demand with 38%, followed by France (26%) and Germany (10%), the latter having been the first country to pass the 100TWh mark in 2019

UK impact  

The UK is not a member of the AIB and uses the Renewable Energy Guarantees Origin (REGOs) scheme, although the report found that the UK is still impacting the supply and demand balance across the European market.

The UK currently allows for the import of GOs to the European Energy Certificate System Standards (EECS GOs). Demand has grown year-on-year with the European markets ramping up – export volume is around 20% of the UK’s total import volume.

Due to different reporting schemes adopted, the statistics could be skewed, however, ECOHZ believes the positive trend could lead to a “healthy” price market in 2020.

There are some uncertainties which could impact pricing and surpluses going forward, such as Brexit uncertainty, clarity on the UK policy for GO imports and REGO exports and the Coronavirus pandemic.

With the UK declaring a carbon net zero target of 2050, there has never been a better time to look at renewable energy sources for your business.

Energy Management have years of industry experience with green energy procurement at the forefront of our service offering.

We can tailor bespoke green solutions for your business, meaning you can mitigate market uncertainty whilst securing the best possible contract for your business.

For more information on how we can help, contact a member of the team on 01225 867722 or email sales@energymanagementltd.com.