23rd September 2022
What do you need to know about renewable markets?
When most people think about renewables, they think of wind farms and solar panels, but how exactly does renewable energy work and how is it regulated? In this blog we look to explain the inner workings of renewable energy.
A changing generation mix
Coal fired plants used to dominate the UK energy landscape and the overall power generation mix, but in recent years has largely become redundant.
The ‘Large Combustion Plant Directive’ was set out in 2001 to reduce emissions of acidifying pollutants, particles, and ozone precursors, along with controlling of emissions from large combustion plants. This directive coupled with a drive towards renewable energy is responsible for coal falling away as a source of power generation.
Today, coal has been largely replaced by gas and renewable power, with renewable power generation doubling since 2014. Coal now equates to just under 3% of the UK’s energy mix with renewable power generation at 45.5% (source Energy Trends UK Gov) leading to the UK being powered by greener, more sustainable technologies.
What is renewable energy?
Renewable energy is defined as energy that is collected from renewable sources.
Typically in the energy industry renewable energy is classified into two categories, Biomass and Non-Biomass.
Non-Biomass renewable energy is what we consider the classic renewable energies; wind, solar and hydro, these create energy solely from the environment. We sometimes refer to these as Tier 1.
Biomass, creates energy based on: biomass, biogas and energy from waste, all of which are renewable. We refer to these as Tier 2.
Part of the reason for this mix of renewable technologies is so that a constant power source is available. Tier 1 energy is reliant on the environment and factors which effect the environment, for example it is more likely to be sunny in the summer, so the rate of production can fluctuate. Tier 2 energy is often more stable and predictable and has a key role to play in meeting the overall energy needs. After all, what would we do if it was not windy at night? There would be no solar or wind energy and no large scale storage so the fall back would be gas…
How is renewable energy regulated?
To ensure that renewable energy is properly regulated there is a UK and European system in place. The UK system is called Renewable Energy Guarantees of Origin (REGOs) and in Europe the system is known as Guarantees of Origin (GoOs). This system provides traceable certificates for renewable generation, so that you can see exactly where and when the energy was generated. This is administered in the UK buy the regulator, Ofgem. Only carefully accredited renewable generators are provided REGOs by Ofgem, These REGOS prove to energy suppliers that the energy they generate is renewable.
The Electricity (Fuel Mix Disclosure) Regulations 2005 mean all electricity suppliers in Great Britain must disclose to their customers the mix of fuels used to generate the electricity supplied annually, for each April to March period. Suppliers must disclose this information by 1 October annually.
Suppliers can be audited by Ofgem to ensure their processes are compliant with the legislation and all claims from a supplier are legal. The only way a supplier in the UK can demonstrate renewable energy supply for the Fuel Mix Disclosure is by holding REGOs in their electronic Ofgem account.
Thus green generators receive REGOs which they then pass to whomever buys the power as evidence it is green.
Until 2023 green energy from the EU, evidenced by GoOs, can be imported into the UK. This provides an abundance of renewable energy for the UK renewables market.
Due to Brexit, trading green power between GB and EU countries in Continental Europe will soon stop. The previous acceptance of GoOs provided stable UK market prices. With the current uncertainty of GoOs being imported into the UK, there has been an upward trajectory with renewable prices. This could have a knock on effect on the amount of renewable power available in the UK.
Despite setbacks over the GoOs, the UK has a target to be net zero by 2050 which means decarbonising all sectors of the UK economy. Renewable technologies will continue to grow within the UK as consumer demand continues to fuel this growth. Renewable Obligation (RO) was a major factor in the growth in renewable large scale projects.
Supporting New Renewables
In order for the government to achieve their net zero targets, over the years financial incentives have been put in place to encourage energy generators to build renewable assets.
Initially smaller scale projects were supported by the Feed-In Tariffs (FIT scheme) which where designed by the government to promote the uptake of renewable and low-carbon electricity generation. This closed to new entrants in April 2019 but saw a large uptake – especially of rooftop solar panels.
Similarly larger projects could benefit from the Renewables Obligation, which came into effect in 2002 and placed an obligation on UK electricity suppliers to source an increased proportion of the electricity they supplied from renewable sources. The RO has been closed to any new projects since 2017. The RO did contribute greatly to the large scale renewable projects that are in effect today.
Today the Contract for Difference Feed in Tariff (CfD or CfD FiT) is a mechanism where large renewable projects can bid for the support they need to finance new projects.
In the last 5 years there have also been many more new projects that have been built without subsidy – primarily with large consumers entering into upfront agreements guaranteeing a price they will pay for the renewable energy, in order to give the stability of income needed to get funding for new projects.
What renewable solutions are available?
Today there is a large demand for renewable electricity and gas as businesses look to decarbonise their operations so that they can function in a more sustainable way. Businesses are also looking at where their renewable supply is coming from and specifically which technologies.
Now more than ever, the purpose of renewable power and gas is to solve a challenge, rather than just products and offerings. There are short term flexible solutions and long term structured solutions.
Businesses that opt for short term solutions are looking for value and flexibility without the commitment or complex structure of a long term solution. These businesses will use market sourcing as their primary solution as they can simply buy power over a short term period. Market sourcing means that a business can go out to market and purchase a renewable power solution which matches their specifications and business needs. This has its challenges though, as they may pay a higher price depending on the market climate.
Businesses opting for a long term solution often consider more than just price. They may also consider access to renewable power, company growth and what their customers’ demands are.
There are a number of long term solutions available, firstly market sourcing where businesses can simply buy renewable power. This works in the same way as short term sourcing with the exception of a longer time frame. Another option is self-generation or local generation which requires investment into a renewable solution such as an onsite or offsite solar or wind farm.
Many larger businesses are looking at Corporate Power Purchase Agreements (CPPAs) where power is contracted over a long term period, usually 10 to 15 years. Long term solutions also present challenges to businesses. Firstly portability, how they will bring their power with them when they change supplier. Another challenge is regulation which could change in 10 to 15 years, this is unpredictable.
Finally, market prices, a business could have fixed a price and potentially the renewable market price could decline however the market prices could also rise which would mean a better deal for the business. This will all depend on the market environment in 10 to 15 years.
At ENGIE we have the solutions for our customers with a range of products to meet their needs.
UK Green is a short term product agreement of up to 5 years which is a bundle of generic renewable power. The pricing stays the same as a standard electricity contract which, can be fixed or flexible contract and is evidenced by a REGO.
UK Green Plus is a medium term product of up to 10 years which uses a specific renewable technology. This is a medium term Corporate PPA, the pricing can be a fixed or flexible contract or a direct price from source and is evidenced by Direct Power or REGOs.
Green Select uses a specific renewable technology. This is a long term Corporate PPA of 10 to 15 years, pricing can be a flexible contract or a direct price from source and is evidenced by a Direct Power or REGOs.