Last Saturday the Times published an article under an eye-catching headline – “How energy giants pay 30p to label their dirty fuel as green” – and a dramatic picture of flames, perhaps indicating fossil fuel combustion and moral outrage. The headline and picture circulated and discussed on social media, with many not actually reading the article, as the Times operates with a paywall.
As is so often the way, the article itself turns out to be more balanced and nuanced than the headline. But for those who really want to understand green tariffs they might want more information to help them decide whether to go for a green tariff or not.
Ironically, whilst in the early years there were at least difficult questions to be answered about their fairness or validity, it seems to me that green tariffs – and the instruments that back them – are just coming of age.
So let’s talk about REGOs – Renewable Energy Guarantees of Origin – which are issued in the UK by Ofgem. They are the UK’s version of the EU “Guarantee of Origin” (GOO) certificates, as defined in article 15 of the European Directive 2009/28/EC.
Every month Ofgem issues renewable generators with one REGO for every MWh of output that their stations generated in the month (subject to controls and audits). The REGOs are not time stamped; its just a total for the monthly output. REGOs are held in Ofgems registry, and they are the certificates that “prove” renewable output. The owner of the certificates can claim all the green bragging rights; so suppliers buy them from generators to evidence that green energy has been supplied. Every year (running April to March), suppliers with green tariffs have to ensure that they have purchased at least enough REGOs from renewable generators to match the volume supplied to their green tariff customers. They also count the REGOs for their overall supply portfolio “Fuel Mix Disclosure” which appears on all customers bills.
In the past REGOs traded at nominal price only, as they were secondary in importance to Levy Exempt Certificates (LECs) which they had to accompany; business customers bought LECs and REGOs instead of paying the Climate Change Levy. But when the government abolished LECs in 2015, REGOs started living their own life. Unlike LECs they have no underlying worth, except the green bragging rights.
To start with supply of REGOs far outweighed demand because green tariffs didn’t really exist – there were no customers. But start-up suppliers in particular started to obtain them and to use them as the evidence of renewable supply – which is exactly their intended purpose. Many of those suppliers chose to offer only green supply – and have grown their customer bases significantly. Significantly two major energy suppliers – E.On and Scottish Power – have joined them and now only offer green tariffs. Simultaneously business customers, keen to show corporate responsibility, are calling out again for REGOs either via their supplier or via corporate PPAs (which also use REGOs as the defining evidence of green supply).
And so, particularly during 2019, the price of REGOs shot up from say 20pMWh to as high as £1/MWh, depending on the attractiveness of the source and delivery month, as the balance between supply and demand started to tighten. Covid demand destruction has put a dent in the pricing for 2020 REGOs; but the market expects that dip to be temporary.
Now even £1/MWh doesn’t sound that much; particularly when you consider historic renewable generation schemes might collects up to £100/MWh in subsidy from the consumer. And that is why, in the early years of green tariffs, you might at least raise an eyebrow on the validity of whether it the REGO should hold all the bragging rights. But things have changed. There are no big subsidies available for new renewable generation schemes now. The last wind CFD auction cleared below £40/MWh in 2012 money, which may well turn out to be close to zero subsidy level for the schemes that won them. Some new solar farms and wind farms have been built with no subsidy mechanism at all. And for all these schemes, even £1/MWh isn’t negligible. Their financial cases are so marginal that if they were able to obtain say £5/MWh per REGO, many many more of them would come forward and get built. They would either be built subsidy free, paid for by only by the buyers of their energy and REGOs; or they would bid lower in CFD auctions. And if they lowered the CFD clearing price below market levels – “negative subsidies”, which seems quite likely – they would in effect be receiving money from green tariffs for their REGOs, and handing some of it back to the consumer, including those in fuel poverty who are not on green tariffs. What’s not to like about that? Its win win.
Another thing that I believe will significantly improve the balance of the market is Brexit. Whether you’re a fan or not, its clear that EU legislation forced the UK government to offer big financial incentives to suppliers that obtained non-UK GOOs, which they didn’t offer to those holding UK REGOs. Many suppliers therefore imported GOOs and avoided big levies. Whilst GOOs may well still be eligible as evidence of green supply, the financial incentive to import them will almost certainly stop next year. That should increase demand for UK REGOs significantly, and tighten the balance further: good news for UK generators, and for the fuel poor who will typically face less of the financial burden of the levies.
The REGO scheme isn’t perfect. Some purists might like to see more than monthly granularity on issue of certificates – maybe even half hourly attribution. Maybe legacy schemes with high subsidy should have REGOs auctioned and the money returned to the consumer. But for all its faults, it’s a really simple system that does seem to have caught public imagination, and is on the cusp of being instrumental in the financial cases of subsidy free generation schemes if prices increase just a little more.
But none of this will happen if consumers and suppliers abandon green tariffs now, just as they seem to be making headway. So why not go for a green tariff? I’ve just used a switch engine to check my supply, and half the top ten supplies were green. Certainly be wary of paying a big premium to your current supplier to “green” your supply that may not be justified. It will cost them more than the 30p/MWh cited by the Times, and – hopefully – the amount they have to pay will increase further – but it still won’t cost them much compared to your overall bill. Best of all, maybe go for a green only supplier. You know they aren’t charging an unreasonable premium – they can’t afford to if they want any customers at all – and the money will ultimately end up in the accounts of renewable generators.
