Buying renewable electricity, via a green energy tariff – as many consumers and hoteliers do – sounds like a great idea to help finance and grow the renewable energy sector. You are going to buy electricity anyway so why not buy renewable? Especially as it doesn’t seem to cost any more.
Well, the last bit is a clue that you might not be getting what you think you are. Producing renewable electricity is more expensive than producing ‘brown’ electricity, maybe ~200% to 500% more. So why do ‘renewable electricity’ customers only pay a small premium?
Don’t kid yourself that paying 101% of the going rate for electricity is financing any significant expansion in renewable electricity. In fact, it is doubtful that even this small premium increases the amount going to renewables – analysis from Cambridge University suggests small energy supply companies (such as Ecotricity and Good Energy selling green power in the UK) have operating costs ~2% higher than more established suppliers so the preimum you are paying could simply be to cover operating costs rather than being ploughed into renewables.
So, if people are buying renewable electricity, why aren’t they paying full price for it?
Well, taking the UK as an example, there are 3 main groups of renewable generator
- Large hydropower stations (often dating from >50yrs ago)
- Medium-scale systems such as wind (expansion can be traced back to the start of subsidies in the 1990s via the Non-Fossil Fuel Obligation and continues today with subsidy via the Renewables Obligation) – this group also includes generation from biofuels such as landfill gas
- Small-scale systems such as solar panels (which only really took off seriously in the last 2 years – subsidies contiue from Feed in Tariffs)
The only expansion that is going on in UK renewable electricity generation capacity is in groups 2 and 3 and it is being driven by legislation meaning that pretty much all new renewable power in the UK is subsidised to a greater or lesser extent by the public purse (e.g. via tax breaks, financial incentives, grants, etc.). The amount of subsidy varies slightly but it is designed to make the technologies competitive with conventional electricity generation plant.
Understanding how the subsidies work is key to understanding how electricity suppliers can afford to sell renewable electricity at no extra cost.
For example, as well as a record of the electricity generated, medium-scale renewable generators obtain 3 further certificates for every unit of electricity they generate.
- a Levy Exemption Certificate (or LEC) which says the electricity is exempt from the Climate Change Levy (a tax paid by commercial energy users that adds ~3% to the cost of their energy);
- a Renewables Obligation Certificate (ROC) which is effectively a certificate saying it is electricity from certain recently installed renewable systems; and
- a certificate (called a REGO) which guarantees its origin from renewable energy;
The UK electricity market works as follows. Generators sell their electricity to suppliers who sell it on to customers. Given there are hundreds of power stations and wind farms generating electricity at any one time and dozens of suppliers, there is a complex system which tracks who is generating and who is buying what volume of electricity.
As well as selling electricity, generators also sell their certificates to suppliers.
The LEC has an inherent value – the final customer will pay the energy supply company a premium for electricity that is exempt from tax – the value of the tax avoided pretty much sets the value of a LEC.
The ROC also has a value because all energy supply companies must purchase sufficient ROCs to demonstrate to the government that a growing percentage of their power (currently around 12%) is from a (recently installed, medium sized) renewable source. If an energy supplier does not have sufficient ROCs, they face a significant fine and it is the threat of the fine which dictates the value of the ROC (and the energy supply companies recoup the cost of the ROCs they have to buy when they sell the electricity to us, the public, anyway).
‘The rules’ give an inherent value to ROCs and LECs and so these certificates provide a means for renewable generators to increase their income – this means they can afford to generate renewable electricity even though they have to sell the electricity they generate at normal market prices.
The third and final certificate, the REGO, does not have any real value. The only real use is that companies selling green electricity to their customers can buy REGOs and use these to demonstrate their electricity is renewable ‘flavoured’.
Really though, the renewable ‘flavour’ of the electricity has been sold twice already – once with the LEC and again with the ROC. There’s probably as much renewable ‘flavour’ left in the REGO as there is ‘flavour’ in a third hand tea bag.
Instead of trying to buy green electricity from energy supply companies where the benefits are slim at best, customers can try and enter into an arrangement where you can be confident your purchase of green power is financing direct expansion of renewable electricity. Be aware though that paying the true cost of renewable power will add considerably to a customer’s bill (+50-100%). The key to any arrangement like this is to make sure you understand the complexities of the local electricity market, renewable energy subsidies and any carbon trading schemes so that you can be sure you are getting what you think you are. In the UK for example, to finance renewable energy you could buy electricity from any supplier and buy the equivalent number of ROCs. Retiring the ROCs (rather than selling them on) would then limit the supply, forcing the price of ROCs up which will encourage more investment.
Other countries will need a different approach as the range of fiscal mechanisms supporting renewable investment is varied and complex. In the developing world for example, renewable energy projects can even get funding from Western nations via Kyoto Clean Development Mechanism payments.
What about generating your own renewable power instead of buying it? Are people that have their own renewable generation making a difference? An organisation that develops green electricity projects might be doing so without subsidies – either out of the goodness of their heart or possibly because the economics of renewables work for them without subsidy (e.g. the business case can be better in remote locations) – but more often than not developments only go ahead where subsidies are in place because these benefits make the investment add up. Effectively we (the public) are probably paying for them to invest in plant in one way or another.
Hoteliers that put up the money, develop renewable energy projects and make them happen on their property may well be getting subsidies of some sort to make it worth their while but they are also going out of their way to make things happen at considerable personal effort and they are often taking a financial risk – if anything goes wrong, they won’t get their money back.
Any expansion in renewable electricity is being driven by either a) green fanatics prepared to invest large sums with no return or b) those people prepared to put in the effort and take the risk of reaping government subsidies to pay for their development.
Individuals can try and make a difference, but it is not as simple as companies selling ‘green’ electricity would have you think.