Why going solo on renewable energy could cost us more
Northern Ireland faces a difficult decision on policy in support of renewable electricity generation. Critical decisions have been made for Great Britain but Northern Ireland retains an option that could leave customers paying more than Great Britain because we are clinging to an over-generous subsidy framework which is closing for new entrants in Great Britain in early 2016. A new competitive regime will apply for investments contracted after April 2016.
There is a choice: either Northern Ireland becomes part of an extended GB scheme or we go it alone. There is now a risk that a separate Northern Ireland renewables regime could prove more expensive to consumers.
Since energy policy is devolved to Stormont, it can be tailored to local circumstances, which puts an onus on Department of Enterprise, Trade and Investment (DETI) - along with the Regulator. The Utility Regulator is assessing how the local retail energy market could be "best attuned to the needs of consumers" independently of a similar review in GB. This review has not yet been published.
At present the incentives for green investors reward generators through cash earning renewable obligation certificates (ROCs). For new investors, ROCs need to end - although for existing schemes, there is a long residual commitment.
ROCs are sold to electricity generators but are proving too expensive. More renewable energy is welcome as a boost to environmental policy, provided that it is at an acceptable competitive price. However, the professional evidence is that the present broad brush incentive mechanisms are now more expensive to customers than can be justified. To some surprise, in Northern Ireland, DETI has said that the current regime will be held for at least a further year.
At a minimum, this decision will add to the bills paid by customers for the 20 years since new investors are given a 'grand-fathered' contract. Stormont might have made the same change as in GB but decided otherwise.
The possible changes become more complex because the incentive system based on ROCs is due to change in 2017. Then, renewable energy contracts should be awarded competitively to suppliers who offer the lowest prices in a system where payment is earned through contracts for difference (CFDs). However, will NI buy into the GB scheme?
The move to competitive bidding is expected to reduce the cost of renewable energy. That is welcome.
A consequence is that investment in renewable capacity will be located at places determined by market forces. The most windswept areas of the UK may have a strong advantage, offering economies of scale (in terms of kwh).
The new CFD regime will be more cost efficient. Does it matter if perchance none of that investment is in NI? A formula will be needed so that electricity customers across the UK pay their fair share for renewables. If, for example, the renewable contracts accrue in parts of Scotland, NI customers would benefit when the renewable levy is minimised and averaged, even if none of the investment comes here.
There are stakeholders here who are unhappy with the implications of the CFD system. If the department supports a standalone renewable investment sector, then NI customers need to be prepared to pay more than GB customers for renewables. Not a very appealing argument and one that the regulator might be expected to criticise.
Even if we adopt a UK system based on CFD, customers here still have to pay for the remaining 19-20 year contracts with the residual ROCs system. This could prove a contentious policy issue between GB and NI.
Logically, if a UK CFD system is in place, the objective is the degree of renewable energy available across the UK, not just in NI. A local NI target may not be needed.
DETI urgently has a policy choice to make.
And the regulator has reservations about the GB scheme and points to risks from uncertainty and unclear policy objectives.