Just who's being green here?

When the EU's new Electricity Markets directive comes into force in July next year, it is intended to increase the proportion of electricity generated from renewable sources and, more importantly, to provide customers with evidence of the origin of green electricity.

Proponents of green energy were optimistic that the directive would see a rapid take-up of green electricity tariffs and a substantial increase in new applications for wind farms, biomass generation schemes and landfill gas projects in the UK. But, 15 months before it is due to come into force, there are concerns that, far from causing the market's biggest shakedown to date as initially predicted, its effect will be negligible.

The market for green electricity is surrounded by confusion. According to Brian Mark, a director at Fulcrum Consulting, the figures for green electricity don't stack up: "Investment in renewable technologies does not appear to reflect the increase in customers who have signed up for a green tariff."

He cites figures from www.whichgreen.com that confirm his concerns. The comparison website claims many suppliers offering a green tariff did not invest a single penny on building new renewable generating capacity in 2004. Although the site was created by green electricity supplier Ecotricity, Mark says the comparison appears valid.

It is not just Mark who is concerned about the current lack of clarity surrounding green electricity tariffs. Environmental campaigner Friends of the Earth is concerned about the "total lack of information provision on this issue from any centralised source" and has removed its green energy league from its website because of insufficient resources to verify suppliers' claims about their tariffs.

Ironically, confusion appears to stem from the introduction of the Renewables Obligation - an initiative from the EU back in 2002 to promote a substantial increase in the proportion of electricity generated from renewable sources. As a result of this obligation, the UK government set a target for a specified quantity of renewable energy generation that licensed electricity suppliers must reach each year. In 2005, the target was 4.9%, but this will rise to 15.4% by 2027. So far, so straightforward.

However, things start to get more complicated at the end of each year. For each MW of "green" electricity produced, a supplier will receive a Renewable Obligation Certificate (ROC). If it has exceeded its Obligation target, the supplier can sell the excess ROCs to other suppliers, but if it falls short of the target, it has to buy ROCs on the open market or pay a fine.

Muddied waters

According to Friends of the Earth, the effect of the Renewables Obligation has been to "muddy the waters considerably" for consumers. The organisation is concerned that, because of a lack of transparency, consumers may end up paying a premium for green electricity that a supplier would have to produce, in any case, as part of its legal requirement under the Renewables Obligation - a practice allowed by the government. In particular, there is concern that new customers signing up to a green tariff are being sold "old" green electricity (generated by existing renewable sources) rather than suppliers installing additional renewable generating capacity.

What is of more concern is that by signing up to a green tariff now, customers could actually be doing little, if anything, for the environment - because, although signing up to a green tariff will guarantee they are supplied with electricity from renewable sources, it does not guarantee any additional renewable generating capacity.

According to the DTI, the net effect of all this "means that the [electricity] mix for other customers will end up less "green" than the supplier's total mix". So in many cases, the only beneficiary of swapping from a standard electricity tariff to a premium rate green tariff will be the energy supplier.

Much to Mark's chagrin, this lack of new green generating capacity has also been used by planning authorities to promote the use of site-based renewable energy technologies, rather than a connection to a green tariff. Mark says it is much more efficient to site wind turbines, for example, "where it is windy" rather than to integrate wind turbines into a scheme, because wind speeds are lower in an urban area. "The flakiness of green tariffs has been picked up by the planners as justification for a requirement for on-site renewables," he says. "In so doing they, and the government, have missed a really good opportunity to link a new development directly to efficient new renewables capacity," he adds.

The problem for planners and green electricity customers alike is that, up to now, there has been no easy-to-follow audit trail to show where a consumer's green electricity has come from. But all that will change with the new directive, which will force electricity suppliers to provide evidence for all renewable electricity in the mix of fuels sold to customers. It will also enable customers to audit a supplier.

Under the ruling, all green electricity suppliers must hold a Renewable Energy Guarantee of Origin certificate, which will "enable producers of renewables electricity to demonstrate that the electricity they sell is produced from renewable sources," according to the DTI. The government's energy markets regulator, Ofgem, has been accrediting REGO certificates since February 2005, though they are not yet compulsory.

The government is hoping that REGOs will prevent suppliers accounting for green energy in more than one way. As the DTI's guide to accompany the new REGO directive makes clear, "In order to avoid double counting, Ofgem's draft revised green supply guidelines propose that suppliers should hold and retain evidence to verify that the total energy sold under green supply arrangements does not exceed the amount of renewable generation claimed in the supplier's fuels mix disclosure".

Mark had originally assumed that REGOs would provide an auditable method to guarantee a supplier has made an investment in a dedicated new generating capacity to supply a new customer with renewable energy. But that is not necessarily the case: on close inspection, the DTI's guide reveals that very little will actually change as the result of the directive.

Even with the REGO mechanism in place, there is still no guarantee that transferring to a green tariff will result in the creation of any new renewable generating capacity. As the DTI's guide explains: "If a supplier is claiming that it [the green supply tariff] is 100% renewable, then they should hold REGOs to match the total sales under that tariff… it should be noted that while this guarantees the customer is supplied with renewables, it does not guarantee any "additionality" because the renewable energy supplied could form part of the supplier's Renewables Obligation".

Forcing new capacity

In other words, by allowing suppliers to count REGOs towards a supplier's Renewables Obligation, the government has created the situation where green tariff electricity can continue to make the grid mix for other customers less green.

With all this evidence, you would think Mark would be totally opposed to the idea of signing up to a green tariff. Far from it: he is of the opinion that if a sufficient number of consumers sign up for a green tariff now, come July 2007 - when every unit of green electricity has to be accompanied by a REGO - the demand for green electricity could be higher than the capacity required under the Renewables Obligation. If this is the case, electricity suppliers will need to have the renewable capacity in place before the directive comes into force. "As they are not shedding customers, if enough people sign up for green electricity now, the more renewable technologies the generating companies will need in place, come July 2007," he says.

There is some evidence this is happening, although as Ofgem does not know the number of customers that are on green tariffs, it is difficult to prove. However, Ofgem's annual report for 2004-05, published in February, showed the number of ROCs issued had increased to 10.8 million, up from 7.5 million in 2003-4. So maybe a shakedown is under way after all - even if it is only a little one.