The Landfill Allowances Trading Scheme and the Landfill Tax Accelerator are the cornerstones of UK waste policy, and will continue to be the primary factors underpinning any residual waste treatment project. Nevertheless, UK energy policy has, over the past few years, become increasingly relevant to the waste sector.

UK energy policy

As part of the binding EU targets agreed in 2008, the UK committed to a renewable energy target of 15% by 2020 - incredibly ambitious, given the current level of 2-3%.

The policies designed to deliver this target have, to date, focused on renewable electricity generation, for which the target is 30% of UK electricity by 2020. This chapter therefore focuses on incentives for renewable electricity generation, and particularly the principal support mechanism - the Renewables Obligation (RO).

However, the importance of incentivising renewable heat has also (belatedly) been recognised by the government. Heat comprises 47% of total UK energy demand. The government hopes that 12% of such heat will be generated from renewable sources by 2020. The soon to be introduced Renewable Heat Incentive is the key policy driver aimed at encouraging renewable heat projects. This is therefore also dealt with briefly below.

The Renewables Obligation - a new order

The RO has been around for nearly eight years now, having been introduced in 2002. However, it has been relatively slow - at least outside the landfill gas and onshore wind sectors - in delivering the developments in renewable electricity generation that were hoped for, and that are necessary if the government's targets are to be met.

Last year, the RO underwent a major overhaul in an effort to create the incentives necessary to allow other technologies (including energy from waste) to flourish. Further amendments are due to be made with effect from April 2010. For those unfamiliar with the RO, a basic outline of the mechanism is set out below.

The focus of the RO has been radically altered - no longer technologyneutral, it is intended to give increased incentives to developing technologies. This shift in policy is referred to as 'banding' because the number of certificates per unit of generation a technology receives depends on the band it falls into under the RO.

Onshore wind, which is generally accepted as the benchmark, continues to receive 1 Renewables Obligation Certificate (ROC) per MWh of electricity generated. In contrast, many of the energy-from-waste technologies have been banded-up to receive more than 1 ROC. Of course, where there are winners, there must also be losers - these include sewage gas and landfill gas. A breakdown of eligibility for some of the key technologies is set out in Table 9.1.

Table 9.1 - ROC eligibility for key technologies

Technology	ROCs per MWh
Landfill gas	0.25
Sewage gas	0.5
Waste incineration with CHP	1
Pre-banded gasification	1
Pre-banded pyrolysis	1
Standard gasification	1
Standard pyrolysis	1
Advanced gasification	2
Advanced pyrolysis	2
Anaerobic digestion	2
Dedicated biomass	1.5
Dedicated biomass with CHP	2

Microgeneration projects (less than 50kW electricity) are treated differently nand will receive 2 ROCs per MWh regardless of technology. Those projects will also fall within the proposed Feed-in Tariff (FIT); the interaction of the FIT with the RO is explored below.

Table 9.1 does not apply in respect of 'grandfathered' landfill gas and sewage gas projects, which will continue to receive 1 ROC per MWh. In light of the grandfathering arrangements:

• Landfill and sewage gas projects that achieved full accreditation under the RO by July 2006 continue to receive 1 ROC per MWh; and
• With limited exceptions projects that achieve full accreditation after July 2006, but before April 2011 (and which obtained preliminary accreditation by April 2009) will be no worse off than under the current regime - where the technology is banded up, they will be banded up; where the technology is banded down, they will continue to be entitled to 1 ROC per MWh.

The principle of grandfathering will be applied in a similar manner in the event of any future changes to the support for which technologies are eligible - although there is currently some confusion regarding the future grandfathering of biomass projects in light of government statements suggesting the grandfathering regime does not apply to those projects. A satisfactory resolution of this issue is likely to be key to the success of the biomass generation sector.

Banding for energy-from-waste projects

Unfortunately, for those involved in energy-from-waste projects, the most complicated aspects of the RO relate to those technologies fuelled by plant and animal matter.

The eligibility for ROCs of electricity generated by fuels derived from plant/animal matter depends upon:

• The technology used (incineration, anaerobic digestion, gasification or pyrolysis);
• Whether the plant is a qualifying Combined Heat and Power (CHP) scheme;
• The proportion of the energy content derived from plant/animal matter as opposed to fossil fuels;
• Whether the plant/animal matter is an energy crop; and
• Whether the fossil fuel is waste (and, if so,whether it is solid recovered fuel).

Assessments of energy content and fuel mix are applied to periods of one month. In assessing eligibility, fossil fuel used for certain permitted ancillary purposes (for example, ignition and emissions control) is not included.

In the case of anaerobic digestion, gasification and pyrolysis (referred to in the RO as advanced conversion technologies), generators will receive ROCs for each MWh of electricity attributable to the renewable energy content of the fuel on the following basis:

• Anaerobic digestion projects earn 2 ROCs (unless the fuel is landfill or sewage gas in which case they earn 0.25 ROCs or 0.5 ROCs respectively);
• Pre-banding gasification or pyrolysis projects (gasification/pyrolysis that does not meet the requirements of standard gasification/pyrolysis in the RO, but which had preliminary accreditation before April 2009 and is accredited by April 2011) earn 1 ROC;
• Standard gasification or pyrolysis projects (gasification/pyrolysis that meets the requirements of standard gasification/pyrolysis) earn 1 ROC ; and
• Advanced gasification or pyrolysis projects (gasification/pyrolysis that meets the requirements of advanced gasification/pyrolysis) earn 2 ROCs.

Waste incineration projects will not generally be eligible for ROCs in the absence of CHP, unless the waste qualifies as biomass. Generators without CHP will receive the following number of ROCs for each MWh of electricity attributable to the renewable energy content of the fuel:

• If the energy content attributable to plant/animal matter is 90% or more (regardless of whether there is a single fuel stream or a number of fuel streams, some of which may be waste) the fuel is classed as biomass, which:
• ordinarily earns 1.5 ROCs; but
• earns 2 ROCs for the proportion attributable to energy crops;
• If the energy content attributable to plant/animal matter is less than 90%, the generator falls into the co-firing category, which:
• is ordinarily eligible for 0.5 ROCs; but
• earns 1 ROC for energy crops; and
• no ROCs if the fuel mix includes any waste (unless the only waste is solid recovered fuel (SRF), as defined in the RO legislation, in which case the renewable energy content of the SRF is ignored but ROCs are issued based on the renewable energy content of the remainder of the fuel).

The position changes with the inclusion of combined heat and power (CHP). The good quality (GQCHP) element of the CHP-generated electricity will receive the following number of ROCs for each MWh of electricity attributable to the renewable energy content of the fuel:

• If the energy content of the fuel attributable to plant/animal matter is 90% or more (whether or not it is from energy crops) - 2 ROCs;
• If the energy content of the fuel is less than 90% and includes waste (regardless of whether or not the waste is SRF) and provided plant/animal matter makes up at least 10% of the energy content - 1 ROC.

Measuring the renewable content of fuel

Establishing the proportion of a fuel's renewable energy content is important in two regards:

• First, the banding that applies may depend upon the energy content - the distinction between 90% plant/animal matter (biomass), and 89% plant/animal matter (co-firing or waste) is particularly significant;
• Second, ROCs will only be issued in respect of the renewable energy content.

The fuel measurement and sampling requirements have always been a matter of contention, and have been regarded as particularly onerous in the case of mixed waste streams, with the oft-quoted result that no ROCs have been issued in respect of CHP waste incineration since it became eligible in 2006.

It is in respect of municipal waste that the biggest change has occurred: a generator can now use published data to satisfy Ofgem that the renewable energy content of its fuel is likely to be 50% or more, in which case a 50% energy content can be relied upon without further sampling or measurement.

In addition, the legislation now allows for the sampling of gases and bottom ash as a means of establishing the renewable content of fuel. Otherwise, the RO legislation remains light on practical detail as to how the renewable energy content is to be established. Nevertheless, a number of useful statements regarding fuel measurement and sampling were made by the Department of Energy and Climate Change (DECC) (and its predecessors) during consultation, and these have largely been reflected in Ofgem's Fuel Measurement and Sampling guidance document.

But a word of caution - this is only guidance and Ofgem will consider each generating station on a case-by-case basis. The industry continues to hope that measurement and sampling becomes less problematic and the new approach to municipal waste is a positive step forward.

Other incentives for renewable electricityGeneration

In addition to support under the RO, electricity from renewables sources (including energy from waste) is exempt from the Climate Change Levy, and so qualifies for Levy Exemption Certificates (LECs) that can be sold with the electricity. For the purposes of the LEC regime, 50% of the energy content of waste is deemed to come from renewable sources.

From April 2010, anaerobic digestion projects (along with other non-waste related projects) below 5 MW will be able to choose between support under the RO or support under the new Feed-in Tariff (in fact, anaerobic digestion projects with a capacity of 50 kW or less will only be supported under the FIT and will no longer be eligible for support under the RO).

Similarly to the RO, the FIT will be funded by electricity suppliers, which will be obliged to enter into arrangements with eligible generators wishing to participate in the FIT regime. The FIT will provide two guaranteed income streams over a 20-year period (indexed at Retail Prices Index (RPI)):

• A generation tariff paid for every kWh of electricity generated, being 11.5 pence in the case of projects of 500 kW or less, and 9 pence in the case of larger projects; and
• An export tariff paid for every kWh of electricity exported to the grid, being 3 pence per kWh.

Generators will have the option to contract independently for the sale of exported electricity, in which case the generator will still receive the generation tariff, but will not receive the export tariff (its income for exported electricity will be as agreed under its commercial arrangements with the purchaser of that electricity).

Other energy-from-waste technologies may become eligible under the FIT in the future, but in light of the complexities over its introduction, the available of the FIT will be limited to anaerobic digestion initially.

The Renewable Heat Incentive

The Renewable Heat Incentive (RHI) is due to be introduced with effect from April 2011. As such, the detail of the policy, not least the method by which the RHI is to be funded, remains to be determined. Nevertheless, the recent DECC consultation confirmed that energy-from-waste projects would be eligible for support under the RHI, to the effect that the 'useful' heat produced otherwise than from fossil fuels would be rewarded.

The RHI is also likely to incentivise the production of biogas, either for combustion on-site to produce heat or for injection into the national gas network.

It is proposed that the level of support will differ from technology to technology and will take the form of a per kWh tariff. In the case of small installations, the tariff will be paid on the basis of deemed generation. In the case of larger installations, the heat will need to be metered.

As outlined above, the use of CHP is currently incentivised via the RO. The current suggestion is that CHP developers would have the option until 2013 to choose between support under the RO or support under the RHI, and that thereafter developers would only be able to receive support under the RHI.

Basics of the RO

Those licensed to supply electricity (whether in Great Britain or Northern Ireland) are required to submit a certain number of ROCs in respect of each year. For these purposes, a 1 April to 31 March year is used - an Obligation Period.

The number of ROCs that each supplier is obliged to submit in respect of each Obligation Period represents a percentage of the total electricity supplied by that supplier in that Obligation Period. The applicable percentage for each Obligation Period is calculated in accordance with the Order, and is intended to increase each year.

Separate Obligations apply to each of (1) England & Wales, (2) Scotland and (3) Northern Ireland, so the supplier is obliged to submit a particular number of ROCs in relation to the amount it has supplied in those three jurisdictions.

The ROCs to be submitted in respect of an Obligation Period must be submitted by the 1 September following the end of the Obligation Period. They are submitted to Ofgem (the GB energy regulator, acting as an agent of the Northern Ireland regulator for Northern Ireland).

The consequence of the RO is that suppliers need to obtain ROCs. ROCs are issued to those who generate renewable electricity but can subsequently be bought by, and sold to, anyone. Suppliers are therefore encouraged either to generate their own renewable electricity, or to purchase ROCs from others who generate renewable electricity.

However, the RO is designed with the intention that there will never be enough ROCs in existence to allow all suppliers to entirely satisfy their obligation to submit ROCs - 'headroom'. As an alternative to submitting ROCs, suppliers can 'buy-out' their obligation by paying a fee to Ofgem for each MWh's worth of ROCs it was obliged to, but has not, submitted. This fee - referred to as the 'buy-out price' - is currently £37.19/MWh, and will increase in accordance with the RPI.

All the money received by Ofgem by way of buy-out price payments is aggregated together to form a 'buy-out fund'. The money in the buy-out fund is then paid back to those suppliers that submitted ROCs in proportion to the number of ROCs they submitted - this is sometimes referred to as the 'recycling payment'. There are actually separate buy-out funds for each of the three jurisdictions, but the recycling payments from each fund are distributed on a UK-wide basis.

The buy-out price and the recycled payment (or at least participants' estimates of the recycled payment) determine the market value of ROCs, as suppliers can either chose to (1) pay the buy-out price or (2) buy ROCs and benefit from the recycled payment.

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For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Rebecca Davies on +44 (0)121 685 3819, Gayle Redding on +44 (0)121 685 2708 or Rebecca Lum on +44 (0)121 260 9973

This published article may contain information of general interest about current legal issues, but does not give legal advice.