“Greenwashing is a luxury no one can afford. By making this change we’ll save consumers money and reinvest in true green energy, and we hope others will follow our lead.”
Those were the words of Ovo Energy chief executive Raman Bhatia as he announced last month that the company will stop buying Renewable Energy Guarantees of Origin (REGO) certificates to market the environmental credentials of its tariffs to customers.
The move has brought back to the surface a long-running and contentious debate over the extent to which REGOs are actually helping to move the needle on decarbonisation; in its latest form, whether a recent rise in prices has made the certificates a meaningful driver of new investment or just a windfall for existing generators.
It has also sparked fresh calls to reform the scheme, with Rachel Fletcher, director of regulation and economics for Octopus Energy, telling Utility Week consumers need to know truth about their energy use to unlock a “new competitive dynamic” between suppliers.
Introduced in 2003 as the UK version of the EU’s Guarantees of Origin, REGOs have faced persistent criticism from some quarters as inherently misleading due to the “unbundling” of the certificates from the power they represent.
The reality is all consumers get their electricity from the same power grid, which for the time being remains heavily reliant on fossil fuels.
Yet by buying enough certificates to cover their consumption on an annual basis, suppliers are able to sell their tariffs as 100% renewable, regardless of where they actually source their power from. And for a long time, the certificates were so cheap – tens of pence per megawatt-hour – they could do this for just a pound or two per customer each year.
However, driven by growing demand for green tariffs, REGO prices have shot up over the last several years. According to Cornwall Insight, which Ovo commissioned to investigate REGOs, spot prices for certificates, each equating to one megawatt-hour of generation, rose to around £6.34 in its latest market survey in January.
Although suppliers are probably paying less on average, Cornwall said meeting yearly demand for the certificates at this price point could cost around £1.4 billion. Summarising the findings of the consultancy’s report, Ovo said the money spent on REGOs will provide “little to no benefit to renewable energy generation and will instead soon become a drain on customer finances.”
One person who agrees is Ecotricity founder Dale Vince, who says they also looked at ditching REGOs around a year ago: “I’ve never been a fan because I don’t believe they bring about any new capacity. They seem to be just a windfall for existing generation, especially when the price goes up.”
At the time, Vince was putting Ecotricity up for sale and ultimately decided against making any major policy changes. But, having shelved plans to sell the company in November, he says this issue is now “back on the agenda”.
“If you’re involved in financing renewable energy projects, you know that you’ve got to make a projection of income over 10, maybe 15 years,” he explains. “And with energy prices you can do that – there are forward curves – and you can have some confidence in it.
“How do you predict the price of REGOs? I don’t believe anybody builds them into their business plan or that they’re fundamental to a go/no go decision to invest in a project.”
This was also the finding of Cornwall Insight, which said REGO revenues remain a negligible proportion of the forecast revenue stack for new renewable projects and are factored into investment decisions at a “steep” discount due to uncertainty over future prices.
Vince says they are “money for nothing,” adding: “Every penny we spend on REGOs is wasted because it’s not building new capacity.”
At the same time, Vince says he finds it “funny” that Ovo are the ones making the argument that REGOs enable greenwashing as they have been “one of the worst perpetrators”. He says that “for long time” Ovo has been buying power from fossil fuel generators and “slapping a REGO on it and calling it green.”
He says the supplier was happy to take advantage of REGOs to boost their green credentials when they were “dirt cheap,” but less so now they are “stupidly expensive”.
Vince says what is really needed is the direct participation of energy suppliers in building renewables: “That’s what energy companies should be doing.”
Ecotricity has always emphasised its direct investments in renewable generation to customers and, alongside Good Energy, is one of the few suppliers to have obtained an exemption from the price cap on this basis.
Vince acknowledges that Ovo has committed to diverting the money it would have spent on REGOs to supporting new renewable projects, but says this is “big volte face” for the company, whose founder, Stephen Fitzpatrick, once “took a very public position against the ownership of generation, telling customers he preferred to focus on keeping their energy bills down”.
Steve Harris, vice president for energy at Ovo, said: “We’re committed to supporting new independent renewable generation through our subsidy-free PPA (power purchase agreement) contracts, which could make the difference between renewable energy developments going ahead or not.”
Tom Bent, former director of operations and trading at SSE and now director of the consultancy PACE, shares Vince’s scepticism towards Ovo’s claimed motives for ditching REGOs.
However, Bent believes the increased prices mean REGOs are now genuinely contributing to the proliferation of renewables: “As an instrument it’s nothing like as bankable as the CfD, which lasts for 15 years at a firm price but I’m absolutely sure that renewable generators in their financial decisions are allowing something for REGO income.”
“The price is firmly in the territory where it does make a difference,” he adds.
Bent concedes that a lot of REGOs will come from assets with Contracts for Difference (CfD) anyway but says this income will lead developers to “nudge their offers lower” when bidding in auctions, offsetting some of the cost.
“If you’re talking about a community scale generator – potentially not in a position to participate in the CfD scheme, either because they’re the wrong scale or it’s too complicated – then REGOs are actually a fairly meaningful revenue stream for you,” says another industry source, now working for a major renewable generator.
“If you’re a larger-scale generator who is participating in the CfD scheme, then the REGO price does at least allow you to reduce your CfD bid. It’s not just extra money”.
They say Ovo has purported to support renewables for a long time and “now the REGO is finally worth something it’s exactly the moment they’re bailing out of it, which ultimately harms development of renewables.
“That’s not to say the other stuff they’re doing isn’t helpful and beneficial – working on flexibility and that sort of stuff is absolutely what we need – but I’m not clear why it’s a binary choice”.
In its report for Ovo, Cornwall said its discussions with developers planning to participate in future auctions CfD auctions suggest they are factoring REGO revenues into their bids but the reduction only amounts to around £1/MWh – significantly less than expected REGO prices over the coming years.
Furthermore, the consultancy noted that, to the extent that procurement is limited not by auction budgets but by capacity caps, this reduction may not make a difference to the volume of renewables that are actually deployed.
As a large supplier, with a substantial number of customers on tariffs marketed as green, Bent says Ovo’s decision will likely make millions more REGOs available to other buyers and therefore be bearish for the market.
He says prices don’t seem to have dropped yet but there “may just be a lagged effect that sellers are not immediately crashing the market because they’re waiting to see a bit more evidence before they panic.”
Even with Ovo dropping out of the market, Bent says he nevertheless expects REGO prices to remain at historically high levels over the next few years at least. Cornwall likewise said market sentiment among traders appears to be that REGO prices will stay at around their current level for the foreseeable future.
Up until April, Guarantees of Origin certificates from the EU were usable in Britain and vice versa for REGOs. However, following the failure of the government to reach a reciprocity agreement with the EU, as of last month their import is banned.
Cornwall said the REGO market is therefore expected to be “very tight” for the remainder of this decade.
Looking further ahead, Bent says the current “tension” in the REGO market, which has driven up prices, will eventually dissipate as the growing supply of certificates surpasses demand for green power from environmentally conscious customers, although when that point will come is not obvious.
Fletcher says whilst REGOs can be confusing for customers, this issue has been “exaggerated by suppliers who want to charge an uplift to customers for renewable PPA-backed tariffs.” She says a miniscule proportion of customer enquiries to Octopus are related to the issue.
She says preventing the unbundling of REGOs from the power they represent, as Dale Vince suggests to Utility Week, would not address the real source of confusion for customers: “What creates confusion is that customers on green tariffs are still supplied fossil fuel generated power at some parts of the year and that happens even when the retailer has entered into a PPA for renewables as well as when they’ve bought an unbundled REGO.”
She says the REGO scheme is now “very old” and needs to be updated for the new world we now inhabit in which many renewables are now cheaper than fossil fuel generation on a per-megawatt-hour basis: “Everybody is paying for renewable power through the environmental levies on their bills… The thing that is missing is the matching of renewable power with the demand profile and that’s what any sort of certification should be trying to encourage.”
She continues: “What would be helpful is to move away from a binary green/not green definition and instead for companies to be required to tell their customers on a time-matched basis what percentage of the time they were being served with green power based on the output of the green power they’re purchasing, either directly through PPAs or by purchasing unbundled REGOs.”
Fletcher says it would be too expensive at the moment for any supplier to attempt to offer customers 100% green power on this basis, but this information would unlock a “new competitive dynamic” between suppliers and enable them to pitch offers to customers to improve their percentage, for example, through participation in demand flexibility services.
Several years ago, Toby Ferenczi, a vice president at Ovo, founded a global initiative called EnergyTag to create an international framework for time-stamped half-hourly generation certificates, and early last year, he left the retailer to start the company Granular Energy to develop a platform for managing and trading these certificates. In an interview with Utility Week, Ferenczi said the EnergyTag initiative could pave the way for the evolution of REGOs.
The government explored the issue in a call for evidence, which was launched in August 2021 and closed to responses the following December. The document said it planned to provide an update in early 2022 but it has yet to report back.
Perhaps the rejection of REGOs by one of Britain’s largest energy suppliers will be a spur to action.