British Gas's green claims take a hit with Renewables Obligation fine

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12 July 2011, Gas, Electricity, Nuclear, Solar, Wind

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Part of the UK's aim to raise renewable energy generation to 15% by 2020 involves adherence to the complex Renewables Obligation (RO) policy program that came into force in 2002. The RO is designed to incentivize renewable electricity generation through the use of Renewables Obligation Certificates (ROCs).

For the compliance period 2010/11, for example, electricity suppliers have to source renewable electricity equivalent to 11.1 ROCs per 100MWh of electricity sold. Electricity suppliers can generate the renewable electricity themselves, buy ROCs on the market, or pay Ofgem a predetermined penalty per MWh they are short. Ofgem is also responsible for issuing ROCs to the eligible renewable electricity producers, and for recycling any penalty payments from suppliers that fall short to give to the eligible producers.

Obviously, staying abreast of legislation and correct reporting procedures is an important aspect of any business, and a large utility's compliance department will reflect this. It must be vexing for British Gas, then, to have misreported its electricity sales for seven years, an error that it discovered and disclosed to Ofgem. This appears to be due to a combination of misinterpretation of the legislation and the fact that a number of the company's business customers were billed based on estimates rather than actual meter readings. As a result, British Gas underreported the total amount of electricity supplied by an average of 0.62% per year.

Miscalculating the total amount supplied increased the renewable proportion of electricity sales that British Gas reported to Ofgem, meaning that it had to surrender fewer ROCs to the energy authority. This also meant that, had British Gas been short, penalty payments in lieu of ROCs would be have been lower than they would otherwise have been.

In addition to the GBP1m fine, British Gas has agreed to retire 87,000 ROCs this compliance period, which Ofgem estimates would have cost other market players GBP2.8m. The costs for British Gas, however, are much higher. According to the Non-fossil Purchase Agency, ROCs traded at an average price of GBP48.60 between September 2010 and May 2011, resulting in opportunity costs of GBP4.2m for British Gas. While the buy-out price is somewhat lower at GBP36.99/MWh for 2010/11, penalty payments to Ofgem could still amount to GBP3.2m, if British Gas were short by the retired 87,000 ROCs.

While the GBP1m fine and opportunity costs will sting, British Gas need not worry too much about further compliance issues. Estimated electricity bills will soon be a thing of the past, as smart or advanced meters are rolled out to small and medium enterprises. Also, the proposed EU Directive on Energy Efficiency mandates minimum information on bills, leading to more accurate billing data.

What British Gas ought to worry about, however, is consumer confidence in the company's green energy offerings. In a recent survey, Datamonitor found that more than half of British businesses do not sign up to renewable energy as they do not trust that the energy really is from renewable sources. Furthermore, brand and reputation are of high importance for nearly three quarters of business customers when choosing their energy supplier. Being fined by Ofgem for misreporting under the RO could undermine consumers' trust in British Gas's green offerings.

Source: Datamonitor

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