Certify fossil power and let customers choose

Jessica Lennard, head of corporate affairs at Ovo Energy, argues that true fuel mix disclosure – and customer choice – requires a new certification scheme for fossil power

Much time is spent debating the optimum fuel mix at the generation end of the industry. Decisions on whether to build more coal, gas, nuclear, or renewables are considered in the context of balancing cost, decarbonisation and energy security. But less discussion of fuel mix takes place on the retail side. This is arguably because the energy which suppliers buy is essentially untraceable in origin, unless it is contracted for via a power purchase agreement (PPA) or is certified as renewable, or both.
Despite this, public disclosure by suppliers of their fuel mix has been a regulatory requirement since 2005. The tables tell an interesting, if predictable, story. Vertically integrated players each naturally contract for, and report, a mix heavily weighted toward their own portfolio, leaving independent suppliers reporting what is theoretically left over once, for example, the majority of nuclear and gas has been claimed by its owners. Independent suppliers like Ovo, buying largely from the wholesale market, have no control over this “residual mix” and no way of proving the true origin of the fuel they use.
The result is that a supplier may end up with a higher coal content and higher emissions than it would like, but options are currently limited in terms of what might be done about it.
One option is to buy more renewables. As mentioned above, the exception to the untraceable nature of energy purchased on the wholesale market is renewable power. Even if not purchased directly by PPA, it is still possible to prove renewables content using Levy Exemption Certificates (LECs) and Renewable Energy Guarantees of Origin (REGOs). These certificates, administered by Ofgem and declared to the Department of Energy and Climate Change (Decc) for the purposes of fuel mix disclosure, account for each unit of renewable electricity purchased by a supplier on behalf of a customer. The level will vary – some niche players are committed to sourcing only renewable power, while others (including Ovo) guarantee different degrees of renewable content in several of their tariffs.
Although offering a certain proportion of renewables on a tariff is a useful driver of consumer awareness, and customers choosing these deals provide an important signal to the market of the direction of travel at the user end of the wire, this system does not itself result in lower emissions. A supplier wishing to offer more renewables content simply purchases more certificates, but nothing has changed in terms of carbon.
The other current option is to simply buy more energy off-market using PPAs. The problem is that this limits the flexibility of a supplier to react to wholesale price changes and – crucially – to be nimble in passing on savings to customers when those prices drop. The 20% decline in the price of gas in the last year, which enabled Ovo to deliver seven price drops, provides a example of the commercial and customer benefits of cost reflectivity enabled by a flexible position in the wholesale market.
A better solution in our view would be to develop a mechanism whereby a supplier could prove they were choosing to use less fossil fuel. This is currently impossible for an independent supplier buying largely on the wholesale market, as they won’t receive generator certificates (as they would with a PPA) and the power is not renewable, so doesn’t come with LECs and REGOs attached.
If a supplier such as Ovo wished to buy less coal, a tradable certification scheme similar to LECs and REGOs would need to be devised either for gas, or for gas and coal. This would allow suppliers to prove, through the market (not just via PPAs) that they had chosen not to purchase coal. It would be a strong signal to the market that coal was not the future; and it would allow companies like Ovo, driven by customers for whom dirtier fossil fuels are increasingly unacceptable, to make more of a difference than they are able to do today. The financial benefits to gas of this increased demand would also be helpful in today’s depressed market.
Although the fuel mix appears primarily a generation side issue, demand is changing at the other end of the wire. Companies like Ovo are primarily retailers, not green campaigners. But our values, and we believe those of a large proportion of our customers, reflect a common commitment to a good balance of sustainability and affordability. We call it “mainstream green”. It means doing what is best for our customers today and tomorrow and we are actively looking for ways to advance our approach. New certification mechanisms to match the demand from companies like ours to use cleaner fuels could be an important stepping stone.