The Renewables Obligation (RO)
We introduced the Renewables Obligation (RO) in 2002 to provide incentives for the deployment of large-scale renewable electricity in the UK.
The RO requires licensed UK electricity suppliers to source a specified proportion of the electricity they provide to customers from eligible renewable sources. This proportion (known as the ‘obligation’) is set each year and has increased annually.
In the UK there are 3 obligations:
- the RO for England and Wales
- the RO for Scotland (managed by the Scottish Government)
- the RO for Northern Ireland (managed by the Department of Enterprise, Trade and Investment)
How the RO works
This is how the RO works:
- The level of the annual obligation on electricity suppliers is published by 1 October in the year before it comes into effect, eg the obligation for the financial year starting 1 April 2015 was published on 1 October 2014.
- Eligible renewable electricity generators report the amount of renewable electricity they generate on a monthly basis to the Office of the Gas and Electricity Markets (Ofgem).
- Ofgem issues Renewables Obligation Certificates (ROCs) to electricity generators relating to the amount of eligible renewable electricity they generate.
- Generators sell their ROCs to suppliers (or traders), which allows them to receive a premium in addition to the wholesale electricity price.
- Suppliers present their ROCs to Ofgem to demonstrate their compliance with the RO. Suppliers who do not present enough ROCs to meet their obligation must pay a penalty (known as the ‘buy-out price’).
- The money Ofgem collects in the buy-out and late payment funds is re-distributed on a pro-rata basis to suppliers who presented ROCs.
The RO will close to new generators on 31 March 2017. Electricity generation that is accredited under the RO will continue to receive its full lifetime of support (20 years) until the scheme closes in 2037.
How the value of a ROC is determined
ROCs are tradeable commodities that have no fixed price. The amount an electricity supplier pays for a ROC is a matter for negotiation between the supplier and generator.
For the purposes of government financial planning, the long-term value of a ROC is made up of the buyout price, ie the payment avoided by the supplier for presenting ROCs to Ofgem, plus 10%.This is roughly £46 per ROC in 2013/14 prices.
From 2027 the Department of Energy & Climate Change (DECC) will fix the price of the ROC for the remaining 10 years of the RO at its long-term value and buy the ROCs directly from the generators (as set out in the white paper on Electricity Market Reform and subject to parliamentary approval). This will reduce volatility in the final years of the scheme.
You’ll find further information about the fixed ROC in the technical update to the white paper on Electricity Market Reform.
Setting the obligation level
DECC sets the level of the obligation each year using a fixed target or a ‘headroom’ calculation. It does this in accordance with provisions in the Renewables Obligation Order 2009 (as amended).
‘Headroom’ works by providing a set margin between the predicted generation (supply of ROCs) and the level of the obligation (demand for ROCs). This helps reduce the possibility of supply exceeding the obligation in any given year and therefore reducing the market value of a ROC. Headroom lets investors feel more confident that there will always be a market for their ROCs and it helps stabilise the ROC price.
The obligation level determines the number of ROCs suppliers are required to produce for each megawatt hour of electricity (MWh) they supply to customers. Each supplier’s obligation is calculated by multiplying their total annual supply to customers in the UK (MWh) by the level of the obligation (ROCs per MWh).
The obligation level for each obligation period (1 April to 31 March) is published annually by 1 October of the previous year. The obligation level for suppliers in 2013/14 is 0.206 ROCs for each MWh they supply to customers in England and Wales. In 2015/16 it will be 0.290 ROCs.
Find out how we’ve calculated the level of the RO for 2014/2015 and 2015/16:
- Renewables obligation level calculations: 2015 to 2016
- Renewables obligation level calculations: 2014 to 2015
Suppliers can meet their obligation by:
- presenting ROCs
- making a buy-out payment to Ofgem to cover any shortfall in the number of ROCs requirement (set at £43.30 per ROC for 2014/15)
- a combination of both
The money Ofgem collects in the buy-out and late payment funds is recycled on a pro-rata basis to suppliers who presented ROCs minus the cost of Ofgem’s administration of the RO.
Suppliers that do not present ROCs pay into the buy-out fund at the buy-out price but do not receive any portion of the recycled fund.
Cap on new build dedicated biomass generating capacity
There is a cap of 400MW on the total new build dedicated biomass capacity that can expect grandfathered support under the RO. Guidance on how to apply for a place within the 400MW cap on new build dedicated biomass projects is available.
The cost to consumers
It is assumed that suppliers pass the cost of compliance with the RO on to consumers through their energy bills.
DECC’s report on the estimated impacts of energy and climate change policies on energy prices and bills, published in March 2012 estimates that the impact of the RO on average household electricity bills is £30 in 2013 (in real 2012 prices).
Since 2011/2012 the RO has formed part of the Levy Control Framework (LCF) within the government’s public spending framework. The purpose of the LCF is to ensure that the RO supports renewable electricity deployment in a cost-effective and affordable way.
Ofgem publishes data on the RO on the Renewables and Combined Heat and Power (CHP) Register, including details of the stations accredited under the RO and the ROCs awarded.
Ofgem also publishes an annual report on the RO and guidance material relating to the operation of the scheme.