The Renewables Obligation (RO)

The Coalition Government has made clear its commitment to increasing the deployment of renewable energy to make the UK more energy secure, help protect consumers from fossil fuel price fluctuations, drive investment in new jobs and businesses in the renewable energy sector, as well as to keep us on track to meet our carbon reduction objectives for the coming decades. As part of EU-wide action to increase the use of renewables energy, the UK has committed to generating 15% of our energy from renewable sources by 2020.

Government analysis suggests the 2020 target requires around 108 terawatt hours per year (TWh/y) of large-scale renewable electricity generation in 2020, with the remainder (126 TWh/y) coming from small-scale renewable electricity, renewable heat and transport. Generating electricity from renewable technologies is generally more costly than from long-established fossil fuelled technologies. If we are to meet this challenging target, appropriate support needs to be provided to these technologies to ensure that they are viable.

The UK renewable energy roadmap focuses in particular on the eight technologies which evidence from the market suggests now have either the greatest potential to help the UK meet the 2020 renewable energy target in a cost-effective and sustainable way, or offer the greatest potential for the decades that follow. It outlines specific actions to remove the barriers to renewables deployment.

What is the RO?

The RO is currently the main financial mechanism by which the Government incentivises the deployment of large-scale renewable electricity generation. Support is granted for 20 years, which balances the need to provide investors with long-term certainty with the need to keep costs to consumers to a minimum.

Since the RO’s introduction in 2002, it has succeeded in supporting the deployment of increasing amounts of renewables generation from 3.1GW in 2002 to 8GW in 2009 and more than tripling the level of renewable electricity in the UK from 1.8% in 2002 to 6.6% in 2010. It is currently worth around £1.3 billion a year in support to the renewable electricity industry.

In April 2010, the end date of the RO was extended from 2027 to 2037 for new projects to provide long-term certainty for investors and to ensure continued deployment of renewables to meet the UK’s 2020 target and beyond.

How does the RO work?

The RO places a mandatory requirement on licensed UK electricity suppliers to source a specified and annually increasing proportion of electricity they supply to customers from eligible renewable sources or pay a penalty. The scheme is administered by Ofgem who issue Renewables Obligation Certificates (ROCs) to renewable electricity generators for every megawatt hour (MWh) 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 ROCs to Ofgem to demonstrate their compliance with the obligation. Where they do not present sufficient ROCs, suppliers have to pay a penalty known as the buy-out price. This is set at £38.69 per ROC for 2011/12 (linked to RPI). The money collected by Ofgem in the buy-out fund is recycled on a pro-rata basis to suppliers who presented ROCs. 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.

Does the RO apply across the UK?

Yes. The RO system works on the basis of three complimentary obligations, one covering England and Wales, and one each for Scotland and Northern Ireland. For investors, particularly those with large portfolios across the UK, it is important that the three mechanisms are as consistent as possible. Decisions regarding the details of the Obligations, including the setting of RO banding levels, in Scotland and Northern Ireland are for the Scottish Government and Northern Ireland Executive respectively. In some cases they have set bands to reflect their national circumstances and objectives. We are committed to working closely with the Devolved Administrations.

When will the RO scheme close to new generation?

The RO will close to new generation on 31 March 2017. Generation which is accredited under the RO will continue to receive its full lifetime of support in the “vintaged” scheme after 2017. The scheme will close in 2037.

This table provides a summary of the Ro since it started in 2002:

• Renewables Obligation: statistics

Other available renewable energy financial incentives

• The Feed-in Tariffs scheme (FITS) works alongside the RO and encourages deployment of additional small scale (less than 5MW) low carbon electricity generation, particularly by organisations, businesses, communities and individuals that have not traditionally engaged in the electricity market.
• The Renewable Heat Incentive (RHI) will when fully implemented, support generation of heat from renewable sources at all scales.

Do you have a query?

If your query concerns the operation of the RO scheme then further information can be found on the Ofgem: Renewable Obligation web pages.

If you have a query about the policy behind the RO then please send it to the RO mailbox at robr@decc.gsi.gov.uk