The Renewables Obligation (RO) is the flagship government scheme to encourage and reward the development of larger scale renewable electricity projects.
It is similar to the Feed in Tariff (FIT) scheme, which focuses on smaller scale projects. The Levy Control Framework underpins both schemes.
In effect RO places an obligation on electricity suppliers to increase the amount of electricity they source from renewable regeneration.
The RO came into effect in 2002 and so alongside the Climate Change Levy (CCL) it is one of the longest running schemes and therefore most regular contributory costs on an electricity bill.
The RO will close to new generators on 31 March 2017 as the Contract for Differences (CfDs) scheme gains traction from its launch date in 2014. However accredited generators under the RO will continue to receive their full lifetime of support (20 years) until the scheme closes completely in 2037. In total therefore RO will have contributed to the cost of each p/kWh of electricity you use for 35 years.
How does it work?
The fundamental principle of RO is to obligate energy suppliers to provide proof of origin for the electricity they provide. This proof takes the form of Renewables Obligation Certificates (ROCs).
The level of the obligation is published by the 1st October each year in advance of the ‘electricity’ financial year commencing 1st April.
ROCs in effect are certificates of greenness that are issued by generators who have sourced their energy from renewable methods. These must be accredited renewable generating stations.
Each month, eligible renewable generators report the amount of renewable electricity they generate to Ofgem.
Ofgem then issues ROCs to the generators in accordance with how much renewable energy they have generated.
Generators can then sell their ROCs to suppliers, allowing them to receive a premium in addition to the wholesale electricity price for creating new renewable sources.
ROCs, in common with electricity, are a tradeable commodity and therefore are not subject to a fixed price. Therefore as with wholesale electricity, the amount a supplier pays for their ROCs is subject to negotiation between the supplier and generator. As a result both advantageous and disadvantageous deals can be entered into.
Suppliers are then required to present their ROCs to Ofgem to demonstrate their compliance with the RO.
However rather than enter deals on disadvantageous terms, or if suppliers cannot source a sufficient number of ROCs to meet their obligation, they are required to pay an amount into a buy-out fund to compensate for their failure.
In effect the supplier does not have to physically receive the renewable energy and supply it to the customer, they simply have to ‘pay’ for the generation of it.
As a result suppliers can meet their obligation by:
- Presenting their ROCs
- Making a buy-out payment to Ofgem to cover any shortfall
- A combination of both
The administration cost of the scheme is recovered from the buy-out fund and the rest is distributed back to suppliers in proportion to the number of ROCs they produced as a compensatory reward.
The cost of sourcing the ROCs or of fulfilling the terms of the buy-out fund are passed onto customers via their electricity bill most often as an inclusive charge not visible on the invoice.
How is the cost set?
The Department of Energy and Climate Change (DECC) sets the level of the RO each year.
Comparing the expected supply of ROCs to demand derives the level. This is based on a forecast of renewable energy generation volumes and a forecast of the expected supplier demand for ROCs.
An imbalance is created to ensure that there is little possibility of supply exceeding demand and thereby reducing the tradeable value of ROCs. In so doing the scheme instils confidence in investors that a beneficial market will exist for their generation in almost all circumstances.
Each supplier has an individually calculated obligation that they are required to meet. This is set by multiplying the forecast of their annual supply volume (MWH) by the level of the level of obligation (ROC per MWH).
This obligation level varies annually:
- In 2013/14 is 0.206 ROCs for each MWH supplied.
- In 2014/15 it will be 0.244 ROCs
Whilst the buy-out fund also varies per £/MWH:
As a result in 2014, a Supplier with a portfolio of 1TWH, or 1,000,000 MWH would be required to present 206,000 ROCs. Under the buy-out mechanism this would currently cost £8.6m. A sum that will be recovered through customer invoices.