The Renewable Obligation Scheme (RO) has incentivized the UK's renewable electricity industry since 2002 through a system of tradable green certificates called Renewable Obligation Certificates (ROCs).

After a series of fine-tuned reforms, the Renewable Energy Obligation Support Scheme was no longer open to new participants in 2017 and was replaced by the Contract for Difference Scheme (CfD), which became the government’s main scheme to support large-scale renewable energy generation. CfD is a mechanism to "hedge" price fluctuations. Facilities that have received RO certification will continue to receive ROC until 2037.

The journey from ROC to CfD

The RO scheme incentivizes electricity suppliers to purchase green energy by requiring them to submit to energy market regulator Ofgem each year the amount of ROC allocated to them based on their market share. Approved renewable energy generators typically sell the ROC earned along with the electricity generated to suppliers under short-term or long-term power purchase agreements (PPAs).

ROC has a separate price in addition to the electricity produced, so selling ROC results in subsidies to renewable energy generators. Historical "tiered" restrictions have meant that less mature technologies can receive more ROC per MWh and thus receive higher subsidies to encourage the development of new technologies.

The ROC price available to generators is based on the "buy-out price", which is set by Ofgem for each obligation period. If a supplier does not have sufficient ROC to meet its obligations, it must pay the buyout fund accordingly. Based on the number of ROC submitted by the supplier, the proceeds from the buyout fund will be returned to the supplier in proportion. Therefore, if there is a shortfall in meeting obligations, the ROC will be worth more than the face value of the buyout price.

ROC aims to create a market and trade at a market price that is different from the official buyout price.

In contrast, CfD is arguably a simpler mechanism, with generators contracting directly with Low Carbon Contracts, a company owned by the government. The available budget is split between more mature low-carbon technologies and less mature low-carbon technologies, with the latter having higher execution prices (and therefore receiving more subsidies).

Fixed price ROC

Last year, the government issued a call for the introduction of Fixed Price Certificates (FPCs) into the UK-wide RO scheme from 31 July to 9 October 2023, assuming that "those currently in receipt of ROCs, electricity traders and suppliers It will be of particular interest to business operators, companies operating in the energy sector, as well as consumer and environmental groups concerned about the electricity sector." No responses or follow-up consultations have been announced yet.

Switching to FPC is not a new initiative. In 2011, the Cameron-Clegg government announced its intention to transition RO "from live trading to an FPC-based scheme" from 2027. As early plants were withdrawn from plans, the project moved to a CfD model, a move aimed at addressing expected ROC price fluctuations.

Such fluctuations have not yet occurred due to the large number of power stations joining the scheme before closure, which is expected to occur in the mid-2030s. However, there is renewed interest in FPC due to the benefits it may bring in terms of supplier payment defaults and potential rebalancing/cost reduction.

The call for evidence sets out the potential benefits of switching to FPC systems. These benefits include price stability, reduced risk of supplier defaults on payments, mutual benefits, and reduced costs of RO programs. It also outlines potential headwinds, including short-term disruption risks, design redundancies, reduced supplier working capital and reduced program value. The call for evidence also outlines two possible models for FPC-based RO schemes.

Under Model 1, a central counterparty is designated and, unlike the current system, no trading of certificates is allowed. The rationale is that this would increase revenue certainty for generators, save suppliers long-term administrative expenses, and reduce costs for consumers (as third-party dealer fees will be eliminated).

In Mode 2, a central counterparty is still designated, but certificate trading is allowed. This maintains the current transferability of ROC, giving market participants greater leeway in managing cash flow. The deal will also drive stronger relationships between generators and suppliers.

Regardless of its final form (if it does come to fruition), the FPC system will have a significant impact on participants engaged in ROC transactions. Previously, the government had said that under the FPC system, the government would purchase ROCs directly from power generators to protect existing PPAs. But as always, policy is still subject to change.

We recommend that clients review their PPAs in advance of upcoming changes, especially where large portfolios may be affected. Any such transition could have a material impact on the revenue payable under the PPA. If the PPA expires before 2027, revisions to the RO plan are unlikely to cause problems. However, for PPAs expiring after 2027, we recommend a review focused on determining the terms of the transition to FPCs.trina solar panels