Renewables Obligation (United Kingdom)

The Renewables Obligation (RO) is a market support mechanism designed to encourage generation of electricity from eligible renewable sources in the United Kingdom. There are three related schemes for the three legal jurisdictions of the UK. In April 2002 the Renewables Obligation was introduced in England and Wales, and in Scotland as the Renewables Obligation (Scotland). The RO was introduced in Northern Ireland in April 2005. In all cases, the RO replaced the Non-Fossil Fuel Obligation which operated from 1990.

The RO placed an obligation on licensed electricity suppliers in the United Kingdom to source an increasing proportion of electricity from renewable sources, similar to a renewable portfolio standard. This figure was initially set at 3% for the period 2002/03, and in 2010/11 it was 11.1% (4.0% in Northern Ireland). By 2020 it was almost half of all electricity in England, Wales and Scotland, and nearly 20% in Northern Ireland. An extension of the scheme from 2027 to 2037 was declared on 1 April 2010 and is detailed in the National Renewable Energy Action Plan.

The RO closed to new generation between March 2015 and March 2017, with some grace periods. It was replaced by the Contracts for Difference scheme. Accredited generating stations will continue to receive 20 years of support, until March 2037.

Suppliers meet their obligations by presenting Renewable Obligation Certificates (ROCs) to Ofgem. Where suppliers do not have sufficient ROCs to cover their obligation, a payment is made into the buy-out fund. The buy-out price suppliers pay is a fixed price per MWh shortfall and is adjusted in line with the Retail Prices Index each year. The proceeds of the buy-out fund are paid back to suppliers in proportion to how many ROCs they have presented. For example, if they were to submit 5% of the total number of ROCs submitted they would receive 5% of the total funds that defaulting supply companies pay into the buy-out fund.

ROCs are intended to create a market, and be traded at market prices that differ from the official buy-out price. If there was an excess of renewable production beyond the supplier obligation, the price of ROCs would fall below the buy-out price. The price of ROCs could approach zero if renewable and non-renewable generation costs became similar, when there would be little or no subsidy of renewable generation. If there is less renewable production than the obligation, the price of ROCs would increase above the buy-out price, as purchasers anticipate later payments from the buy-out fund on each ROC.

Obligation periods run for one year, beginning on 1 April and running to 31 March. Supply companies have until the 31 August following the period to submit sufficient ROCs to cover their obligation, or to submit sufficient payment to the buy-out fund to cover the shortfall.

The cost of ROCs is effectively paid by electricity customers of supply companies that fail to present sufficient ROCs, whilst reducing the cost to customers of supply companies who submit large numbers of ROCs, assuming that all costs and savings are passed on to customers.

The percentage of electricity to be supplied by renewable electricity under the scheme generally increased each year. This is set separately for Great Britain (England and Wales plus Scotland) and for Northern Ireland.