Since 2002 the Renewables Obligation (“RO”) has encouraged the growth of large-scale renewable energy generation and currently contributes £2bln annually to this goal. Renewable generation has grown from 3.1GW to 13 GW, 1.8% to 9.4% in percentage terms. All renewable electricity generation technologies are eligible, however installations that were commissioned prior to 01/01/1990 and where the major components are unchanged since 31/12/1989 are ineligible.
The RO scheme is open to new applicants until 31 March 2017, with support thereafter for 20 years.
The scheme imposes a legally binding obligation upon licensed electricity suppliers to prove that a set percentage of their supply originates from accredited renewable generating stations, or pay a financial penalty. This scheme is enforced via Renewables Obligation Certificates (ROCs).
OFGEM issues ROCs to each accredited renewable generating station in proportion to their net renewable electricity generation that month, and the type of installation. Initially no differentiation between technologies was enforced and a uniform 1 ROC per MWh was issued. The prime beneficiary of this approach was onshore wind projects which proliferated to the detriment of alternative technologies and attracted public anger.
A 2009 banding review addressed this imbalance and varied ROC eligibility by technology. Offshore wind farms received 2 ROCs per MWh (falling to 1.8 by 2016) and onshore wind farms 1 ROC per MWh (falling to 0.9 by 2013). Future tariffs will be reviewed as technologies mature, however fluctuating rates will inevitably discourage component manufacturers and investors from committing to long-term projects.
Generators can sell their ROCs to electricity suppliers and receive additional revenue over and above the wholesale price of their output. ROCs are transferable instruments and can be traded between suppliers. The suppliers present ROCs to OFGEM to evidence the proportion of their energy sales which originated from renewable sources. The 2011/12 rate was 0.124 ROCs/MWh supplied and will rise to 0.154 ROCs/MWh by 2015 where, under current plans, it will remain. Where a supplier fails to present sufficient ROCs, a penalty “buy-out price” (currently set at £40.71 per ROC for 2012/13 and linked to RPI) is payable. OFGEM accrues these payments into a buy-out fund, which is in turn distributed on a pro-rata basis (after administrative costs) amongst those suppliers who have presented ROCs (termed the “recycling payment”).
Suppliers therefore have two motives to present ROCs to OFGEM – to avoid buy-out penalties and to receive buy-out fund rebates. It is therefore possible for ROC prices to exceed the buy-out price in anticipation of a future rebate. Currently 70% of RO are met via ROCs, and 30% by fund contributions.