Renewables Obligation

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Renewables Obligation

The Renewables Obligation (RO) came into effect on 1st April 2002. A market-based mechanism, it replaced the previous Non Fossil Fuel Obligation (NFFO). The Electricity Act 1989 enabled the Secretary of State to impose an obligation on suppliers to supply a specified proportion of their electricity from renewable energy sources. Ofgem (The Gas and Electricity Markets Authority) is responsible for the implementation and administration of this legal obligation on all licensed electricity suppliers known as “the Renewables Obligation” [the Renewables Obligation for England and Wales (RO) and the equivalent Renewables Obligation for Scotland (ROS)].

A similar obligation was introduced in Northern Ireland (NIRO) in 2005. Since its introduction the Renewable Obligation has been amended by statutory instrument to improve its operations.

Under the RO/ROS/NIRO, Renewable Obligation Certificates (ROCs) designed to reward the generation and supply of electricity from renewable sources are issued by Ofgem. New hydropower schemes and all existing hydropower stations under 20 MW built or refurbished after 1st January 1990 are eligible. All stations with a declared net capacity of 1.25 MW or less are eligible regardless of their date of build or refurbishment. The RO/ROS/NIRO places a legal obligation on all licensed electricity suppliers to produce evidence that:

• They have supplied a specified proportion of their electricity supplies from renewable energy sources to customers, or

• Other electricity suppliers have done so, or

• Between them, they have done so.

The ROC separates the renewable attribute from energy production so that its value can be identified and traded separately from the electricity. A supplier may buy ROCs from generators or from another party to be used as evidence to submit to Ofgem on an annual basis that they have complied with the RO. Suppliers submit ROCs to Ofgem on an annual basis to discharge their obligations. Alternatively, suppliers can discharge their obligations, in whole or in part, by paying the buy-out price, which indicates the maximum theoretical price of ROCs. Ofgem returns the buyout funds to suppliers who had fulfilled their obligation with ROCs in proportion to the number of ROCs each of them had presented.

The aim of the RO was to progressively increase the supply of electricity from renewable sources. There was concern that this could leave the RO as a “ceiling” rather than a “target” since the value of ROCs would fall to zero once the RO has been achieved. The Government is in the process of increasing the target to 20% by 2020.

Following the Energy Review of 2006, ‘banding’ was introduced in order to better support newer technologies, such as off-shore wind, wave and tidal power, offering multiple ROCs for these newer technologies and fractional ROCs for established technologies.

Various banding reviews have taken place since 2006 in England & Wales, Northern Ireland and Scotland. The latest in 2012 suggested that hydropower should only receive 0.5 ROC per MWh, i.e. a 50% reduction in England, Wales and Scotland. During the consultations the BHA and the UK hydropower industry made representations to the Department of Energy and Climate Change and the Scottish Government to prove that the ROC rate for hydro should not reduce. This was based on actual current CAPEX and OPEX costs.

The resulting hydro banding, announced in July 2012 was:

• In England and Wales0.7 ROC

• In Scotland1.0 ROC

Government responses affected ROC banding in all administrations and these can be viewed via the following links:

• England & Wales (BEIS)

• Northern Ireland (DETI)

• Scotland (Scottish Government)

In 2010 the UK government commenced a programme of major reform of the Energy Markets.

The main proposals focus on:

• Carbon price support – strengthening the carbon price for electricity generators

• RO to be replaced as the support mechanism for Renewable generation, by Feed-in Tariffs (FiTs) and Contracts for Difference (CfDs).

• Capacity Payments – targeted payments to encourage security of supply

• Emissions Performance Standards – to act as a back-stop to limit how much carbon the most carbon-intensive power stations can emit.

 Renewables Obligation was closed to new Generation on 31st March 2017.

(March 2018)

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British Hydro Association – Representing the interests of the UK hydropower industry