The Renewable Obligation is a government scheme aimed at incentivising large-scale renewable electricity generation in the UK.
What is the Renewable Obligation?
The Renewable Obligation is set up by the government as one of the main support mechanisms for renewable projects in the UK that are large-scale electricity generators.
Originally the Renewable Obligation was open to smaller scale renewable electricity generation, but this was superseded by the Feed-in-Tariff (FIT) in 2010. The Renewable Obligation was set up to incentivise the investment into renewable electricity generation in the UK by energy generators and other investors.
There were variations of the Renewable Obligation in Scotland which was called the Renewable Obligation Scotland (ROS), and in Northern Ireland which was called Northern Ireland Renewable Obligation (NIRO).
All three Renewable Obligation scheme closed to new applications on 31 March 2017. For some renewable technologies such as solar PV and onshore wind, it closed much sooner restricting the amount of support for these technologies as they were deemed more cost-effective and not needing the support of the Renewable Obligation.
Some renewable generators were also able to apply for extensions past this deadline if they meet specific eligibility criteria, but this grace period was strictly limited to specific reasons and for fixed periods of time. The grace period was given where development had already been approved, there was a grid delay, or an investment freeze which saw deadlines for some technologies extend to 31 March 2019.
How Does the Renewable Obligation Work?
The Renewable Obligation works on the principle that all UK energy suppliers were obligated under the Renewable Obligation Order as part of their licence to source an increasing amount of renewable electricity as part of their fuel mix.
To encourage energy suppliers to purchase the renewable electricity generated in the UK they had to purchase Renewable Obligation Certificates from these generators to meet the targets set against them.
Renewable generators had to submit an application to Ofgem to gain accreditation for their project. Once the renewable generation project was accredited Ofgem issued them with Renewable Obligation Certificates based on their monthly renewable electricity generation. Once received the generators can then sell these Renewable Obligation Certificates to the energy suppliers.
How Does the Closure of the Renewable Obligation Affect Those Who Had Already Applied?
The closure of the Renewable Obligation does not impact any renewable projects that had an accreditation date on or before the relevant closure date for that given technology. The obligation will remain in place for those already receiving the Renewable Obligation until 31 March 2027 and the targets for the energy suppliers will continue to be set annually.
After April 2027 a fixed price certification scheme will replace it and it will be fixed at the 2027 buy-out rates plus 10%, but this is yet to be fully consulted on.
If the renewable generation project receiving the Renewable Obligation is undergoing significant changes after the closure date, they would need to check that it still meets the criteria of the Renewable Obligation to remain eligible for it.
If the intention is to increase the generation capacity of the project, then the generator should contact Ofgem before making any changes to discuss how this will impact the current Renewable Obligation support received.
What Are the Closure Dates for Each Renewable Technology?
The following dates are when the Renewable Obligation closed for new applicants, however, some approved schemes were able to complete their development after these dates:
- Solar PV above 5MW closed on 31 March 2015
- Solar PV below 5MW closed on 31 March 2016
- Onshore wind closed on 12 May 2016 with the except of Northern Ireland where projects over 5MW closed on 31 March 2016 and those below 5MW closed on 30 June 2016
- All other renewable electricity generating technologies closed on 31 March 2017
How is the Renewable Obligation Regulated?
The Renewable Obligation is administered by Ofgem, the UK energy regulator, on behalf of the government and they follow the legislation that was put in the Renewable Obligation Orders.
As part of the legislation Ofgem’s role is to:
- Assess and accredit the renewable generating projects for their eligibility
- Distribute Renewable Obligation Certificates or Scottish Renewable Obligation Certificates to the eligible renewable projects for their generation
- Create and maintain a register of all Renewable Obligation Certificates and Scottish Renewable Obligation Certificates
- Revoke any certificates where needed
- Monitor the requirements of the Renewable Obligation Order and the compliance of the industry with it
- Administer the buy-out payments. This is where energy companies who fail to meet their required Renewable Obligation Certificate level must pay the equivalent cost to cover their shortfall
- Re-distribute the funds from the buy-out payments which are divided between the energy suppliers who met their Renewable Obligation Certificate level
- Calculate annually any adjustments to the pricing of the buy-out payments to account for changes in the retail price index
- Recover their Renewable Obligation administration costs from the buy-out fund
- Annually publish a report on the Renewable Obligation progress and compliance
What Are the Renewable Obligation Certificates?
Renewable Obligation Certificates, often called ROCs, are certificates that Ofgem issue to the renewable electricity generators each month for the electricity that they generate from accredited projects.
The renewable generators then sell these Renewable Obligation Certificates to the energy suppliers in order for the energy suppliers to meet their Renewable Obligation targets. Renewable Obligation Certificates must be claimed within the period that they were issued or the proceeding period.
Energy suppliers have set targets to meet each year and if they do not meet this target level they must pay the equivalent costs to Ofgem’s buy-out fund. This buy-out fund is split between the energy suppliers who met their obligation after Ofgem have deducted their administration costs for delivering Renewable Obligation.
The level of Renewable Obligation Certificates issued is determined by the technology, the size of the plant, the location, and when it received its accreditation, but is based on the number of megawatt hours they produce. To receive the Renewable Obligation Certificates, they must also meet the criteria of the Renewable Obligation scheme.
What replaces the Renewable Obligation?
In 2014, the government introduced a new scheme to replace the Renewable Obligation which was called Contracts for Difference (CfD). During this overlapping period, renewable electricity generators were able to choose which of the two schemes they wanted to participate in. The Contracts for Difference scheme is administered by the National Grid and the Low Carbon Contracts Company on behalf of the government.
What are Contracts for Difference (CfD)?
Contracts for Difference (CfD) is designed to stimulate investment and support the growth of renewable energy generation in the UK. CfD was a key mechanism in the Electricity Market Reform.
The CfD works by creating a private contract between the renewable or low carbon electricity generator and the Low Carbon Contracts Company (LCCC). The LCCC is a company owned by the government designed to administer the CfD with the National Grid.
Generators are able to bid for these contracts in auctions as long as they meet the eligibility criteria to participate. These auctions are held every few years with a fixed budget and the aim to guarantee future electricity generation from the development of new generation capacity.
The contract agrees to pay the difference between the strike price and the reference price for electricity generated. The strike price is the price that the generator bids at and this should reflect the cost of the investment in the generation technology. The reference price is the indicator of what the average market price for electricity will be in the UK.
The difference between these two prices is paid to the generator to subside the development and generation of the electricity. The generator would still sell the electricity to energy market as usual but would receive this top-up to guarantee that they receive the agreed strike price.
The reasoning behind this scheme is to guarantee revenue for renewable and low carbon electricity generators and to protect them from price uncertainty and fluctuations. By doing this it should assist generators and investors in making the investment in the UK energy market.
The motivation behind the scheme is to reduce carbon emissions resulting from energy generation and encourage the investment into renewable and low carbon technologies. If at any point the sale price of the electricity exceeds the strike price, then the generator will have to pay the difference back.
What is the Feed-in-Tariff?
The Feed-in-Tariff (FIT) is a government led incentive scheme to encourage the adoption of small-scale renewable electricity up to 5MW, such as solar PV and wind. The gives a guaranteed payment for up to 20 years to the owners of the eligible renewable electricity generating systems for the amount of electricity they produce and for exporting some of the electricity to the grid.
The scheme is run by the energy suppliers who are obligated to pay the FIT to owners of the systems. Only the larger energy suppliers are obligated to take part in the scheme, but many others participate voluntarily. Ofgem act as the FIT scheme administrator on behalf of the government.