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Renewable Obligation (RO)

The Renewable Obligation (RO) is the flagship government scheme to promote and reward the growth of larger-scale renewable electricity projects.

It is similar to the Feed-in Tariff (FIT) scheme, which focuses on smaller-scale projects. The Levy Control Framework underpins both schemes.

In effect, RO places a responsibility for electricity suppliers to increase the amount of electricity they source from renewable regeneration.

The RO came into effect in 2002 and so alongside the Climate Change Levy (CCL), it is one of the longest-running schemes and therefore most regular contributory costs on an electricity bill.

The RO will close to new generators on 31 March 2017 as the Contract for Differences (CFDs) scheme gains traction from its launch date in 2014. However attributed generators under the RO will continue to receive their full lifetime of support (20 years) until the scheme closes completely in 2037. In total consequently RO will have contributed to the cost of each p/kWh of electricity you use for 35 years.

How does it work?

The fundamental principle of RO is to obligate energy suppliers to provide proof of origin for the electricity they provide. This proof takes the form of Renewable

Obligation Certificates (ROCs).

The level of the obligation is published by the 1st October each year in advance of the ‘electricity’ financial year commencing 1st April.

ROCs in effect are certificates of greenness that are issued by generators who have sourced their energy from renewable methods. These must be accredited renewable generating stations.

Each month, qualified renewable generators account for the amount of renewable electricity they generate to Ofgem.

Ofgem then issues ROCs to the generators in agreement with how much renewable energy they have generated.

Generators can then sell their ROCs to suppliers, allowing them to receive a premium in addition to the wholesale electricity price for creating new renewable sources.

ROCs, in familiar with electricity, are a tradable commodity and therefore are not subject to a fixed price. Therefore as with wholesale electricity, the amount a supplier pays for their ROCs is subject to negotiation between the supplier and generator. As a result, both advantageous and disadvantageous deals can be entered into.

Suppliers are then required to present their ROCs to Ofgem to demonstrate their compliance with the RO.

However rather than enter deals on disadvantageous terms, or if suppliers cannot source a sufficient number of ROCs to meet their obligation, they are required to pay an amount into a buy-out fund to compensate for their failure.

In effect the supplier does not have to physically receive the renewable energy and supply it to the customer, they simply have to ‘pay’ for the generation of it.

As a result, suppliers can meet their obligation by:

  • Presenting their ROCs
  • Making a buy-out payment to Ofgem to cover any shortfall
  • A combination of both

The administration cost of the scheme is recovered from the buy-out fund and the rest is distributed back to suppliers in proportion to the number of ROCs they produced as a compensatory reward.

The cost of sourcing the ROCs or fulfilling the terms of the buy-out fund are passed onto customers via their electricity bill most often as an inclusive charge not visible on the invoice.

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