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The Renewables Obligation

The new Renewables Obligation and associated Renewables (Scotland) Obligation came into force in April 2002 as part of the Utilities Act (2000). It requires power suppliers to derive from renewables a specified proportion of the electricity they supply to their customers. This started at 3% in 2003, rising gradually to 10.4% by 2010, and 15.4% by 2015. The cost to consumers will be limited by a price cap and the Obligation is guaranteed in law until 2027.

Eligible renewable generators receive Renewables Obligation Certificates (ROCs) for each MWh of electricity generated. These certificates can then be sold to suppliers, in order to fulfil their obligation. Suppliers can either present enough certificates to cover the required percentage of their output, or they can pay a ‘buyout’ price for any shortfall. All proceeds from buyout payments are recycled to suppliers in proportion to the number of ROCs they present. The buyout price is set each year by Ofgem, and in 2007/08 stands at £34.30/MWh, and ROC trading is administered by Non-Fossil Purchase Agency Ltd.

The RO was designed as a market mechanism to increase the uptake of renewables: ROCs have increased the profitability of renewable energy generation as the certificates have an additional value over and above the price of electricity itself. This is especially true for wind, which is already generating electricity at prices competitive with thermal-fired plant, while the RO has delivered considerably more renewables than the previous support mechanism of the Non-Fossil Fuel Obligation (NFFO) - see RO six times more effective than NFFO.

The climate change levy is another government mechanism for encouraging renewable energy.