Towards the end of the summer, the UK Government, the Scottish Government and the Northern Ireland Executive published a call for evidence outlining the case for transitioning to fixed price ROCs (also known as Renewables Obligation Certificates) in 2027.
This is the first government policy document regarding fixed price ROCs since before the Energy Act 2013, over ten years ago. The topics raised by the call for evidence have the potential to significantly impact affected projects, being those with ROC accreditations that extend beyond March 2027. We encourage the owners of such projects, the PPA (power purchase agreement) offtakers for such projects and licensed electricity suppliers generally to review and respond to the call for evidence.
Below, we briefly outline the proposals and the stated rationale behind the changes.
Background
ROCs are tradable certificates issued to certain accredited renewable electricity generators.
Although now closed to new applicants, eligible generators receive ROCs for a period of 20 years from the date of accreditation; so that some generators will continue to receive ROCs until 31 March 2037, when the scheme ends.
Under the current arrangements, UK electricity suppliers present a required number of ROCs to Ofgem in respect of each MWh of electricity they supply during an obligation year. Suppliers buy these ROCs from generators (or traders). If a supplier fails to present a sufficient number of ROCs to meet its obligation, the supplier is required to pay a specified "buy-out price" for each ROC that has not been presented. These amounts contribute to a "buy-out fund", the proceeds of which are distributed to suppliers in proportion to the ROCs each supplier has presented.
The ROCs that generators receive for their renewable generation output are sold to suppliers via PPAs or via traders or auctions. Prices for ROCs are currently set by market forces of supply and demand.
Rationale for the introduction of fixed price certificates
The call for evidence sets out a number of reasons for switching from the current market-based system for establishing the price of ROCs to a fixed price system, as summarised in brief below.
1. Price stability
As generators' accreditations expire, the number of ROCs will reduce, leading to a reduced ROC obligation for all suppliers. As a result, more suppliers may choose to pay into the buy-out fund, rather than purchase ROCs. This reduced demand may lead to an oversupply of ROCs and a crash in their market price. Furthermore, reduced numbers of accredited generators will lead to greater uncertainty in terms of the number of ROCs produced (as most ROC generators use intermittent generation technologies). This may further increase volatility and the risk of oversupply, again risking a crash in prices. This volatility is expected to be particularly acute in the final years of the scheme, from the early-to-mid 2030s. A fixed price system would eliminate such volatility and the risk of price crashes in the final years of the scheme.
2. Reducing the risk of supplier payment default and mutualisation
Historically, some suppliers have defaulted on their obligations under the scheme and the resulting costs have had to be mutualised across the non-defaulting suppliers (such costs ultimately being passed on to consumers). Under the current scheme, supplier settlement of any required payments into the buy-out fund is annual. A fixed price system would enable more frequent payments by suppliers, reducing the overall exposure of the scheme to payment default.
3. Reducing the cost of the scheme
In order to maintain ROC prices at an acceptable lever, headroom (around 10% of forecast ROC generation) is built into the suppliers' obligation to ensure the number of ROCs actually produced is not greater than the supplier's obligation to present ROCs. Depending on the design of the fixed price system, this headroom may no longer be necessary and could be reduced or removed, as certificate prices would be fixed.
4. Rebalancing electricity costs
The switch to a fixed price system may provide opportunities to shift the costs of the scheme from electricity consumers to gas consumers, thus incentivising electricity consumption over gas consumption and promoting the greener form of energy.
Proposed changes
Primary legislation to introduce a fixed price system already exists under the Energy Act 2013. The call for evidence seeks to assess whether these powers are sufficient to introduce an optimal fixed price system.
The call for evidence presents two potential models, each with various options, and seeks stakeholder input of these models and options, raising various specific questions.
These models and options are briefly described below.
1. Model 1 - central counterparty and no trading in certificates
Under this model, a central counterparty would be appointed that would be responsible for paying generators for their certificates and collecting funds from suppliers in respect of their obligations. The total supplier obligation would be set annually.
There would be no trading of certificates, as payments would be made directly by and to the central counterparty. This model would provide greater revenue certainty for generators (who would be paid monthly retrospectively) and would remove the administrative costs for suppliers associated with procuring ROCs, as well as eliminating fees paid to intermediaries. However, this model could increase the administrative burden on suppliers in relation to settlement of their obligation.
There are a number of options set out in terms of frequency of supplier settlements, ranging from monthly to annual, as well as options for retrospective and advanced settlement. Each of these options has various advantages and disadvantages which are discussed in detail in the call for evidence.
2. Model 2 – central counterparty and trading in certificates
Under this model, a central counterparty would purchase certificates from market participants at a fixed price, either quarterly or annually. However, trading would also be permitted, so that generators could choose to either hold onto their certificates and sell them to the central counterparty or sell them to suppliers (directly or through traders).
The central counterparty would levy suppliers according to their individual obligation, either quarterly or yearly and either retrospectively or in advance (depending on the option taken forward). Again the call for evidence considers the pros and cons of these different settlement options.
3. Setting the price of each fixed price ROC
The call for evidence also explores how the fixed price for each ROC will be established. Significantly, the call for evidence refers to the 10% headroom which currently applies when setting the obligation, as potentially being unnecessary. The call for evidence also proposes a switch from RPI to CPI indexation.
Next steps
The call for evidence is open until 9 October 2023. Responses provided will be used to develop detailed policy proposals which will then be consulted on.
If you need help navigating the evolving regulatory landscape for renewable energy subsidies, our team of energy specialists can assist. We regularly advise a range of clients (including generators, suppliers, government departments and energy traders) on energy regulatory matters. Please contact George Nixon or Gus Wood for more information.