The Renewables Obligation and Fixed Price Certificates: Call for Evidence 

The Government (in conjunction with the Northern Ireland Executive and the Scottish Government) launched a Call for Evidence on 31 July 2023 regarding the introduction of Fixed Price Certificates into the UK-wide Renewables Obligation schemes. We anticipate that generators, licensed suppliers, traders and funders may have strong views on a number of the questions asked in the call for evidence. The closing date for responses is 9 October 2023.

Background

The Renewables Obligation (RO) was launched in 2002 (2005 in NI) as the main method of incentivising UK renewable electricity generation. It operates as a market-based system of tradeable green certificates (Renewable Obligation Certificates (ROCs)) which are issued to accredited generators in proportion to the volume of renewable electricity they generate. ROCs are ultimately purchased by licensed electricity suppliers as a means of meeting their renewable obligation. The precise ROC value is a matter of negotiation but is, in part, driven by the “buy-out value” which is the cash out payment a supplier can elect to make in lieu of each ROC owed plus any anticipated “recycle” payments.

Three separate but complementary schemes cover England and Wales (RO), Scotland (ROS) and Northern Ireland (NIRO) and all three schemes closed to new applications on 31 March 2017 (subject to limited grace periods). Early accredited stations will receive support until 2027 whilst later accredited stations will receive support for 20 years or (if earlier) until final scheme closure on 31 March 2037.

In 2011, the Government announced its intention to transition from a live traded scheme to a Fixed Price Certificate (FPC) scheme from 2027 onwards and the current Call for Evidence seeks views on two different models (see below) for a future FPC scheme across the RO, ROS and NIRO. The call for evidence claims that benefits of the FPC scheme have been identified including (i) price stability (thereby addressing the ROC price volatility anticipated to arise as generators leave the scheme); (ii) a reduction in supplier payment default; (iii) cost reduction; and (iv) a rebalancing of electricity costs. Despite the fact that price volatility is now not expected until early to mid-2030s due to a late surge in RO accreditations ahead of closure, the Government is still minded to deliver any new FPC model in 2027.

FPC Models

The call for evidence asks for views on two potential FPC models:

Model 1 is based on a central counterparty being responsible for paying generators a fixed price for the FPCs they have earned and settling suppliers’ obligations by collecting funds owed. No trading of FPCs would occur as payment is made directly by the central counterparty, thereby eradicating the certificate relationship between generators and suppliers. Generator payments would be made monthly whilst various options for the frequency of supplier settlement are consulted upon within the Call for Evidence.

Model 2 is based on a central counterparty retaining the current administrator’s functions of issuing FPCs and confirming each supplier’s obligation. However, the central counterparty would also be able to purchase FPCs from market participants at a fixed price (either quarterly or annually). Trading of FPCs would be permitted, thereby enabling generators to choose between selling to the central counterparty or to a trader, broker or supplier (who would then on-sell to the central counterparty). The current “portability” of certificates would therefore be maintained together with the option to retain the certificate relationship between generators and suppliers.

With each model, several options for the frequency of certificate purchasing and supplier settlement by the central counterparty are consulted upon within the Call for Evidence.

Pricing

The Call for Evidence also explores how a suitable price for FPCs could be determined. When first muted in 2011, the Government stated that any FPC scheme would offer the same level of compensation to current day (being the buy-out price plus 10% headroom). However, the call for evidence states that the current 10% headroom (i.e. the supplier obligation being set 10% higher than anticipated ROC numbers) may be unnecessary under a FPC scheme as the price stability provided negates the headroom rationale (being to avoid a ROC price crash by minimising the risk of ROC oversupply). The headroom could therefore be reduced or removed meaning that the FPC price would equate only to the buy-out price, thereby generating a significant cost reduction. Significantly, the Call for Evidence also proposes a switch to CPI indexation in relation to the FPC price (as opposed to the RPI indexation of the buyout price under the current ROC regime), with potential adjustments being made to reduce the risk of compound inflation.

Analysis

Whilst the transition to a fixed price certificate regime has been expected, this call for evidence is the first wider Government policy document the energy sector has seen on the transition since 2011 and we anticipate that some of the options mentioned are likely to provoke strong opinions.

At its core, the call for evidence reflects the delicate balancing act the Government needs to take in relation to preserving investor confidence and two elements of the energy trilemma, affordability and sustainability, with regards the legacy renewable regimes. As some of the options have serious cashflow implications for licensed suppliers and/or pricing implications for generators (and ultimately will affect what demand users are charged), we anticipate that generators, licensed suppliers, funders and many others will want to respond to the call for evidence and may take the view that the options proposed do not strike the right balance.

At a more practical level, funders and owners might want to start reviewing what their financial models assume around ROC value post 2027 and generators and suppliers will need to turn their attention in due course to the impact of the introduction of a FPC scheme on RO accredited projects in which they are involved. Many such projects will have a long-term PPA for the sale of all generated electricity and associated ROCs (together with other renewable and embedded benefits) and therefor generators and licensed suppliers will need to carefully review the PPA terms (including the change in law provisions) to ascertain whether the introduction of a FPC scheme has been expressly contracted for (and if so, how?) or whether it amounts to a change in law and the manner in which it is subsequently treated.

If you would like to know more about the potential impact of the FPC regime and/or how the introduction of the FPC regime might be dealt with under any power purchase agreements, please go to our website or contact Alec Whiter, James Phillips, Nick Churchward or Ross Fairley.