Counsel London
"'We envisage that the Call for Evidence will be of particular interest to those currently in receipt of ROCs, electricity traders and suppliers, businesses operating in the energy sector, and consumers and environmental groups with an interest in the electricity sector'."
The Renewables Obligation (“RO”) has incentivised UK renewable electricity generation since 2002 through a system of tradeable green certificates called Renewables Obligation Certificates (“ROCs”). On 31 July 2023, the government issued a call for evidence on introducing Fixed Price Certificates (“FPCs”) into the UK-wide RO schemes, stating: “we envisage that the Call for Evidence will be of particular interest to those currently in receipt of ROCs, electricity traders and suppliers, businesses operating in the energy sector, and consumers and environmental groups with an interest in the electricity sector”.¹ This follows a joint consultation – published in 2021² – between the Department for Business, Energy and Industrial Strategy (“BEIS”), as it then was, and Ofgem, which sought initial views on the introduction of FPCs as a way of addressing supplier payment default.
For those unfamiliar with the RO scheme, participating suppliers of electricity must present ROCs to Ofgem annually. Accredited renewable generators accrue ROCs and sell them to suppliers along with the power they generate, usually under short- or long-term power purchase agreements (“PPAs”). Where suppliers do not have sufficient ROCs to cover their obligation, they must make a corresponding payment into the buy-out fund.³ ROCs were designed to create a market and they are traded at market prices that differ from the official buy-out price. Having been through a series of finetuning reforms, the RO support scheme was closed to new participants in 2017 and replaced with Contracts for Difference (“CfDs”) as the government’s main scheme for supporting large-scale renewable generation. CfDs are a mechanism for “hedging” price volatility.⁴ RO-accredited facilities will continue receiving ROCs until 2037.
Back in 2011, the government announced its intention to transition the RO from a live-traded scheme to an FPC-based one from 2027 onwards. This was to address volatility in the price of ROCs which was expected to emerge as early generating stations were retired from the scheme and as other projects moved to the CfD model. Due to a glut of stations joining the scheme prior to closure, this volatility has not yet materialised – it is expected to be delayed until the mid-2030s. However, there has been renewed interest in FPCs for the benefits they might offer in relation to supplier payment default and the potential rebalancing/reduction of costs.
"Due to a glut of stations joining the scheme prior to closure, this volatility has not yet materialised – it is expected to be delayed until the mid-2030s."
The call for evidence sets out the following potential benefits of moving to an FPC system from 2027:
- price stability;
- reducing the risk of supplier payment default and mutualisation;
- reducing the cost of the RO scheme; and
- rebalancing electricity costs.
It sets out the following potential downsides:
- risk of short-term disruption;
- design redundancies;
- reduction in suppliers’ working capital; and
- reduction in scheme value.
The call for evidence also sketches out two possible models for an FPC-based RO Scheme.
Under Model 1, a central counterparty is appointed and – unlike the current system – no trading in certificates is allowed. The rationale for Model 1 is that it could enable increased revenue certainty for generators, create long-term administrative savings for suppliers and reduced costs for consumers (as third-party traders’ fees would be eliminated).
"Whatever the final shape of the scheme (if it ever materialises), an FPC system will have enormous ramifications for players dealing in ROCs."
Under Model 2, a central counterparty is still appointed but trading in certificates is allowed. Model 2 maintains the current portability of ROCs and allow market participants more leeway to manage their cashflow. Trading is also thought to foster stronger relationships between generators and suppliers.
Whatever the final shape of the scheme (if it ever materialises), an FPC system will have enormous ramifications for players dealing in ROCs. Previously, the government had said that, under an FPC system, it would buy ROCs directly from generators to protect existing PPAs from the impact of change in law provisions. But as ever, policy remains subject to change, and interested parties will have until 9 October 2023 to submit their responses.
In addition to ensuring they put in responses to the call for evidence, we recommend clients check their PPAs well in advance of the impending change, particularly where large portfolios may be affected. Any such transition could have a substantive impact on the revenues payable under a PPA. If a PPA expires before 2027, then revisions to the RO scheme are unlikely to present issues. However, if for PPAs lasting beyond 2027, we recommend carrying out a review focussed on determining what (if any) provisions are made for a transition to FPCs.
London Trainee Hamish Ungless also contributed to this article.
If you will be affected by these changes, or if you would like to discuss any of the issues raised, get in touch with the authors or your usual WFW contacts.
FOOTNOTES
[3] The proceeds of the buy-out fund are paid back to suppliers in proportion to how many ROCs they have presented. Therefore, if there is a shortfall in compliance against the obligation, ROCs become worth more than the face value of the buy-out price.
[4] CfDs are a system of reverse auctions and constitute a mechanism for “hedging” price volatility in low carbon electricity generation.