The Renewables Obligation was introduced in 2002 (2005 in Northern Ireland) and runs until 2027. There are three similar Obligation orders: for England and Wales (the RO), Scotland (ROS) and Northern Ireland (NIRO).

How does it work?

In simple terms the Renewables Obligation makes Licensed Electricity Suppliers source an increasing proportion of their electricity from renewables, or else pay a financial penalty called the buy-out.

The RO annual quotas are set annually starting at 3% in England, Wales and Scotland and rising to 15.4% in 2015-16. For every MWh that the suppliers fall short of their quota, the buy-out is £30 (increasing annually, index linked to the RPI since 2002) . The buy out money is recycled back to suppliers in proportion to how much renewable electricity they supplied.

Renewable Obligation Certificates (ROCs) are the currency of the Obligation and ROCs are used as proof of compliance.  Most, but not all, renewable electricity qualifies for ROCs.

What renewables are eligible under the Renewables Obligation?

The text below is a very general introduction. Refer to the legislation for detail - as it can get complicated!

In the relatively straightforward category is Wind, wave, tidal stream, PV, landfill gas, sewage gas and biogas from Anaerobic Digestion.  All generating stations would qualify if built after 1990.

It is a bit more complicated, in the case of pure biomass (the fuel has to be less than 10% contaminated by fossil fuels, and various other restrictions); and hydro which qualifies whatever its size if built after 1990, and if it is refurbished and under 20MW.  All micro-hydro plant, whenever it was built gets ROCs if it is 1.25MW or less.

The biomass fraction of waste gets ROCs, provided that an "advanced technology" is used, i.e. gasification or pyrolysis.  AD of any waste qualifies for ROCs.

Where it gets complicated is in the case of Co-firing biomass with fossil fuels and for generators located on site of a NFFO project.

What are ROCs worth?

The further we are  away from reaching the percentage of renewables required by the Renewables Obligation the more ROCs are worth.

The buy out price sets a floor price (unless the obligation is met in full - see below) but there is no ceiling price. There is a mathematical relationship between the size of the Obligation, the level of the shortfall and the theoretical value of a ROC. To see how this works in detail see an article by Gaynor Hartnell (though written some time ago, it explains the workings.)

To see recent ROC prices look at the NFFO and SRO auction prices, on the NFPA website.

Administration of the RO

The RO is administered by Ofgem.

It is their role to accredit generating stations under the RO, and to issue ROCs to eligible generation. They also collect compliance statements and ROCs from suppliers at the end of each compliance year, and collect and distribute the buy-out funds.

Following some company collapses in the first year of the RO, there were some significant defaults in payments into the buy-out funds. A subsequent revision of the RO and ROS orders introduced the provision for mutualisation of any such future losses (above a threshold and below a ceiling defined annually) to be collected by increasing the buy-out in future years.

How are we doing?

Some figures on achievement under the RO are shown here.

Ofgem also publishes annual reports on performance of the RO.