What Is the Renewables Obligation and Who Pays for It?

The Renewables Obligation Is a Government Scheme That Forces Energy Suppliers to Source a Proportion of Their Electricity from Renewable Generators. You Pay for It Through Your Electricity Bill.

The Renewables Obligation (RO) is one of the UK’s primary mechanisms for funding renewable electricity generation. Introduced in 2002, it works by placing a legal obligation on licensed electricity suppliers to source a specified proportion of the electricity they supply from eligible renewable sources. Suppliers who cannot source sufficient renewable generation must pay a buy-out price into a fund, which is then redistributed to those suppliers who did meet their obligation. The cost of compliance — whether through sourcing renewables or paying the buy-out — is ultimately passed through to electricity consumers in the unit rate.

For UK businesses, the Renewables Obligation represents a permanent and growing component of the electricity unit rate — one that has been adding to bills since 2002 and will continue to do so until the last RO-accredited generation assets complete their support period.

How the Renewables Obligation Works

Each year, Ofgem sets the Renewables Obligation level — the number of Renewables Obligation Certificates (ROCs) that suppliers must present per MWh of electricity they supply. ROCs are certificates issued to accredited renewable generators (wind farms, solar installations, biomass plants, hydroelectric facilities) for each MWh of eligible electricity they generate.

The trading mechanism works as follows:

• Renewable generators receive ROCs for their eligible generation and sell them to electricity suppliers (or trade them on the ROC market)
• Suppliers accumulate ROCs from renewable generators and present them to Ofgem at year end to demonstrate compliance with their obligation
• Suppliers who fall short of their obligation pay a buy-out price per missing ROC (set annually by Ofgem, approximately £50–55 per ROC in recent years)
• The buy-out fund proceeds are redistributed proportionally to suppliers who did meet their obligation — creating a “recycled payment” that enhances the value of compliance

The cost of acquiring ROCs — either by purchasing them from renewable generators or paying the buy-out price — is recovered from electricity consumers through the unit rate. This cost appears in your electricity bill whether it is visible as a separate line item (on some pass-through contracts) or embedded in the all-inclusive unit rate (on standard fixed contracts).

ROC Banding: Different Technologies Receive Different Support

Not all renewable technologies receive one ROC per MWh. Ofgem applies “banding” — different ROC values for different technologies — to reflect the varying costs of renewable generation and policy objectives for specific technologies:

• Established technologies (large hydro, landfill gas): 0.25–0.5 ROCs per MWh — lower support as they are lower cost
• Standard technologies (onshore wind, solar): typically 1 ROC per MWh (though this varied over time as the scheme evolved)
• Emerging technologies (offshore wind, certain biomass): historically 1.5–2 ROCs per MWh — higher support to incentivise development of more expensive technologies

The banding multiplier affects the total cost of meeting the obligation: a supplier sourcing electricity from a 2-ROC technology receives more compliance value per MWh purchased than one sourcing from a 0.5-ROC technology, affecting the market dynamics of the ROC market.

The Renewables Obligation vs Contracts for Difference

The Renewables Obligation was the primary UK renewable support mechanism from 2002 until 2017, when it closed to new entrants. Renewable projects commissioned after 2017 receive support through the Contracts for Difference (CfD) scheme instead — a different mechanism that provides generators with a guaranteed “strike price” for their output, with differences between the strike price and the market price settled through a levy on electricity consumers.

Crucially, the RO did not disappear when it closed to new entrants. Existing RO-accredited generators continue to receive ROCs for 20 years from their accreditation date. Many wind farms accredited in 2010–2016 will continue generating ROC obligations — and therefore RO costs on electricity bills — until the 2030s.

UK electricity consumers are currently funding both the Renewables Obligation (for pre-2017 generation) and the Contracts for Difference (for post-2017 generation) simultaneously. Both costs appear in the environmental levy component of the electricity unit rate.

How Much Does the RO Cost on Your Bill?

The total cost of the Renewables Obligation as a proportion of the electricity unit rate varies year to year as ROC prices, obligation levels, and buy-out prices change. As a broad indication, the combined environmental levy component of a business electricity bill — covering RO, CfD, Feed-in Tariff, and Capacity Market charges — typically represents 12–18% of the total all-inclusive unit rate.

On an electricity contract with an all-inclusive unit rate of 25p/kWh, approximately 3–4.5p/kWh relates to environmental levies including the RO. For a business consuming 500,000 kWh per year, this is £15,000–£22,500 per year in environmental levy costs — a permanent overhead that is not negotiable through procurement, though it can be reduced for qualifying businesses through CCL exemptions on related charges.

Can You Avoid the Renewables Obligation Cost?

The RO cost is embedded in all electricity supply contracts and cannot be avoided by standard procurement activities. It is a regulated cost applied equally across all licensed suppliers — choosing a different supplier does not eliminate or reduce the RO component.

However, businesses generating their own renewable electricity — through rooftop solar, for example — reduce their grid electricity purchases and therefore reduce the total RO cost they bear proportionally. Each unit of self-generated renewable electricity consumed on-site is a unit not purchased from the grid, so the RO component of that unit is not paid.

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