How ROCs Rip Us Off
How ROCs Rip Us Off
How the Renewables Obligation Certificate scheme will keep increasing our electricity bills.
Introduction
Most of the articles I have produced on subsidies for renewables have focused on the Contract for Difference (CfD) regime. This is because this is the active regime and most new renewables projects are commissioned under this regime. However, whilst producing last week’s article that updated the hidden cost of renewables, I noticed that the cost of the old Renewables Obligation Certificate (ROC) regime was far higher than the CfD regime. This prompted me to delve into the ROC data and see what insights could be gleaned.
Overview of the ROC Regime
The ROC system was designed to encourage the development of electricity from renewables. The scheme came into effect in 2002 in Great Britain and Northern Ireland followed in 2005.
ROCs are issued to operators of accredited renewable electricity generators for the power they produce. The number of ROCs per MWH generated varies by the type of generator. For instance, offshore wind attracts more ROCs per unit than onshore wind or biomass. It is also worth noting that the number of ROCs issued per MWh has changed during the life of the scheme.
Generators generally receive contracts for 20 years. The scheme was closed to new capacity in 2017 and replaced by the Contracts for Difference (CfD) scheme. However, there is a legacy of generators still operating under the ROC regime. Over time, the early generators will start to drop out of the scheme, but many developments will continue to receive subsidy up to 2037.
The scheme places an obligation on electricity suppliers (like Octopus or Eon) to present to Ofgem a specified number of ROCs per MWh of electricity supplied to their customers. Suppliers can meet their annual obligation by presenting ROCs, by paying into a buy-out fund or a combination of the two. The suppliers can buy ROCs from operators of renewables generators or from third-party traders.
Each scheme year, the value or buy-out price of a Renewable Obligation Certificate is indexed upwards by the Retail Price Index (RPI). The buy-out price for financial year 2023/24 is £59.01.
The combination of the value of a ROC certificate and the different ROC awards per MWh by technology means that different generating technologies receive different levels of subsidy per MWh. Note also that the subsidy they receive is in addition to what ever price they achieve for the electricity they sell on to the market. As the market price is frequently set by the price of gas-fired electricity, then by definition all these renewable generators are more expensive than gas.
Overall Volume of ROCs Issued and RO Generation
Each year, Ofgem publish a report and dataset on the performance of the Renewables Obligation Scheme. Figure 1 below (their Figure 3.4) shows how the number of ROCs issued and the amount of electricity generated each year.
The x-axis is expressed in System Years. SY20 is system year 20, which corresponds to the financial year ended 31st March 2022. We can see that the number of ROCs issued rose steadily up to SY18 (FY ended March 2020) but has since dropped back slightly. The amount of electricity generated also peaked in SY18 at nearly 85TWh but fell back to 78TWh in SY20.
Value of the ROC Scheme
Figure 5.10 of the Ofgem dataset shows the value of the ROC scheme for each year since SY9 (FY ended March 2011). The OBR also estimates the future value of the scheme out to March 2029. Figure 2 below combines the Ofgem and OBR data to show the history of the scheme value and the forecast of the future.
As can be seen, the value of the scheme rose steadily up to SY18 (March 2020), dipped back in SY19 and then reach a new peak in SY20 of £6.4bn. The OBR forecasts the value of the scheme to continue to rise and peak in SY25 (March 2027) at £8.6bn before falling back in subsequent years. Presumably, some ROC generators start to become ineligible for support after March 2027. The value in SY21 (year ended March 2023) was £6.8bn. Assuming 28.2m households in the UK, this equates to ~£241 per household, just for the ROC scheme. If the number of households remains constant, the ROC scheme will cost ~£305 per household in SY25.
Split of ROCs Issued by Technology
Figure 3 shows reproduces data in Ofgem’s Figure 3.6 to show the number of ROCs issued by technology type each year. The number of ROCs received is directly proportional to the amount of money received because each RO certificate has the same buy-out value.
The largest recipient of ROCs is offshore wind followed by onshore wind, fuelled generation and solar. The other technologies make up only a small part of the overall ROC scheme. Fuelled generation is mostly biomass, but the category also includes technologies such as anaerobic digestion and dedicated energy crops.
Anyone holding out for tidal or wave power to generate significant amounts of electricity is going to have to wait a long time. The last wave power was produced under the ROC scheme in FY14/15 (SY13) and only trivial amounts of tidal power are being generated by three small projects in Scotland.
Support (Subsidy) per MWh
Figure 4 below reproduces data from Ofgem’s Figure 5.10 that calculates the support (subsidy) per MWh of electricity supplied.
The subsidies per MWh were lowest in the year to March 2012 (SY10) at £47.34/MWh. The subsidy levels have crept up almost each year to reach £78.48/MWh in SY20. Remember, this subsidy is in addition to the price the generators receive from the market for their electricity. At the time of writing the day-ahead price for electricity is £65.10/MWh, meaning on average generators are receiving subsidies greater than the value of the power they produce.
Figure 5 shows the average subsidy per generation technology, calculated by combining the data in Ofgem’s Figure 3.6 and the ROC buy-out price for SY20.
Tidal power attracts by far the greatest subsidy per MWh, so it is just as well that technology is not producing much. Offshore wind is the next most subsidised technology at £96/MWh followed by solar PV at £74/MWh. Fuelled generation (mostly burning trees) attracts £66/MWh subsidy and onshore wind receives £50/MWh. It looks like landfill gas and sewage gas are much more expensive than gas obtained by conventional means as they attract significant subsides of £50 and £41/MWh respectively.
Top-10 Recipients of ROC Subsidies
After downloading the database of ROCs from the Ofgem data portal, it was possible to generate a Top-10 of the generators that received the most subsidy in year ended March 2023. This is calculated by multiplying the RO certificates issued in the year by the buy-out price for the year. The result is shown in Figure 6.
Drax is by far the largest recipient of ROC subsidy largesse, receiving around £550m worth of ROC certificated in FY22/23. The other nine in the Top-10 are all offshore wind farms, receiving £100-220m of ROC subsidies in the year. The Top-10 represent about one third of the total value of ROCs issued for the year.
Conclusions
It was remiss for me to overlook the ROC scheme up to now. However, this deep dive demonstrates that renewables produced under ROC schemes are not cheap and never will be cheap. Generators receive a subsidy in addition to the market value of the electricity they sell. As the market value is frequently set by gas-fired generators, the renewables generators are bound to be more expensive. By far the biggest recipients of ROC subsidy largesse are the tree-burners at Drax and offshore and onshore wind farms
The OBR forecasts that the costs of the ROC scheme are going to continue to rise until 2027, so there will be no let up in the price we pay for this scheme. In fact, if the OBR is right the ROC scheme will cost the equivalent of over £300 per household by 2027. If the Government is serious about reducing the impact of Net Zero on consumers, it needs to find a way of cutting back the ROC system before it bankrupts us all.
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Great article. It would be nice to know how much money has been given out to electricity producers since the beginning of the scheme, and how much the “total bill” will be in year 2037 when the scheme ends.
David it wasn't remiss of you its great you are shining a light on what is really happening here. For me though its the outright lying by the politicians and environmental evangelists that green is going to cheaper it never was and never will be. Its time for people to be told the truth and decide whether they want to pay more but no mainstream political party will tell the truth and most of them just want to double down on green is cheaper. Even for all the berating the Torys are getting the moment they are fundamentally behind this mantra still.
Anyhow back onto the ROC (don't forget the smaller FiT scheme as well!!) take London Array its owned by four entities but one of them Orsted split out the income between wholesale and ROC in accounts and pre the 2022 high price year it was c50% of income but they were able to cover running costs (which aren't cheap for offshore wind) along with finance charges most years from wholesale so ROC was free cash. Then last year Orsted sold its stake to Greencoat UK Wind for 717m which was c20% premia to value of its share of the assets so with less than 10 years ROC subsidy remaining they obviously see the value. As i see it the inflation spike has played right into hands of these assets with ROC value here worth 118/MWh and its due another uplift soon as well. Also not forgetting they get this covered as well if they are constrained off the grid. Conversely though they (as over 50GWh pa) will be subject to Generator Levy when wholesale prices (not the ROC element) exceed £75/MWh although that is indexed linked as well. All in all a nice money spinner for those that got in before the CfD sheme. Oh and don't get me started on DRAX.