Renewables Obligation (Scotland) Order 2009 - inflation indexation changes: business and regulatory impact assessment

Executive summary

Issue and why it needs to be addressed

The RO schemes provide incentives for accredited renewable generators to produce renewable electricity, through providing additional income which they receive for selling their electricity on the wholesale market. The RO schemes were introduced at a time when renewable electricity was significantly more expensive, and when generators faced higher capital costs than those building new generating assets today. As such, the scheme leaves a substantial cost legacy and one that is ultimately borne by consumers through levies on electricity bills. This cost has been rising over time; the scheme’s value is forecast to total over £8.5bn a year across the UK in 2025/26^[3][4]. While the RO Schemes closed to new capacity in 2017, generators across the UK will continue to receive payments until they come off the scheme between 2027 and 2037.

The UK Government, Scottish Government and Northern Ireland Executive are in the process of implementing legislative changes which will alter how the costs of the RO schemes are adjusted for inflation in future. We consider that it would be proportionate and fair to domestic and non-domestic consumers, and renewable electricity generators, to change the price index used to adjust RO scheme costs for inflation from the RPI to the CPI. The CPI is generally a more stable and widely used measure of inflation than the RPI and excludes the housing costs (in CPIH) which we do not consider to be relevant to generators with the majority of capacity on the RO schemes. It is therefore a more accurate reflection of cost pressures. Further, changing inflation indexation to the CPI is expected to generate savings in the energy system, which could be passed onto consumers though reducing the levies on electricity bills, and is in alignment with broader policy and regulatory direction across the UK. More detail is provided on this in Section 1.

Without pre-emptive action, changes to indexation would otherwise take effect in 2030, in line with the Office for National Statistics (ONS) decision to realign the RPI to CPI including owner occupiers’ housing costs (CPIH)^[5]. This would see scheme costs continue to rise in line with the RPI in the short-term.

Intended outcomes

By changing how the RO schemes are adjusted for inflation, the UK Government, Scottish Government, and Northern Ireland Executive intend to reduce the levies on electricity bills and move to a more accurate measure of estimating annual growth. The Scottish Government recognises the balance that must be achieved between ensuring that generators continue to receive an appropriate return on their investments and managing costs to domestic and non-domestic consumers.

This change reinforces Scotland’s commitment to the Just Transition spatial principle set out in the National Planning Framework^[6] and advances the National Strategy for Economic Transformation^[7] ambitions of a fairer, greener economy by reducing inequality through fairer energy costs while still supporting renewable energy generation.

Options

From 31 October 2025 to 2 December 2025, a joint consultation between UK Government, Scottish Government and the Northern Ireland Executive sought views on two policy options for transitioning from the RPI to the CPI:

• Option 1 – Immediate switch to CPI Indexation: This option would involve a simple switch in the price index used to adjust the RO buy-out price from the RPI to the CPI. This approach would ensure generators continue to receive a stable and predictable return that maintains its value, whilst making savings in the energy system.
• Option 2 – Temporary freeze and gradual realignment with CPI: This alternative would involve freezing the RO buy-out price at the 2025/26 level (£67.06 per ROC), taking effect from April 2026 (subject to legislative schedules). This option goes further than Option 1 and would not only prevent further overcompensation in future but gradually realign scheme costs after presumed historical overcompensation caused by RPI’s tendency to overstate inflation

If neither option is pursued, the ‘do-nothing’ option would be for changes to indexation to take effect in 2030, in line with the ONS’ decision to realign the RPI to the CPIH and the projected savings would not materialise.

Following the conclusion of the consultation process, the Secretary of State for Energy Security and Net Zero in the UK Government has chosen to proceed with Option 1. Due to the statutory nature of the ROS, for Scotland to implement this change will require an amendment to the Renewables Obligation (Scotland) Order 2009.

Sectors affected

Renewable electricity generators and operators with assets supported by RO schemes are expected to experience a decrease in forecast revenue from RO projects. In consultation responses, generators, operators and suppliers also raised concerns regarding the impacts of this change including a likely negative impact on investor confidence, and a reduction in the amount of capital affected generators have available for reinvestment in the existing project pipeline and for new investment into nascent technologies.

Consultation responses also suggested that some investors impacted by this decrease in revenue may add risk premiums to new projects or withdraw capital and re-invest in countries with more perceived policy stability which, if widespread, could alter the investment landscape for renewable technology in the UK. It is difficult to quantify this impact due to the commercial nature of investment decisions.

It is also difficult to estimate the impact on consumers as it will depend on individual electricity suppliers and their customer base, as well as the recent UK Government Budget 2025 commitment to remove 75% of the domestic costs of the RO from consumer energy bills.

Engagement completed, ongoing and planned

The Scottish Government has engaged with the UK Government and the Northern Ireland Executive to discuss the consultation responses received. The Scottish Government have also engaged widely with industry stakeholders and representative organisations during and after the consultation, reflecting stakeholder views and consultation responses in this assessment.

Anticipated impacts (intended and unintended, positive and negative) and mitigating actions

The UK Government have estimated that use of the RPI has previously led to some generators benefiting from the overestimation of inflation. This policy change intends to remove that benefit, decreasing anticipated profits from projects supported by RO schemes.

In response to the consultation, industry have expressed concern that sudden changes to the revenue streams of these projects through this policy measure may impact a wide range of factors including project leases, generator’s refinancing and debt repayment arrangements, and overall attractiveness of projects to investors. Industry have suggested that they may have to re-evaluate the risk level associated with current investments in projects supported by RO schemes, damaging investor confidence. We will continue to engage with the renewables industry in Scotland to monitor and evaluate the impact of this change on wider net zero goals.

However, the Department for Energy Security and Net Zero (DESNZ) have estimated that implementing Option 1 could save up to £60 million in policy costs in 2026/27. Of this, around £5 million savings could be captured in Scotland^[8]. These savings are expected to accumulate over time as the delta between RPI and CPI indexed costs widen.

Ongoing and planned engagement will focus on implementation, including updates to stakeholders on timelines, compliance expectations, and any technical guidance required. Planned engagement includes follow-up sessions with industry representatives to monitor readiness and address emerging issues, as well as continued liaison with UK Government counterparts to ensure policy alignment and share best practice.

Noting the impacts described by the renewables industry in responses to the consultation, the Scottish Government will continue to engage with stakeholders throughout the new RO reporting year from 1 April 2026. We will also conduct a review of this policy change in 2027.

Enforcement/ compliance

The UK government is responsible for amending the legislation for the RO scheme for England and Wales. The Scottish Government and the Northern Ireland Executive are responsible for amending the legislation for their respective schemes. All schemes are administered by Ofgem who are responsible for enforcement and compliance.

Recommendations / implementation plans

To change the inflation indexation metric for the RO scheme for the 2026-27 financial year, the UK Government and Devolved Governments must make affirmative statutory instruments before the 1 April 2026. Once the Statutory Instruments have been made, Ofgem will publish an updated CPI-indexed buy-out price for the 2026-2027 period, along with any supporting materials.

Evaluation and monitoring of implementation / review of BRIA

The amendment will come into force in April 2026, ahead of the new RO year. Operation of the scheme, including setting the obligation level, will remain the responsibility of Ofgem.

Given the impacts described by the renewables industry in response to the consultation, we will continue to engage throughout the new RO reporting year from 1 April 2026 and conduct a review of this policy change in 2027.