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

Section 1: Background, aims and options

Background to policy issue

The Renewables Obligation (RO) schemes provide incentives for accredited renewable generators to produce renewable electricity, through providing additional income to that 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 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^[9]. 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. In the context of persistent high energy prices that consumers face, the UK government, the Scottish Government, and the Northern Ireland Executive think it is right to explore all avenues to bear down on costs in the energy system to ease the remaining pressure on domestic bills.

Under the RO schemes the buy-out price is adjusted annually. These adjustments were included in the scheme design to ensure that the value of the financial support kept pace with overall UK inflation. This was intended to maintain investor confidence, ensure the long-term viability of projects and avoid any erosion in the nominal value of subsidy over time. At the time of their design, RPI was a commonly used metric across government contracts and financial instruments and was seen as the lead measure for general inflation.

However, due to methodological differences historically RPI has reflected a higher rate of inflation compared to other indices such as the CPI. Therefore, from 1 April 2026, the UK government, Scottish Government and Northern Ireland Executive will change how the costs of the RO schemes are adjusted for inflation with an immediate switch from RPI to CPI.

Purpose/ aim of action and desired effect

The rationale for change is as follows:

• CPI is generally a more stable and widely used measure of inflation – CPI is the UK government’s preferred inflation measure due to its international recognition and consistency. It is used in uprating various state benefits and pensions. It also underpins the Bank of England’s inflation targets. The RPI is now widely considered to be an outdated and unsuitable measure of general inflation in the UK.
• Accuracy – A weakness of the RPI is that it tends to overestimate inflation, resulting in higher revenues for generators than they would have received had their payments been indexed to CPI or CPIH. Changing indexation to CPI will continue to give generators a reasonable and predictable rate of return and protection against inflation whilst making savings in the energy system. The RPI and CPIH include housing costs such as mortgage interest payments and private rents, which we do not consider relevant to the RO scheme. The scheme was designed to encourage renewable energy generation and was not meant to account for housing costs. The CPI excludes these costs, making it a more accurate reflection of the cost pressures faced by scheme participants for their renewable electricity generation.
• Reducing the burden on consumers – The costs of the RO schemes are recovered through levies on electricity bills, passed on to all consumers via suppliers. DESNZ estimate that Option 1 could, at its peak in 2030, bring about direct savings in policy costs directly borne by consumers of £270 million a year. If inflation indexation for the RO is switched to CPI from 1 April 2026, analysis from DESNZ suggests that there could be an estimated saving of £60m across Great Britain in financial year 2026-27.
• Alignment with broader policy and regulatory direction – Transitioning to CPI indexation would reflect a more consistent approach across government support mechanisms toward a more accurate and equitable inflation metric. Many of the major support schemes in the energy industry use CPI-based indexation to ensure that these reflect economic conditions without overcompensating. For example, Contracts for Difference (CfDs), Renewable Heat Incentive (RHI) tariffs and aspects of the Capacity Market (CM) are all CPI-indexed in different ways.

In addition to supporting the aims of Scotland’s National Planning Framework and National Strategy for Economic Transformation, this change supports Scotland’s overarching commitment to achieve net zero by 2045. By maintaining a robust mechanism which supports renewable electricity generation and shifting indexation from RPI to CPI for fairness and stability, the policy underpins priorities in the Programme for Government to tackle the climate emergency, grow a sustainable economy, and enable a just transition for workers and communities.

Without pre-emptive action, changes to indexation would otherwise take effect in 2030 in line with the ONS’ decision to realign the RPI to the CPIH, which means potential savings to the energy system would not be realised until then.

Options

To ensure a fairer inflation adjustment mechanism for the RO, the UK Government, the Scottish Government, and the Northern Ireland Executive proposed two options for transitioning from the RPI to the CPI. Both options aim to deliver a more proportionate approach to inflation indexation, reduce costs to consumers, and align with broader government and regulatory policy.

• 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. Subject to legislative schedules, the UK Government, the Scottish Government, and the Northern Ireland Executive would look to implement ahead of the next annual adjustment scheduled in March 2026 which would see the RO buy-out price increased in line with 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). The Government would construct a ‘shadow’ price schedule for the RO buy-out price from 2002, annually adjusted using CPI instead of RPI. No further inflation-linked increases would be applied until the cumulative effect of CPI-based inflation on that shadow price matches the current RPI-adjusted buy-out price. At this point of realignment, annual indexation would resume using CPI.

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. It could stabilise scheme costs in the short term and transition to a more sustainable inflation measure over time. It is anticipated this could bring with it greater long-term savings for consumers, as scheme costs would be held steady until CPI and RPI inflation realign.

However, such changes would need to be balanced against the broader impacts on renewables investment in the UK, which is essential to protect consumers against volatile fossil fuel prices.

The ‘do-nothing’ option would be for changes to indexation not to take effect until 2030, in line with the ONS’ decision to realign the RPI to the CPIH. This would see scheme costs continue to rise in line with RPI in the short-term.

Having considered the full range of evidence, Governments recognise that both options carry risks for investor confidence and note that neither option was preferred by the majority of consultees. However, respondents were clear that Option 2 would create materially greater uncertainty and disruption. In deciding which option to pursue, the Governments have been guided by three overarching principles:

• Reducing the burden on consumers and ensuring the energy system remains fit for future demands
• Ensuring long-term stability and confidence for investors
• Alignment with broader energy schemes

On balance, the Governments consider Option 1 is the least disruptive approach, avoiding the prolonged uncertainty and more severe impacts associated with a temporary freeze, while still delivering savings to energy consumers to support cost-of-living. We consider that this approach strikes the most appropriate balance between reducing the cost burden on consumers while maintaining strong investor confidence in the UK’s renewable energy sector and ensuring consistency with other energy schemes such as the CfD and the Capacity Market.

Following a recommendation from the Secretary of State for Energy Security and Net Zero, and conclusion of the consultation process, the UK Government, Scottish Government and Northern Ireland Executive have therefore jointly agreed to proceed with Option 1, an immediate switch to CPI-based indexation of the RO buy out price ahead of the next annual adjustment scheduled in April 2026. This will apply across the RO schemes in England and Wales, Scotland and Northern Ireland (subject to respective legislative processes).

Sectors/ Groups affected

Operators, Generators and Investors

In total 247 consultation responses were received from stakeholders commenting on the proposed policy change. The overarching message from these responses is that operators and generators are strongly opposed to any change to indexation prior to 2030, on the grounds that it constitutes a retrospective change which will undermine the UK’s reputation for stability and predictability which will in turn undermine investor confidence and increase the cost of capital. It is anticipated that renewable electricity generators with assets supported by RO schemes will experience a potential decrease in forecast revenue from RO projects. Assuming that the number of ROCs issued in Scotland remains consistent between 2023-24 and 2026-27, initial estimates show that the total revenue received by Scottish Developers supported by the ROS in 2026-27 could decrease by around £15 million or around 1%. Following 2026-2027, RO contracts for some Scottish developers will begin to expire, making projecting future revenues more difficult.

Respondents also raised several additional concerns:

• Responses showed wide ranging support across stakeholder groups for the RO schemes to remain RPI linked until 2030 when it should move to CPIH, a change announced in 2020 which has been incorporated into business planning. Financial projections on revenue and shareholder dividends have been made on the assumption that the scheme will continue to be adjusted according to RPI. The proposals will result in these having to be revised, further reducing investor confidence.
• Most generation projects will be subject to RPI linked land leases, and the proposals will result in a higher proportion of revenue being paid to landowners
• Generators have urged that the Renewables Obligation Scheme (ROS) be reviewed in a holistic manner, rather than through isolated changes. This call is particularly relevant to the upcoming consultation on fixed-price certificates scheduled for early 2026

Consumers

The Scottish, UK, and other Devolved Governments are all committed to lowering consumer energy bills within their respective parliamentary terms. This includes finding efficiencies within the energy system where this offers the potential to improve affordability for consumers.

Option 1 has been selected on the basis that this approach strikes the most appropriate balance between reducing the cost burden on consumers while maintaining strong investor confidence in the UK’s renewable energy sector.

Community Energy

Through the consultation many, particularly community-energy respondents, raised concern around the potential reduction in revenue uplifts for community projects, which could shrink the funds available for local consumer support programmes such as for schools and help for fuel poverty. Without data on ownership structures it is challenging to quantify how many community energy projects will be affected by this amendment. In total 5 community projects were accounted for in the 247 consultation responses. The Scottish Government remains committed to working with partners to continue to grow the community energy sector and will continue to support communities through our Community and Renewable Energy Scheme (CARES) and our Good Practice Principles.

Indirect Impacts

Consultation responses highlighted that a change to the CPI may reduce generator’s ability to invest in the renewable energy supply chain and in nascent technologies, yet this risk is difficult to quantify without detailed investment plans from generators.