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

Section 3: Costs, impacts and benefits

Quantified costs to businesses

The RO operates as a market-based system of tradable green certificates. The scheme places an obligation on UK electricity suppliers to present a certain number of Renewable Obligation Certificates (ROCs) to the scheme administrator (Ofgem), for each unit of electricity they supplied to non-exempt customers during an obligation year.

Suppliers can purchase these ROCs from generators or traders (with the precise value of a ROC a matter for negotiation) or can meet their annual obligation (in part or in full) by paying into a buy-out fund. The prices of ROCs sold through the buy-out fund is set by DESNZ, with the price indexed each year in line with inflation.

Although the majority of suppliers meet their obligation by purchasing ROCs rather than paying the buyout price, the predefined buyout price is assumed to directly impact on the traded price of ROCs. Any adjustment to the rate of indexation will therefore directly impact on the total spend required by suppliers and the total revenue received by generators.

Estimated benefits

DESNZ have provided analysis of the potential savings from both Options 1 and 2 described above as shown in Table 1. These savings have been calculated by multiplying the projected ROC volumes by the buy-out prices adjusted for different inflation indices and uplifted by 10% to account for headroom. These projections are based on high-level aggregate modelling and are subject to uncertainties.

Other impacts

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

As reflected earlier in the BRIA, the overarching message from consultation responses is that operators and generators, a significant proportion of the largest primary recipients of ROCs, are strongly opposed to any change to indexation prior to 2030. Several recurring issues emerged in consultation responses from this group of stakeholders including concerns a retrospective change would undermine the UK’s reputation for stability and predictability which will in turn undermine investor confidence and increase the cost of capital. Stakeholders also noted that many ongoing project costs are RPI-indexed so switching revenue indexation to CPI could create a mismatch that squeezes margins.

The consultation highlighted the complex ownership structures of existing assets, including widespread involvement of institutional investors such as pension funds, listed funds and infrastructure asset managers. Investors have been unanimous and vocal that a change to indexation (Option 1 or 2) would constitute retrospective action of a scale that has not been experienced before in the UK energy sector. Consultation responses from investors mirrored several of the concerns raised by operators and generators, noting the potentially negative impacts of either option, seen as retrospective changes, on investor confidence. Investors also raised concerns regarding the short timeframe associated with any change coming in to effect and challenged the notion of CPI as a fairer inflation method.

Investors, generators, suppliers and trade associations replying to the consultation also frequently raised concerns that consumer benefits could be short-lived, soon eroded through higher cost of capital linked to damaged investor confidence resulting from either Option 1 or 2.

Scottish firms’ international competitiveness

This change to Scotland’s ROS is consistent with changes made to RO schemes in England, Wales and Northern Island. It is designed to maintain fairness and predictability rather than create competitive advantage or disadvantage and as such, it is unlikely to affect Scotland’s reputation as a place to invest in renewable electricity generation relative to the rest of the UK.

This change is not anticipated to affect Scotland’s international competitiveness as while renewable energy generators will bear the cost of this change, the measure does not impose additional costs on Scottish businesses relative to international competitors and does not restrict market access or export opportunities.

Benefits to business

Businesses that consume high amounts of electricity, as well as those in energy intensive industries, may benefit proportionately more from this proposal if the savings are redistributed through energy bills for non-domestic consumers.

For electricity generators and energy suppliers operating across the UK, there is also benefit in aligning with RO schemes in England, Wales and Northern Ireland to ensure consistency in business planning.

Small business impacts

Small businesses could benefit from this proposed change if savings are redistributed through energy bills for non-domestic consumers. In 2025, 95.8% of Scottish Energy^[10] registered enterprises were small (0-49 employees)^[11] and are defined as consumers in the Consumer Scotland Act 2020. The cumulative benefit for Scotland’s small businesses is therefore potentially significant.

Investment

In line with recommendations of the First Minister’s Investor Panel to make Scotland a globally competitive investment destination the Scottish Government has considered the implications for investors and investor sentiment in the development of this legislation.

Capital investors, with a number of significant investments already in Scotland, have flagged that any retrospective change is likely to have an impact on future investment. Government stability within the UK has been highlighted repeatedly by investors, in both ministerial and official discussions, as is one of the key selling points for the country. Retrospective changes to mechanisms could have implications for investor sentiment in comparison to other locations.

While some investors impacted by the decrease in RO project revenue may withdraw capital and re-invest in countries with more perceived policy stability, this risk is judged to be relatively minor. The UK energy market continues to attract significant investment at pace to deliver Clean Power 2030 targets and strategic plans including the Strategic Spatial Energy Plan, Regional Energy Strategic Plans, and Centralised Strategic Network Plan continue to send strong long-term signals of stability and opportunity. Against this backdrop Scotland remains a highly competitive destination for renewable investment, supported by clear net zero targets, a strong project pipeline across multiple energy vectors, and a policy environment aligned with UK-wide reforms.

Workforce and Fair Work

There are currently no known impacts for workforce and fair work.

Climate change/ Circular Economy

The RO schemes continue to play an important role in powering the UK – in 2023-2024 over 30 per cent of the UK’s electricity generation was supported by the RO schemes^[12]. Ensuring the schemes provide stable and consistent support to these generators, at a fair cost to consumers, remains a priority for the Scottish Government.

In consultation responses some stakeholders expressed concern that this policy change could reduce the amount of capital renewable energy generators have available to invest in new energy infrastructure at a time when investment is needed at scale to achieve Clean Power 2030 targets.

These concerns have been reflected in the final policy option selected, noting that Option 1 is anticipated to have significantly less impact on revenues than Option 2.

Competition Assessment

The Scottish Government has considered guidance provided by the Competitions and Market Authority (CMA) and considers that this legislation is unlikely to impact on competition as measured by the in-depth competition assessment guidelines.

Consumer Duty

The Scottish Government has considered the impact on consumers as required by the Consumer Scotland Act 2020 in completion of this assessment and notes that amendments to ROS legislation have been introduced with consumers in mind.