Renewables Obligation (Scotland) Order 2009 amendments consultation: partial 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 in 2026/27^[1] While the RO Schemes closed to new capacity in 2017, generators are still accredited under the scheme until 2027.

The UK government, Scottish Government and Northern Ireland Executive are proposing to change 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 Retail Price Index (RPI) to the Consumer Price Index (CPI). CPI is generally a more stable and widely used measure of inflation than RPI and excludes the housing costs 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 reduce the levies on electricity bills leading to savings for consumers, and is in alignment with broader policy and regulatory direction across the UK. More detail is provided on this in Section 1.

Intended outcomes

The UK Government, Scottish Government, and Northern Ireland Executive are proposing to change how the cost of the Renewables Obligation (RO) schemes are adjusted for inflation, to reduce the costs that are passed onto consumers in energy 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.

Options

A joint consultation between UK Government, Scottish Government and the Northern Ireland Executive is seeking views on amending the RO schemes so that they are adjusted in line with CPI rather than RPI. For Scotland, this would require an amendment to the Renewables Obligation (Scotland) Order 2009. The consultation is seeking views on two options:

• 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.

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.

Sectors affected

While there are currently no known potential impacts for energy suppliers, as they would continue to pass costs onto domestic and non-domestic consumers through their energy bills, the UK Government has noted that there may be some concerns over how it will impact renewable electricity generators. This impact is expected to be minimal.

Engagement completed, ongoing and planned

Ongoing engagement with UK Government and Northern Ireland Executive on updating the separate RO Schemes (RO England and Wales and The Northern Ireland Renewables Obligation (NIRO)). We will engage with industry stakeholders during the consultation.

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

The RPI has previously led to some generators benefiting from the overestimation of inflation. The proposed options would remove that benefit, with a potential minor impact on profits. The consultation will provide an opportunity for stakeholders, such as generators, to raise any concerns they may have including potential impacts on profits, at which stage they will be taken into consideration.

Conversely, domestic and non-domestic energy consumers can expect to benefit from the small savings as set out in Section 3.

Enforcement/ compliance

The UK government is responsible for the legislation for the RO scheme for England and Wales. The Scottish Government and the Northern Ireland Executive are responsible for the legislation for their respective schemes. All schemes are administered by Ofgem. As such it would be for Ofgem to deal with any issues relating to enforcement and compliance.

Recommendations/ implementation plans

The consultation document sets out two options for changing the price index used to adjust scheme costs for inflation. Following the four-week consultation period, responses will be considered and the partial BRIA will be finalised. The final BRIA will be published alongside the decision document.

Evaluation and monitoring of implementation/ review of BRIA

Subject to the outcome of the consultation, the Scottish Government will work with counterparts in the UK Government and Northern Ireland Executive to lay the legislative amendment in respective parliaments in January 2026. The amendment would be expected to come into force in March 2026, ahead of the new RO year. Operation of the scheme, including setting the obligation level, would remain the responsibility of Ofgem.