Renewables Obligation (Scotland) Order 2009 amendments consultation: partial 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. Three separate but complementary RO schemes cover the UK. The RO (for England and Wales) and the Renewables Obligation Scotland (ROS) were introduced in 2002, and the Northern Ireland Renewables Obligation (NIRO) was introduced in 2005. All schemes are administered by Ofgem.

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^[2] 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).

Options being consulted on

A joint consultation between UK Government, Scottish Government and the Northern Ireland Executive is seeking views on amending the legislation relevant for each scheme so that the RO schemes across the UK are adjusted in line with CPI rather than RPI for the following reasons:

• 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 The RPI is now widely considered to be an outdated and unsuitable measure of general inflation in the UK.
• Avoiding overcompensation of generators – The RPI overestimates 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 schemes were designed to encourage renewable energy generation and were 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. Changing inflation indexation to the CPI is expected to reduce future consumer bill costs. For example, if inflation indexation for the RO was switched to CPI in April 2026, initial analysis from DESNZ suggests that there could be an estimated saving of £80m in FY26/27. This would rise to an estimated saving of £250m in 2030/31 or approximately £3 per year for an average GB household. The savings are greater if indexed to CPI vs CPIH^[3]
• 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.

To address concerns around overcompensation and ensure a fairer inflation adjustment mechanism for the RO, the UK Government, the Scottish Government, and the Northern Ireland Executive are considering two options for transitioning from the Retail Price Index (RPI) to the Consumer Price Index (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. This would bring with it greater long-term savings for consumers, as scheme costs would be held steady until CPI and RPI inflation realign. We estimate that in scheme compliance year 2026/27 this could save consumers around £300m, rising to an estimated saving of around £820m in 2031/32, or around £11 per average GB household.

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.