Third-Party Cost Focus: Renewables Obligation (RO)

In the first of our series of Third Party Cost (TPC) guideline articles, we focus on the Renewables Obligation.

The majority of costs now incurred in a business energy bill are not through gas or electricity consumption but by Third Party Costs (TPCs), or Non-Energy or Non-Commodity Costs, as they are often referred to.

Given the rate of increase in TPCs in recent years, it won’t be long before the percentage of the overall bill attributed purely to power usage is down to a third. At present, the split is weighted around 60:40 in favour of TPCs.

A wide variety of schemes are classed as TPCs. Some are government-led, in the drive towards a more sustainable future, while money raised from others contribute towards the maintenance of the National Grid and the supply of electricity in the system.

TPCs can change every year and with energy demand plummeting during the height of lockdown, 2020 was anything but immune to fluctuations in how businesses were charged.

Renewables Obligation (RO)

First set up by the government in 2002 to encourage and support large-scale renewable energy generation as part of the ongoing action against climate change, the Renewables Obligation for new contracts came to an end on 31 March 2017 and was replaced by Contracts for Difference (CfD). However, existing RO contracts will continue to run until 2027.

The RO places an obligation on UK electricity suppliers to source an increasing proportion of the electricity they supply from renewable sources, such as wind, solar and hydro.

The suppliers fund the cost themselves but can recoup that investment through charges passed on to the customer, either as a pass-through cost or as part of a consolidated bill. Both these options are available to Half-Hourly (HH) and Non-Half Hourly (NHH) customers.

Consumers who qualify for an Energy Intensive Industries exemption (EII), by obtaining certificates from the Department for Business, Energy and Industrial Strategy (BEIS), can receive up to an 85% exemption at source from the RO, Feed in Tariff (FiT) and CfD schemes.

The RO is forecast to account for roughly a fifth of overall business energy bills in 2020/21.

More information on the RO can be found on Ofgem’s website, or you can talk to one of our consultants about any questions you have relating to TPCs.