What it is
The Renewables Obligation (RO) is system designed to encourage the generation of electricity from eligible renewable sources in the United Kingdom. The RO places an obligation on licensed electricity suppliers in the United Kingdom to source an increasing proportion of electricity from renewable sources.
How it works
Suppliers meet their obligations by presenting Renewable Obligation Certificates (ROC) to the Office of Gas and Electicity Markets (Ofgem) When suppliers do not have sufficient ROCs to cover their obligation, a payment is made into a buy-out fund. The buy-out price suppliers pay is a fixed price per MWh shortfall and is adjusted in line with the Retail Price Index each year. The proceeds of the buy-out fund are paid to suppliers in proportion to how many ROCs they have presented.
ROCs are intended to create a market and to be traded at market prices that differ from the official buy-out price. If there is an excess of renewable production, beyond the supplier obligation, the price of ROCs would fall below the buy-out price. Thus reducing the amount the suppliers have to pay for not producing enough renewable energy. If there is less renewable production than the obligation, the price of the ROCs would increase above the buy-out price, increasing the amount suppliers pay.
Why this system matters
The Renewable Obligation Certificate gives incentives for energy suppliers to produce more clean energy. The bottom line of a company is always going to be key factor when determining performance. By financially incentivizing companies through benefits or penalizing them for not producing enough clean energy, they will strive to achieve to meeting the obligation.
This system in the U.K. has led companies to advance technology in clean energy and build a future that has less to do with coal and oil.