The UK government is proposing to change how its legacy renewable energy subsidy programs adjust for inflation, in a move designed to save consumers up to £310 million annually by the early 2030s.
Switching indexation on Renewables Obligation (RO) assets from the Retail Price Index (RPI) to the Consumer Price Index (CPI) would avoid overcompensating generators over the coming years, according to a consultation document published Oct. 31.
The RO schemes support more than 30% of UK electricity generation through a system of tradable green certificates, known as Renewables Obligation Certificates (ROCs), the prices of which are adjusted annually using RPI.
The government said RPI is "outdated" and historically runs higher than CPI due to methodological differences. Consequently, it is proposing to shift the RO scheme to CPI inflation from April 2026.
"This approach would ensure generators continue to receive a stable and predictable return, whilst making savings in the energy system, and preventing further overcompensation," according to the consultation document.
Market observers provided a wary response to the proposal, with Citi analysts describing it as the "latest escalation of political risk for the sector."
Analysts at RBC Capital Markets said that the change "appears unhelpful" at a time when the government is looking to encourage additional investment in renewables.
The move comes amid pressure on the government to reduce the cost of consumer energy bills, with a report on Oct. 23 calling for the UK's 2030 clean power target to be reframed to focus instead on affordability.
The government's subsequent announcement of a renewable energy contracts for difference auction budget that is significantly lower than last year's allocation round was viewed by some as an indication that value for money is an increasing priority.
Dual pathways
The change to the RO scheme, which would also apply to renewables assets supported by the UK's legacy Feed-in Tariff (FIT) program, could result in combined savings of about £100 million in 2026/2027, rising to about £310 million in 2031/2032, according to the consultation document.
The value of the RO scheme alone is forecast to surpass £8.5 billion in 2026/2027, with the costs funded by consumer electricity bills.
Outlining its proposal, the government said it is considering two options for implementation, the first being an immediate switch to CPI inflation from April next year.
The second option would be to freeze the RO buyout price at the 2025/2026 level — £67.06 per ROC — and calculate a "shadow" price schedule for the tariffs from 2002, annually adjusted using CPI instead of RPI.
In option two, no further adjustments would be made until the CPI-based shadow price matches the frozen RPI-adjusted buyout price, after which annual indexation would resume using CPI.
Analysts at Citi said the first option appears to be "most palatable and plausible given the UK's track record of grandfathering policy and only making forward looking changes."
However, they added that the second option would have a bigger impact on consumer bills, even if the scale is "not meaningful" given the context of upward cost pressures elsewhere.
"As result, we would not be surprised if the government decides to pursue the more aggressive option," Citi said in a Nov. 3 note to clients.
The government's consultation runs until Nov. 28.
