What effect on the public purse would closing the Renewables Obligation early have?

7 December 2015
What was claimed

The saving to the public purse from closing the Renewables Obligation (RO) to onshore wind a year early is up to £270 million a year.

Our verdict

The government won't improve its finances by closing the RO early, as the scheme is paid for by energy suppliers and their consumers. £270 million is the government's upper estimate of how much the closure could save them.

"The estimated saving of closing the RO early to new onshore wind is up to £270 million per year."

Amber Rudd, Secretary of State for Energy and Climate Change, 17 September 2015

The Secretary of State was asked in Parliament what effect the early closure of the Renewables Obligation (RO) to onshore wind would have on the "public purse". Her response talked about an "up to £270 million" reduction in subsidy payments, but as the subsidy isn't paid for by the government there won't be a direct benefit to public finances.

This is because, in the words of the Office for National Statistics, "No money is paid to the UK tax authorities… and no money is paid out by the UK Government in subsidies". The scheme is paid for by suppliers and consumers.

£270 million is the government's upper estimate for the reduction in spending on the subsidy. In its best estimate, spending falls by £20 million.

This won't directly improve government finances

The Renewables Obligation (RO) is a way of subsidising the producers of renewable energy. Electricity suppliers (the companies that sell power to households and businesses) have to buy a certain number of Renewables Obligation Certificates (ROCs) from generators (the companies that actually produce power), providing the generators with additional income.

Instead of buying ROCs, suppliers can pay a buy-out fee for each missing certificate. The money raised through these buy out fees is divided amongst the companies holding ROCs according to how many they hold.

So as far as the public finances stand, the scheme is essentially self-funding, with spending directly offset by receipts. The cost of day to day administration (conducted by Ofgem) is paid for by money recovered from buy-out fees.

Suppliers in turn pass on some of the costs to consumers in the form of higher bills.

The government does include the scheme in some measures of its spending, but closing it won't lead to any direct net benefit to the public purse. In the National Accounts (which look at all economic activity within the UK), ROCs appear twice on the 'income' side of the ledger; once as a subsidy (which is counted as negative income), and once as a tax (positive income), leaving total income unchanged.

£270 million would be the saving to suppliers and consumers in one scenario

Electricity suppliers provide the financial power behind the RO. They buy the certificates and pay the buy-out fees that provide the subsidy to generators.

The government sets firms a target for certificates to present at the end of the year, and sets the buy-out fee they pay for each missing certificate.

Closing the scheme early means that there might be fewer onshore wind projects qualifying for the obligation, which in practice means lower obligations and lower spending on the subsidy by energy suppliers.

Spending on the Renewable Obligation could be £270 million (in 2011/12 prices) lower than it would have been if the early closure means that a large amount of onshore wind that would have qualified for the subsidy doesn't.

However, the government didn't consider this to be the most likely outcome. Its best estimate was that spending on the scheme would fall by £20 million.

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