Government eyes change from RPI to CPI for green energy schemes

Two separate consultations have been launched on how inflation is adjusted annually for the Renewables Obligation (RO) and the Feed-In Tariff (FiT) schemes by the UK government’s Department for Energy, Security and Net Zero (DESNZ).

The RO has incentivised UK renewable electricity generation since 2002 via a system of tradable ‘Renewables Obligation Certificates’ (ROCs).  Although the RO scheme closed to new projects completely in 2019, generators will continue to receive payments until they come off it in a decade-long transition period starting in 2027.

Three separate but complementary RO schemes cover the UK. The UK government is responsible for RO legislation in England and Wales, while Holyrood and Stormont are responsible for the legislation of their respective schemes, all of which come under the administration of regulator Ofgem.

Meanwhile the FiT scheme ran between 2010 and 2019 to support small scale electricity generation (up to 5 MW), with a view to helping organisations, businesses, communities and individuals via solar PV, onshore wind, hydropower, anaerobic digestion, and microcombined heat and power (less than 2 kW). It provides fixed payments for the electricity they generate and export to the grid, with support continuing to be provided to generators until 2043.

But as part of a UK-wide drive to cut energy bills for consumers, DESNZ is running consultations into how to decrease costs of both schemes – including shifting how inflation increases are calculated by using the consumer prices index (CPI) instead of the retail prices index (RPI).

Ronan Lambe, a renewable energy expert at Pinsent Masons, explained this change could undermine confidence in the schemes from both consumers and energy generators.

“The changes under consultation are likely to be seen by the developer and investor community as a moving of the goalposts by the government,” he said.

“If implemented, the changes would have significant impact on the economics of existing projects, not just a reduction in the value of FiT or ROC revenue. Many projects will have ongoing operating expenses, the cost of which is indexed in accordance with RPI. If project revenues no longer attract RPI indexation, there’s an immediate mismatch between operating expenses and project revenues.

“While reducing electricity bills for industry and domestic consumers is a laudable aim, it shouldn’t come at the cost of reducing confidence in the UK as a destination for key energy investments.”

CPI has been used since 2003 as the official way to measure inflation, tracking the change in costs of goods and services annually, and tracks the prices of items in a representative shopping basket of household items. RPI, however, uses a different formula to calculate inflation rates, and also includes household costs such as council tax or mortgage repayments, which means it usually tracks higher than CPI figures.

A move to using the CPI for the ventures would bring them into line with other schemes, such as the government’s Green Gas Support Scheme.

Martin McGuinness, an energy expert at Pinsent Masons, said any potential switch to the previous agreed terms for either or both schemes could have longer term repercussions.

He added: “Although these consultations are not too much of a surprise following the focus on reducing bills and the terms of the recent Green Gas Support Scheme, it remains to be seen whether generators and their backers will accept this shift without putting markers down, whether in terms of strongly worded consultation responses or even legal challenges.

“Any adverse impact on forecasted revenues could be difficult to forget among the generator and investor communities.”

The RO consultation runs until 28 November, with the FiT one open until 12 December.