Renewables Obligation (Amendment) Order 2026

Tuesday 17th March 2026 Grand Committee

Considered in Grand Committee

16:57

Moved by

[Lord Whitehead]

That the Grand Committee do consider the Renewables Obligation (Amendment) Order 2026.

Relevant document: 52nd Report from the Secondary Legislation Scrutiny Committee

[The Minister of State, Department for Energy Security and Net Zero (Lord Whitehead) (Lab)]

My Lords, the renewables obligation scheme has incentivised UK renewable electricity generation through a system of tradeable certificates called renewable obligation certificates. Three separate but complementary renewables obligation schemes cover the UK: the RO and the renewables obligation Scotland—ROS—were introduced in 2002, and the Northern Ireland renewables obligation —NIRO—was introduced in 2005. The UK Government are responsible for RO legislation in England and Wales. The Scottish Government and the Northern Ireland Executive are responsible for the legislation of their respective schemes. Ofgem administers all schemes across the UK. The scheme is now closed to new applications—indeed, it was closed in 2017—but existing sites continue to receive support until the scheme ends in 2037. The scheme has been instrumental in taking a nascent renewable energy sector to where it is today, with the scheme supporting around 30% of total UK electricity generation.

Electricity suppliers are required each year to present a set number of renewables obligation certificates to Ofgem reflecting the amount of electricity they supply. Where a supplier does not present enough certificates, it must instead pay a buy-out price for each missing certificate. Those buy-out payments are then recycled back to suppliers that have complied, which supports the overall value of certificates and ensures the scheme operates in a fair and predictable way.

17:00

The RO buy-out price for a certificate is annually adjusted for inflation using the retail prices index. This draft order changes the inflation indexation metric from the retail prices index to the consumer prices index by April 2026. The CPI is widely recognised as providing a more accurate reflection of real world price changes than the RPI and, as noble Lords will be aware, it typically tracks at a lower rate than the RPI. In practical terms, this means that the costs of operating the scheme will grow more slowly in future years, which we expect will ease pressure on electricity consumers. This change forms part of our broader work to drive efficiencies across the energy system, reduce costs for businesses and help to alleviate pressure on domestic energy bills.

The Government have brought forward this legislative amendment following a joint public consultation undertaken with the Scottish Government and the Northern Ireland Executive. The consultation closed in December and received nearly 250 responses from a range of stakeholders including generators, suppliers and investors. I am aware that the options proposed in the consultation generated significant concern and disagreement in the industry We have listened carefully to the points raised, particularly those relating to the importance of policy stability and the need to maintain strong investor confidence in the United Kingdom.

However, it is precisely because the renewables obligation has been such a success—supporting over 30% of the UK’s electricity generation—that we must now ensure its costs remain proportionate and sustainable over its remaining lifetime. The scheme has played a crucial role in building the renewables capacity on which we rely today, and the Government want it to continue to do so but without placing a growing burden on bill payers. By implementing this change in time for the new compliance year beginning in April 2026, the Government estimate savings of around £1.9 billion over the remaining life of the scheme—equivalent to approximately £180 million per year for the next 11 years. These are meaningful savings for consumers, delivered through a measured and sensible adjustment to an established electricity generation scheme.

The Government’s approach is a balanced one. It seeks to reduce cost pressures on households and businesses, while continuing to provide a stable and predictable environment for long term investment in the UK’s renewable energy sector. As we all recognise, the world around us is becoming increasingly unstable—which is rather an understatement. The only sustainable way to shield households and the wider UK economy from global energy shocks is to accelerate our transition to clean, homegrown energy. That requires not only the deployment of new renewable capacity but ensuring every part of our existing system is as fair, efficient and affordable as possible.

This draft order represents a small but important step in that direction. It reflects the pragmatic, consumer focused approach that underpins the Government’s energy strategy: always seeking opportunities to make the system work better for the British people, while maintaining the confidence of the investors who are helping to deliver the energy infrastructure of the future. I beg to move.

[Earl Russell (LD)]

My Lords, I thank the Minister for his introduction. I begin by recognising that this draft Renewables Obligation (Amendment) Order 2026 makes a specific and, on the face of it, sensible change in the way the renewables obligation is updated over time. By moving from RPI to CPI calculations for inflation, it should slow the growth of RO costs and in turn ease some of the pressures on energy bills paid by households and businesses. As the Minister said, during a new energy crisis when far too many families and households are living in fuel poverty and we are seeing rapid rises in our energy costs, we remain acutely conscious that many are watching every pound being spent on their energy bills. This SI, if everything goes to plan, as the Minister said, would save £1.9 billion over the next 11 years.

We therefore welcome the measures, as they are designed to reduce the cost of energy. However, bringing down bills cannot be separated from maintaining the pace of the clean energy transition and maintaining market confidence and those who finance it. As the Minister said, the RO has been instrumental in building our capacity, particularly for mid-scale onshore wind and solar. Many have made investment decisions years ago based on an understood indexing regime. Can the Minister tell us what assessment has been made of the impact on projects that have had financing assumptions predicated on RPI? How many generators are judged to face material changes to their expected revenues as a result? What modelling has been done to check whether these measures could have a disproportionate impact on those at the smaller end of the generating scale?

There is also, for us, the question of overall approach. From the Government’s point of view, this is a small, important, but technical, pragmatic and consumer-focused change. But, for many in the industry, this is yet another incremental tweak to the legacy schemes. I note that, of the 257 responses to the consultation, most did not support either option put forward, citing a preferred option not to change the system at all, based on concerns around investor confidence, minimal consumer benefit and a need—from their point of view—for financial stability and predictability. Do the Government accept that this kind of piecemeal pattern risks the possibility of further eroding investor confidence? That would not be because any one of the individual changes is huge on its own but because it creates a sense that the rules for existing long-term investments are constantly up for potential revision.

As the Minister said, the impact is £1.9 billion. The measures will curtail the existing revenue for RO generators—reductions of around 1% for the financial year 2026-27, which will rise to 5% by the financial year 2030-31. As we know, these are large-scale, long-term investment decisions, so even relatively minor changes can have, over a prolonged period, quite large and sustained impacts on what were expected revenue returns and investment decisions. The Explanatory Memorandum says that, overall, the department does not expect that there will be a disruptive effect on small generators. What does that mean in practice? How confident is the Minister in that statement? Also, how will this be monitored going forward? I note that there is no statutory review clause here, so how will any unintended impacts or consequences of the SI, once it is passed, be monitored? Furthermore, if there are unintended consequences, would there be a willingness by the Government to look again at these changes, particularly if they happen to impact the smaller schemes?

More generally, is it the Government’s intention, over time, to mitigate remaining RO schemes into contracts for difference-type frameworks? Instead of having this piecemeal approach, is there a more fundamental plan, as part of this framework, to reduce bills? I welcome those measures, but is it not time that there was an overall plan for this, rather than looking at individual orders one by one? Is there not a better way of doing this, agreeing it with the investors and the market, so we can both reduce the cost for bill payers and maintain the investor confidence on which we depend to secure future investment? We generally welcome what is here, although we have a few questions about it. We do not oppose this SI in any way, but we want a bit of clarity on those points.

[Lord Moynihan (Con)]

My Lords, I am delighted to stand before the Committee in agreement with the noble Earl, Lord Russell, on this occasion. If I may, I will build on some of the questions he asked. Before I do, I declare my interest as the chairman of Acteon, which is a global specialist subsea services company providing integrated seabed-to-surface engineering solutions for the worldwide offshore energy sector, including oil and gas and wind energy.

During the consultation exercise for this order, almost half—48%—of respondents expressed a preference for not going ahead with either option. Many respondents raised concerns about the wide-reaching, longer-term impacts that these changes could have on investor confidence and regulatory stability. What does the Minister believe will be the effect on investor confidence in this sector?

Many argued that indexation changes could raise risk premia and depress valuations, and that they would likely increase the cost of capital on new investments, which could deter future investment and, ultimately, have an impact on consumers. Does the Minister agree with this? If not, why not? Most respondents felt that both of the options proposed by the Government would represent a breach of legitimate expectations based on prior commitments from the Government. Some believed that the proposals could attract legal challenge. Does the Minister consider legal challenge likely? If not, why not?

Some respondents warned that the estimated consumer bill savings from switching to CPI would be modest or otherwise offset elsewhere by increases to the cost of capital of future projects, and few agreed that the switch to CPI is necessary at all. The UK law firm Burges Salmon said:

“A switch to CPI or a temporary freeze to tariff/buy out levels will therefore unnerve everyone involved. Many investors have modeled returns based on RPI-linked revenues over the full support term. Any switch (whether Option 1 or 2) will therefore undoubtedly result in slower growth of support income which may, in turn, impact projected equity returns and dividends and trigger a downward adjustment in NAV estimations of affected ProjectCos”—


that is, net asset values. It went on to say:

“In addition, projects financed with RPI-linked debt may face a mismatch between the generating asset projected revenues and debt liabilities. Coupled with uncertainty around the introduction of an FPC scheme”—


that is, the fixed price certificates scheme—

“it is clear that the threat of sizable and costly changes to renewable support schemes being implemented is increasingly real and one which the industry may fight hard to resist whether by way of legal challenge or robust responses to the various consultation papers”.

What is the Minister’s response to Burges Salmon?

That firm was not alone. Commercial law firm Travers Smith wrote:

“Although many, including generators, investors and financing parties with interests in existing assets benefitting from these subsidies will be relieved that the more drastic ‘freeze-and-realign’ option (i.e. ‘Option 2’) was not taken, the immediate shift to CPI indexation is nonetheless expected to be a blow to confidence and cause headaches across the sector, with investors seeking to protect valuations and dividend capacity against erosion of RPI linked cash flows, and lenders scrutinising headroom and covenant resilience in the context of the risk of refinancing. The timing—as Government seeks to encourage a ramp-up in investment as part of its Clean Power by 2030 plan—is unfortunate”.


I was going to conclude on this point, but the Minister could not resist the opportunity to refer to the current global crisis and the need to “accelerate to homegrown energy” as his solution—that is, accelerate to intermittent power when what we need is, in essence, firm power.

As we know, three-quarters of our wind and solar power is generated through renewable obligation subsidies. This means that, every time electricity is generated, suppliers get the wholesale price, plus higher subsidies than in all other OECD countries outside China—subsidies that signal the direction of future energy prices for consumers. Every time the wind blows, some wind farms get up to three times the market price of electricity. If wholesale prices are £80 per megawatt-hour—they were roughly at that level before the crisis—wind farms are getting two renewables obligation certificates on top of that, at about £70 each. This means that they have been getting £220 per megawatt-hour, which is almost three times the market price for electricity.

As was evident to those noble Lords who were fortunate enough to see the Secretary of State on Sky News this weekend, he used the word “incredible” in most of the sentences that he spoke. Is it not incredible that the Government continue to say that gas is the problem? In the last week, the price of gas, which generates our electricity, has been high, at around £120 per megawatt-hour. But is it not incredible that the renewables on the scheme will always get more than the gas price? Right now, there are wind farms getting up to, as I mentioned, £270 per megawatt-hour because they get whatever the wholesale price is plus the subsidies on top.

17:15

The reason is clear: wind farms receiving over £200, £230 or £250 per megawatt-hour in the UK are in receipt of high-constraint payments during periods when the grid cannot accept their power or through older high-subsidy schemes. Such payments are often linked to specific, often Scottish-based, onshore wind projects during high-wind, low-demand times—and, incidentally, this is where the Government insist on building the majority of new onshore wind farms.

As we know, wind farms are paid to turn off when transmission capacity is full, especially when exporting to England from Scotland, where most are to be found. These payments can often exceed £200, and indeed £250, per megawatt-hour, particularly for large remote projects. The renewables obligations deals last for 20 years. They are not cheap and they can never be cheap. No matter what the gas price or the wholesale cost of electricity is, they will always be much more expensive, and the subsidy goes up year after year. The Government are trying to address that today, but it is the subsidy itself, not the incremental inflation change, that does the real damage.

Today at lunchtime, yet another nail was knocked into the coffin of Britain’s industrial and chemical industries. Peter Huntsman, president of Huntsman Corporation, which bought the industrial chemicals business from ICI, announced that it would close its UK operation if the Government did not address the incredibly devastating cost of energy. It was facing energy prices six to seven times higher in the UK than in the rest of the world. He added that prices went up as they became more reliant on intermittent energy prices. In the states, the cost of gas is $2.50 to $3 an MMBtu. In the UK, it has moved from $3 to $9 to $17 to $18 today per MMBtu. That is the definition of “incredible”.

We are not linked to world gas prices. If we developed our own reserves by applying the right regulatory fiscal regimes, we would encourage companies to tie back additional production now—not in five or 10 years but now—with the gas being linked, at negotiated prices on long-term contracts, to major industrial users in the UK. I can tell noble Lords that that is the case because, at the turn of the century, I established with colleagues Consort Resources, which had southern basin gas assets. We negotiated the long-term contracts with the market in the UK—none of it went internationally. It was tied back straight to the UK through long-term contracts, which is precisely what we should look at as a country at the moment. Instead, the Government have tried to move the costs of intermittent renewables on to people’s tax bills. Ordinary working people are facing higher taxes on their income and pensions, and their small businesses and student loans are paying for the subsidies. It is in the Minister’s gift to change the subsidy arrangements, as this statutory instrument shows can be done.

The British people are not stupid. They can see that the Government’s energy policy is not credible. Although we should not oppose this order, we would be myopic and completely lacking in foresight or intellectual insight if we did not review it in the context of energy prices paid in the UK. I am grateful to the Minister for allowing us to do so, following his remarks about the international crisis. We urge the Government to go much further. The level of subsidies is truly “incredible”, which, as the Secretary of State and the Minister today know, means—I quote from the dictionary—“impossible to believe”.

[Lord Whitehead (Lab)]

First, I thank noble Lords for their valuable contributions to this debate. The Government have listened carefully to the concerns expressed, particularly in relation to investor confidence, which I will come back to in a moment, to policy stability and to the long-term credibility of the UK’s renewable support schemes.

In considering the valuable and detailed contributions from noble Lords, I must say one thing to start with. The noble Lord, Lord Moynihan, is tempting me into a widespread debate about energy changes, energy prices and so on, but I kindly suggest that that is not the subject of our discussion this afternoon. The points that he makes are certainly ones that need replying to, and I hope that replies are being undertaken—but of course we are undertaking those replies at a time of energy crisis, and indeed a period of great volatility and uncertainty. That perhaps underlines why it is a better idea for the long term to have homegrown sources of energy that are not volatile and which can actually inform what is happening in the domestic market without inevitable consequences on the international market. The move towards renewables and low-carbon energy sourced from within the UK is a very effective way of doing that in the long term.

[Lord Moynihan (Con)]

I absolutely do not want to start a debate this afternoon, because we will unquestionably have plenty of opportunities in the future to cover this ground, but there is nothing more secure, in terms of our security of supply, nothing that creates more firm power, than our natural gas in the UKCS, which is much cheaper and far less polluting than importing gas from Qatar or liquefied natural gas from the United States. That reserve is critical, and if there is one lesson that comes out of this crisis, it is that we should maximise that reserve for our own country, for our own people, in exactly the same way as the Norwegians are doing at the moment for their people—unless the Minister thinks that the Norwegians are hopelessly wrong and should have shut in their basin, which he may wish to say. I think that our differences on this subject are worthy of future debate, but I think it is important to place them on the record.

[Lord Whitehead (Lab)]

I thank the noble Lord for placing that on the record. The Norwegian basin, of course, is far less mature than the UK basin, and indeed the Norwegian system works on substantially the same basis of international pricing as the UK system as far as gas is concerned.

The noble Lord has used the word “incredible” on several occasions. It was incredible, over the years, how much gas we were exporting from UK fields, even at a time when it was absolutely necessary to have the maximum supplies bought and used in the UK. Indeed, even during the Ukraine invasion crisis, there were still substantial exports on to the international market of gas that had come into the UK in the first instance. It is also the case, of course, that as far as marginal cost pricing is concerned, gas still makes the market over 65% of the time, so the whole market is still informed by international gas prices and international gas market-making in a way that is inimical to the stable, homegrown future energy that we need to import so that those positions are no longer taken.

[Lord Moynihan (Con)]

To place it firmly on the record, Norway and ourselves share the same basin in the northern North Sea, delineated by a median line. Geology does not recognise a median line, which is why in 1990 we were, broadly speaking, producing about 2 million barrels a day each, and in 2010 we were, broadly speaking, producing about 4 million barrels a day each. Today, we have gone right down to 400,000 barrels, and the Government are driving it down lower, while the Norwegians are going north of 4 million barrels.

My second point is that yes, the Minister is absolutely right that the Norwegians are exporting it to the international market. They do that because they can satisfy their domestic demand from hydroelectricity. As a result of that, however, they have managed to set up a sovereign wealth fund that assists their healthcare and their social security. The money they are earning is fundamentally important to the success of their economy. If we had done the same thing, we would have been in a far stronger financial position and would be able to take significant tax receipts to the Treasury to assist us with the many other challenges that the Government face.

[Lord Whitehead (Lab)]

The noble Lord is exactly right about a sovereign wealth fund, and it is our joint regret that the UK did not pursue that path many years ago. However, that is not the fault of the current Labour Government, as those actions were taken many years ago. He is right to point out that we would be in a much better position had that path been taken, but we did not take that path. We are where we are and we need to move on from that in terms of homegrown energy of a different form.

I am anxious to make progress with the business in hand, and I am pleased to see the overall welcome for these measures from both sides of the House. I will very briefly deal with one or two concerns that were raised. For example, on the concern about the effect of these measures on investor confidence, the future investment is of course not going to be carried out through the renewables obligation. As I mentioned, the renewables obligation is a sunset measure: indeed, it closed to new entrants in 2017. We are therefore talking about the remaining years of this measure, not the years in front of us of future and present measures, which we are undertaking in order to expand and stabilise the renewables and low-carbon world. Investor confidence will, therefore, be determined by how those measures are working.

In any event, the path that was taken to not freeze the RO, but to relate it to CPI rather than RPI, actually continues to allow RO to grow, albeit at a slightly lower indexed case. Therefore, in terms of the returns that those historic companies thought they were getting as far as the RO is concerned, there is not a great deal of difference—especially since we are so far past the point at which new entrants were accepted to the scheme.

As for legal challenges, we have been very scrupulous in making sure that we have received full advice, and that we are well entitled to make these changes. It is difficult to see how a legal challenge on the basis of not liking the changes very much might succeed, as opposed to a legal challenge on the basis of making the changes in the first place.

The noble Earl, Lord Russell, asked whether there could be a more comprehensive measure as far as future ROs are concerned, and this is something I have been quite interested in doing myself. It would involve trying to move RO recipients on to a CfD contract, which can be done in various ways. I suggest that if we did that forcibly, it would probably result in a legal challenge, but there are other ways of making the change.

17:30

Certainly, that change could have a greater impact on, for example, what makes the market, as far as prices are concerned, by bringing a larger amount of renewables out of the RO—it is 30% at the moment—and into CfDs. That is something we are looking at and reviewing, but we have to accept the considerable difficulties and possibly considerable expenses in moving in that direction, so at least for the time being we are concentrating on what is, I think, a sensible and modest way of saving the consumer some money in a market that still continues to rise as far as the RO is concerned.

The final point I would make is that the noble Lord, Lord Moynihan, is quite right: in a time of great price volatility, people make superprofits under the RO because they are included in that superprofit volatility, as opposed to being insulated from it under CfDs. The noble Lord will remember that, during the Ukrainian invasion crisis, under the Energy Act 2023, an energy price levy was put on the superprofits of both fossil fuel companies and renewable energy producers. That could certainly be looked at, in terms of what this present crisis portends for us, but, as I say, we are still in very early days. We do not know exactly where things are going, but these are the sorts of thing that we need to keep carefully in mind as we move forward with this crisis.

On that basis, I hope that, while I may not necessarily have convinced noble Lords, I have caused them to agree that we should pass this SI this afternoon.

Motion agreed.