RO mutualisation: what it is and what it means for your bills?
The Renewables Obligation (RO) scheme encourages investment in renewable generation sources. Introduced in 2002, the RO requires all suppliers to source an increasing proportion of their power from renewable sources.
Suppliers fund the scheme but pay for it in arrears – sometimes leaving a shortfall. Due to challenging trading conditions over the last few years, several suppliers have gone out of business.
These suppliers failed to meet their share of the RO, and so left a shortfall in funds above a certain amount known as the Mutualisation Threshold. To cover the deficit, the energy regulator, Ofgem, divided this cost across all participating suppliers.
Mutualisation could still occur in the future if a supplier fails. However, Ofgem now requires suppliers to ringfence RO funds on a quarterly basis. This makes the likelihood and impact of a mutualisation event much smaller.
What's the Renewables Obligation scheme?
Ofgem administers the Renewables Obligation (RO) scheme, which requires suppliers to source a percentage of their energy from low carbon sources.
When a supplier buys power from an accredited generator, they receive Renewables Obligations Certificates (ROCs). The suppliers then present the ROCs to Ofgem at the end of the compliance period.
Suppliers can either present ROCs or pay a buy-out to meet their obligation. Ofgem fixed this for 2024-2025 at 0.487* ROCS per MWh of electricity supplied, or at a buy-out rate of £64.73 per ROC.
*The Obligation level currently set by the Department for Energy Security and Net Zero (DESNZ) for 2024-25 RO year may be subject to change before 1 April 2024.
What does 'Mutualisation' mean?
Mutualisation is where Ofgem divides the RO shortfall amongst the remaining suppliers to cover the cost. Ofgem determines the cost for each supplier as a proportion or percentage of their ROC share.
Many suppliers, including us, pass on these RO costs to customers with pass through contracts. We do this by applying a one-off charge to the bills of affected customers.
From 2023-2024 onwards, Ofgem has required suppliers to ring-fence their obligation for domestic energy supply. This is to safeguard other suppliers from high mutualisation costs and discourage suppliers using these funds as working capital for their business.
And from April 2027, DESNZ is planning to replace the RO with a fixed price certificate scheme. With this scheme suppliers will have to pay more frequently to generators. This will help manage the risks of a potential mutualisation.
Why is the RO important?
The RO helps to support renewable generation, reducing the carbon intensity of the power we use and creating a more sustainable energy infrastructure.
All suppliers will likely be passing on these costs to their customers. If you’re a Drax customer, get in touch with your account manager today to find out more.
If you’d like to better understand how the RO and other non-commodity costs are calculated, you can download our guide to Third Party Charges (TPCs). This summarises all the non-energy costs included in your energy bill.
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