Insights / What is RO mutualisation?

RO mutualisation: what it is and what it means for your bills?

2nd December 2020

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 two years, several suppliers have gone out of business.

These suppliers failed to meet their share of the RO for the reporting period April 2018 – March 2019, and so left a shortfall. To cover the deficit, the energy regulator, Ofgem, divided this cost across all participating suppliers.

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Some Drax customers that are, or were, in contract for this compliance period - between April 2018 and March 2019 - will soon receive a bill for this charge.

What's the Renewables Obligation?

Ofgem administers the Renewables Obligation (RO) scheme, which requires suppliers to source a growing 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 2018-2019 at 0.468 ROCS per MWh of electricity supplied, or at a buy-out rate of £47.22 per ROC.

Due to tougher trading conditions and suppliers going out of business, 17 suppliers failed to meet their obligation. This left a shortfall of almost £100m due to Ofgem.

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.

For 2018/19, suppliers will pay their share of the £97.5m RO shortfall. Our share equates to £4.1m or 0.0219p/kWh. Each supplier will pay its share in equal quarterly instalments, starting September 2020.

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, look out for the latest communications from us or 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 of the non-energy costs included in your energy bill.

Download your free copy today