Renewables Obligation Certificates Removal: Profitability Impacts
|Topic: New wind farm projects
|Read Time: 5 mins
| Landowner type:
Independent landowners | Institutional landowners | Professional advisers
|Energy: Onshore wind
Are you wondering how the Renewables Obligation Certificates removal in March 2027 will affect you? If you’re a landowner interested in this upcoming development, stick with us as we explain everything you need to know.
If you’re not familiar with the Renewables Obligation Certificates, then you’ll want to stick with us.
These UK-based subsidies have been helping to boost wind farm revenues for over 20 years. But they’re set to be removed in the first quarter of 2027, and this impact is certainly going to be felt. If you’re a landowner, you might be wondering what this means for YOU. After all, you’re not directly associated with a project’s funding unless you’re a landowner-developer.
In this detailed rundown, we’ll cover how the Renewables Obligation Certificates removal might impact your income. And luckily, it’s not quite as dramatic as you might think.
What are Renewables Obligation Certificates (ROC)?
Before we delve into the Renewables Obligation Certificates removal, let’s talk about what they are. ROCs are the current subsidies that wind farms receive, and they have been in place for over 20 years. They will be coming to an end in March 2027 and are responsible for between 40 and 50% of what current wind farms generate. So, they’re quite key to the financial running of several wind farms around the country.
If you’re a landowner, a site developer will be paying you rental income for leasing land through an agreed payment arrangement. And although the subsidy won’t be paid directly to you, there is a benefit that comes with the ROCs. When the government removes ROC payments, overall wind farm payments will drop. Because of this, landowner payments will also drop accordingly as the books are rebalanced (if a set figure isn’t outlined in a payment arrangement).
It’s worth mentioning that by the time the ROCs are phased out, a lot of these wind farms will be coming to the end of their usable lives. And as the ROCs are being removed at the same time as equipment, would they be repowered or replaced? Well, most of these sites will simply be rebuilt.
In the meantime, developers will keep older sites running for as long as possible to maximise the ROCs they receive. There’s currently no evidence that the ROCs will be replaced with something similar. So, developers are simply doing their utmost to maximise their income before these payments are removed.
Why Are Current Energy Prices So High (And How Might This Help?)
No one’s saying that high energy prices are good news for the average Brit. But because of the Ukraine War and the subsequent energy crisis, power prices are at an all-time high. And as the price of renewables is linked to the price of gas on the UK market, wind farms are earning far more. This is likely to resolve over the next 10 years or so. But in theory, the cash injection from the crisis should soften the blow of ROCs being removed. In some ways, it’s likely to prop up the energy market for the foreseeable future. Although there’s no denying that the removal will be felt, wind farms will still be better off than they were around 2014/15.
What Is Coming in to Replace ROCs (And Are They Any Good)?
After ROCs are removed in March 2027, the government will fully replace them with the Contracts for Differences scheme (CfDs). It’s not quite the same as subsidies (in that it’s not half as beneficial for landowners or developers). But it essentially involves selling energy for a fixed price for 10-15 years in exchange for income stability.
They work to incentivise developers dealing with high upfront costs with direct protection from wholesale prices. These schemes also protect consumers from paying increased support costs when energy prices rise. The prices offered by CfDs will be lower than the current market price. But it’ll still be a reliable stream of income for the wind farm. Even if this is below the current fixed price of energy by market standards (which is very high), revenue should still be decent.
We strongly believe that most wind farms will switch to this scheme once the ROCs are gone for peace of mind. So, developers and landowners won’t be quite as well off as they were under the ROC system.
But the stability and guaranteed rate of return are far more appealing than uncertainty without any kind of subsidy or support. This stable rate of return can also be beneficial when it comes to profit forecasting. This can be especially major for larger projects with stakeholders.
It’s worth mentioning that the site operator must repay any amount above or below the amount listed in the Contracts for Differences. So, let’s say that the agreed-upon price was £50/unit of energy. If the site makes more than this per unit (if the price of energy rises), the site operator must pay this back.
Should the site make less than this unit cost, the government will pay the difference to the site operator. In theory, the price paid for the energy will always be £50/unit of energy as agreed.
What Does the Removal of ROCs Mean for Landowners?
It’s tempting to look at the prospect of the Renewables Obligation Certificates removal as a negative thing. And in some ways, it is. But because the overall cost of running a wind farm is cheaper with technological advancements, it should balance out over time.
Although we’ll say that the removal of ROCs is a revenue blow, you shouldn’t ignore falling management costs. Sure, you may lose some income. But there are still significant margins to take advantage of (especially with good negotiation tactics.).
Many developers will repower sites after ROC removal as newer turbines can produce far more energy than preceding ones. With this increased power comes increased economies of scale per wind turbine. This might feel like a whirlwind, but it’s key at this point to understand the profitability of the site.
By doing this, you’ll be able to negotiate an appropriate rent going forward after ROC removal. Your site operator should consider the net impact of the loss of the subsidy. So, it’s worth checking that you don’t receive a significantly smaller sum. Developers will know exactly how much the ROC removal will reduce revenue, and rent loss should proportionately reflect this. No more, no less.
What If Landowners Are Located Near Local Businesses With Large Energy Requirements?
Because of the removal of subsidies, landowners with significant acreage can hugely benefit if they’re near local businesses. And if businesses OWN land that’s suitable for wind development, that’s even better.
If you’re next to a wind farm that’s selling energy at a wholesale price, you completely remove the middleman. This way, the wind farm can sell for a higher price than the wholesale price to share the cut that would usually go to the middleman. For this reason, companies using large amounts of energy should jump at the chance to have projects on their land. This means the relevant landowners need to be extremely proactive in finding a developer willing to sell the energy without a middleman. But with a bit of hard work (like we’ve seen with the Dewlay Cheese Factory in Lancashire.), this can be a huge cost-saver.
We won’t say that the removal of Renewables Obligation Certificates is a positive move for wind farms. But it isn’t quite as detrimental as it might seem on the surface. With a bit of planning and the continuation of high energy costs, landowners should see minimal cuts to their rent. As with any big change, it’s important to discuss potential outcomes with your developer. However, power prices should continue to prop up the market for quite some time after ROC removal.
If you need more information on Renewables Obligation Certificates removal and how it may impact you, just get in touch. The team will be more than happy to fill you in on everything you need to know. And in the meantime, we’ll be happy to help you analyse your site to ensure it’s getting the best returns possible.