Renewables Obligation Certificates Removal (ROC): Profitability Impacts

Are you wondering how the removal of Renewables Obligation Certificates in March 2027 will affect you? If you’re a landowner interested in this upcoming change, stick with me as I explain everything you need to know.

If you’re not familiar with Renewables Obligation Certificates, don’t worry – I’ve got you covered.

These UK-based subsidies have been helping to boost wind farm revenues for over 20 years. However, they’re set to be removed in the first quarter of 2027, and this change will undoubtedly have an impact.

If you’re a landowner, you might be wondering what this means for you. After all, unless you’re a landowner-developer, you’re not directly involved in a project’s funding.

In this detailed rundown, I’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)?

ROCs are the subsidies currently received by wind farms and have been in place for over 20 years. They will be coming to an end in March 2027.

They are currently responsible for between 40 and 50 per cent of the revenue generated by many current wind farms across the country. So, they play a key role in many farms’ financial viability.

As a landowner, a site developer typically pays you rental income for leasing land through an agreed payment arrangement [Link blog 3(1)]. While you don’t directly receive ROC payments, there’s still an indirect benefit to you.

When the government removes ROC payments, overall wind farm payments will drop.

Because of this, landowner payments will likely be affected too, unless the payment arrangement specifies a fixed figure.

It’s worth mentioning that by the time the ROCs are phased out, many of these wind farms will be nearing the end of their operational lives.

Given that ROCs will be removed at the same time these sites may be repowered or replaced, many of them will simply be rebuilt.

In the meantime, developers will likely keep older sites running for as long as possible to maximise the income from 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?)

It’s no secret that high energy prices are tough on the average Brit.

However, the ongoing energy crisis – sparked partly by the Ukraine War – has driven power prices to 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 than usual.

This is likely to resolve over the next 10 years or so. However, the cash injection from the crisis could 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)?

When the Government removes ROCs in March 2027, they’ll fully replace them with the Contracts for Differences scheme (CfDs).

This is not the same as subsidies (in that it’s not half as beneficial for landowners or developers). Instead, CfDs aim to provide income stability by selling energy at a fixed price for 10-15 years.

They work to incentivise developers dealing with high upfront costs by offering direct protection from volatile wholesale prices.

These schemes also protect consumers from paying the rising support costs when energy prices rise.

The prices offered by CfDs will be lower than the current market price. However, it’ll still be a reliable stream of income for the wind farm.

Even though these payments may be below the current market rates (which are exceptionally high right now), the guaranteed income should still be decent.

I strongly believe that most wind farms will switch to this scheme once the Government phases out ROCs.

Now, 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 more attractive than the uncertainty of having no subsidy or support.

This stable rate of return can also be beneficial for profit forecasting, especially for larger projects with multiple stakeholders.

It’s worth noting that the site operator must repay any excess amount above the agreed CfD price.

For example, if the agreed price is £50/unit of energy and the market price rises above this, the site operator must pay the difference back.

On the other hand, 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?

While the removal of the Renewables Obligation Certificates (ROCs) might initially seem like a setback, it’s not all bad news for landowners.

Sure, the removal of ROCs will result in a revenue reduction, but technological advancements have made the overall cost of running a wind farm cheaper over time. These advancements should help balance things out in the long run.

While you may lose some income from the subsidy, falling management costs could make up for it.

There are still significant margins to take advantage of (especially with good negotiation tactics).

Another positive aspect is that many developers will repower sites after ROC removals. Newer turbines can produce far more energy than older models. This increase in power and efficiency leads to 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 after the removal of ROCs.

Your site operator should factor in the net impact of the subsidy removal. Make sure the rent adjustment accurately reflects the loss of the ROC revenue – 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 near 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 businesses with large energy requirements, this presents a significant opportunity.

This means the relevant landowners need to be extremely proactive in finding a developer willing to sell energy directly, without a middleman.

With a bit of hard work (for example, with the Dewlay Cheese Factory in Lancashire), this approach can lead to substantial cost savings for both landowners and businesses.

Final Thoughts

While the removal of Renewables Obligation Certificates (ROCs) may not be a positive move for wind farms, it isn’t quite as detrimental as it might seem on the surface.

With a bit of planning and sustained high energy costs, landowners should experience minimal cuts to their rent.

As with any big change, it’s important to discuss potential outcomes with your developer.

However, the continued high energy prices should provide support to the market well after the removal of ROCs.

If you need more information on how the removal of Renewables Obligation Certificates 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, I’ll be happy to help you analyse your site to ensure it’s getting the best returns possible.

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