Renewable Obligation update: Government confirms CPI switch

In our previous blog, Matt Neve, Portfolio Team Manager, explored the UK government’s proposal to change the inflation indexation calculation for the Renewables Obligation (RO) and Feed-in Tariffs (FiT) schemes from the Retail Price Index (RPI) to the Consumer Price Index (CPI) — and why it raised concerns around revenue certainty and investor confidence.

The government has now published its response for the RO scheme and confirmed what happens next.

What’s been decided

Government will implement Option 1: an immediate switch from RPI to CPI for RO buy-out price indexation, intended to take effect from April 2026 (subject to legislation).

It rejected Option 2, which would have frozen the buy-out price at the 2025/26 level (£67.06/ROC) and only resumed increases once a CPI “shadow price” caught up.

Government acknowledged neither option was universally preferred, but judged Option 1 the “least disruptive” route, avoiding prolonged uncertainty associated with a multi‑year freeze.

Why government chose CPI

The response points to three drivers:

• Lower consumer burden (with savings referenced in the response summary)
• Long-term stability for investors, arguing Option 1 minimises disruption compared with a freeze
• Alignment with wider policy, as CPI is now the government’s standard inflation measure across schemes

What it means for generators

A CPI link typically means slower annual uplifts than under RPI, reducing ROC-linked revenue growth versus prior expectations.

The central practical issue highlighted by stakeholders is a revenue–cost mismatch, because many costs (e.g., contracts and charges) remain RPI-linked, putting pressure on margins over time.

The response also captures concerns about covenant pressure and refinancing risk, especially for smaller or single‑asset SPVs, plus potential knock‑ons for maintenance and mid‑life refurbishments if cash buffers tighten.

What it means for investors

Investors and generators reiterated concerns about the retrospective nature of changing indexation on existing assets and the impact on the UK’s reputation for predictable policy.

The response notes visible market sensitivity, referencing a drop in market cap across major listed renewable funds following the consultation.

Knock-on effects for large corporate customers

For large energy users, the change is framed as part of a wider effort to bear down on levies and support electricity affordability, including industrial competitiveness objectives.

But there’s a potential trade‑off: if investors price in higher UK policy risk, the cost of capital for renewables can rise, which may feed into higher pricing for new-build renewable PPAs and long-term supply deals, diluting some of the intended bill benefits over time.

Practical next steps for RO generators (what to do now)

With the direction confirmed, the conversation shifts from “what might happen” to “how do we manage the impact?”. Based on the risks highlighted in the consultation response, here are the areas generators should prioritise:

1. Reforecast with CPI indexation from April 2026
   Update base cases and sensitivities for ROC-linked revenues under CPI, and stress test downside cases around inflation divergence (CPI vs your cost indexation).
2. Review debt documents and covenant headroom early
   If you have near-to-medium term refinancing needs, model how lower indexation affects DSCR and covenant buffers and open lender conversations sooner rather than later, particularly for SPVs with less flexibility.
3. Audit your cost indexation exposure
   Map all major O&M contracts, leases and pass-through charges that are RPI-linked, and consider renegotiation pathways where feasible to reduce the mismatch.
4. Plan for maintenance and mid-life capex strategically
   Where cashflows tighten, prioritisation becomes critical. The response highlights the risk that deferred refurbishments could impact reliability and long-term performance so asset management plans should be revisited with a “CPI world” in mind.
5. Engage on potential mitigations and alternative approaches Consultation responses suggested alternatives such as phased transitions, differentiated indexation for high-OPEX technologies, notice periods for contract renegotiation, and hardship mitigations. While not adopted now, these themes may reappear in future policy discussions.

Certainty is still the key

The government has opted for the “cleanest” implementation route a straightforward switch to CPI from April 2026, to avoid the prolonged disruption of a multi-year freeze.

But the message from the market is equally clear: how policy changes are made can matter as much as what changes. Even targeted reform to closed schemes can send a broader signal about predictability, which then feeds into the cost of capital and the pace (and price) of the transition.