UK ROC prices and recycle rates fall on weaker demand

LONDON (ICIS)–Low demand and high wind generation have pushed British renewable obligation certificate (ROC) prices down by 7% to £51.8/ROC in the current compliance period, according to sources.

ROCs are part of the renewable obligation (RO) scheme, which requires suppliers to source a percentage of electricity from renewable sources.

They add additional value to renewable assets eligible to the scheme prior to 2017.

Suppliers can comply with the RO scheme either by submitting required ROCs or paying a buyout fee set by energy regulator Ofgem and the energy department BEIS each year.

Obligations are set in October/November for the year ahead.

For the CP19 period, which runs from 1 April – 31 March 2021, the ROC buy-out price has been set at £50.05/ROC by Ofgem.

The buyout payments are then passed back to suppliers that presented ROCs, which is known as a ROC recycle rate.

A generator can secure the buyout price and the recycle rate, which is determined at the end of the compliance period.

FALLING DEMAND

Power demand in the UK has collapsed following lockdown measures, which has had a negative impact on both ROC volumes and prices in the current compliance period (CP18).

Half-hourly transmission demand (accounting for embedded generation) has dropped by an average of 14% compared to the five-year average.

While the extent of demand recovery remains uncertain, market participants have said low consumption is likely to remain a key bearish driver of prices until delivery.

“At the time of setting obligations, no one knew covid-19 would happen, which meant we have a big decrease in demand this year than was predicted by Ofgem or BEIS,” said one ROC trader.

The low demand has helped to push ROC prices down to £51.8/certificate from a high of £55.5/certificate in March.

RECYCLE RATES

According to another trader: “The kind of buyers that remain at this time of year are the smaller suppliers,” which have been hit hardest by the coronavirus.

“I think the economics for suppliers with the coronavirus means that they want more for their money than previously,” he added.

In the ROCs market generators can buy at a fixed price, i.e. taking a position on the recycling value.

Alternatively generators can buy at a processing fee – determined by the market – which is the buyout, plus recycling value minus the processing fee.

This means a participant is buying an ROC at a discount to the buyout to account for the financing costs.

There could therefore be more participants looking to buy ROCs instead of paying the buyout fee if the market is short enough, similar to the CP18 period.

In a long market there is a risk that the value of an ROC could go below the buyout price, removing the cash incentive, a likely scenario in the upcoming CP19.

Lower demand is expected to keep recycle values deflated, which according to one trader has left people trading on a forward basis “burnt by the recycle rate,” especially if the market errs on the long side.

The current recycle rate is around £4-5/ROC, while the expected value was around £8/ROC, which, combined with low wholesale prices, has pressured generator revenues.