Sustainable energy manager NextEnergy Capital has published its view on the government’s consultation on the application of retroactive changes to the schemes for renewable energy obligations (RO) and feed-in tariffs (FiTs).
NextEnergy Capital, on behalf of NextEnergy Solar Fund, the listed investor, said that changing the way inflation is applied to RO and FiTs would increase consumer costs and threaten long-term renewable energy investment.
What changes are being considered?
In December 2025, the UK Government consulted on moving the indexation of payments under both schemes from the Consumer Price Index (RPI) in favor of the Consumer Price Index (CPI). It would roll back the change until the launch of the RO in 2002.
The RO scheme ran until 2017, but still supports a large part of current electricity generation. It encourages renewable generation by effectively imposing a penalty on electricity companies that do not use renewable generation, certified by purchasing renewable obligation certificates (ROCs).
The FIT scheduleintroduced in 2010, provides financial incentives for individuals, companies and organizations that generate electricity from renewable sources.
The payments linked to both are logically adjusted for inflation every year. However, when both schemes were introduced, RPI was the most common measure of headline inflation, but CPI is now considered more accurate.
HM Treasury has committed to moving all inflation measurements from RPI to CPI by February 2030, but the government’s consultation in December would accelerate the change for the two schemes.
It said this could reduce the cost of subsidies for consumers, saving between £320m and £1.5bn by 2031/2032. The government gave a second option: to freeze payments in nominal terms for most of the remaining duration of the support scheme.
This comes as the The British price ceiling unexpectedly rose for the current period due to policy burdens, something from the government wants to make cuts in his autumn budget.
The impact of changing the way inflation is measured
The change in the inflation measure would save consumers around £5 a year. However, NextEnergy Capital said the proposed changes could lead to a net increase in total costs to consumers in the region from £584 million to £2.5 billion between 2026 and 2050.
These figures were developed in collaboration with energy consultancy LCP Delta to assess the cumulative effect of the proposed change on the cost of capital for the renewable energy sector.
LCP Delta’s figures formed the backbone of the anti-zonal pricing argument during the government’s review of the electricity market regulations (REMA). It opted not to introduce zonal pricing.
The analysis carried out on behalf of NextEnergy Capital showed that share prices of the six main listed sustainable infrastructure funds fell by 5% on the day the consultation was released. It says share prices have not recovered since then, compared to the FTSE250.
LCP’s report says that if the option to retroactively date the CPI change (option 1) is considered the government’s intention, the net asset value (NAV) is expected to decline by an average of 2% for the funds, which would require a discount rate of 0.72% to achieve a 5% decline in the share price, and is expected to impact future projects as a higher cost of capital. It is said this would cost consumers a total of £584 million.
According to LCP’s report, the payment freeze (option 2) would be the first major intervention in a government support program in Britain. LCP’s modeling assumes that the Spanish government’s reduction in payments in its own FiT program is a similar intervention and sets the increase in capital costs at the same level of 2.5% for option 2. This would result in a total cost to consumers of £2.49 billion.
This is because in both cases higher capital costs increase the hurdle rate for future renewable projects participating in Contracts for Difference (CfD) auctions, the scheme that replaced the RO.
LCP’s financial model for CfD projects was used to calculate the expected increase in the necessary strike price as a result of these changes. Costs associated with CfDs are also reflected in consumers’ energy bills.
As such, it refutes government figures that assume the impact of the policy change would end by the end of the RO and FiT schemes (which, although no longer available for new contracts, still pay out on contracts covered while active), and states that higher CfD clearing prices would be ‘locked in for years afterwards’.
Do the changes have consequences for consumers?
The aggregation of higher costs for developers equating to marked increases for consumers is somewhat cynical and perhaps reflects the zonal price debate by suggesting that some of the losses cannot be incurred by large energy companies, which must pass on the associated costs to consumers.
In October, Unite, one of the country’s largest unions, published a report showing this British energy companies made £30 billion in profits by 2024. Unite’s research shows that the average household pays £500 a year in energy company profits.
The report emphasizes that sector gains far outweigh the costs of “green levies”. It specifically cited the RO and CfD schemes, which will cost around £9.9 billion by 2024 and will be passed on to consumers through supplier bills, despite accounting for the equivalent of just over a third of energy companies’ profits.
While it is important that operating in the UK is an attractive prospect for investors, it is worth noting that higher operational costs do not necessarily have to have a direct impact on consumers.
