Plugged in: Wholesale Contracts for Difference – will RO projects stick or twist?

Plugged in: Wholesale Contracts for Difference – will RO projects stick or twist?

The Renewables Obligation (RO) scheme is now closed to new projects, having shut in March 2017. Contracts for Difference (CfDs) replaced it as the UK’s principal support mechanism for new low-carbon generation.

Legacy RO projects continue to receive support until the earlier of 20 years from accreditation or 31 March 2037.

The Government has now proposed a new Wholesale Contract for Difference (WCfD), which would allow eligible projects to transition on a voluntary basis. Alongside the recent increase to the Electricity Generator Levy (EGL), the policy is clearly directed at legacy RO assets.

The intention is to move a greater proportion of generation onto fixed-price contracts and reduce exposure to wholesale electricity prices, which are often set by gas generation. The key question is whether developers will, in practice, choose to make that transition.

Renewables Obligations – a refresher

The RO scheme works by placing an obligation on electricity suppliers to source a proportion of their electricity from renewable sources.

Suppliers can meet this obligation by:

• acquiring Renewables Obligation Certificates (ROCs);
• making a buy-out payment; or
• a combination of both.

Generators earn ROCs for each megawatt hour of renewable electricity generated, and can sell these to suppliers either alongside power or separately.

As a result, RO projects benefit from two revenue streams:

• wholesale electricity revenue; and
• ROC income.

Historically, the cost of the scheme has been passed through to consumers. From April 2026, however, the Government has shifted 75% of the domestic share of RO costs onto general taxation, reducing the impact on retail electricity bills.

ROCs remain tradeable, with value determined through the market framework. The Government has also explored whether to transition to a fixed price certificate model, although no firm position has yet been adopted.

While the RO was designed to support early-stage deployment of renewable generation, the continued exposure to wholesale prices means that, in periods of elevated pricing, many RO projects have derived materially higher revenues than originally anticipated.

Wholesale Contracts for Difference – what we know so far?

The detailed design of the WCfD remains subject to consultation. However, the proposed structure broadly reflects the existing CfD model.

Generators would continue to sell electricity into the wholesale market, with a strike price mechanism providing top-up payments (or requiring paybacks) through the Low Carbon Contracts Company.

The key distinction is that current proposals suggest the WCfD would replace only the wholesale revenue element. Generators would continue to receive ROC income alongside the CfD-style payment mechanism, rather than the RO being disapplied.

This structure is important. It means that, at least in principle, the WCfD is intended to stabilise part of the revenue stack, rather than fundamentally rebase it.

Stick or twist – the key considerations

Certainty versus upside

At the most fundamental level, a WCfD offers a familiar trade-off.

A fixed strike price provides:

• greater revenue certainty; and
• protection against lower wholesale prices.

However, it also limits the ability to benefit from periods of higher pricing.

RO projects already benefit from a degree of revenue stability through ROC income. The remaining exposure to wholesale prices is therefore often a deliberate feature, rather than a risk to be eliminated entirely.

The extent to which developers are willing to give up that exposure will depend heavily on how WCfD strike prices are set relative to market expectations.

Electricity Generator Levy

The EGL forms an important part of the overall policy package. The rate is due to increase to 55% from 1 July 2026 and applies to revenues above a benchmark electricity price.

In practical terms, RO projects remain exposed to the levy in periods of higher wholesale prices, whereas a WCfD structure may reduce that exposure by limiting reliance on market-linked revenues.

This is clearly intended to form part of the incentive to transition. However, it is unlikely to be determinative in isolation. Developers will focus on the combined impact on overall returns.

Contract term and asset life

The duration of WCfDs has not yet been confirmed, and its interaction with existing RO support periods will be important.

A WCfD that broadly aligns with remaining RO support may be relatively neutral in value terms. A shorter term would introduce additional merchant exposure, while a longer term could extend revenue certainty beyond the RO period.

This is particularly relevant given the maturity of many RO assets, where remaining asset life and contract duration may not align neatly.

Financing and stakeholder dynamics

The potential impact on financing is likely to be a central consideration.

A more stable revenue profile may support increased leverage or refinancing opportunities, and improve debt service cover ratios. This is likely to be attractive from a lender perspective.

Sponsors, however, may reach different conclusions. For some, retaining wholesale exposure remains valuable particularly in the context of sustained high pricing.

Practical constraints will also arise. Transitioning to a WCfD is likely to require lender consent, updates to financial models, and potential amendments to finance documents. Joint venture arrangements may impose further constraints on changes to route-to-market.

Commercial and operational considerations

Beyond the core pricing question, a number of practical issues are likely to influence decision-making.

Many RO projects already operate under power purchase agreements. Moving onto a WCfD may require those arrangements to be renegotiated or unwound, potentially giving rise to break costs or timing issues.

In addition, a CfD-style structure does not remove all sources of revenue variability. Generators may remain exposed to differences between reference prices and achieved prices, as well as to curtailment, constraint and negative pricing risk. These issues are becoming increasingly relevant as renewable penetration rises.

Finally, there remains uncertainty as to how WCfDs will be allocated. If access to contracts is constrained or pricing is competitive, this will further affect uptake.

For sponsors with multiple assets, these considerations are also unlikely to be assessed on a purely asset-by-asset basis. Portfolio positioning may be an important factor including the balance between fixed and merchant exposure.

Conclusion – a selective shift?

On the information currently available, a wholesale migration of RO projects to WCfDs appears unlikely in the near term.

For many assets, the existing model continues to offer an attractive combination of ROC-backed stability and exposure to wholesale price upside. Even with the increased EGL, that balance may remain appealing.

That said, there are clearly classes of projects for which a WCfD may be attractive, particularly where refinancing is under consideration, leverage is higher, or investors favour more stable, contracted returns.

Much will ultimately depend on the pricing. Strike prices that are sufficiently attractive to encourage widespread participation may be difficult to reconcile with consumer value. Conversely, if pricing is less attractive, many generators may simply elect to remain within the RO regime.

That tension is inherent in the design of the policy and suggests that, at least initially, WCfDs are likely to be adopted selectively rather than across the market as a whole.

Further reading:
Energy UK guide to the Renewables Obligation and Wholesale Contract for Difference