What a Difference a Letter Makes: UK Government Consults on Changing Renewable Subsidy Inflation from RPI to CPI

The RO and FiT schemes had historically been the UK’s principal policy mechanisms for supporting the deployment of renewable electricity generation. Introduced at different times but operating in parallel for much of the past two decades, both schemes were designed to stimulate investment in renewable technologies by providing predictable, long-term price support for clean energy producers – at a time (when the subsidies were introduced) of considerable uncertainty around the new technologies and market pricing. Through a combination of tradable certificates (under the RO) and fixed tariffs (under the FiT), each scheme offered financial incentives that bridged the gap between the costs of emerging renewable technologies and prevailing market electricity prices. These subsidies not only enabled the scaling up of renewable capacity but also played a critical role in driving innovation and cost reductions across the UK’s renewable sector. By de-risking investment and ensuring a viable revenue stream for both large and small-scale projects, the RO and FiT schemes laid the foundation for the UK’s clean energy transition, paving the way for more competitive and market-based mechanisms in the years that followed. Both schemes have been closed to new, commercial-scale, capacity for some time – with the policy view being that renewable technology can now raise finance without this nature of support (albeit the 'Contracts for Difference' scheme continues to provide a government-backed level of price certainty for larger and/or more novel renewable projects).

Importantly, both schemes (successfully) gave financing parties sufficient comfort on long-term return from these renewable projects, by providing a predictable and regulation-fixed 20-year return. As such the current proposals to retrospectively change price indexation are significant.

The UK Government is proposing to change the price index used to annually adjust the measure for inflation for these renewable subsidy schemes from RPI to CPI – reflecting a wider effort across government to shift to the use of CPI, which it regards as a fairer (and lower) measure of inflation.

• Proposed changes to the RO

The consultation on changes to the RO (available here) presents two potential transition options:

• Option 1: Immediate Switch to CPI

From April 2026, indexation of the Buy-out Price would be switched from RPI to CPI. As illustrated by Figure 1 below, this could result in a significant impact on the price of ROCs over time and Government calculates would result in an estimated saving of £80m in FY26/27 rising to an estimated saving of £250m in 2030/31. This equates to approximately £3 per year for an average UK household.

• Option 2: Temporary Freeze and Realignment

The Buy-out Price would be frozen at its 2025/26 level of £67.06 per ROC from April 2026. A 'shadow' CPI-based inflation model would track what the Buy-out Price would have been if indexed to CPI since 2002 (see Figure 1 below). The Buy-Out Price would remain frozen until the cumulative effect of CPI-based inflation on the shadow prices matches the current RPI adjusted Buy-Out Price (estimated to occur in mid-2030s). Once the shadow CPI adjusted Buy-out Price matches the current RPI adjusted Buy-out Price (i.e. £67.06/ROC), the CPI-adjusted Buy-out Price takes over.

In essence, Option 2 seeks to clawback years of perceived overcompensation by the RO scheme. While this could result in significant savings for consumers (proposed changes are estimated to save about £300m in 2026/27, rising to £820m in 2031/32), as discussed below, such drastic and retroactive measures would more meaningfully impact the profitability and financing of the underlying projects and cause headaches for investors, particularly those with RPI-linked debt facilities.

• Proposed changes to the FiT

The consultation on changes to the FiT (available here) presents two potential transition options, which largely mirror the proposed changes to the RO:

• Option 1: Immediate Switch to CPI

Implement a simple switch in the price index used to adjust the FiT scheme from the RPI to CPI. Subject to legislative schedules, the Government would aim to introduced this prior to the March 2026 annual adjustment.  

DESNZ estimates that Option 1 would save around £20m in 2026/27, which would rise to an estimated saving of £70m in 2030/31 or approximately £2 per year for an average GB household.

• Option 2: Temporary Freeze and Realignment

The tariffs would be frozen at the 2025/26 level from April 2026. The Government would calculate a “shadow” price schedule for tariffs from 2002, annually adjusted using CPI instead of RPI. No further inflation-linked increases would be applied until the cumulative effect of CPI-based inflation on that shadow prices matches the current RPI-adjusted buy-out price. From that point, annual indexation would resume using CPI.

• Project Value and Refinance Risk: The commercial impact of the proposed changes could be significant. Some analysis and market commentary indicate that the proposals for the RO (which supports larger projects representing nearly 30% of electricity generation) could reduce future project returns by c.19% in a worst-case scenario, with NAV (Net Asset Value) drops for listed portfolio companies of about 2% for Option 1, and potentially 5x that for Option 2. Many existing FiT-backed assets could be even harder hit due to the higher proportion of subsidy revenue exposed to indexation often seen in these projects.

• Cost of Capital: The uncertainty and retrospective nature of the proposals could increase the cost of capital for all UK renewables projects – and not just those benefitting from the renewable schemes; as it could heighten investor and debt-provider concerns regarding regulatory risk. And whilst the directly affected existing projects have long been operating, they tend to have been capital-intensive projects due to their deploying (at the time of their construction) novel renewable technologies. As such they continue to operate under long-term and costly financing arrangements. Projects looking to refinance in this environment are already experiencing challenges given the added uncertainty that the consultation brings; and projects with continuing financing (especially where tied to RPI) could face challenges in remaining within their covenants.

• Market Sentiment: This “tinkering” with established contracts could add to UK investment nervousness amidst an uncertain political climate. Ultimately, lower projected returns and increased uncertainty could further undermine sector sentiment.

It is notable that a previous attempt by the UK Government to implement retrospective changes to one of these renewable subsidy schemes faced a rapid legal challenge and was ultimately struck down by the courts. In R (Homesun, Friends of the Earth & SolarCentury) v Secretary of State for Energy and Climate Change [2012] EWCA Civ 28, the Court of Appeal ruled that the Government acted unlawfully when it sought to cut the FiT for solar PV installations that had already become eligible under the scheme, given there was no explicit authority to do so under the primary legislation which laid the framework for the regime.

Ultimately, the Court found that the government’s proposal in that case would unjustly interfere with "vested rights" and undermine investor confidence. The Secretary of State’s defence— that investors had been warned of a possible rate change—failed to overcome the absence of a clear statutory power to retrospectively modify the scheme. The decision reinforced the presumption that it is unlawful to retroactively take away accrued rights or alter economic incentives (particularly where capital investment decisions were made in reliance on a legally fixed regime), unless there is explicit legislative authority from parliament to do so.

The current indexation proposals come in a different regulatory and political environment; and have a very different impact at a much more advanced stage of the schemes than that which was seen with the SolarCentury case. Nonetheless, there is some risk that the Government could see legal challenges brought by environmental groups and/or affected generators – including, potentially, the community schemes and smaller scale household-level persons impacted by the FiT proposals.

Feedback from all stakeholders will be reviewed before a joint government response and draft secondary legislation is prepared. If the proposed changes are adopted, the Government’s (ambitious, with the usual and increasingly relevant caveat of parliamentary time permitting) planned timeline would see secondary legislation come into force from 1 April 2026 – albeit any judicial review could clearly impact that timetable.

The Government's policy intent here is clear: it is seeking to reduce the cost to consumers of renewable schemes, at a time when both Reform and the Conservative party are raising very targeted challenges to the cost of Net Zero policies. This can also be seen in the Government – in its recent Budget – moving (much of) the RO cost from consumer bills to central Government – see further here. The Government is also keen to stress that affected generators have (in its view) been 'over-compensated' under the subsidy regimes thanks to the greater than expected increase in wholesale energy prices, particularly following events in the Ukraine – although the strict relevance of that to the proposed indexation change is questionable.

The proposals will doubtless face significant stakeholder opposition and possibly even legal challenge - particularly if the more impactful options were to be taken by Government - given their retrospective effect. Despite only being a proposal, as discussed above, the uncertainty is already causing headaches for investors and lenders, particularly those negotiating or re-negotiating financing arrangements for existing projects.

This all comes with a serious cost to investor confidence, at the very time Government is looking to 'crowd-in' private capital to meet its Clean Power by 2030 plan, and make the UK a global Net Zero financial centre and pioneer. Historically, clean energy investors have regarded the UK as a market with relative operational regulatory stability. The fear is that these proposals could damage that standing in order to deliver what appears to be a relatively modest saving to consumer bills. And that could be read as a wider signal about the Government's appetite to hold firm on green policy at a politically challenging time. Therefore, the outcome of the consultation – expected in early 2026 – will be keenly watched by many.