Energy regulator Ofgem has criticized a key part of the UK government's energy strategy, calling for a revision of the country's approach to funding renewable energy generation.

The regulator said that the current mechanism of providing financial support to renewable electricity generation in the UK is a very expensive way of reducing carbon emissions compared to other alternatives. It has urged the UK government to consider a plan that promises to deliver more carbon reductions through renewable generation at a lower cost to domestic and business users.

Ofgem said that it believes renewable generation has an important role to play in helping to cut carbon emissions, and acknowledged that the existing support mechanism, the renewables obligation (RO), is providing strong financial incentives to build renewable generation.

However, the regulator said, the way the RO operates means that customers end up paying even if renewable generation does not get built – for example, if projects are delayed by planning problems. It also fails to link the level of support to the price of electricity or the price of carbon emission allowances under the European Union Emissions Trading Scheme, Ofgem stated, meaning existing and future renewable generators will benefit, at consumers’ expense, from much higher electricity prices.

This is leading to much higher returns for current renewable generators than investors expected or required.

In its contribution to a government consultation on reform of the RO, Ofgem has called into question the RO’s cost-effectiveness. It has asked the government to consider an arrangement based on auctions of long-term contracts that offer renewable generators a fixed return and link the level of support to the wholesale electricity price. This could meet the government’s renewables targets at a lower cost to customers, Ofgem believes.

Ofgem has also pressed the government to extend its consideration of possible reforms for the RO beyond its current proposal that support for green generation should be banded to give better returns to specified technologies.