Posted on: 16/12/2020
As Ofgem have announced this year's final figure to be mutualised under the Renewables Obligation and BEIS have published a new consultation on the future of the scheme, Renewables Trading Analyst, Chetan Patel rounds up the key points in this latest blog post.
Renewable Obligation – 90% Mutualisation Threshold in CP19 reached
For the third consecutive year, Ofgem has notified the industry that there will be mutualisation of costs under the Renewables Obligation (RO) for the 2019/20 compliance period (CP18).
SmartestEnergy expects Mutualisation of costs will likely be triggered again next year i.e. for a fourth year in succession, as suggested by analysis of supplier exits made during the current compliance period.
Under the RO scheme, suppliers must present a certain number of Renewable Obligation Certificates (ROCs) to fulfil their obligation or pay a “buy-out price” (£50.05 for 2020/21) if they fail to submit enough certificates.
Suppliers must present their ROCs or pay into the buy-out fund by 31st August each year. If they fail to do so, they then have until 31st October to pay into a late payment fund with added interest.
On 31st October, the shortfall from suppliers that have not fully discharged their obligation is calculated. Once a certain threshold of non-payment is met (£16.94m) mutualisation gets triggered. Mutualisation means that all other suppliers must make pro-rata payments into the fund to cover the shortfall, so that the total value of ROCs can be honoured to those who hold them.
On 10 December, Ofgem announced that during CP18, the total shortfall across all RO schemes stood at £33,135,933.32, excluding interest. SmartestEnergy will contact customers with further information regarding the recovery of these costs.
The shortfall during 2019/20 was a result of thirteen suppliers failing to meet their obligations. Ten of these suppliers have since exited the market, four of which have supply volumes in 2020/21 (CP19).
Estimated supply volumes of Tonik Energy, Effortless Energy and Yorkshire Energy (previously Daisy), suggest these suppliers owe a combined figure of around £10m in RO payments for the CP19 period.
Furthermore, including estimated volumes supplied by Robin Hood, whose customers were sold to British Gas earlier in the year under a book sale, would take the total to around £15.3m, just 10% shy of the £16.94m threshold.
It would therefore take one of the very small suppliers with just 21,000 domestic customers to exit the market, to trigger Mutualisation for the fourth successive year.
Whilst we have seen a reduction in the number of suppliers exiting the market this year, there is a considerable risk surrounding more suppliers defaulting against their payments; due to challenging conditions brought about due to the pandemic.
BEIS Consultation and Ofgem Supplier Licensing Changes
With Mutualisation being triggered three years in a row, there has been growing calls from the industry to review the RO scheme.
Both BEIS and Ofgem have launched reviews and suggested changes which are expected to have differing impacts on the overall RO scheme and supplier defaults occurring in the future. Ofgem’s proposals looking to be prophylactic whilst BEIS looks to lessen the symptoms.
On Friday 11 December, BEIS launched a consultation for changes to the Renewables Obligation Scheme, seeking views on increasing the mutualisation threshold. The consultation included two key questions. First, whether to increase the Mutualisation threshold to around 1% of the scheme size i.e. moving the trigger from £16m to £62m. Second, call for evidence on whether only the amount in excess of the threshold should be mutualised to remove some of the cost burden that falls on suppliers, in case of default.
Both aspects of the review would reduce the financial burden on some suppliers, potentially mitigating the domino effect of supplier defaults arising in the future.
This would however be at the expense of renewable developers who at the time of financial decision built ROC eligible projects with the expectation of receiving greater value than would be available should the changes to the threshold be implemented.
While the suggestions put forth by BEIS may lead to fewer supplier defaults, they may only treat the symptoms as opposed to the underlying cause.
Ofgem’s supplier licensing review, however, has put forward more measures that were announced in late November, with changes effective 22nd January 2021.
The incoming changes are around the following key areas:
- Promoting more responsible risk management
- Improved governance and increased accountability
- Increased market oversight and exit arrangements.
Ofgem has emphasised the requirement of more responsible risk management, advising suppliers to take stringent measures to minimise costs that could be mutualised in future.
Under increased accountability, Ofgem has stated the new changes should ensure suppliers carry out the required level of due diligence check when appointing senior positions. The changes includes ascertaining whether the individual has held senior management position at a failed supplier 12 months up until its failure.
Increased market oversight potentially requires all suppliers to produce Customer Supply Continuity plans, or living wills as they have been formerly known.
Further changes includes around exit arrangements, that require Ofgem approval ahead of customer book sales, that may be harmful to consumers.
Ofgem notes that they could even look at operation of the scheme, including further prescriptive measures requiring legislative changes, such as greater frequency of compliance.