Renewables Obligation - Mutualisation on the Horizon

Ahead of our upcoming Non-Commodity Costs webinar, Head of Pricing, Tom Putney outlines how energy suppliers going bust could lead to another mutualisation process under the Renewables Obligation.

For the third year in succession, there is an expectation that Ofgem may notify industry that a mutualisation of costs under the Renewables Obligation(RO) will need to be undertaken in order to make up the funds owed by suppliers that have ceased trading over the previous year.

This is the case due to the way that the RO scheme works. In a nutshell, suppliers must amass enough 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 do not, they then have until 31st October to pay into a late payment fund with added interest. If suppliers fail to do this Ofgem then issue payment orders or can even revoke supply licences.

Once a certain threshold of non-payment is met (just under £17m) mutualisation is triggered. Mutualisation means that suppliers must make pro-rata payments into the fund to cover the shortfall, so that the price of the ROCs can be honoured to those who hold them.

Whilst this has not officially been announced yet, Ofgem have published figures relating to the shortfall. At the start of October, the regulator said that seven suppliers (Co-Operative Energy; Flow Energy; MA Energy; Nabuh Energy; Robin Hood Energy; Symbio Energy; and Tonik Energy) had failed to meet their requirements under the RO, owing a total of £33,861,450.83. This is in addition to suppliers already known to have exited the market, including Toto Energy and Solarplicity.

Since that announcement, Tonik Energy has gone bust, with it’s 130,000 or so domestic supply accounts being transferred to Scottish Power. This reportedly accounts for around £8.8m of the total figure outstanding.

With Robin Hood Energy also on the list, with an estimated £12m unpaid, we can consider mutualisation as almost certain. With their customers being transferred to British Gas through a book sale, rather than a purchase of the supplier, the renewable obligation liability is expected to remain with the parent - meaning payment is unlikely. Whether such a large default may trigger Ofgem to look at the rules around books sales and industry obligations remains to be seen.

On the other hand, the likes of Co-Operative Energy (owned by Octopus Energy) also remain on the list. However, it seems more likely than not that the outstanding amount relating to this particular supplier will be paid – albeit this will not be enough to prevent mutualisation being triggered.

As always, we will keep SmartestEnergy customers in the loop with the latest updates as soon as we hear them. For more information, sign up for our next Non-Commodity Costs webinar on 17th October.