As the witching hour approaches, RO mutualisation looms

Halloween is just a week away, and it is rapidly taking on a rather other-worldly significance for suppliers. This is because Ofgem reported yesterday that, based on supplier compliance under the Renewables Obligation for 2017-18 (CP16), there has been a significant shortfall by suppliers who have not submitted ROCs and who must therefore pay late buy-out payments.

The shortfall is a chilling £103mn. Thirty-four suppliers were noted (but not named) as not meeting their total obligations by the 1 September deadline. They now have until 31 October to make good these late payments with the addition of the required 5.75% interest.

By way of comparison the shortfall in past years has not exceeded £18mn, with previously only a handful of suppliers exposed to late payments. In practice, virtually all these suppliers made payments by the statutory deadline. The mutualisation provisions in the Renewables Order 2015, which look to protect generators from significant supplier default, have therefore never been invoked.

Failure to pay by the imminent deadline would mean suppliers would be in breach of the order and enforcement action is likely to follow. As far as we can ascertain, only one supplier has been in breach and continued trading; this was a small Northern Ireland supplier, Click Energy, in the 2016-17 compliance year, who had to make good monies owed and saw a significant fine (given the supplier’s size) from its regulator.

The number of suppliers  potentially involved will also be spooking Ofgem. Non-compliance in recent enforcement cases has been dealt with robustly by it. There are also clear cross-overs to industry codes. It is, for instance, highly probable that non-compliance under the order could be interpreted as a default event under industry codes.

A back of a beermat calculation suggests that perhaps £10mn will have to be written off owing to the shortfalls attributable to suppliers that have already failed but who had an obligation for 2017-18. So, with the trigger for mutualisation sitting at £15.4mn, it is looking very likely that it will be breached. This means that the rest of the supply community will be required to make good the position, though the shortfall sits well short of the mutualisation ceiling (which currently exceeds £300mn). This is likely to come as something as a rather unpleasant surprise as few suppliers seem to be aware of the mutualisation provisions in the order. Whether a further call might result in some suppliers already struggling to make good their payments being pushed over the edge is also a moot point. But we think contagion risk is likely to be real.  

To help the market understand what to expect if mutualisation is triggered, we will be holding a webinar tomorrow afternoon, 15.00GMT. This will look at:

  • The recent background of supplier failure
  • Where the shortfall presently sits
  • The mutualisation process and timetable
  • Materiality of possible shortfall and its cost to the supplier community, and
  • Possible impacts on recycling values.


Related thinking

Low carbon generation

What’s in store? Our analysis of the co-location development pipeline

Amid underlying volatility in wholesale power prices, opportunities for access to wider flexibility revenue streams, and the impact of price cannibalisation, the case for co-location for renewable energy assets is growing. As part of Cornwall Insight’s Renewables Pipeline Tracker service, a case study is included in each report’s release based...

Commercial and market outlook

Capacity, reform, and unlawful strategies: 5 things that happened yesterday

Capacity, reform, and unlawful strategies: yesterday was a busy day for energy geekery. The developments encapsulate the shorter and longer term challenges and uncertainties present in the energy market presently: Read the full article here

Commercial and market outlook

Two thirds of energy industry professionals think the market needs to be drastically reformed

A survey conducted of over one hundred leading energy market professionals from across the investment and advisory community, by Cornwall Insight, from the attendees of its Financing Net Zero forum, has shown nearly two thirds (63%) of people working in the energy industry1 believe the UK market needs to be...

Low carbon generation

3G meets in-person| Lots discussed in our low carbon user group

Last week I took a trip to sunny central London to attend Cornwall Insight’s Green Generators Group (3G), which is the user group for our low carbon generation service. In what felt like a novelty after a two-year hiatus of face-to-face forums, I was joined by my colleagues Dan Starman...

Low carbon generation

A collection of resources on net zero – Net Zero Week 2022

For Net Zero Week 2022, we released a range of resources to help you on your journey to net zero. For convenience, we have put them all together in a handy Resource Report. To read the full collection of resources, please log in to your account or sign up for...

Low carbon generation

CfD Auction Secures Greatest Amount Of Renewable Capacity To Date

Yesterday, the government released the results of the fourth round of the Contracts for Difference (CfD) scheme, securing almost 11GW of renewable capacity across 93 projects, nearly double the 5.8GW awarded in Allocation Round 3 in 2019. The greatest capacity – at 7.0GW - has been secured from new offshore wind projects,...

Regulation and policy

Hanging in the balance – Ofgem’s latest proposals on protecting customer credit and RO payments

Ofgem has published a consultation setting out its latest proposal to deal with the risks – and costs – of supplier failure. This forms part of a broader piece of work on increasing the financial resilience of suppliers and curbing the costs passed on to all customers after a supplier...

Home supply and services

Windfall taxes are not the only solution to the energy crisis

The energy market is in a state of transition, with geopolitical concerns threatening to undermine energy security and subsequent wholesale energy rises pushing up bills. It is inevitable that policymakers will look at how best to deliver an affordable energy system for consumers. The temporary, targeted energy profits levy, or...