FiTting up RO mutualisation?

There is no official announcement so far about whether all suppliers have now paid their 2017-18 Renewables Obligations (ROs) in full. Reports in the press today state that one supplier has not paid £14.4mn it owes to the late payment fund, and is in merger talks with another medium-sized supplier.

Wednesday 31 October was the deadline under legislation for suppliers to pay up: we expect many will have done as part of a deliberate commercial choice. But there has been no formal update from Ofgem. Any shortfall in payments over £17mn or so will be met by all paying suppliers topping up. Any defaulting suppliers will know that they are in default of a key activity ultimately controlled by Ofgem through legislation and the supply licence.

The likelihood of RO mutualisation being triggered was reinforced by Ofgem’s contacting suppliers yesterday (13 November) to alert them to the triggering of mutualisation of the levelisation pot for microgeneration Feed-in Tariffs for Q318 (June to September 2018). Suppliers had to pay their shares of this by 6 November (see Figure 1) equivalent to  £7.39/MWh supplied in that period. In the end £4.17mn was not paid, over the threshold to trigger mutualisation of £4.069mn. Suppliers can therefore expect to pay another £0.07/MWh to cover this shortfall.

To trigger FiT mutualisation, we estimate suppliers with in excess of 750,000 domestic electricity customers between them would have not paid. The £4.17mn shortfall in FiT payments is equivalent to 0.9% of supply volumes defaulted for Q318. Is there any read across for RO mutualisation?

Ofgem itself had raised the alarm about RO mutualisation with its statement on 22 October revealing that 34 suppliers between them had yet to “buy out” their 2017-18 ROs in full to a tune of a £103mn. With some suppliers exiting the market without making any payment, we estimate about £10mn of that figure will not be forthcoming. If the latest press statements are true then the RO mutualisation threshold will have been triggered and all remaining suppliers will be required to chip in to meet the shortfall. However, the supplier is apparently in negotiations with Ofgem (and no doubt the medium sized supplier it may merge with too) over the missed payment. It is not beyond the realm of possibility that these talks could try and broker a payment arrangement that could stave off RO mutualisation or at least reduce the call on the rest of the industry.

We do not know the identities of the suppliers that have not paid their FiT shares and we do not know officially if any suppliers missed the late payment deadline for the RO. However if the shortfall volume share for Q318 FiT levelisation matches that for RO late payment, we could be looking at an overall shortfall in the RO buy-out fund for 2017-18 of the order of £45mn. This figure would imply an extra £0.17/MWh on RO costs to be recovered from other suppliers.

There is a lot of concern from suppliers that have paid their dues on time, that so far un-named rivals are gaining a commercial advantage on them by choosing not to pay until as late as possible and, if the worst comes to the worst, leaving them to pick up the tab from customers through mutualisation.

The amounts of money involved may appear small, but £0.20/MWh will be a significant proportion of the gross margin earned by suppliers in the industrial and commercial market and, depending on terms and conditions, they may not be able to pass on that cost.

Cornwall Insight will be monitoring the current RO reconciliation and FiT levelisation proceses, providing any updates as they arise in our Daily Bulletin with commentary in our weekly Energy Spectrum and detailed analysis in regular FiT and Roc reports.

For information on these services please contact Vanessa Murphy v.murphy@cornwall-insight.com

UPDATE

We have since recieved the below confirmation from Ofgem:

RO

“Ofgem has appointed an external party to carry out an audit on the payments received into the Renewables Obligation late payment fund. Following completion of the audit, Ofgem will publish the level of shortfall in the late payment fund for the 2017/18 period, which will then be mutualised. Suppliers that have not met their obligations are in breach of the Renewables Obligation Orders and Ofgem stands ready to take action as needed to secure good outcomes for consumers.”

FiT

“There has been a shortfall of payments made into the levelisation fund for the Feed-in Tariff scheme, which has triggered a mutualisation process. To ensure consumers continue to benefit in full from the scheme, Ofgem will be issuing reduced payments to complying FIT suppliers and will issue invoices to these suppliers requesting mutualisation payments. Suppliers who have not met their Feed-in Tariff obligations are in breach of the Feed-in Tariff Order and Ofgem stands ready to take action as needed to secure good outcomes for consumers.”

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