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Roc market reaches record level of oversupply

Tim Dixon Tim Dixon Team Lead
27th October 2016
Roc market reaches record level of oversupply

Ofgem has confirmed that the Roc market in 2015-16 (Compliance Period or CP14) was the most oversupplied year since the scheme began. Furthermore, BEIS's recent decision to uplift the obligation on suppliers for 2017-18 (CP16) by 18% on the previous year has intensified pressure on the Levy Control Framework (LCF) budget and will increase consumer bills.

Oversupply is not new in the Roc market, with the past three consecutive compliance periods all subject to it. This ongoing issue has decreased Roc values (£/Roc) and reduced revenues for green generators registered to the scheme. For CP14, which has recently closed out, our analysis shows that 93.21mn Rocs were eligible for trading and that the market was oversupplied by an estimated 8.77mn Rocs. Indeed, on 5 October 2016, Ofgem confirmed that UK suppliers presented 84.38mn Rocs against a total UK obligation of 84.44mn Rocs for 2015-16 (CP14). This meant that UK suppliers were 99.9% compliant through presenting Rocs, the highest level since the scheme began in 2002.

Under normal operation, any shortfall in suppliers meeting their obligations is met through a combination of buy-out and late payments. This is known as the redistribution fund and the money is then recycled between suppliers who complied by presenting Rocs. However, only £575,753 was paid through buy-out payments in CP14, which left a shortfall of £1,850,781 to be met via late payments. Prior to redistributing the buy-out fund and late payment fund to suppliers, Ofgem must recover its and the Northern Ireland Utility Regulator's administration costs. Ofgem said that, this year, combining the buy-out and expected late payment funds will not provide sufficient funds to cover them. As such, Ofgem will not carry out a redistribution of either fund this year.

Ofgem is now working with BEIS, the Scottish government and Northern Irish authorities to discuss how this shortfall will be resolved. There appear to be two options that government may take to recover the shortfall. Option one would be to recover the costs directly from the Treasury. Option two would be to borrow the money from the Treasury. In this scenario, the CP14 shortfall would be taken from the CP15 redistribution fund (done in October 2017), which could marginally decrease Roc values for the current compliance period (CP15).

The estimated 8.83mn Rocs not used for compliance in CP14 will now be banked into CP15. This overhang has already made the CP15 market look tight, with Cornwall Energy forecasting that Roc supply in the compliance period fall just shy of the pre-set obligation levels. In fact, if we see similar meteorological conditions to CP14, with strong wind speeds and high rainfall levels, the market may well become oversupplied for a fourth consecutive year. It has become clear that some level of intervention has been needed to fix the market.

Recently BEIS has faced the decision to either uplift the obligation on suppliers to source Rocs, or to leave the market oversupplied and protect consumer bills. With this in mind, it has recently confirmed the level of the Renewables Obligation (RO) for the 2017-18 compliance period (CP16). In a policy paper issued on 1 October, the department said that the overall size of the obligation would be set at 108.2mn Rocs (excluding headroom) in the UK. This means that electricity suppliers will be required to produce 0.409Rocs/MWh in England, Wales and Scotland, and 0.167Rocs/MWh in Northern Ireland. This is an 18% rise on the previous year and would seem to show the government's intent to restore stable market conditions.

However, initial Cornwall Energy analysis indicates that the increased obligation levels could add over £750mn to the costs of the RO scheme (from 2016-17 to 2017-18). These costs will increase consumer bills and put further pressure on the LCF budget.

Cornwall Energy tracks the Roc market closely through its Roc market forecasting and green power curve services. For further details contact Tim Dixon at tim.dixon@cornwallenergy.com or 01603 995881.