Cornwall Insight comments on the looming Renewables Obligation mutualisation

The end of this month marks the end of the annual Renewables Obligation (RO) compliance period where electricity suppliers that have not already fulfilled their obligation must make payments into the ‘late payment fund’. Last year, the series of supplier exits from the market created a shortfall in payments due to the scheme and triggered mutualisation.

This year, it is expected that mutualisation will be triggered once again as most of the suppliers that failed to meet their RO commitments during April 2017 and March 2018 were still supplying volumes for part of the current RO period April 2018 to March 2019.

Ed Reed, Head of Training at Cornwall Insight, said: 

“The purpose of the mutualisation mechanism is to preserve the RO integrity by ensuring that significant shortfalls of payments due to the scheme are spread out across the supply market. The process for triggering mutualisation and determining the amount of money to be collected is set out in legislation.

“The application of the rules last time around saw some late-payers being permitted to negotiate plans with Ofgem to pay their obligation well beyond the October deadline. This year it seems this will not be the case as Ofgem appears to be taking a tougher approach. With the notice from the regulator stating that it was prepared to take enforcement action if the £14.7mn owed was not paid by 31 October.

“Unlike most other supplier obligation policy schemes, where collateral must be posted, or regular payments are taken the design of the RO allows suppliers to pay in arrears and collect sums from customers well in advance of the final deadline. However, as last year has shown, this runs the risk of a large annual bill being unpaid by the supplier.

“The RO accounts for around an eighth of the end bill of a typical electricity household and is a significant factor that nudges a supplier to exit the market. So, it is little wonder that there have been calls to make more regular payments into the RO. Some suggest that payment should be quarterly or even monthly. While this certainly has merit, it would require a change of law, which is not likely to be introduced ahead of the next RO period in April 2020.”