Renewable Obligation mutualisation predicted to be almost £44mn

To protect the financial integrity of the Renewables Obligation (RO), a mutualisation mechanism kicks-in where sufficient missing payments creates a shortfall in the buy-out fund. Mutualisation recovers these missing payments from the remainder of the supply market.

Mutualisation was triggered for Compliance Period (CP) 16 (2017-18) after 14 suppliers failed to make a total of £58.6mn in payments towards the RO. It is predicted that mutualisation is going to be activated for the second CP in a row, CP17 (2018-19), with latest forecasts from Cornwall Insight showing a potential shortfall in the buy-out fund of up to £44mn following further recent supplier exits from the market.

Tim Dixon, Team Lead at Cornwall Insight, said:

“The exit of more than a dozen suppliers has caused ripples across the industry, and the RO is not immune. With 14 suppliers having exited the market since the start of 2018 it is little surprise that mutualisation is expected for the second year in a row. Ten out of the 14 exited suppliers had supply volumes during the compliance year 2018-19, most notably Extra Energy, Spark Energy and Economy Energy.

“As a result of these ten suppliers ceasing trading, Cornwall Insight calculates that 2.0TWh of supply volumes, equivalent to £43.8mn of buy-out and late payments, will not be made. This is against a mutualisation threshold of £16.9mn. If so, the costs will once again be recovered from suppliers who have met their obligations.

“On top of this, renewable generators accredited to the RO scheme would not get paid the full amount for their renewable obligation certificates (Rocs) until after the mutualisation process is completed, with final payments not made until 21 months after the normal final recycle payment deadline.

“The RO scheme allows suppliers to benefit from collecting payments from their customers on an ongoing basis before paying their RO after the end of the compliance year. Where a supplier spends rather than accrues the funds it has collected, it can leave it exposed if cashflow does not allow for paying RO liabilities when they fall due.

“To avoid the risk this creates for mutualisation; it might be wise for policymakers to consider adopting processes from similar schemes – such as the Feed-in Tariff, Contracts for Difference or Capacity Market – where money is collected from suppliers on a more frequent basis.”