Renewables Obligation mutualisation predicted to be triggered

Forecasts from Cornwall Insight’s ‘Within-term ROC market forecast’ predict a potential shortfall in the 2020-21 Renewable Obligation (RO) buy-out and late payment fund of over £170mn, with 16 supplier exits to date that could impact upon the scheme’s payments. Furthermore, it predicts that mutualisation will be triggered for the 2021-22 obligation period too, as six supplier exits in the compliance year to date could leave more than £70mn owed to the scheme.

With a challenging market amid high wholesale prices, there is a heightened risk that more suppliers may now be unable to meet their obligations, triggering mutualisation and increasing the shortfall in payments.

Key findings

  • The expected shortfall is predicted to be over £170mn in the buy-out and late payment fund for 2020-21, triggering mutualisation.
  • For 2021-22, the expected shortfall is already predicted to be over £70mn, which will also trigger mutualisation.
  • Current wholesale market trends could see the mutualisation amount increase further for both compliance years.

Tim Dixon, Lead Analyst for Asset and Infrastructure at Cornwall Insight, said:

“The risk of the RO payment shortfall to grow is high, particularly with the recent spate of supplier exits and ongoing challenging market conditions.

“Suppliers have had to face challenging market conditions with wholesale power and gas prices reaching records highs, and these unseasonably high prices are set to continue for the foreseeable future. As a result, RO compliance season will certainly be tough.

“If mutualisation occurs as expected, the costs will be recovered from suppliers who met their obligations and ultimately be passed on to the consumers’ bill. If it is all passed through to customers, it is likely to add at least £2.00 to the typical domestic electricity bill.

“With initial compliance deadlines having passed, any suppliers with remaining obligations will now need to make a payment by the late payment deadline of 31 October. This day could be a perfect storm for those suppliers struggling in a market which is facing difficult circumstances.”