Renewables Obligation Mutualisation Looms again

The end of October 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’. As we saw last year the spate of supplier exits from the market created a shortfall in payments due to the scheme and led to the triggering of the ‘mutualisation’ mechanism for the first time.

This year will likely see mutualisation implemented again as most of the suppliers that failed to meet their RO during the April 2017 and March 2018 period (known as Compliance Period (CP) 16) were still supplying volumes for part of the current RO (April 2018 to March 2019), before exiting the market.

The sole purpose of the mutualisation mechanism is to preserve the integrity of the RO by ensuring that significant shortfalls of payments due into the scheme are socialised across the supply market. The process for triggering mutualisation and then determining the time and amount of money to be collected from the market is relatively mechanistic and set out in legislation. However, the application of the rules last time around saw some late-payers being permitted to negotiate plans with Ofgem to make good their obligation well beyond the October deadline.

This year around it appears as if Ofgem is taking a tougher approach, with the regulator issuing a notice on 1 October stating that “four suppliers missed the original deadline of 1 September 2019 and have not provided Ofgem with adequate assurances that they will pay by the late payment deadline [31 October]”. The notice went on to say that the regulator is prepared to take enforcement action if the £14.7mn owed by the four suppliers is not paid by the end of the month.

The regulator’s stance can be viewed on the one hand as the appropriate course of action to take: the rules are clear and where one party fails to meet its obligations the consequence is that others have to make up the shortfall.

On the other hand though, there are mixed messages being signalled. For CP16 (the RO period April 2017 to March 2018) when mutualisation was triggered some suppliers that failed to make payments by 31 October 2018 were given an extension. URE Energy, for example, were permitted to pay the outstanding £209,000 owed into the RO by 31 March 2019, a full six months beyond the end of the supposed final payment deadline. In this instance the company still failed to make the payments and had its licence formally expunged in August 2019.

And this year we have seen huge discomfort expressed by Robin Hood Energy, in which the company stated it had agreed a similar payment plan with the regulator in September to complete this year’s RO compliance by March 2020. However, it has found itself as one of the four suppliers that faced enforcement action if the obligation was not fulfilled by the end of the month.

Unlike most other supplier obligation policy schemes, where collateral must be posted or payments are due more regularly, 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 shown last year, this risks a large annual bill being unpaid by a supplier.

The granting of repayment plans for suppliers beyond the end of October has further complicated the issue. Some suppliers may have hoped the regulator would prefer to agree payment plans to extend beyond the 31 October late payment window rather than pursue a course that risked pushing a supplier towards exit.

There have been some calls from suppliers to have to make more regular payments into the RO, perhaps quarterly or even monthly (the latter something suggested by outgoing Ofgem CEO Dermot Nolan). This certainly has merit, though requires a change of law and is not something it is easy to envisage being introduced ahead of the next RO period in April 2020.

The annual RO is a key pinch point for many suppliers (the RO accounts around an eighth of the end bill of a typical electricity household) and has been shown to be a significant factor that nudges a supplier to exit the market.

While the RO represents the single largest supplier policy obligation cost item, where non-payment ends in a supplier failure it is very likely that several other supplier obligations are also left unpaid or undelivered: Feed-in tariffs, Warm Home Discount, Energy Company Obligation, Contracts for Difference, and Capacity Market.

We are hosting a Mutualisation: Processes, Payments and Practicalities webinar on 24 October in which our experts will explain the processes that are followed when mutualisation is triggered for different schemes, including any thresholds for invoking the mechanism, when payments are due and the basis on which the amount paid by suppliers is calculated.

Using our market knowledge we will also give insight on the scale of the shortfall across the sector that suppliers are likely to face.

There will be opportunities to ask questions of the presenters during the webinar.

For more information, including an agenda, bookings and pricing please click here or contact Emily Matthews at training@cornwall-insight.com, 01603 542115.

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