Analysts have predicted a £44 million shortfall in Renewables Obligation (RO) payments for 2018/19 following a spate of supplier failures.
If the forecast is correct, a mutualisation process to recover deficit from the remaining suppliers will be triggered for the second year running.
“The exit of more than a dozen suppliers has caused ripples across the industry, and the RO is not immune,” said Cornwall Insight team lead Tim Dixon.
“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.”
Under the Renewables Obligation scheme, suppliers must submit a set number of Renewables Obligation Certificates (ROCs) to Ofgem for each megawatt hour of electricity they sell to customers or make up the difference through buyout payments. These certificates can be bought from accredited renewable generators, which receive a set a number for each megawatt hour of electricity they produce.
The certificates and buyout payments are collected on a yearly basis. If the outstanding payments following the final deadline exceed a certain threshold known as the relevant shortfall the mutualisation process is triggered.
The missing money is recovered from all operational suppliers, which pay into a mutualisation fund according to the size of their obligation as a share of the total, while taking into account that defunct suppliers cannot contribute. The proceeds are later returned to suppliers in proportion to the number of ROCs they presented to Ofgem. Those that failed to meet their obligation in full do not receive anything.
This process was triggered for the first time ever in 2018 after 14 suppliers failed to make £58.6 million in late payments.
The relevant shortfall across England, Wales and Scotland has been set at £16.9 million for 2018/19. Cornwall Insight estimates that failed suppliers have so far bought 2TWh of electricity during the period, meaning £43.8 million of corresponding buyout and late payments will not be made.
Dixon said the emergence of a large shortfall for the second year running suggests reforms to the scheme may be necessary: “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.”
A spokesperson for the Department for Business, Energy and Industrial Strategy said: “The Renewables Obligation scheme has helped make the UK a world leader in renewable energy, and the equivalent of 22.2 per cent of UK electricity was generated under the scheme in 2016/17.
“Renewables Obligation scheme payments should be built into the business model of all suppliers as they are set almost two years in advance of the date they are due.”
Cornwall’s forecast was published shortly before Brilliant Energy became the third supplier to cease trading in 2019 following Economy Energy and Our Power in January.