Proposals for more frequent settlement of the renewables obligation (RO) scheme have been rejected by the government following a consultation.
Last year both the Department for Business, Energy and Industrial Strategy (BEIS) and Ofgem consulted on several options designed to combat the issue of energy retailers defaulting on their RO payments.
Options included requiring suppliers to settle their obligation on a more frequent basis, such as monthly or quarterly, a licence requirement for suppliers to protect their accruing obligation against the risk of default and continuing with existing policy.
BEIS said responses to the consultation were mixed and that there was a “wide range of differing views” on how best to address supplier payment default under the RO.
It added that while the responses indicated a preference for addressing supplier payment default through a version of option one (more frequent settlement), the detail provided in some cases explained that this would have a negative effect on some supplier’s business.
BEIS also highlighted the market turmoil seen since August 2021 as a result of the gas crisis, with many retailers having exited the market.
It added: “As the market has changed so much in recent months, BEIS need to take some time to consider the wide range of complex issues affecting the market and establish how to productively address them whilst making schemes like the RO a better fit for today’s market.
“The change in the market, as well as a wide ranging mix of views and in some places unclear steers from stakeholders, means BEIS does not think introducing a legislative requirement in the short-term to move to more frequent settlement is the right approach.
“Instead, BEIS will come back to industry later this year to gather more evidence to further develop policy thinking around the RO in a way that not only supports industry and the consumers that it serves but delivers against our net zero targets.”
BEIS acknowledged that many suppliers who have exited the market will have left an RO accruing for the 2021/22 year, risking the trigger of mutualisation once more.
However, it added, it is of the view that moving to more frequent settlements under the RO is not a “quick fix” and that any move to do so would not have had an impact on the 2021/22 year, or likely the 2022/23 year as a legislative change of this scale can take years to take hold.
“BEIS and Ofgem also acknowledge that this makes business planning much harder for the remaining suppliers,” it added.
The consultation response highlighted measures that have already been taken to alleviate the pressure on the market.
Last year BEIS amended the RO for England and Wales, changing the mutualisation threshold from a fixed level of £15.4 million to 1% of the RO scheme’s cost. Had this always been the case, mutualisation would only have occurred twice, for 2018/19 and 2020/21.
It pointed to Ofgem’s supplier licensing review (SLR) to strengthen the regulatory regime and drive up standards among energy suppliers. This is designed to reduce the likelihood of retailers defaulting on their obligations by preventing those operating with unsustainable business models from entering the market.
However, it was noted by the regulator that its financial responsibility principle may not on its own provide certainty that suppliers have in place appropriate protections to prevent the need for mutualisation in the event of their failure.
“It is therefore important to explore the case for introducing binding conditions to further reduce the likelihood and scale of cost mutualisation,” it added.
Ofgem is due to consult on policy options tackling the mutualisation risks associated with RO payments and credit balances this Spring.
In addition BEIS will be issuing a call for evidence on Fixed-Price-Certificates (FPCs). Moving the RO to a system based on FPCs would see generators receiving more frequent payments for their certificates and as a result, more frequent payments by suppliers towards the cost of the RO.
Moving the RO to FPCs was originally proposed in 2011 to address the ROC price volatility that was expected as large generators retired from the scheme from 2027 onwards. However there was a steep increase in the number of generators joining ahead of its closure to most new capacity in 2017 which has delayed the anticipated volatility.
BEIS said despite the driver behind the commitment of moving to FPCs potentially no longer being as significant, there may be several potential benefits to moving to a FPC based system that exist in addition to the movement to more frequent settlements.
This, it said, could provide generators with greater certainty of income and make business planning easier for suppliers by increasing settlement frequency. It could also support the commitment to look at options to reduce electricity costs.