The Department for Business, Energy and Industrial Strategy (BEIS) has said savings resulting from the suspension of capacity market payments should be passed on to customers through lower energy bills.
The European Court of Justice revoked state aid clearance for the scheme last week following a legal challenge by Tempus Energy. The court said the European Commission had failed to properly investigate the mechanism before granting approval in 2014.
As a result, future auctions and payments on existing contracts have both been halted pending reauthorisation.
“While we continue to work with the commission to reinstate the capacity market, we are no longer taking payments from suppliers for these costs,” said a spokeswoman for BEIS. “We’d expect suppliers to do the same when it comes to consumers’ bills.”
The news comes shortly after Ofgem confirmed a mutualisation process will be triggered for Renewables Obligation scheme due to suppliers missing late payments.
Industry sources have told Utility Week the shortfall is at least £50 million and possibly as much as £70 million. Spark Energy recently announced it had missed £14.4 million in late payments and had entered merger talks with another supplier.
Ian Barker, managing partner at BFY Consulting, said the temporary relief from capacity market payments will provide a welcome boost to cash flows for struggling suppliers.
However, he disputes the suggestion it offers a “profit windfall as is being widely reported”.
“Suppliers can request to have credit cover for both past and postponed auctions returned and will not be required to make payments until the capacity market is reinstated,” he explained.
“This will reduce suppliers cash outflows during the winter period. Prudent suppliers will likely hold a provision against the monthly payments they were due to make.”
He continued: “If the obligation to make the payments no longer exists it’s likely this would be factored into Ofgem’s price cap methodology.
“The current level of the cap may be challenging for mid-sized suppliers unable to hedge at the reference price, with an increase of £80 expected for the next price cap window.”