The government has outlined plans to tackle a market distortion from the energy company obligation (ECO), with a view to eventually removing supplier thresholds.
The Department for Business, Energy and Industrial Strategy (BEIS) has previously committed to extending ECO from 2022 to 2026 and raising its value to £1 billion per annum.
A consultation released this week set out how BEIS also intends to expand the scheme, meaning more smaller suppliers would be obligated.
Ultimately, the department’s goal is to remove the threshold of 150,000 customer accounts, which based on current numbers, would more than double the number of obligated suppliers.
Yet in order to avoid disproportionate costs being incurred by smaller suppliers, BEIS has proposed to retain the threshold at 150,000 until a buy-out mechanism is introduced.
In the meantime, BEIS has proposed to reduce the supplier allowance for gas and electricity supply as a “first step toward removing market distortion”.
Currently suppliers become obligated when they reach over 150,000 customer accounts and have a supply volume above 300GWh of electricity and 700GWh of gas annually.
There is also a supplier allowance set at 300GWh for electricity and 700GWh for gas which all are entitled to, with their obligation calculated per unit of supply above the allowance. This is intended to prevent newly obligated suppliers immediately having a large obligation.
For the start of ECO4, BEIS intends to reduce the supplier allowance by 50 per cent to 150GWh for electricity and 350GWh for gas per year.
Reducing both the customer number and supply volume thresholds, it argued, would result in more small suppliers becoming obligated, larger suppliers having a slightly smaller obligation, and existing smaller suppliers having a larger obligation.
As an example, if the customer accounts threshold was reduced to 50,000 (and the supply volume threshold reduced proportionally), some smaller suppliers’ obligations would increase by up to 290 per cent compared with their ECO3 phase 4 obligation.
Buy-out mechanism
While a threshold remains, BEIS said ECO costs are not distributed equitably amongst suppliers, which may create market distortions by enabling non-obligated retailers to offer lower priced energy tariffs. Furthermore, customers of non-obligated suppliers can continue to receive ECO measures, whilst not being required to contribute to the scheme costs.
BEIS intends to remove the thresholds without small suppliers incurring disproportionate costs. Towards this end, the department has proposed a buy-out mechanism allowing smaller suppliers to incur a proportionate cost without having to deliver energy efficiency measures.
It proposed that suppliers with a customer base under the current 150,000 threshold would have the option of buying out 100 per cent of their obligation. It also proposed giving the small suppliers the choice of delivering their obligation in the same way as other suppliers.
Suppliers with a customer base above 150,000 could have the option to buy out a capped proportion of their obligation under a sliding scale approach, with the largest suppliers having the lowest buy-out allowance as a percentage of their obligation.
BEIS is additionally considering an option to retain an obligation threshold, but at a much lower level, to stop the smallest suppliers from facing a disproportionate administrative burden. Those with fewer than 1,000 customer accounts would not have any obligation under ECO.
The department said this lower threshold could alternatively incorporate both accounts numbers and supply volumes, noting that they can fluctuate widely relatively to one another for suppliers with fewer than 10,000 customers.
An obligation threshold based only on supply volumes, it argued, could result in disproportionate buyout costs to consumers if high supply volumes were delivered to a small number of customers. Conversely, a threshold based only on customer accounts could result in disproportionate administrative costs if the supply volumes were relatively small.
BEIS said these issues may also apply to suppliers with more than 1,000 customers and so another option would be to introduce a slightly higher threshold of 5,000 customer accounts accompanied by an equivalent supply volume threshold, both of which would have to be exceeded for a supplier to be obligated.
BEIS proposed to set the buy-out price on an annual basis prior to the obligation phase, using the quarterly published prices reported by suppliers from the previous phase. This would ensure the price set is reflective of the most recent delivery costs.
Furthermore, the option to buy out would be offered during a “decision window” between the confirmation of obligations by Ofgem and before the beginning of the next obligation phase.
Under this method suppliers wanting to use the mechanism would declare their intention to buy-out during this window and once the declaration is committed, there would be no option to choose to deliver the obligation by delivering energy efficiency measures. Additionally, any company which has not declared its buy-out decision during the window would not be able to use it subsequently.
Suppliers would also not be able to buy out previous obligation phases during a decision window.