Usually, it’s the suppliers sending out ominous bills marked “late payment” and “final notice”. However, recent months have seen something of a role reversal.
Many will have opened their mail to find a sternly worded letter from Ofgem warning they risk facing “formal investigation” and “enforcement sanctions” unless they cough up the money they still owe under the Renewables Obligation (RO).
The regulator said an “unprecedented” number had failed to meet their obligations for 2017/18 by the original deadline of 1 September. Ofgem later revealed that 34 companies collectively owed almost £103 million in outstanding buyout payments.
The letter told suppliers in arrears they had until 31 October to make late payments, including any interest.
The final deadline has now come and gone. But industry sources have told Utility Week the unpaid bill still stands at more than £50 million, and perhaps as much as £70 million.
“There are a number of suppliers who haven’t paid, and more than half of that ROCs bill is outstanding,” said one.
“The challenge that suppliers have is if they have been unable to pay this year’s ROCs bill it also means they will have a difficult time paying next year’s bill.” And the introduction of the price cap at the beginning of next year will only add to this challenge.
With wholesale costs rising rapidly as they head into winter, the figures suggest some suppliers are already struggling hard to keep themselves afloat. Another industry insider said they foresaw a “bloodbath” among small and medium suppliers.
Ryan Thomson, partner for energy and resources at the consultancy Baringa, says a lot of suppliers have used the scheme as a way of managing their cash flow as “obviously they get the money from customers in before they have to make the ROC payments”. He believes some may have misjudged their position and been caught short.
However, he has also heard rumours the debtors include several “larger independents”, suggesting “they might not be viable going concerns”.
More generally, Thomson adds: “There is a feeling that the market, certainly at the smaller end of the switching market, is a bit out of whack at the moment in terms of the prices being offered being quite unsustainable.”
He says suppliers running at a loss in a bid to attract customers with cheap tariffs may be finally running out of investors’ cash.
Managing partner at BFY Consulting Ian Barker says it’s also possible that “the level of switching has meant that customers are not building up credit balances going into winter, and customers are not paying their debts on time”.
Mutualisation imminent?
Ofgem has refused to confirm or deny the figures quoted to Utility Week. If correct, a process called mutualisation will be triggered for the first time since the scheme was launched in 2002.
The RO requires suppliers to buy an increasing percentage of the power they sell to customers from renewable sources.
Accredited generators receive a set number of ROCs for each megawatt hour they produce, with the rate depending on a number of factors including technology type. They can then sell these certificates to suppliers, giving them a supplement to the wholesale price.
Suppliers must present enough ROCs to Ofgem each year to demonstrate they have met their annual obligation and make up any difference with buyout payments. This money is first used to cover the administration costs of the scheme, with the rest being returned to suppliers in proportion to the number of ROCs they submitted to Ofgem.
In previous years, any shortfalls have been left unfilled, lowering the amount handed back to suppliers and reducing the “recycle” value of ROCs.
However, if the outstanding payments following the final deadline exceed a threshold known as the relevant shortfall, the mutualisation process is activated. The relevant shortfall is £15.4 million for England and Wales and £1.54 million for Scotland.
The process is intended to punish suppliers that failed to meet their obligation and reward those that met more of their obligation using ROCs.
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. The amount that can be recovered in 2017/18 has been capped at roughly £275 million for England and Wales and £27.5 million for Scotland.
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.
Although there is no mutualisation process if a shortfall occurs in Northern Ireland, suppliers in the region still receive payments if it is activated elsewhere in the UK.
Payment procedure
The money is collected and redistributed in four quarterly instalments. Suppliers will have to make the first payment into the fund by 1 September 2019 and will receive the first payment back by 1 November 2019.
There are several important things to note at this point. First, although the procedure should ultimately benefit suppliers that have met a higher proportion of their obligation using ROCs, they will still have to foot the bill for the shortfall over the short term through lower than expected returns from the buyout fund.
Managing cash flow is already challenging and this could be highly disruptive. They will also have pay into the mutualisation fund several months before they get anything back, exacerbating the issue. For this reason, Utility Week understands several suppliers are considering taking legal action against Ofgem if the mutualisation process is activated.
Second, failed suppliers will obviously be unable to pay into the mutualisation fund. Any part of the shortfall for which they are responsible will therefore be spread across the industry.
Other suppliers would be burdened with this cost regardless of whether mutualisation is triggered. But Thomson says this ties into a wider issue about who pays for failures – one that has already been highlighted within the context of the supplier of last resort procedure.
“We’ve effectively allowed the suppliers to use the money from customers to fund their future activities so they can run at a considerable loss for quite a while before they actually get stuck,” he explains.
Third, there is the question of what happens to suppliers that have neither met their obligation nor failed.
Thomson says the 1 September deadline for the first mutualisation payment “might be far enough away to allow the better run companies to manage the process.
“However, I’m aware of a few companies that seem to be quite close to the edge, and if we got a bad winter, I don’t think they would necessarily survive,” he adds.
He says there are concerns in the industry over how Ofgem will respond to the situation: “Ultimately, what are its options? Does it have to put a winding up petition in place to get them to pay?
“Does it put fines in place if they aren’t able to pay the money? Is that going to make any difference? Or is the reality that these companies are not sustainable and won’t be able to pay that money?”
The lack of a precedent means the industry is now heading into uncharted territory. It will be up to Ofgem to guide the way forward and clear up some of the uncertainties.
However the issue is resolved, the fact the shortfall is so large compared with previous years is a sign that all is not well in parts of the retail sector. It may not be long before more suppliers have bailiffs at the door.