Energy networks are to defer up to £350 million of charges as a last resort for struggling energy suppliers and shippers, following a request by Ofgem.
The measures, announced today (2 June), will cover electricity distribution charges, gas distribution capacity charges and gas transmission charges.
In an open letter the regulator’s chief executive Jonathan Brearley outlined plans to temporarily relax the payment terms for both suppliers and shippers in order to reduce the likelihood of them exiting the market.
The letter also revealed that there are currently no plans for any adjustment to the price cap methodology to account for any potential increase in bad debt as a result of coronavirus.
Brearley said: “As a consequence of the impacts on the energy supply chain, suppliers (and in turn shippers) may find themselves experiencing cash flow issues, which could have negative impacts on consumers. We would expect suppliers and shippers with cash flow issues to seek to access commercial loans or the government’s and Bank of England’s financial support facilities.
“However, we are aware that the eligibility criteria and loan value caps on the schemes may prevent some suppliers and shippers from being able to meet all their liquidity needs through them alone.”
Brearley explained that the regulator had asked network companies via the Energy Networks Association (ENA) to develop schemes to help cash-strapped firms in a way that is financially viable for themselves.
The schemes that have been developed cannot be used by companies who have an investment grade credit rating and can be reasonably expected to be able to access alternative finance arrangements.
“The deferral of network charges by such companies would exhaust network companies’ capacity to support these schemes, meaning that less support would be available to suppliers and shippers for whom alternative support is not available,” Brearley explained.
While the implementation details would vary in each sector and will be set out in due course, the schemes would broadly:
- Be sized and available so as not to threaten a network’s ability to comply with its financial covenants and credit metrics.
- Require a minimum payment of 25 per cent of the monthly invoice amount.
- Be capped at £1.6 million per electricity supplier group and at £1 million per gas shipper (both per network licence area and over the scheme length of three months), offering around £350 million in total for eligible companies.
- Be capped per network company group.
- Ensure that any deferred payments would accrue interest at the default rates set out in the relevant industry codes (currently c. 8 per cent), to incentivise suppliers and shippers to only defer as much as is necessary and return to normal payment terms as quickly as possible.
- Require that any deferred payments be repaid by the end of March 2021 with instalments payable prior to that deadline.
- Require electricity suppliers and gas shippers to self-certify that their companies will not pay dividends or executive bonuses until deferred charges plus interest are repaid.
Those eligible for the schemes would be offered an “extended period” in which they would be allowed to pay the majority of monthly network charges due over a three-month period at a later date.
There would be no requirement to provide additional security to cover the amounts outstanding for the extended period, nor an obligation on the network companies to seek and have this in place.
Ofgem says both National Grid Electricity Transmission and National Grid Electricity System Operator have been involved in the development and are supportive of this initiative. They will join the scheme, subject to the outcome of other requests for Covid-19-related support. SHE Transmission is also willing join in principle, subject to further review.
In his open letter, Brearley stressed the regulator would monitor uptake carefully to mitigate the risk of abuse. He added that suppliers and shippers using the schemes would be expected to not pay out dividends and “show restraint” in relation to senior management pay such as cash bonuses or pay rises until all charges and interest that are due have been repaid.
Retailers must also take into account the aims of the Supplier Licensing Review in relation to their use of these schemes, namely that they should have appropriate capability, processes and systems in place to be able to meet their obligations.
“We would expect suppliers to continue to act in line with their various legal duties and regulatory requirements. This includes the requirement to take into account creditors’ interests when a supplier is insolvent, or where there is a real possibility of insolvency, and to treat customers fairly,” Brearley added.
Network companies would be expected to take appropriate action to enforce any scheme if any supplier or shipper failed to repay deferred charges in line with their proposals.
If a supplier or shipper that takes advantage of any scheme subsequently leaves the market, Ofgem expects network companies to pursue any debt through the liquidation process.
Brearley continued: “However, where network companies have sought to do this, they will be able to recover outstanding bad debt within the year 2021/22. To ensure that consumers benefit from any interest accrued by networks due to the proposed schemes, we propose to treat any interest accrued, net of the cost of capital, by network companies as revenue under the price control. In due course we will propose any licence modifications required to give effect to these.”
Responding to enquiries from suppliers on whether the regulator will adjust the default tariff cap to reflect additional costs incurred due to the coronavirus pandemic such as bad debt, Brearley said the regulator does not have sufficient evidence to justify amending the price cap for the next six-month cap period starting in October 2020.
“In the longer term, if there is a material change in suppliers’ costs as a result of Covid-19 impacts, including bad debt costs, we will consider how to reflect these in the default tariff cap methodology while protecting existing and future domestic default tariff customers”, he added.
In response to the announcement, ENA chief executive David Smith said: “We are continuing to keep Britain’s energy flowing during the Covid-19 pandemic and offer support to customers, especially those who are vulnerable.
“The networks are prepared to use their borrowing powers to help ease cash flow for suppliers by more than £350 million. We want to ensure customers are protected and recognise that this exceptional measure will help do just that.”
Brearley also confirmed that Ofgem will issue its draft determinations for the second set of RIIO price controls (excluding electricity distribution) next month.