Ofgem is planning to change the way it redistributes Renewables Obligation payments it receives after the final deadline.
The regulator said the current process may be unfair to suppliers that cover more of their obligation through buyout payments.
Under the Renewables Obligation (RO) scheme, generators receive a set number of Renewable Obligation Certificates (ROCs) for each megawatt-hour they produce, with the rate depending on the technology type. They can then be sold to suppliers, who must submit enough ROCs each year to fulfil their annual obligation or cover the difference through buyout payments. Companies’ obligations are determined by the amount of electricity they supply.
Payments into the buyout fund are redistributed to suppliers in proportion with the amount of ROC’s they submitted to Ofgem. This “recycling value” is designed to incentivise suppliers to source certificates rather than relying on buyout payments. The fewer certificates submitted, the greater the recycling value.
Suppliers have until 31 August to make buyout payments and 31 October to make late payments. The late payments are treated similarly to buyout payments, although debtors are required to make interest payments on the outstanding amount.
Ofgem has previously treated any further payments beyond the final deadline as if they were part of the late payment fund. This arrangement is not codified in legislation and resulted from an administrative decision by the regulator.
But Ofgem is concerned that it may be unfair to those suppliers which submitted fewer ROCs, if a mutualisation process has been triggered.
The mutualisation process is designed to compensate suppliers for the loss of recycling value resulting from a shortfall in the late payment fund. It is only activated if the shortfall in the relevant jurisdiction – there are separate versions of the scheme for England and Wales, Scotland and Northern Ireland – exceeds a set threshold.
The process was triggered for the first time in the scheme’s history in 2018 after suppliers failed to make £58.6 million in late payments. It was activated again last year following the emergence of the £97.5 million shortfall in the late payment fund, partly due a series of supplier failures.
Ofgem said if a mutualisation process has been triggered, payments made after the final deadline should no longer be redistributed to suppliers proportionate to the number of ROCs they submitted. As they can already expect compensation for any reduction in the recycling value of the certificates, the payments should instead be redistributed in proportion to the size of their overall obligation.
The regulator described this as its preferred option in an open letter to stakeholders. It said the alternative option – continuing with the current arrangement – would have the benefit of retaining an additional incentive for suppliers to submit ROCs.
It invited interested parties to give feedback on its proposed decision and gave 27 March as the deadline for responses.