Ofgem has outlined proposals for recovering bad debts arising from its scheme to allow struggling suppliers to defer a portion of their network charges until next year.
The regulator announced in June that network companies had agreed to defer up to £350 million of charges to ease the strain on suppliers facing cashflow issues as a result of the coronavirus pandemic.
Ofgem said the support, covering a period of three months, would be capped at £1.6 million per electricity supply group and £1 million per gas shipper and would only be available to companies that were unable to borrow enough money elsewhere.
It said shortfalls must be covered by the end of March 2021 and that no dividends or executive bonuses should be paid out until this happens.
The regulator said if a supplier fails, network companies should initially pursue outstanding debts through the liquidation process, but any they could not recoup would be recovered through the network charges for 2021/22.
In an open letter to industry, Ofgem has now outlined three potential mechanisms for how do this:
- Use the Miscellaneous Passthrough term that already exists within the gas distribution license and extend it to the other sectors.
- Use, and in some cases modify, the Eligible Bad Debt terms that already exists within the licenses for all network sectors.
- Introduce a new bad debt term within the RIIO2 licences. Ofgem would set a provisional allowance for bad debt based on estimates provided by network companies that would be “trued-up” as the actual figures became known.
Ofgem said the third option is its preferred one as it would be “easier to implement and maintain”.
The first option, by comparison, would require companies to request consent for the passthrough, placing “an administrative burden on all parties, with Ofgem potentially having to consider a number of requests for consent each.” The need to modify an existing license term would make the second option complex and difficult to implement.
Ofgem is now consulting on the three options and has given 4 September as the deadline for responses.