EDF Energy’s managing director has called for fundamental reform of the way the Renewables Obligation (RO) is collected, on the back of this week’s announcement of a £163 million shortfall in payments.
Philippe Commaret was speaking to Utility Week following the news earlier this week that as of 1 September, 36 retailers had failed to meet the RO deadline. Ofgem has not yet revealed how much of the £163 million shortfall was still owed at the late payment deadline of 31 October or whether mutualisation will be triggered.
A spokesperson for the regulator has since confirmed that a majority of these 36 suppliers are no longer active in the market or are insolvent, meaning it is not possible to take enforcement action against them if they have left behind unpaid RO liabilities.
Where there are monies owed by failed suppliers in respect of the RO scheme, Ofgem will seek to claim for this through the appropriate insolvency processes.
Commaret however said that the same problems will keep arising unless the way the obligations are collected changes.
“We know that the way the RO is set up is creating this type of risk because there is a huge lag between the moment where the obligation is incurred and is stacking up and the moment where the suppliers have to pay for the obligation,” he said.
The RO scheme has long been a source of contention in the energy sector, with compliant suppliers having to pick up the costs of unpaid obligations through the mutualisation process.
Earlier this year the government rejected proposals for more frequent settlement of the RO scheme following a consultation, citing the need for more time to consider issues affecting the market. It said it would gather more evidence to further develop its policy thinking at a later date.
Commaret further warned about the price cap’s methodology, which he said added to the burden on retailers.
He continued: “The reasons suppliers are failing are because the cost at which they are buying energy is much bigger than the cost which is recognised in the price cap, that’s the reality. The price cap is based on a formula which assumes a cost for the energy, but because of the lack of liquidity on the wholesale market it isn’t easy for suppliers to have the ability to match the price assumed in the formula.
“At the moment I think there is still a lot of risk in this market and the cap on prices has aggravated the risk for suppliers to go bust. That is what should be looked at carefully, how to avoid those insolvencies. That’s really something that we need to sort out.”
Commaret also warned about the lack of an ability for retailers to generate a profit in the market, despite the widespread public belief they are.
“For me, that’s really the key point – how to create a market where there is a profit for the suppliers.
“That is completely counterintuitive to the public opinion because the public sees the massive profits of the oil and gas companies. But the reality is that the suppliers in the UK market haven’t made any profit in the last few years.
“So that’s really what has to be sorted if we want to avoid finding ourselves in a situation where industry costs like the Renewables Obligation are mutualised.”
Utility Week spoke about a number of issues with Commaret, including the continuing energy crisis, his thoughts on the government’s plans to target support for vulnerable customers and the smart meter rollout. The full interview will be available next week.
Reform of the energy retail market will be one of the themes at Utility Week Forum on 8-9 November. Find out more here.
