Ofgem proposals to spread out the costs of Last Resort Supply Payments (LRSPs) to reduce the short-term impact on energy bills are welcome but should not come at any price, an industry expert has stated.
Under the plans announced in a recent consultation, retailers would be permitted to sell their rights to LRSPs, which enable them to claim back costs incurred by becoming a Supplier of Last Resort (SoLR) but can take months or years to come through, to third parties.
This would allow suppliers to receive the money faster but allow the costs of the payments, which are made by distribution networks and recovered through their charges, to be spread out over a longer period.
Ofgem confirmed last month it was allowing recently appointed SoLRs to claim more than £1.8 billion in LRSPs, primarily to cover the costs of buying wholesale energy for their newly acquired customers at exceptionally high prices. These payments are expected to help push the price cap on default tariffs to around £2,000 when it is updated in April.
The regulator said its latest proposals would allow more suppliers to participate in the SoLR process by improving appointees’ access to working capital, whilst also smoothing out the impact of LSRPs on energy bills.
Ofgem admitted that the interest rates and other fees required by third-party financiers would likely mean that the costs to consumers will be higher in absolute terms, but said there “could be value” in recovering them over multiple years.
Speaking to Utility Week, Andy Manning, principal economic regulation specialist at Citizens Advice, said the charity has already called for these costs to be spread out.
He said: “I think Ofgem is trying to find a solution that is capable of being achieved quite quickly. In many ways, it’s the industry they are helping but it’s the industry that will strike these deals so less regulatory change is needed, which is sensible.
“Whether these result in outcomes that are in the best interests of consumers is a different question, which mainly hinges on what interest rates get added by these third parties sitting in the middle of it.
“It’s generally a good thing to spread these costs out over years, particularly with the cost of living crisis, but that cannot come at any price. We need to know what the price tag is before we can come to the final conclusion whether it ends up being something worthwhile or not.”
Echoing Manning’s thoughts, Energy UK’s deputy director of retail, Dan Alchin, welcomed the proposals but recognised the trade-offs involved.
Alchin told Utility Week: “We don’t know what the details are of any arrangements that may or may not be reached – so everything will need to be considered with that in mind.
“There’s a very immediate short-term concern with prices set to increase in April and how these costs feed through to consumers. Given the expected increases, any action that can be taken to smooth that impact on consumers is something we welcome and that should be explored.
“There may well be trade-offs involved because, as Ofgem notes, spreading costs may mean it does end up costing a little bit more in absolute terms – but there is also likely value for consumers in meeting these costs over a longer time period, rather than letting them hit their pockets all in one go.”