Renewables Obligation Mutualisation risks are growing

What is the RO?

The Renewables Obligation (RO) scheme was introduced to encourage energy suppliers in the UK to generate electricity from renewable energy sources. The scheme means that licensed energy suppliers are obliged to source an increasing amount of their electricity from these sources.

To show that these obligations have been met, suppliers are required to submit Renewable Obligation Certificates (ROCs) to Ofgem. If suppliers don’t have the necessary ROCs, they instead need to make a payment into a buy-out fund.

Mutualisation occurs when the RO payments made to the energy regulator in leu of energy suppliers using renewable energy generation is spread among suppliers who have made their payments reach a set target.

Cornwall Insight believes there may be a shortfall in the RO buy-out fund of up to half of the £16.94 million mutualisation threshold. 

What’s the cause?

Cornwall Insight believes that the number of energy suppliers exiting the market is the main cause for the shortfall even with fewer suppliers exiting the market than in previous years.

“Contrary to the two previous compliance periods where the mutualisation trigger was breached, it is not currently expected that the impact of supplier exits in CP18 will surpass this amount. The seven exited suppliers each had relatively small supply volumes in the 2019/20 period.

This does not mean there is not a risk of mutualisation, as we could see further suppliers exit the market in the months ahead, or suppliers failing to meet the late payment deadline,” said Tim Dixon, wholesale team lead at Cornwall Insight.

Covid-19 impacts

The number of energy suppliers exiting the market could increase over the coming months as many have so far been protected by the government’s furlough scheme and Ofgem’s £350 million support scheme.

With furlough set to end in October and with new restrictions imposed due to a rise in Covid-19 infections reported across the UK, several energy suppliers could be close to being forced out of the market.

High RO fees have been blamed for the closures of several energy suppliers over the last two years and in October 2019 four suppliers were ordered to pay their outstanding RO fees. Out of those four, two have since exited the market whilst Robin Hood Energy sold its customer base.

“Suppliers have had to face challenging market conditions amid the COVID-19 pandemic, and as a result, there is a heightened risk that some suppliers may now be unable to meet their obligations and instead contribute towards triggering mutualisation. If mutualisation does occur the costs will be recovered from suppliers who met their obligations and ultimately be passed on to the consumers’ bill. “This could prove a particularly fateful day for the energy sector, with both the RO late payment deadline and the end of the furlough scheme set to end,” said Dixon.

The initial compliance deadline has passed with energy suppliers with remaining Ros having until October 31^st to hit the late payment deadline. Failure to do so will see the regulator punishing late payers. 

Further Reading

Government plans new tax on Gas suppliers to support its green energy drive

Will Covid-19 pandemic lead to an energy price cap rise next year? Ofgem opens consultation

Energy Price Forecast 2020 – The impact of Coronavirus

Dyball Associates are proud to help new supply businesses successfully launch in the UK market.

Between our energy market consultancy services and the software we’ve developed, we’re supporting new UK electricity and gas suppliers to get set up and start supplying.

For more information, get in contact with us today.