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Cornwall Insight warns of risk of RO mutualisation

Seven suppliers have exited the market during this RO period.

Seven suppliers have exited the market during this RO period.

The risk of Renewable Obligation (RO) mutualisation has grown, as the supply market continues to be challenging.

Currently, there is a potential shortfall in the RO buy-out fund of approximately half of the £16.94 million mutualisation threshold, according to Cornwall Insight.

Mutualisation – by which the shortfall in RO payments made to the regulator Ofgem in leu of suppliers using renewable generation, is distributed among suppliers who have made their payments – will happen if suppliers reach this set threshold.

The shortfall has been created by supplier exits, although fewer have left the market in the current RO period – with just seven leaving the market over the year – than the previous couple of years.

Tim Dixon, wholesale team lead at Cornwall Insight, said: “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.”

Suppliers have been able to benefit from the government's furlough scheme over the past six months, which may have contributed to the lower number leaving the market in comparison with the surge in the previous two years. More than 16 small suppliers in the UK closed during that period, with some pointing to the high RO fees as a factor.

In October 2019, Ofgem had to order four suppliers to pay their outstanding RO fees – Delta Gas and Power, Gnergy, Robin Hood Energy and Toto Energy. Since this point, Toto Energy and Gnergy have both exited the market, while Robin Hood Energy has sold its customer base after struggling.

More exits could still take place in C18, however, due to challenging market conditions continued Dixon.

“In fact, should a supplier comparable to Extra Energy, Economy Energy or Spark Energy – all of which exited the market the previous year – exit the market it would likely tip the scale and push the shortfall in the buy-out fund towards the mutualisation trigger.

“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.”

In 2019, Ofgem paid out £109,529,764 to suppliers who presented RO Certificates, meaning suppliers got £6.80 for every ROC that they presented.

The initial compliance deadline has now passed, and suppliers with remaining obligations will have until the late payment deadline of 31 October to make up anything outstanding.

“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,” warned Dixon.

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