As the witching hour approaches, RO mutualisation looms

Halloween is just a week away, and it is rapidly taking on a rather other-worldly significance for suppliers. This is because Ofgem reported yesterday that, based on supplier compliance under the Renewables Obligation for 2017-18 (CP16), there has been a significant shortfall by suppliers who have not submitted ROCs and who must therefore pay late buy-out payments.

The shortfall is a chilling £103mn. Thirty-four suppliers were noted (but not named) as not meeting their total obligations by the 1 September deadline. They now have until 31 October to make good these late payments with the addition of the required 5.75% interest.

By way of comparison the shortfall in past years has not exceeded £18mn, with previously only a handful of suppliers exposed to late payments. In practice, virtually all these suppliers made payments by the statutory deadline. The mutualisation provisions in the Renewables Order 2015, which look to protect generators from significant supplier default, have therefore never been invoked.

Failure to pay by the imminent deadline would mean suppliers would be in breach of the order and enforcement action is likely to follow. As far as we can ascertain, only one supplier has been in breach and continued trading; this was a small Northern Ireland supplier, Click Energy, in the 2016-17 compliance year, who had to make good monies owed and saw a significant fine (given the supplier’s size) from its regulator.

The number of suppliers  potentially involved will also be spooking Ofgem. Non-compliance in recent enforcement cases has been dealt with robustly by it. There are also clear cross-overs to industry codes. It is, for instance, highly probable that non-compliance under the order could be interpreted as a default event under industry codes.

A back of a beermat calculation suggests that perhaps £10mn will have to be written off owing to the shortfalls attributable to suppliers that have already failed but who had an obligation for 2017-18. So, with the trigger for mutualisation sitting at £15.4mn, it is looking very likely that it will be breached. This means that the rest of the supply community will be required to make good the position, though the shortfall sits well short of the mutualisation ceiling (which currently exceeds £300mn). This is likely to come as something as a rather unpleasant surprise as few suppliers seem to be aware of the mutualisation provisions in the order. Whether a further call might result in some suppliers already struggling to make good their payments being pushed over the edge is also a moot point. But we think contagion risk is likely to be real.  

To help the market understand what to expect if mutualisation is triggered, we will be holding a webinar tomorrow afternoon, 15.00GMT. This will look at:

  • The recent background of supplier failure
  • Where the shortfall presently sits
  • The mutualisation process and timetable
  • Materiality of possible shortfall and its cost to the supplier community, and
  • Possible impacts on recycling values.

WEBINAR

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