Cornwall Insight predicts shortfall in RO funds will trigger mutualisation for 2018/19

Energy retailers will be called on to top-up the Renewables Obligation (RO) for the second year in a row, Cornwall Insight has predicted, because the failure of more suppliers will mean necessary payments have not been made.

Suppliers can make RO ‘buy-out’ payments instead of submitting RO certificates to meet their obligations, and that fund is allocated to renewable generators. A ‘mutualisation’ mechanism is used when missing payments creates a shortfall in the buy-out fund.

Mutualisation was triggered for 2017/18 after 14 suppliers failed to make a total of £58.6M in payments towards the RO. It is predicted that mutualisation is going to be activated in 2018/19 and Cornwall Insight estimates that the potential shortfall in the buy-out fund will be up to £44M.

Tim Dixon, team lead at Cornwall Insight, said: “With 14 suppliers having exited the market since the start of 2018 it is little surprise that mutualisation is expected for the second year in a row. Ten out of the 14 exited suppliers had supply volumes during the compliance year 2018-19, most notably Extra Energy, Spark Energy and Economy Energy.

“As a result of these ten suppliers ceasing trading, Cornwall Insight calculates that 2.0TWh of supply volumes, equivalent to £43.8M of buy-out and late payments, will not be made. This is against a mutualisation threshold of £16.9M. If so, the costs will once again be recovered from suppliers who have met their obligations.

“On top of this, renewable generators accredited to the RO scheme would not get paid the full amount for their renewable obligation certificates (Rocs) until after the mutualisation process is completed, with final payments not made until 21 months after the normal final recycle payment deadline.”

Dixon noted that if a supplier spends funds it has collected, it can be exposed if cashflow does not allow for paying RO liabilities when they fall due.

He said, “It might be wise for policymakers to consider adopting processes from similar schemes – such as the Feed-in Tariff, Contracts for Difference or Capacity Market – where money is collected from suppliers on a more frequent basis.”

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