37 energy suppliers failed to meet an early September deadline for paying into a scheme that supports renewable generation, leaving a record £276 million shortfall in the fund, some of which could be spread across all energy bills.
Ofgem’s Renewables Obligation (RO) scheme requires energy suppliers to demonstrate that enough of the energy they supplied during the year was green. They do so by presenting Renewables Obligation Certificates (ROC) issued by renewable generators by 1 September each year. Alternatively, they can pay into the RO buyout fund by 31 August or do a combination of the two.
Every year suppliers fail to meet these deadlines. This year debt to the RO scheme stands at its highest level yet: £276 million. This exceeds the £206 million shortfall from 2019 and the £105 million shortfall in 2020.
The 37 suppliers that missed the deadlines have until 31 October to make late payments plus interest into the scheme. Failure to meet that deadline, or to convince Ofgem that they will meet it, often earns energy suppliers disciplinary action, with Ofgem threatening to strip companies of their supply licences in extreme cases. It’s also a reliable sign of financial difficulty, which for suppliers is especially acute this year amid the surge in wholesale gas prices, and a harbinger of the supplier collapsing.
Already this year Ofgem has ordered 10 suppliers to pay into the RO scheme or face the suspension of their licences. Of these, AMPower, GOTO Energy, Colorado Energy, and MA Energy have since ceased trading and won’t make their payments. Delta Gas and Power, Entice, and Neon Reef, and Together Energy are still trading. Home Energy Trading later paid its obligation in full.
With such a large shortfall in the RO buy-out fund and with 22 suppliers having crashed out of the market this year, it’s almost certain that the debts that remain after the late deadline will be above the mutualisation threshold, set at £15.4 million this year.
This means the debts will be spread across all surviving energy suppliers and ultimately be passed onto consumers through higher energy bills. This has happened in the three previous years. In 2019, consumers were ultimately forced to make up a £97.5 million shortfall in the scheme. This meant households faced around a £4 rise in their energy bills.
Debts to green schemes, including the RO fund and the Feed-in Tariff (FIT) scheme, are a contributor of the cost to consumers of energy supplier failures. In addition, there are costs that surviving suppliers take on when they act as supplier of last resort (SOLR) for a collapsed company’s customer base. These include the costs of migrating accounts and protecting domestic customers’ credit balances. Suppliers can claim these costs back in a way that adds to all energy bills.
In late September, financial services firm Investec estimated the bill just for the seven suppliers that collapsed between August and mid-September could be “in excess of £826 million.” That would be a £30 surcharge for every household in Britain. An additional 13 energy suppliers have since folded, meaning the cost will certainly be even higher.
Last week, Chris O’Shea, chief executive of British Gas owner Centrica, estimated the bill for failures to date is £2.5 billion, most of which will be recovered from households. That means an additional £100 on every energy bill.
“The current retail market failures will put £100 on the bills of every single home in the UK whether it is a house in Belgravia or a studio flat in a deprived area of Glasgow, it will be the same amount,” he said.
If more companies fail, that could rise to £200, he added.
O’Shea called for a reevaluation of the way these costs are recouped because the current mechanism is hitting poor households too hard. “My personal view is that if we put these costs on bills on a flat rate then that will not achieve what we want to achieve. That will not achieve a just transition. It will ensure that people are left behind,” he said.
Ofgem has proposed increasing the threshold at which mutualisation is triggered for the RO fund, pushing it to £62 million next year.