Energy and Utilities

BEIS on course to deliver changes to Renewables Obligation mutualisation

Published on 19th Jan 2021

Consultation proposals seek to reduce risk for solvent scheme participants, following concerns around recent failures of challenger energy suppliers

EU_windmill

The Department for Business, Energy and Industrial Strategy (BEIS) has ended its consultation and call for evidence on proposed changes to the Renewables Obligation (RO) mutualisation process, which protects the renewable energy support scheme from significant under-recovery.

The RO mutualisation process requires all suppliers to meet the scheme shortfall left by suppliers unable to meet their obligations over a certain financial threshold. The mutualisation process has been triggered in each of the last two financial years following an increase in the number of supplier insolvencies. This has resulted in criticism that the mutualisation mechanism:

  • creates the perverse situation where solvent suppliers who have fulfilled their obligations take on the liabilities of competitors who have not; and
  • leaves generators exposed to price risk on their RO certificates.

The proposed changes to the mutualisation mechanism are:

  • Linking the threshold at which mutualisation is triggered to the overall size of the scheme. This would increase the threshold from the current fixed value of £15.4m to 1% of the total scheme value (in 2020/21, this would be a threshold of £62.1m), effective from 2021/22.
  • Only recovering monies over and above the threshold when mutualisation is triggered. Currently all unrecovered monies can be recovered.
    BEIS stated that it aims to implement any changes as soon as possible, with a target of 31 March 2021 to make the necessary legislative amendments.

Osborne Clarke comment

The changes proposed by BEIS to RO mutualisation are a clear response to industry concerns about the practices of certain new entrants in the energy supply market over recent years.
The changes should also be seen as part of the wider drive by BEIS to create a fair deal for consumers and facilitating competition in the supply market as set out in the December 2020 Energy White Paper and steps by Ofgem to be robust in their regulation of supply companies. As part of this, BEIS is looking to remove certain obligation exemptions given to challenger suppliers with fewer customers. These threshold exemptions established with the aim of reducing barriers to market entry may have created market distortions by creating differential cost bases. BEIS has committed to consult on removing these energy supplier thresholds causing the market distortions, with the aim of creating a fairer and more competitive energy supply market in future.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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