The Renewable Obligation Scheme
The Renewable Obligation scheme (RO) requires suppliers to buy a certain percentage of the power they sell to customers from renewable sources. This is evidenced either through the purchase of Renewable Obligation Certificates, or suppliers pay into a buy-out fund.
Accredited generators receive a set number of Renewable Obligation Certificates (ROCs) for each megawatt hour they produce, with the rate depending on a number of factors including technology type. They can then sell these certificates to suppliers.
Suppliers must present enough ROCs to Ofgem each year to demonstrate they have met their yearly obligation and make up any difference with buy-out payments. These payments are first used to cover the administration costs of the scheme, with the rest being returned to suppliers in proportion to the number of ROCs they submitted to Ofgem.
Following the failure of a number of electricity suppliers, the RO fund was left short due to the non-payments by defaulting suppliers. This short fall is then recovered through a process known as mutualisation where suppliers who have met their payment obligations make up the shortfall. Ofgem has confirmed this mutualisation process will be triggered following a shortfall of payments (£56.8 million) into the Renewables Obligation (RO) late payment fund for compliance year 2017/2018. Industry experts also predict that mutualisation will be triggered for the current period of 2018/2019 with a further shortfall of around £44 million.
Suppliers who met all or part of their obligation must together fill the gap and make extra quarterly payments.
The charges for each individual supplier are calculated on the basis of their obligation as a share of the total obligation for the year in question, taking into account that failed suppliers cannot contribute.
The money collected, including any interest accrued, is redistributed to suppliers in proportion with the number of ROCs they presented to Ofgem, again in four quarterly instalments. Those which have failed to meet their obligation in full are not entitled to receive any payments. Mutualisation has led to unforeseen costs on suppliers that will now need to be recovered from customers. Total Gas & Power will be contacting customers in the near future with more details about how this will happen which will be dependent on your contractual terms and conditions.
What is Total Gas & Power doing to try and help the situation?
Total Gas & Power is actively lobbying to try and minimise socialised costs to the industry when suppliers fail in the market. We are supporting Ofgem’s review of licensing arrangements that proposes to tighten up the rules for new supplier entry and more closely monitor the financial health of suppliers operating in the market. Total Gas & Power has raised an industry modification to exclude non domestic suppliers / customers from paying for some costs (e.g. credit balances) associated with the failure of domestic suppliers. We are also actively engaging with BEIS to try and change the rules so that RO payments are made more frequently by suppliers, so that if a supplier fails there is less of an RO shortfall owed and therefore less mutualisation.
More information about the Renewable Obligations can be found at the following link:
Details of the 2017/2018 mutualisation of the buy-out shortfall can be found here: