Supplier payment default and mutualisation
Further amendments to address RO supplier payment default
Supplier payment default is of continuing concern to scheme participants. Electricity suppliers resent meeting the unmet obligations of their competitors, whilst generators lose out when the level of default is insufficient to trigger mutualisation, i.e. when it is less than 1% of scheme cost. Some stakeholders have therefore called on the Scottish Government, UK Government, or Ofgem, to address the situation.
BEIS has proposed the following approaches which could help to lower the risk and extent of payment default, identifying some of the likely benefits and risks associated with each. These approaches are as follows.
1. A legislative requirement for suppliers to settle their RO more frequently to lower the amount that they are able to default on - in this consultation we consider a quarterly arrangement. We also consider the case for compressed settlement timeframes, i.e. shorter than the existing 7 months settlement period that follows each obligation year.
Option 1 would require changes to the RO(S).
2. A licence-based requirement for suppliers to protect their accruing obligation against the risk of default. Under this arrangement, suppliers would be given the choice of which protection measure to put in place. Should a supplier exit the market or fail to put additional protections in place when required to do so, any existing protection measures would be put towards settling that supplier's obligation.
Option 2 might require changes to the RO(S) If Ofgem needs further powers via the RO legislation, to enable funds (or ROC's) arising from a supplier's protection measures to be transferred into the scheme.
3. Continue with existing policy. Under this arrangement, we would allow recently introduced legislative changes (i.e. updates to mutualisation arrangements) and licence changes (i.e. those which aim to increase supplier standards of financial resilience) to take effect.
Option 3 would not require changes to the RO(S).
Assessment of options considered
The Scottish Government supports any changes to tackle the issue of supplier default and would want to align the RO(S) with the RO.
We would therefore seek stakeholders' views on the options outlined above and any implications for the RO(S) to
Q2. Do you have a preferred option to tackle the issue of supplier default?
Fixed price certificates (FPCs)
In 2011, the UK Government of the day said it would switch the RO to an FPC based scheme from 2027. The FPC scheme was proposed primarily as a means of addressing ROC price volatility that was expected to emerge as generators began losing their eligibility to receive ROCs from 2027 (eligibility is time limited). Under the envisaged FPC scheme, generators would receive frequent, and therefore earlier payments for their certificates from a newly established certificate purchasing body. In turn, this would likely require suppliers to make more frequent, and therefore earlier payments to the purchasing body. Whilst it was not the stated intention of the FPC based scheme, we are aware that this could lessen the likelihood and extent of supplier payment default.
We note that the UK Government intends to issue a call for evidence on the FPC based scheme in due course, and is seeking the initial views of stakeholders on the introduction of the FPC based scheme as a way of addressing supplier payment default.
Similarly, we would welcome views on the introduction of FPC's under the RO(S).
For more detail on these proposed changes please see the attached link to the UKG RO Consultation.
Consultation questions on Changes to mutualisation arrangements
Q3. Do you agree with the increase to the threshold?
Q4. Do you agree that only the costs over the threshold should be recovered if BEIS/Ofgem make further changes to the RO legislation to require suppliers to settle their obligation more frequently?
Q5. Do you agree that the Scottish Government should mirror those changes in the RO(S)?
Q6. Do you support the introduction of FPC's either as an alternative or in addition to other measures outlined in this consultation?