BEIS looks for ways to update Renewables Obligation scheme

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A consultation seeking views on increasing the mutualisation threshold in Renewables Obligation scheme, including a call for evidence on whether only the amount in excess of the threshold should be mutualised, has been launched by Department for Business, Energy & Industrial Strategy (BEIS).

The Renewables Obligation (RO) scheme in England and Wales supports the generation of renewable electricity.

It operates as a market-based mechanism through a system of tradable green certificates called Renewables Obligation Certificates (ROCs).

The ROCs are issued to generators free of charge by the scheme administrator, Ofgem, in relation to the renewable electricity they generate.

Generators sell the ROCs to suppliers or traders, which gives generators a premium in addition to the wholesale price of their electricity.

Electricity suppliers are under an obligation to present a certain number of ROCs to Ofgem or instead pay a fixed cash payment into a buy-out fund.

Cash payments are recycled back to suppliers who met their obligation with ROCs, so giving ROCs additional value.

When suppliers fail to discharge their obligation, there is a shortfall in the buy-out fund.

Suppliers who met their obligation with ROCs will then receive less in recycled payments than would otherwise have been the case. This will have an impact on both suppliers and generators.

To prevent excessive shortfalls in recycled payments from occurring, the scheme has a mutualisation mechanism.

Once the shortfall exceeds a threshold (currently fixed at £15.4 million) suppliers who met their obligation in part or in full are required to pay the unmet obligations of those suppliers who did not meet theirs.

The mutualisation payments are then recycled back to suppliers who met their obligation with ROCs.

Mutualisation has been triggered in each of the last three years.

Whilst the level of payment default has been relatively small to date (in comparison to the overall scheme value) it nevertheless places a financial strain on those suppliers who are required to make mutualisation payments.

Therefore, BEIS has reviewed the mutualisation arrangements and has identified two areas where improvements could be made.

Consultation – closes 11 January 2021

The first area relates to the mutualisation threshold, which, according to BEIS, has failed to keep pace with growth in the scheme.

The consultation proposes to link the threshold with the annual cost of the scheme to suppliers.

In the first instance, this would increase the threshold to around £62 million, but it would rise or fall in future years as the cost of the scheme changes.

According to BEIS, this new arrangement would restore the balance of risk between generators and suppliers that was established when the mutualisation mechanism was first introduced, and would ensure that suppliers that met their obligation were not unduly exposed to the unmet obligations of their competitors.

Call for evidence – closes 19 January 2021

The second area relates to the way the mutualisation amount is calculated.

Currently, the entire payment shortfall is mutualised once the level of default exceeds the threshold.

BEIS have reflected on this arrangement and think that it might be unfair on suppliers because it exposes them to the full cost of supplier default – and generators to none – by virtue of a threshold having been crossed.

According to BEIS, a fairer and more progressive approach might be to require only the amount in excess of the threshold to be mutualised, subject to an additional administrative threshold being exceeded.

This would represent a departure from existing policy, and BEIS are ‘keen to learn more before deciding whether to progress to a future consultation on the matter.’

Consequently views are sought through the call for evidence.

The consultation and the call for evidence are likely to be of interest to:

  • owners of RO-accredited generating stations and Power Purchase Agreement (PPA) off-takers who sell ROCs to suppliers and brokers
  • electricity suppliers who are under an obligation to acquire ROCs or make payments into the scheme’s buy-out fund
  • businesses involved in the scheme such as ROC brokers, financiers, advisers
  • consumers who ultimately fund the scheme through their electricity bills

More information about this consultation and call for evidence is available on the government website.