Citizens Advice response to BEIS regarding proposed changes to mutualisation arrangements under the Renewables Obligation scheme
Citizens Advice agrees with the proposals put forward in government’s consultation and call for evidence regarding the proposed changes to mutualisation arrangements under the Renewables Obligation (RO) scheme. We also call on BEIS to require more frequent RO payments by suppliers, in order to offer more protection to consumers and generators and constrain bad debts from escalating much more quickly.
We have seen [ 2.4 mb] financial strain on suppliers lead to energy supply company failures, affecting over 1 million energy customers. This results in financial detriment as well as hassle and stress for consumers whose energy supply company fails, and higher costs mutualised among all consumers. The largest costs come from RO mutualisation, placing additional financial strain on energy suppliers, and resulting in higher costs for consumers.
Citizens Advice agrees with the government’s proposals to link the mutualisation threshold to the cost of the scheme. As BEIS acknowledges in the consultation, current arrangements place too much risk on suppliers relative to generators. The proposed threshold would only place a risk on 1% of the generators’ revenue, while reducing the risk to suppliers and of increased costs to consumers. If the currently proposed threshold had been applied in recent years, £84.8m (about half the RO costs socialised across 2017-20) would have been saved for consumers.
We also agree with the approach set out in BEIS’ call for evidence that only the amount in excess of the threshold should be mutualised. this would be a fairer approach, and would align with the policy intent of the threshold by better balancing risk between suppliers and generators. The existing policy of mutualising all costs among suppliers once the threshold is met has the perverse effect of presenting generators with a risk of either 1% of revenue, if the short fall is slightly less than that, or 0% of revenue if the shortfall slightly surpasses the threshold. Ensuring that generators always hold the first percentage of revenue risked would ensure fairer outcomes and a reduction in the risk held by consumers.
While the consultation and call for evidence aim to restore the balance of risks borne by suppliers and generators, we believe government should also act to restore the balance of risk between suppliers who set aside money/pay their RO and suppliers who don’t. We have previously called [ 2.4 mb] for government to amend legislation to require the bills for the Renewables Obligation to be paid more frequently. Citizens Advice have said that more regular supplier payments, as is the case in other schemes, would be the best way of reducing overall risk, rather than shifting risk from suppliers to generators. Requiring more frequent payments, in addition to Ofgem’s principles based rules around financial responsibility and BEIS’ proposed changes to the RO mutualisation threshold, remains a better approach.