Largest policy cost on electricity bills under review

With energy costs so high currently, many businesses are keen to better understand the large number of non-commodity charges that add considerable cost to the invoiced price of electricity – and why some of these are so expensive.

The Renewables Obligation (RO)* in particular has come in for scrutiny, as this is the most expensive policy cost, adding around £26 onto the price of every megawatt of power businesses consume.

One of the factors behind rising RO costs is the ‘mutualisation’ process, where unpaid RO charges from failed suppliers get added on – or ‘mutualised’ – to the RO costs charged to other consumers.

Since July 2018, more than 50 suppliers servicing over six million customers have gone bust. The vast majority of these exited the market without paying their RO charges, which amounts to a shortfall of around £407.5 million.

These costs have added around £2.20/MWh onto existing RO charges.

Lobbying for changes

This is clearly not good news for consumers. That’s why we’ve been lobbying for changes to reduce the impact of mutualisation.

Are we getting anywhere? Yes – albeit very slowly…

In April, Ofgem published potential changes to the way RO payments are handled. This included adding a license condition for suppliers to protect the RO payments they receive from customers with a specified protection mechanism – such as an escrow account, letter of credit or third-party guarantee.

Suppliers have now been asked for input to these proposed changes, and Ofgem will then hold industry workshops before reaching a final decision later this year.

Reducing the likelihood of default

Also, on the table is introducing potential legislative requirements for suppliers to settle their RO more frequently to lower the amount that they can then default on.

But following mixed reactions to a recent consultation, Ofgem has discounted this – at least for now.

Suppliers have also put forward some options of their own, such as introducing a licence-based requirement for all suppliers to protect their accruing obligation against the risk of default, together with more frequent payments.

However, before reaching a decision, the Department of Business, Energy and Industrial Strategy (BEIS) – which oversees Ofgem – says it needs more time to consider the wide range of complex issues affecting the market currently.

It therefore plans to come back later this year and ask Ofgem to gather more evidence to support RO policy planning.

Reducing consumer liability

However, some short-term interventions to reduce the impact of RO mutualisation have already been introduced, namely:

• Changing the mutualisation threshold from a fixed level (£15.4 million) to 1% of the RO scheme cost (this is £65.8 million for 2022/23).
• Introducing a new Financial Responsibility Principle into supplier licenses to make sure that they are managing their finances effectively, including actively managing the risk of leaving costs to be mutualised in the event of supplier failure.

Longer-term, BEIS and Ofgem are also considering ways to address RO price volatility, as the subsidy period for some large generators starts to come to an end from 2027.

Reducing electricity costs

In addition, BEIS is also looking at ways to reduce electricity costs overall, possibly by shifting or rebalancing green levies away from electricity bills and potentially sharing them more equally with gas bills.

While there is no specific date, the aim is to achieve this by 2030.

If you’re keen to better understand other policy-related charges – such as the Feed in Tariff, Climate Change Levy and Green Gas Levy – as well as the various network-related costs that appear on your energy invoices, you can download our latest Energy Made Simple guides to non-commodity charges here.

*Since 2002, the Renewables Obligation has paid subsidies to the first generation of large-scale renewable generation, on top of the wholesale price they receive for every megawatt of energy they sell to market.