Draft Renewables Obligation (Amendment) Order 2021

Alan Whitehead Excerpts

Tuesday 9th March 2021 General Committees

[Dr Alan Whitehead (Southampton, Test) (Lab)]

The SI is, frankly, three years too late. It could be described as more of a disaster relief fund arrangement than anything else because there is a significant alternative history behind the measure in terms of the changes to mutualisation and the ROCs market.

The explanatory notes that were kindly sent out with the SI state:

“The mutualisation threshold has failed to keep pace with the growth in the scheme. When the threshold was introduced in 2005, it was equivalent to about 1% of the cost of the scheme.”

The Minister mentioned that when the scheme was first introduced in 2005 it was equivalent to 1% of the cost of the scheme, but that now it is equivalent to about 0.25%. All that is true, but those figures conceal an alarming story.

When the threshold was first introduced, it was never considered that it would be breached; it was regarded as a very, very long backstop for RO payments and repayments. The Minister has set out how the RO works, and how it distributes fund back to suppliers after putting money in the fund in the first place. Until about 2015, the issue of shortfalls was pretty much an academic issue and the mutualisation levels had not been breached. There were occasions on which generators received a slight shortfall on what they might have received, but that was nothing serious in terms of what they expected to receive as their reward for creating renewables obligation certificates in the first place which were then presented by a supplier for a scheme to proceed. I am not sure that we need to debate the complications of the renewables obligation scheme, but it is quite complicated in terms of how it works.

The point we ought to focus on is the period 2015 to 2016, when new licence arrangements were put in place by Government for entrants to the electricity supply markets. Those arrangements have been described thus:

“Energy suppliers could get a licence with little or no capital and no relevant industry experience.”

Licences were literally given away to people who turned up and said that they would like to set up an electricity supply company. That meant an explosion of supplier companies. Indeed, by the end of 2017, there were 73 supplier companies in the market—an increase from just 32 in December 2015. In the course of two years, the number of supplier companies in the market doubled. It was fairly inevitable that because of the lax licensing procedure arrangements, a number of those companies then proceeded to go bust—22 companies have gone bust in the last three years or so. Just this year, two further companies covering some 400,000 customers have gone bust. A total of 1.8 million customers have switched their accounts, not because they wanted to but because they had to. The supplier of last resort—another interestingly complicated device—has come in and customers have been transferred to companies that have not gone bust.

Over the past three years, supplier companies that have done their job properly, have ensured their customers are properly protected and, most importantly, paid their renewables obligation requirements have, quite naturally and not surprisingly, increasingly voiced their concerns. They have observed that companies were coming into the market, undercutting those companies that had acted responsibly, and hoovering up customers but then were unable to sustain the momentum of those efforts and were going bust. The people who paid the money were those energy supply companies that actually did their job properly. That was an extremely unjust outcome and one should have great sympathy for those suppliers that found themselves in that situation having done their job properly. For that reason I am in complete agreement with the thrust of the motion, but the problem has not just arisen. In the last three years, there has been an exceptional new development; not only has the mutualisation threshold of £15.4 million, which the Minister mentioned, been breached but it has been breached at an astonishing level. There was a short- fall of £53.4 million in 2018; £88 million in 2019; and £31.4 million in 2020. Those sums are way over the theoretical and academic mutualisation threshold originally set in 2005.

Of course, something has to be done about it. The measure will ensure that the mutualisation threshold increases substantially, as the Minister has mentioned. That does mean that generators will bear some of the results of any shortfall and suppliers to a much lesser extent. The level of mutualisation means that, probably, it will not be breached in the near future but, as we can see from the figures, even that new level was breached in two of the past three years.

I hope the Minister will acknowledge that what I have recounted is not just an alternative history, but, substantially, the history behind this particular SI. It is a measure to retrieve the disastrous situation that the Government have got themselves into by allowing the market to go in a wild west way, underpinned by the changes to the licensing arrangements in 2015 to 2016.

The Opposition will certainly not oppose this measure today, because it is the right thing to do given the situation we now find ourselves in, but I would like the Minister to reflect for a moment on the history of how we got here and to indicate to the Committee whether she has confidence that the new thresholds in place will take us back to that semi-academic position of theoretical mutualisation arrangements—mutualisation arrangements that would not be breached. I must say, however, that the signals that came out at the beginning of this year were not good: 400,000 further customers forcibly switching and confidence going down.

As we all know, last year Ofgem introduced tougher entry tests for energy suppliers, and I would be grateful were the Minister to reflect briefly on whether she thinks those new tougher tests will substantially ameliorate the problem that we saw between 2018 and 2020. If those tougher tests do not work and we have continuing large-scale failure of companies, as we have seen in the past three years, this measure will simply not work.

I hope that the Minister will give us a brief thought on what confidence she has that the measure will work and that the number of failures we have seen in recent years will be reduced. Will the market return to some semblance of balance in the relationship between what generators have to bear—insofar as far as shortfalls in ROs are concerned—and what suppliers have to bear in mutualisation?

For the past three years, in effect, every September a stern note has been put out by Ofgem to say, “The following companies are on notice because they have not paid their ROs by now.” Indeed, we got to the point where, regularly, that was the canary in the coalmine, when energy companies started to signal, “We’re in trouble.” Some got out of that by paying their ROs and coming to arrangements with Ofgem, but for others—regrettably in very large numbers of cases—that notice was followed shortly by the company going bust and abdicating its responsibility for the RO payments.

That has been happening for three years now. I would have thought that the Government might have spotted that and taken action to deal with the issue rather earlier. I therefore welcome the change—although it is really two years too late and a lot of damage has been done in the process—but it is incumbent on the Minister to assure us that she thinks that the measures in the draft order will really work and will put us into a new era for RO payments, restoring that balance between the concerns of the suppliers, customers and generators, which has been given as the purpose of this SI. We want to get back to a stable environment in which all such concerns are properly met.