Renewable Energy: Changes to the Renewables Obligation (Scotland) Order 2010: Statutory Consultation

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Section 8: Mutualisation

Summary

  • There is currently no provision in the ROS to link the mutualisation trigger to the size of the Obligation set by headroom. Mutualisation trigger figures are currently linked to the fixed targets set out in the ROS legislation.
  • We are seeking views on whether there is a need to change the mutualisation triggers in the ROS to reflect the size of the Obligation as set by headroom. We are also seeking views on whether it is necessary to change the cap on the size of the mutualisation fund.
  • If we change the level of the mutualisation trigger or the size of the cap we need to decide how to implement those changes.

Issue

8.1 Mutualisation provisions were introduced into the UK Obligations in 2005 to protect the value of ROCs where a significant shortfall in the buyout fund arises because of a supplier insolvency. Mutualisation is triggered if there is a shortfall of more than £100,000 per percentage point of the size of the Obligation, in line with the fixed targets set out to 2016. For the Obligation period ending March 2011 the trigger is therefore set at £1.04m in Scotland, rising annually to £1.54m for the Obligation period ending March 2016 and capped thereafter. This is set at 10% of the equivalent trigger levels in the RO covering England and Wales.

8.2 There is currently no mechanism within the ROS to link the level of the mutualisation trigger to the size of the Obligation as we move away from a system of fixed targets. We are seeking views as to whether the trigger needs to be adjusted to reflect the size of the Obligation as set by the headroom mechanism that was introduced in 2009.

8.3 The mutualisation cap for 2010/11 in Scotland, as announced by Ofgem on 4/2/10, is £22,280,533.33, after which it will rise (or fall) annually in line with inflation. We are also seeking views on whether it is necessary to change the cap on the size of the mutualisation fund.

Background

8.4 The concept of mutualisation was introduced into the Obligations in 2005 following several licensed suppliers being unable to meet their obligations in 2003, which led to a shortfall across the buyout funds of £23m and affected investor confidence in the UK renewables market.

8.5 Mutualisation is intended to maintain investor confidence in the value of ROCs by protecting the value of the buyout fund and therefore the premium attached to the ROC when the buyout fund is recycled.

8.6 The mutualisation process is triggered only when a supplier insolvency results in a large enough shortfall in the buyout fund (calculated by Ofgem) which is equivalent to or larger than the trigger. Ofgem will notify the other suppliers of the shortfall and requests that suppliers make a payment to the buyout fund proportionate to their share of the Obligation. The buyout fund is then re-distributed in the usual way to suppliers in line with the proportion of ROCs they presented. The payments are staggered quarterly and recycled immediately to minimise the burden on consumers and suppliers. A cap exists on the size of the shortfall that can be recovered, to protect against the fund causing smaller suppliers to go into insolvency.

Headroom

8.7 In 2009 a headroom mechanism was introduced to work in parallel with existing fixed targets out to 2015/16 in the ROS, to set the size of the Obligation. Headroom is designed to ensure that there is always a positive gap of on average 10% between generation and the size of the Obligation. This protects investor confidence by ensuring there is always a market for ROCs and also helps protect consumers by guarding against an inflated ROC price (because of too few ROCs in the market) if deployment falls behind expected levels.

8.8 The introduction of the headroom mechanism to determine the size of the Obligation is expected to impact the value of the buyout fund as the gap between generation and the size of the Obligation closes. We expect that although the amount paid into the buyout fund will increase as the Obligation gets bigger, the recycle payment per ROC to each supplier will decrease.

8.9 Currently the size of the mutualisation trigger corresponds to £100,000 for every percentage point of the ROS. As headroom begins to set the level of the Obligation, the link between the size of the Obligation and the size of the mutualisation trigger is increasingly eroded as the size of the Obligation set by headroom is increasingly greater than would have been set by fixed targets in the ROS. This means that the size of the Obligation as set by headroom will no longer be reflected in the size of the mutualisation trigger.

Options

8.10 We would welcome views on whether the mutualisation triggers and cap (as set out in the ROS Order 2009) should be reviewed. There are a few options for how this could be approached.

8.11 For the trigger, we could:

  • leave the mutualisation trigger in line with fixed targets up to 20/15/16 then capped at £1.54 million out to 2037. However, the move to headroom will mean that the size of the trigger will no longer be proportionate to the size of the obligation.
  • link the level of the trigger to the size of the Obligation set by headroom. Although this would mean that the trigger could increase to £3 million as we approach 2020.
  • choose a new trajectory or level for the trigger.

8.12 We also welcome views on whether there is a need to change the cap on mutualisation payments. We are also interested in consultees' views in order to inform our thinking on what level of trigger is most appropriate, how it should be set, and whether the cap on the fund should be adjusted. Finally, we would like to gain a better understanding of the implications of adjusting the mutualisation trigger and cap levels for different sized suppliers and other stakeholders.

8.13 This initial call for evidence therefore seeks views on a number of issues, with a view to implementing any changes from April 2012. We will consult further on any changes prior to implementation.

Questions

  • Is there a need to change the mutualisation cap and trigger for the period
    • up to 2015/16
    • after 2016/17?
  • If you think the mutualisation trigger should be changed at what level should it be set and what calculation process should be used? Please give your reasoning.
  • Should mutualisation payments be capped (and adjusted as they are now in line with inflation) and if so at what level and why?
  • Could smaller suppliers be disproportionately affected by significant increases in mutualisation fund payments? If so, what level of increase would give rise to such concerns?