“Marty, whatever happens, don’t ever go to 2021.” Dr Emmett Brown (Doc)
2021 may not be a year many of us in the energy industry would choose to travel back to. However, the events of last year, including rocketing wholesale prices, numerous supplier exits, several appointed Suppliers of Last Resort (SoLR) and Bulb’s entry into Special Administration will likely continue to shape the future of retail energy markets into 2022 and beyond.
SOLRs, LRSPs & Third-Party Financing
BEIS 2020s Retail Energy Market Strategy
Ofgem’s market resilience measures
Smart Meter Policy update
Green Gas Levy update
Faster switching update
2021 saw a total of 27 supplier cease trading and subsequently enter the SoLR process, meaning more suppliers entered this process in 2021 than the last 10 years combined, effecting over 2.5 million domestic customers and around 60,000 non-domestics.
In recognition of the volumes of customers taken on by the remaining suppliers, and the rise in the cost of wholesale energy, especially in the final quarter of 2021, Ofgem decided to temporarily change the process for Last Resort Supply Payments (LRSP). This allowed any SoLR appointed between 1st September and 1st December to submit an expediated initial claim for the immediate additional costs incurred in supplying SoLR customers, including the costs of purchasing energy, and a second claim to ‘true up’ any later costs, including any credit balances not recovered from the administrator. Relevant initial claims submitted to Ofgem by 6th December were reviewed and subsequently approved by 22nd December, a process which usually takes between three to six months.
The value of initial claims approved totaled more than £1.8bn across both gas and power and will be recovered from suppliers by the Distribution Networks via their 2022/23 use of system charges which come into effect on 1st April 2022. The use of system charges passed to suppliers by Distribution Networks will be based on the market sector in which costs originated, and levied on a volumetric basis. This means non domestics avoid picking up the bill for exclusively domestic consumer protections such as ringfenced credit balances and the retail energy price cap. While this fairer apportionment of costs has previously been the norm in the electricity market, it is a newconcept for Gas Distribution Networks (GDNs), following Ofgem’s decision on Urgent UNC modification 0797 on 20th January 2022.
The expediated nature of these initial claims mean relevant suppliers can begin receiving LRSP in May 2022, a year earlier than would have been possible under standard arrangements. In recognition of the enormity of the £1.837bn that stands to be recovered in 2022/23, Ofgem published a consultation into Third Party Financing of the LRSP on 30th January 2021. It is proposed that a Third-Party financier could be allowed to buy the rights to any LRSP upfront, providing the relevant supplier with the monies to cover their SoLR costs, while allowing transporters to spread their recovery charges over a longer time period, on the understanding that it will pay these recovered sums to the Third-Party Financier, covering their upfront payment plus interest. While costs to consumers may be higher in absolute terms due to the interest and other fees required by a third party, Ofgem see that there could be value in consumers meeting these costs over a longer time period. While a decision to this consultation is still outstanding, networks published their final charging statements on 31st of January in line with the standard timetable.
On 21st December 2021, following a turbulent few months in the retail energy market, BEIS announced that they would be going back in time to revisit their Energy Retail Strategy for the 2020s, first published on 23rd June 2021. The strategy had previously set out the government’s high-level visions and priorities for future regulatory development alongside an indicative timeline of programmed policy roll outs. While the immediate work programs, including Faster Switching, look set to go ahead as planned, the government did announce it will be temporarily pausing any further development of proposed opt-in/opt-out switching arrangements that had been scheduled for implementation in 2024.
In terms of the enduring mission statement, Energy Minister Kwasi Kwarteng confirmed that the government believe their high-level vision “remains the right one” but the “need to take account of the lessons learned from recent months” was recognised. The government did stand by their response to market volatility thus far, stating that three core principles have consistently guided the government’s response:
1. The customer should be protected
2. The government will not bail out failed companies with poor business models
3. The market must not return to the cozy oligopoly of the past
However, the call for evidence itself, which closed to responses on the 16th January 2022, was notably open it its wording, inviting stakeholder views on how future government policy can best ensure that:
• customers are protected and paying a fair price, no matter how they engage
• energy companies are investing in the transition to Net Zero
• regulatory frameworks and price signals are structured to enable low cost, flexible and resilient energy systems
On 15th January 2022 Ofgem announced “a raft of new measures to boost financial resilience in the energy sector”. There were over 110 pages of documentation to work through, including Consultations, Calls for Input, Open Letters, Decision Documents and Licence Modification Proposals that we have summarised in the table below. While these measures are focused on the domestic retail market, Ofgem indicated that they intend to engage with the non-domestic market. All relevant consultations have now closed and the industry awaits a final response from the regulator, sure to be ripe pickings for next quarter’s newsletter!
The immediate focus of our work is on domestic supply. We recognise there is a need to ensure financial resilience for non-domestic supply, and many of the proposed actions may apply to non-domestic suppliers… We will consider in the new year the best approach to engagement with nondomestic suppliers. – Extract from Ofgem Action Plan
Saturday 1st January 2022 ironically marked the first day of the ‘Post-2020 Smart Meter Policy Framework’, after numerous covid-related pushbacks and the ultimate 12 month extension of the previous ‘All Reasonable Steps’ framework. The new scheme aims to deliver on the government’s ambition to ensure that all homes and business have a Smart Metering System installed by mid-2025 by placing legally binding minimum annual installation targets on all licensed gas and electricity suppliers, subject to an annual tolerance.
To read more about Crown Gas & Powers contribution to the roll-out, the purported benefits of SMART/AMR devices, the difference between SMETs1/SMETS2/AMR, what to expect from the installation process or to register your interest in getting a Smart Metering System, please visit the dedicated page on our website: www.crowngas.co.uk/smart-amr-metering-for-your-business
The Green Gas Support Scheme (GGSS) and associated Green Gas Levy (GGL), officially launched on 30th November 2021. While the policy is set by BEIS, the scheme will be administered by Ofgem, with the launch of a digital scheme portal expected imminently.
This environmental scheme provides financial incentives for new anaerobic digestion biomethane plants to increase the proportion of bio-gas in the gas grid. The GGSS is open for applicants for four years from 30th November 2021 and successful registered participants can expect to receive quarterly payments over a period of 15 years based on the amount of eligible biomethane injected into the grid.
The GGL is the mechanism which will fund these payments, placing obligations on all licensed gas suppliers to make quarterly payments on a pence per meter point basis (with the intention to transition to a volumetric levy in 2024/25) for the next 19 years, unless they can prove that over 95% of their total consumption portfolio was entirely served by bio-gas in the previous quarter. Rates for the partial first year of the scheme and the subsequent second year were published by Ofgem on 29th November 2021, equating to 59p per meter in the first six months and rising to £2.10 per meter over the following year.
The first payment from suppliers will be made on 16th May 2022, with sufficient credit cover lodged in advance, as per the scheme schedule published by Ofgem on 21st January 2022. It is expected that Ofgem will use quarterly meter point data provided by the central service provider to calculate a supplier’s relevant contributions.
On 25th January 2022 the industry Switching Programme Delivery Group confirmed that the 18th July 2022 is the working date for bringing the faster and more reliable switching programme live. Under these new arrangements, a supplier will be obligated to complete a switch within five working days, if not before (unless the customer requests otherwise).
This obligation will later be reviewed by Ofgem with a view of reducing the timescale to two working days for non-domestic sites and one working day for domestic sites. The run up to go live will require suppliers to work current and new switching processes in line with specific transition milestones, which will include activities such as including holding back new switching designed for the new central switching service and observing a short market pause on go live whilst the CSS processes initial abnormal loads. The exact timelines for these transition milestones are being discussed at industry working groups and will be confirmed as part of the final GNOG decision on 30th May 2022.
The price cap which protects around 22 million domestic customers on default or variable rates or on credit meters is set to rise when the 8th price cap period commences on 1st of April of this year, running for six months until October 2022.
Relevant consumers can expect an annual increase of around £693, based on Typical Domestic Consumption Values (TDCV) for a dual fuel consumers (2,900 kWh of electricity, 12,000kWh of gas).
On 28th January the government introduced a new tax on profits made if a business which holds assets exceeding £100m, for the benefit of a public interest business (the supply of energy), undertakes an arrangement to release this valuable asset for the benefit of its shareholders, and as a result exacerbates the collapse of an energy supply business.
One such example given in the document was the early termination of significantly ‘in-the-money’ forward energy contracts directly resulting in the company’s insolvency.
On 17th January 2022, Ofgem published its proposed Forward Work Programme for 2022/23. This closes for comment on 28th of February 2022 and feedback will be considered in the publication of Ofgem’s 2022/23 Strategic Work Programme due for publication in March 2022. For a full view of the proposed plan please see www.ofgem.gov.uk/publications/202223-forward-work-programme-consultation.
This BEIS consultation focused on the potential introduction of a mechanism to support the development of heat pumps and increase the number of installations. While the leading proposal is to place obligations in the heating appliance market, there is an alternative proposal for placing obligations in the energy supply market mandating a minimum number of low-carbon heat installations supported through suppliers actively promoting new products and services to low carbon heating.
The consultation closed to responses on 12th of January 2022 and the government is currently studying the feedback.
With Ofgem and Citizens Advice officially appointed as the regulator and advice service for heat networks, the government is consulting on how these ongoing costs of this activity should be recovered.
The preferred option is to smear these costs across the small heat network market and larger existing gas and electricity supply markets, adding an estimated £0.10 per year to energy customers’ bills per year.
What do you want to see in the next issue?
If there is a particular topic or feature that you would like to see in the next newsletter then let us know by contacting your Account Manager or emailing the Crown Gas & Power Regulations Team directly at: email@example.com.
As usual, we welcome your views and appreciate all the positive feedback that we have received to date.
Information provided as of 03/02/2022. The information provided in this newsletter is intended to be a general guide and should not be taken to be legal and/or regulatory advice. At no time will Crown Gas & Power actually be or deemed to be providing advice and no actions taken by Crown Gas & Power shall constitute advice to take any particular action or non-action. Whilst every effort is made to provide accurate and complete information in this newsletter, Crown Gas & Power makes no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of the newsletters and expressly disclaims liability for errors and omissions in the contents of this newsletter.