Finance

Ofgem opens the door for third party finance providers to participate in the Supplier of Last Resort process | White & Case LLP

The week between Christmas and New Year’s is not, traditionally, considered a time when Ofgem pushes for consultations about licensing modifications. However, on December 30, 2021, such a consultation appeared. Perhaps, given the past year, one should not have been surprised that it relates to the payment claims of another resort supplier (“SOLR”).

The energy sector came under “extreme stress” during the second half of 2021, due to ongoing price volatility. Supplier failures reached record levels (with more likely) and nearly 30 suppliers went out of business in 2021. All but one of these failures resulted in Ofgem running the SOLR process, whereby customers of the failed supplier are transferred to another supplier (SOLR) Thus, ensuring continuity of supply.

SOLR is allowed to claim some of the additional costs it incurs in bearing the customers of the failed supplier. These costs are distributed to all energy consumers and are recovered via grid fees payable by all suppliers using the electricity and gas networks (known as “theSOLR LeviDue to the number of recent supplier failures, these network fees for the 2022/2023 fiscal year will increase significantly, due to SOLR taxes.

The process by which a SLRC claim to payment is approved, and ultimately paid, can be lengthy, sometimes extending to several years. Ofgem has already moved to speed up the process, but even with a faster process, there is still significant potential financial exposure to be involved in becoming a SOLR. So Ofgem has been looking at expanding the ways suppliers can access the funding needed to become the Solar Corporation. Ofgem hopes that allowing third-party financing can mitigate the impact of impending increases in SOLR Levy payments on consumer bills by spreading costs over a longer period, as well as increasing competition by enabling more suppliers to participate in SOLR operations.

Ofgem said in its December 30 advisory that it was “examining the feasibility” of several proposals to “reduce the financial impact on clients…potentially severe” [energy price] Increases in April 2022.” These proposals are supposed to include third party financing for business-based enterprises. One proposal, in particular, is described in some detail and can be summarized as a purchase by a third party of SOLR rights in future SOLR payments, with subsequent SOLR payments to be paid directly to this third party by the relevant network licensee rather than SOLR. This proposal has apparently been discussed in some detail, and there is a statement that a potential funding provider believes that it will be possible to implement such an arrangement by the end of January 2022.

Ofgem is keen to point out that this is not the only possible option for external funding, and asserts that any future arrangement (whether or not following the model described) will always need to satisfy Ofgem that clients’ interests are protected (protecting clients’ interests is Ofgem’s raison d’être).

This leads to the conclusion that although the advisory itself is about a fairly narrow adjustment of supplier licensing terms and network operations, Ofgem appears to say it is open to suggestions on how third parties can support the SOLR process. (The license amendments introduced the concept of an ‘LRSP approved beneficiary’ for whom SOLR payments may be made. This concept includes the requirement of Ofgem agreeing to Assigned to LRSP. It is clear from the consultation document that this approval will cover all aspects of any proposed third party financing arrangement.)

Timing is an interesting aspect. License modifications, which Ofgem believes are required to allow payments to be made to unauthorized persons, if made, will follow the standard time frame for license modifications, meaning they will not become effective until 56 days after Ofgem has published its decision to make those modifications. Consultations end on January 27, 2022 and Ofgem must consider responses before making its decision. It is not clear how this timetable fits with the statement that Ofgem wants adjustments in place in January so that the proposed sale/payment of a third party arrangement can also be placed in January. (The urgency arises because Ofgem should revise maximum retail prices (“RPC‘) in February, to take effect in April. RPC takes into account network fees, which include SOLR Levy payments, so if they can be reduced or deferred, this may help keep RPC idle.)

The consultation document is something of a hybrid, covering a relatively “dry” change to the administrative provisions of the standard licensing terms and a more digressive exploration of potential financing options for future SOLR standards. However, it appears to open up the possibility of new funding structures to support the SOLR process, and a willingness on the part of Ofgem to engage in discussions on this topic.

Consultations end on January 27, 2022 and Ofgem is seeking responses from all parties involved, in particular the funders.

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