Given the current economic circumstances and the exceptional energy prices being incurred by
consumers, all parties to the DCUSA should be looking to remove or reduce obligations which increase costs for Suppliers but not realise any real equivalent benefit for consumers.
The obligation on Suppliers to provide adequate credit cover is there to ultimately protect consumers.
Following a supply business failure, any outstanding charges and relevant costs consented by the
Authority are spread across all the other suppliers, which may then be passed on to consumers through customer tariff charges. Consented claims for SoLR costs are notified to DNOs for inclusion and recovery through network charges. The DNOs make payments to Suppliers for notified amounts of their consented SoLR claims. Therefore, for SoLR Suppliers, there is an exchange of funds between the parties for the SoLR-related amounts.
Currently when calculating the Value at Risk for Suppliers any payments which may be due to
Suppliers in the coming months are not included in the calculation. This means Suppliers may be
required to put in place a higher level of credit cover, at additional cost, for no real benefit to
consumers. In the event of a Supplier failure it is likely that any debts owing to the distributors would be netted off against any credits owed to the Supplier in relation to Last Resort payments. It would seem reasonable therefore to take into account Last Resort Supplier Payments when calculating Suppliers’ Value at Risk.
With regard to the materiality of this issue, as a rule of thumb we estimate the costs of putting credit cover in place via Letters of Credit to be between 0.5% and 2% of the value of additional credit. Between September and November 2021 Ofgem approved £1.8 billion of claims from Suppliers who had taken on board customers from failed Suppliers through the SoLR process. If the whole of this value was subject to additional credit being put in place, an additional cost of between £9m and £36m would be incurred inefficiently. This is split across both gas and electricity consumers, with the majority falling on electricity as the sector liable for the larger proportion of total SoLR claims.
