Faster SoLR payments will prevent customers being ‘orphaned’

S&P has welcomed Ofgem’s proposals to expedite payments to companies claiming back costs incurred by acting as a supplier of last resort (SoLR).

The ratings agency said the move will help to avert the growing risk of customers being left without a supplier.

In a letter to the industry published last week, Ofgem chief executive Jonathan Brearley outlined a series of measures being undertaken by the regulator in response to the current market turmoil, which additionally include a review of the methodology for setting the price cap and a pause on all new supply licence applications for six months.

Ofgem also published a letter from its retail director, Neil Lawrence, giving more details on its plans to temporarily speed up Last Resort Supply Payment claims by SoLRs.

The regulator confirmed that although it has historically been used to recoup customer credit balances, working capital and operational costs, the industry levy can also be utilised to claim back “otherwise unrecoverable wholesale costs”.

It said commodity costs are likely to account for a significant proportion of current claims and expressed gratitude for the “cooperation SoLRs have shown so far in committing to providing an appropriate audit trail”.

To date, Ofgem said the earliest SoLRs have begun receiving the payments, which are made by electricity and gas distribution networks, is 15 months after their appointment, with full repayment occurring around 12 to 15 months later.

It acknowledged that this is too slow in the current circumstances and said it will take steps to reduce the time it takes for suppliers to submit a claim and for the regulator to make a decision.

To enable this to happen, Ofgem proposed to consider more than one claim per SoLR, with suppliers submitting an initial claim focussed on wholesale costs that have already been incurred this winter, and then a “true up” claim that would cover further wholesale costs and other cost categories.

It said provided claims are made, decided upon and received by networks prior to the end of 2021, then the payments should commence from April 2022.

S&P said in a bulletin that the changes should reduce the risk of customers being “orphaned”.

Echoing recent comments by its analysts to Utility Week, the ratings agency said: “We believe, given the scale of the crisis, that liquidity would eventually have been a limiting factor for remaining players to take on more customers from exiting suppliers.

“While the companies taking on customers will eventually be compensated via an industry levy, the recompense will be received with a long lag,” it added.

“Ofgem’s intention to expedite payments for SoLR suppliers could therefore prevent liquidity constraints from creating a situation where customers could have been left without a supplier.”

S&P also welcomed Ofgem’s plans to review the methodology for setting the price cap on standard variable tariffs, saying although adjustments are unlikely to prevent any imminent failures, they should improve the resilience of the sector over the long run.

It noted that Ofgem intends to issue a decision on changes to the price cap methodology in February to enable the adjustments to be implemented for the next price cap period beginning in April: “This implies that suppliers will continue to absorb losses from the price differential between spot energy prices (to the extent they are unhedged) and the price cap through the winter.”