Ofgem approves third-party financing for SoLR costs

Ofgem has approved license modifications which will allow the costs of Last Resort Supply Payments (LRSPs) to be financed by third parties and spread out over a longer period.

The plans were initially announced in a consultation published at the end of 2021 in which Ofgem explored ways to reduce the impact of multiple LRSPs on energy bills following last year’s numerous supplier failures.

LRSPs allow companies to recoup otherwise unrecoverable costs incurred by becoming a supplier of last resort (SoLR), including wholesale energy costs for the customers they are absorbing.

Ofgem’s proposals would see SoLRs sell their rights to the payments to third-party financiers. This would enable the suppliers to receive the money faster but allow the costs of the payments, which are made by distribution networks and recovered through their charges, to be spread out over a longer period.

As part of its announcement of the new price cap level from April, Ofgem revealed in February it was shelving the plans given the £9.1 billion support package for consumers unveiled by the government, which includes a repayable £200 rebate on electricity bills in October.

However, the regulator’s director of analysis and assurance Simon Wilde wrote in a decision letter last week: “We have now concluded that the longer term facilitation of new forms of financing of LRSPs remains – in principle – in consumer interests and have therefore decided to proceed with the licence modifications, building on the work we did with licensees and the 3rd party to refine our initial proposals.

“We consider it important to do so in order to increase market liquidity, all the more so as volatility is continuing and may increase as a result of geopolitical events.”

The letter said particular requests for reassignment of payments will still be subject to approval by the regulator: “The authority would consider all relevant circumstances of any proposal for this purpose and would expect to be provided with comprehensive information by the supplier and any other parties to the transaction in order to make that assessment.”

Ofgem said it would consider things like fees, interest rates, terms and benefit sharing mechanisms when deciding whether approving a request is in the interests of consumers.

Last year, the regulator consented to allow nine energy retailers to claim back more than £1.8 billion in expedited LRSPs.

At more than £680 million in total, Octopus Energy’s claims for costs incurred when it took on the 580,000 customers of Avro Energy are the largest by far. To date, Avro is the biggest company to have exited the market via the SoLR process.