Ofgem consults on true-up process for SoLR levy

Ofgem has issued a consultation on the true-up process for companies claiming back unrecoverable wholesale costs incurred by becoming a Supplier of Last Resort (SoLR).

The consultation comes after the regulator introduced a temporary process in December to expedite the assessment of initial claims following dozens of supplier failures over the preceding months.

At the time, Ofgem said it would limit the recovery of wholesale costs to energy delivered by the end of March 2022, or within a 6-month window of an SoLR appointment, whichever was earlier. However, the regulator said it would reconsider this limit ahead of the submission on true up claims in autumn 2022.

Shortly afterwards, Ofgem revealed it had approved £1.8 billion of initial Last Resort Supply Payment claims from nine suppliers.

In its consultation, the regulator said it initially considered four options for which wholesale costs will be recoverable:

• Limit recovery to the cost of energy delivered within six months of an SoLR appointed
• Limit recovery to the cost of energy delivered within six months of an SoLR appointed, or by the end of March 2022, whichever is later
• Limit recovery to the cost of energy procured within six months of an SoLR being appointed and which will be delivered by the end of September 2022
• Limit recovery to the cost of energy that will be delivered by the end of September 2022

Ofgem said its minded-to position is to implement option two on the grounds that this would provide the “best balance” between avoiding the risks of overcompensating suppliers and disincentivising them from acting as SoLRs in future.

It estimated the cost of claims at around £139 million, equating to an increase in average household energy bills of £4.90 in 2023/24.

For comparison, Ofgem estimated the cost of its second preference – option one – at £88 million, equating to average bill increase of £3.10.

With regards to claims for financing costs, Ofgem said it is clarifying its expectations of the standards of evidence SoLRs must provide. Supplier will be asked to provide confirmation from a company director that is has fully considered the commercial options available and chosen the one that is the best value for money for consumers.

Ofgem said its minded-to position is that SoLRs should be able to recover the credit balances of prepayment meter (PPM) customers they take on, but noted that they are unable access accurate data on the credit balances of traditional meters.  It is therefore consulting on a proposed methodology for estimating their value, whereby the average credit balance of their existing smart meter PPM customer would be used as a proxy.

To reduce the risk of overpayment and lessen the short-term on energy bills, Ofgem said it intends to end the temporary accelerated claims process as soon as possible after winter 2022/23.

The deadline for responses to its consultation is 4 August.