Spark Energy enters merger talks after missing £14.4m in RO payments

Spark Energy has entered merger negotiations with another energy supplier after missing £14.4 million in Renewables Obligation payments.

The company blamed rising wholesale costs and the government’s decision to introduce a price cap on energy bills for its failure to meet the 31 October deadline for late payments.

The firm said in a statement: “Due to its strong growth, Spark is eligible for annual Renewables Obligation Certificates (ROC) payments, and despite having met all its payments in previous years, this year it missed its annual payment which was due by 31 October – in common with an unprecedented number of other suppliers.

“The payment has been deferred pending further discussions with Ofgem.”

Spark Energy chief executive Chris Gauld described recent events in the retail sector as “enormously frustrating”.

“There is little doubt that these are difficult times in the industry,” he remarked. “You only have to open the newspapers to see coverage of how the price cap and wholesale costs are impacting suppliers, big and small, across the country.

“We’ve built up a strong, growing energy business over the past 11 years. However, the UK government’s announcement in September that it was capping domestic energy bills at £1,137 a year based on a typical dual fuel customer has caused chaos in the industry.”

Gauld continued: “In recent weeks, we have been in discussions with a number of other energy companies who are in the same boat.

“As a result, we are now in merger negotiations with another, medium-sized UK energy supplier and both of us believe this offers a long-term solution which would create a sustainable business of scale.

“However, we are taking nothing for granted.”

The RO scheme requires suppliers to buy a certain percentage of the power they sell to customers from renewable sources. Accredited generators receive a set number of ROCs for each megawatt hour they produce. They can then sell these certificates to suppliers.

Suppliers must present enough ROCs to Ofgem each year to demonstrate they have met their yearly obligation and make up any difference with buyout payments. These payments are first used to cover the administration costs of the scheme, with the rest being returned to suppliers in proportion to the number of ROCs they submitted to Ofgem.

Last month, Ofgem revealed that 34 suppliers had missed the 1 September deadline for meeting their yearly obligations and collectively owed nearly £103 million in buyout payments. They were given until 31 October to make late payments.

Industry sources have previously told Utility Week the unpaid bill following the final deadline was at least £50 million and possibly as much as £70 million.

Mutualisation

If the outstanding payments exceed a certain threshold known as the relevant shortfall, a so-called ‘mutualisation’ process is activated. The relevant shortfall is £15.4 million for England and Wales and £1.54 million for Scotland.

On Tuesday, Ofgem announced that the procedure will be triggered but said the amount still owed would not be confirmed until the completion of an audit.

The process is intended to punish suppliers that failed to meet their obligation and reward those that met more of their obligation using ROCs.

The missing money is recovered from all operational suppliers, which pay into a mutualisation fund according to the size of their obligation as a share of the total. The proceeds are later returned to suppliers in proportion to the number of ROCs they presented to Ofgem. Those that failed to meet their obligation in full do not receive anything.

The money is collected and redistributed in four quarterly instalments. Suppliers will have to make the first payment into the fund by 1 September 2019 and will receive the first payment back by 1 November 2019.

Ian Barker, managing partner of BFY Consulting, said the failures of the suppliers Iresa, Usio, ePhase and Gen4U will have together contributed around £10 million to the shortfall.

“With Spark announcing this morning that they haven’t been able to meet their ROCs payment of £14.4 million, this brings the confirmed running total of the mutualisation shortfall to around £25 million,” he added.

“Three quarters of this impact will be borne by big six energy suppliers. Our modelling suggests that the confirmed shortfall as at 31 October will be more than £50 million and could be £70 million or higher.”

Spark Energy works with letting and estate agents, large social landlords and property managers to supply energy to their tenants.

The company has almost 500,000 customer accounts and reported pre-tax profits of £4.3 million on revenues of £159 million for its 2016/17 financial year.