The shortfall results from the demise of two suppliers (as retailers are known in the UK), TXU UK and Maverick Energy, which then failed to comply with their obligations to include a mandated volume of green electricity in their supply portfolios, or pay a penalty. Under the Renewables Obligation (RO), retailers demonstrate their compliance with the legislation by redeeming ROCs, or paying a penalty to "buy-out" of their obligation. Money in this buy-out fund is recycled back to suppliers in proportion to their compliance with the obligation; full compliance means no penalty.
The biggest deficit in the buy-out fund was caused by TXU's failure to meet its obligation -- calculated to be some £23 million. Maverick owes around £500,000. The TXU insolvency administrator, Ernst & Young, obtained approval from the High Court to make a part payment directly to suppliers who claim for losses as a result of TXU's failure to pay into the buy-out fund. This will take the form of an "advance dividend" estimated to be around £0.35-0.40 in the pound.
It is not only suppliers who have been stung by the shortfall. Some renewable generators who signed up to deals with suppliers based on a percentage of the recycle value will also be directly affected by the hole in the buy-out fund.
Energy minister Stephen Timms calls Ernst & Young's proposed part payment "a helpful first step" in limiting the adverse impact caused by TXU's failure to comply with its obligation. Timms says he wants to see confidence in the market restored and will consult industry on proposals to minimise the effects of any future shortfalls in the ROCs market. The basis of government's approach, however, "will be that the industry bears the risk of any electricity suppliers going into administration."
That risk is now being factored into prices for ROCs, reports Fiona Santokie from ROCs brokers NatSource Tullett Europe. Before the TXU debacle, most ROC trades were executed at flat prices per certificate as buyers were willing to shoulder more of the risk of the buy-out recycle value. Now, however, buyers are more interested in structured deals for ROCs, she explains. This generally involves a payment consisting of the £30.51 buy-out for each MWh not supplied, plus a given percentage of the recycle value when this is paid out by the government -- for the current obligation period this will be late 2004.
Santokie warns that this trend towards percentage sharing is being reflected in long term bundled transactions and could inhibit growth in renewables -- particularly offshore wind. "Because buyers are less willing to shoulder the risk of the recycle value, guaranteed floor prices within bundled deals will be lower, therefore renewable technologies with higher costs per megawatt hour such as offshore wind will find it harder to obtain financing," she says.