The UK’s industry regulator Ofgem confirmed its decision to allow energy suppliers to defer network payments in light of the on-going COVID-19 pandemic. The new scheme, amounting to £350 million, will support energy providers that are yet to have their investment-grade credit rating.
As rolled out by Ofgem, this new mechanism is created as a collaborative effort of energy network companies via the Energy Networks Association (ENA).
Struggling energy suppliers in this time of crisis can now choose deferral payments as a way to ease their cash flow concerns. This payment deferral lessens their risk of going out of business due to the pandemic and also ensures that the problem is not passed on to consumers in the case of a supplier going bust.
The industry regulator has stated the scheme will be made as a last-resort option, given that all other choices have been exhausted.
In an open letter addressed to the energy network, Ofgem CEO Jonathan Brearley stated that it has closely monitored the turn of events, which prompted them to offer support for suppliers that are hit by the unprecedented emergency caused by COVID-19.
Ofgem acknowledged that the current situation has severely affected the energy supply chain since both suppliers and consumers are faced with financial challenges of which they have very little control over.
With the energy providers agreeing to the government’s directive to provide relief to affected customers, they, in turn, may face cash flow issues. Some suppliers could opt for commercial loans, but value caps and eligibility criteria might limit how much they can borrow, which might not be enough for their liquidity needs.
David Smith, ENA chief executive, said the association will continue to support the steady flow of energy for Britain amid the COVID-19 pandemic, allowing suppliers to offer services to every customer. He stated that their goal is to protect consumers, especially those who are struggling, through these new measures that will deliver support to energy companies throughout these trying times.
The scheme, as agreed upon by different network companies in the UK, lasts over a period of three months and is available for suppliers that don’t have an investment-grade credit rating. They are also expected to repay the full amount by 31st March 2021.
Companies that only rely on funding alternatives, such as this scheme, to make ends meet are eligible for deferred payments because they typically don’t meet the criteria to secure loans from accredited banks.
To ensure the network fulfills its credit metrics and financial commitments, the deferred payments are set via availability and size. Any network company breaking such agreements can be withdrawn from accessing the scheme.
Brearley discussed the scheme further in a blog post, expressing that they expect energy companies to deliver exceptional service and business-as-usual even in this time of hardship. Network companies are to follow the right approach and only opt for this support facility as soon as all other options are exhausted.
This breakdown of the £350-million scheme is capped at £1.6 million per electricity supply group and £1.2 million for every gas shipper.
Ofgem stated it would make no adjustments to the price cap on default energy tariffs and consumers can expect that they will be still be protected from being overcharged by their suppliers. The watchdog said it would continue to evaluate the impacts of COVID-19 on the industry and consider any implications it could have to the default tariff price cap over the coming months.
This new support scheme is the product of several consultations with the electricity generators, suppliers, and energy networks in April as a move to face COVID-19 related challenges.
Many independent suppliers have already gone bust in the past couple of years because of rising consumer complaints regarding customer service and supply challenges. The government price cap has also affected the capacity of these suppliers to maintain cash flow, causing them to leave the market.
In light of the current pandemic, end consumers who opt to defer their payments are also severely impacting some suppliers’ ability to keep afloat in the industry.