Industry regulator Ofgem penned a letter addressed to networks, operators, and stakeholders in the energy industry which discusses the ways in which energy suppliers and gas shippers facing cash flow challenges can get help . With the unprecedented COVID-19 pandemic, some companies have struggled to stay afloat and pay for charges related to their supply.
The open letter by Ofgem CEO Jonathan Brearley presents the temporary easing up of payment terms for suppliers and shippers to ensure that they do not have to exit the market amid rising debts.
Energy networks are set to defer about £350 million in charges for energy shippers and suppliers that are struggling due to the impact of the coronavirus crisis. Ofgem requested networks and operators to relax payment terms to ensure that stakeholders can keep up despite the difficult circumstances brought about by the pandemic.
The appeal aims to provide energy consumers with the support they need while also preventing any disruption to the delivery of energy services. Ofgem wrote the letter to help struggling suppliers and shippers navigate the market and prevent their untimely exit.
The offer of help to energy networks will also help avoid the material decline in market competition due to the likely exit of efficient suppliers.
While suppliers have agreed to relax payment terms and enforce additional measures to help consumers in this time of crisis, they also need support from the regulator to ensure that energy services stay consistent for customers.
In the letter, Brearley stated that no changes to the current price cap method will be made. Changes to the price cap method at this point in time can potentially increase bad debts due to COVID-19. He also said that suppliers and shippers can, and are expected to, seek commercial loans from financial support facilities to resolve cash flow issues.
However, these shippers and supplier companies might not be able to satisfy eligibility criteria or are met with loan value caps, which prevents them from accessing financial help. It could stop them from fulfilling their liquidity needs, which consequently affects their services to consumers.
Run by the Energy Networks Association or ENA, the Network Charge Deferral (NCD) Scheme allows energy suppliers and shippers to take advantage of deferment of payments related to electricity distribution charges, gas transmission charges, and gas distribution capacity charges.
This scheme will help financially-strapped companies to deliver their services to customers in a viable way, given that the economy as a whole is still struggling to recover from the coronavirus crisis.
The NCD scheme cannot be accessed by firms with investment-grade credit rating which means that they are eligible to avail of alternative financial arrangements.
Implementation of alternative financial arrangement would vary per sector, but are expected to be available and sized accordingly to ensure that networks can comply with credit metrics and financial covenants.
The NCD scheme also requires a 25% minimum payment for every monthly invoice amount. The 25% minimum payment is capped at £1.6 million for every electricity supplier group and £1 million cap for gas shippers. A £350 million total in deferred charges will be given to eligible companies.
The current default interest rate of 8% will be implemented to ensure that shippers and suppliers only defer the amount they need. It will also help them return to their normal payment terms as soon as possible.
Companies agreeing to the scheme have until the end of March 2021 to fulfil deferred payments, while payment instalments are made available before the deadline.
The scheme requires the agreeing firms to self-certify that they will not distribute executive bonuses or dividends until their deferred charges and accrued interest are repaid.
Eligible companies can take advantage of the extended period, which will enable them to defer payment on network charges beyond a three-month period. They will not be required to give additional security to avail of this support.
Ofgem stated that the National Grid Electricity System Operator (ESO) and the National Grid Electricity Transmission (NGET) were involved in developing this initiative. SHE Transmission also expressed an intent to join.
Brearley mentioned in the open letter that Ofgem will be monitoring the scheme’s uptake to prevent any abuse. Suppliers and shippers are also expected to fulfil regulatory requirements and legal duties, including fair customer treatment and creditor’s interests relating to supplier insolvency.