Response to increased retail debt
The Authority and many participants in the sector have been concerned about the prospect that the COVID-19 lockdown will lead to increased levels of non-payment of electricity bills, and additional doubtful debt, as households and small and medium-sized enterprises (SMEs) default.
At the same time, there is increased pressure on retailers to try to avoid disconnecting customers who haven’t paid their bills.
Electricity retailers play a key role in the industry, repackaging the total cost of electricity into contracts with customers. If customers don’t pay, the retailers still need to meet the cost of generation, transmission and distribution.
Generally, managing price risk and debt is a major part of our expectation of retailers. However, COVID-19 is an extraordinary event and there is a real and increased potential for some retailers to exit the market.
The Authority wants to ensure COVID-19 and the lockdown does not result in substantially less retail competition and innovation in the future. Less competition means less choice for consumers and potentially higher electricity bills. We consider the risk of multiple defaults due to COVID-19 and the restrictions of lockdown justifies a sector specific response.
What is the Authority doing?
The Authority will be making an urgent Code amendment in May 2020 to put in place the following solution:
- Electricity retailers facing liquidity problems who are otherwise sound
- But may exit the market due to the consequences of the COVID-19 pandemic
- Are provided with breathing space by having their distribution debt from the six largest distributors (including passed through transmission charges) deferred, by allowing an additional 60 days for payment of distribution charges for a period of up to nine months.
This effectively means qualifying retailers will benefit from a holiday of up to nine-months from a maximum of 60 days of distribution and transmission charges.
The Authority has written to the six largest distributors to notify them of our decision. The Authority has selected the six largest distributors on the basis they have the financial strength to cope with deferred payments from qualifying retailers.
Who will benefit?
The Authority is seeking to assist retailers where:
- The retailer was financially sound prior to COVID-19
- The retailer has been materially impacted by additional doubtful debt as a result of the impact of the COVID-19 lockdown
- The retailer cannot cover this impact through other facilities or support from shareholders.
The financial position of retailers seeking assistance will be independently certified.
The solution is not intended for:
- Retailers that were already in financial difficulty before the COVID-19 pandemic, where support is likely to simply result in more unpaid debt within the sector
- Retailers that are already able to access the financial support they need. That includes retailers that are part of a publicly listed group, and retailers that have access to sufficient capacity to provide additional capital or loans to successfully manage new overdue debts.
These circumstances mean we have departed from our usual preference for consulting with affected parties and the sector. We have designed an approach based on the following principles:
- Targeted and proportional
- Spreads a moderate amount of financial ‘pain’ across those who can afford it
- Protects the integrity of the wholesale market.
Retailers at risk of default will apply for the scheme
The financial position of retailers applying for the scheme will be independently certified, and a report provided to the Authority to advise whether to include them in the scheme or not.
More details about the process will be published shortly.