Industry regulator Ofgem has set out a range of options that will help to support electricity operators to recover bad debt in network costs.
In a typical electricity fixed-price contract, distribution network charges are wrapped into the overall contract pricing which is paid by the end-user through their monthly utility invoices. These funds are then used by the supplier to pay the regional Distribution Network Operators (DNOs).
In the event that a supplier accrues bad debt, normally as a result of customers going out of business and being unable to pay their electricity bills, the DNOs are still required to recover their costs.
At present, the Network Charge Deferral (NCD) enables network costs to be deferred once all available lines of credit have been exhausted. In this instance, the DNOs would be expected to chase any bad debt through the liquidation process.
However, as part of Ofgem’s latest proposals, they have outlined three potential solutions to support an industry undergoing significant cashflow constraints with an expectation of rising bad debt in light of the current and likely ongoing UK recession.
The preferred option is to set-up a bad debt cost that will be built in as an estimated value into the network costs from Apr ’21, and then “trued up” for all following cost periods based on any under or over recovery to the scheme.
If this was to come to pass, the impact on consumers should be relatively minimal. However it would likely see an increase in fully delivered supply costs from Apr ’21, and it would also increase the potential for more volatile network charges. This adds to the picture of increased uncertainty over future non-energy costs, which has seen suppliers build in higher risk premiums, often offsetting the cost benefit from lower wholesale costs in fixed price electricity contracts.
The final decision on the proposal is likely to made later this year.
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