08 October 2015

Ofgem launches the UK government's Offtaker of Last Resort Scheme

On 1 October 2015, Ofgem launched the Offtaker of Last Resort (OLR) Scheme. The Scheme is intended to assist eligible renewable electricity generators by providing an alternative route to market should they be unable to find purchasers for their electricity through the usual commercial channels. The government's aim in introducing the Scheme is to encourage competition in the wholesale electricity purchase market by allowing a larger number of independent generators to enter the market. Ofgem will administer and regulate the Scheme.

If an eligible renewable electricity generator is unable to obtain a power purchase agreement (PPA) with an electricity supplier, then the OLR Scheme will ensure that a backstop power purchase agreement (BPPA) is facilitated as a last resort. The BPPA is a standard form, one-year contract whose terms are set by government. The supplier counterparty to the contract will pay a discounted rate to the market reference price of the electricity. This is designed to ensure that Ofgem is only involved in securing a PPA as a last resort as the prices which generators may charge under BPPAs are discounted.

The supplier under the BPPA will be selected using an OLR auction administered by Ofgem. The successful supplier will be selected on the basis of the management fee that they enter as their bid. The electricity generator participating in the OLR Scheme will not themselves need to pay the management fee. Instead, Ofgem will conduct a levelisation process whereby the management fees of suppliers taking part in the Scheme are borne by all licensed suppliers, whether participating in the Scheme or not. Suppliers will be incentivised to submit low management fees and become parties to BPPAs under the Scheme in order to avoid being required to make levelisation payments.

The OLR Scheme is only available to renewable generators with an investment contract or contracts for difference contract. Any licensed supplier of electricity may participate in the OLR auction, but there are certain suppliers (mandatory licensed suppliers) who, because of their market share in the electricity supply market, are obliged to participate. The current mandatory licensed suppliers are British Gas Trading Ltd, EDF Energy Customers Plc, E.ON Energy Solutions Limited, Npower Limited, Scottish Power Energy Retail Ltd and SSE Energy Supply Limited.

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