debt assignment protocol ofgem

Ofgem letter on steps taken to improve the Debt Assignment Protocol | Practical Law

Ofgem letter on steps taken to improve the Debt Assignment Protocol

Practical law uk legal update w-006-4947  (approx. 2 pages).

Can your energy supplier stop you switching?

Ofgem is clamping down on suppliers that have been blocking services that automatically switch customers to cheaper energy deals with rival companies. But can energy suppliers stop you switching?

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With automatic switching services though, you’re automatically switched to a different deal as soon as one is found that that can save you at least £50 a year on your current contract, including any early exit fees.

Switches are only carried out once you’ve given the automatic switching service provider your permission, which, on the face of it, sounds like a good deal. But it’s not without it’s snags.

Unlike UKPower’s switching service, which is comprehensive and completely free-of-charge, automatic switching services either charge a monthly usage fee, or only use a limited of suppliers, each of which pays a referral fee each time a customer makes the switch to them.

So, using an automatic switching service will either eat into the money you save on switching, or offer you a limited range of options, so you can’t be sure you’re on the very best available deal.

There’s also no provision for quality of service with automatic switching, and the switch is made purely on price alone, meaning you could be switched to a provider that has billing or customer service problems.

Earlier this year, for instance, Flipper switched customers to Iresa, a small supplier plagued by customer service problems so severe that Ofgem has extended a ban on it taking on any new customers.

Switching with UKPower means you’re always completely in control of the switch, and to help make sure you’re on the very best deal to suit your needs as well as your budget, we’ll let you which deals have exit fees, which deals use green energy, and how well each supplier scores when it comes to customer service.

While we provide the quotes, the final decision is always with you – to switch to a better deal, enter your postcode at the top of the page, or give us a call on 0800 688 8773 .

Click here to run an energy price comparison, and see if you could be paying less for your gas and electricity.

Les Roberts - Energy Expert at UKPower

If you’ve got an issue with your energy supplier, our consumer champion Les is on hand to help. A decade in consumer affairs means Les understands how confusing energy tariffs can be, so he'll cut through the jargon to help make sure you get the best deal.

Published on: 28th May 2020

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• What to do if you are in debt to your energy supplier
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Energy Supplier Debt Advice

Being in debt to your energy supplier isn’t necessarily a problem, but it’s a good idea to know when it is, and what you can do about it.

With the help of debt charity StepChange , we’ve put together a one-stop guide to energy supplier debt. By the end of this guide, you’ll know exactly what to do if you owe your supplier money, whether you’ve got a standard or a prepayment meter.

Compare energy suppliers and save money in five minutes!

In This Guide

Is supplier debt always a problem.

If you pay for your gas and/or electricity by direct debit, it’s pretty common that during any given month, you might be in debt to your supplier by a small amount. This is because the amount you pay each month is simply your estimated annual usage divided by 12. During winter months, you’ll probably use more than what you pay for, and this will balance out during the summer.

If your debt starts to build up, you’ll often be asked to increase your monthly payments. You’re free to do this or not, but bear in mind that come the end of your contract, you’ll need to settle up the remaining balance. To avoid a nasty shock when do you close your account, it can be worth paying that bit extra each month.

Debt becomes arrears if you fail to make a payment due, and this can become a problem if it builds up, or lasts for longer than a month.

Can you switch to a new energy supplier while in debt to your current supplier?

Energy supplier debt can become a problem when it comes to time to switch tariffs. However unless your debt is particularly high, or you’ve been in debt for a long time, it shouldn’t stop you from being able to switch.

In fact, switching to a new energy supplier and a cheaper tariff is advisable if you find yourself in debt. You’ll need to pay back what you owe, but will find that much easier if you’re paying less each month to a new supplier.

Regulations protecting indebted customers vary depending on what kind of meter your use:

Switching while in debt with a standard credit meter

If you use a standard credit meter, and you’ve been in arrears for fewer than 28 days, then you’re free to switch. The money you owe will simply be added to your final bill but the switch should proceed without issue.

If you have been in arrears for more than 28 days, you’ll need to settle up before you can switch to a new supplier.

Importantly, this is the case regardless of the value of your arrears.

Prepayment meter debt

If you use a prepayment (or pay as you go) meter, Ofgem’s Debt Assignment Protocol (DAP) protects your ability to switch depending on the size of your debt.

When can I switch if I’m in debt on my prepayment meter?

If you owe under £500 per fuel , you’re within your rights to switch a new supplier and request that they take on the debt you owe to your old supplier via the DAP. You’ll need to remain on a prepayment plan until the debt is cleared.

It is important to note, however, that your switch isn’t guaranteed by the DAP. A supplier may still block your switch, but if so they’re required to make it clear to you why they did, and outline any steps you can take to resolve their objection.

Once you have managed to switch and have cleared your debt, it’s advisable to switch from a prepayment to a credit meter , as the price you pay for your energy will be much lower.

What if I’m in debt because of my supplier’s error?  

If your supplier has made a mistake that lead you to owe them money – if they’ve updated your meter readings incorrectly, for example – then they cannot use this as a reason to block your switch.

Paying off energy supplier debts

If your switch has been blocked by your supplier because of debt you owe them money, or you’ve been informed of particularly large arrears, it’s important that you work out a repayment plan as soon as possible.

Setting up a new payment arrangement with your supplier

If you pay for your gas and/or electricity by direct debit, one way to steadily clear what you owe is to increase your monthly payments to eventually make up the shortfall. If you’ve fallen into arrears, you can set up a plan to pay of what you owe on top of your resumed monthly bill.

Speak with your supplier directly and they will be able to help you set up a repayment plan that is tailored to your financial circumstances.

The latter also applies if you’re using a prepayment meter. Whether you’ve managed to switch, but have a sizeable debt to clear, or your switch has been blocked, it’s worth contacting your supplier to set up an affordable repayment plan.

Using benefits to pay back utilities arrears

If you receive benefits and are struggling with arrears, there is a chance that your supplier requests what’s known as a third-party deduction (TPD) . Under a TPD, up to 5% of your benefits would be sent straight to your supplier.

StepChange say:

“TPDs should be considered as a last resort and only used if they are affordable and helpful to those concerned. This is because deductions from benefits can in some instances push people further into financial difficulty.

We would always recommend speaking to your supplier in the first instance to discuss options available for repayment.”

Additionally, StepChange’s free benefits calculator is a helpful tool that you can use to make sure that you’re actually getting all of the benefits you’re entitled to. Each year, millions in the UK miss out on billions of pounds worth of tax credits and benefits.

Can I be disconnected from my energy supply because of debt?

In some extreme circumstances, if you’ve failed to repay (or come to an arrangement to repay) a long-outstanding debt, your supplier may apply for a warrant to disconnect your supply. Your supplier is obliged to notify you that they’ve chosen this course of action, so you’ll have an opportunity to contact them to try and arrange a repayment plan.

Otherwise, a court hearing will taking place at which, if you attend, you’ll have another opportunity to make an arrangement with your supplier. If this doesn’t happen, the court grants to warrant for disconnection and you’ll be given seven days’ notice before your supply is turned off.

This is extremely rare, and it is more common that you would be switched onto a prepayment meter if you’re currently on a credit meter.

Exceptions:

If you are disabled, have long term health problems, live with young children, or are in severe financial difficulty, then most suppliers will not disconnect your energy at any point. Between 1 st October and 31 st March, no supplier is permitted to disconnect you if you are a pensioner living either on your own or with a child under the age of five.

For more guidance on disconnections, visit Citizens Advice .

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CMA gives Ofgem six months to reform debt protocol

Saffron Johnson

Published 14 March 2016

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OFTO sales – avoiding the pitfalls 16 February 2021

First: a disclaimer and a recap.

"To date, all OFTO transactions have been structured as a sale of assets rather than a sale of shares, making it particularly important to ensure that the OFTO SPA includes a definitive list of the OFTO assets and construction contracts."

Ofgem’s consultation on the current tender round was published in November 2020 and initially open for responses until 8 January 2021, as set out in a previous article in this series¹. That deadline was extended to 22 January 2021, and so we find ourselves still waiting² for Ofgem to publish its response and set out any changes to the process. Notably, the consultation did ask questions about the process of finalising the transfer documentation, and so our focus here is on more substantive issues, though readers should certainly keep an eye out for process changes.

For those who are less familiar with the OFTO process, a generator (“developer”, to use the language of the legislation) approaches Ofgem and requests that Ofgem runs a tender exercise for the sale of its transmission assets once they have been built. Ofgem runs a tender exercise involving three or more stages³ to choose a successful bidder to whom it will grant an OFTO licence. In parallel, the developer prepares the sales documentation (the focus of this article) against which bidders carry out their due diligence and submit their bids, and Ofgem determines the recoverable cost of the transmission assets, which is inserted into that documentation. This creates a different dynamic to most sale and purchase transactions; this is considered in more detail below.

In the beginning: How the OFTO sale and purchase agreement developed

The sale and purchase agreement entered into between the developer and the OFTO (the “OFTO SPA”) is one of the key documents in an OFTO transaction and sets out the terms on which the OFTO assets will be transferred by the developer to the OFTO. Referred to as the “transfer agreement” in legislation and Ofgem’s guidance, the OFTO SPA can be structured for an asset sale or share sale.

For the first tender round (“TR1”), Ofgem published a model transfer agreement to be populated by qualifying developers. While it was used as a basis for TR1 OFTO sales, it took the form of guidance only for subsequent tender rounds, with Ofgem recognising that the parties to the transaction were better placed to understand the quirks of each project and to draft the relevant documents. While Ofgem does review the OFTO SPA as part of the OFTO tender process, it does so mainly to ensure no inconsistencies with the regulatory regime, recognising that the OFTO SPA is “ a matter for the parties to commercially agree ”⁴.

To date, all OFTO transactions have been structured as a sale of assets rather than a sale of shares, making it particularly important to ensure that the OFTO SPA includes a definitive list of the OFTO assets and construction contracts. Given that this is also required by Ofgem’s cost assessment process, it should not require too much extra work for developers.

While a share sale is envisaged by the legislation, and would perhaps result in a neater OFTO sales process with fewer third parties involved who could potentially cause delays to novations and assignment of contracts, projects have not been set up in this way. This may be because of economies of scale requiring developers to contract in their own names (as discussed in our previous article on large complex projects ), or it may simply be because setting up a shell project company adds an extra layer of complexity (whether for financing, tax treatment or other considerations) that developers shy away from.

"The dynamics to the negotiation of an OFTO SPA are quite different to a normal M&A deal. For developers, there is no ongoing competitive tension as it cannot threaten to approach alternative purchasers. For the OFTO, as issues are identified during due diligence, it also cannot walk away or easily resort to price chipping."

Whatever the reason, in this article we share some practical tips and insight around an asset sale OFTO SPA based on WFW’s experience of advising on many OFTO transactions across various tender rounds, including (among others) Walney Extension , Race Bank , Galloper and Burbo Bank .

The dynamics to the negotiation of an OFTO SPA are quite different to a normal M&A deal. From the developer’s perspective, there is no ongoing competitive tension as it cannot threaten to approach alternative purchasers. For the OFTO, as issues are identified during due diligence, it also cannot walk away or easily resort to price chipping. The final transfer price will largely be fixed (as determined by Ofgem) and any changes to the OFTO’s tender revenue stream will require justification and Ofgem consent. Whilst tender revenue changes can potentially be agreed, the primary solution will be to seek contractual protection in the OFTO SPA. As the end of the generator commissioning period approaches, it creates additional pressure on the developer to settle and close the transaction and avoid the risk of committing a criminal offence or having to shut down the wind farm.

Preparation, preparation, preparation

As a developer obtains property rights and contracts for construction of the wind farm and the transmission assets (which will be divested to an OFTO in due course), the burden (and opportunity) to prepare for a smooth OFTO process will fall on its shoulders. A key factor in helping ensure a smooth-running and efficient OFTO transaction process is good preparation. This is beneficial in two key ways:

• helping avoid problems in the future once qualifying projects have been tendered and the OFTO SPA negotiation process starts; and
• managing time as the generator commissioning period has usually begun during, if not before, the ITT stage, leaving the developer with 18 months to complete the sale process ( see our earlier article on the impacts of the 18-month period ).

The OFTO will be purchasing the physical OFTO assets and the underlying contracts relating to these assets. It is therefore extremely important that the relevant project/procurement teams are aware of the OFTO transaction process and that these contracts are entered into with this in mind. This includes:

• when structuring the contracts for the offshore wind farm, some consideration will need to be given to how the OFTO assets will be disposed of – in particular, the need to show that costs were “economic and efficient” to recover the full build cost of the OFTO assets in the OFTO process;
• ensuring that contracts which relate to both OFTO assets and developer assets can be split so that the OFTO can receive the benefits in respect of the OFTO assets and the developer can retain the benefits in respect of the developer assets;
• ensuring that contracts which relate solely or mainly to the OFTO assets include provisions permitting novation to the OFTO to hopefully speed up the negotiation process with counterparties at the time of the OFTO transaction. The relevant contracts usually include a template form of novation agreement (although it may be that the OFTO has comments or wants input on the terms);
• ensuring confidentiality provisions in the project agreements allow disclosure of sufficient information (both technical and contractual) to OFTO bidders in the data room at bidding stage to minimise any confirmatory due diligence needed at preferred bidder stage; and
• maintaining up-to-date contact details for contract counterparties to ensure that at the time of the OFTO SPA negotiations, the developer can quickly get in contact with the right people to help facilitate speedy negotiation of the assignment/novation documents.

Key contacts

Chris Kilburn

Partner London

Emmanuel Ninos

Sarah Williamson

Marianne Anton

Counsel London

"The OFTO SPA will typically include a general cap on the developer’s liability which will usually apply for all liabilities other than title warranties. In some of the early tender rounds, this general cap was set at 20%"

Any gaps identified in the information provided during the OFTO process, or any issues that are uncovered may result in developers providing specific indemnities in the OFTO SPA, in addition to or over and above the usual snagging provisions for projects that have just been commissioned. Accordingly, good preparation and early action to resolve issues should smooth the path of negotiations.

Another consideration may be the role that the site visit plays. For the most part, site visits are saved for the preferred bidder stage. This is in large part owing to the practicalities and health and safety implications of hosting visitors to offshore substations; the OFTO process would allow site visits during an ITT stage, for example. While there is extra time and work involved for developers in facilitating this, they may consider it worth their while if issues can be reflected in the OFTO SPA while competitive tension still exists.

Liability caps

So where do we see the development of the OFTO SPA going forward?

As noted in our article on ever larger projects, the scale of offshore wind projects has increased exponentially since the first projects that were included in TR1. Projects in TR1 mainly ranged in size from 90 MW to 315 MW, with the largest project coming in at 500 MW. TR7 was announced by Ofgem on 12 November 2020, with the two projects taking part clocking in at 900 MW and 857 MW.

The OFTO SPA will typically include a general cap on the developer’s liability which will usually apply for all liabilities other than title warranties. In some of the early tender rounds, this general cap was set at 20%, as can be seen in the publicly available bond listing information for Greater Gabbard (a TR1 project)⁵ and Gwynt y Môr (a TR2 project)⁶. In subsequent tender rounds involving larger projects, the general caps have been an area of focus for developers looking to limit their ongoing financial exposure and free up capital. Downward pressure on the level of the general cap means that OFTOs can become particularly sensitive to any material risks identified during the due diligence process and the extent to which any related liabilities should fall within or outside the general cap.

Ofgem’s most recent transfer agreement guidance⁷ sets out general principles for developers and bidders to consider. While it does not dictate commercial positions, it recognises some sensible principles⁸ that developers would do well to take heed of:

• No specific levels for caps are set out, but “ Ofgem encourages Developers to consider the impact insufficient warranty protection may have on the Qualifying Bidders’ TRS Bids ”; and
• Bidders “ may have concerns about the creditworthiness of the selling entity ”, and developers should therefore “ consider offering Security for the obligations of the vendor under the Transfer Agreement ”.

It will be interesting to see what effect (if any) the impact of even larger projects with final transfer values significantly exceeding £1bn will have on the level of liability caps and the form of security developers (particularly consortia) provide.

"It will be interesting to see what effect (if any) the impact of even larger projects with final transfer values significantly exceeding £1bn will have on the level of liability caps and the form of security developers (particularly consortia) provide."

Treatment of shared infrastructure

As multi-phase projects become more and more common, with ambitious targets for deployment of offshore wind, a key consideration in structuring an OFTO sale will be the use of shared infrastructure. Clearly, this will have an impact both on price (determined by Ofgem) and on the OFTO SPA. For example, if an onshore substation is oversized to cater for a later phase of development, the developer has several choices: sell the OFTO a leasehold for part of the building rather than the freehold for the whole site; sell the freehold for the whole site and take back a leasehold of part of the building (to be sold on to another OFTO in due course); or some other arrangement that achieves a suitable division of interests and rights.

Equally, an offshore substation could be oversized to cater for an expansion to the offshore wind farm (and eventual sale of rights to another OFTO), or for access and maintenance to an existing offshore wind farm (for example by addition of a helipad or other equipment to facilitate maintenance).

Getting the deal done

Commercial and technical realities need to be reflected in the OFTO SPA. This needs close cooperation between developer transaction and technical teams, as set out above, with the same required for OFTO bidders and their funders, supported in each case by a team of specialist advisors. WFW’s multi-disciplinary team is specifically structured to ensure that our sector specialists can work together closely to provide a seamless service to our clients. We have experience advising on successful OFTO transactions, and also in providing training sessions to developer project teams and OFTO bidder teams on preparation for the OFTO transaction process.

Please do get in touch to discuss your OFTO transaction needs.

To opt in to WFW mailings and register for alerts on our forthcoming articles as soon as they are published, please email us  here . All the articles published in our OFTO series can be found  here .

[1] https://www.wfw.com/articles/a-review-of-the-ofto-regime-yes-please/

[2] As at 16 February 2021.

[3] An enhanced pre-qualification stage (that may be split into a pre-qualification stage and a qualification to tender stage), an invitation to tender stage, and a preferred bidder stage.

[4] https://www.ofgem.gov.uk/sites/default/files/docs/2009/07/model-spa-and-commentary_0.pdf

[5] https://www.ise.ie/Market-Data-Announcements/Debt/Individual-Debt-Instrument-Data/Dept-Security-Documents/?progID=-1&uID=4911&FIELDSORT=docId

[6] https://www.ise.ie/debt_documents/Prospectus%20-%20Standalone_b7220d81-cd2b-4d13-8ec0-3d296f634613.PDF

[7] Pages 57 and 70, https://www.ofgem.gov.uk/system/files/docs/2020/12/tender_process_guidance_document_november_2020.pdf

[8] Ibid, Page 78.

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