Posted on: 18/06/2020
In the second blog of our series focusing on Non-Commodity Costs affected by Covid-19, Head of Pricing, Tom Putney returns to explain changes to Contracts for Difference (CfD) costs for end users.
Earlier this week, I posted about the way that this pandemic has caused unprecedented drops in demand and the way this has affected Balancing Service Use of System (BSUoS) Charges. This is because National Grid has had to call upon new methods of flexibility in order to keep the lights on by balancing the system.
As well increasing BSUoS, the reduction in demand has had the effect of significantly lowering wholesale prices. On the face of it, this sounds like good news for end consumers. However, this has also had an impact on the expected CfD supplier costs.
The Contracts for Difference scheme works by paying renewable generators a guaranteed strike price for each MWh of energy they produce – regardless of the wholesale market price. When the wholesale price is below the generator’s strike price, the generator is paid a ‘top-up’ payment to reach the level of the strike price. This subsidy is recovered by suppliers from end consumers on their electricity bills. Conversely, when wholesale prices are above a generator’s strike-price, they must pay back the value in excess of their strike price.
Consequently, with the market having remained low due to the demand destruction we’ve seen, the costs of these ‘top-up’ payments to generators have increased.
The true financial extent of this is yet to be seen, but the initial Interim Levy Rate (the rate at which suppliers must recover the costs of this subsidy) for Q2-20 published by the body which administers the CfD scheme - The Low Carbon Contracts Company (LCCC) of £7.469/MWh is now expected to be well below the actual cost. In fact, the combination of the Interim Levy Rate and the Total Reserve Amount (an additional payment that must be made by suppliers) to ensure that supplier payments are sufficient to cover payments to generators in 95% of scenarios, may not be sufficient.
In response to this The Department for Business, Energy and Industrial Strategy (BEIS) consulted with industry on providing the LCCC with an interest free loan to defer part of the increase into supplier costs. Subsequently, a decision was made to defer up to 80% of the additional costs in Q2-20 to Q2-21, up to a cap of £100m.
So just as in the case of BSUoS, industry has identified high risk areas of cost and sought to mitigate the impacts. Whilst these moves are to be applauded, it’s also very important for end user businesses to be forecasting these added costs into future bills.
To find out more on this topic, as well as other issues affecting energy bills, take a look at our Non-Commodity Costs page. Follow the link to sign up for our next NCC Webinar and join me at 11am on 14th July.