What is the CFD Supplier Obligation?
The CFD Supplier Obligation regulations state the Obligation must be paid by all licensed electricity suppliers in GB from 1 April 2015. Suppliers must make pre-payments consisting of a unit cost fixed ‘Interim Levy Rate’, chargeable as a £/MWh rate on eligible demand on a daily basis, and lump sum Individual Supplier Reserve Amount payments at the start of each quarterly obligation period. The Interim Levy Rate and Total Reserve Amount for a given quarter are set by LCCC on a quarterly basis, before the beginning of the preceding quarter. For more information on how we set the ILR and TRA please see our Transparency Tool.
About the Interim Levy Rate and Total Reserve Amount
Interim Levy Rate (ILR) payments are intended to provide funds to enable LCCC to make expected “difference payments” to CFD generators, whilst Total Reserve Amount (TRA) payments are designed to ensure that 19 times out of 20, LCCC has sufficient resources to make all payments due to CFD generators. Amounts collected can only be used to make payments to low carbon generators under CFDs being managed by LCCC. The individual Reserve amounts are calculated by our settlement services provider, EMR Settlement Ltd, on behalf of LCCC, using LCCC’s calculation of the required TRA and historic market share for each supplier. The TRA is published along with the ILR on the LCCC website.
The top half of this equation is essentially the sum of all the difference payments LCCC expects to make in the quarter, where the difference payment is the Strike Price in the contract minus the Market Reference Price. The ILR therefore depends upon a number of key variables for that particular quarterly obligation period, such as:
1) The generators that are expected to have CFDs and generate within the quarterly obligation period – their capacity, load factor and strike price;
2) The expected reference price against which the contracts are assessed; and
3) The expected eligible supply.
The TRA is determined by ensuring that there is a 19 in 20 probability that LCCC will be able to make all its CFD generator payments in time utilising only money collected from the ILR and TRA, considering the timing of payments made and received, and the uncertainties associated with generation, market reference prices and other factors. The TRA is then shared among suppliers based on their recent market share, to form the individual Supplier Reserve Amounts.
The eligible supply currently consists of gross demand. From October 2015 onwards it is expected to exclude up to 85% of demand consumed by suppliers to eligible Electricity Intensive Industries (EIIs) in possession of a current certificate issued by the Department of Business, Innovation & Skills. For the Government Response to its consultation on the EII exemption click here.
Once CFD payments commence, it is also expected that a number of suppliers will apply for an exemption for any eligible imported renewable electricity under the “Green Excluded Electricity” exemption. LCCC guidance on how this will be implemented is available under Publications
From April 2016, new negative pricing provisions (which entered into force in regulations on 20 July 2015) will apply to CFD payments in a negative power price scenario. In effect these provisions mean that if prices remain negative throughout a six-hour period or longer then the difference payments will be set to zero for the entirety of that period. Note that existing CFDs will not be amended so generators with these contracts will therefore receive difference payments (capped at their Strike Price) during periods of negative prices, regardless of the length of those periods.
Operational Costs Levy
From 1 August 2014, the operational costs of LCCC are funded by suppliers through the Operational Costs Levy, which is invoiced daily based on a supplier’s gross demand multiplied by the Operational Costs Levy rate set out as a daily per MWh rate in the Supplier Obligation Regulations. The operational costs levy for 2014/15 was set in the relevant Supplier Obligation Regulations at £0.079 per MWh (based on an estimated 82.9m MWh of electricity being supplied in Great Britain over the period from 1 January 2015 to 31 March 2015, representing an estimated operational budget of £6.485m). The actual operational budget is based on the total metered electricity actually supplied over the period, being 86.6m MWh (which equates to an actual charge of £6.847m). For 2015/16 the levy rate is £0.0397 per MWh (which represents an expected budget for operational costs of £12.007m). The company, in due course, returns to suppliers any monies which it has collected in excess of its operational spend requirements for the relevant financial year. The company is therefore due to return £1.279m for 2014/15.
CFD Supplier Obligation regulations:
- The Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 (2014 No. 2014) [basic design of the CFD Supplier Obligation and Operational Costs Levy:]
- Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015 [including EII and GEE exemption provisions]
- The Contracts for Difference (Standard Terms) (Amendment) Regulations 2015 (2015 No. 1425) [including Negative Pricing provisions]