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.
How do we determine the Interim Levy Rate?
EOC is the estimated quarterly obligation period payment cost
EOI is the estimated quarterly obligation period income
EOS is the estimated quarterly obligation period electricity supply
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.
Exemptions and Negative Pricing
The eligible supply currently consists of gross demand. Once the scheme is effective 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, Energy, and Industrial Strategy.
Suppliers can also 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, negative pricing provisions (which entered into force in regulations on 20 July 2015) have applied 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.
The Transparency Tool microsite was created to help our stakeholders understand how we arrive at our forecasts of the CFD Supplier Obligation
The site displays supporting information on how we set the Interim Levy Rate (ILR) and Total Reserve Amount (TRA), aimed at building confidence in LCCC’s ability to accurately fulfil our regulatory obligations.
In addition to offering transparency around our calculations, the tool also provides forecasts of the ILR and TRA for a further three quarterly obligation periods following the period for which the ILR and TRA has been determined. These will consist of a base forecast based on generator start dates as published in the public CFD register, or where appropriate on the BEIS website. It may also include sensitivities around the base forecast in which one or more generators’ start dates are amended (for example, starting later due to delays in state aid approval or development and construction). Use of these forecasts is subject to legal disclaimers and this can be accessed on the site.
The payments collected from suppliers are subsequently reconciled, with actual CFD generation and demand data used to calculate the actual levy rate. To ensure that our stakeholders have up to date information on the actual costs, we intend to provide these daily reconciled levy rates on a quarterly basis to the Suppliers Area
The Transparency Tool has been designed to give suppliers confidence in the correctness of our ILR and TRA calculations. To give suppliers a view of potential costs further into the future, we now publish ILR and TRA forecasts out to 15 months. The source code for the Transparency Tool can be found here.
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. Please see latest CFD Supplier Obligation regulations as amended.