Good News – Bad News?
In the energy sector of late there have been glimmers of good news – the winter has stayed relatively mild, French nuclear plants and Norwegian hydro stations have been producing more, and gas prices have eased. All this promises to reduce the burden of energy bills on hard-pressed households and businesses. But as so often in life, one has to take the rough with the smooth. The nature of the CfD is to provide counter-cyclical price stabilisation, in other words when the cost of energy goes down, the cost of the CfD goes up.
That is what is happening now: today LCCC is announcing the first non-zero Interim Levy Rate (ILR) since September 2021, in order to make sure that we have enough cash in the bank to meet our legal obligations to generators. This is in the form of an In-Period Adjustment from 9 March 2023, moving the ILR rate up from £0/MWh to £8.12/MWh for the rest of this quarter.
What has been driving the need for this change? As can be seen from the graph above, which shows the average daily Intermittent Market Reference Price (IMRP) since the beginning of December, there has been a rapid drop in the marker against which we pay variable renewables like offshore wind farms. From rates of £200-400/MWh in the daily average in December, with spikes of up to £600/MWh and some hours above £1,000/MWh, there has been a drop down to £100-200/MWh, with no price spikes even when temperatures have trended lower. The majority of operating offshore wind capacity in the CfD portfolio is under earlier Investment Contracts which have higher strike prices, up to £187/MWh in current money. So this means we are now expecting to pay out to generators.
Back in September 2022, when the ILR was set for this quarter, LCCC was forecasting that generators would be paying back £2.2bn over the period. As recently as December, we were still forecasting significant generator payments of £1.4bn, though we raised the amount that we asked suppliers to stake as a reserve to counter the higher risk of lower prices. Since then the price slump has meant we are on track for £105m in payments to generators – a swing of £1.5bn within six weeks! While we can take payments out of the £300m reserve we have on hand from suppliers, the risk of yet-lower prices (and hence higher payments to generators) is such that we need to take action to ensure we don’t run out of cash.
LCCC doesn’t take these decisions lightly, as they are disruptive to suppliers. However, the alternative – waiting to see how prices develop and raise the reserve call from suppliers later – would be worse, since it would require a lump-sum payment from suppliers. It’s also the case that, were prices to rise again, we could cancel the increase in ILR, perhaps even before it takes effect on 9 March. While we can adjust the ILR up or down within period, we are only allowed to raise the reserve, and can’t return any of it before the end of the quarter.
We are continuing to monitor developments in the market: whether the news is bad or good, LCCC aims to make the most efficient decisions to ensure that we protect investor confidence in the CfD while minimising the cost to the consumer. We will continue to do this even as lower cost projects enter service under the CfD and the portfolio becomes all about the good news.
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