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CfD costs to be paid back to electricity suppliers as high wholesale prices continue

CfD generators are given top up payments, but they also pay back money when wholesale prices rise beyond the strike price. Image: Getty

CfD generators are given top up payments, but they also pay back money when wholesale prices rise beyond the strike price. Image: Getty

Around £39,222,407 is to be returned to electricity suppliers through the Contracts for Difference (CfD) scheme, the first quarter in which this has occurred.

In the CfD, generators receive top-up payments to the strike price they are paid for the electricity they generate, but they can also pay back money when the market prices rise beyond their strike price, with high wholesale prices seen consistently throughout the latter half of 2021.

In light of these wholesale prices, the Low Carbon Contracts Company (LCCC) – the counterparty of the CfD – reduced the interim levy rate (ILR) to £0/MWh in September 2021, with this then remaining at £0/MWh for the entire quarter.

The ILR is part of the Supplier Obligation, a compulsory levy for all UK-based electricity suppliers to fund the payments to CfD generators for the electricity they generate.

The ILR determines the interim rate payment, which is a daily pre-payment designed to ensure the LCCC can make ‘difference payments’ to CfD generators, while suppliers are also required to pay a lump sum ‘reserve’ payment at the start of each levy period, which is to ensure the LCCC can make all payments due to CfD generators.

Typically, at the end of a quarter, the amount collected from generators is reconciled with suppliers, with any surplus funds put toward the Total Reserve Amount (TRA), reducing the amount suppliers have to pay. If the sum of the overcollection and the current TRA is higher than the next quarter’s TRA, the difference is returned to suppliers.

In this instance, the expected net payments from generators over the quarter totalled £133,667,990, while the TRA for Q4 2021 was £208,986,765. Meanwhile, the TRA for Q1 2022 is set at £303,432,348, and is netted off against the Q4 2021 numbers, which means the LCCC is forecasting a total reconciliation payment of £39,222,407.

This is expected to continue, with the ILR having also been set at £0/MWh for the current quarter due to the ongoing high wholesale prices. As such, the LCCC is forecasting another net payment to suppliers in the next quarterly reconciliation.

It comes during a challenging time for energy suppliers in the UK market, with 26 collapsing between August 2021 and the end of the year. It's expected that the price cap - which determines how high customer energy bills can be set - will be raised in order to help mitigate some of the impacts of the current high prices, with Cornwall Insight suggesting that the price cap could jump 46% to £1,865 for summer 2022.

Meanwhile, in October trade body Regen called on the government to double the capacity for Pot One technologies in the next CfD auction to 10GW to help hedge against rising power prices, citing the mechanism by which generators must pay back to the public purse when prices are high, directly reducing electricity bills.

This was also highlighted by the LCCC in its announcement of the supplier reconciliation payments, stating that while the CfD provides revenue certainty for generators, it also acts as a hedge for consumers.

The latest CfD auction opened in December, with a £285 million budget for a target of 12GW of electricity capacity - 5GW of which is for Pot One technologies.

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