My Lords, the aim of this draft instrument is to limit the negative short-term impact on electricity suppliers
of an unexpected increase in the costs of the contracts for difference—CfD—scheme as a result of measures introduced to reduce the spread of the novel coronavirus. Before outlining the provisions, I will briefly provide some context for the benefit of your Lordships.
The CfD scheme is the Government’s main mechanism for supporting new renewable electricity generation projects in Great Britain. The CfD is a 15-year contract between a renewable generator and the Low Carbon Contracts Company—LCCC—a government-owned company that manages CfDs and is at arm’s length from the Government.
Contracts are awarded in a series of competitive auctions that determine the strike price in pounds per megawatt hour that the generator will be paid for the electricity produced. Generators receive revenue from selling their electricity into the market as usual. However, when the market reference price of electricity is below the strike price, generators receive a top-up payment for the additional amount. Similarly, at times when the reference price is above the strike price, the generator pays the LCCC.
The LCCC is the designated CfD counterparty under Section 7 of the Energy Act 2013, and as such it has a power to collect payments from licensed electricity suppliers through the CfD supplier obligation to enable it to make CfD top-up payments to generators. This obligation comprises a daily interim rate levy paid on each megawatt hour of electricity supplied, plus a total reserve amount paid in the form of a lump sum at the start of each quarter to cover uncertainty.
Both rates are set by the LCCC three months ahead of each quarter, based on the LCCC’s forecasts of CfD payments and electricity demand. At the end of each quarter, the LCCC carries out a reconciliation of the amount owed by suppliers, based on the actual payments made to generators and amounts received from suppliers. The LCCC advised BEIS that, because of measures introduced to reduce the spread of coronavirus, it was anticipating a shortfall in funds required to pay CfD generators in the second quarter of this year, from April to June.
The LCCC had observed a sharp fall in electricity demand across the quarter, of around 13%, as a result of the lockdown. This would have meant a significant reduction in the amount collected from suppliers under the interim rate levy. There was also a significant fall in the wholesale price of electricity, which would lead to increased payments to CfD generators of £18.6 million higher than forecast. The combined effect of these unanticipated changes is a forecast shortfall of £121 million between the amount owed to CfD generators and the amount collected from suppliers under the interim rate levy.
To address the shortfall, the LCCC was considering an increase of between 22% and 35% in the interim levy rate part-way through the second quarter of this year. This would have been the first time such action was needed. Electricity suppliers would have faced an unexpected increase in their obligations at short notice and at a time when they were facing significant other pressures. Therefore, in line with efforts to support the economy in the light of the Covid-19 national emergency, the Government agreed to provide a loan of up to £100 million to the LCCC so that it could continue to
pay CfD generators during the current quarter without increasing the financial burden on suppliers. The loan is governed by a separate agreement between BEIS and the LCCC and is not covered in this instrument.
Following consultation, the Government also announced that they intended to make changes to regulations to enable the LCCC to defer collection of the additional obligations covered by the loan to the second quarter of 2021. If regulations were not changed, suppliers would face a higher lump-sum payment to the LCCC this month, following the quarterly reconciliation exercise. This draft instrument makes four technical changes to the existing Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 to implement the deferral.
First, it reduces each electricity supplier’s obligation in a quarterly obligation period by the amount of the financial assistance provided by the Government to the LCCC for that purpose, multiplied by each supplier’s market share in that quarter. Secondly, it increases each electricity supplier’s obligation four quarters later by the amount of financial assistance previously provided to the LCCC, multiplied by the supplier’s market share in that later quarter. Thirdly, it enables the LCCC to take into account anticipated receipt or repayment of financial assistance provided by the Government when setting the obligation for a quarter. Finally, it enables the LCCC to repay any financial assistance provided by the Government using moneys collected from electricity suppliers after the reconciliation process following the relevant quarterly obligation period. This deferral will give suppliers more time to prepare for the increase in payments. It provides greater confidence over the level of additional costs that they will face in the second quarter of 2021, enabling suppliers to price future tariffs with minimum cost risk.
I stress that the Government are committed to upholding the self-financing nature of levies in the energy system. The loan to the LCCC and the arrangements for deferring repayment are therefore envisaged to be a one-off response to the current exceptional circumstances arising from Covid-19. However, the mechanism in this instrument is not time-limited and could be used again in the future, if required. This would enable the Government to intervene quickly to ensure that CfD generators can continue to be paid, and burdens on suppliers could be deferred, if a similar exceptional event arose in the future. These legislative changes need to be made ahead of the LCCC’s quarterly reconciliation process that determines suppliers’ obligations for quarter 2 of this year. This is expected to take place on 9 July. Therefore, subject to the will of Parliament, this instrument will enter into force the day after it is made, and I commend these regulations to the House.
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