Government to give Energy suppliers temporary relief on increases to CfD charges

What is the Contracts for Difference Scheme?

The CfD scheme is the main mechanism used by the government for supporting low-carbon electricity generation. The scheme is designed to act as an incentive and encourage investment in renewable energy.

It does this by giving low-carbon developers with high upfront costs and long project lifetimes protection from the volatile wholesale energy prices. It is also designed to protect the consumer from paying higher costs when electricity prices are high.

Suppliers who are investing in new or operating projects producing renewable energy are eligible for the scheme if they are based in the UK and meet the eligibility requirements. The allocations are competitive and see a range of renewable energy technologies go head to head in sealed-bid auctions.

Those that emerge the victor during the competitive rounds are then entered into a private law contract with the Low Carbon Contracts Company (LCCC) where developers are then paid a flat rate for the electricity they produce over a 15-year period.

Read more: Energy suppliers and generators call for changes as the costs from the COVID-19 pandemic pile up

The costs for all licensed electricity suppliers

Under the CFDs, when the market price for electricity generated by a CFD Generator (the reference price) is below the Strike Price set out in the contract, payments are made by LCCC to the CFD Generator to make up the difference. However, when the reference price is above the Strike Price, the CFD Generator pays LCCC the difference. 

The operational costs of the LCCC are funded by the operational costs levy imposed on all UK-based licensed electricity suppliers. These funds are collected by the LCCC under the Supplier Obligation and Operational costs levy. 

Financial relief

Energy suppliers have been hit hard because of the coronavirus pandemic with many seeing a rise in unpaid bills and direct debit cancellations. It is these issues that have prompted the Government to act by providing temporary relief on increases in CfD charges.

The CFD payments were set to be significantly higher than expected, as falling energy wholesale prices resulting from the government-imposed coronavirus lockdown meant top up payments to renewables generators that hold CfDs were higher than anticipated.

The move to grant temporary relief comes after a fast tracked consultation last month by the Department for Business, Energy, and Industrial Strategy (BEIS) proposed that 67% of the initially planned increases in suppliers' financial obligations under the CfD regime be deferred until next year. Now it has increased that to 80% with a relief cap of £100 million.

BEIS also confirmed it would defer the delayed payments by another quarter until the second quarter of next year, rather than the first quarter of 2021 as had been originally proposed.

Struggling energy suppliers are set to receive more assistance after Ofgem announced a £350 million support scheme to help them handle the issues raised by the pandemic.

Further Reading

 Ofgem announces £350 million support scheme to help struggling energy suppliers

Ofgem confirms gas charging reforms will be implemented in October despite criticism from business leaders

Smart Meter Installations resume as lockdown restrictions ease

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