Latest EMR polices hit bills in April
For politicians and policy makers, the hard work of Electricity Market Reform (EMR) is pretty much over. But for businesses, the impact is only just beginning.
Now all the detail is agreed and the mechanisms are at last in place, the bills are starting to come in. From April, businesses will start to see Contracts for Difference (CfD) and the Capacity Mechanism (CM) charges appearing on invoices.
Capacity Mechanism costs
As you may be aware, the CM is an annual auction to purchase electricity capacity in advance to ensure we have sufficient power being generated when we need it.
The first auction has already been held for delivery in 2018/19, although the full CM levy costs will not be introduced until 2016, when demand-side response (DSR) participation begins. This is where large consumers bid to reduce consumption at peak times in exchange for payment, so reducing the overall capacity required. Once the full financial impact is better understood, we will update you.
What we do already know, however, is the operational costs of the Electricity Settlements Company (ESC), which oversees the CM process. These will be applied to invoices from April 2015 at a cost of £0.012p/MWh for the 2015/16 year.
Contracts for Difference charges
CfD guarantees generators of low-carbon power a fixed price for each unit of output. It’s been designed to replace the current Renewables Obligation, which will be phased out from 2017. Like the RO, CfD costs are funded by energy suppliers via a compulsory levy, which is then passed on to consumers.
However, like the CM, it’s not a straightforward transaction. CfD costs consist of the subsidies paid, which depend on the actual take up by low-carbon generators each quarter, and also the cost of administering the scheme, which is carried out by the Low Carbon Contracts Company (LCCC).
The latter element, covering the LCCC’s operational costs, is fixed at £0.040/MWh for the 2015/16 year. But the subsidy share is more complex, as there will be an interim forecast rate for each quarter, followed by a reconciliation of the actual rate, once the calculations on take-up have been done.
Last minute cost changes
However, there’s been some indecision over this interim rate. We were initially told that the interim rate for the quarter starting 1 April 2015 would be £0.035/MWh. But at the end of February, the rate was revised to zero.
According to the LCCC, this decision followed the first CfD allocation round in February which revealed “that no successful generator requires payment during the first levy period”. To be fair, it all took longer than expected to finalise, so the LCCC therefore decided “to use its powers under the Contracts for Differences (Electricity Supplier Obligations) Regulations 2014 to reduce the Interim Levy Rate to zero for this period”.
For customers paying CfD costs as a pass-through charge, the impact is minimal. And for customers on fixed contracts, there is no impact at all. So until these costs start to ramp up, there’s no real issue for customers.
Budgeting for EMR costs
Over time, as CfD and the CM become established, we do expect costs to rise. The Department of Energy and Climate Change (DECC) forecasts CfD costs will reach £8/MWh by 2020, and CM costs will increase to around £3.50/MWh in 2018/19.
Our aim to communicate these costs clearly and prioritise simplicity and transparency when applying CM and CfD charges to bills. That’s why we’ll be providing regular updates to keep customers informed on what to expect and how to budget for these new costs.
We’re also developing new products and services to help customers interested in demand side management to take advantage of the opportunities that EMR measures will bring.
Of course, for those consumers who want absolute budgetary control, our Fixed Certainty contract now offers the option of fixing all non-commodity costs including the CM and CfD, along with commodity costs for your contract duration.