npower’s Wayne Mitchell’s Blog

The contracts that will make a difference to your business  Another week, another important EMR announcement – and this time, rather than analysing new detail released by the government, we […]

Register now!

By Chris Foden

The contracts that will make a difference to your business 

Another week, another important EMR announcement – and this time, rather than analysing new detail released by the government, we are being asked for our views, so they can then do the analysing.

I’m talking about not one but two EMR-related consultations launched by the government in the past week. The more recent draft EMR Delivery Plan Consultation gives us our first proper look at all the Electricity Market Reform policy and implementation plans as a whole. But before we deal with that in the coming weeks, there’s the earlier Contracts for Difference Cost Exemption Consultation. This aims to gather feedback from businesses to determine how best to structure planned exemptions for those whose international competitiveness is most likely to be affected by the higher electricity costs resulting from the implementation of Contracts for Difference.

Unlike previous consultations on financial support to offset other elements of government policy, this one isn’t just targeting energy-intensive users. Because unlike previous consultations, this one concerns exemption rather than compensation, so all businesses are affected – those who become exempt and don’t pay, and everyone else who therefore pays more.

It’s clearly a tricky balancing act. There’s no question that those businesses finding it harder to compete on a global stage due to higher domestic energy-policy costs need support. We know from our own Round Table and other events with industrial and commercial customers that carbon leakage is a very real risk. After all, why stay in the UK if you can relocate elsewhere and pay far lower overheads?

But on the other hand, ramping up energy costs for others who don’t fall into the energy-intensive category, or who aren’t big exporters, is also likely to have a negative impact on the UK’s output and profitability.

Which brings us full circle – because not investing in new low-carbon energy sources will also damage the UK. And it’s this that Contracts for Difference is designed to incentivise – by guaranteeing a fixed price for low-carbon energy, so making investment in new low-carbon generation a more attractive option. But the cost, of course, has to funded by someone – and that someone will be energy consumers.

Our EMR policy team has calculated that Contracts for Difference (CfD) will add between £5-10 to every megawatt hour of electricity consumed by 2020, with a more accurate estimate due once more policy detail is available in the Autumn.

BIS – the Department of Business, Innovation and Skills – has also done some modeling to set out the additional potential financial impact for those not eligible for CfD exemption – and this ranges from 30p to 80p per megawatt hour between 2016 and 2020, depending on the scenario they choose to go with.

There are four potential scenarios currently put forward for consideration during the CfD Cost Exemption Consultation period. The government’s preferred option mirrors eligibility criteria for the EU Emissions Trading System and Carbon Price Floor compensation that’s already been agreed, with the latter pending final sign off. This means businesses must belong to an assigned list of SIC codes (for example, chemical, metal and paper manufacturers) or be able to demonstrate they trade internationally and are therefore at risk from rising UK electricity prices. Carbon costs must also be shown to exceed 5% gross value added (GVA) by 2020. This option provides 80% exemption from CfD costs.

The second option has the same eligibility criteria as the first, but the exemption support is reduced to 67%, so lessening the impact of redistributing costs to other UK consumers.

Option three extends the eligibility criteria to a broader base of businesses, with organisations able to qualify where they can demonstrate that the combined cost of Carbon Price Support, the EU ETS and Contracts for Difference amounts to more than 5% GVA in 2020.

The fourth and final option applies the same approach as three, but would vary the level of exemption, with the ‘core’ (ie those outlined in option one) qualifying for 80% exemption, while those meeting the criteria in option two, for example, qualifying for 50% exemption.

Of course, based on the response to the Consultation, which closes on 31 August, the government may come up with a different plan. But they won’t know what businesses prefer unless they hear enough views. That’s why we’ve arranged an easy-to-complete survey to help our customers present their feedback. Then we – as in the past with other key consultations – will collate the responses and submit the evidence together to BIS in one report.

You can access our EMR Pulse survey here. Your views matter – and they can make a difference to the way in which CfD cost exemption is applied, which will ultimately make a difference to your business. We’ll also be asking you to share your views on the broader EMR consultation in the coming weeks, but we’ll bring you a clear summary shortly so you can see what’s being considered without having to wade through the report yourself.