Our current blog series is based around the non-commodity costs of your bill. In today’s blog, we will discuss the CFD Contract for Difference. We firmly believe in shedding light on aspects customers may not have previously understood about their bills- knowing what you’re paying for is important. Whilst the energy industry, full of legislation can seem confusing, breaking down a bill and letting you know what the costs are for is key to us.
Electricity Market Reform (EMR) is legislation that came into effect in August 2014 to deliver new investment in low carbon sources. This introduced new costs into the electricity market which came into effect in April 2015 which appear on a bill as additional charges. If you’ve read our past non-commodity elements blogs, you’ll be aware of the costs we pay for running and maintaining our National Grid network. Additional to this, you’ll have seen in the news about our country’s responsibility for our environmental impact, in fact, in February it was reported by MoneySuperMarket that only 22% of UK energy comes from green sources and our air quality is, ‘among the worst in Europe.’ From these figures you can see why there’s a necessity for legislation such as EMR. The UK needs approximately £110bn of investment in energy infrastructure from 2014-2024 in order to secure power supplies for the future and reduce our environmental impact. The key mechanics of EMR will provide a system of support for low carbon power generators as well as ensure enough generation is available to meet demand.
Key elements of EMR:
There are two main cost elements for EMR which are:
Contract for difference (CfD)
CfD Contract for Difference supports new investment in all forms of low-carbon generation. This will include renewable energy, nuclear energy and CCS. This will pay a low carbon generator a fixed price for any electricity generated providing price certainty and encouraging investment in new technologies.
Low carbon generation projects can apply for a CfD and depending on it’s personal level of establishment, the project might have to compete in an auction to receive a contract.
Customers are protected from over-payment by this method:
The CfD will have the same requirements from generators in the way they sell energy into the market, but to reduce exposure to changing electricity prices there will be a variable top-up from the market price to an already agreed ‘strike price.’ As and when the market price exceeds this strike price, the generator is required to pay back the difference. So for example, if they agree a strike price of £90 per MWh and the wholesale market trades at £50 then they will receive a £40 per MWh top up payment. If the wholesale markets trade at £100 per MWh then the generator pays £10 back. It is therefore likely that CfD will be onerous the lower wholesale prices trade and difficult to forecast.
Capacity Market (CM)
We can consider the capacity market as an insurance policy of sorts in order to know there’s enough generated electricity to cover demands. The CM give us this security for our electricity by ensuring the capacity is in place to meet demand. This cost is covered by consumers by a ‘supplier levy’ on electricity suppliers. In return for this revenue, providers must be able to constantly meet demands- or face penalties.
If there’s any other aspects of your bill you’d like to discuss further, look out for further blogs on this topic, uploaded weekly. If you’d like to talk to one of our expert energy advisers, please don’t hesitate to get in touch!