Collection: Electricity Market Reform: CFD Supplier Obligation

By HM Government

Overview of the Supplier Obligation

The Supplier Obligation mechanism is a compulsory levy on electricity suppliers to meet the cost of contracts for difference (CFDs). It is collected by the Low Carbon Contracts Company (the CFD Counterparty), who are responsible for making payments to CFD generators.

It is also the mechanism through which any payments back from CFD generators (when the reference price is higher than the strike price) will be paid to electricity suppliers.

Each levy period will be based on a calendar quarter with the underlying amounts owed by suppliers over the quarter equal to the CFD payments owed to generators in respect of the quarter.

Suppliers will make pre-payments against the underlying obligation. These will consist of:

  • an interim rate payment, charged at a fixed £/MWh rate on a daily basis across each levy quarter, and
  • a lump sum ‘reserve’ payment at the start of each levy period.

The Low Carbon Contracts Company (LCCC) will set and notify suppliers of the interim levy rate and total reserve amount three months before the start of each quarter.

At the end of every quarterly levy period, the LCCC will undertake a reconciliation of suppliers’ interim payments against suppliers’ CFD liabilities (‘levy reconciliation’). Reconciliation payments will be due 90 days after they are determined, on the same day as the next quarter’s reserve payment.

Suppliers will also be required to post collateral to cover 21 calendar days of interim rate payments. Further details on the Supplier Obligation are set out in the Implementing EMR publication and the Supplier Obligation Regulations.

The EMR: Changes to the CFD Supplier Obligation and Electricity Intensive Industries exemption from CFD costs: Amendments to the Balancing and Settlement Code consultations introduced two exemptions to Supplier Obligation policy:

  • Suppliers can be exempted from supplier obligation and operational cost payments on up to 85% of the electricity supplied to eligible electricity intensive industries (EIIs).
  • The Green Import Exemption (GIE) will exempt renewable electricity imported from other EU member states and supplied to consumers in GB from the cost of the CFD if it was generated from stations which commissioned after 1 April 2015.

Key documents and links

  • The Energy Act 2013 sets out the legislative framework for delivering secure, affordable and low carbon energy. This includes provisions for to establish a Contracts for Difference (CFD) scheme.
  • The Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 establish a mechanism to allow the CFD Counterparty to raise funds from all licensed electricity suppliers in Great Britain to pay for the liabilities that it has to make for payments to electricity generators under the Contracts for Difference scheme, and to return money to suppliers where appropriate.
  • Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015 introduce exemptions for electricity intensive industries and renewable imported electricity from supplier obligation costs; set the operational costs levy for the period from 1st April 2015 to 31st March 2016; and make minor and technical amendments to the supplier obligation regulations.
  • BSC Amendments (draft) set out the arrangements that will enable the CFD Counterparty (LCCC) to identify electricity supplied to eligible EIIs to apply the EII exemption.

Delivery partners and institutions

  • The Low Carbon Contracts Company (the LCCC) is a company owned by the Secretary of State for Energy and Climate Change that has been designated as the CFD Counterparty. The LCCC will sign and manage CFDs, set the supplier obligation interim rate and reserve amount, and oversee the Settlement Services Provider.
  • The EMR Settlement Services Provider will deliver settlement for the Contract for Difference (CFD) and the Capacity Market (CM) on behalf of the Low Carbon Contracts Company and the Electricity Settlements Company (the CM Settlement Body).
  • Department for business innovation and skills (BIS) are responsible for developing and administering the policy for exempting energy intensive industries from CfD costs, and other schemes for compensating energy intensive industries for the cost of renewable and low carbon support policies.

Related EMR policy

Development of Supplier Obligation Policy

The development of the Supplier Obligation policy has taken the form of a number of consultations, papers and expert groups, all of which have informed the final policy design. DECC established the institutional framework expert group to consider the design of the institutional frameworks and supplier obligation mechanism to support EMR. This group met periodically in 2013 and 2014.

This page collates links to the existing supplier obligation policy development pages in reverse chronological order (starting with the most recent).

Source:: Collection: Electricity Market Reform: CFD Supplier Obligation