Q3 2018 Supplier Obligation Levy Rate & 15 Month

Forecast

9 April 2018

Daniel Minifie, Forecasting Analyst

Questions

Please direct any questions during the webinar to:

info@lowcarboncontracts.uk

Disclaimer

This presentation (including all content, whether oral or in writing) has been prepared for the exclusive use and benefit of those recipients to whom it is addressed. Unless LCCC provides express prior written consent, no part of this presentation should be reproduced, distributed or communicated to any third party. The content of these slides and any statements made by LCCC in the presentation are provided in good faith; however, neither the content of the slides nor any statements made are or are intended to be any form of representation, undertaking, warranty or legal or other professional advice.

Contents

1. Understanding the Supplier Obligation

2. CFD Generation Capacity and Payments

3. Q3 2018 Supplier Obligation Levy Rate

4. Background and Assumptions

5. 15 Month Ahead Forecast

6. Operational Cost Levy

Understanding the Supplier Obligation

Supplier Obligation is a compulsory levy on electricity suppliers to cover CFD payments to

generators. It is paid by electricity suppliers in accordance with their market share of eligible gross

demand. Below is a simplified formula for illustration purposes.

The cost per MWh is given by:

where σ𝑖 is the sum over all CFD generators i

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𝒔𝒖𝒑𝒑𝒍𝒊𝒆𝒓 𝒐𝒃𝒍𝒊𝒈𝒂𝒕𝒊𝒐𝒏 𝒍𝒆𝒗𝒚 =σ𝒊𝒈𝒆𝒏𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒊 ∗ (𝒔𝒕𝒓𝒊𝒌𝒆 𝒑𝒓𝒊𝒄𝒆𝒊 −𝒎𝒂𝒓𝒌𝒆𝒕 𝒓𝒆𝒇𝒆𝒓𝒆𝒏𝒄𝒆 𝒑𝒓𝒊𝒄𝒆𝒊)

𝒕𝒐𝒕𝒂𝒍 𝒆𝒍𝒊𝒈𝒊𝒃𝒍𝒆 𝒅𝒆𝒎𝒂𝒏𝒅

Supplier Obligation is split across three payment mechanisms:

Interim Levy Rate (ILR)

• Daily rate in £/MWh: specified a quarter in advance, but paid on a daily basis

Total Reserve Amount (TRA)

• Reserve amount to cover uncertainty in CFD; set at a level to ensure a 95% probability that LCCC will, during a given period, be able to meet all payments it might have to make under the CFDs

• The CFD counterparty notifies the amount of each electricity supplier’s reserve payment for a quarterly obligation period before the 8th working day of the quarterly obligation period which immediately precedes that period; it is paid within the 5th business day following the invoice i.e. within the 12th business day of the quarterly obligation period to which it relates

Reconciliation

• Retrospective reconciliation based on metered data and actual price information

Understanding the Supplier Obligation

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CFD Generation Capacity by Fuel Type

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CFD Generation Payments by Fuel Type

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Q3 2018 Supplier Obligation Levy Rate

Interim Levy Rate (ILR)

• Set at £4.224 / MWh for the period

• Up from £3.820 / MWh in Q2 2018

Total Reserve Amount (TRA)

• Set at £31,981,875.00 for the period

• Down from £32,136,453.29 in Q2 2018

Supplier Obligation for the period from 01 July 2018 to 30 September 2018, to cover payments to

CFD generators accrued in the period:

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Forecast Assumptions: Generation

• Solar: Two CFD units are expected to generate in Q3 2018

• Biomass Conversion: Generation is expected from two CFD units – one commenced CFD generation at the end of Q4 2016 and another unit is expected to come online during Q2 2018

• Offshore Wind: Generation is expected from six CFD sites during the period; one of these is expected to come online in Q2 2018

• Onshore Wind: Generation is expected from one CFD site coming online during Q2 2018

• Advanced Conversion Technologies: Generation is expected from one CFD unit coming online during Q3 2018

Any significant change to our forecast and/or availability of actual settlement data may trigger an in-period adjustment to the TRA and ILR to meet payments.

Forecasts are affected by changes to start dates or planned outages, or due to unplanned outages occurring.

Unexpected levels of wind and solar radiation can also affect the generator payments.

For illustration, our primary forecasting assumptions include:

Forecast Assumptions: Other

• Market price: The forecast BMRP for Summer 2018 used for the determination of the Q3 2018

ILR and TRA carries very little uncertainty. This is because at the point of determination most

of the Summer 2018 baseload prices were already known. The impact of other variables such

as IMRP, load factors or start dates will therefore have a larger impact on costs.

• Electricity demand: The calculation of eligible demand assumes that 85% of 11.7 TWh of

‘Energy Intensive Industries’ demand will be exempt in 2018/19 as per the BEIS guidance at

the time LCCC produced the forecast.

Any significant change to our forecast and/or availability of actual settlement data may trigger an in-

period adjustment to the TRA and ILR to meet payments.

15 Month Forecast ILR with Low and High Case

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15 Month Forecast TRA with Low and High Case

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Further Assumptions Low and High Case Sensitivities

Base case:

• Commissioning dates as per expected date published in CFD register

Low case:

• Assumes generators commission 6 months after the Base case start date assumption

• Simulates an increase in market prices of 15%

High case:

• Assumes generators commission 2 months prior to the Base case start date assumption

• Simulates a drop in market prices of 13%

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LCCC Transparency Tool - https://sofm.lowcarboncontracts.uk/

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Operational Cost Levy

The Operational Cost Levy is a compulsory levy on electricity suppliers to cover the LCCC’s

operational costs. It is paid by electricity suppliers in accordance with their market share of eligible

gross demand. Below is a simplified formula for illustration purposes.

The cost per MWh is given by:

The Operational Cost Levy for the next three financial years has been approved. The levies are to be

paid on a daily basis, and are set as follows:

• 2018/19 (1 April 2018 – 31 March 2019) – set at £0.0570 / MWh (up from £0.0524 / MWh for 2017/18)

• 2019/20 (1 April 2019 – 31 March 2020) – set at £0.0592 / MWh

• 2020/21 (1 April 2020 – 31 March 2021) – set at £0.0614 / MWh

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𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝒄𝒐𝒔𝒕 𝒍𝒆𝒗𝒚 =𝒃𝒖𝒅𝒈𝒆𝒕

𝒕𝒐𝒕𝒂𝒍 𝒆𝒍𝒊𝒈𝒊𝒃𝒍𝒆 𝒅𝒆𝒎𝒂𝒏𝒅

End

Thank You!

Save the date: LCCC ESC Supplier Event – early July 2018 (we will confirm date soon)

Please direct any questions you have to:

info@lowcarboncontracts.uk