The government is consulting on plans to delay an increase in suppliers’ Contracts for Difference charges with the help of a £100 million loan to the Low Carbon Contracts Company (LCCC).
The fall in demand and electricity prices resulting from the coronavirus lockdown has led to an increase in top-up payments to generators. The government announced in April it would provide a one-off loan to the LCCC to help avoid an unexpected increase in payments for the second quarter of 2020 and give suppliers time to adjust.
The Department for Business, Energy and Industrial Strategy (BEIS) has now given more details, including what it is willing to offer.
As of the 25 April, the LCCC expected its shortfall in funding to be in the region of £40 million to £50 million once its £78 million reserve for the quarter had been exhausted.
Without a loan, the company said it would have made “in-period adjustment” to the interim levy rate to make up the shortfall. It expected suppliers’ total costs for the quarter to rise by between £90 million and £150 million, representing a 22 per cent to 35 per cent increase on a per megawatt-hour basis.
“Since suppliers generally set prices for customers in advance, this would have represented an unexpected cost to suppliers, to be absorbed by their margins,” BEIS explained in the consultation.
The department said the loan, which will be “interest-free and capped at £100 million”, will allow the LCCC to defer the increase until the first quarter of 2021. It said the government intends to cover two thirds of the increase suppliers’ costs for the second of 2020 and this should be enough to do that in most scenarios.
It is also consulting on corresponding amendments to suppliers’ obligations but said it would still offer the loan to the LCCC it if was unwilling or unable to proceed with the legislation: “Suppliers would therefore have to pay a higher lump sum to LCCC following the reconciliation process in July.”
In light of this deadline and the need for the legislation to go before parliament, BEIS has given less than a week – until 19 May – for responses to the consultation.
The department stressed that the loan is in response to the “truly exceptional circumstances” of the coronavirus pandemic and will not be repeated: “It must be emphasised that we are committed to upholding the self-financing nature of levies in the energy system and the government cannot be relied upon to provide capital for consumer-funded energy levies in future.”