The Low Carbon Contracts Company (LCCC) has said it expects to return more than £39 million of Contracts for Difference payments to suppliers as result of exceptionally high power prices over the last three months of 2021.
The body said the final quarter of the year was the first in the scheme’s history in which generators returned more money than they received.
Under the Contracts for Difference (CfD) mechanism, low-carbon generators receive payments to top them up to an agreed strike price if wholesale prices are lower but must also return the excess if wholesale price are higher than the strike price.
The scheme is funded by suppliers, which pay a levy on each unit of consumption by their customers to cover the expected costs of the top up payments. Although suppliers are charged on a daily basis, the levy is fixed in advance for each quarter. Suppliers must also make lump sum contributions to a reserve at the beginning of each quarter to cover potential shortfalls.
After the preceding week became the first ever to see net negative payments to generators, LCCC made an in-period adjustment to the Interim Levy Rate (ILR) on 14 September, reducing it to £0/MWh – the lowest amount it is allowed to charge. It remained at this level for the final quarter of 2021.
At the end of each quarter, the payments are reconciled. Any surplus funds are put towards the Total Reserve Amount (TRA) to be paid to the LCCC for the next quarter, reducing suppliers’ required contributions. If the sum of the overcollection and the current TRA is higher than the next quarter’s TRA, the difference is returned to suppliers.
The TRA for the final quarter of 2021 is around £209 million and net payments by generators for the period are currently expected to be almost £133.7 million. The TRA for the first quarter of this year has been set at around £303.4 million, meaning the LCCC expects to return roughly £39.2 million to suppliers.
Given the ongoing high wholesale prices, the ILR has been kept at £0/MWh for the first quarter of 2022.