Settling up during an energy crisis

The Contracts for Difference (CfD) and Capacity Market schemes have been severely tested by the energy crisis. Patrick Bibby, senior head of operations at the Low Carbon Contracts Company (LCCC), which manages the low-carbon generation auctions, talks about returning £500 million to suppliers, how the company would cope with an expansion of the current CfD scheme and about potential new roles around hydrogen and carbon capture.

In normal times, low-carbon generators with CfDs could expect to be regular recipients of top-up payments collected from levies on customers’ electricity bills.

Although the balance of payments was already forecast to become more even over time after many projects won contracts at “subsidy-free” strike prices in most recent CfD allocation rounds, the previous flow of money has completely reversed over the last year. Since gas prices began surging last autumn, with a knock-on effect on power prices, generators have returned somewhere around half a billion pounds to consumers via the LCCC and suppliers.

Patrick Bibby, senior head of operations at the LCCC, says that despite some minor teething problems the CfD settlement process has worked “really smoothly” in this new situation, adding: “It’s been very positive and we haven’t had any operational issues off the back of it.”

He says all contracted generators, even the earlier projects with the highest strike prices, have been continuously returning money to consumers: “This is why it’s gone up to half a billion.”

Bibby says the energy crisis has further demonstrated the merits of the CfD mechanism, which was already being credited with driving down the cost of low-carbon generation: “I think from our company perspective, we’ve seen a really successful period for the CfD scheme because there’s a lot of news at the moment around the cost of levies and green taxes and things like that, and we’ve got to a place where CfDs are no longer deemed a green levy and it’s a benefit to consumers.

“From a very selfish low-carbon contracts perspective, it’s actually been a really good thing.”

When Utility Week asks if there are changes that could be made to the scheme to make it work better in this new mode of operation, for example, allowing the Interim Levy Rate to be set below zero so less money has to be returned to suppliers during quarterly reconciliation, Bibby says: “We’re constantly looking at this. There is always the chance to tweak the rules that govern how money flows because what we don’t want to do is hold on to money.”

But he adds: “We also have to protect ourselves because we don’t want to get into a place where we are paying money we haven’t got and I think at the present time things are working smoothly. We haven’t got into a place where there are excessive positions.”

He continues: “At LCCC we spend a lot of time forecasting what we believe the wholesale price will do and how that interacts with our contracts. It’s kind of a standard process that we look at on a frequent basis so I don’t think we are concerned with it and we do ensure that we cover any risks, but obviously the market can fluctuate in many different ways – you can’t predict the future – so there are times when we have to make in-period adjustments to reflect what’s gone on.”

With potential gas shortages raising the risk that the electricity system will experience a stress event this winter, Bibby says the Electricity Settlements Company – LCCC’s sister organisation and the counterparty for Capacity Market agreements – has been preparing for this possibility.

“We’ve gone through a stress event testing programme where we’ve been looking at the lowest level of data to ensure that if a stress event was to occur, we’d have a proactive handle on every unit that’s in the Capacity Market and the half-hourly data that goes with them.

“The rules rely on a capacity provider sending data to us if a stress event was to occur and we’ve flipped this on its head.”

The ESC will instead send the data it is already able to access through the normal balancing and settlement processes and ask capacity providers to confirm it is correct.

Although this new process will not cover all Capacity Market units, Bibby says this will drastically reduce the chance of the company missing the “very strict timings” to settle a stress event: “There will be problems, there will be data issues, but we’ll be focussing on the right issues rather than communication issues and things like that.”

Reaching new heights

As well as the emergence of the energy crisis, the last year has also seen the largest CfD allocation round to date – both in terms of the number of contracts and the amount of capacity contracted – as well as the first in more than half a decade to include both onshore wind and solar.

With the 98 contracts from the fourth allocation round being signed over the summer and many more on the way following the government’s pledge to hold auctions annually for the foreseeable future, Bibby says LCCC has been working to ensure its operations can scale quickly and efficiently.

He says most of its systems are now automated, with data flowing in from the industry’s normal balancing and settlement processes, meaning “it’s very low cost to add in contracts”. These systems will flag problems if they need to be addressed manually: “There would be an uptick in things you have to sort out but not on a large scale. It’s very scalable.”

The government was at one point planning a big expansion of the CfD scheme this winter in an effort to claw back windfall revenues from low-carbon generators not already participating. It instead decided to impose a cap on their revenues after negotiations with the industry came to nothing, but the recently passed legislation introducing the cap also included provisions for a CfD expansion further down the line.

Bibby says “nothing’s been agreed or is permanent yet” but “we’ve gone in there with a very positive mindset showing that we can upscale very quickly.

“The CfD is a private law contract so there are technicalities that need to be agreed and it has to be that kind of voluntary approach from generators but from our perspective, yes, we can do this. We would welcome it in fact.

“We think the CfD has been a huge success and if it can offer future stability alongside those organised contracts, then we can only see that as a good thing.”

The government has also floated the possibility of introducing new variants of CfDs, for example, with a cap and floor on prices rather than a fixed strike price. “I think we’re set up to deal with change quite quickly and dynamically,” Bibby comments.

LCCC has additionally been working with the government on the introduction of new CfD-type schemes for electricity generation with carbon capture and storage (CCS), industrial CCS and hydrogen production, both blue and green.

“That’s been a bit more of an advisory function related to our lessons learnt from the Contracts for Difference,” says Bibby. “We’re at different stages in development and the contracts signing will be over the next few years so we’re not in the settlement system or delivery process yet, but we have been recognised as the counterpart”.