The Supplier Obligation mechanism is a compulsory levy on electricity suppliers to meet the cost of contracts for difference (CFDs).
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.Further information about the Energy Act.
- 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
- Electricity Market Reform: Contracts for Difference provides detail as to how Contracts for Difference (CfDs) will work under Electricity Market Reform
- Implementing Electricity Market Reform (EMR) sets out the detail of the final EMR policy design.
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).
CFD Supplier Obligation: Consultation on improving efficiency & transparency
In September 2015, a consultation was published proposing amendments to the CFD Supplier Obligation design to improve its efficiency and transparency, thereby reducing costs to consumers. An impact assessment accompanies this consultation.
Consultations on changes to the supplier obligation (September 2014)
In September 2014, a consultation was published setting out proposed changes to the Supplier Obligation (EMR: Changes to the CFD Supplier Obligation). This included proposals for the implementation of exemptions from CfD costs for electricity intensive industries and imported renewable electricity, and minor and technical changes to the Regulations. Draft regulations and an impact assessment were published alongside this consultation.
A further consultation on proposed amendments to the Balancing and Settlement Code (BSC) required to implement the exemption for EIIs was published in November 2014.
The consultations, the Government response and related documents can be found on the following pages.
- Consultation outcome
- Consultation outcome
Consultation on implementation of Electricity Market Reform (October 2013)
A consultation setting out the Government’s detailed proposals for the implementation of the EMR was published in October 2013. This package included proposals for different options for the design of the Supplier Obligation. An impact assessment, technical analysis and draft regulations accompanied this consultation. The Government’s response to the consultation can also be found on this page.
- Consultation outcome
- Policy paper
Call for evidence on supplier obligation design (November 2012)
A call for evidence was issued in November 2012 setting out a proposed design of the Supplier Obligation and seeking stakeholder views on these proposals. A subsequent publication in August 2013 provided an update on the development of the Supplier Obligation provided the Government’s response to the call for evidence. Both documents are available on the link below.
- Consultation outcome