What is a CFD?
CFD exists as a long-term business contract between an electricity generator and the Low Carbon Contracts Company (LCCC). It is a levy that was introduced to replace the Renewables Obligation. The CFD will provide consumers, generators and suppliers with clear and stable energy prices over time. It will stop unpredictable fluctuation of prices of energy derived from renewable resources and ultimately encourage investment in renewable generation.
Under the CFD scheme, if the price of electricity becomes too low to effectively support most costly generation through renewable energy sources, payments from the LCCC will be made to all CFD recipients. This will suffice as compensation for the lower price. So, the CFD does what it says on the tin- it guarantees payment for all differences in prices. The difference is measured against the ‘floor price’. Electricity prices are not allowed to fall below this price without a consequential compensatory payment being granted.
The Renewables obligation will be levied until 2037- the scheme was created with a 20 year lifespan, although, the CFD will eventually replace the Renewables Obligation in its entirety. Until this occurs however, it will exist as an extra cost on all energy bills, so it is important that you know what its purpose is.
As we continue to make strides toward a low-carbon future, the government have introduced an array of schemes with the intent of incentivising the nation to become more energy efficient and meet 2050 low carbon emissions targets.
The CFD is a ‘low-carbon incentive entity’. It was brought in to help decarbonise our energy market. Concerning the introduction of the CFD, the Government has stated that ‘we must decarbonise electricity generation and it is vital that we take action now to transform the UK permanently into a low-carbon economy, meet our 20% renewable energy target by 2020, and our 80% carbon reduction target by 2050’.
IThe Government understand the importance of keeping on track regarding our emissions reductions, and in addition to the above statement they have added: ‘Power emissions need to be largely decarbonised by the 2030s. At the heart of our strategy to deliver this transition is a new system of long-term contracts in the form of Contracts for Difference (CFD, providing clear, stable and predictable revenue streams for investors in low-carbon electricity generation.’
Costs for your Business
Back in April 2015, operational costs for CFD became the problem of the suppliers. They were made to recover the costs- the supplier obligation cost or (CFD rate).
The exact operational cost suppliers incur is 0.004p/kWh, which is £0.40/MWh. It will also be take the pressure off the National Grid.
Businesses that are energy intensive must use half-hourly automatic metering- this of course will measure exactly when and where the energy is being used and allow the business to be charge accordingly. It can also highlight areas where energy management systems can be implemented.
All costs incurred by Supplier will carry a little cost for businesses. These charges are recovered from customers via an electricity invoice.
Some suppliers have yet to establish exactly how they will be charging their customers. For the suppliers that have set out a framework for the costs, their cost recovery methods will be distinct from one another.
As well as securing the best utility deals for your business, SwiftSwitch exist to make the energy market and the contracts floating within it, more transparent for you as a customer. As a utility expert we can help you to gain clarity on the CFD costs each supplier charges.
If you have any burning questions lingering on your mind regarding CFDs, you can give SwiftSwitch a call and have a chat with one of our energy experts.