FiT costs to reach all-time high amid COVID outbreak

Energy Third Party Charges (TPCs) have certainly been in the limelight recently, and rightly so as less consumption from non-domestic sectors is resulting in a greater recovery of money from domestic households amid the COVID-19 outbreak.

Several measures have been taken to date to protect domestic suppliers and consumers from these sharp rises in costs, including the deferral of additional costs arising from Contracts for Difference and Balancing Services Use of System charges, the latter of which is yet to be approved.

However, little mention has been given to the Feed-in Tariffs (FiT) scheme to date, which is also expected to see a sharp cost increase for the upcoming quarterly levelisation due in July.

What is FiT levelisation?

FiT costs are recovered from electricity suppliers through quarterly levelisations, and an annual reconciliation. The levelisation process spreads these costs uniformly across all suppliers so that, although FiT licensees directly make the payments to eligible generators, they aren’t the only ones baring the costs. This means that all licenced electricity suppliers pay for the costs of the FIT scheme in proportion to their share of electricity supplied.

FiT costs are typically highest in summer quarters as lower demand and increased solar output tends to drive costs up, particularly on a £/MWh basis. Quarterly costs can therefore deviate significantly quarter to quarter.

April – June 2020 sees extremes

A combination of extremes in sunshine hours and low demand resulting from the COVID-19 outbreak are expected to drive FiT costs up to an all-time high for Q220 (April – June).

Both April and May have seen an unusually high number of sunshine hours for the time of year. The Met Office reported that May 2020 was the sunniest calendar month on record with 265.5 hours of sunshine, beating the previous record of 264.9 hours in June 1957. April also saw a high number of sunshine hours, at 224.5, the highest of any April month on record.

Initial transmission system demand (ITSDO) data from National Grid has also shown that power demand has plummeted for the first two months of this quarter, due the UK’s lockdown restrictions. Average daily power demand was 0.56TWh across April and May 2020 compared to the 0.69TWh during the same period last year.

This current combination of high sunshine hours and low demand is therefore creating the perfect conditions to ramp up FiT costs this quarter.

Costs to be at an all-time high

In April – June 2019 outturn FiT costs came to £8.0/MWh. And before COVID-19, we were forecasting FiT costs for April – June 2020 to be little higher at £8.3/MWh – this is approximately the price that energy suppliers would have been preparing for in their tariffs.

But 39% higher sunshine hours and 18% lower demand in the first two months of the quarter point towards higher costs. Electricity suppliers are due to be invoiced for FiT levelisation on 28 July, with payments due 11 August 2020.

A case for deferral?

Record-high costs under such unprecedented circumstances raises questions over whether these additional costs should be deferred. Perhaps this could be done in a similar manor to the CfD scheme where BEIS has agreed to provide a one-off interest free loan to help cover the projected shortfall in CfD payments, and deferring repayment until April – June 2021.

However, the FiT scheme works differently and could be a more tricky issue to resolve. Unlike CfD payments – which are payed to generators by the Low Carbon Contracts Company – FiT costs are paid to generators by suppliers themselves (i.e. by FiT licensees).

Therefore, additional considerations would need to be made in order to protect FiT licensees from baring a disproportionate amount of the costs.

Our Feed-in Tariff Cost Forecast service projects quarterly FiT levelisation costs out five years. Please contact l.woolsey@cornwall-insight.com or t.dixon@cornwall-insight for further information, or questions on COVID-19’s impacts.

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