By Paul Gleaves, Head of Risk & Trading
According to energy research company Cornwall Insights, Feed-in-Tariff (FiT) costs for Q2 ’20 are set to reach record highs on the back of coronavirus-related demand destruction and unusually high levels of sunshine. This places electricity non-energy costs into even sharper focus, as the news comes hot on the heels of similarly negative extrapolations relating to other cost elements.
The FiT scheme is a government-led subsidy scheme aimed at promoting small-scale renewable generation, although closed to new entrants, the costs are recovered from suppliers via quarterly levelisations and an annual reconciliation. FiT unit costs are typically higher in Summer quarters when solar output is higher (meaning higher subsidy costs) and national demand is lower (meaning the costs are spread over a lower demand base). However, in this instance the effect is exacerbated given that:
⦁ May 2020 was the sunniest calendar month on record with 265.5 hours of sunshine, beating the record held since 1957;
⦁ Provisional National Grid transmission demand data shows Apr-May consumption c.19% lower than last year, resulting from coronavirus-led demand destruction.
FiT costs for Q2 ’20 had been forecast to come in at somewhere around 0.8 p/kWh, and these are the prices that suppliers will have planned for. However, it now seems inevitable that the suppliers will be invoiced at significantly higher cost during the next levelisation which is scheduled to take place on the 28th July. In isolation, this wouldn’t be hugely problematic, however it represents an underlying trend which has seen unexpectedly higher supplier costs as a result of coronavirus-led demand destruction and higher balancing costs. For example, BSUoS is set to out-turn at more than double the expected rate this Summer, whilst BEIS has already had to intervene with an interest free loan scheme to cover a ramp up in CfD costs to suppliers.
So what does this mean for businesses? Businesses on flexible and pass-through contracts should expect to see higher non-energy cost reconciliations and should take care in any future budget activity as there is huge uncertainty over how future cost items will pan out for many cost elements. For customers on fixed price contracts, it is beginning to seem inevitable that some suppliers will look to clawback losses via the application of volume tolerance charges or re-opening up costs via the application of contractual clauses.