Capacity Market charges – an FAQ
This year, business consumers will see a significant increase in their charges for supporting the Capacity Market. The scale of the increase will vary dramatically from consumer to consumer, and how the charges will appear on bills will also be highly varied. This FAQ looks at some of the more common questions Utilitywise has been facing as Capacity Market charges hit business energy bills.
What am I actually being charged for?
The Capacity Market is a scheme introduced by the Government to help improve security of supply for electricity. Annual auctions define how much capacity has been bought and at what cost. Those who are successful in the auction are required to provide capacity to the grid in times of system stress.
When will I start being charged for the Capacity Market?
A charge for the Capacity Market has been on energy bills for the last few years, but until 2017/18 the charge was small, generally reflecting the administration costs for setting up the scheme as well as for supporting small scale test projects. However, the costs will now rise sharply as the main scheme went live in October 2017.
What is included in the Capacity Market costs?
The costs of the Capacity Market are split into two parts. The administration or Operational costs, and the costs for the capacity, or the Obligation costs. The relatively small Operational costs are set annually and regulated by the Government. The Obligation costs for each year are dependent on the auction results for capacity being provided in that year.
What is the scale of costs being faced this year?
For the 2017/18 delivery year, 54GW of capacity was secured at the cost of £6.95/kW. The cost of the auction itself is therefore £375 million. With administration costs, this puts the total annual charge closer to £400 million for 2017/18.
How are these costs paid for?
Electricity suppliers are the primary bill payers for the Capacity Market costs, but they will pass these straight on to their customers. Every supplier will face a cost based on their proportion of UK electricity supplied during the year’s ‘peak’ demand periods. This is the demand seen during the winter, from November through to February, on working days between 4pm and 7pm.
Will all business be charged the same?
No, because each supplier will have a different level of exposure to the costs, and because suppliers are not all charging for the Capacity Market in the same way. Below is an example of the range of charging methods we’re currently seeing:
- Charged as p/kWh on all consumption over the year, split between a charge for the administration – the Operational Levy – and another for the running of the scheme itself, also called the Obligation Levy;
- Again, charged as a p/kWh on all consumption, as a single rate, with no distinction between Operation and Obligation costs;
- A single p/kWh rate on all consumption, including the costs associated with the Contracts for Difference (CfD), which is often labelled as the ‘EMR Levy’. This tends to be the case for non-half-hourly (NHH) consumers;
- A p/kWh charge on consumption, on the winter peak units, which correspond to the same time periods that the suppliers’ are charged on;
- A p/day rate charged over the year;
- A p/kWh charge covering the Obligation costs of the scheme, along with a £/month charge on the Operation costs for Capacity Market;
- A flat £/month charge covering all the costs; and
- Not charged separately including it in the standard unit rate for supply.
Is my Capacity Market charge set, or will it change?
While the overall costs of the Capacity Market are known before the start of the year, the charges that suppliers face – and so their customers – can vary over the year. This is due to the supplier charges initially having to be estimated. The Capacity Market year begins in October, before the winter period when demand is recorded to define a supplier’s exposure to the Capacity Market costs. As such, the demand is estimated, and so are the charges. However, once the winter has passed, the actual level of winter demand is known, and suppliers’ costs are reconciled. Their charges to consumers are also then expected to change.
When will the Capacity Market charges change?
The suppliers have said that consumer charges will be reconciled alongside their own costs on contracts where Capacity Market charges are fully passed through. This is expected to be in the March-April period, with the result being either a credit or a debit on energy bills. This is similar to the way Triad costs are reconciled for those on Energy-only pass-through contracts. For other contracts, such as those NHH sites with fully inclusive energy agreements, the price change may not emerge until much later when contracts are reviewed. With this being the first year when these costs are going to have an impact on end user bills, there could be some significant variations in how any reconciliation is applied. As such, careful attention should be taken of bills and how the Capacity Market is being charged.
Can I dispute my demand estimate going into the winter?
This is very much going to be different from supplier to supplier. Some may allow discussion on this issue, particularly during the first few years of the scheme when there are uncertainties over its operation and application. However, many suppliers have also underlined that consumers will have agreed their consumption profile at the time of signing the contract, so this may limit the level of debate that can occur. The matter is further complicated if the site is NHH-metered, or otherwise entering into a contract on the basis of an assumed profile. This highlights the increasing need for businesses to install accurate metering as soon as possible in order to limit the potential for inaccurate charging. In short, it is worth asking with regards to potential revisions in estimates, but, there is no onus on the supplier to vary their forecasts beyond what was agreed in the initial contract.
Can I cut my Capacity Market costs?
Yes, you can. The basis of the Capacity Market cost is winter peak demand. If your consumption can be cut during this period, then your overall costs will also be reduced. This may be done either by simply cutting overall demand, or by shifting energy usage to different times of the day or year. Again, there are strong similarities to how Triad costs can be avoided.
Utilitywise can help
We can help you control all your non-commodity costs, including Capacity Market charges. You can prepare for future charges by budgeting with the help of our Long-Term Price Forecast Report, and ensure your charges have been applied correctly with our Bill Validation service.
If you have any further queries, or need help in mitigating the costs of the Capacity Market, you can contact our Market Intelligence team on 01527 511 757or by emailing email@example.com