EGL22400 - Relevant generating stations: treatment of stations operating under certain contracts

There are a number of different government-backed schemes that have been made available to generators that are intended to encourage investment in renewable energy generation technologies. In addition to direct subsidy or grant funding options, there are schemes that offer support by removing some of the risks arising from volatility in the price of electricity, guaranteeing a set price for electricity generated and exported to the grid. The two main schemes for renewable energy generators in use as at 2023 are the Feed-in Tariff (FiT) and the contract for difference schemes (CfD). A newly legislated mechanism specifically designed to meet the challenges facing nuclear generators is the Regulated Asset Base model (RAB). F(2)A23/S280(1)(b) generally excludes receipts attributable to such arrangements from the charge to EGL.

The Low Carbon Contracts Company (LCCC) Contracts for Difference (CfD) scheme

The Government introduced a CfD scheme for low carbon electricity generators to encourage investment and grow the renewable sector in the UK. This scheme allows companies developing, constructing and operating renewable energy generating stations to enter into a CfD contract with the LCCC. The CfD provides for the power output from the station to be sold on wholesale market terms, with any difference between current market prices and the CfD strike price either payable to, or to be repaid by the generator. CfD strike prices are updated annually in line with inflation.

There is a general exclusion from liability to EGL for stations to the extent that operate under a CfD contract with the LCCC. The LCCC is owned by the Secretary of State for the Department for Energy Strategy and Net Zero (previously the Department for Business, Energy and Industrial Strategy). Generators are not exposed to market volatility to the extent that their output is subject to a CfD with the LCCC and will not be making the exceptional returns that are the subject of the EGL.

Stations operated under third party CfD contracts other than those with the LCCC are relevant generating stations. Receipts for the wholesaling of their power are taken into account, after adjusting for any payments under the CfD contract.

CfD contracts are managed by the LCCC and awarded in periodic batches. Where a generator has entered into a CfD with LCCC it has a period of time to commence generating under the contract and may sell its power direct to the market outside the terms of the contract until that date. This is often called the ‘merchant nose’ period. Any generation that is exported to the grid and sold outside the CfD contract, including the merchant nose, is within the scope of the EGL. Also, there are also some stations that are “part CfD”, in which case the undertaking will need to make a fair and reasonable apportionment in cases where a single meter measures both CfD and non-CfD generation.

Feed-in Tariff scheme

The FiT scheme was available for smaller renewable stations (generally up to 5MW installed capacity) but closed for new applications from 1 April 2019. Eligible generators qualify for two payments, a generation tariff for all power produced, whether or not exported to the grid, and an export tariff that ensures a set price for power exported to the grid from a licensed electricity supplier. It was possible for accredited stations to opt out of the export tariff and sell power at market rates.

Export tariffs are set centrally and vary according to the date when the station was first accredited for the scheme, its technology type, and by the installed capacity of the generating station. Rates are updated annually in line with inflation. To the extent that a generating station that has not opted out of the export tariff is exempted from the EGL.

Where an accredited FiT station sells its power on market terms, then it is a relevant generating station and the amount received for the exported power is within the scope of the EGL, subject to the threshold amount and the revenue allowance being exceeded by the undertaking that operates the station. See EGL23300 for the treatment of generation tariffs received by a relevant generating station.

Regulated Asset Base model

The Department for Energy Strategy and Net Zero (previously the Department for Business, Energy and Industrial Strategy) introduced legislation in 2022 providing for a new funding model for nuclear power. This scheme will operate in a similar fashion to the CfD scheme in relation to income from power but will also provide funding during periods when the station is under construction, or when works are undertaken to extend the life of an existing nuclear power station. A station will not be a relevant generating station to the extent that it is operating under the terms of a scheme covered by the RAB model.