OK, deep breath. This isn't as succinct as I was hoping it would be.
How does the FiTs levelisation process work?
Let's start with an explanation of why there is a need for a levelisation process in the first place.
Imagine there are only two electricity suppliers in the UK - BiG and SmaLL.
BiG has 25 million customers (and supply 91% of the total market in terms of kWh) none of whom have any renewable systems installed.
SmaLL has 2.5 million customers (9% of the market) and 200,000 of them have renewables - that is 100% of the FiT market.
So BiG have to make zero payments to their customers in respect of FiT generation while SmaLL has to pay out, say, £200 million a year - £1,000 per registered FiT customer.
Now if SmaLL can only recover their £200 million FiT costs from their own customers then they are going to have to charge something like an extra 2p per kWh (assuming an average 4500 kWh consumption per customer) for their electricity. That's going to make them very uncompetitive.
Enter the FiTs levelisation process to address this issue.
Levelisation requires that BiG and SmaLL both pay in to a central fund (administered by OFGEM) that enables the scheme to work in a balanced manner.
If the total FiTs payments are £200 million then BiG, with 91% of the market, will be required to pay £182 million in to the fund. And SmaLL, with 9% of the market, will have to pay in £18 million.
BiG will have to increase their prices to their customers in order to recover the extra £182 million costs that they now have to find. And SmaLL only have to get £18 million from their customers. So both companies have to charge £7 per customer per year to generate the FiTs payments. And they both do this by increasing their kWh rates and FiTs has no impact on price competition.
OFGEM will actually require returns from both companies and will ask BiG for the £182 million. They will ask for nothing from SmaLL but will pay them the £182 million from the fund which, when added to the £18 million they have already collected from their own customers, now gives them the required £200 million to pay to their FiT generators.
That's the basic principle of FiTs levelisation, but the reality is clouded by rather a lot of detail.
There are more than just two suppliers in the UK (25 were registered as FiTs suppliers in 2010/11), suppliers fall in to one of two types (mandatory licensees for the big 6 suppliers and voluntary licensees for the smaller companies), suppliers have an irregular and changing base of FiT customers, the amount paid to FiT customers varies and includes export payments (only the deemed export part is included in levelisation and metered exports are handled separately), an administration fee is paid to suppliers (£60 or £95 in the first year for each customer) and in order to help cash flow there are 4 levelisation periods every year - one per quarter.
But essentially all that is happening is that each supplier notifies OFGEM how much it has paid to its own FiTs customers and either pays a balance into the central fund from money it has collected from its customers or receives a payment from the fund to make up any shortfall. The fund notionally ends up empty after all the payments have been made.
So let's look a little more closely at how export payments are handled through this process. This happens in several steps.
Deemed export payments are made by suppliers to generators who do not have export meters fitted. This is currently based on 50% of total generation for all technolgies apart from hydro where the deemed export amount is 75%. Payments are made at the prevailing export tariff which started in 2010 at 3p per kWh. These payments are shown as item 2 in the table below.
Separately from these payments OFGEM calculates the notional value of all the deemed exports by applying a System Sell Price (SSP) factor to the amount of kWh deemed to have been exported. The SSP factor is an average time-weighted system sell price for electricity under the Balancing and Settlement Code (BSC) for the relevant period. This value is deducted from the levelisation fund. This is item 4 in the table below.
As mentioned the payments made by suppliers for metered exports are not included in the levelisation process. These costs are effectively handled internally by each supplier via the BSC if they have decided to register the export meters under that system.
The actual amounts in the levelisation fund for FiTs Year 1 (2010/11) were:
| 1. FIT generation payments | £12,487,028.83
|
| 2. FIT deemed export payments | £357,453.08
|
3. Qualifying FIT admin costs
| £2,044,560.00
|
| 4. Value of net deemed export | (£453,717.14)
|
| 5. Net Levelisation fund | £14,435,324.77
|
Payments for metered exports in the year were £90,797.91.
So in 2010/11 a net £14,435,324.77 was available for redistribution amongst the participating suppliers to balance their FiT payments to their market share. As far as exports are concerned suppliers have paid out £357,453.08 for deemed export which is paid back to them via levelisation. But they have also 'lost' £453,717.14 in respect of the calculated market value of that same export.
Working back from these figures we can calulate the following (with a few assumptions such as there is actually zero deemed export from hydro systems).
With deemed export payments of £357,453.08 at 3p per kWh there was 11,915,102 kWh of deemed export.
At 50% deeming level this represents 23,830,204 kWh of total generation.
If, maybe, 75% of total generation was actually exported (we cannot know this figure as it has not been metered) then 17,872,654 kWh has been exported to the grid and supplied to houses neighbouring the generation sites. At 10p per kWh charged this is nearly £1.8 million income to the suppliers.
This has cost the suppliers £453,717.14 giving a profit of £1.3 million.
But there are some other adjustments that need to be made to this as suppliers have to pay other charges (such as DUoS and TUoS) for the electricity they supply. These would be in the region of 25% leaving the suppliers with a net profit of about £1 million.
Sources:
DECC, 2010, Feed-in tariffs: Government’s response to the summer 2009 consultation
http://www.decc.gov.uk/assets/decc/...@_FITsconsultationresponseandGovdecisions.pdf
DECC, 2011, Qualifying costs for FITs Year 2
http://www.decc.gov.uk/assets/decc/...9-schedule-of-qualifying-fits-cost-year-2.pdf
OFGEM, 2011, Feed-in Tariff (FIT): Annual report 2010 - 2011
http://www.ofgem.gov.uk/Sustainability/Environment/fits/Documents1/FITs Annual Report 2010 2011.pdf
OFGEM, 2012, Feed-in Tariff: Guidance for licensed electricity suppliers (Version 3)
http://www.ofgem.gov.uk/SUSTAINABILITY/ENVIRONMENT/FITS/INFO/Documents1/FIT Supplier Guidance.pdf
The Feed-in Tariffs (Specified Maximum Capacity and Functions) Order 2010
The Feed-in Tariffs (Specified Maximum Capacity and Functions) Order 2010
