Calculation of the R-factor in determining the Public Service Obligation Levy

 
Calculation of the R-factor in determining the Public Service Obligation Levy
Calculation of the R-factor in determining the Public
               Service Obligation Levy

DOCUMENT                   Decision Paper
TYPE:
REFERENCE:                    CER/08/236

DATE                     20th November 2008
PUBLISHED:
CONTACT:                   James Mc Sherry
                           jmcsherry@cer.ie

                        The Commission for Energy Regulation,
                        The Exchange,
                        Belgard Square North,
                        Tallaght,
                        Dublin 24.

                        www.cer.ie
CER – Information Page

Abstract:

The calculation of the PSO levy in a given PSO period requires an ex-ante
estimate of the monies recoverable in that PSO period by relevant parties,
plus the calculation of the monies that should have been recovered by
relevant parties two PSO periods ago. This decision paper addresses the
ex-post calculation of the correction factor (‘R-factor’) to apply in
determining such monies owed to/from the PSO fund. This paper also
addresses responses to the proposed decision paper in relation to the
calculation of the R-factor (CER/08/170) and any issues that were raised
by respondents in relation to that paper regarding the PSO.

Target Audience:

Electricity generators and suppliers (including those participating in the REFIT
scheme), and electricity customers

Related Documents:

   •   Electricity Regulation Act 1999

   •   Notification of Public Service Obligations 2000

   •   S.I. No. 217 of 2002 - Electricity Regulation Act 1999 (Public Service
       Obligations) Order 2002 as amended by S.I No. 284 of 2008.

   •   PSO Invoicing and Collection Procedures, CER 03/013, 27th January
       2003:
       http://www.cer.ie/en/renewables-decision-
       documents.aspx?article=ce87d5b2-be1b-48da-be3c-a209dd82cd22

   •   REFIT Terms and Conditions/Clarifications:
       www.dcenr.gov.ie/NR/rdonlyres/E260E316-B65A-4FDC-92F0-
       9F623BA18B55/0/REFITtermsandconditions.doc

   •   Proposed Approach to Setting the PSO benchmark Price in SEM AIP-
       SEM-07-240 PSO Consultation Paper: Published June 1st 2007
•   PSO Benchmark Price Setting Methodology AIP-SEM-07-431 PSO
    Decision        Paper       :     Published      July    31st     2007
    http://www.allislandproject.org/GetAttachment.aspx?id=d5e5c834-8551-
    4551-81df-f0cf94326045

•   Consultation on the Arrangements for the Public Service Obligation Levy,
    CER/08/093:
    http://www.cer.ie/en/renewables-current-
    consultations.aspx?article=39ce537a-1620-486d-b93e-bc70ab5934ca

•   Decision on Arrangements for the Public Service Obligation Levy,
    CER/08/153:
    http://www.cer.ie/en/renewables-current-
    consultations.aspx?article=39ce537a-1620-486d-b93e-
    bc70ab5934ca&mode=author

•   Proposed Decision in relation to the Ex-Post Correction Factor to apply in
    the Calculation of the PSO Levy CER/08/170:
    http://www.cer.ie/en/renewables-current-
    consultations.aspx?article=39ce537a-1620-486d-b93e-bc70ab5934ca

•   PSO Levy 2008/2009 Decision CER 08/129:
    http://www.cer.ie/en/renewables-decision-
    documents.aspx?article=d96d9b61-b24f-414e-b93e-abe0f4ce561e
Executive Summary
Section 39 of the Electricity Regulation Act 1999 sets out the legal basis for the
Public Service Obligation (PSO) levy in Ireland. Statutory Instrument No. 217 of
2002 made under Section 39 requires that the Commission for Energy
Regulation (‘the Commission’) review the costs associated with the PSO and set
the associated levy for the required period.

In June of 2007, the Commission and the Northern Ireland Authority for Utiltity
Regulation (NIAUR) consulted on and determined the methodology for setting the
ex-ante benchmark price for the PSO in the Single Electricity Market (SEM). This
decision paper decides upon the methodology for the calculation of the ex-post
correction factor - the ‘R-factor’ – for all relevant parties in the context of PSO.
This paper deals with the approach to be used in the calculation of the R-factor
for both the Renewable Energy Feed in Tariff (REFIT) and other mechanisms
supported by the PSO.

The R-factor is calculated as the difference between a supplier’s ex-ante
estimate of entitlements under the relevant PSO scheme and the actual
entitlements determined two PSO periods later through the submission of
audited, verifiable figures. The ex-post figures for review will be obtained through
independently audited submissions from suppliers to the Commission.

Over the course of the consultation on the R-factor, there have been numerous
requests for clarification on issues surrounding the R-factor itself and other
issues in relation to the PSO, in particular with regard to the REFIT scheme. This
decision paper addresses those requests, along with any previous clarifications
outlined in the Commission’s proposed decision paper on the R-factor
(CER/08/170).
Table of Contents

1.0      Introduction ................................................................................................. 1
  1.1       The Commission for Energy Regulation ............................................................. 1
  1.2       Purpose of this paper.......................................................................................... 1
  1.3       Structure of this paper ........................................................................................ 1
2.0      Overview ..................................................................................................... 3
  2.1       Background......................................................................................................... 3
  2.2       R-Factor .............................................................................................................. 5
3.0      Response to Comments Received to CER/08/170 ..................................... 7
  3.1       Distributed Nature of REFIT Information ............................................................ 7
  3.2       Application of CPI and EURIBOR ....................................................................... 8
  3.3       Pre-2008 REFIT Payments............................................................................... 10
  3.4       Requirements Regarding Supplier Submissions .............................................. 11
  3.5       Ex-ante Payments to the PSO Fund & Legislative Changes ............................ 12
  3.6       Capacity Payments ........................................................................................... 13
  3.7       Compensation Payments based on existing MSQ Contracts ........................... 14
  3.8       Use of MSQs for Opportunity Payment Calculations ........................................ 14
4.0      Summary of Decisions .............................................................................. 16
  4.1       Non-REFIT PSO Revenues and Costs ............................................................. 16
  4.2       Definitions of MG and MGLF ............................................................................ 16
  4.3       CPI & EURIBOR ............................................................................................... 16
  4.4       Pre-2008 REFIT Payments............................................................................... 17
  4.5       Supplier Submissions ....................................................................................... 17
  4.6       Treatment of REFIT PPAs ................................................................................ 17
  4.7       REFIT Balancing and Technology Difference Payments .................................. 18
  4.8       In-Market REFIT Opportunity Cost Payment .................................................... 18
  4.9       Out-of-Market REFIT Opportunity Cost Payment ............................................. 19
  4.10      R-factor ............................................................................................................. 19
5.0      Conclusions & Next Steps ......................................................................... 21
Appendix A – Glossary of Terms .......................................................................... 1
Appendix B –             REFIT R-Factor Calculation ........................................................ 3
PSO Ex-Post Correction Factor CER/08/236

1.0 Introduction

1.1 The Commission for Energy Regulation

The Commission for Energy Regulation (‘the Commission’) is the independent
body responsible for overseeing the regulation of Ireland's electricity and gas
sectors. The Commission was initially established and granted regulatory powers
over the electricity market under the Electricity Regulation Act, 1999. The
enactment of the Gas (Interim) (Regulation) Act, 2002 expanded the
Commission’s jurisdiction to include regulation of the natural gas market, while
the Energy (Miscellaneous Provisions) Act 2006 granted the Commission
additional powers in relation to gas and electricity safety.

The Electricity Regulation Amendment (SEM) Act 2007 outlined the
Commission’s functions in relation to the Single Electricity Market (SEM) for the
island of Ireland. This market is regulated by the Commission and the Northern
Ireland Authority for Utility Regulation (NIAUR). The Commission is working to
ensure that consumers benefit from regulation and the introduction of competition
in the energy sector.

1.2 Purpose of this paper

The purpose of this paper is to set out the Commission’s decision with regard to
the methodology to be applied to the ex-post calculation of the R-factors to apply
in calculating the monies owed to/from suppliers in complying with their
obligations in relation to the PSO and, in the case of REFIT1, monies (if any)
owed in accordance with the provisions in clause 5.4. This paper also addresses
any further clarifications requested by respondents pertaining or related to the R-
factor or PSO.

1.3 Structure of this paper

This paper is structured in the following manner:

    •   Section 2.0 details the background to this decision paper, including other
        consultations and decisions in relation to the PSO. An overview of the R-
        factor is also given.

1http://www.dcenr.gov.ie/NR/rdonlyres/E260E316-B65A-4FDC-92F0-
9F623BA18B55/0/REFITtermsandconditions.doc

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PSO Ex-Post Correction Factor CER/08/236

  •   Section 3.0 outlines the Commission’s responses to submissions from
      stakeholders in relation to the proposed decision paper CER/08/170.
  •   Section 4.0 summarises the decisions and clarifications made with regard
      to the initial consultation CER/08/093, the proposed decision CER/08/170
      and this decision paper in concerning the ex-post calculation of the R-
      factor and any issues raised by respondents in relation to this.
  •   Section 5.0 outlines the conclusions and next steps the Commission will
      be taking after this decision paper.

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PSO Ex-Post Correction Factor CER/08/236

2.0 Overview
In this section, the background to this decision paper is given, followed by an
outline of the R-factor and how it is calculated.

2.1 Background

Under Section 39 of the Electricity Regulation Act 19992 the Commission is
responsible for the imposition of PSO on the Board, licence holders and holders
of permits under Section 37 of the Principal Act. S.I. No. 217 of 20023 was made
by the then Minister for Public Enterprise under Section 39 which sets out more
detail in relation to the above matters. S.I. No. 217 of 2002 (as amended by S.I.
No. 284 of 2008) provides, inter alia, for the calculation of the PSO to allow for
the recovery of costs by relevant parties in accordance with the notifications to
the EU Commission regarding the various mechanisms supported by the PSO.

Under S.I. No. 217 of 2002, the Commission is obliged to approve ESB’s
estimated additional costs to be incurred in complying with the PSO. These
include additional costs related to the contracting of ESB with generating stations
which use peat as their primary energy fuel and generating stations that use
renewable, sustainable or alternative forms of energy as their primary fuel
source.

The original November 2000 Notification (‘the Notification’) set out the broad
areas that may be covered by the PSO (as listed in Section 39), namely security
of supply, use of indigenous fuel sources and environmental protection. It
referred specifically to the schemes envisaged to be covered by the PSO at that
juncture, i.e. the imposition on the ESB of a requirement to have available to it
the output of electricity generating stations using peat and stations using
renewable, sustainable or alternative forms of energy.

Subsequent to the Notification, new schemes have been notified to the EU in
accordance with Article 88(3) of the Treaty and Directive 2003/54/EC and have
received state aid clearance. Most recently, the REFIT scheme has been notified
to the EU and received state aid clearance.

The REFIT was introduced by the Government on the 1st of May 2006 as a
support mechanism for certain types of renewable generation. The REFIT
replaces the Alternative Energy Requirement (AER) mechanism and its stated
purpose is the achievement of Ireland’s 2010 renewables target. The REFIT

2
    http://acts.oireachtas.ie/en.act.1999.0023.7.html#partvi-sec39
3
    http://www.irishstatutebook.ie/2002/en/si/0217.html

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PSO Ex-Post Correction Factor CER/08/236

Terms and Conditions are published on the DCENR’s website4.                   The
Government applied to the EU for state aid clearance in August 2006 in
accordance with Article 88(3) of the Treaty and this was received in September
2007 (N571/2006 and C (2007) 4317 final respectively)5. The REFIT differs from
the AER scheme in that it is open to all suppliers, not just ESB CS. Under the
REFIT, the supplier agrees to purchase all of the output from the generator under
contract for 15 years through a Power Purchase Agreement (PPA). Under the
REFIT there are three streams of compensation, accruing to the supplier:

      I.  a 15% balancing payment intended to cover balancing costs associated
          with contracting with undispatchable generators;
      II. a technology difference payment to promote diversity in renewable
          generation; and
     III. an opportunity cost payment to reflect any extra cost of contracting with
          REFIT generators relative to what the energy could have been
          bought/sold from/to the pool.

The DCENR has recently made amendments to S.I. No. 217 of 2002 (via S.I. No.
284 of 2008). This provides a statutory basis for the inclusion of the REFIT costs
in the PSO levy and to provide that suppliers other than ESB may draw support
from PSO schemes.

On the 16th of June 2008, the Commission published a consultation paper on its
website entitled Arrangements for the Public Service Obligation Levy – A
Consultation Document (CER/08/093). In this paper, three issues relating to the
PSO were consulted upon:

      •    the methodology to be applied to the ex-post calculation of correction
           factors to apply in determining the actual monies owed by/to suppliers
           through the PSO;
      •    the ex-ante benchmark price for the REFIT in the context of the PSO;
           and
      •    the collection and distribution procedures to apply for the PSO levy.

On the 20th of August 2008, the Commission published a decision paper on its
website entitled Arrangements for the Public Service Obligation Levy – A
Decision by the Commission for Energy Regulation (CER/08/153). In this
decision paper, the latter two bullet points above were addressed and the
Commission outlined relevant decisions regarding these.

4
 http://www.dcmnr.gov.ie/Energy/Sustainable+and+Renewable+Energy+Division/Sustainable+an
d+Renewable+Energy+Division.htm
5
    http://ec.europa.eu/community_law/state_aids/comp-2006/n571-06.pdf

November 2008                                                                        4
PSO Ex-Post Correction Factor CER/08/236

For the REFIT ex-ante benchmark price, a time-weighted average SMP was
chosen. Historically the Best New Entrant6 (BNE) price was used for the ex-ante
benchmark price. This was chosen because it is consistent with the Notification
to the EU regarding REFIT, is consistent with the Commission/NIAUR PSO
benchmark price setting methodology7, is transparent, does not impose
unnecessary administrative burdens and provides for parity of treatment between
those receiving support under the REFIT and those receiving support under other
PSO supported mechanisms. With regard to collection and distribution
procedures, the PSO levy will be divided among suppliers monthly on a pro-rata
basis. The Commission concluded that the PSO invoicing and collection
procedures, as originally outlined in CER/03/0138, require updating in light of
commencement of the REFIT and the fact that suppliers other than ESB CS are
now entitled to recover monies under the PSO. The Commission also
acknowledged that any changes to the collection and distribution of PSO monies
must be robust enough to deal with a net positive, zero or net negative (money
owed) PSO levy. The Commission intends to publish a paper to reflect the
updated PSO invoicing and collection procedures with the necessary revisions to
CER/03/013.

On the 17th of September 2008, the Commission published a proposed decision
paper entitled Ex-post Correction Factor to apply in the Calculation of the Public
Service Obligation Levy (CER/08/170). This addressed the remaining issue of the
ex-post calculation of correction factors (‘R-factors’) from the initial
consultation (CER/08/093) above. This is the follow-up to that proposed decision
paper and sets out the Commission’s decisions in relation to the issues contained
therein.

2.2 R-Factor

The calculation of the PSO levy requires an ex-ante estimate of the monies
recoverable in a given PSO period by relevant parties plus the calculation of the
monies that should have been recovered by such parties two PSO periods ago.

6
 The BNE price comprised “the all-in cost per MWh of a BNE Combined Gas Turbine (CCGT)
operating at baseload, and at efficiencies, availabilities and cost parameters determined by the
CER”.

7
  PSO Benchmark Price Setting Methodology AIP-SEM-07-431 PSO Decision Paper : Published
July 31st 2007 http://www.allislandproject.org/GetAttachment.aspx?id=d5e5c834-8551-4551-81df-
f0cf94326045

8
 PSO Invoicing and Collection Procedures, CER 03/013, 27th January 2003
http://www.cer.ie/en/renewables-decision-documents.aspx?article=ce87d5b2-be1b-48da-be3c-
a209dd82cd22

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PSO Ex-Post Correction Factor CER/08/236

The Commission has published its decision regarding the PSO monies9 to be
recovered by suppliers under the PSO for this levy period (1st October 2008 –
30th September 2009). Following this period, parties will be required to submit
audited reports regarding the actual monies that should have been recovered by
them for that PSO period. The difference between the estimated and actual
monies that should have been recovered will then be included in the PSO period
1st October 2010 to 30th September 2011 levy as the ‘R-factor’, with interest
applied as per the Notification of 200010.

Prior to the introduction of the SEM, the Best New Entrant (BNE) price was used
to set the benchmark price against which the PSO monies were recovered/paid
to ESB. This price represented the cost of a BNE generator in the Irish market
and there was no ex-post revision of this because no market price existed in the
pre-SEM bilateral trading arrangements. Therefore, the ex-ante estimate only
was used for the recovery of PSO monies. The R-factor was, however,
necessary to account for the differences between factors such as estimated
versus actual plant output. The introduction of the SEM resulted in actual ex-post
values being available for the market price; therefore differences in ex-ante SMP
estimates and ex-post SMP values can now be taken account of and included in
the R-factor.

The Commission and the NIAUR published a decision paper on the 31st July
200711 regarding the methodology for the calculation of the PSO Benchmark
Price to apply in each jurisdiction. This is to be based on a series of forecasted
modelled pool prices, using the same model that is adopted in determining
directed contract prices. This did not explicitly address the methodology for the
calculation of the ex-post R-factor. This paper outlines the Commission’s decision
in relation to the calculation of the ex-post R-factor for PSO supported
mechanisms, including the REFIT scheme. This paper is the follow-up to the
proposed decision paper CER/08/170.

9
 CER 08/129 Public Service Obligation (PSO) Levy 2008/2009 Charges
http://www.cer.ie/en/renewables-decision-documents.aspx?article=d96d9b61-b24f-414e-b93e-
abe0f4ce561e
10
     Paragraphs 5.35 and 5.36 of the Notification of Public Service Obligations 2000

11
  PSO Benchmark Price Setting Methodology AIP-SEM-07-431 PSO Decision Paper : Published
July 31st 2007 http://www.allislandproject.org/GetAttachment.aspx?id=d5e5c834-8551-4551-81df-
f0cf94326045

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PSO Ex-Post Correction Factor CER/08/236

3.0 Response to Comments Received to CER/08/170
In this section, submissions received regarding the 17th of September 2008 Ex-
post Correction Factor to apply in the calculation of the Public Service Obligation
Levy (CER/08/170) proposed decision paper are outlined. The Commission’s
responses (italicised) to these submissions are then given.

Three responses to CER/08/170 were received from the following:

   •   Airtricity Ltd
   •   Saorgus Energy
   •   SWS Group

3.1 Distributed Nature of REFIT Information

One respondent was concerned that there would be difficulties for future market
entrants to gain an understanding of the REFIT scheme, due to the distributed
nature of information relating to the REFIT. They recommended that the
Commission and DCENR publish a guide to REFIT to assist market participants.
The same respondent noted the need for an updated paper to reflect the
changes that have occurred since CER/03/013 PSO Collection and Invoicing
Procedures was published.

The Commission acknowledges that information with regard to REFIT is
distributed across a number of sources and consider that this paper and the
documents contained in the ‘Related Documents” section at the start of this
paper provide sufficient information to enable understanding of the REFIT
scheme. In addition, the Commission notes that the REFIT is a matter for the
DCENR. The Commission has forwarded this request for consolidated
information to the DCENR for consideration.

The Commission intends to publish a document detailing revised PSO collection
and invoicing procedures to replace CER/03/013 in due course. The Commission
acknowledges that the collection and distribution procedures outlined in this
document need to be updated in line with the extra requirements for payment
to/from the PSO fund as a result of the REFIT.

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3.2 Application of CPI and EURIBOR

One respondent requested that “a uniform estimate of CPI and REFIT prices
should be adopted”. It was also requested that timelines and the official rates of
EURIBOR (Euro Interbank Offered Rate) and CPI be clarified.

CPI

The ex-ante CPI estimates used by the Commission are based on global
assumption submissions received from ESB for tariff purposes, as approved by
the Commission. The submissions are based on and checked against CSO
figures and the ESRI’s latest available (relative to when the decision on CPI
estimates must be made) quarterly reports that provide forecasts and known
actuals of CPI and other financial indexes. It is important to note that CPI values
for given year are considered in effect from January 1st of the following year. The
actual CPI applied for the calendar year of 2006 would therefore be the known
2005 value as calculated, applied from 01/0106. CPI values (ex-ante and ex-
post) used are based on the calendar year and not the PSO year.

The CPI figures applied to the reference price for the estimates of the October
2008 - September 2009 PSO were the actual CPI figure for 2007 (effective
01/01/2008 and compounded as appropriate from when the REFIT Terms and
Conditions applied) and the estimated CPI for 2008 (effective 01/01/2009), as
contained in the ESRI’s Spring “Quarterly Economic Commentary”. This forecast
was based on figures available by end-February 2008. For the 2008/09 PSO levy
period, the relevant CPIs were applied to the reference price for the relevant
forecasted volumes, estimated to occur in 2008 or 2009. For example, for
October – December 2008, the known CPI for 2007 was used, for the January –
September 2009 period the estimated CPI for 2008 was used. Actual CPI figures
and actual output per month will be reconciled with the ex-ante estimates and
included in the relevant R-factor calculations.

Example: Application of CPI for 2008/2009 Levy

The 2008/2009 Levy was set to cover the period 1st October 2008 – 30th
September 2009. From a CPI perspective, there are two periods involved here as
the levy period is spread between 2 calendar years. Effectively this means there
will be two reference prices within the period:

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PSO Ex-Post Correction Factor CER/08/236

                                    CPI Period 1

                         October 2008 – December 2008
€ Original Ref (CPI’d up to 31/12/07) x 2007 CPI (applied from 01/01/08) = € Ref 1

The above CPI (REF 1) is applied to the reference price for the volumes relating to
                       October 2008 – December 2008

                                    CPI period 2

                         January 2009 – September 2009
   € Ref 1 (calculated for CPI period 1) x 2008 CPI (applied from 01/01/2009 &
  obtained from ESB’s global assumptions, approved by Commission) = € REF 2

The above CPI (REF 2) is applied to the reference price for the volumes relating to
                       January 2009 – September 2009

CPI is applied on an annual basis and is not pro-rated for the number of months
the reference price is applied for. Therefore, the CPI figure applied for any given
month in a given year is the same.

EURIBOR

The EURIBOR rate will apply to the PSO period, not the calendar year. The
EURIBOR rate is to apply ex-post to R-factor payment values owed to/by
suppliers to/from the PSO fund and is the rate used as submitted by ESB in their
global assumptions, as approved by the Commission. It is intended to reflect the
fact that monies accruing under the R-factor are paid two PSO periods after the
period to which the payment refers. For example, in July 2010, the interest rate
for the October 2008 – September 2009 period and October 2009 – September
2010 period will both be used, compounded. As a result of the calculation of the
R-factor for the October 2008 – September 2009 levy period being carried out in
Q2 of 2010, the most recent EURIBOR rate included in ESB’s global
assumptions for the 2010 levy shall be used as the rate to apply to the 2010
period (i.e. 1st January 2010 – 1st October 2010).

Example: October 2008 – September 2009 Levy R-factor payment at EURIBOR

Payment due in October 2010, calculations being done May 2010. ESB’s global
assumptions submissions have been received, containing the EURIBOR
estimate for the 2010 calendar year. R-factor = €10,000.

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EURIBOR                                               PERIOD (calendar year)12
4%                                                    2008 (actual)
4.5%                                                  2009 (actual)
3.5%                                                  2010 (based on ESB’s submitted global
                                                      assumptions,    as    approved    by
                                                      Commission)

PSO Period 1 October 2008 – September 2009
October 2008 – December 2008 = 4% x (1/4 year) = 1%
January 2009 – September 2009 = 4.5% x (3/4 year) = 3.375%

Total = 1% + 3.375% = 4.375%

PSO Period 2 October 2009 – September 2010
October 2009 – December 2009 = 4.5% x (1/4 year) = 1.125%
January 2009 – September 2009 = 3.5% x (3/4 year) = 2.625%

Total = 1.125% + 2.625% = 3.75%

R-factor amount payable (compounded EURIBOR) for whole period October
2008 – September 2010 = (€10,000 x 4.375%) x 3.75% = €10828.90

A correction will be made ex-post for the application of estimated EURIBOR
values.

3.3 Pre-2008 REFIT Payments

It was requested that clarification be provided in relation to the interest to be
applied to PSO payments of REFIT entitlements before the start of the
2008/2009 PSO Period.

There are two time periods involved here:

      •   From the 1st May 2005 to 31st December 2007
      •   From 1st January 2008 to 30th September 2008

The Commission is not in a position to authorise payment to suppliers of
EURIBOR interest on monies paid out to them in this year’s PSO in relation to
pre-2008 REFIT generation. In section 5.36 of the Notification it clearly states
that the EURIBOR rate is only to be applied to R-factor amounts owed to

12   These are only indicative figures used for illustrative purposes in this example.

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suppliers. Payments for estimated output in the 2008 levy13 (from last actuals
known, up until the 30th September 2008) will be paid at the EURIBOR when they
are included in the relevant R-factor.

3.4 Requirements Regarding Supplier Submissions

One respondent requested that the Commission elaborate on “how the ex-post
submissions by suppliers are to be audited and what specific requirements (if
any) are there for the third party verification of claims”. As regards ex-ante
estimates, it was queried whether parameters for the estimation of output should
be adopted or whether there was any requirements for independent oversight
and auditing of the process.

Ex-ante, the onus is on the supplier to provide their best estimates regarding
output for generation. Therefore P50, P75, or P90 figures from renewable
generators can be used. To this end, the Commission requests that suppliers
make their best estimates of output to ensure that the difference between ex-ante
estimates and ex-post known values are minimised to keep the R-factor (positive
or negative) to a minimum. Once generators have historical data and more
accurate parameters upon which future estimates may be based, it would be
expected that estimates of output would become more accurate.

As detailed in Article 19 of S.I. No. 217 of 2002 (as amended by S.I. No. 284 of
2008), parties (other than final customers & including suppliers) who have any
duties imposed on them by S.I. No. 217 of 2008 are required to specify the
procedures according to which “it will estimate each constituent element of the
PSO Levy, as appropriate, specified in Article 8 (1) of this Order...”. The onus is
on suppliers to provide their best estimates for output, not the Commission. The
Commission may, however, look for a statement from suppliers that details their
MG (or MGLF) output and supporting data, including information with regard to
estimates of output. It is noted that in the case where ex-ante figures are over
estimated, monies are given back to the PSO in the relative R-factor.

As per Article 10 of S.I. No. 217 of 2002 (as amended by S.I. 284 of 2008), “each
supplier shall provide the Commission details of the actual additional costs
incurred by that supplier in complying with the obligation imposed on it by that
Article.........together in each case with a separate auditors’ certificate, detailing

13 The 2008 levy was calculated in July 2008. This levy consisted of actual PSO payments due

before 1st October 2008 and estimates for the period 1st October 2008 – 30th September 2009. In
determining the pre-October 2008 payments, however, estimated quantities had to be used in
2008 for those months up to October where actual values were not known. As such, these values
will be included in an ex-post reconciliation and R-factor amounts due/owed by suppliers relating
to these months will be subject to interest at the EURIBOR rate in accordance with the
Notification of 2000.

November 2008                                                                                11
PSO Ex-Post Correction Factor CER/08/236

the actual amounts of the costs and expenses referred to in subparagraphs (a)
and (b)......”. Ex-post audited submissions from suppliers must be in compliance
with the necessary legislation and the decisions set out in this paper. The
Commission is of the opinion that independent auditing is the most appropriate
way to ensure valid ex-post figures are used and to enable calculation of the R-
factor. This decision is in-line with S.I. No. 217 of 2002.

The Commission intends to monitor the ex-ante and ex-post submissions of
suppliers on an ongoing basis. The Commission may request information and/or
evidence regarding amounts invoiced, received, accounted for and paid by
persons pursuant to Article 20 of S.I. No. 217 of 2002. Auditors will be required to
state clearly that submissions are in accordance with this decision. In this regard,
the Commission may request that estimates are submitted on the basis of
specific parameters (P90, P75, P50).

3.5 Ex-ante Payments to the PSO Fund & Legislative Changes

One respondent raised a concern with regard to a potential situation that the
amounts allocated to be received (ex-ante estimates + R-factor) by suppliers in
the PSO levy may not actually be recovered by such suppliers over the 12 month
period in question. The respondent was concerned that the calculations outlined
in Appendix C of CER/08/170 do not capture the possibility of this occurring.

It was suggested that this could be accounted for in the calculations outlined in
Appendix B of this paper.

The Commission envisages a number of scenarios where this may occur:

   1. A negative PSO (money owed to the PSO fund and not paid).
   2. Forecasted demands: If forecasted demands prove materially incorrect,
      enough money may not be recovered from final customers to ensure the
      PSO fund is sufficiently full. Note this would only occur in the event of a
      positive PSO Levy.
   3. Supplier default: If a supplier defaults and hence does not make its
      payments to the PSO fund, this may result in a shortfall in the monies
      being paid back into the fund. Note this would only occur in the event of a
      positive PSO.

With regard to the first point, in the event of a negative PSO, it is considered that
ESB CS would, at present, be the only supplier owing net money to the PSO
fund. The Commission acknowledges that the current legislation does not
specifically provide for payment to the PSO fund in such a case. The

November 2008                                                                     12
PSO Ex-Post Correction Factor CER/08/236

Commission is engaging with the DCENR to examine the legislative
requirements in this regard.

With regard to supplier default, the Commission notes that the responsibility to
recover monies for the PSO fund from suppliers currently lies with the DSO and
the TSO, as outlined in Articles 14 and 15 of S.I. No. 217 of 2002. The issue of
forecasted demand will not affect this years PSO, as the levy to final customers
was set to zero. Under S.I. No. 217 of 2002 the responsibility to collect levy
monies from final customers lies with the suppliers, the DSO and the TSO. The
Commission acknowledges that more work is required in this area to ensure
payment to the PSO fund is achieved in the event of supplier default or forecast
errors.

The Commission is reviewing the situation with the relevant parties in respect of
all three of these issues in order to provide greater certainty to industry in the
event of such occurrences. There will be no change, however, to the R-factor
calculation outlined in Appendix B of this paper (same as Appendix C of
CER/08/170).

3.6 Capacity Payments

One respondent disagreed with the Commission’s position in CER/08/170
regarding capacity payments to suppliers. In that paper, the Commission
considered that the PPA price between a generator and supplier was effectively
an ‘all-in’ price, covering both energy and capacity payments. The respondent
outlined that in some PPAs the contracted payment is defined in terms of “net
electrical output” and that such PPAs do not include arrangements for the
transfer of capacity payments from the generator to the supplier. On that basis
they felt “it is incorrect to assume the PPA price is an ‘all-in’ price that includes
the capacity payment in such cases”. It was requested that the Commission
consider the PPA price to be the energy price (excluding capacity) in such cases.

The RAs’ decision14 on the setting of the ex-ante PSO benchmark price in the
SEM decided that a capacity adder will be included in this price. Capacity is
therefore factored into the calculation of the ex-ante PSO benchmark price. In
arriving at this decision, it was noted that participants “in general supported the
addition of a capacity adder to the benchmark price”. The Commission deems it
appropriate that capacity is included in the ex-ante benchmark price because
suppliers receive payment for that capacity from the pool.

14
  PSO Benchmark Price Setting Methodology AIP-SEM-07-431 PSO Decision Paper : Published
July 31st 2007 http://www.allislandproject.org/GetAttachment.aspx?id=d5e5c834-8551-4551-81df-
f0cf94326045

November 2008                                                                             13
PSO Ex-Post Correction Factor CER/08/236

The ex-post reconciliation also takes account of capacity in relation to what the
supplier should have received based on energy sold to the pool. If capacity were
excluded from what the Commission considers the “PPA price”, it could lead to
an increase in the PSO levy for final customers. The Commission considers the
PPA price to be an ‘all in’ price, as outlined in the proposed decision
CER/08/170. Whether capacity payments go to a generator or supplier is
considered a matter for commercial negotiation.

3.7 Compensation Payments based on existing MSQ Contracts

It was stated by one respondent that where “existing PPAs are based on MSQ, it
would be unjust not to pay the REFIT revenue streams on the basis of the MSQ”.

As stated in section 2.2.1 (2C) of CER/08/170, the Commission considers it
appropriate that the 15% balancing payment and technology difference payment
will be based on the metered generation (MG or MGLF) of the REFIT supported
generating plant. The opportunity cost compensation is also to be based on MG,
where the generator is not constrained down. The treatment of the opportunity
cost compensation stream is detailed further in section 3.8. As stated in the
Terms and Conditions of the REFIT:

“eligible domestic electricity’ means electricity produced from renewable energy
by new electricity generating plant in the State …..”

“Power Purchase Agreement’…..means….a contractual agreement between an
electricity generator and a licensed supplier obliging the latter to purchase the
output from a new renewable energy powered electricity generation plant ….”

The Commission considers that PPAs should be based on metered generation
because this is in line with what is envisaged in the REFIT Terms and Conditions.
In CER/08/170 it is stated that in the absence of a pro-forma REFIT PPA
contract, the Commission considers that PPAs may be based on MSQ or MG.
From a REFIT perspective, however, suppliers will only be compensated for
metered generation.

3.8 Use of MSQs for Opportunity Payment Calculations

One respondent requested that the revenue stream of the REFIT opportunity cost
payment should not be based on MSQ as currently outlined (Table 1 in
CER/08/170). It was argued that the revenue side of the equation should instead
be based on MG. The respondent was concerned that suppliers would not be
compensated for the difference between their costs and revenues based on
metered generation.

November 2008                                                                 14
PSO Ex-Post Correction Factor CER/08/236

Another respondent requested that the basis for all three compensation streams
be MSQ, where existing contracts are based on MSQ (i.e. revenues and costs of
opportunity cost compensation be based on MSQ)

The Commission is of the view that MSQ should remain on the revenues side of
the Table 1. Under current market arrangements, suppliers are compensated for
constrained generation, when acting as Intermediaries for generators. Suppliers,
under a metered generation contract, only pay for the metered generation. If the
generator in question is not constrained down, the MG=MSQ and, as such, the
supplier’s MG revenues from the pool will be compared with their MG costs at the
REFIT reference price and any compensation due will be paid. In the event that
the generator is constrained, the Commission considers that the supplier, acting
as Intermediary, is adequately compensated from the market for such
constrained generation. The basis for this stream of compensation will still be
MG, unless the generator is constrained, in which case the supplier is
compensated by the market. If MG was used on the revenues side, as opposed
to MSQ, the PSO levy for final customers could potentially be increased.

If MSQs were used on the revenue and cost sides of the above table, the REFIT
supplier would be compensated based on MSQs, not MG. In line with section 3.7
above, the Commission considers that this would potentially increase the PSO
levy on final customers and is not in line with the aims of the REFIT Terms and
Conditions, where ‘metered generation’ and ‘electricity produced’ are referred to.

The Commission, in reaching this decision, wishes to ensure that any potential
PSO levy on final customers is minimised in the context of the governing legal
framework and purpose of the PSO schemes.

November 2008                                                                  15
PSO Ex-Post Correction Factor CER/08/236

4.0 Summary of Decisions
This section provides a review of the decisions reached on the ex-post
calculation of the R-factor and issues relating to this calculation regarding the
REFIT. In reaching the decisions outlined below, the Commission is seeking to
ensure that all parties, including suppliers, generators, and final customers are
treated in accordance with their obligations under the legal framework governing
the PSO.

4.1 Non-REFIT PSO Revenues and Costs

In section 2.2 of CER/08/093 the Commission consulted on the treatment of
costs and revenues associated with contracts and plants supported under the
PSO, other than the REFIT scheme. The Commission’s decision is to proceed
with the approach outlined in CER/08/093. The calculation of the R-factor shall
be as outlined in paragraph 5.36 of the Notification.

4.2 Definitions of MG and MGLF

Metered Generation (MG): Active Power15 produced at the Export Point (being
the nominal commercial point of entry to the Transmission or Distribution System
of the Active Power generated at a Transmission connected or Distribution
connected site)

Metered Generation Loss Factored (MGLF): Metered Generation adjusted to
reflect transmission losses and (where applicable) distribution losses (DLAFs and
TLAFs) at the Trading Boundary.

4.3 CPI & EURIBOR

CPI

In the ex-ante estimates, CPI figures used will be estimates based on the ESRIs
most recent (in relation to when calculations for the levy are being done)
“Quarterly Economic Commentary”. Forecasts are done on a calendar year basis
and the relevant CPI applied to the relevant REFIT reference price for the
relevant period. Ex-post, the actual values for CPI will be known and, as such,

15
   Refer to Trading and Settlement Code for definition –
http://www.allislandmarket.com/MarketRules/
.

November 2008                                                                         16
PSO Ex-Post Correction Factor CER/08/236

will be reconciled against the ex-ante estimates and included in the relevant R-
factor calculations. The application of this is outlined in section 3.2 of this paper.

EURIBOR

The interest rate to be applied to both over and under recoveries of REFIT
monies under the PSO will be that as set out in section 5.36 of the PSO
Notification of 2000:

“the actual annual interest rate at Euribor compounded over an average period
outstanding of 2 years”.

This will be the EURIBOR applied over the PSO period in question, not a
calendar year. The application of this is outlined in section 3.2 of this paper.

4.4 Pre-2008 REFIT Payments

The Commission is not in a position to authorise payment to suppliers of
EURIBOR interest on monies paid out to them in this year’s PSO (October 2008-
September 2009) in relation to the output of REFIT supported generation before
the commencement of the above levy period. This decision is in line with
paragraph 5.36 of the Notification.

4.5 Supplier Submissions

Ex-ante: The onus is on suppliers to provide their best estimates of output to
ensure that the difference between ex-ante estimates and ex-post known values
are kept to a minimum. P90, P75 or P50 figures may be used, but this may be
subject to review at a later date. The Commission may request submissions on a
specific basis regarding details of MG output and supporting data.

Ex-post: The Commission will request that independently audited submissions
are provided by suppliers for their PSO contracts in line with this decision,
CER/08/170, the Electricity Regulation Act 1999 and S.I No. 217 of 2002 (as
amended by S.I. No. 284 of 2008), the REFIT Terms & Conditions and the
Notification of 2000.

4.6 Treatment of REFIT PPAs

Calculation of the monies recoverable under the PSO in relation to REFIT PPAs
will be carried out on an individual PPA basis. S.I. No. 284 of 2008 and the

  November 2008                                                                  17
PSO Ex-Post Correction Factor CER/08/236

REFIT Terms and Conditions clearly envisage that REFIT calculations are made
on a per PPA basis between an individual generator and supplier, and not on an
individual supplier basis. Such calculations will be made with regard to the
determination of ex-ante estimates and the ex-post R-factor.

Payments to/from the levy are made on a supplier basis.

4.7 REFIT Balancing and Technology Difference Payments

The basis for these two streams of compensation will be metered generation (MG
or MGLF), for both in-market and out-of-market generation. Market Scheduled
Quantities (MSQs) will not be used in the calculation of these two forms of
compensation.

The 15% balancing and technology difference payments are ring-fenced from
each another and the third compensation stream, the opportunity cost payment.
Therefore, the Commission confirms that the balancing and technology difference
payment are not included as revenues in the determination of opportunity cost
payment.

The REFIT Balancing and Technology Difference Payments will be given in ex-
ante estimates and reconciled ex-post with known values through the R-factor.

4.8 In-Market REFIT Opportunity Cost Payment

For in-market REFIT, the opportunity cost payment is calculated as the difference
between the total revenues received from the market versus the total cost of
purchasing metered energy from the generator, based on the REFIT reference
price for the relevant PSO period. The opportunity cost payment due suppliers is
outlined in Table A. Where Costs > Revenues, the supplier will be entitled to
compensation. Where Costs
PSO Ex-Post Correction Factor CER/08/236

Table 1. In-market opportunity cost payment

REVENUES                                              COSTS

Energy     (and    where    relevant) REFIT Reference Price x (MG or MGLF
Constraints: SMP x MSQLF x TPD17
                         16
                                      as applicable per contract) x TPD

Capacity Payments

4.9 Out-of-Market REFIT Opportunity Cost Payment

For the purposes of the out-of-market opportunity cost payment, the difference
between the cost to suppliers at the REFIT reference price and what it would
have cost them to buy the equivalent volumes from the market is used to
determine if any payment due. If the Market Cost >= Contract Cost there will be
no payment to the supplier. If Market Cost < Contract Cost, the supplier will be
entitled to compensation under the opportunity cost payment support. The figures
outlined in Table 2 are all that will be considered for the purposes of calculating
the opportunity cost payment.

Table 2. Out-of-market opportunity cost payment

                 Market Cost                                          Contract Cost

 Pool Purchase Price (SMP + Capacity
   Charge + Imperfections Charge +                        REFIT Reference Price x (MG or
  Market Operator Charge) x (MG or                                MGLF) x TPD
            MGLF) x TPD

4.10 R-factor

16
   Note that under the Trading and Settlement Code (section 5) the MSQ of a Variable Price Taker is set to
its Actual Output (Metered Generation = Actual Output x TPD), when it’s dispatch is in accordance with its
MSQ. When such a generator is constrained down in dispatch, its MSQ is set to the greater of its Actual
Output and the time weighted average of its outturn availability. Thus, for the purposes of the revenue
calculation, the formula MSQLF x TPD ensures that the correct market revenue (MG unless constrained
down) accruing to the Supplier is calculated.
17
  TPD is the Trading Period Duration in the TSC and is 0.5 and defines the ½ hour Trading Period in the
SEM. The energy payment is thus calculated in MWh.

     November 2008                                                                                 19
PSO Ex-Post Correction Factor CER/08/236

The R-factor (for the REFIT and other PSO mechanisms) shall be calculated as
the difference between the ex-post amounts actually due to suppliers under the
relevant PSO scheme (based on submitted, audited statements that are
consistent with governing legislation and this decision paper) and the ex-ante
estimates detailed to be paid to them under the relevant PSO levy.

The detailed calculation of the R-factor for the REFIT is outlined in Appendix B.

  November 2008                                                               20
PSO Ex-Post Correction Factor CER/08/236

5.0 Conclusions & Next Steps

The Commission is satisfied that the method by which the R-factor is calculated
for monies owed to/by suppliers under the REFIT and other PSO mechanisms is
outlined in sufficient clarity in this paper, providing a transparent and fair
mechanism by which suppliers are compensated. In coming to this decision, the
Commission has adhered to the principals and policies outlined in the relevant
PSO and REFIT governing legislation, the PSO Notifications to the EU, the
relevant State Aid decisions and the REFIT Terms and Conditions. The
Commission has also attempted to secure that all stakeholders, including
suppliers, generators and final customers are treated equally and fairly with
regard to their obligations under the PSO. In reaching this decision, the
Commission has also attempted to ensure that PSO monies levied on final
customers are kept to a minimum, in the context of the governing legislation.

Next Steps

The Commission is aware that further work needs to be undertaken with the
DCENR and the TSO/DSO in relation to the provision of payments to the PSO
fund and the possibility of a supplier defaulting. In addition, changes to legislation
that may be required to accommodate this. The Commission is of the opinion that
all payments due to suppliers from the PSO fund for the 2008/2009 levy will be
paid as outlined in CER/08/129.18 The Commission will be liaising with the
DCENR on these issues in due course.

The Commission is also aware that the distribution and collection procedures as
outlined in CER/03/013 and revised in CER/08/153 will need to be updated to
reflect the changes to the PSO collection and distribution procedures and the
surrounding issues that have emerged since the introduction of the REFIT.

18 2008/09 PSO Levy paper, CER 08/129
http://www.cer.ie/en/renewables-decision-documents.aspx?article=d96d9b61-
b24f-414e-b93e-abe0f4ce561e

November 2008                                                                      21
Appendices

Appendix A – Glossary of Terms

AER                  Alternative Energy Requirement
Commission           Commission for Energy Regulation
CPI                  Consumer Price Index
DCENR                Department for Communications, Energy and
                     Natural Resources
DLAF                 Distribution Loss Adjustment Factor
DUoS                 Distribution Use of System
DSO                  Distribution System Operator
Large Wind           Wind based generators above installed capacity of
                     5 Megawatts
MG                   Metered Generation
MGLF                 Metered Generation adjusted to reflect
                     transmission losses and (where applicable)
                     distribution losses (DLAF’s and TLAF’s) at the
                     Trading Boundary.
MSQ                  Market Scheduled Quantity
MSQLF                Market Scheduled Quantity Loss Factored
NIAUR                Northern Ireland Authority for Utility Regulation
PPA                  Power Purchase Agreement
PSO                  Public Service Obligation
RAs                  Regulatory Authorities; the Commission for
                     Energy Regulation and the Northern Ireland
                     Authority for Utility Regulation
REFIT                Renewable Energy Feed in Tariff
SEM                  Single Electricity Market
SI                   Statutory Instrument
SMP                  System Marginal Price
TPD                  The ½ hour Trading Period in the SEM
TSO                  Transmission System Operator
TLAF                 Transmission Loss Adjustment Factor

     November 2008                                                    1
Appendices

TUoS             Transmission Use of System

 November 2008                                      2
Appendices

       Appendix B – REFIT R-Factor Calculation

            Table 3: Algebraic formulae for ex-ante, ex-post and R-Factor calculations in PSO

Estimate           Actual                   Variable

                   RFp                      R-Factor relating to the REFIT Project

                   RFs                      Net R-Factor relating to Supplier

                   PPA                      PPA price

                   EBP                      Ex-ante Benchmark Price as defined by the
                                            Commission
                   TRP                      Technology Reference Price as defined in the Terms
                                            and Conditions of the REFIT19
                   RRP                      REFIT Reference Price as defined in the Terms and
                                            Conditions of the REFIT20
                   ETRP                     TRP x estimated CPI

                   ERRP                     RRP x estimated CPI

                   ATRP                     TRP x actual CPI

                   ARRP                     RRP x actual CPI

                   AMC                      Actual Market Costs to supplier

                   AMR                      Actual Market Revenues to supplier

EOG                AOG                      Estimated (or Actual) Output Generated (MG or MGLF
                                            as applicable)
ETPt (1 or 2)      ATPt (1 or 2)            Estimated (or Actual) REFIT Technology Payment

EFEDp              AFEDp                    Estimated (or Actual) 15% Balancing Payment due to
                                            Supplier
ESTp               ASTp                     Estimated (or Actual) Technology Difference Payment
                                            due to Supplier
       19

       http://www.dcenr.gov.ie/Energy/Sustainable+and+Renewable+Energy+Division/Sustainable+and+Renewabl
       e+Energy+Division.htm
       20
          ibid

            November 2008                                                                          3
Appendices

EOCp         AOCp                   Estimated (or Actual) Opportunity cost Payment due to
                                    supplier
ERDp         ARDp                   Estimated (or Actual) REFIT payment due to Supplier

       (i) Ex-ante process

   Before the PSO period commences suppliers estimate REFIT payment due for
   each REFIT supported project:

   ERDp = EFEDp + ESTp (where applicable) + EOCp

   Where:

   EFEDp → ERRP x EOG × 0.15
   ESTp → ETPt (1 or 2) x EOG
   ETPt (1) → If PPA > ETRP = (ETRP- ERRP)
   ETPt (2) → If PPA < ETRP = (PPA – ERRP), provided PPA > ERRP
   EOCp → Diff [(EBP, ERRP) if EBP < ERRP] x EOG

       (ii) Ex-post process

   Ex-post, the actual PSO payment the REFIT Supplier should have received for
   that project is calculated.

   This is a similar calculation as before, but using actual values:

   ARDp = AFEDp + ASTp (where applicable) + AOCp [If (AMC > AMR)]

   Where:

   AFEDp → ARRP x AOG × 0.15
   ASTp → ATPt (1 or 2) x AOG
   ATPt (1) → If PPA > ATRP = (ATRP- ARRP)
   ATPt (2) → If PPA < ATRP = (PPA – ARRP), provided PPA > ARRP
   AMR → See table 1 above
   AMC → See table 1 above

       November 2008                                                           4
Appendices

           (iii) Reconciliation process

        Payments made to each Supplier (based on ex-ante estimates of output and
        values) are compared with actual output and values (ex-post):

        Table 4: R-Factor calculations for 3 REFIT compensation streams

Ex-Ante payment based on         Ex-Post payment based on              R-Factor for
ex-ante output estimate in          actual (MG or MGLF)              particular REFIT
           €’s                          output in €’s              supported project in
                                                                            €’s
EFEDp                           AFEDp                             = AFEDp - EFEDp (1)

ESTp                            ASTp                              = ASTp - ESTp (2)

EOCp                            AOCp                              = AOCp - EOCp (3)

Net=(EFEDp+ESTp+EOCp)           Net=(AFEDp+ASTp+AOCp)             * Net = ∑[(1),(2),(3)]

        * Please note that the R-Factor for the Balancing payment, Technology Payment
        and Opportunity costs may be separately positive or negative. The total R-Factor
        for a particular REFIT supported project may also be zero, positive or negative.

                                     RFp = ARDp – ERDp
        Each supplier’s net position, for all its REFIT contracted projects, is calculated as
        follows:

                                         RFs = ∑RFp
        As discussed in Section 2.2., that the resulting R-Factor for a supplier can be
        positive or negative and that suppliers may be obliged to repay money to the
        PSO levy, as well as receive additional PSO payments for individual REFIT
        supported project(s).

        Please also note that the R-Factor amount will be added to the allowed ex-ante
        estimate for the supplier in question in the relevant PSO period.

          November 2008                                                                    5
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