Decision Paper Public Service Obligation Levy 2020/21 - Commission for ...

 
Decision Paper Public Service Obligation Levy 2020/21 - Commission for ...
An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

               An Coimisiún um Rialáil Fóntas
               Commission for Regulation of Utilities

                                        Decision Paper
             Public Service Obligation Levy 2020/21

               Decision Paper
               Reference:      CRU/20/086           Date Published:     31/07/2020   Closing Date:   N/A

              www.cer.ie

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Decision Paper Public Service Obligation Levy 2020/21 - Commission for ...
An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

Executive Summary
The Public Service Obligation (PSO) levy is charged to all electricity final customers in Ireland.
It is designed by the Irish Government and consists of various subsidy schemes to support its
national policy objectives. This year the PSO levy is entirely related to renewable electricity
supports and is key in enabling Ireland to meet its national targets in terms of the generation
of electricity from renewables and aligns with the CRU’s vision of achieving a secure, low
carbon future.

Government policy determines the level of subsidy provided to generators supported under
the PSO, with the CRU’s primary role being the calculation of the PSO levy. Specifically, in
accordance with Government policy, the CRU’s role is to calculate the PSO levy annually
based on support rates that are set by Government, and to help ensure that the scheme is
administered appropriately and efficiently. The CRU has therefore prepared this Decision
Paper (CRU/20/086), which sets out the PSO levy to apply to electricity customers from 1
October 2020 to 30 September 2021.

The CRU has calculated that a PSO levy of €393.13 million will be required for the 2020/21
PSO year. This represents an increase of €216.66 million (123%) on the 2019/20 levy of
€176.46 million. This increase is less than that published in the Proposed Decision of 8 June
2020 (CRU/20/061), in which the indicative PSO levy for 2020/21 was €480.11 million, as
illustrated in the graph below.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

The decrease in the PSO levy since the Proposed Decision is due to an increase of 15% in
the forecast benchmark electricity price for the 2020/21 PSO year from €46.86/MWh to
€53.66/MWh. This increase in the forecast benchmark price between the indicative PSO levy
and the final PSO levy was driven by an increase in the forward prices of the key commodities
that determine the price of electricity i.e. gas, carbon and coal. The CRU notes that such a
change in the 2020/21 Benchmark Price over a relatively short period highlights the inherent
challenge that exists in accurately forecasting electricity prices. As outlined in Section 4.5, in
Q4 2020 the CRU will be consulting on ways of reducing volatility in the PSO levy, including
options to improve the methodology by which these forecasts are made.

The key drivers in this increase in the 2020/21 PSO levy (relative to the 2019/20 PSO year)
are:

    −   The R-factor: The PSO levy calculation for each year is an estimate of the expected
        cost    of   the    government       subsidy       to   generators.   This   estimate   is   then
        adjusted/reconciled once the actual costs are known. These adjustments are called R-
        factors. There is a significant increase in the R-factor that was applied in calculating
        the forthcoming levy (2020/21 PSO levy) compared to the R-factor applied in
        calculating the current levy (2019/20 PSO levy). The R-factor (from the year 2017/18)
        applied in calculating the current 2019/20 PSO levy was -€185.93 million. This lowered
        the 2019/20 PSO levy amount by €185.93 million.                   The R-factor (from the year
        2018/19) applied to calculate the PSO levy for the forthcoming year (2020/21 PSO
        levy) is €80.54 million. This is swing of €266.47 million.

    −   The Benchmark Price: The PSO levy calculation estimates the expected market price
        for electricity for the forthcoming year (the Benchmark Price). The lower the expected
        market price, the larger the subsidy that will be needed. There is a lower estimated
        benchmark price of €53.66/MWh for the forthcoming (2020/21) PSO year, compared
        to an estimated benchmark price of €57.37 for the current (2019/20) PSO year.

The graph below gives a history of the PSO levy over recent years, by outlining the total levy
and its constituent parts. As illustrated below, the 2020/21 PSO levy is a significant increase
relative to recent PSO years. With reference to the 2018/19 and 2019/20 PSO years, the CRU
notes that the PSO levy for these years was particularly low due to negative R-factors been
applied in the calculation of the PSO levy in both years. It is worth noting also that the PSO
levy for 2020/21 is entirely related to renewable electricity, whereas in previous years it would
have included other elements such as peat and security of supply.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

As noted in this decision paper, PSO levy payments are calculated on the basis of estimated
generation and estimated wholesale electricity market prices for the year ahead. These
payments are then adjusted for actual generation and prices through the R-factor. The CRU
will consider ways of reducing volatility in the PSO levy, including options to improve the
methodology by which these estimates are made. The CRU may also consider additional
methods to reduce volatility in the PSO levy (e.g. mid-year reviews). Some of these options
would require legislative amendments. The CRU notes the PSO levy is ultimately dependent
on wholesale electricity market prices and generation from renewables, which can fluctuate
from year to year. Therefore, it is not possible to fully remove the risk of volatility occurring in
the PSO levy and as such, similar fluctuations in the PSO levy will continue to be possible in
future PSO years.

From a customer impact perspective, the forthcoming 2020/21 PSO levy will result in a
monthly charge of €6.52 and €21.41 for domestic and small commercial customers
respectively. In comparison to the current 2019/20 PSO levy, this equates to a monthly
increase of €3.68 and €11.06 for domestic and small commercial customers respectively.
Customers in the medium/large commercial category will be subject to a monthly charge of
€2.78/kVA, which constitutes an increase of €1.56/kVA relative to current 2019/20 PSO year.

The table below summarises the impact of the 2020/21 PSO levy for each customer category.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

      PSO Customer            Monthly Levy           Monthly Levy          Year on Year      Increase
        Category             Amount (2019/20)       Amount (2020/21)         Increase           (%)

         Domestic             €2.84 / customer       €6.52 / customer    €3.68 / customer     130%

    Small commercial
                             €10.35 /customer        €21.41 / customer   €11.06 / customer    107%
     (MIC < 30 kVA)

      Medium/Large
       commercial                €1.22 / kVa               €2.78 / kVa      €1.56 / kVa       128%
      (MIC ≥ 30 kVA)

The allocation of the total 2020/21 PSO levy between customers is based on ESB Networks’
2020/21 PSO Cost Allocation Model. Within ESB Networks’ model, the total PSO levy is
allocated between each customer category based on the total peak electricity demand of that
category. For the 2020/21 PSO year, domestic customers are encountering a greater increase
in their PSO levy as their peak demand is expected to increase relative to the other two PSO
customer categories (i.e. Small commercial, and Medium/Large commercial).

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

Public/Customer Impact Statement
The Public Service Obligation (PSO) levy is charged to all electricity final customers in Ireland.
It is designed by the Irish Government and consists of various subsidy schemes to support its
national policy objectives. This year the PSO levy is entirely related to renewable electricity
supports and is key in enabling Ireland to meet its national targets in terms of the generation
of electricity from renewables and aligns with the CRU’s vision of achieving a secure, low
carbon future.

For the PSO year starting 1 October 2020, the CRU has calculated that the PSO levy will
increase by 123% in total. The new PSO levy rate from 1 of October 2020 to 30 September
2021 is €6.52 per month for domestic customers. This means that each household will pay
€3.68 per month more on the PSO charge on their electricity bill than in the current 2019/20
PSO year.      The PSO levy rates from 1 October 2020 to 30 September 2021 for small
commercial customers (where MIC 30 kVa) is €2.78 per
kVa per month. The is an increase by €1.56/kVA relative to 2019/20 PSO year. The graph
below provides a breakdown of monthly PSO levy paid by each customer category since the
2011/12 PSO year.

From a customer impact perspective, the CRU notes that the annual PSO levy calculation
consists of an estimate of the cost of PSO payments to eligible suppliers for the year ahead
(to cover the additional costs they incur in purchasing PSO supported electricity generation)
and an adjustment to payments made two years previous once actual costs for that year are
known. These adjustments are called R-factors. The key upward driver of the 2020/21 PSO

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

levy is the significant increase in the 2018/19 R-factor applied in calculating the 2020/21 PSO
levy relative to the 2017/18 R-factor applied in calculating the 2019/20 PSO levy.

The estimated wholesale electricity price (the benchmark price) is another key factor in
determining the PSO levy. There is an inverse relationship between the PSO levy and the
wholesale electricity price. This means if the wholesale electricity price is low, additional
money is required to be raised through the PSO levy to subsidise PSO supported generators.
This is because these generators receive less money from the wholesale market for the
electricity they produce. For the forthcoming 2020/21 PSO year, wholesale electricity prices
are estimated to be lower, which ultimately increases the 2020/21 PSO levy. The estimated
benchmark price for the forthcoming (2020/21) PSO year is €53.66/MWh, compared to an
estimated benchmark price of €57.37 for the current (2019/20) PSO year.

Given the correlation between the increase in the PSO levy and the decrease in the wholesale
market prices, the CRU notes that although an increase in the PSO levy will increase one fixed
charge element on electricity bills, variable charges (e.g. the unit rate) should in fact decrease.
The CRU expects this projected decrease in wholesale electricity prices in the forthcoming
PSO year to be passed on to consumers by electricity suppliers. The CRU emphasises that
savings on the variable aspect of the electricity bill can be gained through switching electricity
supplier and through energy efficiency.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

Table of Contents
Executive Summary .................................................................................................. i
Public/Customer Impact Statement ........................................................................ v
Glossary of Terms and Abbreviations ................................................................. viii
1. Introduction .......................................................................................................... 1
   1.1 The Commission for Regulation of Utilities ............................................................................. 1
   1.2 Purpose of this document ....................................................................................................... 1
   1.3 Structure of paper ................................................................................................................... 1
   1.4     Related documents............................................................................................................ 2
2. Background .......................................................................................................... 4
   2.1 The PSO Levy ........................................................................................................................... 4
   2.2 Legislation Governing the PSO Levy ........................................................................................ 6
   2.3 State Aid Notifications ............................................................................................................ 7
3. Key Assumptions ................................................................................................. 8
   3.1 Benchmark price ..................................................................................................................... 8
   3.2 Capacity payment ................................................................................................................... 8
4. 2020/21 PSO Levy................................................................................................. 9
   4.1 Total levy cost and generation capacity supported ................................................................. 9
   4.2 Drivers of year on year change .............................................................................................. 10
   4.3 Changes since the Proposed Decision ................................................................................... 12
   4.4 Allocation of costs ................................................................................................................. 13
   4.5. Historical PSO Levy Costs ..................................................................................................... 14
5. Key Comments Received .................................................................................. 17
   5.1 List of Respondents ............................................................................................................... 17
   5.2 Key Comments and CRU Responses ...................................................................................... 17
6. Cost breakdown of levy ..................................................................................... 23
   6.1 Overview of support schemes ............................................................................................... 23
   6.2. Publication of individual payments and Generation ............................................................ 28
   6.3. R-factor ................................................................................................................................ 28
   6.4. PSO CfDs .............................................................................................................................. 30
   6.5. Change of PPA ...................................................................................................................... 30
   6.6. PSO Monies Owed................................................................................................................ 30
7. Next Steps........................................................................................................... 31
Appendix 1: Allocation of 2020/21 PSO Levy ...................................................... 32
Appendix 2: 2018/19 Benchmark Price ................................................................. 33
Appendix 3: PSO Monies Withheld in the 2019/20 PSO Year ............................. 34

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

Glossary of Terms and Abbreviations
Abbreviation           Meaning

AD                     Anaerobic Digestion

AER                    Alternative Energy Requirement

CfD                    Contract for Difference

CPI                    Consumer Price Index

DCCAE                  Department of Communications, Climate Action and Environment

DSO                    Distribution System Operator

DUoS                   Distribution Use of System

HE CHP                 High Efficiency Combined Heat and Power

HICP                   Harmonised Index of Consumer Prices

MEC                    Maximum Export Capacity

MIC                    Maximum Import Capacity

MWh                    Megawatt Hours

PPA                    Power Purchase Agreement

PSO                    Public Service Obligation

REFIT                  Renewable Energy Feed-In-Tariff

RESS                   Renewable Electricity Support Scheme

SEM                    Single Electricity Market

S.I.                   Statutory Instrument

TSO                    Transmission System Operator

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

1. Introduction
1.1 The Commission for Regulation of Utilities
The CRU’s mission is to protect the public interest in Water, Energy and Energy Safety.

The CRU is guided by four strategic priorities that sit alongside the core activities we undertake
to deliver on the public interest. These are:

    •   Deliver sustainable low-carbon solutions with well-regulated markets and networks
    •   Ensure compliance and accountability through best regulatory practice
    •   Develop effective communications to support customers and the regulatory process
    •   Foster and maintain a high-performance culture and organisation to achieve our
        vision

1.2 Purpose of this document
This document explains the Public Service Obligation (PSO) levy to apply to electricity
customers in Ireland from 1 October 2020 to 30 September 2021. This follows a proposed
decision paper (CRU/20/061 – “Proposed Decision”) which contained the preliminary
determination of the PSO levy for the 2020/21 PSO year.

1.3 Structure of paper
The remainder of this document is structured as follows:

Section 2 – Background: Provides detail on the PSO levy, and an overview of the legislation
governing the PSO levy and State Aid Decisions.

Section 3 – Key Assumptions: Provides detail on the benchmark price and the capacity
payment applied in calculating the PSO levy for 2020/21.

Section 4 – 2020/21 PSO Levy: Gives a high-level overview of the PSO levy in terms of total
cost and total generation capacity supported, as well as the allocation of the cost to different
customer categories.

Section 5 – Key Comments Received: Summarises main comments received to the
Proposed Decision, along with CRU’s responses to these comments.

Section 6 – Cost Breakdown of Levy: Provides a breakdown of the PSO levy in terms of the
support schemes and generation technologies that it supports.

Section 7 – Next Steps.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

Appendix 1 – Contains key data from ESB Networks’ model used to allocate the PSO levy to
the different categories of customer.

Appendix 2 – Compares the forecast commodity prices used in the calculation of the 2018/19
benchmark price with actual commodity prices in 2018/19.

Appendix 3 – Provides a breakdown by REFIT project of PSO monies being withheld in the
2019/20 PSO year under the CRU’s Withholding Mechanism.

Annex 1 – Lists audited outturn costs for 2018/19 PSO year and provides a comparison of
estimated verses actual generation for all REFIT projects in the 2016/17, 2017/18 and 2018/19
PSO years.

1.4 Related documents
•   Electricity Regulation Act, 1999

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

•   S.I. No. 403 of 2018 – Amending S.I. No. 217 of 2002 for REFIT

Relevant EU State Aid Notifications and Clearance Decisions

•   EC C(2001)3265, State aid n° N 6/A/2001 – Ireland, “Public Service Obligations imposed
    on the Electricity Supply Board with respect to the generation of electricity out of peat”;

•   EC C(2002) 5, State aid n° N 826/01 - Ireland, "Alternative Energy Requirements I to IV”;

•   EC C(2002) 3, State aid N 553/01 – Ireland, “Aid to promote renewable energy sources in
    Ireland” (AER V);

•   EC C(2003)4488, State aid N/475/03 – Ireland, “Public Service Obligation in respect of
    new electricity generation capacity for security of supply” (Capacity and Differences
    Agreements (CADA));

•   EC C(2007)4317, State aid N 571/2006 – Ireland, “RES-E support programme” (REFIT
    1);

•   EC C(2012)8, State aid SA.31236 (2011/N) – Ireland, “Renewable Feed In Tariff” (REFIT
    2); and

•   EC C(2011)7593, State aid SA.31861 (2011/N) – Ireland, “Biomass electricity generation”
    (REFIT 3).

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

Relevant CRU Papers
•   CER/17/073 Decision on ESB Networks’ Updated PSO Levy Cost Allocation Methodology

•   CRU/18/261 Addressing the Risk of Bad Debt to the PSO Levy

•   CRU/19/094 Public Service Obligation Levy 2019/20 – Decision Paper

•   CRU/19/126 Information Paper - Arrangements for PSO Invoicing and Collection

•   CRU/20/012 Notification to Suppliers – Submissions to the CRU for the 2020/21 Public
    Service Obligation (PSO) Levy

•   CRU/20/019 Notification to Suppliers Certification of the PSO Levy, including the role of
    independent auditors

•   CRU/20/013 Arrangements for the Calculation of the Public Service Obligation Levy post
    I-SEM Implementation.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

2. Background
2.1 The PSO Levy
The PSO levy is used to fund various schemes designed by Government to support national
policy objectives related to renewable energy.1

The PSO levy is charged to all electricity final customers2 in Ireland, and the proceeds are
used to compensate the:

    i.    additional costs3 incurred by market participants in generating or purchasing electricity
          from PSO-supported generators4. In the case of in-market generators, these are the
          additional costs over and above the revenues received from selling that electricity into
          the market, and in the case of out-of-market generators, they are the additional costs
          over and above the avoided cost of buying that electricity from the market; and

    ii.   administrative expenses incurred by suppliers, the Distribution System Operator
          (“DSO”), i.e. ESB Networks, and the Transmission System Operator (“TSO”), i.e.
          EirGrid, in collecting payment of the PSO levy.

Policy and terms associated with the generators eligible for support from the PSO levy under
the various schemes are set out in legislation and documents published by the Department of
Communications, Climate Action & the Environment (DCCAE), which have also been subject
to state aid approval from the European Commission. The CRU has no discretion over the
terms of the various schemes. The CRU’s role in relation to the PSO is to calculate the levy

1
 Until 2016, the PSO levy supported security of supply policy objectives. The PSO levy also supported national
policy objectives in relation to indigenous fuels through the Peat PSO Scheme. This scheme expired at the end of
2019.

2
  In accordance with Electricity Regulation Act, 1999, final customer means “a person being supplied with electricity
at a single premises for consumption on those premises”.
3
  “Additional costs” as referenced in the 2002 Order does not define what is meant by such costs other than to
state in Article 2(3) of the 2002 Order that they include costs incurred by the Board (i.e. ESB) in complying with its
obligations under Article 5(1) and (b) (i.e. Public service obligations for Peat), Article 6A or 6B (i.e. Public service
obligation for short-term peaking capacity), Article 6(C) (i.e. CADA), and the costs incurred by a supplier in
complying with its obligations under Article 6D (i.e. Public service obligations for REFIT contracts). Under the CRU’s
current arrangements for the PSO levy, the relevant market participants are not entitled to recover such additional
costs, unless those costs are in accordance with the relevant State Aid Notifications, legislation and the terms and
conditions of the relevant schemes.
4
  Under PSO support schemes such as REFIT, this electricity is procured via Power Purchase Agreements (PPAs)
that suppliers (also referred to as off-takers) enter into with electricity generators.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

and payments in respect of supported generators in accordance with Government policy, and
to ensure that the scheme is administered appropriately and efficiently.

Before the start of each PSO year, which runs from 1 October to 30 September, the CRU
calculates the PSO levy for that PSO year based on:

   i.   An estimate, for the forthcoming PSO year, of the additional costs based on a forecast
        of the cost of selling or buying from the market using a benchmark wholesale electricity
        price (“the Ex-ante Benchmark Price”) as determined by the CRU, and an estimate of
        the generation output determined and submitted to the CRU by the relevant market
        participant.

  ii.   A reconciliation, for the preceding PSO year, of the additional costs actually incurred
        or deemed to have been incurred, with the estimates made in advance of that PSO
        year. Thus, for example, the PSO levy calculation carried out by the CRU prior to the
        start of the PSO year 2020/21 includes a reconciliation of the costs actually incurred
        or deemed to have been incurred during the PSO year 2018/19 with the estimates
        made for the PSO year 2018/19 prior to the start of PSO year 2018/19 The resulting
        reconciliation payments are known as “R-factors” or “R-factor payments”, and may be
        positive or negative, depending on whether the actual costs incurred or deemed to
        have been incurred are higher or lower than the estimates. Such differences arise
        primarily due to differences between the estimated and the actual amount of electricity
        generated, and between forecast and actual market prices.

The PSO levy is collected from electricity final customers by electricity suppliers. For
distribution-connected customers, the levy collected by electricity suppliers is passed to the
Distribution System Operator (DSO – ESB Networks) and then from the DSO to the
Transmission System Operator (TSO - EirGrid), while for transmission-connected customers
the levy is passed directly to the TSO. The TSO pays out the appropriate PSO amounts, as
instructed by the CRU, to the relevant market participants, being either suppliers purchasing
power from eligible generators under a specified PPA or, in the case of the Peat PSO Support
scheme, directly to the generator. Although in most cases the PSO levy is paid to the supplier,
generators receive support through the price specified in the PPA, which must be greater than
or equal to a defined minimum price.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

2.2 Legislation Governing the PSO Levy
Electricity Regulation Act 1999

Section 39 of the Electricity Regulation Act 1999, as amended (“the Act”), gives the Minister
the power to direct, by order, the CRU to impose obligations on holders of licences or
authorisations in relation to security of supply, environmental protection and use of indigenous
energy sources, including the collection of a levy from final customers. In accordance with
Schedule 2 of the Act, the calculated PSO levy is allocated annually across three categories
of electricity customer (i.e. Domestic Accounts, Small Accounts & Medium-Large Accounts)5
based on the maximum demand in respect of each category, as a proportion of the sum of the
three maximum demand figures. The attribution of the maximum demand in respect of each
category of electricity account is carried out by the DSO for each PSO year, in accordance
with Section 39 (5A) (b) of the Act. CER/17/0736 provides further details.

The 2002 Order
The Electricity Regulation Act 1999 (Public Service Obligations) Order 2002 (Statutory
Instrument No. 217 of 2002) (as amended) (“the 2002 Order”) sets out more detail in relation
to issues such as:

      •   PSO Calculations
      •   Duties of suppliers

      •   Duties of the DSO

      •   Duties of the TSO

      •   Duties of final customers

      •   Recovery of contract debt

The 2002 Order has been amended by successive S.I.s to provide for the recovery of
costs under the PSO for such schemes.

5
  In accordance with Schedule 2 of the 1999 Act, Domestic Accounts means electricity accounts held by final
customers and identified by the DSO as liable for distribution use of system charges at the rate for urban domestic
customers or the rate for rural domestic customers. Small Accounts means electricity accounts held by final
customers which are not Domestic Accounts or Medium-Large Accounts, while Medium-Large Accounts means
electricity accounts held by final customers which, in respect of each such account, the DSO certifies as having a
maximum import capacity of not less than 30kVA.

6
    Decision on ESB Networks’ Updated PSO Levy Cost Allocation Methodology.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

2.3 State Aid Notifications
The Government is required to notify the terms of each support scheme under the PSO to the
European Commission and obtain approval. The original State Aid Notification of November
2000 sets out the broad areas that may be covered by the PSO as listed in Section 39 of the
Act. These include security of supply through the use of indigenous fuel sources, as well as
environmental protection. Since the original notification, various Government support
schemes that are funded by the PSO have been notified to the EU Commission (e.g.
Alternative Energy Requirements “AERs”, Capacity 2005 plants, Renewable Energy Feed-in
Tariff “REFIT” 1-3) and have received state aid clearance.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

3. Key Assumptions
3.1 Benchmark price
The benchmark price is an average of the forecast wholesale market price of electricity over
the PSO year. It is used by the CRU to calculate the forecast market revenue of generation
plants supported under the PSO for the relevant PSO year, based on their estimated
generation. This forecast market revenue is subtracted from the guaranteed revenue of the
supported plants in order to determine the amount to be paid via the PSO levy. The lower the
benchmark price, the higher the top up required from the PSO levy and vice versa.

The benchmark price was calculated using a PLEXOS model of the SEM (SEM-20-004). The
benchmark price used in calculating the PSO levy contained in this decision paper is €53.66.7
The exchange rates and forward fuel and carbon prices used in modelling the 2020/21 PSO
year are from 7 July 2020, with the main determinant of the benchmark price being the forward
fuel prices. This benchmark price is higher than the benchmark price of €46.86/MWh used in
calculating the proposed PSO levy for 2020/21.

3.2 Capacity payment
The Final Capacity Auction Results 2020/2021 T-1 are available on the SEMO website8. The
CRU has used the results of this auction to determine capacity revenue remunerated to
generators for the purpose of the 2020/21 PSO calculation.

7
  Any difference between the benchmark price applied here and actual wholesale prices, will be captured in the R-
factor for the 2020/21 PSO year, when calculating the 2022/23 PSO levy.
8
    Final Capacity Auction Results 2020/2021 T-1 Capacity Auction

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

4. 2020/21 PSO Levy
4.1 Total levy cost and generation capacity supported

The total PSO levy for the 2020/21 year, calculated based on the Benchmark Price and
Capacity Payments described in Section 3, is €393.13 million. A high-level breakdown of the
2020/21 PSO levy into its components is shown in Table 4.1.

Table 4.1: Breakdown of total 2020/21 PSO levy

                                                                                          Total PSO
                               Generation            Forecast Cost          R-Factor
                                                                                           support
         Component              Capacity               2020/21              2018/19
                                                                                           2020/21
                             Supported (MW)            (million)           (million)9
                                                                                           (million)
     Renewables                   3,891.2                 €355.62           €66.88         €422.50
     Peat                            -                     -€6.00           €13.66           €7.66
     PSO CfDs                        —                       —                —             -€3.45
     Admin                           —                       —                —              €0.72
     Rebate10                        —                       —                —            -€34.31
     Total                        3,891.2                  349.62            80.54         €393.13

Additionally, Figure 4.1 provides an annual breakdown of the total PSO levy since 2011/12
and presents the overall trend in the cost of the PSO.

                              Figure 4.1: Historical Breakdown of total PSO levy

10
 Rebate relates to PSO payments that were withheld from suppliers, by EirGrid, in the 2019/20 PSO year. This
money is now being paid back to the PSO (refer to Section 4.2 for further details).

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

4.2 Drivers of year on year change
The 2020/21 PSO levy of €393.13 million represents an increase of €216.66 million (123%)
on the 2020/21 levy of €176.46 million. A number of drivers are contributing to this increase,
principally the 2018/19 R-factor and a lower 2020/21 estimated benchmark price.

Downward Drivers on the 2020/21 PSO Levy:

  i.   Positive R-factor: The calculation of the PSO levy requires an ex-ante estimation of the
       monies recoverable in a given PSO year by suppliers plus the calculation of the monies
       that should have been recovered by such parties two PSO years ago (in this instance
       2018/19). This latter calculation is referred to as the “R-factor”.

       A 2018/19 R-factor of €80.54 million is being included in the 2020/21 PSO levy
       calculation. The 2018/19 R-factor accounts for the difference between the PSO monies
       paid suppliers in the 2018/19 PSO year, calculated ex-ante, and the actual PSO monies
       owed to suppliers 2018/19 PSO year, certified ex-post. The R-factor for the 2018/19
       PSO year is positive meaning suppliers typically under recovered in the 2018/19 PSO
       year. This positive 2018/19 R-factor of €80.54 million is the main driver behind the
       increase in the 2020/21 PSO levy. This constitutes a net increase of €266.47 million in
       comparison to the 2017/18 R-factor of -€185.93 million.

 ii.   Lower Benchmark Price: The forecast benchmark price of €53.66/MWh is lower than
       the benchmark price of €57.37/MWh used in calculating the 2019/20 PSO levy. This
       has the effect of increasing the overall levy by approximately €44.44 million relative to
       the 2019/20 PSO levy. This is because lower forecast market revenue increases the
       amount required from the PSO levy to compensate suppliers up to the guaranteed rates
       that they are obliged to pay to PSO supported generators.

Downward Drivers of the 2020/21 PSO Levy
  i.     Decreased Renewable Capacity: An estimated 3,891.2 MW of renewables will be
         supported by the 2020/21 PSO levy. This is a slight decrease of 83 MW, or 2% less
         than the 3,974.2 MW of renewable capacity supported in the 2019/20 PSO year.
         Following the expiry of the Peat PSO Scheme, both Lough Ree and West Offaly plants
         were eligible to claim REFIT 3 support for co-firing biomass with peat, up to 30% of
         the plant capacity in any single year. This REFIT 3 support was subject to the granting
         of planning permission by An Bord Pleanála for the co-firing of biomass at 30% of plant

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            capacity at both plants. ESB have not obtained planning permission at either plant. As
            a result, ESB have not made an ex-ante submission to the 2020/21 PSO levy for either
            of these projects. In addition to these two ESB plants, a number of other small REFIT
            2 and REFIT 3 projects that made submissions to the 2019/20 PSO levy, have not
            made submissions for the 2020/21 PSO year11.

     ii.    Expiry of Peat Scheme: The Peat PSO Scheme expired at the end of 2019.
            Notwithstanding this, in a PSO submission made to the CRU in April 2020, ESB sought
            to claim ex-ante costs of €25.8 million for the 2020/21 PSO year (included Dismantling
            Costs, Environmental Provision Costs, Just Transition Costs & Rates). In a
            subsequent submission received by the CRU in May 2020, ESB proposed treating
            these costs as actual PSO costs. These costs were excluded from the CRU’s
            calculation of the 2020/21 proposed PSO levy.

            The CRU is currently working with DCCAE to determine whether such costs are
            recoverable under the terms of the relevant State Aid Notification and the PSO
            legislation. As a decision has not yet been reached on whether ESB’s aforementioned
            costs are permissible under these terms, the CRU has therefore not included these
            costs in the calculation of the 2020/21 PSO levy.

     iii.   Rebate: €34.31 million of a rebate is to be paid back into the 2020/21 PSO. The rebate
            primarily relates to PSO payments that were withheld from suppliers, by EirGrid, in the
            2019/20 PSO year in accordance with the CRU’s PSO withholding mechanism.

            The 2019/20 PSO year is the first year in which the CRU’s withholding mechanism has
            been implemented. PSO monies can be paid out to suppliers for generation projects
            that have not energised. This creates a risk of bad debt within the PSO levy. In
            accordance with the CRU’s withholding mechanism, ex-ante payments are withheld
            from new REFIT projects until they have met a specific milestone in terms of
            commencing generation. In the current 2019/20 PSO year, €34.19 million is being

11
     The following REFIT 2 projects did not make ex-ante submissions for the 2020/21 PSO year: Gilmore
Clarke Electrical Ltd t/a EMCA (1/2/014), Devine & Associates (1/2/052), Devine and Associates Rathroeen Limited
(1/2/121), Tra Investments Ltd (1/2/129), B9 Power Ltd. (1/2/129). The following REFIT 3 projects did not a
submission of ex-ante estimated generation for the 2020/21 PSO year: Lough Ree Power (1/3/029) and West
Offaly Power (1/3/030).

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           withheld from suppliers that have made ex-ante submissions to the 2019/20 PSO levy
           but have either failed to meet the required milestone in terms of that project
           commencing generation or have provided proof of milestone later than their forecast
           energisation date. A breakdown by REFIT project, of monies being withheld in the
           current PSO year under the CRU’s Withholding Mechanism can be found in Appendix
           3. The withholding of these monies under this policy has reduced the risk of bad debt
           occurring in the PSO. 12

4.3 Changes since the Proposed Decision
The final 2020/21 PSO levy of €393.13 million represents a decrease of €86.98 million relative
to the proposed PSO levy of €480.11 million. The main change to the calculation of the PSO
levy for 2020/21 since the Proposed Decision is the benchmark price. The proposed PSO levy
was calculated based on a benchmark price of €46.86/MWh. Based on up to date forecasts
of the wholesale price of electricity for the 2020/21 PSO year, this benchmark price has been
revised to €53.66/MWh for the calculation of the final PSO levy. Figure 4.2 below graphs the
impact that changes in commodity prices had on the Final 2020/21 Benchmark Price.

Figure 4.2: The relative impact that changes in each commodity price had on the Final 2020/21 Benchmark
Price in comparison to the 2020/21 Indicative Benchmark Price.

The CRU notes that in the two-month period from May to July 2020, the 2020/21 estimated
Benchmark Price has increased significantly by €6.80/MWh (15%). This has been driven by a
substantial increase in commodity prices in that period. Such a change in the 2020/21

12
     Addressing the Risk of Bad Debt to the PSO Levy (CRU/18/261)

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Benchmark Price over that relatively short period of time highlights the inherent difficulty that
exists in the accurate forecasting of the electricity price.

4.4 Allocation of costs
The cost of the PSO levy is allocated across three categories of customer – Domestic, Small
Commercial (MIC < 30kVA) and Medium/Large Commercial (MIC ≥ 30kVA). The peak demand
associated with each category (based on standard load profiles, metered data and forecast
demand data) is determined by ESB Networks. The cost of the PSO levy is then allocated in
proportion to the ratio of these demand peaks.

For the 2020/21 PSO year, ESB Networks have updated their PSO cost allocation model,
using the most recent customer forecasts available. Further detail on the calculation of the
cost allocation is provided in Appendix 1. The proportion of the PSO levy of €393.13 million to
be allocated to each of the three customer categories are presented in Table 4.2.

Table 4.2: 2020/21 PSO levy charges by customer category.

         PSO Customer          Monthly Levy           Monthly Levy         Year on Year      Increase
           Category          Amount (2019/20)       Amount (2020/21)         Increase           (%)

           Domestic           €2.84 / customer       €6.52 / customer    €3.68 / customer     130%

        Small commercial
                              €10.35 /customer       €21.41 / customer   €11.06 / customer    107%
         (MIC < 30 kVA)

         Medium/Large
          commercial             €1.22 / kVa            €2.78 / kVa         €1.56 / kVa       128%
         (MIC ≥ 30 kVA)

One of the factors influencing the scale of the percentage increase in the 2020/21 PSO levy
(across PSO customer categories) is the share of peak demand applied to each category of
customer for this period, as outlined below.

    •     Domestic Customers: For 2020/21, the updated forecast demand data resulted in an
          increased percentage allocation (3.35%) of the total PSO levy to Domestic Customers.
          In 2020/21 domestic customers accounts for 42.28% of peak demand, compared to
          40.91% in the 2019/20 PSO year. This increases their share in the PSO levy relative
          to other PSO customer categories.

    •     Small Commercial Customers:            For 2020/21, the updated forecast demand data
          resulted in a significant decrease in percentage allocation (-15.24%) of the total PSO

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        levy to Small Commercial Customers. In 2020/21 Small Commercial Customers
        account for 10.23% of peak demand, compared to 12.1% in the 2019/20 PSO year.
        This reduces their increase in the PSO levy relative to Domestic Customers.

    •   Medium & Large Commercial Customers: For 2020/21, the updated forecast demand
        data resulted in a slight increased percentage allocation (1.00%) of the total PSO levy
        to Medium & Large Customers. In 2020/21 Medium & Large Customers account for
        47.49% of peak demand, compared to 47.02% in the 2019/20 PSO period. This
        marginally increases their increase in the PSO levy relative to Domestic Customers
        and Small Commercial Customers.

Another factor which impacts the year on year percentage change (across customer
categories) is the variation in the total number of customers for the Domestic and Small
Commercial categories and the total non-domestic Maximum Import Capacity (MIC) for the
Medium & Large Commercial category for 2020/21. The cost attributed to each category is
apportioned to the number of customers in the Domestic and Small Commercial and the MIC
for Medium & Large customers and determines the annual charge kVA.

According to ESB Networks’ 2020/21 PSO Cost Allocation Model, the number of Domestic
Customers in the 2020/21 PSO year will increase by 0.12% when compared to 2019/20. The
number of Small Commercial customers is estimated to decrease by 8.80%. The Medium and
Large customer category is expected to see a slight decrease with non-domestic MIC
decreasing by 1.08%.

4.5. Historical PSO Levy Costs
Each year the PSO levy consists of a combination of estimated ex-ante payments for the PSO
year ahead, and an R-factor adjustment/reconcillation for PSO payments made in the PSO
year two years previous. An estimate of the “true” cost of PSO support in each previous PSO
year may be calculated by taking ex-ante payments made in a specific PSO year and adding
the R-factor for that year that was subsequently calculated ex-post (e.g. the “true” cost of PSO
support in the 2018/19 PSO year may be calculated by combining ex-ante PSO payments in
that year with the 2018/19 R-factor subsequently calculated for that year for inclusion in the
2020/21 PSO levy). Figure 4.3 displays a comparisson of the “true” cost of the PSO levy and
the actual PSO levy in recent years.

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Figure 4.3: Comparison of “true” and actual PSO levy costs13

The CRU notes that the actual 2018/19 and 2019/20 PSO levies were relatively low and not
reflective of the “true” cost of the government subsidy to renewable generators in those given
years. This was due to significant negative R-factors being applied in the calculation of the
PSO levy in both years. As detailed in Figure 4.3, the true cost of the 2018/19 PSO levy was
€404 million. This is much greater than the actual 2018/19 PSO levy of €209 million.

Over the past few years, and as illustrated in Figure 4.3, the “true” cost of the PSO Levy has
been generally trending upwards as the portion of our power generation capacity supported
by the levy has increased. This will likely continue to increase as we approach our 40%
renewable generation target and strive towards the Government’s target of 70% renewable
generation by 2030. The CRU notes that there is an underlying variability in the cost of the
levy as both market prices and level of generation will vary from year to year. When the “true”
cost of the PSO levy is compared to the actual PSO levy, it is apparent that this variability is
exacerbated by the inherent challenges in forecasting future prices and levels of renewable
generation, and then adjusting for actual results.

As indicated in Section 2.1, PSO levy payments are calculated on the basis of estimated
generation and estimated wholesale electricity market prices for the year ahead. These
payments are then corrected for ex-post through the R-factor. In Q4 2020, the CRU will be
consulting on ways of reducing volatility in the PSO levy, including options to improve the

13
  The “true” cost of the 2019/20 PSO levy is not detailed in Figure 4.3 as the 2019/20 R-factor will not be known
until 2021. Similarly, the “true” cost of the 2020/21 PSO levy is not detailed as the 2020/21 R-factor will not be
known until 2022.

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An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

methodology by which these estimates are made. The CRU may also consider alternative
methods to reduce volatility in the PSO levy (e.g. mid-year reviews). Some of these options
would require legislative amendments. The CRU notes however that the PSO levy is ultimately
dependent on wholesale electricity market prices which a can fluctuate from year to year.
Therefore, it is not possible to fully remove the risk of volatility occurring in the PSO levy and
as such, similar fluctuations in the PSO levy will continue to be possible in future years.

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5. Key Comments Received
This section provides a summary of public responses received to the CRU’s proposed 2020/21
PSO Proposed Decision Paper (CRU/20/061), along with CRU responses to the key points
made.

5.1 List of Respondents
Respondents to the CRU’s proposed decision on the 2020/21 PSO levy are listed in Table 5.1
below. Two confidential responses were also received, which are not included in this list.

  1) Aughinish Alumina Limited                     2) Boliden Tara Mines
  3) Bord Gáis Energy                              4) Cement Manufactures Ireland
  5) Fennell Public Affairs                        6) Fergus Wheatly & Peter Brennan
  7) Fingleton White                               8) IBEC
  9) Irish Hotels Federation                       10) Irish Water
  11) IWEA                                         12) Kore Energy
  13) Listal Limited                               14) Masonite Ireland Unlimited
  15) Microsoft                                    16) Nevin Power
  17) RE-Source                                    18) Society of St. Vincent de Paul
  19) Transdev
 Table 5.1: List of Respondents

5.2 Key Comments and CRU Responses
5.2.1 Economic & Social Impact
From an economic perspective, the majority of respondents highlighted the potential negative
impact that such a large increase in the PSO levy will have on the Irish economy. Specifically,
these responses indicated that the proposed increase as outlined in the proposed decision
paper (CRU/20/061) will have an adverse effect on the Irish economy in terms of investments,
employment and cost competitiveness.

Some respondents stated that Irish electricity prices are amongst the highest in Europe and
that the PSO Levy is an additional burden to doing business in Ireland. Many respondents
also expressed concern over the proposed increase of the levy during a time of economic
uncertainty due to the COVID-19 pandemic and Brexit, with some recommending that the
CRU reduce or suspend the PSO levy for the 2020/2021 PSO cycle.

From a social impact perspective some respondents were concerned about the large increase
of the PSO levy to be applied to the domestic customer category and believed the increase

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would contribute to energy poverty. Respondents noted that the PSO is imposed on all
domestic customers at a flat rate which some view as a regressive tax that creates an
increased burden on low income customers and those in arrears. Two respondents also noted
that the PSO being imposed on all domestic customers at a flat rate also leads to low energy
users paying a comparatively higher PSO in proportion to their total electricity bill.

CRU’s Response
The PSO levy has been designed by the Irish Government and consists of various subsidy
schemes to support its national policy objectives. This year the PSO levy is entirely related to
renewable electricity supports and is key in enabling Ireland to meet its national targets in
terms of the generation of electricity from renewables and aligns with the CRU’s vision of
achieving a secure, low carbon future.

From a regulatory perspective, the CRU’s role regarding the PSO is to comply with legislation,
to calculate the PSO levy and to help ensure the PSO levy is administered appropriately and
efficiently. The CRU is not in a position to reduce or suspend the PSO levy. Furthermore, the
CRU does not have discretion regarding the magnitude of the PSO levy, as the CRU
calculates the PSO levy in accordance with the governing legislation.

Regarding the issue of the significant increases in the proposed 2020/21 PSO levy, the CRU
notes that there is an inverse relationship between the PSO levy and wholesale electricity
price. This means if the wholesale electricity price is low, additional money is required to be
raised through the PSO levy to subsidise PSO supported generators. This is because these
generators receive less money from the wholesale market for the electricity they produce.
Given the correlation between the increase in the PSO levy and the decrease in the wholesale
market prices, the CRU notes that although an increase in the PSO levy will increase one fixed
charge element on electricity bills, variable charges (e.g. the unit rate) should in fact decrease.
The CRU expects this projected decrease in wholesale electricity prices in the forthcoming
PSO year to be passed on to consumers by electricity suppliers.

5.2.2 Cost Allocation
Many respondents raised concerns in relation to the methodology used to allocate the cost of
the PSO. In particular, the use of MIC as the basis for allocating costs to medium/large
commercial customers was raised as a concern. The respondents were of the view that
allocating PSO costs in this way is not a fair or justifiable methodology as it does not reflect
actual energy consumption. Respondents noted that the current cost allocation methodology
acts as a disincentive for HE CHP, electric car charging infrastructure and for energy efficiency
as PSO charges based on MIC does not reflect actual energy consumption.

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Respondents argued that applying a consumption-based charge to medium/large consumers
would provide a better incentive for these energy users to manage their consumption
proactively and better align with the climate action plan.              One respondent, in favour of
consumption-based charging, also noted that some high energy users “use power in bursts”
rather than a steady flow. This respondent acknowledged that such consumption has an
impact on the grid but suggests these costs should be recouped through network charges
instead of through an unfair PSO levy.

Two respondents stated their belief that this cost methodology is particularly unfair to HE CHP
plants as these plants often have large MICs that are only utilised rarely for outage and
maintenance requirements. One respondent suggests that the PSO levy should be charged
based on net capacity i.e. MIC less Maximum Export Capacity (MEC). For plants which have
an MEC greater than their MIC, the respondent suggested that the PSO charge should reflect
years when the site is importing to ensure they also contribute to the PSO levy.

One respondent asked that consideration be given to the reliability of customer demand levels
during the COVID 19 pandemic before finalising the apportionment across customer
categories. The respondent noted that recent data during the COVID 19 pandemic may not
be reliable in terms of predicting domestic demand and peak demand volumes.

CRU’s Response
The legislation governing the PSO dictates that the CRU allocates the PSO levy on the basis
of kVA of MIC for medium/large customers. Specifically, the Electricity Regulation Act 1999
(Public Service Obligations) Order 2002, states that:

“The Commission shall make a final determination of […] 22 (v) the PSO Levy amount per
electricity account for Domestic Accounts and Small Accounts and the PSO Levy charge per
kVA of maximum import capacity for Medium-Large Accounts”

The CRU does not have any discretion to revise the legislation that sets out the basis of the
allocation of PSO levy costs.

In the Proposed Decision, the CRU noted that due to the economic uncertainty resulting from
the COVID-19 pandemic, ESB Networks’ Indicative PSO Cost Allocation Model should be
caveated, as the customer number and peak demand estimates for the forthcoming 2020/21
PSO year may change. ESBN has subsequently submitted their updated Cost Allocation
Model reflecting more up to date data, including revised customers numbers and peak demand
estimates.

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5.2.3 PSO Volatility
The majority of respondents expressed concern regarding the proposed rate of increase in
the PSO levy for 2020/21. Respondents also noted the year on year volatility of the PSO levy,
with one respondent asking that the monetary risk for customers and suppliers be mitigated,
especially considering the likely increase of renewables in the next decade.

One respondent acknowledged that accurate forecasting of power prices, commissioning
dates and wind volumes are difficult to predict. In this regard, the respondent noted that the
CRU has seen significant variance between estimate generation submitted by suppliers’ ex-
ante and actual generation submitted by supplier’s ex- post and suggests that improvements
to forecasting accuracy of generation volumes be considered.

One respondent welcomed the CRU’s suggestion of a mid-year review of the PSO, however,
suggested that the objective of such a review should be to inform affected parties of possible
swings year on year rather than changing the PSO levy mid- year. According to the respondent
a mid-year change to the levy would entail considerable implementation and testing costs.
Instead, the respondent suggests, the mid-year review should act as an indication to suppliers
and customers of the expected quantum of increases or decreases expected to arise in the
following PSO year. In their request for greater transparency, the respondent cited an example
in the UK where the Low Carbon Contracts (LCCC) that deals with renewable contracts
publishes a levy dashboard. This dashboard set out the assumptions of the levy forecasts for
three quarters after the levy year as well as in year tracking, which enables viewers to
determine whether the current levy, has been over or under recovered.

CRU’s response
PSO levy payments are calculated on the basis of estimated generation and estimated
wholesale electricity market prices for the year ahead. The PSO calculation methodology
entails reviewing, analysing and calculating data for two PSO years during each PSO cycle
i.e. ex-ante estimates for the forthcoming months and a correction of payments ex-post
through the R-factor.

In the coming months the CRU intends on consulting on ways to reducing volatility in the PSO
levy and will consider the issues regarding volatility raised by respondents in this consultation
process. However, the CRU notes that the PSO levy is ultimately dependent on wholesale
electricity market prices, which a can fluctuate from year to year. Therefore, it is not possible
to fully remove the risk of volatility occurring in the PSO levy and as such, similar fluctuations
in the PSO levy will continue to be possible in future years.

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