Electricity CFDs
What is an electricity CFD?
Electricity Contracts-for-Difference (CFDs) were initially introduced in the UK as a component of the Electricity Market Reform, enacted through the Energy Act 2013. Their primary objective is to incentivise investment in renewable energy sources and enhance affordability for energy consumers. These contracts are concluded between a renewable energy generator and Low Carbon Contracts Company (LCCC), a government-owned company. These contracts are awarded for a period of 15 years.
What is a Financial Power Purchase Agreements (PPA)?
A Financial Power Purchase Agreement (PPA) is a financial contract established between an energy producer (power company) and an energy buyer (offtaker). This agreement meticulously outlines the price and monthly energy production levels that the offtaker commits to purchasing throughout the contract period. Notably, a synthetic PPA is also commonly referred to as an electricity CFD.
What does it stand for?
Electricity Contracts for Difference
Who are the counterparties?
A renewable generator and the Low Carbon Contracts Company (LCCC), a government-owned company.
Purpose
To incentivise renewable energy investment and improve affordability for consumers.
Are they reportable?
Yes. Electricity CFDs are classified as derivatives and are subject to UK EMIR reporting obligations.
How Does an Electricity CFD Work?
An Electricity CFD operates based on the difference between the prevailing market price for electricity and an agreed-upon “strike price”. The mechanics are straightforward:
- If the “strike price” is higher than the market price: The LCCC is obligated to pay the renewables generator the difference. This ensures the generator receives a stable income, mitigating market price volatility.
- If the market price is higher than the agreed “strike price”: The renewables generator must pay back the LCCC the difference. This mechanism ensures that consumers benefit when market prices are high.
- If the market price is at par with the strike price: No payment is exchanged between the parties.
| Yearly strike price | Renewables generator | LCCC (Government) |
|---|---|---|
| Higher than market price | Receives payment | Makes Payment |
| Lower than market price | Makes Payment | Received Payment |
| At Par with market price | No Payment | No Payment |
This system provides price stability for renewable energy generators and helps manage costs for the government and ultimately, consumers.
Is an electricity CFD reportable?
Yes, some electricity CFDs are indeed reportable. Due to the broad definition of financial services under the Financial Services and Markets Act 2000, certain energy products are captured, bringing various electricity market participants under the oversight of the Financial Conduct Authority (FCA).
For example, under UK EMIR (European Market Infrastructure Regulation), the reporting of all derivatives to a Trade Repository is mandated. An Electricity Contract-for-Difference is explicitly classified as a derivative, so the counterparties involved in an electricity CFD must adhere to the reporting and threshold obligations stipulated by UK EMIR.
How do you report an electricity CFD?
Electricity CFDs typically fall under the category of ‘commodity derivatives’. When reporting, they are designated with the base product as ‘energy’ and the sub-product as ‘electricity’.
It’s important to note that while the LCCC acts as a counterparty in the CFD allocation rounds, and its primary role is to issue contracts, it does not constitute an “undertaking” in the context of UK EMIR reporting, meaning it is not classified as a Non-Financial Counterparty (NFC) for reporting purposes.
Under UK EMIR, a Non-Financial Counterparty (NFC) that engages in derivatives contracts must report their trades. The clearing threshold for electricity CFDs is set at EUR 3 billion gross notional value. Crucially, valuation and collateral reporting are only required if the Non-Financial Counterparty exceeds this clearing threshold (classified as NFC+); they are not mandated if the counterparty remains below the threshold (NFC-).
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How can we help you?
At TRAction, we specialise as a third-party delegated reporting entity. We are equipped to assist your organisation in efficiently submitting your electricity CFD transactions to the designated Trade Repository. By partnering with us, you can significantly reduce your organisation’s reporting burden and expenditure, while also simplifying the inherent complexities of regulatory reporting requirements.
For more information on how we can help simplify your reporting processes, please get in touch with us.
Pricing packages
How much does it cost?
We charge a combination of an account management fee and a cost per transaction/position. Contact us for a quote, or view our pricing page for more information.
Power Purchase Agreement (PPA)
Initial set up cost & Trade Submission
-
£0 Monthly Account Management Fee
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£0 Cost of transactions or positions, per upload
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