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What P442 and Licence Exempt Supply rules mean for business energy
Businesses receiving power directly from small-scale electricity generators have long benefited from Licence Exempt Supply rules, which allow power to be supplied without paying the environmental levies that add around 5p/kWh to the cost of electricity in most energy tariffs.
The P442 modification enables businesses using power from the grid to also benefit from a Licence Exempt Supply by matching their demand against the power produced by small-scale generators.
This guide explains how P442 works in practice and the opportunity it presents for businesses. Here’s what we cover:
- What is P442?
- What is a Licence Exempt Supply (LES)?
- What is an Exempt Supply Notification Agent (ESNA)?
- How P442 works in practice
- What charges does P442 affect?
What is P442?
P442 is a change to the Balancing and Settlement Code (BSC), the rulebook for how power is bought and sold on the wholesale electricity market.
The change introduces a new role called an Exempt Supply Notification Agent (ESNA). An accredited ESNA can match the power generated by a small-scale generator to a business’s demand, with power delivered through the grid.
Matched volumes provided by the ESNA can take advantage of Licence Exempt Supply rules, which allow the sale of electricity without paying environmental levies.
What is a Licence Exempt Supply (LES)?
Licence Exempt Supply is a set of rules introduced in 2001 that enables small-scale generators to sell power to end users without the full regulatory burden of becoming a licensed electricity supplier.
The eligibility requirements for an LES are:
- Generation capacity of less than 5 MW (equivalent to approximately 10,000 commercial solar panels).
- Most of the generation capacity must be supplied to non-domestic users.
- The generator cannot participate in the Renewables Obligation scheme or receive FiT export payments.
When electricity is sold to a business under a Licence Exempt Supply arrangement, the generator does not have to collect the environmental levies that fully licensed electricity suppliers must pass on to their customers.
There is no restriction on generation technology under Licence Exempt Supply rules, but it is typically used by solar, hydroelectric, wind farms, anaerobic digestion, energy from waste, and CHP units.
What is an Exempt Supply Notification Agent (ESNA)?
The role of an Exempt Supply Notification Agent is to identify, calculate and report the licence-exempt portion of the electricity fed into the grid by a small-scale generator.
The ESNA calculates exempt and non-exempt electricity by comparing:
- The half-hourly business energy consumption data from the end commercial user, and
- The half-hourly electricity is fed into the grid by the generator.
Only electricity that is both generated and consumed within a single half-hourly period is reported as licence-exempt.
ESNA accreditation
The Exempt Supply Notification Agent role can be performed by any private organisation that is accredited under the scheme.
Accreditation is provided by Elexon, the non-profit organisation that administers balancing and settlement of market transactions on the national grid.
The ESNA accreditation process requires demonstrating the technical competence and systems needed to interact with Elexon’s centralised systems and databases.
How P442 works in practice
Licensed business energy suppliers are starting to offer tariffs designed to take advantage of P442 to deliver cheaper business electricity prices.
Examples include TEM Energy and Good Business Energy. These energy suppliers arrange Power Purchase Agreements with a pool of eligible generators to match against the demand requirements of a pool of business energy customers.
The way electricity is physically delivered under these contracts is the same as any other business electricity tariff. The difference lies in the steps below, which allow Licence Exempt Supply to deliver lower prices.
1. An energy supplier agrees PPAs with a portfolio of LES
The business energy supplier will seek to agree Power Purchase Agreements with a portfolio of small-scale generators that meet the Licence Exempt Supply criteria.
The Power Purchase Agreement will typically include two rates for the electricity these generators feed into the grid:
- A licence-exempt price at a higher rate per kWh generated when there is a successful match to an eligible business.
- A non-licence-exempt price per kWh generated when there is no successful match to an eligible business.
The PPA may also include the purchase of Renewable Energy Guarantees of Origin to support the supplier in offering green business energy tariffs.
2. An energy supplier agrees tariffs with eligible business customers
The energy supplier offers electricity supply tariffs to non-domestic customers that incorporate power purchases from a Licence Exempt Supply.
The tariff is typically structured as a pass-through tariff, where network charges and environmental levies are separated from the wholesale purchase of electricity.
To be eligible, customers must not be receiving relief under a Climate Change Agreement and must have a half-hourly electricity meter installed at the supplied site.
💡At Business Energy Deals, our experts can help your organisation take advantage of a Licence Exempt Supply tariff. Find out how much you can save with our business electricity comparison service.
3. Half-hourly matching by the ESNA
Once the tariff begins, an appointed ESNA continuously calculates how much of the electricity fed into the grid by the generators, and consumed by the supplied customers, meets the criteria of the Licence Exempt Supply.
This apportionment of exempt and non-exempt generation and consumption is submitted to Elexon’s balancing and settlement systems.
4. Calculating the environmental levies
Elexon submits the volumes of eligible electricity supplied by each licensed supplier to the Low Carbon Contracts Company (LCCC) and Ofgem. These consumption figures are used to calculate the environmental levies owed by each supplier:
- LCCC: Calculates the CfD supplier obligation and Capacity Market obligations.
- Ofgem: Calculates the Renewables Obligation levy.
The eligible volumes submitted exclude Licence Exempt Supply, meaning the supplier does not incur these levies on the Licence Exempt Supply portion of their customers’ consumption.
5. Pass-through of levies to customer
In a pass-through tariff, the costs associated with network charges and environmental levies are added to business electricity bills at the cost incurred by the supplier.
This means environmental levies are charged only on the non-matched proportion of electricity consumed in each half-hourly period.
The wholesale unit cost of electricity will be paid in line with the tariff agreed with the supplier.
What charges does P442 affect?
Four types of business electricity charges are reduced by the way P442 enables Licence Exempt Supply:
Contracts for Difference supplier obligation
The Contracts for Difference scheme is the Government subsidy scheme for UK wind farms and other large-scale renewables. The scheme guarantees the price of electricity received by renewable energy generators.
The scheme is funded by adding a levy to the unit cost of electricity for all domestic and non-domestic consumers of power from the grid, except for Licence Exempt Supply and participants in the British Industry Supercharger.
Contracts for Difference currently add approximately 1 pence per kWh to domestic and business electricity bills.
Renewable Obligation levy
The Renewables Obligation scheme is the original subsidy scheme for large-scale renewables and was replaced by Contracts for Difference in 2017.
Participating generators receive Renewables Obligation Certificates (ROCs), which must be purchased by licensed energy suppliers to match against the power consumption of their customers.
The obligation to purchase ROCs currently adds approximately 3 pence per kWh to the cost of electricity for most domestic and business consumers.
Feed-in-Tariff levy
The Feed-in Tariff scheme was the subsidy scheme for small-scale renewable energy generators that applied up until 2019. It was replaced by the Smart Export Guarantee scheme.
The Feed-in Tariff levy currently adds 0.7 pence per kWh to the cost of electricity consumed by both businesses and households.
Capacity Market supplier charge
The Capacity Market is a scheme that funds back-up generation capacity, which can maintain supply in the event of a stress event such as a major power plant outage or extreme weather.
The Capacity Market is funded through a levy paid by all domestic and business electricity suppliers, and adds approximately 0.5 pence per kWh to the price of electricity.
Charges not impacted by P442
The P442 change only affects the environmental levies listed above, which are paid by licensed electricity suppliers based on the overall consumption of their customers.
It does not affect the other cost elements of electricity rates:
- The wholesale cost of electricity paid on the wholesale market to generators.
- TNUoS charges associated with using the high-voltage national grid.
- DUoS charges associated with using regional electricity grids.
- BSUoS charges that fund the grid operator NESO.
Is P442 the same as a sleeved PPA or peer-to-peer energy?
No, there are key differences between the P442 arrangement and sleeved PPAs and peer-to-peer energy purchases. We explain both separately below.
Difference with a sleeved PPA
Larger organisations can choose to procure power through a corporate sleeved PPA.
In this scenario, the business agrees to purchase the power produced by a specific renewable generator, delivered through the grid. This arrangement is managed by a licensed energy supplier who acts as the sleeving party.
The key difference between a corporate PPA and P442 is that a corporate PPA does not typically avoid environmental levies, as it is usually used for installations exceeding the 5 MW threshold of Licence Exempt Supply.
Difference with peer-to-peer energy
Peer-to-peer (P2P) energy trading is currently only a marketing term, rather than a specific regulatory or contractual approach.
It can describe a P442 arrangement, but can also encompass:
- A licensed supply with P2P trading enabled for wholesale purchases.
- Flexible energy contracts that allow direct trading on the wholesale market.
- Private-wire delivery of power in a local area, which allows small-scale generators to supply local homes and businesses.
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