9 October 2014
Contracts for
Difference:
On the
Launchpad
Chris Andrew
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Allen &
& Overy
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Overy 2014
2014
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The Ongoing UK Energy Policy Trilemma
Security of Supply
– In the next decade a fifth of existing UK generating capacity will come off-line.
estimate electricity demand growth of 30% - 100% by 2050.
DECC
Decarbonisation
– DECC’s 2050 Pathways analysis shows that the decarbonisation of the generation sector by
around 2030 is effectively a necessity for meeting the legal requirements of the 2008
Climate Change Act to reduce CO2 emissions by 80% 1990 – 2050.
– The Fourth Carbon Budget commits UK to 50% reduction by 2027.
– The European Commission has proposed a 2030 policy framework for climate and energy
policies envisaging: a 40% GHG reduction, but EU rather than national renewable energy
targets.
Affordability
– Between 2013 and 2020 required expenditure on UK energy infrastructure is estimated at
£110bn.
– Government acknowledges that consume prices will rise. It no longer claims that EMR will
reduce the effects of rising fossil fuel prices (as this is dependant on assumptions as to
future fossil fuel prices), rather that EMR is a cheaper (6%) way of achieving 2030 carbon
targets.
– The Levy Control Framework implies a subsidy (over and above the Carbon Price Floor) for
large-scale low-carbon generation of £7.6bn (2012 prices) in 2020/21.
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Ofgem Electricity Capacity Assessment June 2014
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Projected cumulative new capacity 2010 to 2035
Source: DECC Energy and Emissions Projections – September 2014
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Electricity Market Reform (EMR)
Contracts for Difference (CfD)
Capacity Market
Carbon Price Floor
Emissions Performance Standard
Enhanced Wholesale Liquidity
“In the new, reformed UK electricity
market, the economics of low carbon will
stack up like nowhere else in the world.”
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“The reforms are designed to provide
investors with transparency, longevity and
certainty in order to attract £110billion of
investment to bring forward new lowcarbon generation for the 21st Century.”
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CfDs Summary Timeline
December 2010
- Initial EMR consultation
July 2011
- White Paper
End 2012
- Energy Bill
Summer 2013
- First draft CfD
December 2013
- Energy Act 2013 receives Royal Assent
April 2014
- Investment Contracts allocated (4.5GW)
Summer 2014
- State Aid clearance; final form generic CfD published
October 2014
- First Allocation Round
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CfDs Implementation
2014
Oct
Primary legislation
Secondary legislation,
codes & Licence
change (subject to
parliamentary timings)
Nov
Dec
Jan
Primary
legislation
Feb
Mar
Apr
May
Identify and draft amendments to
existing industry codes
Detailed design and
development (contract,
Strike Prices &
Allocation)
Aug
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
DECC
Secondary legislation, codes,
licences in force
Amend existing
industry codes
Counterparty / SA
System Operator
Powers conferred on System
Operator, Counterparty,
Ofgem
Industry
FiD contracts
signed
FiD for Renewables contract
available
Contract Development
& drafting
Secondary
legislation Parliamentary
process
Secondary legislation amended in light of
consultation
Consultation on
draft amendments
to existing industry
codes ( dates tbc)
July
Secondary legislation laid
before Parliament (timings
tbc)
Royal Assent-subject
to will of parliament
Consultation on draft
secondary legislation
Jun
2015
FiD contracts in force and template
CfD contract given legal effect
Draft CfD budget
published
Revised CfD contract
spine published
Final Delivery Plan
published (inc. final
strike prices)
Modelli
ng &
Analysi
s
Collaborative
Development
Allocation
methodology given
legal effect
Draft Allocation technical
framework published
User
trials
Application and allocation IT system procurement and development
System Operator publishes
application guidelines
Supply chain plan submission
and assessment
CfD Application and
Allocation
CfD Applications processed
Industry implementation
preparatory tasks
Initial
application
process live
Preparation of Processes & Systems to support Application
Procure & develop CfD Contract Administration/Management Process & Systems
Develop 14/15
counterparty business
plan
Consultation
on op cost
budget / levy
rate
Publish 14/15 operational cost
recovery levy
Counterparty &
Settlement
T&C negotiation/pre
application process
Potential earliest date for
first CfD payments
Earliest Date for first
CfD contract award
14/15 op cost levy regs
in force
14/15 op cost levy regs
laid
Counterparty expected to begin
signing generic contracts
Counterparty has full
powers
FiD contract management and generic contract management when signed
Counterparty setup team in place
User testing
Procure & develop CfD settlement systems
Forecasting model
integration
Procure, develop and implement forecasting model
Develop systems for associated BSC changes
15/16 op cost
levy regs in force
Publication of 15/16
op cost levy rate
Consultation
on op cost
Ivey rate
15/16 op cost
levy regs laid
Publication of 15/16 unit cost fixed rate
Preparation of Processes & systems to Settlement & Payment/Billing
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Contracts for Difference (CfDs)
– CfDs to be offered by Low Carbon Contracts Company Limited (CfD
Counterparty) are intended to provide low carbon generators a
guaranteed tariff calculated as the difference between a strike price and a
reference price taken from the wholesale electricity market.
– First allocation round will open on 16 October 2014.
– CfD is to replace the 'pull' of the Renewables Obligation.
– Generation not already accredited when the CfD is introduced will
generally have a choice between CfD and RO until 31 March 2017
(subject to limited grace periods).
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CfD – Strike Price
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CfD Payments to Generators
– Payments to generators will be capped at the value of the strike price (i.e.
generators take risk of negative prices).
– Reference Price
– used as a proxy for the market price for electricity
– intermittent generation: an hourly day-ahead price
– base load generation: season ahead price, possible generator option to move to
year ahead.
– Strike Price
– fully CPI indexed
– administratively set maxima, but can be lower where competitive allocation.
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CfD Strike Prices (First Delivery Plan – December
2013)
Technologies with Over 1 Gigawatt of Potential Deployment
Renewable
Technology
Pot
Strike prices (£/MWh) (2012 prices)
Potential 2020
Deployment
Sensitivities
(GW)
2012
Roadmap
Central View
[6]GW
2014/15 2015/16 2016/17 2017/18 2018/19
Biomass
Conversion
3
105
105
105
105
105
1.7 – 3.4
Hydro
1
100
100
100
100
100
c. 1.7
Offshore Wind
2
155
155
150
140
140
8 – 15
18GW
Onshore Wind
1
95
95
95
90
90
11 – 13
13GW
1
120
120
115
110
100
2.4 – 41
7-20GW
2
125
125
125
125
125
c. 0.3 – 0.6
1
80
80
80
80
80
c. 0.4
Large Solar PhotoVoltaic
Dedicated
Biomass (with
CHP)
Energy from
Waste (with CHP)
N.B. The relevant year is defined by a project’s Target Commissioning Date.
1
Additionally DECC forecast 7.5GW small scale FIT PV
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CfD Terms
– CfD Agreement and CfD Terms and Conditions were published in August
2014.
– On announcing an allocation round, the Secretary of State will issue
notice of what terms are available for that round.
– The terms of the CfD will be largely standardised across all technologies;
however, different standard terms may be issued for different categories
of CfD.
– “Minor and necessary” modifications may occur for individual generators.
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Minor and Necessary Modifications
– Changes to terms of standardised CfD can be requested
– Modifications must be minor and necessary
– Application should be submitted to CfD Counterparty using the
template form
– Last submission day is 20 Business Days before the end of the
Application Closing Date
– Early submission allows time for rejection and resubmission
– Last day for CfD Counterparty to respond is 5 Business Days before
the end of the Application Closing Date
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CfD Payment Period
A start date for payments may be
triggered anywhere within this time
The CfD may be terminated if you have
not reached a start date for payments
by the Longstop Date
Longstop date
Target
Commissioning
Window
Longstop
period
But the 15 year term in which support is offered
will start at the end of the TCW, irrespective of
whether you are generating
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Levy Control Framework (LCF)
Source: GL Garrad Hassan
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Overall CfD Budget and “Pots”
Total support payments available in a given year
Delivery Year
£m (2011/12 prices)
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
CfD Budget (2014 release)
50
220
300
300
300
300
Pot 1 (established technologies)
50
65
65
65
65
65
-
155
235
235
235
235
Pot 2 (less established technologies)
N.B. No budget released for Pot 3 (biomass conversion) in 2014 Allocation Round
No maxima in 2014 Allocation Round
Minimum of 10MW for Wave and Tidal Stream technologies
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LCF Budget and CfD Budget
– 2015/16 Renewables Obligation level increased by approximately
20% on the 2014/15 level – approximate cost of £3.65bn in 2012
money – higher level than was expected in the Delivery Plan
– No LCF increase announced
– Budget increased for Pot 1 and Pot 2 compared to July 2014 Draft
Budget Notice
– RUK calculate new budgets would allow about 700MW of onshore
wind and 800MW of offshore wind at the administratively set strike
prices, and more if those prices are lower
– However, the Final Allocation Framework for the October 2014
Allocation Round set new, lower reference prices, reduced by
approximately £10/MWh
– This means that the valuation of each application will be higher than
previously expected and therefore, the increase in budget will have
limited impact on the capacity
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CfD Technology Pots
Pot 1
(established
technologies)
Administrative
Strike Price
(2015/16)
Pot 2
(less established
technologies)
Administrative
Strike Price
(2016/17)
Onshore wind*
95
Offshore wind
150
Solar Photovoltaic*
120
Wave‡
305
Energy from Waste with
CHP
80
Tidal Stream‡
305
Hydro†
100
Advanced Conversion
Technologies
150
Landfill Gas
55
Anaerobic Digestion*
150
Sewage Gas
75
Dedicated biomass with
CHP
125
Geothermal
145
Pot 3
Biomass
conversion
* (>5MW)
† (>5MW and <50MW)
‡ (0-30MW)
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Qualification Requirements
– The generating station which is the subject of the application must be an
eligible generating station.
– To be a qualifying applicant, the generator must:
1.
meet Eligibility Requirements
2.
not be an Excluded Applicant
3.
provide additional information/data
– The applicant must include a statement which identifies the set of
standard CfD terms and conditions that apply or identifies any “minor and
necessary” modifications agreed with the CfD Counterparty prior to the
start of the allocation round
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Eligibility Requirements
–
–
Applicable planning consents must have been given for the proposed
generating station and other relevant works that enable the unit to be
established or altered and electricity to be supplied (e.g. development
consent order; TWA order, s36 consent; planning permission; and/or a
marine licence)
Connection agreement requirements:
–
–
–
–
–
For projects connecting directly to the transmission or distribution system, a
grid connection agreement
For projects connecting indirectly (private networks), an agreement between
the applicant and the operator of the private network that permits connection to
the transmission or distribution system
For projects not connecting to the transmission or distribution system, a
declaration stating no connection is applicable
Supply Chain Approval Certificate (for projects of 300MW and above)
received from DECC
Supplemental requirements for phased offshore projects, e.g. timing and
capacity requirements
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Excluded Applicants
– The following are excluded applicants:
–
–
–
–
CCS and Nuclear
AD, Hydro, Onshore Wind, Solar ≤ 5MW
Applicants in receipt of funds from other Government support
schemes – RO; CM; ssFIT (some exceptions apply, e.g. dual
scheme facilities)
Non-GB based projects
– All applicants will be asked to declare that their application
is not an excluded application and that they have not
received or are receiving funding from other subsidy
schemes.
– Non-delivery disincentive
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Additional Information
– Name, address and contact details of:
–
–
–
applicant (GB based agent if applicant not based in GB);
party entering into CfD Contract; and
party who will be receiving notices under CfD Contract.
– Company information (e.g. company registration, VAT
numbers)
– Project information (e.g. project name, technology type,
location, proposed capacity, phases and target dates)
– Description and location map of generating station
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Allocation Process (1)
– Delivery Body (DB) reviews eligibility of all applicants
– DB has 10 working days to complete application determination and notify
each applicant as to whether or not their application is a qualifying application
– Whether or not a generator is a qualifying applicant will be determined on the
information provided by that generator in their application.
– All the criteria must be satisfied, otherwise the application will be rejected.
– On appeal, a non-qualified applicant can only rely on the evidence that was
produced with the original application, it cannot submit additional evidence
– DB will give reasons for determining an application non-qualifying
– Applicants deemed ineligible may appeal via a 3-tier appeals process:
– Tier 1: review notice to DB
– Tier 2: qualification appeal to Ofgem (Appeal Body)
– Tier 3: appeal to High Court
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Allocation Process (2)
– Once applications have been submitted, DB will value them, to see if
allocation will be constrained
– Valuation of each application carried out using valuation formula:
Top-up Payment
General conversion
factors
Technology specific
factors
Capacity
– Valuation report sent to Secretary of State (SoS) who may decide to
increase (but not reduce) CfD budget
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Allocation Process (3)
– If sufficient budget for all projects in a pot, then
unconstrained allocation will apply and all projects will
receive the Administrative Strike Price
– If there is insufficient budget for any delivery year in
budget profile (or Maxima exceeded), constrained
allocation will apply for that pot for all delivery years (or
that Maxima) – auction required
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Allocation Process Decision Tree
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Auction Procedure
– Each project submits sealed bids (strike price they are
willing to accept) into the relevant delivery year, which is
the year in which the Target Commissioning Date of the
project falls
– Auction ranks all projects in a pot by price and accepts
cheapest first in any delivery year (regardless of
technology type), until the budget for the pot is used up
– Clearing price for a pot is the price of the most expensive
project accepted in that delivery year (pay-as-clear rule)
– For a successful project its CfD strike price is the
applicable clearing price, capped at the relevant
Administrative Strike Price
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Auction Mechanism High Level Decision Tree
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Illustrative Auction Results
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Flexible bids
– Generators are allowed to submit flexible bids, i.e. a bid which allows
the bidder to vary the capacity, price and/or delivery date of their
project
– For each application, an applicant may submit up to 10 flexible bids
– No more than three flexible bids may be in any given delivery year
– Each flexible bid must have:
– a different strike price;
– a capacity no greater than that in the original application; and
– a Target Commissioning Date which is no earlier than that in the original
application
– The flexible bid with the lowest strike price will be considered first and
should be the applicant’s first choice bid
– Only one bid can be accepted for each application
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Flexible Bid High Level Decision Tree
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Audit, Secretary of State’s Review & Notification
– DB must ensure that Independent Audit of the Valuation and
Allocation calculations are carried out
– SoS will have 2 days from receipt of notification from DB to review the
Auditor’s Report with the DB’s recommendation and determine
whether the Allocation process must proceed to notification, re-run, or
be terminated
– At end of allocation round DB will notify each qualifying applicant
whether their application has been successful
– DB will give CfD notification to CfD Counterparty, who will offer
contracts to successful applicants
– DB will publish Allocation Round report and an Appeals Register
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CfD Allocation Timetable
Stage
Expected Date
(without appeals)
Latest Expected
Date (with appeals)
Allocation Round Commencement Date
16 October 2014
16 October 2014
Application Closing Date
30 October 2014
30 October 2014
Deadline for DB to assess eligibility of applications
13 November 2014
13 November 2014
Deadline for Applicants to request DB to reconsider
-
20 November 2014
DB reconsiders eligibility decision
-
5 December 2014
Deadline for Applicants to request Ofgem to reconsider
-
12 December 2014
Ofgem review of eligibility decision
-
29 January 2015
DB publish Auction Notice
2 December 2014
13 February 2015
Sealed Bid submission closing date
9 December 2014
20 February 2015
DB notifies LCCC and CPB of outcome of allocation round
5/6 January 2015
13 March 2015
Deadline for LCCC to issue contracts for signature
20 January 2015
27 March 2015
Deadline for successful applicants to sign contracts
3 February 2015
14 April 2015
N.B. Subject to change
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Future Allocation Rounds
– It is the Government’s intention to hold the next allocation round in
October 2015
– The Government is minded to release £50m for allocation in the October
2015 allocation round for Pot 1 (established technologies) projects
commissioning from 2016/17
– The Government has not yet decided on an indicative budget for Pot 2
(less established technologies) or Pot 3 (biomass conversion)
– The remaining LCF budget to 2020/21 is in excess of £1bn in the DECC
Medium Scenario
– The remaining estimated LCF funds which could be released for future
CfD projects will be set out later in the year in ‘DECC’s Consumer
Funded Policies – a report to Parliament’
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Alternative CfD Application Procedure
– SoS can direct CfD Counterparty to offer CfD to eligible
generator
– Outside generic CfD allocation process
– Not restricted to Standard Terms
– Likely to be very limited:
– large or unusual projects
– standard terms unsuitable
– generic CfD allocation process unsuitable
– State Aid?
– LCF?
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CfD Generator Journey - Overview
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Contract Capacity Adjustment
– Generators will be able to make adjustments to the proposed capacity
of their projects within set parameters
– These adjustments can be made:
– by the Milestone Delivery Date; and
– by the Longstop Date
– The table outlines the allowed capacity adjustments:
Milestone Delivery Date
Longstop Date
Projects above 30MW
Up to 25%
Up to 5%
Projects up to 30MW
Up to 25%
Up to 5% of intended
installed capacity or by an
amount equal to the
capacity of one turbine
(whichever is greater)
Offshore wind
Up to 25%
Up to 15%
– Also ability to adjust capacity in response to certain geological and other
conditions
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Current DECC Consultations
– Capacity Market supplementary design proposals and transitional
arrangements (respond by 5 November 2014)
– CfD Non-delivery Disincentive Exemptions (respond by 5
November 2014)
– Changes to the CfD Supplier Obligation (respond by 5 November
2014)
– Emissions Performance Standard Regulations (respond by 6
November 2014)
Delivery Plan
– Quinquennial plans
– Annual updates
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A&O EMR site
http://www.allenovery.com/UK-Electricity-Market-Reform
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Questions?
These are presentation slides only. The information within these slides does not
constitute definitive advice and should not be used as the basis for giving definitive
advice without checking the primary sources.
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Contacts
Chris Andrew
Allen & Overy
Email: chris.andrew@allenovery.com
Tel: +44 20 3088 2684
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