In this note (part 3 of a series) we reflect on the Government's continuing implementation of Electricity Market Reform (EMR), highlight key developments in 2015 and Q1 and Q2 2016, and outline EMR milestones we expect to occur in the upcoming months. We also discuss the potential impact on EMR of the UK’s recent vote to leave the European Union.

The First Contracts for Difference (CfD) Allocation Round: Update

14 March 2015 saw twenty five CfD contracts (amounting to approximately 2.1GW capacity of new renewable energy) awarded in the first capacity market auction at a total cost of £315 million1. Offshore wind was awarded 54% of the total capacity in the first allocation round and a further 35% of total capacity was awarded to 15 onshore wind projects. Wind was the clear winner of the first CfD round having been awarded 89% of the total capacity, the remaining 11% of total capacity was awarded to advanced conversion technology (3%), energy from waste (4.5%) and solar PV (3.5%).

To date, four projects (two wind and two solar) have failed to meet their CfD milestones and have had their CfDs terminated by the Low Carbon Contracts Company (LCCC). Reasons for failure included (i) failing to spend 10% of the expected capital expenditure for the project and (ii) failing to prove that the project had reached financial close and signed equipment contracts by the 27 March 2016 deadline. The Government has also suggested that if a project's CfD contract is terminated, the generator concerned will be disqualified from participating in future CfD allocation rounds for 13 months although certain exceptions may apply.

The Second CfD Allocation Round: When will it take place? What will the auction budget be?

In July 2015, the Department of Energy and Climate Change (DECC) announced the postponement of CfD auctions for large renewables projects. In addition, the second CfD allocation round did not take place in October 2015 as originally planned.

Rather than making any sort of official statement, DECC communicated the postponement via email, to renewable energy developers simply stating, "[t]here will be no CfD round this October. In the autumn, the Government will set out its plans in respect of the next CfD allocation round". On 18 November 2015, Amber Rudd, the former Secretary of State for Energy and Climate Change, confirmed that the second CfD allocation round will take place before the end of 2016 and that two other rounds will take place during this parliamentary term.

In terms of the CfD auction budget, the expectation is that the second round will be allocated to "pot-two" technologies, being less established technologies in need of greater subsidy support. Initial reports suggest that offshore wind projects will take the majority of the available funding. In June 2015 DECC announced that it was considering changes to the CfD renewables support system to create separate CfD auction rounds for established and less-established technologies on the grounds this would allow different technology "pots" to progress through the allocation process at different rates preventing delays in the award of CfDs.

On 4 July 2016, the Government launched a consultation on its proposal to extend the delivery years of CfD projects until 31 March 20262. The consultation will close on 8 August 2016. If the Government's proposed amendment is not accepted, the Government will be unable to open allocation rounds for projects commissioning after the cut-off date of 31 March 2020.

The Government announced in the 2016 budget that £290 million would be budgeted for the 2016 CfD auction, approximately £35 million less than the CfD budget available for the first allocation round3. There was a further suggestion that a total of £730 million would be allocated to CfD auctions for up to 4GW of new capacity in this parliamentary term running until 2020. The postponement of the second allocation round and the lack of clarity as to the dates for subsequent allocation rounds and their respective budgets has left developers in the dark. In addition, the UK's vote to leave the European Union (EU) may further impact the availability of funding for renewable energy projects casting doubt on the continued expansion of the CfD mechanism.