BEIS has published some important proposed changes to the Contract for Difference which it hopes to implement in time for the next allocation round scheduled to go ahead in early 2019.
The Department for Business, Energy and Industrial Strategy (BEIS) has published some important proposed changes to the Contract for Difference (CFD). It hopes to implement these changes in time for the next allocation round scheduled to go ahead in Spring 2019, although no exact date has been set. A consultation has recently been published which closes on 9 March 2018.
This note concentrates on the changes to accommodate remote island wind projects and also clarifications to the CFD contract itself. Those involved in advance combustion technology and biomass, however, should also take note of other aspects of the consultation involving raising the efficiency threshold of ACT plants and CHP plants, ensuring that only the most efficient and innovative ACT plants are rewarded with a CFD and amending the greenhouse gas emissions criteria for biomass projects.
BEIS is also proposing a switch to measuring the load factors of the highest performing plants for each technology when checking whether applications fit within the overall CFD budget rather than what has been used in the past ("the central forecast").
Remote island wind
It is envisaged that remote island wind will be included within the less established technologies pot in the next CFD auction enabling it to compete with other less established technologies such as offshore wind, ACT, wave and tidal. There do not appear to be any plans to allow remote island wind to take advantage of a minima in the CFD process. So while government is allowing remote island wind to take part, it will have to take its chances in bidding alongside offshore wind and ACT.
BEIS has already submitted a case for state aid approval to the EU and is hoping to get that approval in principle soon, with this consultation leading to changes in legislation and remote island wind being included in time for the next auction.
The consultation proposes a definition for remote island wind with a “Remote Island” being classed as an island that is at least 10 kilometres offshore. The consultation actually includes a map indicating those islands that are likely to qualify and, as you might expect, most of those are in Scotland. However, there are potential sites off England and Wales that could qualify, including the Isles of Scilly.
The consultation then goes on to say that as well as being on a Remote Island the project also has to have at least 50 kilometres of cabling, of which 20 kilometres must be sub-sea and it must be connected to the Transmission or Distribution system. Why there is a need to refer to or quantify the amount of cabling that is being used is puzzling.
Having already set a definition of a remote island being 10 kilometres offshore, surely the final cable length and route is something which is outside the project’s control and if the policy aim is to encourage developers to drive out costs from renewables, defining a minimum qualifying criteria by length of cable seems an odd way of going about identifying the right projects. Those who have remote island projects may want to respond on this point.
A remote island wind project must also be over 5 MW and, as with other projects under the CFD, if it is over 300 MW, a supply chain plan will be needed.
Contract changes – force majeure
There are some proposed important changes to the definition of force majeure (FM) in the CFD contract itself. FM allows a project to claim relief and extensions in relation to delays outside of a project’s control. It is clear from the consultation and from a meeting with BEIS and The Low Carbon Contracts Company (LCCC), that the LCCC has had to deal with a number of FM delay claims from existing CFDs which has prompted them to want to narrow the ability to claim FM.
BEIS proposes that an FM cannot be claimed where the FM event results from pre-existing factors which the generator was aware of – or ought reasonably to have been aware of – and such an event has directly caused the failure of the project to meet a contractual milestone.
The contractual milestones which BEIS are referring to here are the milestone dates such as the longstop date, milestone delivery date and target commissioning window.
Specific drafting changes will, in our view, need to be looked at by the industry very carefully. It is clear that it has been brought in partly because of the concerns there have been around judicial reviews of CFD projects. On that basis, you can imagine that if, in years to come, a project is delayed as a result of judicial review, BEIS and LCCC will be looking very closely to assess whether the judicial review (JR) was reasonably foreseeable by the generator prior to the award of the CFD contract.
The question of when a JR to an offshore consent could be said to be reasonably foreseeable is inherently difficult, particularly since some JRs are motivated by a desire to cause delay, rather than with a strong expectation of success.
Furthermore, most JRs turn on the conduct of the decision maker and the precise reasoning in the decision letter, over which the developer has no control. It should be remembered that, as a matter of law, it is not just the main grant of consent which can be challenged, but also (while rare) the grant of a variation, the discharge of conditions, and decisions related to the formal review of consents triggered by a new SPA or SAC designation.
If a challenge results in a delay in the project being able to meet key dates, would the project be prevented from successfully claiming FM?
Contract changes – grid connection
There have been specific exemptions for delays in grid connection which allow corresponding extensions to the key delivery dates. The proposals in this consultation now clarify that this relief for grid delays can only be used where the generator has used reasonable endeavours to avoid delays to the milestones by signing up to the grid connections and performing grid works agreement in a timely manner and where delays have occurred the generator has used reasonable endeavours to mitigate the effects of a delay.
What this will mean in practice is that if there is a grid delay, but the grid delay does not affect the critical path of the project and it could have been built out in accordance with the original milestones, no relief will be granted. It also raises the spectre of the generator having to demonstrate that it has complied timely with any grid connection works agreements and potentially the terms of any grid connection.
The consultation closes on 9 March. It contains other proposals, but we believe the points covered in this article should be a focus for the industry.