Introduction

On 15 December 2017, the Government released their consultation on amendments to the Contracts for Difference (“CfD”) regime (the “Consultation”). Following much uncertainty over the status of remote island onshore wind (“RIW”) (discussed in our previous law-now), the Consultation confirms the Government’s intention to allow RIW to compete in future Pot 2 allocation rounds, as foreshadowed in the Clean Growth Strategy. The Consultation also proposes changes to the CfD Contract to lower the risk to the consumer from conservative load factor estimates, and to restrict reliefs awarded to generators in case of Force Majeure or grid connection delays.

Remote Island Wind

The Government intends to define RIW as a separate technology from mainland onshore wind, and to allow it to compete in future Pot 2 allocation rounds, subject to receiving State Aid approval from the European Commission. In order to qualify as a RIW CfD unit, a project would have to meet all of the following criteria:

  • Remote Island: The project is located on a “remote island” which is defined as an island:
  • located in the territorial sea of the United Kingdom (other than Northern Ireland); and
  • where all parts of its coastline are situated at least 10 km from mainland Britain.
  • Subsea cabling: The connection between the unit’s generation circuit and the Main Interconnected Transmission System will require at least 50 km of cabling, of which 20 km must be subsea cabling.
  • Network connection: Upon completion, the project must be connected to the national transmission system or the distribution system in Great Britain.

The following map was published in the Consultation to indicate which islands may satisfy the definition of a “remote island”. These islands are not only located off the coast of Scotland. England and Wales stand to benefit from RIW as well. To compete in future CfD allocation rounds, RIW projects will also need to meet the additional criteria outlined above.

Source: https://www.gov.uk/government/uploads/system/uploads/attachment

Existing eligibility criteria applicable to onshore wind will continue to apply to RIW CfD units, including a generating capacity of over 5 MW, and projects larger than 300 MW must provide an approved Supply Chain Plan.

The Consultation focuses on the potential for local communities to benefit from RIW, in particular, for developers to continue working in partnership with communities to develop a sustainable community benefit package.

Mitigating Load Factor Risks

The Government proposes to use higher load factors when valuing CfD applications at the time of CfD allocation. A load factor is the ratio of how much electricity a generating unit produces over a certain period of time divided by its theoretical maximum output; this varies between technologies and even between subsets of the same technology group. In the most recent allocation round, the Government drew on an independent report on generation costs, which included low, central and high ranges for expected load factors for each technology. The central load factors were used to set the assumptions for the 2017 CfD auction.

However, successful projects may have higher load factors than the Government’s central estimate. This means the budget for the relevant allocation round could be exceeded and, as a result, consumers may be exposed to higher costs than are budgeted for. Going forward, the Consultation proposes to use load factors linked to the best performing projects i.e. those with the highest load factor. The Government may also publish different load factor assumptions for subsets of a technology e.g. to take into account different wind speeds in different geographical regions.

The Consultation also proposes to amend the CfD Contract to require generators to provide their best estimate of their expected generation output to the LCCC at various development milestones for the project, to ensure that data remains accurate and up to date throughout the project’s life.

Changes to improve the operation and clarity of the CfD

The Consultation proposes a number of changes to the CfD Contract:

1. Force Majeure (“FM”)

Clarifications

The language concerning claims for FM relief is further tightened. The extension of time granted for FM relief can only be claimed:

  • where a generator can demonstrate that the delivery of a contractual milestone has, or will be, affected, i.e. the relief does not extend to milestones which are not contractual milestones;
  • where any failure or delay in performing a contractual obligation (including achieving a Milestone Delivery Date (“MDD”), Target Commissioning Window (“TCW”) and Longstop Date (“LD”)) is caused by and directly attributable to a FM event;
  • where the procedural requirements of the FM provisions have been complied with; and
  • where the FM event is a continuing one, it is an event or circumstance that remains beyond the reasonable control of the affected party and remains one that they could not reasonably have avoided or overcome.

Amendments

Furthermore, the Consultation proposes a foreseeability test that an FM event must not be the result of pre-existing factors of which the generator was aware, or could reasonably be expected to be aware, on or prior to the Agreement Date. By its nature, an FM event should be unforeseeable in any case, but because of the broad definition of FM in the CfD Contract, the Consultation makes the requirement that an FM event is reasonably unforeseeable explicit. This amendment may restrict the circumstances in which generators are able to claim FM relief.

The Consultation also suggests amending Condition 69 to bring forward the timing of FM notification, by requiring that an affected party provide notice of any FM as soon as it is aware, or could reasonably be expected to be aware, that the FM is likely to cause it to fail to perform its obligations under the CfD Contract.

2. Grid Connection Delay

Current definitions of the MDD, TCW and LD build in protection for generators to permit extensions to these milestones if grid delay affects the generator’s ability to meet those milestones. The Government proposes to amend the MDD, TCW and LD definitions to:

  • place an obligation on the generator to use reasonable endeavours to avoid delays to milestones occurring by ensuring that the grid connection and works agreements are entered into in a timely manner; and
  • where delay occurs, to use reasonable endeavours to mitigate the effects of delay on the generator’s performance of its obligations under the CfD.

The Consultation also seeks to clarify the definitions of “Installed Capacity” and “Facility” under the CfD controls.

Other changes

Following the responses to the Call for Evidence on fuelled technologies in the CfD issued in November 2016, the Consultation also proposes changes in relation to:

  • Advanced Conversion Technologies (“ACT”) to ensure that only more innovative and efficient projects are awarded CfDs;
  • efficiency requirements for Combined Heat and Power (“CHP”) to ensure that CfD supported CHP plants have high overall efficiency; and
  • methods of determining an updated greenhouse gas emissions standard that new fuelled technologies will have to comply with.

What next?

The Consultation closes 9 March 2018. The changes proposed do not affect existing contracts but developers will be keeping a close eye on responses to the Consultation for the next allocation round, which is expected in Spring 2019.

The Consultation also confirms that the Government intends to review the CfD Contract and various front-end CfD contract agreements to ensure that they operate effectively on the UK’s departure from the EU. Analysis and proposed drafting changes will be set out by the Government in due course.