On 13 May 2014, as part of the on-going EMR process, the UK Government released its response to consultation on CfD allocation. Pending EU State aid approval, the first allocation round is expected in October 2014.
This e-bulletin looks at key points arising from the UK Government proposals for CfD allocation including the relationship with State aid and the proposals for auction design.
The UK Government's position in the response mirrors that set out by the European Commission in its draft Guidelines for environmental and energy projects (the "draft Guidelines") released on 18 December 2013 (please click here for our e-briefing on the draft Guidelines). Subsequently, on 9 April 2014 and, prior to the UK Government's response, the European Commission released the finalised Guidelines for environmental and energy projects (the "final Guidelines") which remove the overt distinction between the treatment of "developed" and "less developed" technologies (please click here for our e-briefing on the final Guidelines), this distinction remains in the UK Government's CfD allocation response in the form of "established" and "less established" technologies.
Commentators have noted that though there now appears to be a discrepancy between the final Guidelines and the UK Government's CfD allocation response, the key European objective of market integration is more vigorously pursued under the CfD, not least because of its early adoption of a competitive bidding process for "established" technologies as opposed to a "First-Come-First- Serve" approach. Further, taking into account the publication of the final Guidelines during the CfD allocation consultation process, the UK Government has reiterated that it believes its approach is still in line with the final Guidelines as, "while prescriptive in requiring a move to competition, they allow Member States flexibility in the way in which they propose to achieve this."
1. "Established", "less established" and other
The CfD allocation response broadly groups technologies into "established", or "Group 1", and "less established", or "Group 2"catagories. Some technologies sit outside these groups and there is a suggestion that Groups 3 and 4 may be added later to accommodate the relevant technologies. In the table below these unclassified technologies are listed under "other".
Click here to view table.
2. CfD budget allocation
The UK Government may release only part of the CfD budget to avoid overspending. Details will be released in Summer 2014 after a period of consultation with the developers aimed at assessing whether they intend to apply under the Renewables Obligation ("RO") or CfD.
The RO rate for 2015/16 will be announced in October 2014. To minimise the risk of uncertainty, the Government will engage with industry to produce an indicative CfD budget in July and both the final RO rate and CfD budget will be confirmed in autumn 2014.
3. Auction Design
According to DECC there are three stages in the auction process for competitively allocated CfDs which are as follows:
- Assigning the Budget and setting of minima and maxima
- DECC will provide the Delivery Body with the available budget in advance of the allocation round and any minimum or maximum amounts for individual technologies in advance of an auction.
- If the minimum is set above the budget profile for any year, a project which is below the minimum may be excluded. If different minima for different technologies are set, they will be set such that they are both/all affordable within the budget profile. Any minima not fulfilled will be available in future allocation rounds.
- If allocation is constrained an auction will be held:
- If a technology grouping’s budget is exceeded for any delivery year in the budget profile, an auction will be run for all future delivery years.
- If a maximum is exceeded but the budget is not, an auction will be run only in respect of the relevant technology grouping.
- Sealed bids will only be requested once constrained allocation has been triggered, and then only for those projects to which constrained allocation applies.
- Auction clearing rules
- A sealed bid system will be followed, where all bidders submit the lowest strike price they are willing to accept, and the auction system finds the cheapest projects affordable within the budget.
- The payment rule is pay-as-clear, where all projects are paid the relevant clearing price, capped at its Administrative Strike Price.
- Each delivery year has a separate clearing price.
4. Further consultations
In addition to the above policy decisions, DECC is consulting further on aspects of CfD allocation where there are issues that mean that the technology does not fit comfortably into the "established" and "less established" categories. These are set out below.
The reasoning behind the treatment of biomass conversion in the UK Government's CfD allocation response indicates that this is regarded as a transitional technology, fitting neither the established nor the less established classifications. The UK Government notes that though there is only 580MW of such power currently online, 900MW is being tested and a further 1GW is in the pipeline, funded through the FID Enabling Scheme. Therefore, the combined amount of biomass conversion already underway, once it is all online, would result in it being regarded as "established" at an early stage of the CfD process. However, biomass has been separated out from the other "established" technologies in Group 1 because the UK Government believes that the long-term fuel supply costs required for biomass conversion mean that it would not be able to compete with other types of established technologies as the price of fuel would undermine their ability to bid competitively at auction for CfDs. This mirrors the European thinking set out in the final Guidelines where an exception is made for State aid for biomass after plant depreciation to ensure that the fuel costs do not result in a reversion to cheaper fossil fuels.
Scottish island onshore wind
This consultation is in relation to:
- the Government's proposal to treat onshore wind projects in the Scottish islands as distinct from onshore wind located in the rest of UK;and
- whether this technology should be considered either as a 'less established' technology grouping (Group 2) or in a separate technology grouping.
Projects based in areas of Comhairle nan Eilean Siar, Orkney Islands and Shetland Islands entail high transmission costs, but that there is the potential for large projects and load factors, making them unique in the UK.
Addition to their unique characteristics, DECC suggests the Scottish Islands projects would be expected to contribute other longer-term benefits such as development of infrastructure to support wave and tidal stream technologies, development of multi-terminal undersea HVDA, which would be applied to other types of technologies and deliver greater interconnection of renewable and other low carbon generation across the EU in the long-run.
DECC is consulting on proposals to finish awarding ROs for large solar p.v. from 1 April 2015. The reason behind this is that the amount of solar deployed has exceeded projections and in doing so, if current deployment rates were maintained, it would have an adverse effect on the operation of the Levy Control Framework both in relation to consumers and other technologies. The new proposals state that large solar p.v. projects will be able to apply for support under the CfD from October 2014. However, they would be subject to the competitive allocation process and possibly technology specific minima and maxima.
Minima and Maxima
In its January consultation, the UK Government consulted on the possibility of introducing specific minima and maxima for each specific technology, which would be floors or caps on the level of deployment of individual technologies through the CfD. The Government has indicated it does not intend to apply minima or maxima criteria for the first Delivery Plan period other than in relation to wave and tidal stream technologies. This is because wave and tidal stream technologies are both considered a very early stage of development and cannot compete in the market at the current stage.
This new consultation is in relation to the UK Government's proposal to reserve a 100MW minimum allocation for wave and tidal stream technologies during the first delivery plan period under both RO and the CfD.
Cross border State aid
The UK Government's response sets out proposals that CfDs will be progressively opened to non UK projects and is currently negotiating this with the Republic of Ireland.
This appears to follow the Advocate General's opinion in Ålands (Case C-573/12). However, it is worth noting that at the time of writing, the ECJ has yet to give its ruling which will have major effect on the operation of the energy markets in the Member States.
5. Conclusion: the effect of State aid on EMR
The final guidelines set out the principle of technology neutral competition in awarding aid to renewable energy projects in the EU and will be effective from 1 July 2014 to 31 December 2020. The CfD model needs to pass the seven-stage test set out under the Guidelines before it can be implemented in the UK. While the EU State aid rules have become tightened, it is clear that UK's EMR proposals exceed the Commission's requirements in which the CfD allocation would be awarded on the competitive bidding basis. In addition, generators in the UK will not be allowed to benefit from both CfD and RO and this is in line with Commission's requirement of avoiding overcompensation otherwise referred to as double recovery.