As part of the wider EMR, on 23 April 2014 the UK Government published its response to the December 2013 consultation on the generic CfD (the "December draft"), together with a Policy and Drafting Update and the form of the generic CfD that will be offered by the CfD Counterparty to eligible renewables generators. The updated generic CfD (the "generic CfD") remains structured as a 'front end' agreement (the "CfD Agreement") containing project-specific provisions which incorporate a set of terms and conditions (the "Standard Terms and Conditions"). The generic CfD is still subject to finalisation of the provision for Sustainability, Phased Projects and Private Wire Network Generation, State aid approval by the European Commission and, as the response states, the will of Parliament.

(For more information on the December draft see our e-bulletin here.)

1. KEY POLICY CHANGES

The consultation called for feedback both on the terms of the CfDs themselves and on DECC's new and revised policy positions. DECC highlights four key areas of development from the December draft:

Phased CfDs

Phased CfDs have been designed to support phased offshore wind projects of up to 1,500MW. This structure allows an offshore wind project to be developed in stages or "phases", each of which is subject to a separate CfD Agreement. Phasing-specific amendments will be made to the Standard Terms and Conditions through the CfD Agreement. Such agreements can either be signed by separate legal entities or the same developer. Once a start date for phase 1 has been triggered, all phases (each a "Phase") will then operate as separate CfD projects. Government hopes that enabling separate CfD Agreements for project Phases will assist developers in refinancing and recycling capital in respect of individual Phases, and consequently reduce the costs to consumers.

DECC has published two variations of the CfD Agreement from which developers may choose:

  • a ‘Single Metering’ approach – this requires the installation of a boundary point metering system for each of the individual Phases within a phased project. Flows of electricity (i.e. interconnection) between Phases are prohibited (three example agreements for this approach have been published by the Government); and
  • an ‘Apportioned Metering’ approach - here the metered output of the entire project would be recorded by at least one settlement meter. An apportionment methodology would then be used to assign the net generation of the project as a whole per Settlement Unit (defined for intermittent technology in the CfD Agreement as "each hour period in the day divided into hour-long periods starting at 00:00 on such day") to each individual Phase based on the overall operational output of that Phase (an example Phase 1 agreement has been published by the government). The projects monitoring system would then be used to determine how many turbines were operating per Settlement Unit and the CfD Counterparty will then calculated the percentage of Metered Output per Phase.

Allowing these different approaches to metering is intended to support developers in relation to differences in project design, metering system build and ownership structure.

Offshore wind projects which are already accredited within the Renewables Obligation (the "RO") and using the RO phasing arrangements will be able to transfer some or all of their unaccredited wind turbines to a single CfD. Developers of these projects can then choose to commission the remaining phases under either or both support schemes. Where such a project is successfully allocated a CfD, although it would technically become a dual scheme facility (see below), its CfD-supported phases would be subject to the CfD phasing provisions. Importantly, however, generators under these circumstances will not have an option to choose a metering approach: instead, a single metering approach must be implemented to ensure that generation and metered data associated with the different support schemes remain distinct and separate.

Dual Scheme Facilities (DSFs)

As noted above, facilities that have existing support for capacity under the RO can seek support under the CfD for new but separate capacity (or the conversion of fossil-based or co-firing Generating Units to full biomass) under a CfD. All eligible technologies (both baseload and intermittent) can qualify to become a DSF.

DECC's policy for DSF has been revised and two separate policies have been developed to account individually for:

  • baseload generation, including biomass unit conversions; and
  • intermittent generation

The revised policies recognise that additional metering equipment is required to measure a generator’s electrical inputs used for services shared between the RO and CfD supported capacities. Seeking to address this issue, both schemes will allow the apportionment of these shared inputs based on installed capacity.

The baseload generation policy also contains a mechanism to reconcile the initial apportionment, using the results from the fuel measurement and sampling ("FMS") process. To enable the reconciliation mechanism to be carried out, a DSF generator must provide the counterparty with separate FMS data for its CfD and non-CfD capacity. This reconciliation is to be undertaken by the CfD counterparty, using FMS data provided by the DSF generators. No reconciliation mechanism is required to be undertaken in relation to intermittent generation, on the basis that it uses significantly less input electricity and due to the absence of fuel data for it. DECC has acknowledged a mismatch between the RO and CfD mechanisms in "Government response to the consultations on the Renewables Obligations and on Grace Periods" dated 12 March 2014 and further amendments to the RO may be required as a result.

Qualifying Shutdown Event

Provision for compensation where a facility is shut down in certain circumstances, falling outside the scope of the general Change in Law provision, has been clarified. A Qualifying Shutdown Event will trigger the same compensation formulate and compensation mechanics as ‘Qualifying Change in Law'. Shutdowns related to health and safety, security, environment, transport or damage to property are among the exclusions from the definition of a Qualifying Shutdown Event.

Change in Applicable Law

The CfD now includes a provision for its continued viability where it would otherwise be impossible or illegal for it to continue as drafted. This has been done by introducing the new concept of a ‘Required Change in Law Amendment’ which refers to any amendment or supplement to the CfD that must be made to ensure either: (i) that the CfD can continue in force; or (ii) that no provision of it is rendered illegal, invalid, unenforceable or inoperable.

If the CfD Counterparty determines that a Change in Applicable Law has occurred which would cause one (or both) of the objectives to be voided, they can instigate the Change in Applicable Law procedure. Further, 30% of generators, either by number or by volume, may also initiate the process.

2. NEXT STEPS

DECC has outlined the following timetable for implementation of CfDs:

  • CfD Budget Allocation: On 13 May 2014 DECC published a consultation response confirming that competition will apply for established technologies. At the same time DECC published a further consultation on treatment of certain individual technologies, including detailed proposals for the application of technology specific minima or maxima, where applicable, and an update on the Levy Control Framework timeline. Please click here for our e-bulletin on CfD allocation.
  • CfD Allocation Framework: This sets out the rules for managing the CfD budget and allocation process. A draft was published on 8 April 2014 and it is expected that the final Allocation Framework will be published at the same time as the Electricity Market Reform regulations are laid before Parliament in June. Please click here for our e-bulletin on CfD allocation.
  • Indicative CfD Budget: In mid-July DECC plans to publish an initial, indicative budget, giving stakeholders three months' visibility of the budget ahead of the first CfD allocation round.
  • Secondary Legislation and Government Response to the EMR Consultations on Proposals for Implementation and CfD Budget Allocation: DECC intends to lay the implementing secondary legislation in Parliament and publish the Government response to the EMR implementation consultation on 4 June 2014 as well as the response to the above consultation.

DECC anticipates that the application and allocation processes for CfDs will begin in autumn this year, with the first contracts awarded in early 2015.

3. DOCUMENTATION

The consultation, Government Response and further relevant documentation can be found on DECC's website by following the links below:

Government Response to Consultation on regulations for Contracts for Difference (Standard Terms and Modifications)

Electricity Market Reform: Contracts for Difference publication page