The Contract for Difference is the new subsidy regime for major renewables projects under the Energy Act 2013. During a transition period from autumn 2014 to 31 March 2017, eligible generators will have a choice of applying for accreditation under the Renewables Obligation or for a Contract for Difference. After the end of the transition period, the Contract for Difference will be the only available subsidy for major renewables projects.
The Contract for Difference (CfD) takes the form of a short Agreement, which sets out certain project- specific matters determined by the Generator’s application, and the much longer Conditions, the pro forma terms applying to all projects.
The CfD is a well-crafted document, but it is necessarily long and frequently complex. We have therefore produced this summary as an introduction for clients and other advisers. We are summarising only the main terms of the document, and this summary is not, and may not be taken as, a definitive guide to the CfD or advice in relation to its terms.
We provide further guidance on some key terms (highlighted in bold where they first appear in the text) in a glossary at the end of this document.
Section 1 – The Agreement
- THE GENERATOR
- THE CFD COUNTERPARTY
The CfD runs for 15 years from the earlier of (a) the Start Date (broadly, when conditions precedent are satisfied) and (b) the last day of the Target Commissioning Window. So, any delay in satisfying the conditions precedent beyond the TCW effectively reduces the period of support.
2. GENERATION TECHNOLOGY TYPE
- The Agreement specifies the technology type, and whether it is baseload or intermittent, and also specifies whether the Renewable Qualifying Multiplier (RQM) and CHP Qualifying Multiplier apply to the Agreement, and (if appropriate) applies the Fuelling Criteria set out in the Conditions.
- RQM applies only to fuelled generating stations. The CHP Qualifying Multiplier applies to CHP generating plant.
3. CONDITIONS PRECEDENT AND MILESTONE
- The CfD is subject to the Initial Conditions Precedent and the Further Conditions Precedent. The main conditions precedent are contained in the Conditions, but the Agreement introduces two additional Further Conditions Precedent. These are:
- Evidence that the Interim Operational Notification has been issued (where the facility is connected directly to the transmission system) or the Distribution Code compliance process has been satisfied (where the facility is connected to the distribution system);
- Additional metering requirements for schemes that are part RO and part CfD, to ensure that the electricity generated is appropriately apportioned between the two.
- The Agreement specifies the Initial Milestone Delivery Date that applies to the project.
4. PROJECT-SPECIFIC TERMS
- The Agreement anticipates that amendments will be made to the standard conditions, and an annex is reserved for the Modification Agreement.
4.2 The Agreement contains the project-specific terms, which include:
- The Specified Expiry Date;
- The generation technology and whether it is baseload or intermittent;
- Whether the RQM or the CHP Qualifying Multiplier apply;
- The Initial Target Commissioning Window;
4.2.5 The Target Commissioning Date;
- The Longstop Period;
- The Initial Milestone Delivery Date;
4.2.8 The Total Project Pre-Commissioning Costs;
- The Initial Installed Capacity Estimate;
- The Required Installed Capacity (which is 85% of the Installed Capacity Estimate for offshore wind and 95% for any other technology);
4.2.11 The Initial Strike Price;
- The Initial Balancing System Charge.
Section 2 – The Conditions
- The CfD comes into effect on the date of signing (Agreement Date) and expires on the 15th anniversary of the earlier of the Start Date and the last day of the Target Commissioning Window.
5.2 No compensation or other termination payment is made on natural expiry.
Conditions Precedent and Milestone Requirements
- CONDITIONS PRECEDENT
- Certain provisions take effect from the Agreement Date, but most of the important provisions either take effect on satisfaction of the Initial Conditions Precedent or the Further Conditions Precedent.
- The Generator is to use reasonable endeavours to satisfy the Initial Conditions Precedent within 10 business days of the Agreement Date. These require the delivery to the CfD Counterparty of a legal opinion addressed to the CfD Counterparty confirming that the Generator:
- is duly formed and validly existing;
- has the power to own its assets and carry on its business; and
- has the power to enter into and perform the Contract for Difference and the other CfD documents.
- The Generator is to use reasonable endeavours to satisfy the Further Conditions Precedent as soon as reasonably practicable, and in any event before the Longstop Date. The Further Conditions Precedent require the delivery to the CfD Counterparty of:
- written confirmation from the CfD Settlement Services Provider that:
- evidence that the Generator has commissioned at least 80% of the Installed Capacity Estimate;
- evidence that the Generator is complying with the Metering Compliance Obligations (see below);
- the electrical schematic diagram showing the locations of the Facility Metering Equipment; and
- evidence that all information technology systems relating to Facility Metering Equipment are satisfactorily installed, commissioned, configured, operational, maintained, tested and are compliant with the BSC.
- There are various notice provisions under the Conditions relating to the satisfaction of the Further Conditions Precedent, on the basis that:
- The Generator has an obligation to keep the CfD Counterparty advised on progress toward meeting the Further Conditions Precedent;
- The Generator has to issue a Further CP Notice each time a Further Condition Precedent is satisfied;
- The Generator has to issue a Further CP Non-Compliance Notice if it is aware that
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- The CfD Counterparty issues a CP Response Notice (or, on further iterations, a Further CP Response Notice) specifying whether the CfD Counterparty is satisfied that the relevant Further Condition Precedent is satisfied.
- Once the CfD Counterparty is satisfied that all Further Conditions Precedent are satisfied, it issues a CP Fulfilment Notice.
Notification of Start Date
- Not later than 10 business days after receipt of a CP Fulfilment Notice, the Generator issues a Start Date Notice to the CfD Counterparty.
6.7 The Start Date has to be:
- At least 10 business days after the date of the Start Date Notice;
- No earlier than the start of the Target Commissioning Window;
- No later than the Longstop Date; and
- No earlier than 1 April 2015.
7. MILESTONE REQUIREMENTS
- The Generator has to give a Milestone Requirement Notice to the CfD Counterparty no later than the Milestone Delivery Date. This has to include evidence that at least 10% of the Total Project Pre-Commissioning Costs has been spent.
- The CfD Counterparty has to revert with a Milestone Assessment Response Notice, specifying whether it considers that the Generator has fulfilled the Milestone Requirements, or requiring further information (the Requested Milestone Supporting Information).
Adjustments to Installed Capacity Estimates
- ADJUSTMENT: RELEVANT CONSTRUCTION EVENTS
- If the Generator believes that a Relevant Construction Event has occurred, it can give an RCE Notice to the CfD Counterparty no later than 3 months before the Longstop Date (the RCE Deadline). An RCE Notice shall specify the reduction to the Installed Capacity Estimate which the Generator considers necessary to account for the Relevant Construction Event.
- If an RCE Notice is given, the CfD Counterparty must respond, within 20 business days, with an RCE Response Notice, specifying whether it considers that a Relevant Construction Event has or has not occurred, whether it has been provided with enough supporting information, and whether it does or does not accept the RCE-Adjusted Installed Capacity Estimate.
- If the RCE Notice is rejected, the Installed Capacity remains unadjusted unless varied in accordance with the Conditions' dispute resolution procedure.
- If the Installed Capacity is adjusted, the Generator may not subsequently increase the Installed Capacity.
- Only one RCE Notice may be given, and any notice served after the RCE Deadline is of no effect.
- No adjustment is made to the Strike Price as a result of the reduction to the Installed Capacity Estimate due to Relevant Construction Events.
9. ADJUSTMENT: PERMITTED REDUCTION
- If the Generator considers that the Installed Capacity will be lower than the Installed Capacity Estimate, it may give an ICE Adjustment Notice to the CfD Counterparty. An ICE Adjustment Notice must be given no later than the Milestone Delivery Date (the "ICE Adjustment Deadline"). The ICE Adjustment Notice must specify the new Installed Capacity Estimate (the "Revised ICE").
- The Revised ICE becomes the Installed Capacity Estimate for all purposes of the CfD, but it cannot be less than 75% of the Initial Installed Capacity Estimate.
- An ICE Adjustment Notice is irrevocable and the Generator cannot subsequently increase the Installed Capacity Estimate.
- Only one ICE Adjustment Notice may be given, and any such notice served after the ICE Adjustment Deadline is of no effect.
10. FINAL INSTALLED CAPACITY: MAXIMUM CONTRACT CAPACITY
- The Generator has to give a Final Installed Capacity Notice to the CfD Counterparty no later than 10 business days after the Longstop Date, specifying the Installed Capacity that has been commissioned at the Longstop Date (Final Installed Capacity).
- The CfD Counterparty responds within 20 business days with a Final Installed Capacity Notice, specifying that the CfD Counterparty agrees with the Final Installed Capacity or requires further supporting information. That process then repeats.
- If the Generator does not issue a Final Installed Capacity Notice by the Longstop Date, the Final Installed Capacity shall be deemed, with effect from the Longstop Date, to be 80% of the Installed Capacity Estimate.
Payment Calculations: Baseload Technologies
- METERED OUTPUT
Metered Output Calculation
11.1 The Metered Output for each Settlement Unit is calculated by the CfD Counterparty as:
- The Loss Adjusted Metered Output as reported by the BSC Company or a BSC Agent; multiplied by
- The Renewable Qualifying Multiplier (if one is expressed to apply); multiplied by
- The CHP Qualifying Multiplier (if one is expressed to apply).
Estimates of Loss Adjusted Metered Output and Reconciliations
- If the CfD Counterparty does not receive confirmation of the Loss Adjusted Metered Output for any Settlement Period, it estimates it as being the Loss Adjusted Metered Output for the last Settlement Period for which it received confirmation.
- On receiving a subsequent notification for that Settlement Period, the CfD Counterparty recalculates the Metered Output for that Settlement Period using the Loss Adjusted Metered Output as notified. If the recalculation produces a different result from the estimate, the difference is used by the CfD Counterparty to recalculate the Baseload Difference Amount for the Settlement Period and the Aggregate Difference Amount for the Estimated Output Billing Period. Any adjustment to the Aggregate Difference Amount for the estimated period is then treated as the Reconciliation Amount, and will be included in the next Billing Statement issued by the CfD Counterparty. [For an explanation of these terms, see Billing and Payment].
12. RENEWABLE QUALIFYING MULTIPLIER
- The Renewable Qualifying Multiplier (RQM) applies in relation to fuelled renewable generation, and is intended to ascertain the proportion of renewable fuel used.
- The CfD Counterparty calculates the RQM for each calculation month, which is then applied to each Settlement Unit in that month.
- There is scope for the CfD Counterparty to adjust the RQM for any Settlement Unit, in terms of the RQM Calculation Methodology. If it does so:
- It also recalculates the Metered Output for that Settlement Unit, using the adjusted RQM;
- The difference between the original Metered Output and the adjusted output is used to recalculate the Baseload Difference Amount for the relevant Settlement Unit and the Aggregate Difference Amount for each Billing Period to which the relevant Settlement Unit relates.
13. CHP QUALIFYING MULTIPLIER
The condition applies if the CfD Agreement provides for it (for CHP technologies). The CfD Counterparty calculates the CHP Qualifying Multiplier for each Settlement Unit.
14. BASELOAD DUAL SCHEME FACILITIES
- A Dual Scheme Facility is a facility that is originally accredited under the Renewables Obligation but has an extension that is subject to a CfD.
- The CfD Counterparty estimates the value of Imported Electricity Allowance in calculating the Loss Adjusted Metered Output for a Baseload Dual Scheme Facility.
- The Imported Electricity Allowance is the actual imported electricity used by the facility, adjusted by a factor of (a) the lesser of the installed capacity and the maximum contracted capacity over (b) the aggregate capacity of the facility assuming maximum output.
- The estimated Imported Electricity Allowance is subject to adjustment based on actual figures for the relevant Settlement Period, and the adjusted amount is applied in reconciling the Baseload Difference Amounts for that Period.
15. STRIKE PRICE
- The Strike Price is subject to indexation on 1 April each year, in accordance with the movement in CPI.
- The Strike Price may also be subject to adjustment as a result of a Qualifying Change in Law, a Generation Tax Change in Law, changes in the Balancing and Use of System Charges in excess of indexation allowances, and movements in the Transmission Loss Multiplier in excess of the profile assumed when the Strike Price was set.
16. BASELOAD MARKET REFERENCE PRICE
The Baseload Market Reference Price is expressed in £/MWh. It is calculated at 1 April and 1 October each year (each period of 6 months is a Season) and is derived from a formula that takes into account a number of baseload price sources, the forward contract price from each source for the relevant Season and the quantity of energy traded through the trades considered in arriving at those forward prices.
Payment Calculations: Intermittent Technologies
- METERED OUTPUT
Metered Output Calculation
- The Metered Output for each Settlement Unit is calculated by the CfD Counterparty as the Loss Adjusted Metered Output as reported by the BSC Company or a BSC Agent.
Estimates of Loss Adjusted Metered Output and Reconciliations
- If the CfD Counterparty does not receive confirmation of the Loss Adjusted Metered Output for any Settlement Period, it estimates it as being the arithmetic mean of the Loss Adjusted Metered Output for the corresponding Settlement Units in each of the 7 billing periods immediately prior to the Estimated Output Billing Period for which it received confirmation.
- On receiving a subsequent notification for that Settlement Period, the CfD Counterparty recalculates the Metered Output for that Settlement Period using the Loss Adjusted Metered Output as notified. If the recalculation produces a different result from the estimate, the difference is used by the CfD Counterparty to recalculate the Intermittent Difference Amount for the Settlement Period and the Aggregate Difference Amount for the Estimated Output Billing Period. Any adjustment to the Aggregate Difference Amount for the estimated period is then treated as the Reconciliation Amount, and will be included in the next Billing Statement issued by the CfD Counterparty. [For an explanation of these terms, see Billing and Payment].
18. INTERMITTENT DUAL SCHEME FACILITIES
There are provisions relating to Intermittent Dual Scheme Facilities similar to those for Baseload Dual Scheme Facilities (see above).
19. STRIKE PRICE
The provisions relating to strike price for Intermittent Technologies are similar to those related above for Baseload Technologies.
20. INTERMITTENT MARKET REFERENCE PRICE
- The CfD Counterparty calculates the Intermittent Market Reference Price for each Settlement Unit. This will either be the relevant Day Ahead Hourly Price or, if no such price is published, or a different price is published from each source, then a calculation is made by reference to all sources and traded prices.
- If no Intermittent Market Reference Price (IMRP) is capable of being calculated (e.g. due to unavailability of all price sources) then the prices are based on the prices ruling for the corresponding Settlement Unit falling on the 7th day prior to the IMRP calculation date, or if no price is available for that day, the Day Ahead Hourly Price for the corresponding Settlement Unit on the nearest prior corresponding day of the week.
21. BILLING STATEMENTS
Billing and Payment
- The obligations of the Generator to make payment are based on billing statements provided by the CfD Counterparty each day (Billing Period).
- The first billing statement covers all Billing Periods from the Start Date to the date of the CP Response Notice (or Further CP Response Notice) in which the CfD Counterparty confirms that all of the Further Conditions Precedent have been satisfied.
- Billing statements will include the following (for each Settlement Unit in the Billing Period, where appropriate):
- The Metered Output (or Estimated Metered Output where appropriate);
21.3.2 The Market Reference Price;
- The Strike Price;
- The difference (Difference) between the Strike Price and the Market Reference Price and the sum of the Difference Amounts (the Aggregate Difference Amount);
- Any Reconciliation Amounts (see below);
- Any Compensatory Interest Amounts (see below);
- If applicable, the Renewable Qualifying Multiplier and any RQM Adjustment Amount;
- If applicable, the CHP Qualifying Multiplier;
- The estimated Imported Electricity Allowance and any Imported Allowance Adjustment Amount (if the facility is a Baseload Dual Scheme Facility);
- The net amount payable by or to the CfD Counterparty (the Net Payable Amount).
- There are various provisions allowing the CfD Counterparty to revise Net Payment Amounts included in previous Billing Statements for various circumstances, including:
- The resolution of metering disputes;
- Any agreed or determined adjustment to the Final Installed Capacity;
- Compensation for qualifying changes in law;
- Any indexation adjustment;
- The correction of any errors in previous Billing Statements
Compensatory Interest Amounts
- If Reconciliation Amounts are due, interest is also calculated (Compensatory Interest Amounts) in respect of the Reconciliation Amounts, running from the Billing Period to which those amounts relate to the period in which the Reconciliation Amount is paid.
Calculation of Net Payable Amount
- The Net Payable Amount is the Aggregate Difference Amount plus the Reconciliation Amount plus the Compensatory Interest Amount.
- If the NPA is positive, it is paid by the CfD Counterparty to the Generator. If it is negative, it is paid by the Generator to the CfD Counterparty.
- Sums payable by the Generator must be paid within 10 business days following the delivery of the relevant Billing Statement.
- Sums payable by the CfD Counterparty must be paid with 28 calendar days of the end of the Billing Period to which the relevant Billing Statement relates.
22.3 Default interest at 5% over base is payable on any unpaid sums.
Representations, warranties and undertakings
- GENERATOR REPRESENTATIONS AND WARRANTIES
- There are a number of standard warranties and representations by the Generator (e.g. power and capacity, no litigation etc), including repeating provisions by reference to the Start Date.
24. CFD COUNTERPARTY REPRESENTATIONS AND WARRANTIES
24.1 There are a number of standard warranties and representations by the CfD Counterparty
(e.g. power and capacity, no litigation etc), including repeating provisions by reference to the Start Date.
25. GENERATOR UNDERTAKINGS: GENERAL
25.1 There are a number of general undertakings from the Generator:
- Compliance with laws;
- Maintain all required authorisations;
- Compliance with all industry documents;
- Not to take any insolvency action;
- At all times from the Start Date be the owner of the facility, subject only to any third party rights arising under security;
- Comply with the Eligibility Criteria for the facility at all times.
- If the Generator fails to comply with the Eligibility Criteria, the CfD Counterparty shall be entitled to withhold any amounts otherwise due, and to recover any amounts relating to a period in which the Generator was not in compliance.
26. GENERATOR UNDERTAKINGS: METERING
- The Generator undertakes to ensure that the Facility Metering Equipment meets the BSC requirements at all times, and accurately records all output and input electricity.
- There are provisions for notification of breaches of the Metering Compliance Obligation by the CfD Counterparty and responses (within 10 business days) by the Generator.
- If a Metering Compliance Obligation breach is agreed or determined on referral to the Expert Dispute Resolution procedure, the Generator has to provide a copy of a remediation plan to the CfD Counterparty within 15 business days of the receipt of the CfD Counterparty’s notification of the breach (or expert determination, if appropriate).
- As soon as reasonably practicable thereafter, and in any event within 60 business days after the BSC company has approved a remediation plan, the Generator must remedy the breach.
26.5 A failure to remedy gives rise to a Technical Compliance Termination Event (see below).
- The Generator has to notify the CfD Counterparty of any material changes to the Facility Metering Equipment within 2 business days of the change occurring, and has to provide an updated electrical schematic diagram within 10 business days of the change occurring.
- If the Generator is in breach of this obligation, the CfD Counterparty may suspend payment of any Net Payable Amounts that are otherwise due. Any catch-up in those payments after the Generator complies with the obligation does not attract Compensatory Interest or Default Interest.
Access to and testing of meters
- The Generator has to grant access to the Facility Metering Equipment to the CfD Counterparty (and persons nominated by it) for the purpose of reading, testing and verifying the equipment.
- If the CfD Counterparty requires access to the metering equipment, it issues a Metering Inspection Notice. The Generator must provide access within 10 business days of the date of that notice.
- If the Generator is in breach of the obligation to allow access, the CfD Counterparty may suspend payment of any Net Payable Amounts otherwise due. No Compensatory Interest Amounts or Default Interest is payable on those amounts once the Generator complies with the obligation.
- If the Generator fails to comply with this obligation within 20 business days of the last date by which it has to comply, a Metering Access Termination Event will be deemed to have occurred.
27. GENERATOR UNDERTAKINGS: INFORMATION PROVISION
- The Generator has various obligations to provide information to the CfD Counterparty, for example:
- The expected Start Date;
- The Installed Capacity as at the Start Date;
- The commissioning profile of the facility;
- Forecasts of availability, the Loss Adjusted Metered Output and (if applicable) the Renewable Qualifying Multiplier and the CHP Qualifying Multiplier, such forecasts to be provided:
- Details of any material event or circumstances likely to affect significantly the Metered Output;
- All information reasonably required by the CfD Counterparty regarding the financial condition, business or operations of the Generator;
- Where the Generator is an Embedded Generator, notification of any Market Supply Agreement becoming effective, or being assigned or transferred or terminated.
Changes in Law
- QUALIFYING CHANGE IN LAW: DEFINITIONS
28.1 A Qualifying Change in Law (QCiL) is:
- A Discriminatory Change in Law;
- A Specific Change in Law;
- An Other Change in Law
that is not, in each case, foreseeable (and no State Aid decision relating to the CfD is a QCiL).
- A Change in Law is a change coming into effect after the Agreement Date, which is not due to a Generator default or which represents no more than a continuous improvement or development of good industry practice.
- A Discriminatory Change in Law is a Change in Law that applies to the Project, the Facility or the Generator, and not to any other project, facility or generator.
28.4 A Specific Change in Law is a Change in Law that specifically applies to (and only to):
- Generating facilities that employ the same technology as the Facility;
- Generating facilities that are subject to a CfD;
- The holding of shares in companies or other economic interests in undertakings (including memberships of LLPs) whose main business is the development etc of generating facilities referred to above.
- An Other Change in Law is a Change in Law which has an undue discriminatory effect on out-of-pocket costs incurred or saved by the Generator when compared with costs incurred or saved by all other generators.
29. QUALIFYING CHANGE IN LAW: PROCEDURE
- Either the CfD Counterparty or the Generator can serve a QCiL Notice if it believes that a Qualifying Change in Law has occurred.
- If the QCiL Notice is a CfD Counterparty QCiL Notice, the Generator must respond with a Generator QCiL Response Notice within 40 business days. The forms of notice are annexed to the Agreement.
29.3 A QCiL Notice (and Response Notice as appropriate) will address the following:
- Why the party serving the notice considers that a QCiL has arisen, and whether it is a Discriminatory Change in Law, a Specific Change in Law or an Other Change in Law;
- The effective date of the QCiL;
- The operating costs or savings arising;
- The capital costs or savings arising;
- Whether it will give rise to an Adjusted Output Period (a period of reduced or increased generation arising because of the QCiL);
- Whether it is a QCiL Construction Event (rendering continued construction before the Start Date illegal);
- Whether it is a QCiL Operations Cessation Event (rendering continued operations illegal).
- As soon as practicable after the Generator serves a QCiL Notice, or a QCiL Response Notice, and in any event within 15 business days, the parties seek to agree:
- Whether a QCiL has occurred;
- The effective date;
- Whether it is a QCiL Construction Event or a QCiL Operations Cessation Event;
- Any allowable costs or savings;
- Any Adjusted Output Period;
- The steps that the Generator must take to mitigate the effects of the QCiL;
- The compensation payable in respect of the QCiL.
29.5 Disputes may be resolved by Expert determination or under the CfD’s Arbitration Procedure.
30. QUALIFYING CHANGE IN LAW: COMPENSATION
30.1 QCiL compensation payments can take the following forms:
- If there are operating costs or savings, a QCiL Opex Payment;
- If there are capital costs or savings, a QCiL Capex Payment;
- If there is an Adjusted Output Period, a QCiL Adjusted Revenues Payment;
- If there is a QCiL Construction Event, a QCiL Construction Event Payment;
- If there is a QCiL Operations Cessation Event, a QCiL Operations Cessation Event Payment.
QCiL Opex payment
- If the QCiL takes effect after the Start Date, the QCiL Opex Payment is made by adjusting the Strike Price (up or down as appropriate). If it takes effect before the Start Date, it is made by daily payments by or to the CfD Counterparty, as appropriate.
QCiL Capex Payment
- QCiL Capex Payments are made in lump sum, staged or daily payments at the discretion of the CfD Counterparty, irrespective of whether or not the QCiL was effected before or after the Start Date.
- The formulae for calculation of QCiL Capex Payments are based on full recovery of allowable costs up to the 12th anniversary of the Start Date, but with a tapering thereafter, so that the recovery right reduces on a straight line basis as the project nears the Specified Expiry Date.
QCiL Adjusted Revenues Payment
- QCiL Adjusted Revenues Payments are made in lump sum, staged or daily payments at the discretion of the CfD Counterparty, irrespective of whether or not the QCiL was effected before or after the Start Date.
QCiL Construction Event Payment
30.6 QCiL Construction Event Payments are paid in lump sum or staged payments.
QCiL Operations Cessation Event Payment
30.7 QCiL Operations Cessation Event Payments are paid in lump sum or staged payments.
31. QUALIFYING CHANGE IN LAW: EFFECTIVE DATE AND PAYMENT
- QCiL Compensation in respect of a Notified Change in Law or a Qualifying Shutdown (see below) is calculated as at and takes effect from:
- In the case of a QCiL Opex Payment or QCiL Capex Payment, the earlier of (a) the effective date of the QCiL and (b) the date on which the Generator first incurs qualifying costs or savings;
- In the case of QCiL Adjusted Revenue Payments, the first day of the relevant Adjusted Output Period;
- In the case of a QCiL Construction Event or QCiL Operations Cessation Event, the date of the relevant event.
(the “QCiL Compensation Date”).
- Any QCiL Compensation that is payable as a lump sum must be paid no later than 20 business days after the QCiL Compensation Date, or if later the date on which the amount is agreed or determined.
- Any QCiL Opex Payment that is effected as a Strike Price adjustment is reflected in the calculation of the Difference, the Difference Amount and the Aggregate Difference Amount in all Billing Statements with effect from the QCiL Compensation Date.
- Any QCiL Compensation that is payable as daily or staged payments commences not later than 20 business days after the later of the QCiL Compensation Date and the date on which the compensation amount is agreed or determined, and in each case the final payment is to be made the earlier of (i) 5 years after the QCiL Effective Date and (ii) the Specified Expiry Date.
32. QUALIFYING CHANGE IN LAW: TRUE-UP
- True-up is a process of adjusting the level of compensation by reference to the actual pattern of costs and savings after the QCiL Compensation has been paid, as opposed to the forecast or anticipated costs and savings at the time the QCiL Compensation was calculated.
- True-up can be triggered by the CfD Counterparty (a “CfD Counterparty QCiL True-Up Notice”) or the Generator (a “Generator QCiL True-Up Notice”).
32.3 No True-Up Notice may be served within 1 year of the relevant QCiL Compensation Date.
33. QUALIFYING SHUTDOWN EVENT: PROCEDURE
- A Qualifying Shutdown Event is the application of law or the exercise of powers by a competent authority (other than pursuant to international or EU policy or guidance) which the Generator is able to establish to the satisfaction of an English court:
- Imposes a requirement that permanently prevents the whole of the facility from operating;
- Is a refusal, for a period in excess of 24 months, to permit any re-start of the whole of the facility.
- If a Qualifying Shutdown Event has occurred, the Generator may give notice to that effect to the CfD Counterparty (which then triggers compensation provisions as above).
34. CHANGE IN APPLICABLE LAW
34.1 A Change in Applicable Law is an industry-wide change.
34.2 The CfD Counterparty is obliged to carry out a Change in Applicable Law Review if:
- there is a Change in Applicable Law (essentially, a general change in law) as a result of which one or more of the Required CiL Amendment Objectives will cease to be met (the Required CiL Amendment Objectives are that the CfD continues in force and no provision is rendered illegal, invalid, unenforceable or inoperable); or
- the Change in Applicable Law Request Criterion is met (at least 30% of all CfD generators have given a Change in Applicable Law Request Notice in any period of 10 business days).
- On conclusion of the Change in Applicable Law Review, the CfD Counterparty notifies the Generator of any Required CiL Amendments – essentially any changes to the CfD to ensure that the Required CiL Amendment Objectives continue to be met.
- If at least 30% in number or value of all CfD generators give a dispute notice to the CfD Counterparty as to the outcome of a Change in Applicable Law Review, the matter is referred to expert determination with application across all CfD contracts.
- GENERATION TAX: PROCEDURE
- A Generation Tax Change in Law is any law coming into effect after the Agreement Date, which is not foreseeable, and which imposes a tax or levy specifically and directly on electricity generators.
- If the CfD Counterparty or the Generator considers that a Generation Tax Change in Law has arisen, it may give a Generator GT Notice to the other party.
- If the parties agree, or it is determined on a dispute, that a Generation Tax Change in Law has arisen, the CfD Counterparty must appoint an Energy Consultant. The Energy Consultant shall determine the change to the Market Reference Prices as a result of electricity generators who are not party to CfDs passing through all or some of the generation tax to wholesale prices, and the consequential change to the Strike Price to reflect the change to the Market Reference Prices.
36. GENERATION TAX: COMPENSATION
- After production of the Generation Tax Report, the Strike Price shall be adjusted (a “GT Strike Price Adjustment”), save that the CfD Counterparty may elect to pay compensation as a lump sum or series of payments for the remainder of the contract term instead of making a Strike Price Adjustment.
- The Generator is only entitled to compensation if it has given a Generator GT Claim Notice, stating the amount of Generation Tax paid as a result of the Generation Tax Change in Law:
- Where a Generation Tax first comes into effect, between 12 and 24 months of the effective date; and
- Thereafter, no less frequently than once in each subsequent period of 12 months.
- If a Generation Tax Change in Law ceases to have effect, any Strike Price Adjustment is reversed.
- BALANCING SYSTEM CHARGE
- The initial Strike Price set out in the CfD Agreement assumes a level of BSUoS (Balancing System Use of System) Charges and RCRC (Residual Cashflow Reallocation Cashflow) Credits.
- Each year, the CfD Counterparty provides a Balancing System Charge Report, which compares the actual balancing system charges paid by electricity generators against the initial balancing system charges in the Initial Balancing System Charge Window (as set out in the relevant CfD Agreement), indexed by reference to CPI.
- The Strike Price is then adjusted to reflect the difference between the Actual Balancing System Charge and the indexed Initial Balancing System Charge.
38. TLM(D) CHARGES
- A similar regime applies for adjusting the Strike Price by reference to movements in TLM(D) Charges (transmission loss multipliers allocated in accordance with the BSC) between the initial TLM(D) charges and the actual TLM(D) charges paid by electricity generators each year.
39. QUALIFYING CPC EVENTS
- A Qualifying CPC Event is either a Qualifying Curtailment or a Qualifying Partial Curtailment.
- A Curtailment is the prevention or restriction by, or on the instruction of the NETSO (National Grid or its successor) of the export from the Facility of electricity to the grid (except for limited circumstances such as default of the Generator). Applying the same rules, a Partial Curtailment is a prevention or restriction of the export of some, but not all, of the electricity.
- A Qualifying Curtailment is a Curtailment in respect of which a number of conditions are satisfied, including:
- A change in law means that the co-ordination of electricity transmission on the grid no longer requires to be conducted so as to minimise costs on a national basis;
- The Balancing Mechanism no longer provides the Generator with the defined levels of compensation arising from a Curtailment, as a result of that change in law
(Effectively, the Generator has had to restrict the export of electricity from the Facility in circumstances where – because of a change in law – the levels of compensation payable under the Balancing Mechanism are lower than those to which the Generator would otherwise be entitled).
39.4 Similar rules apply in respect of Partial Curtailments.
- If the Generator believes that a Qualifying CPC Event has occurred in respect of any contract year, it may provide a Preliminary Annual QCPC Report to the CfD Counterparty. The Preliminary Annual QCPC Report must show, among other things, the amount of electricity which has been foregone because of the Qualifying CPC Event and the differences between the Generator’s lost revenue and the actual compensation recovered.
- A Preliminary Annual QCPC Report that is agreed or determined under dispute resolution becomes the Annual QCPC Report for the relevant contract year.
- Any excess of the actual curtailment compensation received by a Generator over the compensation it would otherwise have received but for the Qualifying CPC Event is payable by the Generator to the CfD Counterparty. Any shortfall is paid by the CfD Counterparty to the Generator.
40. TERMINATION EVENTS
- Termination Events are the events affecting the Generator entitling the CfD Counterparty to terminate the Agreement. They include:
- Generator insolvency;
- The Generator’s failure to pay sums due after specified cure periods;
- Breach of key obligations;
- The Final Installed Capacity is lower than the Required Installed Capacity;
- The Generator fails to give a Final Installed Capacity Notice within 10 business days of the later of the Longstop Date and the expiry of 10 business days of a reminder from the CfD Counterparty;
- The Generator fails to provide the required levels of collateral (see below), or any letter of credit expires or terminates;
- A Technical Compliance Termination Event or a Metering Access Termination Event (see above) occurs.
Pre-Start Date Termination
- The CfD Counterparty may terminate the CfD Agreement before the Start Date in certain circumstances, including:
- If the Generator fails to deliver the Milestone Requirement Notice by the Milestone Delivery Date;
- A Termination Event occurs and is continuing;
- Any of the Initial Conditions Precedent are not fulfilled within 10 business days of the Agreement Date;
- Any of the Further Conditions Precedent are not fulfilled are not fulfilled by the Longstop Date.
- The CfD Counterparty may terminate the CfD Agreement after the Start Date if a Termination Event occurs and is continuing.
Qualifying Change in Law Termination
- The CfD Counterparty must terminate the Agreement if a Qualifying Change in Law gives rise to a QCiL Construction Event or a QCiL Operations Cessation Event (see above for compensation provisions).
41. CONSEQUENCES OF TERMINATION
41.1 No compensation is paid for a pre-Start Date termination.
- If the CfD Counterparty terminates the Agreement after the Start Date (except where the Final Installed Capacity is lower than the Required Installed Capacity), termination compensation (the “Termination Amount”) is payable.
- The Termination Amount is calculated in accordance with annex 1 to the Agreement, by reference to discounted electricity generation values to the end of the contract period.
42. COLLATERAL REQUIREMENT
Notification of Collateral Requirement
- If the Generator fails to pay a Net Payable Amount on more than one occasion in any 12 month period (a “Payment Failure”), the CfD Counterparty may give notice on the second of those occurrences (a “Second Payment Failure Notice”). This is a first strike warning, and does not lead to any further action.
- If there have been Payment Failures on 3 or more occasions in any 12 month period, the CfD Counterparty may give a Collateral Posting Notice, which shall specify:
- The requirement for Acceptable Collateral (see below);
- The Collateral Amount;
- The Collateral Posting Date; and
- The Initial Collateral Repayment Date.
- If a Payment Failure occurs after the date of a Collateral Posting Notice and before the relevant Collateral Repayment Date, the CfD Counterparty may give a Replacement Collateral Notice, which specifies a Replacement Collateral Repayment Date (effectively extending the period during which collateral has to be provided by up to 12 months after the end of the cure period for the relevant Payment Failure).
- The Collateral Amount is the product of a formula that is essentially £10 x 40 (days) x the expected output of the Facility (including factors for RQM and CHPQM where appropriate).
43. ACCEPTABLE COLLATERAL
- Acceptable Collateral is a letter of credit or a cash transfer to the CfD Counterparty (“Posted Collateral”). The letter of credit has to be valid at least until the Initial Collateral Repayment Date and, if appropriate, the Replacement Collateral Repayment Date.
- There are provisions for topping-up collateral if the Posted Collateral ceases to be Acceptable Collateral or is less than the Collateral Amount.
43.3 Letters of credit may only be issued by Qualifying Issuers (A-1 rating or similar).
- The CfD Counterparty may make a demand on Posted Collateral if the Generator fails to pay any amount due under the CfD and that failure continues after the end of the relevant cure period, or if the Generator fails to extend an expired letter of credit or replace it with cash collateral.
43.5 Collateral is returned after the end of the relevant Collateral Repayment Date.
- On termination, the CfD Counterparty is entitled to set-off any obligation of the Generator to pay it a Termination Amount, QCiL Compensation or QCiL True-Up Compensation, against the Collateral Amount.
44. REMAINING PROVISIONS
- The remaining provisions in the front-end of the CfD Conditions are reasonably standard, covering procedural or other non-contentious matters, such as:
- Tiered dispute resolution;
- Expert determination procedure;
- Exclusion of consequential losses etc.;
- Force majeure;
- One provision of particular note is in respect of the CfD Counterparty’s payment and limited recourse arrangements:
- The CfD Counterparty is funded by payments received from electricity suppliers under the Contracts for Difference (Supplier Obligation Regulations) 2014;
- The CfD Counterparty is obliged to take action under the Regulations in order to enforce the obligations of the electricity suppliers;
- The liability of the CfD Counterparty to make payments under the CfD shall not exceed the amounts received by it under the Regulations and allocated to the Contract for Difference.
ANNEXES TO THE AGREEMENT
As well as the Initial Conditions Precedent and the Further Conditions Precedent, the annexes to the Agreement include detailed provisions relating to such matters as the review of Baseload and Intermittent Market Reference Prices, Change Control Procedure, and RQM and CHPQM calculation methodologies, and also include the form of Direct Agreement for the CfD Agreement.
© MacRoberts LLP 2014
Baseload Market Reference Price The reference price calculated for baseload
BSC The Balancing and Settlement Code
CHP Qualifying Multiplier A factor used in calculating Metered Output for combined heat and power stations
Eligibility Criteria The eligibility criteria for the facility set out in the regulations published under the Energy Act 2013
Further Conditions Precedent The main
operational conditions precedent that
need to be satisfied before the Longstop Date
Generation Tax Change in Law A change in law that imposes a tax specifically and directly on electricity generators
Initial Conditions Precedent The conditions that need to be satisfied within 10 business days of the Agreement Date before any other provisions have effect
Initial Installed Capacity Estimate The figure set out in the Generator’s CfD
Initial Milestone Delivery Date A date on or before the Target Commissioning Window, and no later than 12 months after the Agreement Date
Initial Strike Price The Strike Price as bid (for competitive auctions) or set according to DECC’s delivery plan
Installed Capacity The installed capacity of the facility
Installed Capacity Estimate The Initial Installed Capacity Estimate as adjusted where permitted by the Conditions
Intermittent Market Reference Price The reference price calculated for intermittent
Longstop Date The end of the Longstop Period
Longstop Period The duration for the specified generation technology taken from the notes to the CfD Agreement (in most cases this is 1 year – 2 years for offshore wind and wave and tidal)
Loss Adjusted Metered Output The metered output adjusted for transmission losses
Market Reference Price Either the
Baseload Market Reference Price or
the Intermittent Market Reference Price,
depending on the generation technology
Milestone Delivery Date The date specified as such in the CfD application, as extended by force majeure or any failure of the transmission or distribution network to carry out system reinforcement or connection works
Qualifying Change in Law Certain changes in law that give rise to compensation and other consequences under the CfD, and being either a Discriminatory Change in Law, a Specific Change in Law or an Other Change in Law (see Changes in Law)
Relevant Construction Event A geological condition or physical constraint affecting the facility which no generator, acting to a reasonable and prudent standard and having made all due and careful enquiries, would have been aware, and which the Generator was not aware of, at the CfD Application Date, and which renders the project uneconomic
Renewable Qualifying Multiplier (RQM) A factor used in calculating Metered Output for
fuelled renewable generation, intended to ascertain the proportion of renewable fuel used
Start Date The date when the conditions precedent are satisfied
Strike Price The Initial Strike Price as amended in accordance with the Conditions
Target Commissioning Date The date notified by the Generator in its application, being a date falling within the Initial Target Commissioning Window
Target Commissioning Window (TCW) The period notified by the Generator to National
Grid in its application for a CfD, which are set periods depending on the generation technology (in most cases this is 1 year). The TCW is subject to extension for force majeure or certain connection delays
Total Project Pre-Commissioning Costs Set figures per MW installed capacity taken from
the table in the notes to the CfD Agreement. For example, £2,050,000 per MW for offshore wind,
£1,130,000 per MW for onshore wind