© allen & overy 2014 1 9 october 2014 contracts for difference: on the launchpad chris andrew...

© Allen & Overy 2014 1

9 October 2014

Contracts for Difference: On the Launchpad

Chris Andrew© Allen & Overy 2014

The Ongoing UK Energy Policy Trilemma

Security of Supply– In the next decade a fifth of existing UK generating capacity will come off-line. DECC

estimate electricity demand growth of 30% - 100% by 2050.

Decarbonisation– DECC’s 2050 Pathways analysis shows that the decarbonisation of the generation sector by

around 2030 is effectively a necessity for meeting the legal requirements of the 2008 Climate Change Act to reduce CO2 emissions by 80% 1990 – 2050.

– The Fourth Carbon Budget commits UK to 50% reduction by 2027. – The European Commission has proposed a 2030 policy framework for climate and energy

policies envisaging: a 40% GHG reduction, but EU rather than national renewable energy targets.

Affordability – Between 2013 and 2020 required expenditure on UK energy infrastructure is estimated at

£110bn.– Government acknowledges that consume prices will rise. It no longer claims that EMR will

reduce the effects of rising fossil fuel prices (as this is dependant on assumptions as to future fossil fuel prices), rather that EMR is a cheaper (6%) way of achieving 2030 carbon targets.

– The Levy Control Framework implies a subsidy (over and above the Carbon Price Floor) for large-scale low-carbon generation of £7.6bn (2012 prices) in 2020/21.


Ofgem Electricity Capacity Assessment June 2014


Projected cumulative new capacity 2010 to 2035

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Source: DECC Energy and Emissions Projections – September 2014

© Allen & Overy 2014

Electricity Market Reform (EMR)

“In the new, reformed UK electricity market, the economics of low carbon will stack up like nowhere else in the world.”

Contracts for Difference (CfD)

Carbon Price Floor

Enhanced Wholesale Liquidity

Capacity Market

Emissions Performance Standard

“The reforms are designed to provide investors with transparency, longevity and certainty in order to attract £110billion of investment to bring forward new low-carbon generation for the 21st Century.”


CfDs Summary Timeline

December 2010 - Initial EMR consultation

July 2011 - White Paper

End 2012 - Energy Bill

Summer 2013 - First draft CfD

December 2013 - Energy Act 2013 receives Royal Assent

April 2014 - Investment Contracts allocated (4.5GW)

Summer 2014 - State Aid clearance; final form generic CfD published

October 2014 - First Allocation Round

© Allen & Overy 2013 6© Allen & Overy 2014


2014 2015

Oct Nov Dec Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept

Primary legislation

Secondary legislation, codes & Licence

change (subject to parliamentary timings)

Detailed design and development (contract,

Strike Prices & Allocation)

CfD Application and Allocation

Counterparty & Settlement

CfDs Implementation

Preparation of Processes & systems to Settlement & Payment/Billing

Develop systems for associated BSC changes

Procure, develop and implement forecasting model Forecasting model integration

Publication of 15/16 op cost levy rate

Consultation on op cost Ivey rate Publication of 15/16 unit cost fixed rate

15/16 op costlevy regs laid

Procure & develop CfD settlement systems15/16 op cost

levy regs in force

User testingCounterparty setup team in place

Counterparty expected to begin signing generic contracts

Counterparty has full powers

FiD contract management and generic contract management when signed

Procure & develop CfD Contract Administration/Management Process & Systems T&C negotiation/pre application process Earliest Date for first CfD contract award

14/15 op cost levy regs in force

Potential earliest date for first CfD payments

Develop 14/15 counterparty business plan

Publish 14/15 operational cost recovery levy 14/15 op cost levy regs laid

Consultation on op cost budget / levy

rate

Primary legislation Royal Assent-subject to will of parliament

Secondary legislation laid before Parliament (timings tbc)

Collaborative Development

FiD contracts in force and template CfD contract given legal effectContract Development

& drafting

FiD for Renewables contract available FiD contracts signed

Draft CfD budget published

Revised CfD contract spine published

Final Delivery Plan published (inc. final strike

prices)

Draft Allocation technical framework published

Modelling &

AnalysisAllocation methodology

given legal effect

Consultation on draft secondary legislation

Secondary legislation amended in light of consultation

Secondary legislation -

Parliamentary process

Identify and draft amendments to existing industry codes

Consultation on draft amendments to existing industry

codes ( dates tbc)

Secondary legislation, codes, licences in force

Powers conferred on System Operator, Counterparty, Ofgem

Preparation of Processes & Systems to support Application

System Operator publishesapplication guidelines

User trials

Supply chain plan submissionand assessment

Industry implementation preparatory tasks

Initial application process live

CfD Applications processed

Application and allocation IT system procurement and development

DECC

System Operator

Industry

Counterparty / SA

7

Amend existing industry codes


Contracts for Difference (CfDs)

– CfDs to be offered by Low Carbon Contracts Company Limited (CfD Counterparty) are intended to provide low carbon generators a guaranteed tariff calculated as the difference between a strike price and a reference price taken from the wholesale electricity market.

– First allocation round will open on 16 October 2014.

– CfD is to replace the 'pull' of the Renewables Obligation.

– Generation not already accredited when the CfD is introduced will generally have a choice between CfD and RO until 31 March 2017 (subject to limited grace periods).


CfD – Strike Price


CfD Payments to Generators

– Payments to generators will be capped at the value of the strike price (i.e. generators take risk of negative prices).

– Reference Price – used as a proxy for the market price for electricity – intermittent generation: an hourly day-ahead price– base load generation: season ahead price, possible generator option to move to

year ahead.

– Strike Price – fully CPI indexed – administratively set maxima, but can be lower where competitive allocation.

© Allen & Overy 2013 10© Allen & Overy 2014

CfD Strike Prices (First Delivery Plan – December 2013)

Renewable Technology

Pot Strike prices (£/MWh) (2012 prices)

Potential 2020 Deployment

Sensitivities (GW)

2012

Roadmap

Central View

2014/15 2015/16 2016/17 2017/18 2018/19

Biomass Conversion

3 105 105 105 105 105 1.7 – 3.4 [6]GW

Hydro 1 100 100 100 100 100 c. 1.7

Offshore Wind 2 155 155 150 140 140 8 – 15 18GW

Onshore Wind 1 95 95 95 90 90 11 – 13 13GW

Large Solar Photo-Voltaic

1 120 120 115 110 100 2.4 – 41 7-20GW

Dedicated Biomass (with CHP)

2 125 125 125 125 125 c. 0.3 – 0.6

Energy from Waste (with CHP)

1 80 80 80 80 80 c. 0.4

Technologies with Over 1 Gigawatt of Potential Deployment


N.B. The relevant year is defined by a project’s Target Commissioning Date.

1 Additionally DECC forecast 7.5GW small scale FIT PV

CfD Terms

– CfD Agreement and CfD Terms and Conditions were published in August 2014.

– On announcing an allocation round, the Secretary of State will issue notice of what terms are available for that round.

– The terms of the CfD will be largely standardised across all technologies; however, different standard terms may be issued for different categories of CfD.

– “Minor and necessary” modifications may occur for individual generators.



Minor and Necessary Modifications

– Changes to terms of standardised CfD can be requested

– Modifications must be minor and necessary

– Application should be submitted to CfD Counterparty using the template form

– Last submission day is 20 Business Days before the end of the Application Closing Date

– Early submission allows time for rejection and resubmission

– Last day for CfD Counterparty to respond is 5 Business Days before the end of the Application Closing Date

13© Allen & Overy 2014


CfD Payment Period

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Target Commissioning

Window

Longstop date

Longstop period

A start date for payments may be triggered anywhere within this time

But the 15 year term in which support is offered will start at the end of the TCW, irrespective of

whether you are generating

The CfD may be terminated if you have not reached a start date for payments

by the Longstop Date



Levy Control Framework (LCF)

15

Source: GL Garrad Hassan


Overall CfD Budget and “Pots”

Delivery Year

£m (2011/12 prices) 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21

CfD Budget (2014 release) 50 220 300 300 300 300

Pot 1 (established technologies) 50 65 65 65 65 65

Pot 2 (less established technologies) - 155 235 235 235 235

Total support payments available in a given year

N.B. No budget released for Pot 3 (biomass conversion) in 2014 Allocation Round

No maxima in 2014 Allocation Round

Minimum of 10MW for Wave and Tidal Stream technologies



LCF Budget and CfD Budget


– 2015/16 Renewables Obligation level increased by approximately 20% on the 2014/15 level – approximate cost of £3.65bn in 2012 money – higher level than was expected in the Delivery Plan

– No LCF increase announced– Budget increased for Pot 1 and Pot 2 compared to July 2014 Draft Budget

Notice– RUK calculate new budgets would allow about 700MW of onshore wind

and 800MW of offshore wind at the administratively set strike prices, and more if those prices are lower

– However, the Final Allocation Framework for the October 2014 Allocation Round set new, lower reference prices, reduced by approximately £10/MWh

– This means that the valuation of each application will be higher than previously expected and therefore, the increase in budget will have limited impact on the capacity


CfD Technology Pots


Pot 1 (established

technologies)

Administrative Strike Price

(2015/16)

Pot 2 (less established

technologies)

Administrative Strike Price

(2016/17)Pot 3

Onshore wind* 95 Offshore wind 150Biomass conversion

Solar Photovoltaic* 120 Wave‡ 305

Energy from Waste with CHP

80 Tidal Stream‡ 305

Hydro† 100Advanced Conversion Technologies

150

Landfill Gas 55 Anaerobic Digestion* 150

Sewage Gas 75Dedicated biomass with CHP

125

Geothermal 145

* (>5MW)† (>5MW and <50MW)‡ (0-30MW)


Qualification Requirements

– The generating station which is the subject of the application must be an eligible generating station.

– To be a qualifying applicant, the generator must:

1. meet Eligibility Requirements

2. not be an Excluded Applicant

3. provide additional information/data

– The applicant must include a statement which identifies the set of standard CfD terms and conditions that apply or identifies any “minor and necessary” modifications agreed with the CfD Counterparty prior to the start of the allocation round



Eligibility Requirements– Applicable planning consents must have been given for the proposed generating

station and other relevant works that enable the unit to be established or altered and electricity to be supplied (e.g. development consent order; TWA order, s36 consent; planning permission; and/or a marine licence)

– Connection agreement requirements:– For projects connecting directly to the transmission or distribution system, a grid

connection agreement– For projects connecting indirectly (private networks), an agreement between the

applicant and the operator of the private network that permits connection to the transmission or distribution system

– For projects not connecting to the transmission or distribution system, a declaration stating no connection is applicable

– Supply Chain Approval Certificate (for projects of 300MW and above) received from DECC

– Supplemental requirements for phased offshore projects, e.g. timing and capacity requirements



Excluded Applicants

– The following are excluded applicants:– CCS and Nuclear – AD, Hydro, Onshore Wind, Solar ≤ 5MW – Applicants in receipt of funds from other Government support

schemes – RO; CM; ssFIT (some exceptions apply, e.g. dual scheme facilities)

– Non-GB based projects

– All applicants will be asked to declare that their application is not an excluded application and that they have not received or are receiving funding from other subsidy schemes.

– Non-delivery disincentive



Additional Information

– Name, address and contact details of:– applicant (GB based agent if applicant not based in GB);

– party entering into CfD Contract; and

– party who will be receiving notices under CfD Contract.

– Company information (e.g. company registration, VAT numbers)

– Project information (e.g. project name, technology type, location, proposed capacity, phases and target dates)

– Description and location map of generating station



Allocation Process (1)

– Delivery Body (DB) reviews eligibility of all applicants

– DB has 10 working days to complete application determination and notify each applicant as to whether or not their application is a qualifying application

– Whether or not a generator is a qualifying applicant will be determined on the information provided by that generator in their application.

– All the criteria must be satisfied, otherwise the application will be rejected.

– On appeal, a non-qualified applicant can only rely on the evidence that was produced with the original application, it cannot submit additional evidence

– DB will give reasons for determining an application non-qualifying

– Applicants deemed ineligible may appeal via a 3-tier appeals process:– Tier 1: review notice to DB– Tier 2: qualification appeal to Ofgem (Appeal Body)– Tier 3: appeal to High Court




– Once applications have been submitted, DB will value them, to see if allocation will be constrained

– Valuation of each application carried out using valuation formula:

– Valuation report sent to Secretary of State (SoS) who may decide to increase (but not reduce) CfD budget

24

Top-up Payment

General conversion

factors

Technology specific

factors

Capacity




– If sufficient budget for all projects in a pot, then unconstrained allocation will apply and all projects will receive the Administrative Strike Price

– If there is insufficient budget for any delivery year in budget profile (or Maxima exceeded), constrained allocation will apply for that pot for all delivery years (or that Maxima) – auction required



Allocation Process Decision Tree



Auction Procedure

– Each project submits sealed bids (strike price they are willing to accept) into the relevant delivery year, which is the year in which the Target Commissioning Date of the project falls

– Auction ranks all projects in a pot by price and accepts cheapest first in any delivery year (regardless of technology type), until the budget for the pot is used up

– Clearing price for a pot is the price of the most expensive project accepted in that delivery year (pay-as-clear rule)

– For a successful project its CfD strike price is the applicable clearing price, capped at the relevant Administrative Strike Price



Auction Mechanism High Level Decision Tree



Illustrative Auction Results



Flexible bids

– Generators are allowed to submit flexible bids, i.e. a bid which allows the bidder to vary the capacity, price and/or delivery date of their project

– For each application, an applicant may submit up to 10 flexible bids

– No more than three flexible bids may be in any given delivery year

– Each flexible bid must have:– a different strike price;– a capacity no greater than that in the original application; and– a Target Commissioning Date which is no earlier than that in the original

application

– The flexible bid with the lowest strike price will be considered first and should be the applicant’s first choice bid

– Only one bid can be accepted for each application



Flexible Bid High Level Decision Tree



Audit, Secretary of State’s Review & Notification

– DB must ensure that Independent Audit of the Valuation and Allocation calculations are carried out

– SoS will have 2 days from receipt of notification from DB to review the Auditor’s Report with the DB’s recommendation and determine whether the Allocation process must proceed to notification, re-run, or be terminated

– At end of allocation round DB will notify each qualifying applicant whether their application has been successful

– DB will give CfD notification to CfD Counterparty, who will offer contracts to successful applicants

– DB will publish Allocation Round report and an Appeals Register



CfD Allocation TimetableStage Expected Date

(without appeals)Latest Expected

Date (with appeals)

Allocation Round Commencement Date 16 October 2014 16 October 2014

Application Closing Date 30 October 2014 30 October 2014

Deadline for DB to assess eligibility of applications 13 November 2014 13 November 2014

Deadline for Applicants to request DB to reconsider - 20 November 2014

DB reconsiders eligibility decision - 5 December 2014

Deadline for Applicants to request Ofgem to reconsider - 12 December 2014

Ofgem review of eligibility decision - 29 January 2015

DB publish Auction Notice 2 December 2014 13 February 2015

Sealed Bid submission closing date 9 December 2014 20 February 2015

DB notifies LCCC and CPB of outcome of allocation round 5/6 January 2015 13 March 2015

Deadline for LCCC to issue contracts for signature 20 January 2015 27 March 2015

Deadline for successful applicants to sign contracts 3 February 2015 14 April 2015

N.B. Subject to change



Future Allocation Rounds

– It is the Government’s intention to hold the next allocation round in October 2015

– The Government is minded to release £50m for allocation in the October 2015 allocation round for Pot 1 (established technologies) projects commissioning from 2016/17

– The Government has not yet decided on an indicative budget for Pot 2 (less established technologies) or Pot 3 (biomass conversion)

– The remaining LCF budget to 2020/21 is in excess of £1bn in the DECC Medium Scenario

– The remaining estimated LCF funds which could be released for future CfD projects will be set out later in the year in ‘DECC’s Consumer Funded Policies – a report to Parliament’



Alternative CfD Application Procedure

– SoS can direct CfD Counterparty to offer CfD to eligible generator

– Outside generic CfD allocation process

– Not restricted to Standard Terms

– Likely to be very limited:– large or unusual projects– standard terms unsuitable– generic CfD allocation process unsuitable

– State Aid?

– LCF?



CfD Generator Journey - Overview



Contract Capacity Adjustment– Generators will be able to make adjustments to the proposed capacity

of their projects within set parameters– These adjustments can be made:

– by the Milestone Delivery Date; and

– by the Longstop Date

– The table outlines the allowed capacity adjustments:

37

Milestone Delivery Date Longstop Date

Projects above 30MW Up to 25% Up to 5%

Projects up to 30MW Up to 25% Up to 5% of intended installed capacity or by an amount equal to the capacity of one turbine (whichever is greater)

Offshore wind Up to 25% Up to 15%


– Also ability to adjust capacity in response to certain geological and other conditions


Current DECC Consultations– Capacity Market supplementary design proposals and transitional

arrangements (respond by 5 November 2014)

– CfD Non-delivery Disincentive Exemptions (respond by 5 November 2014)

– Changes to the CfD Supplier Obligation (respond by 5 November 2014)

– Emissions Performance Standard Regulations (respond by 6 November 2014)

– Quinquennial plans

– Annual updates


Delivery Plan

A&O EMR site

http://www.allenovery.com/UK-Electricity-Market-Reform


Questions?

These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.

Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.


Contacts


Chris AndrewAllen & Overy

Email: [email protected] Tel: +44 20 3088 2684

mailto:[email protected]

© allen & overy 2014 1 9 october 2014 contracts for difference: on the launchpad chris andrew...

Documents

allocation round allen

decc energy

energy act

carbon targets

uk energy infrastructure

new low carbon generation

cfd settlement systems

economics of low carbon