generator journey through cfd: contract and pre-allocation
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Generator Journey through CFD: Contract and Pre-allocation. 24 June 2014. AGENDA. Welcome and Introduction Session 1: CFD Policy Overview Session 2: CFD Contract Session 3: Applying the Contract to Your Project Session 4: CFD Implementation Feedback Session - PowerPoint PPT PresentationTRANSCRIPT
Generator Journey through CFD:Contract and Pre-allocation
24 June 2014
2
AGENDA
1. Welcome and Introduction
2. Session 1: CFD Policy Overview
3. Session 2: CFD Contract
4. Session 3: Applying the Contract to Your Project
5. Session 4: CFD Implementation Feedback Session
6. Session 5: Offtaker of Last Resort
7. Close
2 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
3
Welcome and introduction
Ruth Herbert
3 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
4
CFD Implementation Coordination
The Low Carbon Contracts Company is taking a proactive role overseeing the delivery of the end-to-end CFD scheme, facilitating:
• delivery partner cooperation and
• industry readiness
4 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
5
What is meant by ‘coordination’?
Overall monitoring of progress and readiness against the CFD Implementation Plan
Maintenance of the CFD Implementation Plan
Co-ordinating implementation activities across delivery partners and potential industry participants
Passing any policy issues to DECC if raised as part of implementation discussions
Owning and updating the operating model
5 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
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Benefits of engaging with implementation events
Engaging in the implementation coordination events will help you to:• Understand the critical path activities• Understand what implementation planning you need to do• Develop internal capabilities and processes to ensure
readiness and successful participation• Collaborate with CFD delivery partners to help us get it right
– Future stakeholder events– Bilateral meetings
6 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
7
AGENDA
1. Welcome and Introduction
2. Session 1: CFD Policy Overview
3. Session 2: CFD Contract
4. Session 3: Applying the Contract to Your Project
5. Session 4: CFD Implementation Feedback Session
6. Session 5: Offtaker of Last Resort
7. Close
7 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Contracts for Difference: Policy Overview
Chris Hemsley
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Contents
1. Introduction• What is the CFD?• The benefits of a CFD
2. High Level Overview: Applying for a CFD
3. The Offtaker-of-Last-Resort
4. Way forward
5. Questions
Generator Journey through CFD: Contract and Pre-allocation – 24 June 20149 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Supporting investment in Low-Carbon Generation
Lowering the cost of
investing in low-carbon Generation
CFD Removes Long-term Price Risk
from Investors
Support payments
backed by a robust
payment scheme
Clear set of roles and
responsibility between
Government and Delivery
Body
Earlier allocation of
CFDs, reducing risk to developers
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
What is the CFD?C
FD
Pa
ym
en
tsS
trik
e P
ric
e &
Re
fere
nc
e P
ric
e
11
Strike Price: - Determined by competitive bidding- No higher than the administrative cap
Reference Price- Determined by the day-ahead
GB price
Difference Payment
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
More than just the difference payment
Contract For
Difference
Difference Payment
15 Year Contract
Term
Dispute Resolution Processes
Change in Law
Protection
Flexibility Over
Delivery
Ability To Adjust
Capacity
Force Majeure
Protection against Grid
Delay
Index Linked
Payments (to CPI)
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Benefits to developers of the CFD
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Removal of wholesale electricity price exposure by providing a fixed strike price to developers, largely stabilising project revenue
1
Robust and reliable private law contractual arrangement providing developers with a clear set of rights and obligations, and recourse to arbitration processes to resolve disputes
2
Early certainty and security of support levels in the project development process
3
4
Provisions that protect the value of the CFD to developers (e.g. change in law protection)
5
Robust single counterparty owned by government and set up as a limited liability company
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Key components of the CFD framework
Allocation Framework Standard Contract Terms
• Auction rules
• Eligibility and qualification requirements
• Details of information to be supplied by applicant
• CFD Agreement
• CFD ‘Terms and Conditions’
• Low Carbon Contracts Company (LCC) issues a version for signature, based on application information
Administered by the EMR Delivery Body, National Grid
Low Carbon Contracts Company issues, signs and
manages contract
Energy Act & Regulations
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
High-level process
Eligibility Checks
CFD Allocation Contract Award
Pre-Commissioning
Obligations
Before applying, Applicants need to consider:- Are they eligible?- Economics of their project- Can they meet the milestone requirements, within a year of signature?
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Eligibility Criteria: Rationale
• The eligibility criteria are a set of upfront requirements that all applicants must satisfy in order to apply for a CFD.
• The criteria form a critical function in ensuring only credible projects secure CFDs and provide a filter that:
• prevents speculative projects from disrupting the CFD allocation process;
• provides a consistent foundation for an auction – ensuring a minimum level of development for all applicants; and
• reduces the risk of bed-blocking to ensure the budget is used as efficiently as possible.
• CFD Contract repeats many of the eligibility checks and implements the milestone checks.
16 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Competitive Allocation
• If applications exceed the available budget, CFDs are awarded through price competition
• Applicants are invited to submit a ‘sealed bid’, which is the lowest price they are willing to accept
• Applications are ranked by price and accepted in price order, across all delivery years
• Successful applicants are paid the highest price accepted in each delivery year
Allocation Framework sets out detailed rules to cover budget reserved for particular technologies, how to deal with tied bids, etc
But, auction designed to allow bidders to submit the lowest price they can accept, in the knowledge that they will be paid either this price, or
a higher price.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Contract Award
CFD Contract
Standard CFD
Agreement
Standard set of Terms and Conditions
Any ‘minor and
necessary’ amendments
Parameters set out in
application
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Pre-Commissioning Obligations
Mileston
e Delivery Date
• Prevents premature application• Ensures developers demonstrate sufficient financial commitment towards
completion
TCW
• Encourages timely commissioning and applications with realistic dates, whilst providing flexibility to projects.
Long-
stop Date
• Encourages timely commissioning and applications with realistic dates.
Non-Delivery Incentive
• Discourages speculative applications
TCW= Target Commissioning Window
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
The OLR provides renewable CfD generators with a guaranteed, 'backstop' route-to-market for their power: a Backstop PPA (BPPA).
► Offtakers are competitively allocated to generators, by bidding a management fee
► Certain suppliers mandated to bid; other suppliers can do so voluntarily
► Credit-worthiness: ensured by credit rating or letter of credit
Generators have a right to a
‘Backstop PPA’
Obligation on some suppliers to bid for
backstop PPAs
► Management fees bid by backstop offtaker are levelised across all suppliers through a levelisation process
Management fees levelised across
suppliers
► All renewable CfD generators have a right to a ‘backstop PPA’ throughout their CfD enshrined in regulations & supply licence conditions. Terms grandfathered from the point of CfD signature
► Provides a guaranteed route to market at a fixed discount of £25/MWh to the market price; when combined with CfD top up, it creates a fixed price per MWh significantly below the strike price but still provides lenders with comfort over the worst case revenues the project will receive.
► Backstop PPAs are 1yr in length, with a minimum tenor of 6 months
OLR: Key Features
Electricity Market Reform20 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
► Should deem the OLR ‘bankable’ and lend against this guaranteed revenue and any secured PPA
► May be willing to assume revenues above the OLR for early CfD years
► Should reduce the collateral required in open-market PPAs deemed bankable through OLR protection
► Suppliers should continue to respond to generator requests for PPAs of all lengths, though they may see an increase in demand for bankable PPAs of shorter tenors
► OLR likely to allow more smaller suppliers to be deemed ‘bankable’ and encourage more activity in the shorter-term PPA market where they operate
► Suppliers should provide indicative PPA terms to generators seeking them ahead of CfD auction
► The OLR effectively ‘caps’ generators’ long term route to market costs (eg imbalance/basis risk)
► Can raise debt on any combination of PPA and OLR revenues, giving greater flexibility to choose the contracting structure and counterparty which best suits their appetite for risk, for example:
Some generators will continue to secure long-term PPAs to remove risk
Some generators will seek to raise debt against the OLR and a short-term PPA to maximise their upside potential
Generators
Lenders
Suppliers
OLR: Key Impacts
Electricity Market Reform21 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
22 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Questions
23 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
CFD Allocation
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Contents
1. Regulations and Allocation Framework
2. Eligibility Criteria & Supporting Information for applications
3. Eligibility Appeals, Audit
4. Unconstrained and Constrained Allocation (inc Auction Mechanism slides)
5. Indicative timeline for first Allocation Round
6. Questions
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Regulations and Allocation Framework
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
The CFD is supported by a robust architecture
1. Allocation Regulations - Parliamentary scrutiny and certainty for investors
• Eligibility and qualification requirements
• Application and eligibility checking process
• Information to be supplied by applicants
• High level principals of auction/allocation process
• High level budget rules
• Dispute resolution procedure and audit requirements
2. Allocation Framework – additional flexibility, easier to incorporate lessons learned
• Auction rules and valuation formula
• Confirm allocation round timings and deadlines
• Details of eligibility and qualification requirements
• Supplemental qualification requirements
• Details of information to be supplied by applicant
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Eligibility Criteria
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Eligibility Criteria
• The eligibility criteria are a set of upfront requirements that all applicants must satisfy in order to apply for a CFD.
• The criteria form a critical function in ensuring only credible projects secure CFDs and provide a filter that:
• prevents speculative projects from disrupting the CFD allocation process;
• provides a consistent foundation for an auction – ensuring a minimum level of development for all applicants;
• reduces the risk of bed-blocking to ensure the budget is used as efficiently as possible; and
• interacts with later contract design features – e.g. Initial Conditions Precedent, Further Conditions Precedent, and Milestone requirements.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Eligibility Criteria
Applicants for CFDs will be required to provide the Delivery Body with evidence that the proposed project meets the eligibility criteria:
• Qualifying eligible generating station (technology type);
• Non-receipt of funds under other Government support schemes for renewable electricity (i.e. the RO, ssFiT or NFFO)
• Applicable planning consents;
• Connection agreement requirements (including Private Network agreements);
• Supply chain plan (only for facilities >300MW);
• Statement identifying standard CFD terms and conditions that apply or any modifications agreed; and
• Inclusion of relevant supporting information.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Application Supporting Information
The Allocation Regulations and Allocation Framework will state what information is to be submitted in support of a CFD Application.
This is to include:
• Name and contact details of applicant (or GB based agent);
• Company registration and VAT numbers;
• Project name and technology type;
• Location and map of CFD unit;
• Proposed capacity (MW);
• Target Commissioning Date and Target Commissioning Window;
• A declaration that existing accreditation does not apply in respect of the relevant CFD Unit; and
• Whether the CFD unit forms part of a dual scheme facility.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Planning Permission Requirements
• Eligibility requires evidence of all applicable planning consents for the relevant works to be undertaken (e.g. development order; TWA order; section 36 consent; planning permission; and/or a marine licence);
• This includes consent for the CFD unit itself and consent for any other ‘relevant works’ which enable the CFD unit to be established/altered and for electricity to be supplied to the grid;
• Note: consent for relevant works undertaken by grid network operators and covered by grid connection agreements will not need to be shown by the applicant.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Grid Connection Requirements
The policy on grid connection eligibility has now been updated to include provisions for private networks.
Evidence to be provided:
a) For applicants connecting directly to the grid - a copy of the applicable agreement(s) which enables connection to the grid and which is for at least 75 per cent of the capacity of the CFD unit.
b) For applicants connecting indirectly (i.e. through a private network operator) – evidence of an agreement between the applicant and the private network operator.
c) For applicants not connected (i.e. islanded generation) – signed acknowledgement (as part of the certificates submitted on application) that no connection is applicable.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Applicants deemed ineligible may appeal their eligibility via a 3-tiered appeals process:
• Where Tier 2 Appeals take longer than 30 days to resolve, the Secretary of State can direct the auction to commence. The Appellant submits a sealed bid; if the appeal is successful, bids are checked and if found to be equal to or lower than the clearing price of the relevant auction, the Appellant is awarded a CFD.
Eligibility Appeals
5 days
• Review Notice to National Grid
10 days
• National Grid conducts review Eligible/ Non-Qualification Review Notice
5 days
• Qualification Appeal to Appeal Body (Ofgem)
30 days
• Appeal Body/Ofgem determines case
28 days
• Appeal to High Court or Court of Session
No t/l
• High Court reviews case
Tier 1
Tier 2
Tier 3
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Withdrawal Disincentive• Applicants may withdraw during the application window or at the stage of
submitting a sealed bid (where an allocation round is constrained).
• Applicants withdrawing after this point will be subject to a withdrawal disincentive. Where an applicant fails to sign a CFD that has been offered or has their CFD terminated between contract signature and Milestone Delivery Date (1 year after contract signature), the site with which they applied will be subject to a bar on participation in allocation rounds for 13 months after the CFD notification was made.
• This mechanic seeks to discourage spurious or highly speculative applications from participating in the auction process. Such applications would potentially distort auction outcomes and block budget that would otherwise have been available to genuine projects with a greater likelihood of delivery.
• Exemptions apply where an applicant’s contract has been terminated due to a QCiL or RCE, or where a landowner who was not the applicant has been unfairly affected by the ban.
34 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Unconstrained and Constrained Allocation
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Unconstrained and Constrained Allocation
• Once applications have been submitted, National Grid will value them, to see if allocation will be constrained.
• If there is sufficient budget for all projects, and no Maxima are exceeded, then unconstrained allocation will apply, and all projects will receive the Administrative Strike Price.
• If there is insufficient budget (or a Maxima is exceeded), constrained allocation will apply for that pot (or Maxima), and we will run an auction.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
High-Level Process
Invite applications - do the applications result in a budget
breach in any year?
Do the applications under any Maxima
result in the Maxima being exceeded?
Non-Competitive Allocation – all
projects are accepted at their Administrative
Strike Price
Run auction for Maxima technology only – invite sealed
bids for those projects.
All other projects are accepted at their ASP
Competitive Allocation (Auction) – invite sealed bids
Assess Minima
General auction (Maxima assessed
here)
YesNo
No Yes
For each ‘pot’:
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
If Allocation is constrained we will hold an auction
• If budget is exceeded for any delivery year in the budget profile, run auction for all delivery years
• If Maxima is exceeded but budget is not, run auction only for Maxima technologies.
• Sealed bids will only be requested once constrained allocation has been triggered, and then only for those projects to which constrained allocation applies.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Does a Minima apply?
Is the Minima exceeded?
Run an auction within the Minima.
Assign all successful projects
a provisional clearing price
Proceed with general auction,
including all projects rejected
under Minima
Assign all Minima projects at their administrative
strike price
Proceed with general auction for
all other technologies
General auction – rank all projects on strike
price bid. Look at lowest strike price bid
project.
Does it exceed any Maxima?
Reject project, consider flexible options, close
Maxima
Consider next project
Does it exceed the budget profile in
any year?
Reject project, consider flexible options, close delivery year
Accept project, remove flexible bids from stack
NoYes
Yes No
For each ‘pot’:
For each Minima:
No
No
Yes
Yes
High-Level Auction Process
When all budget years are closed or no projects remain; close auction
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Basic auction principles
• Sealed bid, pay-as-clear auction.
• Bidders submit the lowest price at which they are able to deliver.
• The auction ranks all the projects, and starts accepting the cheapest first (in
any delivery year), until the budget is used up.
• All projects are paid the price of the most expensive project which has been
accepted (in its delivery year).
• Bidders may submit multiple bids with varying delivery years and capacities
(“flexible bids”). These may not be earlier or larger than the original application.
• The auction will assess the lowest strike price flexible bid first, then assess
other bids if the first was not affordable.
• Bids submitted will not be shared with DECC and will only be used by National
Grid to determine the clearing prices and which applications are successful.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
At its simplest:
• Work out your costs
• Work out the return you need
• Submit a bid with that number – if you win in the auction you will get at least the number you bid, and the highest price paid to any project in the same group and delivery year (with exceptions for Minima)
• Can be more sophisticated if you wish
• Submit additional bids with a different delivery date, if you are able to deliver in a different year.
• Submit additional bids for reduced capacity, if you are able to deliver a smaller project if your first choice is not affordable
Full details of the auction mechanic are available on the DECC websitehttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/302725/af_event__9_april_slides.pdf
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Indicative timeline for first Allocation Round
Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014
Indicative timeline for first Allocation Round
MilestoneExpected Date
(with no disputes)
Worst case dates
(with disputes)
Final budget notice published 30 Sep 2014 30 Sep 2014
Commencement date of the allocation round 14 Oct 2014 14 Oct 2014
Application closing date 27 Oct 2014 27 Oct 2014
Notices of determination 10 Nov 2014 10 Nov 2014
Applicant requests review of a non-qualification determination n/a 18 Nov 2014
Non-qualification review notification n/a 02 Dec 2014
Applicant makes appeal in respect of a non-qualification determination
n/a 09 Dec 2014
Ofgem completes appeals n/a 23 Jan 2015
Auction notice 26 Nov 2014 02 Feb 2015
Sealed bids submission closing date 03 Dec 2014 09 Feb 2015
CFD notifications sent to LCCC 29 Dec 2014 04 Mar 2015
Low Carbon Contracts sends contracts to successful applicants 29 Dec 2014 - 13 Jan 2015 04 - 17 Mar 2015
These dates are indicative and are not binding on National Grid or Ofgem
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
44 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Questions
45
AGENDA
1. Welcome and Introduction
2. Session 1: CFD Policy Overview
3. Session 2: CFD Contract
4. Session 3: Applying the Contract to Your Project
5. Session 4: CFD Implementation Feedback Session
6. Session 5: Offtaker of Last Resort
7. Close
45 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Contracts for Difference
Matthew Taylor
47
The CFD is designed to work alongside your existing project chain incentivising delivery rather than dictating how you run your project
Pre-development Development Financing
Construction and
commissioning
Operation and Maintenance
Levy Control Framework (LCF)
and budget visibility
Supply chainPhasing
CFD AllocationFMS
Sustainability
Milestone Delivery Date
Capacity Adjustments
Conditions Precedent
Target Commissioning Window (TCW)Longstop Date
(LSD)Force Majeure
Payment mechanisms
Limited RecourseDispute Resolution
Change in Law
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
In designing the CFD we have a considered a number of key design factors
48
Accuracy of payments
/settlement
Management of LCF and system
durabilityInvestor certainty Flexibility
Balancing and Settlement Code
(BSC) for metering
standards,settlement
Reliability and familiarity
Eligibility criteria
Allocation
Milestone requirements
Capacity AdjustmentsTermination
Information provisions
Change control
Private Law
Termination
Direct Agreement
Market Reference Price
Indexation
Strike Price Adjustments
Capacity adjustments
Force Majeure
Relevant Construction
Event
Grid Connection Delays
Payment Disruption Event
Phasing
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Key discussion points1. What are all the ‘periods’?
o Target Commissioning Window (TCW), Longstop Date (LD), Start Date
o Term
2. What capacity do I have to deliver and what if something happens?
o Installed Capacity
o Permitted Reductions
o Relevant Construction Event and Force Majeure
3. What is the ‘Milestone Requirement’?
o Total Project Pre-Commissioning Costs (TPPC); OR
o Project Commitments
4. How is value maintained throughout the life of the CFD?
o Change in Law, Curtailment, Generation Tax, Qualifying Shutdown Event (QSE)
o CPI Indexation, Balancing Services Use of System (BSUoS)/Transmission Loss Multiplier (TLM)
5. When might you be terminated?
o Pre-start date termination
o Post-start date termination
49 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
What are all the ‘periods’?
50
Agreement Date
Milestone
Target Commissioning
Window
Long-stop date
Long-stop period
12 months in all instances except solar (3 months) and landfill gas (6 months)
12 months in all cases apart from:• 6 months for landfill gas• 24 months for offshore wind, tidal
range, tidal stream and wave
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
What are all the ‘periods’?
51
Target Commissioning
Window
Long-stop date
Long-stop 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 LD
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
What is ‘Installed Capacity’?
i.e. the capacity “on the box”
52
Nameplate Capacity
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
100% capacity.Able to adjust capacity downwards <25%
Generator must deliver 95% by the LD or face termination (85% for offshore wind).
Worst case protection – not expected to be used.
What capacity do I have to deliver and what if something happens?
53
CFD signed
Milestone Delivery
Date – 12 months from Agreement
Date
Target Commissioning Window - 12 months in all instances except solar (3
months) and landfill gas (6 months
Long-stop date
100MW Reduce 20MW to 80MW
Commission 80MW
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Force Majeure and Relevant Construction Event
54
FORCE MAJEURE – TIME DELAYS Force Majeure means any event or circumstance that is beyond the reasonable control
of the parties; Both the Generator and the Low Carbon Contracts Company are relieved from any
obligation under the CFD where a failure to comply with an obligation is the result of Force Majeure;
Examples include volcanic eruptions that delay construction.
RELEVANT CONSTRUCTION EVENT – CAPACITY REDUCTIONS Means any circumstance which an operator acting to a reasonable and prudent
standard would not have been aware that renders the construction of all, or a part of, the project uneconomic;
Generators may make reductions to their installed capacity, in excess of the permitted reductions, where an RCE occurs;
Examples include unexploded ordinance in the construction site.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
What is the Milestone Requirement?Within 12 months of the CFD being allocated, a generator must re-assert their commitment to delivering the project by meeting one of the following two Milestones:
By incurring actual spend (not “committed spend”) equal to 10% of the expected development and construction costs (Total Project Pre-Commissioning Costs) of the technology (as determined by DECC) i.e. offshore wind will be £2.05m/MW of Installed Capacity Estimate;
OR
By evidencing contracts are in place to buy all of the material equipment for the generation and export of electricity, entering an EPC contract and proving you have the means to finance the projects.
Either limb must be accompanied by a Director’s Certificate confirming that the Director(s) have made careful enquiries in relation to the information provided alongside the certificate.
55 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Maintaining Value: Change in law
56
Designed to address the risk that price stability is unduly impacted by changes in law, regulation or industry documentation.
Only applies to change in law that was not foreseeable. Fall into three categories;
Specific
Specifically applies only to:• one technology• CFD holders• CFD holders of a certain
technology.• holding of interests in
companies or organisations involved in facilities covered by one of the definitions above
Discriminatory
Only affects:• the project• the facility • the generator
“Other”
• Instigated by the UK Government
• Undue, not objectively justifiable, discriminatory effect when compared with the effect on certain other generators
Generators will be compensated for adjustments to revenues, operational or capital expenditure associated with a ‘Qualifying Change in Law’ via: a strike price adjustment, a lump sum payment or a staged payment.
Generators are also compensated in respect of certain Generation Tax, Curtailment and QSE events.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
2013
/14
2014
/15
2015
/16
2016
/17
2017
/18
2018
/19
2019
/20
2020
/21
2021
/22
2022
/23
2023
/24
2024
/25
2025
/26
2026
/27
2027
/28
2028
/29
2029
/30
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
£150
£170
£190
£210
£230
£250
£270
£290
CPI Strike Price - Indexed Base Year Strike Price
Maintaining Value: CPI Indexation
57
The consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.
The CPI 12-month rate between June 2013 and May 2014 was 1.5%
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Maintaining Value: BSC Charges, TLM
58
The CFD sets out an assumed level of ‘Initial BSC Charge’ and a TLM trajectory;
Prior to each ‘Indexation Anniversary’ the LCCC will assess changes in the BSC Charges and TLM via a prescribed formula;
The formula will result in a strike price adjustment reflecting the changes over / under the initial rate or prescribed trajectory.
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Designed to provide an appropriate and proportionate approach to contract enforcement in order to ensure projects are efficient and deliver value for money.
CFDs may only be terminated in specific circumstances of failure by the Generator. There are two types;
1. Pre-start date termination;• Occurs where the Generator fails to meet Milestones or fulfil Conditions
Precedent.• No termination payments apply.
2. Post-start termination;• Occurs in the following instances; Insolvency, non-payment, breach of key
obligations and credit support default. • Generator obliged to pay the Low Carbon Contracts Company a
“Termination Payment” if CFD is terminated on or after the start date (except where formula results in 0)
When might you be terminated?
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Questions
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61
AGENDA
1. Welcome and Introduction
2. Session 1: CFD Policy Overview
3. Session 2: CFD Contract
4. Session 3: Applying the Contract to Your Project
5. Session 4: CFD Implementation Feedback Session
6. Session 5: Offtaker of Last Resort
7. Close
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Applying the Contract to Your Project
Nic Rigby
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Documents referred to• The “Regulations” - The Contracts for Difference (Standard Terms)
– Part 3 describe Minor & Necessary changes• Laid before Parliament on 23 June 2014
• “Guidance” on Minor & Necessary Change Requests, To be published Mid July and includes the template form ‡
FiT Contract for Difference Standard Terms and Conditions• See DECC, Electricity Market Reform: Contract for Difference web
page, dated April 2014 CFD Agreement Relating to [name of Project]
• See DECC, Electricity Market Reform: Contract for Difference web page, dated April 2014
• Private Wires June 2014 last 2 documents are referred to as the “Contract”‡ Guidance Documents published before regulations enter into force will be draft as powers are yet to be
conferred, and will not include “specified amount” as per 7 (3) and (6) of the Regulations
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The Contract, Your Project and You
The Contract has been designed to cover a wide range of eventualities
Standard contracts deliver fairness, good understanding, robust and consistent delivery
Have you checked how your project will fit? Early collection of the data to complete the Contract is
essential Perhaps reviewing the Contract, your project and where
the data fits and why, might identify a “Minor & Necessary” change
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What is a Minor change
• Regulations determine Minor & Necessary• The effect of a modification is not minor where
• it would be likely to decrease the liabilities of a generator under a CFD or
• increase the commercial benefit for a generator of a CFD, or • it would be likely to cause the CFD counterparty to incur costs above a
specified amount as a result of the CFD counterparty carrying out its obligations under the CFD
• Specific parts of the contract are affected (see next slide)• The CFD counterparty may accept an application where the modification
impacts on contractual arrangements with 3rd parties, but would be likely to provide the CFD counterparty with a commercial benefit.
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Not Minor if affects any of the following
• Payment periods• Milestone Dates re sums incurred or documentation• Payment calculation methodologies• Invoicing and payment time limits• Collateral provisions• Information provision necessary re the Low Carbon
Contracts’ obligations and payments• The “Guidance” will provide a non exclusive cross reference
to clauses covered by this part of the “Regulations”
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What is a Necessary change
• “…a modification is necessary where an applicant acting reasonably could not accept the offer of a CFD without the modification.
• A modification is not necessary where the way in which the applicant is owned or controlled is the reason for the modification.”
• If other projects with similar characteristics don’t think the changes are necessary then Low Carbon Contracts will take that into consideration
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Before you start
Read the “Contract”, (https://www.gov.uk/government/publications/electricity-market-reform-contracts-for-difference
If > 300MW you will be developing and preparing to submit your supply chain plan
Collect all data needed to complete a CFD
Today
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The Process – Preparation Stage
• When DECC publishes the final contract online and the Allocation round notice is published Check the Contract for Changes
If the generator believes a “Minor & Necessary Change” is appropriate Submit changes Early submission gives time for rejection and resubmission to find
solution
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When and Where to Apply
• “Guidance” on requesting changes will be published mid July
Minor & Necessary Changes should be sent to Low Carbon Contracts and be submitted using the template form.• Low Carbon Contracts will process from 1 August Last submission date is 20 Business Days before end of Application
Closing Date (ACD) i.e. ACD-20
• Forms received after this deadline in relation to 2014 allocation round projects will not be considered.
The generator should fill in section 1 - 7
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The Minor and Necessary Change Request Form - Draft
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Minor & Necessary Change Request Form
Requests for Minor & Necessary Changes should be sent to xxxx and be submitted using this template. So as to be considered for Projects in the 2014 allocation round, Minor & Necessary Change Request Forms must be received by 1700 on xx September 2014.. Forms received after this deadline in relation to 2014 allocation round projects will not be considered prior to the closing date for that allocation round.
In this form, references to the “Regulations” are to The Contracts for Differences (Standard Terms) Regulations 2014 as laid before parliament on 23 June 2014.
1. Applicant Details
Company name of applicant for CfD: Name of Project: Individual making request: [Point of reference for all communications with the Low Carbon Contracts Company in relation to this request] E mail address: Telephone number: Postal address: Alternative e mail address: Alternative Telephone number:
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2. Date
Date of Submission: Prior application made: Yes/No If Yes, date of prior application: 2014 Allocation round Please ensure Director’s statement is signed Later Allocation round
Date of Receipt: To be completed by the Low Carbon Contracts Company
The Minor and Necessary Change Request Form - Draft
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The Minor and Necessary Change Request Form - Draft
3. Short description of Minor & Necessary Change(s)
Generator noted that they will be connected to the existing Land’s End 400kV substation via a (roughly) 10km underground cable which will be constructed, owned and operated by the Generator. The cable route is permitted and benefits from executed and agreed easements, but in both cases these give some discretion so that the exact route of the cable can be determined during the construction phase within an agreed envelope.
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Minor and Necessary Change Request Form - Draft
4. Proposed change(s) to legal wording of Clause(s) in the CFD Agreement. Please state Clause numbers as relevant.
Limb C of the “Facility” definition to be modified to include the words “(except as otherwise agreed in writing by the CfD counterparty)” to allow the CfD counterparty to accept these assets as a part of the Facility once the exact location was known.
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The Minor and Necessary Change Request Form - Draft
5. Is the change permitted by the Regulations? 5.1 Why is the proposed change considered to be “Minor”?
This change does not decrease the Generator’s liabilities or increase the Commercial benefit for the Generator under the CFD. The costs to the CFD Counterparty should not be material. The proposed change does not change provision for any of the matters listed in regulation 7 (2). The Generator believes that the proposed change also does not affect any existing contractual arrangements between the CFD counterparty and 3rd parties or require the CFD counterparty to enter into any new contractual arrangements with 3rd parties.
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The Minor and Necessary Change Request Form - Draft
5.2 Why is the proposed change considered to be “Necessary”?
The current wording requires the Generator to build the “Facility” within the geographic constraints provided in the application. At this stage the Generator
cannot be completely certain as to what exact route the cable will take and therefore needs flexibility in terms of the route taken by the underground cable.
5.3 Other reasons for the change. Generators to provide details of any other issues associated with the change.
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The Minor and Necessary Change Request Form - Draft
6. Annexes
Please insert any additional analysis here to support the points you wish to make in the section below or attach as separate files in the email with this completed template. Please list names of all files attached.
Drawing showing permitted cable routes.
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The Minor and Necessary Change Request Form - Draft
7. Director’s Statement
In relation to 2014 allocation round projects – I hereby confirm that I am one of the Directors of the Company that owns and manages the above project. I also confirm that all applications required have been made in sufficient time to enable the eligibility criteria to be met before the 2014 application process closes, including grid, network or private wires connection and consent.
Name in Block Capitals Signature
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What Low Carbon Contracts will do
• The generator will be notified of outcome• 8. Accepted, rejected or more information requested• 9. Reason for rejection
• The Low Carbon Contracts Company must respond no later ACD- 5
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The Minor and Necessary Change Request Form - Draft
8. Low Carbon Contracts Company response To be completed by Low Carbon Contracts Company – Accepted
9. Reasons for rejection including references to clauses in the Regulations, if applicable.
To be completed by Low Carbon Contracts Company
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What Generators Can Expect
• Applications submitted close to ACD-20 could be rejected due to insufficient information• with no opportunity to re-apply
• Agreed contract changes will be published by Low Carbon Contracts if the CFD is entered into.
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Minor and Necessary Request
• Guidance published mid July 2014
• Low Carbon Contracts process of change review commences on 1 August 2014
• Last submission date for requests, ACD -20
• Low Carbon Contracts must respond by ACD -5
ACD -20 business days
ACD -5 business days
Publish Guidance
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What Generators should do now
Read the Contract
Collect data
Check how the Contract works for you
If you need to apply for Minor & Necessary changes apply early
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Process Map for Minor & Necessary Changes
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Implementation Plan
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Questions?
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87
AGENDA
1. Welcome and Introduction
2. Session 1: CFD Policy Overview
3. Session 2: CFD Contract
4. Session 3: Applying the Contract to Your Project
5. Session 4: CFD Implementation Feedback Session
6. Session 5: Offtaker of Last Resort
7. Close
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CFD Implementation Feedback Session
Ruth Herbert
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Content
1. Review of risks and issues from previous session
2. Stakeholder events programme
3. General Q&A
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Generators’ risks and issues
I.D. Risk/Issue Owner Actions Status1 Lack of clarity on certain
elements of the overall CFD scheme design.
DECC Mitigate - DECC to engage with market participants to ensure the rules and processes are properly understood.
Open
2 Lack of familiarity with obligations on the generator arising from the generic CFD contract.
DECC / Low Carbon Contracts Company
Mitigate - DECC to engage with market participants to ensure the rules and processes are properly understood.
Open
3 Generators' preparation for CFD eligibility needs to take place several months prior to the confirmation of the available budget for the first round.
DECC Mitigate – actions include planned publication of indicative budget figures in mid July.
Open
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Generators’ risks and issuesI.D. Risk/Issue Owner Actions Status4 Small independent
generators need more information about access to "back-stop" PPAs (Offtaker of Last Resort arrangements) before they can participate.
Ofgem / Low Carbon Contracts Company
Mitigate - DECC to engage with market participants to ensure the rules and processes are properly understood.
Open
10 New market entrants may not be able to take part in implementation coordination sessions but will need to be brought up to speed on CFDs at a later date.
Elexon Mitigate - Elexon and all CFD delivery partners to consider what information should be incorporated into market induction.
Open
11 Implementation Plan does not cover Northern Ireland.
DECC / Low Carbon Contracts Company
Tolerate for now - Update to a UK-wide Implementation plan once timetable is confirmed for Northern Ireland implementation.
Open
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CFD Implementation Coordination EventsDate Event Lead / Contact
10 July Generator Journey through CFD –Eligibility and Allocation Processes
National [email protected]
Late July Applicant readiness Low Carbon Contracts/National [email protected]
August CFD Implementation Coordination Update and Review Session Progress and issue trackingApplication and allocation system readiness (National Grid)Settlement system update (Low Carbon Contracts/Elexon)
Low Carbon Contracts/National [email protected]
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CFD Implementation Coordination EventsDate Event Lead/ Contact email
Sept CFD Implementation Coordination Update and Review Session Progress and issue trackingFinal applicant readiness (Grid)Settlement system testing plans (Low Carbon Contracts/Elexon)
Low Carbon Contracts/Elexon/National [email protected]
Oct CFD Implementation Coordination Update and Review Session Progress and issue trackingFinal applicant readiness (Grid)Settlement system update (Low Carbon Contracts/Elexon)
Low Carbon Contracts/Elexon/ational Grid [email protected]
Nov CFD Implementation Coordination Update and Review Session Progress and issue trackingFinal applicant readiness (Grid)Settlement system update (Low Carbon Contracts/Elexon)
Low Carbon Contracts/Elexon/National [email protected]
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CFD Implementation plan
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CFD User Guide• Already committed to publishing relevant materials
including process maps on our portal following implementation sessions
• Some industry feedback that a User Guide focused on what generators need to do would be more helpful
• We are coordinating with CFD delivery organisations on User Guide that will include:– relevant process journeys and narratives– case studies– links to all relevant reference material
• Aim to complete this before 1 August so it can be the first port of call for applicants
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Questions?
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97
AGENDA
1. Welcome and Introduction
2. Session 1: CFD Policy Overview
3. Session 2: CFD Contract
4. Session 3: Applying the Contract to Your Project
5. Session 4: CFD Implementation Feedback Session
6. Session 5: Offtaker of Last Resort
7. Close
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The Offtaker of Last Resort (OLR)
Helena Crow
Overview
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1. Why is the Offtaker of Last Resort needed?
2. What form will the Offtaker of Last Resort take?
3. What impact will the Offtaker of Last Resort have?
Why is the OLR needed?
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- The Offtaker of Last Resort (OLR) aims to guarantee eligible renewable CFD generators a route to market in such a way that, alongside the competitive allocation of CFDs:
- reduces the cost of investment in renewable electricity generation, - boosts competition, and - ultimately lowers costs to consumers.
- Without the OLR, lenders require independent renewable generators to have a long-term Power Purchase Agreement (PPA) if they are to secure debt-finance. Yet few suppliers are able to offer these contracts on bankable terms.
- This can make it more difficult for independent renewable generators to build in a cost-effective manner. It also reduces competition in the generation market.
What form will the OLR take?
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The OLR provides renewable CFD generators with a guaranteed route-to-market for their power at a significant discount to the market price. Generators may wish to access the OLR if they cannot find a better deal in the open market.
► Offtakers are competitively allocated to generators, by bidding a management fee
► Certain suppliers mandated to bid; other suppliers can do so voluntarily
► Credit-worthiness: ensured by credit rating or letter of credit
Generators have a right to a
‘Backstop PPA’
Obligation on some suppliers to bid for
backstop PPAs
► Management fees bid by backstop offtaker are levelised across all suppliers through a levelisation process
Management fees levelised across
suppliers
► All renewable CFD generators have a right to a BPPA throughout their CFD, enshrined in regulations & supply licence conditions. Terms grandfathered from the point of CFD signature.
► Generators will be able to apply to a BPPA by submitting an Expression of Interest to Ofgem.
► Provides a guaranteed route to market at a fixed discount of £25/MWh to the market price. When combined with CFD top up, it creates a fixed price per MWh significantly below the strike price, but still provides lenders with comfort over the project’s worst case revenues.
► Backstop PPAs are 1yr in length, with a minimum tenor of 6 months. The terms of the Backstop PPA Contract are designed to be as similar as possible to an open market PPA.
► Should deem the OLR ‘bankable’ and lend against this guaranteed revenue and any secured PPA
► May be willing to assume revenues above the OLR for early CFD years
► Should reduce the collateral required in open-market PPAs deemed bankable through OLR protection
► Suppliers should continue to respond to generator requests for PPAs of all lengths, though they may see an increase in demand for bankable PPAs of shorter tenors
► OLR likely to allow more smaller suppliers to be deemed ‘bankable’ and encourage more activity in the shorter-term PPA market where they operate
► Suppliers should provide indicative PPA terms to generators seeking them ahead of CFD auction
► The OLR effectively ‘caps’ generators’ long term route to market costs (eg imbalance/basis risk)
► Can raise debt on any combination of PPA and OLR revenues, giving greater flexibility to choose the contracting structure and counterparty which best suits their appetite for risk, for example:
Some generators will continue to secure long-term PPAs to remove risk
Some generators will seek to raise debt against the OLR and a short-term PPA to maximise their upside potential
What impact will the OLR have?
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Generators
Lenders
Suppliers
Timeline for Implementation
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w/c 23 June: • Government Response to the February Consultation, which focused on the OLR’s high level design.
• Consultation published on the implementation of the OLR, including drafts for three documents: Regulations, License Code Modifications and the Backstop PPA contract.
July 2014: • End-of consultation period.
Autumn 2014: • Secondary Legislation in place by the time of the first CFD allocations
Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014
Questions
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Close
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