Contracts for Difference Allocation Round 3—key changes and likely impact

CfD Allocation Round 3—final contracts and statutory notices published, LNB News 02/05/2019 39

The Department for Business, Energy and Industrial Strategy (BEIS) has published the final contract documentation and issued the required statutory notices for CfD AR3 that opens on 29 May 2019. These include the final versions of the Standard Terms and Conditions, the generic front-end CfD agreement and the contract variants for CfD AR3. BEIS has also published the final statutory notices required and the allocation framework that sets out the rules and eligibility requirements for CfD AR3.

What is the background to CfD AR3 and the key next steps on the process?

The next round of allocation of standard form CfD support to new renewables projects in Great Britain (GB) has for some time been expected to commence in May 2019. On 1 May 2019, government formally confirmed and triggered the AR3 process through the issuing of:

• a number of notices under the Contract for Difference (Allocation) Regulations 2014, SI 2014/2011(Allocation Regulations) and the Contracts for Difference (Standard Terms) Regulations 2014, SI 2014/2012, Statutory Notices
• final forms of the standard contract terms (and variants thereof) to be awarded to successful applicants, AR3 Standard Terms and Conditions
• a final form AR3 Allocation Framework (the Allocation Framework), which supplements the legislative position to provide more detail on the allocation and auction process

Accordingly, project developers will be able to submit applications to National Grid Electricity System Operator Limited (in its capacity as the Electricity Market Reform (EMR) Delivery Body) from 29 May 2019, with a deadline of 18 June 2019 for such applications. Those projects found, following any reviews and appeals, to be eligible will (assuming there is more eligible project capacity than budget available, which is very likely) then be required to compete in a competitive auction process to establish which projects will win support and the level of subsidy (the strike price) they will receive.

The timing of this auction process is contingent on the review/appeals process, however assuming there are reviews/appeals then an indicative window of 9-15 October 2019 for submission of sealed bids has been established by the Allocation Framework. This would lead to CfD contracts being signed in respect of successful projects around early December 2019.

What are the key differences between the CfD Allocation Round 2 (AR2) and AR3 and what impact are these changes likely to have?

Since AR2, there have been a series of government consultations and draft documents, establishing and refining the amendments to the CfD contractual terms and the CfD allocation process that will apply for AR3.

The fundamental architecture of both the allocation process and CfD contractual terms remains the same as for AR2, but there have nevertheless been some important changes. Key among these changes are:

• onshore wind farms of over five megawatts (MW) that are located on remote islands off mainland GB will be eligible to participate in the allocation process. This means that such wind farm projects join offshore wind, advanced conversion technology (ACT), anaerobic digestion (AD), dedicated biomass with CHP, tidal stream, wave, and geothermal in being able to participate in this allocation round. This sets remote islands onshore wind apart from mainland onshore wind, which (as for AR2 and in common with other technologies classed as established) is not able to participate. Whether a project is defined as remote islands onshore wind is in large part determined by the distance of the relevant island from mainland GB and the length of cabling required to link to the project the GB mainland transmission system. The detailed requirements are set out in the Allocation Regulations, as amended for AR3
• the budget available for subsidy under AR3 is £65m per year (in 2011-12 prices) and the new capacity to be supported is capped at a maximum aggregate of six gigawatts (GW). To compete, projects must be expecting to commission between 1 April 2023 and 31 March 2025. The ‘administrative strike price’ caps on the maximum strike price levels at which project can bid have been reduced—most notably for offshore wind and £65m is a considerably lower budget than made available for previous allocation rounds, and therefore competition is expected to be fierce. This will be heightened by the introduction of higher load factor assumptions for AR3 when the EMR Delivery Body is valuing the cost of supporting projects, although conversely lower strike prices would of course have a positive effect on how far budget can stretch. The revised load factors to be used can be found at Appendix 3 of the Allocation Framework and the administrative strike prices are set out in the statutory ‘Budget Notice’ in respect of AR3
• various relatively minor (but nevertheless important) amendments have been made to the standard CfD contractual terms to apply to projects successful in AR3 (versus those term which apply for projects successful in previous allocation rounds). These changes include amendments to the definition of force majeure and the provisions for grid connection/grid reinforcement delay, heightened requirements on forecasting of anticipated generation levels, tightened requirements in respect of ACT plant efficiency and types of equipment and updated Combined Heat and Power Quality Assurance scheme requirements for biomass with combined heat and power (CHP), updated definitions of ‘waste’ and bioliquid sustainability requirements to reflect Directive 2015/1513/EU on renewable energy and biofuels in the EU transport sector, new greenhouse gas emissions level requirements for biomass with CHP, updated drafting to clarify that CfD difference payments should be paid on electrical output net of parasitic loads, various changes regarding State aid, and references to reflect the anticipated Brexit position
• finally, while it has had less emphasis in consultations, the Allocation Framework tweaks the allocation process and auction process in a number of respects. Again, the fundamentals around the eligibility requirements and competitive auction process remain the same (subject to the introduction of remote island wind), but amendments include refinements to evidencing planning consent and connection requirements, updated requirements for ACT reflecting the amended contractual requirements set out above, changes to the flexibility afforded to phased offshore wind bidding, and updates to bids that ‘interleave’ a projects’ flexible bids. Together with the Allocation Framework itself, the EMR Delivery Body’s Round 3 guidance provides additional information on this

Do you view any of the changes to the CfD standard form contracts as likely to have much effect? Anything of surprise?

To a large extent the changes being made in respect of AR3 have been well sign-posted and therefore should not come as a surprise. In AR2, perhaps the main surprise was how low offshore wind farm projects were able to bid versus the 2014 auctions from allocation round one (AR1). Therefore, there will be a keen interest in where strike prices end-up after AR3.

The amendments to the contractual terms are, in the main, perhaps best defined as clarificatory rather than fundamental. Nevertheless, as for previous rounds, it is of course important for projects developers (and their advisors) to consider the specific position of their projects as against both the requirements of the allocation process and the contractual requirements that will apply if a CfD contract is awarded.

The participation of remote island wind will inevitably attract attention as, linked to this, will the ultimate mix of technologies that win support. Depending on where strike prices settle, no doubt the policy debate will continue on the types of technology/projects that should be given CfD support and (of relevance to some technologies more than others) the use of the CfDs with low strike prices to give price certainty as opposed to subsidy.