1. Contracts for Difference: On the Launchpad
9 October 2014
Contracts for Difference:
On the Launchpad
Chris Andrew
© Allen & Overy 2014

2. 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.
The Trilemma, which is the backdrop to EMR, remains, but continues to shift kaleidoscopically.
Security of supply:
Coming off-line significantly faster than DECC expected, leading to the introduction of new balancing services.
Decarbonisation:
Fourth Carbon Budget was affirmed following a review in July. Perhaps more importantly the UK may not have a reviewable target after 2020, with clear implications for the generation mix. EU leaders are expected to finalise this policy later this month.
Affordability:
CPF
Fossil Fuel prices: CfD has different risks. Reference price fell £10/MWh over the summer
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3. Ofgem Electricity Capacity Assessment June 2014
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4. Projected cumulative new capacity 2010 to 2035
Source: DECC Energy and Emissions Projections – September 2014
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5. Electricity Market Reform (EMR)
Contracts for Difference (CfD)
Carbon Price Floor
Enhanced Wholesale Liquidity
Capacity Market
Emissions Performance Standard
“In the new, reformed UK electricity market, the economics of low carbon will stack up like nowhere else in the world.”
“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.”
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6. CfDs Summary Timeline December 2010 - Initial EMR consultation
July White Paper
End Energy Bill
Summer First draft CfD
December Energy Act 2013 receives Royal Assent
April Investment Contracts allocated (4.5GW)
Summer State Aid clearance; final form generic CfD published
October First Allocation Round
2010 was the year my twin children were born. At the beginning of each Christmas and summer holiday since then DECC have kindly dumped at least 1,000 pages of EMR reading to make sure I wasn’t bored.
My children started school last month – that went very quickly! However the CfD has now been given the keys to the door;
as you can see from the bottom row, the first Allocation round will start a week today.
© Allen & Overy 2014
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7. CfDs Implementation © Allen & Overy 2014 2014 2015 Oct Nov Dec Jan Feb
Mar
Apr
May
Jun
July
Aug
Sept
Jul
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
Primary legislation
Royal Assent-subject to will of parliament
Secondary legislation laid before Parliament (timings tbc)
Secondary legislation -Parliamentary process
DECC
Consultation on draft secondary legislation
Secondary legislation amended in light of consultation
Secondary legislation, codes, licences in force
Counterparty / SA
Identify and draft amendments to existing industry codes
Consultation on draft amendments to existing industry codes ( dates tbc)
Amend existing industry codes
Powers conferred on System Operator, Counterparty, Ofgem
System Operator
Industry
FiD for Renewables contract available
FiD contracts signed
Contract Development & drafting
Draft CfD budget published
FiD contracts in force and template CfD contract given legal effect
Revised CfD contract spine published
Modelling & Analysis
Final Delivery Plan published (inc. final strike prices)
Allocation methodology given legal effect
Draft Allocation technical framework published
Collaborative Development
Application and allocation IT system procurement and development
User trials
System Operator publishes application guidelines
Supply chain plan submission and assessment
CfD Applications processed
Industry implementation preparatory tasks
Initial application process live
Preparation of Processes & Systems to support Application
Procure & develop CfD Contract Administration/Management Process & Systems
T&C negotiation/pre application process
Earliest Date for first CfD contract award
Potential earliest date for first CfD payments
Develop 14/15 counterparty business plan
Consultation on op cost budget / levy rate
14/15 op cost levy regs in force
Counterparty expected to begin signing generic contracts
Counterparty has full powers
Publish 14/15 operational cost recovery levy
14/15 op cost levy regs laid
FiD contract management and generic contract management when signed
Counterparty setup team in place
User testing
Procure & develop CfD settlement systems
15/16 op cost levy regs in force
15/16 op cost levy regs laid
Procure, develop and implement forecasting model
Forecasting model integration
Consultation on op cost Ivey rate
Publication of 15/16 op cost levy rate
Develop systems for associated BSC changes
Publication of 15/16 unit cost fixed rate
Preparation of Processes & systems to Settlement & Payment/Billing
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8. 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).
Government has announced that LCCC is “intended to be the only CfD Counterparty for the foreseeable future”.
Offshore wind has flexibility for unregistered turbines.
RO to close to new solar >5MW from 1/4/2014
Expand on grace periods
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9. CfD – Strike Price
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10. 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 2014
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11. CfD Strike Prices (First Delivery Plan – December 2013)
Technologies with Over 1 Gigawatt of Potential Deployment
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
1.7 – 3.4
[6]GW
Hydro 1
100
c. 1.7
Offshore Wind 2
155
150
140
8 – 15
18GW
Onshore Wind 95 90
11 – 13
13GW
Large Solar Photo-Voltaic
120
115
110
2.4 – 41
7-20GW
Dedicated Biomass (with CHP)
125
c. 0.3 – 0.6
Energy from Waste (with CHP) 80
c. 0.4
N.B. The relevant year is defined by a project’s Target Commissioning Date.
1 Additionally DECC forecast 7.5GW small scale FIT PV
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12. 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.
Generic
Phased – Single Metering
Phase – Apportioned Metering
Private Network Generators
SoS may revise CfD terms for a subsequent Allocation Rounds (but existing CfDs unaffected).
T&Cs are 300 pages.
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13. 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
Minor & Necessary Changes
A generator can submit any changes to the standard terms contract, if it believes they are minor and necessary, to Low Carbon Contracts Limited.
The Contracts for Difference (Standard Terms) Regulations determine Minor and Necessary changes. The effect of a modification is not minor where:
It would be likely to decrease the liabilities of a generator under a CfD
Increase the commercial benefit for a generator of a CfD
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
It affects payment periods, milestone dates, payment calculation methodologies, invoicing and payment time limits, collateral provisions
A modification is necessary where an applicant acting reasonably could not accept the offer of a CfD without the modification. The CfD will take into consideration whether other projects of a similar nature or with similar characteristics regard the change as necessary.
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14. CfD Payment Period
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
I don’t propose to talk much about the CfD terms today, but we do need to understand about timing.
TCW:
12 months from date submitted by Generator except for PV (3 months) and landfill gas.
TCD:
Date with the TCW submitted by Generator.
Longstop Period:
12 months except:
6 months for landfill gas
24 months for offshore wind, tidal range, tidal stream and wave.
Time extensions for FM and delay in connection works (other than due to generator fault).
© Allen & Overy 2014

15. Levy Control Framework (LCF)
LCF limits levy-funded policies (HMT view these as tax)
4.5GW of investment contracts (2/3 offshore wind): Public Accounts Committee calculates these as taking up 58% of the available budget for renewables to 2021
Capacity mechanism will be included in the LCF but as a separate budget in addition to the budget for low carbon electricity
FCFS not now contemplated; there will be allocation rounds – to be awarded a standard CfD it will be necessary to participate in an allocation round.
Source: GL Garrad Hassan
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16. Overall CfD Budget and “Pots”
Total support payments available in a given year
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
Pot 1 (established technologies) 65
Pot 2 (less established technologies) -
155
235
Overall CfD Budget and Pots
For each Allocation Round, the SoS is required to issue a budget notice.
DECC recently announced the final budget for allocation in the first auction for CfDs starting this month (together with the RO for 2015/16). The Budget was increased from the indicative budget announced in July to up to £300m.
Note these figures are in 2012 prices (being the same basis as the strike prices), so are about 7% below todays prices.
Budgets are divided by Delivery Years. Note also that we do not have strike prices for Delivery Years after 2018/19, so there is no allocation for those years in this round.
The budget is divided into a number of pots with which technologies and projects are prospectively competing with each other; there may also be maximum and minimum limits for a technology within a pot.
Those who are unsuccessful required to convince boards and investment committees to continue investment ahead of next allocation round
Biomass conversion plants will be included in a separate pot (3). DECC have stated that this pot will be subject to competition and that the reasoning behind this move is to ensure competition is maximised in Pot 1, as biomass conversions would have otherwise disproportionately used the available budget allocated to Pot 1. Note also an individual State Aid notification will be required for biomass conversion projects.
10MW minimum for Wave/Tidal Stream.
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
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17. 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
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18. 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
150
Biomass conversion
Solar Photovoltaic*
120
Wave‡
305
Energy from Waste with CHP 80
Tidal Stream‡
Hydro†
100
Advanced Conversion Technologies
Landfill Gas 55
Anaerobic Digestion*
Sewage Gas 75
Dedicated biomass with CHP
125
Geothermal
145
Note I have chosen different Delivery Years for Pot 1 and 2. For a project its Delivery Year is that in which its Target Commissioning Date falls.
Government expects both pots to be competitive.
Pot 1: Can PV complete with onshore wind?
Pot 3: No budget – State Aid?
* (>5MW)
† (>5MW and <50MW)
‡ (0-30MW)
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19. 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:
meet Eligibility Requirements
not be an Excluded Applicant
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
Eligible: statutory list of low carbon technologies
Supply Chain
Projects of 300MW and above will need to send a copy of their Supply Chain approval Certificate that they have received from DECC
In order to receive a Supply Chain Approval Certificate, generators will need to submit a Supply Chain Plain to DECC, which sets out the details of the project: completion/innovation/skills.
Supplemental requirements for phased offshore projects
Projects can have up to 3 phases, but these must aggregate to no more than 1500MW
Initial Installed Capacity for Phase 1 must be at least 25% of the total capacity of all phases
First phase to have a Target Commissioning Date no later than 31 March and last phase to be no later than 2 years after Target Commissioning Date of first phase
Excluded Applicants
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.
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20. 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
Connection agreements
The evidence required to satisfy this criteria depends on which of three connection types applies to the project in question:
Direct Connection – this is a connection to transmission or distribution system whereby all power is to be exported to the transmission or distribution system – evidence required: agreement(s) for connection with TSO and/or /DNO for at least 75% of the capacity
Partial Connection – connection to transmission or distribution system via a Private Wire Network Operator with only part power to be exported to transmission or distribution system – evidence required: Private Network Use Agreement(s) and agreement(s) for connection with TSO and/or /DNO
Islanded CfD Unit – connection of Private Network Generator to Private Wire Operator but no connection of this Private Wire Network Operator to the transmission or distribution system – evidence required: Private Network Use Agreement(s) and confirmation that no connection agreement applies or is to apply
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21. 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
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22. 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
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23. 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
Qualification – Determination
Submitted applications assessed by Delivery Body after application window for CfD has closed
Delivery Body has 10 days to decide whether an application qualifies and to notify each applicant as to whether their application is a qualifying application
Where non-qualifying, Delivery Body will provide reasons for that decision
Qualification – Request for Review (Tier 1 appeal)
To review the Delivery Body’s decision, non-qualifying applicants may give the Delivery Body a Review Notice within 5 working days. The applicant cannot submit any new evidence but can clarify the original evidence.
The Delivery Body has 10 working days from the date of the review notice to reply to the Applicant.
The Delivery Body will send the Applicant a non-qualification review notice which either overturns or upholds the original decision and gives reasons for this decision.
Qualification – Request for Appeal to Authority (Ofgem) (Tier 2 appeal)
Applicant submits Appeal and Review Documents to the Authority within 5 working days
The Authority has 30 working days to respond
The Delivery Body will make an appeal statement to Ofgem
Authority can overturn or uphold the original decision and will provide reasons for this decision.
Qualification – Appeal to High Court (Tier 3 appeal)
The applicant has 28 days from the Authority’s date of determination to appeal to High Court
High Court could ask Authority to reconsider its decision or direct Delivery Body to reinstate the applicant as a Qualifying Applicant
Implications for timetable: 30 BD stay then excluded (but may submit conditional bids).
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24. Allocation Process (2)
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
Top-up Payment
General conversion
factors
Technology specific
factors
Allocation
Once qualification has been completed, the Delivery Body will proceed with the valuation of the applications and the allocation of CfDs.
Applications Valuation and Auction Decision
Valuation is on a “per Pot” basis. No transfers of “unused” pots.
The Delivery Body will use the valuation formula set out in the applicable Allocation Framework to value all Qualified Applications and send Valuation report to SoS. SoS has 5 BD to increase the budget (and maxima/minima, provided headroom is maintained) if desired
Valuation formula:
Top-up payment (administrative strike price minus specified reference price) x general conversion factors (e.g. transmission losses, hours to days) x technology specific factors (e.g. load factors) x capacity (in MW)
Additional multipliers for dedicated biomass CHP and EfW CHP.
A Year One Factor will pro rate a project’s first year to reflect its TCD. The exception is a final phase of a phased project which has a TCD in 2020/21, which will have a Year One Factor of 1 to avoid overspend in subsequent years.
Phased offshore projects will be valued based on the TCD of each phase at a single strike price.
Delivery Body will compare aggregate value of all qualifying applicants for each delivery year with the applicable budgets for each technology pot and any minima or maxima limits to determine if there is a requirement for an auction.
Capacity
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25. Allocation Process (3)
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
Unconstrained allocation
Where no auction is necessary the relevant, qualifying applications will be offered a CfD at the prevailing Administrative Strike Prices.
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26. Allocation Process Decision Tree
Minima first (sealed bids if necessary); unused minimum is available for the relevant pot.
There is a 100MW minimum threshold for wave and tidal stream across ROCs and CfDs, for the duration of the Delivery Plan. Unassigned minima will be available in a future allocation round.
Then main auction for a pot.
Maxima (none in this Allocation Round): sub-limits in main pot, but could have a separate bidding round.
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27. 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
Constrained allocation (auction)
Where an auction is necessary, the Delivery Body will issue a Notice of Auction to all relevant Qualifying and Pending Applicants, inviting the submission of sealed bids.
Applicants have 5 working days to submit their sealed bids, which set out the strike price they are willing to accept, together with the Target Commissioning ate and Target Commissioning Window start date for each bid. Investors need to know in advance what their strategy will be in an auction.
The sealed bids cannot exceed the relevant Administrative Strike Price.
During the auction, all projects in the same pot will compete on strike price basis, regardless of delivery year. Projects will be awarded in order of lowest to highest strike price (irrespective of technology or delivery year). The project that would result in the budget for the pot being exceeded will not be successful. A Project will be paid the clearing price set by the most expensive, successful project in the applicable delivery year, capped at the relevant Administrative Strike Price.
Tie breaker – if 2 projects are tied on the same strike price bid, the first rule is to make the best use of the available budget, so the project which comes closest to fulfilling (but not breaching the budget) will be accepted.
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28. Auction Mechanism High Level Decision Tree
Each delivery year in the auction will have its own clearing price.
Note that accepting a higher ranked bid will revalue the clearing price for previously accepted bids in the delivery year and this must be taken into account in the affordability calculation.
When a project in a delivery year is unaffordable, the auction will cease considering further projects in that year (irrespective of affordability). The auction will continue until all delivery years are closed or there are no more bids.
The exception is flexible bids which we will come to in a moment; but first an example.
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29. Illustrative Auction Results
The projects are ranked by strike price bid.
The lowest strike price bid project in any year (project A) is considered first.
The highest accepted strike price bid in any year sets the clearing price for that year.
The amount paid to any project is capped at its Administrative Strike Price (ASP). For example, the clearing price for 2016/17 is £119/MWh, but project A is capped at £90 (its ASP), and project E is capped at £110.
Once a project has been rejected in a given year, no more projects for that year are considered. For example, project F has been rejected, so project H is not considered.
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30. 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
Generators may be in a position to submit flexible bids. These are mutually exclusive.
If bid would not be affordable at its initially envisaged capacity, there could be an alternative bid with reduced capacity or a different delivery year.
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31. Flexible Bid High Level Decision Tree
If a bid from an application is unsuccessful as it is unaffordable, the auction will assess whether the application includes flexible bids.
If such a flexible bid exists in the same delivery year it must be the sole next lowest strike price for it to be considered. (Flexible bids may be submitted to the nearest 0.1 pence rather than the normal 1p).
If a flexible bid is accepted all further flexible bids from that application will be removed.
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32. 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
Independent audit
The Delivery Body must ensure that the Valuation and Allocation calculations are independently audited. After the allocation process the Delivery Body will instruct the Independent Auditor to carry this out. The Independent Auditor’s role is to verify the Delivery Body’s use of the valuation rules, allocation rules and applicant details, and an audit report will then be produced which sets out whether, in the Auditor’s opinion, the allocation process was carried out accurately.
Secretary of State Allocation Review
SoS will have 2 days from receipt of notification from the Delivery Body to review the Auditors Report with the Delivery Body’s recommendation, to determine if the Allocation process must proceed to notification, re-run or be terminated. If the SoS does not reply within that 2 day period, the Delivery Body will proceed on its recommendation
 CfD Notification
The Delivery Body will notify each qualifying applicant as to the success of their application, at the end of the allocation round.
A CfD notification will be sent to all successful applicants, which will set out the final strike price, the successful allocation capacity, the Target Commissioning Date and the start of the Target Commissioning Window, and all information required by the CfD Counterparty to enter into the CfD. A CfD notification will also be sent to the CfD counterparty.
The Delivery Body will also notify each unsuccessful applicant with its reasons for reaching such a decision.
Finally, the Delivery Body will complete the CfD allocation process by publishing an Allocation Round report (which will include details of all CfDs entered into in that round) and an Appeals Register where applicable.
The CfD will then be entered into between Low Carbon Contracts Company and the generator, either on the Standard Terms or the modified terms.
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33. CfD Allocation Timetable
Stage
Expected Date (without appeals)
Latest Expected Date (with appeals)
Allocation Round Commencement Date
16 October 2014
Application Closing Date
30 October 2014
Deadline for DB to assess eligibility of applications
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
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34. 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’
Draft budget notice July 2015
Budget notice September 2015
Note that the budget may need to accommodate the CCS commercialisation projects, though new nuclear will be later.
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35. 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?
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36. CfD Generator Journey - Overview
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37. 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:
Milestone Delivery Date
Longstop Date
Projects above 30MW
Up to 25%
Up to 5%
Projects up to 30MW
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 15%
Milestone Delivery Date is 12 months from the date of the CfD.
The CfD Counterparty may terminate if the Generator has not then spent 10% of total project pre-commissioning costs and/or entered into other qualifying commitments.
Also ability to adjust capacity in response to certain geological and other conditions
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38. 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
Disincentive: If generator does not accept a successful bid, may not re-apply until after what would have been the Milestone Delivery Date
SO: EII exemption
Subject to State Aid
Exemptions for imported renewable energy
DPs: CfD strike prices; CM
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39. A&O EMR site http://www.allenovery.com/UK-Electricity-Market-Reform
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40. 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.
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41. Contacts Chris Andrew Allen & Overy Email: chris.andrew@allenovery.com
Tel:
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