Contracts for Difference

Harrison Clark Rickerbys

Solar Strategy and EMR

• Drive to increase building mounted solar PV projects on roofs of commercial/industrial buildings

• EMR policy to replace ROC’s with Contracts for Difference( CfD’s)

• Drive to increase the number of Community Schemes

Contracts for Difference (CfD’s)

• What they are

• Who will be eligible

• When they will be available

What is a CfD ?

• A 15 year contract between an eligible generator and a government

owned counterparty

• They are funded by a charge on suppliers

• The generator is paid the difference between a market reference price

and CPI linked contractual strike price ( or pays the counterparty if the

reference price exceeds the strike price)

• Eligible generators will compete for CfD’s

• CFD’s will replace ROCs which will close in 2017

What is a CfD ?

• CFD’s will replace ROCs which are to be closed by 2017

• They will not replace PPA’s

• The implementation timetable and availability of CfD’s will differ for

differing technologies

• There are proposed changes to RO for Solar PV above 5MW that propose

closing RO from 1 April 2015 leaving CfD’s as the prime source of support

• In addition technologies will be allocated budgets and possibly maxima

and minima to control the deployment of differing technologies.

Community Schemes– Proposal for added support for community renewable projects over 5 MW

• In May 2014, DECC launched a consultation (in three parts) on its proposals for FITs for community energy projects:

• Part A. Introduction and estimates of deployment, which explains the importance of community energy, and sets out the current financial support, costs and interdependencies.

• Part B. Increasing the FITs ceiling from 5 megawatts (MW) to 10 MW, which proposes using the power under section 146 of the Energy Act 2013 to increase the maximum capacity for community energy projects for all renewable technologies in the FITs scheme.

• Part C. Combining FITs and grants.

How Does the CfD Work

• The Generator will enter into a PPA agreement

• The Generator will enter into the CfD

• The Generator will be paid for the power under the terms

of the PPA

• The Generator will be paid the difference between the

Strike Price and the Market Reference Price under the CfD

Strike Prices and Reference Prices

• Strike Prices. These are capped by legislation but determined by bidding and are

adjusted for CPI on an annual basis and for certain risks under the CfD

• Max SP(£/MW2012 Prices Solar PV )

Year 15/16 16/17 17/18 18/19

120 115 110 100

• FiT Market Reference Price set by reference to market position

• The generator is paid the difference between a market reference price and CPI linked

contractual strike price ( or pays the counterparty if the reference price exceeds the

strike price)

Strike Price & Reference Price

CfD payments

PPA

• The Generator will also have the option to enter

into a long term PPA agreement or to rely upon

the OLR

• The Generator is guaranteed a backstop form of

PPA through the Offtaker of Last Resort (OLR)

Offtaker of Last Resort

• 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

Implications• The purpose behind the structure as seen by DECC is to allow flexibility with back

stop certainty.

• Generators can raise debt against the OLR and a short-term PPA to maximise their upside potential

• 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

Who will be eligible

• Applicants for CfDs will be required to provide the Delivery Body with

• evidence that the proposed project meets the eligibility criteria, i.e.:

– Qualifying eligible generating station (technology type);

– Non-receipt of funds under other Government support schemes;

– Applicable planning consents;

– Connection agreement requirements (including Private Network

– agreements);

– Statement identifying standard CfD terms and conditions that apply or

– any modifications agreed;

– Inclusion of relevant supporting information;

– [Supply chain plan (only for facilities >300MW)].

CFD Budget Notice• July 2014

– indicative CfD budget allocations released to National Grid for allocation

round one in October set out indicative budgets for Group 1 (including solar)

• September 29th 2014

– legal CfD budget notice as required by the secondary legislation (NB may change

from the July indicative budget)

• October 2014

- Allocation process opens

Allocation Process Timetable

• October 2014

• Allocation opens for applications – expected mid-October 2014

• Deadline for applications + 10 working days

• Dispute Resolution processes (varies)

• Analysis of whether budget allocation is exceeded (varies)

• Sealed Bids invited Circa Mid November 2014

• CfD Award End 2014

• CfD Signature Early January 2015

Pre-Commissioning Obligations• Milestone Delivery Date (MDD)

• Prevents premature application

• Ensures developers demonstrate sufficient financial commitment towards

completion;

– Evidence of Actual spend = 10% of the Total Project Pre-Commissioning

Costs or

– by evidencing contracts are in place for material equipment for

generation/export of electricity, entering an EPC contract and proving

you have the means to finance the projects.

Pre-Commissioning Obligations

• Target Commissioning Window (TCW)

– Encourages timely commissioning and applications with

realistic dates, whilst providing flexibility to projects.

– Each project nominates a commissioning date which is then

afforded a window to allow for variation in delivery.

– The length of the TCW varies and reflects the technical

challenges varying across technology type: 3 months for solar.

Pre-Commissioning Obligations

• Long Stop Date (LSD)

– Encourages timely commissioning and

– applications with realistic dates.

– A point after TCW by which a project must either qualify for

payment or be terminated. Varies by technology. LCC will

need to monitor progress, adjust contract capacity and

consider termination.

Pre-Commissioning Obligations

• Non-Delivery Incentive (NDI) where applicant

• does not sign CfD or

• has contract terminated between Signature and Milestone

Delivery date

• Applicant prevented from making an application until 13

months after contract (should have been) signed

• LCC will decide whether to permit early termination.

Partner

Head of Renewables

Business Services

twillis@hcrlaw.com

01905 744872

07818 410326

Worcester Office

Tim Willis