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UK PROTECT – COMMERCIAL

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APPENDIX B – PROPOSED CFD VARIATIONS

SWANSEA BAY TIDAL LAGOON PROJECT

CONTRACT FOR DIFFERENCE – FINAL OFFER

1. BACKGROUND

1.1 The Swansea Bay Tidal Lagoon project (“Swansea Bay Tidal Lagoon” or the “Project”) has a number of features which make it unique – it is a long-term asset, first-of-a-kind project. As the pathfinder project to a fleet of UK lagoons Swansea Bay Tidal Lagoon represents the financing of a new asset class and discussions are taking place against a backdrop of uncertainty about the direction of Government's energy policy.

1.2 Swansea Bay Tidal Lagoon has taken the generic CfD and set out proposed amendments to maximise the value-for-money of a 120-year asset by insulating the Project from financial market movements that are outside the control of the Project and thereby facilitating long-term project finance (Paragraph 2 – Protection from financial market volatility).

1.3 HMG officials have also asked Swansea Bay Tidal Lagoon to give more detail on the risks that the project faces, the potential impact of the risks and the proposed amendments to the generic CfD for those risks where the Project is seeking additional protections (Paragraph 3 - Key risks and reasons for seeking CfD protection).

1.4 The tables below set out more detail on how these changes would be implemented in the legal documentation, by describing what amendments would be required to the generic CfD. The tables are split into key changes to the commercial terms of the CfD (Paragraph 4) and process / mechanical issues (Paragraph 5).

2. PROTECTION FROM FINANCIAL MARKET VOLATILITY

2.1 Project finance debt for infrastructure assets typically has a tenor commensurate with the length of the support mechanism. In the case of Swansea Bay Tidal Lagoon, a 90-year CfD is requested to maximise the value of a 120-year asset. The financial markets do not have sufficient liquidity to be able to provide the Project with 90-year debt, whilst ensuring such debt is competitively priced. As such, Swansea Bay Tidal Lagoon recommends that the most efficient financing of the Project will be achieved through short-term construction debt, followed by rolling long-term debt (typically 10 – 30 year tenor), with the debt amortising towards the end of the CfD term.

2.2 In order to facilitate construction debt and then long-term rolling debt, each achieving an investment grade, the Project will require certain protections in the CfD to insulate the Project from financial market volatility, which is outside the control of the Project, and thereby preserve sufficient cash flows available for debt service.

2.3 The proposed amendments includes some pain/gain for the Project around the protection benchmarks in order to incentivise the Project to achieve the best cost of financing available at each refinance.

2.4 The CfD will need to be amended to take into account these proposals following detailed discussions between the Project and HM Government officials.

2.5 This will require a detailed mechanism, and full drafting will need to be discussed subsequent to submission of the BAFO to ensure that all aspects of the mechanism are agreed in full. Any changes to the cost of debt which are not passed through to the CfD counterparty will need to be considered in particular detail. These are likely to be a key bankability points.

2.6 The costs of debt proposals presented to HMG are based on several assumptions, and in particular it is currently assumed that the project will be able to achieve an investment grade rating with the CfD protections described below. If this is not achieved, then TLSB would need to revisit its BAFO proposal and revisit with HMG the protections in the CfD and whether either (i) amendments could be made to secure an investment grade rating; or (ii) it would be appropriate to amend the cost of debt mechanism so that it reflects the actual financing assumptions and is a straightforward pass through of the cost of debt on that basis.



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3. KEY RISKS FOR WHICH CFD PROTECTION IS SOUGHT

3.1 We set out below the key risks for a tidal lagoon in the operational phase for which protection is sought in the CfD. These either (i) are exclusive to tidal lagoons; or (ii) may be difficult to finance due to the magnitude of the risk or due to the risk being outside the Project's control.

3.2 We seek the following protections in the CfD:

3.2.1 Costs of debt (Paragraph 2)

3.2.2 No-fault shutdown:

(A) Pure political decision: There is a risk that legislation could be passed to partially or fully shutdown tidal lagoons or expropriate the Project's assets; and

(B) Economic shutdown: for example, where new environmental legislation makes it prohibitively expensive to continue operating tidal lagoons. Examples might include restrictions on how or when the lagoon could be operated in order to protect marine mammals – these could require additional capex or lead to reduced revenues if the tidal lagoon cannot generate at currently expected levels when available.

3.2.3 O&M costs:

(A) New HSE legislation: Requirements could be introduced which result in increased costs or reduced revenue for the project. For instance, TLSB may be required to perform more frequent dredging or use different (more costly) techniques, make other changes to the maintenance regime, or employ a larger workforce and comply with wider reporting / monitoring obligations.

3.2.4 Change in Law or market arrangements could increase TLSB's costs or decrease its revenues:

(A) Changes in TNUoS charges / Triad methodology: Swansea Bay Tidal Lagoon could be negatively affected if there are changes to grid arrangements in relation to TNUoS charges or changes are introduced affecting the ability of the Project to avoid Triads. Note that these mechanisms are not within Swansea Bay Tidal Lagoon’s control and are not protected through the generic change in law clause; and

(B) Changes in the treatment of debt interest: Swansea Bay Tidal Lagoon is aware of a recent proposal in relation to Base Erosion and Profit Sharing provisions (BEPS) which would affect the proportion of interest on debt financing which is tax deductible. There is insufficient visibility on the final form of this legislation to conclude at present whether the Project would fall within an exemption. If the Project is not able to avail itself of an exemption this would have significant negative financial implications for the project.

3.2.5 Specific operational costs / revenues which may not be fully compensated by partial inflation and not otherwise protected by the CfD:

(A) Business rates payable to the local authority: Swansea Bay Tidal Lagoon will not be certain about how the project will be treated for the purposes of business rates at the time of signature of the CfD. Depending on whether the installation is treated as onshore and offshore (and depending on future changes in law) the modelled costs may be significantly different to the actual business rates in the operational phase.

3.2.6 Uncertain / unexpected capital costs in the operational phase:

(A) New HSE legislation: For example, requirements could be introduced that require TLSB to modify the sea wall, the turbines or onshore installations. In these circumstances, the Project would need to incur (and finance) the additional capex.

3.2.7 Loss of revenue due to future tidal or other marine infrastructure/energy projects:

Future tidal or other marine infrastructure/energy projects may affect tidal flows and have an impact on the output of Swansea Bay. The CfD pays a top up to the market price based on actual output, not on the assumed output today, meaning that Swansea Bay Tidal Lagoon's revenues could decrease significantly if future projects are commissioned which negatively affect tidal flows. Where these projects are developed by affiliates of Swansea Bay Tidal Lagoon, it will be possible to enter into arrangements which provide cross project compensation on a fair basis, and which provide lenders with sufficient comfort about the robustness of the Project’s revenues. However, Swansea Bay Tidal Lagoon has no control over which projects developed by third parties are consented and on what terms. Other competing tidal lagoon operators could construct projects in



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future and there is no mechanism to compensate Swansea Bay Tidal Lagoon for any adverse effect on its revenues.

3.2.8 Loss of revenue due to curtailment:

Swansea Bay Tidal Lagoon is at risk of reduced revenues if market arrangements in relation to grid balancing are changed adversely in future (which is widely expected by market participants) or if the frequency of (uncompensated) emergency de-energisation orders from National Grid or DNOs increases when there is a larger proportion of intermittent generation on the system.

3.2.9 Cardiff Payment

Swansea Bay Tidal Lagoon is at risk of increased debt servicing costs if the Cardiff Tidal Lagoon does not receive the necessary consents or is not awarded a CfD, and the linked payment is not forthcoming;

3.3 Swansea Bay Tidal Lagoon believes that specific adjustments to the CfD strike price are better than alternative approaches because:

3.3.1 these risks and events may or may not materialise, and the financial impact of their materialising may be to increase costs or reduce costs. Specific adjustments are therefore likely to deliver better value for money than pricing contingency into the Strike Price; and

3.3.2 the stable, predictable returns should support an investment grade rating which both TLSB and (we believe) HMG would like to see in order to achieve a lower cost of capital.

3.4 Swansea Bay Tidal Lagoon is therefore proposing a mechanism to adjust the Strike Price (upwards and downwards) where risks materialise for which the Project has been given protection. Swansea Bay Tidal Lagoon understands that any adjustments will be subject to de minimis amounts, timing limitations and appropriate processes.



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4. KEY COMMERCIAL ISSUES

No. Clause / Subject Action Justification

A. CFD AGREEMENT

1. General The agreement has been made into a deed. This is to avoid risk of legal invalidity (owing to lack of consideration prior to the Start

Date), which is of concern in the context of Government's policy changes. Otherwise,

this amendment has no impact on the substantive rights and obligations set out in the

agreement.

2. Payment Calculations: Strike Price (Clause 9.2)

We propose the Initial Strike Price as £[xx]/MWh

2012 values.

This reflects the financial model submitted to DECC.

B. TERMS AND CONDITIONS

B.1. DEFINITIONS AND PROVISIONS

3. "Change in Law" Marked for further discussion. TLSB considers that the generic CfD change in law regime needs amendment to reflect specific risks to which the

Swansea Project is exposed. For instance:

(a) Specific Changes in Law

The generic CfD does not offer any protection to TLSB for 'specific' changes in law – as there are no other tidal lagoon projects, the

protection offered by the generic CfD is too limited for a long term first of a kind project.

It will be helpful to have a detailed discussion on the specific risks which are of concern to TLSB (as previously flagged to DECC): flooding,

environment, Severn estuary issues, shipping and port entry are (non-exclusive) areas of concern.

For instance, TLSB considers itself to be at risk where there is a change to laws or regulation in relation to health, safety and environment

which has a disproportionate effect on the operation of tidal lagoons (in comparison to offshore wind generating facilities) and results in

increased costs or loss of revenue (or adversely affects availability). This risk is further heightened owing to the term and the bespoke

FOAK nature of the project.

TLSB considers that this risk can be addressed by protection for changes in law which apply to / have a disproportionate effect on the

operation of tidal lagoons (please also see the letter from TLSB to Hugo Robson on 1 April 2015).

(b) Base Erosion and Profit Sharing provisions (Interest Expenses)

TLSB considers that the proposed new rules for addressing BEPS through interest expenses as announced by Government in its budget

announcement for 2016 (and proposed to be introduced in rules applicable from 1 April 2017) are unsuitable and will have a significant

adverse impact on the project.



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As the TLSB CfD will be entered into prior to the Rules coming into force, it will be helpful to clarify in the Change in Law provisions that

TLSB will have particularly in relation to interest deductability.

(c) Foreseeable Changes in Law

TLSB notes the latest DECC consultation on amendments to the generic CfD proposes certain amendments to the formulation of

Foreseeable Change in Law which have the principle objective of widening the scope of Foreseeable Change in Law (and reducing the

Change in Law protection available to the generators).

Government is proposing that if there is a change in law – resulting from a judicial review of a planning consent – after a CfD is signed,

then that should also be deemed as a foreseeable change in law. This is contrary to the policy / drafting set out in the current draft of the

generic CfD (given the change in law was not foreseeable on or before the Agreement date).

Government is also proposing that any proceedings against a competent authority in relation to a required authorisation (for the project)

should be a foreseeable change in law. This may be acceptable at a principle level, but the relevant competent authority should bring any

such proceedings to the attention of the generator prior to the Agreement date (note as the generator is not the defendant in a judicial

review claim it will not be aware of such proceedings unless the competent authority informs it or it becomes public knowledge).

4. "Default";

Termination Events (Condition 53)

The Termination Event relating to fraud has been

deleted from the list of termination events in

Condition 53.

TLSB believes it is inappropriate for a subjective trigger not based on imputability to the

Generator or conviction for fraud to give rise to termination. This point has been

specifically raised by the banks and their concerns will be increased the longer the term

of the CfD.

5. "Financing Arrangements";

"Finance Cover Ratios"; and

"Trigger Events"

Amounts Payable (Condition 1.16)

Payment scheduling for compensation should take

into account the Generator's obligations/debt

repayment profile under its financing arrangements.

The significant discretion which is available to the CfD Counterparty in how to pay

compensation creates a risk of TLSB breaching its finance documents: if the CfD

Counterparty decided to pay compensation on an instalment basis / on a payment profile

of its own choosing, TLSB may be in default of finance cover ratios. This interacts with

the affordability discussion – the lower the cover ratios the greater the concern on this

point.

6. "Force Majeure" TLSB does not agree with the proposals set out in the

latest Government consultation on the Generic CfD

(on a time limit for extensions owing to a Force

Majeure event).

TLSB notes that Force Majeure events are – by definition – events over which generators

do not have any control and introducing such an 'extension cap' will be detrimental to the

interest of generators.

We understand Government's concern is around the LCF budget being 'blocked' owing

to projects with prolonged delays. However, we think introducing such an 'extension cap'

will be a blunt instrument to address that concern – instead, such issues may be better

resolved practically by discussions between Government and developers / by changes to

the LCF budget rules.



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7. "Qualifying Shutdown Event"

Permanently (Condition 1.12)

Amendments to the definition. Interpretation of

"permanently" marked for further discussion.

Concern about QSE is heightened by changes in energy policy. The level of protection

offered by the generic definition is low. Greater protection is needed to give sufficient

confidence to stakeholders in a long term first of a kind project.

Also, the use of 'permanently' (in assessing political shutdown) is a concept developed in

HPC, where permanence is easier to measure because of the nature of nuclear

technology and the interface between shutdown and accessing the FDP. Here, it would

give greater certainty to define 'permanently' by reference to a number of months.

8. "Rateable Value Assessment"

Propose to reset at the first rating assessment after

the CfD Start Date and then again if TLSB is

assessed as onshore at any time.

Practically, the Generator cannot get certainty about rateable value at the time of

signature of the CfD and finalisation of the Financial Model and it is possible that the

business rates assumed in the original financial model (used to calculate the Strike Price)

may be significantly different to the actual business rates in the operational phase. This

would have a significant cost impact on this project (and is a lender bankability concern

as well as an equity concern) – TLSB has proposed a reset mechanism to address this

risk.

9. "Specific Change in Law"

For discussion. We will need to consider with you the application of this definition as there are no similar

projects (i.e. the current formulation does not offer TLSB any protection). Please also see

sub-paragraph B.1.3 above.

10. "Specified Expiry Date"; and

"Term"

The Generator is seeking a 90 year term. A 90 year term is proposed to reflect the long term nature of the project.

11. Strike Price Adjustments (Condition 20)

TLSB is seeking: (i) partial indexation at [34]% of CPI

to year 40 operations and 25% thereafter; and (ii)

Strike Price adjustment in relation to the cost of debt.

Amendments will need to be included to reflect the proposal for indexation of CPI at [34]%

to year 40 of operations and 25% thereafter and to reflect the proposed cost of debt

mechanism (once agreed). Also, the provisions of the Strike Price adjustment

mechanism are linked with the Term of the project. We note that the details are still being

discussed between us and Government and please see paragraph 2 above .

12. Qualifying Change in Law: Procedure (Conditions 33.4-33.6, 33.9-33.11, 36.4-36.5, and 36.9-36.10)

Process amends in revised draft. A clear process with defined timelines is needed in the context of a long term project with

a first of a kind technology in order for equity and debt providers to be confident that this

mechanism delivers compensation. Process clarity is required on when a party can ask

for additional information and what happens if a party does not respond to a notice on

time. If no consequences are specified, then there is simply process failure and,

practically, this means there is a block on obtaining compensation (even if the tests are

met).



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We would welcome the opportunity to discuss with DECC.

13. Qualifying Shutdown Event: Procedure (Condition 37)

Clarificatory amends inserted. We believe it is helpful to clarify aspects of this procedure so that equity and debt

providers are confident about a clear process with defined timelines in the context of a

long term project with a first of a kind technology and the context of Government's policy

changes. The Generator's obligation to mitigate should be clarified so that it cannot be

argued to extend recommencing generation; (ii) a structured mechanism to provide

information needs to be set out; and (iii) QSE proceedings should be settled in the Courts.

14. Qualifying Shutdown Event: Compensation (Condition 37A)

Drafting inserted. The basis for calculating political shutdown compensation should be the net payments

which, but for the political shutdown, would have been received by the generator. This is

at the core of the concept of compensation – that the innocent party receives its losses.

Again, the process should set out clear timelines on the provision of information and

response deadlines and that any dispute as to the compensation amount should be

submitted to an expert for determination. TLSB is seeking this change to the generic

terms in the context of a long term project in a first of a kind technology and in the context

of Government's policy changes.

We would welcome the opportunity to discuss with DECC.

15. Adjustment in relation to exceptional operational phase costs

TLSB suggests a mechanism to adjust the Strike

Price to reflect the actual costs incurred / actual

revenues received during the operational phase

when exceptional events occur.

Given the long-term first of a kind nature of the project, TLSB believes costs and revenues

in the operational phase should be reviewed when exceptional events occur and that

subject to: (i) a de minimis cost level (i.e. no compensation unless the costs exceed a

specified threshold); and (ii) a de minimis time level (i.e. TLSB takes the risk for a specified

number of years from the date of commercial operations), identified increases or

decreases should lead to a Strike Price adjustment.

TLSB accepts that it cannot claim costs arising from any issues within its control. It will

be helpful to discuss further.

16. TNUoS / Triad Charges

TLSB requires cover for increases to the level of

TNUoS charges / changes adversely affecting

TLSB's ability to avoid Triads.

Similar to the protection for the BSUoS and TLM charges, TLSB also required cover for

any future increase to the TNUoS charges / changes adversely affecting TLSB's ability to

avoid Triads. TLSB notes that DECC had decided not to provide cover for these charges

in the generic CfD on the basis that "these charges have very large locational elements"

(and therefore DECC was of the opinion that CfD holders had some ability to manage the

risk of TNUoS charges). However, we note that TLSB had no ability to manage this

particular risk given the nature / location of the Swansea project.



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Mechanically, the front-end CfD Agreement can set out the base TNUoS charges used

in the calculation of the Strike Price and changes to that base value can be compensated

though a Strike Price adjustment mechanism.

17. Curtailment TLSB requires protection where the existing industry

curtailment arrangements (or the effect of such

arrangements) are changed so that TLSB is no

longer effectively compensated for curtailment.

TLSB does not consider that the current curtailment cover formulation in the generic CfD

is adequate as the protection only applies where there has been a formal change in law

– this is not likely to be the case given that the industry arrangements which curtailment

mechanisms sit below the level of law.

This exposes TLSB to risks such as changes to grid balancing market arrangements /

increasing use of emergency de-energisation instructions from National Grid which

results in TLSB not being adequately compensated when curtailed. Over a 90 year term

this represents a bankability risk.

To be effectively protected, TLSB needs curtailment cover for changes to, or to the effect

of, industry arrangements applicable at the date of the CfD.

18. Future Tidal /Marine Infrastructure Projects

TLSB requires protection where future tidal/marine

infrastructure projects (not developed by TLSB or

any of its affiliates) adversely affect TLSB's

generation ability.

As noted earlier, future tidal/marine infrastructure projects may affect tidal range and have

an impact on the TLSB's generation ability.

TLSB will be able to discuss and enter into mitigation arrangements if there is any adverse

effect on the Swansea Bay project owing to future tidal projects developed by TLSB (or

its affiliates). However, if there is any adverse effect on the generation ability of the

Swansea Bay project owing to a tidal/marine project developed by another party then for

TLSB to be financeable lenders will need to be paid compensation.

19. Intellectual Property Drafting inserted. Because tidal lagoons are first of a kind, the intellectual property issues are more sensitive

than in projects with more established technologies.

TLSB proposes that the requested IP rights are modified for the first ten years of the

operation of the CfD. At all times however TLSB needs the IP provisions to recognise

that TLSB can only make available to LCCC the IP derived from third parties that it is

entitled to make available.

20. State aid provisions TLSB requests further clarity on the status of the State aid notification process regarding the Swansea project and notes that the State aid process for the Swansea project is separate from that for the generic CfD. However, in any event TLSB notes that it does not agree with DECC's latest proposals on the generic CfD State aid provisions:

a) Obligation to repay 'State aid'



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Government is proposing a hard obligation on developers to repay any 'additional' State aid (i.e. additional to the CfD).

TLSB notes State aid is not a defined concept. It is generally understood to mean 'any advantage' granted by public authorities. An 'advantage’ can take many forms. This new obligation will create uncertainty and potential long-term risk of some benefits being found to be State aid (and note that – given the lack of clarity – the CfD Counterparty can argue that a wide range of benefits are State aid). At the very least, the repayment obligation should be triggered by a Commission decision.

b) Certification that all State aid has been repaid

Government is proposing that as new initial / operational conditions precedent, the generator has to certify all State aid received in respect of the project (and that such State aid – excluding under the CfD – has been repaid).

TLSB notes that failure to meet the conditions precedent by the relevant deadlines specified in the CfD entitles the CfD Counterparty to terminate the CfD. As noted above, what is 'State aid' is unclear (introducing new termination risk for developers). Further, note that all conditions precedent have to be evidenced by the generator in 'form and content satisfactory to the CfD Counterparty (acting reasonably)' – providing the CfD Counterparty even greater flexibility to argue that a certain benefit is State aid).

c) Suspension of CfD payments

Government is proposing: (i) to suspend CfD payments until such additional State aid is repaid (along with interest calculated on such State

aid – as determined by the CfD Counterparty under the CfD); and (ii) when such State aid has been repaid, it will pay the suspended CfD

amounts but without any interest (and can stagger the payments at its discretion).

TLSB notes that such interest on State aid is determined by the CfD Counterparty. It is unclear if such interest is additional to any interest

which may have been separately negotiated between the developer and the State aid provider / agreed by the EC. Also, Government is

indicating that the CfD Counterparty becomes the primary creditor in respect of all State aid extended to the project (notwithstanding the

identity / terms agreed with the entities actually extending State aid or EC approval) – query if that is the policy intent?

B.2. SCHEDULES / ANNEXES

21. Annex 2 (Change Control Procedure) - general

Annex 2 (Change Control Procedure) has been

deleted.

The Change Control Procedure allows the CfD Counterparty to implement unilateral

amendments. Such rights are inappropriate for a project-financed agreement which has

been bi-laterally negotiated and TLSB is of the view that this annex should be deleted.



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5. PROCESS ISSUES


A. CFD AGREEMENT

1. General The Background has been amended to reflect that the CfD will be

entered into following a Secretary of State direction.

The standard wording does not apply as this CfD is not being entered into

following the Generic CfD allocation process.

Non-relevant drafting in relation to baseload / other technologies

has been deleted.

The facility will be an intermittent ocean energy tidal lagoon project. To

streamline drafting, we have deleted all wording which applies only to

baseload / other plants as they are not relevant.

2. Conditions Precedent and Milestone (Clauses 5.1- 5.3)

The Initial Target Commissioning Window has been proposed as

[5] years commencing on [●].

The Target Commissioning Date has been proposed as [●].

The Longstop Period has been proposed as 4 years.

We understand the purpose of the Target Commissioning Window and

Longstop Date (and Milestone Delivery) to be that developers do not apply

for CfDs in relation to projects which have no real prospect of development

not to set subjective timescales (with penal consequences) for the delivery

of such projects.

Given the bespoke and unique first of-a-kind nature of the project, and its

financing structure (which relies on debt financing) an Initial Target

Commissioning Windows of [5] years, and a Longstop Date 4 years after the

last day of the Target Commissioning Window are necessary. The CfD

Counterparty should be able to terminate the contract at the Longstop Date

only if none of the turbines have been commissioned by then.

3. Milestone (Clause 5.5) An "Initial Milestone Delivery Date" of 12 months after the date of

Financial Close has been proposed, rather than 12 months after

the Agreement Date.

Additionally, we have deleted the references to Project Pre-

Commissioning Costs and Project Commitments (which are

specified in the Generic CfD as evidence to prove Milestone

delivery).

For a bespoke, first of a kind, project-financed project such as this, we

consider that the appropriate reference date for milestone delivery is

Financial Close.

The Milestone for this project should be the down payment on the Turbines

Contract (please see B.1.10). For a project such as this, an infrastructure

milestone is more appropriate than a pure cost based milestone and a more

accurate indicator of commitment to the project.

4. Installed Capacity Estimate and Required Installed Capacity (Clause 7)

Required Installed Capacity definition has been amended to allow

flexibility in respect of three (and not one) turbines.

There needs to be sufficient flexibility for design finalisation, especially as

this is a first of a kind project. Therefore, the Required Installed Capacity

should be the lower of (a) 85% of the Installed Capacity Estimate or (b) the

Installed Capacity Estimate less the size (expressed in MW) of three of the

Facility's turbines. Because of the design of the lagoon – based on blocks of

turbines – it is more likely that any change would be to remove a set of



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turbines (whereas offshore wind, for example, might have more flexibility in

looking at changes to individual turbines). The test should reflect this.

5. Balancing System and TLM(D) (Clause 10)

Balancing System and TLM(D) values not yet provided. TNUoS

values also need to be provided.

The values of the Balancing System Charge and TLM(D) Charge serve as

the bases for the annual price review mechanism in the Terms and

Conditions. These values are related to the financial model assumptions and

will be completed at a later stage.

As flagged in the commercial issues paper, the Generator also requires

adjustment to the Strike Price in respect of changes to the base TNUoS

charges – the base values for this adjustment mechanism (i.e. the values

used in the determination of the Strike Price) will need to be specified in the

CfD Agreement.

6. Agent for Service of Process (Clause 13)

Agent for Service of Process provisions deleted. Agent for Service of Process mechanism not required as Generator is based

in England and Wales.

7. Annex 2 (Description of Facility)

Description of Facility added as required. This description is taken from the Crown Estates documentation.

B. TERMS AND CONDITIONS

B.1. DEFINITIONS

8. "Commissioning Tests"

We have amended the definition of Commissioning Tests to refer

to the wet commissioning of the first four turbines.

This definition is used to determine when the facility is regarded to have been

commissioned for the purposes of the CfD and the amended definition

reflects the particular characteristics of the facility.

9. "Inflation Factor" Amendments are required given the re-basing of the CPI. TLSB notes that from February 2016, the CPI has been re-based with 2015 as the base year – this means that formula (B) of Inflation Factor will be applicable.

In formula (B), CPItnew is defined as the applicable CPI to a Settlement Unit

– this is contrary to Condition 20.3 of the generic CfD which states that each indexation adjustment is to use the January CPI for a relevant year (unless the January CPI is not available – in which case, the most recently published

CPI will be used). The simple fix will be to replicate the definition of CPIt in

formula (A):

"is the CPI applicable to Settlement Unit (t), CPI for January of the relevant calendar year or, where the CPI for January is not published by the first (1st) day of the Summer Season in such



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calendar year, the Reference CPI which is applicable to the Settlement Unit (t),using the new (rebased) index"

CPIbold and CPIb

new are defined as the CPIs in the month in which re-basing

has occurred (using the original and new index respectively) – this does not work, e.g. if the month in which re-basing has occurred is January 2016 and

the base month for the new index is July 2015 then 𝐂𝐏𝐈𝐛𝐨𝐥𝐝 is the CPI for

January 2016 using the old index (and this data is not available). The simple

fix will be to amend 𝐂𝐏𝐈𝐛𝐨𝐥𝐝 and 𝐂𝐏𝐈𝐛

𝐧𝐞𝐰 as follows:

"is the CPI in the month in with reference to which the rebasing has occurred…"

Minor amends are also required to other provisions of the CfD which refer out to the Inflation Factor (but just refer out to formula (A)) – at clauses

46.1(D) and 47.1(E), instead of referring to just CPIbase or CPIt

,

the

references should be to: (i) CPIbase or CPIbase

old and (ii) CPIt or CPIt

new, as the

case may be?

10. "Turbines Contract";

"Down Payment" and

Milestone Requirement Notice (Condition 4.1)

Definitions added for use in relation to milestone delivery. For a project of this scale and complexity, an infrastructure-related milestone

is a more reliable indicator of progress with the project than a pure-spend

milestone. Accordingly, we have proposed that the milestone for this project

should be Down Payment on the Turbines Contract.

B.2. SUBSTANTIVE PROVISIONS

11. Further Conditions Precedent (Condition 3.5);

Schedule 1, Part B (Further Conditions Precedent)

TLSB has asked DECC to clarify status of State aid notification

process regarding Swansea project.

State aid approval is a condition precedent because TLSB's bespoke CfD

will need separate clearance from the EC Commission. In the unlikely

scenario there is a State aid challenge, we would need to insert operative

provisions on how the CfD is to be amended so that it is in compliance with

any State aid re-determination. Please also see comments on the State aid

provisions proposed in the latest DECC consultation on the generic CfD at

sub-paragraph B.1.20, paragraph 4 above.

12. Resolution of Metering Compliance Obligation breach (Condition 31.5)

Amendment to the deadline for the Generator to implement the

Metering Remediation Plan.

Under the CfD, the Generator is allowed to remedy a metering breach

pursuant to a remediation plan approved by the BSC Company. At the same

time though, the remedy period was capped at 60 Business Days. TLSB

considers that if the approved remediation plan sets a deadline greater than

60 Business Days, the cap should reflect the approved plan. The amendment

is necessary to ensure that the Generator is not tied down to an artificial 60



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Business Day deadline where the BSC Company has approved a different

deadline in the Metering Remediation Plan.

The time limit on the Generator's obligation to provide notice has

been amended so that it runs from written confirmation from the

BSC Company that the breach has been remedied.

The Generator will only be in a position to notify the CfD Counterparty that it

has fulfilled its obligations once the BSC Company has confirmed that the

breach has been remedied, (which may occur after 60 days of the BSC

Company approving the Metering Remediation Plan). We have adapted the

drafting accordingly.

13. Qualifying Change in Law: Compensation (Conditions 34.11, 34.12, 34.14 and 34.15)

Compensation tapering provisions amended. The change in law compensation regime also sets out a tapering mechanic

(where the relevant costs are incurred after a certain number of years). For

the 15 year generic CfD, the tapering threshold is 12 years – as the proposed

term of the TLSB CfD is 90 years, TLSB proposes a tapering threshold of 72

years and would welcome the opportunity of discussing with DECC.

14. Change in Applicable Law (Conditions 39-41)

Threshold to trigger anti-frustration mechanic has been deleted. These provisions are an anti-frustration mechanic to address the risk of any

future change in law frustrating the contract. However, under the generic

CfD, approval of 30% or more of all CfD generators is required to activate

this mechanic – given the bespoke, first of its kind nature of this project (and

the attendant risks), it is not appropriate to limit the Generator's ability to

activate this mechanic and we propose the threshold be deleted.

15. Pre-Start Date termination (Conditions 51.3 and 51.4)

Pre-Start Date termination provisions have been made subject to

dispute resolution proceedings.

The CfD Counterparty should not be permitted to exercise its termination

rights (in respect of non-compliant supporting information provided by the

Generator) where a dispute is pending or where such a dispute has been

resolved in favour of the Generator.

16. Expert Determination Procedure (Condition 59.10)

Expert/Arbitral Tribunal should have an express power to amend

the CfD.

In relevant circumstances, an expert (and an arbitral tribunal) may need to

amend the CfD in order to avoid legal frustration (e.g. under the Change in

Applicable Law drafting) and should have the express power to do so.

B.3. PROCESS POINTS (We have made various repeated amendments to processes throughout the CfD)

17. Directors' certification Where directors certify the accuracy of third party information, this

is to the best of their knowledge.

Directors take this certification seriously and cannot reasonably be expected

to certify the accuracy of information of which they are not aware. Also, if

information is provided by a third party, directors can certify only to the best

of their knowledge/belief after having made all due and careful enquiries.

18. Deemed approval

provisions

Amended to the effect that where the CfD Counterparty does not

provide a response notice in time, it will be deemed to have

agreed with the Generator.

To ensure process integrity is maintained, where the CfD Counterparty does

not respond within a stipulated timeframe there should be a mechanic to



11/37427578_8 14



ensure that the process does not come to a standstill. Accordingly, we have

proposed this deemed approval mechanic to resolve this issue.

B.4. SCHEDULES / ANNEXES

19. Annex 3 (Direct Agreement) - general

CfD Counterparty representations and warranties marked for

discussion.

It would be typical for a direct agreement counterparty to give

representations and warranties in respect of its status, power and authority

to enter into a direct agreement, no conflict, and enforceability.

20. Annex 3 (Direct Agreement) - Notification of Default (Clause 3.1)

Clarification has been requested regarding what the "notice of

default" in Clause 3.1 refers to.

TLSB was not clear from the original drafting whether this was intended to

be a reference to the notice which triggers the commencement of the Step-

In Decision Period (i.e. a CfD Counterparty Enforcement Notice) or a notice

of events occurring prior to this time?

As a CfD Counterparty cannot take a CfD Counterparty Enforcement Action

during a Step-In Decision Period, the lenders require clarity as to the trigger

for commencement of this period and what information/notices it is to receive

prior to this time.

21. Annex 3 (Direct Agreement) - Statement of Amounts Due (Clause 5.2)

Statement of Amounts Due clause marked for discussion. The CfD Counterparty should be under an obligation to make all due

enquiries and use reasonable efforts to ensure that the statement of amounts

is up to date and accurate.

The lenders require a firm statement of the Generator's liabilities as it will be

difficult to find a Substitute prepared to take on the uncertain liability (i.e.

based on a statement which may not be accurate and up to date). Also,

provisions should be included in relation to disputes regarding the statement

of amounts.

22. Annex 3 (Direct Agreement) - Step-In Notice (Clause 6.1)

Amendment to Step-In Notice clause to clarify the effect of

revocation.

Lenders would typically have the right to revoke one or more Step-In Notices

during the Step-In Decision Period and so we have amended Clause 6.1(c)

to the effect that the Step-In Decision Period will not terminate on revocation

of a Step-In Notice.

23. Annex 3 (Direct Agreement) - Communications in Writing (Clause 12.1)

Methods of communication marked for discussion. The method of communication does not match the CfD (see Condition 80.1)

i.e. fax is not permitted under the CfD, but is permitted under the Direct

Agreement, and email is permitted in certain circumstances under the CfD,

but is not expressly permitted under the Direct Agreement. The lenders

would like email communication to be expressly permitted in the Direct

Agreement.



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24. Annex 3 (Direct Agreement) Form of Step-In Undertaking - Annex 1; and

Form of Novation Agreement - Annex 2

Obligation of Appointed Representative (in Annex 1), and

Substitute (in Annex 2) to pay sums owed by the Generator to be

discussed.

The Step-in Undertaking and Novation Agreement require full payment of all

amounts due to the CfD Counterparty but they do not refer to the amount

arrived at in the Statement of Amounts Due clause (Clause 5.2), or what

happens if any amount is in dispute.

The lenders require clarification in relation to both issues in order to provide

certainty for an incoming Appointed Representative or Substitute.

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