AR4: What you need to know about the next CfD round

United KingdomScotland

On 24 November 2020, the Department for Business, Energy and Industrial Strategy (“BEIS”) published its response to the consultation on the proposed amendments for allocation round four (“AR4”) Contracts for Difference (“CfD”) for Low Carbon Electricity Generation (the “Response”).

The Response confirms most of the amendments proposed by BEIS in its spring consultation but makes some new adjustments as to how future CfD rounds will operate. Additionally, a further consultation regarding changes to the Supply Chain Plans (“SCP”) was published, as well as an impact assessment of the costs and benefits of the amendments for AR4.

Industry should note the headline amendments to AR4, in particular: the new “pots”, changes relating to negative pricing, capacity caps and the amended SCP policy. This bulletin explores each of these amendments in detail.

Pot structure

The amended pot structure will be:

Pot 1

Established technologies

  • Onshore wind (>5MW)
  • Solar Photovoltaic (“PV”) (>5MW)
  • Energy from Waste with CHP
  • Hydro (>5MW and 5MW)
  • Landfill Gas
  • Sewage Gas

Pot 2

Less established technologies

  • Advanced Conversion Technologies (“ACT”)
  • Anaerobic Digestion (“AD”) (>5MW)
  • Dedicated biomass with CHP
  • Floating offshore wind
  • Geothermal
  • Remote island wind (>5MW)
  • Tidal stream
  • Wave

Pot 3

Offshore wind

  • Offshore wind

Budgets for each “pot” will be set closer to the opening of AR4, in 2021, so the level of support available and the total capacity procured will only really be ascertained then. However, the Response confirmed that established technologies, such as onshore wind and solar PV, will be once again eligible to compete for support in AR4. Further, there is the re-introduction of pot 3, which will be dedicated to fixed-bottom offshore wind projects only. While previously there was suggestion that the CfD scheme could support coal-to-biomass conversions in AR1, no support was ever awarded; moreover, coal-to-biomass conversion projects are no longer eligible for CfD support and have been excluded from AR4.

Read our comments on the impact of the proposed changes as part of the consultation here.

Floating and Fixed Bottom Offshore wind

In addition to the creation of its own pot, fixed bottom offshore wind will now be defined as distinct from floating offshore wind projects for the purposes of CfD AR4. The key result of this is that projects within this new definition of floating offshore wind will compete with other less-established technologies, but not with conventional fixed bottom offshore wind, in pot 2 and have an administrative strike price specific to floating offshore wind. It is evident from the Response that these changes are a product of the UK government’s targets to achieve 1GW of floating offshore wind and 40GW of fixed-bottom offshore wind by 2030.

While the new definition for floating offshore wind is not yet set in stone, it has been confirmed that floating offshore wind projects must be located in water depths of at least 45 metres to be eligible, reducing this from the proposed 60 metres.

The Response also states that phased offshore wind projects awarded a CfD contract will continue to be capped at 1.5GW, though this will be reviewed for future allocation rounds.

Negative pricing

Confirming the original proposal, the Response sets out the government’s intentions to extend negative pricing for future CfD contracts to ensure difference payments are not made to generators when the Intermittent Market Reference Price (based on the day-ahead price) is negative. The Response states the rationale behind the extension to negative pricing is to continue to incentivise generators to adapt to the needs of the system, by diverting power away from the grid during times of high supply/low demand, so as to produce lower system costs and ultimately pass this benefit on to the consumer.

Additionally, a Call for Evidence on Renewable Support will be launched to explore how negative pricing should evolve as more intermittent renewables are integrated onto the electricity system.

Milestone Delivery Date

The current deadline for CfD generators to demonstrate delivery progress (the Milestone Delivery Date “MDD”) stands at 12 months after contract signature. However, the Response outlines an extension to 18 months for the MDD for all successful CfD AR4 projects. This reflects the larger projects being procured in these later allocation rounds and the related challenge of raising project finance and/or taking financial investment decision within this period.

Technical changes to future allocation rounds

The current legislative final delivery year of 2026 will be amended to 2035 providing longevity for the CfD scheme. Consequently, allocation rounds may well run at the same two-year intervals past 2026, though BEIS cautions that “whilst we have had two consecutive delivery years for the past two allocation rounds, it should not be assumed future rounds would necessarily follow the same pattern”. As a reminder, delivery years for AR3 were 2023/24 and 2024/25 but have not yet been confirmed for AR4.

While the Response does not confirm its implementation for AR4, it is intended that flexible capacity caps will be set out in the allocation framework to be decided on a round-by-round basis. Under this change, BEIS will have the option of applying a “hard” constraint (as in AR3) or “soft” constraint to capacity caps, whereby a bid may breach the cap but shall be subject to certain conditions. The Response notes that some feedback was wary of the uncertainty this may cause for projects/bidders but that, ultimately, the flexibility would allow the government to reach its target capacity for each allocation round. Until the conditions are published it is hard to know how much of a difference having this flexibility will make for the industry.

Supply Chain Plans

The Response confirms the government’s intention to strengthen the SCP policy by “increasing clarity, ambition and measurability of developers’ commitments; and ensuring that those commitments are delivered”, which will be delivered in a number of ways. Most notably, perhaps, are the requirements to provide SCP updates after the CfD has been awarded and to submit a Supply Chain Implementation Report for assessment, as well as the introduction of non-delivery consequences attaching to the project, rather than the developer, as is currently the case.

Additionally, the Response states that the SCP guidance and Electricity Market Reform (General) Regulations 2014 will be updated to align more closely with the Industrial Strategy’s five foundations (competition, innovation, people and skills, infrastructure, and regional growth) and wider government policy.

A further consultation regarding Supply Chain Plans and changes to the CfD contract has begun and will close to respondents on 18 January 2020. Within the consultation are proposals relating to the failure to meet the requirements (listed above), namely that failure to submit a Supply Chain Implementation Report will give rise to a termination right for the Low Carbon Contracts Company (“LCCC”). The consultation can be read in full here.

What’s next?

The changes require legislative amendments to be laid before Parliament ahead of AR4, for example, amendments to the Contracts for Difference (Allocation) Regulations 2014 regarding the definition of floating offshore wind and the extension of the CfD scheme delivery years.

It is proposed that AR4 will run in late 2021, however, considering that BEIS have opened new consultations, responses to which will be published prior to and possibly implemented for AR4, it will be some time yet before an allocation round notice is issued and dates for AR4 are confirmed.