UK Government updates and consults on the Contract for Difference Allocation Round Five

1. INTRODUCTION

On 14 December 2022, the Department for Business, Energy and Industrial Strategy (“BEIS”) published key documents relating to the Contracts for Difference (“CfD”) Allocation Round five (“AR5”) including the Draft Allocation Framework. Further to this, on 19 December 2022, BEIS published a consultation on drafting amendments to the CfD contract for Allocation Round 5 (the “Consultation”).

Please see our article on the other key documents published by BEIS on 14 December here.

Key matters being introduced or proposed are:

• Further requirements for Private Network CfD Agreements;
• An amended methodology for calculating interest when repaying cumulated subsidy to an awarding body (where an interest rate is not otherwise specified);
• Changes to how the CfD contract is initiated, to prevent generators delaying the CfD start date for commercial reasons;
• Simplification of the generator data provision requirements; and
• Removal of the requirement for generators to provide Expected Generation Output Data as a CfD Operational Condition Precedent.

2. DRAFT ALLOCATION FRAMEWORK

The Draft Allocation Framework sets the rules and eligibility requirements for AR5 and remains largely unchanged from AR4.

Key differences between AR4 and AR5 include:

• Additional requirements with respect to Private Network CfD Agreements including the need for the applicant to prove they are a Private Network Generator (which has been added to the Allocation Framework and will be defined in the Private Network CfD Agreement);
• Removal of the requirement that, of the four flexible bids that may be submitted, one of these bids must have the same Target Dates and same capacity as specified in the original application;
• Clarification as to the Target Commissioning Date, such that in respect of Phased Offshore Wind CfD Units, the latest date that the Target Commissioning Date can fall is the last day of the final Delivery Year;
• Clarifications in respect of the Target Commissioning Window Start Date:

- that Commissioning Window Start Date now determines the initial point of valuation and the Relevant Delivery Year; and

- that the earliest date that the Target Commissioning Window Start Date can fall must allow for the final day of the Target Commissioning Window to fall on the first day of the applicable Delivery Year;

• Simplification of the notice of auction from the Delivery Body to the relevant applicants; and
• Clarification about clearing prices for Minimum auctions, such that should a Qualifying Application be cleared at a higher price than the clearing price of any relevant Minimum auction(s), then the Qualifying Applications from that/those Minimum auctions should also be cleared at this price.

3. CONSULTATION ON DRAFTING AMENDMENTS TO THE CFD CONTRACT FOR AR5

The CfD contract is entered into by a low carbon electricity generator and the government-owned Low Carbon Contracts Company (“LCCC”) and comprises the CfD Standard Terms and Conditions and the CfD Agreement. The CfD Agreement contains project-specific information and can include variants, such as the Private Network CfD Agreement. In this Consultation, BEIS seeks comments on certain amendments to the CfD contract for AR5, which BEIS has proposed to ensure that the CfD contracts reflect current policy and that the scheme continues to function as originally intended.

3.1 CfD Start Date

Previous versions of the CfD contracts have not specified when the generator should set their CfD start date, as long as it is no earlier than:

1. the first day of the Target Commissioning Window (“TCW”);
2. the date on which the notice relating to the fulfilment of the final Operational Condition Precedent was given; or
3. the date of the Start Date Notice, and
4. as long as it is no later than the Longstop Date.

This flexibility was intended to provide confidence to generators and investors that the CfD contract could still proceed in the event of unforeseen delays to generation, such as hold-ups during the construction or commissioning phase.

However, BEIS considers that this flexibility has been used by some generators as a means to generate electricity on a merchant basis during the TCW before the CfD start date is triggered. By doing this at a time of high electricity rates, such generators are avoiding making CfD payments to LCCC where revenues exceed the CfD strike price achieved in their relevant allocation round. BEIS’s view is that the Government does not wish for delays for commercial gain to remain an option for future successful CfD applicants, and as such is proposing certain changes to address this. These include changes to the start date notice mechanism and the introduction of Unilateral Commercial Operations Notice.

BEIS considers that the economic case for the change to prevent generators from delaying their CfD start dates for commercial gain is finely balanced. On the one hand, this could have a potential impact on strike prices, if generators bidding into AR5 and beyond may price in potential financial gains from operating under merchant terms before their CfD contract starts, while wholesale prices are high. On the other hand, the proposed changes should result in a reduction in foregone CfD payments (i.e. delayed generator repayments which are refunded to electricity suppliers) from generators delaying their start dates if wholesale electricity prices remain high.

BEIS is therefore inviting views on its proposal to amend the CfD Standard Terms and Conditions to prevent generators delaying the CfD start date for commercial reasons.

3.2 Amendments to data provision requirements

BEIS is proposing several amendments to the existing reporting requirements for generator estimates within the CfD contract at Condition 32.1. The intention of the changes is to simplify the requirements and bring the CfD contract terms into line with the administrative changes implemented by LCCC for existing generators. The changes include:

• Simplification of data provision requirements to ease the administrative burden on LCCC and generators;
• Removing the generator’s monthly requirement to provide an update of the Expected Start Date and Installed capacity so that these are only required at the Agreement Date and every month for the six months before the Start Date, after which they are required only if the generator becomes aware of any changes or the LCCC requests such an update;
• Removing the generator’s requirement to provide a commissioning profile of the facility;
• Removing the requirement to provide Forecast Data for intermittent technologies and simplifying the process for baseload technologies;
• Removing the OCP requirement to provide Expected Generation Output Data;
• Alignment of the definitions “Private Network” and “Private Network User Agreement” to those in the Contract for Difference (Allocation) Regulations 2014 and that definitions are added to the Private Network CfD Agreement for terms contributing to the term “Private Network Generator”. These changes are to be made alongside the proposed changes to the Allocation Framework with respect to Private Network Generators (mentioned above);
• Following revocation of interest rate methodology requirements under EU regulations, replacing the Reference Rate methodology with the Interest Rate methodology based on the SONIA Compound interest rate.

3.3 Further changes not subject to consultation

BEIS has also made the following changes to the CfD contract that it is not consulting on:

• Removing references to Balancing Services Use of System Charges since generators are no longer liable for these; and
• Amending the Further Conditions Precedent for Floating Offshore Wind reflecting that all Floating Offshore Wind applicants are to be subject to the supply chain plan requirements.

4. WHAT’S NEXT?

A final Allocation Framework will be issued in March 2023. Please see our separate article for further details as to the next steps for AR5.

The closing date for responding to the Consultation is 5 February 2023. Responses can be submitted here.

We will be publishing commentary on BEIS’s consultation on proposed changes to the CfD scheme for future allocation rounds.