On 12 July 2023, the Department for Energy, Security & Net Zero (“DESNZ”) published a summary of the responses (the “Consultation Response”) to the December 2022 consultation on policy considerations for future rounds of the Contracts for Difference (“CfD”) scheme (the “Consultation”). The Consultation ran from 14 December 2022 to 7 February 2023 and sought views on specific changes proposed for Allocation Round 6 (“AR6”), as well as early views on longer-term policy considerations for rounds beyond this. This is an update to the Consultation which we have reported on here.
We have set out below the key considerations and the government’s response for each of the proposals considered in the Consultation Response.
Considerations for AR6 – Private Network CfD Agreement
The Consultation sought views on whether to make generators who supply electricity, via private wire, to offshore oil and gas (“O&G”) facilities ineligible for Private Network CfD payments.
Most respondents supported the proposal and agreed that, in the context of an unprecedented rise in energy bills, such payments should not be ultimately subsidised by consumers. Further, supporters of the proposal noted that O&G companies, as producers of fossil fuels, are not the intended beneficiaries of the CfD scheme.
Alongside the Consultation Response, the government published an Impact Assessment that considers the results of the Innovation and Targeted Oil & Gas (“INTOG”) offshore wind leasing round released in March 2023. The assessment indicates that generating projects in the ‘TOG’ category may not be eligible to apply for a Private Network CfD Agreement. This is because the applicant must meet the definition of ‘Private Network Generator’ which requires being exempt from the electricity generation licence requirement for generators providing less than 50MW of power from a station with a declared net capacity of up to 100MW. According to the INTOG results, many successful projects in the ‘TOG’ category exceed these capacity limits.
The government’s final position is to implement the proposal from AR6 onwards. Specific amendments to the Private Network CfD Agreement (and corresponding Allocation Framework) will be finalised following further consultation prior to the launch of AR6.
Considerations for future CfD Allocation Rounds
Defining ‘Floating Offshore Wind’
The government consulted on changes to the definition of ‘Floating Offshore Wind’ in Regulation 27ZA(4) of the CfD (Allocation) Regulations 2014 and welcomed views on “new and innovative” foundation types which may be eligible under the scheme.
Most respondents agreed on the need to change the definition of ‘Floating Offshore Wind’ to accommodate technological developments, but there was no consensus on the specific details of the change. While no preferred approach emerged from the Consultation, some respondents suggested using the principle of ‘positive buoyancy’ to define a floating offshore wind turbine, while others advocated for a site-specific approach. Concerns were raised about introducing a new principles-based definition and a list of eligible technology types, as it may hinder innovation due to its prescriptive nature.
Due to the lack of consensus in its definition, the government has decided to keep this proposal under review and has not yet amended the definition of ‘Floating Offshore Wind’.
Facilitating Coordinated Infrastructure
Views were sought on introducing CfD eligibility for offshore wind farms connecting to a multi-purpose interconnector (“MPI-OFW”).
The majority of respondents agreed that MPI-OFW should be eligible to apply for a CfD, as they saw no material difference between an MPI-OFW and radially connected offshore wind farms. Some recognised the importance of the CfD in enabling these projects, which offer benefits such as decarbonisation, energy security and improved consumer value. However, further clarity is needed on metering arrangements, treatment of exported outputs, project timings, interconnector capacity and a general consideration of MPI-OFWs in the context of the CfD Agreement.
However, the government is not currently proposing to make these changes due to uncertainty related to the novelty of the projects in this category. The government plans to work closely with the Offshore Transmission Network Review to continue work that would support the first-of-its-kind MPI projects for AR6 and beyond and expects to issue an update at the end of the year.
Phasing
The CfD scheme provides for a phasing policy whereby offshore wind projects are built in three different phases, each phase qualifying for the CfD scheme. In the Consultation, the government queried whether the phasing policy is obsolete and sought views on whether to remove this policy.
The majority of respondents were in favour of keeping the offshore wind phasing policy for future allocation rounds. However, the question of whether to remove or restrict the policy remains complex, considering its impact on various project aspects and the supply chain, especially with the increased global demand for offshore wind projects. Some respondents suggested extending the phasing policy to floating offshore wind projects to provide similar benefits as fixed-bottom offshore wind projects.
Accordingly, the government will keep the phasing policy in place for now. However, the policy is being kept under review as the concerns are explored further, with an inclination to extend the phasing policy to include floating offshore wind projects in future allocation rounds. The government also notes in the Consultation Response that the implementation of contract changes for AR5, designed to prevent generators from delaying their CfD Start Date for commercial gain, will reduce the potential for the phasing policy to be used as a bid optimisation strategy.
Appeals
The government currently operates a two-tiered appeals system that risks delaying future allocation rounds. In line with the government’s move to make allocation rounds annual, the Consultation considered potential changes to the appeals process.
The majority of responses highlighted the uncertainty of the current CfD appeals process. Respondents favoured the publication of a fixed annual timeline with appeal windows linked to key milestones that occur at similar times each year. Some respondents were also keen for a prequalification process to be explored further, while the majority ruled out the option of the pending application process due to concerns that it would cause delays and uncertainty in the allocation process and auction outcome.
At present, the government will make no changes to the appeals system but notes the support to reform the appeals process and will continue to consider how best to approach this for future rounds.
Treatment of Repowered Projects
The government sought views on whether the CfD is an appropriate mechanism through which to support repowered assets and welcomed responses on the competition structure of such projects if participating in the CfD, the definition of a repowered project and what barriers currently exist for repowering projects in relation to the CfD.
The majority of respondents consider the CfD an appropriate mechanism through which to support repowered assets, on the condition that the projects were aligned towards full repowering as opposed to partial repowering or life extensions. Regarding how such projects could be incorporated into the CfD process, while some respondents advocated for a separate repowering ‘pot’ to ensure fair competition in the process, others highlighted that due to comparatively similar project economics, repowering projects could compete against new builds.
The government acknowledges the merit of exploring suitable revenue support mechanisms for repowering projects (excluding unabated coal-to-biomass conversions), particularly as a significant portion of renewable assets near the end of their operational life and revenue support. However, the government notes that in making a decision, the benefits must be balanced against potential disbenefits, which include increased levy costs for consumers and a potential reduction in the proportion of capacity exposed to market signals. They recognise that the current CfD legislation (CfD (Allocation) Regulations 2014) restricts sites looking to repower existing projects but emphasise the need for further considerations before reforming the scheme. Any reforms to the CfD in this context must be considered within the proposed REMA reforms, and the government will continue to examine the necessary changes for future CfD allocation rounds from AR7 and beyond.
Conclusion
In agreement with those responding to the Consultation, the government will implement the proposal to amend the Private Network CfD agreement, such that renewable energy generators supplying offshore O&G facilities, via private wire, will be ineligible for CfD payments.
Despite the concerns surrounding AR5, including soaring capital costs, inflation and interest rates, which have resulted in higher strike prices compared to AR4, the government remains committed to launching AR6 in March 2024. However, the government must be mindful of the adverse impact of increased costs may have on the development of CfD projects, as seen with the cessation of Vattenfall’s 1.4GW Norfolk Boreas offshore wind project which saw costs for the project increase by up to 40%.
The government is seeking stakeholder views in relation to introducing non-price factors and variables in CfD auctions (see our previous Law-Now on this here).
Article co-authored by Emily Lakeman, Trainee Solicitor at CMS.
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