Generator Journey through CFD: Contract and Pre-allocation

Generator Journey through CFD:Contract and Pre-allocation

24 June 2014

2

AGENDA

1. Welcome and Introduction

2. Session 1: CFD Policy Overview

3. Session 2: CFD Contract

4. Session 3: Applying the Contract to Your Project

5. Session 4: CFD Implementation Feedback Session

6. Session 5: Offtaker of Last Resort

7. Close

2 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

3

Welcome and introduction

Ruth Herbert


4

CFD Implementation Coordination

The Low Carbon Contracts Company is taking a proactive role overseeing the delivery of the end-to-end CFD scheme, facilitating:

• delivery partner cooperation and

• industry readiness


5

What is meant by ‘coordination’?

Overall monitoring of progress and readiness against the CFD Implementation Plan

Maintenance of the CFD Implementation Plan

Co-ordinating implementation activities across delivery partners and potential industry participants

Passing any policy issues to DECC if raised as part of implementation discussions

Owning and updating the operating model


6

Benefits of engaging with implementation events

Engaging in the implementation coordination events will help you to:• Understand the critical path activities• Understand what implementation planning you need to do• Develop internal capabilities and processes to ensure

readiness and successful participation• Collaborate with CFD delivery partners to help us get it right

– Future stakeholder events– Bilateral meetings


7

AGENDA







7. Close


Contracts for Difference: Policy Overview

Chris Hemsley

Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014

Contents

1. Introduction• What is the CFD?• The benefits of a CFD

2. High Level Overview: Applying for a CFD

3. The Offtaker-of-Last-Resort

4. Way forward

5. Questions

Generator Journey through CFD: Contract and Pre-allocation – 24 June 20149 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

Supporting investment in Low-Carbon Generation

Lowering the cost of

investing in low-carbon Generation

CFD Removes Long-term Price Risk

from Investors

Support payments

backed by a robust

payment scheme

Clear set of roles and

responsibility between

Government and Delivery

Body

Earlier allocation of

CFDs, reducing risk to developers


What is the CFD?C

FD

Pa

ym

en

tsS

trik

e P

ric

e &

Re

fere

nc

e P

ric

e

11

Strike Price: - Determined by competitive bidding- No higher than the administrative cap

Reference Price- Determined by the day-ahead

GB price

Difference Payment

Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014


More than just the difference payment

Contract For

Difference

Difference Payment

15 Year Contract

Term

Dispute Resolution Processes

Change in Law

Protection

Flexibility Over

Delivery

Ability To Adjust

Capacity

Force Majeure

Protection against Grid

Delay

Index Linked

Payments (to CPI)


Benefits to developers of the CFD


Removal of wholesale electricity price exposure by providing a fixed strike price to developers, largely stabilising project revenue

1

Robust and reliable private law contractual arrangement providing developers with a clear set of rights and obligations, and recourse to arbitration processes to resolve disputes

2

Early certainty and security of support levels in the project development process

3

4

Provisions that protect the value of the CFD to developers (e.g. change in law protection)

5

Robust single counterparty owned by government and set up as a limited liability company


Key components of the CFD framework

Allocation Framework Standard Contract Terms

• Auction rules

• Eligibility and qualification requirements

• Details of information to be supplied by applicant

• CFD Agreement

• CFD ‘Terms and Conditions’

• Low Carbon Contracts Company (LCC) issues a version for signature, based on application information

Administered by the EMR Delivery Body, National Grid

Low Carbon Contracts Company issues, signs and

manages contract

Energy Act & Regulations



High-level process

Eligibility Checks

CFD Allocation Contract Award

Pre-Commissioning

Obligations

Before applying, Applicants need to consider:- Are they eligible?- Economics of their project- Can they meet the milestone requirements, within a year of signature?



Eligibility Criteria: Rationale

• The eligibility criteria are a set of upfront requirements that all applicants must satisfy in order to apply for a CFD.

• The criteria form a critical function in ensuring only credible projects secure CFDs and provide a filter that:

• prevents speculative projects from disrupting the CFD allocation process;

• provides a consistent foundation for an auction – ensuring a minimum level of development for all applicants; and

• reduces the risk of bed-blocking to ensure the budget is used as efficiently as possible.

• CFD Contract repeats many of the eligibility checks and implements the milestone checks.



Competitive Allocation

• If applications exceed the available budget, CFDs are awarded through price competition

• Applicants are invited to submit a ‘sealed bid’, which is the lowest price they are willing to accept

• Applications are ranked by price and accepted in price order, across all delivery years

• Successful applicants are paid the highest price accepted in each delivery year

Allocation Framework sets out detailed rules to cover budget reserved for particular technologies, how to deal with tied bids, etc

But, auction designed to allow bidders to submit the lowest price they can accept, in the knowledge that they will be paid either this price, or

a higher price.



Contract Award

CFD Contract

Standard CFD

Agreement

Standard set of Terms and Conditions

Any ‘minor and

necessary’ amendments

Parameters set out in

application



Pre-Commissioning Obligations

Mileston

e Delivery Date

• Prevents premature application• Ensures developers demonstrate sufficient financial commitment towards

completion

TCW

• Encourages timely commissioning and applications with realistic dates, whilst providing flexibility to projects.

Long-

stop Date

• Encourages timely commissioning and applications with realistic dates.

Non-Delivery Incentive

• Discourages speculative applications

TCW= Target Commissioning Window


The OLR provides renewable CfD generators with a guaranteed, 'backstop' route-to-market for their power: a Backstop PPA (BPPA).

► Offtakers are competitively allocated to generators, by bidding a management fee

► Certain suppliers mandated to bid; other suppliers can do so voluntarily

► Credit-worthiness: ensured by credit rating or letter of credit

Generators have a right to a

‘Backstop PPA’

Obligation on some suppliers to bid for

backstop PPAs

► Management fees bid by backstop offtaker are levelised across all suppliers through a levelisation process

Management fees levelised across

suppliers

► 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

OLR: Key Features

Electricity Market Reform20 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

► Should deem the OLR ‘bankable’ and lend against this guaranteed revenue and any secured PPA

► May be willing to assume revenues above the OLR for early CfD years

► Should reduce the collateral required in open-market PPAs deemed bankable through OLR protection

► Suppliers should continue to respond to generator requests for PPAs of all lengths, though they may see an increase in demand for bankable PPAs of shorter tenors

► OLR likely to allow more smaller suppliers to be deemed ‘bankable’ and encourage more activity in the shorter-term PPA market where they operate

► Suppliers should provide indicative PPA terms to generators seeking them ahead of CfD auction

► 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

Generators

Lenders

Suppliers

OLR: Key Impacts

Electricity Market Reform21 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014


Questions


CFD Allocation


Contents

1. Regulations and Allocation Framework

2. Eligibility Criteria & Supporting Information for applications

3. Eligibility Appeals, Audit

4. Unconstrained and Constrained Allocation (inc Auction Mechanism slides)

5. Indicative timeline for first Allocation Round

6. Questions


Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014

Regulations and Allocation Framework


The CFD is supported by a robust architecture

1. Allocation Regulations - Parliamentary scrutiny and certainty for investors

• Eligibility and qualification requirements

• Application and eligibility checking process

• Information to be supplied by applicants

• High level principals of auction/allocation process

• High level budget rules

• Dispute resolution procedure and audit requirements

2. Allocation Framework – additional flexibility, easier to incorporate lessons learned

• Auction rules and valuation formula

• Confirm allocation round timings and deadlines

• Details of eligibility and qualification requirements

• Supplemental qualification requirements

• Details of information to be supplied by applicant



Eligibility Criteria



• The eligibility criteria are a set of upfront requirements that all applicants must satisfy in order to apply for a CFD.

• The criteria form a critical function in ensuring only credible projects secure CFDs and provide a filter that:

• prevents speculative projects from disrupting the CFD allocation process;

• provides a consistent foundation for an auction – ensuring a minimum level of development for all applicants;

• reduces the risk of bed-blocking to ensure the budget is used as efficiently as possible; and

• interacts with later contract design features – e.g. Initial Conditions Precedent, Further Conditions Precedent, and Milestone requirements.




Applicants for CFDs will be required to provide the Delivery Body with evidence that the proposed project meets the eligibility criteria:

• Qualifying eligible generating station (technology type);

• Non-receipt of funds under other Government support schemes for renewable electricity (i.e. the RO, ssFiT or NFFO)

• Applicable planning consents;

• Connection agreement requirements (including Private Network agreements);

• Supply chain plan (only for facilities >300MW);

• Statement identifying standard CFD terms and conditions that apply or any modifications agreed; and

• Inclusion of relevant supporting information.



Application Supporting Information

The Allocation Regulations and Allocation Framework will state what information is to be submitted in support of a CFD Application.

This is to include:

• Name and contact details of applicant (or GB based agent);

• Company registration and VAT numbers;

• Project name and technology type;

• Location and map of CFD unit;

• Proposed capacity (MW);

• Target Commissioning Date and Target Commissioning Window;

• A declaration that existing accreditation does not apply in respect of the relevant CFD Unit; and

• Whether the CFD unit forms part of a dual scheme facility.



Planning Permission Requirements

• Eligibility requires evidence of all applicable planning consents for the relevant works to be undertaken (e.g. development order; TWA order; section 36 consent; planning permission; and/or a marine licence);

• This includes consent for the CFD unit itself and consent for any other ‘relevant works’ which enable the CFD unit to be established/altered and for electricity to be supplied to the grid;

• Note: consent for relevant works undertaken by grid network operators and covered by grid connection agreements will not need to be shown by the applicant.



Grid Connection Requirements

The policy on grid connection eligibility has now been updated to include provisions for private networks.

Evidence to be provided:

a) For applicants connecting directly to the grid - a copy of the applicable agreement(s) which enables connection to the grid and which is for at least 75 per cent of the capacity of the CFD unit.

b) For applicants connecting indirectly (i.e. through a private network operator) – evidence of an agreement between the applicant and the private network operator.

c) For applicants not connected (i.e. islanded generation) – signed acknowledgement (as part of the certificates submitted on application) that no connection is applicable.



Applicants deemed ineligible may appeal their eligibility via a 3-tiered appeals process:

• Where Tier 2 Appeals take longer than 30 days to resolve, the Secretary of State can direct the auction to commence. The Appellant submits a sealed bid; if the appeal is successful, bids are checked and if found to be equal to or lower than the clearing price of the relevant auction, the Appellant is awarded a CFD.

Eligibility Appeals

5 days

• Review Notice to National Grid

10 days

• National Grid conducts review Eligible/ Non-Qualification Review Notice

5 days

• Qualification Appeal to Appeal Body (Ofgem)

30 days

• Appeal Body/Ofgem determines case

28 days

• Appeal to High Court or Court of Session

No t/l

• High Court reviews case

Tier 1

Tier 2

Tier 3



Withdrawal Disincentive• Applicants may withdraw during the application window or at the stage of

submitting a sealed bid (where an allocation round is constrained).

• Applicants withdrawing after this point will be subject to a withdrawal disincentive. Where an applicant fails to sign a CFD that has been offered or has their CFD terminated between contract signature and Milestone Delivery Date (1 year after contract signature), the site with which they applied will be subject to a bar on participation in allocation rounds for 13 months after the CFD notification was made.

• This mechanic seeks to discourage spurious or highly speculative applications from participating in the auction process. Such applications would potentially distort auction outcomes and block budget that would otherwise have been available to genuine projects with a greater likelihood of delivery.

• Exemptions apply where an applicant’s contract has been terminated due to a QCiL or RCE, or where a landowner who was not the applicant has been unfairly affected by the ban.



Unconstrained and Constrained Allocation


Unconstrained and Constrained Allocation

• Once applications have been submitted, National Grid will value them, to see if allocation will be constrained.

• If there is sufficient budget for all projects, and no Maxima are exceeded, then unconstrained allocation will apply, and all projects will receive the Administrative Strike Price.

• If there is insufficient budget (or a Maxima is exceeded), constrained allocation will apply for that pot (or Maxima), and we will run an auction.



High-Level Process

Invite applications - do the applications result in a budget

breach in any year?

Do the applications under any Maxima

result in the Maxima being exceeded?

Non-Competitive Allocation – all

projects are accepted at their Administrative

Strike Price

Run auction for Maxima technology only – invite sealed

bids for those projects.

All other projects are accepted at their ASP

Competitive Allocation (Auction) – invite sealed bids

Assess Minima

General auction (Maxima assessed

here)

YesNo

No Yes

For each ‘pot’:



If Allocation is constrained we will hold an auction

• If budget is exceeded for any delivery year in the budget profile, run auction for all delivery years

• If Maxima is exceeded but budget is not, run auction only for Maxima technologies.

• Sealed bids will only be requested once constrained allocation has been triggered, and then only for those projects to which constrained allocation applies.



Does a Minima apply?

Is the Minima exceeded?

Run an auction within the Minima.

Assign all successful projects

a provisional clearing price

Proceed with general auction,

including all projects rejected

under Minima

Assign all Minima projects at their administrative

strike price

Proceed with general auction for

all other technologies

General auction – rank all projects on strike

price bid. Look at lowest strike price bid

project.

Does it exceed any Maxima?

Reject project, consider flexible options, close

Maxima

Consider next project

Does it exceed the budget profile in

any year?

Reject project, consider flexible options, close delivery year

Accept project, remove flexible bids from stack

NoYes

Yes No

For each ‘pot’:

For each Minima:

No

No

Yes

Yes

High-Level Auction Process

When all budget years are closed or no projects remain; close auction



Basic auction principles

• Sealed bid, pay-as-clear auction.

• Bidders submit the lowest price at which they are able to deliver.

• The auction ranks all the projects, and starts accepting the cheapest first (in

any delivery year), until the budget is used up.

• All projects are paid the price of the most expensive project which has been

accepted (in its delivery year).

• Bidders may submit multiple bids with varying delivery years and capacities

(“flexible bids”). These may not be earlier or larger than the original application.

• The auction will assess the lowest strike price flexible bid first, then assess

other bids if the first was not affordable.

• Bids submitted will not be shared with DECC and will only be used by National

Grid to determine the clearing prices and which applications are successful.



At its simplest:

• Work out your costs

• Work out the return you need

• Submit a bid with that number – if you win in the auction you will get at least the number you bid, and the highest price paid to any project in the same group and delivery year (with exceptions for Minima)

• Can be more sophisticated if you wish

• Submit additional bids with a different delivery date, if you are able to deliver in a different year.

• Submit additional bids for reduced capacity, if you are able to deliver a smaller project if your first choice is not affordable

Full details of the auction mechanic are available on the DECC websitehttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/302725/af_event__9_april_slides.pdf


https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/302725/af_event__9_april_slides.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/302725/af_event__9_april_slides.pdf


Indicative timeline for first Allocation Round


Indicative timeline for first Allocation Round

MilestoneExpected Date

(with no disputes)

Worst case dates

(with disputes)

Final budget notice published 30 Sep 2014 30 Sep 2014

Commencement date of the allocation round 14 Oct 2014 14 Oct 2014

Application closing date 27 Oct 2014 27 Oct 2014

Notices of determination 10 Nov 2014 10 Nov 2014

Applicant requests review of a non-qualification determination n/a 18 Nov 2014

Non-qualification review notification n/a 02 Dec 2014

Applicant makes appeal in respect of a non-qualification determination

n/a 09 Dec 2014

Ofgem completes appeals n/a 23 Jan 2015

Auction notice 26 Nov 2014 02 Feb 2015

Sealed bids submission closing date 03 Dec 2014 09 Feb 2015

CFD notifications sent to LCCC 29 Dec 2014 04 Mar 2015

Low Carbon Contracts sends contracts to successful applicants 29 Dec 2014 - 13 Jan 2015 04 - 17 Mar 2015

These dates are indicative and are not binding on National Grid or Ofgem



Questions

45

AGENDA







7. Close


Contracts for Difference

Matthew Taylor

47

The CFD is designed to work alongside your existing project chain incentivising delivery rather than dictating how you run your project

Pre-development Development Financing

Construction and

commissioning

Operation and Maintenance

Levy Control Framework (LCF)

and budget visibility

Supply chainPhasing

CFD AllocationFMS

Sustainability

Milestone Delivery Date

Capacity Adjustments

Conditions Precedent

Target Commissioning Window (TCW)Longstop Date

(LSD)Force Majeure

Payment mechanisms

Limited RecourseDispute Resolution

Change in Law


In designing the CFD we have a considered a number of key design factors

48

Accuracy of payments

/settlement

Management of LCF and system

durabilityInvestor certainty Flexibility

Balancing and Settlement Code

(BSC) for metering

standards,settlement

Reliability and familiarity

Eligibility criteria

Allocation

Milestone requirements

Capacity AdjustmentsTermination

Information provisions

Change control

Private Law

Termination

Direct Agreement

Market Reference Price

Indexation

Strike Price Adjustments

Capacity adjustments

Force Majeure

Relevant Construction

Event

Grid Connection Delays

Payment Disruption Event

Phasing


Key discussion points1. What are all the ‘periods’?

o Target Commissioning Window (TCW), Longstop Date (LD), Start Date

o Term

2. What capacity do I have to deliver and what if something happens?

o Installed Capacity

o Permitted Reductions

o Relevant Construction Event and Force Majeure

3. What is the ‘Milestone Requirement’?

o Total Project Pre-Commissioning Costs (TPPC); OR

o Project Commitments

4. How is value maintained throughout the life of the CFD?

o Change in Law, Curtailment, Generation Tax, Qualifying Shutdown Event (QSE)

o CPI Indexation, Balancing Services Use of System (BSUoS)/Transmission Loss Multiplier (TLM)

5. When might you be terminated?

o Pre-start date termination

o Post-start date termination


What are all the ‘periods’?

50

Agreement Date

Milestone

Target Commissioning

Window

Long-stop date

Long-stop period

12 months in all instances except solar (3 months) and landfill gas (6 months)

12 months in all cases apart from:• 6 months for landfill gas• 24 months for offshore wind, tidal

range, tidal stream and wave


What are all the ‘periods’?

51

Target Commissioning

Window

Long-stop date

Long-stop period

A start date for payments may be triggered anywhere within this time

But the 15 year term in which support is offered will start at the end of the TCW, irrespective of whether you are generating

The CFD may be terminated if you have not reached a start date for payments by the LD


What is ‘Installed Capacity’?

i.e. the capacity “on the box”

52

Nameplate Capacity


100% capacity.Able to adjust capacity downwards <25%

Generator must deliver 95% by the LD or face termination (85% for offshore wind).

Worst case protection – not expected to be used.

What capacity do I have to deliver and what if something happens?

53

CFD signed

Milestone Delivery

Date – 12 months from Agreement

Date

Target Commissioning Window - 12 months in all instances except solar (3

months) and landfill gas (6 months

Long-stop date

100MW Reduce 20MW to 80MW

Commission 80MW


Force Majeure and Relevant Construction Event

54

FORCE MAJEURE – TIME DELAYS Force Majeure means any event or circumstance that is beyond the reasonable control

of the parties; Both the Generator and the Low Carbon Contracts Company are relieved from any

obligation under the CFD where a failure to comply with an obligation is the result of Force Majeure;

Examples include volcanic eruptions that delay construction.

RELEVANT CONSTRUCTION EVENT – CAPACITY REDUCTIONS Means any circumstance which an operator acting to a reasonable and prudent

standard would not have been aware that renders the construction of all, or a part of, the project uneconomic;

Generators may make reductions to their installed capacity, in excess of the permitted reductions, where an RCE occurs;

Examples include unexploded ordinance in the construction site.


What is the Milestone Requirement?Within 12 months of the CFD being allocated, a generator must re-assert their commitment to delivering the project by meeting one of the following two Milestones:

By incurring actual spend (not “committed spend”) equal to 10% of the expected development and construction costs (Total Project Pre-Commissioning Costs) of the technology (as determined by DECC) i.e. offshore wind will be £2.05m/MW of Installed Capacity Estimate;

OR

By evidencing contracts are in place to buy all of the material equipment for the generation and export of electricity, entering an EPC contract and proving you have the means to finance the projects.

Either limb must be accompanied by a Director’s Certificate confirming that the Director(s) have made careful enquiries in relation to the information provided alongside the certificate.


Maintaining Value: Change in law

56

Designed to address the risk that price stability is unduly impacted by changes in law, regulation or industry documentation.

Only applies to change in law that was not foreseeable. Fall into three categories;

Specific

Specifically applies only to:• one technology• CFD holders• CFD holders of a certain

technology.• holding of interests in

companies or organisations involved in facilities covered by one of the definitions above

Discriminatory

Only affects:• the project• the facility • the generator

“Other”

• Instigated by the UK Government

• Undue, not objectively justifiable, discriminatory effect when compared with the effect on certain other generators

Generators will be compensated for adjustments to revenues, operational or capital expenditure associated with a ‘Qualifying Change in Law’ via: a strike price adjustment, a lump sum payment or a staged payment.

Generators are also compensated in respect of certain Generation Tax, Curtailment and QSE events.


2013

/14

2014

/15

2015

/16

2016

/17

2017

/18

2018

/19

2019

/20

2020

/21

2021

/22

2022

/23

2023

/24

2024

/25

2025

/26

2026

/27

2027

/28

2028

/29

2029

/30

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

£150

£170

£190

£210

£230

£250

£270

£290

CPI Strike Price - Indexed Base Year Strike Price

Maintaining Value: CPI Indexation

57

The consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.

The CPI 12-month rate between June 2013 and May 2014 was 1.5%


Maintaining Value: BSC Charges, TLM

58

The CFD sets out an assumed level of ‘Initial BSC Charge’ and a TLM trajectory;

Prior to each ‘Indexation Anniversary’ the LCCC will assess changes in the BSC Charges and TLM via a prescribed formula;

The formula will result in a strike price adjustment reflecting the changes over / under the initial rate or prescribed trajectory.


Designed to provide an appropriate and proportionate approach to contract enforcement in order to ensure projects are efficient and deliver value for money.

CFDs may only be terminated in specific circumstances of failure by the Generator. There are two types;

1. Pre-start date termination;• Occurs where the Generator fails to meet Milestones or fulfil Conditions

Precedent.• No termination payments apply.

2. Post-start termination;• Occurs in the following instances; Insolvency, non-payment, breach of key

obligations and credit support default. • Generator obliged to pay the Low Carbon Contracts Company a

“Termination Payment” if CFD is terminated on or after the start date (except where formula results in 0)

When might you be terminated?


Questions


61

AGENDA







7. Close


62

Applying the Contract to Your Project

Nic Rigby


63 Generator Journey through CfD: Contract and Pre-allocation – 24 June 2014

Documents referred to• The “Regulations” - The Contracts for Difference (Standard Terms)

– Part 3 describe Minor & Necessary changes• Laid before Parliament on 23 June 2014

• “Guidance” on Minor & Necessary Change Requests, To be published Mid July and includes the template form ‡

FiT Contract for Difference Standard Terms and Conditions• See DECC, Electricity Market Reform: Contract for Difference web

page, dated April 2014 CFD Agreement Relating to [name of Project]

• See DECC, Electricity Market Reform: Contract for Difference web page, dated April 2014

• Private Wires June 2014 last 2 documents are referred to as the “Contract”‡ Guidance Documents published before regulations enter into force will be draft as powers are yet to be

conferred, and will not include “specified amount” as per 7 (3) and (6) of the Regulations

63


The Contract, Your Project and You

The Contract has been designed to cover a wide range of eventualities

Standard contracts deliver fairness, good understanding, robust and consistent delivery

Have you checked how your project will fit? Early collection of the data to complete the Contract is

essential Perhaps reviewing the Contract, your project and where

the data fits and why, might identify a “Minor & Necessary” change

64


What is a Minor change

• Regulations determine Minor & Necessary• The effect of a modification is not minor where

• it would be likely to decrease the liabilities of a generator under a CFD or

• increase the commercial benefit for a generator of a CFD, or • it would be likely to cause the CFD counterparty to incur costs above a

specified amount as a result of the CFD counterparty carrying out its obligations under the CFD

• Specific parts of the contract are affected (see next slide)• The CFD counterparty may accept an application where the modification

impacts on contractual arrangements with 3rd parties, but would be likely to provide the CFD counterparty with a commercial benefit.

65


Not Minor if affects any of the following

• Payment periods• Milestone Dates re sums incurred or documentation• Payment calculation methodologies• Invoicing and payment time limits• Collateral provisions• Information provision necessary re the Low Carbon

Contracts’ obligations and payments• The “Guidance” will provide a non exclusive cross reference

to clauses covered by this part of the “Regulations”

66


What is a Necessary change

• “…a modification is necessary where an applicant acting reasonably could not accept the offer of a CFD without the modification.

• A modification is not necessary where the way in which the applicant is owned or controlled is the reason for the modification.”

• If other projects with similar characteristics don’t think the changes are necessary then Low Carbon Contracts will take that into consideration

67


Before you start

Read the “Contract”, (https://www.gov.uk/government/publications/electricity-market-reform-contracts-for-difference

If > 300MW you will be developing and preparing to submit your supply chain plan

Collect all data needed to complete a CFD

Today

68

https://www.gov.uk/government/publications/electricity-market-reform-contracts-for-difference




The Process – Preparation Stage

• When DECC publishes the final contract online and the Allocation round notice is published Check the Contract for Changes

If the generator believes a “Minor & Necessary Change” is appropriate Submit changes Early submission gives time for rejection and resubmission to find

solution

69


When and Where to Apply

• “Guidance” on requesting changes will be published mid July

Minor & Necessary Changes should be sent to Low Carbon Contracts and be submitted using the template form.• Low Carbon Contracts will process from 1 August Last submission date is 20 Business Days before end of Application

Closing Date (ACD) i.e. ACD-20

• Forms received after this deadline in relation to 2014 allocation round projects will not be considered.

The generator should fill in section 1 - 7

70


The Minor and Necessary Change Request Form - Draft

71

Minor & Necessary Change Request Form

Requests for Minor & Necessary Changes should be sent to xxxx and be submitted using this template. So as to be considered for Projects in the 2014 allocation round, Minor & Necessary Change Request Forms must be received by 1700 on xx September 2014.. Forms received after this deadline in relation to 2014 allocation round projects will not be considered prior to the closing date for that allocation round.

In this form, references to the “Regulations” are to The Contracts for Differences (Standard Terms) Regulations 2014 as laid before parliament on 23 June 2014.

1. Applicant Details

Company name of applicant for CfD: Name of Project: Individual making request: [Point of reference for all communications with the Low Carbon Contracts Company in relation to this request] E mail address: Telephone number: Postal address: Alternative e mail address: Alternative Telephone number:


2. Date

Date of Submission: Prior application made: Yes/No If Yes, date of prior application: 2014 Allocation round Please ensure Director’s statement is signed Later Allocation round

Date of Receipt: To be completed by the Low Carbon Contracts Company


72



3. Short description of Minor & Necessary Change(s)

Generator noted that they will be connected to the existing Land’s End 400kV substation via a (roughly) 10km underground cable which will be constructed, owned and operated by the Generator. The cable route is permitted and benefits from executed and agreed easements, but in both cases these give some discretion so that the exact route of the cable can be determined during the construction phase within an agreed envelope.

73


Minor and Necessary Change Request Form - Draft

4. Proposed change(s) to legal wording of Clause(s) in the CFD Agreement. Please state Clause numbers as relevant.

Limb C of the “Facility” definition to be modified to include the words “(except as otherwise agreed in writing by the CfD counterparty)” to allow the CfD counterparty to accept these assets as a part of the Facility once the exact location was known.

74



5. Is the change permitted by the Regulations? 5.1 Why is the proposed change considered to be “Minor”?

This change does not decrease the Generator’s liabilities or increase the Commercial benefit for the Generator under the CFD. The costs to the CFD Counterparty should not be material. The proposed change does not change provision for any of the matters listed in regulation 7 (2). The Generator believes that the proposed change also does not affect any existing contractual arrangements between the CFD counterparty and 3rd parties or require the CFD counterparty to enter into any new contractual arrangements with 3rd parties.

75



5.2 Why is the proposed change considered to be “Necessary”?

The current wording requires the Generator to build the “Facility” within the geographic constraints provided in the application. At this stage the Generator

cannot be completely certain as to what exact route the cable will take and therefore needs flexibility in terms of the route taken by the underground cable.

5.3 Other reasons for the change. Generators to provide details of any other issues associated with the change.

76



6. Annexes

Please insert any additional analysis here to support the points you wish to make in the section below or attach as separate files in the email with this completed template. Please list names of all files attached.

Drawing showing permitted cable routes.

77



7. Director’s Statement

In relation to 2014 allocation round projects – I hereby confirm that I am one of the Directors of the Company that owns and manages the above project. I also confirm that all applications required have been made in sufficient time to enable the eligibility criteria to be met before the 2014 application process closes, including grid, network or private wires connection and consent.

Name in Block Capitals Signature

78


What Low Carbon Contracts will do

• The generator will be notified of outcome• 8. Accepted, rejected or more information requested• 9. Reason for rejection

• The Low Carbon Contracts Company must respond no later ACD- 5

79



8. Low Carbon Contracts Company response To be completed by Low Carbon Contracts Company – Accepted

9. Reasons for rejection including references to clauses in the Regulations, if applicable.

To be completed by Low Carbon Contracts Company

80


What Generators Can Expect

• Applications submitted close to ACD-20 could be rejected due to insufficient information• with no opportunity to re-apply

• Agreed contract changes will be published by Low Carbon Contracts if the CFD is entered into.

81


Minor and Necessary Request

• Guidance published mid July 2014

• Low Carbon Contracts process of change review commences on 1 August 2014

• Last submission date for requests, ACD -20

• Low Carbon Contracts must respond by ACD -5

ACD -20 business days

ACD -5 business days

Publish Guidance

82


What Generators should do now

Read the Contract

Collect data

Check how the Contract works for you

If you need to apply for Minor & Necessary changes apply early

83


Process Map for Minor & Necessary Changes

84


Implementation Plan

85

86

Questions?


87

AGENDA







7. Close


88

CFD Implementation Feedback Session

Ruth Herbert


89

Content

1. Review of risks and issues from previous session

2. Stakeholder events programme

3. General Q&A


90

Generators’ risks and issues

I.D. Risk/Issue Owner Actions Status1 Lack of clarity on certain

elements of the overall CFD scheme design.

DECC Mitigate - DECC to engage with market participants to ensure the rules and processes are properly understood.

Open

2 Lack of familiarity with obligations on the generator arising from the generic CFD contract.

DECC / Low Carbon Contracts Company

Mitigate - DECC to engage with market participants to ensure the rules and processes are properly understood.

Open

3 Generators' preparation for CFD eligibility needs to take place several months prior to the confirmation of the available budget for the first round.

DECC Mitigate – actions include planned publication of indicative budget figures in mid July.

Open


91

Generators’ risks and issuesI.D. Risk/Issue Owner Actions Status4 Small independent

generators need more information about access to "back-stop" PPAs (Offtaker of Last Resort arrangements) before they can participate.

Ofgem / Low Carbon Contracts Company

Mitigate - DECC to engage with market participants to ensure the rules and processes are properly understood.

Open

10 New market entrants may not be able to take part in implementation coordination sessions but will need to be brought up to speed on CFDs at a later date.

Elexon Mitigate - Elexon and all CFD delivery partners to consider what information should be incorporated into market induction.

Open

11 Implementation Plan does not cover Northern Ireland.

DECC / Low Carbon Contracts Company

Tolerate for now - Update to a UK-wide Implementation plan once timetable is confirmed for Northern Ireland implementation.

Open


92

CFD Implementation Coordination EventsDate Event Lead / Contact

10 July Generator Journey through CFD –Eligibility and Allocation Processes

National [email protected]

Late July Applicant readiness Low Carbon Contracts/National [email protected]

August CFD Implementation Coordination Update and Review Session Progress and issue trackingApplication and allocation system readiness (National Grid)Settlement system update (Low Carbon Contracts/Elexon)

Low Carbon Contracts/National [email protected]


mailto:[email protected]







93

CFD Implementation Coordination EventsDate Event Lead/ Contact email

Sept CFD Implementation Coordination Update and Review Session Progress and issue trackingFinal applicant readiness (Grid)Settlement system testing plans (Low Carbon Contracts/Elexon)

Low Carbon Contracts/Elexon/National [email protected]

Oct CFD Implementation Coordination Update and Review Session Progress and issue trackingFinal applicant readiness (Grid)Settlement system update (Low Carbon Contracts/Elexon)

Low Carbon Contracts/Elexon/ational Grid [email protected]

Nov CFD Implementation Coordination Update and Review Session Progress and issue trackingFinal applicant readiness (Grid)Settlement system update (Low Carbon Contracts/Elexon)

Low Carbon Contracts/Elexon/National [email protected]








94

CFD Implementation plan


95

CFD User Guide• Already committed to publishing relevant materials

including process maps on our portal following implementation sessions

• Some industry feedback that a User Guide focused on what generators need to do would be more helpful

• We are coordinating with CFD delivery organisations on User Guide that will include:– relevant process journeys and narratives– case studies– links to all relevant reference material

• Aim to complete this before 1 August so it can be the first port of call for applicants


96

Questions?


97

AGENDA







7. Close


The Offtaker of Last Resort (OLR)

Helena Crow

Overview


1. Why is the Offtaker of Last Resort needed?

2. What form will the Offtaker of Last Resort take?

3. What impact will the Offtaker of Last Resort have?

Why is the OLR needed?


- The Offtaker of Last Resort (OLR) aims to guarantee eligible renewable CFD generators a route to market in such a way that, alongside the competitive allocation of CFDs:

- reduces the cost of investment in renewable electricity generation, - boosts competition, and - ultimately lowers costs to consumers.

- Without the OLR, lenders require independent renewable generators to have a long-term Power Purchase Agreement (PPA) if they are to secure debt-finance. Yet few suppliers are able to offer these contracts on bankable terms.

- This can make it more difficult for independent renewable generators to build in a cost-effective manner. It also reduces competition in the generation market.

What form will the OLR take?


The OLR provides renewable CFD generators with a guaranteed route-to-market for their power at a significant discount to the market price. Generators may wish to access the OLR if they cannot find a better deal in the open market.

► Offtakers are competitively allocated to generators, by bidding a management fee

► Certain suppliers mandated to bid; other suppliers can do so voluntarily

► Credit-worthiness: ensured by credit rating or letter of credit

Generators have a right to a

‘Backstop PPA’

Obligation on some suppliers to bid for

backstop PPAs

► Management fees bid by backstop offtaker are levelised across all suppliers through a levelisation process

Management fees levelised across

suppliers

► All renewable CFD generators have a right to a BPPA throughout their CFD, enshrined in regulations & supply licence conditions. Terms grandfathered from the point of CFD signature.

► Generators will be able to apply to a BPPA by submitting an Expression of Interest to Ofgem.

► 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 project’s worst case revenues.

► Backstop PPAs are 1yr in length, with a minimum tenor of 6 months. The terms of the Backstop PPA Contract are designed to be as similar as possible to an open market PPA.

► Should deem the OLR ‘bankable’ and lend against this guaranteed revenue and any secured PPA

► May be willing to assume revenues above the OLR for early CFD years

► Should reduce the collateral required in open-market PPAs deemed bankable through OLR protection

► Suppliers should continue to respond to generator requests for PPAs of all lengths, though they may see an increase in demand for bankable PPAs of shorter tenors

► OLR likely to allow more smaller suppliers to be deemed ‘bankable’ and encourage more activity in the shorter-term PPA market where they operate

► Suppliers should provide indicative PPA terms to generators seeking them ahead of CFD auction

► 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

What impact will the OLR have?


Generators

Lenders

Suppliers

Timeline for Implementation

103

w/c 23 June: • Government Response to the February Consultation, which focused on the OLR’s high level design.

• Consultation published on the implementation of the OLR, including drafts for three documents: Regulations, License Code Modifications and the Backstop PPA contract.

July 2014: • End-of consultation period.

Autumn 2014: • Secondary Legislation in place by the time of the first CFD allocations


Questions


105

Close
