This seeks to define Contracts for Difference (CfDs) and their relevance to energy related development in Copeland.

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1 Contracts for Difference and Electricity Market Reform LEAD OFFICER: REPORT AUTHOR: John Groves Denice Gallen Summary and Recommendation: This seeks to define Contracts for Difference (CfDs) and their relevance to energy related development in Copeland. Recommendation: That the contents of this report are noted. 1. Introduction 1.1 Electricity Market Reform (EMR) is the most significant change to the energy market since privatization and Contracts for Difference (CfDs) is a key element of the EMR. The reform is delivered through the Energy Act which received Royal Assent on 18 December The Act seeks to establish measures to attract the 110 billion investment which is needed to replace current generating capacity and upgrade the grid by This reflects the need to cope with rising demand for electricity; the creation of a secure and resilient energy supply and legislative requirements to reduce carbon emissions. The measures include provision for, amongst other things, CfDs long-term instruments to provide stable and predictable incentives for companies to invest in low-carbon generation. 2. Contracts For Difference (CfD) Overview 2.1 CfDs intend to provide long-term revenue certainty to investors in low carbon generation, including renewables, nuclear and carbon capture and storage. 2.2 Under CfDs, generators will receive the price they achieve in the electricity market plus a 'top up to an agreed level called the 'strike price. When the market price exceeds the strike price, the generator will have to pay back the top up. The Government believes CfDs offer the best value for money and price stability for consumers. 1

2 2.3 CfDs were welcomed by the developers of potential new nuclear generators within the UK and seen to give some form of assurance or security over pricing for the future. CfDs will provide stable and predictable incentives for businesses to invest in low carbon electricity generation. 2.4 In October 2013 the government agreed a strike price with EDF, the developer of the nuclear power station at Hinkley Point C, of This was welcomed by those in the nuclear industry as it gave confidence to developers of nuclear power stations that there was certainty of return to investment. 2.5 The UK Government needed permission from the European Union to grant the strike price under EU rules for state aid. In July 2014 the European Commission concluded that the UK scheme for Contracts for Difference was in line with state aid rules. 2.6 There remains some potential for challenge within the European Community over what some view as subsidies for the energy sector. This position creates some degree of uncertainty which may affect final investment decisions over large scale energy projects. 2.7 The briefing note attached as an appendix to this document provides further analysis. 3. Round one CfDs Awarded 3.1 The first CfD allocation auction round outcome was announced on 26 th February 2015 with 27 contracts worth 315million being offered to projects expected to deliver over 2GW of renewable energy across the UK. The established technologies pot was dominated by onshore wind projects (combined total of approximately 750MW) with only 5 solar PV projects being awarded contract (worth 72MW). Strike prices variation was an issue with two large scale solar PV projects awarded contracts for the 2015/16 delivery year obtaining a strike price of 50, significantly lower than the solar PV administrative strike price of 120/MWh. 3.2 Cambridgeshire County Council s Triangle Farm Solar Park 12MW project was awarded a contract with a strike price of 79.23p for full details refer to Appendix Implications for Copeland 4.1 Developers are seeking certainty over revenue prior to committing to invest billions of pounds in developments with a long term return in investment such as those with the nuclear energy field. 4.2 The intrinsic link between growth and development in Copeland and the energy sector is clearly reliant on investment in energy projects. Energy Market Reform and CfDs are significant in that regard 2

3 5. Way Forward 5.1 Publication of the White Paper marks the first stage of the reform process. Successful implementation and delivery of CfDs is an important element is securing confidence within developers of nuclear new build. 5.2 The Council, will maintain a watching brief on the developments with EMR and update members accordingly 3

4 Appendix One: Contracts for Difference what are they? 1. Introduction Electricity Market Reform (known as EMR) is the Government s response to the 3 main issues facing UK - the need to decarbonise the electricity supply; providing a security of supply; and minimising energy costs to consumers. Legislation in the Energy Act 2013 introduces two new reforms to the energy market, the Contracts for Difference (CfD) and Capacity Market, from the end of Contracts for Difference (CfDs) will provide long-term price stabilisation to low carbon plant, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers. CfDs will help to support new investment in all forms of low-carbon generation (renewables, nuclear, carbon capture and storage) and are designed to provide efficient and costeffective price stabilisation by reducing exposure to volatility in wholesale electricity prices. As a result it is expected that investors looking to finance new renewables and related technology will be more likely to do so due to the revenue stream being stable over the duration of the contract and so helping to diversify the UK s domestic energy supply. Low carbon generation projects have to apply for a CfD and depending on whether the technology is 'established or 'less established, the project may have to compete in an auction in order to receive a contract. CfDs will require generators to sell energy into the market as usual but, to reduce exposure to changing electricity prices, CFDs provide a variable top-up from the market price to a pre-agreed 'strike price. At times where the market price exceeds the strike price, the generator is required to pay back the difference thus protecting consumers from over-payment. Successful projects receive 15 year contracts. The CfD will be implemented through a bilateral contract between the generator and the Low Carbon Contracts Company Ltd (LCCC). The contract is a private law contract between a low carbon electricity generator and the Low Carbon Contracts Company (LCCC), a government-owned company. A generator party to a CFD is paid the difference between the strike price a price for electricity reflecting the cost of investing in a particular low carbon technology and the reference price a measure of the average market price for electricity in the GB market. It gives greater certainty and stability of revenues to electricity generators by reducing their exposure to volatile wholesale prices, whilst protecting consumers from paying for higher support costs when electricity prices are high. The payments to be made to generators will be calculated and paid out by the LCCC whilst the cost of CfDs will be met by consumers via the supplier obligation, a levy on electricity suppliers. 2. The Low Carbon Contracts Company 4

5 LCCC will play a key role in the delivery of Electricity Market Reform (EMR). It is a private company, owned by DECC, Low Carbon Contracts will manage the new Contracts for Difference introduced as part of the EMR programme which is designed to attract the 100 billion investment needed this decade to replace the ageing energy infrastructure with a more diverse and low-carbon energy mix. In order to be eligible to apply for a CFD contract, generators need to satisfy certain eligibility criteria. Five organisations have roles and rresponsibilities under the CFD sscheme Government has, amongst other things, the main role of policy design and implementation, sets the terms of the CfD contract, sets out application criteria and is the sole shareholder of the Low Carbon Contracts Company. Low Carbon Contracts Company manages and monitors CFDs, forecasts CFD payments, calculates quarterly reconciliation payments and collects payments from suppliers and passes to generators and vice versa as well as other duties. National Grid (EMR Delivery Body) responsibilities includes assessing the eligibility of applications for generic CFDs and notifying applicants of eligibility determination, valuation of all applications and assessment of whether an auction process is required, running the CFD allocation process and determination of tier 1 disputes regarding CFD eligibility. EMR Settlement Ltd (Settlement Services Provider) collects payments to/from suppliers and generators, collects and holds collateral from suppliers and takes action to recover debts owed by electricity suppliers and generators, and mutualises any unpaid debts as well as some other duties. Ofgem, amongst other things, ensures that the EMR Delivery Body carries out its duties efficiently, cost effectively and in a timely fashion, determines tier 2 disputes regarding CFD eligibility and is the body to which suspected market collusion is reported. The first CfD allocation auction round outcome was announced on 26 th February 2015 with 27 contracts worth 315million being offered to projects expected to deliver over 2GW of renewable energy across the UK. The established technologies pot was dominated by onshore wind projects (combined total of approximately 750MW) with only 5 solar PV projects being awarded contract (worth 72MW). Strike prices variation was an issue with two large scale solar PV projects awarded contracts for the 2015/16 delivery year obtaining a strike price of 50, significantly lower than the solar PV administrative strike price of 120/MWh. The majority of the less established technologies budget was taken up by two large offshore wind projects whilst no dedicated biomass with CHP projects were awarded a CfD. Cambridgeshire County Council s Triangle Farm Solar Park 12MW project was awarded a contract with a strike price of 79.23p.l Ed Davey, Energy and Climate Change Secretary noted that the auction has driven down prices and secured the best possible deal for new, clean energy. He noted that only the most price competitive projects received contracts which helped to drive down the cost of renewables 5

6 support and claimed that all technologies apart from energy from waste, cleared significantly below the maximum prices per megawatt hour (MWh), strike prices, showing competition has delivered better value for consumers. The clearing price for solar came in at up to 58% lower than the price would have been without competition, offshore wind at up to 18% lower and onshore wind at up to 17%. APSE Comment APSE welcomes the CfD awarded to Cambridgeshire County Council reflecting the fact that this local authority has demonstrated its ability to successfully manage a project which will benefit local people, generate jobs and contribute to the national energy agenda. Having passed the relevant criteria the scheme will also benefit from subsidy and hopefully this will encourage the council to invest further in renewable technologies. This is certainly an approach that others could follow. Councils should take every opportunity to get involved in this agenda. Help can be provided through APSE Energy, a dedicated resource to support local authorities who are looking to invest in renewable energy for the benefit of their communities. 6

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