Contract for Difference: The Basics. Levy Control Framework

Transcription

1 Contract for Difference: The Basics Electricity Market Reform has long been a key priority for the renewable energy industry. Scottish Renewables has been closely involved in this fast changing policy environment since the publication of the UK Government s white paper in Now, with the first allocation round of Contracts for Difference taking place this October, we are rapidly moving from a stage of policy development to one of implementation and there is an urgent need to bring the industry up to speed with the new mechanism. The following document sets out some of the key principles of this new support mechanism and is designed to act as a guide for those that are new to this policy area and provide direction to sources of more detailed information. The topics covered include: Levy Control Framework Renewables Obligation Transition arrangements Contracts For Difference (CfD) Eligibility Criteria Allocation Rounds Auctions o Minima Auctions o Technology Neutral Auctions o Bid flexibility Delivery obligations Levy Control Framework Source:

2 The Levy Control Framework (LCF) essentially operates as a cap on levy funded expenditure to ensure that DECC achieves its fuel poverty, energy and climate change goals in a way that is consistent with economic recovery and minimising the impact on consumer bills. The LCF begins at 3.3 Billion and rises to 7.6 billion in 2020/21. However, DECC has been clear that its ambition is to deliver the 2020 carbon reduction targets under-budget. Overall the LCF acts to constrain the total spend on deployment of all technologies that are delivered through the Feed-in Tariff, Renewables Obligation and Contracts for Difference. With this in mind, DECC has modelled some assumptions of the volume of capacity for various technologies that it expects to come forward within each support scheme. The table below sets out the projected range for total capacity by technology for Great Britain. The capacities shown are taken from the System Operator (National Grid) modelling (available here). The ranges reflect different underlying assumptions about future technology costs, fossil fuel prices, biomass conversions and the commissioning dates for new CCS plants. Although the ranges shown do not cover the full range of possible outcomes, they do provide a useful indication of what the modelling suggests is possible. Although DECC has previously stated that these scenarios are in no way government targets, it has become increasingly evident that the modelled onshore wind scenario of 13GW is an accurate representation of the UK Government s ambitions for total deployment of this technology. With current installed capacity of onshore wind in the UK sitting at 7.2GW, 1.5 GW under construction, a further 5GW consented and 6.5GW in planning, it is clear that these ambitions fall short of the current total pipeline. However, it is important to note that not all projects in planning or even with consent will be constructed; the rate of onshore wind deployment in 2012 and 2013 sat at around 1.2GW in each year. Finally, as it stands, 13GW has not been defined as an explicit cap anywhere within the EMR legislation or regulations; it has only been used as a scenario to inform the size the available budget. Renewables Obligation (RO): Transition The Renewables Obligation remains open to all technologies (with the exception of Solar PV >5MW) until 1 st April 2017 and the developer s choice of scheme is considered to take place at the following points: Application for RO accreditation Application for CfD Signature of an Investment Contract Under the RO, the application for accreditation takes place once the project is generating, unlike the CfD where the generator must apply in advance. Therefore it is important to note that, if you apply for the CfD and are unsuccessful,

3 Price ( ) you can still opt for the RO as long as it remains open. However, if you successfully apply for a CfD and choose to turn down the contract, then neither option will be available. For those projects choosing to progress under the RO, there are four grace period provisions available. Generators can only choose one grace period and each of the options is available to selected technologies or groups as follows: 12 months for radar and grid connection delay open to all technologies 12 months for contract termination under specific conditions open to all FIDeR projects 12 months for enabling financial decisions open to offshore wind and advanced conversion technologies (ACT) 18 months for all biomass and biomass CHP below 400MW Further details of each grace period, including the application timeframe required qualifying evidence can be found in Annex C of DECC s response to the consultations on the Renewables Obligation and on Grace Periods, available here Finally, the RO system as a whole will end on the 1st April This means that, although the grace period extends the window to access the RO, the 20 year contract length is not protected beyond this date. Contracts for Difference (CfD) Contracts for Difference (CfD) will be the only option of support for all low carbon electricity generating technologies >5MW beyond 1st April CfD s differ from the RO both in terms of contract length and in the nature of the payments received. CfD s offer support for 15 years and, rather than receiving a fixed payment per MWh, CfD generators essentially receive a top up payment between the market price and an agreed strike price. market price of electricity Strike Price Time The graph above sets out the principle of the CfD mechanism. You can see that where the market price of electricity remains below the strike price generators will receive a top up payment. However, where the market price exceeds the strike price, generators are required to pay back the excess. The strike price for each technology is different and designed to reflect their varying levels of technology readiness and cost of capital. The administratively set strike price for each technology is set out below.

4 /MWh, 2012 prices Technology 2014/ / / / /19 ACT (with or without CHP) AD (with or without CHP) Biomass Conversion Dedicated Biomass (with CHP) Energy from waste (with CHP) Geothermal (with or without CHP) Hydro (>5MW and <50MW) Landfill gas Sewage Gas Offshore Wind Onshore Wind (>5MW) Solar PV (>5MW) Tidal Stream Wave Scottish Islands Onshore Wind Although DECC has set strike prices up to 2018/19, the final strike prices for 2019/20 will be determined at a later date. In addition to each technology having its own administratively set strike price, all technologies are split between the following pots and each pot will be assigned its own budget: 1. Established Technologies 2. Less Established Technologies 3. Biomass Conversion Established technologies will undergo a competitive allocation process from the outset this will require each project to enter an auction and submit bids for a strike price on or below the administratively set price, with the allocation of support going to the lowest affordable bids. Less established technologies will be able to access the administratively set strike price, unless the capacity of projects applying exceeds the level of budget allocated. In this instance a competitive process will be triggered. It is important to note that wave and tidal generators, although considered as less established technologies are subject to a 100MW minima (allowing the first 100MW access to the available budget). Finally, given the scale and unique costs of biomass conversion technologies, DECC has determined that this technology should be allocated budget to a unique pot and it is expected that this will be sized to generate competition.

5 Allocation Rounds Generators aiming to secure a contract can do so through allocation rounds, which will be held at least on an annual basis. Ahead of each of round the Secretary of State will write to the EMR Delivery body to inform them of the budget level (i.e. the proportion of the LCF) that they will be allowed to allocate. DECC has announced that the first allocation round will take place in October 2014 and a total of 300 million has been set aside for allocation in (an increase of 95m from the draft budget notice issued in July). The budget will be split between two pots, with an increasing profile in each. However, DECC have also set out their revised reference price. This is DECC s forecast of the wholesale electricity price which they use to value the impact of CfD applications. The revised price has reduced by roughly 10 across all years, which will mean that all projects will be valued as more expensive and will therefore dampen the impact of the budget increases set out below. established technologies (onshore wind, solar, energy from waste [with CHP], Hydro [>5MW <50MW] and landfill & sewage gas): will be able to access a total of 65m - 50m for projects commissioning from 2015/16, and a further 15m for projects commissioning from 2016/17 an increase of 15m from the indicative budget announced in July. less established technologies (offshore wind, wave, tidal, island onshore wind [pending state aid approval], advanced conversion technology, anaerobic digestion, dedicated biomass with CHP and geothermal): will be able to access ): a total of 235m will be available - 155m for projects commissioning from 2016/17, and a further 80m for projects commissioning from 2017/18 this represents an increase of 80m from the indicative budget announced in July. There is no budget attached to the third pot for biomass conversion, and no further clarification on the budget to be made available in the second allocation round expected in October 2015 (other than it anticipates a further 50m being made available for established technologies) Further Allocation? DECC has been clear that they do not intend to release any further budget information ahead of the scheduled budget notice in July

6 Eligibility Criteria In order to qualify to apply for an allocation round, you cannot have been excluded from a previous round and the developer must satisfy the following eligibility criteria : Grid connection agreement/ countersigned offer Planning permissions Approved supply chain plan (for projects > 300MW) Supplemental requirements for phased offshore wind Other information Grid Connection Agreement The CfD delivery body will accept three types of connection agreement: Direct connection agreements entail an agreement(s) for connection with the TSO and/or DNO for at least 75% of capacity; Partial connection agreements are an agreement between a private wire generator and private wire network operator and an agreement between the private wire network operator and the TSO/DNO; Islanded CfD unit agreements require an agreement between the private wire generator and private wire network operator in addition to confirmation that no connection agreement applies or is to apply. The generator must determine which option applies and upload the relevant documents to the system. The delivery body will then assess the document s consistency against the CfD application and take into account any contradictory evidence presented. Planning Permissions The applicant must present all relevant planning permissions relating to the CfD unit and getting the power to the transmission of distribution network. However, there is no requirement to provide permissions for the TO/DNO works. The relevant consents could include: Section 36 Crown Estate agreement for lease/ lease (offshore only) marine licence Marine licence Planning permission Development order/ Transport and Works Act order The generator must determine which permissions apply and obtain and upload copies of relevant documents. The CfD delivery body will then assess consistency against the CfD application and take account of any contradictory evidence. Approved Supply Chain Plan The supply chain plan is designed to allow government to assess the extent to which projects will support the development of competition, innovation and skills in supply chains. Each plan should be written for the specific project and each criterion will be assessed against: The commitments or actions that the project has either already undertaken or will undertake in the future; The impact on the supply chain as a whole, using examples from the contracted supply chain if not a vertically integrated project, and; The wider long term impacts across the relevant low carbon electricity generating industry. DECC have produced guidance for all projects required to submit supply chain plans: Projects entering the first allocation round in October 2014 were required to submit their supply chain plan to DECC between 1 st and 26 th August and DECC aimed to assess plans within 30 days. Supplemental Requirements

7 Where the technology type is AD (with or without CHP), Hydro, Onshore Wind or Solar PV the capacity of that CfD unit must be greater than 5MW. Where the CfD unit is (or is to be) a phased offshore wind project, applicants are required to demonstrate that the final project will be no greater than 1500MW once all phases are complete, the first phase is targeted to be complete no later than 31 March 2019 and the target commissioning date of the last phase is no later than 2 years after that. Further details on each of these requirements can be found in the CfD Allocation Framework Auction Process Where an auction is required, this will proceed under a sealed bid approach and the payment rule will be pay as clear. In order to address concerns around confidentiality, the National Grid Delivery Body will be required by provision in the Allocation Regulations to treat sealed bids confidentially (albeit that the independent auditor will require access, subject to appropriate confidentiality clauses). To outline the auction process as clearly as possible the following simplifying assumptions have been applied: There are 4 technology types There is a 30MW minima attached to technology type 3 There are only two delivery years (16/17 and 17/18) Although established and less established technologies will be subject to separate auctions the process for each will be the same. We have therefore not included this definition Bid flexibility is covered at the end Full details of the process and regulations can be found on the DECC website. Step 1: Application potential applicants will be notified that an allocation round will commence with applicants able to submit projects for eligibility assessment within a defined time period Step 2: Supply chain plan approval Step 3: Eligibility Applicants will be assessed against defined eligibility criteria, including planning consent and connection agreement as set out above. Step 4: Valuation The delivery body will take all eligible projects and value their impact on the relevant budget allocations (established, less established or biomass conversion) using the defined valuation formula 1. Minima Where a minima has been defined for that allocation round, the delivery body will sum the capacity and value of the technology type specified. Where the capacity sum is less than the defined minima and the budget is not breached in any year, all applications will be determined as successful. Otherwise there will be a requirement to hold an auction within the minima. General - Where the budget is breached in any delivery year, an auction will apply for all years. Step 5: Invitation to auction Where an auction is required the delivery body will notify all qualifying applicants inviting the submission of sealed bids within 5 working days Sealed bids submitted must contain proposed strike price, delivery year and capacity Step 6: Minima Auction The first step of the auction process will be for the delivery body to collate all sealed bids for any technology specific minima and rank in order of proposed strike price (i.e. bid price) regardless of delivery year. 1 Budget Impacts,yr = ((Strike Pricet,cy X Inflation Indexyr) (Reference Priceyr X Inflation Indexyr)) X (Capacity Deployeds X Hoursyr X Load Factort X RQMt X (1-TLMyr ) X CHPQMs)

8 Example: Projects A- F submit following bid prices Project Bid price Administrative SP Capacity (MW) A B C D E F

9 The Delivery Body will then sort according to bid price regardless of delivery year Project Bid price Administrative SP Capacity (MW) B A D C F E CLEARING PRICE 121 TOTAL CAPACITY 27 Starting with the cheapest bid, the delivery body will assess two things: 1. Is the minima breached (in terms of capacity)? 2. Is the using the strike price, is the budget breached in any year? In this example, Project E is the cheapest with a capacity of 5 MW with a bid price of The capacity is lower than the minima of 30MW 2. Using the valuation formula the delivery body will assess whether the project will exceed the budget in any year Where minima and the budget are not breached, then the project is successful. The next project is then assessed with its bid price becoming the clearing price for all projects below. The process is then repeated - in this example Project F is the second cheapest project with a capacity of 10MW and bid price of The combined capacity of projects F and E is 15MW and therefore lower than the 30MW minima 2. The bid price of 113 now becomes the clearing price and the delivery body will now use the valuation formula to assess the impact on the budget of 15MW with a strike price of 113 Where minima and the budget are not breached, then the project is successful. This process continues until all applications are accepted or one project breaches the minima or the budget. In this example, projects D,C,F and E are all successful and the auction ends with a clearing price of 121. Unsuccessful minima projects (B and A) will now be included in the technology neutral auction.

10 Step 7: Technology neutral auction Following the minima auction the delivery body will now look to allocate remaining budget across all other applications Project Bid Price Admin SP Capacity Delivery Year Tech type B /17 3 A /18 3 F /17 1 G /18 2 H /18 4 I /17 1 J /18 2 K /17 2 L /18 1 M /17 2 N /18 4 O /17 1 P /18 4 First delivery body will sort all applications into price order regardless of delivery year Project Bid Price Admin SP Capacity Delivery Year Tech type B /17 3 A /18 3 G /18 2 M /17 2 J /18 2 K /17 2 L /18 1 F /17 1 O /17 1 I /17 1 H /18 4 P /18 4 Repeating the same process, the cheapest bid is assessed first. In this example the delivery body will use the valuation formula to assess project P with a bid price of 80 and a capacity of 400 against the remaining budget profile. If the project does not breach the budget in any year beyond the delivery year then the project is successful.

11 Next, the delivery body will look at the second cheapest project which in this example is Project H with a capacity of 100 and a bid price of 85. Now the bid price of 85 becomes the clearing price. Therefore using the valuation formula the delivery body will assess the impact on the budget profile of a combined capacity of projects P and H ( MW) with a strike price of 85. If the budget is not breached in any year then both projects are successful. This process repeats with each new successful project setting the clearing price for all technologies below. However, the clearing price for all technologies is capped at the administratively set strike price for each technology. In this example: projects M,J,K,L,F,O,I,,H and P are successful The clearing price for 16/17 is 107 The clearing price for 17/18 is 105 All projects will receive the clearing price subject to administratively set Strike Price o All tech 1 projects will receive the admin SP of 100 o All tech 4 projects will receive the admin SP of 90 Projects B, A and G are unsuccessful Bid Flexibility DECC has included some provisions that allow for some flexibility across bid price, delivery year and capacity. Each project will submit [X] bids and, where the budget is breached in the delivery year, the EMR delivery body will look at the flexible bids. Your overall preference order is associated with your strike price bid. Projects cannot bid a different strike price within the same delivery year. However, in order to differentiate bids and to state order of preference, differentiated strike price bids may be submitted within a fraction of a penny. Project Bid Price Admin SP Capacity Delivery Year Tech type B /17 3 A /18 3 G /18 2 G /17 2 G /18 2 G /18 2 M /17 2 J /18 2 K /17 2 L /18 1 F /17 1 O /17 1 I /17 1 N /18 4 H /18 4 P /18 4

12 In this example projects, P,H, I,O,F, L, K, J and M are all successful based on their preferred bid option. Project G breaches the budget therefore the delivery body will look at the flexible options. G 1 is the cheapest option which breaches the budget and is therefore discounted. G 2 G 3 and G 4 are considered in turn if one of the options is successfully valued without breaching the budget, it will be accepted and will become the new clearing price. If there are no successful options the auction is closed and whatever year is breached will now be closed for new applications in this allocation round. In this instance G 4 is successful with a reduced capacity of 150MW delivering in 18/19. Delivery Obligations Applicants that successfully secure and sign a CfD are now subject to a series of delivery obligations. Failure to meet some of these obligations could result in the cancellation of your contract and this is designed to ensure that only the most viable projects seek support through the CfD. The CfD delivery obligations are reflected in the contract through initial conditions precedent (ICP) and further conditions precedent (FCP) which must be fulfilled within ten days of signing the contract. ICPincludes: Legal opinion that the generator is properly formed under relevant laws Generator is compliant with know your customer or equivalent procedures FCP includes: Milestone evidence Target commissioning window; and Maximum capacity to be commissioned before the long stop date Throughout the process of providing this information there are opportunities to adjust the levels of contracted capacity within certain limits. Finally, a range of force majeure clauses are in place to protect the applicant from events that are outwith their control. The Milestone Delivery Date (MDD) is set at one year from the point of contract signature for all technologies. Within this year the applicant must provide evidence of either: Spend on 10% of all project pre-commissioning costs specified by CfD technology in the CfD agreement by the MDD Commitments that are a proxy for spending money such as signing contracts committing significant expenditure against the delivery of agreed capacity Failure to meet this requirement could result in contract termination. The Target Commissioning Window (TCW) is the period (elected by the generator) within which the generator can commission without penalty. The available window is technology specific, and failure to meet delivery results in the contract commencing, thereby gradually reducing the effective period of support. Failure to deliver the specified capacity by the Longstop Date will result in contract termination, allowing DECC to reallocate budget within the LCF from projects that have failed to deliver within a reasonable timeframe. Generators are able to make cost free adjustments to capacity within set parameters at the MDD and the Longstop Date. Projects with a capacity greater than 30MW are able to adjust the capacity (reduction only) of 25% at MDD and 15% at Longstop Date.

13 Projects with a capacity less than 30MW will have appropriate flexibility to ensure that failure to deliver one turbine does not result in termination of the contract. Therefore, projects with a capacity less than 30MW can adjust the capacity by up to 25% at the MDD and by 5% at the Longstop Date or by an amount equal to the capacity of one turbine. Other capacity adjustment securities exist within the Force Majeure provisions in the contract, such as the ability to adjust capacity in response to certain geological conditions. Key Terms CfD LCF CCS FiT DECC CHP MW MWh GW RO PV FIDeR ACT TSO DNO SP RQM TLM CHPQM MDD TCW Contract for Difference Levy Control Framework Carbon Capture and Storage Feed-in Tariff Department of Energy and Climate Change Combined Heat and Power Megawatt Megawatt hour Gigawatt Renewables Obligation Photovoltaic Final Investment Decision enabling for Renewables Advanced Conversion Technologies Transmission System Owner Distribution Network Operator Strike Price Renewables Qualifying Multiplier Transmission Loss Multiplier Combined Heat and Power Qualifying Multiplier Milestone Delivery Date Target Commissioning Window