CONTRACTS FOR DIFFERENCE

Transcription

1 CONTRACTS FOR DIFFERENCE The UK experience of premium subsidy Greg Dyke, Clean Electricity Directorate October 2016

2 Outcomes from Round 1 27 projects were offered contracts 22 projects from pot 1, and 5 from pot 2 2 did not sign and were barred from participating in any round within 13 months through the Non-Delivery Disincentive We have secured a range of technologies offshore wind; onshore wind; solar PV; Energy from Waste with CHP; ACT All technologies apart from energy from waste have cleared significantly below the administrative strike price Savings of around 20% on strike prices Enabled UK to secure more capacity than anticipated: rough estimate of pot 1 budget at reserve price was 700MW capacity we secured 880MW For Pot 2 we estimated the budget would buy approx 900MW at reserve prices we secured 1220MW The budget has largely been utilised 315m of the 325m budget across both pots Good geographical spread of projects 12 are in England, 4 in Wales and 11 in Scotland. Good spread of companies Winners include big 6 firms, independent generators, and one community scale wind company.

3 Contracts for Difference: Why? 3

4 The case for the CfD Capacity margin predictions c Between DECC anticipated a need for 55-65bn in new generation assets. 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% DECC Base Case (no Capacity Market) DECC Base Case with a Capacity Market Ofgem Reference Scenario DECC recognised a need to incentivise both modern conventional and renewable energy sources to replace retiring assets. 4

5 Policy drivers for the CfD Bringing forward lowcarbon capacity Driving down the cost to deliver Moving away from demandled subsidy Crosstechnology competition Delivery certainty An objectively robust framework 5

6 What the CfD delivers top ups 6

7 What the CfD delivers 1 2 Removal of wholesale electricity price exposure by providing a fixed strike price to developers, largely stabilising project revenue 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 3 Robust single counterparty owned by government and set up as a limited liability company 4 Early certainty and security of support levels in the project development process 5 Provisions that protect the value of the CFD to developers (e.g. change in law protection) 7

8 Contracts for Difference: Who? 8

9 Setting the Budget Role for UK Government In March, UK Government announced a budget of 730m for CFD auctions this Parliament, including 290m for the next auction Technologies grouped into pots Pot 1 (established technologies) onshore wind, solar PV, energy from waste with CHP, hydro, landfill gas and sewage gas Pot 2 (less established technologies) offshore wind, wave, tidal stream, advanced conversion technologies (ACT), anaerobic digestion, dedicated biomass with CHP, geothermal Pot 3 (biomass conversion) Set administrative strike prices maximum strike price per technology 9

10 Who is eligible? Qualifying form of low carbon generation Planning consents secured ACT, AD, biomass conversion, dedicated biomass, energy from waste with CHP, geothermal, hydro, landfill gas, onshore wind, offshore wind, sewage gas, solar PV, tidal range, tidal stream, wave Planning Permission/Development Consent/marine licence, section 36 Plus Crown Estates Agreement for Lease if applicable (offshore only) No requirement to provide permissions for the TO/DNO works Grid Connection Validly incorporated company Agreements for connection with TSO and/or DNO for at least 75% of capacity AND/OR Private Network Use Agreement(s) between Private Network Generator and Private Wire Network Operator Evidence that applicant is validly incorporated under the laws of the jurisdiction in which it is incorporated Supply Chain Plan Certificate from Govt. that a company s supply chain plan meets the eligibility condition If greater than 300MW Not an excluded applicant No in receipt of another subsidy (RO, CFD< CM, NFFO,RHI if Energy from Waste, unless additional capacity Non GB 10

11 The CFD auction characteristics Reverse auction: lowest bids are selected first Sealed bid: bidders simultaneously submit bids anonymously Pay as clear: the last successful bid sets the price Reserve prices: set as the administrative strike prices Pots, minima and maxima: to deliver a diverse technology mix Up to 10 flexible bids (3 in any given year): avoid bidder regret 11

12 Contracts for Difference: How? 12

13 Contract terms and conditions Maintaining Value Conditions for Delivery Management Process An instrument that regulates how payments are made and the rights and obligations that the parties to the contract agree. Contract sets out: The delivery conditions that the generator needs to meet to receive payments How payments are calculated and when they are paid Requirement to make certain representations, warranties and undertakings to enter into the contract and receive payments The measures to preserve the value of those payments How the contract can be terminated How disputes are to be resolved How the contract can be amended Sustainability and fuel measurement requirements 13

14 Agreement Date Milestone 12 months after contract signature, able to adjust capacity downwards <25% 1 year for all technologies. Payments can start at 80% capacity. 15 year term starts at the end of the TCW, irrespective of whether you are generating. 2 years for offshore wind 1 year for all other technologies, Generator must Target Commissioning Window deliver 95% by the LD or face termination (85% for offshore wind). Long-stop period Long-stop date (LD) The CfD may be terminated if generator has not reached a start date for payments by the LD Onshore wind: 100MW Reduce 20MW to 80MW Relevant Construction Event Commission a minimum of 78MW Force Majeure 14

15 Bankability of the CFD Requirements: Value for money for consumers Minimise distortion of retail market Minimise negative impacts on the market (barriers to No recourse to HMT funds entry, liquidity) Workable Fiscal neutrality Funded solely by the industry Payment certainty for generators Daily payment on 28 th calendar day Advance collection of funds Consumer costs Foresight of future liabilities Pay when paid 15

16 Key CfD design choices Private contract Strong obligations Independent management Indexed / protect from Change in Law Market benchmark drawn from forward markets Footer text 16

17 ANNEX 17

18 Maintaining Value: Change in law Change in law principle is that generators are left in a no better, no worse situation; 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 or other payment. Generators are also compensated in respect of certain Generation Tax, Curtailment and QSE events. 18

19 Termination 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 Counterparty a Termination Payment if CfD is terminated on or after the start date (except where formula results in 0) 19

20 Force Majeure and Relevant Construction Event 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 CFD Counterparty 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. 20

21 Management Processes: Direct Agreement Lender (Debt) Generator/ SPV Equity Direct Agreement CFD Difference Payments /MWh LCCC 21

22 Government s Role Under the LCCC s framework document, only one contract matter is reserved to BEIS material amendments to existing contracts This means that BEIS has no formal role in approving/requesting, e.g.: Termination Force majeure flexibility Compensation Minor or technical amendments When the LCCC makes these decisions, the only thing it will consider is its Guiding Principle: A. maintain investor confidence in the CFD regime; and B. minimise cost to consumers 22