How to get a CfD:

Allocation Process and the

Transition from the RO

11/06/14

Agenda

1. EMR objectives and the CfD instrument

2. CfD supported by a robust legislative architecture

3. Already attracting significant investment

4. How to get a CfD?

a) Eligibility

b) Allocation Process and Timelines

c) Application Process, Withdrawals and Incentives to Sign

5. Constrained Allocation and the Auction for CfDs

6. EMR next steps

7. Transition from the RO

8. Questions

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Government’s objectives for EMR

• The Government’s energy and climate change goals are

to deliver secure energy on the way to a sustainable,

affordable, low-carbon energy future and drive ambitious

action on climate change at home and abroad.

• This requires substantial investment in new generation

and networks: approximately £110 billion of capital

investment in the decade to 2020 – this is like building 20

Olympic stadiums every year.

• To meet this challenge, we need to attract investment

from a broad pool of investors, and support investment by

a wide range of developers.

• The Contract for Difference (CfD) is the proposed

instrument to attract this investment in low-carbon

generation.

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The CfD instrument: seeking to reduce the cost of investment

• CfD pays a variable ‘top-up’ to

developers, based on:

• Strike Price: Estimate of the cost

of investing in each technology

• Reference Price: Measure of the

average price of electricity

• Benefits of the CfD include:

• Removes one of the largest

commercial risks faced by

developers

• Maintains normal incentives to

invest, innovate and operate at

least cost

• Developers pay back to

consumers, when prices are

high, keeping overall costs down

CfD

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Electricity Market Reform

Benefits to developers

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

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The CfD is supported by a robust

architecture1. 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

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EMR has already attracted significant

investment into the electricity market

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FiD Enabling for Renewables

May 2014 – 8 projects signed Investment Contracts which were laid in Parliament

Investors committing up to £12bn of investment backed by this early form of CfD

Projects expected to generate over 4.5GW of renewables generation capacity

Biomass conversion, dedicated biomass with CHP and offshore wind

New Nuclear 21 October 2013

UK Government and EDF Group reach commercial agreement on the key terms of a proposed investment contract for the Hinkley Point C

£16 billion investment will provide power for nearly 6 million homes.

Carbon Capture and Storage

9 December 2013

SoS opens the Drax coal-to-biomass conversion plant

Government awards FEED study funding to further the White Rose CCS project

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 Condition

Precedents, Further Condition Precedents, and Milestone

requirements.

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Eligibility criteria

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

• Applicable planning consents;

• Connection agreements;

• Qualifying low-carbon generator;

• Declaration of non-receipt of funds under other

Government support schemes;

• Incorporation;

• Authorisation of officers;

• Declaration on contract conditions acceptance;

• Offshore generating stations.

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Application

The Regulations state that certain information is to be submitted in

support of a CfD Application.

This includes:

• Applicant name, company registration number

• Project name and location of CfD unit

• Capacity (MW) for each delivery year

• Target Commissioning Date and Target Commissioning Window

• A self-certification declaration that existing accreditation does not

apply in respect of the relevant CfD Unit.

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Allocation Process & Timelines

1. DECC will publish the final Allocation Framework and Budget Notice 10 days

before opening an allocation round.

2. CfD applications are expected to open 14 October 2014 and close ten days

later. The Delivery Body will then determine whether each applicant is a

qualifying applicant.

3. Any applicant that the Delivery Body has determined to be not qualifying will

then have the opportunity to dispute that decision.

4. Once all disputes are resolved, the Delivery Body will assess whether a

competitive allocation process is necessary, and if it is will invite the qualifying

applicants to submit a sealed bid.

5. With no disputes, we would expect that sealed bids (if necessary) would be

submitted towards the end of November; the final decision on which applicants

are successful should be taken by the end of 2014; and contracts will be offered

to successful applicants in early January 2015.

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Allocation Process Under Delay

• Resolution of disputes is expected to take up to 45 working days, in such a

circumstance sealed bids (if necessary) would be submitted in February 2015

and final decision would be expected in early March with contracts being offered

later in March. No interim decisions or notifications would be sent to applicants.

• In extraordinary circumstances, CfD allocation timelines could extend further,

however this would be a rare circumstance (e.g. resolution of complex appeals

taking longer than 45 days or re-run of the allocation process as a result of

issues raised in the audit report).

• Any delays caused by a complex appeal would also delay the deadline for

submitting sealed bids. This means that a complex appeal would not extend the

time between submission of sealed bid and contracts being offered.

• In the event of a delay, applicants have the opportunity to shift their affected

target dates (day for day by the length of the delay).

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Application Withdrawal

• An applicant may validly provide notice to withdraw its application during the

application window or prior to being considered in an auction process where an

allocation round is constrained.

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Incentives to Sign and Deliver

• In order to mitigate gaming risks, where an applicant has been allocated a CfD

but then fails to sign a CfD when offered one by the Low Carbon Contracts

Company, or where an applicant has its CfD terminated between contract

signature and Milestone Delivery Date (which occurs 1 year after contract

signature), this will impact upon their eligibility for future CfD allocations.

• In particular, Government will be bringing forward regulations before the end of

2014 that will make such applicants ineligible to apply for a CfD for thirteen

months after a CfD notification has been issued to a successful applicant.

• This mechanic seeks to discourage spurious or highly speculative applications

from participating in the auction process, potentially distorting auction outcomes

and blocking budget that would otherwise have been available to genuine

projects with a greater likelihood of delivery.

• The Government is currently considering any exceptions that may apply to this

provision.

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Contract Allocation

The Allocation process is built around Regulations and an Allocation

Framework produced by Government;

The National Grid as Delivery Body is responsible for managing the process

from application, eligibility checks, allocation including running the auction,

before requesting that the CPB issue contracts to the successful applicants.

We have built a number of flexibilities in to the contracting process that enable

the allocation process to function but which are given effect through the

Contract and so require oversight from the LCCC. These are:

• Milestone Delivery Date;

• Capacity adjustment;

• Target Commissioning Window, Long Stop Date, Termination at LSD; and

• Non-Delivery Incentive

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Eligibility Criteria, TCW, LSD, SFC

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Policy Area Role Approach

The eligibility criteria, Target Commissioning Window (TCW), Long Stop Date (LSD) and Substantial Financial

Commitment (SFC) are contractual criteria and waypoints that help DECC determine whether a project can apply

for a CFD and then assess whether it is developing as planned.

Milestone Delivery

Date. (MDD)

Ensures developers demonstrate sufficient

financial commitment to completion,

providing a protection against budget

allocation.

Provide evidence of either (a) combination of SFC milestones, or

(b) minimum financial spend at the ‘Milestone Delivery Date’ - one

year after CfD contract signature. Failure to provide evidence

results in termination by LCCC.

Target

Commissioning

Window (TCW)

Allows for incentives and penalties to be

applied to the project to ensure the LCF is

used cost effectively.

Each project nominates a commissioning date which is then

afforded a window to allow for variation in delivery. The length of

the TCW varies and reflects the technical challenges varying

across technology type.

Long Stop Date

(LSD)

Allows for incentives and penalties to be

applied to ensure developers are

progressing as planned.

A point after TCW by which a project must either qualify for

payment or be terminated. Strike prices degress between the end

of the TCW and the LSD. Varies by technology. LCCC will need to

monitor progress, adjust strike prices and terminate.

Non-Delivery

Incentive (NDI)

Incentivises Developers to progress projects

by treating developers that terminate before

the Milestone Date as if they had retained

the Contract until Milestone Date

LCCC will need to decide whether to permit early termination and

ensure that information is available to the Delivery Body to enable

the NDI to be applied in the next allocation round.

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Capacity Adjustment

CfD

signed

Evidence of

MDD for

project TCWLong-stop

date

CfD may be

terminated if capacity

delivered is below a

pre-defined threshold

(i.e. 70%).

Initial Application:

100%

Can adjust by

25% at no cost

TCD

Can adjust by a further 5%

but with financial penalty

Developers submit an initial capacity estimate but can update this and create an

Amended Capacity Estimate at two points:

• At the Milestone Date can adjust capacity by 25% (if any part of this adjustment is

not used at MDD then it cannot be claimed later);

• By Longstop Date, by a further 5%;

• LCCC terminates if under 70% is delivered by the Developer

This gives developers flexibility early in the project life and gives HMG earlier visibility of

the change in capacity which allows earlier reallocation of the budget.

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)

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YesNo

No Yes

For each ‘pot’:

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

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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

EMR Next Steps

June 2014

• Lay secondary legislation for implementing EMR

• Publish EMR handbook

• Government Response to EMR Consultations

• Publish final CfD Allocation Framework

July 2014

• Publish indicative CfD Budget

• Approach to technology group allocation finalised

August 2014

• EMR regulations come into force

• National Grid full powers

• Low Carbon Contracts Company operational

Second half of 2014

• Secretary of State confirms CfD Budget

• Signing of first CfDs under enduring regime

• First Capacity Market auction

RO transitional arrangements

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• Long term plan for renewables support will be contracts for

difference under EMR

• Will need to be a transitional period between Renewables

Obligation and CfDs

• The two schemes will run in parallel between 2014 and

2017 to allow a smooth transition between both schemes.

• Developers have a choice whether to enter RO or apply for

a CfD

RO transitional arrangements

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• No new entrants to the Renewables Obligation

from 2017 (unless they have a grace period)

• Existing market will continue to operate on a

declining basis until 2037

• Proposing to close RO to solar PV >5MW from

April 2015

• However, Government will protect significant

financial investments under RO through grace

periods

Questions

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