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Applying for a Contract for Difference this October 2014: the “Allocation Framework” – DECC paper URN 14D/328

General disclaimer: the following constitutes the written view of the author and in no way constitutes actual legal advice or a legal opinion and so no reliance may be placed upon the content hereinafter contained by any reader of this document in any way whatsoever.  In the event that legal advice or opinion is sought, please contact the author of this opinion at the contact details below.  The view below is expressly confined to matters as they stand at 6 September 2014, under the laws of England and Wales and in accordance with current publications from Her Majesty’s Department for the Energy and Climate Change as published at https://www.gov.uk/government/publications/electricity-market-reform-contracts-for-difference on 1 September, 2014.

 

 

Earlier this year we reported on the consultation paper URN 14D/114[1] and the proposal from the UK government to change the subsidy regime from renewable obligation certificates (ROCs) to contracts for difference (CfDs) for large >5MW projects for solar as put simply the Levy Control Framework does not have sufficient budget to allow for ROCs to instead phase out in 2017 as was previously mooted by the British Government.  On 1 September 2014, DECC uploaded a paper (URN 14D/328) which outlines in greater detail the rules for the process for CfD allocation[2] (“Rules”), or the “Allocation Framework” for the first round of CfDs to be issued by OfGEM with the CfD Counterparty following the application process commencement for the 1st round of CfD applications on 14 October 2014.

 

In essence the Allocation Framework affirms that for AD, Hydro, onshore wind or solar, a generating unit (“CfD Unit”) must be larger than 5MW for an application for a CfD to be made.  Facilities that are either already accredited for the renewable heat incentive or that are energy from waste with CHP related[3], are expressly excluded from the process.

 

For each prospective project, the Allocation Framework and the 2014 CfD Contracts for Difference (Allocation) Regulations 2014[4] contain the basic information that a developer will need to provide when applying for a CfD for their project to ensure that it is a Qualifying Application[5], namely:

 

(a)    the application should show that the relevant eligibility criteria have been satisfied, and if there are any additional Secretary of State information required then this has been provided (see Schedule 4 in the Allocation Framework and below in this article, – i.e. a supply chain statement; applicable planning consent; confirmation on connection agreement or equivalent; confirmation of non-receipt of other UK Government subsidies for the same facility; evidence of incorporation of the generator-vehicle; confirmation of the target commissioning window);

 

(b)   the national system operator will determine whether an applicant is a qualifying applicant based on their satisfaction of the criteria for application for a CfD (so regulation 17 of the draft 2014 Allocation Regulations[6], and see (j) below in this article);

 

(c)    the developer presenting a technology generating station should not be presenting a generating station that is not supported in whole or part by another scheme or is sub-5MW and as otherwise set out in draft regulation 14 of the 2014 Allocation Regulations[7];

 

(d)   the generating station should have planning consent so a planning permission under part 3 of the Town and Country Planning Act 1990 for an onshore generating station such as a ground-mounted solar plant that is over 5MW in generating capacity;

 

(e)   if there are conditions in the planning permission so it is a conditional planning consent, then the applicant for the CfD should draft a planning consent discharge of planning conditions plan to show that the planning conditions to the consent provided by e.g. a local authority can be discharged;

 

(f)     there must be evidence of a DNO connection offer or if it is a private system then according to the Allocation Framework the connection agreement in place must secure at least 75% of the initial installed capacity estimate of the CfD unit, or, where the connection will be to 75% to a distribution system a connection agreement will be required or evidence that the agreement is in place so that the CfD Counterparty (now incorporated as: Low Carbon Contracts Company Limited – UK CRN 8818711) can know the amount of metered electricity is estimated to be exported[8].  If there will be partial or no connection then, as per Regulation 25(4)[9], “…Where a partial connection applies or is to apply to a relevant CFD unit, the applicant must provide a statement setting out how data in respect of metering of electricity supply is to be provided to the CFD counterparty. ..”, and the CfD applicant should provide a copy of the connection agreement between the owner of the transmission system and the generator, or a copy of the private network use agreement between the generator and the operator of the network and a copy of the connection agreement between the private network operator and the operator of the transmission system[10];

 

(g)    when applying, certain minimum sizes apply to the type of project that can obtain a CfD, e.g. for solar it is 5MW[11];

 

(h)   https://www.gov.uk/government/publications/electricity-market-reform-contracts-for-difference – at this link are all of the documents that relate to completing the contract for difference and metering agreements for an application. For the FIRST ROUND, the Government have issued the following table: The Contracts for Difference Standard Terms Regulation  2014  which contains information on e.g. the expected target commissioning window, and so it is 1 year for anaerobic digestion, to 3 months for solar photovoltaic, as well as the total project pre-commissioning costs, so anaerobic digestion with or without combined heat and power is £1,750,000, or, for solar photovoltaic it is £1,000,000;

 

(i)      Developer Asset-Co (or Developer backed by Funder – Asset-Co) supply chain plan/development phase deliverables[12]
 – General Project Commitments[13] will need to be submitted with applications for CfDs (including a Directors Certificate that the Generator that owns the Asset e.g. Developer/Developer-Consortium with a funder, that the developer have financial resources for the total project spend (‘proof of funds’), evidence that the site for the plant is relatively unencumbered by third party property rights and where necessary easements/other rights have been/can be obtained, and all other consents for the installation of the PV plant have been obtained) as a part of the Project Commitments in the CfD Agreement, together with evidence of an EPC agreement (Construction Phase) and evidence of a framework (major kit) supply (“Material Equipment”) agreement and a binding purchase order for the Material Equipment (so modules, inverters, frames, switchgear). 300MW sized portfolios of solar assets being developed, require more sophisticated responses in terms of the supply chain plan to obtain Secretary of State approval for submission of the related application for allotment of related CfDs, and the related guidance[14];

 

(j)     the applicant should also be an eligible generator, in that they operate or participate in the operation of, or intend to carry out a generating activity in relation to, an eligible generating station, such as solar photovoltaic array that generates and supplies electricity to the Grid[15];

 

(k)    Credit Support Documents – “Collateral”
 – this is referred to as “collateral” in the terms and conditions published in April and will not include parent company guarantees, and will include a letter of credit or equivalent on-demand liquid form of guaranteed payment security that, e.g. in the event that the issuer loses their credit rating or folds, can be replaced within five working days with an equivalent form of security[16] – so an applicant will most probably have to provide evidence that a standby letter of credit, on-demand bond or guarantee banked probably by a well-rated bank or insurance company is available to secure the obligations of the generator under the contract for difference.  Despite a request for a similar form of security to be provided by the CfD Counterparty, the counter from DECC was that the provisions in the legislation including the ability for the Secretary of State to replace the insolvency remote CfD Counterparty in the event of default[17] (limited/no measure to terminate for CfD Counterparty default under the terms and conditions) were sufficient, without the need for any additional form of security.

 

Allocation process

 

  • The review date for applications, called the Non-Qualification Review Request Date is 18 November 2014.  Appeals against any rejected applications is 9 December 2014.  The start date for allocation of CfDs will be 22 December 2014 if no appeals, but if there are any appeals then the allocation start date will be 23 January 2015 (Rule 8 of the Allocation Framework).
  • In the event that there is an assessment from OfGEM that there is a requirement for an auction, then the applicants will be able to submit sealed bids[18] which would include the Applicant’s proposed Strike Price in pounds sterling that an applicant will accept for each megawatt hour of metered output, but which, in any event must not be more than the applicable Administrative Strike Price (e.g. for 2015/16 for solar photovoltaic this is £120/MWh).The applications will then be ranked and assessed according to lowest Strike Price to highest, clearing price, cumulative value of qualifying applications, with the application process closing when the Minimum-only cap-amount for an auction process being reached to allow assessment and award of CfDs.  A similar process will run for the Pot, Overall Budget and Maximum only auctions.Under Rule 18 of the Allocation Framework on “Tiebreaker Rules”, where there is a tiebreaker-type scenario, where there are two or more Qualifying Applications with the same strike price, then,
    • the individual bids will be assessed on their own and if they would result in the Minimum (minimum budget reserved for an allocation round as specified in a Budget Notice[19]) or Maximum (maximum budget for an allocation round specified in a Budget Notice[20]) being exceeded, then the application will fail, or,
    • if a Qualifying Application or combination of Qualifying Applications comes close to fulfilling the Minimum or Maximum without exceeding either of them, then the Qualifying Application that comes closest to fulfilling the Minimum or Maximum will be deemed successful, or,
    • where Qualifying Applications come equally close to fulfilling the Minimum or Maximum without exceeding it then an electronic random assignment process will be used, or,
    • a Qualifying Application subject to a Minimum (budget) can also be determined as a Flexible Bid[21] (with such a bid being made at different Strike Prices, expressed to the nearest whole penny, with a first Delivery Year no earlier than the Delivery Year in the application, and a capacity no greater than in the original application before the auction was announced[22] as long as it is e.g. in the case of onshore wind or solar, as examples, over 5MW initial capacity) and will be determined as being successful provided it is not the same as or higher than the Strike Price of another Applicant’s sealed bid (Rule 15.1 (viii) of the Allocation Framework) – but if not successful will then be considered against the Pot/Overall Budget.

 

Similar decision making methods to determine successful applications in tie-breaker situations as above apply to the situation where the Pot/Overall Budget (but not the Minimum or Maximum budgets) would be exceeded, and where the Pot/Overall budget and the Minimum or Maximum budgets would be exceeded[23].

 

For assistance in applying for contracts for difference, advice on and actual drafting of appropriate legal documentation for application for a contract for difference, and advice on the draft legislation and process, email: bhalindra.bath@mybusinesscounsel.com.

 

Article by Bhalindra Bath– Infrastructure Projects.

London, 6 September 2014.

 

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To find out more on how My Business Counsel can assist you on planning, energy, real estate, corporate, commercial or project agreements on infrastructure development, contact the Infrastructure Projects Team today on 0121 562 1704 or email info@mybusinesscounsel.com

 

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[2] Contract for Difference Allocation Framework 2014 (URN 14D/328), the “Allocation Framework”: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/349370/Final_Allocation_Framework.pdf

[3] As defined in The Contracts for Difference (Definition of Eligible Generator) Regulations 2014: http://www.legislation.gov.uk/uksi/2014/2010/contents/made

[4] The Contracts for Difference (Allocation) Regulations 2014: http://www.legislation.gov.uk/ukdsi/2014/9780111116777/contents

[5] Regulation 17 of the draft 2014 Contract for Difference Allocation Regulations: http://www.legislation.gov.uk/ukdsi/2014/9780111116777/regulation/17

[6] Ibid.

[8] Rule 4 of the Allocation Framework.

[9] Regulation 25 of the draft 2014 Contract for Difference Allocation Regulations: http://www.legislation.gov.uk/ukdsi/2014/9780111116777/regulation/25

[10] Rule 4.1 (iii) of the Allocation Framework.

[11] Rule 5.1(ii) of the Allocation Framework.

[13] Annex 6 of the CfD agreement (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/305539/cfd_agreement.pdf  (draft CfD agreement as at April 2014): “…Delivery to the CfD Counterparty of the following:

(A) a copy of a resolution of the Generator’s board of directors (or an equivalent management committee or body) to: (i) undertake the Project; (ii) approve the total financial commitments required to commission the

Project (the “Total Project Spend”); and (iii) approve a timetable for undertaking the Project which demonstrates that the Facility can reasonably be expected to be commissioned no later than the Longstop Date;  (B) a Directors’ Certificate certifying that: (i) the Generator has, or will have, sufficient financial resources to meet the Total Project Spend; and (ii) any contract entered into and provided as Supporting Information pursuant to the Milestone Requirements Notice, in the reasonable opinion of the Generator by reference to the facts and circumstances then existing, is: (a) legal, valid and binding; and, (b) entered into with one or more counterparties who are each able to perform their obligations under such contract; (iii) the Generator has a leasehold or freehold interest in the site where the Facility is based (the “Facility Site”) or a contract to obtain the same; (iv) the Facility Site is not subject to any covenants, restrictions, agreements, planning obligations, estate contracts, options, rights of way or other encumbrances which materially inhibit the use of the Facility Site for the purposes of the Project; (v) there are available to the Facility Site such rights, easements and services as are necessary to undertake the Project and operate the Facility; (vi) the Generator has identified all necessary consents and planning permissions to undertake the Project (the “Necessary Consents”); and (vii) there is a credible strategy in place to obtain the Necessary Consents and the Necessary Consents are not subject to any condition for which there does not exist a plan approved by the Generator’s board of directors to satisfy that condition, such that the Generator is not awareof any necessary consents and planning permissions which cannot be obtained or complied with, ((iii) to (vii), together the “Facility Requirements”); (C) Supporting Information evidencing (i) that the Generator has, or will have, sufficient financial resources to meet the Total Project Spend and (ii) the Facility Requirements. ..”

[15] Section 3 of The Contracts for Difference (Definition of Eligible Generator) Regulations 2014: ibid. at FN3 above.

[17] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/307060/cfd_policy_drafting_update.pdf

[18] Rule 11.1 of the Allocation Framework

[19] Regulation
11(2)(a) of the draft 2014 Allocation Regulations: http://www.legislation.gov.uk/ukdsi/2014/9780111116777/regulation/11

[20] Regulation 11(2)(b) of the draft 2014 Allocation Regulations: http://www.legislation.gov.uk/ukdsi/2014/9780111116777/regulation/11

[21] A bid that meets the requirements of Rule 11.6 of the Allocation Framework.

[22] Rule 11.6 of the Allocation Framework.

[23] Rules 18.2-18.3 of the Allocation Framework.