What options will solar developers have post 1.4.15 as new renewable energy laws shape future growth.
What happens after 1.4.15 for Developers? Developer potential next steps in response to Government proposal to bring in CfDs further to URD 14D/114
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 18 May 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 on 13 May, 2014.
Following 1.4.15, should the new proposals in URD 14D/114 come into force following the end of the Consultation period on 7.7.14, then under a CfD next year, Suppliers will pay the difference between the market reference price (“MRP”) (for electricity sales every periodic billing period net of all other costs), and the strike price (“SP”) under the CfD (at £125/MWh for 2014/15), and the CFD Counterparty (wholly owned by HM-Gov., likely to be managed by the team at DECC/OfGEM who have the experience of managing payment of a premium to Suppliers in return for the ROCs certificates presented to them by Suppliers) acts in effect as a form of conduit between a Generator and Supplier to either:
(i) take payment from the Generator and pays the Supplier for the difference between the MRP and the SP under the CfD from a Generator if the MRP is higher than the SP under a CfD in a billing period within ten (10) working days, or, (ii) take payment from the Supplier and pays the Generator for the difference between the MRP and the SP under the CfD within twenty-eight (28) calendar days if the MRP is lower than the SP for a billing period.
For 5+MW solar plants, there will be a PPA and there will be CfDs. These will be the revenue stream documents.
To say, “…it’s a bundle of 6 x 4MW plants, not a 24MW plant..”, but in reality the local Grid connection point is going to be supplied by plant from one company operating infrastructure that aggregates 24MW, and the planning permission is for a 24MW plant, will most probably mean that the regulators will deem this for what in reality it is, namely, in such instance, the applicant will not be able to claim ROCs but will be able to apply for one CfD, but, if the applicant during the development phase for a CfD (with a usual “shovel-ready” pack of rights) is slow off the mark, then given that the date for the auction-process for CfDs will be kicking off in October 2014, this will mean that only those Developers who aggregate a number of shovel-ready applications together, get a PPA end-user client (perhaps in a tri-partite PPA with a buyer, a Supplier and a Generator; or a usual bipartite PPA) in place, can show that they have an EPC contract in place with an installer, have framework agreements for main-kit supply (modules, inverters, switchgear, frames(,galvanised cabling)), and can show binding purchase orders for the main kit, will be able to demonstrate to the regulators that a CfD should be awarded during the first bidding round, applications from 14 October. If a competitive allocation bidding auction-process is announced, then sealed bids for an alternative SP (the SP that the applicant for a CfD would be willing to be paid under a CfD) for a competitive allocation process under the rationing rules if that is announced (if the rationing rules under the allocation regulations are invoked) would be able to be made during 26/11-03/12.
According to estimated current timeframes, during Christmas the Secretary of State would review the proposed allocation of CfDs, approve it or not, and from 29/12-the middle of January 2015, CfDs would be awarded and first payments under the CfDs made available from April next year at the switchover date between ROCs and CfDs. The Government, if they approve the changes in July-August/September this year onwards following the end of the Consultation would have a bidding allocation process twice a year, every five-six months.Developer possible next steps?
- Contract relationships with main kit providers set up in framework supply agreements.
- Mechanise a CfD application procedure for probably 50-200MW pipelines. If 300+MW under development, then the Secretary of State must approve it and a supply chain plan will be required (may take time or not, but at that level, and given the line of the documents recently issued from DECC, namely that the spend is high in solar and that UK-Gov. want to limit such spend, the time in getting approval from the Secretary of State for such large portfolio CfD applications would require to be factored into company development timelines and financial models).
- Organise a development pack of an option to lease agreement, all third party rights agreements (property) organised, planning consent, DNO connection offer accepted and draft/final connection agreement in place, set up an SPV (LLP/private limited company per park per CfD), mechanise the system and train the development team so that everything is seamless and the application for CfD process is the culmination of the development phase.
- Within a CfD, there is a level of protection built in as the Government will replace a Supplier if they fail to make the payments that they must make, and will replace the CfD Counterparty which is “insolvency remote” (i.e. incapable of being the cause for a termination under a CfD) if it fails in its role under the CfDs, via the protections under the Energy Act 2013, and as with securitisation-models, there will be a “security trustee” that will kick in to gear whenever there is a default event under the CfD to step-in, rectify the default, and then step-out, as the idea is that CfDs stay in place for at least 15 years. Financiers and investors should appreciate this if it is explained to them.
- Qualifying changes in law (“QCiLs”) are compensation events and so the Generator will be compensated in relation to such events that mean that there is a change caused by a change in law that has a material affect on its position to carry out and effect its obligations under the CfD. Financiers and investors should appreciate this if it is explained to them.
- All Developers may look to aggregate their resources with a fund/panel manufacturer/EPC and an O&M to incorporate larger-solar-cos that can manage the entire production cycle of the solar build and to ease the allocation decision-maker’s answer to a bid during the auction allocation process for a CfD into a positive, and to ensure that debt finance/equity investors view the investment as bankable. The requirement to provide collateral that is liquid such as a standby/LC/on-demand bond, not a parent company guarantee (which has been rejected by HM Gov. as having inadequate liquidity as viewed against other methods of relatively immediate recourse), will mean that the future of solar in this country with large-solar-cos that get good rates on the collateral required to underwrite the obligations of the Generator under the CfD will necessarily mobilise smaller solar-cos that may well look to mergers/JVs/acquiring or being acquired, so as to acquire a good net balance sheet to obtain such security relatively cost-effectively for a large pipeline.
- The Government also want mid-sized 250-500kW rooftop installations to be a current/future focus for solar Developers on buildings and commercial real estate and are pushing the UK solar market to examine this as a future market for them.
- The Government has based their findings on surveying the rate of installed large-scale solar over the past year or so, and so unless Developers can show that the rate of development and installation is slower than the rate at which the Government cite in their Consultation paper within responses to the Consultation over this next period of time until 7 July 2014, it is perhaps likely that the CfDs will be brought in on 1/4/15 as a complete replacement for ROCs.
- Plants over 5MW can still be developed, installed, and sold in a DIT or DIOM model.
- For smaller than 5MW plants, the FiT will still be available but under a new degression-model as in the Consultation paper if approved.
- For smaller than 5MW plants, ROCs will be available if for some reason FiT is not available or not selected as preferred subsidy and so this might be examined somewhat more during the Consultation RFIs, however the Consultation paper makes this point clear.
London, 18 May 2014.