Applying for contracts for difference when the application window commences on 14 October. Details on Allocation Framework and draft allocation regulations from the UK Government and as published on DECC's website.
URN 14D 328 - applying for a Contract for Difference this October 2014 under the Allocation Framework and draft Regulations
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Applying for a Contract for Difference this October
2014: the “Allocation Framework” - DECC paper
URN 14D/328 (published 1 September 2014)
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/1141
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 allocation2
(“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 related3
, are expressly excluded from the process.
For each prospective project, the Allocation Framework and the 2014 CfD Contracts for Difference
(Allocation) Regulations 20144
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 Application5
, 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
1
http://www.mybusinesscounsel.com/legal-updates/page/2/
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_Framew
ork.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
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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 Regulations6
, 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 Regulations7
;
(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 exported8
. 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 system10
;
(g) when applying, certain minimum sizes apply to the type of project that can obtain a CfD,
e.g. for solar it is 5MW11
;
(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:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/34820
2/The_Contracts_for_Difference__Standard_Terms__Regulations_2014_-
_CFD_Standard_Terms_Notice__29_August_2014_.pdf, which contains information on
6
Ibid.
7
http://www.legislation.gov.uk/ukdsi/2014/9780111116777/regulation/14
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.
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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 deliverables12
- General Project Commitments13
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 guidance14
;
(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 Grid15
;
12
http://www.mybusinesscounsel.com/solar-urn-14d-114-analysis-by-bhalindra-bath/
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. ..”
14
https://www.gov.uk/government/publications/supply-chain-guidance (updated 1 August 2014)
15
Section 3 of The Contracts for Difference (Definition of Eligible Generator) Regulations 2014: ibid. at FN3 above.
4. 4 | P a g e
(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 security16
- 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 default17
(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 bids18
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,
o 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
16
Part 13 of GTAC
(https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/305536/generic_cfd_t_and_cs.pd
f).
17https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/307060/cfd_policy_drafting_upd
ate.pdf
18
Rule 11.1 of the Allocation Framework
5. 5 | P a g e
Budget Notice19
) or Maximum (maximum budget for an allocation round specified
in a Budget Notice20
) being exceeded, then the application will fail, or,
o 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,
o 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,
o a Qualifying Application subject to a Minimum (budget) can also be determined
as a Flexible Bid21
(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 announced22
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 exceeded23
.
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.
London, 6 September 2014.
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.