How to get a CfD: Allocation Process and the Transition from the RO 11/06/14

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 2

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. 3

CfD Payments Strike Price & Reference Price 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 4

Benefits to developers 1 2 3 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 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) 5 Electricity Market Reform

The CfD is supported by a robust architecture 1. 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 6

EMR has already attracted significant investment into the electricity market 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 New Nuclear 21 October 2013 Projects expected to generate over 4.5GW of renewables generation capacity Biomass conversion, dedicated biomass with CHP and offshore wind 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 7

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. 8

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. 9

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. 10

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. 11

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). 12

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. 13

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. 14

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 15 Presentation title - edit in Header and Footer

Eligibility Criteria, TCW, LSD, SFC 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. Policy Area Role Approach Milestone Delivery Date. (MDD) Target Commissioning Window (TCW) Long Stop Date (LSD) Non-Delivery Incentive (NDI) Ensures developers demonstrate sufficient financial commitment to completion, providing a protection against budget allocation. Allows for incentives and penalties to be applied to the project to ensure the LCF is used cost effectively. Allows for incentives and penalties to be applied to ensure developers are progressing as planned. Incentivises Developers to progress projects by treating developers that terminate before the Milestone Date as if they had retained the Contract until Milestone Date 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. 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. 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. 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. 16

Capacity Adjustment 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. Initial Application: 100% Can adjust by 25% at no cost Can adjust by a further 5% but with financial penalty CfD signed Evidence of MDD for project TCD TCW Long-stop date CfD may be terminated if capacity delivered is below a pre-defined threshold (i.e. 70%). 17

High-Level Process For each pot : No Invite applications - do the applications result in a budget breach in any year? Yes Do the applications under any Maxima result in the Maxima being exceeded? Competitive Allocation (Auction) invite sealed bids No Yes Non-Competitive Allocation all projects are accepted at their Administrative Strike Price Run auction for Maxima technology only invite sealed bids for those projects. Assess Minima All other projects are accepted at their ASP General auction (Maxima assessed here) 18

For each pot : Does a Minima apply? High-Level Auction Process For each Minima: Yes No Yes Run an auction within the Minima. Assign all successful projects a provisional clearing price Is the Minima exceeded? No Assign all Minima projects at their administrative strike price Yes General auction rank all projects on strike price bid. Look at lowest strike price bid project. Does it exceed any Maxima? No When all budget years are closed or no projects remain; close auction Proceed with general auction, including all projects rejected under Minima Proceed with general auction for all other technologies Reject project, consider flexible options, close Maxima Yes Does it exceed the budget profile in any year? No Consider next project Reject project, consider flexible options, close delivery year Accept project, remove flexible bids from stack 19

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 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 21

RO transitional arrangements 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 22

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