REA response - CfD Contract Terms Consultation The REA represents a wide variety of organisations, including generators, project developers, fuel and power suppliers, investors, equipment producers and service providers. Members range in size from major multinationals to sole traders. There are over 1000 corporate members of the REA, making it the largest renewable energy trade association in the UK. The renewables CfD contract represents a crucial plank of the CfD and broader EMR policy and will set the basis for how generators interact with the policy day to day. Unlike other existing power support schemes, the move to a bilateral private-law contract is a major change to the existing arrangements and therefore it is vital that the industry are as comfortable as possible with the terms. We would welcome the opportunity to discuss any of these points in further detail. We would draw attention to the following principal issues: - Allowing CfD contract capacity flexibility allowances for Deep geothermal and ACT technologies due to technological factors - FMS procedure payments - Need to ensure follow-through of policy intent on biomass CHP CfD proposals to implementation via contract wording - As repeatedly stated, the timescales proposed for generator payments, and/or the grace periods for such payments, should be extended to avoid initiating needless hair trigger termination procedures. - Such triggers risk making CfD contracts un-bankable as investors may not invest in a contract with the possibility of such light touch termination. EMR CfD Contract Terms consultation FMS Procedures The FMS arrangements are of particular interest to our members and we welcome the discussions to date on this issue and officials time engaging with our members. As we have previously outlined, it is important to ensure that the RO and CfD FMS procedures remain identical wherever possible and avoid duplication of approvals, particularly for dual scheme plants. We are encouraged that progress has been made on working towards this equivalence.
There are some concerns remaining, for example the arrangements relating to failure to comply. The document accompanying the CfD Terms document outlining changes from the previous draft sets out that the failure to comply with FMS Procedures incurs a suspension of payments to the Generator until such time as the instance of non-compliance is remedied. However feedback suggests that the drafting of Annex 7 Clauses 6.1 and 6.2 may not in effect capture this intent. The clauses could be re-drafted so that if the Generator fails to comply with the FMS procedure only a part payment is made for the power that month. Member feedback is that it may be disproportionate for the entire month's generation to be suspended due to what would be a non-material breach. Suspending part of the month s payment could be sufficient to incentivise the Generator to remedy the failure. CfD Payment timeframe requirements As we have repeatedly stated, the timescales proposed for generator payments, and/or the grace periods for such payments, should be extended to avoid initiating needless hair trigger termination procedures. Such triggers risk making CfD contracts un-bankable as investors may not invest in a contract with the possibility of such light touch termination. Permitting technologies to change contracted capacity where necessary for technical reasons The CfD contract terms state that any changes in capacity must be notified to the CfD Counterparty Body via a Revised Installed Capacity Estimate ( ICE ), and that Any ICE Adjustment Notice shall be irrevocable and the Generator may not subsequently increase the Installed Capacity Estimate. Crucially, the ICE must be provided at the Milestone Delivery Date which is set one year following contract signature, and not at project commissioning date. This creates problems for two technologies. Deep geothermal contract flexibility The nature of deep geothermal power means that developers cannot know the exact output of any one plant at the point of applying for a CfD (i.e. when they have planning permission and a grid connection offer in place, but no development on the site and therefore no bore hole drilled). The output capacity of a borehole will be known only after it has been drilled and the flow of steam/hot water measured. This means that the capacity will not be known at point of Revised Installed Capacity Estimate as this is only following SFC and therefore before commissioning before the final capacity of such plants is known.
This means that a developer can apply for a CfD contract for a certain size of capacity, but the final capacity out-turn is likely to be different from the amount specified at the point of application due to the nature of development of the technology. Therefore there needs to be recognition that deep geothermal projects will need to routinely over-apply for capacity in the CfD allocation process and make use of the 30% capacity reduction mechanism at commissioning stage, which is a later stage than that currently proposed. This is because final capacity is not known until the project borehole has been sunk and the plant commissioned. Uniquely for any renewable technology, the capacity level could go up or down at this stage (within a roughly 30% range). This means that, as currently drafted, in order to avoid possible termination procedures, a geothermal project will need to apply at a level above what is most likely to be achieved. An accompanying minimum reserved level of capacity (to be discussed in the forthcoming CfD Allocation Framework consultation) would allow the impact of any short term sterilisation of funds to be insulated from other technologies in the non-mature pot. Our members would appreciate confirmation that geothermal generators will not be penalised in the CfD process and that their technical issues will be accommodated. We would be happy to discuss this in more detail and will contact the team regarding the issue. ACT generator contract flexibility The CfD contract terms state that any changes in capacity must be notified to the CfD Counterparty Body via a Revised Installed Capacity Estimate ( ICE ), and that Any ICE Adjustment Notice shall be irrevocable and the Generator may not subsequently increase the Installed Capacity Estimate. The ICE must be provided at the Milestone Delivery Date which is set one year following contract signature. This creates potential problems for gasification (ACT) plants. These plants typically increase capacity over the course of 2-3 years. Specific, inflexible contract capacity requirements possibly also create an impractical situation for gasification (included in the ACT strike price) plants. Such plants normally ramp up from about 70-80% of capacity in the first year to 89-90% in the second year, before operating thereafter at a steady level of around 90-95% of nameplate capacity. Therefore clarity is needed over whether such projects would risk losing their contract at commissioning stage by only, for example, delivering 69% of contracted capacity for technical reasons and despite the level increasing in subsequent years. This could potentially be remedied by allowing for a change in the wording of the project-specific CfD coversheet for ACT generators.
Provisions for biomass CHP generators The REA, industry and DECC have been in discussion over provisions for biomass CHP generators with CfD contracts, due to the specific circumstances of this sector. The CfD Update document accurately summarises the proposal - Annex C (paras 7 to 12) outlines the plan to scale CfD payments by the Qualifying Power Output and introduce a safeguard provision for the first 5 years. Clauses 9, 12 and Annex 6 of the draft CfD appear to correctly implement DECC's proposal to scale difference payments by the CHP Qualifying Multiplier. However there does not appear to be the wording in the latest CfD terms draft that implements the 5 year safeguard. While the proposals are still not satisfactory to enable industry to have full confidence in the measures, it is nonetheless essential that the proposals join up and the necessary wording is included to this effect. Provision allowing generators to transfer rights to another party (PPA provider) Under paragraph 73 of the CfD contract, the generator will be able to transfer rights and benefits to another body with the written permission of the Counterparty. This is to allow the provision to be used by some generators where necessary, to enable their PPA provider to undertake CfD admin and settlement services on their behalf. We welcome this provision, as our members have concerns regarding the likely time and cost involved in administering the generator side of a CfD contract. This clause should serve to reduce administrative burdens if certain obligations can effectively be passed on to another party. For example smaller generators faced the possibility of contract termination should payment dates be missed for minor administrative reasons such as employee sickness, and this will enable payments back to the Counterparty Body to be administered by a PPA provider with their generally larger, sophisticated administrative capacity, presumably in exchange for a reasonable fee. We still have concerns regarding the complexity of CfD contracts, but this should reduce some of the burdens. Qualifying Shutdown Events DECC has not yet confirmed what compensation may be available following such shutdowns, and is provided with wide discretion to argue that "concerns" with the project (or even with other projects which then indirectly apply to the project) has led to their decision to enforce permanent closure.
Therefore there are industry concerns around certain carve-out provisions, especially environmental, which provide potentially very wide cover for shut downs. Member feedback is that cover should be extended to include EU derived changes alongside UK Government changes. BSUoS and TLM Charges Potential for TLM & Balancing Charges (BSUoS) Report Confusion Feedback suggests there is a potential issue with the possibility of conflicting strike price adjustment advice being provided by two separate reports to generators. The Part DD Balancing System Charges Report and Part EE TLM Charges Report will be sent to generators each year. Each of the reports is prepared no later than one (1) calendar month prior to the Indexation Anniversary as set out in Part 10 40.2 (C) and 41.2 (C) respectively. Each report only covers their respective change to the Strike Price (i.e. BSUoS or TLM) and makes no reference to the other. However, each report concludes by stating a revised Strike Price at the end. The question therefore arises of what will happen when the Generator receives both reports on the same day if each has an adjusted strike price figure, which would apply if the two reports have not referenced each other? Therefore it may be necessary to combine reports in order to include both changes that results in a single new Strike Price rather than risk ambiguity and conflicting information being provided to generators. Future amendments to BSUoS and/or TLM rules- locational charges These charges are, generally speaking, moving in the direction of reflecting locational costs to a greater degree. For example the move to Location Marginal Pricing at the EU level would be based on trans-national zones and industry code changes have in the past sought to base transmission losses on locational factors. However the CfD contract wording explicitly states that the calculations/reports for BSUoS and TLM adjustments will take no account of: any locational incentives or differences under 40.2 (D) and 41.2 (D) respectively. Therefore, should BSUoS and TLM charging be changed in this matter, the contract wording on any new or substituted multiplier or factor, and the interaction with the clauses that state take no account of: any locational incentives or differences, will become contradictory. Generation Taxes
Member feedback is that the scope of "Generation Tax Liability" for which protection is provided could be expected to be extended. Generator right to compensation As is drafted at present this is conditional on meeting requirements which some members believe may make it difficult to give notice of an intention of claiming within the necessary timeframes. For example enough time must be available to receive notice of the change, analyse its expected impacts, and report to the Counterparty Body the actual impact on the particular company. The circumstances suggest that payments could be made on the basis of an estimate and then subsequently corrected, as there will be at least a 12-24 month period between any change occurring and payment of compensation. Indeed, the CfD Counterparty has wide discretion over how and when to pay compensation to generators as drafted. A more acceptable option to industry may be for payment terms where possible to correlate to the impacts from the measure being compensated for. Paragraph 38.4 (C) As worded, this requires the provision of the tax returns as an automatic requirement. Such information could be very complex, lengthy and commercially sensitive, creating more work for all parties therefore member feedback suggests the wording be amended as follows:.including, as relevant, any tax returns or amended tax returns. Paragraph 39.3 The wording of this clause could be amended so that ongoing payments are ruled out, in line with the implied intention. For example: For the avoidance of doubt, no retrospective repayment will arise for the period up to this date. Curtailment Feedback from our members is that the clause as drafted deals with separate issues via the same mechanism. Setting out the UK s balancing/curtailment mechanism as it exists today and ensuring that the Generator is protected where there is any move away from such a mechanism for which the Generator is not fully compensated as a result would avoid such confusion. Extend Change in Law contract protection to EU legislation As a significant volume of regulation originates at this level, and the UK has an input into the policy making progress, the protection under this clause could be argued to be broadened to encompass changes to law or regulation from the EU.