REA response to Consultation on Minima and Maxima in the CfD Allocation Process

REA response to Consultation on Minima and Maxima in the CfD Allocation Process The Renewable Energy Association (REA) is pleased to submit this response to the above 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. The REA is the largest renewable energy trade association in the UK representing all renewable technologies. The allocation of CfD contracts is now paramount to CfD policy as it has become clear that the available Levy Control Framework funds will be exceeded by applications for renewables support. This is particularly the case as even if early year applications do not exceed the budget, the allocation of CfDs for those years will still operate via auction as later years are highly likely to be over-subscribed, meaning that both technology pots are extremely likely to enter auctions for all years in October s opening allocation round. The REA strongly believe that the widespread use of minima is essential to securing industry investment and a successful allocation process. Capital is highly mobile and investment could therefore move to more favourable locations without more certainty. Decreasing risks for investors lowers the cost of capital and therefore lowers the overall cost to consumers. The effect of investor uncertainty can be noted already as the UK slipped another place down the renewable energy attractiveness index this month 1. Please see the attached Annex A to this response, which outlines the REA s approach to a CfD allocation process with multiple minima designed to create competitive tension while achieving the multiple policy aims inherent in the CfD allocation process. Answers to specific consultation questions: A. Do you agree that biomass conversion should be placed in a separate grouping and subject to immediate competition through a constrained allocation process, if budget is available? It is not clear how this proposal will operate in practice - will the allocation of CfDs to such projects operate completely outside of the established pot, in which case what is the significance of being classified as an established technology and what is the impact on auction bids for other technologies in this category? 1 Ernst & Young Renewable Energy Country Attractiveness Index: http://www.ey.com/uk/en/industries/cleantech/renewable-energy-country-attractiveness- Index 25 Eccleston Place Tel: 020 7925 3570 http://www.r-e-a.net/ Victoria, London SW1 9NF

If operating as a standalone group with its own budget, would any unsuccessful capacity for the pot s budget then be able to move across into the established pot and bid for funds from this pot? The ability to re-allocate unused funds is central to the policy being able to cope with inherently unpredictable demand from the various technologies. Will projects in this category need to account for possible biomass conversions in their bids, or be able to disregard them? There are possible advantages to providing competitive pressure to the established pot by including it in this pot, however the unique characteristics of biomass conversion projects should also be noted. Biomass conversions represent a small number of relatively large projects, providing excellent value and stable, baseload power (which is crucial for future supplies to the grid as intermittent power supplies increase). The UK could therefore benefit considerably from biomass conversions and deployment will depend on a small number of big decisions. For this reason the probability of any impact on budgets will be very hard to predict, therefore there is a need to ensure that there is definitely budget available for such projects and that, if such projects do not go ahead, other technologies are able to access any unused funding. B. Do you believe that onshore wind projects on the Scottish islands should be placed in Group 2 or a separate grouping (Group 4)? A similar point to that raised above applies if placed in a separate group, will such projects have the opportunity to apply to Group 2 once the group s budget has been allocated, or will they be restricted to their own group (and therefore only this respective budget)? We note the industry concerns regarding State Aid clearance for such projects which could be seen as geographically based. We also strongly argue that should such projects be included in the less-established technology group, the case in favour of minima for multiple technologies would be even greater as Scottish Island projects could deploy significant capacity, further constraining the ability of other technologies in this group to deploy. Therefore should Scottish Island projects be included in the less-established technology group it is essential that minima are extended to other technologies in this group. C. Do you agree that wave and tidal stream are the only technologies that warrant a minimum or maximum? We strongly disagree with limiting minima to only wave and tidal projects, as proposed. Well-designed minima need to be extended to the majority of technologies, including all those in the less-established/group 2 category. 2

The renewables industry requires certainty and consistency to continue sustainable levels of deployment and therefore cost reduction, and the current auction proposals provide no certainty for almost all technologies. Capital is highly mobile and investment could therefore move to more favourable locations. As set out to DECC in our response to high-level CfD Allocation consultation, we strongly believe that appropriately designed minima should be extended to the majority of technologies in order to create certainty that each sector can continue to deploy at least a minimum level of capacity for the whole Delivery Plan period. Experience from the Non-Fossil Fuel Obligation (NFFO) mechanism was that the stopstart nature of the programme caused considerable damage to the industry, and this has been well documented. Uncertainty over support and widely differing levels of deployment from year to year was a major impediment to the development of a sustainable, viable and long-term industry. The UK must not repeat the same mistake and miss out on the opportunity for jobs and investment from a sustainable supply chain built on consistent deployment. For example, a review of NFFO by two leading energy policy academics concluded; NFFO did not deliver deployment; did not create mentors; did not promote diversity and was generally beneficial only to large companies (Mitchell & Connor, 2004) 2. The rounds of contract awards were identified as particularly problematic; [Allocation rounds] creates waves of development which create unnecessary environmental concern (Mitchell, 1995) 3. The same paper outlines another reason for reserved minima arising from competitive allocation; smaller-scale companies and lower resource sites in particular are at a disadvantage in a competitive system. (Mitchell, 1995). A 2010 review of UK renewable energy policy by respected academic experts also concluded that; The simple lesson for policy from the extensive literature is that policy needs to provide targeted support that matches support levels to technological maturity (Imperial College, 2010) 4. Strike prices clearly aim to be tailored to technologies maturity and deployment levels, however allocation risk does not take this into account (despite the two technology categories) if all projects immediately go into auctions. Minima design Minima can be designed so that the cost benefits of competitive tension are combined with the certainty to industry of reserved capacity. Essentially technologyspecific auctions would operate as the minima would not accommodate all applications for support, and the excess capacity would then enter the wider 2 Mitchell C. & Connor P., 2004, Renewable energy policy in the UK 1990 2003, Energy Policy 32, p1935-1947 3 Mitchell C., 1995, The Renewables NFFO: A Review, Energy Policy 23, p1077-1091 4 Gross R. & Heptonstall P., 2010, Time to stop experimenting with UK renewable energy policy, Imperial College Centre for Energy Policy and Technology 3

category s technology-neutral auction process. Any unused minima capacity would be recycled for use by other projects. Established technology minima Minima designed for the established technologies should set a consistent capacity level for each technology, at a level below the expected-deployment levels - thereby enforcing competitive allocation for capacity applications above the minima level (and overcoming sufficient scarcity concerns in the auction process). Minima could be set to the same percentage of expected deployment (i.e. 40% of each technologies expected 2020 deployment) rather than on a fixed MW basis (ie 200MW for every technology). Capacity applications exceeding the minima would enter a technology-neutral, cost competitive auction process in line with State Aid requirements. We argue that maxima on established technologies would not be necessary, as the suggested minima would ensure some deployment for every technology and spare funds would then go to the cheapest technology - therefore protecting budget for other technologies, with the same net effect. Capacity in technology-specific minima that is not utilised should be recycled to be available to other technologies via the auction process within the respective financial year. This is important as underspend in the LCF cannot currently be carried over to future years. Auctions should be run on a six-monthly basis as a minimum to provide projects more than one opportunity to apply for support over the Delivery Plan period and level opportunities for faster-deploying technologies. This would also allow projects to return to the process with lower bids and therefore improve value for money for energy consumers. Non-established technologies- In the current proposed category or grouping of technologies, offshore wind sits alongside emerging technologies such as geothermal and ACT. However offshore wind has ten times the minimum deployment potential of all other technologies in the pot combined, therefore many technologies run the very real risk of not receiving any support if offshore wind dominates allocation. Scottish Islands wind projects, if included in this category, could also significantly deploy, further squeezing the remaining technologies. Therefore minima should be allocated to each individual technology in the pot, on a technology-specific basis (as opposed to the uniform minima applied to technologies in the established technologies pot receiving a standard minima level). Offshore wind is an important industry to the UK and worthy of support, therefore we do not in principle oppose its inclusion in the non-established technologies group. However due to the differences in deployment potential and costs within the nonestablished pot, we do not believe offshore wind will require a minimum. This is because even if all other technologies were to meet their full deployment potential, 4

the pot would be set at a level at which offshore wind would then be expected to be able to access significant funding. Wave and tidal projects already have a proposed minimum therefore there is a precedent for minima in the process and the same arguments for this minimum apply to other technologies such as ACT and geothermal (emerging technologies with future cost reduction potential). It is essential that capacity in technology specific minima that is not utilised is made available to other technologies via the competitive allocation process. We propose that in this pot funds would first be recycled to the non-established pot, and then be made available to the established pot. This would prevent sterilised funds and offer more opportunities for the most costcompetitive technologies. This approach would also require multiple allocation rounds in each year. This would meet the following policy aims - Auctions both for individual technologies and across multiple technologies should reduce costs and introduce greater competition, reducing overall cost to consumers - Minima for each technology would support economic and industrial priorities such as well distributed economic growth across the country and manufacturing supply chains - The minima levels could be set to ensure the 2020 renewables targets are met - The approach would guarantee at least some deployment for every technology (albeit below the maximum possible), aiding discussions with financiers and lessening allocation risk to a degree, thereby reducing risks and costs to consumers - Minima provide certainty to support investors and long term decision making, therefore supporting a sustainable UK supply chain and generation industry Related issues regarding CfD Allocation We would like to take the opportunity to reiterate a series of points previously raised regarding the CfD allocation process, which remain highly relevant and need to be looked at in the round together with the issues regarding minima and maxima. Eligibility There remains some industry uncertainty regarding the requirement for a grid connection agreement or grid connection offer to be in place prior to CfD application. A grid connection agreement requires a very significant outlay prior to any certainty over receiving a contract. A connection offer still requires significant spend, but around ten times less than an agreement. Therefore the relevant requirement must be for evidence of a signed grid connection offer, not agreement. Frequency of allocation rounds It is essential that allocation rounds take place quarterly, or as a minimum on a sixmonthly basis. This will require DECC to hold back budget from the initial rounds. 5

This is to offer more projects the opportunity to apply for support and to avoid locking in more expensive projects when the same projects in future years could be significantly cheaper due to cost reductions, for example with solar PV in future years. It will create greater stability in the market and avoid stop and start deployment cycles, while also making it more feasible to attract finance if there are more opportunities to apply than just one or two make or break application windows. We are also concerned that the eligibility requirement of a countersigned grid connection offer could lead to grid capacity being sterilised. Current grid connection offers do not stipulate a timeframe within which to commission. At present this is generally not an issue as developers are incentivised to build out as soon as possible in order to meet ROC or FiT degression dates. With the proposed CfD allocation process, developers who are unsuccessful in the allocation process will not be able to build out their project, but will be unwilling to hand back the grid offer otherwise they would be unable to apply in the next CfD allocation round. This lends weigh to the argument in favour of more frequent allocation rounds, as more frequent allocation rounds will offer more opportunities to gain a CfD and therefore use the reserved grid capacity. It is also very possible that future grid connection offers stipulate that the capacity must be used (ie the projects built) within a certain number of years, or CfD allocation rounds, in which case frequent allocation rounds would be even more important. The alternative is that renewable deployment as a whole is held up due to grid offers going unused, which would be an inefficient outcome. Complexity of accessing support We understand the reasons for the proposed mechanism as a way to allocate scarce resources in the event of high demand for CfDs and a finite LCF budget. The proposed mechanism however will be seen as very complex by many independent and smaller players in the market, and this risks future renewable power investment in the UK as 25-50% of the required capacity to meet our 2020 targets is projected to come from the independent sector. Although not yet clear, and subject to UK interpretation, the recent State Aid guidelines imply a lower Feed in Tariff threshold than currently operating, and this could mean more independent and smaller generators forced to apply for a CfD. While we welcome the effort DECC have put into the development of an effective Offtaker of Last Resort mechanism to support market participation by smaller players (though with many details still to be resolved), the more fundamental issue of being able to receive a CfD in the first instance could become a block to such generators access to the market. For example, while the proposed flexibility options will be welcome, the de facto requirement to consider multiple bidding options over multiple delivery years may lead to the development of bidding strategies, requiring added management time 6

and resources. This has to be balanced against the benefits of allowing greater flexibility, but suggests that having fewer options for flexible bids might generally ensure a more level playing field as the process will be slightly less complex. Risk of different pricing levels for OLR and balance-sheet generators Generators accessing the OLR mechanism and those accessing their own balancesheet finances or in-house PPA, will be basing strike price bids on different prices and as the OLR discount will be public knowledge this may impact bids. The other factor in relation to the OLR is that the terms will not be finalised as currently envisaged until after the CfD allocation process opens. This means that those accessing the support will be competing on a different basis to those using the standard terms CfD. Finalisation of the OLR contract terms should therefore be brought forward so that it is in place prior to the applications opening on 14 October, as bidders in the first allocation round cannot accurately price their CfD bids without the information. Delays to allocation process The proposals to allow generators to push back their Target Commissioning Window (TCW) and Target Commissioning Date (TCD) in the event of delays to the allocation process are welcome, however we note the industry concerns that there may be greater issues and that this may therefore not be sufficient to accommodate projectspecific conditions, such as supply chain issues. We also note that allocation delays in the event of appeal could delay the entire allocation round if deemed significant enough, which introduces greater uncertainty (although we acknowledge this should be rare). The length of the allocation process as a whole is also of concern. Over 2 months as a minimum - assuming no delays for eligibility appeals - is a long period of uncertainty for any developer. Penalties for withdrawal from a CfD We note the proposals to penalise generators who withdraw from a signed, allocated CfD before the Milestone Delivery Date (MDD, formerly termed Significant Financial Commitment), with no penalty for those withdrawing after the MDD. We note the concerns that the ban from re-applying for another contract for the next Allocation Round and at least before the MDD could lead to concern that developers will be left in a poor bargaining position in commercial negotiations, and that depending on allocation round dates, this could become a de facto 24 month ban. We also agree with concerns that punishing developers for early hand back of contracts risks sterilising the budget and that a sliding scale of penalties could be more appropriate, based on date of cancellation. 7

Communicating the Allocation Process to Industry Finally, we would like to stress that the proposals represent a fundamental change to how large-scale power support has operated in the UK in previous years. Instead of building a project and being able to access support without an application process (although support levels may vary), developers will in the future have to enter a competitive allocation process and possibly devise bidding strategies. Bringing market players up to speed on how this will operate is essential and rapidly approaching as the October application window gets nearer. We therefore argue strongly that DECC and National Grid should seek to engage as much of the industry as possible, and at events outside of London to meet the wider community, in order to raise awareness of this. While we appreciate the policy is still in development, many industry players may be less aware of the changes, as originally auctions were not proposed until 2017 (and not technology neutral until the mid-2020s), and therefore it will take time to bring the wider industry up to speed. 2 June 2014 8