CONTRACTS FOR DIFFERENCE The UK experience of premium subsidy Greg Dyke, Clean Electricity Directorate

October 2016

Outcomes from Round 1 •

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27 projects were offered contracts • 22 projects from pot 1, and 5 from pot 2 • 2 did not sign and were barred from participating in any round within 13 months through the Non-Delivery Disincentive We have secured a range of technologies • offshore wind; onshore wind; solar PV; Energy from Waste with CHP; ACT All technologies apart from energy from waste have cleared significantly below the administrative strike price • Savings of around 20% on strike prices • Enabled UK to secure more capacity than anticipated: • rough estimate of pot 1 budget at reserve price was 700MW capacity – we secured 880MW • For Pot 2 we estimated the budget would buy approx 900MW at reserve prices – we secured 1220MW The budget has largely been utilised • £315m of the £325m budget across both pots Good geographical spread of projects • 12 are in England, 4 in Wales and 11 in Scotland. Good spread of companies • Winners include big 6 firms, independent generators, and one community scale wind company.

Contracts for Difference: Why?

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The case for the CfD Capacity margin predictions c. 2014

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% DECC Base Case (no Capacity Market) DECC Base Case with a Capacity Market Ofgem Reference Scenario

Between 2014-2020 DECC anticipated a need for £55-65bn in new generation assets.

DECC recognised a need to incentivise both modern conventional and renewable energy sources to replace retiring assets. 4

Policy drivers for the CfD Bringing forward lowcarbon capacity

Crosstechnology competition

Driving down the cost to deliver

Moving away from demandled subsidy

Delivery certainty

An objectively robust framework 5

What the CfD delivers – ‘top ups’

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What the CfD delivers 1

Removal of wholesale electricity price exposure by providing a fixed strike price to developers, largely stabilising project revenue

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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

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Robust single counterparty owned by government and set up as a limited liability company

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Early certainty and security of support levels in the project development process

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Provisions that protect the value of the CFD to developers (e.g. change in law protection)

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Contracts for Difference: Who?

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Setting the Budget • Role for UK Government • In March, UK Government announced a budget of £730m for CFD auctions this Parliament, including £290m for the next auction • Technologies grouped into ‘pots’ • Pot 1 (established technologies) – onshore wind, solar PV, energy from waste with CHP, hydro, landfill gas and sewage gas • Pot 2 (less established technologies) – offshore wind, wave, tidal stream, advanced conversion technologies (ACT), anaerobic digestion, dedicated biomass with CHP, geothermal • Pot 3 (biomass conversion) • Set administrative strike prices – maximum strike price per technology 9

Who is eligible? Qualifying form of low carbon generation Planning consents secured Grid Connection Validly incorporated company

Supply Chain Plan Not an excluded applicant

• ACT, AD, biomass conversion, dedicated biomass, energy from waste with CHP, geothermal, hydro, landfill gas, onshore wind, offshore wind, sewage gas, solar PV, tidal range, tidal stream, wave • Planning Permission/Development Consent/marine licence, section 36 • Plus Crown Estates Agreement for Lease – if applicable (offshore only) • No requirement to provide permissions for the TO/DNO works

• Agreements for connection with TSO and/or DNO for at least 75% of capacity • AND/OR Private Network Use Agreement(s) between Private Network Generator and Private Wire Network Operator

• Evidence that applicant is validly incorporated under the laws of the jurisdiction in which it is incorporated

• Certificate from Govt. that a company’s supply chain plan meets the eligibility condition • If greater than 300MW

• No in receipt of another subsidy (RO, CFD< CM, NFFO,RHI if Energy from Waste, unless additional capacity • Non GB

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The CFD auction characteristics Reverse auction: lowest bids are selected first Sealed bid: bidders simultaneously submit bids anonymously Pay as clear: the last successful bid sets the price

Reserve prices: set as the administrative strike prices Pots, minima and maxima: to deliver a diverse technology mix Up to 10 flexible bids (3 in any given year): avoid bidder regret 11

Contracts for Difference: How?

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Contract terms and conditions Maintaining Value

• An instrument that regulates how payments are made and the rights and obligations that the parties to the contract agree. Contract sets out: • • •

Conditions for Delivery

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Management Process

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The delivery conditions that the generator needs to meet to receive payments How payments are calculated and when they are paid Requirement to make certain representations, warranties and undertakings to enter into the contract and receive payments The measures to preserve the value of those payments How the contract can be terminated How disputes are to be resolved How the contract can be amended Sustainability and fuel measurement requirements

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Milestone Agreement Date

12 months after contract signature, able to adjust capacity downwards