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Generator Journey through CFD: Contract and Pre-allocation

Generator Journey through CFD: Contract and Pre-allocation. 24 June 2014. AGENDA. Welcome and Introduction Session 1: CFD Policy Overview Session 2: CFD Contract Session 3: Applying the Contract to Your Project Session 4: CFD Implementation Feedback Session

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Generator Journey through CFD: Contract and Pre-allocation

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  1. Generator Journey through CFD:Contract and Pre-allocation 24 June 2014

  2. AGENDA • Welcome and Introduction • Session 1: CFD Policy Overview • Session 2: CFD Contract • Session 3: Applying the Contract to Your Project • Session 4: CFD Implementation Feedback Session • Session 5: Offtaker of Last Resort • Close 2 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  3. Welcome and introduction • Ruth Herbert 3 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  4. CFD Implementation Coordination • The LowCarbon Contracts Company is taking a proactive role overseeing the delivery of the end-to-end CFD scheme, facilitating: • delivery partner cooperation and • industry readiness 4 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  5. What is meant by ‘coordination’? • Overall monitoring of progress and readiness against the CFD Implementation Plan • Maintenance of the CFD Implementation Plan • Co-ordinating implementation activities across delivery partners and potential industry participants • Passing any policy issues to DECC if raised as part of implementation discussions • Owning and updating the operating model 5 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  6. Benefits of engaging with implementation events Engaging in the implementation coordination events will help you to: • Understand the critical path activities • Understand what implementation planning you need to do • Develop internal capabilities and processes to ensure readiness and successful participation • Collaborate with CFD delivery partners to help us get it right • Future stakeholder events • Bilateral meetings 6 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  7. AGENDA • Welcome and Introduction • Session 1: CFD Policy Overview • Session 2: CFD Contract • Session 3: Applying the Contract to Your Project • Session 4: CFD Implementation Feedback Session • Session 5: Offtaker of Last Resort • Close 7 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  8. Contracts for Difference: Policy Overview Chris Hemsley

  9. Contents • Introduction • What is the CFD? • The benefits of a CFD • High Level Overview: Applying for a CFD • The Offtaker-of-Last-Resort • Way forward • Questions 9 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  10. Supporting investment in Low-Carbon Generation

  11. What is the CFD? • Strike Price: • Determined by competitive bidding • No higher than the administrative cap Strike Price & Reference Price • Reference Price • Determined by the day-ahead GB price CFD Payments Difference Payment Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  12. More than just the difference payment

  13. Benefits to developers of the CFD Removal of wholesale electricity price exposure by providing a fixed strike price to developers, largely stabilising project revenue 1 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 2 Robust single counterparty owned by government and set up as a limited liability company 3 Early certainty and security of support levels in the project development process 4 Provisions that protect the value of the CFD to developers(e.g. change in law protection) 5 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  14. Key components of the CFD framework Energy Act & Regulations Administered by the EMR Delivery Body, National Grid Low Carbon Contracts Company issues, signs and manages contract Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  15. High-level process • Before applying, Applicants need to consider: • Are they eligible? • Economics of their project • Can they meet the milestone requirements, within a year of signature? Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  16. Eligibility Criteria: Rationale • 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; and • reduces the risk of bed-blocking to ensure the budget is used as efficiently as possible. • CFD Contract repeats many of the eligibility checks and implements the milestone checks. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  17. Competitive Allocation • If applications exceed the available budget, CFDs are awarded through price competition • Applicants are invited to submit a ‘sealed bid’, which is the lowest price they are willing to accept • Applications are ranked by price and accepted in price order, across all delivery years • Successful applicants are paid the highest price accepted in each delivery year Allocation Framework sets out detailed rules to cover budget reserved for particular technologies, how to deal with tied bids, etc But, auction designed to allow bidders to submit the lowest price they can accept, in the knowledge that they will be paid either this price, or a higher price. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  18. Contract Award Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  19. Pre-Commissioning Obligations TCW= Target Commissioning Window Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  20. OLR: Key Features • The OLR provides renewable CfD generators with a guaranteed, 'backstop' route-to-market for their power: a Backstop PPA (BPPA). Generators have a right to a ‘Backstop PPA’ • All renewable CfD generators have a right to a ‘backstop PPA’ throughout their CfD enshrined in regulations & supply licence conditions. Terms grandfathered from the point of CfD signature • Provides a guaranteed route to marketat a fixed discount of £25/MWh to the market price; when combined with CfD top up, it creates a fixed price per MWh significantly below the strike price but still provides lenders with comfort over the worst case revenues the project will receive. • Backstop PPAs are 1yr in length, with a minimum tenor of 6 months Obligation on some suppliers to bid for backstop PPAs • Offtakers are competitively allocated togenerators, by bidding a management fee • Certain suppliers mandated to bid; other suppliers can do so voluntarily • Credit-worthiness: ensured by credit rating or letter of credit Management fees levelised across suppliers • Management fees bid by backstop offtaker are levelised across all suppliersthrough a levelisation process Electricity Market Reform

  21. OLR: Key Impacts Generators • The OLR effectively ‘caps’ generators’ long term route to market costs (eg imbalance/basis risk) • Can raise debt on any combination of PPA and OLR revenues, giving greater flexibility to choose the contracting structure and counterparty which best suits their appetite for risk, for example: • Some generators will continue to secure long-term PPAs to remove risk • Some generators will seek to raise debt against the OLR and a short-term PPA to maximise their upside potential Lenders • Should deem the OLR ‘bankable’ and lend against this guaranteed revenue and any secured PPA • May be willing to assume revenues above the OLR for early CfD years • Should reduce the collateral required in open-market PPAs deemed bankable through OLR protection Suppliers • Suppliers should continue to respond to generator requests for PPAs of all lengths, though they may see an increase in demand for bankable PPAs of shorter tenors • OLR likely to allow more smaller suppliers to be deemed ‘bankable’ and encourage more activity in the shorter-term PPA market where they operate • Suppliers should provide indicative PPA terms to generators seeking them ahead of CfD auction Electricity Market Reform

  22. Questions Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  23. CFD Allocation Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  24. Contents • Regulations and Allocation Framework • Eligibility Criteria & Supporting Information for applications • Eligibility Appeals, Audit • Unconstrained and Constrained Allocation (inc Auction Mechanism slides) • Indicative timeline for first Allocation Round • Questions Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  25. Regulations and Allocation Framework Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  26. The CFD is supported by a robust architecture • 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 • 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 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  27. Eligibility Criteria Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  28. 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 Conditions Precedent, Further Conditions Precedent, and Milestone requirements. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  29. Eligibility Criteria Applicants for CFDs will be required to provide the Delivery Body with evidence that the proposed project meets the eligibility criteria: • Qualifying eligible generating station (technology type); • Non-receipt of funds under other Government support schemes for renewable electricity (i.e. the RO, ssFiT or NFFO) • Applicable planning consents; • Connection agreement requirements (including Private Network agreements); • Supply chain plan (only for facilities >300MW); • Statement identifying standard CFD terms and conditions that apply or any modifications agreed; and • Inclusion of relevant supporting information. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  30. Application Supporting Information The Allocation Regulations and Allocation Framework will state what information is to be submitted in support of a CFD Application. This is to include: • Name and contact details of applicant (or GB based agent); • Company registration and VAT numbers; • Project name and technology type; • Location and map of CFD unit; • Proposed capacity (MW); • Target Commissioning Date and Target Commissioning Window; • A declaration that existing accreditation does not apply in respect of the relevant CFD Unit; and • Whether the CFD unit forms part of a dual scheme facility. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  31. Planning Permission Requirements • Eligibility requires evidence of all applicable planning consents for the relevant works to be undertaken (e.g. development order; TWA order; section 36 consent; planning permission; and/or a marine licence); • This includes consent for the CFD unit itself and consent for any other ‘relevant works’ which enable the CFD unit to be established/altered and for electricity to be supplied to the grid; • Note: consent for relevant works undertaken by grid network operators and covered by grid connection agreements will not need to be shown by the applicant. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  32. Grid Connection Requirements The policy on grid connection eligibility has now been updated to include provisions for private networks. Evidence to be provided: a) For applicants connecting directly to the grid - a copy of the applicable agreement(s) which enables connection to the grid and which is for at least 75 per cent of the capacity of the CFD unit. b) For applicants connecting indirectly (i.e. through a private network operator) – evidence of an agreement between the applicant and the private network operator. c) For applicants not connected (i.e. islanded generation) – signed acknowledgement (as part of the certificates submitted on application) that no connection is applicable. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  33. Eligibility Appeals Applicants deemed ineligible may appeal their eligibility via a 3-tiered appeals process: • Where Tier 2 Appeals take longer than 30 days to resolve, the Secretary of State can direct the auction to commence. The Appellant submits a sealed bid; if the appeal is successful, bids are checked and if found to be equal to or lower than the clearing price of the relevant auction, the Appellant is awarded a CFD. Tier 1 Tier 2 Tier 3 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  34. Withdrawal Disincentive • Applicants may withdraw during the application window or at the stage of submitting a sealed bid (where an allocation round is constrained). • Applicants withdrawing after this point will be subject to a withdrawal disincentive. Where an applicant fails to sign a CFD that has been offered or has their CFD terminated between contract signature and Milestone Delivery Date (1 year after contract signature), the site with which they applied will be subject to a bar on participation in allocation rounds for 13 months after the CFD notification was made. • This mechanic seeks to discourage spurious or highly speculative applications from participating in the auction process. Such applications would potentially distort auction outcomes and block budget that would otherwise have been available to genuine projects with a greater likelihood of delivery. • Exemptions apply where an applicant’s contract has been terminated due to a QCiL or RCE, or where a landowner who was not the applicant has been unfairly affected by the ban. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  35. Unconstrained and Constrained Allocation Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  36. Unconstrained and Constrained Allocation • Once applications have been submitted, National Grid will value them, to see if allocation will be constrained. • If there is sufficient budget for all projects, and no Maxima are exceeded, then unconstrained allocation will apply, and all projects will receive the Administrative Strike Price. • If there is insufficient budget (or a Maxima is exceeded), constrained allocation will apply for that pot (or Maxima), and we will run an auction. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  37. High-Level Process For each ‘pot’: No Yes No Yes Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  38. If Allocation is constrained we will hold an auction • If budget is exceeded for any delivery year in the budget profile, run auction for all delivery years • If Maxima is exceeded but budget is not, run auction only for Maxima technologies. • Sealed bids will only be requested once constrained allocation has been triggered, and then only for those projects to which constrained allocation applies. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  39. High-Level Auction Process • Does a Minima apply? For each ‘pot’: Yes No For each Minima: • Is the Minima exceeded? • General auction – rank all projects on strike price bid. Look at lowest strike price bid project. Yes No When all budget years are closed or no projects remain; close auction • Does it exceed any Maxima? • Run an auction within the Minima. Assign all successful projects a provisional clearing price • Assign all Minima projects at their administrative strike price Yes No • Reject project, consider flexible options, close Maxima • Does it exceed the budget profile in any year? • Proceed with general auction, including all projects rejected under Minima • Proceed with general auction for all other technologies Yes No • Consider next project • Reject project, consider flexible options, close delivery year • Accept project, remove flexible bids from stack Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  40. Basic auction principles • Sealed bid, pay-as-clear auction. • Bidders submit the lowest price at which they are able to deliver. • The auction ranks all the projects, and starts accepting the cheapest first (in any delivery year), until the budget is used up. • All projects are paid the price of the most expensive project which has been accepted (in its delivery year). • Bidders may submit multiple bids with varying delivery years and capacities (“flexible bids”). These may not be earlier or larger than the original application. • The auction will assess the lowest strike price flexible bid first, then assess other bids if the first was not affordable. • Bids submitted will not be shared with DECC and will only be used by National Grid to determine the clearing prices and which applications are successful. Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  41. At its simplest: • Work out your costs • Work out the return you need • Submit a bid with that number – if you win in the auction you will get at least the number you bid, and the highest price paid to any project in the same group and delivery year (with exceptions for Minima) • Can be more sophisticated if you wish • Submit additional bids with a different delivery date, if you are able to deliver in a different year. • Submit additional bids for reduced capacity, if you are able to deliver a smaller project if your first choice is not affordable Full details of the auction mechanic are available on the DECC website https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/302725/af_event__9_april_slides.pdf Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  42. Indicative timeline for first Allocation Round Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  43. Indicative timeline for first Allocation Round These dates are indicative and are not binding on National Grid or Ofgem Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  44. Questions Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  45. AGENDA • Welcome and Introduction • Session 1: CFD Policy Overview • Session 2: CFD Contract • Session 3: Applying the Contract to Your Project • Session 4: CFD Implementation Feedback Session • Session 5: Offtaker of Last Resort • Close 45 Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  46. Contracts for Difference Matthew Taylor

  47. The CFD is designed to work alongside your existing project chain incentivising delivery rather than dictating how you run your project Supply chain Phasing CFD Allocation FMS Sustainability Levy Control Framework (LCF) and budget visibility Milestone Delivery Date Capacity Adjustments Conditions Precedent Target Commissioning Window (TCW) Longstop Date (LSD) Force Majeure Payment mechanisms Limited Recourse Dispute Resolution Change in Law Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  48. Flexibility Management of LCF and system durability Accuracy of payments /settlement Investor certainty In designing the CFD we have a considered a number of key design factors Eligibility criteria Allocation Milestone requirements Capacity Adjustments Termination Information provisions Change control Private Law Termination Direct Agreement Market Reference Price Indexation Strike Price Adjustments Capacity adjustments Force Majeure Relevant Construction Event Grid Connection Delays Payment Disruption Event Phasing Balancing and Settlement Code (BSC) for metering standards, settlement Reliability and familiarity Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  49. Key discussion points • What are all the ‘periods’? • Target Commissioning Window (TCW), Longstop Date (LD), Start Date • Term • What capacity do I have to deliver and what if something happens? • Installed Capacity • Permitted Reductions • Relevant Construction Event and Force Majeure • What is the ‘Milestone Requirement’? • Total Project Pre-Commissioning Costs (TPPC); OR • Project Commitments • How is value maintained throughout the life of the CFD? • Change in Law, Curtailment, Generation Tax, Qualifying Shutdown Event (QSE) • CPI Indexation, Balancing Services Use of System (BSUoS)/Transmission Loss Multiplier (TLM) • When might you be terminated? • Pre-start date termination • Post-start date termination Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

  50. 12 months in all instances except solar (3 months) and landfill gas (6 months) What are all the ‘periods’? Long-stop date Agreement Date Target Commissioning Window Long-stop period Milestone • 12 months in all cases apart from: • 6 months for landfill gas • 24 months for offshore wind, tidal range, tidal stream and wave Generator Journey through CFD: Contract and Pre-allocation – 24 June 2014

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