CfDs favour big offshore wind projects

The results from the first contracts for difference auction are in and there is little for small developers or experimental technologies to celebrate, says Lis Blunsdon.

We always knew that the introduction of contracts for difference (CfD) was going to ration the level of subsidy available to renewable projects. We also knew that offshore wind was going to swallow a large chunk of the available funds – it was merely a question of whether more than one or two projects would get a CfD.  

The announcement of the CfD auction allocation round results on 26 February has, however, really brought home how the renewable world is going to look now that allocation of renewable support is no longer based on simply meeting the relevant accreditation criteria.

In the event, offshore wind was awarded two CfDs: one for delivery year 2017/2018 and the other for delivery year 2018/2019. These two CfDs between them represent about 54 per cent of the total capacity awarded CfDs in this first allocation round.

A further 35 per cent has been awarded to 15 onshore wind projects, across the delivery years 2016/2017, 2017/2018 and 2018/2019. Wind, therefore, gets 89 per cent by capacity of the CfDs allocated.

The remaining 11 per cent has been awarded to advanced conversion technology (3 per cent), energy from waste (4.5 per cent), and photovoltaic (3.5 per cent).  

These numbers appear to point to larger wind (and in particular offshore wind) projects doing rather better than smaller projects – but is this the whole story and does it set a pattern for the future?

Certainly there may be an argument that this first allocation round is unusual in that it is set against the current scramble to get projects accredited under the Renewables Obligation Certificate (ROC) regime before it closes. Additionally, it is not helpful that the Department of Energy and Climate Change (Decc) has stated it will not publish any information about individual bids, or, more importantly, about those bids that did not result in a successful allocation. By com­parison, the recent capacity market auction provided a full breakdown of bids.

By definition, offshore windfarms have large installed capacities, so any successful bid is going to take a large slice of any available budget. The two projects awarded CfDs this time are well advanced in the development process and so will have a good idea of when exactly the commissioning date will occur.  

This is important because, unlike the ROC process, the route to a signed, effective CfD follows a highly structured, and very tight, timetable. Helpfully, the Low Carbon Contracts Company (LCCC, the CfD counterparty) will provide a summary of the key dates in that process by means of a generic letter that is being sent to all generators who are to be offered a CfD.  

This means generators have a set time­table of specific dates, calculated by reference to the various regulations, but without the “do we count today or do we start tomorrow?” debate that invariably accompanies any calculation of business days. LCCC will issue signed CfDs on 12 March 2015 and countersigned CfDs must be returned by 5pm on 27 March 2015. There are then ten business days from the date on which the generator signs its CfD in which to fulfil the initial set of conditions precedent (CPs). Failure to fulfil these in time will give LCCC a right to terminate the CfD.  

These initial CPs are largely administrative and require the provision of a legal opinion on the capacity of the generator to enter into the CfD, provision of “know your customer” information about the generator and the provision of certain information about the generating facility, including aerial maps.

One important thing to note is that any further know your customer information that LCCC needs in addition to the generator’s initial submission must be provided within the ten business day period.  

This is not the first timing-related termination trigger built into the CfD. Each CfD contains milestone requirements that relate to the level of financial commitment that the generator has entered into. The milestone delivery date occurs not later than 12 months after the date of signature, and failure to provide the relevant evidence will give the LCCC the right to terminate the CfD, although there are some procedures to go through, which means it is not quite the hair trigger that it sounds.  

There are then further CPs that must be satisfied by the start of the period known as the target commissioning window (TCW) – the duration of which is set according to technology type. If the further CPs are not satisfied by the beginning of the TCW, the term of the CfD is reduced by every day of delay in satisfying the further CPs, and if after a year the further CPs are still not satisfied, once more the LCCC may terminate the CfD.

These pre-start terminations do not give rise to compensation payments, but the generator will be prevented from participating in future CfD allocation rounds for a period of time.

This timetable will be the same for every generator with a CfD. So all the projects with a CfD will be looking to align their procurement and construction schedules to this timetable, and they will all be looking for financing commitments and then closing at the same time. Quite what the knock-on effects on supply chain, financing and permitting are going to be remains to be seen.

The termination triggers also mean that the best way to manage the risk of not hitting the trigger dates once a CfD is awarded is to ensure that the project is well developed before applying for the CfD. That may work for the larger, well-financed developers, but it will be difficult for the developers without serious balance sheet backing to justify incurring high development costs without any certainty that a CfD will be forthcoming.  

This looks like something of a double whammy for smaller developers, particularly those looking to build more risky technologies. Certainly there will be plenty of such developers taking a long hard look at their development portfolios now that we know the results of the first allocation round.

Lis Blunsdon, of counsel, Hogan Lovells