CfD Allocation

149. The allocation of generic Contracts for Difference under the administrative strike price-setting phase of CfDs has been designed to balance the need to ensure timely access to the scheme, with the requirement to make efficient use of the available budget. As set out in Figure 3.5 below, the allocation design under administrative price-setting is made up of three key stages:

 First Come First Served (FCFS),

 Unconstrained Allocation rounds; and

 Constrained Allocation Rounds.

150. Government intends to move to competitive price discovery processes for all low-carbon technologies as soon as practicable. We envisage the competitive price discovery processes will build on the design of auctions under constrained allocation rounds.

151. The duration of the First Come First Served phase of allocation will be impacted by wider decisions on the use of the LCF cap including decisions relating to Investment Contracts, and the Renewables Obligation calculation and wider value for money and affordability considerations. There are some scenarios in which FCFS may only last for a short period or may not be able to operate at all, and, if so, Government will consider moving immediately to allocation rounds and will also consider introducing constraints for certain technologies or groups of technologies.

Figure 3.5: The stages of CfD Allocation

First Come First Served

152. The rationale for beginning allocation through the First Come First Served (FCFS) process is to allow eligible projects to benefit from the scheme without undue delay or uncertainty. The First Come, First Served process is designed to be as mechanical and simple as possible. This first stage was developed in response to industry concerns about unnecessarily constraining the process of allocation, which could impact on the timing of investment decisions.

However, we acknowledge that the introduction of FCFS raises the risk of gaming and a rush to avoid constrained allocation.

153. Once an application is submitted the EMR delivery body will check that the Generator satisfies the eligibility criteria and that there are sufficient funds available in the remaining CfD budget. If this is the case the EMR delivery body will notify the counterparty of the name of the eligible generator, along with other specified information needed to issue the CfD.

154. Applications under FCFS will be awarded in order of application date. If maxima are used, then if the maximum defined for any technology or group of technologies is reached, no more allocation would be possible to that technology/ group for that delivery year. However Government retains discretion to increase the maximum. Minima or protections for technologies will have no effect at this point unless they have the effect of activating the trigger (which will be a significant part, perhaps 50% of the CfD budget) for contacting the Secretary of State to ascertain whether FCFS should be stopped and allocation rounds should commence.

155. In the event that no determination of eligibility is made by the EMR delivery body, it will notify the applicant of this and the reason for not meeting the eligibility criteria. Under FCFS, the project is free to re-apply if eligibility is rejected, although the project will not retain its place in the queue of projects while it seeks to remedy deficiencies in its application. If instead the project appeals the decision, the corresponding level of budget will be reserved during the appeals process, but should the appeal fail the budget is released and the applicant will need to re-apply at that point.

Allocation Rounds

156. The intention is that once a trigger has been met (for example if a significant part, perhaps 50%) of the CfD budget within any delivery year has been used up, the EMR delivery body will seek Government’s approval to move to Allocation Rounds⁶⁸ The precise level for this trigger is set will be confirmed in the final delivery plan, planned for publication in December 2013.

157. Once Allocation Rounds have been introduced, they will operate for all delivery years and across all technologies. First Come First Served will cease regardless of whether other delivery years have yet reached the trigger.

158. Allocation rounds will only allow applications to be submitted within a given date range. Once the deadline for the Round closes, eligibility for each applicant will be checked by the EMR delivery body and determinations of eligibility will be made. Then the total budget being bid for in that Round by eligible applicants will be calculated by the EMR delivery body.

159. Our intention is to increase the degree of budgetary control over time as CfDs are issued, to make best use of the available budget. In order to facilitate an orderly transition between phases, our preference is that Allocation Rounds start when there is a strong expectation that there will initially be no constraint, although this will depend on wider considerations as set out above.

Unconstrained Allocation

160. Once allocation rounds have been introduced, unconstrained allocation is expected to follow FCFS in order to ensure an orderly grouping of applications so that the CfD allocation Budget can be effectively monitored and managed.

161. Unconstrained allocation is preferred (where wider considerations allow) in addition to FCFS in order to ensure an orderly transition to competition.

68Our current proposal is that Government will retain discretion to increase budget during FCFS. Should this ability be exercised, the more from FCFS could be deferred until the trigger is again reached.

162. If all the bids within the round can be satisfied within the currently unallocated budget for a given delivery year (unconstrained) then all projects are allocated contracts. The exceptions to this may be where a technology or group of technologies minima or maxima interact with the wider budget in particular ways.

Constrained Allocation

163. The rules for constrained allocation will be set out within the Allocation Technical Framework. If there is insufficient budget to satisfy all bids or maximum constraints are exceeded, then an auction (constrained allocation) will apply. The mechanics are still being developed, but the following summarises our proposals in the Allocation Methodology published in August.

These are subject to further development through our engagement with stakeholders:

 Firstly, if there are any technologies with a protected budget (minimum), then any eligible projects within these technologies will be added together. If the value of the eligible projects adds up to less than the protected budget for that technology, we currently propose they will all be allocated contracts at the administered Strike Price. If not, then an auction is run for that technology.

The successful bidders will be allocated contracts. Those that are unsuccessful then move into the general auction.

 Second, an auction is run involving all remaining eligible applicants and all technologies. These are ranked by strike price (whether their default strike price or a lower bid price if they submitted one).

 Starting with the cheapest bid, each eligible project will be awarded a contract until either (i) any maximum budgets for given technologies /groups are reached (in which case all remaining applicants in that category are rejected) or (ii) the budget for that delivery year is used up, at which point any remaining applicants are rejected.

164. Our preference is that the constrained allocation process will operate on a

“pay-as-clear” basis for each technology or technology group, although Government is considering alternative auction formats, such as pay as bid.

The Strike Price paid to any generators with a CfD will in any case be no higher than the administrative strike price for the technology.