CFD contract management

140. The CFD places a number of obligations on the contract parties, some of which are particularly relevant before the generation facility is fully commissioned and others that are likely to be more relevant once the facility is fully operational. The following sections set out some of the more important rights and obligations included in a CFD.

2.2.4.1 Pre–commissioning

141. Following signature, a CFD places a number of obligations on developers, aimed at encouraging applications only from those developers with a strong likelihood of progressing to commissioning, and doing so in a timely manner.

142. In particular, the CFD contract includes (amongst other requirements):

 Obligations to provide the CFD Counterparty with information about progress to commissioning (Initial conditions precedent);

 A requirement to make a range of representations and warranties about the nature of the project, shortly after signature (further conditions precedent);

 A requirement to demonstrate that a substantial financial commitment has been entered into within a year of contract signature (i.e. milestone evidence at the Milestone Delivery Date);

 A Target Commissioning Window within which commissioning can take place whilst maintaining the value of support under the CFD and commissioning (start date) notice; and

 A requirement to commission a minimum capacity before payments can commence and ahead of a Longstop Date; and

 An ability to adjust the contracted capacity at the Milestone Delivery Date and at the Longstop Date.

143. The latter four requirements are discussed in more detail below.

2.2.4.1.1 Milestone Delivery Date

144. The Milestone Delivery Date (MDD) is set within one year of signature of the contract, for all technologies. Generators will provide the CFD Counterparty with evidence either that:

 they have spent ten per cent of total project pre-commissioning Costs (specified by technology in the CFD Agreement) by the MDD; and/or

 that they have entered into other commitments that are a proxy for spending money (as set out in the CFD Agreement), such as signing contracts committing significant expenditure against the delivery of the agreed capacity by the Target Commissioning Date.

145. Developers that do not meet the relevant requirements at the MDD will be liable to have their CFDs terminated, allowing the budget to be reallocated to new applicants.

2.2.4.1.2 Target Commissioning Window

146. The Target Commissioning Window (TCW) is the period of time within which a generator is able to commission without penalty. The length of the Target Commissioning Window aims to reflect the technical challenges faced by generators of each generation type.

147. Force majeure provisions within the CFD contract (Schedule 2) provide for circumstances which are outside the generator’s control and which would result in a delay to commissioning within this window.

148. Failure to meet deliver sufficient capacity (and, more specifically, satisfy the ‘Further Conditions Precedent’ in the contract) results in the 15 year term of the CFD commencing even though the plant is not yet eligible to receive top-up payments through the contract. This has the effect of gradually reducing the effective period of support offered to any project that is commissioning late (i.e. outside of the Target Commissioning Window).

2.2.4.1.3 Longstop Date

149. The Longstop Date is the point beyond the end of the Target Commissioning Window after which a project which has failed to meet its contractual ‘Further Conditions Precedent’ and will be liable to have its CFD terminated by the CFD Counterparty. This allows for DECC to reallocate budget within the LCF from these projects that have failed to commission within a reasonable timescale.

2.2.4.1.4 Contract capacity adjustment

150. Generators will be able to make ‘cost-free’ adjustments to the capacity of their projects within set parameters, at two points in their project’s development. The contract provides:

 flexibility that must be used or surrendered at the Milestone Delivery Date; and

 flexibility that is available at any point up to the Longstop Date.

151. For projects above 30MW we currently propose allowing most technologies to make up to a 25 per cent adjustment to their capacity at the Milestone Delivery Date and a further 5 per cent adjustment at Longstop Date. Offshore wind projects will be allowed to technologies to make up to a 25 per cent adjustment to their capacity at the Milestone Delivery Date and a further 15 per cent adjustment at Longstop Date.

152. Projects up to 30MW will benefit from an appropriate degree of flexibility to alleviate the risk that failure to deliver a single turbine leads to termination of their CFD. It is intended that they will have the flexibility to make up to a 25 per cent adjustment at the Milestone Delivery Date, and a further adjustment at the Longstop Date of up to 5 per cent of the intended installed capacity³³ or by an amount equal to the capacity of one turbine (whichever is the greater).

153. These are in addition to other forms of flexibility, such as force majeure provisions in the contract (which allow for circumstances outside the generators control) and the ability to adjust capacity in response to certain geological and other conditions.

154. Contract termination would only be a risk if the amount of capacity delivered by the Longstop Date falls below the minimum level permitted by the flexibilities outlined above.

2.2.4.2 Post–commissioning

155. As set out above, the CFD regime will operate though a contract between the CFD Counterparty and each relevant generator. This contract will set out the terms of the CFD arrangements associated with that relevant generator. The CFD Counterparty will manage the contract for the duration of the life of the contract, including managing the process of termination if circumstances require it.

156. Below is a short summary of post-commissioning phase:

a) Payment commences when party notifies CFD Counterparty and the generator has met the Further Conditions Precedent (and no later than Longstop Date);

b) The contract includes a number of metering obligations (and, for some technologies, fuel measurement obligations) that allow the CFD Counterparty to measure the eligible generation that attracts payment;

33 I.e. the Installed Capacity Estimate specified at the Milestone Delivery Date.

c) The contract sets out the detail of how ‘difference payment’ will be determined.

This payment is determined principally by the strike price and the relevant market reference price, as adjusted for inflation indexation, with adjustments for reconciliation differences and any other payments that are due/owed.

d) The contract provides a number of mechanisms that reduce the risks faced by generators, including change-in-law, force majeure and adjustments for changes in some transmission charges.

e) There are also terms that require certain information to be provided to the CFD Counterparty and which set out how disputes under the contract should be resolved.

157. The full ‘CFD Standard Terms and Conditions’ and ‘CFD Agreement’ provide detail on the contract terms, and have been made available in an iterative form since August 2013³⁴, alongside documents that chart their functioning and development since that time published on 19 December 2013 and 23 April 2014. A short summary of the key CFD terms is set out at Annex B.

158. Further details on the set up of the CFD Counterparty, the Low Carbon Contracts Company, can be found in Section 2.4.