The CfD Counterparty

335. This section sets out what the counterparty is and its responsibilities in delivering the CfD regime and its governance arrangements.

3.4.1.1 Roles of the CfD Counterparty

336. The counterparty’s principal roles are to act as the counterparty to, and manage, Contracts for Difference, and also to manage the collection and payment of monies under the supplier obligation for the CfD regime. The counterparty will only undertake defined activities relating to the CfD regime.

337. The counterparty will contract with the settlement agent (ELEXON Ltd) to carry out certain settlement activities as its agent.

338. In relation to its role of managing Contracts for Difference, the counterparty will:

o Negotiate pre-signature small administrative changes (‘adjustments’) to the standard terms of a CfD;

o Sign contracts with generators once they are allocated by the EMR delivery body (National Grid);

 Conditions Precedent,

 Change Control process,

 Change in Law requests,

 Contract Variations,

 Terminations,

 Providing information to the EMR delivery body and Government as appropriate.

339. In relation to its role in tax raising and settlement, the CfD Counterparty will:

o Manage ELEXON Ltd, who will be designated as the settlement agent working on behalf of the CfD Counterparty to deliver settlement services for CfDs;

o Forecast and set the unit cost fixed rate (for further details see Section 3.3 above);

o Manage payments between suppliers and generators including identifying when payments will start, data collection, calculating the value of payments to generators according to the formula within the Contract for Difference and the supplier obligation rules, raising money from suppliers and managing underpayment and collection of debts.

3.4.1.2 Governance and Constitution of the counterparty

340. The counterparty will be a private company limited by shares, established and wholly owned by the Secretary of State. A Government owned company strikes the right balance between the need to have sufficient independence to operate efficiently in its day to day activities once contracts are signed, and the need for Government to ensure that its policy is being delivered appropriately and responsibly.

341. The Counterparty and its directors will operate within two main frameworks: statutory controls and the corporate and company law governance framework.

342. In considering the level of controls to be established over the Counterparty, the intention is to:

o Ensure that for matters where Government wishes to retain decision-making, there are clear and transparent routes for escalation to the Secretary of State;

o Provide clarity on key issues such as the purpose and guiding principles of the company, the company’s strategy, financial and performance monitoring;

o Give comfort to industry in the company’s day to day functioning and decision-making;

o Provide a transparent structure;

o Ensure financial accountability to the Department of Energy and Climate Change’s Permanent Secretary; and

o Allow for flexibility should the role of the company need to evolve.

3.4.1.3 The statutory framework for the CfD Counterparty

343. The duties of the CfD Counterparty will be designated to it by virtue of a designation order made under Clause 7 of the Energy Bill. The designation order constitutes secondary legislation, and will confer upon the CfD Counterparty company the powers and responsibilities contained within the Energy Bill.

344. The designation order will come into force at the same time as other secondary legislation under the Energy Bill, though as it is an administrative exercise it is not subject to this consultation.

345. It is the Government’s intention that there will be only one CfD Counterparty. In the unlikely event that the CfD Counterparty fails, the ability to designate more than one counterparty is contained under Clause 7 of the Energy Bill in order to ensure a speedy transition to a new counterparty; the power can only be used in the limited circumstances set out to ensure that payments continue to flow.

346. The counterparty will enter into CfDs in two ways: it will be directed under powers in legislation by the Secretary of State to enter into CfDs and it will be allocated CfDs to enter into by the EMR delivery body. It does not choose which CfDs it enters into.

347. The CfD Counterparty will have, under the legislation, certain tax raising and settlement functions for the purposes of implementing the CfD regime. The CfD Counterparty will not be able to raise funds for any purposes other than paying the supplier obligation and meeting its own operational costs.

3.4.1.4 The Corporate Governance framework for the CfD Counterparty

348. Under UK company law, the Secretary of State as sole shareholder will have ultimate control over the counterparty. This is primarily through the ability to appoint and remove directors, amend the company’s constitutional documents, and give shareholder instructions to the directors.

349. The composition of the Board will be guided by best corporate governance practice; it is currently anticipated the Board will comprise eight members, half of whom will be independent non-executive directors. It is also proposed that Board members would be appointed for three years and subject to re-election thereafter.

350. The Secretary of State will appoint a minority of the Board, likely to include the Chair, Senior Independent Director (SID) and a government shareholder representative. There will be a nominations sub-committee of the Board which will appoint the remaining Board members, including the CEO. As sole shareholder, the Secretary of State will have the power to veto any proposed appointments to the Board when they are recommended by the Nominations Committee but will not have any involvement in the recruitment process

3.4.1.5 The Constitutional Documents of the CfD Counterparty

351. The counterparty’s constitutional documents will include Articles of Association, and as a company, the body will be subject to UK company law.

352. As with other Government owned companies the counterparty will also be subject to certain guidance relating to government-owned entities, including the fact that it will be governed by a Framework Document in line with HM Treasury’s Managing Public Money guidance⁹⁵ in relation to arms’ lengths bodies. This Framework Document will be made public and is proposed to set out, inter alia:

o the relationship between the CfD Counterparty and DECC as its sponsoring department,

o the operating principles of the CfD Counterparty,

o the extent of its day to day operational independence within certain parameters, o matters reserved for the Shareholder (including potentially in relation to contract

controls);

o certain controls relating to the CfD Counterparty’s levy function;

o the CfD Counterparty’s management of ELEXON Ltd;

o the CfD Counterparty’s strategic priorities,

o governance and accountability of the Board, including the Secretary of State’s right to appoint a senior Government official to be the Secretary of State’s representative on the Board;

o management and financial responsibilities including budget setting;

o remuneration limits that may apply;

o the broader business planning processes and timetables; and o performance monitoring.

3.4.1.6 Arrangements for the Operational Establishment of the CFD counterparty

353. As set out in section 3.3 the counterparty’s operational costs will be funded via a levy on suppliers. Government will fund the set up costs of the CfD Counterparty i.e. until the company is operational⁹⁶.

95https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/212123/Managing_Public_Money _AA_v2_-_chapters_annex_web.pdf

96 Some set up costs e.g. for settlement systems will continue to be incurred once the counterparty is operational, these will also be borne by Government.

354. Another important aspect of establishment of the counterparty is to decide where it will be located. Government policy is that no new leases should be signed when there is existing Government estate available, to avoid new charges to the taxpayer. We have undertaken an assessment of existing Government estate that would meet the counterparty’s space requirements ensuring that there are also the appropriate skills available in the locations available.

355. Following this assessment, the decision has been taken to locate the counterparty in London. It will be particularly important in the final stages of set up and initial operation that the counterparty is able to work closely with DECC and ELEXON Ltd (its designated settlement agent) to ensure that the counterparty is operational on time and implementation progresses smoothly. We believe this is best achieved by locating the counterparty within proximity to DECC. This will be reviewed in 3 years’ time in order to decide whether to locate outside London and South East within 5 years of operation.

356. The anticipated timetable for the setting up of the counterparty can be found in Figure 3.10 below:

Figure 3.10