Phase 0: Setting the Framework and Transition to the CfD

Figure 3.2

Summary:

 In Phase 0 (2012 to July 2014) the Government will set the framework for CfDs and begin the transition to the new regime, including managing the interface with the Renewables Obligation and Investment Contracts.

 This will be achieved by establishing the responsibilities of each of the bodies involved in allocating and managing CfDs in legislation and framework documents; through defining the detailed contract terms and publishing the contract and through establishing allocation arrangements through the Allocation Technical Framework document. Secondary legislation will be laid before Parliament in late spring 2014, and subject to the Parliamentary timetable we intend that it will be in effect by July 2014.

 The Levy Control Framework (LCF), a cap on the maximum amount of public spending allowable through consumer bills to support Government’s electricity market decarbonisation objectives. We are considering methods to ensure the CfD budget is well managed within the LCF.

 Initially, CfDs will be allocated with strike prices that are set administratively (i.e. set by Government), moving to competitive price discovery processes for all low-carbon technologies as soon as practicable.

 Government has amended the Energy Bill to seek further measures to support independent renewable generators to find routes to market. These measures will be consulted upon in the next few months

98. The Energy Bill includes provisions to ensure that the transition from the Renewables Obligation to the CfD does not result in a hiatus in investment.

Powers in Chapter 4 Part 2 and Schedule 2 of the Energy Bill seeks to allow the Secretary of State to give effect to early CfDs – referred to as ‘Investment Contracts’ – with the intention that these contracts will be transferred to the counterparty once it is established.

3.2.1.1 Renewables Obligation Transition

99. Arrangements for the transition from the Renewables Obligation (RO) to CfDs were put forward for consultation in on 17 July⁵⁷, and closed on 25 September. We are now considering responses to this consultation, and will publish a Government Response before the end of 2013.At this early stage, we cannot confirm whether any policy within that consultation has changed on the basis of responses to the consultation. Policy as set out within that consultation is described in brief below.

100. During the period of transition from RO to CfD (second half of 2014 to March 2017), new generating capacity will have a choice between the RO and CfD schemes.

57 https://www.gov.uk/government/consultations/transition-from-the-renewables-obligation-to-contracts-for-difference

101. Additional generating capacity of more than 5MW at an existing RO-accredited generating station will also be eligible to choose which scheme is applied to during the transition period, and will continue to be entitled to apply for a CfD after the transition period ends. Where a generating station has some capacity within the RO and some covered by a CfD, it will be termed a

‘dual scheme plant’, and we propose that it will be subject to additional metering requirements, to ensure that generation within each scheme is measured accurately. Additions of capacity of 5MW or less at existing RO-accredited stations will not be eligible to apply for CfDs, as Government considers that the administrative complexity of dual scheme plant arrangements would be unsuitable for small-scale capacity additions.

102. On 31 March 2017, the RO will close to new capacity, and will then continue running in support of accredited capacity for a further 20 years, until 31 March 2037. We will offer grace periods for operators who expected to deploy prior to the RO closure date, but were delayed, ensuring that such operators are still able to accredit under the RO when it is appropriate that they should do so. The RO Transition consultation proposed key principles to be used as the basis for defining the precise length, evidence and eligibility criteria for these grace periods.

103. There are two transition measures which are specific to particular technologies: biomass co-firers, and offshore wind. To incentivise RO-accredited biomass co-firers to convert to full biomass firing, we propose that they would be able to apply for a CfD as a biomass conversion, and to withdraw from the RO as a co-firer if successful. This option would be available for full stations and for units or groups of units within stations. In addition, co-firers will be able to bid in to the Capacity Market, and to withdraw from the RO if successful. In both cases, stations or units would not be able to return to the RO once they have made this choice. Operators of offshore wind stations who have not yet registered all phases of their RO-accredited capacity will be entitled to register those remaining phases under the RO on or before the closure date, even if the phases have not yet commissioned or they will be entitled to apply for a CfD for the unregistered phases.

3.2.1.2 Investment Contracts

104. Government recognises that in the period before the CfD goes live generators may delay investment decisions. Investment Contracts are Government’s policy to address this risk of an investment hiatus. Investment Contracts will work by enabling the Secretary of State to give effect to an early form of the Contract for Difference with investors who wish to commit funds before the

105. A number of generators have expressed interest in the process of Final Investment Decision enabling through Investment Contracts. The UK Government is in negotiations with NNB GenCo (a subsidiary of EdF) about a potential Investment Contract which might enable their final investment decision on the Hinkley Point C new nuclear power plant project. Government has also received applications for Phases 1 and 2 of FID Enabling for components of these powers are the following:

o Mitigation against delays and payments to generators -The provisions in Schedule 2 seek powers for the Secretary of State to fund Investment Contracts (either by direct payment or by collecting money from suppliers). The supplier obligation provisions mirror to a large extent those in Chapter 2 of Part 2 of the Bill on CfDs These powers are designed to give investors’ confidence that payments under an Investment Contract will be honoured, even if the enduring EMR regime is delayed significantly or does not come into force at all.

o Investment Contract Counterparty – under the Bill the Secretary of State would have the powers to create an Investment Contract Counterparty to administer Investment Contracts, which would be similar to the counterparty envisaged under the enduring EMR regime.

107. Schedule 2 of the Bill also seeks powers for the Secretary of State to transfer Investment Contracts (by transfer scheme) to the counterparty under the enduring EMR regime, and a regulation making power under paragraph 16(2) to treat Investment Contracts which have been transferred as CfDs for the regulations under paragraph 16(2) in relation to Investment Contracts which have been transferred.

108. The Bill includes a duty (in certain circumstances) to transfer Investment Contracts to the counterparty once the following conditions are met:

 the Investment Contract powers expire (1 Jan 2016 or earlier if CfD regulations define an ‘eligible generator’);

 the counterparty is designated; and

 supplier obligation regulations are in force.

109. It is anticipated that these conditions could be in place as early as July 2014.

Therefore, in order to ensure that Investment Contracts can be administered and funded by the counterparty, Regulations under clause 16(2) would need to be in force at the same time as the contract is transferred, and ideally at the same time as the EMR Regulations that form the trigger for the duty to transfer come into force. The draft supplier obligation regulations published alongside this document therefore include provisions to treat Investment Contracts as CfDs for the purpose of the Regulations.

Investment Contracts

Question CFD1  Do you agree with the approach outlined in section 3.2.1.2 of this document to treat Investment Contracts as CfDs once they have been transferred to the CfD Counterparty in order to allow the counterparty to administer and fund these contracts in the same way as CfDs?

3.2.1.3 The CfD Allocation Budget

110. The Government’s Levy Control Framework (LCF) cap represents the maximum amount of public spending allowable through consumer bills to support Government’s electricity market decarbonisation objectives.⁵⁸ It is expressed as a series of annual limits on the overall costs of support across a number of schemes. These schemes include the Renewables Obligation, Small Scale Feed In Tariffs (FIT), Investment Contracts and CfDs. The proportion of the LCF allocated for each scheme is described as a ‘budget’.

111. The Government is developing a governance mechanism to monitor and manage the risk of over and underspend within the LCF, including the allocation and reallocation of budgets for particular schemes within the LCF.

Further details of how Government will manage the LCF will be published in the Delivery Plan scheduled for December 2013.

112. Table 3.4 below shows the upper limits to low carbon electricity policy levies agreed under the LCF.

Table 3.4: LCF for Low Carbon Levy Funded Schemes, 2011/12 prices⁵⁹.

58 Annex D of the draft Delivery Plan provides further details of how the Levy Control Framework has been extended to 2020/21 to support Electricity Market Reform.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/223654/emr_consultat ion_annex_d.pdf

59 Figures are not cumulative.

113. From within these overall annual limits, and taking account of the other schemes supported through the LCF, the EMR delivery body will be provided with a budget that it can allocate to CfD participants, we refer to this as the

‘CfD budget’. Indicative budget levels for the years 2014-15 to 2018-19 will be included in the Delivery Plan⁶⁰.

114. The need to manage the costs imposed on consumers and the LCF constraints make it necessary to have controls over the CfD budget whilst providing as much certainty as possible to generators. The principle budget control measures will be:

a) The design of the allocation process set out at section 3.2.2.5 below.

b) We are considering the possible use of minima (floors) or maxima (caps) placing restrictions on allocation of the CfD budget for some technologies or technology groups. A minima would effectively reserve a portion of the CfD budget for a technology or group of technologies while a maxima would constrain a portion of the CfD budget available for a technology or group of technologies.

115. Subject to the will of Parliament, the Government will establish the budget for generic CfDs and set this out in the Delivery Plan. Regulations will establish the ability of the Government to vary the generic CfD budget, including restrictions on doing so within an Allocation Round and establish the potential for optional use of maxima and minima within this budget.

Changes to the CfD Allocation Budget

116. The Government has the ability to adjust the CfD budget. Where it does so Government will issue updated values to the EMR delivery body as these will act as the basis for the EMR delivery body to determine CfD allocation.

117. Government will have the ability to increase the CfD budget limit at any time, including during an Allocation Round. This flexibility would come from managing the interdependencies between the CfD and other budgets within the LCF as described above.

118. To provide investors with certainty that budget will not be removed just before they apply for a CfD, Government will not be able to reduce the budget for applicants within an Allocation Round – all applicants to a round will be

60 We also propose that this will be in the proposed Allocation Technical Framework.

2015/16 2016/17 2017/18 2018/19 2019/20 2020/21

£4.30bn £4.90bn £5.60bn £6.45bn £7.00bn £7.60bn

assessed against a budget that is at least as high as that which was in place when the round opened for applications.

119. The Government will inform the Devolved Administrations (DAs) ahead of amending budget parameters, and will aim to involve them as far as is possible. In particular we will aim to do so where decisions will impact technologies in which DAs have a particular interest. There may be a limited number of circumstances in which we will reserve the ability to make quick decisions where it is in the public interest to control costs; for example if the allocated budget had to be reduced very suddenly in order to address gaming risks or pressures elsewhere in the LCF. In these circumstances the DAs will be informed, but further involvement may not be practicable.

Publication of Budget Information

120. Market participants need to know how much of the CfD budget is available so that they can make informed choices about their project development spending. The EMR delivery body will provide this information via a website during both the First Come First Served (FCFS) stage of the allocation process and in allocation rounds (see section 3.2.2.5. for a description of the allocation process).

3.2.1.4 Strike Prices

121. Initially, CfDs will be allocated with strike prices that are set administratively (i.e. set by Government).

122. The Government intends to move to competitive price discovery processes for all low-carbon technologies as soon as practicable, and the allocation processes described in this document are designed to support a move to competitive price discovery as soon as this is possible.

123. We anticipate that the CfD Allocation Technical Framework will set out the detail of the allocation processes including explaining how Government may use any cost information provided by developers in support of their applications.

CfD Budget

Question CFD2  Do you agree that Government should be able to increase the budget allocation to the EMR delivery body without further consultation, but should be restricted from reducing this for applicants within an allocation round?

Question CFD3  Do you have any comments on the use of minima and/or maxima budgets, the case for technology-specific and general auctions, and how they might best support value for money and the management of the CfD budget (within the LCF)?

3.2.1.5 Route to Market

124. The Government has also established two working groups, comprised of industry and consumer experts, to create products⁶¹ that will prepare independent renewable generators for the introduction of CfDs. Government has also amended the Energy Bill to seek further measures to support independent renewable generators. These measures will be consulted upon in the next few months, and any secondary legislation required would be brought forward in spring 2014. Further detail is set out in Annex B.