Electricity Market Reform – Contracts for Difference
Consultation on changes to the CFD Contract & CFD
Regulations
The Law Society of Scotland’s Response
April 2015
Introduction
The Law Society of Scotland (the Society) aims to lead and support a successful and respected Scottish legal profession. Not only do we act in the interests of our solicitor members, but we also have a clear responsibility to work in the public interest. That is why we actively engage and seek to assist in the legislative and public policy decision making processes.
To help us do this, we use our various Society committees which are made up of solicitors and non-solicitors to ensure we benefit from knowledge and expertise from both within and out with the solicitor profession.
The Law Society of Scotland’s Energy Law Committee (the committee) welcomes the opportunity to consider and respond to the Department of Energy & Climate Change consultation: Electricity Market Reform – Contracts for Difference Consultation on changes to the CFD Contract & CFD Regulations. The committee has the following comments to make.
Comments
1. Do you believe that the terms within the UJV Agreement effectively enable the participation of UJV projects without materially altering the balance of risk and reward represented by the CFD?
In general terms, yes we agree. The UJV agreement will enable participation but it is unlikely to incentivise that structure e.g. termination when a single UJV party becomes insolvent even if that would be capable of remedy by the insolvent party’s share transferring to all other UJV parties.
That said, we have no particular knowledge of this structure being prevalent in the industry or therefore a concern that large numbers of parties will be impacted..
2. Do you know of UJV project structures for which the approach present particular difficulty? Please provide evidence.
3. Do you have any evidence or views in relation to the incidence, impact and evolution of negative pricing?
No comments.
4. Do you have any views in relation to the above (negative pricing) proposals or the drafting itself?
We understand the state aid requirement and indeed the policy objective behind not incentivising generation when supply significantly outstrips demand. However, The decision to provide zero CfD payments during periods of negative pricing fundamentally affects the nature of the CfD. The intention of the CfD was to remove price risk from generators and therefore to reduce the financing cost of new generating plant. Generators and their funders will now need to consider the potential frequency and duration of negative pricing episodes. This will affect the debt equity ratio and therefore the cost of financing new generating plant. It also seems to us that the proposed change could be construed as having a discriminatory effect on intermittent technologies, as the impact of these changes on such generators will be greater. We therefore encourage DECC to consider mitigating strategies so that the original intent of the CfD remains intact.
In addition, it is critical to ensure that the proposed new drafting will link to and be taken account of in the wider PPA market. Generators will only be able to manage this negative price risk by switching off generation and indeed we consider that this is the behaviour government is trying to incentivise. PPAs will therefore have to permit generators to switch off generation in these negative price periods without further penalty.
Furthermore, not all generators will have the resources to check half hourly market prices. Generators should be advised of the negative price periods by the CfD Counterparty, this could be done in a similar way to the capacity warnings provided under the capacity market arrangements.
5. Do you have any views or evidence in relation to any alternative (negative pricing) arrangements that may be made while still aligning with the Commission’s condition?
Please refer to our response to Q4 above.
6. Do you have any views on the above amendments in relation to Definitions, given the stated intent?
No comments.
7. Do you have any views on the above amendments in relation to Milestone Requirements, given the stated intent?
The new drafting at Clause 4.1B, rather than provide further clarity appears, we would suggest, to provide further discretion to LCCC as the test is the CfD Counterparty’s satisfaction. If the intention is to provide objective guidance then the simple requirement should be stated and preferably made clear in the Project Commitments section of the CfD Agreement. We do not have any comment on Clause 4.8.
8. Do you have any views on the above amendment in relation to Metered Output, given the stated intent?
We note that the amendment is not clearly shown in CfD Agreement. We suggest that this should be clarified.
9. Do you have any views on the above amendments in relation to Representations and Warranties, given the stated intent?
We note that the amendment at 28.1G suggests that litigation need not involve the Generator to be the subject of the warranty. This seems inappropriate as there may be third party litigation which the Generator has no knowledge off but which may impact a project or a Generator. The litigation should specifically relate to the Generator or the Facility.
Questions 10 - 22 –
No comments.
23. Do you agree that running each pot as a separate round is an effective means of achieving the policy objective? If not, are there any other regulatory changes you would suggest to achieve the policy objective?
We would agree provided that communication on timescales is clear and accurate to avoid confusion to participants in either pot.
24. Do you have any views in relation to the above proposed amendment (Applications to participate in the Capacity Market Auction?
No comments.
25. Do you have any views on the above amendments in relation to Excluded Applications, given the stated policy intent?
No comments.
26. Do you have any views in relation to the proposal to distinguish between sensitive price information and non-price information contained in an applicant’s sealed bid submission?
Distinction must be clear and what constitutes sensitive price information should be specified for the purposes of consultation.
27. Do you have any views on the proposal to allow non-price bid information as described above to be shared with the Secretary of State and used for evaluation purposes?
We understand that this data is valuable to government and to the industry generally to analyse auction outcomes. However, it is critical that any data made public is aggregated and anonymised such that individual participants bid strategies cannot be ascertained. Bid strategy will be wider than simply pricing information.
Question 28 – 33
No comments.
34. Do you believe that the above proposal in relation to Negative Pricing achieves its purpose appropriately? In either case, please provide evidence.
No comment other than the response to Q4 above.
35. Do you agree with the proposal to treat UJV parties collectively for most purposes in the CFD regime?
Yes, we agree. Please refer to our comments to Q1 above.
36. Do you agree that UJV parties may need to be treated individually rather than collectively under certain circumstances? Are there circumstances where this would be appropriate?
We agree that the principle is appropriate.
37. Do you believe that the above proposal in relation to Sustainability Directions achieves its purpose appropriately? In either case, please provide evidence.
This, we suggest, appears to be clarification based on the current terms of the CfD and on that basis we have no comments.
38. Do you agree that the requirement on the LCCC to amend existing contracts should be at the discretion of the Secretary of State on a case-by-case basis, rather than automatically incorporating any and all amended Sustainability Criteria?
No comment.
39. Do you agree with the proposal to allow for the amendment of the Standard Terms Notice in certain circumstances?
40. Do you agree with the use of twenty working days as a guaranteed period between the last possible amendment to the Standard Terms Notice and the opening of the Allocation Round.
Given that the only potential changes relate to ‘manifest error’ the timeline could be shortened further. Depending on the nature of the error it may cause more prejudice not to correct the error.
41. Is the use of a minimum ‘manifest error’ sufficient to safeguard against unnecessary changes?
Yes, we agree this is, in our view, sufficient.
42. Do you have any other views on the above proposal (Amendments to Standard Terms Notices)?
No comment.
43. Do you agree with the proposal to exclude only those Bank Holidays that occur in England and Wales from the definition of ‘working day’?
We would suggest that in in theory this may potentially disadvantage smaller projects in Scotland that bank locally but in reality this is trying to reflect days when businesses will be working and for clarity it seems sensible to all.
For further information and alternative formats, please contact:
Brian Simpson
Solicitor, Law Reform DD: 0131 476 8184
E: [email protected] The Law Society of Scotland 26 Drumsheugh Gardens Edinburgh
EH3 7YR
