Electricity Market Reform Update: Contracts For Difference Allocation Procedure

Author:Mr Richard Ceeney, Christopher Parrott and Edward Ewart
Profession:Reed Smith


In the past year a series of government publications and consultations have given greater clarity to the government's thinking as to how the new Contracts for Difference (CfD) regime will work. Guidance has also been issued to explain the transition to the CfD from the Renewables Obligation (RO).

To recap, the UK government department responsible for energy policy, the Department of Energy & Climate Change (DECC), is closing the RO to applicants on 31 March 2017.

Under the current position, the relevant renewable energy generators receive RO Certificates (ROCs) which, in essence, provide additional income above the price received on the market for generating electricity from renewable sources. From January next year (and continuing after closure of the RO to new applicants) these generators will instead be given the opportunity to bid for a CfD, to be entered into with a government-appointed counterparty. Under the CfD, generators will receive a fixed price for the electricity they generate. If the generator sells the electricity for less than the price set out in the CfD (known as the "strike price"), the counterparty will make up the deficit between the price received and the strike price. Conversely (although this detail is often forgotten in the industry), if the generator receives more than the strike price, the generator will pay the excess above the strike price to the counterparty.

In this alert, we summarise the proposed procedure for allocation of CfDs, focussing on the first allocation round taking place later this month. This allocation procedure will also be likely to apply to subsequent rounds.

The RO will close earlier, on 31 March 2015, for solar PV projects. This is subject to a grace period under which late commissioning may be possible. DECC announced significant changes to its approach to this grace period earlier this month – we shall discuss these developments in a further alert in the near future.

Allocation of CfDs

DECC had originally planned to allocate at least a percentage of CfDs on a "first come, first served" basis. However, that is no longer the case. From the first round of allocations, which opens this month, the majority of CfDs (apart from CfDs strategically pre-ordered through the Final Investment Decision enabling process, for example the investment contract awarded to Hinckley nuclear plant, and any bespoke CfDs entered into as the Secretary of State directs) will be allocated as detailed in this alert.

We set out below the stages involved in the allocation process, as well as what will be required by applicants at each stage. The stages are summarised in the following diagram:

The dates for these stages have changed on a number of occasions, but the dates shown in the diagram reflect the most recent information available. It appears that the dates within which applications will be accepted (commencing on 16 October 2014, closing on 30 October 2014) are now fixed, having been confirmed by DECC on 2 October 2014.

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