One of the key components of the UK government’s electricity market reform is the allocation of long term contracts for difference (CfDs) to low carbon generators. CfDs are awarded through a competitive allocation process and will eventually replace renewables obligation certificates as the principal low carbon generation incentive in the UK.
CfDs seek to incentivise the investment in low carbon electricity generation by guaranteeing generators a price, known as the strike price, for all electricity generated. If the wholesale price of electricity is below the strike price, the government (through the Low Carbon Contracts Company Limited) will pay the difference to the generator. Conversely, should the market price exceed the strike price, the generator will be required to pay the difference.
Below is a summary of the process by which CfDs will be allocated.
The Allocation Process: A Summary
1) The Department of Energy and Climate Change (DECC) announces allocation rounds and corresponding budgets.
2) A new allocation framework will apply to each round. This is a document published by DECC which covers the allocation process and the method of calculation by which the delivery body (National Grid) determines the value of applications received.
3) An allocation round’s budget will set out the overall budget available for each year in respect of that allocation round, as well as the strike prices applicable to different generation technologies. Budgets may also specify certain minimum and maximum capacity thresholds for different technologies.
4) The first allocation round opened for applications on Tuesday 14 October 2014 and closed on 28 October 2014. The budget for this allocation round provided the following:
- In the first delivery year (April 1 2015 to 31 March 2016), £50 million has been allocated to established technologies (including onshore wind under 5MW, solar PV under 5MW, landfill gas) with no budget available for less established technologies (including offshore wind, wave, tidal). In the second delivery year, £65m has been allocated to established technologies and £155m has been allocated to less established technologies.
- A minimum of 10MW capacity for wave and tidal technologies (but no maximum thresholds). This means that such technologies will have first access to the less established technologies pot, without competition from other technologies.
5) Applications may be made by eligible generators (as defined by secondary legislation). Eligible generators include not only those persons establishing (or intending to establish) a generating station, but also those persons operating them and, where such persons are companies, persons associated with such companies (broadly speaking, companies with no less than 20% ownership or voting rights in such companies).
6) National Grid will also check that the projects meet certain eligibility requirements. These include having obtained the required planning consents and having a grid connection agreement in place. Applicants will also have to provide certain supporting information (including expected capacity and target commissioning dates).
7) Within 10 working days of an application closing date (i.e. 11 November 2014 for the first allocation round), National Grid must notify each applicant whether or not their application will be deemed to be a qualifying application (subject to appeal/review if not).
8) Once all qualification appeals have been determined (or once National Grid has been notified by the Secretary of State to do so), the allocation process begins. All applications are evaluated by National Grid in respect of each year that a strike price has been set. This is done using a published valuation formula.
9) Provided all qualifying applications combined do not exceed the total budget, a pot or any minimum or maximum thresholds set out in the relevant budget, all applications will be accepted and all projects will receive the strike price applicable to the generating technology used. Where the budget or a pot’s budget is exceeded, or where any minima or maxima thresholds are breached, an auction will be held to determine the award of CfDs in respect of applications comprising the relevant budget, pot or threshold which has been exceeded.
10) Auctions are held by the submission of sealed bids, submitted in accordance with a notice of auction, issued by National Grid to the relevant applicants. Auctions in respect of applications that did not meet a minimum threshold will be held before any other auctions. Applicants will have a minimum of 5 working days to submit any bids following issue of the notice of auction.
11) Bids will contain:
- the applicant’s proposed strike price for each MWh of output (which must not be more than the applicable published strike price);
- the applicant’s target commissioning date and start of the target commissioning window; and
- the capacity of the generating station.
12) Each applicant may submit up to 10 flexible bids to demonstrate any flexibility in their bids. Flexible bids will have a varying price, capacity and/or target commissioning dates but only one bid can be accepted for each application.
13) Starting with the bid with the lowest strike price and working up, each application will be successful until the application which would cause any pot, overall budget or maximum threshold for any delivery year to be exceeded is reached.
14) Following completion of the allocation and auction process, National Grid must procure that the allocation process is audited by an independent and qualified auditor. This is to ensure the valuation formula was properly applied and that all procedures were properly followed.
15) Successful applicants will receive an offer to enter into a CfD with the Low Carbon Contracts Company Limited. The strike price applicable under a CfD will be the published strike price where allocation is not constrained (i.e. no auctions are required) or the lower of the strike price bid of the last accepted bid in that year (known as the clearing price) and the published strike price where allocation is constrained).
The steps outlined above represent a brief summary only of the steps involved in the CfD allocation process and should not be relied upon as a definitive guide. Please contact us should you have any questions or wish to discuss anything in this briefing.
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