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Last chance to respond on the transition from RO to CfD - issues for generators

In July 2013 the Department of Energy and Climate Change (DECC) issued a consultation on the transition from the Renewables Obligation (RO) to Contracts for Difference (CfD).

This week the government published the Draft Renewables Obligation Order 2014 which, subject to responses, will implement the proposals in the consultation. The draft Order serves as a timely reminder that the consultation closes on 25 September 2013. As discussed below, the issues raised in the consultation could have a significant impact on renewable generators and interested parties. Those who wish to have their say should respond in the next couple of weeks.

Transition to CfD

The Electricity Market Reform (EMR) White Paper proposed that CfDs will become the main support mechanism for large scale low carbon electricity generation and that the current RO regime will be phased out. It is intended that CfDs will be available to new projects from mid-2014. The RO will close to new accreditations from 31 March 2017 but will continue to support accredited capacity until 31 March 2037.

During the period between mid-2014 and 31 March 2017 (the transition period) an operator (defined as a person constructing or operating a new generating station or additional capacity or is proposing to do so) will have an element of choice as to whether new generating capacity is supported by the RO or CfD regimes. We consider some of the issues/limitations around these choices below.

New generating stations

During the transition period, new renewable generating stations will have a one-off choice between support under the RO and support under a CfD. Once an application for a CfD is made, an operator will not be permitted to apply for RO accreditation unless its application for CfD is unsuccessful.

If an operator applies for a CfD for a new generating station then chooses to withdraw voluntarily from the process, the station will no longer be eligible for RO. Similarly, if an operator enters into a CfD in relation to a new generating station then breaches the terms and causes the CfD to be terminated, the station will no longer be eligible for RO accreditation.

Additional capacity

Operators adding additional capacity of more than 5MW to an existing generating station accredited under the RO may be eligible in certain circumstances to apply for a CfD in relation to that additional capacity. It is perhaps more likely, however, that the preference during the transition period will be to seek RO accreditation on the additional capacity.

Where during the transition period existing RO accredited generators install additional capacity of 5MW or less, they will not be eligible to apply for CfDs on that additional capacity, but will be able to seek RO accreditation.

However, the consultation proposes that additional capacity added to an existing RO accredited generating station will not be eligible for RO support after 31 March 2017. The important upshot is that additional capacity of 5MW or less will not be eligible for support under either scheme after 31 March 2017.

Grace periods

DECC has made it clear that grace periods beyond the end of 31 March 2017 will be available under the RO regime for operators who experience delays in commissioning caused by certain factors beyond their control. Six months was originally proposed but DECC is seeking views on advice from certain stakeholders that this may be insufficient. The consultation seeks views on the lengths and conditions of grace periods.

The consultation document indicates that obtaining preliminary accreditation under the RO does not preclude a generator subsequently seeking a CfD in place of support under the RO. Conceivably therefore, if a generator who was expecting to obtain support under the RO is unable to commission its generating station before 31 March 2017, there may be scope in principle for making an application for a CfD instead. However, one of the key risks associated with the new CfD process is that allocation of CfDs is not guaranteed. Although it may be the case in practice that "constrained" CfD allocation procedures will not be triggered as early as 2017, generators (and banks) bringing forward projects in the latter part of the transition period are likely to be concerned about the feasibility and financial impact of making a last minute switch from the RO to a CfD. In these circumstances, the extent of comfort offered by any grace period rules in relation to the RO is likely to be a key factor in deciding whether to make a choice at the point of financial close between the RO or CfD.

Fixed Price Certificates

The Fixed Price Certificates (FPC) scheme aims to protect the income that operators receive after the RO closes to new generating capacity. In short, once FPCs are introduced, these will be available to RO accredited generators in place of ROCs. DECC originally proposed that it would implement FPC scheme in 2027 but the consultation considers and seeks views on the possibility of bringing the scheme forward to 2017.

While it was considered unlikely that many projects would have power purchase agreements (PPAs) extending beyond 2027, there is a risk that if the scheme is implemented in 2017 it could trigger change of law provisions in many existing PPAs. The usual position under provisions of this kind is that if agreement on a particular change in law (for example, how to share the value of any FPC) is not reached through negotiation between the parties, there will be scope for an independent expert to impose a decision on the parties.

Summary

It is expected that DECC will provide final confirmation on the detailed arrangements applicable to the CfD regime, including confirmed strike prices, the final terms of the CfD itself and the CfD allocation process, by December this year.

Generators will need to assess these arrangements carefully, alongside the RO to CfD transition arrangements touched on in this note, in order to inform their decision on whether to seek support under the RO or CfD regimes for projects due to come on line during the transition period.

In the meantime, pending the closure of the current consultation exercise, there is still an opportunity to influence government thinking on what those transition arrangements should look like.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2013. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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