Frequently Asked Questions

 

 

General

  What is a Contract for Difference (CfD)?

Contracts for Difference (CfDs) are the government’s main mechanism for supporting new low-carbon electricity projects. CfDs are designed to attract new sources of finance and reduce the cost of capital by providing generators with future price revenue certainty in exchange for them bearing development and construction risks.

 CfDs are private law contracts between a generator and LCCC, in a standard template form published by the Department for Business, Energy & Industrial Strategy (BEIS). The template CfD is divided into two parts- the front-end agreement (the “CfD Agreement”) into which the project-specific details and variables determined by the allocation process are inserted (e.g. generators name, facility description, installed capacity, strike price), and the standard terms and conditions (the “Standard Conditions”) which apply to all projects. The Standard Conditions provide termination rights to LCCC (on behalf of consumers) under certain circumstances that may arise, such as failure to demonstrate commitment to the project within the first 12 months and failure to commission 80% of capacity by the Long Stop Date. They also provide certain protections to generators, for example in case a project is impacted by a Force Majeure event.  

 Once the project has satisfied all the initial Conditions Precedents, the generator will be paid the difference between the ‘strike price’ and the ‘reference price’ for the electricity they produce over the course of the contract. The strike price is a price for electricity in £/MWh determined through a sealed bid process during the allocation round, and therefore should reflect the cost of investing in a particular low carbon technology. The reference prices used (either Baseload or Intermittent depending on the technology) represent the average market price for electricity at the relevant point in time.

  When is the next allocation round?

The third CfD allocation round (AR3) opens on 29 May 2019, and thereafter allocation rounds are expected to be held around every 2 years. The BEIS 2017 Clean Growth Strategy indicated that up to £557m (2011/12 prices) of annual support will be available for future CfD allocation rounds (more can be found at:  https://www.gov.uk/government/publications/control-for-low-carbon-levies)

  What changes is the government making to the CfD scheme for the third allocation round?

The substantive design of the scheme remains the same, but we are making some small technical improvements.

Following a series of policy development and consultations over the last year, these changes will:

  • Improve the forecasting of scheme costs and mitigate the risk of higher than expected spend, by using load factor assumptions that are at the high end of departmental forecasts when allocating CfD budget and by requiring generators to provide their best estimates of expected generation output during the CfD contract term;
  • Ensure that only more innovative and efficient Advanced Conversion Technology plants are awarded subsidy;
  • Increase the overall efficiency requirements for Combined Heat and Power (CHP) plant;
  • Update greenhouse gas emissions standard that new fuelled technology projects using solid and gaseous biomass as feedstock will have to comply with.
  • Improve the operation and clarity of the CfD contract relating to protection for the generator against Force Majeure events and grid connection delays, the definitions of Installed Capacity and Facility, as well as a several minor and technical changes and changes to bring the contract into line with EU legislation on the definition of ‘waste’ and sustainability criteria relating to indirect land use change.
  Why are you making these changes?

These changes are necessary to ensure that the CfD scheme continues to deliver low carbon electricity at best value for bill payers and focus subsidy on high quality projects in order to drive innovation and bring down the cost of energy in the long term.

The design of the scheme remains unchanged.

 

 

Eligibility

  What technologies will the next allocation round support?

The auction will be open to ‘less established’ (Pot 2) technologies only. The following technologies are eligible to compete:

Advanced Conversion Technologies​
Anaerobic Digestion​
Dedicated Biomass with CHP
Geothermal​
Offshore Wind​
Remote Island Wind​
Tidal Stream​
Wave​

 

  Is there a maxima or minima set for any of the technologies?

No, there is no technology specific maxima or minima.

  Who needs to submit interim Post Build Reports?

All Applicants (including any consortium member with a 20% share or greater) who have been awarded a Contract for Difference for a project over 300MW.  If their most recently awarded CfD project has already been completed and a Post Build Report was submitted to BEIS, then a copy of the response they received from BEIS in relation to that project will suffice.

  What is the supply chain process?

 Developers applying for a CfD on behalf of a generating station with a generation capacity of 300MW or more will be required to provide the National Grid (Delivery Body) with a statement from the Secretary of State for Business, Energy and Industrial Strategy, approving the Supply Chain Plan submitted for that station.  

A Supply Chain Plan guidance document will be prepared and will be made available on this website.  The guidance is intended to assist Applicants in considering how they might wish to structure their application.

 This Supply Chain Plan guidance provides detail for Applicants regarding:

  • the process and timetable for submitting Supply Chain Plans to the Department for Business, Energy & Industrial Strategy (BEIS) for assessment;
  • the process and timetable for submitting Interim Post Build Reports (iPBR) or Post Build Reports (PBR) to BEIS for assessment;
  • the process and timetable which the Department intends to follow when assessing submitted Supply Chain Plans and iPBR/PBRs; and
  • the evaluation methodology and criteria against which the Secretary of State intends to assess Supply Chain Plans.
  What are the different types of connection in the CfD Framework?

There are three types of connections, which are:

Direct Connection – connection to the Transmission System or a Distribution System with all power to be exported to that system.

Partial Connection – connection to the Transmission System or the Distribution System via an operator of a Private Network with only part of generated power to be exported to the Transmission System or the Distribution System.

Private wire connection – the facility does not directly interface with a Transmission System or a Distribution System.   

There are two subsets to a private wire connection.  One is where the private wire network does in turn connect to a system and the other is where the private network is totally islanded (not connected to transmission or distribution system).  

Directly connected projects exclusively use Balancing SC metered systems.  Private wire connections exclusively do not use Balancing and Settlement Code (BSC) meters and require a different form of CfD agreement as the provisions of the BSC do not automatically apply.

 

 

  Will assessing an iPBR delay the assessment of my Supply Chain Plan?

 No. BEIS will endeavour to notify Applicants as to whether or not their Supply Chain Plan (and their iPBR) has been approved within 30 working days of the Supply Chain Plan Application Window closing.

 

  Do I need to submit an interim Post Build Report (iPBR) ?

Yes. You will need to submit an iPBR if you have been awarded a CfD with an approved Supply Chain Plan, regardless of the technology the CfD is supporting.

 

 

Auction

  What are the delivery years for this next auction?

The auction is open to projects that aim to start generating in ‘delivery years’ 2023/24 and 2024/25. (Delivery years run from 1 April to 31 March).

  What is the auction clearing mechanism?

The auctions are held on a “pay-as-clear” basis, where all projects in any delivery year are paid the price of the highest successful bid (although there are technology specific Administrative Strike Prices, which set a maximum possible support rate for each competing renewable technology).   

 

Capacity

  How do the phasing assumptions put into the original application constrain the options for phases at the sealed bids stage?

As a general rule, the target commissioning date (‘TCD’) and capacity submitted in the initial application for all types of projects are constrained by the eligibility requirements – see Schedule 4 of the allocation framework for details.

 

At the sealed bids stage, the following rules apply:

  • Applicants cannot submit sealed bids with an earlier TCD or larger capacity than in the original application.
  • Applicants can only submit one sealed bid that has exactly the same TCD and capacity as the original application.
  • No more than two flexible bids are allowed per delivery year.
     
    For phased projects, the following (additional) rules apply:
  • The TCD for all phases cannot be earlier than that of phase 1 in the original application. The TCD of later phases can be earlier than the TCDs of the respective phases in the original application.
  • The capacity of phase 1 cannot exceed that of the original application. The capacity of later phases can be greater or lesser than the capacities of the respective phases in the original application, so long as the capacity of all phases combined does not exceed that of the original application.
  • Each phase must have a capacity greater than 5MW.
  • As per Rule 4 of the allocation framework -
  • 25% of the total capacity must be in the first phase;
  • the first phase TCD must be before 31 March 2025;
  • the TCD of the final phase must be no later than 2 years after the TCD of the first phase.
     
    Further clarity will be provided in the final allocation framework, which will be published in due course.
     
  What parasitic electrical loads and electrical losses are included in determining the net capacity?

The parasitic electrical loads and electrical losses that should be deducted when determining the Initial Installed Capacity Estimate (IICE) are:

a. any parasitic electrical load generated by auxiliary equipment required to operate the Facility ; and

b. any electrical losses within the Facility from the generating units to the export metering point.


Any parasitic electrical load and/or electrical losses required to operate equipment to prepare waste derived fuels and other feedstock can be excluded as part of the Facility as it is accepted that this process can be done offsite. However, where it is done on-site and due to the site’s electrical and metering configuration it cannot be metered outside of the Facility Metering Equipment, LCCC will allow a generator to include such systems and loads as parasitic loads but this will obviously have an impact on a generator’s installed capacity.

 

 

Budget

  What is in the draft budget notice?
  • BEIS has published draft and final budget notices setting out the key parameters for the next Contracts for Difference allocation round for less established technologies (such as offshore wind), which opens on 29 May 2019.
  • The auction will be open to less established (‘Pot 2’) technologies which start generating in delivery years of 2023/24 and 24/25. The size of the budget is £65m (in 2011/2012 prices) for eligible generators applying in respect of projects with Target Commissioning Dates in either Delivery Year of 2023/24 or 2024/25.
  • The £65m budget (in 2011/2012 prices) is expected to support the delivery of new renewable energy generating capacity, capped at a maximum of 6GW. This whole auction capacity cap is designed to increase competitive tension and maximise value for money for consumers.
  How did BEIS set the CfD Allocation Round 3 budget?

BEIS have taken into account the expected costs of renewable electricity generators, the expected wholesale price of electricity and the government’s decarbonisation objectives.

  How will the cost of CfDs be met?

The cost of CfDs will be ultimately met by electricity consumers via the CfD Supplier Obligation, which is a levy imposed on all active GB electricity suppliers in accordance with The Contracts for Difference (Electricity Supplier Obligations) Regulations 2014, as amended.

For more information on how the levy is managed, visit LCCC’s Transparency Tool, available at:  https://www.lowcarboncontracts.uk/resources

 

Application

  What evidence of incorporation do I need to provide?

If you are an incorporated body (which includes SPVs) in the United Kingdom or outside the United Kingdom, you must provide your company registration number and an electronic PDF copy of your certificate of incorporation (or equivalent if non UK Company).

Your certificate of incorporation must be provided in English.

  What evidence of Applicable Planning Consents do I need to provide?

You will need to confirm which of the 5 Applicable Planning Consents (Allocation Regulation 24) applies to your project.

 In respect of those that do, you will need to provide the planning decision notice which applies to the relevant works, which enable your CfD Unit to be established or altered and to allow you to get power to the Transmission System, Distribution System or Private Network (Allocation Regulation 23(2)). Planning meeting minutes are not an acceptable source of evidence of planning consents (as are just a record as to the decision of the council/planning authority).

 Where the Applicable Planning Consents does not apply to your project, you will need to confirm the reason why but do not need to provide documentary evidence to demonstrate this. Where a general permission or consent or an exemption applies, you will need to provide details to us within your CfD Application (Allocation Regulation 23(6)).

 Allocation Framework Schedule 4 sets out the checks that must be undertaken by the Delivery Body, including in respect of the Applicable Planning Consents but ultimately the onus is on Applicants to provide the evidence considered relevant to demonstrate that its project has sufficient planning permission to develop.

  Are there any restrictions on what capacity I can apply for?

This is dependent on whether or not you are establishing (new capacity) (Eligibility Regulation 3(5)(a) or altering (additional capacity) (Eligibility Regulation 3(5)(b)) an eligible generating station and your technology type.

Where you are establishing new capacity at a site then your Initial Installed Capacity Estimate must be >=0.01MW unless your technology is one of those that can apply into the Small Scale Fit (SSFiT). In accordance with Allocation Regulation 14(4), where your technology can access the SSFiT (only Anaerobic Digestion for the upcoming Allocation Round), then Initial Installed Capacity Estimate must be >5.00MW.

In accordance with Eligibility Regulation 3(5)(b), where you are altering capacity at a site regardless of technology type, then your Initial Installed Capacity Estimate must be >=5.00MW.

 As per the Supplemental Requirements pursuant to Allocation Regulation 28 and as set out in Allocation Framework Paragraph 4, there are further capacity limits for Offshore Wind projects that are applying as a Phased Offshore Wind CfD Unit:

  • Initial installed capacity estimate for Phase 1 must be >=25% of the total Initial installed capacity estimate for all phases; and
  • Total Initial Installed Capacity Estimate for all phases must not be >=1500MW

Please be mindful that Applicants must ensure that the evidence they submit with their CfD Application provides them with the rights to the Initial Installed Capacity Estimate they apply for and they must also consider their obligations under the CfD Contract should they be successful in the allocation process.

 

  How should I calculate my installed capacity?

The Initial Installed Capacity Estimate (IICE) is the capacity in MW for which successful allocation has taken place and is stated in the CfD Agreement. The Initial Installed Capacity Estimate (“IICE”), Installed Capacity (IC) and Final Installed Capacity (FIC) are all expressed as net volumes in MW.

 

Therefore when calculating the Installed Capacity at application stage, the generator will need to calculate the aggregate of the nameplate capacity/specification of generating assets comprising the Facility, minus any parasitic electrical load and/or electrical losses as measured at the export meter without which the Facility would not be able to continuously generate.

 

The Generator should be aware of the requirement not to exceed the FIC on final commissioning which will be determined by Commissioning Tests and the fact that the IICE can be only reduced. A Generator can elect to reduce the Installed Capacity at any time before its Milestone Delivery Date (MDD) so long as the revised capacity is still greater than 75% of the IICE. IICE may also be reduced for a Relevant Construction Event.

 

  What commissioning tests must a Generator undertake?

Commissioning Tests is a defined term in the CfD and the Generator should evidence that it commissions the Project in accordance with the contractual provisions, namely the Operational Conditions Precedent. LCCC has published on its website detailed guidance on the evidence to be provided and the underlying process which should be referred to and which will be updated from time to time.

 

 

Allocation Framework

  What is the Allocation Framework?

The Allocation Framework (AF) is a technical document, which sets out the rules that will apply to the third Contracts for Difference (CfD) allocation round for less established technologies. It also sets out how applications will be considered against the eligibility requirements and includes a list of checks that the EMR Delivery Body (National Grid) carries out when assessing CfD applications.

  What is the difference between the draft and final versions of the Allocation Framework?

As for previous CfD allocation rounds, we have published a draft version of the AF in advance of the opening of the round to give industry and investors sight of the new CfD parameters. The final AF will be published no later than 10 working days before the start of the allocation round.

  What new material is included in the Allocation Framework for Allocation Round 3 (AR3)?

The draft Allocation Framework for the third CfD allocation round includes, for the first time, how a capacity cap will operate.

From the third allocation round, Remote Island Wind (RIW) is included as a technology type within “Pot 2” (less established technologies). The draft AF sets out how the EMR Delivery Body (National Grid) will determine if an applicant meets the RIW conditions set out in the legislation (The Contracts for Difference (Allocation) Regulations 2014 (as amended))

Other technical changes to the draft Allocation Framework have also been made to incorporate updates to the eligibility requirements for fuelled technologies.

Update 1 May 2019: The final Allocation Framework, setting out the rules for Contracts for Difference Allocation Round 3 and the eligibility requirements applicants must satisfy, was published by BEIS and is available here.  

 

  Which aspects of the draft Allocation Framework will not apply for Allocation Round 3 (AR3)?

A maxima and minima will not apply to AR3, and as such any reference to a maxima or minima is not relevant for the upcoming round.

For further details on the key parameters that are intended to apply for AR3, please refer to the draft budget notice, published in November 2018.

Update 1 May 2019: The final Budget Notice and accompanying note was published and is available here.

The final Allocation Framework, setting out the rules for Contracts for Difference Allocation Round 3 and the eligibility requirements applicants must satisfy, was published by BEIS and is available here.  

 

  Is there a Capacity Cap in place?

The government intends to set a 6-gigawatt cap on the total amount of capacity that can win support. This means that even if the budget is not fully spent, we will buy no more than 6GW. 

  Can the capacity bid and awarded in the allocation round be exceeded?

Generators should not overbuild or install equipment whose maximum generating capacity, in aggregate across the Facility and net of losses and parasitic loads, exceeds the Initial Installed Capacity Estimate (IICE).

The Final Installed Capacity (FIC) shall not exceed the Initial Installed Capacity Estimate (IICE), which is the capacity generators have bid for and awarded in the Allocation Round. The Generator is entitled to receive settlement payments up to an output that corresponds to the Maximum Contract Capacity which sets a cap for CfD payments. The Maximum Contract Capacity is the Installed Capacity Estimate, which can only be adjusted downwards from its initial value (being Initial Installed Capacity Estimate) until the FIC is determined, and then it is the FIC.

Additional generating assets that are separately metered and not a part of the Facility and to all intents and purposes are distinct from the Facility, are not subject to the CfD.

 

Contract operation

  What happens after I sign a CfD?

After the generators sign a contract with the LCCC, and have passed the ICPs, they need to work towards meeting the Milestone Requirement, which requires them to demonstrate their commitment to the Project within 12 months of signing the CfD.  As a minimum, a generator needs to prove they have either: a) spent 10% or more of the Total Project Pre-Commissioning Costs on the Project or b) that they have met the Project Commitments set out in the CfD.  The CfD also requires the generator to provide LCCC with monthly progress reports towards their estimated start date.  LCCC is required by regulation to publish updated Estimated Start Dates on a quarterly basis in the CfD register (www.lowcarboncontracts.uk/resources).  LCCC has the right to terminate the contract if the generator fails to meet the Milestone Requirement, or subsequently if the generator fails to commission 80% of the installed capacity by the Longstop Date.

  When/why does the LCCC adjust strike prices?

The ‘strike price’ is a price for electricity generators have bid at the CfD allocation and is set out in the CfD Agreement, which is signed following allocation and together with the Standard Conditions, forms the CfD. 

The strike price is adjusted in accordance with the provisions of the Standard Conditions which require annual adjustments for Consumer Price Index (CPI), balancing services use of system (BSUoS) and transmission loss multiplier (TLM), where applicable.  When a strike price is adjusted, the CfD Register will be updated accordingly in accordance with Regulation 12 of The Contracts for Difference (Standard Terms) Regulations 2014, as amended.

  How do other consents affect Installed Capacity?

The Generator must at all times comply with all Laws and Directives, promptly obtain and comply with all Required Authorisations (including planning consents and connection agreements) and at all times comply with all terms of those Industry Documents to which it is a party.

 

  What are the consequences to a Remote Island Wind (RIW) generator awarded a CfD if Ofgem final Needs Case approval for an island interconnector remains outstanding, or Ofgem's final Needs Case approval conditionality tests have not been fulfilled?

Grid delay protections in the CfD Standard Terms and Conditions (on pages 35, 38 and 59 of the May 2019 version) apply only where the result is a delay to the project/delivery of contract commitments. All claims under these protections will be judged on the specific circumstances but, in general, the LCCC would consider the information in the construction agreement that was valid at the time the CfD agreement was signed, which the generator would be expected to provide to the LCCC. In coming to a view on whether or not there had been a failure by the [TSO, Transmission Licensee, or Licensed Distributor] to carry out in a timely manner any required system reinforcement or connection works specified in that construction agreement, the LCCC would also want to understand the reason for the failure, including confirming that it is not due to the fault or negligence of the generator.

 

 

Disclaimer

 

These frequently asked questions and responses (“FAQs”) will be prepared by Low Carbon Contracts Company Ltd ("LCCC") in response to queries raised by stakeholders in relation to the content of the Contract for Difference (“CFD”), which is comprised of the CFD Agreement and CFD Standard Terms and Conditions (“Conditions”), as published by the Department for Business, Energy and Industrial Strategy on 29 August 2014. The FAQs will also be applicable to Investment Contracts (“ICs”) but users of this website are advised to fully review the equivalent clauses in their ICs as there are differences between the CFD and the IC.

 

These FAQs are subject to and are provided on the basis of the following:

  • The FAQs do not supersede or replace the provisions of the CFD or IC and are not intended to and do not constitute legal, investment, commercial or operational advice and should not be relied upon as such. Users of this website should not place reliance upon these FAQs and should refer to the full terms of the CFD or IC, and/or consult their professional advisors where they require information or advice on matters relating to the CFDs or ICs generally and/or any CFD or IC to which they are a party.
  • The FAQs reflect the current thinking and approach of LCCC and should not be viewed as in any way as binding on LCCC.
  • It is our intention to keep the FAQs under review and to publish revised issues from time to time.

 

Defined terms used in the FAQs but not defined therein have the meanings prescribed to them in the CFD or IC (as applicable) and the Energy Act 2013.

Please note that the primary source and most reliable source of information are the regulations, allocation framework and statutory notices. These will be available on the gov.uk website and linked here in the ‘News’ section, as they are published over the next few months.

 

 

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