Government Consultation Response on Proposed Amendments to the CfD Regime

United Kingdom

On 15 December 2017, the Government released their consultation on amendments to the Contracts for Difference (“CfD”) regime 1 (the “Consultation”) (discussed in our previous law-now). In January 2018, shortly after the Consultation and the Government’s Remote Island Wind (“RIW”) proposals, the European Union provided State aid approval to allow RIW to compete for support with “less established” renewable technologies. On 6 June 2018, the Government released Part A of their response to the Consultation (the “Consultation Response”), primarily addressing the Government’s intention to allow RIW to compete in future pot 2 allocation rounds with less established technologies (“Pot 2”). The Consultation Response also speaks to further proposals put to the Government in relation to RIW, including improving RIW competitiveness, qualifying Pot 2 allocation rounds with “Minima” and “Maxima” budgets and/or capacity, timescales and implementation of the CfD support and the definition of RIW.

Remote Island Wind

Comments on the proposed approach

The response to the questions surrounding RIW’s ability to compete in Pot 2 allocation rounds was largely positive, with support for treating RIW differently to other onshore wind project under the CfD scheme which are eligible to take part in pot 1 allocation rounds. Some respondents put forward the idea of removing the minimum size limit on RIW projects eligible to apply for a CfD or at least lowering the minimum of 5MW.

The Consultation Response outlines further areas in which allowing RIW to compete in Pot 2 would be beneficial. Various respondents postulated that times of high wind on remote islands does not always correlate with those on the mainland, potentially smoothing overall variability in generation. The potential of enhanced transmission infrastructure and consequent security of supply for islands at reduced consumer cost was also put forward as a benefit of potential Pot 2 competition.

Certain responses denoted the potential negative impacts of allowing RIW to compete in Pot 2, including, the adverse ecological effects on the various environments and ecosystems caused by incentivising large-scale development in RIW. In light of the responses received, the Government has confirmed its intention to proceed to legislate to differentiate RIW from other onshore wind projects and allow them to compete for a CfD in Pot 2. However, in addressing the responses the Government also confirmed it will not extend the scope of RIW to encompass projects smaller than 5MW.

Comments on RIW competitiveness

Respondents advocated that RIW, which would not be competitive in pot 1, has become increasingly less competitive against other technologies in Pot 2, so much so that the ability of RIW to win a CfD is questionable. This is supported by further responses set out in the Consultation Response, arguing RIW will not even compete with offshore wind, even with similar load factors, due to the higher costs facing RIW. Furthermore, unlike offshore wind, RIW will not be provided with an availability guarantee for their power export.

To contend with RIW’s lack of competitiveness, respondents considered the idea of using Section 185 powers under the Energy Act 2004 (the “Act”) to locally limit transmission charges. The limit would come from charging transmission charge payments at the point of commissioning, rather than at the start of the financial year in which the project connects to the transmission network. However, the Consultation Response stipulates that all transmission charging arrangements and matters relating to transmission links to remote islands are a matter for Ofgem. The Government also outline the inability of any scheme introduced pursuant to Section 185 of the Act to match the 15 year term of a CfD contract.

Minima and Maxima Pot 2 allocation rounds

A proposition put forward by several respondents in the Consultation Response is the prospect of ring-fencing a minimum budget and/or capacity for RIW in the next allocation round. Respondents argue that, in turn, this will allow for a significant volume of RIW projects to be successful in the allocation round. In contrast, other responses in the Consultation Response propose a maximum budget and/or capacity for offshore wind. In their response, the Government acknowledge the need to differentiate RIW from other onshore wind projects but do not extend this to offshore wind. In response to a proposed “Minima” or “Maxima” of budget and/or capacity for RIW and offshore wind respectively, the Government state that the benefits to competitiveness are outweighed by the potential risk to safeguarding consumer electricity costs.

Timescale and implementation

Under the Consultation Response the Government have been encouraged to align the timescales for delivering transmission cables to remote islands with the timescales of the CfD support. Other respondents have pressed for the Government to avoid delay to the intended Spring 2019 timeline for the next allocation round. It is believed this will cater for projects subject to time-limited planning or connection agreements, allowing them to bid for a CfD award. Some respondents have requested the Government provide a “minded to” position on the delivery years for the next allocation round. The Government’s position under the Consultation Response in relation to the implementation and timescale of the proposed changes to RIW is limited. There is an acknowledgement of the benefits for providing early clarity and which key parameters would benefit most, such as delivery years and indicative budgets. However, the Government have not put forward any further thinking on the matter, possibly with further intention to address this in greater detail in Part B of their Consultation Response.

Definition of RIW

The Government proposed a definition of RIW in order to distinguish RIW from onshore wind in the Consultation. Certain respondents considered the higher costs of connecting to and using the transmission system could in itself be considered a definition. The Consultation Response evidences clear support for the Government’s proposal under the Consultation that a “remote island” must be 10km from the mainland. However, the Consultation definition also required the “remote island” be in “territorial sea”. Respondents have shown concern that certain “remote islands” are actually in “internal water” and so greater scope under the definition is required. Under the Consultation Response the Government has confirmed the 10km parameter will remain but a new definition of “offshore waters” will be introduced. This will mean waters “between the low water mark and the seaward limits of the territorial sea”.

What Next?

As outlined above, the Consultation Response is only Part A of the Government’s full response to the Consultation. A further Part B of the Government’s response, dealing with the wider range of proposals from the Consultation, will be published later in the year. More immediately, the Government plans to consult on the contractual amendments stemming from the proposed changes in the Consultation Response.

1 The Consultation can be found at https://www.gov.uk/government/consultations/contracts-for-difference-cfd-proposed-amendments-to-the-scheme.