AR4 update: What you now need to know about the next CfD round

United Kingdom

On Friday 7 May 2021, the Department for Business, Energy and Industrial Strategy (“BEIS”) announced that the Fourth Allocation Round (“AR4”) for the low carbon Contracts for Difference (“CfD”) scheme will open to applications in December this year. While the date of when the CfDs are likely to be awarded is not fixed, previous allocation processes have taken circa 4 to 5 months (i.e. we can expect award of the AR4 CfD to occur around April/May 2022). The years in which the successful projects must commission (the “delivery years”) have not yet been confirmed either but would need to follow the last delivery year of the Third Allocation Round (i.e. 2025).

BEIS also published its consultation response (the “Response”) on the CfD contract and Supply Chain Plan amendments for AR4. The Response confirms most of the amendments proposed by BEIS in its consultation published on 24 November 2020.

Read our commentary on the key decisions previously made in respect of AR4 here.

AR4 aims to double the capacity of renewables from 5.8GW achieved in the last round to up to 12GW and expand the number of technologies supported – in particular floating offshore wind is to be treated as its own separate technology class and “established” technologies which includes onshore wind and solar PV are to be allocated budget for the first time since AR1.

Supply Chain Plan

In November 2020, BEIS confirmed its plans to strengthen the Supply Chain Plan (“SCP”) process for CfD projects of 300MW and above. The consultation confirmed this “strengthening” taking two primary forms:

  • 1) in respect of the existing legislation – the introduction of a requirement for relevant projects to have their SCPs approved by government in order to apply for a CfD for future allocation rounds; and

  • 2) for CfD contracts awarded from AR4 - the introduction of a new requirement within the CfD contract setting out that projects must obtain confirmation from government that they have implemented their SCP as part of satisfying the Operational Conditions Precedent (“OCP”).

In respect of the former, confirmation on the full details of the new criteria (and government assessment thereof) that will apply is awaited in the form of BEIS’ upcoming response to its consultation on a new Supply Chain Plan questionnaire (“SCP Questionnaire Consultation”) and publication of drafts of the amendments to the relevant Regulations.

In respect of the latter proposal, naturally considerable attention is paid by industry to any proposed new measure that widens the potential for the “cliff edge” of CfD contract termination or which may delay the commencement of payment.

The Response has concluded that SCP implementation will indeed be introduced as an OCP, despite alternative suggestions being put forward by industry. At the same time, BEIS has softened the risks associated with the new SCP OCP to some extent through concluding that projects will be able to obtain the relevant confirmation of SCP satisfaction from government (now to be defined as a “Supply Chain Implementation Statement”) shortly after satisfaction of the project’s Milestone Delivery Date (“MDD”). This is a considerable way in advance of the ultimate deadlines for OCP satisfaction generally, and therefore in principle leaves time to rectify the situation if the project initially fails to obtain a Supply Chain Implementation Statement.

In addition, BEIS notes that it will reflect on comments made in respect of the extension of existing CfD contract Force Majeure provisions to allow for issues that may arise in respect of supply chain arrangements and obtaining a Supply Chain Implementation Statement. BEIS will set out its position on this in its response to the SCP Questionnaire Consultation. In its upcoming response to the SCP Questionnaire Consultation, BEIS will confirm its approach to projects providing Updated Supply Chain Plans and to monitoring SCP compliance after the point of the Supply Chain Implementation Statement.  This is now of heightened relevance given the earlier point in time for the Supply Chain Implementation Statement.

Milestone Delivery Date

Following strong stakeholder support, the government will extend the MDD from 12 to 18 months. The government believes 18 months will better align with project timelines, whilst still providing a suitable indicator of progress towards project delivery.

Floating Offshore Wind

Several drafting changes to the CfD contract will be introduced in relation to floating offshore wind, making it potentially more challenging to deliver a floating offshore wind project supported by a CfD in comparison to fixed offshore wind, as highlighted in the table below: 

 

Floating Offshore Wind

Fixed Offshore Wind

Longstop Period

12 months after the end of the Target Commissioning Window.

24 months after the end of the Target Commissioning Window.

Required Installed Capacity

95% of estimated installed capacity (or estimated installed capacity less one turbine, if this is a lower percentage).

85% of estimated installed capacity.

Extra Requirements

Generators to be required to demonstrate their project satisfies the legal requirements for floating offshore wind CfD units at OCP stage (i.e. that all turbines are mounted on floating foundations and situated in water depths of 45 metres or more).

No equivalent OCP.

Despite stakeholder resistance, the government will also not extend phasing to floating offshore wind projects for the time being. The government rationale for this decision focuses on the smaller project sizes and potentially lower construction risk of floating offshore wind in comparison to traditional fixed bottom offshore wind. However, the government has expressed its openness to review this decision in the future.

Negative Pricing

The government has confirmed its drafting changes to the CfD contract to implement the decision to extend the negative pricing rule to ensure that difference payments are not paid to CfD generators when the Intermittent Market Reference Price is negative for any length of time (in contrast to the previous position which required a 6 hour period of negative pricing to trigger the cessation of difference payments).

The government has reiterated its view that the new negative pricing rule achieves the right balance between de-risking renewable electricity projects whilst incentivising behaviour (both in the form of not exporting to the grid during such periods and alternative uses for excess power during such periods, such as charging storage assets or production of green hydrogen) which supports the needs of the electricity system.

Coal-to-biomass Conversions

The Government has decided to exclude coal-to-biomass conversions from future CfD allocation rounds.

What’s next?

In the coming months, the government intends to implement the decisions laid out in the Response.

As noted above, BEIS has not yet responded to its SCP Questionnaire Consultation. The Questionnaire will form the basis of the initial assessment before an allocation round and the ongoing monitoring, review and assessment following CfD signature. BEIS intends to publish the responses along with the final Supply Chain Plan guidance for AR4.

Finally, BEIS states it will soon be consulting on any proposed changes to the standard terms and conditions relating to Brexit to reflect the conclusion of the Transition Period.