Annual auctions and strengthened Supply Chain Plans - What's changing for UK CfD auctions?

On 4 February 2022, the UK Government, BEIS, published two CfD consultations of note relating to the expansion of the obligations when it comes to Supply Chain Plans (“SCP”). In addition, it was confirmed that the UK will hold annual CfD auctions, which was welcomed by many in the industry.

A move to annual CfDs allocation rounds but longer NDD if successful applicants don’t sign up to a CfD

On 9 February, UK government confirmed (Ministerial Statement / Press Release) that the next allocation round (AR5) will be brought forward to March 2023, and following that allocation round, CfD auctions will run annually The operational plan in respect of these annual auctions is expected to be published in Spring 2022.

Recognising that yearly auctions would mean a shorter “freeze out” period under the Non-Delivery Disincentive (“NDD”), which prohibits a generator who is awarded but fails to sign a CfD contract from applying for a CfD for the same site, BEIS intends to extend the NDD period to the next 2 applicable allocation rounds (i.e., 2 years).

Bolstering the Supply Chain Plan (SCP) process and obligations

SCP statements are required of any project that has a capacity of 300MW. This threshold will be widened to include emerging technologies to ensure that technologies on the verge of deployment, but which haven’t yet reached the 300MW threshold, are captured. Floating offshore wind has been identified as the first emerging technology in this respect, while other emerging technologies will be kept under review.

Feedback from the latest CfD Allocation Round (AR4) indicated that while making the supply chains more competitive and encouraging investment in infrastructure is working well, diversity and carbon footprint are areas for potential improvement in the SCPs.

SCP interviews

BEIS is proposing to hold interviews within 2 weeks after the SCP window closes to probe elements of the SCP in greater detail. Interview questions will be based around the scoring criteria and responses will be considered in BEIS’ initial assessment. Applicants can amend their plans following the interview (and before the submissions are evaluated).

Raising the game

Given the aim to increase ambition within the SCPs BEIS intends to raise the pass mark for each section of the SCP from 50% to 60%. Since most SCPs only just pass the assessment, this will be a challenge to the status quo.

What’s more, the questions will be changed to help applicants give clearer answers by setting out the supply chain challenges the Government wants to address. A template for answers will be included with each action broken down by feasibility, ambition, deliverability and how outcomes will be measured.

If, as planned, the CfD allocations will take place annually, parts of the SCP which have developed will need updating on an annual basis too. A separate consultation is expected to follow on the scoring mechanisms to address these in more detail and there are currently no plans to include a method of rewarding decarbonisation in AR5.

Duration of DCP Statement of Approval

SCP approvals (the document provided by the Secretary of State to confirm that an applicant has passed) are currently valid for 12 months. These will now be linked to the allocation rounds to avoid an arbitrary cut-off date. The Secretary of State will maintain their discretion in approving the SCPs.

Other points to note in the Call for Evidence

The Call for Evidence focusses on more significant changes to SCPs (i.e., those that will take longer to implement or will require more regulatory changes).

Key areas where BEIS is asking for evidence include:

• financial penalties for not delivering commitments;
• a negotiated SCP (i.e., between BEIS and the developer. This would be based on the scoring criteria but applied within the framework of a negotiation as opposed to the questionnaire); and
• changing the capacity threshold of 300MW for SCP statements to capture the projects that come in at under 300MW, but which have a material impact on the supply chain.

Comment

AR4 will offer an overall budget of £285 million in delivery years 2023-2024 with £200 million specifically provided for offshore wind. As the largest portion of the AR4 budget, and with a potential 8GW of potential new capacity coming from the technology, the Government is setting its stall out to meet the 40 GW of installed capacity by 2030 for the Offshore Wind Sector Deal. It is likely that the Government will take a similar approach for AR5.

While annual CfD auctions are welcome news, concerns remain around the increased bureaucracy that may come with annual CfD auctions and particularly whether generators would need to submit SCPs annually. To avoid this, some have suggested that SCPs remain valid for a minimum of two allocation rounds. It remains to be seen what approach BEIS will favour and what lessons will be learnt from the proposed SCP interview process.

Finally, smaller projects are keen not to be unduly burdened through the enhanced SCP requirements. Given that the proposals include emerging technologies and those projects just under the 300MW threshold in the requirement for an SCP, some will ask if this is an unnecessary burden on smaller projects.

The SCP Consultation will close on 15 March 2022 and the supporting Call for Evidence on 29 April 2022.