On 15 November 2022, the Department for Business, Energy and Industrial Strategy (“BEIS”) published its response to the April 2022 consultation (the “Consultation”) together with updates to the Dispatchable Power Agreement (“DPA”) terms that would be entered into between CO2 capture plants and the designated counterparty. This updates the DPA Terms and Conditions (“DPA Conditions”) and the DPA Front End Agreement (together the “DPA Contract”) from the April 2022 position.
Please see here for our commentary on the April 2022 Consultation position.
Key themes in the response to the Consultation
BEIS highlighted six main themes for which it requested responses to the Consultation:
- Incentivising efficient decarbonisation;
- Ensuring Power CCUS Facilities respond to electricity market price signals and consumer needs by providing flexible and mid-merit dispatchable output;
- Incentivising investment in new build, re-powering and retrofit projects alike;
- Ensuring fair allocation of risk to enable investment and value for money for consumers;
- Ensuring appropriate facility performance testing; and
- Preventing overcompensation through a gain share mechanism.
Incentivising efficient Decarbonisation
Recognising that the use of a Deemed CO₂ Capture Rate would disincentivise generation during periods of low availability, BEIS has introduced a mechanism using Declared CO₂ Capture Rates (see the table below for more detail). The threshold has also been amended from 1MW for a Generation Outage Event to unavailability, curtailment or derating of more than 1% of the net dependable capacity.
Ensuring Power CCUS Facilities respond to electricity market price signals and consumer needs by providing flexible and mid-merit dispatchable output
The Consultation asked whether the Availability Payment and the Variable Payment would ensure that a Power CCUS Facility would react to electricity market price signals effectively. Some respondents challenged that interconnected unabated plants would be able to dispatch ahead of DPA facilities as a result of being able to avoid Carbon Price Support (“CPS”) and UK ETS costs. Yet, BEIS have retained the previous position on the basis that this is outside the DPA workstream scope and that creating a mechanism to deal with this would be too complex.
Despite industry feedback that the Variable Payment should account for actual additional costs incurred by a DPA plant compared with the Reference Plant using metered information ex-post, BEIS has not adjusted the Variable Payment. Accordingly there remains a risk that the Variable Payments will not cover a plant’s opex costs, and could in particular disincentivise adding capture technology to existing plant.
There are also some concerns raised by the respondents about whether the flexibility encouraged by BEIS under the DPA may be undermined by requirements in other authorisations such as through the planning/environmental permits. In the absence of contractual carve outs in the DPA, how this will be resolved will be a matter of seeing how these overlaps play out in practice.
Incentivising investment in new build, re-powering and retrofit projects
BEIS has clarified in the updated DPA Front End Agreement that Material Equipment may need to be set on a project-by-project basis. This is to address concerns that “Material Equipment” in the Project Milestones is worded in such a way that could be disadvantageous for retrofit projects which already have certain equipment installed.
BEIS has confirmed that the intention of the Subsidy Control Declaration Operation condition is to prevent overcompensation through receipt of support for the same elements of the Facility but that the current drafting would not oblige retrofit projects to repay historic funding from other schemes due to the specification of DPA in the definition of “Project”. However, BEIS has accepted that the definition of “Project” will be reviewed, and potentially amended, to ensure retrofit projects are not disincentivised.
Fair allocation of risk
A key concern from industry has been around DPA generators being held liable for issues arising from T&S network availability. BEIS has agreed to remove T&S Operators and Gas Licensed Transporters from the definition of ‘Contractors’ thereby allowing T&S network issues to be within the scope of Force Majeure relief.
However, BEIS has not amended the provisions for the Termination for T&S Prolonged Unavailability Events, though has recognised that compensation calculations may need to be amended as part of the Phase 2 negotiations.
Performance testing
In spite of concerns from the industry that performance testing requirements are too rigid for the first of a kind nature of the Facility, BEIS has not materially changed these requirements. It has however agreed to remove a set window (1 June to 1 September) for Annual Net Dependable Capacity (“NDC”) tests to allow Generators flexibility.
BEIS has confirmed that the Target Commissioning Window concept will remain, and will be aligned with T&S Cluster plans as part of its broader aims of aligning the DPA with the implementation of CCUS clusters.
Gain share mechanism
There was concern from industry with respect to the gain share mechanism, but this remains in the DPA Conditions. In particular, BEIS noted that the position is informed by recommendations from the National Audit Office in 2014 regarding CfDs. BEIS also noted that a ‘pain share’ mechanism would be inconsistent with the fiscal rules under which the DPA has been developed. BEIS has acknowledged views on the sale gain share mechanism, in particular vs the project gain share, and has committed to consider its proportionality while considering the views of shortlisted projects in the Phase 2 process.
Development of the November 2022 DPA from previous drafts
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| Term Length | Term length of between 10 and 15 years. The term will be DPA and project specific and flexible enough to account for the remaining operational life of each project. | The term length has not been altered in the latest update. |
| Performance Tests | Full Load Tests and Start/Up Shutdown Tests will be applied uniformly against all projects. The benchmarks projects will be scored against are under discussion. | The Annual NDC Test Window has been removed to provide flexibility to Generators. Remainder of provisions has been retained. |
| Transport and Storage (“T&S”) Prolonged Unavailability Events | New guidance was provided on when a T&S Prolonged Unavailability Event gives the DPA Counterparty (the Low Carbon Contracts Company) the right of termination and what compensation a Generator will receive for irrecoverable and unavoidable costs in this instance. Prolonged Unavailability Events listed in the Update include: - a Full T&S Outage Event which lasts for at least 6 months;
- a T&S Commissioning Delay which lasts for at least 6 months; or
- a T&S Cessation Event such as a notice of discontinuation from the Secretary of State or the revocation of the T&S operator’s licence.
BEIS’ compensation proposal was that if termination for a T&S Prolonged Unavailability Event occurs, a Generator will receive compensation for irrecoverable and unavoidable out-of-pocket costs which have been, will be or are reasonably likely to be incurred. These include development and pre-development costs, decommissioning costs, financing and contractual break costs and construction costs. | The timelines are under consideration and therefore potentially subject to change. The following information will be required to be made available to the DPA Counterparty from the SCADA system: - plant dispatch information;
- fuel gas consumption and composition of information;
- CO₂ export information; and
- data relevant to the status of capture plant operation.
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| DPA Counterparty suspension of payments to Generator | Where a project fails to achieve a minimum CO₂ capture rate of 50% for a prolonged period, the DPA Counterparty may suspend payments where the Generator: - is in breach of the metering schematic obligations;
- fails to provide the DPA Counterparty with metering access rights;
- fails to provide Declaration Capacity Data;
- fails to allow the DPA Counterparty to exercise its Declaration Access Right;
- fails to undertake an Annual NDC Test;
- fails to provide the DPA Counterparty with Annual NDC Test Access Rights;
- fails to comply with a SCADA Systems Obligations;
- fails to comply with the Compliance of Technology undertaking; or
- fails to comply with a T&S Prolonged Unavailability Procedure Obligation.
| In addition to the October 2021 proposal and the April 2022 update, the DPA Counterparty may also suspend payments where the Generator: - provides false, inaccurate or misleading Subsidy Control Declaration information; and
- fails to Comply with the T&S Connection Confirmation Requirement.
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| Generator Declaration Obligations | Confirmation that the Generator will be obliged to notify the DPA Counterparty of any Full Capture or Full Outage Events, Declared CO₂ Capacity Data and Capture Rate – each a Generator Declaration Obligation. | Position retained and expanded. Expansion of the Declared CO₂ Capture Rate as well as the removal of the 12 month rolling average capture rate as part of the Deemed CO₂ Capture Rate in order to remove the effect of double counting reductions in capture performance to incentivise the Generator to switch off during periods of poor capture performance. |
| Installation, Configuration and Operation of CO₂ Meters | The Generator is required to install, configure and operate CO₂ meters in accordance with BEIS CO₂ metering standards. The rationale for metering being that Achieved CO₂ Capture Rate, CO₂ quality and quantity of CO₂ captured by the Facility and delivered to the T&S Network, factors important for ensuring that accurate payments between parties across the CCUS chain are made, will be closely recorded. | This position is unchanged and BEIS plans to publish the metering standards before the first DPA contract awards in mid-2023. BEIS is yet to confirm the benchmark CO₂ metering standards but it is anticipated these standards will correspond to requirements under the UK ETS regime. |
| Gain Share | BEIS’ “minded-to” position provided for two types of gain share where a Generator’s profits exceed an agreed equity IRR threshold: - “Project gain share”, where a project pays 30% of profits above the agreed threshold every 5 years; and
- “Sale gain share”, where a project pays 30% of the profits of any sale of a material interest in the Generator before the later of
- 5 years of the Start Date, or
- the date on which the aggregate economic interests of an investor group fall below 60% of their original level.
The Generator must provide collateral of £35,000/MW with respect to these obligations in the final years of the contract. Failure to do so would result in an additional Generator Default Termination Event. | The latest update confirmed the “minded-to” position and, in the updated version of the contract, BEIS has: - incorporated the gain share schedule into the DPA Conditions;
- provided example forms of bond or parent company guarantee for the credit support requirement; and
- included additional avoidance event definitions for arrangements designed to avoid gain share payments under the DPA.
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| Change in Law | The DPA Contract was drafted with qualifying change in law (“QCiL”) provisions based on those in the CfD AR4 in order to provide protection to Generators. These included: - Discriminatory Change in Law. A change in law specifically applying to the particular project the particular Facility; or the particular Generator.
- Specific Change in Law. A change in law specifically applying to generating facilities deploying CO₂ capture technology.
- Other change in law. A change in law not specifically applying to Generators deploying CO₂ capture technology but having an undue discriminatory effect in the costs incurred by them compared to one of four comparator groups.
| Updated the Specific Change in Law to include a change in law specifically impacting recipients of a DPA. Updated other change in law by adding a fifth comparator group (Generators operating generating facilities deploying CO₂ capture technology where the generation output is not subject to a DPA). |
| Transmission loss multiplier | The Variable Payment calculation took into account a transmission loss multiplier with respect to Loss Adjusted Metered Electricity Output. | BEIS removed the transmission loss multiplier from the Variable Payment calculation. |
What comes next?
It is anticipated that the latest updates to the DPA Contract will be used during the negotiation/due diligence phase of the Phase-2 Cluster Sequencing Process (which is ongoing as of December 2022), as BEIS has confirmed that the Cluster Sequencing for Carbon Capture Usage and Storage Deployment: Phase-2 timeline (published November 2021) continues to apply.
Significant next steps in the 2035 Delivery Plan are as follows:
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| Launch of £140m Industrial Decarbonisation and Hydrogen Revenue Support Scheme | Q4 2022 | This covers revenue support for under both the DPA and ICC Business Models. It is not clear at this stage what “launch” refers to, as BEIS have previously stated that the first DPA and ICC contracts are to be awarded in 2023. Interested parties will need to await further details on allocation and award of relevant contracts. |
| Decision in relation to allocation of support and Project offers allowing FID to take place | From Q2 2023 | This includes support under the DPA, the LCHA and ICC and follows the publishing of shortlisted projects for Phase-2 of the Cluster Sequencing Process in August 2022. |
| Track-1 Cluster Construction | From mid-2023 | This relates to the HyNet and East Coast clusters which were confirmed as the Track-1 clusters in October 2021. |
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