Worth the wait? DECC responds to RO / CfD consultations

In July and November last year, DECC consulted on the transition period between the introduction of the Contracts for Difference (CfD) regime under Electricity Market Reform (EMR) later this year and the closure of the Renewables Obligation (RO) to new generating capacity at the end of March 2017.  The response to these consultations was published earlier this week, just as Spring came to London.  Some of the policy decisions it sets out will already have been apparent to careful students of the draft Renewables Obligation (Amendment) Order 2014 that was published and laid before Parliament last month with an accompanying  written ministerial statement, but the response provides an opportunity to see DECC’s approach to RO / CfD transition issues in the round, with a fuller set of explanations.

Botticelli’s “Spring”: spot the connections between the picture and this post!

The transition period

The transition period begins once the CfD regime is live.  No firm date is given for this, but the response refers to 31 October 2014 as the date when CfD applications are expected to open.  It also says Government does not expect applications for CfDs to be open in advance of State Aid clearance. 

Choice of scheme

During the transition period, developers will be able to apply for accreditation under the RO or for a CfD or Investment Contract (if they meet the relevant eligibility criteria).  When they make their applications, they will be required to make various declarations: for example, if they are applying for a CfD, to declare that they are not supported under the RO.  A developer who is unsuccessful in relation to an application under one scheme will be able to apply under the other. 

A developer whose Investment Contract is terminated for certain reasons relating to State Aid, or to possible amendments to the Investment Contract in the light of the standard terms for CfDs will be able to apply for RO accreditation.  But a developer who withdraws an RO or CfD application or refuses a CfD or RO accreditation will not be able to apply under the other scheme: so, you cannot, for example, bid for a CfD, decide that you don’t like the strike price (e.g. in a “pay as clear” regime), and decide to retreat to the perceived safety of the RO instead. 

The level of the RO (i.e. the extent of the obligation on electricity suppliers to purchase ROCs) will continue to be set by 1 October, rather than being pushed back to being decided by 1 February.  Whilst effectively acknowledging that the likely launch of the CfD regime in the later part of this year will complicate the task of setting the RO level at the same time, Government has been persuaded that moving to a February deadline would mean that suppliers had to rely on their own internal RO forecasts when pricing supply contracts, resulting in the addition of a risk premium which would increase consumer bills.  The status quo was therefore preferred.

Dual Scheme Facilities

Additional capacity added to an RO accredited project will be eligible for registration under the RO if no application for a CfD has been made in respect of the project.  However, additional capacity of 5MW or less added to RO accredited stations after 31 March 2017 will not be eligible for RO or FiT support.  On the basis of the representations made to it, DECC does not seem to believe that there is a significant class of potential ≤5MW extensions to existing RO-accredited projects which would not be able to go ahead without an extension of the RO deadline (or FiT support) beyond March 2017. Although, between 2006 and 2012, 131MW of the 190MW of additional capacity accredited in respect of existing projects was ≤5MW, 103MW was for landfill and sewage gas sites: analysis of this sector suggests that existing sites have added most of the extra capacity they can, and DECC do not expect many new sites to be developed under the RO.  Finally, increases in capacity resulting from station refurbishment or unit replacement after the closure date will not be eligible for support under the RO.

On the other hand, projects which are developed in phases may find themselves with part of their capacity accredited under the RO and part being the subject of a CfD.  In such cases there will need to be separate metering and fuel data collection for the two parts of the project, so as to make sure that plants do not claim ROCs / CfD payments in respect of capacity which is not entitled to them.  As DECC puts it, “preventing arbitrage opportunities between the two schemes and ensuring accuracy, is crucial to minimise the impact on consumer bills”.  DECC also take the view that the dual scheme arrangements should not be available to RO-accredited projects which wish to add less than 5MW of extra capacity funded by a CfD, as it would give rise to an “unjustified” and “disproportionate administrative impact in relation to the amount of additional generation produced”.

Grandfathering

The July consultation included some proposals about grandfathering, with particular reference to biomass co-firing.  The response reports “widespread misunderstanding” of these proposals, which DECC concludes “were too confusing and administratively complicated to take forward” and “would have had little genuine impact in terms of budgetary stability”.  Further proposals in this area may be consulted on “later in the spring or summer”.

Grace periods

The grace periods are a set of four exceptions to the rule that the RO closes to new capacity on 31 March 2017: projects which reach the stage at which RO accreditation could have been given within a certain period after that date will be allowed to be accredited in certain circumstances.  A project that is in a position to benefit from two or more of these exceptions will only be permitted to benefit from one, but (subject to the eligibility rules) has a free choice in deciding which one it will benefit from.

• New or additional capacity which is delayed by a failure to resolve issues with radar or to establish a grid connection will have a 12 month grace period.  In the case of grid delays, there must be evidence of a grid connection offer made and accepted and a network operator having set a date before April 2017 for connecting the project.
• There will be a 12 month grace period for any project that is awarded a FID Enabling Investment Contract if that contract is terminated either for reasons relating to state aid or because the developer exercises a right to terminate when changes are made or proposed to it in the light of the CfD standard terms.   
• A 12 month grace period will be available to a class of ACT or offshore wind projects which are scheduled to commission close to 31 March 2017 and have been identified as at risk of investment hiatus.  These projects are expending funds but are unwilling to commit to the CfD regime because elements of it are still uncertain.  The deadline for applications for this grace period will be 31 October 2014 – i.e. about the time when applications for CfDs are expected to open.  DECC rejected suggestions of a later deadline “as it could give projects which could have applied for a CfD shortly after applications open an incentive to enter the RO instead”.  Of course, it may be that by requiring developers to apply for the grace period before the outcome of the first CfD allocation round is apparent, DECC will simply guarantee that they opt for the RO, but DECC’s thinking seems to be partly that it is targeting projects that ought to be commissioned before 31 March 2017 and making sure that this happens by giving them the confidence to proceed, in the knowledge that the grace period provides them with a safety net.  By way of evidence that they are sufficiently advanced to be eligible for this grace period, developers will have to produce a grid connection offer, a letter from the network operator indicating that connection will take place before April 2017, planning consent (the conditions of which need not have been discharged) and land use rights or an option to acquire them.  They will also have to produce a director’s certificate confirming that the developer will have sufficient resources to commit to the project and that it is expected to commission before April 2017.  Various forms of more detailed evidence of “substantial financial commitment” towards the project were considered and rejected as “too restrictive, too unclear or too sensitive”. 
• DECC begins discussion of the final grace period by observing that “dedicated biomass projects have in some cases been delayed while detailed Government policy arrangements in relation to the 400MW cap were put into place”.  Dedicated biomass projects allocated an unconditional place within the cap will therefore be offered an 18 month grace period, regardless of whether they are CHP or not.  However, this grace period will not be available for additional capacity.

Further measures for biomass

Generating stations which co-fire biomass and are RO-accredited but have never claimed ROCs under the biomass conversion support band will be permitted to apply for a CfD or Investment Contract as biomass conversions, and leave the RO if they are successful.  If the operator gets cold feet about its CfD before reaching the CfD “Start Date”, it will be able to revert to the RO.  However, DECC has not yet decided whether an operator which finds itself in this position with respect to only some of the units in a generating station would still be entitled to claim ROCs at the conversion band for units in respect of which it has not previously fired or claimed this level of support.

Biomass co-firing stations which are supported by the RO will be permitted to bid into the EMR Capacity Market, leaving the RO if they are successful in their bid.

Offshore wind

Offshore wind projects accredited under the RO when it closes will be permitted to commission their remaining phases under (i) the RO, (ii) the CfD or (iii) both regimes, provided that they “inform Ofgem by 31 March 2017 “whether they intend to take up the RO option” in relation to any of those phases.  Option (iii) is expected to be a minority interest.  RO and CfD phases “will need to be on entirely separate strings of turbines”, with no connection that enables electricity generated by one string to be exported on another.  

Replacement of ROCs with Fixed Price Certificates

The July consultation opened up the possibility that the transition from the current ROC regime to a system of fixed price certificates (FPCs) might be brought forward to coincide with the closure of the RO to new capacity in 2017 rather than taking place in 2027 as originally proposed.  However, DECC intends to stick to the original plan, because consultees did not persuade it that ROC values are likely to fall below the buyout price or that a significant oversupply of ROCs is likely to occur.  

What next?

The implementation of most of these policies will be spread across the RO (Amendment) Order mentioned above (intended to come into fore on 1 April 2014) and the RO Closure Order (due to be laid before Parliament in May and come into fore in July 2014).  “Some remaining transition policy issues, such as those relating to interaction between the RO and the Capacity Market” will be dealt with in an RO Consolidated Order to be made “later in 2014/15”.

Comments

In a world where there is no perfect answer and the most important thing is for developers to know where they stand, DECC’s consultation response is to be welcomed.  It bears the hallmarks of  evidence-based policy making and shows a proper degree of engagement with what consultees had to say as well as a willingness to interrogate critically the representations that they made.  

Overall, the response appears to take a slightly tougher line than is sometimes found on what DECC evidently sees as unjustified special pleading in some areas.  This, and a recurrent emphasis in the response on controlling costs, make sense both in domestic political terms and from the point of view of clearing these policies with the European Commission under the state aid rules.  

The response is perhaps a little more favourable on balance to biomass developers than some of DECC’s publications on biomass of last year, whilst emphasising its transitional status.

DECC has tried to keep things simple at a number of points.  However, the detail of what must be done in order to be eligible to make particular choices is inevitably quite intricate.  Developers will need to think carefully about how to integrate transition and grace period decision-points and criteria, as well as the various steps in RO and CfD procedures, into their own project plans.

As ever with EMR, some big questions remain.  Perhaps the biggest in this case is whether the flexibility to move between the RO and CfD regimes will encourage those who are able to choose either regime to opt for a CfD in preference to the RO.  If it does not, there must be a risk that the RO’s share of Levy Control Framework funding (see the table below, based on DECC figures) will continue to dominate UK renewables subsidies to a greater extent and for a longer period than to be comforably consistent with either the ultimate goals of EMR or the European Commission’s policies on state aid for renewables schemes.