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Decc discussion slides investor simulation workshop breakout_onshore large-scale_v 1

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  • 1. Mapping the developer and CfDlifecyclesBreakout session:Onshore wind (>50 MW)21 May 2013DRAFT – This should not be taken to represent DECC Policy
  • 2. Agenda for the breakout session2DRAFT – This should not be taken to represent DECC PolicyTime TopicIndicative timeavailable10:55am Introduction 10 minutesDeveloper lifecycle bytechnology30 minutesPre-development 15 minutesDevelopment 15 minutesFinancing 15 minutesConstruction andCommissioning15 minutes12:40pm Collate feedback 15 minutes
  • 3. Agenda31. Introduction and session organisation2. Development lifecycle by technology3. Pre-development4. Development5. Financing6. Construction and Commissioning7. Collate feedbackDRAFT – This should not be taken to represent DECC Policy
  • 4. Introduction4• Recap objectives for this session:1. To understand the developer lifecycle for different low carbon technologies,2. To explain the current CfD policy position across the developer lifecycle, aswell as present some additional options for discussion,3. To take on board views on the degree to which the CfD policy logicallymaps with the developer lifecycle for different low carbon technologies• At the end of the session we will collate views and then feedback tothe wider groupDRAFT – This should not be taken to represent DECC Policy
  • 5. Key CfD issues to be covered across thedeveloper lifecycle5Pre-developmentDevelopment FinancingConstructionandcommissioning• CfD strike pricevisibility• CfD allocationbudget• Statement of howmuch allocationbudget remains• ConditionsPrecedent for CfDpayment start• TCW and LSD• Force majeure andother exceptions• Substantial financialcommitment (SFC)• Contractualobligations, andconsequences• CfD eligibilityprocess• Allocationmechanisms• Constrainedallocation processDRAFT – This should not be taken to represent DECC Policy
  • 6. Agenda61. Introduction and session organisation2. Development lifecycle by technology3. Pre-development4. Development5. Financing6. Construction and Commissioning7. Collate feedbackDRAFT – This should not be taken to represent DECC Policy
  • 7. Comparing DECC and Roadmap lifecycle assumptionsOnshore wind (>50 MW)DRAFT – This should not be taken to represent DECC Policy4 years 2 yearsPre-development ConstructionSource: DECC (2012)Applicable to onshore wind (>50MW)Source: Renewable RoadmapApplicable to onshore wind
  • 8. Spend profile:Onshore wind (>50 MW)8DRAFT – This should not be taken to represent DECC PolicyNote: Grid and other infrastructure costs assumed to be part of pre-developmentAssumed incremental spend 0.7% 1.3% 4.6% 6.5% 43.5% 43.5%Assumed cumulative spend 0.7% 2.0% 6.5% 13.0% 56.5% 100.0%0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%100.0%Assumed incremental spendAssumed cumulative spendPre-development ConstructionOverall, does ourassumed spend profilelook accurate for yourtechnology? If not, whynot?
  • 9. Agenda91. Introduction and session organisation2. Development lifecycle by technology3. Pre-development4. Development5. Financing6. Construction and Commissioning7. Collate feedbackDRAFT – This should not be taken to represent DECC Policy
  • 10. CfD strike price visibility10CfD strike price visibility• NG will provide analysis to inform the Government’s CfD strike price decisions in the Delivery Plan• At the time of CfD allocation, strike prices are locked in for the year of commissioning• Strike price setting for the second Delivery Plan may involve some competitive elementsDRAFT – This should not be taken to represent DECC Policy
  • 11. CfD budget allocation11CfD budget availability by technology• The LCF will increase to £7.6b in 2020 (real 2012 terms)• This covers the costs of the CfD as well as existing policies (including the RO, small-scale FiT and theWarm Home Discount)• Ahead of allocation commencing, developers can expect to know the annual CfD budget as well as anyconstraints applying to their technology• Set by DECC, managed by NG• Single budget ‘pot’ for all renewabletechnologies• Potential minimum/maximumconstraints for individualtechnologies (e.g. maximum fortechnologies deemed capable oframping up deploymentquickly, such as solar and biomassconversions)• Strike prices remain the main driverof investment by technologyCfD allocationbudget forrenewables(non-FID)DRAFT – This should not be taken to represent DECC PolicyCfD allocation budget by technologyWider LCF(managed byDECC)
  • 12. Forecasting budget headroom12CfD budget headroom forecast• The CfD allocation budget constraint will apply on an annual basis, subject to the total period budget• The SO will be responsible for publishing CfD budget updates throughout the year: Taking into account the changing value of existing contracts Could be real-time available data if CfDs are allocated on a First Come First served (FCFS) basis• Any underspends in a given year will be available in the following year’s CfD budget2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2020/212019/20CfD Budget byyear between2014/15 and2020/21CfD budget will be allocatedon a forward-looking basis forthe anticipatedcommissioning yearDRAFT – This should not be taken to represent DECC Policy
  • 13. Questions for consideration13• How often should NG provide information on CfD budget availability? How should the information be provided and how often should the assumptions beconsulted on? How should progress against any technology-specific CfD budget constraints becommunicated?• Is there sufficient visibility of CfD strike prices? When do developers need to know DECC’s decision on whether administrative pricing willcontinue beyond 2020? How will developers deal with a situation in which later phases are forecast to occuroutside the window of CfD strike price visibility (e.g. offshore wind)?DRAFT – This should not be taken to represent DECC Policy
  • 14. Agenda141. Introduction and session organisation2. Development lifecycle by technology3. Pre-development4. Development5. Financing6. Construction and Commissioning7. Collate feedbackDRAFT – This should not be taken to represent DECC Policy
  • 15. Applying for a CfD15Eligibility criteria RequirementEligible technology? Detail of the type of generation intended to be built (with appropriateconfirmation that it will be a form of generation eligible for the CfD).Eligible company? Company registration and VAT number.Planning permission? Copy of the planning permission decision note, as given by a competent authority(SoS or Council Planning). Can be subject to conditions.Grid connection? Copy of a grid connection acceptance letter which has been signed by bothNational Grid (or DNO if applicable) and the developer.Target commissioning date? Grid connection acceptance letter must include a connection date no later thanTarget Commissioning Date (TCD)Intended generation capacity? Details on the intended MW size of the of the projectCfD application process• Developers will be assessed by the SO against eligibility criteria at the time of applying for a CfD• Two key requirements: signed grid connection offer, and planning permission• Period between CfD allocation and Target Commissioning Date (TCD) will be left to developers, but isconstrained by visibility of strike prices or competitive processDRAFT – This should not be taken to represent DECC Policy
  • 16. CfD allocation mechanisms16CfD allocation• We have committed to a period of First-Come-First Served (FCFS), to avoid unnecessary costsand constraints on development timings• Once a pre-defined threshold is passed, allocation rounds will commence and then remain inplace (on either an unconstrained or constrained basis)First-Come-First-ServedApplications submitted whendeveloper chooses, and consideredin order of receiptUnconstrained Allocation RoundsApplication window, within whichall applications are assessedequally, but no expectation ofrationingConstrained Allocation RoundsApplication window, within whichall applications are assessedequally, but with an expectation ofrationingDRAFT – This should not be taken to represent DECC Policy
  • 17. Application of triggers17Application of triggers to move from FCFS to allocation roundsWhat level should the trigger be set at? Our current working assumption is that the trigger will be set at a conservative level This would imply circa 40% - 60% allocated through FCFS An additional trigger may apply for the move to constrained allocation rounds (see next slide)How should progress towards the trigger be calculated? Our current working assumption is that the trigger would be met when actual applicationsshow a specified percentage of the CfD Budget has been allocatedCan allocation return to FCFS once a trigger has been activated (e.g. if electricity prices increase)? No, moving through the various allocation mechanisms will be a ‘one-way street’DRAFT – This should not be taken to represent DECC Policy
  • 18. Constrained allocation18Constrained allocation windows• Once a significant portion of the CfD allocation budget has been committed and DECC is a long waytowards achieving its targets, more projects may come forward in a particular round than can besupported• In such situations CfDs may need to be rationed through constrained allocation windows• The rules for rationing must be defined upfront to enable visibility for developers• Developers will need to submit additional information ahead of a constrained allocation window• Two rationing options are currently being considered: price-based and discount-basedRationing option Description Advantages DisadvantagesPrice-based Stack projects by the price theywould be willing to acceptLeast cost overalldeploymentReduced diversityof generationDiscount-based Stack projects by the % discounton the relevant strike price thatthey would be prepared to offerAllows for least costprojects bytechnology,enabling diversityMay result ingreater cost ofdeploymentoverallDRAFT – This should not be taken to represent DECC Policy
  • 19. Questions for consideration19• Are the suggested eligibility criteria appropriate? Are there any additional criteria you would recommend? What criteria should apply for biomass conversions which demonstrates genuine commitment to deliver the project? Is it feasible for marine developers to have grid connection acceptance prior to CfD allocation, given the high localcontent and thus significant level of securities/liabilities?• What conditions could be applied alongside ‘planning permission’? For example, how to determine whether the condition detracts from readiness (i.e. radar / MOD)? Should environmental consents also be required at this stage? What flexibility could be applied in cases where permission is classed as ‘pre-approval’? Are separate planning consents required for generation and grid?• What type of contingencies may be contained in the grid offer? Does the grid offer need to be firm for all phases of the project? How should interdependencies and conditionality in offers be taken into account in the CfD application process?• How often should allocation windows take place? Is twice annually often enough?• In the context of allocation under constraint, would you prefer projects to offer the price they would beprepared to accept via sealed bid process or via a descending clock auction process?DRAFT – This should not be taken to represent DECC Policy
  • 20. Agenda201. Introduction and session organisation2. Development lifecycle by technology3. Pre-development4. Development5. Financing6. Construction and Commissioning7. Collate feedbackDRAFT – This should not be taken to represent DECC Policy
  • 21. Substantial FinancialCommitment [1]21Reaching the SFC milestone• Within 1 year of signing the CfD, the developer must demonstrate to the Counterparty Body(CpB) that it has made a Substantial Financial Commitment (SFC)• Failure to meet the SFC within the prescribed timeframe after CfD allocation will constitute anearly termination event in favour of the CpB No termination payment shall be due by either party The generator can reapply for a later CfD• The evidence required to demonstrate SFC may differ according to the financing structure of theproject in question, for example:ProjectFinance• ‘Financial Close’• Evidence required: Firm contractual commitment to undertakeexpenditure (i.e. with equivalent milestone or terminationpayments if the commitment is breached)BalanceSheet• Actual or approved Board expenditure• Evidence required: Invoices or Directors’ certificate forexpenditureDRAFT – This should not be taken to represent DECC Policy
  • 22. Substantial FinancialCommitment [2]22Minimum spend threshold• SFC will be defined according to a minimum spend threshold, which is yet to bedetermined• The SFC milestone is intended to represent ‘the point of no return’ for a project After this point, either construction proceeds or the developer will have incurred significantunrecouped costs• We recognise that the minimum spend threshold may differ by technology, forexample depending on: Capex profile pre-commissioning Extent of development costs as a proportion of total spendDRAFT – This should not be taken to represent DECC Policy
  • 23. Questions for consideration• What does Substantial Financial Commitment (SFC) mean for different investors? Project finance? Balance sheet financed?• What do you regard as the best means of providing evidence of SFC?• What minimum spend threshold is appropriate by technology? How can we relate this to the spend profiles by technology?• How should phased projects be treated? For example, if separate CfDs are allocated to individual phases, but financing of thewhole project is completed upfront23DRAFT – This should not be taken to represent DECC Policy
  • 24. Agenda241. Introduction and session organisation2. Development lifecycle by technology3. Pre-development4. Development5. Financing6. Construction and Commissioning7. Collate feedbackDRAFT – This should not be taken to represent DECC Policy
  • 25. Payment start date25Conditions Precedent• Eligibility for CfD payment can commence once the Conditions Precedent are satisfied• Actual payments then commence on the basis of eligible metered output (MWh)Condition RequirementPassed eligibility test? Evidence of compliance with the published eligibility criteria at the time of CfDallocationPlanning permissionremains valid?Copy of the detailed planning permission and confirmation that it has not lapsed,expired or been terminated, revoked or withdrawn and any conditions have been sosatisfiedAuthorisations obtained? Copies of all required licenses, accreditations, permits, consents etc required tooperate the facilityGrid Code compliant? Confirmation from SO that Grid Code Compliance process has been satisfied (or fromDNO – Distribution Code) – includes commissioning acceptance testsSettlement ready? Confirmation from the Settlement Agent that it has received information it requires toundertake settlement (includes metering) – includes collateralInstalled generationcapacity?Confirmation from generator that installed capacity is not less than a pre-specified[85%] of the adjusted contracted quantityDRAFT – This should not be taken to represent DECC Policy
  • 26. Building to schedule [1]26Target Commissioning Window (TCW) and Long-Stop Date (LSD)• Generator will receive full duration of CfD support if the Conditions Precedent are met within the TCW• Clock starts ticking once outside the TCW• CfD is terminated if the Conditions Precedent are not met by the Long-Stop DateCfDgrantEvidence of SubstantiveFinancial Commitment:Obligation to demonstratefinancial commitment by reachingfinancial investment decision, orreaching a minimum spendTarget CommissioningWindow:Window within which the developermust commission the generator tosecure full support of the CfD.Long-StopDateTarget CommissioningDateThe CfD is terminatedif constructionsurpasses a specifiedlong-stop date15 year right to paymentautomatically begins atend of TCWDRAFT – This should not be taken to represent DECC Policy
  • 27. Building to schedule [2]27Indicative TCW and LSD, by technology• We would like to explore some indicative timeframes by technology:Technology TCD TCWLSD(following endof TCW)Biomass conversionSpecified bydeveloper1-2 years 6-18 monthsOnshore wind 6-12 months 6-18 monthsOffshore wind 1-3 years 1-3 yearsSolar PV 6-12 months 6-18 monthsDRAFT – This should not be taken to represent DECC Policy
  • 28. Capacity delivered28• As explained, we are currently exploring the potential to allow a limiteddegree of flexibility on the contract quantity• We would like to test this thinking for different technologiesDRAFT – This should not be taken to represent DECC PolicyCfDgrantEvidenceof SFC TCWCfD may be terminated if capacitydelivered is below a pre-definedthreshold (e.g. 85%).Potential strike price reduction forunder-delivery (e.g. between 95 and85% of adjusted capacity), s.t. FMInitialApplication:100%Obligation to deliver:100-95% (of adjustedcapacity)CanAdjust:100-95%Deliveredcapacity(before strikeprice reductions)
  • 29. Force majeure and otherexceptions29Exceptional circumstances affecting build timeframes• The Long Stop Date may only be extended in limited circumstances:1) The generator is affected by a Force Majeure event, or2) Grid connection works are not delivered on time (except if due to the fault or negligence ofthe generator)• Force Majeure: “any event or circumstance that is beyond the reasonable control ofthe generator which could not reasonably have been avoided or overcome and whichis not due to the fault or negligence of the generator or its contractors, sub-contractors or agents.”• Is bad weather covered? Current thinking is that extreme one-off weather events would be covered (e.g. ahurricane), but a rainy summer would not be covered (i.e. this would be picked up by theTCW)DRAFT – This should not be taken to represent DECC Policy
  • 30. Questions for consideration30• Do the suggested TCWs and LSDs look acceptable for each technology?• Do you agree with our proposed approach to enabling flexibility in the delivered capacity at thetime of SFC as well as commissioning?• What feasible scenarios could be envisaged in which delivered capacity is less than contracted?• Force majeure and other exceptions: How should weather-related risks to commissioning be captured? Are there any other events that should be considered as exceptional warranting an extension to theLSD?• As a whole, does the suggested approach mitigate developer / investor risk?• If there are other risks you feel should be covered in this approach, please explain why wouldGovernment or the consumer be best placed to bear or manage them?DRAFT – This should not be taken to represent DECC Policy
  • 31. Agenda311. Introduction and session organisation2. Development lifecycle by technology3. Pre-development4. Development5. Financing6. Construction and Commissioning7. Collate feedbackDRAFT – This should not be taken to represent DECC Policy
  • 32. Thank youDRAFT – This should not be taken to represent DECC Policy
  • 33. Timing assumptions33DRAFT – This should not be taken to represent DECC PolicyTechnology Pre-developmentPeriod (years)ConstructionPeriod (years)Biomass Conversion 2 1Offshore wind (~1000 MW) 5-6 3Onshore wind and solar (10-15 MW) 4 2Onshore >5 MW 4 2Marine (~20 MW)* 5-6 3Pre-development and construction timings per technology(Annex 1, DECC , Electricity Generation Cost, Oct 2012)*In the absence of specific information, we have assumed that marine and tidal will have similar timelines to offshore wind
  • 34. Capital cost breakdown across Pre-developmentand Construction phases34Capital cost item Onshorewind >5MWOffshorewindDedicatedBiomassBiomassConversionMarine*Pre-development 3% 2% 1% 3% 2%Construction 87% 91% 95% 68% 91%Grid costs 5% 2% 2% 0% 2%Other infrastructure 5% 5% 2% 29% 5%Source: DECC/ARUP, Review of the generation costs and deployment potential of renewable electricity technologies in the UK, Oct 2011)DRAFT – This should not be taken to represent DECC Policy• Pre-development costs include: public enquiries, licensing, radar mitigation, designconsultancy and habitat enforcement measures• We have assumed that ‘Grid Costs’ includes the cost of use commitment payments –securities and liabilities*In the absence of specific information, we have assumed that marine and tidal will have similar timelines to offshore wind
  • 35. Drawn-down profile assumptions35# of Pre-developmentyearsYr1 Yr2 Yr3 Yr4 Yr5 Yr61 100.00%2 50.00% 50.00%3 15.00% 35.00% 50.00%4 5.00% 10.00% 35.00% 50.00%5 5.00% 10.00% 20.00% 30.00% 35.00%6 5.00% 10.00% 15.00% 20.00% 25.00% 25.00%Draw-down profile – Pre-development(Baringa starting assumptions – to be discussed)# ofConstructionyearsYr1 Yr2 Yr3 Yr4 Yr5 Yr61 100.00%2 50.00% 50.00%3 15.00% 35.00% 50.00%4 5.00% 10.00% 35.00% 50.00%5 5.00% 10.00% 20.00% 30.00% 35.00%6 5.00% 10.00% 15.00% 20.00% 25.00% 25.00%Draw-down profile - Construction(Baringa starting assumptions – to be discussed)We recognise thatthese profiles mayvary significantlyby technology.DRAFT – This should not be taken to represent DECC Policy