The document discusses the UK government's plans to introduce a second round of Contracts for Difference (CfDs) to support renewable energy projects. Key points include: - The first round of CfDs in the UK was considered a failure as bids for some technologies like solar were too low to build viable projects. - The 2016 UK budget announced £730 million for CfDs over this parliamentary term for up to 4GW of offshore wind and other less established renewables. - £50 million was also allocated for energy storage innovation to help technologies access the market. - The document outlines some of the key considerations and terms of the new CfDs, including strike prices, indexing, availability

1. The Contracts for Difference – Strike Back (with a cameo appearance by...Energy Storage)!
Seconds out...round 2 for CfDs
We tried it once in the UK and it was too complicated for a marketplace used
to (very) vanilla/simple (exit the park pre-build or at the date of issue of the
provisional acceptance certificate (PAC-date)/accreditation for renewables
obligation certificates (ROC) date (ROC-Accredition-Date)) transactions
(asset/share sales), but some do say that where there's a will there's a way,
so yes we're going to have Contracts for Difference (CfDs), once again.
What happened last time?
Round 1 was roundly lambasted by the international solar industry(and most
other renewable energy tech.-cos.) encamped in the UK as a failure, as simply
put, the bids for solar projects and some others were unduly low so as to win
the CfD but that meant the plants couldn't be built as the financial model to
deliver the project simply couldn't factor in the low price/W generated and
to be paid for generation by Low Carbon Contracts Limited
(https://lowcarboncontracts.uk/) under the relevant contract for difference
agreement. Insufficient revenue streams via the power purchase agreement
and the CfD contract aggregated, meant paying off the relevant debt, then
getting to net-positive didn't model well under the CfD-model hence
sporadic (if any) bids at the really low end.
This year most renewable energy companies are consolidating through M&A
or JVs, whilst some companies are selling rights-holding asset-SPV
pipelines to the highest bidders, with the rest of the industry departing the
UK for some countries in Europe which haven't exhausted solar (or where
other technologies are needed in abundance and PPAs pay relatively well),
ASEAN, a select few countries in North Africa and the GCC, sub-Saharan
Africa, the Caribbean & South America.

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The remaining renewable energy technologies, excluding the big favourites
of offshore wind and nuclear, might plug away and hope that they can model
well under long term PPAs, but their cost-base has to (if it hasn't already)
drill down to meagre levels to ensure any semblance of (net profit) success
where only very high volumes of low worth contracts make a viable plan.
What happened today in the British Government Budget
announcement?
At Edie it was stated: (http://www.edie.net/news/11/Budget-2016-energy-
environment-green-policy-George-Osborne-key-points/):
"...The official Budget document reads: "The government will auction
Contracts for Difference of up to £730m this Parliament for up to 4GW of
offshore wind and other less established renewables, with a first auction of
£290m. Support for offshore wind will be capped initially at £105/MWh (in
2011-12 prices), falling to £85/MWh for projects commissioning by 2026."
..".
In terms of storage:
"...The government will allocate at least £50 million for innovation in
energy storage, demand-side response and other smart technologies over
the next five years to help new technologies and business models access the
market. Ofgem will consult later this year on the future of the £100 million
Network Innovation Competition to maximise the delivery of genuinely
innovative projects and technologies.." (at 5.8
in https://www.gov.uk/government/publications/budget-2016-
documents/budget-2016).

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What are the key points when it comes to CfDs?
The following are worthy of consideration when considering CfDs:
 What is a CfD?
Section 6(2) of the Energy Act 2013 defines this as a contract under which a
supplier funds certain payments and as being a contract that the CfD
Counterparty (incorporated under the Companies Act 2006/a public
authority) is required to enter into under the Act.
 What are the key points to be aware of in relation to a CfD?
a. Change in Law
- QCiL events or “Qualifying Changes in Law” have now been drafted into the
standard terms and conditions ("STAC") for CfDs most recently updated
in December 2015
(https://www.gov.uk/government/uploads/system/uploads/attachment_d
ata/file/486212/Blackline_-_CfD_Standard_Terms_and_Conditions_-
_comparison_against_versi....pdf) and have been designed to compensate a
Generator in the event that a change of law is a material and unforeseeable
change that uniquely targets specific technologies, individual projects or
certain CfD holders as a group. The QCiL protection covers political
decisions to shut a Generator down/general changes that have a
discriminatory effect without any objective justification. The QCiL
protection extends to changes in law that would limit a Generator’s ability to
deliver exported electricity or to receive appropriate payment for delivered

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exported electricity. The QCiL compensation will provide protection against
certain changes in network charges relating to balancing system payments
and transmission loss.
b. Credit Support Documents – “Collateral”
- This is referred to as “collateral” in STAC and will not include parent
company guarantees, and will include a letter of credit or equivalent on-
demand liquid form of guaranteed payment security that, e.g. in the event
that the issuer loses their credit rating or folds, can be replaced within five
working days with an equivalent form of security. Despite a request for a
similar form of security to be provided by the CfD Counterparty, the counter
from DECC was that the provisions in the legislation including the ability for
the Secretary of State to replace the insolvency remote CfD Counterparty in
the event of default (limited/no measure to terminate for CfD Counterparty
default under the terms and conditions).
c. Variability in wholesale electricity market price
- The CfD when it is issued has the relevant strike price for the period within
which it is issued attributed to it, which was £125/MWh for 2013-2014, and
2014-2015(“Initial Strike Price”). This can be adjusted during the lifetime of
the CfD in accordance with STAC. The Net Payable Amount under the CfD
Agreement is the price that the Generator under the CfD receives if the Net
Payable Amount after all deductions is positive (“NPA”, but if the NPA is
negative, any NPA will be repaid by the CfD Counterparty – see g.
below). The “Market Reference Price” (being the Baseload/intermittent
market reference price) is calculated by reference to a “ Calculation Season”
(a six-month period from 1 April or 1 October during which the Baseload
Market Reference Price is calculated: see condition 15.2 of STAC for the
formula expressed in MWh in respect of each Settlement Unit, relating to the

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Baseload forward season trading day price calculated in respect of a trading
day, reference price sample period or where a fallback Baseload price applies,
in relation to a Settlement Unit (as defined under the draft CfD Agreement
as each, “half hour period in a day divided into half hour-long periods
starting at 00:00 on such day”)). Where the Market Reference Price is
higher than the Strike Price, the Generator pays the CfD Counterparty who
in turn pays the Supplier, the difference between the two, and if lower, then
the CfD Counterparty obtains the difference from the Supplier and pays the
Generator such amount (or ‘top-up payment’). The aim of the payment
regime is for the Generator to be paid close to the Market Reference Price so
that it obtains a predictable and steady revenue stream for power, but as we
saw with round 1, the minimum strike price needs to be at a de minimis
threshold level to make commercial sense.
d. Indexation
- The Strike Price is fully indexed 100% to the Consumer Price Index
throughout the entire Term (see i. below).
e. Less than forecast metered output/Capacity Adjustment
- Developers will be able to have a limited amount of flexibility to adjust their
target capacity for a plant, to a limited extent above or below the Installed
Capacity Estimate due to a Relevant Construction Event (“RCE”) by means
of a RCE notice (Part 4 of STAC) which is defined as an event that the
Generator acting to a Reasonable and Prudent Standard would not be aware
at the application date and which renders the
development/construction/installation/conversion/commissioning of a
Facility uneconomic. This is to be welcomed by developers, who albeit with
the RCE would have to have the director’s certify separately as to the

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truthfulness of the RCE notice, the capacity can be reduced, however under-
estimation does not seem to have been provided for in the STAC but the
DECC guidance does mention this, which may again something that is
discussed during this consultation period.
f. Availability
- This is not a determining factor for payments which is to be welcomed,
however the forecast availability will be considered as a part of the Generator
(owner of the Asset) information in relation to a prospective plant for which
a CfD is sought and so has some materiality as it is explicitly referred to
within the STAC and so is required to be submitted.
g. Conditions Precedent
- These will be conditions prior to first payments being received under the
CfD so that once standards in connection, metering, capacity installed, and
contract payment/Collateral (credit support – see b. above) have been
provided, then, payments will be able to flow (see i. below).
h. Developer Asset-Co (or Developer backed by Funder – Asset-
Co) supply chain plan/development phase deliverables
- General Project Commitments (annex 5 in the generic
agreement: https://www.gov.uk/government/uploads/system/uploads/att
achment_data/file/486213/Blackline_-_CfD_Generic_Agreement_-
_comparison_against_version_published....pdf) will need to be submitted
with applications for allocations together with broadly the same criteria as

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set out above for the Development Phase (including a Directors Certificate
that the Generator that owns the Asset e.g. Developer/Developer-
Consortium with a funder, have financial resources for the total project
spend (‘proof of funds’) to deliver the asset(s), evidence that the site for the
plant is relatively unencumbered by third party property rights and where
necessary easements/other rights have been/can be obtained, and all other
consents for the installation of the PV plant have been obtained) as a part of
the Project Commitments in the CfD Agreement, together with evidence of
an EPC agreement (Construction Phase) and evidence of a framework (major
kit) supply ("Material Equipment") agreement and a binding purchase order
for the Material Equipment (so e.g. modules, inverter, mounts, cabling for
solar). Very large portfolios of assets being developed require more
sophisticated responses in terms of the supply chain plan to obtain Secretary
of State approval for submission of the related application for allotment of
related CfDs in compliance with the related guidance.
i. Payment
- If the Net Payable Amount (see condition 23 of STAC) is a negative number
in the relevant billing cycle then the Generator pays the CfD Counterparty
the absolute value of the Net Payable Amount within 10 working days; but, if
positive, then within 28 calendar days (1 month), the CfD Counterparty will
pay the Generator the Net Payable Amount to allow the CfD Counterparty to
recover the same amount from the Supplier. The “pay when paid”
configuration is confirmed in the most recent guidance, so that the CfD
Counterparty has time to get funds from the supplier to cover any Net
Payable Amount relating to any strike price adjustment, qualifying law
change compensation (as well as any relevant true-up payment).

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j. Term
- It is anticipated that each CfD will endure 15 years. This can be varied to
the extent that a CfD Counterparty can offer a CfD on certain specified terms,
e.g. where the generic terms do not suit the funding structure, and bilateral
negotiations to permit, e.g. sharing of refinancing gains – with an example
in the DECC guidance being where a “…project is sufficiently expensive or
important..”. The DECC guidance goes on to cite that refinancing bespoke
term negotiations may arise, “…[w]here the largest Generators are able to
later negotiate cheaper financing following construction, bespoke contract
terms may enable suppliers (and therefore consumers) to share the benefits
of lower financing costs. ..”. As such, only those solar developers with
aggregated large-scale portfolios of development Assets might be able to
petition to negotiate such bespoke conditions where e.g. all parties have tier-
1 ratings with the usual credit reference agencies. The DECC guidance goes
on to provide that large projects may have refinancing clauses which might
enable developers to be free to recycle capital, however the definition of what
‘large’ will entail will require to be further requested during this consultation
period by relevant interested parties.
k. Force Majeure
- The provisions will allow relief relate to events beyond a developer’s control
(e.g. QCiL – see a. above), for example where a network operator is at fault.
l. Dispute Resolution

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- The provisions allow for senior representatives, failing which expert
determination, failing which LCIA (London Court of International
Arbitration) binding arbitration.
m. Termination
- This relates to events such as non-payment of the NPA despite a 20
business day cure period, credit support (Collateral) default, metering access
termination event, or the finally installed capacity is lower than the required
installed capacity (after the Start Date). In the consultation documents
published, the reasoning behind no termination for the insolvency-remote
Government backed CfD Counterparty is that it can be replaced by the
Government if for any reason it defaults in its payments, or if the supplier
defaults in its obligations to provide the NPA payments to the CfD
Counterparty to on-pay to the Generator then it can be replaced (akin to the
Government acting in a form of trustee-role during the Term of the CfD to
ensure that no matter what, even if late, payment is still made to the
Generator if due).
Navigating global renewable energy projects in the UK and
beyond
If you need advisers that understand energy in the UK/internationally, and
that work on power purchase agreements, contracts for difference,
structuring projects in the clean energy space in the UK/internationally,
energy storage/efficiency ESCO models, as well as the balance of financing,
corporate, commercial and projects legal work and advice, then
email: bhalindra.bath@mybusinesscounsel.com.