DECC CONSULTATION RESPONSE: RO Grace periods consultation

Transcription

1 DECC CONSULTATION RESPONSE: RO Grace periods consultation Introduction RenewableUK represents 610 organisations in the field of wind, wave and tidal stream energy. Scottish Renewables represents the renewable energy industry in Scotland, with 330 member organisations working across all renewable energy technologies. This response focuses on wind, wave and tidal stream technologies, and issues common to all technologies. These technologies will provide a significant proportion of the UK s electricity supply in the future, and play a major role in the UK s drive to decarbonise its economy. The views of this sector on the transition between the RO and the CfD, and therefore the continuity of investment in these technologies, should therefore be of keen interest to DECC. Question 1 Do you agree with the proposal to offer a 12-month grace period for RO accreditation delays due to radar and grid connection? RenewableUK and Scottish Renewables agree with this proposal and believe it to be an essential minimum pre-condition to prevent further development hiatus in the industry. Question 2 Do you agree with the proposal to offer a 12-month grace period to projects with an Investment Contract, in case of lack of State Aid approval? We welcome this proposal from DECC which appears to be appropriate risk mitigation against the State Aid clearance risks. We would highlight, however, that there needs to be a time limit built in to this proposal, so that if State Aid approval has not been obtained by a certain date, then entry into the RO with a Grace 1

2 Period is guaranteed, rather than being bound by the IC until such time as the European Commission has made its decision. It may be that Conditions Precedent in the IC state such a situation, but it needs to be clear by some route. We understand the intent of this proposal to clearly provide further investor certainty and we would therefore encourage DECC to elaborate on the comments regarding specific circumstances for contract termination which need to be clarified so that developers fully understand the circumstances whereby the IC could fail. Question 3 Do you agree with the proposal to offer a 12-month grace period to projects which participate in a notification process targeted at developers making investment decisions between now and the 31 July 2014? We agree with the principle, however, we feel that the balance between the strength of the eligibility criteria and the application deadline is incorrect. Either the deadline should be later if the aim is to limit notification to projects that can prove significant financial commitment, or if the date is not moved the criteria should be limited to evidence that the project could be delivered by 31 March 2017, not that no turning back financial decisions have been made. We also feel that the deadline on the application for an RO grace period is not conducive to the efficient start-up of the CfD. Under the current proposals we would strongly urge that the deadline for notification should be pushed back, perhaps to 31 March This would allow developers to compare the RO and CfD support options in a safe space, where there is a known fallback option of entering the RO, without this being extended indefinitely. This should allow developers to negotiate finance for projects under the CfD knowing that if the complexities and less-understood details of the new instrument prevent progress, there is an alternative. Having a feasible alternative with a known risk-reward balance will also strengthen the negotiating hand of developers attempting to strike the first CfD deals with suppliers and financiers. The CfD is a new support scheme. Developers, particularly small and medium sized developers, will require time to adapt. Investors and financiers will also be highly risk averse and seek opportunities to hedge risks by seeking higher margins for finance, and suppliers may offer only very conservative PPAs. In negotiations in which a developer has no other choice than the CfD, investors will have a very strong negotiation position in the short term. Developers that can deliver under the RO will have a much stronger negotiating position. As developers adapt their systems (financial models, process, contracts, etc.) to the CfD they are likely to review RO projects that are still eligible to apply for a CfD and potentially enter

3 such negotiations. This creates a positive feedback loop as developer-learning from these negotiations will transfer to projects that cannot feasibly deliver under the RO. With a rapid shift to constrained allocations possible, there is an urgent need to facilitate rapid reduction in the cost of capital in order to reduce the risk of under delivery and maximise the benefits to consumer. The alternative to moving back the deadline for notifications is to soften the criteria for having a notification accepted by Ofgem. This could centre on the comfort letter mentioned in 2.17.c.v, and might be augmented by evidence of negotiation with offtakers and/or financiers for PPAs or lending. The advantage of a lower hurdle than full financial commitment is that the process should flush out the large majority of the projects that could enter the RO, thus aiding the process of Levy Control Framework budgeting. This would also retain the benefit noted above of giving developers greater negotiating power when attempting to secure good terms to bring forward CfD-supported projects. Having a lower barrier also makes the statement in para 2.22, that notification does not prevent projects from applying for a CfD, a meaningful one. The statement, which is welcome, would be functionally useless if projects had to prove significant financial commitment in order to notify, since projects will have built their contracting structure and financing model on the choice of scheme, and this would be essentially fixed at FID. Projects would thus be extremely unlikely to switch horses to the CfD in this situation, unless the notification did not represent essentially a commitment to enter the RO. As an additional note, developers who intend on commissioning a project under the RO do not have to provide any evidence until commissioning. For developers, evidence in line with para 2.17.c. of the consultation document is currently not on the critical path of their project programmes. The proposals are therefore a significant shift from business as usual, which will impact small and medium developers more severely than large developers. Question 4 Do you agree with the proposed form of evidence are appropriate to the purpose of the above grace period, as defined in paragraph 2.14? We agree with evidence requirement 2.17.a. & 2.17.b. that are in line with the CfD Eligibility Criteria. We feel that this has the additional benefit of providing a smooth transition to the CfD, which is highly desirable, and we therefore welcome this proposal from Government. As noted above, however, we believe the additional barrier of having to provide URN 13D/182

4 evidence of substantial financial decisions (2.17.c.) prior to 31 July 2014 is too onerous. A small developer might not have reached this level of evidence requirement for a project with a target commissioning date in 2016/17 yet it is these small developers that could see a transition to the CfD as too much of an obstacle to pursue their projects. Additionally, we feel that additional constraints will limit the number of applications and therefore limit the possible benefits of this process. We discuss this in more depth in our response to question 3. As before, we believe that either the date of notification should be pushed back to a later point, or the criteria for notification should be relaxed. Question 5 Do you agree with the proposal to offer 18-month grace period to projects allocated a place within the RO 400MW cap for dedicated biomass? N/A Question 5 Do you have any other comments on the RO closure arrangement? Point 2.20 of the consultation document appears to introduce arbitrary criteria in the notification process which create unnecessary uncertainty. It appears that this point seeks to give Government the ability to refuse certain eligible projects from receiving Grace Periods on the grounds of size alone. Combined with the current application deadline in 2014 we feel that DECC are not taking advantage of this opportunity to foster an early transition to the CfD scheme and help manage the LCF budget. Allowing projects that have Notified for Grace Periods to be subsequently allowed to apply and sign a CfD is an excellent start in facilitating the uptake of the CfD. We feel that many developers will only take the time to develop a real understanding of the CfD (financial models cost of finance, contractual changes, delivery obligations, etc.) after a period of adaptation. Thus many developers will

5 not be in a position to fully assess the benefits of the CfD before the RO grace period notification deadline. We highlighted above that providing developers with the RO as a feasible alternative to the CfD for a certain period will help the industry to understand the real cost of capital under the CfD, avoiding unnecessarily high rents associated with a constrained negotiation position with the finance and offtake community. Managing allocation of the LCF budget is a driving force behind the whole design of the CfD scheme. The weight of the uncertainties that surround this task is felt throughout the whole design process as well as by industry as we try and anticipate these. We feel that the Grace Period notification process is an excellent opportunity to reduce some of the uncertainties related to the RO draw on the LCF budget and would therefore like to see this process encourage, rather than deter, developers that intend on delivering a project before April 2017 to apply for the RO grace period. In addition to increasing developer negotiating power this would also go a long way toward reducing both the risks of over-allocation of the LCF budget and under-delivery of our 2020 targets. URN 13D/182

6 SR Consultation Response Biomass CHP Renewables Obligation Transition Team Department of Energy and Climate Change 4th Floor Area A, 3 Whitehall Place, London SW1A 2AW 28 November 2013 Dear Sir/Madam Consultation reference: URN 13D/295 - RO Grace Periods consultation Scottish Renewables and Renewable UK have jointly responded to the consultation referenced above. Due to the nature of our membership, the response focused on those renewables technologies common across Renewable UK and Scottish Renewables; wind, wave and tidal. However, Scottish Renewables has some technology specific concerns that we wish to make on behalf of members in the biomass and CHP industries. Scottish Renewables welcome the proposal to offer a 12-month grace period for RO accreditation delays due to radar and grid connection. We believe that this is essential to prevent further delays in the biomass sector. We also support the proposal for an 18-month grace period for projects allocated a place under the 400MW dedicated biomass cap (England and Wales) and the 15 MW individual legislative cap in Scotland. Given the uncertainty that dedicated biomass projects face with the legislative caps that have been put in place we believe that this is vital to ensure projects are able to continue and eventually contribute towards our renewable electricity and heat targets. We do however feel that a similar grace period for biomass CHP projects should also be offered. Biomass CHP projects have suffered similar delays to dedicated biomass, caused by uncertainty over Government policy arrangements in relation to the 400MW cap as well as the 15MW individual cap in Scotland. Further uncertainty arises from the introduction of a specific CHP tariff under the Renewable Heat Incentive, which was proposed by DECC in September 2012, but has yet to be implemented. As a result of these delays we feel that the 18-month grace period for dedicated biomass should be extended to biomass CHP. This response has been formulated by Scottish Renewables following internal discussion within our membership. If you have any further work arising from this consultation or would like clarification on any of the detail in this correspondence please do not hesitate to contact Scottish Renewables. Yours sincerely Stephanie Clark Policy Officer