The Move To Contracts For Difference

The UK government and industry are in a constant dance trying to balance policy with industry needs. With further changes imminent, Bristol based TLT Solicitor's Maria Connolly, Real Estate Partner and Head of Renewables, and Stuart Urquhart, commercial associate look at the impact of CfDs on the UK industry.

Regulatory change continues to hit the solar industry and challenge everyone involved. While this changeable environment continues, it's essential to keep on top of what's happening at a policy level and assess the impact of these policy changes on existing business models.

Last month, the Government issued its latest consultation on financial support for solar PV. One of the main proposals set out was the closing of the RO scheme to projects over 5MW from April 2015 across England, Wales and Scotland. This will be replaced by the Contracts for Difference (CfD) regime.

Contracts for Difference issues

The move to CfDs represents a major change to the way large scale solar projects will receive support from the Government. Further details about the scheme will be confirmed over the coming months, however some of the key issues that those in the sector will need to grapple with, include the following:-

£ No guarantee of support "“ strictly speaking, the existing support regime under the RO was always subject to change at short notice by the Government. However, in practice, a developer could be confident at the time of starting to commit substantial costs to a project, for example, in securing planning, that support would be available at a particular level. With CfDs this is no longer the case, at least for solar and other established technologies, as it is now clear that developers will have to bid for support on a competitive basis, with no certainty of the overall "pot" of funding made available by the Government will be. 

£ Eligibility "“ it seems likely that any developer seeking to  bid for a CfD will not only need to have secured a connection  offer, but also need to have accepted that offer. Developers will therefore need to check the terms of their connection  offers carefully and understand what payment commitments will arise on acceptance of the offer. They will also need to understand what scope there is for recovering initial payments if unsuccessful in the CfD allocation process.

£ Frequency of allocation rounds "“ it is not clear what the frequency of these will be. DECC previously indicated that they might happen every six months, but some recent statements are suggesting they may only take place once a year. For developers with projects expected to commission in late 2015 or early 2016, for example, it will be crucial to understand whether the autumn 2014 allocation round will be the only opportunity to secure a CfD for the 2015/2016
delivery year.

£ Ability to determine what strike price(s) to bid "“ given the competitive allocation process now confirmed by the Government, it seems likely that solar developers will be required to bid a "strike price" below the maximum of £120 per MWh applicable to solar projects. In order for a developer to determine the lowest strike price they can bid, they will need to determine the minimum internal rate of return and then work backwards deducting all CAPEX, OPEX, debt
 and power purchase agreement (PPA) prices. To have some confidence in what these costs will be, developers will need engage at an early stage both with key supply chain members and with project funders.

Complexity

The CfD contract terms run to several hundred pages and contain complex provisions covering a range of areas, including timescales for building out projects, metering requirements, payment processes and the allocation of change in law risk.

At the outset at least, developers and their funders will need to spend time analysing what these provisions mean and how they are likely to interact with other project documents, such as PPAs. In the longer term, developers can take comfort in that the terms are intended to apply on a standardised basis. They should not need to be reviewed and negotiated on a project by project basis.

Rooftop PV issues

Given the challenges thrown-up by the move to the CfD regime, we anticipate that some developers will look closely at the scope for pursuing sub 5MW projects for which support will continue to be available under the existing (and rather less complex) feed-in tariff (FIT) scheme. In particular, given recent government proposals to restructure FIT degression arrangements, we anticipate that developers will look closely at the viability of pursuing non "stand-alone" projects in which the PV system is wired to provide electricity to an occupied building, probably via a rooftop lease model.

There are a number of commercial and legal issues to consider around building wired projects.

One set of issues relates to the possibility that the building is, or may in the future be, tenanted. When occupied, it will be the tenant who consumes most, if not all, of the electricity supplied on-site. Subject to the terms of the lease, it will be the tenant, rather than the landlord, who will benefit from the potential to reduce the cost of electricity consumption from the grid. Under a rooftop lease model an additional challenge thrown up by tenanted properties is about who is responsible for paying the project company for the electricity consumed on site.

The project company is likely to want some control over the counterparty to any PPA governing the supply of the power. They may consider that the building owner represents the preferred counterparty for these purposes.

However, a structure of this kind would effectively make the building owner responsible for the power consumed by its tenants, which may not be commercially viable. In addition, any structure where power from the PV system is sold to one person, such as the building owner, for onward supply to someone else
as ultimate consumer, for example a tenant, needs to be assessed for compliance with the rules governing
the basis on which unlicensed electricity suppliers are allowed to operate.

Building Dependencies

Any developer looking to install PV via a rooftop lease model will need to consider the fundamental dependency on the building itself. Importantly, this means checking whether the building is structurally sound and able to provide a stable support for the PV.

The developer also needs to consider what obligations are imposed on the building owner and/or any PPA counterparty. This is in relation to the operation of the building's electrical infrastructure and of the grid connection, which may be in the building's owner name. The purpose of obligations of this kind is to ensure that the amount of electricity generated by the PV system is maximised and that any power not taken on site is capable of being exported to the grid.

As a related point, the developer will need to consider what the impact would be if the building owner was to become insolvent, leaving the property vacant.

None of these issues need create an absolute barrier to the successful establishment and financing of rooftop lease projects. However, careful consideration of the structure and terms of the lease and any related PPA will be important.

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