Catching up with CfD–how is it working so far? article banner image

This article was first published on Lexis®PSL Environment on 30 April 2015. Click for a free trial of Lexis®PSL.

Environment analysis: Where are we now with contracts for difference (CfD)? Peter Cooper, solicitor in the renewable energy team at Stephens Scown, considers how the CfD scheme has been received and what can be improved in the future.

Is the CfD scheme now up and running?

The scheme is up and running, with the results of the first CfD allocation auction round having been published on 26 February 2015. Those who were successful had until 27 March 2015 to physically sign the contracts. Mild delays seem to be pervasive, with timeframes slipping slightly throughout the implementation process of round one, although this is perhaps to be expected and will no doubt be tightened up going forward into round two and beyond.

How are developers finding the process?

SMEs are finding the process more onerous than those with more resources to throw at it, and are less well placed to soak up the costs of an unsuccessful application and the resultant displacement in their revenue stream. Solar developers in general are going to be disappointed that so little photovoltaic (PV) technology found a place in the first round, although they should perhaps feel better than developers of biomass with combined heat and power (CHP) projects, who saw none awarded at all. Wind developers effectively cleaned up, but with bids a little lower than expected.

Is the transfer from the renewables obligation (RO) to CfD complete?

While RO has been closed for large scale solar from 1 April 2015, it remains open to other technologies (including ‘small scale’ solar) until the RO closes in March 2017. The transition is therefore more of a work in progress, speeded in part by political will and shrinking availability of subsidy funds as a result of take-up, rather than something which is entirely complete.

Full closure of the RO for the remaining technologies will remove the floor on CfD bids for those affected–something the Competition and Markets Authority has commented on in their Issues Statement of 18 February 2015–which should increase the competitiveness of the process in general.

What is the mood around CfD? Is it expected to be successful in securing the future of the energy market?

This depends on who you talk to. Certainly from a public perspective the transition to CfD from RO looks to be more cost effective and efficient, with market competition having been introduced and the European Commission praising the approach and seeking all member states to roll out something similar.

Competing as they do for the same pot of CfD money, large scale solar developers may see the moratorium on on-shore wind development contained within the Conservative manifesto as a potential blessing in disguise, and proponents of both technologies will no doubt be watching the upcoming election (and placing their votes) carefully.

Are disputes expected? What are the legal challenges around CfD?

It remains to be seen whether those parties successful at auction can obtain finance and make the level of their successful bids work in practice. The CfD non-delivery dis-incentive scheme has yet to be fully tested and the amending regulations have yet to be put in force, but as penalties proposed are limited to a prohibition on applying for a new CfD for the same site for a period of 13 months, it may be more cost effective for non-delivering applicants to simply wait it out rather than look for loopholes.

What should lawyers do next?

The primary direction renewable energy takes over the next few years will largely be dictated by the outcome of the general election. Lawyers may anticipate developers involved in a larger number of smaller solar sites, feed-in tariff degression permitting, and an increasing focus on community energy.

Peter Cooper is a solicitor in the renewable energy team at Stephens Scown, where he advises clients on onshore wind, solar, anaerobic digestion and biomass projects. He acts for both renewable energy developers and landowners, and also deals with the fine detail of legislative and Ofgem regulation interpretation for clients.