Annex A Feed-in Tariff with Contracts for Difference: Operational Framework November 2012 Annex A: Feed-in Tariff with Contracts for Difference: Operational Framework Contents Executive Summary ............................................................................................................................. 5 Document Overview ............................................................................................................................ 9 1. Introduction .................................................................................................................................... 10 The Energy Bill: The Legal Framework for the CfD ............................................................................. 10 The Developer Journey ...................................................................................................................... 12 Reforms to support transparent pricing and access to market for independent generators ................. 14 Liquidity .............................................................................................................................................. 15 Call for evidence on PPAs .................................................................................................................. 15 Long-term vision ................................................................................................................................. 16 Next steps .......................................................................................................................................... 17 2. CfD price-setting and allocation ................................................................................................... 19 Introduction ........................................................................................................................................ 19 The administrative price-setting process ............................................................................................ 22 The allocation process ........................................................................................................................ 23 Incentives to ensure the timely delivery of CfD generation ................................................................. 29 Transition to competitive price-setting ................................................................................................ 34 3. The Contract ................................................................................................................................... 35 Introduction ........................................................................................................................................ 36 Commencement and Term ................................................................................................................. 39 Payment ............................................................................................................................................. 43 Change Provisions ............................................................................................................................. 59 Obligations ......................................................................................................................................... 65 4. The CfD counterparty .................................................................................................................... 67 2 Annex A: Feed-in Tariff with Contracts for Difference: Operational Framework Overview ............................................................................................................................................ 67 The CfD counterparty’s relationship with the CfD, the Government and the delivery body ................. 69 Solvency and creditworthiness of the CfD counterparty ...................................................................... 71 Accounting for the CfD ....................................................................................................................... 72 Operational costs ............................................................................................................................... 73 5. Funding the CfD: supplier obligation ........................................................................................... 74 Introduction ........................................................................................................................................ 74 Summary of approach to supplier obligation design ........................................................................... 75 Delivering the supplier obligation ........................................................................................................ 76 How does the obligation work? ........................................................................................................... 76 Data collection .................................................................................................................................... 77 Measures to ensure the certainty of payment ..................................................................................... 78 Enforcement of the supplier obligation ................................................................................................ 80 Exemptions for Energy Intensive Industries ........................................................................................ 80 Impacts and Call for Evidence ............................................................................................................ 80 Next Steps .......................................................................................................................................... 82 6. Access for independent market participants ............................................................................... 83 Introduction ........................................................................................................................................ 84 Power Purchase Agreements ............................................................................................................. 84 Summary of responses....................................................................................................................... 85 Next steps .......................................................................................................................................... 90 Liquidity .............................................................................................................................................. 91 Next steps .......................................................................................................................................... 92 7. Next steps ....................................................................................................................................... 93 Transition from the current arrangements to CfDs .............................................................................. 93 3 Annex A: Feed-in Tariff with Contracts for Difference: Operational Framework Developing and implementing the CfD and supporting framework ...................................................... 94 Transition from initial CfD arrangements to greater competition ......................................................... 95 8. Stakeholders .................................................................................................................................. 97 CfD Expert Group and broader stakeholder engagement ................................................................... 97 Devolved Administrations ................................................................................................................... 97 Appendix A – Structure of the Heads of Terms ............................................................................... 99 Glossary ........................................................................................................................................... 108 4 Annex A: Feed-in Tariff with Contracts for Difference: Operational Framework Executive Summary 1. The introduction of a Contract for Difference (CfD)1 is a key part of the Government’s Electricity Market Reform (EMR) programme, which aims to secure the significant investment required to replace the generation capacity closing this decade and deliver a secure, low- carbon electricity system. The Government is committed to achieving these outcomes in the least-cost way. 2. Low-carbon generation with a CfD will sell their electricity into the market in the normal way, and remain active participants in the wholesale electricity market. The CfD is a long term, private law contract that pays the generator the difference between an estimate of the market price for electricity (the ‘reference price’) and an estimate of the long term price needed to bring forward investment in a given technology (the ‘strike price’). This removes generators’ long term exposure to electricity price volatility, substantially reducing the commercial risks faced by these projects, encouraging investment in low-carbon generation at least cost to consumers. 3. Since the draft Operational Framework in July 2012 the Government has worked closely with the System Operator National Grid, industry and other interested parties to develop further the CfD design. This operational framework sets out the details for how CfDs will be allocated and the key contract terms. The draft