In light of the current uncertainty with the Covid-19 pandemic there have been a number of changes and clarifications announced specifically with regard to Contracts for Difference (CfD) schemes:

• BEIS has issued a number of statements and revisions to the CfD consultation with regard to deadlines and the supplier obligation; and

• there has been guidance issued by the Low Carbon Contracts Company (LCCC), as CfD Counterparty, with regard to force majeure provisions within CfD contracts.

CfD supplier obligation and CfD consultation extension

Under the CfD, payments to generators are made by the LCCC who receive funding for these CfD payments through the Electricity Suppliers' Obligation (ESO). The CfD pays generators the difference between an agreed strike price and the market price for electricity, meaning the lower the market price the more subsidy is paid. This subsidy is funded by the ESO levy on electricity suppliers who then have to recoup that levy from the customers. 

Currently, due to the Covid-19 pandemic, although we are all using more electricity in our homes, the overall energy demand has significantly decreased due to large factories and manufacturing plants being closed. This lower use and therefore lower payments from customers to suppliers, coupled with higher payments to the generators because of lower wholesale electricity prices, has resulted in suppliers facing an increase in their ESO payments (they are having to build up to the strike price from a much lower amount) causing massive cash flow issues. 

As a result the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation on 12 May 2020 proposing to defer the ESO payment which would otherwise have been collected in July 2020 to Q1 2021 and further stating that they intended to consult on any proposed changes to regulation to reduce supplier's liabilities for payments this quarter by the amount of the loan provided to the LCCC (as detailed below). 

In its response released by the Government on 4 June 2020 "Government response to consultation on proposed changes to the ESO Regulations in response to Covid-19" it was decided to defer the suppliers' obligations by an additional quarter, giving them until Q2 2021 before any increase in the level of ESO payment. The response further confirms that the calculation of the reduction of suppliers' obligations for the current quarter would be based on their market share over this quarter. Additionally the government has confirmed it will protect suppliers from 80% of the increase in suppliers' obligations in Q2 2020, this is higher than the 67% which was proposed. The LCCC will be able to add the loan amount to be repaid to the Q2 2021 ESO as well.

These changes are being brought about through amendments to the Contracts for Difference (Electricity Supplier Obligations) Regulations, which were laid before Parliament on 4 June and should hopefully be approved by 9 July (the date LCCC are due to carry out their reconciliation process for the current quarter). LCCC are tracking the projected shortfall in levy payments collected from suppliers against the payments they are making to CfD generators on a weekly basis here.

Further, on 24 April 2020 BEIS issued a statement: “Loan arrangement for Low Carbon Contracts Company in respect of the Supplier Obligation Levy”, in which they acknowledge the difficulties faced by suppliers in the current "unprecedented situation" and as a result have asked the LCCC not to implement an in-period adjustment and will instead, on a one-off basis, extend a temporary loan to the LCCC to ensure that the LCCC can continue to pay CfD generators in Quarter 2 of 2020. 

Additionally, BEIS confirmed that the deadline for the CfD consultation, launched in March and which looked into potential changes including a revision of technology pots, an extension of the negative pricing rule and a relaxation of energy storage metering requirements, as detailed in our previous article here, was extended by a week. The initial closing date of 22 May was extended to the 29 May following "a number of requests" for an extension in light of many stakeholders being occupied with the current Covid-19 pandemic. This extension comes after BEIS previously stated the consultation would not be pushed back in April because of "the importance of maintaining the delivery of AR4 in 2021". 

BEIS has confirmed however that it is still aiming for the CfD AR4 to open in 2021 and as such is strongly encouraging stakeholders to provide responses before the revised deadline.  

It is also worth noting that at the end of the last auction round (AR3) a judicial review was brought by Banks Group to challenge the exclusion of Pot 1 technologies (established technologies such as onshore wind and solar PV) from the CfD process. This review caused uncertainty over the CfDs signed in October 2019. It meant developers held off making any financial decisions on their projects in case the judicial review challenge was successful and the CfD scheme found to be invalid. In April 2020 however the judicial review was withdrawn because the Government agreed that Pot 1 technologies will be included within the next auction round, as we reported in our article Contracts for Difference Scheme Extended. This allows developers to proceed, but as a result developers are now behind on meeting their milestones as required under the CfD. On review the LCCC has determined that the Milestone Delivery Date, the end of the Target Commissioning Window and the Longstop Date will all be extended by 6 months. Further, if a developer can provide evidence that their project delay due to the judicial review is longer than six months they may be granted a further extension from the LCCC. This is good news for developers who can all now proceed with their projects and be able to meet their key date obligations under the CfDs without risk of penalty. 

LCCC Force Majeure guidance

On the 7 April 2020 the LCCC stated that it understands the potential impacts of Covid-19 may not yet be clear but clarified that the COVID-19 outbreak is, in LCCC’s view, capable of constituting a Force Majeure (FM) event for the purposes of the CfD. Usually if generators don’t meet their milestones under the CfD they are penalised. This clarity will be welcomed by generators in light of the potential and actual delays to construction and commissioning expected due to the Covid-19 pandemic. This clarification will most likely affect those generators who have plants which are still being built but are inevitably delayed or stalled due to the pandemic. That said, generators must still demonstrate that all other relevant elements of an FM claim are satisfied. LCCC reminded CfD generators that the conditions for granting FM relief includes the requirements for generators to use reasonable endeavours to mitigate the effects of the FM event and to comply with its obligations under the CfD as far as reasonably practicable. 

The LCCC has requested that any prospective claimants provide notice of any FM event to them as soon as reasonably practicable along with a brief explanation of their specific circumstances, it will then take a reasonable and pragmatic approach to each claim. LCCC has acknowledged that it may be some time before generators are able to fully assess and evidence how their projects have been impacted, especially for those which are still in the construction process, but notes it will work with the generators to assess impacts both now and those which develop over time. 

Comment

These developments are good news for both energy suppliers and renewable electricity generators. Suppliers will not have to pay a larger ESO payment this quarter and generators whose projects are still being constructed have had their deadlines relaxed. There are many calls for the UK government to implement a green economic recovery package following the Covid-19 pandemic and these measures show that the government is serious about continuing support for the renewable energy industry during these times.

 

Key Contacts

Richard Goodfellow

Richard Goodfellow

Partner, Head of Infrastructure, Projects & Energy Group
United Kingdom

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Paul Dight

Paul Dight

Partner, Energy and Utilities
United Kingdom

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