We hope you weren't spending too much of your holiday time getting used to the Contract for Difference (CfD) that was published by DECC in August last year, because just in time for the Christmas and New Year break, DECC published a major update to the CfD – all 394 pages of it.
The contract structure has now changed dramatically. It appears in two parts: a short CfD Agreement (a measly 28 pages) and the whopping CfD Terms and Conditions. The intention of Government is clear. The CfD Agreement contains the project-specific terms, and therefore will be tailored to each scheme, while the Terms and Conditions (the real nuts and bolts of the contract) are proffered as being written in tablets of stone and therefore not open for amendment.
Whether this is a successful strategy remains to be seen, but we think it highly unlikely that any generator will accept the terms as offered, and there will at least be a rather tortuous initial negotiation of the CfD before the market and Government settle on a position. Certainly, the project finance market's experience on PPP contract standardisation would bear this out, quite apart from the length and complexity of the CfD.
MacRoberts will be publishing a summary of the CfD in early course, but in the meantime some of the key changes from the August 2012 draft are as follows:
- The Milestone Requirement can be satisfied in one of two ways: either that the generator has spent 10% or more of the estimated total project costs, or the generator can provide evidence of progress toward timely commissioning
- Generators can amend the capacity of the scheme at the Milestone Delivery Date by up to 25%. In order to qualify for difference payments, generators need to deliver at least 95% of the revised capacity estimate, but provided they hit at least that level, they will qualify for the full strike price
- Several changes to the CfD Counterparty's rights to terminate, including extending remedy periods before termination can take effect
- No requirement for upfront credit support/collateral (for difference counter-payments by the generator). Instead, a three-strike system is introduced where collateral requires to be produced if the generator fails on a third warning for non-payment of the difference.
And to cap it all, Government has announced a further reduction in the strike prices for onshore wind. The 14/15 level had been proposed at £100 MWh, but has now been reduced to £95 MWh.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
