UK Contracts for Difference Allocation Round 2

2017Round 2Pure pricecfd two way3 winners3.2 GW3 won

Also known as: AR2, UK AR2, CfD AR2, UK CfD AR2, Allocation Round 2, Second Allocation Round, Contracts for Difference Allocation Round 2, Contracts for Difference (CfD) Allocation Round 2, CfD Allocation Round 2, Second CfD Allocation Round, 2017 CfD Allocation Round 2

Read the full analysis →(60 min read)

Framework SnapshotAwarded 11 Sept 2017

AR2 opened on 3 April 2017 after AR1 had established offshore-wind clearing prices around GBP 114-120/MWh, so most observers expected further compression rather than the step-change that followed. Bidding was shaped by a deep consented Crown Estate Round 3 and Greater Wash pipeline, rapid turbine scaling into the 8 MW-plus class, and post-Brexit sterling depreciation against a strong BEIS value-for-money narrative. The immediate policy frame was the November 2016 Autumn Package (ASP Methodology, Supply Chain Plan Guidance and the fuelled-tech call for evidence), followed by the 1 February 2017 Government Response and SI 2017/112 in force from 1 March 2017, with European Commission State Aid approval SA.44475 arriving mid-round on 26 July 2017.

Competition

Bidders (preQ → bid → won)

Format

Sealed · single-round

Prize / Award

Award

Contract for Difference

Capacity

3.2 GW

Target delivery

1 year for all AR2 technologies under the Standard Terms Notice; the window may be extended day-for-day for specified delay events.

Project stage at bidding

post permit

Commercial terms

Price

GBP 57.5–74.8/MWh (2012 real)

Payment duration

15 years

Indexation

CPI

Risk allocation

Site investigation

developer

Offshore transmission

developer

Negative prices

For intermittent technologies, 6 or more consecutive negative-price settlement hours create an Intermittent Rolling Negative Price Period during which the Difference Amount is zeroed for that block; baseload technologies use the corresponding rolling-window rule in half-hour units.

Wake-loss support

—

Curtailment policy

Curtailment compensation is available under the Qualifying Curtailment / Qualifying Partial Curtailment provisions in the Standard Terms.

Non-delivery penalties

AR2 uses a non-delivery disincentive in termination form rather than a financial penalty: failure to meet the Milestone Requirement or to satisfy Operational Conditions Precedent by Longstop can lead to termination without payment.

1Prize Composition

Award Components

Contract for Difference(15y)— 15 years from the earlier of the Start Date and the last day of the Target Commissioning Window.

15-year two-way FiT Contract for Difference awarded to successful applicants under AR2. The CfD runs to the Specified Expiry Date, defined as the 15th anniversary of the earlier of the Start Date and the last day of the Target Commissioning Window.

Site Investigation: developer

State pre-investigated site: No

Transmission Build: developer

Delivery Obligations

Milestone Requirement Notice — No later than 12 months after the CfD Agreement Date. The generator must evidence either spend of at least 10% of Total Project Pre-Commissioning Costs or compliance with the Project Commitments.

→ If the milestone requirement is not met, LCCC may terminate the contract before Start Date; no termination payment is due on this pre-Start Date termination route.

Operational Conditions Precedent — Operational Conditions Precedent must be fulfilled or waived before the Longstop Date.

→ If Operational Conditions Precedent are not fulfilled or waived by the Longstop Date, LCCC may terminate the contract.

Start Date Notice — After the final Operational Condition Precedent, the generator must submit a Start Date Notice within 10 Business Days; the proposed Start Date must be no earlier than the first day of the Target Commissioning Window and no later than the Longstop Date.

→ An ineffective Start Date Notice does not bring the contract into payment; a further valid notice must be submitted subject to the contract rules.

Final Installed Capacity Notice — Following Start Date, and in any event no later than 10 Business Days after the Longstop Date, the generator must submit a Final Installed Capacity Notice with supporting information.

→ If no valid notice is given by the deadline, Final Installed Capacity may be deemed to be 80% of the Installed Capacity Estimate, and failure can also become a termination event.

TCW: 1 year for all AR2 technologies under the Standard Terms Notice; the window may be extended day-for-day for specified delay events.

Late delivery: AR2 uses a non-delivery disincentive in termination form rather than a financial penalty: failure to meet the Milestone Requirement or to satisfy Operational Conditions Precedent by Longstop can lead to termination without payment.

Extension grounds: Force Majeure day-for-day extensions.; Delay by a Transmission System Operator, Transmission Licensee, Licensed Distributor or OFTO in required reinforcement or connection works, except where caused by the generator or its representatives.

2Competition Mechanism

Strike Price bid(GBP/MWh (2012 prices))↓ Lower wins

Phases: final binding (binding)

Bid Format

Single-round sealed-bid pay-as-clear auction. Qualifying applications compete on Strike Price, with original sealed bids plus permitted Flexible Bids; all successful applications in a given Delivery Year receive that Delivery Year's clearing price, capped at the applicable Administrative Strike Price.

sealedsingle-round1 rounds

Reserve: — Technology- and Delivery-Year-specific Administrative Strike Prices act as the bid cap / reserve-price ceiling. For Offshore Wind these were GBP 105/MWh for 2021/22 and GBP 100/MWh for 2022/23.

Selection Envelopes

Pot 2, Delivery Year 2021/22maximum · monetary budget290,000,000 GBP per delivery year (2011/12 prices)own clearing price

Pot 2, Delivery Year 2022/23maximum · monetary budget290,000,000 GBP per delivery year (2011/12 prices)own clearing price

Dedicated Biomass with CHP + Advanced Conversion Technologies + Anaerobic Digestionmaximum · capacity150 MW

3Qualifying Gates

eligible generator statusbinary predicate

Applicant must qualify as an Eligible Generator under the Contracts for Difference (Definition of Eligible Generator) Regulations 2014 and must not apply in respect of an already-commissioned generating station except where the specific conversion exception applies.

company incorporation evidencebinary predicate

Applicant must provide incorporation and registration evidence, including UK Certificate of Incorporation, VAT registration, or non-UK equivalent documentation as applicable.

applicable planning consentsbinary predicate

Applicant must provide signed and dated planning consent evidence consistent with the project's stated capacity, technology and location, or show that the consent does not apply.

connection agreementsquantitative minimum≥75 percent of Initial Installed Capacity Estimate or equivalent qualifying connection capacity

Applicant must show a qualifying grid connection arrangement. For direct transmission connection, Transmission Entry Capacity must be at least 75% of the Initial Installed Capacity Estimate; equivalent thresholds apply for other connection pathways, with separate phase evidence for phased offshore wind.

supply chain plan statementbinary predicate

Projects of 300 MW or more must hold a valid BEIS Supply Chain Plan Approval Certificate before the main application window opens. The qualification outcome is binary even though the underlying SCP assessment uses scored criteria.

non receipt of other government supportbinary predicate

Applicant must confirm that the project is not in receipt of incompatible support such as NFFO, Scottish Renewable Obligation, Renewables Obligation accreditation where excluded, or Capacity Market support, subject to stated exceptions.

target commissioning date within delivery yearbinary predicate

The Target Commissioning Date must fall within the Delivery Year specified in the application.

structural attribute rulesformula based

Composite structural eligibility rules: phased offshore wind units must be no more than 1,500 MW in total, have a first phase of at least 25% of total capacity, have first-phase Target Commissioning Date no later than 31 March 2023, final phase no later than 2 years after the first phase, and no more than 3 phases; AD projects must be above 5 MW; EfW with CHP projects are excluded where an RHI accreditation application has been made.

technology specific eligibility conditionsbinary predicate

AR2 eligibility is limited to Offshore Wind, Advanced Conversion Technologies, Anaerobic Digestion (>5 MW), Dedicated Biomass with CHP, Wave, Tidal Stream and Geothermal. Remote Island Wind and Floating Offshore Wind were not eligible at AR2; ACT did not yet have the later physical-separation requirement; Biomass with CHP / EfW with CHP used the then-current CHPQA efficiency standard rather than AR3's later 70% threshold.

4Scoring Dimensions

Strike Priceprice100%lower wins

Method: quantitative formula

Unit: GBP/MWh (2012 prices)

5Tiebreak Chain

closest envelope fit — Where tied applications cannot all succeed under the relevant maxima and/or budget constraint, the Delivery Body selects the application or combination of applications that comes closest to fulfilling the relevant envelope in the final budget-profile year without exceeding the applicable constraint.
electronic random assignment — If two or more applications or combinations are equally close under the relevant Rule 18 test, the Delivery Body chooses at random using an electronic random assignment process.

6Revenue Mechanism

Instrumentcfd two way

Directionbidirectional

Term15 years

Term StartThe support term runs to the 15th anniversary of the earlier of the Start Date and the last day of the Target Commissioning Window.

Indexationcpi — Annual CPI indexation in 2012-price terms on the Indexation Anniversary under Standard Terms Version 2.

Reference PriceIntermittent Market Reference Price for Offshore Wind, Wave and Tidal Stream; Baseload Market Reference Price for ACT, AD, Biomass with CHP and Geothermal.

Price ComputationPer settlement unit under the Standard Terms. For auction valuation, Schedule 2 uses published yearly Reference Prices together with Load Factor, YR1F, TLM, RQM and CHPQM parameters.

Rate Cadenceper settlement unit

Payment Cadencemonthly in arrears

Negative Price RuleDeveloper not paid (after 6h) — For intermittent technologies, 6 or more consecutive negative-price settlement hours create an Intermittent Rolling Negative Price Period during which the Difference Amount is zeroed for that block; baseload technologies use the corresponding rolling-window rule in half-hour units.

Curtailment CompensationCurtailment compensation is available under the Qualifying Curtailment / Qualifying Partial Curtailment provisions in the Standard Terms.

7Authorities & Jurisdiction

Department for Business, Energy and Industrial Strategypolicy ownerscheme ownernational

Legal basis: Energy Act 2013; Contracts for Difference (Allocation) Regulations 2014 as amended. BEIS issued the Allocation Round Notice and Budget Notice on 2017-03-13 and ran the Supply Chain Plan approval process.

National Griddelivery bodynational

Legal basis: Acted as the EMR Delivery Body under the CfD (Allocation) Regulations 2014 and the Allocation Framework for AR2.

Low Carbon Contracts Company Ltdcounterpartynational

Legal basis: Energy Act 2013 and Contracts for Difference (Standard Terms) Regulations 2014 as amended; acted as CfD Counterparty for awarded contracts.

Gas and Electricity Markets Authorityappeals authoritynational

Legal basis: Qualification appeals authority under the CfD (Allocation) Regulations 2014.

Independent Auditorindependent auditornational

Legal basis: Regulation 36 process-audit role for valuation and allocation calculations.

European Commissionstate aid regulatorsupranational

Legal basis: EU State Aid approval SA.44475 on 2017-07-26 under the pre-Brexit State Aid regime.

8Process & Timeline

Process Stages

1. Consultation on contract and regulatory changes — BEIS consulted on CfD contract and regulation amendments that fed into the AR2 contract and rule package.2. Autumn Package publication — BEIS published the ASP Methodology, Supply Chain Plan Guidance and the fuelled/geothermal call for evidence that shaped AR2's pre-round settings.3. Government Response and implementation SI — The February 2017 Government Response crystallised anti-cumulation, storage and other contract changes, implemented by SI 2017/112 coming into force on 1 March 2017.4. Final round documents and notices published — Final Allocation Framework, Budget Notice, Accompanying Note, Standard Terms Version 2, Generic Agreement and associated statutory notices were published on 13 March 2017.5. Supply Chain Plan approval process — Projects at or above the 300 MW threshold had to secure a valid BEIS Supply Chain Plan Approval Certificate before the main application window.6. Main application window — Applicants submitted CfD applications during the April 2017 application window.7. Qualification assessment — National Grid assessed applications against Schedule 4 qualification requirements and phased-offshore-wind structural rules.8. Application valuation — National Grid valued qualifying applications against the monetary budget and other applicable constraints using the Schedule 2 valuation formula.9. Review and appeals window — Non-qualifying applicants could seek a Non-Qualification Review and then appeal to GEMA within the Rule 8 timetable.10. Notice of Auction and sealed bid submission — If constrained allocation was required, National Grid issued a Notice of Auction and invited sealed bids and permitted Flexible Bids.11. Allocation, tiebreak and audit — National Grid applied maxima and budget rules, ran the pay-as-clear auction, used Rule 18 tiebreakers if needed, and the Independent Auditor audited the calculations before final review.12. CfD notifications and results publication — Successful applicants received CfD Notifications and BEIS published the AR2 results on 11 September 2017.

Timeline Events

11 May 2016consultation launched[Department for Business, Energy and Industrial Strategy]— Launch of the consultation on CfD contract and regulation amendments that fed into AR2's contract and rule changes.

1 Jul 2016beis formedmonth[UK Government]— Formation of BEIS, replacing DECC as the lead department for AR2 policy.

9 Nov 2016asp methodology published[Department for Business, Energy and Industrial Strategy]— Publication of the AR2 ASP Methodology underpinning technology-specific Administrative Strike Prices.

9 Nov 2016supply chain plan guidance published[Department for Business, Energy and Industrial Strategy]— Publication of AR2 Supply Chain Plan Guidance; later updated on 2016-11-25.

1 Nov 2016fuelled and geothermal call for evidencemonth[Department for Business, Energy and Industrial Strategy]— Call for evidence on fuelled and geothermal technologies, later reflected in AR2's 150 MW cumulative maxima on fuelled technologies.

1 Feb 2017government response published[Department for Business, Energy and Industrial Strategy]— Government Response on CfD contract changes published, formalising anti-cumulation, foreseeable Change in Law clarification, co-located storage treatment and related amendments.

1 Mar 2017statutory amendment in force[UK Government]— SI 2017/112, the Contracts for Difference (Standard Terms) (Amendment) Regulations 2017, entered into force.

13 Mar 2017final round documents published[Department for Business, Energy and Industrial Strategy]— Final Allocation Framework, Budget Notice, Accompanying Note, Standard Terms Version 2, Generic Agreement and associated statutory notices were published together.

3 Apr 2017application window opened[National Grid]— AR2 main application window opened.

21 Apr 2017application window closed[National Grid]— AR2 main application window closed.

16 May 2017non qualification review request deadline[Applicants]— Rule 8.1(a) Non-Qualification Review Request Date.

13 Jun 2017appeals deadline[Applicants]— Rule 8.1(b) Appeals Deadline Date.

26 Jul 2017state aid authorisation[European Commission]— European Commission approved the CfD scheme under State Aid case SA.44475.

11 Sept 2017results published[Department for Business, Energy and Industrial Strategy]— BEIS published the AR2 results at 07:00, timed to coincide with National Grid notifying applicants.

9Market Context

Policy Targets in Force at Open

UK Climate Change Act 2008 — 80% by 2050 target80 percentby 2050

Electricity Market Reform (EMR) Delivery Plan 2013

UK Modern Industrial Strategy green paper, November 2016

Regime Events

May 201611 May 2016 CfD contract and regulation amendments consultation launchconsultation launch

Jun 2016Brexit referendumpolitical macro context

Jul 2016BEIS formationmachinery of government change

Nov 20169/25 November 2016 Supply Chain Plan Guidance publicationguidance publication

Nov 2016November 2016 call for evidence on fuelled and geothermal technologiescall for evidence

Feb 20171 February 2017 Government Responseregulatory decision

Mar 20171 March 2017 SI 2017/112 in forcestatutory amendment

Jan 2016SI 2016/1053 and SI 2016/1246statutory amendment

Jul 201726 July 2017 EU State Aid scheme SA.44475 approvalstate aid authorisation

Nov 20169 November 2016 ASP Methodology publicationmethodology publication

Narrative ReferenceAR2 opened on 3 April 2017 after AR1 had established offshore-wind clearing prices around GBP 114-120/MWh, so most observers expected further compression rather than the step-change that followed. Bidding was shaped by a deep consented Crown Estate Round 3 and Greater Wash pipeline, rapid turbine scaling into the 8 MW-plus class, and post-Brexit sterling depreciation against a strong BEIS value-for-money narrative. The immediate policy frame was the November 2016 Autumn Package (ASP Methodology, Supply Chain Plan Guidance and the fuelled-tech call for evidence), followed by the 1 February 2017 Government Response and SI 2017/112 in force from 1 March 2017, with European Commission State Aid approval SA.44475 arriving mid-round on 26 July 2017.

Cross-Axis Structures

Financial Parameter Links

Administrative Strike Price (ASP)

Technology- and Delivery-Year-specific cap set under the AR2 ASP Methodology; bids could not exceed the applicable ASP and clearing prices were capped at the ASP.

Axis 2 bid capHard bid-price ceiling by technology and Delivery Year.

Overall Monetary Budget (per Delivery Year)

GBP 290 million per Delivery Year in 2011/12 prices, CPI-rebased by inflator 1.0193 to about GBP 295 million in 2012 prices for valuation.

Hard selection envelope applied separately to 2021/22 and 2022/23.

Reference Price

Budget impact = (Strike Price − Reference Price) × Load Factor × YR1F × Capacity × (Days × 24) × (1 − TLM) × RQM × CHPQM.

CPI rebasing inflator

2011/12-price budget × 1.0193 = 2012-price valuation budget.

Relationships & Sources

Preceded By1 auction

Followed By5 auctions

Source Documents10 documents

Auction Results (3)

Winner	Site/Lot	Category	Awarded MW	Current MW	Price	Total Value	Delivery	Term	Mechanism	Signed	Offer	Current Status
Triton Knoll Offshore Wind Farm Limited	Triton Knoll Offshore Wind Farm	Offshore Wind	860 MW	847.5 MW	GBP 74.75/MWh	—	2021	—	auction clearing	—	—	Live
Breesea Limited	Hornsea Project 2	Offshore Wind	1,386 MW	1,358.24 MW	GBP 57.5/MWh	—	2022	—	auction clearing	—	—	Live
Moray Offshore Windfarm (East) Limited	Moray Offshore Windfarm (East)	Offshore Wind	950 MW	937.602 MW	GBP 57.5/MWh	—	2022	—	auction clearing	—	—	Live