Life after ROCs: what is in store?

Neasa Quigley, head of the Energy Team at Carson McDowell, discusses the impact of the Contracts for Difference regime on renewable energy developers.

The closure of the current Renewable Obligation (RO) to all new renewable projects on 31 March 2017 has been well signalled. The first allocation round for generators in Great Britain under the new Contracts for Difference regime (CfDs) introduced as part of the electricity market reform will open this month (October 2014). However, due to proposed reforms to the SEM, generators in Northern Ireland will have to wait until 2016 before they can participate. In this article, I will highlight some of the issues involved in the change from RO to CfDs as well as flagging some of the Northern Ireland-specific risks for developers.

The process for participating in CfDs is based on allocation rounds. It is expected that “established” technologies, such as on-shore wind, solar and energy from waste with CHP will be run on a competitive basis (assuming applications exceed the available budget). There is still uncertainty around the process, such as when they will take place and how much of the available budget will be allocated.

In order to be eligible to even take part in the allocation process, a generator will need to meet certain criteria which includes securing planning permission, accepting a grid connection offer and providing project specific details (such as location, estimated installed capacity and target commissioning date).

This marks a change from the current RO system, where once a project meets the relevant accreditation criteria, it is entitled as a matter of law to receive ROCs. Under CfDs, a project has no statutory guarantee of being allocated a CfD (even if it meets the criteria), especially if it is using an “established” technology and is subject to price competition. In this respect, the CfD regime introduces more uncertainty for the generator, particularly considering that obtaining planning and grid are costly processes. Accordingly, the risk profile for a developer or generator of obtaining support is increased for projects under the CfD regime.

Currently under the RO, the generator takes the risk that a ROC that has been issued in respect of electricity generated may be revoked or that the accreditation for the ROCs is withdrawn. Under the CfD regime, termination of support will remain a generator risk but the risks are enhanced as there are more circumstances in which the CfD can be terminated. These include a right for the CfD counterparty to terminate if the project is not delivered by the prescribed long-stop date. This will be of concern to Northern Ireland developers particularly given the uncertainty of grid delivery.

Concern has been raised by the renewable energy community in Northern Ireland about the difference in treatment between developers in Great Britain and Northern Ireland as regards transition to the new regime. In summary, developers in Great Britain will have an overlap period of 30 months during which developers they can fall back on the RO if they have are unsuccessful in the CfD allocation round. In Northern Ireland, that period is reduced to six months.

The introduction of the I-SEM at the end of 2016 will create further uncertainty in the market and will have a direct impact on the details of the CfD contract and the all important market reference price. Indeed, the virtually simultaneous target timetable for the introduction of the I-SEM and CfDs in Northern Ireland, would suggest that the closure of the RO in 2017 is unduly harsh on Northern Ireland developers.

Although the CfD regime is designed to provide sufficient confidence for investors to commit to the United Kingdom’s renewable energy generation targets, it appears to introduce more risk for developer, particularly so in Northern Ireland.

Neasa Quigley is a partner with Carson McDowell LLP
Murray House
Murray Street
Belfast, BT1 6DN
Tel: + 44 (28) 9024 4951
Email: neasa.quigley@carson-mcdowell.com
Web: www.carson-mcdowell.com