Renewables

This year All-Energy is coming to Glasgow for the first time, and no doubt the election will be a topic for discussion. But I know many Studio spotlightgoing to the conference are as interested in the details as the wider policy. The first CfDs have now been allocated – the question is what comes next? Incidentally, my colleague Sarah-Jane McArthur will be speaking on the topic of CfDs at All-Energy –covering lessons learned and a look forward to next CfD allocation round – it will be well worth a listen.

Once you had an RO accreditation, you had to go to some lengths to lose it. The same is not so true of a CfD. To keep it you need to keep up with your monthly progress reporting, pass the Milestone Requirement hurdle and achieve commissioning of your project in time (or at least not too far behind time) to name but a few. The RO was a statutory accreditation right. The CfD, by contrast, is a contract and contains all the usual – and some unusual – grounds of termination.

The first, and one of the most demanding, is the need to meet the Milestone Requirement within one year of entering into the CfD (MDD). If you don’t, your CfD can be terminated. There are two ways to achieve it.

First, you can spend 10% of the total project development cost of your project before the MDD. ‘Spend’ means money out the door and out of your control – liabilities, securities, probably even escrow arrangements don’t count. Only money spent on the generating assets and cables to the point of connection count – you don’t own the grid infrastructure you handsomely pay for so that doesn’t count. All in all, it’s a significant financial commitment. Note, the 10% figure is set out in the statute on a per technology per MW basis, it is not your actual forecast development cost.

If you don’t want to spend 10% of your project cost as early as this, you can alternatively satisfy a ‘commitments test’. The requirements for this test run to several pages in the contract so it is not straightforward. Essentially, though, it is the requirement is to hold, or have under contract, all rights, assets and funds required to develop the project.

The big question – and one without a clear answer right now – is whether this means financial close or something short of financial close. You certainly need to have signed a legally binding contract for, or incorporating, the supply of equipment. You must also show that you ‘have, or will have, sufficient financial resources’ to develop the project. Does ‘will have’ mean a legally binding agreement? Or will something short of a legally binding contract be sufficient to show that you ‘will have’ sufficient financial resources?

Deciding between the two tests is not easy. One thing though is clear – once you have a CfD you need to think not just about developing the project, but also how to satisfy the MDD test – and that might involve diverting from the normal development path.

We once again have a stand at All-Energy (H41) – come and visit us.

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Keith Patterson

Partner at Brodies LLP
Keith is a Partner in the Energy & Infrastructure Team and Co-Head of the Renewables Group. He advises developers, investors, lenders and public sector bodies on developing and financing low carbon projects, as well as M&A deals in the sector.
Keith Patterson

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