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18 | 7Th - 13Th FEbrUarY 2014 | UTILITY WEEK Finance & Investment Market view C ontracts for difference (CfDs) – which are being introduced as part of Electric- ity Market Reform (EMR) – will replace the Renewables Obligation (RO) as the sup- port regime for medium and large-scale renewable energy projects in the UK. The RO is being phased out from 2015 and will close completely to new applicants at the end of March 2017. A CfD is a 15-year contract between a renewable generator and CfD Counterparty Company Ltd (CfD Counterparty), a gov- ernment-owned limited liability company. Under the contract, CfD Counterparty will pay the generator the difference between an estimate of the market price for electric- ity (the reference price) and an estimate of the long-term price needed to bring forward investment in a given renewable technology (the strike price). If the reference price ever exceeds the strike price, the generator must repay the difference to the CfD Counterparty. So the generator should, in theory, receive the strike price for all the electricity it exports. However, that depends on the gen- erator's ability to obtain a power purchase agreement (PPA) to sell its electricity at the reference price. If it is unable to achieve the reference price for its generation under a PPA, its top-up payment from the CfD Counterparty will nevertheless be based on the reference price and therefore it will not achieve the full strike price. CfDs will be funded through a levy on all licensed suppliers in Great Britain and Northern Ireland, which will be raised by the CfD Counterparty. Further details of the CfD regime became clear on 6 December 2013 when the final CfD strike prices were published in the new National Infrastructure Plan (see table below), and on 19 December 2013 when the government published the EMR delivery plan alongside a policy paper on CfDs and revised CfD contract terms. The Energy Bill (which became the Energy Act on 18 December 2013) is the primary legislation that enables the government to introduce EMR, but the secondary legislation containing details of the individual elements (including CfDs) has yet to be draed. Strike prices In setting the final strike prices, the govern- ment made some slight adjustments to the dra strike prices published in July 2013 – upwards for anaerobic digestion, dedi- cated biomass with CHP, geothermal and hydro; downwards for energy-from-waste, landfill gas, onshore wind, sewage gas and large-scale solar PV. However, the industry appears to be broadly comfortable with the new pricing levels. The majority view seems to be that the slight drop in support for cer- tain technologies simply demonstrates the strength and maturity of the UK onshore renewables industry. The strike prices themselves have been based on the equivalent RO value, less an adjustment factor that reflects the greater subsidy certainty that a CfD gives compared with RO certificates (Rocs). The shorter sub- sidy term – 15 years for CfDs compared with 20 years for Rocs – is also factored in. Move to CfD competition The European Commission recently pub- lished its suggested approach to future state aid guidelines, which proposes a move to competitive, technology-neutral allocation of renewables support across EU member states. This will have implications for the EMR (including CfDs) as state aid clearance is required before implementation. The new guidelines could require the UK to move to a CfD competition for more established technologies. There is some concern within industry that solar PV is likely to be treated as an "established" technology (to which the new competitive allocation process would apply immediately) whereas offshore wind is not. Transition from RO to CfDs The Department of Energy and Climate Change (Decc) closed its consultation on the transition from the RO to CfDs on 25 Septem- ber 2013 and the formal response is awaited. As part of this, the government consulted on the transition from a Roc market to fixed- price Rocs and proposed that the fixed-price Roc might be introduced earlier than first planned. Originally, the fixed-price scheme was to replace the RO from 1 April 2027 and run until the RO end date of 31 March 2037. A further consultation, this time on CfDs – are we there yet? It's a long and winding road from the Renewables Obligation to contracts for difference. Clare King sets out where we've been and where we're going next. fInal strIke prICes, deCeMber 2013 strike price (£/MWh) technology 2014/15 2015/16 2016/17 2017/18 2018/19 Advanced conversion technologies 155 155 150 140 140 Anaerobic digestion >5MW 150 150 150 140 140 Biomass conversion 105 105 105 105 105 Dedicated biomass with CHP 125 125 125 125 125 Energy from waste with CHP 80 80 80 80 80 Geothermal 145 145 145 140 140 Hydro >5MW to <50MW 100 100 100 100 100 Landfill gas 55 55 55 55 55 Sewage gas 75 75 75 75 75 Offshore wind 155 155 150 140 140 Onshore wind >5MW 95 95 95 90 90 Solar PV >5MW 120 120 115 110 100 Tidal stream 305 305 305 305 305 Wave 305 305 305 305 305 Scottish islands onshore wind >5MW – – – 115 115