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UTILITY WEEK | 13TH - 19TH FEBRUARY 2015 | 19 Finance & Investment A ccording to Ofgem, the UK will need around £100 billion of capital investment in electricity infrastructure over the next decade. The Contracts for Difference (CfD) mechanism is designed to lower the government's cost of subsidising the decarbonisation of energy provision in the UK – but will it do that in practice? With Ofgem now in the appeal process for the first CfD subsidy auction, timescales for the allocation of CfDs to successful projects have not only been delayed but have also been a moving feast as regards bid dates. So we will have to wait to find out if at first sight a lower cost of subsidy for the government has been achieved. The real test for the cost of CfDs, however, will be whether the projects successful in the sealed bid auction process are ever built and take up their CfD allocations. To qualify to apply for a CfD, the developer only needs to have secured planning permission and a grid connection. While important, these do not give certainty a project will be fundable. Even if awarded a CfD, a project may still never reach operation for a range of project- and funding- related issues, not least being the "bankability" of the whole CfD mecha- nism itself. These are compounded if a CfD allocation is not taken up within one year of targeted commissioning, when the CfD strike price will degrade substantially. Given the immense costs of developing projects, especially those in "less-established" technologies such as offshore wind and biomass, developers will have to think carefully about development costs. Since investors generally will not look at projects until they are fully developed, what then is a suitable reward for a developer when a project may not ever get a CfD allocation at all? It is also unclear what happens to CfDs allocated to projects which subsequently fail to reach operation. Will there be any projects le to take up these allocations? With all this uncertainty, project developers in the CfD world may feel they are playing Russian roulette. The answer? Spending time with a patient and knowl- edgeable investor early on is the way for developers to ensure that the end project meets the investor's needs. We hope enough developers will have the stamina to progress CfD-based projects to fruition – if not, the gov- ernment may face reduced costs for the wrong reasons. Peter Bachmann, director, Scottish Equity Partners "Spending time with a patient investor early on is the way for developers to ensure that the end CfD project meets the investor's needs." Investor view Peter Bachmann "Even if awarded a CfD, a project may still never reach operation" SEVERN TRENT FIVE-YEAR SHARE PRICE (1 FEBRUARY 2009 - 1 FEBRUARY 2015) NATIONAL GRID FIVE-YEAR SHARE PRICE (1 FEBRUARY 2009 - 1 FEBRUARY 2015) SSE FIVE-YEAR SHARE PRICE (1 FEBRUARY 2009 - 1 FEBRUARY 2015) CENTRICA FIVE-YEAR SHARE PRICE (1 FEBRUARY 2009 - 1 FEBRUARY 2015) 2009 2010 2011 2012 2013 2014 2015 2200 2000 1800 1600 1400 1200 1000 800 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 1000 900 800 700 600 500 400 2200 2000 1800 1600 1400 1200 1000 460 420 380 340 300 260 220 2200 1900 960 860 1680 1480 310 260 Three-month share price Three-month share price Three-month share price Three-month share price