Mike Read, head of waste at Grant Thornton UK LLP discusses contracts for difference (CfD) and the challenges for developers of waste to energy projects in a foggy world…
If you are a developer of thermal waste treatment solutions these must feel like very challenging times. With the Autumn Statement came the announcement that the Renewable Heat Incentive (RHI) scheme wasn’t going to be cut, but that £690m will be taken from the available pot. So for the larger projects that didn’t get a CfD allocation in the first auction, or have missed the boat with the RO phase out, what next?
The CfD process brings significant challenges for developers of waste to energy projects. These come in preparing, bidding and then achieving milestones to trigger CfD payments, but also the little question of when the next auction will take place? The second auction planned for October 2015 was postponed and no new date has been announced.
This comes at a time when there is likely to be excess demand on the overall Levy Control Framework (LCF) budget from which the CfD funding comes. Amber Rudd announced at the Select Committee that “… EMR (Electricity Market Reform of which CfD is a main tool) has to be delivered within the framework of making sure we look after consumers’ bills.” Therefore when the next auction will actually be and what level of funds there will be to bid for is clearly uncertain.
“With the Autumn Statement came the announcement that the Renewable Heat Incentive (RHI) scheme wasn’t going to be cut, but that £690m will be taken from the available pot”
When we at Grant Thornton, working with Pöyry, undertook our independent evaluation of the roll out of EMR for DECC which was issued a couple of months ago, the key message was that the auction process was largely fit for purpose, subject to some tweaks, but the big concern was how much funds there would be for future rounds.
So, assuming that there is a future auction, what should you expect as a developer? Firstly, the costs of delivering a project to the stage where it meets the eligibility criteria will be significant and only guarantees you a place at the table, and not whether you will be fed. Then comes the auction and the bidding strategy. After one auction this is far from a more mature process and unlike the capacity market (the other main strand of EMR) it will continue to often be novice bidders, which will bring a further dynamic to the process.
Assuming as a developer you are successful in the auction… and you are not like me the morning after a charity auction thinking what price did I bid and trying to rapidly back pedal… then your only concern will be securing the debt financing and delivering the project in the timescales you said you would. So plain sailing from then on!…except the strike price is only certain assuming the underlying power prices that DECC have used to set the calculations are achieved (not something everyone is aware of), so hopefully that has been factored into your wider project economics assessment.
If you are not successful in the auction, then you could be left with a semi-developed project with no CfD. What next? Well hopefully you will have already modelled whether the economics stack up without CfD. In our experience projects can be delivered without CfD’s but depending on the other variables, the returns are definitely marginal.
So we are clearly facing an uncertain time. It is more important than ever for clear and robust financial assessments of projects to be done as early as possible to ensure that the next steps are undertaken with clear knowledge of the potential implications.