Out-Law News | 27 May 2021 | 3:39 pm | 3 min. read
The UK government will have the ability to withdraw or terminate a contract for difference (CfD) if a developer fails to deliver an acceptable supply chain implementation statement (SCIS) under changes to the renewables auction scheme.
The government has confirmed several changes to be made to supply chain plans under the CfD scheme for the generation of low carbon electricity. In its response to a consultation on the amendments (36 page / 284KB PDF), the Department for Business, Energy and Industrial Strategy said the assessment of a developer’s delivery of supply chain commitments would be brought forward until shortly after the project’s milestone delivery date.
The business secretary will gain new powers to pass or refuse a supply chain implementation statement (SCIS), and the government is introducing a new operational condition precedent which could see the termination of a CfD if an SCIS is not provided to the Low Carbon Contracts Company before the 'longstop date' set out in a developer's CfD .
Energy law expert James Todd of Pinsent Masons, the law firm behind Out-Law, said the introduction of the operational condition precedent would not be popular within the offshore wind sector.
“The government’s confirmation that it will implement this proposal in the consultation response is not surprising because more stringent supply chain requirements for CfDs were signposted in the Energy White Paper as part of the government’s push to increase UK employment opportunities in the offshore wind manufacturing sector,” Todd said.
“In some respects, it is encouraging that the consultation response has sought to assuage industry concerns about developers having CfDs withdrawn or terminated if the government’s assessment concludes that supply chain commitments are inadequate by making a change to the timing of that assessment,” Todd said.
“With that assessment now intended to take place shortly after a project’s milestone delivery date, developers should have a clearer idea of when they will receive confirmation as to whether or not their supply chain implementation statements have been approved. It is hoped that this will enable them to time their final investment decisions, and if necessary, to tailor their construction contracts, based on a clear timeline. Supply chain assessment will therefore effectively act as a ‘stage gate’ in the process,” Todd said.
Todd said the requirement for an application by a developer for an SCIS to be processed within 60 days significantly reduced the risk of developers being caught in a limbo period where they cannot proceed to a final investment decision or commence construction while a decision is awaited.
However, he said questions remained about how statements would be assessed and how their implementation by developers will be monitored and enforced on an ongoing basis.
The government has also sought views, in a separate consultation (19 page / 326KB PDF) on the supply chain plan questionnaire, on a proposal to re-orientate the current supply chain plan requirements for the CfD regime to more closely track the principles underpinning the Industrial Strategy. These include removing barriers for entry to local suppliers, increasing capability and competitiveness of local supply chains, supporting local employment and generally creating local economic opportunities.
Todd said the response to this consultation should shed further light on the SCIS assessment methodology.
The government said it was considering the introduction of a penalty charge that could be applied to projects not meeting supply chain commitments, although it is not introducing the charge ahead of the fourth CfD allocation round later this year.
“While such a proposal would itself cause consternation in the sector, it may be that this could serve as a less severe sanction which could be applied to developers whose projects are on the borderline in terms of the quality of their supply chain implementation statements as an alternative to the 'nuclear option' of withdrawing or terminating a project’s CfD,” Todd said.
The consultation response is part of ongoing efforts by the UK government to stimulate further UK supply chain activity. Energy market regulation expert Ronan Lambe of Pinsent Masons said another example was the Offshore Wind Sector Deal, which included commitments from the government and the offshore wind sector to increasing UK content in domestic projects from 50% to 60% and to increase exports fivefold to £2.6 billion by 2030.
“The government has identified improving UK industry and supply chain activity as a key priority alongside the ongoing push towards net zero,” Lambe said.
“Following the UK’s exit from the EU on 31 December 2020, and with the development and implementation of a subsidy controls framework (which is a requirement under the Trade and Cooperation Agreement) still being considered, the government may feel emboldened to push harder for involvement of local supply chains than had been the case when it remained subject to the EU state aid regime,” Lambe said.
Lambe said the government would also be “keenly aware” that it needed to support rapid deployment and value for money to meet the Energy White Paper commitment of deploying 40GW of offshore wind by 2030.
“It must therefore balance its support for local supply chain with its need to deliver national objectives in the years ahead,” Lambe said.
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