Contracts for Difference: AR7 / 7a Qualification Round Comes to a Close

Friday 26 September marks the end of the AR7/AR7a qualification period, and applicants have now been notified of NESO’s initial assessment. 

Good news for some – those who have qualified for participation in AR7/7a will now wait for DESNZ to publish its Contract Budget Notice and issue a Notice of Auction, which will inform those eligible applicants of the sealed bid window. The earliest possible date for publication of both is 6 October (if no appeals are lodged by unsuccessful applicants). 

For those who have not qualified in the first instance, no need to despair: non-qualifying applicants will have the opportunity to request a Tier 1 appeal between 29 September – 3 October asking NESO to review its decision on qualification status. The result of NESO’s decision on appeal can be expected on 17 October. Applicants that still fail to qualify following a Tier 1 appeal will then be able to lodge a Tier 2 appeal between 20 – 24 October, which escalates the review of their application to Ofgem. Ofgem will then return its decision on 28 November. 

Next Steps 

If you have qualified, you can be proactive by starting to think about your bid and reviewing the terms of the CfD that you may soon enter into with the LCCC. 

If you have not qualified, you should consider lodging an appeal. It is worth noting that no new evidence can be adduced at this stage; for example, if you have failed to qualify because your grid connection offer was not countersigned but it has since been countersigned, you will unfortunately not be able to submit the countersigned offer to NESO.  

If you have any questions regarding the AR7/7a process, whether you want to better understand the terms of the CfD you may sign in late December / early January, or whether you are looking to lodge an appeal, please do not hesitate to get in touch.

If you are not a participant in AR7/7a but would like to better understand the CfD scheme, we invite you to read our short explainer article below.

What is the CfD scheme?

CfDs encourage investment in clean energy as they shield generators from fluctuating market prices. Entering into a long-term agreement with the government-owned Low Carbon Contracts Company (“LCCC”) guarantees the generator a fixed price per unit of electricity generated (a ‘strike price’). This is set by auction during the Allocation Round and remains fixed for the duration of a CfD subject to annual index-linked adjustments.

The CfD scheme is even more attractive to developers of fixed and floating offshore wind, as the Clean Industry Bonus (CIB) offers additional CfD revenue support in exchange for investment in more sustainable supply chains. Due to the success of the first round of CIB, with £544 million of investment allocated to support the offshore wind supply chain, the government is considering expanding the CIB to hydrogen and onshore wind.

How do CfDs interact with Corporate PPAs?

CfDs and Corporate PPAs both offer long term revenue certainty to generators and are mostly seen as complementary routes to market. Being government-backed, CfDs offer a level of security, with limited credit risk and often longer tenors, but a generator must go through a highly competitive auction process which only occurs once per year. Corporate PPAs, on the other hand, are bespoke commercial arrangements that can be negotiated and entered into at any time of year.

However, we understand from recent conversations with clients that the announcement of CfD allocation windows can make some counterparts reluctant to engage in Corporate PPA negotiations until the allocations are announced. This is to avoid what they perceive as wasted time and money on PPA negotiations only for the generator to be granted a preferable CfD. Now that the government CfD scheme is a yearly occurrence, it will be interesting to see whether this has a cyclical effect on the Corporate PPA market.

How we can help

At Bird & Bird, we advise clients seeking to secure a CfD and can guide you through each step of the application and auction process. If you have questions regarding any stage of the CfD allocation process – or similar processes such as the Capacity Market – please do not hesitate to get in touch.