Contracts for difference (CFD) scheme consultation – updates to supply chain plan policy

The post below was first published on our Energy blog.

BEIS has published a further consultation on amendments to the CfD scheme ahead of the CfD Allocation Round 4 planned for late 2021.

This consultation sets out in further detail proposed amendments to the CfD arrangements in relation to Supply Chain Plans that aim to align the focus of Supply Chain Plans with the Government's Industrial Strategy (in particular supporting regional growth), increase the monitoring of developers' delivery of supply chain commitments, and strengthen the consequences of non-compliance.

Responses are invited by 18 January 2021.

Please see here our previous update on BEIS's proposed amendments to the CfD scheme for Allocation Round 4.

Supply Chain Plans

Developers of projects with a capacity of 300MW or more in previous Allocation Rounds were required to obtain a supply chain statement from BEIS approving a Supply Chain Plan submitted in respect of their generating station, as part of the CfD application process.

BEIS's focus to date has been on the development of competition, innovation, and the development of skills in the supply chain.

Applicants were required to provide Supply Chain Plans, in the form of a written report, setting out amongst other things:

• Details of how the project will encourage broader supply chains and competitive procurement processes.
• Details of how the project will support new technology, methods or processes.
• An assessment of any skills gap during the lifetime of the project and a plan for training workforces to fill any gap.

Applicants awarded a CfD have their Supply Chain Plans published and monitored by BEIS – BEIS may take into account an applicant's failure to implement a Supply Chain Plan when considering any subsequent Supply Chain Plan submitted by that applicant (or a related consortium) in a future CfD Allocation Round.

Industrial Strategy and policy drivers

BEIS's Industrial Strategy, published in 2017, sets out the Government's ambitions to boost productivity and earning power throughout the UK. Key objectives of the Industrial Strategy relate to research and development, skills and training of workforces, improving infrastructure and boosting regional economies.

In its previous consultation in March 2020, BEIS noted that the Supply Chain Plan policy required fundamental change to align with its Industrial Strategy (in particular supporting regional growth and boosting productivity) as well as its commitment to achieving net zero emissions by 2050.

BEIS therefore proposes that going forwards Supply Chain Plans will focus on:

• Business Environment - promoting competitive procurement processes that broaden supply chains, reducing costs and carbon footprints, removing barriers to entry for local suppliers, and developing and increasing the productivity, competitiveness, and capacity of businesses and suppliers, directly or through alliances.
• Ideas - bringing innovation through nurturing and commercialising innovative technologies to create more efficient equipment, improved installation methods and new types of procurement and contracting strategies, which reduce the costs of projects and overcome the technical challenges of renewable electricity generation.
• Infrastructure - removing barriers and increasing investment by encouraging investment in infrastructure that broadens the opportunities for low carbon electricity generation and increases the capabilities of local supply chains to meet the requirements of new technologies.
• People - developing a diverse skilled workforce and increasing local employment opportunities by supporting the training and transitioning of the workforce to attain the skills needed for low carbon electricity generation, in ways that minimise skill shortages, increase productivity, achieves diversity, and is ethical and safe.
• Place - creating local opportunities, supporting communities and strengthening the local economy of regions close to low carbon electricity generation projects by developing competitive local supply chains, infrastructure and skills, aligning with local development strategies and engaging with communities and universities.

It is proposed that the Supply Chain Plan application will comprise a questionnaire relating to the five elements above.

Proposed process for Allocation Round 4

As noted above, BEIS had previously stated that it wished to strengthen the compliance process in relation to Supply Chain Plans. The process proposed by BEIS now involves:

1. Generators of projects with a capacity of 300MW or more submitting a Supply Chain Plan application (by way of questionnaire) to BEIS before an Allocation Round in order to be eligible to participate in the Allocation Round.
2. Supply Chain Plan commitments being monitored by BEIS after CfD signature on a regulator basis (at least six-monthly).
3. Generators submitting an Updated Supply Chain Plan near to the Milestone Delivery Date (18 month after CfD signature) for review by BEIS, who will provide feedback on status of compliance.
4. Generators submitting a Supply Chain Implementation Report before commission of the facility. If the report is passed, a Supply Chain Implementation Report certificate is provided by BEIS.
5. Obtaining the Supply Chain Implementation Report certificate being a new CfD Operational Condition Precedent required before any CfD payments may be made. Failure to fulfil this condition precedent may lead to reduction in the CfD payment term, or ultimately termination of the CfD contract if the condition is not satisfied before the CfD Longstop Date.

BEIS has published new draft guidance reflecting this strengthened process, and plans to consult on the new draft Supply Chain Plan questionnaire shortly.