CfD Supply Chain Plans – update on consultation

The post below was first published on our Energy blog.

The UK’s Department for Business, Energy and Industrial Strategy (BEIS) has published a response to consultation on its proposed amendments to the CfD scheme in relation to Supply Chain Plans ahead of the CfD Allocation Round 4 planned for late 2021.

This follows a second consultation paper issued by BEIS in November 2020. Please see here for our previous blog post on BEIS’s proposals and the policy background.

Initial process proposed for Allocation Round 4

As noted in our previous update, BEIS wishes to strengthen the compliance mechanisms in relation to CfD Supply Chain Plans to align this policy with its wider Industrial Strategy and net zero ambitions (in particular its plans to support regional growth).

The process originally proposed by BEIS in November would involve:

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. BEIS has separately consulted on the form of questionnaire, available here.
2. Supply Chain Plan commitments being monitored by BEIS after CfD signature on a regular basis (at least six-monthly).
3. Generators submitting an Updated Supply Chain Plan near to the Milestone Delivery Date (the deadline by which projects must prove delivery progress by providing evidence of spend, proposed to be extended from 12 to 18 months after CfD signature) for review by BEIS, who will provide feedback on status of compliance.
4. Generators submitting a Supply Chain Implementation Report before commissioning 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 consultation response

BEIS has decided to introduce a new CfD Operational Condition Precedent relating to the Supply Chain Plan implementation, giving rise to a potential termination right if this is not satisfied before the CfD Longstop Date, on the basis that BEIS believes this is the most effective means of ensuring that generators deliver on supply chain commitments.

However, BEIS has recognised the concerns raised by stakeholders that the proposed timing of the assessment by BEIS would be too late in the process, as significant investment would have already been committed by the commissioning stage. In light of the concerns that this might affect the bankability of projects and increase the cost of capital, BEIS has decided that the assessment of the delivery of Supply Chain Plans will be brought forward closer to the Milestone Delivery Date. This timing, they believe, should better coincide with when generators generally take final investment decisions and decisions on their main supply chain contract packages.

BEIS have also amended the proposed process so that generators will not need to submit a Supply Chain Implementation Report for approval, although they will still be required to apply for a Supply Chain Implementation Statement from the Secretary of State in relation to the delivery of their Supply Chain Plan, which is intended to serve the same purpose.

To further address timing concerns, BEIS proposes that if the Secretary of State has not given a notice to a generator within 60 working days of receiving an application for a Supply Chain Implementation Statement, the application will be deemed to have passed. In addition, BEIS has clarified that, if an application is rejected, a project will have several further opportunities to re-apply for the Implementation Statement up to the Longstop Date.

BEIS is still considering how its approach to ongoing monitoring (including whether the provision of an Updated Supply Chain Plan will be required) in light of the amended process above.  BEIS is also considering the extent to which a generator’s implementation of its supply chain commitments in a previous round would impact upon its assessment of that generator’s supply chain plan in a future round, intending this to act as a further incentive for generators’ compliance.

Next steps

It is envisaged that the statutory instrument that will implement BEIS’s decisions will be laid before parliament this May 2021.

BEIS will also publish in due course its response to consultation on the proposed Supply Chain Plan questionnaire, as well as its more detailed guidance on the final Supply Chain Plan process and approach to ongoing monitoring.

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