FACULTAD DE INGENIERIA CIVIL CAPITULO X: ESPECIFICACIONES TECNICAS

The scope of change in law protection in a CfD is of great importance. DECC has always maintained this would be the instrument under which the Government (or more latterly suppliers and their customers) absorbed policy risk. A contractual right (which the CfD now clearly is) may (subject to the ability of the counterparty to deliver) be more stable than one that derives only from legislation.

The approach outlined by the Government is that ‘change in law’ should be defined to cover not only formal changes in law but also a range of legislative and regulatory interventions and changes to industry codes. This avoids making a possibly artificial distinction between legislation and other ‘quasi-legislative’ changes. This is similar to the scope of “law” in a UK PFI transaction, but also extends to directly enforceable rights under international treaties to which the UK is a signatory (which may have some interesting implications).

However, not all such changes will qualify for protection under a CfD. Investors and developers are expected to carry out effective due diligence on the legislative and regulatory landscape, and so risks from ‘foreseeable’ changes sit with generators (e.g. current Code Reviews if not then implemented). In the interests of focusing the administrative role and resources of the CfD counterparty, it is also proposed that the risks of changes which are not considered to have a material impact (this is not to be defined, and as such is an obvious concern)on generators will also sit with generators. Further, CfD generators are not to be protected from ‘general’ changes in law that apply across the economy or across the energy sector as a whole. The Government considers that while generators may need to price general change in law events into strike price expectations if they are left as uncovered risks, the wider long term indexed revenue protection offered by the CfD as a whole is a sufficient counter balance to any inability that a generator may have to pass through costs associated with a general change in law.

There will therefore be protection against specific and discriminatory changes in law. This is not an untypical approach; however, the Government’s argument that wider protection may “discourage necessary changes in law that benefit consumers” is not wholly reassuring. Specific and discriminatory change in law will include those which apply specifically to: the particular CfD project; projects of the same or similar type; projects of a similar type that are subject to a CfD; or CfD projects as a class. While again the language is recognisable from UK PFI transactions, it is less clear that it is appropriate here. Great care will be needed in considering the definitions of these terms. For example the latest Spanish proposals for a 7% revenue tax for all generators are likely to disproportionately affect FiT renewables generators, but might not be ‘discriminating’.

The Government is proposing that compensation for a qualifying change in law should be administered through an adjustment to the strike price as opposed to a lump sum payment. The Government is minded to develop a standard formula for calculating the adjustment to the strike price. If the CfD Counterparty reasonably considers it unlawful, impossible or impracticable for a party to recoup change in law costs over the remainder of the term by way of adjustment to the strike price (for example, because the change in law prevents generation and therefore no payment in relation to the strike price would be received), the CfD Counterparty must propose an alternative formulation in respect of the “lost” compensation.

The change in law provisions are designed to be symmetrical. Consequently, if there are material cost savings to the generator as a result of a change in law, there may be a downwards adjustment to the strike price.

The extent of change in law protection and the difficulties of defining “discriminatory” and “specific” changes which are not “foreseeable” and have a “material” effect will, as noted above, all no doubt be talking points for industry

participants. However, we believe that there are a number of more fundamental questions which industry will likely need to consider carefully before getting to this greater level of detail:

–The protection implicitly assumes that only changes in law that have an impact on “net cashflow” are worthy of protection. This ignores the fact that there are certain base-line legal provisions which are likely to be a stop/go investment decision in the context of EMR. Given that a significant justification for the need for a CfD is to resolve these stop-go decisions, not offering protection against their change is, at best, curious.

–Perhaps the best example that applies to all technologies relates to the creditworthiness of a CfD Counterparty. The rules and regulations which backstop this are to be set out in secondary legislation (though some important principles, notably the purpose of the Supplier Obligation, are in the primary legislation of the Energy Bill). If these rules and regulations are changed during the life of the CfD they will not immediately affect the net cashflow of the generator, but will affect its credit profile. This could have implications for future financings and, more importantly, for future equity exits which allow initial investors to recycle capital to deliver programmatic development.

–We recognise the observations made by DECC in the response to the ECC Committee that a change in primary legislation would be necessary to remove the primary duty on the Secretary of State to ensure funding for the CfD Counterparty and that, equally, primary legislation could alter the terms of a signed CfD. However, at the launch of the initial consultation into EMR the Minister very clearly stated that the CfD would be the vehicle under which the Government accepted change in policy risk on a legally enforceable basis. Whilst this has not been achieved, we suspect that the proposed approach will nonetheless be acceptable to a wide range of investors (as has been the case with PFI and other UK Government-led capital procurements and investment in the UK utility sector), particularly those who come with investment treaty protection. Of course, significant comfort may be derived from the

Government’s ownership of the CfD Counterparty (which is stated to be the intended position), but as noted above this is not entrenched as a requirement in the Energy Bill. It will be interesting to see whether sufficient confidence is achievable from the investor community that this approach will deliver the scale of capital required at an acceptable price.

–Compensation happens through the strike price. However, changes in law can also produce the need for capital investment. What is to happen if there are no providers of this new capital at the time (noting that, as one would expect, non-availability of funds is specifically excluded from force majeure in the draft CfD but more unexpectedly there is a duty to resume operation as soon as practicable after a change in law occurs)? Other government supported capital projects have included lender of last resort provisions in these circumstances.