The FID Enabling project team sits in DECC’s Commercial Directorate and forms part of the Electricity Market Reform Programme (EMR). The EMR is working to introduce a range of mechanisms that will ensure the UK is able to move to a secure, low carbon, cost effective electricity system. The main investment incentives for decarbonisation will come through the introduction of the Contract for Difference (CfD). The FID project is designed to enable early investment decisions for low carbon plants ahead of the implementation of the CfD. Chapter 4 of our recent Technical Update provides further information (http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/energy-markets/3884-planning-electric-future-technical-update.pdf). The FID Enabling process is open to low carbon developers who meet the characteristics outlined in paragraph 157 in that document, which includes demonstrating they are in a position to take a final investment decision prior to EMR’s implementation. Those who choose to come forward will participate in one-to-one negotiations with DECC over what form of comfort might be given to them ahead of EMR. We anticipate a series of negotiations with different developers from May 2012 until EMR is implemented, due in 2014. The eligible technologies that may choose to participate are renewables, nuclear and carbon capture and storage (CCS). The first developer to have come forward is New Nuclear Build Generation, a consortium of EDF and Centrica to build a new multi-billion pound nuclear power plant at Hinkley Point C. B. Work required Specific requirements under the project may evolve, but the outputs below are currently anticipated for most in-depth FID negotiations and supporting the development of the wider CfD framework, though these may vary in practice. Timings shown relate to the negotiation with New Nuclear Build Generation and are indicative only. This negotiation is expected to last from July to December. Timings for other negotiations and wider CfD work may vary substantially. i. Advice on modelling the costs of the development. This will involve assessing the developer’s model or potentially liaising with them to develop a joint model, including an assessment of the model’s economic, tax and accounting assumptions and its overall integrity, and building or adapting a financial model for DECC if necessary. It will also involve regular analysis of the model’s outputs for multiple scenarios/combinations of inputs, interpreting the results and explaining the sensitivities revealed. • Four weeks to test/develop model, then frequent input thereafter on using and interpreting the model ii. Advice on the pricing of risk and its allocation in FID enabled projects and for CfDs for wider EMR projects. This will include interrogating the developer’s assessments of probability and impact, whether risks are hedgeable or insurable (and if so at what costs), and advising DECC on indexation and risk pricing. Advice will be required on which risks should feed directly into the CfD strike price and which are best managed through separate terms, and the best way to manage risk jointly with the developer so that the corresponding cost is minimised. This will include advice on risk allocation for standard CfD projects and how far FID enabled projects can best be aligned with these. • Six weeks iii. Advice on the economic and financial assumptions underpinning the developer’s proposed pricing, assessing how reasonable their approach is to factors such as rates of return, tax assumptions and commodity prices. • Four weeks iv. Tax and accountancy advice on the implications of different forms of agreement under consideration. This advice will include identifying potential improvements in tax and accountancy treatment, if these reduce the cost of the eventual agreement in a manner consistent with HM Government’s wider responsibilities. • Four weeks v. Work closely and constructively with the FID Enabling team’s legal and engineering advisers. This includes provision of advice on the financial aspects of all legal issues, and on the financial aspects of the cost discovery work conducted by the engineers. • Continuous vi. Advice on the accounting impacts of different legal frameworks and payment models for the CfD: FID projects and the enduring CfD regime will depend on the same legal framework and payment model to ensure that funds can flow from suppliers to generators in a reliable, creditworthy manner. Ongoing accounting and wider commercial advice will be required on the detailed design of the legal framework as the CfDs are developed. • Eight weeks vii. Inputting to the design of contract allocation and price setting processes for renewables developments: advising DECC on the overall viability of the systems for enabling renewables project developers to secure CfDs. • Four weeks viii. Recommendations on valuations & financial viability: Having regard for the above, advising DECC on the overall viability of the financial model for the construction and operation of the plant under the CfD framework. • Two weeks ix. Strategic advice on the conduct of the negotiation. This will include bringing senior transactional experience to bear in assessing DECC’s proposed starting and fallback positions and negotiation tactics. A key role will be in helping to identify obstacles to an agreement at the earliest possible stage and advising DECC on how best to resolve issues as (or before) they arise, providing constructive routes to avoid the negotiation stalling. Advisers may be required to attend negotiations alongside the DECC team, at the discretion of the FID Enabling project team. Broader advice on the overall process and shape of the negotiation timetable and any other considerations will also be sought. • Four weeks initially, then frequent ad hoc input through to the end of the negotiation x. Advice on how best to replicate work undertaken, for future negotiations. The supplier will be expected to help DECC maximise the potential for adapting and re-using the knowledge and tools arising from the negotiation in question for subsequent negotiations. This will require an ongoing assessment of how various elements of the negotiation might be used for future projects. • One week xi. Other work in relation to FID Enabling or financial advice on EMR, as required. Such work might for example include undertaking: cost-benefit analysis of alternatives to a CfD; analysis of the costs of alternative power technologies; and analysis of scenarios for wholesale electricity prices . PLEASE NOTE: There will be no exclusivity of service under this contract nor will the winning bidder be guaranteed to perform all of the above tasks. DECC is still finalising its advisory team and it is possible that additional financial advisers might be procured separately to assist the project, in which case that adviser might cover some of the tasks above. Similarly, we might procure alternative advice should a development come forward where the winning bidder was conflicted. C. Capability sought Given the scale and importance of the work involved, we expect to draw upon senior experienced teams in each of the following areas: • Corporate Finance; • Transaction services; • Tax and Accounting. Knowledge of the electricity market is also desirable. It is vital that all of these teams are able to work well with the project’s legal and engineering advisers. Expected Outputs Some or all of the following outcomes will be expected depending on the negotiation (in the case of Hinkley Point C all will apply). i. A verified cost and price model that aids discussions between DECC and the developer, plus supporting analysis that highlights all the significant impacts in each of a range of chosen scenarios. ii. An opinion letter from the advisers confirming that the financial model (and associated sensitivies) is sound, both in its functionality and from a tax and accounting perspective. iii. A qualitative assessment and/or opinion letter of the final agreement with the developer from a financial perspective, including the CfD terms, risk allocation, and tax and accounting implications. iv. An accurate forecast of the overall cost to consumers of the final agreement reached, allowing for a set of reasonable assumptions (to be explicitly listed alongside). v. A report on how best to use the work undertaken for this negotiation in subsequent negotiations. This includes capturing lessons learnt but also the potential for adapting tools such as the cost model. vi. An auditable suite of documentation, covering the processes followed, information exchanged and evaluations undertaken to achieve the above outcomes. vii. Appropriate inputs to the final Operational Framework for the Contract for Difference system.
Ref: TRN 409/05/2014,
james.clarke@decc.gsi.gov.uk
Contract value: 100000.00GBP
Published: 13 Dec 2012, Receipt by: 13 Jun 2013
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