Updates on CfD Scheme Soon to be Launched in Romania
Only days after the European Commission approved the Contracts for Difference (CfD) scheme to be launched in Romania, the Ministry of Energy published (i) the draft of Government Decision approving the CfD scheme, (ii) the Grounding Note and (iii) the draft of CfD agreement, available here (Romanian version only). The Ministry of Energy awaits comments on such drafts until March 25, 2024 and, shortly after, it will publish the final version of such legal enactments, together with the Auction Initiation Order.
While many of the principles included in the latest drafts are consistent with those previously announced by the Ministry of Energy, important changes and additions are made to the scheme. Also, a significant amount of information on auction requirements is not yet available and will be included in the Auction Initiation Order.
The below summary is based on such new drafts and on previously announced information.
I. OVERVIEW OF THE CfD SCHEME
1. Accepted Technologies and Total Capacity
The scheme will support onshore wind and solar photovoltaic projects with a total capacity of 5,000 MW split in two auctions, (i) 2,000 MW in a first auction to be launched during the next weeks and (ii) 3,000 MW to be awarded in a 2025 auction. Each auction will be equally split between the two technologies.
2. Involved Authorities
The main actors of the CfD Scheme will be the following:
Ministry of Energy manages and monitors the CfD Scheme;
ANRE elaborates the secondary scheme regulations;
OPCOM is the CfD Counterparty, acting based on a mandate from the Ministry of Energy;
TSO manages the auction process.
3. Funding of the Scheme
With a view to ease the burden on end consumers, the CfD scheme will be financed from the Modernization Fund. If insufficient, the Ministry of Energy will decide on how to cover the deficit and will follow a simplified notification and approval procedure with European Commission (in principle, increase of scheme budget not exceeding 20% is not viewed as a change that requires EU approval).
In addition, a levy payable by the end consumers will be imposed only to ensure the necessary income for CfD Counterparty and TSO for carrying out their administrative responsibilities related to the scheme. The levy will be collected by suppliers (similarly to green certificates contribution) and will be paid to CfD Counterparty based on a contract to be concluded between suppliers and CfD Counterparty. Financial guarantees will be established by suppliers to secure the payment of such levy.
II. AUCTION PRINCIPLES
1. Project eligibility requirements
The eligibility requirements will be set out in the Auction Initiation Order. Nevertheless, based on the information available so far, the following main project eligibility requirements are expected:
Excluded Technologies: the projects with behind the meter storage capacities or hybrid projects (combining onshore wind and solar photovoltaic) with single meter will not be eligible;
New Capacities: the scheme does not apply to replacing, extending or repowering existing capacities;
Project Capacity: the project must have a capacity between 5 MW and 200 MW(1); similar maximum capacity per sponsor is expected;
Partial Capacity: bidders may apply for part of project installed capacity if separately metered;
Project Maturity:
·ATR: no longer an eligibility requirement and must be obtained by the deadline set out in the Auction Initiation Order under the sanction of CfD agreement termination and enforcement of the performance guarantee;
EPC: projects with ongoing EPC contracts/equipment supply contracts are eligible if such are concluded after July 20, 2022;
COD: projects having already reached COD are not eligible; COD must occur within maximum 3 years from CfD agreement signing date, with delays of maximum 24 months being acceptable;
No Cumulation of State Aid: projects benefiting from other support schemes (e.g. National Recovery and Resilience Plan or Modernization Fund) are not eligible.
2. Maximum Auction Price
The Strike Price that may be auctioned by the bidders may not exceed EUR 91 / MW (for the solar photovoltaic auction) and EUR 93 / MW (for the wind auction).
3. Evaluation Process
According to previously announced principles, the auction evaluation process will be carried out in two stages:
First-stage: evaluation of the Technical Offer (on a pass or fails basis compared to the eligibility criteria); and
Second-stage: evaluation of the Financial Offer (ascending order of the Strike Price); tied bids will be differentiated based on the following criteria:
offered capacity (larger prioritized);
target commissioning date (earlier prioritized);
application date (earlier prioritized);
random draw.
4. Bid Bonds
Bid bonds will be required (i) for participating in the CfD auction and (ii) for the good performance of the CfD agreement, if signed. According to previously announced information, the amounts are expected to range between EUR 10,000 – 20,000 / MW (for participation bond) and between EUR 50,000 – 100,000 / MW (for performance bond).
The bonds will be enforced (i) if the selected bidder fails to sign the CfD agreement (for the participation bond) and (ii) in the default cases set out in the CfD agreement, such as failure to reach COD by the required deadline/delays in making CfD payments/commissioning less than 90% of awarded capacity (for the performance bond).
III. FUNCTIONING OF THE CfD SCHEME
1. Duration of CfD agreement
The duration of the CfD agreement will be 15 years from COD. Such duration is decreased pro rata if:
COD does not occur in 3 years from signing date (without the delays exceeding 24 months); or
less than 100% of the project awarded capacity is commissioned (without falling below 90%).
2. Key financial principles
The CfD system is a two-way support payment between the Strike Price (price auctioned by the bidders) and Reference Price (calculated based on regulated formula). Should the Reference Price fall below the Strike Price, the CfD Beneficiary is paid the differential by the CfD Counterparty, for each MWh of electricity produced, delivered into the grid and sold. If the Reference Price exceeds the Strike Price, the CfD Beneficiary pays the CfD Counterparty the differential.
Few key financial principles are set out below:
Strike Price: it is subject to indexation every 3 years based on the Eurozone Consumer Price Index, only if such increased by at least 10% which is likely to make such indexation inapplicable;
Reference Price:
the Reference Price is the monthly weighted average of the day ahead market price for the respective technology and will be calculated by ANRE based on the formula set out in the CfD agreement and on a dedicated methodology to be approved by ANRE;
is revised by ANRE if (a) such considers it causes systemic overcompensation of producers or (b) 50% of CfD Beneficiaries notified ANRE that it causes systemic undercompensation;
Negative Prices: CfD Beneficiaries will not receive CfD payments for negative prices intervals;
Exchange Rate: CfD payments are calculated in RON using the monthly average of the daily RON/EUR exchange rates published by the National Bank of Romania;
Excess Profit:
following ANRE proposal, a “profit sharing scheme” was inserted with the declared purpose of increasing the liquidity of centralized bilateral contracts markets;
should the CfD Beneficiaries sell the electricity via bilateral contracts (on centralized markets only) and the Contract Price is higher than the Reference Price, a percentage of the differential (viewed as Excess Profit) is paid to the CfD Counterparty, as per the diagrams below:
the Excess Profit is calculated by ANRE and paid on an annual basis;
no similar rules exist for the case the Contract Price would fall below the Reference Price.
3. Sale of electricity
Contrary to what was initially announced, the CfD Beneficiaries will have the obligation to sell the electricity only on the centralized markets only (both spot and forward markets).
IV. OTHER KEY PRINCIPLES
Few key principles of the scheme are summarized below:
·Failed Payments Due to CfD Fund Illiquidity:
an important red flag is that the CfD Counterparty has no liability towards the CfD Beneficiary for failed CfD payments if such are due to CfD fund illiquidity (not even delay penalties are due); also, CfD illiquidity refers to absence of amounts allocated by the CfD Counterparty to the respective CfD agreement only, not overall illiquidity (allocation mechanism per CfD agrement not available);
also, during such non-payment period, the CfD Beneficiary is not allowed to set-off such amounts with those that become due to the CfD Counterparty; the CfD Beneficiary is only entitled to block such amounts in a reserve account; the payments due by CfD Beneficiary which exceed the outstanding amounts not-paid by CfD Counterparty must be made to the latter, even during the latter’s non-payment period;
insolvency of CfD Beneficiary due to such nonpayment qualifies as an event of default;
·Failed Payments Not Due to CfD Fund Illiquidity:
delays by CfD Counterparty in making the CfD payments for other reasons than fund illiquidity trigger payment of delay penalties equal to NBR reference interest rate plus 4%;
no unilateral termination rights are granted to the CfD Beneficiary, irrespective of the duration of such delays;
CfD Beneficiary is entitled to suspend its own payments in case of such delays.
Change in Law: specific change is law provisions are set out allowing the revision of the Strike Price (both upward and downward); such provisions are limited to the legislative changes affecting CfD Beneficiaries only;
Termination for Convenience: the CfD Counterparty is allowed to terminate for convenience the CfD agreement subject to paying the CfD Beneficiary a compensation calculated based on the formula set out in the CfD agreement; such compensation is meant to cover all CfD payments that would have been due to the CfD Beneficiary until the agreement expiry date, updated based on the monetary policy interest rate valid in the termination year;
Direct Agreement: to ensure the bankability of the scheme, it is allowed the execution of Direct Agreements between CfD Counterparty, CfD Beneficiary and the project’s financing bank;
Guarantees of Origin: CfD Beneficiary is awarded the guarantees of origins for the electricity generated, according to the general applicable framework.
(1) Information from the mandate report just published by the Minister of Energy (maximum limit of 20% of total capacity per technology).
