In recognition of the importance of the supply chain’s role in helping to reach Net Zero greenhouse gas emissions by 2050, the government has published its response to the consultation on changes to Supply Chain Plans and the Contract for Difference (“CfD”) contract. The Supply Chain Plan assessment process applies only in relation to CfD projects of 300 MW capacity and above and is designed to encourage competitive and innovative supply chains, the ultimate goal being to facilitate an effective and long-term pipeline of lower cost low carbon electricity generation. The results of this consultation are the latest in a wave of challenges posed by the supply chain on the path to Net Zero. Supply chain challenges will not be new to any sector or technology – we’ve previously written about such challenges in the context of offshore wind and energy from waste – but this latest development further demonstrates the need for careful consideration of supply chain factors by developers and investors.
The government’s proposals are intended to hold developers accountable for the commitments made in the Supply Chain Plans as part of the CfD process. The main changes to the current CfD process coming out of the consultation are:
- Generators must satisfy a new CfD Operational Condition Precedent (“OCP”). The CfD contract may be terminated if the OCP is not met;
- The Secretary of State will have the power to evaluate the implementation by generators of their Supply Chain Plan commitments. The SoS may approve or reject this implementation; and
- The Department for Business, Energy & Industrial Strategy will monitor and review the Supply Chain Plan process.
Perhaps unsurprisingly, only 8 out of 36 respondents were in favour of the introduction of an OCP backed by a right to terminate. Significant concerns were expressed about the new right to terminate, including that some Supply Chain Plan commitments may be delivered at a late stage in construction when a large amount of investment may no longer be recoverable. To deal with these concerns, the review of a project’s Supply Chain Plan delivery will take place a little over 18 months after contract signature. While the early review date should help to manage such concerns, the chance that a CfD award is terminated 18 months down the line is still a significant risk to take – as has been recognised by Vattenfall’s UK country manager, Danielle Lane.
These changes to the CfD process are fragments of a larger picture, pulling together to bring supply chain factors to the top of the Net Zero agenda. For instance, the delivery of the offshore wind pipeline faces challenges in potential resource issues (see more here) – illustrating the significance of the government’s revamp of the CfD system. Taken together with growing pressure on localised supply chains to meet a surge in demand of increasingly technical challenges in sectors such as offshore wind and floating wind (expanded on in our earlier article), early engagement with and monitoring of supply chains has never been more important to delivering low carbon energy projects.
Despite the challenges that such shifts to the CfD process will bring to developers and investors, the positives of a strengthened supply chain are not to be underestimated, with Vattenfall’s Lane calling this “a vital step forward for the offshore wind project pipeline”. The final CfD Supply Chain Plan guidance and the results of a consultation on a new Supply Chain Plan questionnaire will be published ahead of AR4.
This article was written by Genevieve Vaughan and Lloyd James