Contracts for Difference: challenges of the first CfD auction

After a long wait, the CfD mechanism was initiated by the Romanian Government, through the Ministry of Energy, in 2021, to encourage investment in low-carbon electricity generation technologies (i.e., those that use onshore wind, offshore wind, solar photovoltaic, hydro, nuclear, hydrogen, and energy storage resources). The proposed scheme includes two support mechanisms: participation in a CfD auction, or the granting of ad-hoc state aid – in this latter case, only for eligible generation technologies that cannot participate in a CfD auction.

CfD Mechanism Framework

The CfD mechanism works as follows: when the reference price of electricity is lower than the strike price set in the CfD contract, the CfD beneficiary is entitled to receive the difference between the two prices. On the other hand, when the reference price of electricity is higher than the strike price, the CfD beneficiary must pay the difference to the Electricity and Natural Gas Market Operator OPCOM S.A. (the “CfD Counterparty”).

The reference price is the weighted average of prices (in EUR/MWh) from any day-ahead markets (DAM) operated by any electricity market operator in Romania, with the weighting based on the volumes traded in each such market by CfD beneficiaries (i.e., auction winners) using the same technology.

In the case of CfD auctions, the strike price is the one bid by the beneficiary during the auction and included in the applicable CfD contract. On the other hand, in the case of ad-hoc CfD state aid, the strike price is established through direct negotiation, and the terms and conditions of this contract are subject to obtaining a state aid authorization decision from the European Commission, after notification of the ad-hoc state aid.

The CfD contract for onshore wind and solar photovoltaic technologies is regulated by Government Decision no. 318/2024 approving the general framework for the implementation and operation of the contracts for difference support mechanism for low-carbon technologies.

The first auction was formally launched on 5 September 2024, by the Order of the Minister of Energy no. 1290/2024, targeting an installed capacity of 1,000 MW for onshore wind electricity generation and 500 MW for solar photovoltaic electricity generation.

For the first auction, the bid strike prices cannot exceed EUR 82/MWh for electricity produced in onshore wind installations and EUR 78/MWh for electricity produced in solar photovoltaic installations. To participate in this first auction, interested parties must submit:

• A technical offer, demonstrating that both the applicant and the proposed project meet the eligibility criteria, and which must mandatorily indicate the proposed installed capacity and target commissioning date;

• A financial offer, specifying the bid strike price.

By 3 October 2024, requests for clarification regarding the bidding procedure rules for the first auction could be submitted to officials, and on 10 October 2024, the Ministry of Energy held a conference where participants had the opportunity to discuss the rules’ implementation. The responses to the clarification requests were published on the Ministry of Energy’s website on 23 October 2024,¹ and the next day, the Order of the Ministry of Energy no. 1530/2024 entered into force, bringing several impactful changes to the bidding procedure rules.

Below is a brief overview of some points of interest for market participants regarding the first CfD auction:

1. Applicant Eligibility Criteria

According to Art. 5 of Annex 1 to the Order of the Minister of Energy no. 1290/2024, to participate in the CfD scheme, applicants must cumulatively meet all the eligibility criteria provided in Section 2.1 of Annex 2 to the same order. Among these criteria is the requirement that the applicant’s statutory documents show electricity generation (NACE code 3511 – Electricity generation) as main or secondary activity.

In other words, investment funds cannot participate directly in the auction but only through special purpose vehicles (SPVs) or sub-funds/subsidiaries whose main or secondary activity, as listed in their statutory documents, is electricity generation. Non-specialized investment funds, therefore, do not seem to qualify.

The situation could become particularly challenging for those companies in Romania that are forced to modify their group structure or add electricity generation to their object of activity to be eligible to participate in the first CfD auction. A group structure change would most likely require notification to the Foreign Direct Investment Examination Commission (CEISD), which involves, in practice, procedures lasting approximately six weeks. At the same time, even a simple amendment to a company’s object of activity can take about a month due to the current issues caused by the modernization of the Trade Registry's online services portal.

Another eligibility requirement is that the applicant must have experience in developing, constructing, or operating comparable projects in Romania or globally within any period of time in the last 10 years. According to Section 2.1 point (iii) of the Order of the Minister of Energy no. 1290/2024, 'comparable projects' refer to projects using the same technology, meaning onshore wind and/or solar photovoltaic for the first auction. This requirement significantly limits potential participants, as it indirectly excludes SPVs from participating in the auction, despite the fact that in practice, renewable energy production capacities in Romania are developed and operated by separate SPVs specifically created for this purpose.

One solution is to designate the SPV actually developing the beneficiary project to sign the CfD contract - but even so, the applicant must still have electricity generation as its main or secondary activity and demonstrate experience in developing, constructing, or operating comparable projects. The good news is that through the amendments introduced by the Order of the Minister of Energy no. 1530/2024, applicants are now allowed to rely on the experience of their direct shareholders or affiliates to meet the eligibility criteria, leaving only the issue of how to meet the main/secondary activity requirement.

Another solution is to participate in the auction as part of a consortium, considering that the requirements regarding power production as the main/secondary activity and 10-year experience must only be proven by the consortium’s leader.

Separately, we note that the experience criterion must be proven in either developing, constructing, or operating comparable projects – so it is not necessarily required to prove experience in all three types of activities. Moreover, experience is necessary to be proven at any time within the last 10 years, meaning that even newer players in the market could participate in the CfD auction. The differentiation of bids with the same strike price would not be based on the experience of the applicants, meaning that those with 1-2 years of development experience would not be disadvantaged compared to those with more years of experience or involvement in multiple types of activities (e.g., development and operation).

Another eligibility criterion that seems to pose problems for potential participants in the first CfD auction is the one concerning the classification as an enterprise in difficulty within the meaning of item 20 of the European Commission’s Communication (2014/C249/2001) – Guidelines on State Aid for Rescuing and Restructuring Non-Financial Undertakings in Difficulty. According to this provision, one of the cases in which a company is considered to be in difficulty is when more than half of the subscribed share capital has disappeared due to accumulated losses. In such a situation, under Art. 153^24 of Companies’ Law no. 31/1990, either the share capital should be reduced by an amount at least equal to that of the losses that could not be covered from reserves, or the company’s net assets should be restored to at least half the share capital. In the case of a capital reduction, it is clear that the articles of association must be amended and registered with the Trade Registry, bringing us back to the issue of Trade Registry delays.

Given the above, it appears that an SPV with a ready-to-build project (but that hasn’t yet been operated), according to existing legal provisions, seems to meet the eligibility criteria outlined above. However, this approach will need to stand the test of time to see how the authorities decide to interpret it.

2. Project Eligibility Criteria

The project eligibility criteria are set out in Section 2.2 of Annex 2 to the Order of the Minister of Energy no. 1290/2024, and the criterion that has raised most questions is related to the target commissioning date. Specifically, this date, as specified in the funding application, must not exceed 36 months from the anticipated date of signing the CfD contract by the CfD Counterparty (i.e., 20 January 2025, according to the indicative timeline published on the Ministry of Energy’s website). In this context, the question arises whether projects for which the technical connection approval (ATR) states that commissioning will take place after the 36-month period from the anticipated signing date of the CfD contract are still eligible, and what the consequences are if the deadline is exceeded for reasons beyond the applicant’s control.

The answer received during the 10 October conference was clear: these projects will not be considered eligible. However, in the clarifications published on the Ministry of Energy's website, the authority seems to have changed its position, indicating that a commissioning date mentioned in the ATR beyond the exploitation start deadline will not lead to the applicant’s disqualification, provided the eligibility criteria are met. Regardless, it should be noted that the target commissioning date must not exceed 36 months from the anticipated CfD contract signing date, regardless of the date specified in the ATR.

3. Non-Compliance by the Producer with Certain Obligations under the CfD Contract

Not only the eligibility criteria have raised issues for potential participants in the first CfD auction, but also the risk of non-compliance with obligations undertaken based on the CfD contract.

One such example concerns the statement made by the producer under Art. 10.1.11 of the CfD contract approved by Government Decision no. 318/2024, namely that both the producer and the project meet and will continue to meet the eligibility criteria applicable to the auction throughout the duration of the CfD contract. In other words, if the applicant designates the SPV developing the project for signing the CfD contract, the SPV itself must meet the requirement of having experience in development, construction, or operation. On the other hand, based on the recent amendments to the bidding rules introduced by the Order of the Minister of Energy no. 1530/2024, the SPV may demonstrate its experience by relying on the experience of its direct shareholders or affiliates. It remains to be seen if the SPV could also demonstrate experience through the project benefiting from the CfD scheme itself.

Another problematic example is the producer’s statement under Art. 10.1.6, which asserts that there is no ongoing or pending litigation, arbitration, lawsuit, administrative procedure, complaint, or tax investigation against the producer at the time of signing the CfD contract. The language is quite general, as it doesn’t limit itself to disputes related to the CfD contract. Thus, for companies with a history, established in the past and not exclusively involved in electricity generation but also providing other services (e.g., electricity distribution, trading, etc.), the risk of unrelated litigation is relatively high. This could involve disputes with consumers (in the case of an electricity supplier), disputes with commercial partners, or even internal disputes (e.g., salary-related issues). Of course, such an interpretation would render the contractual text meaningless, and the legislator’s intention was likely different, but this problem appears to persist given the clarifications received from the Ministry of Energy that the provisions of the CfD contract, as approved by Government Decision no. 318/2024, will not be subject to negotiation or modification. Additionally, it should be noted that any statement made by the producer under Art. 10.1 of the CfD contract that is not true at the time it was made and is not remedied within 30 days of the CfD Counterparty issuing a notification to correct the issue constitutes an event of default under Art. 14.1.6 of the CfD contract.

Separately, there is the issue of the sanction applicable if the ATR is not issued by the grid operator within six months of the CfD contract being signed, given that delays in this process are notorious, even if the ATR issuance request was submitted by the beneficiary in a timely manner. According to Art. 13.1 of the CfD contract approved by Government Decision no. 318/2024, the sanction is the termination of the contract, and the CfD Counterparty has the right to execute the performance guarantee, even if the failure to submit the ATR copy was due to causes unrelated to the producer. The same sanction applies if the commissioning deadline is not complied with due to objective reasons beyond the producer's control – including when the commissioning deadline is missed because the grid operator failed to complete reinforcement works within the agreed time. It was confirmed during the 10 October conference that the grid operator’s failure to complete reinforcement works does not constitute a force majeure event, meaning the producer cannot rely on this exonerating cause of liability, even in the situation described above.

As for submitting a funding application for only part of a project’s capacity (e.g., for large projects where the capacity exceeds the maximum of 25% of the capacity offered in the auction), this will only be possible if that portion of the capacity is measured separately from the rest of the project for the entire duration of the CfD contract. Therefore, for capacities that are close to reaching ready-to-build status, a new metering system would need to be added. Aside from the high costs of installing such a system, there is also the issue of updating the ATR for the old installation to cover the new metering system. This update, however, takes time, and recent history shows that it would take around 6-8 months to obtain the update. This means that those intending to submit funding applications for only part of an existing project’s capacity will most likely have to wait until the next auction to ensure the separate metering system is included in the ATR in time.

In conclusion, despite the significant efforts of the legislator to create a more predictable legislative framework for the CfD scheme, many aspects still need to be revised to make the mechanism truly attractive for investors. The good news is that the current rules apply only to the first auction, meaning that the issues identified now can be resolved before the auction planned for 2025.