On 1 March 2016, in Solar Century Holdings Ltd & Ors v Secretary of State for Energy And Climate Change [2016] EWCA Civ 117, the Court of Appeal dismissed an appeal by a number of renewable energy companies against a judgment of the High Court upholding the Government’s decision to close the Renewables Obligation (RO) for large-scale solar PV projects from 1 April 2015 (two years earlier than had been expected).

Background

The RO supports the creation of generation capacity from renewable sources and was the Government’s main support mechanism for large scale renewable electricity from 2002. However, in July 2011 the Government issued a White Paper titled “Planning our Electric Future – a White Paper for secure and affordable low carbon” where it announced the introduction of Contracts for Difference (CfDs). The White Paper revealed that the Government intended to phase out the RO so as to replace that scheme with CfDs and transitional arrangements were proposed. Despite previous indications that during the transition to CfDs the RO scheme would remain open to new generating capacity (i.e. generation not yet accredited under the RO scheme) until 2017, the Department for Energy and Climate Change (DECC) issued a Consultation paper in May 2014 entitled “Consultation on changes to financial support for solar PV” (Consultation) which signalled a change in that policy. 

The Consultation proposed to bring forward the closure date for unaccredited large-scale (>5MW) solar PV by two years, to 1 April 2015. The proposal included a grace period (extending the period for accreditation under the RO to 31 March 2016) to protect companies that could demonstrate significant financial commitments to projects on or before the cut-off date of 13 May 2014. Following the Consultation, the Government decided to proceed, albeit with a relaxation of the conditions required to qualify for the grace period, and the proposals were given effect by the Renewables Obligation Closure (Amendment) Order 2015. 

The justification for the change was the higher than expected uptake of solar PV generation since the government had announced its levels of support under the scheme and the effect this had on the Levy Control Framework (LCF), which sets an overall cap on DECC’s spending for certain levy-funded policies.

Judicial review proceedings

The renewable energy companies commenced judicial review proceedings at the High Court, claiming that the early withdrawal of the RO was (i) ultra vires, (ii) violated assurances that the RO scheme would run until 2017, (iii) violated statements by Government that the scheme would run until 2017 giving rise to legitimate expectations and (iv) that the grace period was retrospective in effect and therefore unfair in a public law sense. Green J decided to dismiss all four grounds for judicial review. The renewable energy companies then appealed the decision to the Court of Appeal, which dismissed the appeal.

The Court of Appeal’s reasoning

Legitimate Expectations and Assurances 

The Court reiterated the principle that the Government is entitled to formulate and re-formulate policy when rational grounds exist for doing so, unless to do so would amount to an abuse of power by reason of the manner in which it has previously conducted itself. The critical question in relation to this was whether there had been a “specific undertaking, directed at a particular individual or group, by which the relevant policy’s continuance is assured”. 

The LCF - and in particular what was meant by paragraph 1.3 - was at the heart of this question and the case. At paragraph 1.3, it was stated that “The Government remains committed to maintaining support levels for those existing investments where it has said it would do so and not to making retrospective changes”. The Court found that this statement would be understood as applying to accredited installations which would be grandfathered and not to existing pipeline investments. Moreover, the Government’s statements about investment security would not be taken as being immune to change. The Court also took the view that the arguments relating to clear assurances that the RO scheme would run until 2017 could not survive this conclusion.

The Court’s comments on the requirements for a legitimate expectation echo those of the High Court in the case of R (on the application of Drax Power Limited and Infinis Energy Holdings Ltd) v HM Treasury and HM Revenue and Customs [2016] EWHC 288 (Admin), in which it was stated that the principle “cannot depend merely on a generalised sense of unfairness, and must logically require that Government has said or done something in particular such as to generate specific expectations in individuals or groups of persons which EU law demands will be honoured”.

Misuse of Statutory Powers 

With regard to the alleged misuse of statutory power, the Court rejected the appellants’ argument that the Secretary of State's power should be constrained to closing the scheme with effect from 1 April 2017. In particular, Section 32LA of the Electricity Act 1989, which sets out the Secretary of State's power, merely provides that he may close the scheme “to electricity generated after a specified date”. The Court also rejected the argument that the decision was ultra vires because it only applied to large-scale solar capacity (above 5 MW), while the purpose of the power in Section 32 LA was to close the RO scheme in its entirety. The Court held that this purpose did not prevent the power from being used for a more limited purpose.

Unfair Retrospective Grace Periods 

The appellants argued that an investor who had failed to submit a planning application for his solar farm by 13 May 2014 would not have known that such an omission rendered his installation outside the scope of the grace period and the RO scheme and that the grace periods were therefore unfair in a public law sense.

The Court took the view that the decision to close the RO scheme to new generators from 1 April 2015 was not retrospective and that it did not affect accrued entitlements. The Court drew a distinction between retrospective legislation which changes the consequences of acts or omissions from that which alters the legal nature of those acts or omissions. The Court concluded that the legislation in question did not “alter the legal nature or even the legal effect of those acts or omissions”. While the decision did “alter the rules of the game after investors had started playing it” this could not “be more than a factor in the overall assessment of the fairness of the exercise of the power which Parliament had granted.” As to the existence of a grace period, the Court held that “a line had to be drawn” as regards the particular level of investment that would be required to qualify. Moreover, the Court rejected any criticism of the consultation process leading up to the decision where this line should be drawn as the process “resulted in a significant relaxation of the conditions”.

Comment

The successful outcome of the Friends of the Earth case[1] probably encouraged renewable investors and developers to bring legal challenges to policy changes, but this case and the case of R (on the application of Drax Power Limited and Infinis Energy Holdings Ltd) v HM Treasury and HM Revenue and Customs [2016] EWHC 288 (Admin) confirms that the hurdles for successful challenges remain high.

As a consequence of the Court of Appeal’s decision, “pipeline” investments remain vulnerable to policy changes, particularly under the RO and feed-in tariff schemes where an accrued entitlement only arises once generation commences.

The case also, first, underlines the importance of the LCF to all Government policy in this area and explains why investors (and the Energy & Climate Change Committee) are calling for greater transparency about the LCF budget so that they can properly take it into account when making investment decisions. Second, the case supports the Government’s practice of setting grace periods by reference to circumstances existing on the date of an announcement of a policy change, with the Court of Appeal moving away from Green J’s suggestion that there was an element of retrospection about such practice.

A copy of the judgment is available here.