It has recently been announced by Defra that a £10 million fund will be made available to developers of Anaerobic Digestion (AD) in England.  The Anaerobic Digestion Loan Fund (ADLF) is designed to support the development of new AD capacity and aims to support 300,000 tonnes of annual capacity by 2015, diverting food waste from landfill.  Applications for the first round of funding are open until 31 October 2011.

But, could accepting public funding cause difficulties in relation to eligibility for the Feed-in Tariff (FIT) or Renewable Heat Incentive (RHI)?  Developers may recall that grant-funded projects supported under the FIT ran into difficulty in relation to compliance with the EU State Aid.  The same principles should apply to RHI.  This article considers what potential interaction whether there may be between the ADLF and the FIT/RHI.

Feed-in Tariffs (FITs)

As FITs are designed to replace, not supplement, existing public grants schemes, it became clear that there may be State Aid implications for those projects in receipt of both benefits.  When this issue was first raised, those installations that benefited from a grant were in a state of regulatory limbo until a decision was made regarding whether receiving a FIT in addition would constitute an unlawful State Aid.

DECC clarified the position in the Feed-in Tariffs (Specified Maximum Capacity and Functions) (Amendment) Order 2011.  It has been confirmed that projects already in receipt of a grant are generally not also eligible to receive FITs, except: where a grant from public funds has been made, and that grant has been repaid; where a grant has been made, but not repaid, and it is a "permitted grant", under Article 8(5) of the 2010 Order (as amended); where the grant is not a "permitted grant", but Ofgem is satisfied that the making of FIT payments would be in accordance with the law relating to State Aid.

When will grants comply with law on State Aid?

Provided that the total aid awarded to a project, including prospective FITs payments, meets the EU's de minimis regulations, receipt of a grant in addition to FITs payments is possible.

At present, the de minimis regulations state that a project can receive no more than €200,000 over three fiscal years, "regardless of the form of aid, or the objective pursued".  Awards of support "in kind" must be converted into a cash value for the purposes of these regulations, and will count against the amount allowed.

What about RHI?

The RHI provisions are still in draft.  While we have found no explicit reference to the de minimis exception in the draft RHI Regulations currently before Parliament (which seems strange), we note that the same legal principles should apply equally to RHI as for FIT, and we therefore expect that those projects in receipt of public money should in principal also be eligible for RHI insofar as they are compliant with the State Aid rules.  This is an issue that would benefit from some clarification from DECC.

Will the ADLF be compatible with RHI?

If ADLF is considered a form of grant for these purposes (this has not yet been addressed directly by either DEFRA or DECC), i.e. because it is state provision of services on preferential terms, this does not mean that the total loan amount available to installations is capped at the de minimis level of €200,000 over three fiscal years.

The Waste & Resources Action Programme (WRAP) has been approved by the EU as State Aid, pursuant to Articles 107 and 108 of the Treaty on the Functioning of the European Union (TFEU), with "soft" loans to be provided through a modification to WRAP's Capital Grants and Lease Guarantee Fund Scheme.  The European Commission has decided that the amount of aid received through receipt of such a loan would be determined not by the amount of the loan, but by the difference in interest due on that loan as compared to that which would have been payable against a commercial loan.

The aid granted through the scheme stems not from the loan itself, which, as a loan, is to be repaid in full, but from the favourable interest rate agreed upon that loan.  It follows from this that a project in receipt of an AD loan could then also receive FIT or RHI payments (as the case may be), if the project intended to utilise AD technology for the production of renewable electricity, provided the total payments did not exceed the de minimis limit of €200,000 over three fiscal years.

Official clarification from DECC on these issues should assist investors looking at AD to make informed decision.