Introduction

The Government has decided to slow down solar PV deployment by cutting off the availability of support for projects over 5MW under the Renewables Obligation (RO) from April 2015. Some projects may be eligible for a one year grace period. These proposals are being consulted on until 7 July 2014.

Background

The Department of Energy and Climate Change (DECC) recently published the “UK Solar PV Strategy Part 2: Delivering a Brighter Future” (the Solar PV Strategy). One issue that caused particular concern was the announcement that DECC was considering the implications of current trends of deployment on the financial incentives available to solar PV under the Renewables Obligation (RO) and Feed-in Tariff (FIT) support regimes.

Current RO banding

The current RO bands for newly accredited ground-mounted solar PV projects were announced in December 2012 in the “PV Banding Response”.1 They are set out below:

Click here to view table.

Subject to the outcome of the current consultation, the 2016/17 band would appear no longer to be relevant.

DECC’s previous position on changes to PV support

It was confirmed in the PV Banding Response that the Government would rely on the mechanisms that already exist under the RO to ensure that support levels for solar PV remain sustainable. The Government considered at that time that the existing mechanism for early reviews was the most appropriate tool to use, should it become necessary to do so, to ensure that any future changes in the PV industry did not lead to windfall gains for developers and put pressure on the RO budget. However, the Government did confirm that it takes the potential risks to the Levy Control Framework and the RO budget very seriously and needed to be able to respond to market changes as quickly as possible.

However, the current consultation proposals are a significant departure from these assurances. A blanket cut-off of RO support for some projects in less than one year’s time is much more draconian than a reduction in levels of such support.

What is DECC concerned about?

DECC has stated that over the last four years, the development of larger, ground-mounted, utility-scale solar PV has greatly increased both in terms of the installed capacity and the number of installations. In addition, the typical size of these installations has been increasing. At the end of 2011-12, there were 46 projects larger than 1 MWp operational, totalling 160 MWp of installed capacity. By the end of February 2014, that number had grown to 184 projects (850 MWp) with a further 48 projects (538 MWp) expected to commission before the end of 2013-14. In addition, another 194 projects (1656 MWp) have planning permission and are awaiting construction. This rate of deployment appears to have caught DECC by surprise.

Details of the announcement

DECC is consulting on closing the RO across Great Britain to new solar PV generating stations, both ground- and building-mounted, above 5MW from 1 April 2015.

RO closure would also apply to any additional capacity added to an accredited solar PV station from 1 April 2015 where the station is, or would become, above 5MW. In addition, the Government reserves the right to implement harsher controls if deployment poses a bigger budgetary threat than was envisaged at the time of the launch of the current consultation..

Such projects are able to apply for a Contract for Difference (CfD), a new form of low carbon energy support introduced under a process known as Electricity Market Reform. However, CfDs remain in their infancy, and there are uncertainties about the levels of support that will be available under a CfD and the implications for a competitive allocation process for PV projects getting access to CfD support (see further below).

Grace periods

Limited grace periods will be available allowing projects to be RO accredited after 31 March 2015 if:

  1. preliminary accreditation was obtained for the station on or before 13 May 2014; or
  2. evidence is provided to Ofgem demonstrating that significant commitments have been made on or before 13 May 2014 in respect of the project. Evidence must be provided to Ofgem by 31 March 2015.

For a grace period to apply, the station must be commissioned and accredited by 31 March 2016 and all of the other usual RO eligibility requirements must be met (i.e. the project must have commissioned).

Projects benefitting from a grace period would receive the RO band in force on the date of accreditation, i.e. the grace period would not protect the project from scheduled reductions in the level of RO support. RO support for PV is scheduled to reduce in April 2015 in any event, as set out above.

It can be argued that creating a safe haven for projects that have applied for preliminary accreditation at this point in time is unfair. There is no requirement for projects to apply for preliminary accreditation in advance of full accreditation. Under the RO (unlike under the feed-in tariff regime), there were until now no advantages in doing so (particularly for non-fuelled generating stations). As such, many developers may not have chosen to apply for preliminary accreditation and may now find themselves at a disadvantage compared to those who did.

There will be a rush for accreditation of projects:

  1. before 1 April 2015 if possible; or
  2. before 1 April 2016 if this is not possible and a grace period applies.

However, it should be noted that any rush may have further negative consequences for the industry, as the Government has reserved the right to implement even more draconian controls on PV deployment where necessary.

Evidence for grace periods

In order for a grace period to apply, evidence of all four of the following must be provided:

  1. Grid connection offer and acceptance of that offer, both dated no later than 13 May 2014, and a letter from the network operator estimating or setting a date for the grid connection which is on or before 31 March 2016; or confirmation that no grid connection is required;
  2. Relevant planning consents dated no later than 13 May 2014 (pre-commencement conditions are not required to be satisfied);
  3. Director’s Certificate confirming that as at 13 May 2014 the developer or proposed operator of the station owns the land on which the station is to be situated or has an agreement to lease the land. An option to purchase or lease land is not a sufficient indication that a project has made a significant financial decision and is as committed to proceeding as a project which has actually purchased or leased the land; and
  4. Evidence in the form of invoices and payment receipts from the developer or proposed operator of the station that demonstrate that a minimum of £100,000 per MW of expected consented capacity in project pre-commissioning costs (PPC) has been incurred on the project by 13 May 2014, OR proof that all material equipment contracts have been entered into for the project by 13 May 2014.

This creates further (and novel) barriers to RO accreditation for developers to grapple with. However, unless the consultation proposals are modified, developers have not been provided with any opportunity to get their houses in order in respect of these new criteria.

Pressure to “commission”

These announcements are likely to lead to a rush to commission projects as soon as possible so that they can be accredited under the RO regime and therefore benefit from current levels of RO support. However, there is little clarity on the approach that is taken to commissioning and the ability to accredit. As a matter of law, “commissioned” means, in relation to a generating station, "the completion of such procedures and tests in relation to that station as constitute, at the time they are undertaken, the usual industry standards and practices for commissioning that type of generating station in order to demonstrate that that generating station is capable of commercial operation". Ofgem’s guidance on what constitutes a generating station in essence provides that it is the whole generating station, i.e. all of the generating equipment and associated electrical equipment. However, our experience is that Ofgem has taken a relatively pragmatic approach to allowing a generation station to accredit under the RO and has not always required that all elements of the generating station are operational and generating electricity in order for a generating station to be RO accredited. Many developers have sought to rely on G59 certificates as being definitive proof of commissioning, but this approach is not one that is referred to under either legislation or guidance. There remains a risk that Ofgem becomes less flexible in its interpretation of the requirements for commissioning if pressure to reduce RO support for PV increases.

Turn to a CfD?

These consultation proposals may have been less onerous if the proffered alternative to RO support, being the CfD, presented fewer uncertainties to developers. However, the final form of the CfD contract has only just been made available. Further, it represents a very complicated document (running to several hundred pages of drafting) for developers to work through and fully understand over the coming months, in order to establish whether the economics of support under a CfD would be acceptable for a project. This had not been a high priority for the PV industry until now, as it had largely been assumed that the RO would remain available under 2017 and that the complexities of the CfD would be unattractive for smaller projects. Entities already familiar with the CfD as a result of also developing technologies with longer lead-times than PV will be at an advantage.

Further, whereas the level of support under the RO was largely understood in advance, the same is not true of CfDs. Partly as a result of state aid requirements, developers of established technologies such as PV will be forced to compete for allocation of a CfD in auctions. Determining the level of support at which to bid as part of an auction will represent an additional layer of complexity.

State Aid

A further issue to note is that the European Commission’s state aid guidelines on environmental protection and energy aid come into effect on 1 July. The Government has announced that the guidelines could have an impact on the government’s current proposals and suggest that if this is the case then rather than cut off the RO in 2015 the Government might find another mechanism to reduce support for PV under the RO. This could be done by limiting the ability of electricity suppliers to use certificates from PV projects to satisfy their obligations under the RO. Alternatively, a capacity cap could be implemented to prevent PV projects being accredited over a certain capacity level. Finally, the government might consider a rebanding of RO support for PV by way of a review of the levels of banded RO support for PV.

Contractual protections

In many instances EPC contractors have been ready to accept commissioning delay risks leading to RO downbanding as their own or as a shared risk. A similar approach may not be available where the alternative is a requirement to apply for support under a CfD. Parties are unlikely to provide protection in respect of risks that are not yet quantifiable. Should contacts be executed in advance of certainty about the levels of future support, risks are likely to lie with developers. Equally, lenders are unlikely to be comfortable providing finance in respect of projects where levels of support are uncertain.