The Energy Act 2013, which received Royal Assent on 18 December 2013, marks a significant milestone for the energy sector. The Act came three years after the white paper was published, and will reform the system of subsidies for low-carbon technologies. This edition of the newsletter reflects upon the key changes which are underway.
New strike prices for Renewable Technologies announced
DECC announced revised strike prices and published terms of contracts for difference (CfDs) on 4 December 2013. Lower support will be granted for onshore wind and solar photovoltaic (PV) which have decreased by £5/MWh. Energy from waste (EfW) and landfill gas are also worse off than in the July consultation.
New strike prices will be available to renewable energy developers between 2014 and 2019. As for the rates offered, increased support from July 2013 consultation has been announced for some technologies. Geothermal energy is due to receive £25/MWh more than the initial plan, while anaerobic digestion, hydro and dedicated biomass will receive a £5 boost. Strike price for offshore wind will also receive higher support by £5, but only in 2018.
The key contract terms are broadly the same as those set out in August 2013, with increased flexibility given to developers to reduce capacity, protection against unexpected events and protection against changing circumstances.
Electricity Market Reform Delivery Plan
DECC published its Electricity Market Reform Delivery Plan on 19 December 2013 – the first of what are planned to be 5-yearly delivery plans setting out the package of measures and mechanisms which will support the deployment of low carbon generating capacity. Much of the document confirms what was expected and what has previously been announced (for example in relation to the levels of Contract for Difference (CfD) strike prices) but a number of elements are worthy of emphasis:
Competition for CfDs
Responding to draft new state aid guidelines and a perceived strong pipeline of projects using ‘established technologies’, the Government proposes to divide the CfD budget between ‘established technologies’ and others. For established technologies (which we would expect to include onshore wind and solar) the size of the budget allocation will be set to ensure competition for the allocation of CfDs between all of these technologies from the outset (where the previous expectation had been for allocation initially on a ‘first come first served’ basis with a gradual move towards competition).
Government will need to be cautious in the introduction of this process (both in terms of the level of budget allocated to these technologies, and in the detail of the allocation process) because introducing this mechanism too aggressively risks jeopardising projects which are currently under development. The allocation framework which will scope the detail for how CfD allocation will work is not expected to be published until early 2014.
These changes affect not only the developers of renewable energy projects, but also any companies that are seeking to develop on-site renewables or are looking to buy power from renewable projects. The amount of projects in the market will be rationed via the auction process effectively limiting opportunities for companies to buy this type of energy.
Offtaker of Last Resort
Work is continuing on the development of proposals for an ‘Offtaker of Last Resort’ to give independent generators a backstop route to market (albeit at a discounted price) where they are unable to secure a PPA. It is hoped that this will give investors certainty of a route to market, and reduce independent developers’ dependence on long term PPAs (for which DECC has acknowledged there may not be a competitive market).
This is a sensible mechanism, but its value and effectiveness in inspiring investor confidence will depend to a significant extent upon the level of the discount to market price which the Offtaker of Last Resort provides.
Again, these changes impact not only on power project developers, but also on companies considering on-site projects or that are seeking to buy renewable electricity.
Capacity Market Reliability Standard
DECC has confirmed the level of the reliability standard which will underpin the Capacity Mechanism. The reliability standard identifies the accepted level of risk that electricity demand is not met in any given year - the capacity which the Capacity Mechanism is designed to bring forward will then be set at a level which meets this accepted level of risk.
The standard identified by DECC assumes a loss of load expectation of 3 hours per year. This is a level which is consistent with other similar jurisdictions, and is based on the ratio of the cost of open cycle gas turbine capacity (the cheapest marginal peaking plant) to the value which customers are deemed to place on not being disconnected. The reliability standard will be reviewed on a 5-yearly basis.
Renewables Obligation grace periods consultation
In light of prominent updates on the Energy Market Reform there was some good news for the developers of onshore wind and biomass projects. DECC published a consultation on grace periods for Renewables Obligation (RO) in preparation for closure of this scheme from 31 March 2017 when the RO is due to be fully replaced by the new contracts for difference model.
The consultation puts forward four detailed grace period arrangements which will apply as exceptions to projects commissioned after the closure date (ie, the affected projects can be accredited under the RO after 31 March 2017). These are:
- 12-month grace period to address radar and grid connection delays, where the project was scheduled to commission on or prior to 31 March 2017;
- 12-month grace period for projects which have signed Investment Contracts under FID Enabling, should these contracts fall away or be terminated under certain specific circumstances;
- 12-month grace period for projects able to demonstrate that substantial financial decisions and investments have been taken prior to 31 July 2014, where the project is scheduled to commission on or prior to 31 March 2017. However, these projects will have to undergo a notification process by 31 July 2014; and
- 18-month grace period for projects allocated a place under the 400MW dedicated biomass cap.
During the transition period (ie, 2014 to 2017), operators of projects which have commissioning dates on or close to 31 March 2017 will have the option to apply for the RO or CfD for assurance in case of unexpected delays although developers need to be aware of the costs they may incur if they attempt to surrender a CfD. However, RO will continue to provide support for 20 years at the levels which applied when the scheme closes.
The consultation closed on 28 November 2013, and covered England, Scotland and Wales. Subsequent to this, the Government aims to provide legislative certainty to developers by passing a Renewables Obligation Closure Order which will be laid before Parliament in Spring 2014. Developers of onshore wind and biomass projects would be best placed to keep abreast of this development.
These changes will assist those companies seeking to develop on-site projects or that are considering buying power from renewable operators.
Decarbonisation target blocked by the House of Lords
The proposal to set a decarbonisation target for 2030 in the Energy Bill was narrowly defeated in the House of Lords by 14 votes (216 to 202) on 28 October 2013.
The proposed measure would have enabled the Secretary of State for Energy and Climate Change to have introduced regulations by 1 April 2014 to impose a cap on the amount of carbon emissions from the UK power sector by 2030. The cap would have been set based on a target range of “carbon intensity”, that is the amount of carbon dioxide produced per unit of electricity generated.
Under the Climate Change Act 2008 (2008 Act), the UK is bound to meet a greenhouse gas emissions reduction target of 80%, against a 1990 baseline, by 2050. Alongside various policies adopted to reduce national greenhouse gas emissions (such as the CRC scheme and the EU emissions trading scheme), the Government has sought to reduce carbon emission reductions through targeting the power sector.
Since the 2008 Act entered into force, the Government has begun adopting legally binding carbon budgets to restrict the total amount of greenhouse gas the UK can emit over a five year period. To date, four carbon budgets have been set, covering the period from 2008–2027. Each carbon budget defines emissions limits for the traded sector (ie, power and heavy industry) and non-traded sector (i.e. road transport, agriculture and buildings).
The result of this outcome does not mean the decarbonisation target is rejected completely. The Energy Bill 2013-14 still contains a provision which allows a target to be set in 2016 when the fifth carbon budget (2028-2032) is due to be agreed. The Devolved Administrations in Northern Ireland, Scotland and Wales must be consulted before a target range can be set. The Secretary of State must also consider a number of factors before setting a target range, including scientific knowledge about climate change and economic circumstances.
The loss of this target will impact on all companies involved in the low carbon or energy efficiency sectors.
Further tax boost for Fracking
The Government has announced on 13 January 2014 that local authorities will be able to keep 100 per cent of business rates collected from shale gas development in England. This tax boost could be worth up to £1.7m for a typical shale gas site, which may well have an impact on councils considering planning applications for shale gas exploration, although it is not a relevant factor that they are allowed to take into consideration.
Under the current tax scheme, all businesses are required to pay a tax to their local council (“business rates”). Local authorities can keep 50 per cent of business rates income including growth and the rest is paid to the Treasury. The impact of this new scheme places shale gas on equal footing with renewable energy and new nuclear projects, for which councils have been able to retain 100 per cent of business rates since April last year.
While this tax break is designed to promote the shale industry, readers should note that so far only few licensed areas in the UK have permitted exploratory drilling. Bath and North-East Somerset Council, where the Hicks Gate licence is located, have already indicated that the business rates boost will not influence their decision to prohibit shale gas development due to the potential for damage to local hot springs. Reactions of other Councils remain to be seen to determine whether this favourable scheme will achieve its desired effect.
For further information on community benefits from shale gas, please visit our previous article entitled Planning Guidance for Shale Gas Developments in Englandfrom shale gas development in England.
Proposals to change the regulator for offshore Oil and Gas
The HSE Triennial Review report published on 9 January 2014, which examined HSE’s status as a public body, contained some interesting recommendations for the future regulation of the Oil and Gas sector.
The report recommended that the environmental inspection functions currently exercised by DECC be moved into the HSE’s Energy Division. As this approach could not be implemented immediately, the report recommends that, in the meantime, DECC’s approach as a regulator of environmental risks be brought “significantly closer to HSE’s preventative approach.”
If the Government chooses to act on the recommendations, 2014 could be a year of significant change for the regulation of the offshore industry in the UK Continental Shelf (UKCS).