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).