This article discusses some of the opportunities for occupiers to utilise energy generation and storage technologies co-incidental to occupation of their property assets and, where the property is let, the legal considerations in relation to the lease.
Commercial occupiers are increasingly embracing new and evolving energy technologies to streamline and differentiate their businesses as well as cut costs and manage exposure to energy prices. Equally, opportunities are emerging of which occupiers can take advantage. Occupiers need an understanding of both the energy market and incentives, and the interaction with the landlord – tenant relationship, to be able to fully consider the range of opportunities and benefits. This note discusses some of the opportunities for occupiers to utilise energy generation and storage technologies co-incidental to occupation of their property assets and, where the property is let, the legal considerations in relation to the lease.
Use of renewable and other technologies
Use of renewable and other low carbon technologies to generate electricity to supplement or substitute electricity imported from the electricity grid is not a recent development; for example solar panels have been seen on the roofs of buildings, both commercial and residential alike, for a number of years. However, despite general falls in the construction costs of renewable energy equipment, the ending of the Government subsidies (Feed-in-Tariff and Renewables Obligation) supporting new onshore wind and solar PV, has resulted in most energy project companies turning their focus to other technologies. Commercial occupiers are not focussed upon harnessing renewable technologies for the purpose of revenue generation but instead identifying where advances in technology can be used to reduce their costs. Commercial occupiers can utilise renewable technologies, in particular solar and wind, to generate electricity for their premises. One of the key challenges to occupiers is the extent to which they are permitted (or otherwise) to install these technologies. This is discussed in more detail below.
Combined with electricity generation equipment, batteries can be used to store surplus electricity generated at times of heightened generation for use when it is needed. A prime example would be where an intermittent technology is installed such as solar or wind and so generation capacity is affected by weather conditions. Batteries can also be connected to the grid, enabling an occupier to import electricity from the electricity network at night and at other periods of low demand, when prices are typically cheaper. This electricity can be stored and then used during times of higher demand, when it would otherwise cost more to import from the electricity network.
Storing electricity imported during periods of low demand, or after generating a surplus during periods of heightened generation, could also enable an occupier to sell it back on to the electricity network via a licensed electricity supplier when demand on the network increases. This is done by the occupier signing up to provide 'balancing services' to National Grid (e.g. through STOR (Short Term Operating Reserve) contracts or Capacity Agreements). This could generate a profit for the battery storage provider in addition to the electricity cost-saving benefit associated with using stored electricity for operating premises. In order to take advantage of this, the battery would need to be connected to the electricity grid, which requires a connection agreement with the local Distribution Network Operator (DNO).
If an occupier wants to connect a battery storage unit or any renewable energy generation unit to the electricity grid, it will need to contact its local DNO to ask for a connection. Each DNO has its own application process, normally available on its website, setting out what information it requires. The installer of the energy project will typically apply on the occupier's behalf. Discussion with the DNO at the outset is crucial, to make sure that the local network has capacity to take the increased load that the installation will create, and to determine what the charge for connection works will be.
Once the DNO has received the application, it must respond with an offer of connection terms as soon as practicable. This will specify the conditions for the connection and the amount of the connection charge. There will be a specified period (typically 30-90 days) to accept the offer. The installer will then carry out the work to install the battery and/or generating unit and connect to the connection works carried out by the DNO. In some circumstances, it may be cost effective to contract with an accredited third party independent connection provider (ICP) to carry out those connection works that do not have to be carried out by the DNO. Again, the installer is likely to guide the occupier through this process.
If an occupier wishes to install any of these technologies to serve its premises there are various property issues which it would need to consider. Some of the potential issues are discussed below, but the considerations would vary on a case-by-case basis.
Whether an occupier wants to install solar panels, wind turbines, batteries or other technologies, it needs to be entitled to erect and keep the equipment in its installed location. An occupier may have an internal demise with the roof and external areas retained by the landlord. Even if an occupier has a full structural demise of a unit, there may not be any external areas in the demise which could be used for installing the equipment. This is not fatal however. But the occupier would therefore need to persuade its landlord to agree to allow installation on retained areas. Some landlords are very open to the idea of renewable technology on their property and in some cases this may even be a requirement of the planning permission for the unit or wider estate.
The installation of renewable technologies is likely to require planning permission in addition to the existing planning permission for the premises. It is usual to expect an occupational lease to include a restriction on a tenant applying for planning permission without landlord's consent. As a result, the occupier's landlord may need to be engaged before any application for planning permission is submitted to ensure there is no breach of the lease covenants and to avoid potential for wasted costs in connection with the planning application.
Landlord's consent to alterations
Even if the occupier has, within its demise, the area needed to install the relevant equipment, it is usual to find that an occupational lease will contain a prohibition on structural or external alterations or additions being carried out without landlord's consent. A licence for alterations would need to be applied for and, in practice, this will usually include relevant permissions for the occupier to apply for planning permission for the proposed alterations. Likewise, if the proposed electricity generation equipment requires the installation of cables across the landlord's retained land in order to connect the equipment and/or storage devices to the network it will be necessary to establish whether existing lease rights permit the laying of such cables or whether new rights will need to be sought from the landlord. Once again, the landlord should be engaged early to ensure that the occupier has the required permissions under its lease.
An occupier carrying out alterations will usually be required to covenant with its landlord to reinstate the premises, removing the alterations, at the end of the term of its occupation. However, the installed equipment may have a residual value to the occupier (who has paid for its installation) or the landlord (if it can compel the occupier to leave the equipment at the premises). A landlord may be interested in the equipment remaining at the premises if the premises have an improved EPC rating by virtue of the equipment or if the landlord otherwise sees a benefit in re-letting the premises with the installed technology. The occupier would not want to forego the residual value. The landlord and the occupier may therefore want to draw up a pre-installation agreement as to how the equipment is dealt with at the end of the period of occupation where this is due to end before the useful life of the equipment ends and to cover any early forfeiture.
Landlord's consent to underletting
Depending on the proposed arrangements for the installation, ownership and maintenance of the generation/storage equipment it may be that the equipment is intended to remain in the ownership of the supplier/operator, with the occupier simply benefitting from the cost savings in taking power from the onsite equipment rather than from the electricity grid. If this is the case the occupier's lease will need to be checked to establish the requirements for landlord's consent to any such underlease.
Future proofing leases
We have assisted some of our clients in their lease negotiations by including express rights to use roofs and external areas (whether within or outside the demised areas) for installing renewable technology equipment, with the future possibility of such installations in mind. The occupier is in a much better position to negotiate with its landlord to install renewable technologies where it has an underlying right to do so.
There are significant potential benefits to commercial occupiers in adopting renewable technologies and/or battery solutions to enhance their business operations. However there are also several challenges, including investment implications and the entitlement of an occupier to install equipment.