In April 2010, the Government introduced Feed-in Tariffs ("FITs") in Great Britain ("GB"). FITs are already firmly established in other EU Member States such as Germany and Spain. Recent reports from these countries have noted retrospective changes to the legal framework on FITs, which have reduced the level of payment received by investors. Though there is no indication that such a trend will be followed in GB, these reports illustrate the need for investors to take into account the issue of regulatory risk.

Context

In 2008, a detailed analysis by the European Commission concluded, "well adapted feed-in tariffs regimes are generally the most efficient and effective support schemes for promoting renewable electricity".

In October 2008, DECC announced that Britain would implement a feed-in tariff by 2010, in addition to its current renewable energy quota scheme ("ROCS"). The FIT programme introduced under the Energy Act 2008 "went live" in April 2010. Northern Ireland has no current plans to introduce FITs.

Under the FIT regime, an obligation is imposed on (regional or national) electricity suppliers to buy renewable electricity (generated from solar power, wind power, wave and tidal power, biomass, hydropower and geothermal power). The amount of the FIT depends on the size and technology of the installed generation plant.

How the Feed-in Tariff Regime Works

Key points of the FIT regime can be described as follows:

The tariffs are fixed in the licenses of the FIT licensees (suppliers). The generator will receive payment of the tariff from the licensees.

There are two classes of eligible generators:

  • Microgenerators (under 50kW). Eligible generators in this class will no longer be eligible for ROCs and must be accredited for FITs.
  • Small Generators (from 50kW to 5MW). Eligible generators will be entitled to opt either for the FIT Scheme or the ROC scheme.

Generators eligible to received feed-in tariffs can claim two types of payment:

(i) generation payment (a fixed payment from the supplier for every kWh generated); and (ii) export payment (a payment for every kWh exported to the grid).

The installation will benefit from FIT payments for 25 years after commissioning and thereafter will no longer be eligible for FIT payments. A list of the tariffs payable is contained in the supply licence, available on Ofgem's website.

The FIT Programme review is scheduled for 2013.

Regulatory Risk

Renewable technologies might be subject to additional regulatory risk. Changing economic or political priorities may create pressures to reduce the scale of previous commitments to renewable generation and to shift back to towards traditional technologies. The technological innovation in the renewables sector may also lead governments to shift priorities towards a specific renewable fuel type.

In Germany, for example, costs for generating electricity from wind and biomass have already decreased, while future costs for solar PV still remain uncertain. Therefore, in July 2010, the German Government has cut 16% of the sum payable under the FITs regime for solar panels installed on the roof, 11% for "stand-alone systems" and 15% for other projects. In Italy similar cuts of 18% have been reported. In Spain cuts of 45% for new projects and 30% for existing projects are expected.

In GB, some comfort might be taken from the historic approach taken by the Government to changes to renewable supports. When banding was introduced to the renewable obligation, those investors already engaged in the market were protected from any adverse effect through the grandfathering provisions included in the new provisions. Nevertheless, a potential investor should remain alive to the issue of regulatory risk in light of recent trends from the continent.