The regulation of renewable energy in the UK has seen significant recent changes something which appears set to continue under the new Conservative Government. This article covers some of these recent changes and considers what lies ahead for the industry.
Climate Change Levy
The exemption from the Climate Change Levy (CCL) for renewable electricity supplied to business or public sector consumers is to end. This means Levy Exemption Certificates (LECs) will no longer be available for generation from 1 August 2015 onwards. Whilst LECs may not usually be included in a funder's financial model, it will lower the rate of return for equity investors. Generators and Power Purchase Agreement (PPA) providers may be looking at the change in law provisions of their PPAs to see if these have been triggered by the change.
The government has announced that the Renewables Obligation (RO) scheme will close to new onshore wind projects a year earlier than planned. The change is intended to take effect from 1 April 2016. Similarly, the RO is also likely to close a year early for new solar PV projects of 5MW and below and for additional capacity added to existing accredited stations up to 5MW total installed capacity. There will be grace periods that will help some projects to get into the RO, but not all.
For England and Wales, it is also proposed that grandfathering will end for solar PV projects of 5MW and below that are not accredited under the RO as of the date of the consultation (22 July 2015). Also in England and Wales, it is proposed that there will be a banding review for solar PV projects of 5MW and below which will result in lower levels of support.
The government has also decided that the support rate under the RO for new biomass conversion and co-firing stations/combustion units should no longer be covered by the grandfathering policy. This also applies to stations or combustion units that are already receiving support under the RO and move for the first time into the mid-range co-firing, high-range co-firing or biomass conversion bands. The effective date for this change is the date the consultation was published (12 December 2014).
Ofgem are currently consulting on their proposal to end pre-accreditation and pre-registration for the Feed-in Tariff (FIT) scheme. Assuming this policy goes forward following consultation, generating stations will no longer get the benefit of the tariff guarantee during the construction phase. This means installations will only receive the tariff rate as at the date they apply for full accreditation, which is a minimum of two months' prior to the date of commissioning.
Interestingly, Ofgem have commented in the consultation that as part of planned FIT review, pre-accreditation and pre-registration may be reintroduced for community groups or other similar schemes. Pre-accreditation has proved a useful tool especially for projects that seek project financing. Pre-accreditation and pre-registration is of clear use to community projects which may develop at a slower pace than the average commercial project.
The draft Energy Bill
The Bill is the first major piece of energy and climate legislation since the general election and the main principles of the Bill were announced back in the Queen's Speech in June. While relatively short two pages and a few short clauses make unsettling reading for investors in renewable energy. Clause 60 of the Energy Bill, introduced to Parliament on 9 July 2015, amends the Electricity Act 1989 to provide for the closure of the RO to new onshore wind generating stations located in England, Wales and Scotland on 31 March 2016.
It does this by preventing RO certificates from being issued for electricity generated by these generating stations after the closure date of 31 March 2016 – one year earlier than the deadline for which the industry had planned.
Some projects will benefit from a proposed “grace period”. These are projects that, as of 18 June 2015:
- had planning consent
- had accepted a grid connection offer or can confirm that no grid connection is required
- could provide a director’s certificate confirming that the developer or proposed operator owns the land; or has an option or agreement to lease the land; or is party to an exclusivity agreement.
Projects that qualify for the grace period will be able to become accredited for the RO up to 31 March 2017 – the original closure date. And if they satisfy the eligibility criteria for other existing grace periods (eg, if they have been affected by a grid or aviation delay), they can become accredited to receive it up to 31 March 2018. Projects that obtain accreditation will receive support for 20 years.
But what of projects that do not meet those criteria? DECC announced, a day before the introduction of the Bill, that it would like to hear from developers with projects currently in the planning system but without planning consent. The department said it wanted to seek clarity on which stage these projects are at, how much developers have already spent and their expected final planning and investment decision dates. The Bill provides an enabling power for the Secretary of State to make further regulations to set out further details. Such regulations would be subject to the affirmative resolution procedure and will therefore require a vote in both Houses of Parliament to approve the draft regulations.
The Bill was laid before Parliament in July and will enter the committee stage in September and is expected to come into force next year.
The Bill also grants planning powers over large-scale onshore wind farms to local authorities. We have written about these changes in our briefing: 'Changes to planning policy for onshore wind farms.'
What is next
There will be grace periods to help manage the closure of the RO to small scale solar and onshore wind. However, whilst the grace period criteria for small scale solar are likely to follow those previously used for large scale solar there is greater uncertainty around the criteria to qualify for a grace period for an onshore wind project. This leaves great uncertainty for market participants as the criteria may change whilst the Energy Bill passes through Parliament, and there is a risk that the test becomes even stricter. In fact, we are already seeing that some funders are refusing to lend because they don't know what the grace period criteria are going to be.
It has been suggested that the grace period could be extended by the period of delay between the date of the announcement on 18 June and when the act is passed. However, given that the RO was due to close in 2017, this may not be an attractive option for the government which wishes to be seen as taking a tough stance on onshore wind. The nature of the parliamentary process for passing primary legislation such as the Energy Bill is that the only way to influence the progression of the bill is through lobbying or the application of international law. Foreign investors that are impacted by the changes could try to bring a claim under the Energy Charter Treaty, however, this is not an option that is open to UK companies.
It will be interesting to see what stance the government takes at the forthcoming Paris conference and there is a big question around whether it will sign up to new targets for 2030 at the same time that it is cutting renewables support at home.
Also, towards the end of this year there will be a review of progress on energy directive targets – heat and transport.
Investment into the industry depends heavily on clear, stable and supportive government policies on renewable energy. Until grid parity is achieved, support is needed to help many projects achieve commissioning. This could have been achieved by lowering the support under the RO, or allowing onshore wind to continue participating in the CfD allocation rounds, possibly with a reduced administrative strike price.
While that may be what the industry and its investors need, the government has different needs. With a slim majority and a potentially divisive EU referendum campaign fast approaching, the government needs to appease potentially disruptive backbench MPs. Abolishing the Human Rights Act wasn't the easy win the government was looking for, so it has turned to onshore wind and solar instead. This is a political issue.
Backbench MPs oppose onshore wind and solar, and in some cases, offshore wind, because they see votes in doing so. While the renewables industry can point to majority public support for renewables (although DECC has just stopped publishing the results of its own polling on the level of support), a vocal minority, particularly in certain parts of the Southern and Central England, remain opposed to these projects. The industry has not won the "hearts and minds" battle with this group or their fellow constituents, who are seen to be neutral or passive on this issue. Sitting MPs do not fear the impact of being labelled as "anti-renewables" enough to change their stance on these projects.
The response from the industry needs to have a number of strands and to recognise the political constraints that the government considers it faces, along with the issue that consistently low (and currently falling) oil prices, means that grid parity with gas-fired plant is more difficult to achieve.
The arguments against renewables usually focus on visual impact and value for money grounds, and it was on the second point that the Conservative manifesto focussed. If the objection to onshore wind and solar is that they require subsidy, can the industry propose changes to the CfD regime that bring support closer into line with a "non-subsidy" position?
As an alternative, while European support regimes for renewables have focussed on the alternatives of feed-in tariffs or green certificate schemes, other jurisdictions, including many of the American states, use tax incentives to support projects and the CCL had a similar effect in the UK, before the government removed that benefit in the Summer Budget. Would providing support via the tax regime rather than through consumers' bills meet the needs of both DECC and the industry?
As well as working with the government on a solution that meets their needs, the industry should continue to put pressure on the government and MPs to change their views. The central points (or "inconvenient truths") are that carbon emissions need to be brought down and that onshore wind and solar are currently the most cost effective means for the UK to generate renewable electricity.
The industry needs to push the government for a programme for the 2020's; currently DECC will only set out its priorities for 2015. There are a number of levers the industry can deploy here, including the outcome of the Paris COP in December 2015 which it is hoped will lead to a successor to the Kyoto protocol and so set the international framework out to 2030.
At a European level, the UK government is substantially behind its targets under the Renewable Energy Directive, because of issues relating to renewable heat and transport. Commissioning more renewable electricity could address this shortfall.
Domestically, the government's advisory Committee on Climate Change called on the government to set its carbon objectives for the energy sector for the 2020s as soon as possible and to extend funding under the LCF to match energy project timelines; with the power sector typically needing at least a 10 year lead time. Allowing the current onshore industry to wither over the next five years will only increase the costs to current and future voters of decarbonising in the period beyond 2020.