UK legislative framework for renewable energy

UK legislative framework for renewable energy 2015 Update Dominic FitzPatrick Partner, Head of Energy (UK) Last year s article for Clean Energy UK Finance Guide 2014 set out a comprehensive review of the regulatory framework for renewable energy in the UK including summaries of the main support mechanisms. That article is available at http://bit.ly/1tqudvy. This article supplements and updates last year s article by summarising the principal legal developments since that article was written. Renewables Obligation ( RO ) Transition Period The RO moved into the transition period on the commencement of the Contracts for Difference ( CfD ) scheme in October 2014. This period will last until the RO is closed to new generation capacity on 31 March 2017. Amendments were made to the Renewables Obligation Order to reflect this transition. Choice of Scheme Under the transition arrangements, generators in England, Wales and Scotland have a one off choice of scheme between the RO and the CfD scheme. Once an application for accreditation is made for a CfD an application cannot be made for accreditation of the same generating station under the RO, unless or until the application for the CfD is rejected. Similarly, if an investment contract has been entered into under the FID Enabling Programme for the same generation station, then the station is ineligible to apply under the RO unless or until the investment contract is terminated for a permissible termination event (i.e. events relating to delay or refusal of approval for a CfD or conditions attached by the EU or amendments proposed by the Secretary of State). An application for preliminary accreditation under the RO does not constitute a choice of scheme. Degression The RO banding and degression remains unchanged from the degression rates introduced on 1 April 2013 following the 2012 banding review. The rates for the previous and remaining obligation periods in the transition period are set out last year s article for this publication. These rates will be reviewed at four year intervals (the next schedule review being due in 2017) but remain subject to emergency review in a number of circumstances, including changes to other support schemes, introduction of new technologies capable of being deployed on a large scale and significant variations in net costs of any technology changing the economic case for support. 4

THOUGHT LEADERSHIP Closure of RO to Solar >5MW Solar PV capacity accredited under the RO increased 250% in the calendar year 2014. The substantial increase in the rate of deployment of solar PV in the UK raised concerns about the impact upon limits imposed by the Levy Control Framework on support for renewables. After a number of consultations in 2014, on 1 April 2015 the RO was closed to new solar PV generating stations having a total installed capacity (TIC) above 5MW and to additional capacity added to existing stations resulting in a TIC of more than 5MW. Three grace periods were introduced, allowing the possibility of RO accreditation of solar generating stations above 5MW if the relevant criteria are met and the station is commissioned on or before 31 March 2016. Solar PV stations that have been accredited under the RO and add new capacity resulting in the TIC exceeding 5MW, can apply for support under the CfD for the capacity above 5MW (known as excluded capacity ) provided that the capacity is separated and separately metered. A station that is accredited for part of its capacity under the RO and part of its capacity under the CfD scheme is known as a dual scheme facility. Grace Periods Three grace periods were introduced, allowing the possibility of RO accreditation of solar generating stations above 5MW if the relevant criteria are met and the station is commissioned on or before 31 March 2016. These are the significant investment, grid delay and preliminary accreditation grace periods. The significant investment grace period allows accreditation of solar PV stations of more than 5MW if it can be demonstrated that, on 13 May 2014: 1. an application had been made for planning permission, 2. an accepted grid connection offer existed for grid works for the connection of the station; and 3. the operator of the station declares that a developer or a person connected with the developer held one of the specified interests in the land or an exclusivity agreement with the owner or lessee of the land relating to the development of the solar PV generating station. Cumulative solar photovoltaics deployment 2010 to 2015 Installed Capacity (GW) Feed in Tariffs eligible 7 6 5 4 3 2 1 0 Renewables Obligation accredited Other Solar 2010 2011 2012 2013 2014 2015 Source: Solar Photovoltaics Deployment, Department of Energy and Climate Change 29 May 2015 The grid delay grace period allows accreditation of solar PV stations of more than 5MW if it can be demonstrated that: 1. an accepted grid connection offer existed for grid works for the connection of the station; 2. the estimated or planned date for completion of the grid works (as stated by the relevant network operator) was no later than 31 March 2015; 3. the relevant network operator confirms that the relevant grid works were completed after the planned completion date and in its opinion the failure to complete the works by that date was not due to any breach by the developer of any agreement with the relevant network operator; and 4. the operator of the station declares that to the best of their knowledge and belief the station would have been commissioned not later than 31 March 2015 if the relevant connection works had been completed on or before the planned date. Where preliminary accreditation had been granted, no further evidence is required to be submitted other than evidence of commissioning. In all cases applicants must submit evidence of commissioning. 5

CHP Uplift Prior to 1 April 2015, qualifying combined heat and power (CHP) stations could claim additional support under the RO for heat produced (the CHP Uplift ). From 1 April 2015, new generating stations and existing stations adding capacity can no longer claim the CHP Uplift under the RO but may instead claim support under the Renewable Heat Incentive ( RHI ). There is an exception where the technology or fuel source is ineligible under the RHI. A new Renewables Obligation Order DECC published a draft Renewables Obligation Order 2015 in a technical consultation that ended in April 2015. This consolidates the existing Renewables Obligation Order and amendment Orders and adds new provisions dealing with interaction with the Capacity Market and provides for the introduction of mandatory sustainability provisions from 1 October 2015 for stations of 1MW and above using solid and gaseous biomass feedstocks. These include: the introduction of land criteria for woody biomass, which requires feedstocks to have been obtained from a sustainable source (supplementing existing sustainability criteria); the establishment of a greenhouse gas (GHG) target trajectory and GHG averaging methodology; providing for a reduction of CO2eq/MWh for Dedicated Biomass and Conversions & Co-firing to 200kg CO2eq/ MWh from April 2020 and 180kg CO2eq/MWh from April 2025; and a requirement for generators of 1MW and above to produce independent audit reports relating to their compliance with sustainability criteria. FEED IN TARIFFS (FITS) To date, deployment of commercial and industrial scale building-mounted solar PV has been below levels in other European countries. The Government s Solar PV Strategy published in April 2014 has a policy objective to increase this deployment. DECC also seeks to increase the participation of communities in renewable energy generation. As a result of high deployment rates, the maximum degression of 28% will apply to stand alone PV with effect from 1 July 2015. In 2015, a number of adjustments to the FiT scheme were introduced in order to increase the deployment of building mounted solar PV and to facilitate community participation in FiT generation. Building mounted solar PV Split in solar degression bands The degression banding that previously applied to solar PV installations of more than 50kW has been split into separate >50kW other than stand alone and stand alone bands with effect from 1 January 2015. Degression bands for new solar PV installations from 1 January 2015 are set out below. As a result of high deployment rates, the maximum degression of 28% will apply to stand alone PV with effect from 1 July 2015. Other than stand-alone installations >250kW In the Government s response to the further consultation on the changes to financial support for solar PV published Degression bands for new solar PV installations from 1 January 2015 Aggregate Declared Net Capacity of all other than stand-alone solar photovoltaic installations with a Declared Net Capacity of 10kW or less deployed in the previous quarter Degression rate Aggregate Declared Net Capacity of all other than stand-alone solar photovoltaic installations with a Declared Net Capacity of more than 10kW but not more than 50kW deployed in the previous quarter Degression rate Not more than 100MW nil* Not more than 50MW nil* More than 100MW but not more than 200MW 3.5% More than 50MW but not more than 100MW 3.5% More than 200MW but not more than 250MW 7.0% More than 100MW but not more than 150MW 7.0% More than 250MW but not more than 300MW 14.0% More than 150MW but not more than 200MW 14.0% More than 300MW 28.0% More than 200MW 28.0% Not more than 32.5MW nil* Not more than 17.5MW nil* More than 32.5MW but not more than 65MW 3.5% More than 17.5MW but not more than 35MW 3.5% More than 65MW but not more than 97.5MW 7.0% More than 35MW but not more than 52.5MW 7.0% More than 97.5MW but not more than 130MW 14.0% More than 52.5MW but not more than 70MW 14.0% More than 130MW 28.0% More than 70MW 28.0% * Degression can only be zero for two quarters in a row. 6

THOUGHT LEADERSHIP on 5 November 2014, DECC announced that the definition of Other than stand-alone installations for installations above 250kW will change to include a requirement for a minimum on site usage of electricity produced from the installation of 10% of the declared net capacity (DNC) of the FiT installation. FiT generators of such plant will need to demonstrate that there is sufficient plant on site to be capable of drawing a load of at least 10% of the DNC at time of low power generation. The FiT scheme now includes a number of provisions intended to promote community energy installations. Transferability of building-mounted solar PV installations In the Government response to the consultation on the transferability of building-mounted solar PV installations dated 20 March 2015, DECC confirmed that it will introduce secondary legislation in 2015 to modify the FiT scheme so that building mounted solar PV of >50Kw may be transferred from its installed location subject to a number of conditions (some of which were modified following the consultation). These are: 1. The installation must continue to be classed as otherthan-stand-alone. 2. Transfers would only be allowed for installations whose eligibility date is on or after the date the legislation comes into force. 3. An installation would not be able to transfer location in the first 4 years that it is entitled to FIT payments. 4. Payments will not be made during the transfer and there will be no extension to the facility s entitled FIT payments period to compensate for this. 5. Where the installation formed part of the compliance with new build energy performance requirements of the building it was originally attached to the transfer will not be allowed. 6. The owner of the transferring solar PV installation will be liable to pay for a new energy performance certificate for the building they are removing it from that shows the energy rating of the building without the PV installation, excluding instances where the building is to be demolished or where the panels have been removed for remodelling. 7. The owner of the transferring solar PV installation must inform the local planning authority of their intention to transfer and must carefully consider if the removal of the installation could breach a condition or limitation, subject to which planning permission has been granted. Community Energy Installations The FiT scheme now includes a number of provisions intended to promote community energy installations. Community energy and school installations already benefit from less stringent energy efficiency requirements than other generators (EPC level of G or above rather than D or above). The Feed-in Tariffs (Amendment) Order 2015 introduced changes to the definition of community organisations, extended the period of validity of preliminary accreditation of a community organisation and provided that the sharing of a grid connection with another project by a community organisation would not determine the extent of the Site (and therefore would be disregarded determining the eligibility of the installation under the FiT scheme). Definition of community organisation Community interest companies and subsidiaries of charities have been added to the definition of community organisations (which previously included charities, community benefit and co-operative societies only). This is intended to give greater flexibility to the legal structure of the community participation. The eligible organisations (and in the case of a subsidiary of a charity, the subsidiary and the parent charity) must have 50 or fewer employees. Validity of preliminary accreditation The validity of preliminary accreditation given to an installation that will be owned by a community organisation is increased by 6 months. Therefore the validity periods are: solar PV - 2 months; wind and anaerobic digestion - 18 months; and hydro - 30 months, each beginning with the date on which the application for preliminary accreditation was received by the Authority. Shared Grid connection Eligible installations on the same site using the same technology are treated as a single installation under the FiT scheme. Although there is no statutory definition of site for these purposes, OFGEM s guidance states that the meter point administration number (MPAN) (i.e. grid connection) is a determinative factor. Installations that share a single grid connection are therefore likely to be considered as a single installation. By virtue of the 2015 Amendment Order the MPAN shall not be taken into account in determining the extent of the Site where at least one of the installations is owned by a community organisation. 7

Climate Change Levy Current CCL rates are set out below: Commodity Electricity Rate from 1 April 2016 0.559 pence per kwh Rate from 1 April 2015 0.554 pence per kwh Reduced rate of CCL for CCA holders From 10% Renewable Heat Incentive The RHI is funded directly from general taxation. Although it does not fall under the Levy Control Framework, the Treasury has assigned annual budget limits to the RHI until 2016. These limits allowed 424 million expenditure in 2014/15, and allow for 430 million expenditure for 2015/16. The Government has introduced set tariffs for certain technologies and the degression mechanism to ensure the RHI scheme stays within these financial limits. Gas supplied by a gas utility or any gas supplied in a gaseous state that is of a kind supplied by a gas utility Any petroleum gas, or other gaseous hydrocarbon, supplied in a liquid state Any other taxable commodity 0.195 pence per kwh 1.251 pence per kg 1.526 pence per kg 0.193 pence per kwh 1.240 pence per kg 1.512 pence per kg Road Transport Fuel Obligation ( RTFO ) From 35% From 35% From 35% The Renewable Transport Fuel Obligations Order 2007 was amended by the Renewable Transport Fuel Obligations (Amendment) Order 2015 with effect from 15 April 2015. The 2007 Order previously provided for one renewable transport fuel certificate (RTFC) to be issued for each kilogram of gaseous renewable fuel or litre of liquid renewable transport fuel. The 2015 Order provides that each kilogram of biomethane will receive 1.9 RTFCs, and each kilogram of biopropane or biobutane will receive 1.75 RTFCs, reflecting the higher energy content of those fuels. The amendment brings the treatment of hydrotreated vegetable oil (HVO) and fatty acid methyl ester (FAME) into line, as well as clarifying the Department of Transport s administrative powers. DECC calculates anticipated spend by using data based on applications received by Ofgem and installations already participating in the scheme to establish how much it is committed to spend over the next 12 months. The 12-month period moves forward every quarter with the previous assessment date as its starting point. Monthly reports are also produced. DECC has announced there will be a 15% reduction to the small commercial biomass tariff for non-domestic RHI for the quarterly period starting 1 April 2015. The uptake of ground source heat pumps and solar thermal panels has been much smaller than anticipated, therefore it is unlikely these other technologies will be at risk of degression. DECC also announced that there would be a 20% reduction in the biomass tariff for domestic RHI for the quarterly period starting 1 April 2015, from 10.98p to 8.93p. The Government has committed to the concept of grandfathering the RHI, in order to provide certainty to those investing in renewable heat installations about the level of support they will receive. This means that any changes to tariff levels will only affect new projects accredited on or after the date that new tariff levels are implemented. Levy Control Framework In November 2012 DECC announced an upper limit of 7.6 billion (in 2011 to 2012 prices) on spending until 2020-21 for the combined cost of RO, FiTs and Contracts for Difference. Capacity market expenditure will be paid for through the LCF, but it will be in addition to the 7.6 billion LCF upper limit. From DECC s projections, it appears that around 6.7 billion has already been allocated to renewables support outside the CfD mechanism, thus constraining the funding capacity available for CfDs.

THOUGHT LEADERSHIP ELECTRICITY MARKET REFORM Contracts for Difference Introduction CfDs are intended to guarantee a strike price for successful bidders over a period of 15 years of electricity generation. Further details of the mechanism are set out in last s years article. On 26 February 2015, the first auction round for CfDs were published by DECC, with 27 projects totalling over 2GW successfully securing a CfD. The CfDs allocated in the first round are worth 315 million. The Competition and Markets Authority ( CMA ) has been conducting an investigation into CfDs as part of a wider review of the Energy Market Reform, with concerns that the auction process may be restricting competition in the UK electricity generator market. Allocation of technologies to pots DECC announced in mid-2014 that technologies would be divided amongst three separate pots for the purposes of allocating CfDs. The pots were organised as follows: Pot 1 - established technologies, including onshore wind (>50 MW), solar PV (>5 MW), hydro (between 5 MW and 50 MW), EfW with CHP, landfill gas and sewage gas; Structure of the first round of auctions The terms of the CfDs for the first auction round were published by DECC in August 2014. Applicants submitted their sealed bids for CfDs to DECC in early February 2015, and DECC then selected the cheapest bids, up to the budget limit. All successful bids were awarded a CfD at the clearing strike price, being the price offered by the most expensive bid in each technology pot. The clearing strike price cannot exceed the relevant administrative strike price, which was set by the Government in December 2013. Pricing ranges were: 2016-17 2017-18 2018-19 Advanced conversion tech 119.89 114.39 Energy from waste with CHP 80.00 Offshore wind 119.89 114.39 Onshore wind 79.23 79.99 82.50 Solar PV 79.23 50.00 Allocated CfDs according to technology Onshore wind Solar PV Offshore wind Advanced conversion technologies EfW with CHP Pot 2 - less established technologies, including offshore wind, wave, tidal stream, advanced conversion technologies, anaerobic digestion, dedicated biomass with CHP, and geothermal; and Pot 3 - biomass conversion. In January 2015, Pot 1 was allocated 50 million for projects commissioning from 2015/16, and an additional 15 million ( 65 million in total) for projects commissioning from 2016/17 onwards. Pot 2 was allocated 155 million for projects commissioning from 2016/17 onwards, and an additional 105 million ( 260 million in total) for projects commissioning from 2017/18 onwards. The difference in budget allocation between Pots 1 and 2 was intended to incentivise the development of these less established technologies of Pot 2, making them more competitive with those in Pot 1. No budget was released in the first auction round for Pot 3 in 2015. Total commitment of projects allocated a CfD (MW) 1,200 1,000 800 600 400 200 0 Source: DECC 2015-2016 2016-2017 2017-2018 2018-2019 Delivery year

Wind generators secured the majority of the CfDs available in round one, with 17 onshore and two offshore projects successful. The two offshore projects are to deliver a combined 1162 MW, while onshore projects will deliver 749 MW in total. Solar PV projects had only five successful bids of the 27 CfDs allocated, two of which were not taken up. Post-auction Following the close of the first auction and execution of CfDs, successful applicants may enter into the Offtaker of Last Resort ( OLR ) scheme. This scheme is aimed at providing an alternative route to market for electricity generated by parties to CfDs, where a normal power purchase agreement cannot be entered into by normal commercial means. Suppliers may access the OLR scheme via auction, submitting a contract management fee bid to Ofgem. Ofgem also appoints mandatory suppliers for each OLR year, which must take part in the auction process. If successful, the supplier enters into a backstop power purchase agreement with a CfD generator, which allows for the generator s electricity to be sold to the supplier at a specified discount to the market price. The OLR will open to eligible generators on 1 October 2015. The process from application to commencement of a backstop power purchase agreement is expected to take at least 26 days. CfDs were over-subscribed in the first auction round, with 27% of applicants successful in their bids. Non-delivery The Government has implemented its non-delivery disincentive exemptions policy (the NDD ) through the Contracts for Difference (Allocation) (Amendment) Regulations 2015 (the Regulations ). The Regulations define an excluded site as the area on which the generating station is (or was intended to be) situated, as per the CfD application. Subject to the certain exemptions, developers will be unable to bid for a new CfD for 13 months for any project site where the generating station would overlap with the excluded site. For non-signature cases, the 13 month period begins from the date on which a CfD was originally offered. For non-delivering cases, the period begins 13 months from the date of termination of the CfD. Following the announcement of the auctioned CfD allocations, the developers of the two 2015-2016 solar PV projects refused to take up their CfDs. Developers will be unable to reapply for CfDs for a period of 13 months for the generating areas of these projects. The LCCC has published an excluded sites register stating that exclusions apply to these sites until 25 March 2016. Exemptions to the exclusion may be available upon application to the Secretary of State under certain grounds, as implemented by the Regulations as regulation 14B of the Contracts for Difference (Allocation) Regulations 2014. Future allocations of CfDs CfDs were over-subscribed in the first auction round, with 27% of applicants successful in their bids. It is unknown how much of the unallocated LCF budget will be available in any future round of CfD auctions. Tidal, Nuclear and CCS projects may also be included in any future allocations. Despite DECC not disclosing any details on unsuccessful bidders or the strike prices submitted in the first auction round, the results provide some clarity and guidance for developers bidding in future CfD auctions. DECC currently plans for the next allocation to take place in October 2015. An operational plan was published in March 2015 setting out the anticipated process for this second auction round. Other developments DECC is currently carrying out a consultation on changes to the terms of CfDs. The proposed amendments focus on: i. bespoke terms and conditions for projects developed by unincorporated joint ventures; ii. disincentivising generators to generate electricity at negative prices; and iii. other minor changes to the terms and conditions. The public were invited to respond by 20 April 2015. No response had been published by the Government at the time of writing. Investigation of the CfD process by the CMA On 26 June 2014, the CMA received a reference by Ofgem raising concerns around CfDs and the Capacity Market. The CMA published its initial view on 2 March 2015. It noted that the division of projects into pots is a risk to competition. Projects from one pot may be displaced by a more expensive project in another pot, meaning CfDs may not be allocated to the most efficient projects or at the lowest possible cost to consumers. The statutory deadline for the CMA to provide its findings is 25 December 2015. If the investigation reveals that these mechanisms have an adverse effect on competition in the UK energy market, then the CMA may use any of its wide range of powers and remedies to prevent any future anti-competitive effect. Capacity Market The Capacity Market, which was launched last year, provides regular, set payments to capacity providers in return for which capacity providers must deliver energy when needed (or reduce demand when the system is in stress), or face penalties. DECC make a forecasts of future peak demand four years ahead of the delivery year in which it is needed, and, if there is a risk of a shortfall in capacity required, an auction is held to contract for the capacity required to meet the demand. Capacity suppliers submit bids and the market clears at the price that balances supply and demand. Under a pay-as-clear auction all parties are paid the market 10

THOUGHT LEADERSHIP clearing price set by the marginal bid into the auction (set by the most expensive successful bidder). Successful bidders at the auctions will be offered capacity agreements four years ahead of the year in which capacity must be delivered (and also, in some instances, one year ahead), in both existing and new capacity terms. This also gives investors certainty over their future revenues. Eligibility and pre-qualification In comparison to the RO, FIT and CfDs, the Capacity Market is technology neutral. Capacity providers therefore participate on the basis of Capacity Market Units ( CMUs ). Plant are compared in capacity auctions on the level of their auction bids, and there is no requirement for certain plant characteristics. The following forms of capacity are eligible to participate in the Capacity Market: new and existing generation capacity (including combined heat and power (CHP)); demand side response (DSR), including embedded generation; electricity storage; and interconnected non-gb capacity, including the interconnectors themselves (which were only made eligible in December 2014. This form of capacity can begin participating in the second four-year ahead auction). 11

However, the forms of capacity set out below are not eligible to participate in the Capacity Market: capacity which is already receiving support through the RO, small-scale FiT, CfDs, RHI, New Entrants Reserve 300 (NER300), or plants that are fitted with Carbon Capture and Storage (CCS) and in receipt of a CfD (however CCS which is not in receipt of a CfD is eligible to participate); applicants who currently hold long-term contracts to provide Short-Term Operating Reserve (STOR) (and who do not declare to terminate their STOR contracts if awarded a capacity agreement); and capacity below a de-minimis threshold of 2MW can only participate when combined with another capacity. The first round of auctions On 1 August 2014 the Secretary of State announced that the first four-year ahead auction (T-4) would take place in December 2014 for the years 2018/19. The auction parameters which include the amount of capacity to be procured were also confirmed at this time. The results for the December 2014 T-4 auction were published on 2 January 2015. The Delivery Body allocated 48.6GW of capacity to guarantee supplies for the winter of 2018/2019. Bidders ranged from large to small generators and included both established and emerging players in the market. The auction began bidding at 70-75/kW and the price dropped by 5 each round until there were enough bids to meet the target capacity (at which point the auction cleared ). On this occasion, the price set was 19.40/kW. A further one-year ahead auction will be held in late 2017 to contract a further 2.5GW of capacity for delivery in 2018/2019. For this auction, all capacity will need to be available from October 2018 for one year. Further auctions for the four-year ahead contracts will be held on a rolling basis with two transitional auctions being held in 2015 and 2016 for demand side capacity. These additional intermediary auctions will enable the Government to fine-tune the amount of capacity it procures. Website: Contact: Position: Email: Telephone: www.taylorwessing.com Dominic FitzPatrick Partner, Head of Energy (UK) d.fitzpatrick@taylorwessing.com +44 (0)20 7300 4689 is a leading international law firm with more than 1,000 lawyers across Europe, the Middle East and Asia. We work with clients in the world s most dynamic industries including most notably Technology, Media and Communications, Life Sciences, Private Wealth, and Energy. We have a long-standing international Energy group comprising more than 60 lawyers. Our renewable energy practice advised on some of Europe s earliest wind-farms and continues to be an active player in the wider renewables field. We advise on investment in, and the development and financing of, renewable and alternative projects from many different renewable energy and alternative fuel sources. We act for clients providing a variety of services to the sector from energy companies and project developers to suppliers, and from banks to strategic investors (both corporate and private). We are able to bring together specialist lawyers with extensive international experience from key strengths of the firm in project finance, corporate and commercial law, planning and environment, banking, project development, mergers and acquisitions, real estate, construction and engineering, tax and intellectual property. 12