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Grace periods for early closure of Renewables Obligation support for onshore wind

On 8 October 2015, the UK Government’s Department of Energy and Climate Change (DECC) set out its detailed proposals for mitigating the impact of the proposed early closure of the Renewables Obligation (RO) to new onshore wind projects from 1 April 2016. The provisions now set out in a series of proposed amendments to the relevant part of the Energy Bill, which are to be debated by the House of Lords on 14 October 2015, go a little beyond what DECC first put forward at the start of its period of “engagement” with the industry at the start of July 2015.

The original grace period proposal was relatively simple, and based on the “significant investment grace period” for >5MW solar PV projects. An onshore project would be able to achieve RO accreditation if it commissioned and applied for accreditation after 31 March 2016 but before 1 April in 2017, provided that, as at 18 June 2015 (the date of DECC’s announcement about the proposed early closure) it had planning permission, an accepted offer of connection to the transmission or distribution network, and sufficient rights over the land where it was to be situated – e.g. in the form of a lease, option, agreement for lease or exclusivity agreement.

The proposals set out in the 8 October amendments are more generous, but also more complex. They consist primarily of the insertion of a new run of sections in the RO provisions of the Electricity Act 1989 and their effect is summarised in the table below.

Section of Act (as it would be amended) Date wind farm / relevant additional capacity  is accredited Applicable grace period conditions to be satisfied in order to obtain accreditation
32LD On or before 31 March 2016 No need for grace period
32LE Between 1 April 2016 and 31 March 2017 Grid and radar delay condition – i.e. that:

In respect of either grid connection or radar mitigation works relating to the wind farm / additional capacity on or before the date when Ofgem decided to accredit it, Ofgem has received from the operator:

(a) evidence of an agreement to carry out the works in respect of the wind farm / additional capacity;

(b) document from the network operator / radar agreement counterparty estimating completion on or before the primary date (see below);

(c) letter from the network operator / radar agreement counterparty confirming that the works were completed later than planned, and that this was not due to any breach by the wind farm developer; and

(d) declaration by the operator that to the best of its knowledge and belief, the wind farm / additional capacity would have been commissioned / formed part of the wind farm before the primary date if the works had been completed by that date.

For the purposes of section 32LE, the primary date is 31 March 2016.

32LF On or before 31 March 2017 Approved development condition – i.e. that the accreditation application is accompanied by the following as regards planning, grid connection and land rights.

Planning

One of the following:

(a) evidence that planning permission (or s. 36 consent / development consent under the Planning Act 2008) was granted on or before 18 June 2015;

(b) evidence that planning permission (or s. 36 consent / development consent under the Planning Act 2008) was refused on or before 18 June 2015 but granted after that date following an appeal or judicial review;

(c) evidence that an application for planning permission was made to the local planning authority on or before 18 June 2015; the authority failed to determine or decline to determine application, or refer it to Ministers, within the statutory period; the application was not referred to Ministers; and the application was granted after 18 June 2015 following an appeal; or

(d) a declaration that to the best of the operator’s knowledge and belief, planning permission is not required for the wind farm / additional capacity,

and that any conditions as to the time for commencement of development in the relevant planning permission have been complied with.

Grid connection

One of the following:

(a) a copy of an offer from a licensed network operator made on or before 18 June 2015 to carry out grid works in relation to the wind farm / additional capacity and evidence that the offer was accepted on or before that date; or

(b) a declaration by the operator that to the best of its knowledge and belief no grid works are required to commission the wind farm / additional capacity.

Land rights

A declaration that to the best of the operator’s knowledge and belief a developer of the wind farm or additional capacity or a person connected with it in within the meaning of s. 1122 Corporation Tax Act 2010:

(a) was an owner or lessee of the land where the wind farm / additional capacity is to be situated;

(b) had entered into an agreement to lease that land;

(c) had an option to purchase or lease that land; or

(d) was a party to an agreement by the owner or lessee of the land not to permit any person other than those identified in the agreement to construct a wind farm there.

32LG Between 1 April 2017 and 31 March 2018

 

Approved development condition

and

Grid and radar delay condition – noting that:

Documentary requirements are as described in relation to section 32LE, but

For the purposes of section 32LG, the primary date is 31 March 2017.

32LH Between 1 April 2017 and 31 December 2017

 

Approved development condition

and

Investment freezing condition – i.e. that the accreditation application is accompanied by the following documents:

(a) a declaration from the operator that, to the best of its knowledge and belief, as at 1 May 2016:

(i) it required funding from a recognised lender (a provider of debt finance with an investment grade credit rating) before the wind farm / additional capacity could be commissioned / added;

(ii) the recognised lender was not prepared to provide such funding until enactment of the Energy Act 2016 because of uncertainty about whether it would be enacted / how it would be worded if enacted; and

(iii) the wind farm / additional capacity would have been commissioned / added on or before 31 March 2017 if the funding had been provided before enactment of that Act; and

(b) a letter or other document dated on or before 1 May 2016 from a recognised lender confirming that it was not prepared to provide funding for the wind farm / additional capacity until enactment of the Energy Act 2016.

32LI Between 1 January 2018 and 31 December 2018 Approved development condition

and

Investment freezing condition

and

Grid and radar delay condition – noting that:

Documentary requirements are as described in relation to section 32LE, but

For the purposes of section 32LI, the primary date is 31 December 2017.

It seems likely that the Government’s proposed amendments will be adopted. It remains to be seen whether subsequent debates as the Energy Bill passes through the remaining stages of its passage through the House of Lords, or through the House of Commons, will result in the addition of any further grace period criteria or the tweaking of those already covered. For now, the following points may be noted:

  • The grace period criteria based around a combination of planning, grid and land rights proposed in July have been broadened as regards planning permission.  In particular, what is now called the “approved development condition” allows grace period status to be claimed not just by projects that had obtained planning permission by 18 June 2015, but also by those who had their planning applications refused on or before that date, but have managed to obtain planning permission through an appeal or judicial review process subsequently.  The value of a further extension, relating to cases which local authorities have failed to handle according to statutory timetables, may be more limited, because as currently drafted it appears only to benefit cases that have not been referred to Ministers for determination.
  • The introduction of provisions acknowledging that some projects may be delayed because lenders are unwilling to commit to finance them before the legislation has received Royal Assent is clearly a welcome addition to the package of mitigation for early closure.  However, note that the “investment freezing condition” in which this is set out does not function as an independent justification for not commissioning by 31 March 2016.  Rather, it allows those projects that can already justify an extension of the period within which they can achieve accreditation under the approved development condition to extend for an additional 9 months.
  • In July 2015 DECC had already indicated that projects which benefited from planning, grid and land rights on 18 June 2015 could bring themselves within the scope of the existing grace period provisions on grid and radar delay – thereby potentially enabling them to apply for accreditation as late as 31 March 2018 where such delay had occurred.  The proposed amendments to the Energy Bill disapply the grace period provisions of the Renewables Obligation Closure Order 2014 from onshore wind projects, but reproduce the effect of its provisions on grid and radar delay as part of their own suite of grace period criteria.
  • The revised impact assessment produced alongside the proposed amendments does not appear to suggest that any more capacity will be accredited as a result of the expansion of the grace period criteria (the numbers in all the key tables are the same as in the version of the impact assessment published in September, apparently on the basis of the original proposals).  However, the accompanying DECC press release states that “around 2.9 GW” of onshore wind capacity could be eligible for the grace periods.

The package of mitigation proposed by the amendments is appreciably more generous than what was suggested by DECC in July, but there are limits to that generosity.  For example, the amendments have not simply followed the model established by the >5MW solar PV RO grace period and allowed the planning criterion within the approved development criterion to be satisfied by any project that had applied for planning permission by 18 July 2015.  However, it is noticeable that the DECC policy paper of 8 October 2015 invites “onshore wind developers to tell us about any of their projects affected by our proposals. In particular, we are interested in hearing from developers with projects that are currently in the planning system, but which have not yet secured planning consent, and to receive information and evidence relating to:

  • the stage that such projects have reached in the planning process, anticipated final planning decision dates, and expenditure incurred on projects as at the date of the Secretary of State’s announcement
  • project timetables and anticipated dates for securing a grid connection offer and acceptance; and
  • the prospects of such projects being in a position to accredit under the RO by 31 March 2017 and expected final investment decision dates.”

It is therefore possible that Government is leaving the door open (or, at least, slightly ajar) to a revised ‘approved development condition’ that more closely resembles the model established by the >5MW solar PV RO grace period (and is more favourable to the industry than that currently tabled in the Energy Bill).

Conversely, it will be interesting to see whether some of the new concepts introduced by the proposed ‘grace period’ conditions for onshore wind, such as the investment freezing condition, will find any place in DECC’s eagerly awaited response to its consultation on the proposed early closure of the RO to ≤5MW solar PV projects.

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Grace periods for early closure of Renewables Obligation support for onshore wind

Levellling the playing field? UK Government reduces effective of price of renewable power by £5/MWh

On 8 July 2015, George Osborne’s Summer 2015 Budget had little new to say about UK energy policy: extension of some North Sea tax reliefs, a review of energy efficiency taxation, repetition of existing commitments to seeking a UN climate change deal at Paris later this year.  However, one measure stood out as an unwelcome surprise for generators of renewable electricity.  From 31 July 2015, suppliers who sell “green” power to business users will have to pay the same “climate change levy” (CCL) of £5.54/MWh as they do when supplying “brown” power from coal, gas or nuclear plant.

The CCL is a tax on business and public sector energy use.  The general rule is that supplies of electricity to non-domestic customers are subject to a levy of £5.54/MWh.  (There are separate or additional rates for supplies of other “taxable commodities” such as coal and gas.)  But electricity generated from renewable sources is exempt.  Generators of such electricity receive “levy exemption certificates” (LECs) from Ofgem which entitle suppliers to claim relief on the tax when they supply the associated power.  As a result, when renewable generators sell their power to suppliers under power purchase agreements (PPAs), part of the payment which they receive from the supplier for each MWh of power that they sell is made up of a proportion of the value of the associated LEC to the supplier.

Brief details of the change announced in the Budget are set out in a policy paper from HMRC.  The removal of the exemption is justified on the grounds that it will contribute to “fiscal consolidation” and “maintain the price signal necessary to incentivise energy efficiency”, and that a third of the value of the exemption (£3.9 billion over the life of the current Parliament) goes to supporting “renewable electricity generated overseas” (possible sub-text: “and those pesky EU single market rules might make it hard for us to stop overseas projects receiving LECs without also removing the entitlement from domestic ones”?).  HMRC also suggest that the value of LECs will be “negligible by the early 2020s, when the supply of renewable electricity will exceed CCL eligible business demand for it”, but even if that is so, it is not clear why it justifies scrapping LECs now, while they are still worth having.

The Budget indicates that there will be some transitional provision: “There will be a transitional period for suppliers, from 1 August 2015, to claim the CCL exemption on any renewable electricity that was generated before that date. The government will discuss the details of this transitional period with stakeholders over the summer and autumn, to determine an appropriate length for it.“.  The relevant legislation will be included in the Summer Finance Bill 2015 and the Finance Bill 2016.

However, the key point is that within a few months, all existing and future renewables projects will be deprived of a small but significant element of their anticipated revenue, and the suppliers who buy their power will have one less reason to purchase renewable power.  Some projects may find that the reduction in the rate of corporation tax, also announced in the Budget, offsets, or helps to offset, the reduction in revenue.  But for projects in the early stage of their operating lives that are on relatively low rates of Renewables Obligation or Feed-in Tariff support, there is likely to be an appreciable impact.  Moreover, the removal of LECs is one of a number of recent changes that may make renewable PPAs less attractive.  These include the shift from the Renewables Obligation to CfDs – admittedly partly counterbalanced by the backstop PPA or “offtaker of last resort” regime – and Ofgem’s decision to increase significantly the imbalance prices that suppliers can be exposed to as a result of contracting with intermittent generators.

The good news is that removing renewable generators’ entitlement to LECs will help to reduce the deficit.  The Government’s estimates of the impact of the measure show a positive impact on annual tax revenues of £450 million in 2015/2016 rising steadily to £910 million in 2020/2021.

Behind these fairly large increases in Exchequer revenues lie some significant negative effects on individual projects.  Shares in Drax fell substantially on the announcement and the company indicated that the change could reduce its 2016 earnings by £60m.  It is also possible that projects whose bids set, or were close to, the clearing prices in the first auction of Contracts for Difference (CfDs) may feel the loss of LECs if they included LEC revenues in the financial modelling assumptions for their bids.

The LEC change comes on top of the Government’s announcement of early termination of the Renewables Obligation for onshore wind and suggestions by the Competition and Markets Authority in the summary of its provisional findings on competition in GB energy supply markets that even the competitive allocation process that was used by DECC to allocate CfDs earlier this year may be too generous (in reserving particular “pots” of funding to specified technologies).  While they wait to see what allocation of funding will be made available for new projects in the next CfD round, and when it will take place, renewable generators are likely to want to spend some time reviewing the Change in Law provisions in their existing PPAs (or even CfDs) to see how the loss of LECs affects them.

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Levellling the playing field? UK Government reduces effective of price of renewable power by £5/MWh

The Politics of Onshore Wind

The new Conservative Government has made curbing the growth of onshore wind one of its short-term priorities.  On 18 June 2015, the Department of Energy and Climate Change (DECC) confirmed the Government’s intention to implement the Conservatives’ 2015 General Election manifesto promise to “end new public subsidies for onshore wind” by “legislating to close the Renewables Obligation across Great Britain to new onshore wind generating stations from 1 April 2016”.  The Secretary of State for Energy and Climate Change, Amber Rudd, made a further, oral statement to Parliament on 22 June 2015, giving further details of her thinking and the potential impacts of the change.

DECC has stated that “up to 5.2GW of onshore wind capacity could be eligible for grace periods which the Government is minded to offer to projects that already have planning consent, a grid connection offer and acceptance, as well as evidence of land rights”.  But it has also calculated that some 7GW of new onshore wind capacity (250 projects, 2,500 turbines) are likely not to be commissioned as a result of the early closure.  The future treatment of onshore wind under the separate Contracts for Difference and Feed-in Tariffs regimes remains to be clarified.

Industry has not been slow in condemning the chilling effect which the Government’s announcement will have on many projects.  But what can they actually do about it?

The Renewables Obligation (RO) is scheduled to be closed to new projects on 31 March 2017 in any event (subject to some grace period arrangements) as part of the transition to the Contracts for Difference regime being the primary subsidy vehicle for large-scale renewables projects.  The early closure for onshore wind echoes the treatment of >5MW solar projects, to which the RO was closed on 31 March 2015, subject to one-year grace periods both for projects already holding planning consent, grid connection offer and acceptance and evidence of land rights, and for projects which only failed to commission in time to be accredited by 31 March 2015 because of grid delays.

The early closure of the RO to >5MW solar was effected by an “RO closure order”: a piece of secondary legislation which Ministers were given powers to make (subject to Parliamentary approval) under the Energy Act 2013.  Ministers could, of course, use the same method in the case of onshore wind, but the DECC announcement states that the closure of the RO for onshore wind will be achieved by primary legislation – i.e. a Parliamentary Bill.  This means that there will be no statutory obligation to consult on the proposals before they are put to Parliament.  It also means that they will receive vastly more Parliamentary scrutiny: when a draft order is put before Parliament, it is presented on a take-it-or-leave-it basis and it is seldom debated for more than an hour by a handful of MPs or Peers.  In the vast majority of cases, the draft is approved.  By contrast, any provision that is put before Parliament as part of a Bill is capable of being amended or made the subject of counter-proposals.  So the industry can fight back by lobbying MPs and Peers, and the Government’s Commons majority may or may not be strong enough to make it impossible for those seeking a less harsh outcome for onshore wind projects to make some headway.

Before the 18 June announcement, there was much talk of possible legal challenges to the expected ending of onshore wind subsidies.  However, DECC’s decision to use primary legislation makes judicial review a less promising avenue for the industry.  A recent judgment in a case relating to changes to solar subsidies has made it clear that in certain circumstances a Government decision to consult on proposed subsidy cuts can be challenged in itself (even if there is no subsequent decision to implement the proposal).  The same case has clarified the range of circumstances in which projects which have not yet achieved accreditation under a subsidy scheme can nevertheless still make a claim for damages as a result of a change in subsidies.  However, if the next thing that Government does is to introduce provisions to implement the closure of the RO to onshore wind in its forthcoming Energy Bill, it is doubtful whether that action could be judicially reviewed.  Unlike a decision to make a piece of secondary legislation, or to consult on doing so, which are executive acts, a Minister’s decision to put forward a Bill is something that he or she does in his or her capacity as a Member of Parliament.  As such, it may well be considered by the Courts to fall within the category of “proceedings in Parliament” which are not judicially reviewable.  One possible trump card for the industry might be to find a way of characterising the proposed legislation as contrary to EU law: no doubt some opponents of onshore wind (inside and outside Parliament) would relish that.

The industry – using the language of judicial review – has attacked the early closure as “irrational”.   Amber Rudd told Parliament: “We could end up with more onshore wind projects than we can afford – which would lead to either higher bills for consumers, or other renewable technologies, such as offshore wind, losing out on support.  We need to continue investing in less mature technologies so that they realise their promise, just as onshore wind has done.”  The references to issues of affordability and the impact that the amount of subsidy budget (the “Levy Control Framework”) that wind would consume might have on support for other types of renewable generation echo the arguments for closing the RO early to >5MW solar, where a claim for judicial review was firmly dismissed.  But it is hard to avoid the feeling that political, as well as economic considerations are in play.  And although DECC has stated that “we now have enough subsidised projects in the pipeline to meet our renewable energy commitments”, it is interesting to note that a few days earlier, the European Commission published a status update on EU Member States’ prospects of meeting their 2020 renewables deployment targets that showed the UK as being one of a number of Member States that need to “assess whether their policies and tools are sufficient and effective in meeting their renewable energy objectives“.

The subsidy change is explicitly linked to the parallel commitment to “give local communities the final say over any new wind farms”, fleshed out in a statement from the Secretary of State for Communities and Local Government on the same day.  But whilst the subsidy changes would apply throughout Great Britain (the content of the RO being for DECC Ministers to determine), the planning regime is more of a patchwork.  Hitherto, broadly speaking, onshore wind projects up to 50MW were consented by local planning authorities (everywhere), while applications to develop projects of 50MW or above fell to be determined by DECC Ministers in England and Wales and Scottish Ministers in Scotland.  It is now proposed that all wind farm applications in England will be decided locally, and that planning permission should only be granted if “the development site is in an area identified for wind energy development in a Local or Neighbourhood Plan”.  This gives English local authorities who do not wish to see wind farms in their area much greater ability to refuse them planning permission.  In Wales, under the St David’s Day Agreement, there are moves to devolve consents for projects up to 350MW to Welsh Ministers.  But before that happens, a number of old consent applications for >50MW onshore wind projects in Wales that have attracted considerable opposition and been the subject of a public inquiry are likely to be decided by DECC Ministers.  In Scotland, where >50MW consents are already devolved, no changes made by Ministers in Whitehall in relation to consenting will have an effect, but the subsidy changes will probably have a much greater negative impact on future projects throughout Great Britain than any decisions taken by planning authorities or Ministers on consents.

It could be said that all this is simply democracy at work.  There is a broad strand of Conservative opinion that is anti-onshore wind.  The Conservative Party sent a clear signal of its intentions in regard to onshore wind in its manifesto.  It won the election.  Of course, it didn’t do very well in Scotland, but while most of the big onshore wind farms are in Scotland, the money to support them under the RO mostly comes from England, where the largest number of consumers (who pay for subsidies in their electricity bills) live.  No doubt there will be lively debates on the provisions of the current Scotland Bill that proposes (very limited) further devolution of energy matters to the Scottish Government, as well as on the provisions of the forthcoming Energy Bill on closure of the RO to onshore wind.  But it hardly needs saying that however politically exciting the process may be, it does not provide a stable background for investment in what is apparently still the cheapest form of renewable generation – and one which new research suggests could also be made a lot quieter and more efficient, thus removing some of the stronger potential non-aesthetic objections to it.

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The Politics of Onshore Wind

Worth the wait? DECC responds to RO / CfD consultations

In July and November last year, DECC consulted on the transition period between the introduction of the Contracts for Difference (CfD) regime under Electricity Market Reform (EMR) later this year and the closure of the Renewables Obligation (RO) to new generating capacity at the end of March 2017.  The response to these consultations was published earlier this week, just as Spring came to London.  Some of the policy decisions it sets out will already have been apparent to careful students of the draft Renewables Obligation (Amendment) Order 2014 that was published and laid before Parliament last month with an accompanying  written ministerial statement, but the response provides an opportunity to see DECC’s approach to RO / CfD transition issues in the round, with a fuller set of explanations.

Botticelli’s “Spring”: spot the connections between the picture and this post!

The transition period

The transition period begins once the CfD regime is live.  No firm date is given for this, but the response refers to 31 October 2014 as the date when CfD applications are expected to open.  It also says Government does not expect applications for CfDs to be open in advance of State Aid clearance. 

Choice of scheme

During the transition period, developers will be able to apply for accreditation under the RO or for a CfD or Investment Contract (if they meet the relevant eligibility criteria).  When they make their applications, they will be required to make various declarations: for example, if they are applying for a CfD, to declare that they are not supported under the RO.  A developer who is unsuccessful in relation to an application under one scheme will be able to apply under the other. 

A developer whose Investment Contract is terminated for certain reasons relating to State Aid, or to possible amendments to the Investment Contract in the light of the standard terms for CfDs will be able to apply for RO accreditation.  But a developer who withdraws an RO or CfD application or refuses a CfD or RO accreditation will not be able to apply under the other scheme: so, you cannot, for example, bid for a CfD, decide that you don’t like the strike price (e.g. in a “pay as clear” regime), and decide to retreat to the perceived safety of the RO instead. 

The level of the RO (i.e. the extent of the obligation on electricity suppliers to purchase ROCs) will continue to be set by 1 October, rather than being pushed back to being decided by 1 February.  Whilst effectively acknowledging that the likely launch of the CfD regime in the later part of this year will complicate the task of setting the RO level at the same time, Government has been persuaded that moving to a February deadline would mean that suppliers had to rely on their own internal RO forecasts when pricing supply contracts, resulting in the addition of a risk premium which would increase consumer bills.  The status quo was therefore preferred.

Dual Scheme Facilities

Additional capacity added to an RO accredited project will be eligible for registration under the RO if no application for a CfD has been made in respect of the project.  However, additional capacity of 5MW or less added to RO accredited stations after 31 March 2017 will not be eligible for RO or FiT support.  On the basis of the representations made to it, DECC does not seem to believe that there is a significant class of potential ≤5MW extensions to existing RO-accredited projects which would not be able to go ahead without an extension of the RO deadline (or FiT support) beyond March 2017. Although, between 2006 and 2012, 131MW of the 190MW of additional capacity accredited in respect of existing projects was ≤5MW, 103MW was for landfill and sewage gas sites: analysis of this sector suggests that existing sites have added most of the extra capacity they can, and DECC do not expect many new sites to be developed under the RO.  Finally, increases in capacity resulting from station refurbishment or unit replacement after the closure date will not be eligible for support under the RO.

On the other hand, projects which are developed in phases may find themselves with part of their capacity accredited under the RO and part being the subject of a CfD.  In such cases there will need to be separate metering and fuel data collection for the two parts of the project, so as to make sure that plants do not claim ROCs / CfD payments in respect of capacity which is not entitled to them.  As DECC puts it, “preventing arbitrage opportunities between the two schemes and ensuring accuracy, is crucial to minimise the impact on consumer bills”.  DECC also take the view that the dual scheme arrangements should not be available to RO-accredited projects which wish to add less than 5MW of extra capacity funded by a CfD, as it would give rise to an “unjustified” and “disproportionate administrative impact in relation to the amount of additional generation produced”.

Grandfathering

The July consultation included some proposals about grandfathering, with particular reference to biomass co-firing.  The response reports “widespread misunderstanding” of these proposals, which DECC concludes “were too confusing and administratively complicated to take forward” and “would have had little genuine impact in terms of budgetary stability”.  Further proposals in this area may be consulted on “later in the spring or summer”.

Grace periods

The grace periods are a set of four exceptions to the rule that the RO closes to new capacity on 31 March 2017: projects which reach the stage at which RO accreditation could have been given within a certain period after that date will be allowed to be accredited in certain circumstances.  A project that is in a position to benefit from two or more of these exceptions will only be permitted to benefit from one, but (subject to the eligibility rules) has a free choice in deciding which one it will benefit from.

  • New or additional capacity which is delayed by a failure to resolve issues with radar or to establish a grid connection will have a 12 month grace period.  In the case of grid delays, there must be evidence of a grid connection offer made and accepted and a network operator having set a date before April 2017 for connecting the project.
  • There will be a 12 month grace period for any project that is awarded a FID Enabling Investment Contract if that contract is terminated either for reasons relating to state aid or because the developer exercises a right to terminate when changes are made or proposed to it in the light of the CfD standard terms.   
  • A 12 month grace period will be available to a class of ACT or offshore wind projects which are scheduled to commission close to 31 March 2017 and have been identified as at risk of investment hiatus.  These projects are expending funds but are unwilling to commit to the CfD regime because elements of it are still uncertain.  The deadline for applications for this grace period will be 31 October 2014 – i.e. about the time when applications for CfDs are expected to open.  DECC rejected suggestions of a later deadline “as it could give projects which could have applied for a CfD shortly after applications open an incentive to enter the RO instead”.  Of course, it may be that by requiring developers to apply for the grace period before the outcome of the first CfD allocation round is apparent, DECC will simply guarantee that they opt for the RO, but DECC’s thinking seems to be partly that it is targeting projects that ought to be commissioned before 31 March 2017 and making sure that this happens by giving them the confidence to proceed, in the knowledge that the grace period provides them with a safety net.  By way of evidence that they are sufficiently advanced to be eligible for this grace period, developers will have to produce a grid connection offer, a letter from the network operator indicating that connection will take place before April 2017, planning consent (the conditions of which need not have been discharged) and land use rights or an option to acquire them.  They will also have to produce a director’s certificate confirming that the developer will have sufficient resources to commit to the project and that it is expected to commission before April 2017.  Various forms of more detailed evidence of “substantial financial commitment” towards the project were considered and rejected as “too restrictive, too unclear or too sensitive”. 
  • DECC begins discussion of the final grace period by observing that “dedicated biomass projects have in some cases been delayed while detailed Government policy arrangements in relation to the 400MW cap were put into place”.  Dedicated biomass projects allocated an unconditional place within the cap will therefore be offered an 18 month grace period, regardless of whether they are CHP or not.  However, this grace period will not be available for additional capacity.

Further measures for biomass

Generating stations which co-fire biomass and are RO-accredited but have never claimed ROCs under the biomass conversion support band will be permitted to apply for a CfD or Investment Contract as biomass conversions, and leave the RO if they are successful.  If the operator gets cold feet about its CfD before reaching the CfD “Start Date”, it will be able to revert to the RO.  However, DECC has not yet decided whether an operator which finds itself in this position with respect to only some of the units in a generating station would still be entitled to claim ROCs at the conversion band for units in respect of which it has not previously fired or claimed this level of support.

Biomass co-firing stations which are supported by the RO will be permitted to bid into the EMR Capacity Market, leaving the RO if they are successful in their bid.

Offshore wind

Offshore wind projects accredited under the RO when it closes will be permitted to commission their remaining phases under (i) the RO, (ii) the CfD or (iii) both regimes, provided that they “inform Ofgem by 31 March 2017 “whether they intend to take up the RO option” in relation to any of those phases.  Option (iii) is expected to be a minority interest.  RO and CfD phases “will need to be on entirely separate strings of turbines”, with no connection that enables electricity generated by one string to be exported on another.  

Replacement of ROCs with Fixed Price Certificates

The July consultation opened up the possibility that the transition from the current ROC regime to a system of fixed price certificates (FPCs) might be brought forward to coincide with the closure of the RO to new capacity in 2017 rather than taking place in 2027 as originally proposed.  However, DECC intends to stick to the original plan, because consultees did not persuade it that ROC values are likely to fall below the buyout price or that a significant oversupply of ROCs is likely to occur.  

What next?

The implementation of most of these policies will be spread across the RO (Amendment) Order mentioned above (intended to come into fore on 1 April 2014) and the RO Closure Order (due to be laid before Parliament in May and come into fore in July 2014).  “Some remaining transition policy issues, such as those relating to interaction between the RO and the Capacity Market” will be dealt with in an RO Consolidated Order to be made “later in 2014/15”.

Comments

In a world where there is no perfect answer and the most important thing is for developers to know where they stand, DECC’s consultation response is to be welcomed.  It bears the hallmarks of  evidence-based policy making and shows a proper degree of engagement with what consultees had to say as well as a willingness to interrogate critically the representations that they made.  

Overall, the response appears to take a slightly tougher line than is sometimes found on what DECC evidently sees as unjustified special pleading in some areas.  This, and a recurrent emphasis in the response on controlling costs, make sense both in domestic political terms and from the point of view of clearing these policies with the European Commission under the state aid rules.  

The response is perhaps a little more favourable on balance to biomass developers than some of DECC’s publications on biomass of last year, whilst emphasising its transitional status.

DECC has tried to keep things simple at a number of points.  However, the detail of what must be done in order to be eligible to make particular choices is inevitably quite intricate.  Developers will need to think carefully about how to integrate transition and grace period decision-points and criteria, as well as the various steps in RO and CfD procedures, into their own project plans.

As ever with EMR, some big questions remain.  Perhaps the biggest in this case is whether the flexibility to move between the RO and CfD regimes will encourage those who are able to choose either regime to opt for a CfD in preference to the RO.  If it does not, there must be a risk that the RO’s share of Levy Control Framework funding (see the table below, based on DECC figures) will continue to dominate UK renewables subsidies to a greater extent and for a longer period than to be comforably consistent with either the ultimate goals of EMR or the European Commission’s policies on state aid for renewables schemes.

£m 2011/2012 prices 2015/2016 2016/2017 2017/2018 2018/2019
  £ % £ % £ % £ %
Levy Control Framework Cap: RO + FIT + CfD 4,300 100 4,900 100 5,600 100 6,450 100
Committed FIT expenditure(estimated) 760 18 760 15 760 14 760 12
Committed RO expenditure(estimated) 2,900 67 2,790 57 2,790 50 2,790 43
Projected new FIT expenditure 40 1 130 3 200 4 260 4
Renewables Investment Contracts (maximum) 260 6 450 9 720 13 1,010 16
New RO projects, other CfDs 340 8 770 16 1,130 20 1,630 25

 

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Worth the wait? DECC responds to RO / CfD consultations

Contracts for difference: established technologies must compete for strike prices

Only a few weeks ago, DECC announced the “final” strike prices that were to apply to contracts for difference (CfDs) for the various eligible renewable technologies under Electricity Market Reform (EMR) (see our earlier post on this).  But things move fast in the world of EMR.  On 16 January 2014, DECC announced that for those technologies considered “established”, there would be no guarantee of securing strike prices at the level of the figures fixed in December 2013. 

The group of “established” technologies for these purposes consists of onshore wind (>5MW), solar PV (>5MW), energy from waste with CHP, hydroelectric (>5MW and <50MW), landfill gas and sewage gas.  For these technologies, it is proposed that strike prices will be set by a process of competitive bidding for which the December figures will function as a cap.  For the “less established” technologies (offshore wind, wave, tidal stream, advanced conversion technologies, anaerobic digestion, dedicated biomass with CHP and geothermal) the December strike prices will apply.  A decision has yet to be made about strike prices for biomass conversion and Scottish islands projects.

Moreover, all technologies will have to apply for their CfDs through allocation rounds – i.e. at specified times, rather than whenever it is most convenient for them to do so.  There will be no initial period of “First Come, First Served” allocation of CfDs.  The draft CfD allocation framework, originally scheduled for publication in January 2014, will not now be published until March 2014.

The DECC announcement is cast as a consultation, but the key points look fairly firm.  Although the document lists a number of factors that have been taken into consideration, it is clear that the European Commission’s draft state aid guidelines have played a big part in DECC’s thinking (see our earlier post on the draft guidelines).  The draft guidelines place a heavy emphasis on the desirability of competition for subsidies to renewable generators.  

There can be no doubt that the change of approach on strike prices ought to improve the chances of gaining state aid clearance from the Commission for the CfD regime.  But what will be the practical and wider impacts of more projects having to compete on strike prices sooner? 

How “technology-specific” will each auction be?  How frequently will auctions take place? Some questions will have to wait for an answer until we have seen the allocation framework.  For some time now, it has been clear that the allocation framework will be a hugely important document.  Assuming that DECC sticks to its overall timetable, there will not be very much time to consult on the first allocation framework before the package of EMR secondary legislation that requires Parliamentary approval is laid before Parliament.

In the meantime, it is a fair bet that some projects which might have applied for a CfD will now opt for the more predictable support mechanism provided by the Renewables Obligation (RO) instead (as they will be able to do until 2017).  Many of these projects are not large and the process of competing on strike price can only add to the costs of a CfD application.  But if more opt for the RO from the outset, how will that affect the budget available for CfDs under the Levy Control Framework?  And what will be the implications for any state aid analysis of the RO if projects that fail to win CfDs in the auction process can go on and claim what turns out to be a higher level of support under the RO?

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Contracts for difference: established technologies must compete for strike prices