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Government slashes feed-in tariffs - International Law Office

International Law Office

Energy & Natural Resources - United Kingdom

Government slashes feed-in tariffs

August 01 2011

Introduction
Evolution of renewables policy
Feed-in tariffs
Comment


Introduction

On March 18 2011 the government launched a fast-track review of the feed-in tariffs scheme for small-scale, low-carbon electricity generation in the United Kingdom (for further details please see "Feed-in tariffs: government review risks uncertainty for renewables"). Submissions to the consultation have been filed and on June 9 2011 the government published its response. In maintaining the changes to tariff bands as originally proposed, it went against over 80% of the submissions, which objected to the proposed tariff band changes. On July 12 2011 the government released its white paper on electricity market reform and its intention to accelerate investment in low-carbon infrastructure.

This update focuses on the government's response to submissions by interested parties on the fast-track consultation; it also provides a brief history on renewables in the United Kingdom.

Evolution of renewables policy

Non-fossil fuel obligation
The non-fossil fuel obligation was developed following the privatisation of the electricity market in 1989. Originally, it was intended to subsidise nuclear power generators - which remained in public hands - through the imposition of a fossil fuel levy on electricity consumers. In 1990 this was expanded to include the renewable energy sector as generators of renewable energy lobbied for equal financial support. The obligation required public electricity suppliers to purchase a certain amount of electricity from the renewable energy industry. The extra price that suppliers paid for such electricity was compensated by proceeds from the levy. Private companies were then awarded contracts for the development of renewable energy projects. The Non-Fossil Purchasing Agency buys the electricity from non-fossil fuel obligation projects at a fixed contract price. Non-fossil fuel obligation contracts are essentially a form of feed-in tariff.

Although some non-fossil fuel obligation contracts are ongoing,(1) following the introduction of the Renewables Obligation, no more will be awarded.

Renewables obligation
In 2002 the government moved away from non-fossil fuel obligations and introduced the renewables obligation. This was chosen in preference to a feed-in tariff scheme in order to encourage the generation of electricity from eligible renewable sources in the United Kingdom while maintaining the UK policy of a liberalised market and allowing the forces of supply and demand to determine the price of green electricity and green certificates. Some of the United Kingdom's neighbours, such as Germany and France, opted for a feed-in tariff scheme at an early stage.

The original Renewables Obligation Order 2006 was replaced on April 1 2009 with the Renewables Obligation Order 2009. Both orders require requires electricity suppliers in the United Kingdom to source an increasing amount of energy from renewable sources and to provide the Office of Gas and Electricity Markets with evidence that they have provided customers in England and Wales with a certain amount of such electricity. Suppliers can meet these obligations by submitting renewable obligation certificates, making a buy-out payment or a combination of both. Buy-out payments are recycled back to the suppliers that met their obligations in proportion to the number of certificates that they submitted.

The renewables obligation was originally technology neutral - one certificate was awarded, regardless of the technology used to produce the 1 megawatt/hour (MWh). As a result, the cheaper technologies became favourable for developers, as they generated the most profit. Therefore, the 2009 order introduced a banding system, which awarded more expensive renewable energy projects a higher number of certificates. For example, offshore wind receives two certificates for every 1MWh, but onshore wind receives only one.

The renewables obligation has been criticised for its complexity and the introduction of banding has not simplified it. However, sponsors and lenders have familiarised themselves with the regulations and are now generally comfortable with what is required. The Renewable Obligations (Amendment) Order 2010 extended the obligation for a further 10 years from 2027 to 2037 in order to provide certainty for long-term investors and increase support for offshore wind projects. However, the electricity market reform white paper has confirmed that feed-in tariffs with contracts for difference will replace the obligation in the coming years.

Feed-in tariffs

The renewables obligation was targeted at large-scale renewable energy projects, as are the future feed-in tariffs with contracts for difference. The government accepted that there should be a simplified scheme to support smaller-scale and more expensive technologies. On April 1 2010 the government introduced the feed-in tariff scheme for microgeneration. This works alongside the renewables obligation (and will continue alongside the feed-in tariffs with contracts for difference), as the government was concerned that a replacement would create uncertainty for large-scale commercial generation. The new scheme introduced feed-in tariffs for small-scale microgenerators of up to 5MW. However, the government has announced that the feed-in tariffs for generators over 50 kilowatts (kW) and standalone installations will be significantly reduced from August 1 2011.

Government response to consultation submissions
The government has maintained its position on reducing feed-in tariffs for solar photovoltaic projects over 50kW and standalone installations following the consultation discussed above. It has stated that since the scheme was launched, the capital cost of solar photovoltaic installations has fallen substantially - it is approximately 30% lower than the estimate when the scheme was developed. The modelling undertaken over 12 months ago predicted uptake of solar photovoltaic projects only at the domestic scale for the first three years, with no large-scale deployment. The government has stated that there is evidence that the uptake of large-scale projects could be significant if it does not intervene to reduce the tariffs; if it fails to do so, it may not make the savings to which it committed itself in the 2010 Spending Review. The Department of Energy and Climate Change has stated that the evidence from the consultation shows that uptake of the feed-in tariff scheme has outstripped the funding available in the present spending review period. The government maintains that the construction of these projects would threaten the availability of subsidies for smaller-scale installations. The modifications are therefore said to be intended to rebalance the scheme and revert it to its original objective (ie, to limit the number of larger schemes, including rooftop installations and solar farms).

Despite numerous suggestions from respondents, the government has not offered transitional arrangements for projects in the pipeline, stating that no transitional arrangement "would have a fair spread of benefits". It has stated that the implementation of a transitional arrangement would affect the number of domestic photovoltaic installations that could be supported, given the costs that would need to be allocated to the transitional arrangements. Feed-in Tariffs Limited has stated that this fails to recognise the lead times for such projects and amounts to acting retrospectively. The government has acknowledged that in some cases there will be significant sunk costs for those that have already invested; its response is that it is vital to protect the integrity of the scheme for the sake of the wider industry. However, this contradicts government policy that no changes in law and regulation with respect to low carbon shall have retrospective effect.

The government has also been criticised for providing a consultation period of seven weeks, which is shorter than that recommended in the Code of Practice on Consultation. Its reasoning is that a review of tariff changes is urgently needed to minimise the risk of the feed-in tariff scheme failing to deliver the savings that are part of the 2010 Spending Review commitments.

Judicial review
On April 19 2011 a group of solar power companies filed for judicial review against the secretary of state at the High Court. Among other things, the group argued that the department made clear that the first review of the feed-in tariff scheme would not take place until 2012, with no changes to be implemented until 2013. However, in November 2010 it was stated that a review might take place earlier, but that no changes would come into force until 2012. However, the judicial review application was withdrawn because the hearing could not be held before the summer recess. The solar companies indicated that they had decided that lengthy legal proceedings would not be sustainable in terms of cost to themselves or the public.

A loophole or a legal right
Developers, by their nature, are persistent and innovative. Working together with lawyers they identified a way to benefit from the higher tariffs even after the August 1 reduction date. This is because the original feed-in tariff order provided that if a plant is extended within 12 months, the extended plant qualifies for the tariff available on the original date of accreditation. Therefore, several developers have developed small solar installations in time for the deadline with a view to extending them within 12 months to up to 5MW. Developers argue this is a legal right. However, on July 27 2011 the department issued an emergency consultation stating these extension rights are a "loophole", and that it was never the intention to allow developers to extend and receive the benefit of the higher tariffs available prior to 1 August.

It is now looking increasingly likely that this loophole will be closed by the end of September 2011 giving developers only a limited window to extend.

Comment

Unsurprisingly, many interested parties are uncomfortable with the government's changes. This is a reaction not only to the changes themselves, but also to the approach in implementing them, including the short consultation periods and the failure to implement transitional changes to the modifications. Some parties believe that the proposals for solar developments over 50kW and standalone installations require greater scrutiny, given that 81% of respondents disagreed with the government - hence the judicial review application. It also appears that the legal loophole for extensions will be closed as soon as possible.

It has been claimed that the tariff changes will mean that projects over 50kW are unlikely to be built after August 1 2011, which would have a devastating impact on community energy schemes. Feed-in Tariffs Limited has stated that the changes will "kill the whole [photovoltaic] market over 50kW". The chief executive of Low Carbon Solar UK has stated that the government will cause the abandonment of hundreds of community-scale schemes. The government may initially achieve its intention by limiting the number of larger schemes over the next three years, including rooftop installations and solar farms. However, if these negative predictions prove accurate, it may subsequently find that there is an absence of larger solar photovoltaic projects and further incentives for investment will be required.

On 22 June 2011, the department published a microgeneration strategy, which sets out its vision for microgeneration - the that the feed-in tariff scheme is part of its realisation.

For further information on this topic please contact Antony Skinner or David McCormick at Ashurst by telephone (+44 20 7638 1111), fax (+44 20 7638 1112) or email (antony.skinner@ashurst.com or david.mccormick@ashurst.com).

Endnotes

(1) The last will expire on November 29 2018.


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