Renewable energy update
6th October 2015
Introduction
Financial support for renewable technologies primarily comes in the form of subsidies which are ultimately paid for via consumer energy bills. The total amount of subsidies available is capped via the Levy Control Framework (LCF). The Department of Energy and Climate Change (DECC) has announced various consultations and policy changes in recent weeks with the purpose of managing the predicted overspend within the LCF.
The first consultation deals with the removal of pre-accreditation under the feed-in tariff (FIT). The second consultation relates to controlling subsidies under the Renewables Obligation (RO) for solar PV of 5 MW and below. DECC also announced its response to the consultation on changes to the grandfathering policy in respect of future biomass co-firing and conversion projects in the RO. In addition, the immediate withdrawal of the climate change levy (CCL) exemption was declared in July’s budget. Even investors hoping to cash in on the only real remaining scheme, Contracts for Difference (CfD), are left with delays and uncertainties.
The Feed-in Tariff
Under FIT, businesses and consumers generating their own electricity through renewable methods receive a subsidy. When pre-accredited projects progress to full accreditation, they are funded through the LCF at a cost that is passed onto consumers. This is the rationale that DECC has provided to justify the need for a consultation. The Energy and Climate Change Secretary Amber Rudd stated:
“My priorities are clear. We need to keep bills as low as possible for hardworking families and businesses while reducing our emissions in the most cost-effective way”.
The removal of pre-accreditation creates uncertainty in the sector, as the level of FIT support will be unknown until a developer has applied to Ofgem for final accreditation. Consequently, this means that developers will potentially take higher commercial risk on projects, resulting in financing becoming increasingly more expensive. However, the government maintains that the uncertainty is within the bounds of “acceptable commercial risk”.
The consultation for the removal of FITs pre-accreditation was launched on 22 July 2015. The consultation period ran for four weeks and closed on 19 August 2015; we currently await the results of the consultation.
The Renewables Obligation
On 22 July 2015, the government also launched a consultation on proposals to change the RO. Under the scheme, operators of accredited generating stations producing renewable electricity receive Renewables Obligation Certificates (ROCs); funds from the scheme are then distributed in proportion to the number of ROCs the operator has obtained in relation to their obligation. DECC proposals include the early closure of the RO to new solar PV projects of 5 MW and below from 1 April 2016 (the RO was originally due to remain open to new applicants for renewable energy support until March 2017). The proposed change follows the closure, on 1 April 2015, of RO support for large-scale solar projects.
Grace periods will allow new solar PV projects of 5 MW and below to continue to be eligible to enter the RO after 31 March 2016 (until the full closure in 2017) if certain criteria are satisfied. The criteria include providing evidence of a grid connection offer and acceptance, confirmation that a planning application has been submitted, or evidence that there is a delay in grid connection that is outside of the developer’s control.
DECC is also proposing to exclude new solar PV projects of 5 MW and below, and additional capacity, from its grandfathering policy. Under the grandfathering policy, a fixed level of support for the lifetime of a generating station’s eligibility under the RO can be put in place, protecting investment decisions.
The precise meanings of the proposals are in debate. One interpretation is that the proposals would mean that DECC can intervene at any point during the lifetime of a project and change the level of support a project receives. An alternative interpretation is that once a project is commissioned the rate is fixed, but the problem is that it will not be certain what rate the projects will receive until they are commissioned. We await the results of the consultation.
Grandfathering – Biomass
On 22 July 2015, the government’s response to the December 2014 consultation on grandfathering biomass co-firing and conversion projects in the RO was published. DECC confirmed that the grandfathering policy would no longer apply to:
new biomass conversion and co-firing stations and combustion units; and
existing generating 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 changes will apply with retrospective effect from 12 December 2014, a move which is intended to reduce the LCF spend by up to £500 million a year.
These changes are likely to affect investor confidence in the sector and could result in reduced returns for biomass projects.
Climate Change Levy Exemption
DECC announced the immediate withdrawal of the CCL exemption in July, with levy exemption certificates (LECs) no longer being issued from 1 August 2015. The CCL is a UK tax on energy use by businesses (not domestic users). Exemption was previously granted for the generation of electricity from qualifying renewable sources. Generators would be issued with LECs for each MWh of electricity generated; they would then sell the LECs to suppliers under power purchase agreements to obtain a commercial deal.
The removal of the CCL exemption is predicted to reduce LCF spend by £900m by 2020, but has come at the disappointment of renewable energy companies as it potentially represents a significant reduction in their revenues.
Contracts for Difference
The CfD scheme, which remains in place, enables low carbon generators to be paid the difference between a pre-agreed price for electricity which reflects the cost of investing in low carbon technology (the “strike-price”) and the actual market price of such electricity by entering into a contract with the government owned Low Carbon Controls Company. The aim is to provide greater certainty for generators given the volatility of wholesale prices.
Competitive auctions are used to implement the scheme and, although the first round auction proved successful, the second round auction has been postponed, with no indication from DECC as to when it will take place.
Conclusion
The changes have been driven by the expected overspend of the LCF and the government’s desire to keep household energy bills to a minimum. Although the policy to keep bills to a minimum is welcomed, it appears to have displaced decarbonisation as the priority on DECC’s agenda.
