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A brighter future?

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06/06/2014

In July 2011, the Government published the Renewable Energy Roadmap (the Roadmap). The Roadmap sets out how in the future the Government aims to meet its goal of generating 15 per cent of the UK’s energy from renewable sources by 2020. The Government has, since the Roadmap was published, issued annual updates which have indicated that good progress is being made towards achieving the 2020 target. One of the key statements in the first of those updates, which was issued in December 2012, was that solar PV is of crucial importance under the Roadmap due to increased deployment and a significant decrease in costs.

As a result of the increased focus on solar PV, on 8 October 2013 the Department of Energy and Climate Change (DECC) published a solar PV specific roadmap, the UK Solar PV Strategy Part 1: Roadmap to a Brighter Future (the Solar PV Roadmap). As outlined in the article we published in October 2013 the Solar PV Roadmap sets out the strategy for development of solar PV energy generation in the UK and provides that solar PV should help provide carbon emissions reductions, energy security and affordability for consumers and that cost-effective projects should therefore be promoted in order to support the decarbonisation of the economy, both in order to meet the UK’s 2020 target but also to reduce emissions in the longer term. The Solar PV Roadmap further provides that solar PV installations should be appropriately sited and that proper weight should be given to environmental considerations including visual impact, heritage and local amenity and that local communities should have the power to influence decisions that affect them.

The Solar PV Roadmap has been published in advance of the UK solar PV strategy which DECC intends to issue this year. The DECC is in the process of finalising that strategy and amongst other things, is undertaking analysis on:

  • the cost reduction potential of solar PV
  • the likely proportions of domestic, industrial and ground mounted solar PV that there will be by 2020
  • how to manage grid connections.

Further support to solar PV has been given in the form of the recently published Community Energy Strategy introduced by the DECC to increase Government support for shared community energy. Although the strategy did not impose a specific figure, the suggestion was that large-scale solar farm developers ought to offer a ‘meaningful share’ of their projects to local communities via schemes whereby communities come together to reduce their energy use or purchase and generate their own energy.

It should however be noted that despite the obvious support for solar PV, on 13 May 2014 the DECC published a consultation paper on proposals to change support for solar PV projects under the Renewables Obligation (RO) and the Feed-in tariffs (FITs) scheme. The consultation appears to be aimed at addressing concerns raised by the public in relation to the prevalence of large-scale solar PV installations. The first part of the consultation considers how DECC can regulate spending on large-scale solar PV under the RO. The second part addresses promotion of midscale (250kilotwatt (KW) – 500kW) building-mounted solar PV under the FITs regime. DECC has proposed:

  • the closure of the RO to new ground- and building-mounted solar PV with a capacity above 5 megawatts (MW) from 1 April 2015
  • to split the current FITs degression [1] band for installations over 50kW into separate bands for stand-alone solar PV installations and all other solar PV installations.

The consultation closes on 7 July 2014.

Investing in a ‘brighter future’; what real estate professionals need to know

By June 2013 the UK had 2.4 gigawatts (GW) of installed solar PV capacity. Estimates from the DECC suggest that this is set to increase to 10 GW by 2020, although the Government believe that more is achievable and National Grid has confirmed that the current network could support 10 GW of solar PV capacity without need for any significant change to the way that the Grid is managed. Taking all of this into account, together with the fact that solar PV has an 85 per cent. acceptance rate, the highest rating of any renewable technology, and one might conclude that there couldn’t be a better time to invest in solar PV.

Whilst the fundamental principles of a solar PV development mirror those of most other real estate transactions, there are additional considerations to be taken into account over and above those of a ‘standard’ transaction. As such, the increased activity in the market will require real estate professionals to acquire a thorough understanding of those additional considerations in order to ensure the smooth negotiation and conclusion of solar PV transactions.

Initial due diligence

As with any transaction, thorough due diligence is key to ensure that the matter progresses as quickly and smoothly as possible. The principle of caveat emptor means that the seller is under no duty to furnish the buyer with information (save for any latent defect in title) and this, coupled with the fact that solar PV sites are generally in rural locations, means that thorough investigation of the landowner’s title is imperative. Access to the site and the ability to run cabling across adjoining land is key and as such investigations should be extended to encompass, not only the land on which the solar PV farm will be sited, but also the neighbouring land over which access and cabling rights will be required. If adjoining land is owned by a third party then the cost and time involved in procuring such rights will need to be factored into proposals.

Consideration also needs to be given to any existing covenants or rights which affect the site in question. Obtaining a release of such covenants or rights can be costly and time consuming and indemnity insurance could, in certain circumstances, provide a cost-effective solution to such issues. The site may be affected by public footpaths, the diversion of which could also cause delays in implementing a scheme.

Whilst detailed discussion concerning planning matters is beyond the remit of this article, one of the biggest challenges to a solar PV farm is securing satisfactory planning permission. Although the Solar PV Roadmap outlines the principle that support for solar PV should ensure proposals are appropriately sited and opportunity should be given for local communities to influence decisions that affect them, it provided no new guidance on planning matters and merely reiterated the fact that the Department for Communities and Local Government published revised planning guidance for renewable energy developments in 2013. The 2013 guidance provides commentary on the implementation of the planning policy for England set out in the National Planning Policy Framework and provides planners with more specific guidance on issues that should be taken into consideration in relation to large-scale solar PV planning applications. What is clear from the guidance is that the need for renewable energy does not automatically override the requirement for planners thoroughly to scrutinise the effects of developments on communities. The impact of renewable energy developments on visual amenity and their effects on cultural and heritage landscapes must be acceptable and proportionate if a development is to get the green light.

Documentation

Documentation will usually be led by an option agreement or agreement for lease between the landowner and the developer. An option agreement is preferable to the developer as they would not usually wish to take on a site until they have procured both planning permission and grid connection for the supply of electricity to National Grid (plus any additional site specific requirements, for example, obtaining cable easements and access rights referred to above) but if the landowner is not willing to grant an unconditional call option to the developer, any agreement for lease will need to be conditional on such matters. The option agreement will be drawn on fairly standard terms but the length of the option period should be carefully considered and, ideally, there should be an ability for the developer to call for an extension of time in certain circumstances.

Whilst the terms of the subsequent lease will vary from site to site there are many provisions that are considered to be standard in the industry. For example, the length of the term of a solar lease is usually between 25 and 30 years and rent payable is generally a fixed percentage of income received from electricity sales (and government subsidies) or a fixed sum increased on an annual basis in line with RPI. As with most leases, rent will not generally be payable, or will be payable at a discounted rate during the construction phase of a scheme. Consideration will need to be given to the extent of the tenant’s repairing liability (a full repairing obligation is not likely to be acceptable to a tenant) and, from a landowners perspective, the tenant’s reinstatement obligations at the end of the term will be of utmost importance. As alluded to previously, access and cabling rights are of paramount importance and the tenant will need sufficient rights over the landlord’s neighbouring land to allow effective operation of the site, and the tenant will want the landlord to be obliged to enter into any wayleave agreements with utilities providers. Furthermore, maintenance of access roads and contributions to the cost of their upkeep will need to be agreed between the parties.

Alienation rights will also need to be carefully negotiated. A tenant will require the ability to grant both an underlease of the substation on site without the landlord’s consent and cable easements to an electricity provider. In relation to such cable easements the landowner as landlord will need to be joined in as a party (as might any neighbouring landowners depending on the route of such easements). A tenant will also want to be able to assign or charge its interest to a funder without the landlord’s consent and the funder will require step in rights to protect its interest in the event of tenant default. As solar sites are considered an attractive investment for certain funders it is critical to a tenant to ensure that the provisions of the lease that they enter into are ‘institutionally acceptable’ so as to avoid any issues should they choose to raise funding against the site.

WM comment

It is clear that solar PV is set to play an important role in meeting the targets that have been set for renewable energy generation in the coming years. As such landowners, developers and real estate professionals alike need to be alive to the issues that can arise in relation to solar PV developments. Whilst many of these issues are similar to those faced in relation to more ‘standard’ real estate transactions and, as ever, thorough due diligence is key, there are considerations that are specific to the sector, such as planning and access, that should be addressed as early in a transaction as possible so as to reduce any issues at a later stage and maximise investment opportunities.

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[1] Degression is a mechanis1m used to control FITs costs introduced in 2012. Currently there are three degression bands for solar PV. Deployment of solar PV installations is assessed on a quarterly basis and if above a certain level, triggers tariff cuts. In addition, solar PV is subject to automatic degression which means that there is a minimum of 3.5 per cent. reduction for every solar PV tariff every nine months.

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