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Microgeneration on commercial property: Legal and practical matters for landowners

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28/03/2017

There has been a raft of legislation targeted at commercial property owners over recent years aimed at tackling climate change and helping the UK to meet greenhouse gas emission reduction targets. Most of the energy used in properties is for heating rooms and water and is usually sourced from gas-fired boilers, which accounts for approximately 20% of the UK’s CO2 emissions.   Commercial real estate is therefore often seen as an area in which changes could result in real progress towards meeting environmental targets.

Next ‘generation’ energy efficiency

The UK has therefore seen a rise in ‘microgeneration’ – that is, the small-scale production of electricity and/or heat from a low carbon source. This is a way of generating electricity and heat for a single site or local grouping of properties, providing greater efficiency as less energy is lost as heat during transport over long distances, as well as reducing carbon dioxide emissions.

Microgeneration technologies include micro wind turbines, solar panels, ground source heat pumps and biomass boilers. The work involved in setting up these systems often has the benefit of permitted development rights (although specific planning advice should be taken), and most are exempt from the requirement to hold an electricity supply licence. Surplus energy can also be sold back to the grid, depending on the availability of a commercial arrangement in that regard, or stored in batteries for future use.

There can be significant benefits for the property owner in utilising microgeneration, both in terms of reducing long term energy bills and complying with the evolving regulatory framework, however there is inevitably a substantial upfront capital cost and there are other legal and practical matters to consider.

Cost and practical considerations

In order to try and entice property owners to take advantage of microgeneration, the Government has offered financial incentives for such small-scale renewable electricity and heat generation in the form of the Feed In Tariffs (FITs) and the Renewable Heat Incentive (RHI). Unfortunately the future of these incentives is uncertain and property owners can no longer necessarily rely on the supported income which was previously envisaged to alleviate concerns about the increased capital outlay required to install the technology.

Nevertheless landowners may therefore seek (or, increasingly, be approached by third parties offering to install) a microgeneration installation at their property, allowing the owner to take the benefit of reduced energy costs and regulatory compliance, usually while the third party takes the benefit of the subsidy entitlements as well as payment for the energy generated. In simple terms this seems like a fair commercial deal, however integrating third party apparatus with something as sensitive as your building’s essential service media requires careful consideration. For one thing, taking energy through private conduits also precludes you from getting the benefits of a competitive energy market and could leave you exposed to price changes in the future. It is therefore important to ensure that the documentation governing the relationship and the asset ownership and liability is clear and fair.

Key issues and advice

If you are contemplating installing a microgeneration system on any commercial real estate, it is worth bearing the following issues and advice in mind.

  • Planning and title matters – Many of the requirements that a landowner-landlord would normally expect of a tenant in terms of ensuring that appropriate planning and other consents are acquired in advance of installation and compliance with title matters will likely be omitted or reversed to the landlord on a microgeneration scheme. As the deal is centred on the installation being ultimately for the benefit of the landlord then there is some rationale behind this approach.  However the termination provisions or consequences of planning/title issues should be carefully reviewed to ensure what level of loss the property owner is expected to cover in the event that completion of the installation cannot occur or the kit is required to stop generating. These are issues which the landowner may be more comfortable to accept if it were to become the ultimate owner of the kit upon any such termination or breach.
  • Responsibility for damage, repairs and maintenance – These would traditionally be tenant responsibilities but the operator may be looking to pass responsibility to the property owner to remove liability and running costs going forward.  This point therefore needs to be part of the commercial deal and carefully weighed up against the upfront cost. In any event, the actual installation will need to have been carried out by an accredited engineer and the property owner should seek the usual guarantees and warranties on manufacture and workmanship.
  • Use of services – While the whole concept of microgeneration machinery is to provide energy to the building, most kit requires the use of some input services as well. If the landowner is expected to provide, say, telecoms and water supply, then careful consideration should be given as to what extent this usage should remain the responsibility of the owner and to what extent any such usage should be offset from the cost of the energy received.
  • Obligation to generate – In an ideal scenario, the operator ought to be under some obligation to actually generate, although such a term will likely be resisted by an operator. Usage by the property should also be the primary goal and any offtake or storage should be for the benefit of the property in the first instance. There is a lot of value in battery storage and this may well impact on the commercial deal.
  • Indemnity/guarantee of subsidy income – A property owner should be wary of a scheme which obliges it to indemnify the installer for the payments it is expecting to receive under the incentives scheme, particularly given the volatile and ever-changing nature of the incentives landscape and the fact that this is outside the control of the property owner. Such protection should also not apply where the benefits are lost due to any default of the operator.
  • Decommissioning and reinstatement – Landowners will likely find that the term of the microgeneration licence or lease offered is 20 years, which corresponds with the RHI payment lifetime. After the expiry of this period there is less value in the installation for the operator, who may then be happy to walk away. Landowners and their legal representatives should therefore check the expected life expectancy of the kit and, if it in excess of 20 years, should ensure that there is scope for ownership of the installation to transfer, so that the landowner can continue to benefit from energy efficiency measures. If the machinery is likely to be redundant, however, then landowners may be well advised to agree with the operator who is to be responsible for the cost of decommissioning and reinstatement of the site and considering, in particular, the integration of the plant with the heating and electricity service media throughout the building.
  • External funding – Where an installation project is being externally funded, the installer may seek step-in rights for its funder.  These need to be carefully considered to ensure that the step-in would not supersede any rights of the property owner to the extent that generation could be stopped and the agreement terminated, particularly if the property owner has accepted any liability for the operator’s subsidy losses.
  • Insurance – A key element of eligibility for RHI is that the applicant owns the installation.  The lease/licence should therefore be clear on ownership. This may preclude the landowner from being able to insure the kit, in which case the operator could be the only party able to do so. Provisions would therefore be required to oblige the operator to claim on such policy ad spend the proceeds on repair in the event of damage or destruction by an insured risk.

Ultimately it will always be sensible for any landowner considering microgeneration to carefully weigh up the commercial benefits of engaging a third party to supply and operate the equipment against simply buying in the equipment and operating it itself.

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