Solar cuts confirmed: changes to the Renewables Obligation and Feed-in Tariff regime in Great Britain

On December 17, 2015, the Department of Energy & Climate Change (DECC) published responses to controversial consultations launched over the summer in relation to reductions in the support for renewable energy under the Feed-in Tariff (FiT) and the Renewables Obligation (RO) schemes.

Both schemes provide revenue support for renewable energy in Great Britain (GB).

The RO places an obligation on UK electricity suppliers to source an increasing proportion of the electricity they supply from renewable sources. Renewables Obligation Certificates (ROCs) are green certificates, issued to renewable energy generators, sold to suppliers and ultimately used by suppliers to demonstrate that they have met their obligation.

The FiT scheme is designed to support small scale renewables. It requires some suppliers to pay indexed tariff payments on both generation and export of renewable and low carbon electricity.

Both schemes have been victims of their own success. The Government has sought to limit projected overspend under renewable energy support schemes, to comply with the Levy Control Framework caps. Even if these cost control measures are implemented, the Government estimates that a total of 12.8GW of solar capacity will be deployed under the RO, FiTs and Contracts for Difference by 2020/21.

Moves to limit renewable energy deployment in the UK are in stark contrast to announcements made recently in the USA, where law makers agreed to extend tax credits for solar and wind for another five years.

For solar photovoltaic (PV) projects of 5 MWs and below and for additional capacity added to a project which does not take it above 5 MWs in total, the Government has decided:

• to close the RO from 1 April 2016;
• that the closure will be subject to grace periods for projects which are affected by grid delay or which, on or before 22 July 2015, had preliminary accreditation or had made a significant financial commitment;
• to end grandfathering (a fixed rate of support from the date of accreditation) under the RO for projects in England and Wales with an accreditation date falling on or after 23 July 2015 unless they meet the criteria for the significant financial commitment grace period (described in more detail below); and
• that there is sufficient evidence of cost reductions for solar PV and has launched a technology-specific banding review for projects in England and Wales only.

Since the Government launched the original consultation on 22 July 2015, developers have rushed to build out their projects before the proposed RO closure date. Now that the decision is confirmed and with legislation is expected to hit the statute books by 1 April 2016, analysis of whether the grace period criteria have been met will become increasingly important for investors whose projects are on the margins.

Changes to grandfathering

Grandfathering is defined by DECC as “a statement of policy intent that once a generating station is accredited and receiving support under the RO at a certain level (or band), the level it receives […] would not change for the lifetime of its support under the RO.”

Whilst the announcement to end grandfathering for solar PV of 5MWs and below is disappointing for some investors, it does not affect projects that:

• were accredited on or before 22 July 2015; or
• meet the significant financial commitment criteria on or before 22 July 2015.

Other projects however will only obtain the rate of support which applies at the time of accreditation until the implementation of any proposed reduction in support. Therefore, projects accrediting after 22 July 2015 which did not meet the significant financial commitment criteria on or before that date, will not be grandfathered even if such projects either:

• accredit in the period from and including 23 July 2015 to the closure date of 1 April 2016; or
• accredit after the closure date of 1 April 2016 by virtue of being eligible for the preliminary accreditation or grid delay grace periods.

Changes to banding

The Government has also launched a consultation on a reduction in support for all solar PV projects located in England and Wales, whether ground or building-mounted, of 5 MWs and below (or additional capacity where the total installed capacity does not exceed 5MWs) with an accreditation date of 23 July 2015 onwards. These changes do not apply in Scotland or Northern Ireland as banding levels are devolved matters and the Scottish Government and Northern Ireland Executive have elected not to undertake a banding review. The consultation closes on 27 January 2016, with changes expected to be implemented by 1 June 2015.

Affected projects would receive the lower band of 0.8 ROCs/MWh, effective from 1 June 2016. This means up to a 46% reduction in the level of support when compared to existing ROC bands for solar PV (see table below).

To try to maintain investor confidence, an exception is proposed where a project has met the significant financial commitment criteria, whether they accredit under the RO before or after the implementation of the banding review. All generating stations accredited on or after 23 July 2015 will need to provide the evidence detailed below to retain their level of support.

Why is evidence of a significant financial commitment important?

Meeting the criteria for a significant financial commitment on or before 22 July 2015 will be particularly important for investors. This will allow a project to:

• accredit under the RO until 31 March 2017, 12 months after the closure date on 1 April 2016 (the significant financial commitment grace period criteria);
• secure grandfathered support under the RO for 20 years (the grandfathering exemption criteria); and
• be insulated from any down-banding implemented as a consequence of the December 2015 consultation (the banding reduction exemption criteria).

The evidence required to demonstrate a significant financial commitment broadly comprises:

• a grid connection offer and acceptance dated on or before 22 July 2015 (or a declaration that no grid works are required);
• a director’s certificate confirming land rights were held by the developer or the operator on or before 22 July 2015; and
• confirmation that a valid planning application had been received by the relevant planning authority no later than 22 July 2015 (or a declaration that no planning permission is required).

Legal challenge

Litigation has already been announced in relation to the removal of grandfathering on the grounds that the UK government had given “clear and unambiguous assurances that it was committed to the principle of grandfathering”.

Separately, litigation commenced by Solar Century relating to the early closure of the RO to large scale solar PV will go to appeal in early February 2016. The outcome of the case will be important for small scale solar PV generators who will be interested in any ruling that the Government acted beyond the scope of the powers conferred under the Energy Act 2013 and contrary to developers’ legitimate expectations based on previous policy statements.

In relation to FiTs, the Government received 55,000 responses to the consultation, a testament to the strength of public opinion on the subject. The Government determined to:

• reduce generation tariffs for small scale solar PV, wind and hydro (not anaerobic digestion) and revise tariff bands. Generation tariff reductions are not however as drastic as initially proposed;
• cap FiT expenditure budget at £100 million of new spend from January 2016 to April 2019. All new installations applying for FiTs on or after 15 January 2016 will be subject to a new system of caps from 8 February 2018. The annual cap will be divided between technologies and degression bands, with the time and date of an installation’s MCS certificate or application for FiTs accreditation or pre-accreditation being the basis for determining whether or not it qualifies under the cap. Projects which miss out will be placed in a queue and granted a FiT when the cap next opens (although with no guarantee of support until they qualify under the cap). This may result in a ‘start-stop’ development cycle and will significantly slow deployment; for example, it is estimated that only 5 standalone solar PV projects could qualify in any quarter;
• implement default degression for all technologies on a quarterly basis. Contingent degression of 10% will take place if the quarterly cap is breached;
• reintroduce pre-accreditation from 8 February 2016;
• remove the generation tariff for extensions from 15 January 2016; and
• not make changes to indexation (the FiT is indexed at RPI).

Pre-accreditation

Pre-accreditation gives generators a guaranteed tariff level in advance of commissioning their installation, provided a project is commissioned and full accreditation applied for within a specified time period, called the validity period. It was (and will be again) available to solar PV and wind of 50kW or more, hydro and anaerobic digestion. To qualify for pre-accreditation, a project must have planning consent and a grid connection agreement (and, for hydro installations, environmental permits). Validity periods are 6 months for solar PV, one year for wind, and two years for hydro and anaerobic digestion.

Given the introduction of caps, industry will be relieved that pre-accreditation is being reintroduced in its original form from 8 February 2016. DECC observes that these projects “will be able to “book” a place within a cap long before they are fully commissioned, reducing (although not removing) the risks associated with missing out on a cap”.

Timetable

The changes to the FiTs are being introduced by the Feed-in Tariffs (Amendment) (No. 3) Order 2015 (FiT Order) and the Modifications to the Standard Conditions of Electricity Supply Licences 2015 No. 3 (Licence Modifications). The revised FiT Order is currently before Parliament and is subject to a minimum 21 day period before coming into force on 15 January 2016. Changes to the electricity licence conditions will take 40 days and so will only come into effect on 8 February 2016. As a result, to avoid a regulatory mismatch, the FiT regime will be paused for 4 weeks from 15 January 2016, during which time no new accreditations will be permitted (other than for schemes which pre-accredited prior to 1 October 2015 and are applying during their validity period).

Industry should brace itself for a further consultation on FiTs for anaerobic digestion and micro-CHP in early 2016. DECC have also refused to ruled out further consultations on eligibility and tariffs in 2016 and will be keeping these under review. For projects waiting in the ‘cap queue’, which are not insulated from future regulatory change, this represents a real risk.