The promotion of renewable energy has increasingly been the focus of the government’s environmental policy in recent years, largely due to the UK’s ambitious carbon emission reduction targets and its underlying objective to source 15% of UK energy consumption from renewable resources by 2020, thus reducing our reliance on imported oil and gas supplies. This promotion of renewable energy has primarily been made through the introduction of various government incentive schemes, which have achieved some degree of success. Indeed Department of Energy and Climate Change (DECC) statistics published in September 2011 indicated a 50% rise in renewable energy generation between April and June 2011 when compared to the same period in the previous year.
The renewables market has, however, suffered recent setbacks – most notably a significant reduction in Feed-In Tariffs (FIT) for solar photovoltaic (solar PV) projects. Despite these reductions, the government has emphasised that promoting renewable energy sources remains a priority and maintains that recent cuts were crucial in order to protect consumers from rising energy bills (as the FIT is paid for through a levy on energy bills) and to ensure the long-term growth and stability of the wider renewables industry. However, the recent changes have caused uncertainty in the renewables market and questions have been raised as to whether viable renewable energy projects can be developed in the current financial climate. While the answer to this question is almost certainly yes, undertaking thorough research and developing a comprehensive understanding of the market and the opportunities that are still available to investors has become even more crucial.
The current incentives
The main current incentive schemes for the promotion of renewable energy in England and Wales are the Renewables Obligation (RO), the FIT scheme and, most recently, the Renewable Heat Incentive (RHI). The RO was introduced in 2002 and remains the primary support mechanism for renewable electricity generation projects. It requires electricity generators to source an increasing proportion of electricity from renewable sources. Generators are issued with Renewable Obligation Certificates (ROCs) for each set amount of renewable energy supplied, which must be presented to Ofgem as evidence that a generator has complied with its obligation. Those generators that do not obtain a sufficient amount of ROCs to meet their obligation must pay a penalty fee that goes into a buy-out fund, the buy-out is then paid back to the generators that have successfully met their obligation in proportions relative to the number of ROCs each has presented. The Renewables Obligation Order 2009 introduced banding that provided for different levels of support for different renewable technologies. The Renewables Order 2010 has extended the RO scheme until 2037, with the intention being to increase confidence in the scheme and its long-term stability.
The FIT scheme was introduced in April 2010 and was intended to promote small-scale renewable electricity generation (5MW and under). FITs are available for a smaller group of technologies than the RO being; wind, solar PV, hydro and anaerobic digestion. The scheme allows certain small-scale renewable electricity generators to receive payments for the electricity they generate (generation payments) and, to the extent requested, payments for energy exported to the grid (export payments). The obligation is on licensed electricity suppliers to make the generation and export payments to FIT generators at rates determined by government. These suppliers then pass the cost back to their customers in the form of increased electricity bills.
The RO and FIT schemes have, thus far, achieved relative success in terms of increasing the amount of renewable energy generated in the UK. In particular, the FIT scheme has proved to be extremely popular, with over 45,000 installations registered between April 2010 and June 2011. The vast majority of these were for solar PV (43,100), although over 1,500 new wind installations were also registered. However, only 220 hydro systems and five anaerobic digestion facilities were registered over the same period, suggesting more could be done to promote these technologies in future.
The RHI was opened to new applications from non-domestic generators on 28 November 2011 and is described in more detail later in this article.
The significant reduction in August 2011 of the FIT rates for large-scale solar PV and current proposals to reduce rates for small-scale solar PV have slowed growth in the solar PV industry. The solar PV tariff was originally reduced from 1 August 2011 for installations over 50kW from as much as 29.3p/kWh to 8.5p/kWh for a 250kW installation. DECC’s current consultation on phase 1 of the comprehensive FIT review has also proposed reductions for sub-50kW installations. At the time of writing, Friends of the Earth has received permission to judicially review the government’s decision to propose a cut-off date for the new rates to apply before the end of the phase 1 consultation period. However, despite the government appealing the decision, it is likely that this will simply delay introduction of the proposed rates for a short period. Of potentially greater concern is the impact that the government’s action has had on the wider renewables sector, most notably the market’s concern regarding the government’s ability to change direction quickly with potentially devastating effects to previously viable projects.
In justifying the FIT tariff cuts, the government stated that the cost of installing solar technology was significantly over-estimated in calculating the initial tariff rates (by at least 30% according to DECC statistics), which resulted in the potential rates of return being much higher than intended. According to the Energy Saving Trust, cutting of the tariff rates will reduce the rate of return for some solar PV projects from 10% to 4%. While many within the solar industry have acknowledged that changes to the scheme were going to be required at some point, anger has been expressed at the extent of the tariff reduction and the short timescale within which the changes are to be implemented, giving the sector little time to adjust.
Stay on target
Away from solar PV, it is important not to lose sight of the more positive changes in the renewables market, including the increase in FITs available for anaerobic digestion installations introduced as a result of the fast-track FIT review, which saw increases to 14p/kWh for up to 250kW plants and 13p/kWh for 250kW to 500kW plants. At the time of writing, the consultation on phase 2 of the comprehensive FIT review is still awaited and is unlikely to be published before the appeal against permission to judicially review (referred to above) is heard. The consultation will detail proposals for the non-solar PV technologies and it is hoped that positive measures will be proposed in order to restore confidence.
More generally, the government continues to express a clear commitment to promoting renewable energy, and will now be keen to demonstrate the stability of the market and the benefits of investment. Such commitment has recently been demonstrated via the introduction of the RHI, which is now open to applications. It remains to be seen what effect the RHI will have, but the hope is that its introduction will ease renewables market nerves and improve prospects for eligible installations.
The RHI: promoting confidence?
The most recent incentive scheme, which the government extols as the first of its kind in the world, is the RHI, which was launched in March 2011 and opened to applications on 28 November 2011 for non-domestic installations first commissioned on or after 15 July 2009. The RHI provides regular quarterly payments over a period of 20 years from accreditation (which will be adjusted annually in line with inflation) to renewable installations that generate heat or produce biomethane. As with the RO and FIT scheme, the incentive payment levels vary depending on the type and size of the technology used ranging from 1p/kWh for large biomass plants (1000 kWth and above) to 8.5 p/kWh for sub-200 kWth solar collectors. The RHI is funded by £860m from central government so does not carry with it the direct implications of increasing energy bills and it is hoped that this will allay concerns about major reductions in future tariff levels.
The RHI regulations and guidance establish a number of important criteria that operators and investors should carefully consider when developing a potentially eligible installation. For example, the requirement to prove that heat produced is ‘usable and useful’, which acts to encourage operators to develop sustainable strategies for using heat in an efficient manner. Furthermore, RHI payments will only be made to ‘owners’ of eligible installations, which has implications for investment providers and project structures. As with the FIT scheme, there are also rules about what constitutes an installation and how multiple units are treated, which need to be understood in order to prevent any issues arising during accreditation.
As the RHI scheme progresses and operators become more familiar with the legal and technical requirements, we will likely see a rapid increase in applications for RHI and it is hoped that it will further promote renewable energy projects without becoming a victim of its own success. The RHI doubtless represents good news for the renewables sector as a whole and is likely to encourage investment in technologies that have proved less popular under the FIT scheme, such as anaerobic digestion.
What does the future hold?
It is too early to tell what impact the RHI will have but the tariffs available certainly give an indication of where the government wants to focus in terms of support. Promotion through the RHI of anaerobic digestion and biomass as a result of relatively poor uptake and lack of support respectively under the FIT scheme may well see an increase in uptake of installations using these technologies. In particular, recent increases in the FIT rate for anaerobic digestion projects together with the RHI rate for biomethane injection and biogas combustion suggests a concerted effort to increase uptake of this technology. This is in line with the commitment in the coalition’s ‘Programme for Government’ to promote an increase in energy from waste through anaerobic digestion. The added benefits of anaerobic digestion are the potential to use feedstocks that may otherwise be going to landfill and the creation of potentially marketable digestate as a by-product of energy and biogas production.
It remains to be seen if the government has created balance in the renewables market, which will be evidenced by an uptake of technologies across the board rather than a rush to one particular technology that looks to be the most attractive investment. Careful consideration of the levels of support available across the various incentive schemes and the interaction between them will be required in order to ensure the success of renewable energy projects.
There is no doubt that a degree of uncertainty currently exists in the renewables market as a result of the recent reduction in FITs for solar PV. That uncertainty has the potential to deter developers, operators and investors from embarking on or supporting renewable energy projects and incurring costs in the knowledge that incentives could be cut before accreditation is achieved. However, with the recent increases in incentives for certain technologies in the FIT scheme and the introduction of the RHI there is still a great deal of potential for successful renewable energy projects to be developed and operated. The costs of some of the technologies are coming down, which is also helping drive developments. 2012 will see greater detail emerge on the proposed Electricity Market Reform and the mechanism to replace the RO, which is eagerly awaited. Careful planning, combined with a detailed understanding of the market and comprehensive advice should allow this potential to be realised.
By Ross Fairley, partner, and Sam Sandilands, solicitor, energy group, Burges Salmon LLP.