DLA Piper UK LLP

UK renewable energy: an investor-friendly industry?

Question

In the wake of recent developments, what are the opportunities for investment in renewable energy in the United Kingdom?

Answer

Under the EU Renewable Energy Directive, the United Kingdom has a target of achieving 15% of final energy consumption from renewable sources by 2020. To put this in perspective, the United Kingdom managed approximately 5% in 2013 and 7% in 2014.

The target includes generating at least 30% of electricity from renewables by 2020; the United Kingdom achieved just over 19% in 2014 and a record 22% in the first quarter of 2015.

As part of this drive towards renewable energy, the government has overseen an average of around £7 billion a year of investment in renewables since 2010.

Recent developments

Solar

Following large increases in renewable electricity production by solar means in 2014, when solar photovoltaic accounted for approximately 6% of renewable electricity generation, growth has plummeted since 1 April 2015 when access to the Renewables Obligation (RO) subsidy scheme closed to solar farms.

Then on 27 August 2015 the Department of Energy & Climate Change (DECC) published a consultation on a fundamental review of the Feed-in Tariffs (FITs) scheme. The deadline for public responses to the consultation is 23 October 2015. The consultation's headline proposals include:

  • generation tariffs (the main payment under the scheme) will be slashed for new installations by up to 87% and some tariff bands revised. The generation tariff may even be withdrawn for new installations from January 2016;
  • tariff inflation will be linked to the less favourable Consumer Prices Index rather than the Retail Prices Index;
  • no new technologies will be eligible and extensions to existing installations will not be able to claim FITs; and
  • new expenditure will be capped at an overall budget of £75-100 million from 2016 to 2018-19.

Any changes are likely to take effect “as soon as legislatively possible”, which DECC expects to be January 2016. The timetable for changes will be confirmed in the government's response to the consultation.

Despite the cost of solar energy substantially falling in recent years (which has allowed the sector to expand even as subsidies have been cut), the level of the new proposed cuts was widely unexpected. The severe proposed reductions will now see a surge in deployment until the end of the year as consumers and installers seek to avoid the cliff edge of cuts. Looking further ahead, such cuts would be hugely damaging for the UK solar industry and would significantly curtail its future potential.

Until costs of the technology drop to a level at which a profit can be comfortably made without a subsidy, it is difficult to foresee further significant investment in the industry.

Onshore wind

Even with onshore wind farms being widely regarded as the cheapest form of renewable energy and onshore wind power being the leading individual technology for the generation of electricity, the UK government has made it clear that it intends to halt their spread. On 18 June 2015 it was announced that DECC will close the RO scheme to onshore wind a year early (April 2016 rather than April 2017).

More recently on 30 September 2015, the Department of Enterprise, Trade and Investment launched a two-week consultation proposing closure of the Northern Ireland Renewables Obligation (NIRO) from 1 April 2016 to new onshore wind projects not meeting eligibility criteria. Projects that meet the early closure eligibility criteria will be able to apply to accredit under the NIRO to 31 March 2017, with a further 12-month grid and radar delay grace period for projects meeting the relevant criteria.

Onshore wind farms will now have to bid for public subsidy under Contracts for Difference (CfD). However DECC has postponed the next CfD auction, which had been scheduled for October 2015, without giving a future date for when it will take place. The government will supposedly set out plans this Autumn.

Furthermore, the government has announced new planning guidance to ensure that local communities have the final say over onshore wind farms, with applications to be decided at a local level.

The government believes that the move to curtail deployment will balance the interests of onshore wind developers with the wider public and that the United Kingdom has enough projects in the pipeline to meet its commitments.

However, it is yet to be seen to what extent the announcement has knocked investor confidence, with it likely to be a considerable blow to future investment in the technology. Many consider it a strange decision to end the onshore wind programme, as it is the cheapest readily-available form of clean energy.

Offshore wind

Offshore wind in the United Kingdom is an international powerhouse, accounting for over 51% of the global offshore wind energy capacity in 2014 and approximately 21% of renewable electricity generation in the United Kingdom.

The technology is subsidised under the CfD scheme despite its higher cost than onshore wind and to incentivise project development, the government is looking to reduce the generation cost by 30%. Moreover, the government is intent on supporting offshore wind as one of the technologies that it believes has not received as much support as others.

Offshore wind therefore currently seems to be a relatively steady industry for potential investment, with no plans for upheaval. However, given the United Kingdom's wide-ranging review of its electricity market, potential backers may decide to delay projects until they have clarity about how the market will operate in the longer term.

Biomass and anaerobic digestion

The direct taxation Renewable Heat Incentive (RHI) subsidy, which supports biomass boilers and anaerobic digestion (AD) facilities completed after 15 July 2009, is due to have its budget reviewed in April 2016 when the current allocation stops. Fears in the industry and news of budget overspends are pointing to either severe cuts in subsidy levels or potentially the scrapping of any new budget allocation.

The uncertainty should lead to a rush for installations to be completed this year to secure the domestic seven-year or commercial 20-year RHI subsidy.

Furthermore the budget statement on 8 July announced the intention to remove the Climate Change Levy (CCL) exemption for renewable electricity; levy exemption certificates relating to renewable electricity generated on or after 1 August 2015 will no longer be eligible for the purposes of the CCL exemption.

The RO is also to close to new generation in 2017 and there is a cap of 400MW on the total new build dedicated biomass capacity that can expect grandfathered support under the RO. Projects applying to the 400MW cap must be aiming to commission by 31 March 2017.

However, biomass and AD can receive support under the CfD scheme. Both biomass combined heat and power (CHP) and AD fall under the CfD’s funding ‘pot 2’, which is for less established technologies. Although the next CfD auction date has been indefinitely postponed, in January 2015 DECC announced an increase of £25 million to the pot 2 budget. This means that there will be £155 million for projects commissioning from 2016-17 onwards and an additional £105 million for projects commissioning from 2017-18 onwards.

Biomass conversions are in CfD pot 3, which was not allocated a budget for the first allocation round.

With doubt around the future of the RHI and the RO set to end within the next two years, the continued growth and success of biomass and AD should be boosted by the government's commitment to less established technologies. As a further positive example, in DECC's recent FITs consultation, there were no proposed changes to the tariff bands for AD, in stark contrast to the large cuts faced by solar.

Hydro

As hydropower has been a generator of renewable electricity in the United Kingdom since the 1950s, most suitable sites for large-scale hydro have already been utilised. As such, the generation of hydropower is unlikely to significantly increase.

However, hydro accounted for around 9% of total renewable electricity generation in 2014 and continues to play a useful role.

Wave and tidal

The announcement in the summer budget that power from renewable sources will no longer be exempt from the CCL will have little impact on the tidal sector, given the low current level of operational tidal capacity.

Tidal power projects will place greater reliance on CfD subsidies, which provide price certainty and are set to continue as the technology is developed. Tidal projects fall under CfD pot 2 for less established technologies, similarly to biomass CHP.

Encouragingly, the government is to place wave and tidal array projects at the front of the queue for lucrative support with the first 100 megawatts of wave and tidal capacity to apply for financial support guaranteed access to CfD at a strike price of £305/MWh under the current delivery plan, which runs until 2019.

The financial support looks likely to continue at this crucial stage as the technology develops toward commercial viability.

The future

It has recently become apparent that opportunities to invest in renewable energy in the United Kingdom have shifted quite dramatically. Further severe cuts to the FITs scheme, the closing of the RO and an uncertain future for the RHI have all shaken investor confidence in the medium to long-term prospects of the industry and caused a flurry of activity to complete projects before various deadlines close and subsidies drop.

However, it is not all doom and gloom, as the government has increased its support for less established technologies such as biomass, AD and wave and tidal – and will be providing additional financial support to these developing areas.

Moreover, with the costs of renewables continually falling, new ventures should still be profitable fairly soon despite the cuts to subsidies, even if not at the levels previously obtainable.

Although the landscape for investing in renewables looks quite different now to how it did even as recently as a year ago, some potential still exists for investment, growth and profit to help ensure a cleaner future.

Ed Moys is a trainee solicitor at DLA Piper. He is based at the firm’s Leeds office.

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