Renewable Energy – Feed-in Tariffs, an Update
27 January 2012
Solar power and the coalition government’s claim to be the “greenest ever” have been in the news since December, over the on-going battle between the Department for Energy and Climate Change (DECC) on one side and a combination of solar panel installers and Friends of the Earth on the other. The issue – judicial review of the decision by DECC to reduce the level of the feed-in tariffs (FiTs) available to small-scale generators of solar photovoltaic (PV) electricity prior to the end of the statutory consultation period.
Judgement in the latest instalment of this case - The Secretary of State for Energy and Climate Change v Friends of the Earth and others [2012] EWCA Civ 28 - was handed down by the Court of Appeal on 25 January 2012 when it was held by the Court that the DECC had acted unlawfully in attempting to reduce tariffs for those eligible generators, installing panels between 12 December 2011 and 1 April 2012.
However, the story threatens to continue to roll as DECC has indicated that it intends to appeal to the Supreme Court, though it has not been granted leave to do so by the Court of Appeal.
The FiTs scheme is a mechanism by which small-scale generators of renewable power (installations of up to 5 MW capacity) are paid for generation of electricity from renewable sources. The FiTs scheme is funded by the energy industry itself which passes on the cost to the consumer. There are two elements to the payment received by the generator:
1. A generation tariff, irrespective of whether the electricity produced is exported to the grid and
2. An export tariff paid only in respect of electricity exported to the grid.
The export tariff is the same for all renewable technologies whereas the generation tariff differs from one technology to the other. The principle behind the differences in the generation tariff – and DECC’s ability to periodically review same – is that a renewable technology that DECC wishes to encourage will have a higher tariff (and therefore a higher return for a generator or investor) whereas, if a particular technology becomes markedly more efficient or less expensive to operate, the tariff can be reduced.
The tariffs cannot be reduced retrospectively – once a scheme is registered, the tariff that the generator is entitled to receive is fixed for 20 or 25 years (again depending on the particular technology) and is reviewed only in line with RPI. However, some FiT levels already anticipate that some technologies will become more efficient/less expensive over time and therefore some tariffs already decrease gradually over the coming years, for installations registered during those years.
Broadly, the dispute between DECC and the objectors was precipitated by significant recent falls in the cost of PV panels with the result that, in the opinion of DECC, the returns to small-scale wind generators, fuelled by the generous FiT subsidy, were much higher than anticipated. DECC claimed that the over-subsidisation of small-scale wind generation would lead to DECC exceeding its entire FiT-scheme budget, thereby hampering the development of other technologies and threatening future generation.
For a balanced picture and a more positive illustration of DECC’s ability to review FiT levels, there is the example of anaerobic digestion (AD) technology, the FiTs for which were actually increased for small and medium-scale installations, at the same time as those for PV were being reduced. The FiTs for the small and medium-scale AD installations were increased as DECC wished to encourage generation by AD, the take-up hitherto not being as high as expected.
The conclusion of the current PV saga will not however be the end of the story for review of FiT levels. The government’s review of FiTs continues (PV and AD were reviewed first as part of a fast-track procedure), as does its ongoing review of the Renewables Obligation (RO) – the regime under which large-scale (and some small-scale) renewable generation is currently subsidised.
As part of the government’s plans for Energy Market Reform, the RO itself will be phased-out by 2017 and replaced with a form of FiT thereafter. Some of the proposals for phasing-out the RO have already been announced and further detail on the form of FiT to replace it is expected soon.
Review of the subsidies (for both small-scale and large-scale projects) is very much one of the current “hot topics” in the renewables sector, as certainty and clarity of future returns is essential both to:
1. attract the investment that this sector needs; and
2. ensure that contracts and project documents that are being entered into now or during any transitional phase will take into account any changes in the law.
The energy team at Kerman & Co acts for a number of small-scale and large-scale renewables developers and investors and is available to discuss this article and to advise on how it believes the proposed changes to subsidies will affect both existing and future projects.
For further information on this article, please contact Chris Sayers on 0207 539 7093 or email chris.sayers@kermanco.com
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.