Subsidies: all you need to know

Written by: Nick Churchward and Dan Ballard | Published:

It’s all change in the world of subsidies. Nick Churchward and Dan Ballard of law firm Burges Salmon’s energy team provide a recap of the UK’s renewable energy subsidy regimes and summarise how the recent changes will impact various technologies

Since the general election in May, many changes have been made to the support mechanisms for renewable energy technologies – partly to address a perceived overspend from the levy control framework (through which the main subsidy mechanisms are funded) and partly to honour the Conservatives’ manifesto promises.

The renewables obligation (RO) provides a fixed price subsidy to larger-scale renewable energy projects. Through the RO, the government places an annual obligation on licensed electricity suppliers to use a certain amount of renewable energy sources.

These suppliers are required to meet their individual obligation by purchasing renewables obligation certificates (ROCs), from renewable generators directly, from the ROC market, or by paying a penalty to government (the so-called ‘buy-out price’).

At the end of each obligation period, the regulator distributes the proceeds from the buy-out penalties to those suppliers that have met their RO obligations by purchasing ROCs.

In this way, ROCs have a monetary value as it is desirable for suppliers to acquire them (in August, they were trading at around £42 each) and generators have been able to sell – among other things – the electricity made at their renewable stations (and associated ROCs) to licensed electricity suppliers.

The RO is in the process of being phased out and replaced by contracts for difference (CfDs) as part of the government’s electricity market reform.

A transitional period, during which both subsidies are available, began in autumn 2014 and was originally intended to end in March 2017, with closure of the RO to new applications.

Which waste technologies are eligible?

Advanced conversion technologies (ACTs) with or without combined heat and power (CHP), anaerobic digestion (AD), and energy from waste with CHP.

What are the changes?

The RO for 5MW-plus solar PV closed on April 1 2015 and it has been announced that it will now close to onshore wind and solar PV below 5MW (subject to Parliamentary approval) on April 1 2016.

What does it mean for future projects?

The RO is available to all projects that accredit, whereas the new CfDs are awarded by auction so there is no guarantee that a project will receive one. This makes the RO much more desirable to generators and is why there is a rush to build-out before the deadlines.

The good news for developers of energy from waste projects is that RO will remain open to qualifying projects until March 2017. Subject to meeting the qualifying criteria, waste projects may also have the benefit of a further 12-month grace period to submit accreditation applications.

Time is now of the essence, however, given build-out periods and that many developers are now in the process of trying to finalise funding in order to build projects out before the cut-off date.

Feed-in tariffs (FiTs)

FiTs are guaranteed payments to small-scale generators of electricity from renewable sources. Renewable generators are paid a fixed (indexed linked) amount per kilowatt hour of electricity that is generated (the generation tariff) and a fixed (indexed linked) amount per kilowatt hour of that electricity that is exported to the local electricity distribution network (the export tariff). Which waste technologies are eligible?

AD projects less than 5MW.

So what are the changes in this instance?

Pre-accreditation for all technologies and applicants was removed from October 1 2015.

Pre-accreditation was the process by which generators could secure a guaranteed tariff (subsidy) level in advance of commissioning (and construction), provided that their facility was commissioned and full accreditation applied for within a period reflecting the expected construction time for each technology (12 months for AD projects).

The Department for Energy & Climate Change (DECC) is also currently consulting on a fundamental review of FiTs. The consultation includes proposals for:

• Significantly reduced generation tariffs and new tariff bandings for most generating technologies (other than for AD, which will bethe subject of a consultation later this year)

• A quarterly default degression mechanism for

all technologies with contingent degression of 5% and then 10% occurring where deployment (across technology and then all technologies together) exceeds specified thresholds

• Potential future changes to the export tariff to ensure it reflects more accurately the wholesale electricity price

• The generation and export tariffs to be indexed by the consumer price index rather than theretail price index

• A new overall budget expenditure limit of £75 million to £100 million for the FiT to 2018/19, which will be enforced by a complex system of deployment caps followed by the removal of the generation tariff.

The consultation makes clear that the generation tariff could be removed at an earlier date if consultation responses indicate that deployment caps will be an ineffective means of controlling costs.

How does it affect waste projects?

Removal of the ability to secure a guaranteed tariff level through pre-accreditation will make it difficult for developers to secure financing for construction.

If proposals in the current consultation are implemented, deployment caps will create further uncertainty for investors over whether any subsidy will be available on commissioning.

This is likely to have an impact on the food waste market as large food waste producers (such as local authorities), who may have been planning on developers constructing new facilities on the back of a cornerstone contract, will have to look for capacity at existing facilities (or new RO-accredited facilities that are commissioned before March 31 2017).

Local authorities setting evaluation criteria for food waste treatment procurements must ensure that they consider the change to the market dynamics resulting from these changes.

Contracts for difference

CfDs, which are replacing the RO as the main renewable energy subsidy regime, provide a variable ‘top-up payment’ (from the market power price to the project’s ‘strike price’).

Unlike the RO and FITs, which are available to all eligible plants built and accredited prior to closure, CfDs are allocated through a competitive ‘pay as clear’ auction process that also sets the project’s strike price.

The CfD auction budget, funded out of the LCF, is currently divided into two pots: established technologies; and less

established technologies.

Projects in each pot compete with other projects (of other technologies) within their pot, but not against projects in the other pot.

Which waste technologies are eligible?

ACT, with or without CHP (Pot 2); and AD above 5MW and energy from waste with CHP (Pot 1).

What are the changes?

The government intends to honour a manifesto commitment by excluding onshore wind from the next allocation (auction) round. It has also delayed the second allocation round, prompting concerns as to the future availability of CfDs for some technologies.

What does it mean for future projects?

The good news is that qualifying energy from waste projects are still likely to remain eligible for the next allocation round.

However, debate on how to exclude onshore wind and the potential overspend from the LCF means that there remains considerable uncertainty around when the next allocation round, originally scheduled for October 2015, will be held.

It remains to be seen how onshore wind will be excluded from the next allocation round, but some have speculated that this could be achieved by allocating all of the remaining funds available from the LCF to Pot 2.

If that approach if followed, it has the potential to benefit ACT projects, a number of which secured CfDs (competing successfully against larger offshore wind projects) in the first allocation round.

The renewable heat incentive (RHI) is a scheme under which regular payments are made to individuals and organisations that either install an eligible renewable heating system, or inject biomethane into the gas grid.

As the RHI is funded out of general taxation, rather than the LCF, it is not directly affected by the potential overspend from the LCF, but it remains under review and the level of continued support should be clearer following the publication of the government’s joint spending review and autumn statement in November.

Which technologies are eligible?

Waste projects supplying heat from the biomass element of MSW and gas-to-grid AD projects.

What are the changes?

Mandatory sustainability requirements apply from October 5 2015 (to both new and existing participants) which require all biomass and biogas burning installations (of any size) and producers of biomethane to:

• Use only sustainable biogas or biomass, or produce only sustainable biomethane

• Comply with mandatory sustainabilityrequirements on greenhouse gas emissions limits and land use criteria

• Provide information to Ofgem every quarter on the sustainability of each consignment of fuel.

What does it mean for waste projects?

Installations using waste as fuel do not have to demonstrate compliance with the land and greenhouse gas emissions requirements because the waste is deemed to be sustainable.

Making a declaration

However, participants must still declare that each consignment of fuel used is waste and be able to demonstrate that it meets the regulatory definition of waste (in the Environmental Protection Act 1990).

With the exception of the impact on AD projects, the waste industry has avoided many of the cuts being suffered by other sections of the renewable energy sector, and has been able to benefit from new revenue streams such as participation in the capacity mechanism.

However, further anticipated spending cuts are likely to present additional challenges to the waste industry over the coming years, along with current low energy prices and investor confidence compromised by government reform of renewable subsidies.

What the industry has shown over recent years is its ability to adapt, innovate and embrace new technologies in order to face the challenges ahead – and this will doubtless continue.


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