Reed Smith Client Alerts

Authors: Christopher Parrott Richard A. Ceeney

Introduction Last year we published an alert summarising the government’s proposals for the transition from the Renewables Obligation (RO) regime to Contracts for Difference (CfDs). Since then, the UK government department responsible for energy policy, the Department of Energy & Climate Change (DECC), has controversially consulted on changing the transition dates for solar PV. On 2 October, DECC confirmed that the changes would be brought in to force.

The original plan was for large scale solar PV installations (above 5MW) commissioned before 31 March 2017 to be able to apply for RO support. Now, the deadline has been brought forward to 31 March 2015.

Effect of the withdrawal of RO support The withdrawal of RO support may lead to a change in strategy for solar developers. As RO support is dependent on reaching commissioning before the set deadline of 31 March 2015 (subject to a potential and limited grace period, see below), solar developers may instead be forced to consider applying for a CfD.

It remains to be seen how many solar developers apply for CfDs as part of the first allocation round, which commences shortly. We summarised the CfD allocation process in a recent alert.

As a result of the withdrawal of RO support, a judicial review action is being brought by four solar developers. However, previous judicial review action in relation to renewable policy changes (for example, the reduction to the Feed-in Tariff rates without consultation), has not led to DECC backtracking on its proposed withdrawal of RO support.

Grace periods As the judicial review action is unlikely to affect the withdrawal of RO support, solar developers may need to look to one of the potential grace periods in order to obtain RO support if their projects are not commissioned before the deadline of 31 March 2015. At present there are three potential grace periods, which are summarised below.

Although qualifying under a grace period would allow a project to be accredited under the RO, it would not protect projects from the reduction in the ROC levels which had been scheduled to apply for solar PV projects commissioned from 1 April 2015. Projects commissioned during the relevant grace period would receive the ROC level applicable at the time of accreditation, rather than the ROC level applicable as at 31 March 2015.

Significant financial commitment

Firstly, DECC have confirmed that a grace period will be available for projects where “significant financial commitments had been made on or before 13 May 2014”.

For a project to qualify for this grace period, DECC’s original proposal required that the developer must have either spent “a total of £100,000 per MW of installed capacity of total pre-commissioning costs”, or otherwise demonstrate that all “material equipment contracts” had been entered into by 13 May 2014.

A significant change, heralded in DECC’s response published on 2 October 2014, is to remove this requirement. As it stands, the requirements are summarised in the DECC response as follows:

  • A grid connection offer and acceptance of that offer, both dated no later than 13 May 2014
  • A Director’s Certificate confirming ownership of the land, lease of the land or an option to lease or to purchase the land as at 13 May 2014
  • Confirmation that a planning application had been received by the relevant planning authority in respect of the project on or before 13 May 2014, and that the planning application that was finally approved did not represent a “material variation” from the original application

The removal of the requirement to show a certain level of financial expenditure is likely to be welcomed by the solar industry. However, the requirements may necessarily lead to changes in the strategy that developers adopt.

In particular, one point that is currently unclear from the DECC guidance is whether the applicant for RO support must (if it is to qualify for ROCs during this grace period) be the person who had the relevant land rights and grid connection as at 13 May 2014.

Speculative developers will often obtain grid connection and other rights in the name of the parent development company, before later transferring the rights to an SPV company as the structure develops. When the developer comes to sell the project, it would then have the option of selling the SPV as a whole or just transferring the underlying assets. Whether the SPV or the assets are sold is usually tax-driven.

However, if the entity that applies for RO support must also be the entity that had the relevant rights as at 13 May 2014, any transfer prior to RO accreditation may mean that the grace period would not apply. Further guidance is required on this point.

For this grace period to apply, the project must be commissioned and accredited no later than 31 March 2016.

Grid delay

Secondly, there is an on-going consultation into a potential grace period for projects that are not commissioned by 31 March 2015 as a result of grid delay.

The proposed grace period would apply to projects that were expected to be commissioned on or before 31 March 2015 but, due to delays in grid connection outside of their control, were not commissioned by this date.

The proposed eligibility criteria for this grace period, as set out in the consultation, are:

  • A grid connection agreement consisting of an offer, acceptance and letter from the Distribution Network Operator (DNO) estimating a date not later than 31 March 2015 for delivery of the connection (the “estimated grid connection date”)
  • A written declaration by the project generator that the project would have been commissioned before 31 March 2015 if the connection had been made on or before the estimated grid connection date
  • A letter from the DNO acknowledging that the failure to make the estimated grid connection date was not due to any breach of the grid connection agreement by the generator/developer

The grace period is proposed to last for three months, so the latest date of accreditation to qualify for the grace period would be 30 June 2015.

The grid delay grace period consultation closes to responses on 24 October.

Preliminary accreditation

Lastly, a grace period will apply if a project obtained preliminary accreditation under the RO by 13 May 2014. For this grace period to apply, the project must be commissioned and accredited no later than 31 March 2016.

Client Alert 2014-281