In recent years, rising energy costs and a desire for energy independence have made on-site renewable generation both desirable and economically advantageous. This article examines the potential advantages for businesses in developing on-site renewable energy generation and highlights ten key issues that project teams will need to be aware of when planning the development of and implementing such projects.By Nick Churchward, Energy & Environment, Burges Salmon LLP.
Advantages of on-site renewable energy generation
Some of the key advantages for businesses in developing on-site renewable energy generation are as follows:
1. Security of supply at a stable price
On-site generation can potentially provide generators with a dedicated electricity supply at a more stable price over the long-term, thus minimising exposure to market price fluctuations. Generators may also use on-site generation capacity to exploit the wholesale electricity market by responding to short-term demand changes, purchasing electricity from the national grid when prices are low and selling when prices are high.
2. Financial Incentives
Various financial incentives provide “clean energy cashback” to generators of renewable energy. The exact form and level of incentive which a specific on-site project may claim will depend on the technology type and generating capacity, as summarised below. All of the mechanisms below are available for technologies which are only grid-connected, off-grid or part of a “hybrid” project.
a) Feed-in Tariffs (“FITs”)
The FIT Order 2012 (as subsequently amended) offers incentive payments to anaerobic digestion, hydro, solar photovoltaic and wind projects with a generation capacity of 5MW or less.
There are two types of FIT payments; firstly, the “generation tariff” is a fixed payment for each kWh of electricity generated, payable regardless of whether the electricity is used on-site or exported to the network. Secondly, an “export tariff” is a guaranteed minimum payment for each kWh of electricity generated and exported to the local electricity network. The total cost of these payments is divided between all electricity suppliers by their market share. The suppliers administer the payments to generators and ultimately pass the cost on to electricity consumers.
Tariff levels vary by technology type, but are ‘grandfathered’ i.e. remain fixed for the lifetime of the project. However, in recent years generation tariffs have been cut for all technologies (most of all for solar installations) and degression mechanisms introduced to control costs.
b) The Renewables Obligation (“RO”)
The RO is to be replaced by contracts for difference (see below) as the principal incentive regime for large-scale renewable projects. Unless a project under consideration can be built and commissioned by the scheme closure date of 31 March 2017, or already benefits from one of the limited extensions of time that have been made available (known as “grace periods”) it will not be able to receive ROCs. For >5MW solar installations the scheme closure date is 31 March 2015.
c) The Renewable Heat Incentive (the “RHI”)
The RHI scheme incentivises a switch from using fossil fuel for heating to certain renewable sources, including solid biomass, municipal solid waste (including CHP), on-site biogas, bioliquids, deep geothermal and solar thermal. The RHI is now available for both non-domestic and domestic renewable heat systems. As with the FIT, payments are governed by index-linked tariffs over a 20 year period.
d) Contracts for Difference (“CFDs”)
Generators are now able to bid for CFDs to be allocated to them via an annual allocation and a bidding process. This will replace the RO as the principal incentive regime for large-scale renewable projects.
CFDs are private, bilateral contracts between a generator and a Government-owned limited company which set a fixed “strike price” for electricity produced and sold to the wholesale market. When the market price for electricity is below the strike price, the generator receives a top-up payment for the additional amount from the supplier, ultimately paid for by consumers. Conversely, when market price is above the strike price, the generator pays back the difference to the supplier.
3. Corporate Social Responsibility
Many businesses consider the environmental impact and sustainability of their activities to be increasingly important. Whilst any on-site generation project will need to be commercially viable, the positive reputational impact associated with the use of renewable energy may tip the balance where the business case for the development is marginal.
Ten Considerations
If, on the above analysis, a particular project appears desirable, the ten key issues below should invariably be considered before proceeding. These considerations are in all circumstances likely to be relevant, but on a project-by-project basis priority will depend on whether a business is developing a project itself or “hosting” a project to be constructed/operated by a third party developer.
1. Fuel Source
In the case of intermittent “natural” fuel types (e.g. solar panels and wind) which can vary in strength and undermine the short-term predictability of generating capacity, modelling and testing can enhance predictability over the medium to long term.
Where “physical” fuels are being used (e.g. biomass, waste etc.), fuel supply contracts should be considered with a view to securing long term supply and ensuring fuel specifications fulfil the requirements for the relevant incentives and technologies.
2. Technology Type
Assess the credibility of the underlying technology provider, the performance, reliability and reputation of that technology market generally, the scope and length of any warranty offered, the form of any deposit required and the lead-in time for supply.
3. Land Availability
Careful assessment and investigation must be made of the land required for access (for the purposes of installation, continued operation and maintenance or subsequent decommissioning), any safety clearance zone and the required connection
infrastructure as well as access to any point of grid connection, which can be some distance from the point of generation.
4. Planning
To determine whether a planning application is required, consideration should be given to whether any permitted development rights exist, removing the need to secure planning permission for works that fall within defined parameters. If the development requires an Environmental Impact Assessment (“EIA”), any permitted development rights lapse and a full planning application will be required. Currently, local authorities aim to determine planning applications within 8-13 weeks of submission (16 weeks if an EIA is required) but where there are significant local objections this period can be materially longer. They will consider the nature of the development and its particular features and impacts.
5. Licensing
Unless an exemption applies under the Electricity (Class Exemptions From the Requirement for a Licence) Order 2001 (which is common for typical on-site supply projects), generators must be formally licensed under The Electricity Act 1989. Particular care should be taken if there are plans to supply electricity to third parties (including domestic consumers). A consequence of being licensed is a requirement to subscribe to various complex and onerous industry codes.
6. Corporate Structure
Depending on the way the project is financed, its risks and whether there is a desire to structure the project to simplify onward sale, it may be preferable to set up a special purpose vehicle to own and operate the on-site generating assets.
7. Financing
There are a number of options available to finance the initial capital expenditure on underlying infrastructure such as self-fund, debt financing (e.g. a bank loan) and/or third party equity investment in the project company.
Where debt financing is sought, funders will expect to see long term guaranteed revenue e.g. from financial incentives and electricity offtake payments. Developers will also need to evidence their own financial credibility and may be required to provide financial guarantees or security over the underlying assets.
8. Offtake Requirements
Where a private network is to be relied upon to transmit the electricity (or heat) to end consumers, consideration will need to be given to various factors including the network design/route, infrastructure and installation costs, land availability, planning constraints and operation and maintenance requirements.
Where electricity is to be exported to the local distribution network, early contact should be made with the Distribution Network Operator to clarify various issues including the presence of any connection restraints, the proposed location of the connection, the connection capacity, any necessary connection works, upgrades and/or reinforcement works (and the time required to complete such works), the level of connection charges and any applicable metering/safety practices.
9. Sale of Energy
If the developer intends to sell heat or electricity generated on-site to a third party, consideration will need to be given to the underlying contractual arrangements, which will take the form of a heat purchase/steam supply contract or power purchase agreement (“PPA”) respectively. The specific PPA terms will depend, in part, on whether the sale is made to licensed suppliers who in turn trade on the wholesale market (this is the basis upon which the FIT export tariff is offered) or whether electricity is sold directly to local end users via private wire networks or to non-local end users via “Direct PPAs”.
10. Availability of Grants
The potential availability of grants at an EU, national and regional level made available to help fund renewable energy projects should be kept under close review by prospective developers. For the most part, however, the Government has been keen to avoid duplicating incentives and, consequently, it is not anticipated that sizeable grants for projects at a commercial/industrial level will be made available alongside the existing financial incentive mechanisms outlined above.
Conclusion
The development of on-site renewable energy generation can produce significant benefits, including reduced electricity and/or heat costs and the receipt of a guaranteed financial incentive. Before embarking on any development, however, a number of key issues need to be considered as outlined in this article. Although the significance of each issue will vary depending on the project scope, it is important for project teams to carefully assess the implications of each to ensure that an appropriate project is developed.
If you would like to discuss any aspect of this article please contact nick.churchward@burges-salmon.com.
