UK: An Outlook Of Change, Uncertainty And Tough Decisions For Renewable Energy

Last Updated: 3 October 2014
Article by James Snape

Summary and implications

The regulation surrounding renewable energy in the UK has undergone a significant transformation over the past decade or so, specifically with the introduction of the Renewables Obligation in 2002 and the more recent Electricity Market Reform, all of which are intended to help the UK reach its 2020 targets (specifically, reducing greenhouse gas emissions by 34 per cent and generating 15 per cent of its energy from renewable sources, all by 2020).

A recent PwC report estimates that approximately £64.4bn of investment is required in the renewable heat and electricity sectors to meet the UK's 2020 target, with £40.8bn of investment required in the renewable electricity industry alone. Whilst it is anticipated that wind and solar PV projects will dominate such investments, biomass is expected to contribute around seven per cent of the total investment target for renewable electricity; achieving this target will heavily depend on the support offered through government subsidies and effective implementation of supportive regulations to encourage investors and developers.

Regulation and framework in the UK

With the introduction of the Energy Market Reform, biomass generators currently have a window of choice between two regimes of government subsidies and incentives primarily under either the Renewable Obligation scheme (which closes in 2017) or the new Contracts for Difference scheme for generating electricity from renewable sources (including biomass). The UK Government also offers a scheme to support the generation and supply of heat from renewable sources the Renewable Heat Incentive scheme (RHI); however, this article focuses on the reforms affecting the generation of electricity which is a regulated sector in the UK and the EU.

The Renewables Obligation scheme (RO Scheme)

The RO Scheme essentially places a requirement on electricity suppliers to procure electricity from renewable sources and incentivises such provision through the purchase and sale of Renewable Obligation Certificates (ROCs). Once a station is eligible under the RO Scheme and therefore eligible to receive ROCs, there are additional forms of support available for those operating in the biomass industry, such as the grandfathering provisions, combined heat and power (CHP) uplift and the removal of the co-firing cap, to help encourage investment.

Participants in the RO Scheme are subject to certain restrictions however. A 400MW cap will apply across the entire scheme and, whilst it will not be set out in any formal legislation, will operate so that stations that have been allocated a place within the cap will receive 1.5ROCs/MWh until such time as the cap is reached. Participants are also now subject to mandatory sustainability criteria and reporting requirements. The Department of Energy and Climate Change (DECC) announced in August 2013 that it would be setting sustainability criteria for biomass as well as biofuels (in contrast to the EU's Renewable Energy Directive which only sets criteria for biofuels); biomass stations generating 1MW capacity or more must ensure compliance with the criteria by April 2015, to continue claiming support under the RO Scheme.

At the same time DECC also announced additional reporting requirements. From April 2014, generating stations with a 1MW capacity or above will be required to submit an independently audited report on their sustainability, including details as to where the biomass is sourced and that it meets the published sustainability criteria, to continue to be eligible for the RO Scheme.

The Contracts for Difference scheme (CfD Scheme)

The CfD Scheme will operate in a fundamentally different way to the RO Scheme; rather than biomass generators trading ROCs, the generating station will enter into a contract with the Low Carbon Contracts Company Limited, owned by the UK Government (the CfD Counterparty) for the electricity produced and the feed-in tariff. The CfD contract sets a "strike price" for the electricity generated from renewable sources, currently set at a maximum of £125/MWh for new dedicated biomass stations (with CHP) and £105/MWh for biomass conversion stations. If the market price is less than the strike price, the generator receives the difference between the two prices from the CfD Counterparty whereas if the market price rises above the strike price the generator must pay back the difference to the CfD Counterparty.

In theory, the CfD Scheme should offer great incentives to biomass stations; however, there remains uncertainty over how successfully CfD contracts will be allocated to renewable energy suppliers. The current method of allocation for the majority of suppliers is through submission of an application followed by a competitive auction process. Suppliers must first submit an application for a CfD contract which should evidence not only that they are eligible for support from the CfD Scheme, but also that they have reached an expected stage of development. In most cases this means that suppliers will need to evidence that all the relevant planning consents have been obtained for the development, along with the appropriate grid connection agreement for the station.

Once applications have been submitted, applications within certain groups of renewable technologies may be automatically awarded CfD contracts, provided there is budget within the group's allocation for all of them. However, this will not be the case for many technologies; the scheme is currently designed to offer support to new biomass projects (with CHP) and biomass conversions only, so suppliers in these areas will have to submit sealed-bids setting out their proposed strike price.

Each type of renewable technology has been allocated a grouping, with most falling into Group 1 which automatically go to auction; however, DECC are still undergoing consultation as to where biomass conversion stations fall within the technology groupings. DECC has suggested that a separate Group 3 be created but that this group will still be subject to the competitive auction process. In any event, the UK Government's intention for CfD allocation in the long term, once all technologies are proven, is for all awards to be subject to the auction process regardless of technology type.

Transition between the RO Scheme and the CfD Scheme

The RO Scheme is still open to new entrants until 31 March 2017. This means that until the RO Scheme closes, energy suppliers can potentially choose which scheme they wish to apply for. Developers need to carefully consider which scheme to apply for as they can't apply for both schemes simultaneously. However it also means that if they fail to obtain support under one they are not precluded from applying for support under the other. The UK Government has confirmed that there will be specific grace periods offered in relation to the RO Scheme's closure date in 2017; in particular, dedicated biomass CHP and dedicated biomass power-only projects will be granted an 18-month grace period for eligibility, as well as 12-month grace periods for other technologies delayed due to grid connections or financial decisions. These periods will be formally implemented in the RO Closure Order 2014 due to come into force in August 2014.

Some biomass stations may also qualify as "dual scheme plants" whereby part of the station can qualify and receive support under the RO Scheme, with the other potentially receiving support under the CfD Scheme. Electricity generated in each part of the station is measured separately and support is provided under the corresponding scheme accordingly. However until suppliers and investors actually experience the financial benefits of the new CfD Scheme, it is hoped that the extension of the RO Scheme will continue to attract investment into renewable energy technology and the biomass sector in particular.

The effect on investment into biomass projects in the UK

It is expected that biomass projects will contribute to approximately seven per cent of the UK's target renewable electricity investment in the next six years. Analysis compiled by PwC suggests that biomass is expected to be a smaller recipient of renewable energy investment compared to offshore wind and solar projects and most of this investment is likely to be concentrated in large coal conversion projects. Such investment has already been evident over the last few years, most notably with the conversion project at Drax power station.

Investment into the industry depends heavily on clear government policies in relation to renewable energy, as well as supportive frameworks and mechanisms to incentivise such investment. The biomass industry has previously fought off potentially prohibiting regulatory reforms, such as the ORR's proposal to increase charges for the transport of biomass by rail in 2013, but it is argued that the industry now faces another potential hurdle with the CfD Scheme. Whilst the UK Government hopes that the CfD Scheme will bring in an additional £110bn of investment across the electricity sector by 2020, concerns have been raised over how available support will be for biomass projects in particular.

Under the CfD scheme, new dedicated biomass stations will only qualify for the new CfD contracts if they use CHP. Whilst this does encourage new stations to supply heat and power efficiently, it costs more to the developer and investor at the outset, and potentially creates additional obstacles in the form of UK planning laws. CHP is considered practical only when it is located close enough to pipe the heat to nearby buildings, who must also be prepared to pay for it. However this makes finding a site for such large new biomass projects considerably more challenging if it must be situated in a built-up area but on a site that is still likely to be granted planning permission.

In addition, there are concerns over the eligibility criteria used to establish whether a project can even make a bid for CfD. As mentioned above, suppliers must provide evidence of the relevant planning consents and grid connection agreements having been obtained so that they may be considered eligible for CfD support. Whilst obtaining such consents would be necessary for the project to develop anyway, paying the costs involved to obtain them when there is no guarantee that the project will be given any government support, is quite a risk for any investor or developer. Although the UK Government insist this new criteria provides "necessary investor certainty", combining this issue with the strict CHP requirements for new biomass plants, it is easy to see why investors may be nervous about participating in biomass schemes in the UK going forward.

What is promising however is the recent award of three investment contracts (sometimes referred to as the "early CfDs") to biomass projects, with the potential for a fourth award following Drax's successful appeal against the DECC's subsidy decision on its second biomass conversion unit. The first round of these investment contracts for renewable energy projects were awarded recently in April 2014 with three out of the eight awards going to two biomass coal conversions and one to a dedicated biomass plant with CHP. Given the UK's need to reach its 2020 targets, it is hoped that these investment contracts will bolster investors' faith in the new regime and in investment into the renewable energy industry in general. In addition, the RO Scheme offers some comfort to investors whilst the CfD Scheme is finding its feet, particularly following confirmation that support under the RO will remain available until 2037.

Whilst both schemes may provide uncertainties for investors and developers of biomass projects, what is clear is that the UK Government is trying to encourage investment into the biomass industry and it seems to be working. In 2013 alone, the industry received £2.2bn of investment and renewable energy investment funds, such as the Ludgate Environmental Fund, are continuing to invest in projects and companies within the UK in 2014.

Biomass industries outside the UK

Outside of the UK, efforts are being made in the EU and the US to promote renewable energy projects and encourage investment. The EU recently announced two funding initiatives aimed at benefiting bioenergy projects. The European Commission awarded a total of $1bn to 19 renewable energy projects, of which four are biomass developments with a further two relating to other bioenergy technologies. Following this announcement the EU launched the European Joint Undertaking on Bio-Based Industries (BBI), which aims to provide €3.7bn of funding for biobased projects and materials to be developed and sourced within Europe, specifically hoping to make use of the vast amount of untapped biomass resource in Europe.

A similar approach has been adopted in the US, with the Department of Energy (DOE) opening a loan guarantee solicitation, providing up to $4m of funding available for renewable energy projects. Whilst its main aim is to encourage development in biofuels and waste-to-energy, it anticipates biomass and co-firing projects qualifying for funding. Both of these funding initiatives may well prove beneficial to the UK biomass industry as well; the BBI could potentially provide direct funding to UK projects and the US scheme may provide indirect benefits to the UK biomass industry if the funding trickles down to help assist the managed forestries and wood-pellet industries which are a large supplier to the UK. However, regardless of the impact these initiatives could have on the UK specifically, it is clear that reform and support of the renewable energy sector is a global concern and that efforts in this area will continue to provide opportunities for the biomass industry to grow and develop.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.