1 Overview of the Renewable Energy Sector

1.1 What is the basis of renewable energy policy and regulation in your jurisdiction and is there a statutory definition of 'renewable energy', 'clean energy' or equivalent terminology?

The Promotion of the Use of Energy from Renewables Sources Regulations 2011 (SI 2011/243) applies the definition set out in Directive 2009/28/EC (Renewable Energy Directive) on the promotion of the use of energy from renewable sources. This defines "energy from renewable sources" as "energy from renewable non-fossil sources, namely wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases", each of which is then defined separately.

This legislative framework required the government to ensure that renewable energy comprised 15% of the UK's total energy mix by 2020. The Renewable Energy Directive has now been superseded by Directive (EU) 2018/2001 (RED II). Although the UK has now been released from the renewable energy targets under RED II following Brexit, the UK-EU Trade and Cooperation Agreement includes a commitment to promote energy efficiency and the use of energy from renewable sources and reaffirmation of the EU's 2030 "targets" and the UK's 2030 "ambitions" for renewable energy and energy efficiency.

Ongoing policy and regulation of renewable energy is currently derived from retained EU law and UK statute, notably the UK's binding commitments to:

  • cut greenhouse gas emissions by 78% by 2035 compared to 1990 levels in the Carbon Budget Order 2021 (SI 2021/750); and
  • achieve a 100% reduction of greenhouse gas emissions by 2050 compared to 1990 levels (the "net zero" target) in the Climate Change Act 2008 (2050 Target Amendment) Order (SI 2019/1056).

There are various other policies, incentives, requirements and regulations that are detailed throughout this chapter below.

1.2 Describe the main participants in the renewable energy sector and the roles which they each perform.

Governmental participants

The Department for Business, Energy and Industrial Strategy (BEIS) is responsible for overseeing the electricity sector, including in relation to renewable energy. BEIS was formed in 2016 following the merger of the Department of Energy and Climate Change and the Department for Business and Innovation.

BEIS is supported by other public bodies, including:

  • The Gas and Electricity Markets Authority (GEMA): GEMA has primary responsibility for regulation of the energy sector. Its powers and duties are derived from UK statute (including the Gas Act 1986, the Electricity Act 1989 (Electricity Act), the Utilities Act 2000, the Competition Act 1998, the Enterprise Act 2002 and the Energy Acts of 2004, 2008, 2010 and 2011), together with directly effective European Community legislation that was retained by the UK after its exit from the EU.
  • The Office of Gas and Electricity Markets (Ofgem): GEMA delegates regulation of the renewable energy sector to Ofgem, a non-ministerial government department. Ofgem administers environmental programmes and sustainability schemes on behalf of the government under its E-Serve business unit (see question 3.10 for more detail). Key duties and functions concerning electricity include:
    • regulating distribution and transmission networks;
    • granting licences; 
    • protecting the interests of existing and future electricity (and gas) consumers; 
    • ensuring that electricity wholesale and retail markets are competitive; and 
    • managing the commercial tender process for offshore transmission projects.

The Energy Security Bill, introduced to Parliament on 6 July 2022, includes measures that would (if enacted as law) establish a new independent body, the Future System Operator (known in the Bill as the Independent System Operator or ISO), which will be tasked with strategic oversight across the UK's electricity and gas systems.

Private participants

  • Generation companies: following privatisation of the generation industry in the 1990s, an increasing number of generating companies have been established, including the "big six" – British Gas, e.on, EDF, RWE npower, Scottish Power and SSE. However, Ofgem has announced that it will no longer use the term "big six" (who once controlled 98% of the domestic supply market), now that their market share has shrunk to under 57%, after acquisitions, mergers and a customer exodus to smaller challengers.
  • Transmission companies: the transmission network is owned and maintained by regional transmission companies: National Grid Electricity Transmission plc for England and Wales; Scottish Power Transmission Limited for southern Scotland; Scottish Hydro Electric Transmission plc for northern Scotland and the Scottish islands groups; and Northern Ireland Electricity for Northern Ireland. The National Grid Electricity System Operator (NGESO) is responsible for controlling the stable and secure operation of the national electricity transmission system as a whole.
  • Suppliers: Energy is purchased from the wholesale market by suppliers and then sold to customers.

1.3 Describe the government's role in the ownership and development of renewable energy and any policy commitments towards renewable energy, including applicable renewable energy targets.

Renewable energy assets will continue to be owned and developed by the private sector with the support of the government in order to satisfy its binding commitments to reduce UK greenhouse gas emissions, as described in question 1.1.

In December 2020, BEIS published a white paper titled "Powering our Net Zero Future" (Energy White Paper), setting out how it intends to meet these targets and building on the government's "Ten Point Plan for a Green Industrial Revolution" (Ten Point Plan) published in November 2020. Key features of the Energy White Paper and the Ten Point Plan include:

  • targeting 40GW of installed offshore wind capacity by 2030 through £20 billion of private investment;
  • investing £1 billion in the UK's energy innovation programme to develop future renewable technologies such as green hydrogen, with the aim of 5GW of low-carbon production capacity by 2030;
  • developing a biomass strategy, particularly in relation to biomass with carbon capture and storage; and
  • increasing the funding available to study the use of hydrogen in homes and consulting on the role of "hydrogen-ready" appliances.

In October 2021, the government published its Net Zero Strategy: Build Back Greener (Net Zero Strategy) setting out how it proposes to meet the 2050 net-zero target. One of the principal ways in which the UK proposes to achieve this is by increasing the use of renewable energy and for the biggest polluters to pay the most for the transition through fair carbon pricing. The English High Court has recently declared that the Net Zero Strategy fails to meet the government's obligations under the Climate Change Act and that it must be updated by March 2023.

The Energy Security Bill, among other things, aims to leverage private investment in clean technologies. The government states that the Bill will help drive £100 billion of private sector investment by 2030 into industries to diversify Britain's energy supply. Whilst most of this investment is expected to be made in offshore wind, the government also wishes to promote investment in emerging technologies such as green hydrogen production and carbon capture, use and storage.

2 Renewable Energy Market

2.1 Describe the market for renewable energy in your jurisdiction. What are the main types of renewable energy deployed and what are the trends in terms of technology preference and size of facility?

The UK is particularly well placed to take advantage of wind power, with some of the best conditions in Europe and high average wind speeds. As a result, onshore and offshore wind farms together are the largest source of renewable energy in the UK, with 14.9% of aggregate UK generation (including from fossil fuels) coming from offshore wind projects and 13.9% from onshore wind projects in Q1 2022. Examples include Orsted's Hornsea One, located 120km off the Yorkshire coast in England, which is currently the world's largest offshore wind farm with a capacity of 1.2GW, and the Dogger Bank project which, when completed, will be the world's largest offshore wind farm with a capacity of 3.6GW.

Bioenergy (biomass or waste-fuelled plant) projects are the UK's second-largest contributors to renewable energy generation after wind, providing 11.6% of UK electricity generation in Q1 2022. These include the Drax Power Station in Yorkshire, formerly the UK's largest coal-fired power station, where four of the six boilers have been converted to biomass, with a combined capacity of 2.6GW. The two remaining coal units ceased commercial operations in March 2021 and the plant is piloting a carbon capture and storage scheme in order to create negativeemissions power generation.

Hydropower and solar photovoltaic (PV) projects contribute a smaller (but still significant) percentage of UK renewable energy and tend to be smaller in scale (the majority being less than 10MW).

2.2 What role does the energy transition have in the level of commitment to, and investment in, renewables? What are the main drivers for change?

In 2019, following Parliament's declaration of a "climate emergency" and recommendations from the independent Committee on Climate Change, the government legislated for net-zero greenhouse gas emissions by 2050, as discussed in question 1.1. The Energy White Paper, and Net Zero Strategy discussed in detail in question 1.3, sets out how the UK will invest in renewable energy in order to support the energy transition.

2.3 What role, if any, has civil society played in the promotion of renewable energy?

Civil society has been key to the promotion of renewable energy in the UK, with the environment consistently polling as one of the top three issues for the British public. This can be seen by the strong environmental, social and governance (ESG) movement in the UK, with investors putting almost £1 billion a month on average into investment funds that apply ESG criteria in 2020. The rise of responsible investing, together with a strong activist shareholder culture in the UK, benefits renewable energy in the UK.

In addition, at a community level, there has been a noticeable growth of on-site distributed renewable generation projects in recent years (both residential and commercial), which is underpinned by general environmental concerns and technological innovation, as well as by government policy.

2.4 What is the legal and regulatory framework for the generation, transmission and distribution of renewable energy?

The Energy Act 2013 (Energy Act) is the principal legislation relating to renewables, establishing a legal framework with a key aim to secure affordable and low-carbon electricity. The central provisions of the Energy Act relating to renewable energy include the introduction of:

  • provisions to enable the Secretary of State to set a decarbonisation target range in secondary legislation (as discussed in question 1.1);
  • a statutory framework for Contracts for Difference (CfD) (see question 3.2 for more detail);
  • the Capacity Market, being a market to ensure the security of electricity supply based on the government's forecast of electricity demand;
  • renewables obligations certificates (see question 3.7 for more detail); and
  • access to markets via long-term contracts for independent renewable generators (including power purchase agreements (PPAs)), and through liquidity measures to enable the government to improve the liquidity of the electricity market.

The Electricity Act is the principal legislation governing electricity generation generally, including from renewable sources. Subject to applicable exemptions, an electricity generator requires a generation licence from Ofgem to operate. See question 4.1 for more detail.

2.5 What are the main challenges that limit investment in, and development of, renewable energy projects?

The challenges include:

  • Uncertainty as to the long-term laws, policies and the associated incentives relating to the renewable sector that may be adapted by successive governments is a challenge to any investment modelling. For example, onshore wind projects benefitted from certain government subsidies that were then removed in 2016, and then, in early 2020, onshore wind subsidies were revived.
  • Intermittency of output (given that renewable sources, by their nature, will vary and not be continuous) presents an issue for renewables integrating into a stable power supply. This can be mitigated, to some extent, with energy storage systems. However, whilst the technology is developing rapidly and the costs are falling, such storage systems can be expensive (particularly on large-scale projects).
  • Much of the technology involved with renewables projects is new or rapidly evolving and there is an investment risk associated with any nascent technology, including in respect of deployment issues and risk of obsolescence.
  • Grid inflexibilities mean that integration of variable renewable sources into grid infrastructure creates increased complexity, including with respect to balancing supply and demand.

2.6 How are large utility-scale renewable power projects typically tendered?

The CfD scheme is the government's main mechanism for supporting low-carbon electricity generation (see question 3.2 for more detail).

CfDs are awarded in a series of competitive auctions, which drives efficiency and cost reduction. To date, there have been four successful CfD allocation rounds. 10.8GW of UK onshore and offshore wind, solar, tidal stream and other renewables were awarded CfDs in the recent fourth allocation round announced by BEIS in July 2022 (99 contracts in total). These projects are due to come online in 2023–24. The fifth allocation round, planned to open in March 2023, is expected to be the beginning of annual allocation rounds (rather than every two years).

2.7 To what extent is your jurisdiction's energy demand met through domestic renewable power generation?

The share of UK electricity generated from renewable sources has increased dramatically in recent years, with a 500% increase in the amount of renewable capacity connected to the National Grid from 2009 to 2020.

In Q1 2022, the renewable share of total electricity generation was 45.5%. This is the second-highest quarterly share on record (since Q1 2020).

3 Sale of Renewable Energy and Financial Incentives

3.1 What is the legal and regulatory framework for the sale of utility-scale renewable power?

The Energy Act and related secondary legislation provide the main legal and regulatory framework for the sale of utility-scale renewable power in the UK and implement the UK's Electricity Market Reform policy. The Energy Act supplements the Electricity Act and the Utilities Act 2000, which provide a legal and regulatory framework for the wholesale electricity market generally in the UK.

3.2 Are there financial or regulatory incentives available to promote investment in/sale of utility-scale renewable power?

The primary incentive schemes related to renewable energy include:

The CfD scheme: the CfD scheme is the primary mechanism to incentivise new low-carbon electricity generation. The CfD is a quasi-PPA between an eligible generator and the Low Carbon Contracts Company (LCCC), a wholly government-owned company established under the Energy Act. Generators with a CfD sell their electricity into the wholesale electricity market in the typical way; the CfD then pays the difference between an estimate of the market price for electricity and the generator's lowest estimate for the costs of developing, financing and operating the given technology (the strike price). When the market price is below the strike price, the generator receives a top-up payment from the LCCC for the additional amount. However, when the market price is above the strike price, the generator must pay back the difference to the LCCC. Although a CfD is a private law contract between a low-carbon electricity generator and the LCCC, it is issued under a detailed statutory framework under the Energy Act.

The Offtaker of Last Resort (OLR) scheme: the OLR scheme aims to promote the availability of PPAs. It is intended as a last resort to help independent renewable generators who cannot get a PPA through the usual commercial means by providing eligible generators with a guaranteed "back-stop" route-to-market at a specified discount to the market price.

Green Gas Support Scheme (GGSS): the GGSS provides financial incentives for new anaerobic digestion biomethane plants to increase the proportion of green gas in the gas grid. Participants will receive quarterly payments over a period of 15 years, based on the amount of eligible biomethane that a participant injects into the gas grid. The GGSS is open to applicants for four years from 30 November 2021.

3.3 What are the main sources of financing for the development of utility-scale renewable power projects?

The offshore wind sector currently represents the primary source of financing activity for large-scale renewable projects in the UK. In recent years, a low interest rate environment coupled with a large number of lenders looking to participate in this sector has provided project developers with favourable conditions to finance their projects in recent years. To date, the main source of debt financing has been commercial banks; however, we have seen participation from export credit agencies and also new entrants to the market such as pension funds and infrastructure investors. A new development in the market has been the limited recourse financing of battery storage projects, although the (relatively) small scale of these projects combined with the lack of "bankable" long-term offtake solutions has impacted the commercial banks' appetite to finance these assets.

Originally Published by ICLG

To view the full article, click here

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.