Background
The Feed-in Tariff scheme (FITs)
was introduced in the UK on 1 April 2010 to help the UK as a whole
achieve its renewable energy target by 2020. It provides financial
incentives for generating renewable energy, offering considerable
benefits to RSLs in the current economic climate as well as meeting
other requirements, such as reducing the risk of fuel poverty for
tenants. Nevertheless, challenges remain in delivering these
projects, heightened by the uncertainty caused by the recent review
announcement.
First review of FITs
On 7 February 2011 Chris Huhne,
Secretary of State for Energy and Climate Change, launched a
comprehensive review of the scheme to be completed by the end of
2011. The review will also fast track the consideration of
large scale generators which produce more than 50kW and which now
face a tariff reduction earlier than previously expected. Tariffs
for small schemes will remain unchanged until April 2012 (after
which they are expected to reduce), unless the review reveals a
need for greater urgency. Tariff changes implemented as a result of
the review will only affect new entrants into the scheme.
Welsh context
The Welsh Government (WG) has set
its own target to produce seven terawatt hours of renewable
electricity annually by 2020 and to meet almost all local energy
needs by low carbon electricity production by 2050.
The Fuel Poverty Strategy 2010
reconfirmed WG's target to eradicate fuel poverty in social housing
by 2012. The Welsh Housing Quality Standard, which requires the
raising of social housing stock to an acceptable level by 2012,
includes the requirement that all social landlords should do
"whatever they reasonably can to minimise the cost of heating
dwellings to a comfortable level". This includes both improvements
in energy efficiency and cost reduction through participation in
renewable energy schemes.
WG recently advertised a framework,
for which Hugh James were the lead legal advisors, to which
contractors offering to finance (optional), design and install
photovoltaic panels on public sector buildings will be appointed.
It will allow other Welsh public bodies to call off solar panel
installations from the framework, saving the cost and effort of
undertaking their own full procurements and, perhaps more
importantly, saving time so as to avoid the threatened reduction of
the current generous tariff rates.
How does FITs work?
FITs apply to small scale low
carbon electricity generation up to 5 megawatts. It covers the
renewable technologies of wind, solar, hydro and anaerobic
digestion. There are two types of tariff:
- Generation tariff - a fixed
payment per kWh generated. The generation tariff rate (currently
43.6p/ kWh for solar panels) will be fixed for 25 years subject to
indexation increases.
- Export tariff – an additional
guaranteed minimum payment for every kWh exported to the grid
(which is currently 3p/kWh for each of the technologies).
What are the options for a
landowner?
- Appoint a MCS accredited
contractor to install and then obtain accreditation of the
installation. The landowner retains the FITs and control of, but
also responsibility for, the installation.
- Lease roof space or land to a
contractor who will install, the system, obtain accreditation and
receive the FITs. Under this option the landowner avoids any
expenditure and usually obtains electricity generated for free or
at a reduced price, and often a small share of the FITs received by
the leaseholder. The landowner may have reduced control over the
roof/land affected and may have responsibility for events which
interrupt the receipt of the FITs by the contractor, such as
re-roofing work.
What are the issues?
Which system to
procure?
Different systems will have
different prices but also different income generation
potential. The total income from FITs will reflect the amount
of electricity which is actually produced over the lifetime of the
system. This is not only dependent on hours of sunlight,
orientation and shading but also on the capacity, efficiency and
degradation of elements of the system. It is also important
to be able to rely on those promised performance levels for the
whole period of 25 years although inverters are likely to have a
much shorter life-span than the solar PV panels.
Accordingly, value for money will
depend on assessing which system will provide the best income
generation/cost ratio for the specific site, taking into account
evidence of reliability, enforceability of warranties and any
assumptions as to the costs of future replacement of the
inverters.
It is also important, irrespective
of how the system is procured, to identify who takes the risk if
the installation is found not to be eligible for registration or
the relevant tariff. In the case of the leasing option,
registration is achieved only after the installation is completed
and only for the owner of the installation.
How to procure and which
process to use?
If the landowner is a public body,
it may have to comply with the EU procurement rules even though no
payments are being made to the contractor for example under the
leasing option referred to above.
If the procurement rules apply, the
landowner will need to decide whether to undertake its own
procurement exercise or utilise an existing procurement, such as
the WG framework in the case of a Welsh public body. Using
the procedures, pricing and contractor panel set up under the
framework may be beneficial even where the procurement rules would
not apply to the particular requirement.
Payments
There are a number of issues to
resolve here for example:
- What happens if, during the
lifetime of the system, the revenue increases beyond that assumed
as the basis for the agreed sale price or lease premium?
- Should this be dealt with through
a rent review or an overage clause as applicable?
- Under a lease arrangement, what
are the range of benefits being offered to the landowner and which
of them offers the best value?
- Should the landowner require a
fixed periodic rent and/or a percentage of the generation/export
tariff or a premium?
Roof-space
A number of schemes involve
installation on roofs of housing stock. If installing on a
roof space, the first action should be to check who owns the roof
space, particularly where land/buildings are tenanted or there are
multiple owners of a building. Also check whether the
building is suitable having regard to orientation, condition and
affects of shading.
Consideration must be given to how
the works and any subsequent maintenance may affect the use of the
premises for example satellite dishes as well as any occupiers and
their legal rights. It will be necessary to identify any
existing security affecting the property and ascertain any
requirements which will be imposed by any person holding such a
security. This issue may also affect sufficiency of security for
the person financing the installation.
Whoever is funding the
installation, it will be necessary to ascertain whether that funder
will require security over the panels/property or require a
nomination of the FITs payments until the loan is repaid.
It is almost certain that any lease
of the roof space will create a potential business tenancy under
the Landlord and Tenant Act 1954 Part II, so the lease needs to
contract out of this. Other matters to be addressed in a
leasing arrangement will include:
- What happens if the owner wants to
develop or relocate?
- Will the contractor have any
rights to remove the system?
- Can the landowner require the
contractor to remove the system in any circumstances for example on
re-roofing?
- What effect will any of these
matters, including removal, have on any payments/liabilities
between the landowner and the contractor?
Other steps
It is important to keep in mind
that FITs are not payable until the Statement of FIT terms have
been agreed between the FITs generator and the electricity
supplier. Ofgem guidance therefore recommends early
consultation with the electricity supplier to agree terms in
advance based on stipulated requirements.
It is also possible,
notwithstanding permitted development rights which apply for most
solar PV panels roof installations, that there may be other
authorisations required before commencing for example building
regulation consent, listed buildings consent and planning
permission in conservation areas.
Further considerations for
registered social landlords (RSLs)
- Some schemes may pre-date FITs but
still be eligible to transfer to the new scheme. For example,
installations commissioned on or after 15 July 2009 below 50kW
which are not RO accredited will receive the full tariff rate once
FIT-registered.
- Tenants will need to be consulted
and tenancy agreements may need to be varied to allow roof space to
be used and to deal with issues such as metering, maintenance and
access.
- What is proposed in relation to
availability of electricity for use by tenants and will there be a
charge for any electricity used?
- What happens if the tenant
exercises a right to buy in terms of retention of the physical
installation, rights of access and rights to receive the FITs?
- How should the RSL deal with
tenants whose properties are not suitable for PV panels and so
cannot take advantage of cheaper or free electricity?
- If it is a private wire scheme, a
separate energy supply agreement with the tenant may be necessary.
Some renewable energy projects serving an estate have assumed a
level of payment from the tenants for the use of electricity
generated. What happens if a tenant wants to terminate the supply
agreement, doesn’t make the required payments or even exercises the
right to buy?
- If the RSL is funding the work
itself, any construction contract will need to be drafted carefully
to deal with, amongst other things, design responsibility,
completion, product warranties, funder requirements, work
monitoring and contractor access.
If you are considering installing a
system to take advantage of the FITs it is important to seek legal
advice at the offset from someone who is experienced in all these
issues to ensure you make an informed and well balanced business
and financial decision.
About Hugh James Energy team
Hugh James has a team of energy
specialists, including procurement, property and construction, who
offer practical and cost effective advice based on their
understanding of the sector. Working closely with their network of
energy consultants, they offer advice from feasibility through to
project completion and are currently advising on solar projects
across Wales, including solar farms.
For more information or for a
no-obligation legal and technical consultation, please contact Ioan
Prydderch on 029 2039 1127 (email ioan.prydderch@hughjames.com)
or Shaun Jamieson on 029 2039 1053 (email shaun.jamieson@hughjames.com)