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Legal loophole offers solar PV benefit

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As I pointed out in my last piece for LGC, the rise of solar power in the UK continues apace.

Prior to the introduction of the Feed in Tariffs in April of last year, barely 30 MW of solar PV facilities had been fitted in the UK. Since April 2010 OFGEM has now confirmed that over 120 MW has already been bought and fitted, much of it on domestic dwellings.

The rush to solar caused some concern in Whitehall and the government therefore felt the need to act to calm the growth. Sadly, it is widely believed that these misguided efforts have led to a situation whereby lasting damage may be created to the UK’s fledgling solar industry.

The problem is with the amount of funding that has been earmarked for the Feed in Tariff regime. It now transpires that this is woefully inadequate to meet the capacity of solar PV installations already planned, let alone future years or other technologies.  These include roof-based systems on domestic or commercial buildings, but also land based systems (the so called ‘solar farms’) that are so prevalent on the Continental mainland.

For this reason in June 2011 the Government followed up its ‘fast track’ review consultation process with the announcement of proposed changes that came into effect from 1 August 2011. These drastically reduced the Feed in Tariffs applicable to stand alone projects (ie those not buildings or roof mounted) and projects over 50 kw in capacity. In simple terms, the effect of these changes was to make such systems uneconomic and so by removing their business case support, the Government ensured that they would not proceed.

The Government has made it clear that the purpose of these changes was to reduce the pressure on the FIT budget, which is fixed for this spending period (up until 2014). It was concerned about the call of such large projects on the FIT pot of money.

It is therefore with some consternation that DECC has uncovered a legal loophole that could possibly allow many more larger or ‘stand alone’ systems to slip through the net and still be able to claim the higher FITs.

The way that this works is relatively straightforward.  The wording of the relevant provision – the Feed in Tariffs (Specified Maximum Capacity and Functions) Order 2010 (SI 2010 No XX) - is complex, but under this it is permitted for a developer to fit a solar PV system of over 50kw and then to extend that system within the 12 month period following the installation. Under the regulations, if that happens, the complete, enlarged, system can then claim the same Feed in Tariff as the original system.

This would not be an issue at all were it not for the Government’s changes to constrain the development of the so called ‘solar farms’ on open land. But bearing in mind the fact that such systems were effectively halted by the changes in FIT levels, this loophole suddenly became vitally important.

The reason is simple. A developer could fit a solar PV system with a capacity of more than 50 kw before the 1 August deadline, get this commissioned and registered with OFGEM and the clock would then stop. That developer would then have a full year to extend that system up to the very highest limit of 5 MW (200 times larger) and still be able to claim the higher rate of 29.3 pence per kwh, not the heavily curtailed rate of 8.5 pence per kwh.

The existence of this loophole was widely known in the industry and the legal advisers working for solar PV developers.  In an unusual step, DECC have now confirmed that their lawyers have reached the same conclusion, ie that this is possible, and therefore have taken urgent steps to remedy the situation.

On 27 July 2011, just before the summer recess, DECC went out to consultation on a move to change this position. Its paper Consultation on a change to the rules on the treatment of extensions to installations under the GB Feed in Tariffs scheme, makes clear that it intends to close this legal loophole as soon as possible.

The Government now proposes a further amendment to the FITs Order that would effectively prohibit extensions within 12 months having this effect. They have to consult on this proposal and the focus is now on how quickly the changes can be made. Under normal Parliamentary rules, there has to be a consultation (in this case until 31 August 2011), followed by a Government consideration of the responses to that consultation (which has to be thereafter); a ‘decision’ is then made as to the way forwards and only then can an amending Order be laid before Parliament. The normal convention is for this to be laid for 21 days, meaning that the changes are unlikely to come into effect much before the end of September 2011.

This has a number of important consequences. The Solar Power Portal undertook a review of those projects that had made it ‘under the wire’ before the 1 August deadline. These included many large schemes that had been commissionsed and built in record time after planning consent had been given. Examples are Westmill Solar Farm in Swindon which is a 5 MW facility built in just six weeks or the partnership between Octopus Investments and Lightsource Renewable Energy, which delivered 11 large scale solar projects, with 30 MW of capacity, throughout the UK to beat the deadline.

Some of these projects, however, did not actually make it. In other words, a developer tried to complete a large facility before 1 August but was unable to do so. In these circumstances, provided that some part of the facility over 50 kw was commissioned before the deadline, construction work can continue until the loophole is closed and the full park, once completed, can still claim the higher FIT rate.

For local authorities this is also important. Many authorities have now realized that solar PV offers an excellent ‘quick win’ to its renewable energy portfolio. Most authorities are considering buildings based systems, rather than land based projects. But even a buildings based system could well be over the 50 kw limit. As an example, a large civic building could in the right circumstances (ie a suitable orientation roof with the right structural stability) site 200 kw + of solar panels.

So if any local authority entered into a contract for the fitting of 50 kw capacity of solar panels to its property before 1 August 2011 and those were commissioned and registered with OFGEM, it could now extend that facility during a short window of opportunity. There might, of course, be legal issues to consider here, such as the procurement rules, but it is entirely possible that the physical installation work could be comfortably completed before the (new) deadline.

Some might consider that it is wrong to exploit a legal loophole of this nature. However, I have continually pointed out that the position of the public sector organisations and the private sector here is completely different.  The public sector’s involvement in renewable energy just might offer the boost that is required to weather the financial storms and put some verve back into local economies. Obviously, local authorities need to act within their legal powers and have to ensure that decisions are taken reasonably and for the correct motives.

The reasons that public sector organisations are carefully considering this agenda are many. They are often covered by the CRC Energy Efficiency Scheme and so have begun to take greenhouse gas emissions more seriously. They are concerned about ever-rising energy costs (as they are major energy users) and energy security. They desperately need measures to boost their local economies, create jobs and demonstrate civic and community leadership. Business cases for development projects are hard to sell, but low cost borrowing is available.

Many councils have now recognised that a programme of renewable energy can deliver all of these aspirations. Bearing in mind the current state of local economies, renewables offer one of the few areas of light in the tunnel for local government.  They need something to get them through the next few years.

So this means that civic or public renewable energy schemes are not primarily motivated by money. Whilst every commercial scheme might not be either, the general trend is for institutional investors seeking double-digit growth from their PV investments.

But it is that level of profit that the government appears to have concerns about. This is why the FIT on land based solar has been substantially reduced. This will mean (subsequent to the closing of the legal loophole mentioned above) that those type of schemes drop out of the double digit return on investment and many may be unlikely to go ahead as a result.

However, the civic schemes have different drivers. They are about jobs, about efficiency and effectiveness, about development of a local supply chain. They are about a major land owning and property owning entity improving its own publicly owned assets. In these circumstances, a local authority (that can borrow money with few strings attached at around 5%) might consider a lesser gain as perfectly acceptable. After all, if all of those other benefits are delivered, a return on its investment of 5% on top would be highly attractive.

There has been much talk of the impact of the current situation on the solar industry in the UK.  The Renewable Energy Association and the Solar Trade Association have talked about a devastating effect on the growth of solar in the UK due to the FIT changes. So any further projects that can be undertaken have to be welcome and local authorities should benefit from any potential avenue of action, the same as anyone else.

Looking further ahead, it might just be that the potential damage to the fledgling solar industry can be improved by an emphasis on a different type of project, such as social housing work.  However, we should perhaps be wary about this as the Government is shortly to publish yet another consultation exercise, this time on the Feed in Tariffs more generally, and that may well have a careful look at social housing solar PV schemes and their call on the inadequate FIT budget.

There is always much happening on the local government stage and now is no exception. The Localism Bill continues its passage in Parliament and one area of focus is assets of community value and how to make the most of them. While the main thrust of that debate might be the potential transfer of assets to community groups and others, another potential outcome is the treatment of local authority buildings and land more as a valuable asset that can be used to generate income for the authority.  Solar PV offers that benefit but there can be only one message to local government in relation to this particular agenda and that is time is of the essence.

Stephen Cirell is a consultant specialising in low carbon and renewable energy projects for local government stephencirell@me.com

 

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