Energy Law

CIA -3

RENEWABLE ENERGY LAW IN UNITED KINGDOM

Submitted By
Kurian Oommen
1550232
INTRODUCTION
The UK's energy sector continues to undergo significant change. The 2018 Renewable Energy
Directive set a target for the UK to achieve 32 per cent of its energy consumption from
renewable sources by 2030. The Energy Act 2013 (the Energy Act), initially enacted to achieve
the target set by the 2009 Renewable Energy Directive, implemented key aspects of Electricity
Market Reform (EMR) – a policy initiative pioneered by the UK government to mobilise £110
billion of capital investment required by 2020 to ensure a reliable and diverse supply of low-
carbon electricity. Reforms such as these are vital, as the UK has seen significant power plant
closures in recent years; the Energy Act was aimed at ensuring both investment in
infrastructure, alongside decarbonisation as more power plants are decommissioned in the UK.
Around a fifth of the capacity that was available in 2011 will close by the end of this decade,
and demand for electricity is set to increase as major sectors such as transport and heat are
electrified.

To allay concerns that the EMR target would be lost on the UK's exit from the EU, in June
2016, the Conservative government announced the target of reducing carbon emissions by 57
per cent by 2030 and 80 per cent by 2050. These targets are informed by the UK's need to
develop approximately 59GW of new net capacity by 2025, with as much as 33GW coming
from renewables and the remaining 26GW coming from conventional thermal power. In an
effort to promote private investment in the development of large-scale infrastructure projects
(and in particular, the development of low-carbon technology) in the UK, the UK government
has instituted a series of programmes that are specifically designed to stabilise the economics
of financing for such projects.

THE POLICY AND REGULATORY FRAMEWORK

1) The policy backgrounds

Introduced on 1 April 2010, the Feed-in Tariffs (FIT) scheme was a government programme
designed to promote the uptake of small-scale renewable and low-carbon electricity generation
technologies. The FIT scheme was available for solar photovoltaic, wind, micro combined heat
and power, hydro or anaerobic digestion technology up to a capacity of 5MW, or 2kW for
micro combined heat and power. The FIT scheme closed to new generation capacity from 1
April 2019.

The provision of CfDs is one of the key policy measures to incentivise new low-carbon
electricity generation. The provision of CfDs is intended to stabilise revenues for investors in
low-carbon electricity generation projects such as renewables, by helping developers secure
the large upfront capital costs for low-carbon infrastructure. The CfD is a quasi-power purchase
agreement. Generators with a CfD will sell their electricity into the market in the normal way
and remain active participants in the wholesale electricity market. The CfD then pays the
difference between an estimate of the market price for electricity and an estimate of the long-
term price needed to bring forward investment in a given technology (the strike price). When
a generator sells its power, if the market price is lower than needed to reward investment, the
CfD pays a top-up. However, if the market price is higher than needed to reward investment,
the contract obliges the generator to pay back the difference. In this way, CfDs stabilise returns
for generators at a fixed level for the duration of the contract. This removes the generator's
long-term exposure to electricity price volatility, substantially reducing the commercial risks
faced by these projects. The Energy Act includes a provision whereby a new UK government-
owned company (the Low Carbon Contracts Company, or LCCC) will act as the counterparty
to eligible generators under the CfD. This mechanism was in direct response to concerns about
the 'credit' behind the CfD economics. Although a CfD is a private law contract between a low
carbon electricity generator and the LCCC, the cost of CfDs will ultimately be met by
consumers via a levy on electricity suppliers. Two offshore wind projects were awarded CfDs
at £57.50/MWh in the 2017 round. A third round of CfDs is planned for May 2019. With up to
£557 million made available for investment, BEIS announced that further allocation rounds
would be held every two years starting from 2021. Eligible technologies are offshore wind,
onshore wind in remote islands, certain forms of biomass or waste-fuelled plant (e.g., advanced
conversion technologies, anaerobic digestion, biomass with CHP), wave, tidal stream and
geothermal.

The Renewable Obligation (RO) scheme is one of the main support mechanisms for large-scale
renewable electricity projects in the UK. Smaller-scale generation is mainly supported through
the FIT scheme. The RO came into effect in 2002 in England and Wales, and Scotland,
followed by Northern Ireland in 2005. The scheme places an obligation on UK electricity
suppliers to source an increasing proportion of the electricity they supply from renewable
sources. The RO scheme closed to all new generating capacity on 31 March 2017.

The Climate Change Levy (CCL) was introduced in 2001 and is a tax on UK business, collected
by energy suppliers, designed to encourage energy efficiency, reduce carbon emissions and
promote energy from renewable sources. Businesses were previously able to claim an
exemption if they could show a levy exemption certificate, showing that they bought energy
from qualifying renewable energy sources. In the July 2015 budget, the UK government
announced the removal of CCL exemption for electricity generated from renewable sources
from 1 August 2015.

The Offtaker of Last Resort (OLR) is a government scheme that aims to promote the
availability of power purchase agreements (PPA). It is intended as a last resort to help
renewable generators who cannot get a PPA through the usual commercial means. The OLR
scheme is part of the government's wider programme on EMR.

2) The regulatory framework

The Department of Energy and Climate Change (DECC), formed in 2008, was the ministerial
department responsible for making decisions, setting policy and implementing legislation
affecting the electricity sector. The corresponding government ministry in Northern Ireland is
the Department of Enterprise, Trade and Investment. Following the EU Referendum held on
23 June 2016, DECC was merged with the Department for Business and Innovation to create
the Department for Business, Energy and Industrial Strategy (BEIS).

BEIS works closely with and is supported by other agencies and public bodies, including the
Gas and Electricity Markets Authority (GEMA) and the Office of Gas and Electricity Markets
(Ofgem).

GEMA has primary responsibility for regulation of the energy sector. GEMA's powers and
duties are largely provided for in statute (such as the Gas Act 1986, the Electricity Act 1989,
the Utilities Act 2000, the Competition Act 1998, the Enterprise Act 2002 and the Energy Acts
of 2004, 2008, 2010 and 2011), as well as arising from directly effective European Community
legislation. GEMA's principal objective is to protect the interests of existing and future
consumers in relation to gas conveyed through pipes, and electricity conveyed by distribution
or transmission systems. The interests of these consumers are their interests taken as a whole,
including their interests in the reduction of greenhouse gases, and in the security of the supply
of gas and electricity to them. GEMA is constituted of individuals who are appointed by the
Secretary of State for specified terms of not less than five years.

GEMA delegates its functions to Ofgem and provides it with strategic direction and oversight.
Ofgem is also a non-ministerial government department and an independent national regulatory
authority recognised by EU directives. Ofgem states that its principal objective is to protect the
interests of existing and future electricity and gas consumers. Ofgem E-Serve, which introduces
itself as the 'delivery arm of Ofgem', administers environmental schemes and consumer and
social programmes on behalf of the government, including schemes related to renewable
energy such as the FIT scheme, CfDs, RO, the CCL and the OLR scheme (see Section III.i for
more details).

The Environment Agency is responsible for protecting and improving the environment, as well
as promoting sustainable development. The role of the Environment Agency regarding
electricity is limited to matters related to pollution and therefore mainly relates to conventional
generation and nuclear energy.

The Energy Act (together with secondary legislation) implements key aspects of electricity
market reform and is a policy initiative pioneered by the UK government to mobilise £110
billion of capital investment required by 2020 to ensure a reliable and diverse supply of low-
carbon electricity. This is the applicable regulatory framework for the developing, financing,
operating and selling of power and environmental attributes from renewable projects, and the
regulation of CfDs.

The RO scheme has created a market for the sale of environmental attributes. Through the RO
scheme, the government places an annual obligation on licensed electricity suppliers to source
a proportion of the electricity they supply to customers from renewable energy sources. These
suppliers are required to meet their individual obligation target by purchasing Renewable
Obligation Certificates (ROCs) from renewable generators directly, from the ROCs market or
by paying a set amount to government by way of a penalty. Through this mechanism, ROCs
have a monetary value (the buyout price for the 2019–2020 ROCs is £48.78 per ROC) and
generators have been able to sell (among other things) the electricity generated by their
renewable generating stations (and associated ROCs) to licensed electricity suppliers.

A generation licence is required for the sale of electricity and this stipulates compliance with
the relevant industry codes. In particular, all licence holders (for example, transmission,
generation, supply and distribution) must be registered within the Balancing and Settlement
Code. Certain environmental, health and safety, and electricity quality measures must also be
in place for the construction and operation of systems that generate and supply electricity
(Electricity, Safety, Quality and Continuity Regulations 2002 (as amended)); these will depend
on the relevant renewable project in question.

RENEWABLE ENERGY PROJECT DEVELOPMENT

i Project finance transaction structures

As with all energy and infrastructure projects, the financing structure for renewable energy
projects depends on the nature of the client and the type of project. In a straightforward project,
for example, the funding may come from a combination of equity investment or debt finance
(including in some cases, mezzanine finance), through a single lender or multiple lenders and
on a non- or limited-recourse basis. Senior lenders can include commercial banks familiar with
project financings, export credit agencies, multilaterals such as the European Investment Bank
or the International Finance Corporation.

Private equity funds may be willing to take construction risk and provide additional funding
ranking senior to pure equity, which can be contributed at a senior or mezzanine level
(depending on the particular project).

Where there are unproven technologies or other uncommon risks that traditional financiers are
not willing to take, or where the use of traditional project financing would prove too expensive,
certain other sources of funding have been available, such as the EU NER300 fund, direct
grants from the government and, in Scotland, the Renewable Energy Investment Fund
administered by the Scottish Investment Bank.

Once the 'risky' construction phase period has ended and projects are operational, further
financing structures become available in addition to those described above. Examples of these
are refinancing of construction-phase bank financings by way of capital market instruments
and institutional investors such as pension and insurance funds, who do not customarily have
an appetite for construction risk, but who look favourably at long-term debt financings with
proven and stable cash flows.

In domestic UK project financings, the intention of the parties (and the usual requirement of
all types of lenders) is to create security over all, or substantially all, of a project company's
assets. Project finance borrowing vehicles are normally special purpose vehicles (SPVs) with
no pre-existing businesses, rights or liabilities beyond those associated with the project.
Security is normally granted by way of a general security agreement, such as a debenture,
which covers all the SPV's rights and assets (both pre-existing and after-acquired) or (less
commonly) by way of separate security agreements for each type of asset. Lenders will look to
achieve 'going concern' security on a UK-based project or asset. This is aimed at putting them
in a position of default, stepping in if necessary and operating (or selling) the relevant asset as
a going concern. Basic legal security is normally insufficient to achieve this type of outcome;
conventional legal security is often supplemented by bespoke contractual arrangements
providing lenders with specific notice, 'cure' and 'step-in' rights. Where (as is very often the
case) the viability of a project as a going concern is dependent upon the continuing availability
to an operator or owner of permits and licences, special attention will need to be paid to the
consequences of default in the wider sense – by way of example, breach of licence conditions
or change of control can result in permits and licences being breached or becoming terminable.
Certain types of licences and permits are, in effect, personal to the initial licence holder;
contractual rights can be expressed to be non-assignable in the absence of consents. A careful
analysis of the regulatory and practical conditions applicable to the application for, and
maintenance of, permits, licences and key contracts is necessary and will differ on a case-by-
case basis.

The main types of securities under English law are mortgages (equitable and legal), charges
(fixed and floating), assignments (broadly equivalent to charges), pledges and liens.
Mortgages, charges and assignments are the most frequently used forms of security.
Assignments may be legal or equitable; the process for enforcement of the two types of security
differs. A debenture will include a range of mortgages, charges and assignments depending on
the nature of the security assets. Debentures can create legal mortgages and fixed and floating
charges over all the borrower's assets, if agreed, and as set out in the debenture. The debenture
is executed as a deed.
ii Distributed and residential renewable energy
Underpinned by general environmental concerns, technological innovation and government
policy, the growth of on-site distributed generation projects has been noticeable in recent years.
In particular, an uptake in residential use has been seen, with very small-scale projects operated
and maintained by residential end users evident across the country. Similarly, businesses and
public sector institutions continue to install their own generation projects, whether that be high-
street stores, office blocks or public-sector services buildings, such as hospitals.

The types of technologies seen in the residential sector include solar photovoltaic panels, small
wind turbines, natural-gas-fired fuel cells and emergency backup generators. In the commercial
and industrial sectors, the same technologies exist in addition to hydropower, biomass
combustion, municipal solid waste incineration, natural gas or biomass-fuelled fuel cells and
reciprocating combustion engines. The uses of such distribution generation projects and the
ownership and offtake structure depend largely on the user and their needs. For example, if a
hospital has a system, it will seek high reliability and thus high quality, perhaps at the expense
of cost. On the flip side, industrial plants may prioritise a low cost system over other factors.

Recently, microgrids have emerged as part of a number of solutions for the UK's transition
from a conventional energy system to one fit for the 21st century and beyond, responsive to
changing needs and desires, namely the pursuit of low-cost, efficient energy that has minimal
environmental impact. The UK government in particular has encouraged microgrids because,
as they work locally, they can be disconnected from the national grid to operate independently
where necessary. The importance of their independence cannot be understated, namely
because, in the event of a disturbance, microgrids can be isolated to minimise greater
disruption. For that reason they are an attractive option for small communities. An example of
a scheme is the Flexible Plug and Play initiative, introduced in 2012. This three-year
programme delivered cheaper and faster distributed generation connections, as well as enabling
such distribution schemes to become active, where previously they were thought to be
unfeasible.

The nature of distributed generation is that it allows for self-consumption, offering significant
consumer benefits in terms of economics. However, it is particularly important in this context
that consumers fully understand the legal backdrop of any electricity generated, especially if
they intend to sell the excess electricity generated. Not only is compliance with the applicable
regulations imperative, but there are a number of agreements and contracts that need to be put
in place by the distributor, meaning in the residential sector legal and professional advice must
be sought, adding to expense. In terms of property rights, it may be advisable for those involved
to ensure they are sufficiently protected by obtaining options for leases and options for
easements. In addition, the effect of Brexit is unknown, and this uncertainty has a particular
impact on distributed generation, an area partially regulated by the European Union.

In 2018, there was 3.3GW of storage capacity operational in the UK, and planning consent was
obtained for a further 5.4GW (including 4.8GW of battery storage). These storage projects
consist in the majority of lithium-ion battery, lead-acid battery, open-loop pumped hydro
storage, closed-loop pumped hydro storage and modular compressed storage. Electricity
storage is treated as a form of electricity generation and, as such, the applicable legal
framework to electricity storage is currently the same as that applicable to electricity
generation.

The classification of electricity storage as generation (and therefore the application of the legal
framework applicable to generators) has been seen to be a significant hurdle to the development
of energy storage projects in the UK; this has been acknowledged by Ofgem, which has
committed to work together with the government to provide greater regulatory clarity. Some
of the key concerns are that certain licensed operators, such as distribution licence holders, are
restricted from holding a generation licence and therefore from operating electricity storage.
The requirement for electricity storage operators to hold a generation licence is
administratively burdensome for the operators, as it imposes on them all the regulations and
codes that apply to electricity generators. In addition to the above, the current regulatory regime
also treats electricity storage operators as consumers as well as electricity generators, resulting
in electricity storage operators being charged double for using the electricity grid – once as a
consumer when electricity is taken from the grid for storage and again as a generator when
exporting electricity to the grid (they also potentially face double-charging of various
government levies to fund low-carbon incentive schemes where the levies are themselves
added to electricity costs). In January 2019, BEIS launched a consultation to solicit views on
proposed changes to the treatment of energy storage under the planning system.

iii Non-project finance development

In the UK, the divide between conventional project finance and the bond and leveraged finance
markets continues to narrow. The market saw a continuation of diversification of both sources
and types of project-related debt. As with the project bonds market, the trend comes in part
from the United States; 2018 saw a number of infrastructure and energy sponsors
experimenting with Term Loan B structures – sometimes as refinancing tools, sometimes to sit
alongside conventional financings or less conventional financings – for example, inventory and
receivables financings.

There are no legal requirements that apply exclusively to project companies seeking to issue
bonds or similar capital markets instruments. Any project company seeking to issue debt
instruments (securities) on the London Stock Exchange (LSE) must comply with the Listing
Rules of the UK Listing Authority (UKLA) (the Listing Rules). The UKLA, a division of the
Financial Conduct Authority, is the body responsible for regulating all securities listed on the
LSE. The Listing Rules contain (1) the rules and regulations for listing debt securities, and (2)
the continuing obligations that apply to issuers and bondholders for the duration of the listing.
The Listing Rules cover principles ranging from corporate governance and executive
remuneration to accounting standards and full disclosure of information to prospective
investors. Debt securities admitted to the Main Market of the LSE must be listed in accordance
with Chapters 2 and 17 of the Listing Rules. Debt securities admitted to the Professional
Securities Market must be listed in accordance with Chapter 4. All debt securities admitted to
trading must comply with the LSE's Admission and Disclosure Standards and the relevant
Disclosure and Transparency Rules.

Rules may differ according to the issuer's market sector. Rules may also differ according to the
issuer's investor base. For example, an issuer will be subject to more stringent obligations if
marketing its securities to retail investors as opposed to solely professional investors.

V RENEWABLE ENERGY MANUFACTURING

As the EU is a customs union, UK companies can buy most goods from other member countries
without restrictions – although VAT and excise duty will normally still apply. If a UK company
imports from outside the EU, it may have to comply with import licensing requirements and
with common customs tariffs that apply across the EU. Apart from the general restrictions
concerning materials that are deleterious to health and safety and the environment, there are no
legal restrictions or controls that apply exclusively to importing construction equipment. It is
not yet known whether the UK will remain part of the EU Customs Union following the UK's
exit from the EU on 31 October 2019.

VI CONCLUSION
As the UK emerges from the economic slowdown and moves into a period of economic growth,
there is considerable demand for upgrading existing infrastructure or investing in new,
greenfield projects. The Conservative government expects that over the next decade to 2027,
total public and private investment in the sector is expected to reach around £600 billion.
Already, public and private infrastructure investment has gradually increased over the past
three decades (since 2010, 4,500 infrastructure projects have been delivered). The two largest
sectors, energy (which boasts investment of £191,338.5 million from 2017/2018 to 2020/2021)
and transport (£135,276.9 million from 2017/2018 to 2020/2021), account for 70 per cent of
the infrastructure pipeline's total value.

The UK government's commitments under the Paris Climate Agreement, together with its
obligations under the 2009 and 2018 Renewable Energy Directives, coupled in turn with the
political and legislative uncertainty resulting from the UK's referendum vote to exit the EU,
are likely to be the biggest drivers of change in the renewables energy market in the short and
medium term.