A life less green?
12 September 2010
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Renewable energy initiatives have come under threat in Europe as governments renege on incentive schemes. Simon Currie and Tim Baines examine the likely impact on existing and proposed green initiatives
Renewable energy growth in Europe has been built on a range of incentive regimes. Recently the headlines have been grabbed by proposed changes in a number of jurisdictions, including Spain, Italy and the UK, but this is also a live issue in other jurisdictions.
This changing landscape and fears about the sustainability of incentives in straitened times have sent many investors and energy providers to their lawyers seeking advice on what changes are likely to be introduced and how they may be affected.
This is an issue that will not go away, and it could have a huge impact on the renewable energy sector.
This article considers some of the proposed amendments, how these will affect existing and new projects and highlights the key issues for legal advisers.
In Italy the scheme that promotes renewable electricity generation (excluding solar) is the legal framework for ’green certificates’ (GCs). Currently, generators and importers of conventional power have an obligation to purchase a certain amount of GCs every year.
In 2008 various amendments were made to the GC system, including the introduction of a GC price determination system and a GC buyback scheme, which support the price of GCs. Important changes have been made during the course of 2010. The buyback scheme, which had been threatened, was maintained. However, a cap has been placed on the financial commitment of the buyback mechanism and the regulator will have to spend 30 per cent less in 2011 than was spent in 2010 (which will, in turn, result in a decrease of the cost of electricity for consumers). Recently changes have also been made to the ’Nuovo Conto Energia’, which subject to certain conditions guarantees generators a feed-in tariff for the production of energy from photovoltaic plants.
The generation of electricity through renewable technologies in Spain is fostered by the award of incentives in the form of feed-in tariffs, additional premiums and other incentives applicable to the electricity produced by renewable sources.
In April the Spanish government declared its intention to revise the economic regime for facilities already in commercial operation by adjusting the level of tariffs and incentives available through its review process.
The Spanish government has engaged in negotiations with trade associations with a view to reaching a consensus on tariff cuts and regulatory changes. While agreement has largely been reached with the wind and solar thermal sectors, no compromise was achieved on solar power. The government has since released a draft of regulations that contain limitations on operating hours eligible for tariffs, restrictions on transfers of projects and facilities and requirements to install certain equipment to protect the grid. However, the final word on tariff adjustments for existing solar facilities is not expected until October.
The Renewables Obligation (RO) is the main support mechanism in the UK for the development of renewable electricity generation. It has been in place in England, Wales and Scotland since April 2002 and in Northern Ireland since 2005.
The UK coalition Government has announced that it intends to implement a system of feed-in tariffs in electricity as well as maintaining the current RO. However, the Government has not revealed what the new feed-in tariffs will look like, nor what changes will be made to the RO scheme to accommodate the tariffs scheme. Consequently, there is uncertainty as to the financial and practical implications of any changes.
More broadly, concerns have been raised about the future of feed-in tariffs in respect of small-scale electricity generation and in relation to a proposed renewable heat incentive. All eyes are now on the Government’s upcoming strategic spending review.
Amendments to renewables regimes in various jurisdictions have led many investors and energy providers to seek advice as to how their existing and future renewables projects may be affected. In relation to new projects, the uncertainty surrounding the proposed amendments leads to difficulties in assessing the profitability of projects. This inevitably causes investor caution and will no doubt mean a number of renewables projects are reconsidered.
As well as threatening new renewables projects, changes to renewables regimes may significantly affect projects that are already in operation. It is worth noting that many jurisdictions prohibit or limit laws that have retrospective application. However, as changes to investment incentives can affect the profitability of projects that rely on predictable future income streams, such changes may not always be considered retrospective in a manner that is legally prohibited and could therefore remain a concern for investors and energy providers.
Investors and energy providers, in seeking to protect their legitimate expectations, may be concerned that they will no longer continue to receive the incentives they expected. In many jurisdictions the legitimate expectations of parties may be protected in certain circumstances, such as when a party has been led to believe that it will be treated in a certain way by an express promise made by a government body. Whether these expectations can be protected must be considered in the context of each jurisdiction.
In the UK investors can take some comfort from the concept of grandfathering, whereby the level of RO support a generator receives is generally fixed, or ’grandfathered’, for the length of time originally determined and will not be reduced in any subsequent review. This provides an element of income certainty to a project and underpins investment in renewable technologies.
However, not all technologies are grandfathered and the extent to which grandfathering will be implemented in the future is not beyond doubt. Any failure to grandfather support under the RO, particularly retrospectively, could have serious implications for market confidence and undermine the UK Government’s ability to meet the country’s renewables targets.
Uncertainty still surrounds many of the proposed changes. Their true impact may not be realised until revised regimes begin to bed in. However, there are already clear signs of forum shopping, with investors no longer concerned only about the level of incentives on offer, but also questioning the robustness of promises by governments to continue to support projects at anticipated levels in the future. This sends a message that, at least in the eyes of investors, not all incentives are equal.
Simon Currie is a partner and global head of energy and Tim Baines is an associate at Norton Rose