Consultation Announced on Potential Abolition of FIT Pre-Accreditation
22nd July 2015
Amidst the changes to solar subsidies announced by DECC today, the government has issued a consultation with potentially major consequences for renewable project developers and investors. Hot on the heels of the removal of levy exemption certificates for renewable projects, the government is now considering whether to remove another key element, the FiT pre-accreditation mechanism.
The consultation must be put in context. A typical power project development process will involve several key stages, from site assembly and technology selection, through financial close and construction, to operation of the generation asset.
At financial close, funders commit their investment to the project based on an expected return, for an agreed margin. The funders investment decision will be based on an assessment of the level of risk in the scheme – whether it be technology or construction risk, or fiscal or financial risk meaning that the returns are less than expected. In the infrastructure market, the majority of funders are prudent lenders, investing for predictable long term returns.
To date, once a project qualifies to receive the FiT, it shall continue to receive the level of tariff to which it was initially entitled for the duration of the tariff. This is known as ‘grandfathering’, and has two key consequences. First, it provides certainty to project funders and developers, as it locks in the return for a project, but secondly, it creates a cost to the state for such subsidy across the entire duration of the project. More recently the Government, via the Levy Control Framework, has demonstrated more clarity as to how these costs are accounted for. In the continued challenge for deficit reduction, consolidating feed in tariff payments as a single number makes a very large and obvious target for the Chancellor’s attention.
By using the FiT pre-accreditation mechanism, funders and developers are able to lock in a tariff level for a limited period, earlier than first generation – typically at financial close of the project. The project will only receive the tariff when they demonstrate that the generation asset becomes operational, but it provides an advance indication of how much will be paid. This mechanism currently operates across all technologies where the installed capacity will be less than 5MW.
Up until now, the Government has sought to manage the growth in its exposure to the feed-in-tariff by periodically reducing the level of the tariff payments, via FiT degressions.
The threat of time-based reduction in project value, through FiT degressions has had the simultaneous effect of creating development rush, whilst encouraging the growth of larger projects, offering a higher investment return. This in turn generates local political concern over intensive development activity, and leads to an increase in the burden on the levy control framework. DECC is now considering whether to take further steps to ease the fiscal pressure by removing the pre-accreditation process altogether.
If funders cannot be sure of the level of return to be received for their investment until first generation, and given the long duration of the construction phase, in the absence of the mechanism, funders will regard investments into the sector as inherently more risky. A logical response for prudent investors would be to change their investment strategy, and either increase their funding costs, or withdraw from the market altogether.
Set against a background of deficit reduction, DECC is seeking views from the renewable industry as to whether to remove the pre-accreditation mechanism. DECC’s consultation is open for four weeks from 22 July 2015 to 19 August 2015, inviting a response to four specific questions regarding the future of pre-accreditation.
The government is firmly stuck in the horns of the energy trilemma – secure, low carbon generation sources need to be found, providing cheap energy to the consumer, but at a cost that is politically acceptable. Following the announcement earlier this month that energy security is at its lowest for a decade, if DECC fails to find an appropriate balance, funders will leave the market, and we will be forced to rely on higher risk power imports.
Ward Hadaway has expertise advising funders and developers in relation to a range of renewable energy projects. Please contact Mark Whitehead if you would like to discuss the impact of the proposal and consider if you wish to respond to the consultation.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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