Renewable energy projects in the UK – new opportunities

Renewable energy projects in the UK – new opportunities

In a seminar at its London office on 24 June 2010 international law firm Watson Farley Williams highlighted new opportunities for commercial-scale renewable energy projects in the UK (excluding Northern Ireland) following the introduction of 'feed in tariffs'.

Introduced in April 2010, feed in tariffs provide incentivising payments for small scale generation (up to 5MW) using anaerobic digestion, hydro, wind, micro combined heat and power and solar photovoltaic. 

For commercial scale projects, tariffs payable over 25 years mean that project developers will receive payment from an energy supplier for each KWh generated, plus a further payment for any electricity exported to the grid.

The provisions create opportunities for energy project developers to install microgeneration technology, such as solar pv panels, on rooftops or on open land, such as agricultural land.  In each case, the payments available through feed in tariffs represent a potential income stream for commercial landowners, with rental income based on a share of payments to the project developer.

Social housing providers and commercial landlords are also likely to be attracted by the possibility of providing cheaper energy to tenants, and by the potential for reputational gain in commercial sectors subject to mandatory environmental and sustainability reporting requirements.

The feed in tariffs regime favours early adopters.  Tariffs for the initial years of the scheme are set at a higher level, with 'degression' taking effect in 2013, after which tariffs will reduce annually by 7.5%.

Structuring issues

Tax issues (eg the project developer's eligibility for capital allowances) mean that deals are likely to be structured using familiar real estate documentation, including option agreements and leases of roofspace or open land.

Potential pitfalls stemming from that approach include administrative complexity and possible additional liability to stamp duty land tax (a UK tax on property transactions) where part of the benefit to the landowner includes free or cheap electricity.

Commercial landlords would also be likely to face challenge from tenants under the UK's service charge code of best practice unless the benefits of free or cheap electricity were passed on to the occupiers of a building served by a relevant project.

Tenants may also challenge the landlord's deal if it involves the landlord electing to receive income derived from feed in tariffs in circumstances where the CRC Energy Efficiency Scheme (CRC) applies.  CRC is a new 'cap and trade' scheme for energy use that requires larger commercial and most public sector organisations to buy allowances for surrender against energy use.  It aims to incentivise energy efficiency by allowing organisations whose energy use is within their allowance to sell surplus allowances on a secondary market to organisations that have exceeded their limits.

CRC also seeks to incentivise renewable energy generation and use by providing a 'generation credit' which discounts energy produced through qualifying microgeneration.  However, CRC and the feed in tariffs regime are mutually exclusive, so that if a landlord elects to receive feed in tariff payments the energy to which they relate cannot be discounted for CRC purposes.  Allowances must be purchased and surrendered against that energy.  Consequently, where the cost of CRC allowances is passed on to tenants there is a significant risk of challenge if the landlord receives and retains income derived from feed in tariffs.

The legislation governing the feed in tariff regime was rushed through Parliament, and there is a pressing need for practical guidance from the government and from HM Revenue and Customs to ensure that projects receive the tax and tariff treatment expected.  Nonetheless, the potential for developing and funding renewable energy projects at building and portfolio level is receiving close attention in the real estate sector, both for urban estates and in rural areas where other sources of income (eg revenue from telecommunications sites, now being decommissioned due to network consolidation) are drying up.