Renewable energy law and regulation in United Kingdom

Introduction

In 2019, the UK became the first major economy to enshrine in law its commitment to reduce its net contribution to greenhouse gas emissions to zero by 2050; signalling to governments and markets worldwide its commitment to tackle climate change and transform its economy. However, the UK Committee on Climate Change recently reported that progress is generally off-track in most sectors and as such, the UK is unlikely to stay within its set carbon budgets over the next decade. 

In response to the Covid-19 pandemic, an emphasis has been placed on the need for economic recovery packages to accelerate the UK’s transition to net zero. In particular, the UK government aims to position the UK as a world leader in low carbon technologies as part of its plan to “Build Back Greener”. Solutions to meeting the UK’s decarbonisation targets while ensuring security of supply and affordability for consumers continue to be developed as the UK plans for all coal generation to come offline by 2025. Although substantive generation capacity is forecast to be provided by new nuclear and possibly clean gas with carbon capture and storage (CCUS) technology, this is subject to concerns about both delay and commercial viability. The UK already has the world’s largest offshore wind generation capacity and in October 2020, the UK government announced a target of 40GW of offshore wind capacity by 2030, up from its original 30GW by 2030 target. These plans include 1GW of floating offshore wind – which is more than 15 times the present worldwide capacity for this emerging form of generation.

The routes to market for the UK’s main renewable technologies (discussed more particularly below) include via subsidy support (principally CfD), long-term revenue contracts secured with corporate offtakers and/or participation in flexibility markets. In 2020, the UK rose to 6th place in EY’s index of the most attractive countries for the investment in and deployment of renewable energy.

1. Brief overview of renewables sector

Key statistics

In 2020 Q1, renewables formed a record 47% share of UK energy generation, surpassing the previous record of 39% set in the summer of 2019. This has been largely attributed to an expansion in offshore wind capacity and favourable weather conditions caused by sustained periods of high wind and sunshine. In 2020 Q2, renewable generation exceeded fossil fuel generation and coal generation fell to record low levels, due to a 67-day period of coal-fee generation nationwide. This is the longest such period since the 19th century.

By the end of 2019, overall UK renewable energy capacity stood at 47.2GW, a 6.5% increase compared to the previous year. Growth in offshore wind capacity was the main factor behind this, having seen 21% capacity growth during the year. Onshore wind capacity grew 4.2% in the UK during 2019 and formed the largest share of renewable capacity (29.9%). Solar PV provided 28.3% of capacity and bioenergy capacity accounted for 16.6% of capacity.

Subsidy schemes

The main support scheme for new renewable generating stations is through the CfD (contract for difference) mechanism which was introduced under the Energy Act 2013. The other schemes such as the Renewables Obligation scheme and the feed-in tariff scheme for certain renewable generators with a maximum capacity of 5MW closed to new capacity in March 2017 and April 2019 respectively. 

In May 2019, the UK government announced that it would allow, subject to derating factors, subsidy-free renewable technologies to participate in the UK’s capacity market for the first time, and a year later, introduced a carbon emissions threshold and mandatory reporting and verification requirements for participants in the scheme.

Small-scale generation is supported through a smart export guarantee regime, which came into force on 1 January 2020, and requires electricity suppliers of a certain size to offer to enter into contracts with owners of small, low-carbon electricity generation installations. This provides a guaranteed route to market for small-scale renewable generation in the absence of the feed-in tariff regime, although the level of tariff is at the discretion of the individual supplier and the tariffs being offered by some electricity suppliers are as little as 0.5-1.5p/kWh. 

The UK government also supports the use of certain renewable technologies in heating through the domestic and non-domestic renewable heat incentive scheme. Participants receive quarterly payments for seven years for the renewable heat their renewable heating systems generate, provided they comply with certain ongoing obligations. Since it was introduced in 2014, the UK Government has spent more than £500 million on the scheme.

2. Recent developments in the renewables sector

CFD auctions

In November 2018, the Department for Business, Energy & Industrial Strategy (BEIS) announced the third round of CfD allocations (AR3) for “less established technologies” – advanced conversion technology (ACT), dedicated biomass and offshore wind, and a separate pot for remote island wind projects. 

The results of the third allocation round, announced in September 2019, demonstrated the rapid decrease in the cost of offshore wind. Nearly 6GW of capacity in the 2023 / 2024 and 2024 / 2025 delivery years was awarded CfD contracts with strike prices falling by 30% since the lowest strike price seen in the second CfD auction in 2017. As a result of the very competitive strike prices (below the wholesale electricity prices assumed in the auction), AR3 in principle had a neutral impact on the budget made available for CfD support.

Given that the CfD is the main method by which a project can achieve investment certainty, the continuing fall in prices and the dominance of large offshore wind projects demonstrates the sector’s confidence in being able to deliver profitable projects at prices almost on part with wholesale electricity prices. 

These results are driven by improvements in technology and supply chains, and cost of capital make the technology less reliant on support mechanisms. Therefore, while fewer projects may be able to secure additional revenue support through CfDs, there is growing appetite for “subsidy-free” CfDs which offer the price stability but not the additional revenues. 

In March 2020, the UK government published a consultation proposing a number of significant changes to the CfD scheme to apply to projects competing in allocation round four (AR4), scheduled to run in late 2021. BEIS published its response to the consultation at the end of November 2020, confirming the changes to be made for AR4 and future allocation rounds. 

Of the changes to AR4, the most ‘headline grabbing’ was the UK government’s plans to restructure the budget allocation “pots”: this includes abandoning its opposition to subsidising new onshore wind farms and solar power projects, after withdrawing additional CfD support for both technologies in 2015, and the creation of a “pot 3” dedicated to fixed bottom offshore wind. Moreover, it was confirmed that a new definition and separate strike price will be introduced for floating offshore wind, which will continue to compete with other “less established technologies” (such as dedicated biomass with CHP) in “pot 2”.

Other notable amendments for AR4 that will impact all eligible bidders include the extension of negative pricing which had been introduced in AR3, the extension of the milestone delivery date to 18 months post-contract signature, and the intention to strengthen the supply chain plans for which an additional consultation has begun. For future allocation rounds, BEIS has also confirmed its will implement flexible capacity caps and that the current final legislative delivery year of 2030 will be extended to 2035, to enable the CfD scheme to run beyond 2026.

Offshore Wind Leasing Round 4

The Crown Estate and Crown Estate Scotland are in the process of their latest round of offshore wind leasing, known as "Round 4" and “ScotWind" respectively. Round 4 launched in September 2019 but has seen its timetable revised with ITT (invitation to tender) Stage 2 due to open in late 2020 with multicycle bidding following in early 2021. 

The bidding process is designed to award at least 7GW, with the maximum possible 8.5GW to be awarded. The Crown Estate has defined 'innovation' as one of its key objectives and has offered a 50% discount for the first five years’ of rent for up to 10% of the project’s capacity where there is deemed to be qualifying ‘innovation’. 

ScotWind differs from Round 4 to the extent that no capacity cap has been designated and commentators expect floating offshore projects to be of particular interest to Crown Estate Scotland given the potential of this market in Scotland’s favourable wind conditions. Commentators also expect prescribed bands of option fees to be set, allowing developers to select which band they would be willing to pay. This is in comparison to the competitive option fee process in Round 4 whereby bids are ranked by price and the site with the highest option fee price will be selected. 

Offshore Transmission Owner Tender Rounds 6 and 7

The offshore transmission owner tender round six (TR6) opened for three projects at the end of 2018. Since then, two of the projects (Beatrice and Hornsea One) have reached preferred bidder stage. The third project, East Anglia One, remains at ITT stage due to delays caused by Covid-19 but a preferred bidder is expected to be announced by the end of 2020 or early 2021.

In November 2020, Ofgem announced its intention to commence tender round 7 (TR7) for the Moray East and Triton Knoll projects. TR7 is expected to launch in late November 2020 and it is anticipated that both projects will enter ITT stage in 2021. Ofgem is also consulting on future changes to the tender rounds, putting forward proposals to streamline the tendering and transaction process.

Corporate PPA growth

Corporate PPAs are transactions between a generator and a corporate end-user. Corporate PPAs offer a solution to renewable energy developers seeking to mitigate the problems they face in the form of reduced subsidies and also large energy users, such as corporates, looking to secure a hedged position against volatile or increasing energy prices and source a percentage of their energy from a renewable source. Investor appetite in the UK market continues to rise as a growing number of projects seek secure revenue streams for financing purposes and corporates face mounting pressure to clean up their operations and earn “green kudos”. 

Growth in the storage sector and flexibility markets

The UK has seen rapid growth in the energy storage sector, which has been driven by falling costs of technology and the availability of new revenue streams. At scale, battery storage will allow renewables to represent a greater proportion of the UK’s power and help the UK to meet its ambitious net-zero target whilst also playing an important role in the future grid’s resilience. Where only 20MW of commercial batteries were in operation in 2016, at the end of 2019 the UK’s operational battery storage capacity reached 1GW with a further 4GW in development. There was c.300MW of battery storage deployed in 2019 alone, demonstrating the industry’s growth over the last half of the decade. Revenue stream certainty continues to be a challenge for storage projects however, this is being mitigated by some developers by way of an optimisation agreement with an electricity trader, who manages short term contracted system services and merchant revenue streams, potentially with downside floor price protection.

The outcome of the UK government’s 2019 consultation on the treatment of electricity storage within the planning system was published in January 2020 and, as a result, the Draft Infrastructure Planning (Electricity Storage Facilities) Order 2020 is currently being laid before Parliament. If passed, the legislation will facilitate the construction of more battery storage sites with higher capacities in England and Wales. This will largely be due to the removal of electricity storage sites (>50MW) from the nationally significant infrastructure project (NSIP) regime meaning that such projects will no longer need to apply for a development consent order (DCO). It is estimated there is around 13.5GW of battery storage projects in the pipeline in the UK, all at various stages, with the average capacity per project being 26MW (likely a representation of a high percentage of these being c.49.9MW in line with the current NSIP cap).

Electric vehicles

Transport remains the largest emitting sector of CO2 in the UK and the electrification of the industry is seen as pivotal to meeting emission reduction targets. In November 2020, the UK government brought forward its ban on selling new petrol, diesel or hybrid cars from 2035 to 2030, signalling a clear commitment to the market and driving momentum to ensure infrastructure is robust to deal with the transition. 

The UK currently ranks as Europe’s third-largest EV market by volume, with EVs making up 3.2% of all new car and van sales in 2019 (a total of 74,400). There is a continuing upward trend for the purchase of EVs in the UK as over 108,000 EVs have been registered in 2020 to date. Projections show that UK stock could rise as high as 36 million by 2040. Policies such as the UK government’s ‘Road to Zero Strategy’, tax benefits and proposals to implement a requirement for all new homes to be fitted with EV chargepoints are a testament to the UK's commitment to wide-scale deployment of EVs. Nonetheless, commentators remain cautiously optimistic, as the nature and terms of the UK/EU withdrawal deal will undoubtedly have an impact on the growth of the UK’s EV market.

Hydrogen

In the context of decarbonising public transport, hydrogen is expected to play a key role. The Office for Low Emission Vehicles’ Hydrogen for Transport Programme is supporting 33 hydrogen fuel cell electric buses for Aberdeen, Belfast and Liverpool while the Mayor of London has pledged all London busses to be emissions-free by 2037. The UK is expected to have its first hydrogen trains operating as early as 2022 and, in September 2020, mainline testing began on HydroFLEX, a joint project between the University of Birmingham’s Birmingham Centre for Railway Research, that saw it carry out a 25-mile trip reaching up to 50mph. 

Hydrogen will also play a key role in decarbonising the UK’s heating and industry sectors. With an extensive gas network in the UK, the decarbonisation of heating will be instrumental in achieving the UK’s net zero goals. Hydrogen blending projects are being piloted across the UK and in May 2020, Cadent announced its HyDeploy pilot project has seen positive results in the blending of up to 20% hydrogen onto the gas network. 

The UK government has demonstrated its dedication to decarbonise industry through its Low Carbon Hydrogen Supply Competition under which funding was awarded to HyNet North West which has now received a total of £12.8 million over phases 1 and 2 of the competition to establish the world’s first net-zero carbon industrial cluster by 2040. As part of the cluster, ten large industrial sites will be converted to operate using 100% hydrogen.

3. Forthcoming developments / opportunities in the renewables sector

The Energy White Paper

The UK Government has announced its intention to publish a number of policy documents over the course of late 2020 – through 2021. 

Chief amongst these is the widely anticipated Energy White Paper, which will set out the pathway that all stakeholders in the energy system will need to take in order to accelerate the energy transition.

Industry sources anticipate that the paper will include the following policy commitments:

  • Decarbonising heating systems in up to four million homes by 2030; 
  • Making energy efficiency a national infrastructure priority;
  • Targeting up to 40GW of new low-carbon baseload capacity comprising new nuclear and gas with CCUS; and
  • Targeting CCUS projects to capture 10 million tonnes of carbon by 2030.

Other policy developments

Ahead of the COP26 climate summit, which the UK government will host in Glasgow in November 2021, policymakers intend to release a comprehensive Net Zero Strategy. The strategy will outline the UK government’s vision for a net zero economy, indicating what it sees as the economic and employment opportunities that the energy transition will provide across the country.  This follows suggestions from a broad range of stakeholders that an overarching net zero strategy would provide much needed certainty and would facilitate further private investment. 

The UK government also intends to issue its Heat and Buildings Strategy, which will set out its plan for the decarbonisation of heat over the coming decade. New strategies for hydrogen and biomass have been earmarked for spring 2021 and 2022, respectively, and will provide further clarity for stakeholders in these sectors.

For further details on net zero, green finance, energy storage licencing, CCUS, the offshore wind sector deal, and EVs, please see our recent articles on these subjects on Law Now.

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Munir Hassan
Partner
London
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Dalia Majumder-Russell
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