Renewables Update July 2010
ANAEROBIC DIGESTION – WHAT DOES THE FUTURE HOLD?
The Coalition Government has made it clear that anaerobic digestion (AD) will play an important role in future UK energy and waste policy.
Markets for AD outputs
Digestate and biogas produced from AD have a variety of potential markets.
Both biogas and digestate can be used as fuel for electricity / heat generation, and biogas can also be used as transport fuel, or be injected into the gas grid.
Current government policy and proposals largely seek to incentivise electricity and / or heat generation, with support offered through two key mechanisms:
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Renewables Obligation (RO) – AD currently attracts 2 ROCs/MWh, and the Department of Energy and Climate Change (DECC) recently indicated that it proposes to guarantee this level of support for existing AD plants while they are eligible under the RO.
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Feed-in Tariffs – For small-scale electricity generation (i.e. sub-5MW), electricity generated from AD receives 9p/kWh, or 11.5p/kWh for farm-scale AD.
When the Renewable Heat Incentive (RHI) begins in April 2011, both the combustion of biogas for heat up to 200kW and the injection of biomethane into the gas grid will benefit. However, will this be sufficient to stimulate grid injection as an additional market for biogas, given that the UK is effectively beginning from a standing start in this area?
Additional measures proposed to encourage renewable heat include:
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exemption from the requirement for a Gas Transporter's Licence for biomethane plant and associated pipelines connecting with the gas grid, which the DECC intends to consult on later this year; and
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the possibility of relaxing the gas quality specifications in the Gas Safety (Management) Regulations 1996 and relevant Network Entry Agreement for specific locations and/or using a blended gas to meet the specification.
However, given the relative complexity (for those not in the industry) of the licensing and contractual arrangements, and the physical connection to the gas network itself, these proposals may be insufficient to develop this efficient method of delivering renewable heat in the UK.
The Renewable Transport Fuels Obligation (RTFO) supports the use of biogas as a transport fuel. However, such support is not "banded", as it is under the RO, with the level of support instead being the same for all renewable fuels. There is therefore less support for emerging technologies, such as upgrading biogas for transport fuel use. DEFRA indicated recently that it will consider how best to support this use of biogas, and it seems conceivable that some form of banding of the RTFO might help stimulate the uptake of, and investment in, such technologies.
Waste issues
Both biogas and digestate are wastes and are subject to waste regulatory controls, including the Waste Incineration Directive until it is shown that they have left the waste chain.
This means that they must meet the test from the landmark OSS v EA case, namely that they have been converted into distinct marketable products that can be used in exactly the same way as an ordinary fuel, and with no worse environmental effects.
Critical issues here include selecting the correct fuel comparator, and having a robust technical case backed up by legal arguments demonstrating compliance with relevant EC law on end-of-waste. The EA intends to publish a Regulatory Position Statement indicating the circumstances in which biomethane produced from waste is fully recovered. However, it is crucial to remember that compliance with the Statement will not represent the only way of achieving end-of-waste for biogas – the true test being compliance with EC case law and legislation. As such, innovation in other methods should not be discounted.
WRAP and the EA have developed a Quality Protocol (QP) for soil improver / fertiliser complying with the PAS:100 standard. However, this requires the input to the AD process to be source segregated. Again, soil improvers and fertilisers not meeting the QP may nonetheless meet the test for end-of-waste, and Semple Fraser has been working recently on such projects with companies in the water industry.
All in all, AD has the potential to contribute to a host of policy objectives, including renewable energy targets, diversion of waste from landfill, decarbonising transport, reducing greenhouse gas emissions and ensuring security of supply. The real question is whether the UK stimulus package can develop new markets for its outputs, or whether its contribution will be restricted to medium-large scale electricity and heat generation.
PLANNING AHEAD – POWER TO THE PEOPLE
The plans for the introduction of a Decentralism and Localism Bill were announced as part of the Queen's speech at the end of May “to devolve greater powers to councils and neighbourhoods and give local communities control over housing and planning decisions". This will make radical changes to the planning system in England and Wales.
Abolition of the IPC
The most significant change for energy developers, will be the means by which consent for major energy projects will be authorised. Since 1 March 2010, the Infrastructure Planning Commission (IPC) has been receiving applications including those involving renewable and traditional forms of energy generation. Its role is mainly inquisitorial, with the IPC Commissioners sifting through large amounts of evidence and then making a decision on an application.
However, before the IPC has even issued a decision, it has received criticism for being "undemocratic", as a result of its decisions taken by unelected commissioners. Its work has also been delayed because its policy framework, the National Policy Statements (NPS), published for consultation in November, were not (and are still not) approved by Parliament. Lawyers also consider that the potential for error by the IPC is considerable which may give rise to many applications for judicial review.
This has led the UK Government to announce that the IPC is to be abolished and replaced with "an efficient and democratically accountable system” that also provides a fast-track process for national significant infrastructure projects. A Major Planning Infrastructure Unit (MPIU), within the Planning Inspectorate, will replace the IPC. The main change is that the final decision on a development consent will be taken by the Minister, the Secretary of State for Energy and Climate Change, rather than the unelected IPC Commissioners. It is also expected that the MPIU would consider evidence at a public inquiry and make a recommendation to the Minister. However, the full details of the IPC’s abolition will not be known until the Bill is published.
Is there a transitional period?
It is intended that those applications under active consideration by the IPC when it is abolished will be transferred to MPIU. Energy developers will want to ensure that they fully understand the transitional and new consenting process before committing to new projects, especially if it threatens deliverability. At present, there are 42 project developers listed on the IPC website as having indicated an intention to submit an application to the body. Under the Government’s current plans, if any of these proposals are brought forward before the MPIU is established, they will be decided by the IPC if the National Policy Statements (NPS) for Energy are in place (otherwise the final call will rest with the Secretary of State).
What about National Policy Statements?
Currently, planning applications which are in conformity with the NPS receive permission from the IPC unless there is a conflict with national or international law. Although it is not yet clear if the NPS will play the same pivotal role under the new regime, the Government has announced that all NPS would now have to be ratified by Parliament and said it wanted to have the NPS in place as rapidly as possible. There are six NPS for Energy currently up for consideration, including one for renewable energy. The Government has also stated that it aims to complete the scrutiny process for the NPS for Energy before bringing forward revised final texts for consideration by Parliament although it is not yet clear whether this would involve further consultation. The Government plans to make a more detailed statement on the development of the NPS, including a revised timetable, later in the summer.
What is the timescale?
The IPC was created by primary legislation and therefore primary legislation has to be passed to abolish it. It is expected that the Bill will be introduced in late 2010 and should become law in 2011. Until the new legislation is in place, the IPC will continue in its present role. The energy industry will once again find itself in the position of having one system in place whilst knowing that another system is soon to be implemented.
What about smaller energy projects?
Local authorities will still determine the vast majority of project decisions (less than 50 MW), and that regime is crying out to be made more consistent and efficient. Another main element of the Bill is returning decision-making powers on housing and planning to local councils. Plans to give residents the power to instigate referendums on any local issue and ensure that any petition that secures 100,000 signatures will be eligible for formal debate in Parliament have also been announced. It is not clear whether the referendums will be within the public consultation as part of an application or will allow objectors another bite at the cherry. Developers may be concerned about the potential impact both of these announcements could have on their ability to secure planning permission where there might be local opposition and the knock-on effect of this on timelines.
The most crucial aspect of any new consenting process, is that it does not add to the disproportionately long planning process. Long and expensive planning inquiries have been a major disincentive to private investment in the past and, at a time when we need more infrastructure investment than ever before, this could have an adverse impact on the UK’s economic performance and global competitiveness. One thing that the new UK Government ought to ensure is that any changes are implemented and effective well before the next general election, otherwise it may be groundhog day for those engaged in the energy consenting process.
THE NEW MARINE LICENSING REGIME
The recent Marine and Coastal Access Act 2009 (MCAA) and Marine (Scotland) Act 2010 (MSA) introduced a framework for consolidated marine licensing regimes to replace the current regimes under the Food and Environment Protection Act 1985 (FEPA) and the Coast Protection Act 1949 (CPA). The new regimes are currently expected to take effect in Spring 2011.
The MSA covers the Scottish marine area out to 12 nautical miles, while the MCAA applies out to 200 nautical miles around England and Wales, and from 12 to 200 nautical miles around Scotland.
Licensable activities
The licensable activities remain largely the same as under FEPA, with the only activity not previously covered being dredging where there is no removal of materials from the seabed. The regime does not apply to fishing or to oil and gas activities.
Key considerations are protection of the environment and human health and prevention of interference with legitimate uses of the sea. However, there is also a strong emphasis on climate change, with those exercising functions under the Acts required to "act in the best way calculated to mitigate, and adapt to, climate change so far as is consistent with the purpose of the function concerned". This requires a balance between environmental protection and the need to develop a network of renewables to decarbonise the electricity sector in the fight against climate change, and should therefore benefit the renewables industry.
The Acts also introduce an additional consideration for licensing decisions regarding deposits of substances / objects in the sea / on the seabed, whereby regard must be had to the practical availability of any alternative method of dealing with the substance / object. This suggests that applicants may have to close off this issue in their application.
Overlaying the licensing regime is the EU Marine Strategy Framework Directive, which requires Member States to achieve or maintain good environmental status in the marine environment by 2020. "Good environmental status" is defined according to a number of detailed criteria, and in particular provides that anthropogenic inputs of substances or energy (including noise) into the marine environment must not cause pollution effects. This will be of direct relevance for offshore renewables given the potential for noise and heat emissions during the construction and operational phases of certain types of project. Mitigation of such effects is therefore likely to be high on the regulatory agenda.
The new regimes do simplify the licensing process, however the tensions between the need to protect the environment (and specifically to comply with the Marine Strategy Framework Directive) and the need to develop offshore renewables resource look set to make unfavourable decisions ripe for challenge.
In the pipeline
The main benefit of the new regimes is the streamlining of existing licensing requirements, with applications for s.36 consent also able to be considered together with marine licence applications.
However, much of the detail is yet to be worked out. Of particular interest to the renewables industry will be:
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Activities requiring pre-application notice – The MSA provides for regulations to be made specifying certain types of activity in respect of which applicants will have to make a pre-application notice at least 12 weeks before the marine licence application, describing the proposed activity and location and setting out any other information that the regulations require. It is expected that regulations will include a requirement to notify and consult with certain persons.
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Exemptions from the need for a marine licence – The Acts provide for an order to specify activities which will not require a marine licence, or will not require a marine licence if certain conditions are met, including that the activity has been approved. There is a requirement to consult prior to making any such order, and clearly the contents of any such consultation will be of interest to all those operating offshore.
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Activities requiring only registration – The MSA provides for regulations specifying low risk activities which will not require a marine licence, and which will simply need to be registered. The critical phrase here is "activities which fall below a specified threshold of environmental impact", and the way that this is defined will be key in setting the bar for registrable activities. The MCAA does not make any such provision, suggesting that activities will either be listed as exempt, or will require a licence.
As the saying goes, the devil will be in the detail.
THE GREEN DEAL – THE ENERGY SECURITY AND GREEN ECONOMY BILL
Another Bill announced in the Queen’s Speech that will affect the energy industry is The Energy Security and Green Economy Bill.
The main element of the Bill is the implementation of a "Green Deal", committed to in the Coalition's Programme for Government to deliver energy efficiency to homes and businesses. This will involve the creation of a framework of potential incentives for energy suppliers and consumers and seek to establish a "pay as you save" approach to energy efficiency, whereby low-interest loans are given to pay for energy efficiency and low-carbon improvements.
The promotion of low carbon energy production will also be a key priority, along with improving the security of energy supplies. It is hoped that such legislation will provide greater access to energy efficiency measures so that both domestic customers and businesses can reduce their energy bills and also their carbon footprint.
The Bill may also contain measures to:
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regulate carbon emissions from coal-fired power stations – it is expected that this will have the effect of preventing the construction of new coal-fired power stations unless they involve carbon capture and storage technology to reduce emissions;
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reform energy markets to deliver security of supply and ensure fair competition;
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put in place a framework to guide the development of a smart grid that would revolutionise the management of supply and demand for electricity;
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require energy companies to provide their customers with more information on utility bills in order to ensure that consumers are kept fully informed of how their payments are constituted;
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widen the availability of North Sea infrastructure to all companies to ease the exploitation of smaller and more difficult oil and gas fields; and
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create a Green Investment Bank to support investment in low carbon projects to transform the economy.
It seems likely that this Bill, coupled with amendments to existing legislation will be the Government's main legislative tool for implementing its energy policy. This will impact across the UK, although it may be the case that certain matters are devolved.
Coalition policy is in the early stages of evolution and information released on measures that may be included in the Bill is generalised in its scope. There is still some uncertainty over whether the following commitments included in the Programme for Government will be implemented via the Energy Security and Green Economy Bill or by other means:
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the establishment of a full system of feed-in tariffs in electricity (alongside the maintenance of banded Renewable Obligation Certificates);
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the introduction of measures to promote the increase in energy from waste through anaerobic digestion; and
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the introduction of measures to encourage marine energy.
It could well be that these policies will be implemented under the Bill as part of measures which will "reform energy markets to deliver security of supply". However, until more information is released or a draft Bill is published, those engaging in the renewables sector are left with many questions unanswered. Other policies which were not expressly referred to in the Queen's Speech may be implemented via other legislative means, or may not necessitate new legislation such as the provision of an Annual Energy Statement to Parliament to set strategic energy policy and guide investment.
Much flesh still needs to be put on the bones of the new Government's energy policies and the relative legislation necessary to implement them in order to assess how “green” they actually are.
THE PROPOSED GREEN INVESTMENT BANK
The pressure for an increase in renewable energy is being driven by environmental, political and regulatory forces. In addition to the EU Renewable Energy Directive, the new Coalition Government has pledged to make itself the greenest government ever. With all this pressure and the impending 2020 targets, it is estimated there is a need for around £550 billion of investment in the UK in the renewables sector (as highlighted by the Green Investment Bank Commission’s recent report).
Achieving that level of investment seems almost delusional in the context of the current economic climate – to achieve this, targeted action is needed and the idea of a “Green Investment Bank” (GIB) evolved.
Following on from proposals made by Labour, the Coalition Government has continued to show support for a GIB in its coalition manifesto (issued in May) which showed enthusiasm for investment in a green economy.
With an objective "to help deliver the capital investment necessary to meet the UK’s 2020 and 2050 low carbon, renewable energy and energy security targets", the GIB will be a £2 billion fund used to provide risk equity for the development of low carbon industries.
If implemented, the GIB plans to assist the sector through:
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leveraging and facilitating private sector investment;
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providing public sector funding and support where private sector capital is not available, and
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underwriting the economic risks of policy change to mitigate investor concerns about politically-induced market instability.
Historically, the UK has encountered difficulties in attracting low carbon investment from British investors, with much of the sought-after funding being ploughed into other countries. Barriers to UK investment being: the UK’s reputation for an unpredictable regulatory regime, an overwhelming amount of bureaucracy when it comes to applying for funding, a lack of efficient communication across governmental departments, a grid and transmission system which is failing to live up to expectations and a planning system which is regarded as slow and unpredictable.
Through a balance of only co-investing when approached by a private investor, refraining from seeking to invest for commercial rates of return which are not commensurate with the private investor and, as a rule of thumb, leaving the originating, sponsoring and structuring of investments to the private investor, the GIB would seek to create a solid public / private sector partnership. This approach will sound familiar to the Scottish investment community – the Scottish Enterprise Co-Investment Funds operate in a very similar way and have leveraged significant amounts of private sector equity and debt funding into emerging technology businesses, many of which could probably not have been successful in their fund raising without the Co-Investment Funds.
Despite all these benefits, there remain concerns and questions. Will small to medium sized enterprises have sufficient opportunity to access the funding or will it be directed towards projects on a larger scale? How quickly can government bonds be sold (one of the proposed manners of creating the GIB fund), bearing in mind we are coming out of a recession?
The biggest concern, however, is the fact that the £2 billion proposed to be used for the GIB is simply not sufficient to transform the UK into a low carbon economy, bearing in mind the gigantic scale of funding required (£550 billion).
All the political rhetoric is yet to crystallise into positive actions – this is highlighted by the June budget in which the Coalition Government again stated its support for the GIB but was hesitant to provide further information regarding its implementation. As a result, it is unlikely that the GIB will progress until after the Government’s spending review in the Autumn.
If the UK is to meet its legal obligations under the EU Renewable Energy Directive and the UK and Scottish Climate Change Acts, urgent action is needed to facilitate the necessary funding for renewable energy projects in the UK. A failure to address the funding issue is also likely to prejudice the UK’s position as a leading player in the development of renewable energy projects and technologies.
WELCOME TO ‘ABILITY’, THE WORLD OF RENEWABLE ENERGY
Anyone familiar with the renewable energy sector will be well versed with their use of the suffix “ability”. Sustainability, reliability, serviceability, installability are all buzz words that surround the evolving world of renewable energy and the technologies emerging from it.
One of the most important “abilities” in the sector is fundability, without which many projects would not get off the ground. Funding is generally scarce and there have been a number of pleas to the Government to address this issue. Until such a time as Government plans are implemented, there remains a gap, the only armour against which is ensuring that your project is fundable.
Banks and private investors have shown a reluctance to fund start-up renewable projects that are at the research and development stages, and have a propensity to target those projects which have overcome the initial hurdles and are revenue generating (or close to that) and have something tangible to offer as security.
However, in terms of tangibility, there is no need to have an actual commercialised product so long as you have a patent.
Intellectual Property can come in many forms but having a patent in place gives you a degree of tangibility that can dramatically improve your funding prospects.
A patent is a registered right to your ideas and inventions. Your rights to the idea are protected meaning that you have something tangible against which funding could be obtained.
As the pace at which new technologies are developed has increased, the patent system within the UK has not been able to keep up. A typical patent application can take three to four years to be fully registered, which is not acceptable in fast-moving industries.
In May 2009, the UK sought to speed up the process by introducing a ‘green channel’ for patent applications. Under this system, applicants are able to request accelerated processing of their application if the invention relates to ‘green’ or environmentally friendly technologies. However, this was only available for patent protection of the idea within the UK’s boundaries.
Renewable energy projects know no territorial boundaries thus the green channel for patent applications was only helpful to a certain extent.
In May 2010, whilst highlighting the fact that the backlog of patent applications costs the global economy an estimated £7.6 billion per year, the Intellectual Property Office announced a new scheme to combat the backlog of international patents – the Patent Cooperation Treaty (PCT) Fast Track procedure.
The PCT was drafted in 1970 and facilitates the process of obtaining patents by enabling an applicant to file a single application, specifying the countries in which protection is sought. The applicant must then pursue each application in each individual country but it means that a single search stage is undertaken.
The new PCT Fast Track procedure is open to all 142 countries and the UK has been one of the first to implement it. The result of this for patent applications is as follows:
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The application is filed under the PCT and specifies that patent protection is sought in the UK;
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Once the clear search has been received, the applicant applies to register the patent in the UK; and
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If requested, the application will then be dealt with under the accelerated procedure.
The IPO pledged that waiting times for applications under the PCT Fast Track procedure will be cut by more than a year, which bears similarity to the existing green channel. However, the PCT Fast Track Procedure will be more useful for applicants seeking patent protection on the international stage.
These advances in the patent process show an understanding of the importance of patent applications in the successful exploitation of emerging technologies. It is therefore of the utmost importance that companies in the renewable and energy sectors have a clear intellectual property strategy in place. Although the fast track systems can speed up the process, you have to ensure that you initiate the process at the right time – is your idea ready to be released into the public domain?
Catch 22 it may be, but the release of your idea into the public domain and the initiation of the registration process may be the only way you can ensure the fundability of your project.
The matters covered in this ebulletin are intended as a general overview and discussion of the subjects dealt with. They are not intended, and should not be used, as a substitute for taking legal advice in any specific situation. Semple Fraser LLP will accept no responsibility for any actions taken or not taken on the basis of this publication.
For further information please contact: Bill Fowler