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Government to prioritise fully-funded biomass projects under Renewables Obligation cost controls

Out-Law News | 16 May 2013 | 11:53 am | 4 min. read

Biomass projects that had already reached financial close before the Government finalised limited subsidy arrangements will be treated as "priority projects" under the new system, the Government has confirmed.

The Department for Energy and Climate Change (DECC) is consulting on the design and operation of the notification process it will use to decide which projects in England and Wales will receive support for dedicated biomass  under the Renewables Obligation (RO). In December, DECC announced that it would cap subsidies for dedicated biomass once 400MW of generating capacity was built / accredited under the RO.

"Our intention is to design a notification process which allocates places within the 400MW cap only to projects that have reached financial close and have either taken a decision to move to the construction phase of the project or have actually started construction," the consultation paper stated.

"Projects that reached financial close before the Government announced the 400MW capacity cap on 18 December 2012 will have invested heavily in bringing their project to that point. They will be concerned at the risk of not being covered by our grandfathering policy that their business case may have been based upon," it stated.

The notification process is due to begin in July, according to the consultation. Projects must have reached financial close on or before 18 December 2012 in order to be ranked as a priority project. A decision must also have been taken to move to the construction phase of the project, or construction must have started, for priority status to apply, according to the consultation. Priority projects will be able to apply two weeks before the general registration period begins.

Projects that do not meet priority criteria will be subject to a two-stage notification process, allowing them to reserve a place within the cap provided that they agree to achieve financial close within a specified window. Places will be confirmed if financial close is achieved and a decision is taken to move to the construction phase of the project within that window. Developers will be asked to provide a date by which they expect financial close to be achieved when applying.

"Under the proposals, new projects not allocated a place within the cap will be exposed and will face the prospect of support being removed  by DECC at a later date in the event that the cap is exceeded. Essentially, projects will not be able to bank on revenue from Renewable Obligation Certificates (ROCs) throughout the lifetime of the project," said environment and energy expert Fiona Ross of Pinsent Masons, the law firm behind Out-Law.com.

"There is therefore significant impetus for developers to apply for a place within the cap for  projects," she said. "However, the criteria on eligibility for a place within the cap,set out by DECC,   means that a project must be well beyond the stage when preliminary accreditation would ordinarily have been applied for before it can apply. Indeed, in getting to this stage, including grid connection and having an environmental permit in place, developers will have to outlay significant sums" said Ross.

Ross questioned  whether many developers will be prepared to do this, particularly with no project finance in place and "against an increasingly uncertain background" when it comes to RO accreditation. "Those who do so run the risk of the cap being exceeded prior to their application  for a place under it, in which case they may have lost the opportunity for support under the RO altogether" she said.

Ross does point out that  DECC has acknowledged the difficulties of achieving financial close without ROCs revenue having been secured, for instance by means of preliminary accreditation, which she notes "is encouraging".  

DECC has proposed a two stage process for applying for a place within the cap but Ross warned that "the eight week time limit for reaching financial close once the process has begun is tight. The process itself is also subject to strict time limits, with DECC able to reject applications within short timeframes if information requested  is not provided, after which developers will not be able to  're-apply' for a set period of time."

Ross said that "whilst the rationale for DECC's approach is clear – to prevent developers blocking out capacity within the cap – it does mean that the application process will have to be very tightly managed by developers if they are not to risk losing out."

The RO is the main financial support mechanism used by the Government to encourage the development of large-scale renewable electricity generation projects. It places an obligation on suppliers to source an increasing proportion of the electricity they supply to customers from renewable sources. Banded Renewables Obligation Certificates (ROCs) were introduced in 2009, changing the RO from offering a single level of support for all renewable technologies to one where support levels vary depending on the cost of developing that technology and its future potential.

As announced in December, dedicated biomass plants up to the 400MW cap will receive 1.5 ROCs per MW generated. Once the cap is reached, the Government plans to consult on proposals to restrict further biomass deployment by removing guaranteed incentives. However, plants that fall within the cap will be 'grandfathered' into any new scheme, to run until the RO ends in 2017.

The notification process will be voluntary, to the extent that projects may be accredited under the RO regardless of whether or not they participate. However, dedicated biomass projects using solid biomass which are accredited under the RO after the notification process has opened will not automatically be allocated a place within the 400MW cap, meaning that they risk losing out on any future grandfathering arrangements.