Renewables rent negotiations must take account of funding changes or more sites will be lost, says expert

The way that Government support is going to be distributed is different from how it was imagined just a few weeks ago and landlords may still think that developers have good guaranteed income once projects are live. But because of changes to the funding mechanism that were announced this month it won't be clear what that income will be until much later in the process.

This means that developers need to make sure that surveyors negotiating for them manage landlords' expectations so that they get rent and the lease terms right. If the terms cannot be supported by potential income because of the funding changes then otherwise-viable sites will go unused unless the landlord can be persuaded to agree lesser terms. This is almost impossible unless the landlord appreciates the changes in Government support which have occurred.

The Government's recent decision to change how support for renewable energy projects is made available is already resulting in planned projects being cancelled. Two projects in England were shelved this week, and more will join them. To add more projects to that list just because of a lack of information supplied to surveyors would make a bad situation even worse.

The change in funding is an example of exactly the kind of policy uncertainty that has damaged the renewable energy industry's prospects in the past. Lack of certainty has been explicitly cited as a detterent to investment in the UK by the European Union (50-page / 3MB PDF) and the operator of this week's two closed sites cited exactly this funding uncertainty as the reason.

In December the Government published revised 'strike prices' for renewable energy. These appeared to guarantee fixed sums for energy generated in particular ways. Onshore wind generation, for example, was allocated a strike price of £95 per megawatt hour, and slightly more in Scotland, under the Contracts for Difference (CfD) regime. This is designed to provide stable revenues for investors in low carbon energy projects by providing guaranteed payments to operators of approved renewable generation technology.

But earlier this month the Government changed its plans, saying that (20-page / 442KB PDF) those technologies considered to be 'established', which includes onshore wind, would have to 'compete' for CfD funding.

In effect this will mean that companies will bid for the funding and those offering the lowest prices will get it. Suddenly £95/MWh becomes a cap, not a guarantee, as Pinsent Masons energy expert Simon Hobday pointed out at the time.

The implications for investors, project developers and existing and potential landlords are significant. Developers previously thought they knew now the price they would get for future energy, but now they won't know that price until the bidding process is complete.

Projects which have not yet secured funding will find it harder than ever to find. Existing funders will be considering pulling the plug. The result will be fewer projects, less renewable energy, and a backwards step in the proposed policy aim of providing a secure financial environment in which renewable can develop.

The established technologies that this applies to are: onshore wind (greater than five megawatts); energy from waste (with combined heat and power); solar photovoltaic (greater than five megawatts); hydro electric (greater than five megawatts but smaller than 50MW); landfill gas, and sewage gas.

Anyone developing capacity using these technologies will now rush to complete the project to seek funding under the existing Renewables Obligations system. But any money they take out of that system will just cut the amount available for the CfD system in the future.

The problem will be particularly acute amongst developers of onshore wind and solar photovoltaic projects. Because market intelligence on what projects are being developed is poor it is difficult to gauge which other sites you might be competing against when bidding for CfDs. This will be likely to drive those developers to finish quickly and avoid the CfD system altogether.

The change will cause problems for landlords too. They will be expecting returns based on the guaranteed strike prices and any agreements made on that basis will have to be renegotiated. This will introduce yet more uncertainty for already-struggling projects.

Another change in the way support is calculated will reduce the income available to developers. Under the previous Renewables Obligations regime the metering of energy, and therefore the calculation of income, was done at the point of generation. 

Under the CfD regime, though, the measured output will take account of losses in transmission, when energy dissipates in the transmission system when moved from the place where it is generated to the place where it is used.

This means that the cost of the 'unusable' energy is now borne by the generator. This is a change that landowners will not be expecting as it will again lower income from generation.  This again undermines the viability of a project.

Again, this could affect deals with landowners if rents are linked to generation and force another downward renegotiation that will not be welcomed, and may not be accepted, by landlords.

These changes have been introduced relatively late in the day and make the investment environment much tougher for renewable developers. They undermine the supposed aim of the whole scheme, to provide certainty for investors to encourage the renewable energy sector.

Developers can't change the funding system but they can make sure that those negotiating on their behalf know the implications of the changes so that even more sites are not lost.

Fiona Ross is an environmental expert at Pinsent Masons, the law firm behind Out-Law.com