The UK Government’s decision to end wind farm subsidies, including closure of the Renewables Obligation to nearly all new generating capacity, has raised concerns across the nation’s renewable energy sector. New renewable generating stations will now be expected to seek support under the Contract for Difference (CFD) mechanism but this is only open to emerging technologies such as offshore wind. The more established means of renewable power generation including onshore wind, solar and biomass are currently excluded from CFD support.
This tightening of the Government’s financial support regime raises many questions about what kind of future might lie ahead for the UK’s renewables sector, especially for developers involved in these more established technologies. As the Scottish Government strives to reach its target of generating 100 per cent of its electricity consumption and 11 per cent of its heat demand through renewable sources, are successful and profitable projects still viable with no further public subsidies?
The answer is not straightforward and will revolve around the key areas affecting the sector being planning, regulation, construction, funding, and my particular area of focus, land agreements and how these are managed. Flexibility in land agreements is now of much higher importance for subsidy-free projects.
The level of rent payable to landowners has a huge impact on the financial viability of a project. Aiming to secure a lower rent is one way to optimise the project but the landowner would have to agree to that. What may be more palatable to a landowner is a rent model where the landowner and developer share the ‘pain and gain’. We are seeing innovative rent mechanisms being agreed which, for example, link the percentage of the gross income paid to the landowner to the average price per megawatt hour achieved by the developer each year or to the size of the development. In our experience, when new land agreements are being negotiated or existing land agreements are being revisited, most landowners acknowledge that rents for renewables projects have fallen since the withdrawal of subsidies. Most take the pragmatic view that they’d rather consider a new arrangement than risk losing all their rental income if it is set at such a level that it makes the project unviable.
The ending of subsidies means developers are also requiring more flexibility around the permitted use in their land agreements. These had traditionally allowed for only one type of development on a site but that is now changing. More flexibility to co-locate battery storage and other types of energy on sites is increasingly being built into existing and new land agreements, another factor which can further increase the viability of many new projects.
It is standard for renewable energy project leases to include the right for the developer to extend the lease for a further term of 25 to 30 years on mutually agreed terms. While there has been little detail about those terms and conditions to date that is also changing. We think that developers must now consider their options for the future, factoring in aspects including further advances in windfarm technology. A developer could, for example, build in an option to depart from the existing layout of a site if the prospect of a smaller number of larger turbines may be required on it in future. Agreeing principles on how rental charges during any repowering construction period may be calculated could also be included to help shape discussions in the future and give the developer more flexibility.
As the UK’s renewable energy sector faces some tough financial challenges, building flexibility into existing and new land agreements will not be the sole factor determining whether or not a project will be viable, but it is likely to prove highly significant. In the current market where question marks hang over many new projects, flexibility will be of utmost importance for both developers and landowners going forward. Both sides have a common interest to ensure that compromises can be made which enable the industry to progress within the bold and somewhat uncertain post-subsidy environment.
Claire Wallis, Senior Associate at law firm CMS