No-deal Brexit: Low-carbon electricity generation
Ian Holyoak considers HM Government's technical notice setting out the potential impact on low-carbon electricity generation in the event that the UK leaves the EU without an agreement. In this article we outline the content of the notice and the impact for renewable energy market participants.
What does the notice cover?
The notice itself is very specific – the areas covered are those which interact or have a direct connection with the EU's Renewable Energy Directive 2009/28/EC, which, following Brexit, will have no direct application in the UK.
Given the narrow focus, unlike notices issued in other sectors, this technical notice gives little insight into the government's view on the impact of Brexit on business in the renewable energy sector, and the energy market generally, or indeed the wider questions relating to energy pricing and security of supply.
These broader questions are likely to remain unanswered until much further down the line in the Brexit negotiations and deal (or no-deal) implementation.
Impact on electricity suppliers, traders and small-scale renewable energy installers
The note touches on certain points of relevance to electricity suppliers, traders and small-scale renewable energy installers.
Guarantees of Origin and REGOs
One of the key areas covered by the notice is the potential impact of a no-deal Brexit on accreditation on Guarantees of Origin (GoOs) under the Renewables Obligation, which includes Renewable Energy Guarantees of Origin (REGOs).
REGOs are primarily used by electricity suppliers to comply with their fuel mix disclosure obligations, which form part of the standard licence conditions for suppliers. These were introduced in 2009 to ensure compliance with the EU's directive on renewable energy generation and to stimulate growth in renewable energy generation.
In short, the guidance confirms that in the event of a no-deal Brexit:
- GoOs issued in the EU and Northern Ireland will continue to be recognised in Great Britain. Currently, this occurs via an OFGEM-regulated process whereby the GoO is audited, cancelled in the issuing country, and then re-issued in Great Britain.
- GoOs issued in Great Britain and Northern Ireland will no longer be recognised in the EU. As pointed out by the guidance document, this will mean electricity suppliers or traders may be compromised if their contract terms require the transfer of GoOs recognised by the EU. The above is most likely to affect the fifteen or so energy suppliers and traders who currently utilise OFGEM's overseas-issued GoOs certification process.
Contractual arrangements should be revisited in the event parties are under any binding obligations to utilise either of the above mechanisms. It may be the case that relief can be sought through supervening events or change in law provisions in contracts.
Renewable Electricity Support Schemes
The notice also considers the impact of a no-deal Brexit on UK Renewable Energy Support Schemes. The potential impact described in the notice is again limited in scope and of a technical nature.
Currently, to receive support under the Renewables Obligation scheme generators must demonstrate that bioliquids used in those generation activities comply with certain sustainability requirements. Separately, GoOs interact with the Feed-in Tariff (FIT) scheme and the Contracts for Difference (CfD) scheme, as the cost of these schemes is levied on electricity suppliers in proportion to their market share. A supplier can reduce its exposure to this levy through the use of overseas GoOs that confirm a relevant proportion of electricity was generated by renewable energy sources.
On these two separate issues, the guidance confirms that:
- The current sustainability requirements under the Renewables Obligation will continue to apply for bioliquids, solid and gaseous biomass.
- GoOs will still be accepted for the purpose of calculating the applicable levy under the FIT and CfD schemes.
We would not expect the above to be of much concern to entities operating in this market. It should be noted however, that this notice does not bind the government in relation to future legislative change. The key point to note is that while the above confirms that the status quo will be maintained in the immediate term, given the decoupling of UK and EU energy policy, there could well be regulatory divergence in the not-too-distant future.
Installers of microgeneration technologies
Microgeneration technologies are small-scale generation technologies used to produce power from renewable energy sources, primarily in domestic and light industrial contexts. Biomass boilers, heat pumps and solar PV are all examples of microgeneration technologies.
Currently, the UK is required to recognise the certifications of installers of these microgeneration technologies issued by states in the European Economic Area (EEA). Similarly, installers accredited in the UK have been provided with recognition of accreditation in the EEA. In the event of a no-deal Brexit, this recognition is at risk.
The guidance confirms that:
- The UK will continue to recognise installer certificates issued by the EEA.
- Installers certified in the UK may need certification in the EEA to continue to install microgeneration technologies.
Installers should ensure all certifications are up-to-date, noting that any EEA-based operations of UK companies will require a review and refresh in the event of a no-deal Brexit.
It should be noted that HM Government's notice covers only a narrow area, and there are a number of wider considerations not addressed in it that may affect those operating or investing in the renewables market when looking at Brexit-related scenarios.
Foreign exchange risk is high on the list of potential concerns. At the very least, we would expect a no-deal Brexit to lead to more volatility in the GBP/EUR currency pair, if not outright devaluation of the GBP.
European supply chain and technology costs are likely to be of particular concern to UK-based developers and investors in projects reliant on components commonly manufactured in Europe: e.g. Combined Heat & Power (CHP), anaerobic digestion, gas peaking, wind. Developers and financiers in such projects should consider their contractual and commercial options if and when a no-deal Brexit becomes more likely.
A no-deal Brexit also puts Britain's access to the EU's Internal Energy Market (IEM) at risk. Market commentators expect that Britain losing access to the IEM would result in higher and more variable wholesale energy costs. Although this may in fact stimulate investment in generation projects, higher energy costs are unlikely to dampen calls for regulatory and legislative change in the market.
While we do not expect such changes to threaten revenue streams for those projects already locked in to receiving legislative support (e.g. CfD, Renewable Heat Incentive (RHI)), they could very well alter the revenue landscape fundamentally for projects in the pipeline. Ultimately, losing access to the IEM is likely to add to the difficulty of making robust investment decisions in the GB energy market.
If you would like more information on this topic, please contact Ian Holyoak.