NFFO sterilisation - reversing the process (the sequel)
The Government's 'technical' review of the Renewables Obligation (RO) comes at a time of recent market setbacks, particularly surrounding TXU's administration. It is faced with a challenge: balancing a real need to amend those areas of the RO that have proven deficient, with the need to avoid excessive interference that could further weaken market confidence.
The department of trade and industry (DTI) probably viewed reducing restrictions on renewables developments at non fossil fuel obligation (NFFO) sites as an easy win. Enabling ROC qualifying projects to be developed at these sites would free up significant amounts of sterilised capacity and help towards achievement of the renewables targets. Unfortunately, the proposed amendments to the RO are not as clear as they should be and have left many developers and landowners unsure as to where they stand. The amendments will (worryingly) also impact on all involved in ROC trading - once again demonstrating that changes in one area of the RO can have significant repercussions in another.
Position under the existing RO
Articles 8(2)(e) and 8(11) of the RO currently restrict development, by anyone, of a qualifying RO plant at: (1) a site that was previously covered by a NFFO contract that has been terminated for breach; or (2) a site covered by a NFFO contract, where the NFFO plant is not generating (either because it has not yet been built or has suffered an outage). Approximately 1,990 MW of renewable generation contracted for under NFFO contracts remains unbuilt. As we explored in our November briefing note, there are a number of reasons why this is the case. No-one doubts, however, that the restrictions set out in article 8 of the RO are a contributing factor - particularly their application to anyone, even an innocent landowner who is in no way involved with the NFFO holder.
The proposed amendments to the RO rightly seek to remove some of the restrictions without compromising the NFFO regime. In the August consultation, the DTI introduced the concept of 'connected' persons. This definition (based on the tax definition and turning on common control) narrowed the application of the restrictions considerably. Rather than applying to anyone and everyone, they were to apply only to the NFFO holder and persons 'connected' to the NFFO holder. Although not welcomed by all, this did appear to increase the future chances of further development and (being based on a well-established principle) provided certainty to developers and landowners.
During the consultation, the Government clearly had second thoughts. The proposed amendment now applies the restriction not only to the NFFO holder and any 'connected' person, but also to 'linked' persons. The DTI's concern appears to have been that NFFO holders could still benefit (despite the fact they had not built a NFFO generating station or had breached their NFFO contract) by selling their development rights to a third party for financial gain.
This was quite possibly a valid concern. However, the proposed remedy leaves a lot to be desired.
Draft amendment order - linked persons
Some of the proposed amendments are to be welcomed. For example, the proposed article 8(11) is now based on whether or not it has been commissioned rather than whether or not the NFFO plant is generating in any month. The unintended consequence of short-term outages at a NFFO plant is therefore avoided. However, the introduction of 'linked' persons, along with the requirement for an associated declaration, has wideranging consequences.
In contrast to the 'connected' definition, that of 'linked person' is much harder to follow. One person (the 'second person') will be 'linked' to the NFFO holder (the 'first person') if:
'the second person has given or has arranged to give or has ensured or has arranged to ensure that the first person is given, a financial or other inducement relating to any right or interest in, or in respect of, the construction or operation of a generating station at the [NFFO site]. The references ... to the first person and the second person shall include any person who is a connected person in relation to either of them.'
This definition will leave many landowners and developers scratching their collective heads.
Landowners with no connection to or agreement with the NFFO holder should (from 1 April) be able to develop qualifying RO plant on their land (or allow third parties in the same position to do so). Steps must be taken though, to ensure they do not inadvertently give the NFFO holder any money or other reward - even, possibly, in exchange for consequential information such as wind-speed data.
The position of NFFO holders and of landowners with agreements with NFFO holders is far less clear. For example, a landowner will be linked to a NFFO holder if the landowner pays the NFFO holder to secure release of option rights previously granted. But what of a third party who then pays the landowner for development rights? Presumably the DTI also intended to catch this third party. Whatever the intentions, the proposals may not prevent NFFO holders from making a return on their development rights provided careful thought is given to the structure of the arrangements.
The wider impact - a new declaration
The proposed amendments require that each generator makes a declaration that his qualifying RO plant is not owned or operated by a party to a related NFFO contract or by a person connected or linked to such person. Where a false declaration is made:
- the person making the declaration will (to the extent he knows the declaration to be false or is reckless in making the declaration) be criminally liable and may be fined; and
- Ofgem shall revoke all the Renewable Energy Certificates (ROCs) issued in respect of generation by the generating station in those months to which the declaration relates.
While generators will no doubt be concerned about the possibility of committing a criminal offence, the second consequence has much wider implications. The risk of ROC revocation has always been a cause for concern. In practice there have, to date, been very few instances of revocation and certainly not on a large scale. Minds have been set at ease. The possibility of all the ROCs ever issued (but not yet presented) in respect of a generating station being revoked is a worrying one.
Revocation looks set to become a real concern again. Those buying ROCs from the owner of a generating station are unlikely to be able to verify how the current owner came to be the owner and what may or may not have gone on behind the scenes. Any future purchasers of such ROCs will of course have still less chance to do so.
The revocation risk can be managed by obtaining welldrafted contractual assurances from counterparties. But the worth of those assurances (and therefore the willingness of participants to buy ROCs on the basis of them) will depend on the financial strength of the counterparty. Market participants may be less willing to buy ROCs from small players and independent developers may find they are paid less for their ROCs, as the risk of revocation is factored into the price.
Any initiative to free up more potential sites for renewable generation must be welcomed. Parties to NFFO contracts, the associated landowners and third party developers should consider whether previously sterilised sites could now (with the correct structure) be developed within the RO regime.
As for the associated declaration and the new revocation risk, those involved in buying and selling ROCs should ensure their contracts contain appropriate confirmations and indemnities concerning revocation and look, once again, at the worth of their counterparties.
This alert may contain information of general interest about current legal issues, but does not give legal advice.