UK: Analysis: Early Closure Of The ROCs Regime Ruled Lawful

Summary

The Government's decision to close the Renewables Obligations Certificates (ROC) subsidy scheme for larger solar PV installations (above 5MW) two years early, and the grace periods introduced to mitigate the effects of the closure, were upheld as lawful by the High Court at the end of 2014 after a challenge by solar operators. This is despite a successful challenge over the change to the Feed-in-Tariff regime for smaller installations in 2012. In this blog, we will analyse the likely effect of this ruling.

Background

In October 2014, the Department for Energy and Climate Change (DECC) decided that, owing to unforeseen growth in the renewables sector, the ROC scheme (under which larger renewable installations received financial support) had become too generous and so had to be closed in April 2015, rather than April 2017 as originally planned.

The Secretary of State made a Renewables Obligation Closure Order providing that no ROCs be issued for new installations or additions to capacity after 31 March 2015. The same Order introduced grace periods, under which installations where there was a previous 'significant financial commitment' or a 'grid delay' could still receive ROC accreditation after 31 March 2015.

This meant that, from April 2015, subsidies for all new installations, or additions in capacity, (over 5MW) must be tendered for under the new Contracts for Difference (CfD) regime. The 2014/15 CfD process is currently in progress, with the first contracts likely to be awarded by mid-April 2015.

Solar Century and three other solar operators decided to challenge DECC and made an application for judicial review in an attempt to reverse the changes and keep the ROC scheme available until 2017 as originally planned.

The Case

Solar Century and its fellow applicants argued that the Secretary of State did not have the power to make the order; government assurances meant that he could not make the order; and that the order was a retrospective change in the law as it removed the opportunity to achieve a legal right when operators had already incurred cost to do so.

The Secretary of State argued that DECC's limits for levy-funded spending were made clear in March 2011 by the 'Control Framework for DECC Levy-funded Spending' document issued by HM Treasury. Therefore, changes to levy schemes were a known risk accepted by investors and it could not be argued that the Secretary of State had no power to close the ROCs scheme or that government statements prevented any early closure.

The Secretary of State also argued that the order was not 'retrospective' because no rights to ROCs were removed from those who had already been granted them and, while the 'significant expenditure' grace period did not apply to everyone who had incurred more than minimal expenditure, the cut-off point was a matter of discretion and was neither unfair nor irrational.

The Court found in favour of the Secretary of State on all grounds and dismissed the application.

Comment

This is the second occasion on which the government has been challenged in the courts in relation to changes to renewable energy levy-funded spending. In 2012, Solar Century made a successful application for judicial review (along with Friends of the Earth and others) in response to changes to the Feed-in-Tariff (FIT) subsidy regime for smaller solar PV installations.

The key distinction between the two cases (as highlighted by the court in the 2014 case) is that the changes introduced to the FIT regime would have affected operators who had already been accredited, and so affected existing legal rights.

In contrast, the changes to the ROC regime did not affect operators who had already achieved the right to receive ROCs. Therefore, no accrued legal rights were being removed by the order. The Secretary of State had simply moved the goalposts: unfair possibly, but not unlawful. Had operators accrued rights which the order then removed or altered, then Solar Century's application would have been likely to have been successful.

Future Impact

It appears that DECC has learned from its previous experience with FITs and now has a judicially endorsed method which it can follow to make similar unexpected changes to financial support regimes in the future. Operators can take some comfort from the fact that, if they obtain legal rights to support, it appears that those rights cannot be retrospectively removed or altered by DECC. However, operators and their investors will know that government support is fluid they must take into account the potential risk of goalposts being moved (or even removed) prior to taking any investment decision. This is especially the case if it appears that uptake is in excess of projected DECC figures alongside future government spending cuts that will place further pressure on DECC to control its levels of support in the coming years.

It is not clear whether the court would have upheld the early closure of the ROC scheme in the absence of the grace period. On balance, we suspect that the Court's decision would not have been different, not least because the Court commented that there was only a 'modest element' of retrospectivity in this case. Nevertheless, if similar action were taken in the future without the inclusion of grace periods to protect those who had already committed to the regime being closed, the absence of grace periods could provide a basis upon which to mount a challenge.

CfDs are allocated on a project-by-project basis based upon set tender rounds. This process is very different from the guarantees under the ROC and FIT schemes that any project accredited within the relevant deadline will be given a specific level of support. The reason for DECC's actions, in 2012 and again in 2014, have been that reductions in the cost of solar PV installations have meant that projects have become more profitable than expected. This has led to greater volumes of installations and, therefore, a higher take-up of the support schemes than DECC anticipated. It is in the light of these trends that the CfD scheme was devised. The CfD process gives DECC a much greater level of control over the gross level of support offered. Therefore, the risk of similar sudden or retrospective changes to the CfD process should be significantly lower.

Minister of State, Matthew Hancock, also made the point in a Select Committee hearing in January that the fact that CfDs are contracts with a corporate body under common law, rather than statutory creatures, means that they should provide greater certainty for operators and investors than the previous statutory regimes. See here for our posting on that Select Committee Hearing.

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