United Kingdom: Renewable Energy

The UK has a world-leading renewable energy industry. In June 2019, the UK became the first major economy to pass net zero emissions laws with the target to bring all greenhouse gas emissions to net zero by 2050. This was followed by the publication of the Energy White Paper in December 2020 which aimed to initiate the transition from fossil fuels to clean energy in power, buildings and industry; whilst creating jobs, growing the economy and ensuring energy bills are affordable. Renewables therefore play an active role within the UK market, with businesses active in the UK low carbon and renewable energy economy having generated an estimated £42.6 billion turnover in 2019.

As of Q3 2021, low carbon sources generated 51.5% of the UK’s total electricity generation with renewables comprising 35.9% of generation at 24.3 TWh. Whilst renewables have yet to surpass fossil fuels usage, Q3 2021 saw an increase in renewable capacity highlighting the potential for further growth.

Great Britain’s electricity market is regulated by the Gas and Electricity Markets Authority (GEMA). GEMA consists of a panel appointed by the Secretary of State; however, GEMA is entirely independent from the government with no stakeholder involvement in GEMA’s regulatory or operational capacities.

The day-to-day administration of GEMA is carried out by the Office of Gas and Electricity Markets (Ofgem). Ofgem follows the strategy and decisions set by GEMA and implements these policies in its regulation of companies which run gas and electricity networks. Notably, Ofgem is responsible for granting, modifying and enforcing licences; approving significant changes to the industry standard documents; price control regulation for the network businesses and tariff capping for energy supply companies.

In Northern Ireland, the renewables market is regulated by the Northern Ireland Authority for Utility Regulation (NIAUR). The NIAUR is a non-ministerial government department that protects the interests of the renewables consumers alongside gas, water and sewerage consumers. Northern Ireland operates a wholesale electricity market independent to Great Britain, known as the single electricity market (SEM). The SEM in Northern Ireland was reformed in 2018 to comply with the European Third Energy Package to develop trading arrangements with the government of the Republic of Ireland thereby forming the Integrated Single Electricity Market (I-SEM). The I-SEM model enables wholesale electricity to be traded on an all-island basis for regulatory purposes.

Companies engaged in the supply, generation, transmission or distribution of electricity must obtain a licence under the Electricity Act 1989, unless the relevant company is exempt either as an individual exemption or a class exemption under The Electricity (Class Exemptions from the Requirement for a Licence) Order 2001. The applicant must initially submit a written application alongside a fee to Ofgem. Following this, a notice of application must be submitted. A licence will then be granted or refused, or a request for further information may be made by Ofgem. As of the time of writing, there are 527 generation licence holders which are all based in the UK and operate a variety of generation types.

Corresponding applications must be made to the relevant organisations in respect of the industry codes that must be complied with or become a party to the licence. These industry codes include: Elexon for the Balancing and Settlement Code (BSC); NGESO for the Connection Use of System Code (CUSC); Electralink for the Distribution Use of System Agreement (DCUSA); Gemserve for the Master Registration Agreement; NGESO for the Grid Code; the Energy Networks Association for the Distribution Code; NGESO for the System Operator – Transmission Operator Code (STC); and SECAS for the Smart Energy Code (SEC).

The supply mix of electricity in the GB market in Q3 2021 was published and consists of the following (TWh/quarter):

• Coal – 1.38
• Oil – 0.29
• Gas – 27.97
• Nuclear – 9.63
• Hydro – 0.65
• Wind and Solar – 14.37
• Bioenergy – 7.88
• Other fuels – 1.92
• Net imports (interconnectors) – 7.65

Wind energy is leading the renewable energy market in the UK. Electricity generation from wind power in the UK has increased by 715% from 2009 to 2020. This is expected to grow with increased capacity and size in order to meet the UK’s 2050 net zero targets.

The government is involved in the renewables industry through Ofgem who incentivise the generation of electricity through low carbon sources. The Energy Act 2013 introduced the Low Carbon Contracts Company (LCCC) as a Government-owned company which could enter into contractual agreements with generators and enable incentive schemes. The LCCC has so far participated in three Contracts for Difference (CfD) allocation rounds. Run as reverse auctions, previous CfD allocation rounds have used competition to successfully reduce strike prices and thereby the cost of renewable energy, dropping the price per unit of offshore wind energy by approximately 65% between the first round in 2015 and the third round in 2019. The UK government is currently undergoing the fourth CfD allocation round with the aim to secure 12GW of renewable electricity capacity.

The UK Government published the Energy White Paper in December 2020. This White Paper outlined the Ten Point Plan for a Green Industrial Revolution which are as follows:

• Advancing offshore wind
• Driving the Growth of Low Carbon Hydrogen
• Delivering New and Advanced Nuclear Power
• Accelerating the Shift to Zero Emission Vehicles
• Green Public Transport, Cycling and Walking
• Jet Zero and Green Ships
• Greener Buildings
• Investing in Carbon Capture, Usage and Storage
• Protecting Our Natural Environment
• Green Finance and Innovation

In terms of legislation, the UK has incorporated Directive 2009/28/EC through The Promotion of the Use of Energy from Renewable Sources Regulations 2011 (SI 2011/243). These laws remain in force following the UK’s withdrawal from the EU and administered schemes to encourage participation in the renewables industry. This includes Feed-in Tariffs (FiT), the Renewables Obligation, Contracts for Difference (CfD), the Renewable Energy Guarantee of Origin and the Alternative Fuels Infrastructure Directive which are discussed further below.

There are several schemes in the United Kingdom that incentivise the adoption, production and technological development of renewable energy. The key incentive schemes are outlined below.

The Feed-in Tariff (FiT) scheme was introduced in April 2010 by the Energy Act 2008 (and orders made under it) to promote the uptake of renewable and low-carbon electricity generation. It is limited to small scale renewable installations up to 5MW and requires participating licensed electricity suppliers to make payments on electricity generated and exported by accredited installations. The FiT scheme closed to new applicants on 1 April 2019, with some exceptions. In June 2019, the government announced its decision to introduce a new Smart Export Guarantee in Great Britain from 1 January 2020 to support small scale renewable generation – this replaced the FiT scheme – both schemes involve the making of payments from suppliers to generators.

The Renewables Obligation (RO) scheme imposes an obligation on electricity suppliers to source a certain amount of electricity from renewable sources. The RO rewards the output of renewable energy over a period of time and similarly imposes financial penalties on the failure to do this. The RO was (before the advent of the Contracts for Difference scheme under the Energy Act 2013 – see below) the main financial mechanism used by the government to incentivise the deployment of large-scale renewable electricity projects in the UK. The RO scheme, which came into effect in 2002 in Great Britain (GB) and 2005 in Northern Ireland (NI), closed to all new generating capacity on 31 March 2017, but with exceptions which extended the deadline for certain projects to January 2019 in GB, and March 2019 in NI. Newly accredited capacity receives support for 20 years or until the final closure of the RO scheme on 31 March 2037, whichever is the earlier.

The Contracts for Difference (CfD) scheme was introduced by Part 2 (Electricity Market Reform) of the Energy Act 2013, which is the central plank of the legislative framework created for delivering secure, affordable and low carbon energy. The scheme was designed to replace the Renewables Obligation and incentivise investment in large-scale low carbon electricity generation. CfDs operate as private law contracts between low carbon electricity generators and the Low Carbon Contracts Company (LCCC), which manages CfD contracts. The CfD provides price security and thereby bankability for a renewable generator by setting a “strike price” for the electricity generated. The CfD then pays the difference between the wholesale market price (the “reference price”) and the strike price. For example, should the market reference price fall below the strike price, the LCCC would pay a ‘top-up’ to the generator for the drop in value. However, should the market reference price exceed the strike price, the generator would pay back the difference to the LCCC. In this way, the CfD scheme abates the risk of market volatility that would otherwise discourage generators from entering into the renewables industry and lenders from financing these projects.

The increasing prevalence of renewables as a means to supply the UK with energy alongside the drive to net-zero and sustainable ways of living has undoubtedly effected change in the policies of large corporates. Private companies in the natural resources sector, particularly oil, gas and other carbon intensive actors, are increasingly attempting to ‘green’ themselves in light of the energy-transition, for example the large investments into renewable energy recently made by the ‘Oil Majors’.

Aside those in the energy and natural resources sphere, private companies are also increasingly aiming to reflect their green agendas through ESG policies and initiatives. The COP26 climate summit last year saw more than 1,000 companies pledge through the Science Based Targets initiative to set science-based targets that align with Paris Agreement levels.

Companies that set science-based targets often look to their emissions as a means to reach net-zero. These business-related emissions can be separated into three areas; direct emissions from controlled business assets and activity, indirect emissions associated with, for example, the production of energy used during business operation and all other indirect emissions such as those emitted in the supply chain. The latter is often overlooked by companies in their carbon accounting.

This aside, there has been a rush of companies that have huge energy demands (particularly industrials, big tech, real estate and, increasingly, retail) looking to source renewable energy to meet their net-zero commitments and science-based targets. Such demands are often met with corporate purchase power agreements (“PPAs”); contracts under which companies purchase energy directly from renewable energy generators. DLA Piper’s Natasha Luther-Jones has developed a market-leading corporate PPA practice, having advised on PPAs involving household names such as Google, McDonalds, Unilever, Vodafone and Lloyds Bank.

There is large variety in the ways in which renewable energy projects are realised, both internationally and on a domestic level. Variables such as the type of project, method of energy production, financing of the project, geographical factors, political landscape and development laws can all have an impact.

Also of note is the variety in types of sponsor (the person, group or company that owns the project and provides resource) of any given project. Should the sponsor be a financial investor they would need to procure more contracts that cover construction and management of the project, whereas developer sponsors will be more likely to manage construction in-house and instead rely more heavily on contracts for financing the project.

The specific types of contracts seen include, but are not limited to, the following:

Permits which provide the necessary authorisations, licenses and consents from a governing body to allow the project to go ahead.

Grid connection for the renewable energy project to be connected to the energy supply network. Connection agreements are often preceded by a connection offer made by the developers of the project.

Leases for the site of the project.

Construction contracts which provide for the actual development of the project. These will vary depending on the project itself. Common examples are engineering, procurement and construction (EPC) contracts that provide wrap-around coverage of numerous aspects of the project, or there may be a multi-contract approach (common for offshore wind) with separate supply agreements or balance of plant agreements that deal with different construction elements.

Operation and maintenance contracts, often referred to as O&M Contracts, that cover construction management, owners’ engineer agreements, technical manager agreements, balancing agreements and other obligations from the operator.

Power Purchase Agreements under which companies can contract directly with the project developers for the provision of energy.

Joint Venture Agreements should multiple parties want to contract to develop a project, for example, a developer and a financial investor investing together to deliver a project.

Other areas of a project’s development that require contractual relations include external financing, particularly in the loan and bond markets. We have also seen some banks funding projects earlier (as early as the development stage), as well as offering right-to-buy construction financings, which allow financiers to purchase the completed project. Project refinancing (including use of bond products) is also on the rise as more projects are coming online.

Up until recently the UK had the world’s largest offshore wind capacity (just under 10.4 gigawatts as at 2020; for reference, the worldwide capacity reached 34.4 gigawatts during the same period). The UK Government is looking to capitalise on such clean energy through opportunities for global trade.

In June 2021 the UK’s export credit agency, UK Export Finance, signed a memorandum of understanding with Offshore Renewable Energy Catapult Ltd., an offshore wind research and innovation centre, to help UK suppliers export and trade energy on a global scale. Prior to this, the UK Government’s Offshore Wind Sector Deal looked to increase UK offshore wind exports to £2.6 billion per year by 2030, five times the amount seen in 2020, as well as investing up to £250 million in building a stronger UK supply chain for renewable energy export.

The UK is, however, still a net-importer of energy. The UK Government is focused on local content through the construction and operation phases of renewable energy projects, particularly via ‘Supply Chain Plan questionnaires’. These questionnaires will determine whether developers can bid into the CfD scheme; the UK Government’s renewable energy investment incentivising programme. The CfD scheme ensures that developers are paid a flat rate for electricity produced, and prevents high support costs for consumers when the cost of renewable energy is high. Should developers not ‘pass’ the Supply Chain Plan questionnaire via ensuring a certain level of local content in their supply chain, they will not qualify for the CfD scheme.

The decommissioning of renewable energy projects in the UK across the sectors identified above is not subject to any general and overarching regulations which prescribe specific rules in relation to each type of renewable energy source. Instead, each project is subject to a process of assessment and evaluation when a planning permission for its development is sought. Consequently, the regulation of the decommissioning of a project falls in the remit of local authorities who in evaluating a proposed project will determine the decommissioning requirements which will attach as planning conditions to a permission. It is common, for example, to see a performance bond or other credit support being agreed with local authorities covering the cost of the decommissioning of a project.

While there are no statutory guidelines regarding the decommissioning of renewables projects, there are statutory instruments which will nevertheless influence the decommissioning process since they govern the disposal and treatment of individual components. For example, in disposing the metal used in a project the EU Waste Framework Directive (as retained in UK law) will have to be followed.

One exception to the above is the decommissioning of offshore windfarms which is governed by the Energy Act 2004. This enables the Secretary of State to require the submission of a decommissioning programme for approval, oversee the adherence to such programmes, enforce their conditions as well as make regulations regarding decommissioning.

The UK has some of the best conditions in Europe for the production of wind power due to its high average wind speeds. Accordingly, offshore and onshore wind farms are the largest source of renewable energy in the UK.

The world’s largest offshore wind farm, Orsted’s Hornsea One, sits 120km off the East cost of in England and spans am area of approximately 407 square kilometres. The windfarm has a total capacity of 1.2GW which is enough power to supply one million homes.

Harnessing energy from biomass is Drax Power Station, a project located in what was the UK’s largest coal-fire power station. Four of the six boilers have been converted to transfer biomass into a renewable source of energy, and the remaining two coal units have been decommissioned and ended operations in March 2021. Drax Power Station currently has a capacity of 2.6GW and the plant is in the process of piloting a carbon capture and storage scheme in its pursuit to becoming a negative-emissions power plant.

In regards to solar, Elgin Energy, a leading international independent solar and storage developer, recently sold a 519MW portfolio of solar PV projects and 70MW of co-located energy storage capacity to ScottishPower Renewables (UK) Limited, a wholly-owned subsidiary of global utility Iberdrola Group, one of the world’s largest energy companies.

The portfolio sale marks the UK’s largest solar PV transaction to date, consisting of 12 projects at the pre-construction stage located across England, Wales and Scotland, with a combined capacity of 519MW. The portfolio also includes a co-located 70MW battery solution that is at an advanced stage of development. It is anticipated that the projects will be operational between 2023-2025. The portfolio will be the largest to be delivered in the UK’s post-subsidy market, demonstrating the key role that solar PV combined with storage will play in the UK’s future generation mix, providing flexible and competitive renewable energy.

The UK renewables sectors is currently home to major global players as well as an emerging cleantech industry fuelled by smaller start-up companies who are looking to slow climate change with innovative renewable energy technology.

The companies holding the largest market share in the Renewable Electricity Generation in the UK industry include Orsted Power (UK) Ltd, Scottish Power UK plc, SSE plc and RWE AG.

Increasingly, Iberdrola has identified the UK market as a key target for its renewable generation capacity growth. In October 2021, they announced that it would invest £10 billion in the UK by 2025, with the aim of doubling its renewable generation capacity and be at the forefront of decarbonisation in the country.

The Whitelee Green Hydrogen Project is a first-and-largest-of-its-kind hydrogen storage project alongside Whitelee Windfarm, near Glasgow, which in part will develop the UK’s largest electrolyser to convert water into hydrogen gas. The project has received £9.4 million in funding from the UK Government and when finished could store and provide enough zero-carbon fuel for 225 buses travelling to Glasgow from Edinburgh and back each day.

The Blue Eden Project (which features renewable energy projects, a data centre and eco-homes) is a privately-funded project being built off the coast of Swansea. The scheme is part of Swansea Council’s ambition to become a net zero city by 2050. This £1.7 billion project is part of a £4.3 billion total investment that is to be injected into the region in order to re-vamp their energy strategy and move away from fossil fuels entirely.

The future of each renewable energy source faces its own issues in the UK. Solar energy faces a slow-down in growth rate due to significant cut in government subsidies. In the UK, solar power is intermittent in nature and so grid modernisation is key to helping solar energy grow in the UK.

Drawing from geothermal energy can run into problems, mainly economically and regulatory, such as gaining planning permission as well as acquiring licenses/ownership over geothermal resources – which under UK law is currently not clear.

Issues around biomass energy production include environmental issues, such as the combustion of certain biofuels, which may affect the UK’s commitments to Air Quality, as well as the expectation of short-term growth as more biowaste is used to produce fuel, whilst also potential long-term supply reductions due to collective conscience efforts to reduce waste.

Prior to the COVID-19 pandemic, renewable energy consumption was expected to rise by around 3% in 2020. However, the pandemic led to a decrease in the production of renewable energies such as solar PV and wind energy, with added capacity for renewable technologies sharply declining. Capacity levels were less than a third in Q3 2021 of what they had previously been in Q3 2020, which was during a peak period in the COVID-19 crisis, showing the detrimental impact of covid on the renewables industry.

Social distancing guidelines and lockdown measures inevitably caused supply chain disruption and delays to the construction phase, meaning that commissioning renewable energy projects such as biofuel facilities proved increasingly challenging. There was also less demand for renewable energy, as restrictions on travel and border closures in an attempt to limit the spread of the virus lead to reduced demand in the transport industry, therefore causing the consumption of biofuel and other renewable energy sources to decline.

With these disruptions and reduced demand for renewable energy there has been less need to procure new renewable energy projects, however, demand is now starting to rise again following COP26 and the push to meet UK climate and net carbon zero targets.

Foreign investment and changes in regulation will continue to act as a positive force for good in respect of the overall investment of the renewables industry. If managed correctly, they will speed up economic recovery after the Covid-19 pandemic and help create thousands of new jobs across the country.

In October 2021, the UK Government announced it has secured £9.7bn in new foreign investments to be used in 18 renewable focused deals across the UK.

A snapshot of the deals include £6bn to be invested by Spanish firm Iberdola through Scottish Power in the East Anglia Hub offshore windfarms, creating 7,000 jobs, and £1bn to be invested by KRR owned Viridor in cutting edge decarbonisation technology across five of its UK sites, creating 1,180 jobs. The other new deals include a host of projects which all utilise differing renewable technology across the whole spectrum of the industry.

As part of the impetus to continue the drive for increased foreign investment in renewables, the UK Government has also launched it’s ‘Investment Atlas’; an online tool designed to support potential foreign investors identify high-priority investments, each with a strong focus on sustainability within the UK.

One of the UK’s main targets under the Paris Agreement was their commitment to reducing economy-wide greenhouse gas emissions by at least 68% by 2030 compared to 1990 levels, and 100% by 2050 (net zero).

The main focus to meet these ambitious targets has been on energy and electricity, which account for a large proportion of UK emissions, with the development of low carbon technologies accelerating the UK towards these goals. The Climate Change Committee has recommended the UK takes steps to become more energy efficient by switching low-carbon fuels for heating and transport and moving towards electricity generated from renewables to meet net carbon zero targets. Since the Paris Agreement Britain has also left the EU, and have entered into their own UK-only Emission Trading Scheme to limit emissions from energy-intensive sectors such as steel, chemicals, ceramics and power generation. This involves companies receiving a permit to emit greenhouse gases and they can then trade them at the market rate, which therefore assigns a price to carbon emissions and encourages companies to lower emissions in order to save money. Schemes like this are providing cost-effective ways for the UK to adhere to their commitments under the Paris Agreement and encouraging them to meet net carbon zero and energy efficiency targets.

The COP26 green energy transition campaign is focused on accelerating the decarbonisation of the power sector by phasing out coal and supporting the rapid scaling up of renewable energy by ensuring renewables are the most attractive option for new power generation in all countries.

The UK has committed £200 million in investment to the Accelerating Coal Transmission programme, which will be used to fund numerous schemes across several countries including India, South Africa and the Philippines to drive the global transition to greener energy. A reduction of 80% in coal energy is required for the UK to meet their ambitions to be net carbon zero by 2050, with coal accounting for a high proportion of the rising CO² emissions.

Transitioning into more renewable energy sources such as solar and wind power or battery storage technologies will not only be more cost-effective however will also provide critical climate benefits, as the decarbonisation from using mire natural energy sources will reduce emissions.

In order to meet long term net carbon zero targets, the UK is looking to cut greenhouse gas emissions urgently in the aftermath of COP26 to try and limit global heating to 1.5ºC in 2022.

With regards to roads and transport systems, some of the largest global car manufacturers are working together to ensure that all new cars sold will produce zero emissions by 2040, which aligns closely with the UK’s own ambitious petrol and diesel car phase out dates as more consumers are switching to electric cars which produce lower emissions and market leaders such as Tevva scaling up their production of electric and hydrogen trucks at their London-based production facility.

Additionally following COP26, the UK has pledged an additional £55 million to support Pakistan to build its resilience to climate change, as the 8^th most vulnerable country to the rising temperatures.

These are just a few examples of the investments which the UK government are making both locally and globally in an attempt to reduce greenhouse gas emissions and reach 2030 and 2050 net carbon targets which were reinforced in the COP26 agreement.