CHAPTER 1
Legal, regulatory and industry frameworks
Munir Hassan
Andrew Sawbridge
CMS Cameron McKenna Nabarro Olswang LLP
1. Introduction
Solar power appears to be at the cusp of fulfilling its promise of providing utility-scale clean power at an affordable price. The plunge in solar technology costs, among other factors, has catalysed significant deployment of solar projects across the globe. Investors are keen to take advantage of the efficiencies offered by these developments while looking for a sufficient measure of stability to enable the required financial decisions to be made. Part of that stability is afforded by the legal and regulatory framework within which projects progress. But the framework may also seek to achieve a number of other objectives, such as:
• to progress and implement social, policy and environmental objectives;
• to ensure proper integration of solar projects within the wider industry matrix of legislation, codes, contracts, permits and guidance documents;
• to provide routes to market for the power produced from the project;
• where subsidies exist, to ensure that the project is, and remains, eligible for such subsidies.
The dynamic nature of the solar industry and its rapid technological advances have made governments and regulators sometimes feel, in responding to demands from investors for certainty and clarity, that they are seeking to establish enduring, stable and reliable policies on ever-shifting sands. Nevertheless, left to themselves, price signals from liberalised electricity markets generally tend to favour the safest investments. This disadvantages projects with high upfront capital expenditure (compared to operating costs) such as solar projects. Therefore, despite the difficulties, supportive national policies – in particular, specific renewables targets, arrangements for stable revenue streams and (in many cases) formal procurement programmes for solar projects – have been crucial to the success and growth of the solar sector. With the advent of subsidy-free solar, even in northern climes, the key to continued future growth will be for these policies to provide a sufficiently stable landscape for supply chains to be established and bed down, and for the economic benefits of greater scale to be fully realised.
The chapter provides an overview of the main considerations for solar projects in respect of the overarching legal, regulatory and industry frameworks, with specific details drawn from the regime in the United Kingdom and selected other jurisdictions to illustrate the approaches taken. What it shows is that the solar industry is in a period of major transition. The industry has long looked to legal, regulatory and industry frameworks to help to give solar projects preferential access to the system, to provide a policy backbone of decarbonisation and, in most cases, to provide subsidies to help solar projects achieve financial returns that justify investment. The solar industry is now having to adjust to a new reality, one in which, particularly in Europe, projects need to proceed without the benefit of a highly supportive policy blanket. In this more Darwinian world, revenue streams are potentially fixed at below market prices, or left entirely for projects to agree with offtakers. While formal procurement programmes for new solar projects remain in many countries, for those governments and regulators that have invested in solar programmes over the past years, many are now looking for the sector to become less reliant on government policy. It should be noted that legal frameworks can both support and actively destroy value in the sector, as was demonstrated by the examples of retroactive changes to subsidy arrangements for renewables a few years ago. However, with solar projects becoming increasingly self-sufficient, their exposure to such intervention is diminishing.
2. International legislation indirectly promoting solar projects
Climate change legislation has been seen as an important driver for policies promoting solar projects. Such legislation can be applicable on an international, continental, federal, state or national scale.
Public international law can come in a variety of forms, and does not automatically have the same legal effect or characteristics as legislation promulgated under the sovereign authority of a nation state. The need for a global response to the challenges of energy security and climate change has led to coordinated international legislative measures that are of varying legal effect. A well-known example is the Kyoto Protocol, an international agreement linked to the United Nations Framework Convention on Climate Change. The major feature of the Kyoto Protocol is that it set binding targets for 37 industrialised countries and the members of the European Union at that time for reducing greenhouse gas (GHG) emissions. These amounted to an average reduction of 5% against 1990 levels over the five-year period from 2008 to 2012. Levels vary by country: the United Kingdom accepted a legally binding target to reduce GHG emissions by 12.5% from 2008 to 2012.
The Kyoto Protocol requires countries to meet the targets mainly through national measures, although three market-based mechanisms are also offered to meet targets: emissions trading, the clean development mechanism (CDM) and joint implementation. The policy behind these mechanisms is to encourage green investment globally at least cost to the countries. For example, Brazil has implemented measures allowing the use of credits under the CDM in connection with renewable energy projects to incentivise investment in green energy.
The Kyoto Protocol works by monitoring the emissions made in each country and keeping a record of the trades that each country carries out to ensure that all transactions are within the rules prescribed. Countries submit annual emissions inventories and national reports for this purpose. The Kyoto Protocol has also established a compliance system that can assist countries with meeting their targets if they are having difficulty in complying.
In addition, the Kyoto Protocol helps countries to adapt to the negative impacts brought about by climate change and an Adaption Fund has been established to finance projects within this area. The Kyoto Protocol drove the development of national emissions reduction schemes and legislation in many countries worldwide before being superseded by the Paris Agreement.
The Paris Agreement entered into force on 4 November 2016. The text1 was agreed by 195 countries including a number of prominent polluters who were not signatories to the Kyoto Protocol, such as China, India and, initially, the United States.
The overall objective of the Paris Agreement was to hold global average temperatures to well below 2°C above pre-industrial levels. The message of the Paris Agreement was clear: it is the shared responsibility of the global community to mitigate the impact of climate change, and those with the broadest shoulders should take on the largest burden.
Developed countries are required to provide nationally determined contributions (NDCs) which consist of economy-wide absolute emission reduction targets. Article 6 of the Paris Agreement provides a framework for bilateral cooperation between countries to lower GHG emissions; countries may cooperate in implementing their NDCs by internationally transferred mitigation outcomes. This does not replace the CDM established under the Kyoto Protocol although the idea of a CDM transition has been floated, under which CDM projects could be incorporated into the structure of the Paris Agreement, rather than the Kyoto Protocol.
The longer-term commitment enshrined in Article 4 of the Paris Agreement is "to achieve a balance between anthropogenic emissions by sources and removals by sinks of GHGs (greenhouse gases)". The development of renewable sources of energy remains crucial to achieving these goals.
The Paris Agreement provides for a two-track approach. Developing countries have more time to transition to a low-carbon economy than developed countries.
Public international law, such as the Paris Agreement, is relevant for those projects that specifically use the mechanisms established under it. For most projects, the Kyoto Protocol and the periodic summits to discuss the climate change agenda are more important as indicators of trends, and drivers of government policies to promote the green agenda, of which renewable generation (and solar generation) is a part.
At an EU level, legislation can have direct effect on solar projects or require the implementation of measures that have such an effect. The principal piece of legislation is the 2009 Renewable Energy Directive (2009/28/EC), enacted by the European Parliament and the Council to promote the use of energy from renewable sources. It establishes an EU-wide framework for the promotion of renewable energy and sets legally binding targets on member states for the use of renewable energy. In particular, the directive requires:
• 20% of the European Union's overall energy consumption (electricity, heat and transport fuels) to come from renewable sources by 2020; and
• 10% of each member state's transport energy consumption to come from renewable sources by 2020.
Under the directive, each member state is required to submit a national renewable energy action plan (NREAP), following a template produced by the European Commission. The United Kingdom's NREAP requires the United Kingdom to reach its target for 15% of energy consumption in 2020 to be from renewable sources by setting out certain measures and action items. The directive also requires member states to implement measures for guarantees of origin, information and training and providing access to the grid for renewable energy projects.
The directive allows member states to achieve their targets by receiving a transfer of a certain amount of another country's renewable energy to contribute towards their national targets. Further, the directive provides for member states to enter into joint projects on renewable energy with other member states or third-party countries.
The directive must be implemented by each EU member state. For example, in the United Kingdom, the Promotion of the Use of Energy from Renewable Sources Regulations 2011 (SI 2011/243) implements the target set by the Renewable Energy Directive for the United Kingdom to achieve 15% of its energy consumption from renewable sources by 2020, together with interim indicative targets. Separate legislation then introduces the measures intended to achieve these targets.
In terms of broader organisations, a number of development banks and international organisations are active in the sector, to differing degrees. The World Bank has at its core, in relation to sustainable power, the Sustainable Energy for All initiative. This aims to promote sustainable energy across the world, particularly developing countries, while still allowing states to be autonomous in their energy policy decisions. The International Finance Corporation (IFC) appears more focused on renewables as a policy decision than the World Bank at large. In 2015, the IFC launched the 'Scaling Solar' project to attract investment in two large-scale solar projects in Zambia with a total capacity of 76 MW. The auction attracted 48 solar power developers, seven of whom submitted final proposals which secured the lowest solar power tariffs in Africa up to that point. In June 2016, one of the successful bidders offered to sell power at just US$0.06015 per kWh for 25 years. The European Bank for Reconstruction and Development takes a more geographically focused view on the renewable energy market as relevant to its reconstruction remit.
3. National legislation
3.1 Legislation indirectly promoting solar projects
A solar project developer should be cognisant of the overall international legislative landscape for its project, even if the developer is one step removed from day-to-day implementation, because it drives the impetus towards clean energy projects in general. However, the key requirements and determinants of success will be in the national-level legislation that directly applies to the project. A solar project is a complex venture requiring compliance with a wide variety of legislative requirements. It is beyond the scope of this chapter to detail the full scope of rules applicable to a solar project. This section therefore deals with two types of legislation: that dealing with climate change generally and that specifically dealing with solar or renewables projects.
Some countries have implemented national legislation to deal with decarbonisation in order to address climate change and to encourage investment in renewable energy. In the United Kingdom, the main piece of climate change legislation is the Climate Change Act 2008. The explanatory notes outline the purpose of the act as implementing a framework for the United Kingdom "to achieve its long-term goals of reducing greenhouse gas emissions and to ensure steps are taken towards adapting to the impact of climate change".
Some elements of the act include:
• establishment of emissions reduction targets and carbon budgeting in statute by the creation of an emissions reduction programme and medium and long-term targets;
• annual reporting by the government on the United Kingdom's GHG emissions, and the granting of powers so that domestic trading schemes can be established through secondary legislation; and
• the establishment of the Committee on Climate Change, an independent body set up to advise the government and devolved administrations.
3.2 Legislation directly promoting solar projects
The principal way that countries have supported solar projects is through the creation of financial support mechanisms. In Europe, such mechanisms tend to take the form of either a fixed payment or a top-up payment per megawatt hour (MWh) of electricity produced, the level of which tends to differ for different types of renewable generation (further detail on which can be found in the chapter on financial incentives and revenue streams). By way of example, policy in Morocco has tended to focus more on providing attractive tax incentives for renewable generation. There is no feed-in tariff in Morocco. Instead, there is a total exemption from corporate tax for any new industrial business and a number of Export Processing Zones have been established which are exempt from customs regulation, foreign trade and exchange control and other restrictive regulation. Likewise, in the case of India, the central government has tended to grant exemptions from customs and excise duties on certain machinery and systems needed to set up a renewable energy project. See the chapters on Morocco and India for further details of these solar markets.
Other governments have adopted legislation to limit foreign direct investment in order to protect the country's home-grown industries. In the United States, the government has approved tariffs of up to 30% on solar equipment made outside the United States, while high tariffs on solar technology remain in Brazil, despite the reduced import tax for solar PV equipment introduced in 2011, provided there is no equivalent local production.
In addition to providing financial incentives, governments have taken other actions to promote solar and other renewable projects. The European Union has been active in this area – for example, by requiring member states to impose an obligation on suppliers to disclose information about their fuel mix in the hope that this will enable consumers to exercise their purchasing power in favour of renewable electricity. It has also imposed a requirement on EU member states to ensure that renewable generation has priority access to the grid.
More broadly, governments can also make a difference to renewable projects by ensuring that the wider regulatory regime does not present an obstacle to their success – for example, by ensuring that planning laws balance local and national interests appropriately, and that the interests of renewables are taken into account in the development of industry arrangements, such as the network charging regime. In general terms, the perceived stability and nature of the regulatory regime in a particular jurisdiction can have a significant effect on the success of the renewables industry and the terms on which investors are willing to finance projects there, and therefore a stable legislative regime is important. Of course, this is important to all investors, but the fact that solar projects have high upfront capital costs and have traditionally depended on subsidies makes it all the more so for them.
