How to Mitigate Policy and Regulatory Risk in Renewable Energy
Disclaimer: Information provided in this communication is for general informational purposes only. The post should not be construed as legal advice. For specific legal advice tailored to your individual circumstances, please consult with a qualified lawyer.
As the world accelerates towards sustainable energy solutions, navigating the complex landscape of policies and regulations becomes paramount for successful renewable energy projects. This article continues on our series on challenges faced by renewable energy developers with reference to historical cases.
We delve into high-level key takeaways to systematically address and mitigate policy and regulatory risks. Taking a survey of how regulations and policies have evolved in different countries over time, this article will give you historical examples to evidence policy and regulatory challenges faced by developers.
Understand the Local Regulatory Environment
In the United Kingdom, for instance, the Energy Act of 2013 is the main policy governing renewable energy infrastructure. The act put forward mechanisms like Contracts for Difference (CfD) and the Renewable Obligation (RO) scheme. Under the RO scheme, UK national power offtakers must prove to the government that a certain percentage of power purchased comes from renewable energy sources.
Financial incentives, including CfD and Feed-in Tariffs (FiT), were also introduced through the Energy Act and drove investment in renewable energy projects in the UK. The act’s directive overseen by governmental bodies like the Department for Business, Energy and Industrial Strategy (BEIS) and Ofgem, is required for construction and connecting to transmission or distribution networks. The UK’s legal and regulatory framework applies to both utility-scale and distributed renewable energy projects, with financial incentives like FiT and Smart Export Guarantee (SEG) available for small-scale installations.
From our office in Casablanca:
In Morocco, the policy landscape is different. The Kingdom of Morocco has set a very ambitious target of 52% of their energy to come from renewable energy sources by 2030 and, this past April (2023), Law No. 40.19 was passed. Law No. 40.19 allows businesses to operate IPPs to power their own services, alongside selling the surplus to offtakers. As a consequence from passing the law, businesses hoping to build a solar farm no longer need to abide by the previous zoning restrictions in place.
Comparing countries to each other, Morocco has recently been pushing through laws to advance their sustainability targets while the UK builds upon existing frameworks. Regulation and policy varies entirely from country to country and even local and national regulations could fundamentally differ. Alongside these stratified differences from country-to-country, regional authorities (or council-by-council) will adjust and update policy.
Building an understanding of the regulation specific to your project’s region and country is crucial, especially in the energy sector.
Forecast for the Future
Modeling and forecasting financial feasibility based on different policy scenarios can make or break your future revenues. Spain’s Royal Decree 661/2007 led to long term economic negative effects for investors and the Spanish government because both sides did not accurately assess post-policy financial consequences.
The decree was revised from an earlier 2004 policy; investors in small scale solar plants (less than 100 MW) were promised a guaranteed return on their investments via a new feed-in tariff. Higher costs associated with the new fixed rates, such as payments to transmission and distribution networks and capacity-based payments, were supposed to be covered by passing them on to consumers.
However, the amount charged to consumers failed to include the full extent of these costs. As a result, an annual revenue-cost deficit in the grid started to accumulate. By the end of 2012, Spain had accumulated a €30 billion grid deficit (Spanish Economic and Financial Outlook, 2013).
At the same time, Spanish developers who had conducted thorough due diligence on the effects of these changes were better equipped to navigate this grid deficit. In addition, active engagement with stakeholders, such as José Manuel Soria (former Minister of Industry, Energy, and Tourism), allowed several Spanish investors to negotiate more favorable terms.
Furthermore, the decree was revised once again in 2012 to reduce financial incentives for investing in renewable sources, but the Feed-in-Tariff remained. According to IEA’s 2021 report on the state of Spain’s energy sector, the grid deficit has finally been settled.
This historical instance demonstrates the criticality of assessing risks, performing economic feasibility studies, and engaging stakeholders to avert potential pitfalls.
What should I consider with policy and regulation due diligence?
Compliance Assessment
Permitting and Licensing
Government Policies
Grid Connection
Environmental Compliance
Land Use and Zoning
Engaging in Policy Advocacy
Advocacy can shape favorable regulatory environments. Denmark’s wind energy success in the 1980s was propelled by advocates like Preben Maegaard and the introduction of the ESA (Electricity Supply Act).
Maegaard (1935 – 2021) guided world policy around wind energy, founding the Nordic Folkecenter for Renewable Energy and acting as chairperson for the World Council for Renewable Energy (WCRE) in 2001. His lobbying efforts with environmental groups and industry associations led to policies like guaranteed buyback of excess electricity and incentives for wind turbine installation.
Maegaard’s example underscores the power of industry collaboration and educational initiatives in influencing policy changes.
Continuously Adapting and Evolving
The launch of the “Contracts for Difference” (CfD) scheme in March 2013 marked a significant turning point for the United Kingdom’s offshore wind sector. CfD introduced competitive auctions and incentivized cost reduction targets, creating a more dynamic and cost-effective environment for offshore wind projects.
After its initial implementation, the CfD scheme underwent several revisions and adaptations:
- 2014 – 2015: The scheme was refined to address issues related to market liquidity and grid access. Developers and stakeholders provided feedback, leading to adjustments that improved the scheme’s effectiveness in promoting offshore wind development.
- 2017: The UK government announced ambitious targets to secure an additional 10GW of offshore wind capacity by 2030, building on the success of the CfD scheme. These targets signaled a long-term commitment to renewable energy and provided investors with confidence in the sector’s growth prospects.
- 2019: The UK conducted its third CfD auction, resulting in record-low prices for offshore wind contracts. This achievement demonstrated the effectiveness of the scheme in driving down costs and making offshore wind more competitive with traditional energy sources.
- 2020: The UK government increased its offshore wind capacity target to 40GW by 2030, reaffirming its commitment to renewable energy and creating a stable, long-term pipeline of projects. This ambitious goal set the stage for continued growth in the sector.
Throughout this evolution, key figures in the UK’s offshore wind industry, including industry leaders, policymakers, and advocacy groups, played vital roles in shaping and revising the CfD scheme. Continuous industry dialogue, feedback, and collaboration between government and stakeholders facilitated the adaptation of policies to support offshore wind expansion.
As such, the UK has created a regulatory framework that not only promotes renewable energy but also fosters innovation and cost reduction in the offshore wind sector. This adaptability has made the UK a global leader in offshore wind development, with a growing portfolio of projects contributing to its sustainable energy future.
Obtaining Licenses and Permits
Navigating the bureaucratic process of obtaining licenses and permits is a fundamental aspect of renewable energy project development. The general process involves rigorous application submissions, environmental impact assessments, and public consultations.
Successful projects hinge on meticulous planning, transparent communication with regulatory bodies, and a commitment to meeting compliance standards. Engaging legal experts with expertise in permitting can streamline this crucial phase and reduce regulatory hurdles.
Conclusion
Navigating policy and regulatory risks requires a multi-faceted approach informed by historical examples. Understanding the current local regulatory landscape, conducting comprehensive due diligence, engaging in policy advocacy, considering political risk insurance, obtaining licenses and permits, and continuously adapting are pivotal steps for success.
By learning from the experiences of the past, renewable energy developers develop tools to hedge and mitigate political and regulatory risks. GIA can help you find the right legal advisor for your project and offer solutions to mitigate policy and regulatory risks.
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