A MOVING TARGET: THE RHI RESET AND TARIFF GUARANTEE

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1 A MOVING TARGET: THE RHI RESET AND TARIFF GUARANTEE

2 Introduction You may remember, back in the mists of time, that the Government announced a raft of changes to the Renewable Heat Incentive scheme (the RHI ). The changes were intended to be implemented in spring 2017, then in autumn 2017, and then in early New RHI regulations were finally laid before Parliament on 7 February 2018, only to be replaced with a superseding draft, laid before Parliament on 19 March The implementation date for the changes to the scheme has been a moving target. However, it looks as if we can now pin down a date. The new regulations published on 19 March are subject to the affirmative procedure (a procedure by which legislation must be actively approved by both Houses of Parliament). Legislation subject to affirmative procedure is typically approved by Parliament in 6 to 8 weeks. The regulations have now been debated in the House of Commons and all that remains is a similar debate in the House of Lords. So it looks like we can expect an implementation date in May. Time-line to a Tariff guarantee You do however receive the tariff applicable on the date of issue of the provisional TG notice you can therefore financially close the project knowing the tariff to which you are entitled. We therefore envisage a project development time-line similar to the example set out in the box Time-line to a Tariff Guarantee. Agree draft agreements Submit application for TG Ofgem allocates provisional TG It s important to monitor this date as applications for the tariff guarantee open at 10am on the day the new RHI regulations come into force. The regulations reset the tariffs to June 2016 levels (inflation adjusted) and make a number of changes, one of which is the introduction of the tariff guarantee (TG). Achieve financial close 3 Weeks There are a number of elements to the TG, which are essential to understand, if you are to secure its benefits. Tariff guarantees Tariff guarantees will apply to a number of technologies including biomass (>1MW), biogas (>600kW), new solid biomass CHP and biomethane. The TG is a welcome addition for the industry, as it provides certainty of both eligibility and tariff. There are a number of elements to the TG, which are essential to understand, if you are to secure its benefits. The most important element is that you will have only a three week period to reach financial close once your application for a TG has been approved. You must therefore be in the advanced stages of the development of your project, including having advanced the draft documentation to agreement, or at least very close to it. Submit evidence of financial close Ofgem allocates full TG Build and commission plant Ofgem accredits plant with TG By deadline date

3 What do you need to apply for a TG? This is not a full list but some of the information which will be required includes: Source of energy and technology. The expected commissioning date or, for biomethane projects, the date of commencement of injection. The estimated annual production of the expected capacity of the plant. For CHP, the expected power efficiency. What is required to achieve financial close? A tariff guarantee will only be allocated if the applicant provides evidence of financial close no later than 3 weeks after the date on which Ofgem issues the provisional TG notice. This is important if evidence is not provided on time the provisional TG will lapse, and you will need to submit a fresh application for a new provisional TG. The new RHI regulations define financial close as the date on which the applicant has entered into all financing agreements in relation to all the funding required for the construction of the proposed plant, or the production and injection of biomethane (our emphasis). Ofgem has issued guidance, which described what is required, as well as detailed information on budget availability (Guide to Tariff Guarantees). The Guidance states that, in order to demonstrate evidence of financial close, evidence of two main points will be required. First, that funds are available to cover the complete construction of the project and, second, that these funds are formally committed to the project. For non-biomethane plants, evidence of the proposed heat use. Evidence of grant of planning permission. For biomethane plants, evidence of a signed connection agreement. Ofgem may also request any further information which they think is relevant to the application.

4 Ofgem also require that financial close is verified by a report from an independent auditor appointed by the developer. The report must confirm that the information submitted in respect of financial close is valid, that funds are available, that they are committed to the project, and any caveats to these confirmations. It must be provided by a non-connected person, but there is no guidance as to the form of the report beyond that described above. It is not entirely clear to us that the two approaches are consistent and what they actually mean in practice. This is best illustrated by taking examples of two different funding structures. "They offered excellent advice on renewables with access to all areas of the firm when required, and adopted a very commercial and pragmatic attitude." Chambers UK, 2018 Project finance structure. In this structure you would expect to see a single purpose project vehicle, funded by debt and equity. It is reasonably clear how the wording in the RHI regulations apply financing agreements will cover any share subscription agreements and loan agreements. Signed copies of all such agreements will require to be submitted to Ofgem. It is clear from Ofgem s reference to formally committed that evidence of authority to enter into the agreements will also be needed i.e. board minutes of the applicant. It may also require a copy of a credit or investment committee approval by the provider of funds. Two main questions arise. One, how do you demonstrate you have financing for all the funding required? Developers are not required to submit a cost estimate at the application stage. Do you need to submit copies of all supply and installation contracts to demonstrate the cost of construction? Or will a reasonable cost estimate suffice? Two, can the financing agreements remain subject to conditions precedent? The RHI regulations refer only to entered into which suggests that a signed agreement is all that is required. Ofgem s use of the word available may suggest that Ofgem interprets the requirement more strictly. However, we are of the view that the word available is consistent with appropriately worded conditions precedent, and we consider the wording of the RHI regulations permits such conditions precedent. Corporate finance structure. In this structure, you may have an applicant which is a trading entity, which either has funds available in its bank accounts or has a corporate credit line. The RHI regulations refer to agreements which suggests counter-intuitively that providing evidence of the funds sitting in your bank account does not demonstrate evidence of financial close. Ofgem s guidance suggests they may accept evidence, not of agreements, but of the availability and commitment of funds to the project. This suggests evidence of funds plus a board minute authorising that the applicant to sign the supply and installation contracts may be sufficient. However, it remains hard to reconcile this with the wording of the RHI regulations. If necessary, we believe there is a reasonably straightforward structural fix. Commissioning deadline Applicants must provide an estimated commissioning (or biomethane injection) date. To receive the tariff guarantee, applicants must commission their plant within 183 days of the estimated date, and by 31 January 2020 at the latest. Note the 183 day period is not quite the same thing as saying 6 months you can t just take the corresponding day 6 months ahead as the deadline date.

5 If the estimated date is not met, ofgem has the power to revoke the TG. Applicants have a free choice as to the estimated date they provide in their application and can therefore mitigate this risk by choosing a conservative date. However, choosing a later date comes with a trade-off the plant would not be eligible to receive payments for the period before estimated date, even if commissioned in advance. Ofgem s guidance suggests they may accept evidence, not of agreements, but of the availability and commitment of funds to the project. You must also commission a plant which is the same as the plant described in your application. There is some flexibility (for example, actual capacity can be +/- 10% of the estimated capacity) and the rules clearly set out the changes which are not permitted, providing certainty on what is required to achieve the TG. Key contacts Keith Patterson CO-HEAD OF RENEWABLES Energy +44 (0) keith.patterson@brodies.com Join the conversation at brodies.com/blog/renewables Ali Rimell MANAGING ASSOCIATE Renewable Energy +44 (0) ali.rimell@brodies.com

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