The government is keen for PV project developers to offer interested communities the chance to invest alongside them (this is the Shared Ownership Agenda, subject of various previous blogs of mine). However, if this is to happen then Distribution Network Operators (DNOs), planners, lenders and Ofgem all need to be pulling in the same direction.
Government has legislated for a change in the feed-in tariff, in a manner which makes the split ownership model of shared ownership particularly attractive. That’s because it offers a new lease of life for sub 5MW projects which would otherwise have been lost due to the change in the renewable obligation (RO). Developers also like the idea of having the community work with them to secure planning consent. Communities like the idea also, and have been shown to have an appetite to fund megawatts-worth of capacity.
So far so good, but how will a DNO react to a developer requesting to share a grid connection? And what will a lender think of the idea of having a separate site, owned by a community group, making use of that connection and Connection Agreement?
Taking the latter question first – the answer is that the lenders don’t like it. Robin Dummett, of Novus Energy Management, comments below on the view of the financiers. Incidentally Novus develops and owns large-scale PV installations and is “delighted” with the general approach to community schemes, seeing shared community ownership as a “far fairer way of development, fostering a real partnership between all parties”.
Dummett firstly summarises lenders’ reactions to having a shared connection where there is one Connection Agreement, one Meter Point Administration Number (MPAN) and separate FiT generation meters beyond it. This is the scenario that is now allowed following the change to the FiT. He then goes on to elaborate the solution:
“Under the arrangement envisaged in the new legislation, you will have the commercial developer owning the Connection Agreement and providing the community access to it via a flow-through agreement and a cross-indemnity. This leaves both owners having some exposure to each other. Under this scenario lenders will ask ‘what happens if one party breaches the Connection Agreement and does not have the funds to pay for any arising liability? Does the first party have a residual liability? If one party requires a difference PPA provider or tariff rate, how is this resolved?'
“It’s not that they won’t fund it, but they will require a higher return, priority over the community scheme, the Connection Agreement to be in their name and will want to cut off the community scheme at any sign of trouble. That is not a happy recipe.
“The solution is as much segregation between the two schemes as possible, meaning two Connection Agreements and two MPANs. This might lead to a bit of additional capital expenditure, but it reduces the cost of capital as it is much safer and cleaner.”
The next issue is how will a DNO react to this request? Some weeks ago I started out on the task of asking each of them in turn. It soon became apparent that a much better strategy was to set out how we (the Renewable Energy Association) believed DNOs should react to the request, and then put it to them and see if they agreed. So together with Bob Weaver, the REA’s grid consultant, I drafted a paper for the Distributed Generation Working Group, a forum run by the Energy Network Association attended by all DNOs.
A copy of our paper can be found here. The short read is – given that it’s government policy to encourage developers to do this, please allow them to pass the capacity in their grid offer to a community group without it going interactive and losing its place in the queue. Plus, if this has to be unpicked (for example if the community group pulls out), allow the developer to backtrack again.
None of the DNOs saw any particular issue with developers sharing a grid offer with any party if the resulting configuration still has one MPAN. Indeed, they wouldn’t see that posing a problem if shared with a community organisation or anyone else for that matter. However, there was a divergence of opinions on whether a situation resulting in two MPANs would be acceptable or not. This, as described above, is what lenders and commercial developers are likely to want.
Some felt that with grid capacity being in such high demand there would be difficulty with anything which did not result in the relinquished capacity being offered back to others already in the grid connection queue. They felt to do otherwise would be discriminating against those in the queue and in favour of a community group, and might be in breach of their licence conditions.
Others felt that if a developer wanted to share the capacity with any other entity, such that the grid offer and agreement was split in two, this would be OK. Furthermore, they weren’t concerned whether one of connectees was a community group or not of if they were able to access the FiT or not – regarding this as nothing to do with them.
Happily, they were united in the view that Ofgem’s provided guidance is absolutely clear, they wouldn’t have any problem in discriminating in favour in allowing the change without requiring the capacity to go interactive.
The awkwardness is that the legislation change does not actually address the situation where the end result sought is two MPANs. The Department of Energy and Climate Change assumed that the one MPAN configuration was what people would want to go with. Given this, the DNOs do feel somewhat confused about what the policy intent is. Just in case you are wondering, the new Ofgem guidance does not assist in navigating this situation.
The DNOs are going to collectively produce a paper setting out what would be required of Ofgem to give them comfort that they were not in breach of their licence conditions. This will take a little time, so in the meantime in the hope of speeding things up a little bit, we have just written to Ofgem asking what its view is.
We will keep members posted in the happy event of some clarity arising, and blog again when there is something more to say.