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...