The Feed in Tariff (“FIT”) is a Government-backed measure that was introduced to reward the production of small scale renewable low carbon electricity.

Under this scheme, energy suppliers make regular payments to those that generate their own electricity from renewable or low carbon sources. The scheme guarantees a minimum payment for all electricity generated by the system as well as a separate payment for electricity exported to grid. These payments are in addition to the savings made by using the electricity generated on site. The returns are potentially very significant.

The scheme came into effect on 1 April 2010 and it is intended that the payments will run for 20 years from when the system is first registered for most projects, 25 years for solar power and 10 years for small scale gas powered plants.

Once a system has been registered, the tariff levels are guaranteed index linked for the period that the tariff has to run. The rate of return is locked-in. However, the rates will decrease each year for new entrants into the scheme in order to help drive down the costs of the technology. There is a strong incentive to enter the scheme as early as possible.

The Government’s own guidance indicates that FITs are “set to deliver an approximate rate of return of 5-8% for well sited installations.”

Investing in renewable energy has a number of additional benefits including carbon emissions reduction, increased energy security and less exposure to future fuel price rises.

Solar Electricity (PV) is particularly well suited to Schools, Colleges and Universities for a number of reasons:

1. They will ordinarily have a large estate and access to finance on better terms than commercial operators;
2. They are likely to benefit from the tariff for its full 25 year life (unlike homeowners that will move during this time); and
3. Solar is less dependent on location than wind, for example, which requires specific conditions. Schools, Colleges and Universities will have roof spaces at a height to avoid shading throughout the day, and which are structurally capable of taking the panels and the frame.

While solar levels are much lower in Scotland than in the South West of England, PV can still perform well in Scotland, but it is important to use as accurate data as possible to produce a robust and reliable business case for such projects.

Some forms of renewable generation are better suited to Scotland than others and are therefore more attractive than in other parts of the UK due to the structure of FITs payments. In particular, given the prevalent wind speeds, wind turbines whether pole mounted or stand alone are potentially financially attractive solutions and may well be a better FITs option than PV on suitable sites.

There are a number of commercial models for FITs projects:

1. Self funded/ bank funded- paying a contractor to construct and install the system. On installation, the ownership of the equipment remains with owner of the site and they would be entitled to revenue derived under the FITs scheme
2. Rent a Roof Scheme/ PV for free- an outside company provides capital funding in exchange for securing the FITs payments over the 25 year period. The landowner would typically benefit from reduced energy bills. The provider will receive a far greater share of the long term revenues but this may be the price that has to be paid if organisations are unable to raise capital or justify the expenditure. Educational bodies should maintain a healthy scepticism towards long term relationships that may not deliver best value.
3. Property Rental- the landowner leases part of its estate to a developer at a commercial rent with the developer retaining entitlement to all electricity generated and the FITs revenue.

There are a number of factors that will impact on the viability of a scheme and the choice of commercial model:

1. Sources of funding and funding constraints. For lender funded projects, the bankability of the project is crucial. We have dealt with a number of the major bank’s specialist teams and we understand their requirements.
2. The organisation’s own electricity demand
3. Appetite for risk in relation to the operation and maintenance of the chosen form of generation. PV maintenance costs are low compared to other forms of technology. Wind turbines will require routine annual maintenance.

It is also worth noting that the Westminster Government in March of this year published long awaited details of the Renewable Heat Incentive (RHI). Similar to FITs, the RHI is a fixed Government subsidy for heat produced from installed renewable sources. The Government will make a payment based on a pence/ KwH rate. Anything from a public library or a swimming pool to a chemical plant will be eligible under the RHI to install technologies like biomass boilers, heat pumps and solar thermal. Anyone taking up the scheme will receive a rate of return on their outlay of about 12%, according to government calculations.

Renewable energy projects, backed by the FITs or RHI, are capable of providing predictable and transparent revenue streams with potentially significant returns. However, it is crucial at the outset of the project to consider the risks and opportunities implicit in a range of delivery and funding models.

Anderson Strathern have experience in the core advice areas for all Renewables Projects including project consent, property, corporate and construction and have advised on renewable energy projects since the early 90's. We have a wide network of contacts in the industry and we are keen to help facilitate discussions with relevant parties. We offer both strategic and detailed advice and our guiding approach is to de-risk projects and maximise return.

Further information

For further information please contact Bruce Farquhar, Head of Renewables, or your usual contact within the Anderson Strathern.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.