Are landowners who want to get a better deal from hosting renewables stuck in a ‘power export’ trap?

 

Politicians and energy industry commentators are both saying the same thing: the UK needs more wind power. And although offshore projects have hit the headlines with record-breaking installations, the government’s decision to end its moratorium on onshore wind means the industry is quietly looking forward to another boom.

Between 2025 and 2030 we estimate that 3GW of wind projects will reach the 20-year milestone. This could prove a bonanza for developers, landowners – and the UK as a whole, as onshore wind is both an important domestic industry and the cheapest form of electricity generation.

The repowering process, however, still has pitfalls for the unwary and in at least one case – the right to export power – potentially open to fears that it is anti-competitive.

 

Permanent connection

Whereas in the past most large power stations would be ‘permanent’ fixtures in the landscape, on sites owned by the power company, new energy assets are not.  Solar and wind farms are sited on land that is not owned by the developer but leased from a farmer or other landowner.

They are prime targets for repowering. In the decade or two since those sites were opened up, climate change has moved higher up the agenda and that is likely to help dissipate objections to replacement turbines. And it is highly unlikely that landowners and local districts will want to give up lease payments and other local financial rewards.

But one issue that remains unaddressed is ownership of the right to export power.

Existing wind and solar farms have a connection agreement between the project developer and owner and the local distribution network operator (DNO) that is not time-limited.

However, that open-ended arrangement may come under pressure, especially if landowners take an active, competitive approach to repowering. What happens if the landowner wants offer their site, most likely on a 25-year lease, to the wider market as a repowering project – potentially at better terms? They could – but the incumber developer has a lock on the grid connection that could make it next to impossible for a repowered site to export power and gives the incumbent leaseholder a significant advantage in any competitive process to re-use the site.

 

No transfer obligation

Louise Dalton, partner in the clean energy practice at CMS, confirms that the connection arrangement is with the developer and is not time limited. It clearly gives an advantage to the original developer.

There is nothing to stop a new developer from taking on a site without being able to take on the right to export from the incumbent, she says, “but that depends on getting a connection and that adds more cost and time, particularly if reinforcement is needed.”

In practice, the danger of leaving the site lying fallow entirely unassailable. There is no obligation to transfer it [the connection agreement] but if you are not using the connection you may be required to hand the capacity back to the DNO where it is not being utilised.”

She adds, “Any network operator has a requirement to develop and maintain the network in an efficient manner. We haven’t seen DNOs be aggressive in clawing back  connection agreement capacity,” but she suggests networks may act if a developer is “sitting on a grid connection”.

Stuart Urquhart, legal director at TLT, saw the  possibility of disputes:“For regular, grid connected projects (not those involving private wire arrangements), we would not expect the existing owner’s lease to contain any obligations on the owner to transfer its grid connection agreement to the landowner, or to take any other steps to ‘hand over’ export capacity to the landowner, at the end of lease term.

“It follows that if the existing’s owner lease came to an end, the owner would likely be free either to terminate the grid connection agreement or to leave it in place until the DNO took steps either to terminate it or implement a reduction in export capacity due to the connection no longer being used. Either way, it is not obvious that the landowner could do anything to force either the existing owner or the DNO to take any action of this kind.

“Ultimately, even if – one way or another – the owner’s existing connection agreement did get terminated, or the un-used export capacity was ‘taken back’ by the DNO, it is not obvious that the landowner or any alternative developer could necessarily secure the relevant export capacity itself without making a fresh connection offer to the DNO at the time and potentially then having to compete for this capacity with other developers.

“All of this would point to there being at least some nuisance value for the existing owner, by virtue of it having the existing contractual connection agreement relationship with the DNO, that it could use as leverage in securing a lease extension with the landowner.”

 

DNO options

Can this by addressed via the distribution network operators (DNOs)? They are managing very constrained networks where connections are often hard to get. They have recently evolved principles for ‘queue management’ for assets waiting for a new connection to the network. That addresses a different but related problem: DNOs accept requests to connect in date order, but in constrained areas, projects unlikely to be realised or delayed can block more achievable projects. DNOs can downgrade projects that fail to achieve milestones or bring forward others, such as storage, that can enable other assets to be connected. But that change has taken many years to bring forward as it conflicts with DNOs’ duty not to discriminate.

Now, CMS’s Rawle says, new energy asset leases would assume there was an opportunity to use the land beyond the lifetime of the initial asset. So “You build into the land agreement an option to renew and you agree a mechanism to set a market rent at that point in time. It puts you in the driving seat as the incumbent and can be quite attractive for the landlord.” Dalton says, “you bake in the idea from day one that there will be repowering or life extensions.” And there are new types of connection being considered as part of the Access and Forward-Looking Charging Review, although none of the proposals include a  time-limited term.

When New Power raised this issue with leaseholder organisations it was not on their radar – perhaps because they are experienced in dealing with property disputes, rather than questions over the right to export power.

Developers expect that this issue will not arise – perhaps because they too are accustomed to thinking of energy assets as near-permanent.

Both sides may be too relaxed: similar rights around land use that refer to other services – vehicle access or water rights, for example – have proven fertile ground for disputes. As long as a change of leaseholder could require the incumbent to give up rights to export, or force an alternate to make new arrangements and join the connections ‘queue’, we suggest that it will remain a barrier to competition and put a landowner seeking a better deal from a new leaseholder at a material disadvantage.

 

This  is based on a longer article published in the August 2020 issue of New Power Report