REUTERS | Juan Carlos Ulate

When government changes its mind: Solar Century’s lesson for in-house lawyers

The recent Solar Century case gives an important warning to in-house lawyers about the government’s ability to change policy at short notice, despite potentially devastating effects on a particular sector.

In this case, the Court of Appeal rejected an attempt by renewables developers to persuade the court to judicially review the government’s decision to close the Renewables Obligation (RO) subsidy to new larger solar photovoltaic (PV) in March 2015, which was two years earlier than the government had previously indicated in its policy documents and ministerial announcements. Two years is a long time in most industries, particularly renewables.

Unsurprisingly, many in the renewables sector complained that they were caught with large solar PV projects in the pipeline that relied on RO support, but were suddenly and unexpectedly denied it in a rapidly shifting regulatory landscape.

Any renewables project involves a significant lead-in time and substantial “at risk” project costs in pulling the finance together, obtaining planning permissions and consents, construction and grid connection (perhaps about two years?). A regulatory market had been closed down with little notice. Solar Century argued that it had a legitimate expectation that the government would stick to its (policy) word.

The court disagreed. The court was clear that there was no legitimate expectation that the cap on RO support, which had been reached and so led to the early closure decision, would be extended in favour of large solar PV projects already in the pipeline.

Notably, the court said that the government’s various statements about ensuring investment security (which is often a key function of policy) could not be taken as being immune to change.

It considered that there was no need to review the RO legislation to check for a power for the government to act retrospectively in closing the RO earlier than previously indicated, or to consider misuse of statutory power in determining the grace periods granted for some projects in development.

Interestingly, and perhaps a ray of light for some, the court contrasted the effect of the RO provisions with those of the feed-in tariffs (FITs) scheme (subsidising small-scale renewables), which led to the opposite conclusion by the Supreme Court in the Friends of the Earth case. Here the government was unsuccessful in its attempt to modify the FITs rate because that policy change had a retrospective effect and so potentially took away the owner’s entitlement to FITs payment at a fixed and pre-determined rate. However, in Solar Century, the court considered there had been no such modification of an accrued entitlement.

Of course, renewables is not the only sector that is significantly influenced by, or even a creature of, government policy. Many industries have to watch government policy carefully and in-house lawyers in regulated sectors are often asked how regulation and policy in their sector will change in the future and impact on their industry.

The Solar Century case emphasises that this kind of horizon-scanning cannot rely on individual government statements. Instead, lawyers need to consider the full body of government policy and statements, analysing the interaction between different aspects of policy and checking the effect of any caveats.

The case is also a reminder of the fragility of government subsidies. We all understand that government subsidies (or some prefer to say “financial support”) are unlikely to be there forever. They are often introduced within a policy framework to boost and encourage investment in an embryonic (or flagging) industry or technology to enable it to grow and compete with (and eventually outcompete) established industries or technologies.

The aim of subsidies is often to balance out a market failure or to achieve a public good. We also understand that such subsidies are provided in that policy framework to give both developers and investors some certainty in planning their pipeline of projects, while often accepting that such subsidies will eventually be withdrawn when (sometimes if) the goal of achieving parity is reached.

Practical Law Peter Harvey

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