FITs and non-starts

Secretary of State for Energy and Climate Change v Friends of the Earth and others [2012] EWCA Civ 28The Secretary of State for Energy and Climate Change last week lost his appeal against a High Court judgment handed down at the end of 2011 that a proposal to halve feed-in tariffs (FITs) to small-scale producers of solar electricity was unlawful.

03/02/2012

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Emily Heard

Partner

Secretary of State for Energy and Climate Change v Friends of the Earth and others [2012] EWCA Civ 28

The Secretary of State for Energy and Climate Change last week lost his appeal against a High Court judgment handed down at the end of 2011 that a proposal to halve feed-in tariffs (FITs) to small-scale producers of solar electricity was unlawful.

The FITs scheme was introduced in April 2010 to encourage members of the public and community groups to invest in and install low-carbon electricity generation facilities on their own properties via generous financial incentives intended to guarantee long-term returns of some 5%. The financial incentives came in the form of FITs which are paid by electricity supply companies, such as British Gas, to solar generators with a generating capacity of less than 4kW/hour for every unit of electricity generated, regardless of whether they use this electricity themselves.  Small-scale generators are also paid for every unused unit of electricity subsequently exported to the national grid.  The FITs payments are guaranteed for a period of 25 years. 

By early 2011, it had become apparent that the take up by the public had been significantly higher than expected with the result that the costs of solar panels had fallen by some 30%.  As such, the expected 5% rate of return was due to be exceeded for most investors in solar energy.  The Secretary of State therefore declared the existing FIT level to be unsustainable and, in October 2011, published a consultation on a proposal to effectively halve the level of FIT for small-scale solar generators from 1 April 2012, from 43.3p to 21p per kilowatt hour.  Responses to the consultation were invited until 23 December 2011.

The controversial element of the Secretary of State’s proposal was to also apply the reduction to those who had become entitled to FITs payments on or after 12 December 2011 so that they would only benefit from the higher level of FIT until 1 April, at which point it would be reduced to the new, lower level.  In other words, the Secretary of State was consulting on a proposal which was expressed on the one hand to take effect from 1 April 2012, but on the other hand stated that any small-scale solar generator which became eligible for FITs payments after 12 December 2011 would also be bound by the new regime.  This proposal was unsurprisingly negatively received by organisations involved in the installation and supply of solar energy who, along with Friends of the Earth on behalf of a large number of community organisations, issued a judicial review of the Secretary of State’s proposal. 

First instance judgment

The judicial review was heard by Mitting J on 20 and 21 December 2011, two days prior to the end of the consultation period.  Mitting J narrowed the Claimants’ points down to five issues, the key ones being whether or not judicial review was available to challenge a proposal that had not yet been passed into law and whether the Secretary of State’s proposal was to effect a modification to the FIT which was retrospective and/or unauthorised by the enabling legislation.

In respect of the first issue, the Judge held that judicial review is available to challenge a proposal to take an unlawful decision.  He agreed, however, with the Secretary of State’s argument that judicial review is not or should not generally be available to challenge a proposal to do something lawful stating: “the Secretary of State is entitled to consult on any proposal he likes.  Provided he has not made his mind up, he may identify his preferred proposal, or even set out only one on which to consult and the fact […] that the making of this proposal has had an impact on the market affected by it does not make it amenable to review”.

With regard to whether the Secretary of State was entitled to make a modification to the FIT which was in effect retrospective, the Judge looked to the wording of the Energy Act 2008 which, at section 42, sets out a mandatory procedure for effecting modifications.  This procedure involves a period of consultation, followed by draft modifications being laid before Parliament, followed by parliamentary approval, followed by the making of the modification.  Mitting J stated that because the wording of the statutory scheme did not contemplate a modification which could take effect retrospectively, the proposal was to make a decision which would be unlawful and was therefore amenable to judicial review and could be the subject of effective relief from the Court.

Court of Appeal judgment

The Secretary of State sought permission to appeal the High Court judgment, and this application was heard alongside the appeal itself in a rolled-up hearing last week.  Lord Justice Moses, handing down judgment, summarised the key question in the appeal as “whether it was within the power conferred on the Secretary of State by the Energy Act 2008 to make a modification which reduced the tariff in respect of installations becoming eligible for payment prior to the coming into force of the modification”.

The Court looked at the detail of the enabling legislation to determine whether the rate of FIT was fixed from the date the installation became eligible and determined that this principle was in fact fundamental to the whole FIT Scheme.  Moses LJ stated that this “provides an assurance as to the rate of return to an owner who has paid a capital sum prior to the installation coming into operation […] That the Scheme provides for a fixed rate of return during the period of generation is crucial to resolution of this appeal.”  Any attempt to change this retrospectively would be unlawful and he summarised: “I have concluded that the delegated legislation proposed in the consultation of 31 October 2011 would have retrospective effect in respect of any installation becoming eligible for payment prior to the modification coming into effect, as proposed on 1 April 2012”. l.

Effect of the judgment

The Secretary of State has confirmed his intention to seek permission to appeal to the Supreme Court.  This means that many people who committed to the installation of solar technology after 12 December 2011 still lack certainty as to whether they will be able to benefit from the higher FIT beyond 1 April 2012.  If the Court of Appeal’s judgment is upheld by the Supreme Court a new reference date of 3 March 2012 is due to be introduced and consumers should assume that for all small-scale generators installed after that date the FIT rate will be 21p per kilowatt hour from 1 April.  If the Secretary of State is successful in his appeal, the date of 12 December 2011 will apply and any small-scale solar generator deemed eligible for the FIT after that date will only receive the reduced amount from 1 April.

Comment

This decision leaves many housing associations and local authorities in a position of continued uncertainty regarding the financial viability of installing panels across a group of properties, both in terms of original procurement and financing costs.  For any installations which become eligible for FITs payments before 3 March 2012 the current position is that the higher rate will be available for the fixed period of 25 years, although that may change if appealed.

The proceedings hinged on procedural points of law, while substantive points such as, for example, the question of whether those who had either committed to or were contemplating installation prior to 1 April 2012 had a legitimate expectation of receiving the higher FIT rate for a fixed period of 25 years were not considered.  As has been apparent from several recent high-profile judicial reviews, the Courts have been reluctant to interfere in macro-economic decisions of central government on anything other than procedural grounds such as failure to consult or to have due regard to equalities considerations.

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