Sun shines on the righteous

12th February 2012


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IEMA

Stephen Tromans reminds us that the government must always act lawfully when changing the rules

Much modern environmental law involves the government trying to influence markets and modify market behaviour. The use of such techniques can be traced back to the landfill tax of the mid-1990s, through to the proposed Green Deal. But the government must act lawfully when setting and modifying such rules, otherwise the players in the market may be unfairly impacted.

This is well exemplified by the decision of Justice Mitting in the case of small solar energy systems, decided a few days before Christmas: R (Homesun Holdings Limited, Solar Century Holdings and Friends of the Earth) v Secretary of State for Energy and Climate Change (Administrative Court, 21 December 2011), which was affirmed by the Court of Appeal in January.

It is well known that the government introduced, from 1 April 2010, a system of feed-in tariffs to encourage the installation of photovoltaic solar panels with no more than four kilowatt hours capacity. The scheme requires licensed electricity suppliers to pay money for the next 25 years to owners of such systems for the electricity generated.

On the basis that what the secretary of state (in this case Chris Huhne) giveth, the secretary of state can also taketh away, Huhne then proposed in a consultation the reduction of that benefit, which would apply to systems installed before the end of the consultation period.

This proposal was successfully attacked as unlawful by Friends of the Earth, and by companies in the solar energy market. Essentially, the decision turned on three legal issues. First, whether a proposal to change the law could be the subject of challenge in the courts at all. It was held that it could, particularly, as in this case, the secretary of state was proposing to make an executive decision, as opposed to parliament proposing to enact primary legislation, and where (as here) the very making of the proposal would have an immediate and significant effect on the market.

Second, as a strict point of law, whether the secretary of state had the power to make the change. And, third, even if Huhne did have such a power, this was retrospective legislation, as it would have an adverse retrospective effect on solar systems installed after 12 December 2011, halving the tariff they would receive from 1 April 2012 – a significant adverse impact on those proposing to install systems before the date on which the modification took effect. Such changes would not, the judge found, further the statutory purpose of encouraging small-scale, low-carbon generation of electricity. Rather, they would undermine consumer confidence.

The reason given for prompting the proposed change was that the cost of small solar systems had fallen by about 30% – from approximately £13,000 to £9,000 – and the price of electricity had risen, affecting the original assumptions underlying the scheme, and making it unduly favourable to small-scale generators, which in turn had led to the scheme taking off at a much higher rate than foreseen.

The proposal, as Justice Mitting put it, “inevitably caused dismay in the industry which has grown up to supply and install small solar systems and amongst community organisations which proposed to install small solar systems in social housing schemes, village halls and schools.”

The government subsequently appealed. The Court of Appeal upheld the original ruling, stating that: “The question [is] whether parliament conferred a power [to DECC] to make a modification with such a retrospective effect. It did not.”

But to some extent the ultimate outcome is not what is important. The key message that comes out is that the government is now, in many areas of the environment and energy field, taking decisions in terms of programmes and policies that have a direct and immediate effect on commercial activity, investment, and company plans.

Decisions on matters such as the use of biofuels and support for particular types of low-carbon energy, for example, all have that effect. Indeed, it is inevitable in systems where government seeks to work through, rather than above, the market. But as this case shows, it is not always possible to get it right initially, and for every winner there is a loser.

The sums paid by the energy suppliers to the owners of the rooftop solar energy systems do not come out of thin air – they come out of the tariffs charged to other, quite probably much poorer, consumers. Low-carbon generation comes at a cost. The question is, who bears it? This case highlights the critical importance of getting those rules right in the first place.


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