FIT

New Feed-in Tariff guidance announced by DECC

DECC announced their response today to the Feed-in Tariff (FiT) consultation initiated in February 2012.  The full response is here.  Although DECC have previously announced their decisions regarding FiT support for Solar PV, this response also covers some aspects of solar PV, for example community scale solar PV projects.

This is the new FiT tariff table - note all FiT changes will now take place on 1st December 2012, not 1st October 2012 as suggested previously.

FiT tariff table 2012

Note the new tariff band for hydro projects at 100-500kW (15.5p/unit).  This should make this scale of project much more attractive.

Cutting the tariff on 1.5-15kW wind installations by 25% is seriously disappointing particularly for the UK's small wind industry where we are one of the global leaders with international manufacturers like Gaia Wind, Kingspan, Evance etc. If anything, this is the scale of wind project that should be encouraged most given it has the most potential to offset on-site energy bills and the least impact on the landscape.  DECC are worried about this scale of project becoming very popular and the proportion of the FiT budget it might then attract.  Our view is they should have kept it at 28p/unit and cut other bands if they needed to control their budget.

RenewableUK was also unhappy about the planned cuts to micro wind.  They describe it as "puzzling," given there was "no danger of it overshooting Decc's deployment trajectory and 95 per cent of the Fit payments going to other technologies", according to RenewableUK small and medium wind development manager, Indre Vaizgelaite.

So if you are planning a wind project under 15kW then it's wise to do it sooner rather than later (provided of course you have got a sound assessment of your wind resource and you're not relying on NOABL data).  The likelihood is there will be a spike of new installations although at least the new deadline offers a bit more breathing space.

Paul Thompson, Head of policy at the Renewable Energy Association, comments: “These decisions demonstrate that DECC has listened carefully to many of our concerns, and this should restore some certainty to the sub-5MW sector. We particularly welcome the support for community schemes and the improvements to the cost control mechanism. The introduction of tariff guarantees for projects at a relatively early stage is also very helpful, and we look forward to a similar approach being extended to the Renewable Heat Incentive (RHI).

“However, our over-arching concern that ambitions for AD are too low has not been addressed. We will be pressing the Coalition Government to raise its ambitions for AD in line with clear commitments in the Coalition Agreement.”

We summarise the key details of the changes below.

Definition of Sites
  • There are some tweaks being made to the official definition of a 'site' to ensure that installations that share network connections, e.g. park homes and remote hydro installations, can access FITs.  Other revisions mean you will no longer be able to register 2 turbines (or a turbine and a solar PV system) with different MPAN numbers on the same site as 2 separate FiT installations.  They will be treated as the same site.  This could have some significant implications.
Cost Control
  • There will be a system of degression of generation tariffs annually from April 2014, with a baseline degression of 5% each year (in real terms). This will be adjusted according to deployment in the previous year, with a minimum annual reduction of 2.5% in the event of very low deployment (with the exception of some wind bands which would have a minimum reduction of 5%), and a maximum of 20% for very high deployment.
  • In exceptional circumstances where there has been extremely high deployment, there will be a mechanism for six-monthly contingent degression: this is a safety net mechanism and would not take effect with normal deployment levels.  This could introduce a 10% degression in rates.
  • The degression arrangements do not apply to microCHP because the existing review process already provides sufficient cost control.
  • If the rates decline at the expected baseline rate of degression (5% annually) then the table below shows the likely tariffs for projects being initiated over the next few years.  The tables below summarise the cost control system.  Tariff levels will be reviewed by 2017 to reflect interaction with the Electricity Market Reform (EMR) support mechanisms (i.e. they may need adjustment for new installations at the date when the EMR mechanisms take effect). It should be noted that these tariffs are shown in real terms. They will be adjusted each year for changes in the RPI as well as the degression percentages.
FiT tariff degression rates
Preliminary Accreditation
  • A new system of preliminary accreditation for certain prospective FITs generators is being introduced. The system will primarily be available to solar PV and wind installations of greater than 50kW declared net capacity, and all AD and hydro installations. To be eligible, proposed installations must have planning approval and evidence of acceptance of a firm grid connection offer, if needed, and hydro installations must have any necessary environmental approvals. The system will provide a tariff  guarantee for a fixed period of six months to two years depending on the technology. The tariff guarantee will apply only to the capacity that is included in the preliminary accreditation application.
Community Projects
  • A new package to support community energy projects is being introduced - see the new rates in the tables above.  This defines “community energy projects” as those where the FIT generator is one of a range of small scale not-for-profit enterprises. 
  • Community Projects will be exempt from the minimum energy efficiency requirement including on non-domestic buildings, and all PV installations on schools and further education colleges; they will still need to obtain an Energy Performance Certificate.
  • There will be a new system of tariff guarantees, similar to those provided for installations with preliminary accreditation, during the development phase for non-domestic community energy projects.
Solar PV multi-installation projects
  • They are NOT introducing measures, as suggested in the consultation, to drastically cut the FiT rates for commercial companies offering multi-installation schemes.  
Support for small tidal projects
  • They are extending the definition of “hydro generating station” to include small tidal projects such as tidal mills and tidal locks that use a mixture of fluvial and tidal power.
Export Tariff
  • The export tariff will be raised to 4.5p/kWh for new installations in all technologies from 1st December 2012 in line with the same decision for Solar PV.
Other issues
  • There was an interesting discussion on the eligibility of second-hand equipment - the result is confirmation of the status quo for now.  That is, there is no ban on using second-hand equipment per se as long as it has not previously received support under the FiT or Renewables Obligation (see Point 76, page 24).  [Not sure how they could tell whether it has or hasn't received support previously?]
  • They have decided not to extend energy efficiency requirements to non-PV installations.
  • They are keen to keep open discussions with the small wind manufacturing industry regarding their concerns on the deliberate under-sizing of wind installations.

 

Summarising the FiT Review Changes & Proposals

Finally the Government has published its thinking around a revision of the Feed-in tariff scheme.  The press release was published on the DECC site today, 9th February 2012. 

We have divided up the implications of this FiT Review announcement into three sections. The first looks at the definite changes to Solar PV, the second at proposed changes to Solar PV, and the third at proposed changes to other technologies covered by FiT (wind, hydro, AD etc) and more general FiT administration issues.

Definite changes to Solar PV

  • A new set of tariffs will be introduced for all systems registered after 3rd March 2012 ie. 21p/unit for domestic scale installations.  The Ministerial statement says “The new tariffs are designed to apply to all installations with an eligibility date from 3 March onwards.”  See our article "Is Solar PV worth considering in 2012?" for more detail on these.
  • From 1st April 2012 properties should achieve an Energy Performance Certificate rating of level D or above to qualify for the full FiT tariff.  That means older properties that tend to leak energy are unlikely to be eligible for the full FiT so will significantly reduce the market for solar PV.
  • From 1st April  DECC will change the multi-installation tariff rates (which are 80% less than standard rates) will now only apply to projects involving 25 installations or more (rather than 2 or more) – this is aimed at helping community schemes.
  • A new higher tariff for microCHP units will be introduced to incentivise take-up of these.
  • There is, as yet, no clarification on the situation for people registering PV systems right now (Feb 2012).  “The government cannot give certainty on tariff levels to people who install solar panels with an eligibility date between 12th December 2011 and 3rd March 2012 due to ongoing legal proceedings. DECC is appealing to the Supreme Court and has until 21st February to lodge its case.”

Proposed Changes to Solar PV

DECC are consulting on their Solar PV changes (Document 2A) which requests feedback by 3rd April.  These are the highlights from the consultation document together with some of our thoughts:

Their proposed PV tariff table from 1st July 2012:

Solar PV tariffs proposed for 1st July 2012

The DECC consultation document (2A) outlines the detail of Options A, B and C which are based on different scenarios. The stand-alone rate would apply for those properties which do not achieve an EPC rating of D.

  • DECC would like to introduce a new set of reduced tariff options from 1st July 2012.   This would be based around a much more flexible PV tariff system that could take account of rapidly changing market conditions.  This is likely to include a 5-10% cut (called a ‘degression’) every 6 months together with the ability to cut the tariffs even quicker if demand starts to rise significantly (with a 2 month notice period).  We would suggest the previous hikes in demand are highly unlikely without major falls in the price of PV panels given the scale of cuts to the tariffs.
  • DECC are proposing to cut the FiT for PV from 25 to 20 years.
  • DECC are proposing to review the export tariff currently at 3.1p/unit – this could potentially be increased although they would then decrease the tariff to keep returns consistent.
  • DECC are proposing to review whether tariffs should be index-linked and increase automatically each year or ‘flat’.
  • DECC propose to reduce the solar PV tariff for non community-owned multi-installations to a level equivalent to the stand-alone tariff from October 2012. As we understand this will dramatically affect the business for those offering commercial companies offering ‘rent-a-roof’ schemes

Proposed Changes for Other Renewable Generation Technologies

A further consultation (2B) document has been produced covering other FiT technologies and general FiT administration.  The closing date for feedback on this is 26th April.  Here are some of the highlights.

Proposed tariff changes – note they are proposed to be introduced from October 2012:

Proposed FiT tariffs for October 2012 onwards

Note, one of the major potential loosers is the small wind sector where those installing wind turbines between 1.5 kW and 15 kW after October 2012 could get their tariff cut by 25%.  Look out for a major spike in installations of small turbines over the summer if this is confirmed.

Annual Degression – DECC propose ‘automatic degression’ of tariffs and capacity triggers across all other technologies.  They have particular concerns over a potential rapid increase in the number of micro-wind projects..”there may be some budgetary risk from other technologies that can be deployed quickly such as micro-wind installations.  We propose that from April 2014, all tariffs should be subject to a minimum degression rate of 5% per year.”

Proposed degression on FiT tariffs

Energy Efficiency Measures – linking these in to buildings so smaller scale generation projects based on building mounted wind turbines and microCHP could be dependent on the energy efficiency of a building.

Use of Second-hand Equipment - DECC are considering whether ‘second-hand equipment’ could qualify for the FiT and, if so, how should the tariff be reduced to support this?  If this is brought in it would have a big impact on the market almost instantly generating a second-hand marketplace for used and refurbished equipment.

AD – Tariffs are frozen.  DECC has concerns around environmental risks associated with purpose-grown crops for AD plants.

Wind - Tariffs for 1.5kW to 1.5MW wind installations are set to provide an approximate 8% rate of return for reference wind installations located at sites with an average 6 m/s wind speed. This target rate of return at the high end of the 5-8% target rate of return is justified because of the portfolio risks experienced by wind developers.

Hydro – “Recalculation of tariffs using the revised estimates based on an 8% rate of return would result in a profile of tariffs that was very similar to the existing tariffs.”

MicroCHP – “..we propose to raise the support level to 12.5p. This increase will allow a rate of return for μCHP comparable to other low carbon domestic technologies.”

Community Energy Schemes – DECC would like to develop clearer ideas on how to define a community energy project

FiT Accreditation process -  “We recognise the value of a preliminary accreditation process, along the lines of the RO. We believe that preliminary accreditation should be offered to wind projects over 50kW and all hydro and anaerobic digestion installations i.e. those that are eligible for ROO-FIT.”  This would suggest that DECC are considering some way that projects can get a tariff guarantee offering financial certainty earlier in their project life-cycle.  This would certainly be very helpful.

General Admin of FiT - DECC are considering greater powers to remove installations from the FiT register where, for example, they have been unlawfully erected through not getting planning permission.

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Temporary respite for cuts to solar PV tariffs?

Yesterday's High Court Appeal by the Government regarding solar PV tariffs back-fired big time.  It was a resounding victory for the solar industry led from the front by Jeremy Leggett's SolarCentury.  While it's not 'set in stone' yet (Chris Huhne is seeking an appeal to the Supreme Court) it would appear that some in the industry do feel this verdict gives them the confidence to advertise based on the original tariffs and rekindle PV projects that were put on ice following the 12th December deadline.  But they need to act fast..!

Unfortunately confusion reigns right now but this is our understanding of the timescales for those considering a solar PV project.

The original rates available before 12th December MAY apply (eg. 43p/unit for less than 4kW projects) provided you register your project before 3rd March - but this is far from certain (as of end of January 2012) as Chris Huhe at DECC is currently threatening a further legal challenge that could jeopardise this.  If you haven't done much yet this gives you little time!  If you register your project between 3rd March and end of March you may get the old tariff rates until the end of March but you then move automatically to the new tariff rates from April onwards which are approximately 50% less.  If you register a project after the end of March you qualify for the new rates.

As tax payers, DECC have just spent over £58,000 on legal fees to get this far and that doesn't include legal fees of 'the winners' which they may have to pick up or the fees to take it to the Supreme Court.  Talk about wasting our cash...how many more times do they need to hear it?

This all matters for the relatively limited proportion of potential customers that are in a position to get a project done quickly..and can find a PV installer that has sufficient resources to do the job (given they've probably shed a lot of their staff in the last few months).  However what really matters is the medium and long term health of this industry and this is all a storm-in-a-tea-cup in comparison.

While I have the greatest respect for Jeremy Leggett in taking the fight to the Government on this he does seem to over-egg the implications.  Will this restore solar PV as a thriving sector again? In our view its unlikely.  It should give it a temporary shot in the arm but, if Chris Huhne is to be believed, the implications of having higher rates in the short-term could be even lower rates come April.

We believe the Government is unlikely to raise the current FiT budget cap to meet the potential solar PV demand.  So, if the Government is committed to the solar PV industry (and this is certainly questionable right now), then it needs to set up a new dedicated Solar PV scheme (the 'Solar PV Incentive') with a much fairer form of budget from core tax revenue.  This would be much like the Renewable Heat Incentive. Or, alternatively (and frankly much more likely), it needs to build in clear support for solar PV into it's Green Deal and have a transition period between April and October to ensure the industry stays healthy.

If homeowners and businesses could implement solar PV through a Green Deal loan, then pay-off the installation costs over 10 years from energy bill savings, this could be a very attractive idea.  It also gets round the problem that people move house and don't want to commit to a long-term investment.

What a huge mess!  The sooner the industry, investors and, most of all, consumers get some clarity the better.  If the government believes solar PV is an inappropriate technology in UK latitudes because the subsidies required to make it attractive are not affordable then it should clearly say so!  But, before they do, they really need to consult their crystal balls to see whether PV technology prices could change over the next 5 years making it directly competitive with other forms of energy generation.  If that's the case they will miss a massive opportunity.

 

Government incentives must be generous to work!

As things wind down for Christmas we thought we would reflect on the solar PV story over the last 12 months, particularly in the light of the high court ruling yesterday which questioned the legality of cutting solar Pv subsidies so quickly.  [Nb. Am I the only one to think that Government's should think very hard before they appeal a High Court decision?  Could they not just accept the weakness of their approach and do something about it quickly rather than spending more public money to take it back to the courts?]

Just when it was all starting to look so rosy...last year conferences were concerned about our ability to get anywhere close to the targets for solar PV in the light of the small number of companies specialising in installation services, their need to become MCS qualified, and the potential lack of skills.  They need not have worried - electricians, roofing companies, mainstream retailers...every man and his dog suddenly got MCS qualified and joined in.  Suddenly the number of vans with "Solar PV installation" down the side multiplied rapidly!  The scheme, it is claimed, was a victim of its own success and  no longer sustainable - it was eating into too much of the overall FiT budget.

At the end of July 2011, on the back of the BBC Dragons Den programme that featured a solar PV installer (who was spoilt for choice in terms of investor options, by the way!), we undertook a bit of rough-and-ready market research to try and size the UK market for domestic solar PV.  We wanted to estimate the potential demand for solar PV amongst households in the UK.  If we can do this in about a day then hopefully DECC would have had much more sophisticated predictions telling them much the same sort of thing!  As it appears, our short-term predictions were not too short of the mark and would clearly have rung alarm bells given the budget implications.  We even built in a 'peak' in Jan-March 2012 to take into account the likely fall in FiT levels come April.  As we said then, the big question was "what would happen from April onwards?"  Our research (following research done by PwC) suggested the Government targets for take-up of domestic PV were very high and growth would continue until about 2016 when it would start to slow down.  But the predicted growth was entirely dependent on continued (and adequate) government support.

Then we wrote another post on 31st October at the point of the announcement about the solar PV cuts looking at the causes and implications.  This makes one very key point backed up by our article on whether solar PV makes financial sense.  It is a point that appears to be widely missed.  Solar PV tariffs were, in our view, not overly generous - they were around about the right sort of level because they were sufficiently generous to encourage people to install them despite significant risks that the real benefits will come many years down the line.

Unfortunately some solar PV companies 'over-hyped' the potential benefits in their marketing.  The media picked up on this as did politicians.  But the ONLY DEFINITE WINNERS from solar PV are households that are unlikely to ever move house - for example those who installed it on their farmhouse where their family farming business is connected to a specific location and they are likely to be there for generations to come.  Other potential winners may well be those who purchase houses that have had solar PV installed but have not paid the full "solar PV premium" on the house price.

On average people move house every 7 years.  And there remains no credible evidence I've seen which suggests that your house price will generate a "solar PV premium".  If you do move house within 15-20 years of installing your panels the AER rate of return is not that different from putting your money into other more standard investments.  The profitability of the scheme ONLY ramps up dramatically between 20 and 25 years.

A significant proportion of  households that have invested in PV may find it very tricky to predict where they will be in 25 years time.  There are so many uncertainties over such a long time frame!  And who knows what the technology options for power consumption and generation will be in 2035?

Our sustainable solution - if the Government wants to support Solar PV without impacting on the existing FiT budget then take solar PV out of the current FiT scheme.   Set up a separate "Solar PV Incentive" scheme with a defined Treasury budget like the RHI.  Instead of spending millions on a couple of big infrstructure projects (as planned) re-direct this budget to supporting 'green jobs' in predominantly SME solar PV businesses which, due to the nature of the industry, are likely to be fairly well spread about the whole country (thereby avoiding regional bias).  There always seems to be a desparate temptation within Government to regenerate the economy through investment in a smaller number of big projects rather than share this money across a large number of projects driven by SMEs.

So, a Christmas message to Government from us - for all decisions like this there is a delicate balance between "risk" and "reward".   To date an investment in domestic solar PV has, I would contend, been relatively high risk - it therefore requires relatively high reward to incentivise people.  The sort of FiT levels we've seen have been enough for about 220,000 households to take the leap (this is the approx. number of installations less than 4kW to 18th Dec 2011).  With some trimming to account for lower technology prices, this success story could be continued.  It's not like solar PV has hit the mainstream just yet! Take-up levels are currently around 1% of all households in Britain.  If our predictions are anywhere near correct there is a great deal more capacity.

You need to assess how much risk households believe they will have to take.  Risk is not just financial, it's also the risk that a project sucks up lots of effort, time and general hassle that could be avoided.  If risks are perceived to be high (often due to the long-term nature of the benefits) then incentive schemes must be generous to make them attractive.  For those behind the Green Deal, take note...