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.
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.
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.
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.
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.
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.
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.
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...
It appears from Greg Barker's post this morning that the DECC spokesperson were right - the document referenced in our last blog post was inaccurate in the sense that the deadline date was not 8th December but 12th December - 4 days out! Pretty much everything else is spot on. You can read the full DECC report here.
These are the proposed new tariffs compared with the current ones to see the extent of the suggested reductions:
If I'm some way through the process already what should I do?
If you're at a relatively early stage and you have yet to get a confirmed install date with an installer then it's likely to be too late. Most installers we've spoken to do not have any free slots for new customers.
For those that are some way down the road with an installer then it's all about whether you can meet the 12th December deadline. You should probably seek guarantees from your installer that they can get your system signed off with some days to spare before the deadline. What exactly do you need to do to meet this?
The DECC report says the following..
47.The effect of the proposal is that in order to be eligible for existing tariffs a PV installation with a total installed capacity of up to 250kW must be commissioned (see definition below) and have its request for accreditation received by a FIT Licensee (in the case of PV installations with a declared net capacity of 50kW or less) or Ofgem (in the case of PV installations with a declared net capacity of more than 50kW) before 12th December 2011. In the case of PV installations with a declared net capacity of 50kW or less, the request for accreditation must include a Microgeneration Certification Scheme (MCS) certificate.
Our reading of this (and we are seeking confirmation specifically on this from our Supporters) is that for domestic and small scale projects (under 50 kW) you will need to have your system up-and-running (ie. commissioned by your installer), completed all your documentation (with no gaps or mistakes), and have sent this off to your chosen FiT licensee to arrive with them on 11th December 2011. To be certain you should check with your chosen FiT licensee. You should consider using a FiT Licensee that you can trust to follow their procedures, has a strong reputation in this area and can act quickly - we would suggest Good Energy as one of the FiT Licensees that would be a good option. You do not have to switch to them to provide your electricity - you can just use their FiT registration service.
Subsequent to this post we have included specific Good Energy guidance which they issued for those wishing to use their FiT registration service - see our follow-up comment below.
Installers will be keen to do your work over the next 5 weeks but you may want to back out given the risks of not getting in before the deadline. If you decide to go ahead, given the likely rush and pressure on installers to get through installations quickly, you should be careful to make sure performance is not compromised.
For those who have signed contracts and paid deposits (either for purchase of solar PV or a rent-a-roof scheme) you need to contact your installer or service provider and read the detail of your contract. You may even need to seek legal advice if you want to back out.
Households that have been considering solar PV (given they have south-facing roof space) should seriously consider solar thermal as an alternative solution for offsetting their energy consumption - in this case water heating. The panels will take up significantly less roof space and the overall cost of such a solution may well be 50% or less than that of a solar PV project. Financial support for domestic scale solar thermal projects is likely to be introduced through the Renewable Heat Incentive (RHI) from October 2012. It may not be as generous at first sight but ultimately FiTs and other incentives are a temporary catalyst. We should all be more focused on how much these technologies can save us on our existing energy consumption. Solar thermal solutions are inherently a more efficient way to generate energy from sunshine and should offer sustainable, long-term benefits in terms of offsetting your energy use.
What are the wider consequences of these changes?
If this goes ahead as is very likely, it will be a major blow to the attractiveness of domestic and commercial (up to 50 kW) scale solar PV projects. Take-up from now is likely to be curtailed significantly. The availability of 'free rent-a-roof' schemes is also likely to drop sharply - many of those offering such schemes are already in the process of shelving them.
Customers should keep an eye on the health of their installer - it's likely a significant number of them may not be around long-term. Many customers of solar PV systems are starting to realise these are not "fit and forget" solutions - glitches are occuring and these have tended to be fixed by the installer for free. So if your installer goes bust where does that leave you? You should have warranties on your kit (panels, inverter etc.) with the manufacturer in case problems arise but chances are you may not be able to diagnose the specific problem. It's likely that a smaller number of current installers will set up maintenance services to provide on-going specialist support to anyone with solar PV...but not for free!
The use of Energy Performance Certificates (EPCs) in the qualification process from 1st April 2012 is a new and significant introduction that focuses much greater emphasis on EPC ratings for buildings. There is likely to be renewed investigation of these for residential and commercial properties. Our experience is that larger commercial buildings and older historic properties could find it a costly process to achieve a Grade C or above EPC rating which could effectively rule them out of solar PV FiT receipt.
For the industry the impact will be significant for all those companies that have invested in MCS accreditation and have skilled up their workforce to deliver projects. They should feel rightfully aggrieved with this sudden policy change. A significant number of these companies will either have to focus more on the much smaller market for maintaining these systems or diversify away from this area. If they fail to do so successfully they may go to the wall leaving their PV customers in an awkward position should they need further on-going support. The idea that solar PV companies can diversify into solar thermal systems is worth exploring although the solution is inherently more complex and requires new skills.
What's caused this problem?
The crux of this issue appears to be size and lack of expandability of the budget set for the FiT scheme. The current economic climate and budget deficit probably has a lot to do with this too. While the funding is raised through increases on all our energy bills, it is actually treated as a tax by the Treasury and therefore has to be given an upper limit. The Government are not prepared to increase this budget with the consequence of greater rises across the board to all our energy bills. They are also not prepared to let solar PV hoover up the majority of the FiT budget - there are a range of other renewable technologies that actually are considered 'higher priority' by DECC.
Our view is that FiT has demonstrated it can lead to a significant increase in jobs in this area - jobs which are likely to be evenly distributed across the whole country. So, as a means of creating and supporting jobs it has been very successful. However, as a means of (green) energy production we can understand why many believe it doesn't offer great value. Aggregated outputs from all domestic PV projects would generally fall a significant way short of the sort of output from a single gas fired power station. There is also the argument that the UK is one of the windiest countries in Europe (and the world) but a long way from having a good solar resource.
Much is made in the DECC justification document of the explosion in solar PV installation rates that could blow the FiT budget. Could this have been anticipated? We believe the sort of installation rate increases over recent months should have been entirely predictable - they are in line with our predictions (and those of others) on the take-up of domestic PV. So, the real cause may be one or more of the following:
The FiT budget has taken a 10% cut as a result of cross-government budget cuts so this will have had some impact.
DECC initially predicted very little take up (if any) of anything other than sub 4 kW schemes in the first few years according to their published figures - in reality there has been significant take up (in terms of generation capacity and therefore budget) of larger scale generation projects and also stand-alone projects that has put considerable pressure on the overall FiT budget.
DECC got their early sums wrong in terms of the budget that was actually needed to support the rapid growth of solar PV to meet targets.
Officials assumed initially that the upper budget figure was likely to be more 'flexible' - but that is now proving politically unpaletable in the current climate with rising consumer energy prices.
DECC are far from convinced that support for solar PV is the best way to achieve their energy production and carbon saving objectives. As they say in their document, solar PV is NOT one of their 8 'priority renewable technologies'. The amount needed right now to incentivise customers to invest in solar PV is too great and it does not offer value for money.
The solar PV industry is not something that DECC are prepared to artificially support for the sake of maintaining jobs - they would prefer to put their money for (renewable?) energy projects into other things - like building nuclear energy plants.
My vote is that Government priorities have changed since Labour lost power and the objectives of this government in terms of spending in the current environment are quite different. They believe Solar PV incentivisation is too big a price to pay for the benefits (in relatively small-scale green energy production, carbon savings, jobs and wealth creation). Politicians are extremely keen to see the Green Deal scheme become a major success at the domestic scale and much less enthusiastic about schemes that have been inherited from the previous Government, notably FiTs and RHI. [From a 'green perspective' focusing on efficiency savings is entirely logical but whether the Green Deal will be as popular as FiT remains to be seen.]
In retrospect, what lessons could we learn?
Were the tariffs too generous? Unlike many people, our financial analysis suggests that the rate of return for solar PV was in NOT excessive in relation to risk. The problem relates to it being hugely over-hyped. We've talked to a lot of households who were interested in solar PV but put off by the length of payback period and the relatively 'average' returns based on the walking away after 15-20 years. The value that solar PV might add to your house in the long-term is very unclear. Those that have installed solar PV should be rewarded for taking a significant risk. Unfortunately the hype around solar PV (often perpetuated by those in the industry) suggested the deal was "too good to be true". Many households will move house within the 25 year period and may well not see a financial return on the scale they were expecting - they may even be substantially out of pocket.
Who have been the real winners from FiT supported solar PV to date? In broad terms, they are likely to be:
Wealthier households with savings that have been able to afford to invest up-front in solar PV particularly if their property is unlikely to be sold on outside the family in the long-term.
Many owners of solar PV companies who have had a very profitable last 12 months making significant margins largely on the sale of the kit. Also some owners of 'rent-a-roof' service companies who have made substantial profits due to the nature of the FiT scheme. [We would tend to agree with the DECC report that the benefits to households that have opted for the rent-a-roof scheme are fairly marginal due to the limited ability to actually consume the energy that solar PV generates.]
Anyone who buys a property with solar PV already installed where it qualified for this higher tariff - provided the price the new owner paid does not include a significant "PV Premium". These new owners should be very happy indeed with the windfall payments every quarter!
Should incentives for energy generation have been launched before incentives for energy conservation? We believe they should not. A scheme like Green Deal should have been brought in first to incentivise households to save energy before they try to generate it. Successive Government's have been focused on energy generation ahead of energy efficiency (see ACE blog post). Depending on the energy efficiency measures taken by a household, it should then qualify for generation tariffs. The Government is therefore (belatedly) right to link generation with energy efficiency as they are seeking to do now.
Overall, we feel the Government has asked industry to 'ramp up', 'skill up' and 'certify up' to install solar PV. Unfortunately they have been well and trully dumped on. The industry has generated '000s of new jobs which are now threatened. The recent comments by the Prime Minister to pump prime the economy through large capital intensive projects ring rather hollow when some of this money could go into an industry that has already demonstrated it can generate jobs across the whole country. So, rather than drastic changes and job losses, why not top up the FiT budget with this additional 'pot' and reduce solar PV tariffs more gradually in line with technology costs - that way you should have a sustainable, long-term solar PV industry that supports a large number of 'green jobs'.
Just to clarify, the suggested changes above are 'under review' at this stage, subject to a consultation period. If you feel strongly you can respond to the consultation on the DECC website. The fact that the date of close of consultation is after the 12th December deadline suggests you may be wasting your time!
Many of you will know that the Government is planning a review of the Feed-in Tariff scheme to be implemented from April 2012. It is widely anticipated this will lead to a significant decrease in the current tariff levels which many regard as overly generous, particularly for technologies like solar PV where the prices of the panels have fallen significantly in the last year. The impact of this review on the renewables sector could be huge. The viability of small to medium scale generation projects could be put in doubt if the rates fall significantly. We heard yesterday from Scottish Renewables, the industry body, that the first announcement from DECC is likely to be in the 2nd or 3rd week of November 2011. This will be the first point they 'show their hand' although this will be the start of a consultation period before they are finalised. If experience is anything to go by the chance of any significant change is perhaps unlikely. So watch this space - we will bring you the news as soon as we hear anything.
Renewable Heat Incentive..delayed but not for long
One of our Sponsors, MacRoberts, has sent us the latest details on the Renewable Heat Incentive scheme - this announcement is only relevant to non-domestic customers - RHI for domestic customers is due in October 2012. That said, we heard yesterday that OfGem are taking a flexible attitude to RHI applicants so even small businesses like B&Bs can apply for RHI now.
On 7 October 2011 the Department for Energy and Climate Change announced that state aid approval had been granted by the European Commission for the Renewable Heat Incentive (RHI) for non-domestic generators. Full details of the scheme can be found HERE. For a brief overview of the scheme, see MacRoberts' e-update from March 2011 Government Lights a Fire Under Renewable Heat.
In the process of considering its approval the Commission expressed concerns that the large biomass tariff was set too high, and the approval is therefore subject to that tariff being reduced. As a result, there will be a delay to the launch of the RHI scheme while the draft Regulations implementing it are amended and re-submitted to the Parliamentary process.
DECC are estimating that the scheme can nonetheless be open before the end of November 2011.