Consultation Response – Renewable Energy Financial Incentives – Feed-in Tariff
Introduction
We welcome the introduction of Feed-in Tariffs for sub 5MW renewable electricity generation and thank Decc for moving swiftly to pave the way for their introduction in April 2010. The proposals have the potential to foster much wider deployment of renewable energy at the local level and to attract investment in renewable energy from groups as diverse as farmers, commercial companies, social housing providers, local authorities and communities, as well as householders. Apart from helping to meet renewable energy targets, the Tariffs will enable greater consumer choice in the market going forward. A successful scheme will also contribute to economic prosperity through the creation of quality local jobs, wider sector innovation and new manufacturing opportunities.
We are also impressed by Elexon’s proposals to undertake the levelisation of costs between suppliers. It is very important that suppliers do not suffer competitive impacts as a consequence of the tariffs, and that the redistribution process takes place efficiently.
However, we remain concerned by the low level of ambition set for the scheme (just 2% of electricity by 2020). The UK faces the most challenging renewable energy target in Europe and we urge the government to be more ambitious. While the recession is putting a squeeze on finances it is important not to allow this to impact on the success of the Tariffs as financially the Tariff scheme is back-loaded i.e. it does not entail significant cost in the early years of the scheme, thus the scheme is well designed for current economic circumstances and emergence from recession. We would also urge Decc to generally put greater emphasis on the economic benefits of the Tariffs scheme and the development of the UK renewables sector.
Ideally the RHI should have been introduced at the same time as the schemes need to dovetail effectively together. However clear price signals for the forthcoming biomethane injection and heat tariffs should at least inform project developers as to the relative opportunities between the two mechanisms. The December consultation document should therefore set out Renewable Heat Incentive (RHI) prices, and guarantee that the final prices are no lower than those consulted upon.
Key improvements
Whilst there is much that we support within the consultation document, there are a number of key improvements that we would draw your attention to:
- All technologies should benefit from the same rate of return.
- The rate of return should ideally be 10%. There are a number of reasons for this:
- A 10% return on investment (ROI) will get the scheme off to a good start, foster early necessary investment in the UK industry, and reduce the risk of tariff rates needing to be adjusted significantly up at future reviews.
- We believe that the 5 – 8% proposed is simply insufficient.
- As argued later in this response, the Element Energy report suggests tariffs based on 10% deliver better value overall than 8%.
- Although, 8% might be adequate for some householders, it is not sufficient to engage the commercial sector. It should be noted that the commercial sector (and large public sector) may find even a 10% return inadequate, but might be able to accept this if they could also benefit from Carbon Reduction Commitment (CRC) and/or other carbon benefits.
- The tariffs, generation and export, need to be index-linked to ensure that they retain their value for their full life.
- Tariff degression should not be applied until the third anniversary of the scheme, to ensure a robust start.
- The generation tariff, as well as the export reward should be exempt from income tax, for household installations.
- Enhanced Capital Allowances should be extended to all renewable technologies to support their growth in the commercial sector.
- Onsite renewable technologies should be exempt from assessment for business rates, council tax and stamp duty.
- Existing installations should be eligible for the tariffs.
- Other ‘hidden’ costs need to be addressed e.g. grid connection charges.
- There is a need for better communication by Decc about the Tariffs to potential investors.
REA is generally concerned with the low level of awareness about the scheme. It is vital to communicate with potential investors to ensure that proposals are effective from the perspective of a range of key investors. Important groups we have spoken to, including commercial companies, were not aware of the scheme or unclear on key aspects of the design proposals. We are also concerned that the role of local government is recognised. Local authorities have a central role to play in the success of the scheme. It is also important that the needs of organisations that can use the Tariffs specifically to target fuel poverty are carefully considered, e.g. social housing providers (see also off-grid treatment).
However, REA notes Decc media communications alongside the announcement of the consultation earlier this year were excellent. It is the breadth of communication with stakeholders, rather than the quality of communications we are concerned about.
Feed-in Tariffs
Q35. Do you agree that FITs should be structured in order to recognise all generation, rather than just exports?
Yes, we firmly believe generators should be rewarded for all electricity generation and agree with the rationale set out in the consultation document for this. The FIT scheme is not designed to create an incentive for merchant power generation, rather to attract a far wider range of investors at the local level who are primarily interested in generating electricity for their own consumption.
Q36. Do you agree that the best way of delivering security for the investor is to set a long-term guaranteed price for exports?
We agree with the principle of setting a guaranteed price for exports. This must be set as a minimum, not maximum rate. We acknowledge the price may not accurately reflect the value of the export to suppliers; however that is not its purpose. Its purpose is to encourage the on-site generator to reduce its own electricity consumption.
The consultation document does propose an “opt out” of the guaranteed 5p export tariff, but it is also important that those opting in for the long-term “guarantee” are not penalised unnecessarily for doing so. Over a 20 or 25 year tariff, the value of a fixed export tariff of 5p/kWh will erode quickly through inflation or may vary significantly from market levels. Renewable generators should, as a minimum, expect the value of their exported electricity to increase over time in line with energy inflation.
Q37. Do you agree that FITs generators should also benefit from on-site use of their generation?
Yes. See response to question 35. The Tariffs are not designed to deliver bulk power. Rather they are designed to reward smaller investors who are interested in greening their own energy consumption and who should be encouraged to do so.
Q38. Do you have any other views on the basic structure of the FITs?
The industry warmly welcomes the principle of a long-term support structure which will enable long-term planning for investment, innovation and capacity building. Likewise it is essential for investors planning projects and making investments under Tariffs to have full confidence in the robustness and stability of the scheme going forwards. Whilst the structure broadly reflects the recommendations set out in our tariff document[1], there are a number of areas where the structure needs to be improved.
Taxation
The consultation document does not state whether the tariffs will be subject to taxation. Currently domestic generators’ income from Renewable Obligation Certificates (ROCs) and supply company export tariffs are exempt from taxation and we would expect that exemption to continue for feed-in tariff income, for both the generation tariff and export reward. For non-domestic generators, it is essential to the success of the tariff scheme for the tariffs to be revised upwards to take account of taxation, or ideally made exempt from tax altogether. Otherwise the current assumptions on ROI are meaningless.
Hidden costs
It is important that there are no “hidden” additional financial penalties placed on householders and businesses as a result of their decision to invest in building mounted technologies such as PV and claim the feed-in tariff. We have repeatedly drawn attention to the implications of increases in business rates for PV (and solar thermal) installations in particular. This must be addressed.
For domestic customers the value of renewable investments must be excluded from assessments of property value for the purposes of council tax and stamp duty calculations.
Inflation
The tariff proposal in the consultation document assumes that tariffs will not be index linked and therefore not protected from inflation. This means that over the 20-25 year tariff lifetime, the real value of the tariff payments (and the 5p/kW export tariff) will decline substantially, further reducing the real ROI and failing to keep pace with the refuelling, maintenance and other operating costs to which most systems will be subject. Therefore to ensure that the policy is effective and is consistent with the Renewables Obligation (RO), we recommend the generation tariff is index-linked to RPI. This is a measure that is well understood by both domestic and non-domestic consumers.
For new entrants, the value of the export tariff needs to be kept in line with electricity prices. In the consultation document it suggests that it will be set once, and thereafter never vary. We therefore recommend that the export tariff is reviewed in line with movements in the wholesale price of electricity.
Missing technologies
The Energy Act 2008 included a number of renewable technologies that it suggested would be eligible for tariff payments, but which have been omitted from the consultation document. These include geothermal, tidal, wave, bio-fuel generation, gasification and pyrolysis. We have worked with industry to recommend tariff levels that should be sufficient to encourage their deployment.
Degression
Whilst we support the concept of degression, placing an onus on the industry to reduce technology costs, we believe setting levels at the outset will not have the desired effect that the policy intends. Using PV as an example, we believe it is highly unlikely installed costs will fall significantly in year 1 or 2. This is because the UK industry has been constrained by relatively low levels of grant funding and now needs to invest significantly to expand. Setting a high degression rate is likely to stifle this necessary early investment. Therefore we recommend delaying the introduction of degression rates for a period of 3 years.
Q39. Do you agree with the proposed limits of 5MW for renewable technologies and
50kW for gas fired CHP for FITs installations?
Yes. However the membership is not unanimous on this point. Our larger utility members in particular are of the view that this scheme should be for sub 50kW plant.
Q40. If you disagree with the proposed limits, what lower limits would be more suitable and why?
No comment.
Q41. Do you agree that generators off the electricity grid should be eligible for FITs? If so, what safeguards should be put in place for these generators to ensure the electricity is being used?
Yes. Off-grid households can have some of the highest fuel bills and we believe it is essential that they are not excluded from benefiting from Tariffs.
Generators that are off-grid are currently eligible under the RO. In order to claim ROCs for the eligible electricity used on-site they are required to sign every year a “Permitted Ways” Declaration and submit this to Ofgem. In order for ROCs to be issued, the electricity in question must be measured accurately using a meter and readings reported to Ofgem. Currently Ofgem do not collect data on the number of off- grid generations that are claiming ROCs.
Ofgem conducts a number of audits of accredited off-grid generating stations. Their purpose is to protect against fraud, to check the generator is still eligible under the RO and that the correct number of ROCs are being issued. The metering arrangements and the data submitted to ROC claims are also reviewed. However, Ofgem do not specifically check that all the generators signing a permitted ways declaration are using the electricity as they assume, due to the cost of investing in the generation equipment, it is likely they are using all the electricity generated. This seems a fair assumption to make that could also be extended to Tariffs. It would also be disproportionately costly to check all these generators.
Q42. Do you agree with the selection of technologies for which we will be providing tariffs from April 2010?
Tariffs should be set for geothermal, gasification and pyrolysis, biofuels, and wave and tidal energy from the outset. Whilst relatively few projects may wish to take this up, as most projects under consideration are larger than 5MW, for some developers the tariff will be very important and these technologies may present the best option for investors in a particular location. To refrain from setting tariffs for certain technologies because they are not yet widely deployed will effectively keep them from the market indefinitely.
The REA’s initial modelling suggested that tariffs were not required for sewage and landfill gas, although it may be justified for where the lower quality gas is being exploited at the final end of the landfill gas decay curve. An example of this is a new technology[2] which can routinely operate at very low methane levels (around 30% typically, but capable of operation down to around 12% methane) the application of these 125kW engines has the potential to extend the operational life of many existing landfill gas projects, but also to be applied at many sites which have never had sufficient gas quality to support power generation. We estimate there is around 40MW potential which could be realised with the benefit of a feed in tariff.
Q43. Should technologies for which we do not propose to offer a specific tariff from April 2010 be handled by:
– Providing a single tariff from April 2010 for all remaining technologies;
or:
– Considered as a new tariff band as part of regular FITs reviews?
We have recommended tariff levels in the Annex for the technologies identified in the Energy Act 2008 but which were missing from the consultation document. These technologies should have their own bands from the outset.
Under the RO, if a new technology is developed, the Secretary of state may review the banding provisions at any time. This approach could be mirrored with the feed in tariffs.
Q44. Do you agree that the FITs should not require on-site generators to comply with any energy efficiency standards as a condition for eligibility?
Yes. For electricity tariffs this approach makes sense, as users have the incentive to consume less electricity in order to benefit from greater income via the export tariff. This should encourage energy efficiency and make beneficiaries of the tariff think carefully about how efficient an electrical appliance is before purchasing it, so maximising the export potential. Indeed the REA recommended this approach for this reason. However, this incentive will be reduced if the export tariff is not either index linked, or otherwise reviewed, to keep it in line with price increases.
It is also important to keep the process as straightforward as possible for those wishing to install renewables. There is a risk that requiring energy efficiency advice or assessment may delay things for a householder, particularly if energy advice providers’ resources are stretched. It may even divert resource away from those who are not planning to install renewables – who may well need that advice more.
However, we agree that better energy efficiency information across the board is needed, from trusted sources. It is likely that those not installing their own generation equipment are in more need of energy efficiency advice, underlining the need for programmes targeted at those in fuel poverty
Q45. Are there any issues regarding eligibility that we have not foreseen here? If so, how should we address them?
DC meters which are often used in off-grid installations may not be Ofgem-approved. This should not limit these installations’ ability to claim the tariff.
Q46. Do you agree with our approach not to offer up-front capitalisation to schemes as part of the FITs? If not, what alternative approach do you propose and why?
The terraced tariff mechanism that the REA had proposed is a far neater approach to setting tariff levels as it removes the need for banding technologies by capacity and also inherently provides a degree of upfront capitalisation. It also reduces perverse incentives to maximise income as opposed to renewable electricity generation. This downside is most marked with respect to hydro.
In not adopting the REA’s suggested approach, it is even more important that the tariff levels provide a sufficiently high ROI to entice a significant number of private investors to provide capital. The pre-tax ROI levels of 8% used for most technologies in setting proposed tariff levels will not do this, although it would help if CRC / CCA benefits can be realised in addition to claiming FITs. As pointed out earlier, some technologies in the consultation document have had an even lower ROI applied. For example, the tariff levels for PV are no higher than 4% for domestic retrofit customers and fall far lower than that for large commercial or public sector projects. So the danger is that we end up with the worst of both worlds i.e. no mechanism for addressing the upfront capital cost issue, coupled with ineffective tariff rates.
We also have concerns over whether the ROI suggested by the proposed tariffs will in practice be high enough for “owner occupier” investments. Many residential and non-residential owner occupiers will be dependent on bank lending to fund the initial capital cost of installation. Banks will take a 10 year view on payback as a maximum, ideally 7 years, and the cost of 10 year funds at present is around 7%. If you factor this into the equation, the “payback” on PV in the current tariffs is well over 10 years and therefore an unattractive proposition to bank lenders. A key concern in a recession is that few business or public sector users will have the cash to finance schemes directly, so the use of bank finance will be critical to uptake.
We urge Decc to consult specifically with the finance sector to ensure that the proposed ROIs will enable them to develop sufficiently attractive products, such as 20 year fixed low interest loans, for both householders and the commercial sector. Decc might also consider making available ‘soft loans’, as in Germany, either through government underwriting or potentially allocating the remaining £3bn secured from EIB to support UK renewables deployment.
Again, if the ROI is sufficient the industry itself can develop Energy Service Company (ESCO) products, including those targeted at the fuel poor. For example, one company we spoke to anticipates being able to provide the technology for no upfront capital costs in return for a contract to retain the tariff payment. The homeowner benefits immediately from reduced bills. This ESCO/contract model needs to be examined by Decc.
Q47. Do you agree with our approach that a generator may assign the rights to their FITs payments to a third party? If not what alternative approach do you propose and why?
Yes, this is essential if tenants of social housing are to benefit fully from the introduction of FITs. Or if other forms of ESCO services are to develop. Also, should a property be sold, the benefit from the FIT will need to be transferable to the new owner/nominated third party.
This is also important for community or integrated technology schemes where there may be multiple owners. It will be essential in practice to ensure payments are received by the nominated scheme manager.
This will be even more essential for financing. For example, if the rights to FIT payments could be assigned to a bank, this could cut risk, and lead to lower interest rates. It may also lead to the development of leasing type models.
Q48. Do you agree with the proposed model for registration and accreditation of plant claiming FITs discussed in the Accreditation, Registration and Connection section?
The Microgeneration Certification Scheme (MCS) scheme should be seen as a mark of confidence in the product and installation. However, much work needs to be done to simplify the product certification system by not duplicating other certification requirements, placing unnecessary cost on producers of products and delaying new products’ entry onto the market.
To propose that all plant over 50kW uses the RO accreditation process misses an opportunity for streamlining administration, particularly with respect to biomass where the requirements for measuring and sampling fuel are far more complex than is appropriate for generators with a few hundred kWs capacity (or indeed sometimes for a generator of any size).
Q49. Do you agree with the principle that all generation should be metered to qualify for FITs? Do you foresee any issues with that approach?
Yes. All generation should be metered. However, export metering will initially be difficult for Non Half Hourly scale customers, as settlements may need to be changed and suppliers systems will definitely need changing. It is too late to achieve all of this by April 2010.
Currently it is not possible to get generation meter readings to a supplier automatically. Generators will need to enter reads manually into suppliers and/or Ofgem. This will not be resolved until smart meters are introduced.
For export, most suppliers do not currently settle Non Half Hourly exported power. To register the volume, suppliers would need to install an import/export meter at a cost of approximately £80, which would be replaced by a smart meter in a few years time, and who would pay for cost of this stranded asset? Additionally, suppliers would need to change systems and processes to be able to deal with installing these export meters, which they will be doing in any case for smart meters.
To ensure the initial success of the FIT scheme, Decc must be prepared to take a pragmatic approach in the first few years whilst the numbers are low (low 10’s of thousands in the early years). We believe suppliers would be prepared to take a low tech interim approach whilst simultaneously developing the processes and systems for the enduring solution alongside smart meter rollout. Therefore it may be necessary to deem the export generation for the early stages of the scheme.
All grid-connected and ideally off-grid generation plant as well should be metered. It is very useful to encourage metering for multiple policy benefits, but also to ensure the reward of actual energy produced.
Finally, it is essential that the smart meters due for roll out can deliver the necessary functions for administering FITs. Those installing renewable energy systems should be at the front of the queue for smart metering, but again the industry must not be held up by the administration of the Smart Meter programme. Decc will need to think through carefully how to ensure this is resolved, especially in the early stages of both schemes.
Q50. What are your views on regulating which suppliers should be required to offer FITs, and in what circumstances?
We are agnostic about exactly how this is done. It may be appropriate to have a de-minimis threshold whereby suppliers with fewer than 50,000 customers could be exempt from the obligation to pay FITs. It is important that prospective generators who are already customers of an electricity supply company, can easily sell their export to, and have their production tariff paid by, their existing supplier. Or, should they wish to move to a different supplier, to be able to do so easily.
If this is the case, we cannot see the need for on-site generators to seek to approach different suppliers for the provision of supply and the sale of export.
We appreciate that a new (and larger) prospective export-only generator (e.g. a new community wind scheme) could cause cash flow problems for smaller suppliers. We therefore see merit in limiting the obligation to offer tariffs to off-site generators to larger suppliers.
Q51. Do you agree with the tariff levels, lifetimes and degression rates we have set out for the chosen technologies? If not, what evidence do you have for choosing alternatives?
Tariff levels
No. We believe the tariffs should be set higher, at least initially. The tariff should be set at a sufficiently high level to establish a good level of take-up, i.e. at least that anticipated in the Renewable Energy Strategy (RES). If the take-up is felt to be too high in any technology, and therefore judged unsustainable, then the tariff levels for new entrants can be adjusted downwards at the first review. If the tariff levels are set too low, the resulting lack of uptake will not provide sufficient data on which to base any changes.
While we respect the opinions of German experts set out in the consultation on appropriate ROIs, the UK context is different; starting from a much lower base and facing a more challenging renewables target. It is a question of political ambition for the scheme and the development of the UK industry and we urge an ambitious approach.
In recommending an appropriate tariff level we needed to look no further than the consultation’s supporting quantitative analysis document. This document clearly demonstrates that a 10% ROI represents better value for money than when an ROI of 8% is used. We have modelled a 10% ROI and these tariff rates can be found in annex A.
Whilst we advocate a 10% ROI, if the government adopts 8%, then this should apply across all technologies. We have also modelled an 8% ROI across all technologies and the rates it gives can be found in the Annex B.
Both of the above scenarios have been modelled with tariff rates for the “missing” technologies.
Note; all of the above is subject to appropriate financing mechanisms being available. Please see our answer to Q46.
Tariff life-time
There would be a benefit in standardising the tariff lifetimes for all technologies and to this end we would recommend that PV tariff paid over a 20 year period rather than 25, with the tariff rate adjusted upwards accordingly.
Degression
The introduction of degression rates should be delayed until tariffs have bedded in and we would suggest a 3 year delay is imposed.
Taxation
We have assumed no tax in our modelled tariff rates. Therefore, if the tariffs are to be subject to tax, to protect their value they will need to be increased accordingly. We assume tax will not apply to the domestic sector, either for the generation tariff or the export reward.
Inflation
To protect the value of tariff, both generation and export payments, will need to be index linked, ideally to RPI. However, we are not opposed to linking it to energy costs if a suitable easy to understand index is used.
Size thresholds
AD
The Tariffs need to distinguish in support between centralised AD facilities and small on-farm and community AD. Our 4 proposed bands, based on carefully considered commercial realities are; <50kW; 50kW-250kW; 250kW-500kW; >500kW. (See proposed levels in Annex A and B – the detailed data behind these recommendations is available to Decc on request). The former are larger and typically benefit from a gate fee whilst the latter are typically smaller and will require a range of higher tariffs, banded according to installed capacity, if any new build is to take place in the future.
For larger installations the security of the proposed single guaranteed FIT tariff will stimulate investment in plant of over 1000kW, because of the long-term guaranteed income, even when compared with the potentially higher returns from ROCs in a high base energy price situation. Investors will view the increased income security of FITs as attractive, and are likely to offer increased levels of debt funding, typically from 50% to 70%. Therefore there are likely to be a substantial numbers of larger plants who would opt for FITs.
For small to medium plant, the proposed single FIT tariff is too low to achieve any growth in medium to small AD plant located on the farm and at the community level. For any expansion to take place from the current zero position and to achieve anywhere near the aspirations of Defra Shared Goals, it will be necessary to introduce tariff banding linked to the commercial fundamentals of each range of plant.
When all sizes of AD plant are equally viable, the result should be balanced development of AD plant across the board and maximum capture of viable organic wastes and crop surpluses.
We have conducted a specific consultation amongst the members of the REA UK Biogas Group and have built a model which details the commercial fundamentals of each proposed band and the necessary levels of support. We would be glad to discuss the details of the model with Decc.
Hydro
We merely wish to note that we are disappointed that Decc is banding by capacity, rather than energy. This method of banding impacts particularly badly on hydro. However, for completeness, we have modelled tariff rates based on capacity which can be found in the attached annexes.
Solid biomass
We agree with the Government’s intention to include biomass in the FITs. It is particularly important to get the scheme design right as the RO’s rules and definitions for biomass are not suited to smaller-scale installations. Although this issue is arguably more important for the heat incentive, we are disappointed that the tariff bands and rates have not been modelled as thoroughly as most of the other technologies.
We note that various studies have been commissioned for the heat incentive – on both the cost of biomass fuel and the overall cost of installing and operating the equipment – and we would urge Decc to make use of this work for the FITs.
We were only able to source limited data from our members on likely costs for FITs of solid biomass, although we have included them in the tables in the Annex A and B of this response for comparison with our other proposals.
Liquid biofuels
We believe that liquid biofuels should be included in the FIT design. They have the potential to offer significant reductions in GHG emissions in a highly cost-effective way. It should be relatively straightforward to ensure that any biofuels used are both sustainable and offer genuine GHG savings as the controls established in the Renewable Energy Directive (deadline for implementation 5 December 2010) apply equally to all renewable liquids, whether used for transport, heat or power.
We note that some of the arguments against inclusion have been on the basis that sustainable liquid biofuels are a finite resource that could be in short supply. Given the Directive’s rules above will apply, and that biofuels are an internationally-traded commodity, it seems unwise to us to second-guess how global markets will behave. It would be better to include biofuels from day one and take a view later on the impact of the interaction of the Renewables Obligation, FIT, Renewable Heat Incentive and Renewable Transport Fuel Obligation with the benefit of practical, real-world experience.
We have not modelled a tariff band for liquid biofuels. We understand that Oftec have recently submitted data to Decc, with a view to including them in the renewable heat incentive and we believe this can form the basis for modelling tariff rates for the FITs.
PV
The ROI for PV in the consultation is particularly low. PV needs to be treated in the same fashion as other Tariff technologies (including digression) and not made a less attractive investment proposition on account of its popularity. We have therefore remodelled the PV figures based on the 8% and 10% ROIs – see Annex.
Unlike many successful European tariffs, the current tariff structure has no premium for building-integrated PV (BIPV). Incorporating PV within the structure of the building (i.e. as tiles and glass laminates) has several advantages, and the UK is particularly strong in the manufacture of these products. Promoting the widespread uptake of building-integrated PV products will assist with the engagement of both house builders and the wider construction industry, in a way which building-mounted products do not. The end result is also typically more aesthetically pleasing. There is great scope for encouraging UK expertise, jobs, skills and new product development in this area. Therefore we have modelled a band to support the deployment of BIPV.
We also recommend increasing the lower size threshold from 4kWp to 5kWp. This will help reduce the number of systems that are sized to get under the G83 16A limit, rather than to meet the energy needs of the building. 5kWp also fits well with the amount of PV required for a Code 6 house.
Wind
In line with BWEA, we recommend increasing the cut off band for 15 – 50kW, to 15 – 100, and moving the 50-250 kW band to 100 – 500kW, in light of:
- International small wind turbines standard revisions i.e. IEC61400-2 moving from 50 to 100kW scope.
- Products available to the market, currently there is a large gap between 100kW and 225kW turbines.
- The energy cost per scale of technology (energy costs of a 50kW turbine are similar to those at 100kW).
- Product applications & UK site demand profile (100kW likely to used onsite.
- UK specific industrial arguments (UK manufacturers up scaling product range to supply the EU market).
We note that the Tariff levels for wind appear to decline dramatically over 500kW and in addition to general expressions of concern, have spoken with one community scheme developer who is unequivocal that there will be no schemes over 500kW at the current proposed Tariff levels. ROCs would be used instead, but it is clear that ROCs have not been effective at stimulating community schemes – hence the need for user-friendly Tariffs. We hope government will want to ensure the success of community schemes.
Geothermal
Based on the limited data from our membership, we have modelled tariffs for Geothermal. However, these compare favourably to those Tariffs offered in more developed continental markets.
Q52. Do you agree with our proposed guaranteed minimum price for the exported electricity? If not, what price would you propose and what is your proposal based on?
We agree that a minimum price is needed, but think that it either needs to be index linked, or to reflect changes in electricity prices. We acknowledge that this price may not reflect the value to suppliers of this export. However, it needs to be high enough to encourage customers to be energy efficient and seek to maximise their export levels, and to continue to do so over time.
Q53. Does the proposed review structure provide the right balance between providing certainty and adapting FITs to the changing circumstances in which it operates?
Yes. However, if against our recommendation it is decided to apply degression rates from year 1, we would advocate a mini review at the end of year 1 in case the rates are too low for year 2. It would also be useful to factor in a ‘lessons learnt’ review to ensure the tariff programme is working efficiently.
Q54. Do you have any initial views on the relationship between FITs and those in fuel poverty or on low incomes?
Fuel poverty is a complex policy issue and we are concerned that fuel poor households are not excluded from participating in the Tariff scheme. We urge the government to ensure social enterprises, ESCOs, public institutions, social housing providers etc. have a sufficient ROI and sufficient expertise/capacity to be able to use the Tariffs to help directly alleviate fuel poverty. While heating technologies are likely to be more directly relevant, installing renewables at dwellings where the occupants are likely to be (or could fall into) fuel poverty can assist them. Fuel poverty concerns are therefore consistent with an ambitious Tariff scheme, but the potential impact of the Tariff scheme (along with all other energy sector investments) on fuel poor households needs to be anticipated and addressed through a range of targeted complementary measures at both the local and national level. Renewable technologies can provide active protection to vulnerable households against volatile energy price rises and significantly cut fuel bills. Any enterprise that enables the fuel poor to directly access the benefits of renewables needs to be systematically supported.
However, it is important to realise that a feed-in tariff policy even in an extreme scenario could only have a marginal effect (good or bad) on fuel poverty – certainly compared to fossil fuels price spikes. We therefore believe that whilst it is important to pursue the flanking measures described it should not be used as a reason to dilute environmental or energy security policy, particularly when a failure to invest in alternatives to fossil fuels will result in far higher incidents of fuel poverty in future.
Q55. Do you agree that the levelisation process described above provides the best system for redistributing costs amongst suppliers? If not, what other ways can we levelise costs across suppliers?
The levelisation process will be very important to the success of the FIT. The cost should fall evenly across suppliers and not put any at a competitive disadvantage relative to others. The levelisation process must therefore cover differences between mandated export price and actual power value to suppliers, additional admin costs due to FITs, any stranded asset costs if Decc decides that import/export meters are required from day 1.
We are very impressed with the proposal put forward by Elexon to administer the levelisation process between suppliers. Under this proposal we understand payments could readily be made monthly. These should be based on payments identified as due, but not necessarily paid. This will protect smaller suppliers from a potentially challenging cash flow position.
Q56. How can the levelisation process facilitate participation in FITs for small suppliers?
See above.
Q57. Should suppliers be able to include an administration cost in the levelisation process? If so, what should the level of that allowance be and how should it be determined?
Yes. If an export payment is agreed then suppliers need to recover the cost of export metering, and the cost of putting energy into settlements. The amount charged should be based on “cost to serve” data which is available. Until systems are automated, these costs will inevitably be higher.
Q58. Should the levelisation process include consideration of large and unforeseen price differences between prices paid to generators and the market value?
As long as payments to generators are unaffected, and export is still incentivised, the REA is agnostic on this point.
Q59. Do you agree with the proposed approach to auditing, assurance and enforcement? If not, what alternative approach do you propose and why?
We agree with the proposals put forward in the consultation.
Q60. Are there any issues regarding the role of suppliers that we have not foreseen here? If so, how should we address them?
We believe the threshold for half hourly metering (currently set at 30kW) should be increased. Two REA members are participating in Elexon’s working group on this issue.
Q61. What do you think is the best way of defining an installation for the purposes of FITs?
The definition of site needs to be clear. It needs to take into account all the types of renewables installation, right from installations on single dwellings, to building mounted systems serving flats/apartments right through to larger community schemes. This will be particularly important with the introduction of the RHI in 2011 e.g. a centralised district heating scheme be penalised for its economies of scale unless it can get the same benefit as each of its customers could get if they were treated as an individual installation. Therefore it would be appropriate to ensure that ‘site’ can either be defined as the location of the scheme or the end user(s).
It might also be a useful starting point to look at the definition of site used when competition in supply was being introduced. At that time there would have been an incentive for sites to aggregate demand into one, whereas in this case the objective is to seek in some cases to prevent the incentive to disaggregate.
Q62. Once an installation is defined, do you think further checks are required to verify this? If so, what would these checks be?
Guidelines to accredited installers could cover this.
Q63. How could we deal with installations at a single site installed in different years?
There would be benefit in making this consistent with the rules applying under the RO.
Cross Cutting
Q64. Do you agree with the proposed approach for the treatment of existing generating stations?
No. As a general rule we disapprove of early adopters being penalised or disadvantaged – these are the very individuals or organisations that could be exceptional advocates of the scheme in their local community. However we have sympathy with the need to ensure value for money as electricity consumers are ultimately paying for a move to more renewable generation. Some of these early adopters are housing associations and local councils trying to address fuel poverty issues, there will also be schools and other community projects that could, and arguably should, benefit from tariff payments. Finally, early adopters might be motivated to replace their system with a new one simply to claim the tariff. This would be wasteful and perverse.
Therefore we would recommend that the tariff should be set as if they had been claiming ROCs and the tariff’s lifetime reduced by the number of years the system has been installed. In the case of commercial entities that have benefited from grants under the Low Carbon Buildings Programme, these should be able to pay a proportion of the grant back in order to benefit from the grant. We would be happy to meet with officials to discuss this suggestion.
Some people have been installing Solar PV on the understanding that a Tariff would be introduced, not realising that by getting an installation a few months before the tariff was introduced that they would be debarring themselves. Clearly these enthusiastic individuals should be included in the scheme.
Installations where the Renewables Obligation has not been claimed should not be barred. There may be various reasons why they are not claiming ROCs. Indeed, a core rationale for introducing a Feed In Tariff was that the RO was an unsuitable and complex way of rewarding microgenerators. Therefore to prohibit those who have not used the RO from participating fails to recognise the fundamental reasons for introducing it in the first place.
9p/kWh is lower than some customers are currently earning under the Renewables Obligation, even taking into account the 5p/kW export tariff. Most homeowners with PV systems installed prior to 15th July are currently either with Scottish and Southern which pays 28p for every unit exported, or Good Energy which pays 15p for every unit generated. Both suppliers act as ROC agents on behalf of the homeowners and arrange the ROC registration. The homeowners would have reasonably been expecting this level of payment to remain in place for the life of their PV system; if not improve gradually over time. From April 2010 the introduction of the FIT would see their payments reduce to 9p per unit generated; with an additional 5p for exported units.
To give an example; an owner of a PV system generating 1,600kWh/year is currently receiving £240 through the Good Energy buy-back scheme (1600 x 15p per unit generated). They also benefit from every unit they use as they generate it. Assuming they export 50% of the electricity they generate and export the other half; from April 2010 this payment would be reduced to £184 under the FIT (1600 x 9p per unit generated, and 800 x 5p for exported units). This amounts to a reduction of £1,008 over the remaining 18 years the ROC scheme was due to run for.
These generators should be entitled to the rate for new generators.
Q65. Do you agree with the proposed approach for the treatment of generating stations that completed installation during the interim period?
It is not reasonable to expect that every contract between suppliers and small scale generators is compatible with the proposals in the consultation, from the date on which it was published. It is not worth complicating the scheme for the sake of saving a few months worth of tariff contributions to relatively few individuals. We suggest that all installations installed from the 15th July 2009 onwards qualify for 20 years of support under the feed in tariff. To do otherwise might also delay some customers from having installations put in, with obvious detriment to installer companies.
Q66. Do you agree that, for non-household installations built during the interim period, we should make access to FITs conditional upon repayment of any central Government grant received for such installations?
We have suggested earlier (Q64) that projects that have received a grant or benefited from ROCs have the duration they have already been generating docked from the 20 year support period. We believe this is a more pragmatic and sensitive approach than requiring grants to be paid back from pioneering people or groups. Also the administrative costs involved recovering grants may outweigh the benefit.
Q67. Do you agree with the proposed approach for the treatment of new generating stations once the FITs scheme becomes operational?
Yes. However some members have recommended that a decision point needs to be set by which a 50kWp+ generator needs to decide whether they want to receive FiTs or ROCs, which is far enough in advance of commissioning that it won’t affect ROC predictions or headroom calculations.
Q68. Do you agree with the decoupling of support for heat and electricity for new renewable CHP plants? What are the technical issues that need to be considered in implementing transitional arrangements towards the introduction of FITs and RHI for CHP installations?
We agree that decoupling payments for renewable heat and electricity from Combined Heat and Power (CHP) plants provides better policy clarity. It could also improve the quantity of renewable heat output. But more importantly it allows CHP plant to be sized and operated in a manner which best fits the customers’ needs. The ability to be flexible and not having to conform to the Good Quality Combined Heat and Power (GQCHP) provisions, will make CHP installations more attractive and less risky, and therefore encourage more to be built in the first place. We suggest that in the interim, new CHP plants wishing to qualify for FITs and the RHI when it comes in are not required to comply with the GQCHP provisions.
Q69. Do you agree that FITs should not restrict access for those projects covered by other schemes?
We believe that FITs should work hand-in hand with other policies. Therefore we would not support any change to either the FITs or other policies that seek to reduce or remove access to FITs. In particular, the FIT should not prevent onsite generators’ ability to claim zero emissions under the Carbon Reduction Commitment (CRC), or Climate Change Agreements (CCAs). We are pleased to see that this approach has just been adopted with respect to Defra’s Greenhouse Gas (GHG) emissions guidelines.
To not enable entities coming under the CRC or CCA to benefit from FITs would fundamentally undermine the scheme’s uptake as it would render renewables dramatically less attractive. This would be counterproductive and result in less renewables deployment at a time when a dramatic increase is essential.
This is discussed further in our responses to the CRC and GHG reporting guidelines consultations. (We suggest in these responses that the recipients refer to supply companies’ own submissions).
Stuart Pocock
Head of On-site Renewables
6th October 2009
Annex A: Proposed tariff levels
Recommended tariff levels to:
- Achieve a 10% rate of return (see Q 51)
- Reinstate omitted technologies (see Qs 42 and 43)
|
Technology |
Scale DNC |
2010-13 Tariff p/kWh |
|
AD |
<25kW |
31 |
|
AD |
25kW-50kW |
22.5 |
|
AD |
50kW-500kW |
15 |
|
AD |
500kW-5MW |
11.5 |
|
Biofuel power |
<50kW – 5MW |
See answer to Q51 |
|
Biomass |
<50kW |
17 |
|
Biomass |
50kW-5MW |
17 |
|
CHP – all technologies |
All bands |
+2.5 |
|
Gasification & pyrolysis |
<100kW |
20 |
|
Gasification & pyrolysis |
100-2500kW |
9 |
|
Gasification & pyrolysis |
2.5-5MW |
4.5 |
|
Geothermal |
<5MW |
21 |
|
Hydro |
<10kW |
30 |
|
Hydro |
10–100kW |
20 |
|
Hydro |
100kW–1MW |
12 |
|
Hydro |
1-5MW |
4.5 |
|
Micro-CHP |
<50KW |
[tba] |
|
PV (BIPV) new build |
<5kW |
65 |
|
PV (BAPV) new build & Retrofit |
<5kW |
59.5 |
|
PV |
5-50kW |
46 |
|
PV |
50–250kW |
40 |
|
PV |
250kW–5MW |
37.5 |
|
Tidal |
<5MW |
27 |
|
Wave |
<5MW |
27 |
|
Wind |
<1.5kW |
35 |
|
Wind |
1.5–15kW |
29 |
|
Wind |
15–100kW |
25 |
|
Wind |
100–500kW |
16 |
|
Wind |
500kW–5MW |
4.5 |
If the tariff period for PV were adjusted to 20 years to match the other technologies, these PV tariffs would need to be about 12.5% higher.
Annex B: Tariff banding adjustments and levelisation
Illustrative tariff rates highlighting in red the required adjustments to:
- Levelise the rates of return across all technologies and bands (see Q 51)
- Reinstate omitted technologies (see Qs 42 and 43)
- Set more coherent capacity band thresholds (see Q 51)
We are presenting these figures for consistency, but do not advocate these levels, which are calculated only to deliver the rate of return selected by the Government. We believe this will severely curtail achievement as described in this response and we propose the alternative tariff levels detailed in Annex A.
|
Technology |
Scale DNC |
2010-13 Tariff p/kWh |
|
AD |
<25kW |
9 29 |
|
AD |
25kW-50kW |
9 21 |
|
AD |
50kW-500kW |
9 14 |
|
AD |
500kW-5MW |
9 11 |
|
AD (CHP) |
<5MW |
11.5 |
|
Biofuel power |
<50kW – 5MW |
See answer to Q51 |
|
Biomass |
<50kW |
15 |
|
Biomass |
50kW-5MW |
15 |
|
CHP – all technologies |
All bands |
+2.5 |
|
Gasification & pyrolysis |
<100kW |
19 |
|
Gasification & pyrolysis |
100-2500kW |
8.5 |
|
Gasification & pyrolysis |
2.5-5MW |
4.5 |
|
Geothermal |
<5MW |
19 |
|
Hydro |
<10kW |
17.0 25 |
|
Hydro |
10–100kW |
12.0 16 |
|
Hydro |
100kW–1MW |
10 |
|
Hydro |
1-5MW |
4.5 |
|
Micro-CHP |
<50KW |
[tba] |
|
PV (BIPV) new build |
<4 5kW |
31.0 55.0 |
|
PV (BAPV) new build & Retrofit |
<4 5kW |
36.5 49.5 |
|
PV |
4 5-5010kW |
31.0 37.5 |
|
PV |
1050–250100kW |
28.0 32.5 |
|
PV |
100250kW–5MW |
26 |
|
PV (stand alone) |
<5MW |
26 |
|
Tidal |
<5MW |
22.5 |
|
Wave |
<5MW |
22.5 |
|
Wind |
<1.5kW |
30.5 |
|
Wind |
1.5–15kW |
23.0 26.0 |
|
Wind |
15–10050kW |
20.5 |
|
Wind |
250100–500kW |
16 |
|
Wind |
500kW–5MW |
4.5 |
If the tariff period for PV were adjusted to 20 years to match the other technologies, these PV tariffs would need to be about 12.5% higher.
[1] Renewable Electricity and Heat Tariffs REA Preliminary Blueprint 26th March 2009
[2] For more information contact Vykson, 28 Ryarsh Crescent, Orpington, Kent BR6 9SQ