Most countries in the EU now use guaranteed price Feed-In Tariffs (FIT) to support renewable energy projects, with different prices being fixed for each type of technology. The FITs have proved to be very effective at getting capacity installed rapidly at relatively low costs. For example, Germany has installed 25 Gigawatt (GW) of wind generation capacity so far under a FIT scheme , whereas the UK, with its competitive Renewable Obligation Certificate (ROC) trading scheme, has only achieved 4 GW, with some of that actually being supported by grants (for offshore projects). And this in a country with a far better wind regime than Germany.
Moreover, it cost consumers more. With the FIT, a developer of a new wind farm can get loans from banks at low interest rates, since their income stream is defined years ahead. With the ROC system, since they have no idea what the future income stream will be, banks will only offer high rates – so consumers have to be charged more. Thus, consultants Ernst and Young note that, in 2005/2006, the UK’s ROC system cost consumers 3.2 pence/kilowatt hour, whereas in 2006 the German Feed-In Tariff only cost consumers 2.6/p/kWh – despite having a much bigger wind capacity in areas with generally much less wind than in the UK. And also despite the fact that the German FIT has also supported a lot of expensive solar PV projects, very much more than the UK.
With the UK committed to getting 15% of is total energy from renewables 2020, which means they would have to supply maybe 30% of its electricity, something had to be done. The UK governments remains wedded to the market-orientated ROC system, and it has made some changes to it – e.g. creating “technology bands” with different numbers of ROCs for each type of technology. That may help to some extent – making it a bit more like a FIT. But the government eventually conceded that a fixed-price FIT system might be better for small-scale projects. There was some debate about how small “small” should be, but a ceiling of 5 MW was chosen – large enough to include some small community projects.
The governments proposals were for a fixed “Clean Energy Cashback” payment from the electricity supplier for every kilowatt hour (kWh) generated (the “generation tariff”); i.e. for self-generated power you use, plus a guaranteed minimum payment additional to the generation tariff for every kWh exported to the wider electricity market (the “export tariff”). The export tariff will be market determined – it’s currently at £0.05/kWh, for electricity delivered to the grid. Proposed generation tariff levels were set at 36.5p/kWh for retrofitted PV solar systems up to 4kW; and 28p/kWh for systems up to 10 kW, while wind projects would get 30p/kW for turbines below 1.5 kW and progressively less for larger units, down to 4.5p/kWh for wind turbines between 500 kW and 5 MW. Hydro projects would get 4.5–17p/kWh depending on size. Anaerobic digestion and biomass were also eligible (getting up to 9p/kWh), so was AD fired combined heat and power (11p/kWh), but not landfill gas or sewage gas, which are deemed already commercially viable.
As with the German FIT, UK FIT prices will be reduced, or “degressed”, in annual stages to reflect expected reductions as the technology develops and the market for it builds. But only for some of the technologies. The annual degression was set at 7% for all solar PV projects, 4% for wind turbines below 1.5 kW, 3% for those in the 15–50KW range. The rest would have no price degression.
In some ways it is quite generous, give that, if you can afford to install the equipment then you will get money from your electricity supply company, even for the power you consume yourself that you have generated. They are in effect paying you not to use or buy their power! They will presumably pass the extra costs on to their consumers across the board- who will in effect be subsidising those who can afford the equipment. While many commentators have supported FITs for large efficient projects like wind farms, using them for expensive options like PV and micro wind does seem likely to raise some problems of social equity. The high extra cost to consumers has already led to capacity caps being imposed for PV in FIT schemes elsewhere e.g. in Spain. But the overall scale of the UK FIT is quite small – overall it is expected to led to a total of 8 TWh generation by 2020 – about 2% of UK electricity by then. So maybe extra cost of PV will not matter.
Initial reactions were mixed. The Renewable Energy Association (REA) commented: “The 2% figure is really lacking in ambition. The potential for microgeneration is much, much larger.” The UK’s largest solar panel provider Solarcentury said that the FIT would “accelerate the market a bit, but we will not grow explosively as has been the case in other countries such as Germany, France and Spain”. They put the rate of return under the UK FIT at only about 4%. However, the Guardian’s (23 July 2009) rough estimates of FIT yields suggested that a 15 kW wind turbine at a good site could get a 12% p.a. return, but at 7%, solar PV was only a marginally attractive investment. Well, yes, but banks currently offer less on money invested, so those with money may well see FITs worth the trouble. For an interesting survey of consumer attitudes to investing in FITs, visit http://www.iop.org/EJ/article/1748-9326/4/4/044004/erl9_4_044004.html#erl311425s1.
In its subsequent submission to the consultation exercise the Renewable Energy Association suggested that “all technologies should benefit from the same rate of return,” which should ideally be 10%. REA argued that “the 5–8% proposed is simply insufficient”. It added: “Although, 8% might be adequate for some householders, it is not sufficient to engage the commercial sector.”
But what about community scaled projects? Friends of the Earth felt that: “For community-scale or larger on-site projects the rates [tariffs]are inadequate.” The REA later concurred. In its submission to the consultation exercise it said: “The Tariff levels for wind appear to decline dramatically over 500 kW,” which meant that, according to one community scheme developer they asked: “There will be no schemes over 500 kW at the current proposed Tariff levels.” ROCs would be used instead, though REA said: “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.”
Of course the FITs run for 25 years and should help community schemes a bit. But clearly there were a lot of disagreements about the details – especially on PV. The FIT as it stands is only predicted to yield around 0.5% of UK electricity from PV by 2020. Friends of the Earth felt that the “degression for solar PV is quite aggressive” at 7% per year, (much higher than in Germany) and that since the bonus payment for export to the grid will fluctuate with the “market price”, it will be discounted by banks providing debt for projects financed under the feed-in tariff. The We Support Solar lobby group claimed that adding 10p/kWh to the tariff would deliver more than six times more capacity.
And then REA piled in with a long list of suggested upgrades: “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.” And it added: “In line with BWEA, we recommend increasing the cut off band for 15–50 kW, to 15–100, and moving the 50–250 kW band to 100–500 kW’. Quite a shopping list! And all before April 2010, when it’s supposed to start.
Moreover, widening the agenda, REA noted that several technologies had been omitted from the consultation document and said: “Tariffs should be set for geothermal, gasification and pyrolysis, biofuels, and wave and tidal energy from the outset.” And finally it said that it was “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”.
It will be interesting to see how the government responds.
DECC Consultation (now closed): http://www.decc.gov.uk/en/content/cms/consultations/elec_financial/elec_financial.aspx