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More PV solar cuts

The full Department of Energy and Climate Change (DECC) review of the ‘Clean Energy Cashback’ Feed In Tariff (FiT) for photovoltaic (PV) solar installations resulted in further cuts to support – following on from the 72% cut in the tariff for PV projects over 50kW that had emerged from the earlier ‘fast track’ review.

The new cuts were prefigured in a speech at the end of October by Energy Minister Greg Barker, who, while welcoming the successful installation so far of over 100,000 PV arrays (around 300MW), said: ‘Much of the growth in PV has been as much about consumers accessing the Government backed tariff as accessing the technology. High net worth individuals chasing returns which are now easily reaching double figures at a time when interest rates for savers have collapsed to an historic low. That can’t be right.’

So DECC is planning to more than halve feed in tariff incentives for solar PV projects of 4kW or less from, in effect, December this year- reducing the tariff from 43p/kWh to 21p/kWh, which it says should yield a 4.5% rate of return. They also proposed reductions to the tariffs for PV installations between 4kW and 250kW, ‘to ensure those schemes receive a consistent rate of return’.

There’s also a proposal to introduce an energy efficiency requirement for FITs for solar PV. If the building does not meet the energy efficiency criteria the installation would receive a lower FIT rate of 9p/kWh. In addition there’s a proposal for new multi-installation tariff rates, set at 80% of the standard tariffs for individual installations, for ‘aggregated’ PV schemes- where an individual or organisation gets FIT payments from more than one PV installation, located on different sites, as in ‘rent a roof’ schemes.

Launching a consultation on the proposals, Barker said that the existing tariffs led to ‘returns for investors in solar PV that are simply not sustainable and, without action, could result in the spending envelope for the scheme rapidly being breached’ He explained that ‘If the Government took no action, by 2014-15 FITs for solar PV would be costing consumers £980m a year, adding around £26 (2010 prices) to annual domestic electricity bills in 2020. Our proposals will restrict FITs PV costs to between £250-280 m in 2014-15, reducing the impacts of FITs expenditure on PV on domestic electricity bills by around £23 (2010 prices) in 2020.’

DECC is to publish a separate consultation ‘around the end of 2011’ on ‘other aspects of the scheme including the tariffs for other FIT technologies. As part of its review of the FITs, DECC will also consider ‘whether more could be done to enable genuine community projects to be able to fully benefit from FITs.’

Reactions

In a fact sheet it evidently released prematurely, the Energy Saving Trust gave an early warning of the scale of the cuts and said that under the proposed changes payback time would be 18 years for a 2.9kW system, eight years longer than at the current levels. But it said that the new rate of return, which it put 4%, was more “appropriate” than the original 5-8% rate, due to the changes in the investment market that has seen interest rates slashed.

Dave Sowden of the Micropower Council agreed that ‘they needed to recalibrate it….but if you go below five per cent then you completely wipe out free solar and social housing schemes. It just becomes a rich man’s game.’ Friends of the Earth concurred: ‘The proposals will pretty much exclude everyone who does not own their own home and have significant savings to hand from installing solar’. The proposal to backdate the changes to December also caused concern – e.g. it could impact on those half way through installation negotiations. Overall, the timing of the cuts was a big problem for developers.

However, the idea of linking supply schemes to efficiency was widely seen as making sense- it’s foolish not to sort building energy losses out first. Barker had said he wanted a new ‘whole-house approach’, including new measures to ensure that all new domestic solar PV sites meet minimum energy-efficiency standards: ‘It cannot be right to encourage consumers to rush to install what are still expensive electricity-generating systems in their homes before they have thoroughly explored all of the sensible options for reducing their energy consumption first. Frankly, such a standard should have been a pre-requisite for accessing the FiT subsidy from day one’.

He also, maybe sensibly, urged developers to move into the solar thermal market, which has seen slower deployment rates under the pilot Renewable Heat Premium Payment Scheme than those experienced by the PV under the FiT. While that may be an option for some developers, there were predictions of massive job losses in the PV sector, and a lot of resentment about the cuts. Surely if the FiT system was allowed to work, the cost would reduce as the market built, with FiT prices being ‘degressed’ continually, so consumers wouldn’t be hit hard.

The DECC report suggests otherwise- PV had boomed too fast. The consultation report notes that, as at September 2011 ‘ 255MW of solar PV had been registered for FITs. This compares to the 94MW that was originally projected for this point in time’, driven mainly by ‘the reduction in the cost of PV systems’. Barker claimed that ‘The cost of an average domestic PV installation has fallen by at least 30% since the start of the scheme – from around £13,000 in April 2010 to £9,000 now’. In addition, DECC noted, there were increased returns available from solar PV due to the ‘13% increase in retail electricity prices since April 2010, which has increased the savings from avoided consumption of imported electricity’. It added that multiple installation schemes had also played role in the uptake of FITs.

All of this threatened to push the cost passed on to consumers up rapidly- although that has to be put in perspective- DECCs impact report indicates that, at present, the FiT added just £1.40 p.a. to typical household bills. But what about the benefits, not just the cost savings for those on the scheme, but the climate benefits, which all share, and the indirect cost saving since less fuel has to be used nationally?

More specifically, there were social benefits. As DECC admitted, some multiple installations schemes enabled ‘those who cannot afford the upfront capital costs of purchasing a PV installation, including the fuel poor, to share in some of the benefits’, as in ‘free solar’, rent a roof schemes.

However DECC noted that some felt that for these, ‘the principal beneficiaries are generally the third parties rather than the hosts of the generating equipment.’ DECC say that ‘the returns available to such schemes are higher than in the case of individual installations. We therefore consider there is a strong case for adopting a different approach and tariff for multi-site generators of FITs’.

So it’s cuts across the board. It may be true that the UK FiTs were quite generous to PV. But then the FiT system was a new venture for the UK. DECC says that the new PV Tariffs are now similar to those in Germany. That’s not quite true. Despite recent cuts, most of the German tariffs are still larger, and the German FiTs have been running for many years, so that PV has a well-developed market. Here it is still in its infancy. And now it could stay that way.

DECCs consultation report is at: [www.decc.gov.uk/en/content/cms/consultations/fits_comp_rev1/fits_comp_rev1.aspx
](http://www.decc.gov.uk/en/content/cms/consultations/fits_comp_rev1/fits_comp_rev1.aspx)

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Solar cuts

Around 15 large solar farms have connected to the UK grid, beating the August 1st deadline for the imposition of the savage cuts of up to 72% to the PV solar Feed-In Tariff (FiT) for projects over 50kW. In all about 60MW of ground-mounted projects made it, according to a Solar Portal review: http://www.solarpowerportal.co.uk/blogs/just_how_many_solar_projects_beat_the_fast_track_review_5478/ .

Some of the smaller ones include the 1 MW Ecotricity Fen Farm project in Lincolnshire, the 1.4 MW Wheal Jane park in Truro, and a 7450kW Solar century project at Howbery business park in Oxfordshire. Larger ones include the 5MW Gehrlicher Langage project near Plymouth- 5MW was the limit originally imposed for the FiT. Interestingly, at that time, DECC said it had gone for 5MW since ‘we want to give ourselves a bit more flexibility… to include projects like schools, hospitals and community schemes’. But now, with a new government in power, 5MW is clearly seen as too much for PV.

It was quite a race against time to beat the deadline. EOS Energy installed a £3m 1.15MW farm at a holiday park near Newquay in just 7 weeks. Lark Energy/Lightsource managed to complete two large ones – a 4.9MW farm at Hawton, Notts, and a 4.5MW project at Marston, in Lincolnshire, the latter built in just six weeks. Swindon-based Sunstroom managed to fit 20,000 solar panels on a 36-acre brown-field site in just five weeks.

However that’s about it for now. Solar Century told the Guardian that the cuts means that ‘virtually all investors have withdrawn from financing such developments. There were probably many hundreds lined up for development across the country. They’re pretty much all canceled now because of the fast track review. This type of installation will be a relative rarity for a few years.’ But it was optimistic about the future. ‘They will come back because tariffs and subsidies for solar are a necessary device to create the industry right now but the rate of change of price of solar is on a strong downward trend. Within a few years, the amount of subsidy needed will go down significantly. When that happens, more of these can happen with less cost and become more attractive to investors.’

They also seem popular with local people. For example, the 5 MW solar farm project proposed by Vogt Solar Ltd for land north of Bourn, Cambridgeshire, was the subject of a local community consultation process last year, via an exhibition, website, email and postal questionnaire. Of the 46 people who completed the questionnaire, 41 (89%) were ‘very supportive’ or ‘supportive’ of the plan and 3 (7%) were ‘undecided’, two (4%) were ‘opposed’ or ‘very opposed’. 91% of respondents said they supported the use of renewable energy to help to combat climate change, whilst aiding the security of the UK’s energy supply; and 93% said they supported the use of solar power as a source of renewable energy.

It seems pretty clear that local people were happy with it, and similar projects elsewhere have got strong local support, so why has the government decided to block projects on this scale by cutting the FiT support that they would have attracted? The ostensible reason was that commercial projects on this scale would reduce the money available for domestic scale PV projects- the scheme having had an artificial total cost cap imposed. The FiT support is paid by a small extra on all electricity bills, so it’s up to consumers- would they object where it went, or if there were more schemes so that the cost to them was larger? Arguably you get better value for money with large schemes- and more capacity faster. What’s not to like?

There had also been hopes that community based schemes would prosper. One scheme did make it. Not-for-profit company Sussex-based Ovesco launched a share issue for a proposed 98 kW solar installation on the roof of Lewes’ Harveys Brewery, who leased their roof in exchange for free electricity, which will be used primarily to cool its beer, Sunshine Ale. Any surplus will be sold back to the grid, and the additional revenue used to fund community projects. It just made it before the deadline, so it gets the old full tariff.

The original tariffs were quite generous it’s true. But the cuts were very savage, with the tariffs being reduced from 31.4 – 26.8p/kWh (for 4kW – 5MW) to 19p (50 – 150kW) 15p (150 – 250kW) and 8.5p (250kW – 5MW)

Apologists for the cuts said that they mean there will be a larger number of smaller projects, creating a larger constituency for supporting PV power, but in reality the result seems to have been that the UK PV solar industry has been seriously undermined- there may not be enough well off people able to afford PV to compensate for the loss of these larger projects.

This all seems very odd given that the government says that it sees solar PV as likely to move ahead to become a major renewable source. FiTs help capacity build so that prices fall, but you have to stay the course.

What next? Soon we should hear the results of the full review of the Feed In Tariff system for electricity generation projects- the recent cuts were just the results of the ‘fast track’ review of large ‘solar farm’ PV projects. But the Budget talked of seeking to shave off at least £40m from the FiT programme, so more cuts are likely for PV and maybe other green electricity options. One way to look at it is to see this all as a preliminary to the introduction of the proposed new more competitive-market orientated ‘Contracts for a Difference’ FiT system for renewables, nuclear and Carbon Capture, although whether that will help smaller renewable electricity generating schemes is unclear.

What is clear is that the government is more interested in the short term at least in green heating, and in terms of solar, solar heat collectors, which are a lot cheaper to install than PV. They are to be supported by the £860m Renewable Heat Incentive (RHI) scheme -running, for domestic projects, from next year. As a preliminary to that, for off gas-grid areas, it has launched a £15m ‘Renewable Heat Premium Payment’ scheme- which opened for applications on 1st August- the same day that the PV tariff cut came into force! It’s a grant scheme funded by the government (i.e. the taxpayer), not a Feed In Tariff (with costs passed on to consumers).

DECC says it will support up to 25,000 installations, with grants set at £1,250 for a ground source heat pump; £950 for a biomass boiler; £850 for an air source heat pump; and £300 for solar thermal water heaters. On average, this should work out at about 10% of the total cost of the equipment and installation. Landlords will be encouraged to access the grants to improve their housing stock, with £3m of the £15m set aside for them.

It will be run by the Energy Saving Trust, but it doesn’t cover Northern Ireland: www.energysavingtrust.org.uk/RHPP

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Fighting for FiTs

PV solar had boomed in Germany, with more than 14 GW being installed so far, but there have been some gloomy predictions about the fate of the German Feed-In Tariff, and PV solar in particular, with support levels falling from a high of 43.01 €cents per kilowatt hour for small solar power plants at the end of 2009, to 28.74 €cents at the beginning of 2011. In addition, PV plants on arable land had been eliminated from the support programme all together.

It’s the same elsewhere.

Similar issues emerged in France. The French government talked about a ‘speculative bubble’ and has imposed a three-month halt to new PV installations over 3 kW, while legislators worked on new tariffs for larger PV installations, which were expected to include rules providing caps on development and lowering feed-in tariffs for solar PV projects. The government also played the China card. ‘Most panels installed in France were made in China with a highly questionable carbon footprint,’ Environment Minister Nathalie Kosciusko-Morizet said, whereas the policy must “create jobs in France, not subsidise Chinese industry.’

To some extent what we have seen are the results of success- PV has got cheaper, so it needs less subsidy. But success has also led to problems. As more people signed up to the FiT the cost to (other) consumers rose- only by a tiny amount true, much less that other fuel price rises, but enough to provide those hostile to FiTs with a case for them to be throttled back.

Tariff cuts and capacity caps have also been imposed in the Feed In Tariff for PV in Spain via a Royal Decree, and were retroactive i.e retrospective for existing projects, which led to major protests by people whose jobs were threatened, with protestors from all over Spain wielding PV panels. One said: ‘The Government is bowing to the pressures of major energy companies and is misleading citizens into believing that the tariff deficit is a problem created by renewables.’

The Spanish Association of Renewable Energy Producers said: ‘It appears Parliament has given itself over to the electric utilities to do away with the solar PV sector in this country.’ Congress approved the Decree by 175 to 12, but with many abstentions. There are likely to be a lot of legal disputes as thousands of PV array owners are hit.

You might see all of this as a failure of nerve – the whole idea of FiTS is that, by building a market they force the price down. This has actually already occurred. According to the German Solar Industry Association (BSW), system prices have fallen by 45% in the last four years. But you have to stick with the process, even if it seems to be pricey initially. Some however say that PV was just too expensive initially to be suited to this approach – it loads consumer up too much. Actually in Germany the extra amounted to approximately 2 €cents per kilowatt hour in 2010, although it was set to rise to 3.53 €cents in 2011.

Figures like this were disputed, but the German solar industry association (BSW-Solar) eventually agreed to a compromise under which feed-in-tariffs will be reduced according to the amount of solar electricity installed annually, with a sliding scale of reductions based on capacity predictions. For example, if the calculated solar PV market capacity for 2011 year was over 3.5 GW, tariffs would be reduced by 3%; if the projected capacity was 7.5 GW, tariffs would be reduced by 15%. As previously planned, funding will also be cut by a further 9% at the turn of the year 2012. Renewable Energy Focus commented: ‘This new step is seen as an earlier than planned reduction, following warnings against the artificial stimulation of the solar market.’

There will be a review of the EEG (the German Renewable Energy Sources Act) in 2012 which will presumably play a decisive role in the future of PV in Germany.

So what does this means for the UK? The UK’s ‘Clean Energy Payback’ FiT for micropower projects, including PV, is so small (it’s expected to yield just 2% of electricity by 2020) it is hardly likely to have a noticeable impact on consumer prices, but the government aims to cut support for PV in 2013, leading to a £40m saving in 2014/15 (10%), ‘unless higher than expected deployment requires an early review’. And if need be, access to the FiT might be limited for large solar farms on greenfield sites before the review, which was scheduled for 2012, but has now brought forward to this year, because of ‘growing evidence that large scale solar farms could soak up money intended to help homes, communities and small businesses generate their own electricity’. So far around 40 MW of PV has been installed under the scheme, out of about 77 MW in all – tiny by comparison with Germany and Spain, but much more than before.

So what next? Given the global recession, extra costs to consumers were obviously politically difficult, even if in fact they were much smaller than other energy price hikes. But the cuts do mean that the growth of PV, and the reduction in price that the FiT system would then yield longer term, will be slowed. And it may get worse.

In addition to the proposed £40m cut for PV, the UK government is trying to limit the problem of short-term consumer costs in its proposed new Electricity Market Reforms by adopting a variant of the FiT which has a strong market element and possibly also contract auction/tenders to keep prices down. That’s not really a FiT at all- it’s more like the old Non Fossil Fuel Obligation, which saw many successful tenders but few actual projects, since companies often bid at unrealistically low prices. It also includes nuclear as well as Carbon Capture of Storage projects, with opponents worrying that, there will therefore be less support available for renewables.

Opponents argue that it makes no sense to lump nuclear, CCS and renewables all in the same category and try to support them in a ‘one scheme fits all’ approach. They are all at different stages of development, for example nuclear has had 40 years plus of funding (and arguably shouldn’t get any more), some renewable are now well established, but some still need help, whereas, a few pilot projects apart, CCS is still mainly unproven.

Worse still, in addition to the £40m cut and the new ‘fast track’ review of tariffs for PV projects over 50 kW, the government has now indicated it will also look at reducing support for on-land wind projects in ‘unsuitable’ lower wind-speed areas. It’s hard not to see all this as panic measures to cut costs by hitting renewables, while continuing to support nuclear and CCS.

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A Christmas whimsy- and an unwanted present

As a lapsed nuclear physicist, nowadays active in the renewable energy policy area, I sometimes make forays back to see how the subject in progressing.

I once worked in high-energy physics, so it’s interesting to see how fusion research is moving on. A while back I did a tour of Culham and was impressed by the dedication of the research staff there- who seem prepared to spend their careers churning through data from endless JET runs, while knowing that it will be many decades before anything solid comes of it by way of a viable energy device. Maybe I’m just unable to defer gratification that long! But, more prosaically, I was also struck by the row of bottles in the toilet- for staff urine samples. That reminded me of one of the reasons why I got out of nuclear research. It seems that, while often touted as being a ‘clean’ option, fusion still has safety issues, just like fission.

I see that the EU is trying to find a way to maintain funding for the follow-up, ITER in France, after it was discovered that there was a €1.4bn shortfall in the EU budget for the programme over the 2012-3 period. One option considered was to raid the EU 7th Framework research programme, but that would have reduced funding for other projects. It seems that the start of ITER construction may have to be pushed back to 2012. The EU’s eventual contribution to construction is now expected to be around €6.6 bn. It seems a lot of money for a very long-term project, which may (or may not) eventually lead to a technically and economically viable energy device sometime after mid century. No help then with our current energy problems.

More recently I visited CERN in Geneva and the Large Hadron Collider, and went round their ATLAS project display. Sadly visitors can’t go underground, but it is still an impressive project. Another €6 billions worth I’m told. Pure curiosity-led research, although their PR made much of the training aspects, international collaboration, and technical spin-off possibilities.

Well yes, but €6 billion would go a long way to helping us develop cheaper more efficient renewable energy technologies. As would the €6bn for ITER. It may be good to try to develop novel energy options for the very long term, and to know what happened in the first few nano-seconds after the Big Bang, but personally, I’m more concerned about what will happen in the next few years as we try to grapple with climate change and energy security.

However, there is no denying that ‘big science’ can be intriguing, inspiring and even fun! So, good luck to them. But spare a thought for the hard pressed innovators trying to develop and deploy new solar, wind, wave, tidal and bioenergy systems in an ever more competitive and risk averse market environment, often with minimal state funding.

We did get a Christmas present of sorts though from the UK government – a set of proposals for Electricity Market Reform, including, maybe, a new form of support for low carbon technologies. They say it’s a Feed-In Tariff, but the variant they seem to favour has variable market determined prices and possibly involves a contract auction/tendering process. I know it’s traditional not to like your Xmas presents, but I wonder if we can swop the one they are offering with a proper fixed-price Feed In Tariff, of the sort that has worked so well in Germany.

I have a horrible suspicion that what actually has happened, as occasionally does at Christmas, is that they have wrapped up an old unwanted, discarded present from a few years back to try to offload it – in this case the old Non Fossil Fuel Obligation. The NFFO used a contact tendering process and led to lots of optimistic bids for renewable energy projects, many of which were then given to go ahead on the basis of price/capacity conflation. Tragically though, very few projects actually happened- developers often found they couldn’t deliver at the price they had specified to win the contract.

As with the system that was eventually to replace the NFFO , the Renewables Obligation, the competitive mechanism in the NFFO also meant that only the most developed renewables got supported- sewage gas, landfill gas and then wind. And it could be the same with the proposed new ‘auction contracts for difference’ system- emerging options, such as wave and tidal stream, could be squeezed out. As Chris Huhne put it, there was the risk that ‘the contract arrangements exclude technologies that may in the long run actually perform a very useful role in providing low-carbon electricity.’ So some other form of support might have to be offered.

It’s good that the government has recognised, at long last, that the Renewables Obligation has problems, and is prepared to phase it out. That will cause disruption of course, but we have to make changes – the RO is an expensive way of subsidising a limited range of projects (the relatively high payments may be why some who get projects supported under it, like it). But before we throw away the wrapping on its proposed replacement, maybe we could ask, via the handy consultation process that is attached, for a proper fixed-price FiT, and while we are at it, one that doesn’t also support nuclear. That was the really unwelcome part of the present- if nuclear projects are eligible for support they could well squeeze out renewable projects. Indeed some even see that as the aim: http://realfeed-intariffs.blogspot.com/2010/12/uk-government-to-subsidise-nuclear.html

Certainly anti-nuclear Scotland won’t want anything to do with it. Scottish First Minister, Alex Salmond, said ‘it could see support mechanisms for nuclear generation in England at the expense of renewable energy sources and CCS [carbon capture and storage] in Scotland.’ Oh dear. Whatever happened to peace and good will to all men.

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Survival of the FiTs – for now

The government’s spending review brought fears that the government would backtrack or water down the existing Feed-In Tariff (FiT) for electricity and also the proposed Renewable Heat Incentive (RHI). A coalition of 22 groups, including the Renewable Energy Association, the National Farmers Union and the Federation of Master Builders, warned energy secretary Chris Huhne that cutting schemes that subsidise household generation of renewable energy would jeopardize job creation, energy security and greenhouse-gas targets. An open letter to Vince Cable and Danny Alexander from 64 companies, including E.ON & British Gas, adopted a similar stance: ‘premature adjustments to the tariff would have a profoundly damaging effect on long term investor confidence in the clean tech and renewable energy sectors, and may cause investors to flee altogether’.

Energy & climate change’s minister, Charles Hendry, had said: ‘We inherited a situation where we could see who was going to benefit commercially but we couldn’t really see how it was going to be paid for and that it would create pretty substantial bills.’

Neither the existing FiT or the RHI cost the government anything directly, other than administrative effort – it’s suppliers and then consumers who pay ultimately. But if the FiT leads to a take-up boom, these costs could grow faster than the prices falls due to the FiT, and overtake the built in price degression mechanism, as arguably happened in Germany and Spain. And the government may then wish to limit the cost to consumers. The electricity FiT levels are due for reassessment in 2012, but it was feared that this might be advanced prematurely.

One of the problems with the RHI is that, whereas it’s relatively easy to identify who the suppliers are for grid electricity, and levy a FiT charge on them accordingly, heat is supplied by a range of companies in a range of forms – natural gas, propane, butane, oil, wood and other biomass and even direct heat. And the scale is much larger than just for electricity – heat is about 49% of UK energy end use. But it ought to be faced, and as the REA/NFU coalition argued: “Costs come down when the industry can plan and invest with confidence, and economies of scale are achieved- that is one of the simple aims of these policy mechanisms.”

In the event, the campaigning seems to have paid off: the electricity FIT was left untouched for now, and the RHI will go ahead, although cut back to £860 m p.a. and with a two-month delayed start, until June 2011. The government said: ‘This will drive a more-than-tenfold increase of renewable heat over the coming decade, shifting renewable heat from a fringe industry firmly into the mainstream.’ However it added that it would ‘not be taking forward the previous administration’s plans of funding this scheme through an overly complex Renewable Heat levy’.

The government also noted that the existing Feed-In Tariffs will be refocused on the most cost-effective technologies, saving £40 m in 2014–15. ‘The changes will be implemented at the first scheduled review of tariffs, unless higher than expected deployment requires an early review’, presumably because of high cost PV solar.

There may be a case for changes, but it does seem sensible to leave the FiT system to bed in first to see how it goes. Friends of the Earth had commissioned Arup to review the current Feed-in Tariff. The report Small Scale Renewable Energy Study: FIT for the Future uses financial modelling of the performance of 20 generic renewable-energy schemes, and concluded that for some technologies, it could ‘seriously damage investor confidence’ to amend the tariff levels before the end of the previously announced review period in 2013.

Arup found that, while there were some perverse scale effects for wind and also PV project, due to the structure of the FiT price bands, in some cases, the FIT could work very well (e.g. a community co-operative that buys a 1.5 MW wind turbine could earn 15.9% return on investment annually for 20 years). This would mean the scheme would pay for itself in seven years. But micro-wind only had an Internal Rate of Return (IRR) of 7%. Micro hydro was in the range 10–13% IRR.

On the heat side, heat pumps had an IRR of 7%, unless used in off-gas grid contexts, when they were 12%. Domestic scale biomass boilers had very good returns: IRR 18%, but biomass fired micro-CHP was less attractive, with solid biomass micro- CHP coming in at under 5%. Individual domestic solar heating was also very poor, with an IRR of only 3%, although grouped schemes were better. The IRRs for AD biomass were even lower.

So coming up with a viable RHI system is obviously going to be tricky. That point was made strongly in a report The Renewable Heat Initiative: Risks and Remedies produced on behalf of Calor Gas Ltd by the Renewable Energy Foundation. It said that the government should scrap the proposed Renewable Heat Incentive (RHI) scheme and start again because it would be bad for the sector by encouraging technologies that ‘are not quite ready’. RHI was ‘an expensive leap into the dark’, relying on a major deployment of technologies that are new to, and untested in, the UK context. REF also uses government data to estimate that the RHI could, in practice, consume around 2% of the annual income of the poorest households – funds that REF claims will go directly towards reducing bills of the richest households, who are able to put up the initial capital for installations and so benefit from the RHI subsidies.

Dr John Constable, REF research director, said: “It appears to be a severely regressive policy; I can’t believe the previous government anticipated this impact as it is clearly an iniquitous policy. The only winners from this are those with initial capital to install the technologies in the first place.” The same argument that has been used by some against the FiT.

Overall REF claimed that the cost of the RHI could potentially increase the average domestic gas bill by 14% p.a. by 2020. Constable commented: ‘The simplest thing to do is to stop it. It is in the public interest to cross this one off and start again. Otherwise, significant changes will need to be made to avoid the risks we have identified.’ In free market mode, he added: ‘Left to its own devices, the market will learn. The RHI on the other hand would embed and shelter bad technologies and bad implementations,’ pointing to the recent Energy Saving Trust’s report on heat pumps as an example. That had found that about 87% of heat-pump systems tested in the UK didn’t achieve a system efficiency (COP) of 3 ,which the Trust considers the level of a “well-performing” system. And 80% failed to meet 2.6. EST blamed the use of multiple contractors for fitting systems instead of a single contractor as used in Europe, wrongly sized systems, complicated controls and a lack of education for householders using them. Obviously there are some issues to be resolved before the RHI can be sorted but, although the government did say that it would scrap the RHI levy idea, it clearly did not take REF’s advice and scrap the whole thing.

The EST study: www.energysavingtrust.org.uk/Generate-your-own-energy/Heat-pump-field-trial

The FoE/Arup study: www.foe.co.uk/resource/reports/fit_for_future.pdf

As an interesting coda to the debate on the FiT and its possible amendment, energy minister Greg Barker seems to be worried about the recent boom it has created in solar farms – large ground-mounted PV arrays. He said that the government would not act retrospectivel, but ‘large green field-based solar farms should not be allowed to distort the available funding for domestic solar technologies’. Roof-mounted PV is probably preferable aesthetically but what seems to be the issue here is a concern that the very limited FiT allocation will get used up rapidly by large commercial schemes.

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FiT for purpose?

The debate on the UK’s new Feed-In Tariff (FiT) has been quite lively, with the Guardian‘s George Monbiot arguing that, with solar PV being still very expensive, the way the FiT provided the support needed was economically regressive.

It does look that way at first glance – those that could afford to invest say £10,000 in PV might get £1000 p.a. back for the electricity they generated and used, paid for by all the other consumers, who would be charged extra via their electricity bills. It’s been suggested that this would lead to a £11 p.a. surcharge on bills by 2020.

However, in a rebuttal to Monbiot’s analysis, Jeremy Leggett from Solar Century said “the average household levy in 2013, when tariff rates are all up for review, is likely to be less than £3” and he added “this is far less than the average saving from the government’s various domestic energy efficiency measures over the same period. So there is no net subsidy. The levy is not ‘regressive’ at all”.

The extra cost is certainly small, since the expected size of the FiT scheme is small, only maybe leading to 2% of UK electricity by 2020, so maybe this is not a major issue. But it is good to see that the government has now announced a “green-energy loan” scheme (part of its new “Warm Homes, Green Homes” strategy) under which energy-supply companies and others (e.g. the Co-op) may offer consumers zero or low interest loans for installing new energy systems, to be paid back out of the resultant energy savings. Details have yet to be agreed, but up to £7 bn may be made available over the next decade in this way – although it seems it will start off slowly, from 2012 onwards.

This scheme could help the less well-off to invest in new energy technologies like PV, and join in the FiT. Providing up-front loans via a “pay-and-you-save” system certainly seems likely to be more effective at ensuring wide uptake than just using revenue over time from a FiT. And there would be no extra charges on the taxpayer or the other consumers. So it could be popular.

There does seem to be a lot of support for self-generation. A YouGov survey for Friends of the Earth, the Renewable Energy Association and the Cooperative Group found that 71% of homeowners who were asked said that they would consider installing green-energy systems if they were paid enough cash. So perhaps, one way or another, uptake will be significant.

However, there are still some uncertainties. I argued in an earlier blog, before the UK FiT details emerged, that, while it worked very well for wind in Germany, using a FiT to push PV down its learning curve, to lower prices, might not be the most effective approach for PV.

Now we have the details of the tariff, which has set the price for PV so that those who install it get the same rate of return as those using other cheaper options. This may be fine if you are desperate to get PV accelerated. That’s a matter of judgment. For electricity, in the UK context, large-scale on-land and off-shore wind is clearly a better bet for the moment in terms of price, and also the scale of the resource. But PV prices are falling, and it could well be next in line for expansion, helped by the FiT, plus the loan scheme. Certainly there are benefits: localized generation using micro-power units like PV do avoid long-distance transmission losses, which can amount to up to 10% across the whole UK, and that is important.

However, domestic micro-generation has it limits – it’s arguably the wrong scale. PV is one of the better ones – there are no real technical economies of scale, except via bulk buying and sharing installation costs for larger projects. But micro wind is only relevant in a very few urban UK locations – larger grid-linked machines in windy places are so much more efficient and cost effective. Solar heating (to be supported under the forthcoming Renewable Heat Incentive) maybe be the best domestic option, but even then there are economies of scale (e.g. for grouped-solar schemes sharing a large heat store or even solar-fed district heating). Micro Combined Heat and Power (CHP) similarly: larger-scale mini or macro CHP, linked to district heating networks, are arguably more sensible.

Fortunately the 5 MW UK FiT ceiling, though low, gives us a chance to operate at slightly larger community scale, which may redeem the whole thing. See the excellent Energy Saving Trust report Power in Numbers, which states that “the economics of all distributed energy technologies improve with increasing scale, leading to lower cost energy and lower cost carbon savings and justifying efforts for community energy projects”. And for some smaller-scale renewables, it adds that “it is only when action occurs at scales above 50 households, and ideally at or above the 500 household level, that significant carbon savings become available”.

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The wrong FIT?

In April the government is to launch a Feed In Tariff for small renewables- the ‘Clean Energy Cashback’ scheme – and details of the tariff rates should emerge next week. Under it, electricity supply companies will offer guaranteed payments for electricity generated from renewable energy devices that consumers have installed their own homes, or to small projects installed by community organisation and the like, the limit being 5MW. See my earlier blog for details: http://environmentalresearchweb.org/blog/2009/10/uk-tries-to-get-fit.html

Eligible technologies include micro wind turbines, photovoltaic modules, micro hydro plants, and biomass-fired units. In the domestic sector, PV solar seems likely to dominate – micro wind is only really viable in a limited number of places and micro biomass units for electricity generation (usually micro CHP) are still relatively novel.

The Feed-In Tariff (FiT) that has been running for several years now in Germany has certainly helped get PV established, so maybe that will also happen here. The theory is that this guaranteed subsidy helps build the market for PV, so that prices begin to fall – and the FiT support can then be reduced. The German system has a built-in annual price ‘degression’ formula to take account of that. And it seems to work – PV prices have fallen and installed capacity has grown.

However, it has to be said that this has come at a cost: the supply companies pass on the FiT charges on to all electricity consumers. PV is expensive. But since the PV element the German FiT has so far been relatively small (most of the FiT has been used to support wind, which is cheaper) the overall cost of the FiT to consumers has been relatively small – initially 3–4% or so extra on average bills. However, with demand for PV increasing due to the FiT and the reduced cost of PV, there have been concerns about loading consumers up with the higher costs. That has already led to a cap on total PV capacity supported under the FiT in place in Spain. And the German government has now decided to reduce the FiT support rate for PV by15% to reduce the cost to consumers.

Initially, the German government was clearly convinced that PV was a major option for the future – as is widely accepted to be the case. It did of course have to balance the costs to consumers, the expected reduction in prices as the FIT helped PV move down its learning curve, and how much capacity was wanted, but it obviously felt that it was right to push PV ahead rapidly. Now, however, following a shift to the political right, it’s being more cautious. That change was no doubt buttressed by claims by the German news magazine Spiegel that the additional costs for subsidizing new PV installations in 2009, based on initial industry estimates for new installations of around 700 MW, could be as high as €10bn over the course of the 20-year FiT programme. And also by the study published last year by RWI (Rheinisch-Westfaelisches Institut für Wirtschaftsforschung), which claimed the extra cost added to consumers bills was around 7.5% p.a., and calculated the total cost of PV to German electricity users could be more than €77 bn over a 25-year period. These estimates may be inflated: the German Institute for Economic Research (DIW) put the latter cost at €50 bn. But it did seem that a continuing rapid expansion of PV was going to put more cost on consumers.

Basically the problem is that, although they are falling under the FiT, PV costs are still high at present, much higher than for other renewables, and the rapid expansion of PV meant the cost to consumers was too high. A problem really of success! By contrast, near-market options like large wind turbines are much cheaper/kW and per kWh, and so FiT support for wind cost consumers less in total. And so wind has been the main focus, with the result being that the German FiT has helped support 25 GW of wind capacity, and only about 4 GW of PV.

The UK FiT

What does this mean for the UK? If FiT’s aren’t that good at supporting expensive options like PV without loading up consumers with high costs, arguably we’ve got it the wrong way around in our approach. FiTs should be used for the big cost-effective stuff. We are using it for the small expensive stuff.

It could be that, nevertheless, as the UK’s ‘Clean Energy Cashback’ FiT gets going, customers who are willing and able to borrow money to install the equipment will push ahead, as happened in Germany. The guaranteed FiT income does make it easier to get loans from banks. And it’s certainly better than the than the UK’s dismal ROC/Renewables Obligation system. But what smaller expensive projects like PV really need is up-front capital grants. The UK tried that earlier with the PV grants system in the Low Carbon Building programme – but the level of demand for grants was such that it overwhelmed the relatively small scheme, and there were limits to how much more taxpayers money the government felt it could provide. Hence the interest in a FIT for PV and other small renewables – then its the consumers who pay.

The FIT may work well for some people. At present, for those with money, investing in PV solar will give a better return, via the FiT, than banks offer! But what about those without money? In the pre-budget report last December, the government said that ‘although feed-in tariffs and the Renewable Heat Incentive will make payments over the life of installations, low-income households may still find it difficult to meet upfront costs’. It added that ‘building on the experience of pilot projects for Pay as You Save financing and Warm Front,’ it will consult ‘on measures to help low-income households take advantage of clean energy cash-back’. That could help. And some community schemes may also prosper.

Even so, sadly, not much is expected on the UK FiT. At best, the government sees it as delivering just 2% of electricity by 2020. The Renewables Obligation (RO) is seen as the main way ahead, helping us to get about 30% from renewables, mostly wind, by 2020. So far, using the RO, plus a few capital grants, we’ve barely made it to 6%, with only tiny amounts of PV. And the RO has loaded up consumers with much higher prices per kW and kWh than under the German FiT system- even though the latter also included support for much more PV. Ofgem, the energy regulator, has reportedly estimated that the RO cost consumers £1 bn last year and a total of £4.4 bn so far. But it has only helped support 4 GW of wind generation capacity (some of which also benefited from grants), compared to the 25 GW installed under the FIT in Germany. So in general, in terms of capacity and costs, FITs are a much better option.

Whether that will prove true of the limited UK version for small projects remains to be seen. It will be interesting to see what the government comes up with next week in terms of tariff levels. Will PV get enough to move ahead seriously? And if so, what will that cost us?

Interest in using the scheme seems high. A YouGov survey for Friends of the Earth the Renewable Energy Association and the Cooperative Group found that 71% of homeowners said they would consider installing green energy systems if they were paid enough cash – and 64% of those asked thought that the government’s plans were not ambitious enough. But what if it puts bills significantly? The poll showed that 70% of respondents said that they would be prepared to pay an extra 10p on their electricity bills each month (£1.20 annually), on top of the already proposed annual increase of £1.17, until 2013 when the scheme is due to be reviewed. So maybe there is an appetite for change.

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UK tries to get FIT

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

REA’s input: http://www.claverton-energy.com/consultation-response-from-renewable-energy-association-rea-%e2%80%93-renewable-energy-financialincentives%e2%80%93-feed-in-tariff-fit.html

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