The UK Department of Energy and Climate Change (DECC) has launched a consultation proposing savage cuts in the levels of subsidy under the Feed-in Tariffs (FITs) regime for small-scale renewable electricity generation (the Consultation). This comes only a few weeks after DECC announced the ending of more or less all subsidies for onshore wind, the removal of the renewables exemption from the Climate Change Levy and other proposals designed to reduce the costs of renewable subsidies significantly. What does the Consultation say, and what does it mean for the future of renewables in the UK? We look first at the background of the FITs regime and then at the detail of the proposals.
Some background
The legal foundation for the FITs regime was inserted very late in the Parliamentary passage of the Bill that became the Energy Act 2008. Although there had been pressure to include provision for FITs from the moment the Bill was introduced in January 2008, the then Labour Government only finally gave in to it on 5 November 2008, by which time the Bill was rubbing shoulders in the Parliamentary timetable with legislation designed to avert financial meltdown as a result of the banking crisis.
Perhaps we should not be surprised that a scheme launched in the far-off days of Gordon Brown’s premiership should now be in the process of being dismantled, after 5 years of apparently too successful operation, as part of the current Conservative Government’s attempts to reduce public spending (whether funded from taxation or levies on consumers). To see quite how different the world looked in 2008, it is worth recalling that Ministers then looked forward to a time when, by 2020, the Renewables Obligation (RO), newly modified to include different bands of support for different technologies would be “worth about £1 billion a year in support of the renewables industry”. Current annual support under the RO runs at around three times this level, and it may hit £5 billion by 2020.
During the passage of the 2008 Energy Bill, EU Member States were set the targets for the percentage of final energy consumption from renewable sources that they would have to meet by 2020 under the Renewables Directive of 2009. Some suggested that the UK would not meet its target of 15% unless FITs were introduced. There was a widely held view that following the German model of FITs was at least an essential supplement to the RO, and that feed-in tariffs were generally, and could be in the UK, a cheaper way of subsidising renewables.
That was perhaps over-optimistic. DECC and Ofgem figures show that in 2013-2014, generating stations accredited under the RO produced 49.6 TWh, or 16.3% of electricity supplied in the UK. At the same time, FIT installations produced 2.6 TWh, or 0.84% of the UK’s final consumption of electricity. But whilst the output of RO-subsidised generation to FIT-subsidised generation stood in a ratio of about 19:1, the comparative costs of RO were no more than 4 times those of FITs. Another comparison from DECC’s evidence review of FITs is even more interesting, when it calculates that the p/kWh cost of FIT-generated electricity is about 3 times the level of the strike price under the proposed Contract for Difference (CfD) for the Hinkley Point C nuclear power station.
Perhaps this should come as no surprise. FITs were intended as a way of encouraging “microgeneration”. One of the ways that renewables resemble other forms of power generation is that they tend to be more cost-effective on a larger than on a smaller scale. But FITs were not just about meeting targets: they were to make renewable generation accessible to individual households for whom trying to deal with the RO was (in the words of one MP, apparently speaking from personal experience) a “bloody nightmare”. FITs would be simple, and they would popularise renewables.
That part certainly seems to have worked. As DECC notes, the scheme has all but reached 750,000 FIT installations already – a level it was not originally expected to reach until 2020.
Headline proposals
DECC says that the deployment of FITs has been significantly exceeding its projections both in terms of numbers of installations and installed capacity. As a result, the FIT scheme has put undue financial pressure on the Levy Control Framework (LCF), which was created to limit the extent to which consumer bills increase to fund the subsidies for low-carbon generation. The measures proposed in the Consultation are intended to remedy these problems.
Significant decreases in generation tariffs for solar PV, wind and hydro power
At the larger end of the scale of FIT eligible installations, generation tariff reductions are proposed for:
- standalone solar PV (Large Solar PV) – from 4.28 p/kWh to 1.03 p/kWh;
- wind farms with a capacity >1.5 MW (Large Wind) – from 2.49 p/kWh to 0 p/kWh; and
- hydro installations with a capacity >2MW (Large Hydro) – from 2.43 p/kWh to 2.18 p/kWh.
Installations with smaller capacity would also see their tariffs reduced, in the case of solar PV, even more steeply, with 4 kW installations having an 87% reduction in generation tariff levels.
In addition, the different capacity-based generation tariff bands for each technology would change (their number being reduced in the case of wind and hydro and the boundaries redrawn for solar).
It can be said that the relative levels of reduction in generation tariffs roughly correspond to the extent to which DECC’s Impact Assessment reckons the different sizes and types of installation have seen reductions in their grid connection and capex costs since 2012. But only roughly: for example, it appears that Large Solar PV has seen an increase of 3% in costs and will have its tariff reduced by 76%, while the smallest PV installations have seen a decrease in costs of 35% and will have their tariff reduced by 87%. These reductions in generation tariffs are said to be aiming at a target rate of return of 4%, as compared to the 5-8% range of rates of return that was used to calculate the current tariff rates
The changes would mean that for future solar PV installations, the generation tariff (received on all the power they generate) would be a much less significant component of their revenue stream than it has been historically. For those receiving the export tariff for the electricity which they export (or are deemed to export), the export tariff is likely, at least initially, to be higher in p/kWh terms, but by far the largest benefit for those who consume the renewable electricity that they produce will be in the avoidance of the costs of purchasing electricity generated elsewhere from a third party supplier.
The problem for most solar installations though, especially on domestic premises, is that for much of the year, the bulk of household energy consumption tends to occur at times when there is no sun and no generation. The solution to that would be to connect your PV panels to a battery and store the electricity generated during daylight hours for the evening. But – needless to say – the Consultation contains no proposals for any new German-style subsidy for adopting storage technology.
Degression
At present, FIT generation tariffs “degress” periodically by a fixed percentage automatically, but can degress further if deployment reaches specified thresholds (contingent degression).
The Consultation proposes:
- a new fixed quarterly degression mechanism, reducing generation tariffs available for new Large Solar PV to zero by January 2019. DECC is not proposing to degress the generation tariffs for Large Hydro, which would stand at 2.18p/kWh throughout the three-year period budgeted for under the Consultation;
- harmonising the frequency of degression to quarterly across all technologies; and
- a further degression of 5% if deployment of FITs exceeds DECC’s deployment projections, and 10% if the cap (discussed below) on the eligibility of new projects for the FIT scheme is reached.
The Impact Assessment takes as a working assumption the proposition on which DECC consulted in July, that future FIT eligible installations will not be able to protect themselves from the impact of degression by applying for preliminary accreditation when they have planning permission and an accepted offer of a grid connection, thereby “locking in” to the higher tariff band prevailing at the time of preliminary accreditation for a period of between 6 and 30 months (depending on technology and ownership of the installation) provided that they are commissioned and accredited within that period.
Indexation
Previously, both generation and export tariffs have risen automatically in line with the Retail Price Index (as under the RO). New installations will see their tariff payments rise according to the movements of the Consumer Price Index link (as under the CfD regime), which is less generous.
Overall cap
So far, the proposed changes, although they slash the amounts of support available to new installations, leave the basic architecture of the regime in place. But the existence of the proposed new FIT regime is a much more precarious thing than might be suggested by any of the above.
This is because DECC further proposes:
- a maximum overall budget for the FIT scheme of £75 – 100 million for the period from January 2016 to 2018/2019. This would apparently be expressed as a series of quarterly limits on FIT-supported deployment at each generation tariff level, so that once the cap is reached no further generating capacity would be eligible for the tariff during the period to which the cap applies;
- separate caps for each of a number of different capacity-based bands for solar and wind (each of which cover a number of generation tariff bands). These would limit quarterly FIT solar deployment, for example, to between 42 MW and 54 MW during the period budgeted for by DECC in the Consultation (Q1 2016 – Q1 2019). This is less than is typically accredited in a single month at present. The caps on larger solar installations would limit deployment under FIT to one or two per quarter; and
- unlike the measures relating to generation tariffs and degression, the caps would apply to anaerobic digestion (AD) installations as well as solar, wind and hydro.
With exquisite understatement, DECC observes: “We recognise that implementing deployment caps presents significant logistical challenges.”, although DECC has outlined a number of possible ways in which the caps might be administered (essentially, by Ofgem or by licensed suppliers). Anticipating the possible objections to a system where eligibility for a particular tariff (or any support at all) would depend on the relative timing of accreditation of different installations, measured in seconds, DECC proposes to suspend the FIT regime pending any better suggestions. Anticipating the objection that a cap will simply not achieve its purpose of controlling costs, the Consultation proposes the alternative solution of ending generation tariffs altogether, possibly as soon as January 2016. The industry is, in effect, challenged to accept the capping proposals or face potentially worse consequences.
Almost as an afterthought, DECC adds that its consideration of “further amendments to the existing FITs scheme to ensure that it provides better value for money” includes “consideration of whether future applications within a system of caps could be prioritised through a competitive process“. It’s a pity the CfD regime, with its competitive allocation process, wasn’t designed to cover microgeneration.
Other points
DECC is concerned that (especially in the wind and AD sectors) the “extension” of an existing FIT installation – or developing what is in truth a single installation in a series of separately accredited stages – can be used as a way to gain the benefits of economies of scale associated with larger installations whilst qualifying for the higher generation tariff rates associated with smaller installations, leading to “overcompensation”. To put an end to this, it is proposed to “put in place a rule to prevent new extensions claiming support under FITs.” No detail is given as to how this will work in practice.
When the Energy Bill was being debated back in 2008, three issues were often raised (not necessarily in connection with FITs) on which less progress has been made in the intervening years than could have been wished: smart meters, the impact of small-scale renewable generation on distribution networks, and energy efficiency. The Consultation has something to say on each.
- DECC propose to end the practice of estimating how much electricity smaller installations export to the grid (deemed exports) in favour of full metering of exports, and may take further measures to enable remote generation meter reading. The key question here seems to be whether existing installations of 30kW and below should be compelled to accept smart or “advanced” meters in order to facilitate this more accurate and “remote” measurement of their FIT entitlements. DECC note that deemed exports were meant to be a temporary measure. It remains to be seen whether smart meters will be rolled out before the FITs regime closes to new installations.
- More accurate measurement of exports would facilitate a further reform: moving to “dynamic” export tariff rates that could reflect changes in the wholesale price of electricity, rather than the current, static export tariff rates. It is a matter of concern to DECC that “the current export tariff is higher than the wholesale electricity price, with resulting overcompensation of generators by suppliers“. This is because the tariff is meant to represent the wholesale price less the value of the transmission and distribution costs which suppliers do not have to pay in respect of FIT electricity (even though, DECC acknowledges slightly confusingly “in certain circumstances these can be additional rather than avoided costs“).
- DECC propose an obligation to notify DNOs of new small-scale generators to facilitate grid management. The problems of DNOs not being made aware of new generation on the grid are not new. Such an obligation is perhaps a case of “better late than never”, but would no doubt have been more welcome to DNOs when FIT generating capacity was still increasing at a rate unconstrained by the proposed new caps.
- DECC propose that roof-mounted solar PV installations seeking to accredit at the higher generation tariff rate should satisfy the requirement of being at least in energy efficiency band D before they commission the solar installation, rather than being able to count the installation itself as one of the things entitling them to be certified at band D or above. Under the current regime, the higher tariff sees to have become effectively a default rate, applying to 99% of installations, rather than setting any kind of incentive to improve the energy efficiency of buildings. DECC mentions, but is not yet proposing, the further step of raising the higher tariff threshold to band C.
Finally, DECC is “considering implementing”, but is not yet proposing, changes such that AD plants that sought accreditation under the FIT regime would have to comply with the same sustainability requirements that the feedstock of AD plants seeking support under other renewable incentive mechanisms (e.g. the RO and Renewable Heat Incentive) are required to observe. This would be to avoid FITs becoming a haven for operators with non-compliant feedstocks.
The good news?
In contrast to some of its recent proposals in relation to the RO, DECC has reasserted its commitment to its “grandfathering” policy on FITs, so that existing installations will not be affected by the proposed changes to tariffs and caps. However, the Consultation does not address explicitly the question whether any tariff reductions will affect projects which have been pre-accredited (whilst this was still possible) but have not achieved full accreditation at the point when the new tariffs come into effect. Such projects are likely to be at risk of being subject to the new, lower tariffs if construction or grid connection delays result in them not being commissioned and applying for full accreditation within their pre-accreditation periods of e.g. 6 months (12 months for community projects) for solar PV. But it is to be hoped that if they are commissioned and accredited within their pre-accreditation periods, they will still benefit from the earlier, higher tariffs prevailing at the time of their pre-accreditation.
What next?
The proposed measures in the Consultation, if implemented, will bring about a drastic change in the FITs regime. Is this anything more than the latest manifestation of fiscal austerity, or are the Government’s proposals for the FITs regime part of a coherent renewables / energy policy?
There are a number of points on which the proposals are notably consistent with other statements of the present Government’s policy on renewables. The gentlest decrease in solar PV generation tariffs (a mere 62%) has been applied to the 250-1000kW band which most obviously represents the commercial rooftop solar sector that DECC has said it wants to see expanding. The fact that wind generation tariffs have only been abolished for installations above 1.5kW (with proposed tariff reductions of as little as 37% for the smallest wind installations) tends to reinforce the impression that the current Government’s objections to further onshore wind subsidies owe as much to aesthetic as to financial considerations. There is a general intention that tariffs should be set at a level that encourages “well-sited” installations rather than making viable those that ought not to be viable.
As noted above, the UK nearly didn’t have a FIT regime. Political pressure ensured that it did. It may be that calculations of what was and was not politically feasible resulted in the regime being unreformed for too long after its 2012 review. A number of the ideas in the Consultation feel as if they could have been more usefully deployed if they had been proposed much earlier, but may now come too late, and/or in too Draconian a form, to save the regime as far as any significant quantity of new installations is concerned.
Whether, in retrospect, the proposals will look like a well marked out path to subsidy-free small-scale renewable generation is hard to assess. However, it is clear that DECC is determined to avoid a situation in which a large bulge of smaller projects that fail to make the relevant cut-off date for accreditation under the RO flood into the FIT regime instead. The proposed caps should stop that.
If you would like to discuss any issues arising from this post, please feel free to contact the authors or another member of the London Energy team at Dentons.
