Consultation Response - Feed-in Tariffs Scheme Consultation
on Comprehensive Review Phase 2A: Solar PV cost control
Introduction
DECC recognise that IRR cannot be used to steer the FIT scheme, given the budget cap
and that deployment at an attractive IRR may exceed what the Government are
prepared to pay for. We recognise this reality for a capped scheme. While we recognise
the need for budgetary control and value for money, the operation of a FIT scheme within
an inflexible cap remains highly problematic and has a poor record internationally. As
well as creating difficulties for the industry, it puts unfair pressure on civil servants and
Ministers. It also creates challenges for public value for money, since public investment is
best protected by a smooth ‘glide path’ that allows the stable development of a strong
and competitive industry.
That important caveat aside, steering the FIT scheme to meet inflexible budget demands
has to be guided by a clear sense of the desired market size. The industry wants to see
clarity about expected deployment and an agreed trajectory set out. When this is
agreed the industry can work with government to keep deployment on track through
regular revisions. Industry hopes to work directly in a formal process with government to
share responsibility for achieving this. Regular revisions are desirable because the
relationship between market size and tariff is not yet understood and interventions may be
needed early under the new mechanism. In addition, smaller degressions, which help
avoid cliff edges, are more desirable for both industry and government planning.
The lack of clarity over a defined ‘budget’ leaves the industry in a difficult position. Of
particular concern is the relationship with support under the Renewables Obligation (RO).
With the prospect of FITs support for the non-domestic solar falling below the equivalent of
2 ROCs it makes no sense to constrain deployment from this point. Indeed, it will illogically
hinder public value for money if solar that is viable at lower support levels remains
constrained by the FIT cap, while more expensive technologies are able to expand freely
under the RO. In this case, investors will most likely be incentivised to switch to the RO,
despite the fact that the FIT was explicitly designed to counteract to be an easier-to-use
alternative to the RO.
Including sub 2ROC equivalent solar within the FIT cap calculations means this will draw on
a FIT ‘budget’ - that ‘draw’ is better spent securing sufficient resources to secure the
industry over the next year (and expanding ambition for other FIT tech including AD). We
are particularly concerned about the solar industry over the 2012/2013 period. We expect
at least 300MW of solar at 21p from April to July – under current indicated deployment
bands only around 521MW – 563MW of ‘ambition’ is scheduled to April 2013 (trigger point
4). However, from discussions with officials, we understand the trigger points will keep
rolling forward if volumes exceed triggers – it is hard to see how this will enable control to
deliver the overall level of ‘ambition’ over the next 3 years of (3083-3542MW).
Capital Tower, 91 Waterloo Road
Tel: 020 7925 3570
London, SE1 8RT
Fax: 020 7925 2715
Email: info@solar-trade.org.uk
The industry agrees with the overall volume and commends DECC for recognising the
need for volume to secure a mature solar market. However, we think the scheme can be
better managed, and provide greater forward visibility and confidence, by setting out
quarterly deployment objectives. Tariff adjustments can be made at each quarterly
review to meet the next quarter target. The industry needs to see 800MW min over the
2012/2013 year under FITs.
Our modelling shows that our original proposal of 800MW 2012/2013, 1000MW 2013/2014
and 1200MW 2014/2015, which is a level of deployment we have agreed with our
members, would cost X. While we understand why DECC would like to see deployment
more ‘back loaded’ to ease the budget, and while we appreciate the need for sector
competitiveness, there is a danger that pressure to restrict initial deployment levels could
excessively damage good quality firms which may have much value to add to UK plc in
future.
For solar under the RO, this is largely utility-scale solar which typically stacks finance up
through PPAs. This is a very different equation for determining IRR than for onsite investors.
2ROCs will therefore broadly remain appropriate for utility solar until 2013, and we urge
DECC not to destabilise this area of the market while it establishes.
Disappointingly the consultation only raises “unquantified costs” associated with solar pv
(.e.g network balancing costs). As per the Energy White Paper, DECC need to recognise
very broad “unquantified benefits”. The former Distributed Generation Co-ordinating
Group set out benefits of distributed power as below;
o It will reduce the total capacity needed within networks.
o It will reduce the need for peak provision in electricity networks.
o It will reduce power system losses.
o It will deliver major energy efficiency gains.
o It will automatically provide diversity in terms of power and location
o It will reduce the amount of large-scale centralised generating capacity
As DGCG said in 2005 “Mechanisms to access all these benefits either do not exist or at best can
be described as emergent and/or restrictive.” That remains the case. We hope that DECC will put
more resources into quantifying the broader system benefits of distributed power as its in the public
interest/value for money case to do so. We also recommend that DECC recognise the importance
of self-supply in opening up the UK electricity market to much wider consumer choice and
competition.
Answers to questions
1. Do you agree that in setting tariffs we should move away from explicitly targeting an
average rate of return of 4.5-5%?
Yes. The multitude of different business models and the fast moving nature of costs
make trying to peg tariffs to a narrow range of ROI’s very difficult, if not impossible. For
example, the ROI for a 2kw system can easily be 1.5% below a 4kw system, but that
difference represents a 4p difference in FIT. Given that the scheme is operating under
a fixed cap, there may not be the resources available to support all the deployment
that could come forward at that ROI. Nevertheless, we must recognise that the ROIs
2
achieved by the tariffs are probably the main factor that regulates the level of
demand, and that different investors have different hurdle rates for investment.
2. Do you agree that the tariff table from 1 July should depend on the volume of
deployment in the first two months of the post-3 March tariff tables?
No. March is not a representative month as the energy efficiency requirement and
reduction in multiple schemes will not have come into effect. Therefore only post 31st
March data should be considered.
We are concerned that even data for April to June may show a higher number of
deployments than current proposals recognise. History tells us that every time there is a
prospect of a significant reduction in tariffs, deployment rates increase as generators
seek to benefit from the higher rate. Therefore, it is likely March and April will see
significantly higher deployment as generators seek to beat the 1st July deadline. This
may well lead to more than 200MW being installed during the period, leading to a tariff
of 13.6p kWh for single domestics and even less for larger installations, which is
insufficient to maintain a viable UK industry. Even a reduction in tariff to 15.7p kWh, the
result of 150-200MW being installed in the period, is not a viable tariff rate.
3. Do you agree that the ranges of tariffs displayed in Options A, B and C are broadly
appropriate, and that the proposed deployment triggers for the choice between these
options are the correct ones?
If the installation cost data from Parsons Brinckerhoff is a fair representation of the
achievable cost from the industry then the range is fair, however our analysis suggests
that option A is the lowest acceptable level that we can accept as an industry to
provide a reasonable, minimal ROI to maintain a stable industry. Many smaller installers
will be unable to operate even at this level as they do not have the buying power and
economies of scale that the larger installers have.
Tariff Rate
Having digested the Parsons Brinckerhoff report we believe their installed costs are too
low and therefore are delivering lower tariffs than actual installed costs would merit.
Our modelling can be found in annex A
We do not agree with the proposal to use a 35-year lifetime to calculate tariff rates and
IRR. Although this may increase in future, current guarantees are generally for 25 years.
Most consumers in the on-site market typically stay in their homes for 10 years, so a 35year period to realise the full value of an investment is not likely to be meaningful. This is
by contrast with analysis for merchant generation and LCOE, where it is worth using the
full lifetime of the plant.
Trigger
We recognise that Government is committed to keeping the cost of FITs within budget,
although see the comments above on the difficulties of doing so. Therefore we
understand the need for a volume trigger mechanism to ensure there is sufficient
control to deliver a glide path to grid parity via a sustainable and growing industry. As
stated in our answer to Q2, using March and April will give a skewed level of
deployment that may result in unsustainable tariffs at all scales post 1st July. This may
leave PV unviable for most generators and therefore stall the industry for a significant
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period afterwards. If sector capacity and efficiency are lost during this period, it may
make it difficult to achieve lowest install costs for solar and this will not aid public value
for money.
4. Do you agree that tariffs for multiple installations (over 25 installations) should continue
to be 80% of the relevant individual tariff, and do you have any cost information to
support your response?
No. Our modelling (annex B) indicates that multiple schemes do not deliver 20% savings.
The reasons for this are;
 that in most cases the tariff recipient will not be the beneficiary from the avoided
costs of electricity consumption;
 although less easy to model, the legal cost involved in setting up these schemes can
be high. Therefore, any reduction in the tariff from economies of scale are more
than removed by these two factors.
We believe that maintaining access to PV for social housing and low income groups
should be a priority, but for these sectors an ongoing revenue stream is not necessarily
a key requirement for a project to go ahead. Therefore, FITs may not be the optimal
mechanism and low cost funding through such bodies as the HCA and/or Green
Investment Bank may be a better solution (through a ‘revolving fund’ type mechanism).
5. Do you agree that installations that do not meet the energy efficiency requirement
should attract the “stand alone rate”?
We are pleased that Government listened to industry and opted for a lower energy
efficiency requirement than originally proposed. However we believe that building
owners should be given a period of time after the application of the FIT has been made
to attain level D. Once attained the full tariff could be applied from that point on. As a
comparison, if a car fails the MOT, it is given a period of time to rectify the faults. Once
rectified, the MOT is passed at no extra cost..Indeed, if Government truly believe that
FITs will drive energy efficiency, surely it is difficult to see why this approach would not
be taken.
We also think that many buildings that should be outside the intended scope of an EPC
will get caught up in the requirement to attain a level D EPC. Some examples where this
may be the case follow:
• A poultry or pig shed, heated when occupied by young animals such as chicks or
piglets, and actively ventilated when occupied by adult chickens or pigs. At
present, we do not think SAP or SBEM software allows the estimation of an energy
rating – most of the standard factors concern factors such as heat from IT
equipment or human occupation. Assuming that it is not currently possible to
obtain an EPC certificate for the building, does this make it exempt from the energy
efficiency requirement?
• A grain store with 100 kW of roof-mounted PV, some of the electricity from which is
used to drive fans to dry and condition the grain during three months of the year,
the remainder being exported. The heat and ventilation is being used here to dry
the grain, not to condition the building environment for human occupation. Again,
this building is probably outside the scope of SAP/SBEM
• An open-sided dairy barn with 200 kW of PV on the roof. Some of the electricity
may be used on-site throughout the year, both in the dairy (milk cooling and water
heating) and in the farmhouse which is part of the same electricity supply. While it
may be possible to upgrade the farmhouse to meet EPC level D (although in many
cases this is likely to be more difficult and expensive than for an urban house 4
•
larger, solid walls, possible heritage barriers, etc.), it could be prohibitively expensive
to do the same for the milking parlour
Places of worship. Many of these will be listed buildings with limited scope for
energy efficiency improvements, but with tremendous value in fostering community
engagement with renewables
We therefore believe the definition should be restricted to those buildings that require
an EPC under the Energy Performance of Buildings Directive.
6. Do you agree with the principles of tariff degression described above, using baseline
degression and a deployment-related contingent mechanism, supplemented with
annual reviews to check that the system is working as planned?
Combining baseline and deployment-related contingent degression will only work if the
process allows degression to be slowed, paused or indeed tariff rates increased should
deployment fall below the glide-path. Adding a ‘reverse gear’ will be a key indicator
of Government’s commitment to the technology and to see if its newly stated ambition
for the technology is actually a target. This is vitally important for investor and industry
confidence.
We have developed a formula that is able to respond to a change in deployment rates
that either exceed or fall below the glide path. This has limitations, in that it is only a
theoretical link between tariff levels and deployment, but the formula could be refined
based on real-world experience. It has the added attraction of being transparent and
easily fine-tuned to ensure a smooth glide path is derived.
Projecting a baseline degression out to the future is unhelpful and ill-advised, given such
a complex and dynamic market. See also our response to question 7.
7. Do you agree that the baseline degression steps should be at the rate of 10% every 6
months?
No. History tells us that big reductions in tariffs can lead to spikes in demand, further
exasperating the problem. Costs of equipment have dropped significantly over the last
year, however our feedback suggests that costs are already on the low side with panel
manufacturers complaining that they are selling below cost. We do not see costs
dropping anything like the levels suggested by Parsons Brinkerhoff.
Although Germany has recently moved to a one-monthly degression rate,we believe it
better to have a quarterly baseline degression of 3%, meaning the baseline annual
degression equates to 12%. the additional capacity-based degression mechanism can
be used to accelerate degression above baseline If needed. It is important that if
deployment falls below the glide path, the next quarter’s degression can be cancelled.
If the following months see demand not getting back on track, tariff rates can be
increased for the following quarter. Our model as set out in the answer to the previous
question will allow this degree of flexibility whilst maintaining control of the
budget/deployment.
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8. Do you agree that the contingent degression triggers should be based on 125% of
expected deployment, and that actual deployment should be measured and
published by Ofgem in the manner described?
Setting the contingent degression at 125% is reasonable if the corresponding tariff
correction steps are small. The proposed 5% in October 2012 followed by 6 monthly 10%
reductions are too great and will undoubtedly lead to peaks in demand pulling forward
further demand until eventually demand falls off a cliff, at which point a viable industry
ceases to exist.
It is essential that industry has confidence in the data produced, which has not been
the case up to now. Therefore monthly publication of up-to-date and accurate
deployment data at all scales will be essential in ensuring a stable framework for the
scheme to operate.
9. Do you consider that the baseline degression and/or the contingent deployment
triggers should change once the 2 ROCs rate has been reached?
The growth of the sector at 2ROC/sub2ROC should not be constrained. There is no
public value-for-money case for doing this – particularly when the benefits of distributed
power are factored in.
This interface with the RO needs to be resolved – but it needs to be resolved in the
round, considering EMR and competition policy too. The RO is not a good mechanism
for DECC to manage solar and it is unclear whether EMR will be. FITs are the right
mechanism, but they are being constrained and mostly limited to domestic investors.
That will be very hard to justify when solar falls below 2ROCs.
It is impossible to answer this question without also considering PV’s treatment under the
RO banding review. Provided PV’s eligibility for 2 ROCs remains unaltered, with
subsequent degression in line with the proposal set out in the recent banding review
consultation1 then, where the installed cost evidence supports such a decision, it may
be appropriate for the FITs rate to be degressed below the 2 ROC level.
However it is important to remember that the RO is a complicated mechanism
designed to be used by industry professionals and the rationale behind FITs was to allow
those outside of the sector to participate. Therefore we are keen that the RO does not
become the only viable route for larger-scale PV and would argue strongly for sufficient
support to remain available under FITs. See our modelling as to what this level of support
should be (annex.....)
RO Banding review
We are extremely concerned by any suggestion that the RO Banding Review may bring
forward degression for PV sooner than the timetable set out in the consultation. A
reduction below 2 ROCs for PV would be unwise as utility solar has a different IRR
calculation to on-site. It is vital to re-establish investor confidence in solar following the
last 12 months. 2ROC utility solar is only just starting to establish itself in the south of
England. This is providing good value, including because of distributed power benefits
(which are exceptional in Cornwall). DECC should view this positively and encourage it.
Consultation on proposals for the levels of banded support under the Renewables Obligation for
the period 2013-17 and the Renewables Obligation Order 2012
1
6
Unlike offshore wind, PV does not benefit from any other Government subsidy (such as
grid reinforcement) and therefore when it reaches 2 ROCs will already be considerably
cheaper than the marginal technology. We are not arguing that offshore wind
subsidies should be reduced, rather that when PV reaches 2 ROCs it should be allowed
some breathing space to allow it to establish itself.
Indeed, a rush to reduce the number of ROCs available to PV may well scare off
investors, which in turn risks PV at the larger scale not reaching its potential. If this were
to happen then it would represent a missed opportunity and poor value for money.
As set out in our response to the RO Banding Review consultation2, historically the power
produced from PV has been systematically undervalued. PV produced daytime
generation has a value 2 to 5 times higher than base load electricity. Somehow this
needs to be considered in the context of both money and CO2. Secondly, a kWh from
PV also saves more CO2 than a kWh from base load nuclear. This is because daytime
peak electricity is made with inefficient plant (peaking plant) with notoriously poor
efficiency. Comparing cost per kWh is unacceptable as it can distort results by over
100%. Similarly comparing cost per tonne of CO2 saved is wrong unless the time of day
the CO2 is created is used (it has not been).
10. Do you have views on whether deployment triggers should be divided into bands, and if
so whether the bands described above are the appropriate ones?
PV is now recognised as having a significant role to play in meeting the UK’s 2020 and
forming a pivotal role in UK’s future decentralised energy mix. Therefore PV needs to be
encouraged with policy mechanisms supporting sustainable growth at all scales.
However a balance needs to be struck between tariff management and investor
certainty. Too much tinkering with tariffs could seriously undermine confidence.
Therefore on balance we believe it is not appropriate to adjust tariffs at different rates
for size bands but rather roll it into the annual review process so that any significant
anomalies can be adjusted on a more strategic basis.
11. Do you consider that we should reduce the tariff lifetime for new entrants to the FITs
scheme, from 25 to 20 years?
In the eyes of most consumers the difference between 20 and 25 years is likely to be
minimal. Therefore, providing returns do not fall below the 5-8% set out in the
consultation document, we would support this proposal. However we note that DECC
is now taking into account project income over 35 year system lifetimes which means
that the export tariff and income from avoided electricity purchase in the last 15 years
now play a very significant role in determining the returns achieved. There needs to be
consistency in the modelling – if we move to a FIT of 20 years, then the ROI also needs
to be reflected over 20 years.
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12. Do you consider that the current level of the export tariffs fairly represents the value to
suppliers of exports from FITs generation? Please provide evidence to support your
answer.
No. As a general principle, the value of the export tariff guarantee should reflect the
true value of the electricity exported. This appears to be in the region of 5-6p
13. Should any changes to export tariffs apply to all generators or only to new entrants to
the scheme, and should there be compensating changes to generation tariffs?
We are agnostic on the former issue but would point out that any desire to increase
the export payment must not be paid for out of the FITs budget. With a constrained
budget and our desire to see it bring forward as much renewable generation as
possible, it would seem appropriate to make a corresponding adjustment to the
generation tariff provided the ROI remains unaltered.
14. Do you think tariffs should be index-linked?
Yes. This was a fundamental feature of the scheme’s design and something the
REA/STA argued strongly for when the scheme was being designed. It is also a key
differentiator between FITs and the RO, allowing non-energy professionals to be more
confident when engaging in energy generation. Therefore if removed, the scheme
would be significantly less attractive for investors, in the earlier part of the scheme it
would also increase the cost per MW as the tariffs would need to be increased to
compensate for the loss of index linking.
15. If index-linking is maintained what would be the best model? (i) CPI for whole life, (ii)
RPI for whole life, or (iii) index-linking (either RPI or CPI) for the first x number of years?
We believe that it is essential to maintain indexing within the entire FIT tariff lifetime.
Within that, we are agnostic as to whether RPI or CPI should be used.
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Annex A: FIT’s 2a Consultation – sensitivity testing
25 years tariff and system lifetime:
Required generation tariff at stated rate of return (p/kWh)
2012 total project costs (£/kWp)
Capacity
(kWp)
Annual yield
(kWh/kWp)
Required
Return on
Investment
<=4kW (domestic - 2.7kW)
2.7
850
5.0%
50%
3,072
2,200
0
18.3
15.8
14.3
13.0
11.6
10.3
9.0
7.8
6.7
5.6
<=4kW (domestic - 4kW)
4.0
850
5.0%
50%
2,546
1,800
0
13.1
11.1
9.78
8.66
7.5
6.4
5.3
4.3
3.4
2.5
commercial <=4kW (EPC below D)
4
850
5.0%
50%
2,546
1,800
0
13.1
11.1
9.8
8.7
7.5
6.4
5.3
4.3
3.4
2.5
commercial >4-10kW
6
850
8.0%
50%
1,800
1,800
0
12.9
11.0
9.8
8.8
7.7
6.7
5.8
4.9
4.0
3.2
commercial >10-50kW
25
850
8.0%
30%
1,600
1,400
0
8.0
6.5
5.4
4.5
3.5
2.6
1.7
0.8 -
0.0 -
0.8
commercial >50-150kW
120
850
8.0%
30%
1,500
1,350
0
6.8
5.3
4.3
3.4
2.5
1.6
0.8 -
0.0 -
0.8 -
1.6
commercial >150-250kW
200
850
8.0%
30%
1,400
1,300
0
5.6
4.2
3.2
2.4
1.5
0.7 -
0.1 -
0.9 -
1.6 -
2.3
industrial
>250-5,000kW
350
850
8.0%
20%
1,200
1,200
0
2.4
1.2
0.3 -
0.4 -
1.2 -
1.9 -
2.7 -
3.4 -
4.0 -
4.7
utility
stand alone
2,000
850
8.0%
100%
1,200
1,200
0
11.5
9.4
8.7
8.0
7.4
6.8
6.3
5.7
5.2
4.7
Band
Description
domestic
domestic
20
% electricity
exported
As
modelled
Industry
lowest
DECC
Impact
Assess't
1/4/12
1/7/12
1/10/12
Generation tariffs (p/kWh) to achieve
rates of return of 5% in the domestic
sector and 8% in the non-domestic
sector
18
1/4/13
1/4/14
1/4/15
1/4/16
1/4/17
1/4/18
<=4kW (domestic - 2.7kW)
<=4kW (domestic - 4kW)
>10-50kW
16
>250-5,000kW
Generation tariff (p/kWh)
14
12
10
2 ROC equivalence
8
6
4
2
1/4/12
1/7/12
1/10/12
1/4/13
1/4/14
1/4/15
1/4/16
1/4/19
1/4/17
1/4/18
1/4/19
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Annex B: Aggregated projects – effect on returns of removing the
savings from the internal use of generated electricity
In its consultation document DECC is proposing that multi-installation tariffs should be set
at a level 20% lower than the standard tariffs for individual installations. This is justified on
the basis that such aggregated projects enjoy economies of scale and that these should
be passed on through lower tariffs. However we do not believe that the economic
analysis has been undertaken correctly. The business model of aggregator schemes,
whether they be social housing or so-called “free solar” (or “rent a roof”) schemes,
involves the investor receiving the generation and export tariffs, whilst the occupier of the
building receives free electricity during periods of generation. Currently for domestic
premises this is deemed at 50% of the total generation. For the occupier it offsets the
purchase of electricity at retail price and represents a significant sum, given recent (and
projected) increases in electricity prices. Our modelling indicates that an individual
receiving a 4.7% return based on the 21p/kWh tariff would see that return drop to 1.0%.
Another way of looking at this is to compare the tariffs required to achieve a 5% return
both with and without the inclusion of the savings from internal use. The bar chart below,
showing outputs from the modelling for three years between the present and 2020/21,
clearly indicates that the savings through internal use represent around a 10p/kWh
differential on the generation tariff. Given this differential, there is little justification in
reducing the tariff paid to multi-installation projects, as this would undermine the viability
of such schemes.
Tariff required to achieve 5% rate of return in the domestic retrofit band effect of excluding savings from internal use of half the electricity
35
31.4
Including savings from internal use of electricity
30
Excluding savings from internal use of electricity
25
21.9
20
p/kWh
18.3
15
11.5
10
8.2
5
0.9
0
2011/12
2015/16
2020/21
10