October 2009
Consultation
response
Response from Friends of the Earth to the
DECC consultation on Renewable Electricity
Financial Incentives (Feed-in Tariffs) 2009
Introduction
Friends of the Earth warmly welcomes this consultation. The UK has historically been one of
the worst international performers on renewable energy. However the passing of Feed-in
Tariff and Renewable Heat Incentive in the Energy Act 2008 gives us the opportunity to put
in place two world leading schemes to promote decentralised renewable electricity and
renewable heat.
The Feed-in Tariff scheme proposed in the consultation contains a number of useful
innovations from schemes operated in other countries, such as the ability to benefit from
onsite generation. Friends of the Earth believes that the basic structure and levelisation
process are correct. However we are very disappointed by the lack of ambition of the
scheme - just 2% of UK electricity by 2020. This lack of ambition is reflected in the tariff
Response to Renewable energy financial incentives consultation 2009
rates that have been set and is compounded by the tax treatment, extreme tariff degression
rates for some technologies and the lack of any indexation of tariffs.
There are also notable technologies - wave and tidal – missing from the scheme entirely and
a highly worrying lack of support for community scale wind generation.
We are also concerned by the lack of any accompanying policies to address the problems
that some businesses and households may have (such as SMEs and the fuel poor) in getting
access to capital and finance.
These problems are all easily fixable. Friends of the Earth looks forward to the Government
acting on these recommendations to improve the scheme and therefore to allow
communities, households, farmers, local authorities, businesses, social landlords and others
to benefit from the reduced energy bills and increased energy security which small-scale
renewable electricity generation can bring, while at the same time cutting carbon emissions
and generating jobs.
Addressing the poor level of ambition
The Impact Assessment for the consultation shows that Business-As-Usual would produce
0.6% (or 2TWh) of UK electricity from sub 5MW renewable by 2020. The proposed scheme
adds just 1.4% to the total to see 2% (or 8TWh) of UK electricity from sub-5MW renewable
by 2020.
The research by Poyry and Element Energy identifies a technical potential of 131TWh
available from sub 5MW renewable sources in the UK1. The proposed scheme would bring
forward just 8TWh of this huge potential by 2020.
Despite the Poyry/Element Energy research commissioned by DECC modelling a 3.5% by
2020 (as well as 2% scenario) the govt rejected this and only looked at scenarios in the
Impact Assessment that would reach a 2% target (which they do at varying costs and with
different amounts of the various technologies). The 3.5% target would mean 13.5TWh by
2020. Almost double the proposed scheme.
Given the huge potential for decentralised electricity under 5MW and the urgency of
climate change. Friends of the Earth propose the Government could triple the current
ambition of the scheme and should therefore adopt tariffs consistent with a 10% Return on
Investment (ROI) until the first review in 2013. Following the first review they can
potentially be reduced as the UK market matures, as the cost of technologies hopefully
comes down and to account for the development of other supportive policies such as low
interest loans for homes and businesses – while maintaining the same level of ambition.
According to the modelling commissioned for the consultation from Poyry and Element
Energy2 a 10% ROI would result in 25TWh of small scale renewable electricity generation by
2020. It would do so more cost effectively than tariffs based a lower rate of return 3.
1
Qualitative issues in the design of the GB feed-in tariffs, Poyry and Element Energy, June 2009
Design of Feed-in Tariffs for sub-5MW Electricity in Great Britain, Quantitative analysis for DECC, Poyry
and Element Energy, June 2009
2
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How to proceed with your new briefing
This is the equivalent of the output of Drax power station (25.4TWh in 2008)4 or two and a
half times the output of Sizewell B (9.8TWh in 2008)5.
Answers to specific questions
Q35. Do you agree that FITs should be structured in order to recognise all generation,
rather than just exports?
Yes. The rational in the consultation is correct.
Q36. Do you agree that the best way of delivering security for the investor is to set a longterm guaranteed price for exports?
The principle of setting a long term guaranteed price for both generation and exports is
correct. A fluctuating market based export would create uncertainty and mean the export
could not be properly valued as part of the income stream for financing purposes. However
this does not justify the proposal to fix the export (and generation) tariff without up grading
for inflation or increases in wholesale energy prices. This will considerably erode security for
the investor. As wholesale energy prices are likely to rise considerably to 2020 a fixed export
price will also lead to unacceptable and unjustified supplier windfall (financed by
consumers). This would have a severe impact on public perception of the scheme.
The export tariff offers an incentive for energy efficiency and is a welcome feature of the
proposed tariff structure. However a fixed export price will mean this incentive will
disappear over time. The export price should be fixed as a minimum price which will rise (ie
it could only go higher) index linked to wholesale energy prices (while allowing a small
margin for suppliers to help ensure their compliance with the scheme). This way its value
can be better included when financing schemes (though as the actual quantity of export will
vary hugely between schemes it still incurs the higher hurdle rate for ‘Premium Tariffs’ – see
below).
The provision of the export price makes the UK tariff what is generally known as a ‘Premium
Tariff’ rather than a ‘Fixed Tariff’ (as operates in Germany for example). This is also an
important factor when setting tariffs levels which Friends of the Earth believes has not been
compensated for in the proposed tariffs. The consultation is wrong to suggest that just
because the export tariff is fixed in value per KWh then the increase in hurdle rates need not
apply. This is incorrect because while the value per KWh might be fixed the overall value is
still unknown because it depends entirely on the energy behaviour of the generator.
If tariff ROI’s have been calculated based on generation plus export tariffs this decreases the
security of the scheme as exports cannot be accurate predicted in onsite installations
circumstances (stand alone generators where everything is exported are different). For
example a household with a PV roof will have very different exports if they stay at home all
day using electricity compared with if the house is empty.
3
141£/MWh for 10% ROI compared with 204£/MWh for 8% ROI.
http://www.draxpower.com/aboutus/ourbusiness/key_facts/
5
http://british-energy.com/pagetemplate.php?pid=96
4
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Response to Renewable energy financial incentives consultation 2009
The research for the consultation by Poyry and Element Energy 6makes it clear that a
premium tariff will increase investor hurdle rates by 1%. However this has not been allowed
for in setting the proposed tariff.
We support the proposal for generators to be able to choose to adopt a Power Purchase
Agreement approach.
Q37. Do you agree that FITs generators should also benefit from on-site use of their
generation?
Yes. This is a crucial and welcome innovation in the proposed UK tariff which an
improvement on that operated in some other countries. The addition of an avoided import
benefit for generators plus the ability to assign FIT export and generation payments
potentially opens up all kinds of innovative leasing arrangements which could over-come
the problem of upfront capital costs for many households and SMEs. Friends of the Earth
knows of at least one very large local authority which is considering investing in PV panels
for its housing tenants creating a situation where the household benefits from reduced
electricity bills while the LA collects the export and generation tariff.
Energy companies or other companies could engage in a similar relationship with owneroccupier households. The avoided import benefit could also overcome the tenant/landlord
split incentive problem which has dogged efforts to extend energy efficiency measures into
the private rented sector (ie the landlord pays but the tenant benefits). Both tenant and
landlord can benefit with this FIT scheme.
However these situations require the generation and export tariffs to deliver the return on
investment. It is our understanding that in many cases when calculating tariff levels DECC
has added avoided imports, exports and generation. This is a mistake. If the combination of
all three are required to meet an investors hurdle rate then they will not invest if only two
of the three are available to them (with someone else receiving the avoided imports
benefit). Tariffs should calculated to deliver the appropriate ROI based on only the
generation (and where applicable) the likely export tariff rather than including the value of
onsite generation (ie avoided imports).
Q38. Do you have any other views on the basic structure of the FITs?
Friends of the Earth broadly welcomes the basic structure of the proposed FIT – generation
and export tariffs plus avoided imports. It has a range of benefits: reduced network costs
and network loses, increased energy security for onsite generators and reduced energy bills,
the ability to create innovative ownership models which overcome capital costs, an
incentive for energy efficiency and behaviour change.
However we have serious concerns that the export and generation tariff are not index
linked and that implications of this structure for tariff levels have been ignored when setting
proposed tariffs.
6
Qualitative issues in the design of the GB feed-in tariffs, Poyry and Element Energy, June 2009
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There are a number of other vital issues which must be address in the basic structure:
Tariff degression:
Tariff degression is potentially a useful tool to encourage innovation and cost reduction,
deliver price certainty, encourage early uptake and first mover advantage. However Friends
of the Earth believes its use for the first period of the tariff up to the first review is not
appropriate. The use of tariff degression is not universal in FITs in other countries. However
the Poyry/Element Energy report recommends a combination of regular reviews and tariff
degression. Friends of the Earth agrees that this is to model which should be eventually
adopted but opposes setting any degression rates until the first review when there is real
rather than theoretic market data on which to base them. The UK is a very small and
uncertain market for small scale renewables which will undergo dramatic shifts if a good
scheme is introduced. It needs stability for the first few years.
Under normal circumstances prices would be expected to fall as economies of scale were
exploited however prices for many technologies may rise dramatically as demand rises
when economies emerge from the current recession.
The high degression rates in the consultation are not justified with evidence from
Poyry/Element Energy report (which contain lower rates). The rates for PV are particularly
punitive.
Tax treatment
While the consultation document is silent on the tax treatment of FIT revenues to
generators – pushing decisions to HMT - our understanding is that DECC officials are
assuming tax will be payable on the revenue from FITS by all but domestic generators. This
is a position which Friends of the Earth strongly supports.
Extending the current tax treatment of ROC revenues for households to FIT revenues is a
logic step. Forcing households to complete a tax return would be a huge disincentive for
both the reduced final revenue and ‘hassle factor’ reasons.
Friends of the Earth wants onsite generation by businesses to be seen as a normal activity
and to provide a significant part of UK businesses energy needs. If this is to happen a tax
exemption could not be sustained indefinitely. However it is vital that if non-domestic
generators are to pay tax on revenue that this should be included in tariff calculations to
ensure the ROI is high enough to support investment and pay tax.
We are very concerned that while DECC understands that tax will increase hurdle rates the
tariffs have been calculated without taking this into account but in the full knowledge that
HMT intend to make revenues taxable. The rates ROI are already far too low to encourage
investment. The lack of clarity on tax treatment means they could be even lower than they
appear.
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Response to Renewable energy financial incentives consultation 2009
Index linking for generation and export tariffs
The consultation does not propose to index link either the generation or export tariffs.
Friends of the Earth believes this is a fundamental flaw which will severely affect the success
of the scheme.
As set out above (Q36) we advocate index linking the export price to wholesale electricity
prices. Failure to do so will see the real value of the export tariff decline over time and its
effect as an incentive for energy saving disappear and will, as wholesale prices inevitably
rise, produce an entirely unearned windfall for energy supplier (ie they will pay 5p/KWh but
it will be worth much more on the wholesale market).
Generation tariffs must be index linked to inflation. Many countries index link (Germany
doesn’t but France, Spain and Greece do). Index linking the generation tariff is essential
especially for those technologies which have any significant level of ongoing maintenance
and operating costs and which require a renewable fuel (eg biomass CHP). These costs will
rise with inflation and with increased demand so the generation tariff must rise too if the
installation is to remain viable. In the worst case it is possible to foresee circumstances
where with tariffs set too low and not index linked it simply becomes more expensive to
generate using a renewable electricity installation than to turn it off and return to grid
electricity.
One bank which potentially could finance huge numbers of schemes has signalled to Friends
of the Earth that without index linking they would find many more schemes impossible to
finance.
Q39. Do you agree with the proposed limits of 5MW for renewable technologies and
50kW for gas fired CHP for FITs installations?
Yes. Within the powers the Government has under the Energy Act 2008 it should set tariffs
up to the full 5MW limit for renewable technologies and 50kw for gas fired CHP. However
Friends of the Earth still believes a 10MW limit would have been the correct one to set in
primary legislation.
However while tariffs have been technically proposed for all technologies the tariffs towards
the upper limit of the FITs scheme are set so low that the are effectively a de facto limit. This
is especially true for wind where the proposed tariff drops from 16p/kWh to 4.5p/kWh.
There is simply no justification for the tariff dropping this steeply and such a low capacity
level. The effect will be to kill off many community scale schemes between 500kw and
5MW. This contrasts dramatically with the aspirations of Ministers to support much greater
levels of community renewable electricity schemes.
Q40. If you disagree with the proposed limits, what lower limits would be more suitable
and why?
No comment.
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How to proceed with your new briefing
Q41. Do you agree that generators off the electricity grid should be eligible for FITs? If so,
what safeguards should be put in place for these generators to ensure the electricity is
being used?
Yes. Many off-grid generators are currently using the most polluting and expensive
technologies (eg diesel-generators) which leaves them vulnerable to fuel poverty.
Consumer Focus estimate 50,000 and 100,000 homes not connected to the National Grid,
including up to 40,000 families in vans, caravans and boats. It is essential they are allowed to
benefit from FITs. Allowing them to do so would have a very small impact on the overall cost
of the scheme but could make a great difference to the families involved.
Q42. Do you agree with the selection of technologies for which we will be providing tariffs
from April 2010?
No. Friends of the Earth supports the setting of tariffs for the following additional
technologies: wave, tidal, geothermal.
Wave and tidal developers have signalled to Friends of the Earth that they would benefit
from inclusion of the scheme which would help them overcome the so-called ‘valley of
death’ between initial R&D stages and mass commercial deployment of these technologies
at large scale. These technologies are not just an important part of the UK’s future energy
mix but an area in which the UK could have an international competitive advantage and
capture considerable export markets in other wealthy countries. Allowing them support in
the FIT would be an important step in supporting the growth of a UK manufacturing base.
It is a regrettable that the FIT maximum is just 5MW. A higher max would allow these vital
technologies to be much better supported to bring them through their initial commercial
stages to mass deployment. Just because it is imagined that once established wave and tidal
technologies would be deployed in installations greater than 5MW is no reason to keep
them out of the FIT now, quite the reverse.
We do not support the setting of a tariff for bio-fuels or incineration.
Q43. Should technologies for which we do not propose to offer a specific tariff from April
2010 be handled by:
– Providing a single tariff from April 2010 for all remaining technologies;
or:
–
Considered as a new tariff band as part of regular FITs reviews?
–
No. As indicated above there are some technologies which have not been included which
should have been. Further new technologies (perhaps currently in development or not yet
on the market such as Micro-CHP) should be included into the scheme at any time when it
can be shown that they would benefit from the scheme and are proved to be suitable and
appropriate (eg meet sustainability criteria). Each technology should have its own tariff
based on evidence.
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Response to Renewable energy financial incentives consultation 2009
Q44. Do you agree that the FITs should not require on-site generators to comply with any
energy efficiency standards as a condition for eligibility?
Yes. Onsite generators should not have to comply with energy efficiency standards. This
position has been reached after considerable thought by Friends of the Earth as we are an
organisation actively campaigning on fuel poverty and energy efficiency issues. There are a
number of reasons:
Firstly the basic model for the tariff already includes a financial incentive for energy
efficiency via the export tariff.
Secondly the complexity of setting binding energy efficiency standards especially for nondomestic premises would be extraordinary and could threaten the role-out of the scheme
on time. Meeting energy efficiency standards (apart from for all but the least disruptive and
cost effective measure) would act as a considerable disincentive in financial and practical
terms for a potential generator. For example a company may have chose PV because it can
be installed easily on their roof without shutting down the business for a period of time but
they change their mind about the PV installation if they are forced to shut down to replace
their boilers too (the result being that no PV is installed and the boilers go unreplaced).
Thirdly Friends of the Earth believes that the answer to energy efficiency is to has strong
and comprehensive energy efficiency policies rather than shoehorn or bolt something onto
a policy to increase renewable power deployment.
However the provision of a tariff must not be a wasted opportunity for energy efficiency
measures and the scheme should interact with other schemes to promote energy efficiency
rather than act in isolation.
Businesses or households installing eligible technologies should be automatically referred to
the Carbon Trust, Energy Saving Trust (or other relevant agency) to be approached with
energy saving advice (which will after-all maximise their earnings thanks to the export
payments). If possible a referral system should be adopted which means the installer is
approached in time for any efficiency work to be integrated with the renewable power
installation.
Renewable energy systems are increasingly accepted as an integral part of the whole-house
approach. This is especially true for homes that are hard to treat through insulation (homes
with electric only heating for example). Future policy developments should include the FIT
as an integral part of the financing for these whole house overhauls alongside PAYS
schemes.
Q45. Are there any issues regarding eligibility that we have not foreseen here? If so, how
should we address them?
No comment.
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Q46. Do you agree with our approach not to offer up-front capitalisation to schemes as
part of the FITs? If not, what alternative approach do you propose and why?
Yes and No. A well structured, simple, stable and transparent FIT with rates set above
minimum hurdles rates (as advised by Poyry/Element Energy) to provide a reasonable (but
not excessive) rate of Return on Investment should bring forward loan finance from the
market for commercial, community, not for profit or household schemes across the
technologies and at a variety of scales which would meet the upfront capital costs. Many
businesses, community and household schemes may be financed in this way by banks.
However tariff rates must be high enough to meet the costs of capital and those currently
proposed are not sufficiently high to do so.
However even with a strong scheme there will many groups who may not be able or willing
to access this finance – those on low incomes, in fuel poverty and small businesses are the
most obvious. They may be unable to get credit or may be unwilling to undertake high levels
of debt compared to their income.
We agree with the approach which does not offer up-front capitalisation provided some
other form of assistance with up-front costs is offered to those who would have difficulty
with finding finance from the market. The qualitative analysis provided by Poyry/Element
Energy states that: “it may be prudent to consider specific instruments targeted at removing
investment barriers or lowering hurdle rates for specific investors such as households.”7
They propose Low interest loans and loan guarantees:
“interest rates and repayment periods of loans have a major impact on the overall cost of
RES projects. New technologies, smaller projects or project developers without a proven
track record often experience difficulties in obtaining commercial loans at reasonable
conditions. Offering low interest loans with lower interest rates and/or longer repayment
periods or loan guarantees tailored for specific technologies through subsidies to
commercial banks could significantly increase the commercial viability of projects. Low
interest loans have been applied successfully in Spain and Germany. The scheme could also
provide guarantees for debt repayment to the lending bank, thus reducing risk and hence
interest rate (e.g. 1 to 2%), debt term and debt service conditions of the loan.”
They also propose: Investment subsidies or capital grants paid up-front on the basis of
installed capacity or the estimated annual generation of a reference plant – intended to
reduce risk and capital cost.”
The current proposal from DECC proposes no scheme to help those with low access to
finance and sets tariff rates so low that commercial finance will make payback periods
unacceptably high to everyone bar those that are highly motivated and with their own
capital. In the short term revised tariff rates are needed. In addition the Government should
urgently boost The Carbon Trusts highly successful soft loans scheme for SMEs and start a
low or zero interest loan scheme for households
7
Qualitative issues in the design of the GB feed-in tariffs, Poyry and Element Energy, June 2009
9
Response to Renewable energy financial incentives consultation 2009
Q47. Do you agree with our approach that a generator may assign the rights to their FITs
payments to a third party? If not what alternative approach do you propose and why?
Yes. This an essential feature of the UK scheme and combined with the onsite use of
generation leading to an avoided imports benefit this is an exciting opportunity for
innovative ownership models which could overcome upfront capital constraints and the
tenet/landlords divide and could become a powerful model to deliver the benefits of energy
security and reduced bills (not to mention reduced emissions) to the fuel poor.
It could also facilitate ESCO business models but only if the ROI is sufficient and calculated
on the basis of the generation and export tariff rather than generation, export and avoid
imports. This is because the ESCO will receive the generation and export tariff while the
household will receive the benefit of onsite use (ie reduced imports and bills). Therefore the
ESCO will need a sufficient ROI delivered by the generation and export tariff. If tariffs have
been set to deliver a ROI based on the sum of all three elements then it will be insufficient.
We agree that if properties are sold the FIT should be able to transferred to the new owner
and compensation should be left to the parties concerned.
If FITs payments could be assigned directly to a bank then the risk of default for the bank is
substantially reduced with the household or business still benefiting from reduced energy
bills. Again this will only work if the tariff rate is high enough and calculated on the
generation and export tariffs.
Q48. Do you agree with the proposed model for registration and accreditation of plant
claiming FITs discussed in the Accreditation, Registration and Connection section?
Friends of the Earth is not an expert of the various accreditation schemes and the
complexity of the MCS and RO processes. However we are very concerned that applying to
receive the FIT should be as simple and unbureaucratic as is possible (while protecting
against fraud). We are concerned about the crude use of the 50kw threshold to determine
who should use which system rather than a serious process of establishing the right
framework for generators. There is no reason why a generator installing a 45kw hydro
turbine should have to complete the MCS accreditation while one installing a 55kw hydro
turbine should be required to complete the more complex RO accreditation. This could lead
perverse impacts where generators downsize in order to access a less onerous accreditation
scheme.
This goes completely against the objective of providing a simple scheme so as to encourage
participants from outside the traditional energy industry (one of the key advantages of a
FIT) and will act a barrier to those who might invest or develop installation above 50kw.
Q49. Do you agree with the principle that all generation should be metered to qualify for
FITs? Do you foresee any issues with that approach?
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Yes Friends of the Earth agrees all generation should be metered. There is a minor problem
of how to deal with those installations which come on-stream before Smart Meter
standards have been finalised. However it should be perfectly possible to start these
generators off with inexpensive ‘dumb meters’ with a priority to return to install smart one
later. There is definitely no reason to delay any FIT installation because of the ludicrous slow
progress of finalising and rolling smart meters in the UK.
Q50. What are your views on regulating which suppliers should be required to offer FITs,
and in what circumstances?
All suppliers should be required to offer FITs. It has been suggested that small suppliers
should be exempt. However these are often the ones already operating some form of
voluntary above-market rate export tariff.
However there is a possible problem if several large sub-5MW generators joined a small
supplier simultaneously. This might cause cash flow problems for the supplier while they
wait for the levelisation process to compensate them. If this is a real (rather than
theoretical) risk then perhaps small suppliers could have a generation capacity limit beyond
which they wouldn’t have to accept a generator. However this should under no
circumstances extend to large suppliers who should be required to accept any scheme of
any scale.
Q51. Do you agree with the tariff levels, lifetimes and degression rates we have set out for
the chosen technologies? If not, what evidence do you have for choosing alternatives?
Tariff Levels
Friends of the Earth does not agree with the proposed tariff levels or degression rates. We
believe the lifetime for all technologies should be 20 years.
Friends of the Earth is mystified by the means by which the consultation has arrived at its
proposed tariff rates. We believe that the proposed tariff rates are too low for almost every
technology at every scale. We are particularly concerned about the rates for community
scale schemes especially wind above 500kw (this is no way means other tariffs are
anywhere near acceptable).
According to the Poyry/Element Energy research8:
“Financial support will need to be set at a level that is sufficient to deliver investment, but
which does not over-compensate investors. Experiences of other schemes suggest that
various RES-E technologies have a minimum remuneration threshold that is necessary to
initiate deployment – beyond this threshold; remuneration does not necessarily correlate
with policy effectiveness.
8
Qualitative issues in the design of the GB feed-in tariffs, Poyry and Element Energy, June 2009
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Response to Renewable energy financial incentives consultation 2009
“The initial feed-in tariff level should at a minimum apply a rate of return, equal to the
hurdle rate of a standard investor class to the specific cost of generating electricity from the
RES-E plant.”
The hurdle rates calculated in the research are:
Households: 3-20%
Commercial buildings 6-15%
Commercial investors and utilities: 8-14%
It also explains that as the UK has a premium tariff so hurdles rates will be 1% higher and
tariffs will therefore need to be therefore higher.
Yet the DECC consultation states:
“We therefore considered tariff levels that would provide a rate of return of
approximately 5-8% for well sited installations, taking into account the risks associated
with deploying the different technologies and the likely effect those risks would have on
investors’ willingness to invest.”
The only justification offered in the consultation seems to be in the previous para:
“The German parliamentarian, Hans-Josef Fell, credited for inventing and implementing
the German legislation for their feed-in tariff (the Renewable Energy Sources Act, EEG),
proposed a target return of 5-7% as “significantly higher returns were not desired
because the extra costs to be passed on would push up the price of power too far. If
returns were too low, this would lead to investments hardly being made any more.”
In other words despite their own research saying they need to set tariffs meeting the
minimum hurdle rates they have set rates well below the hurdle rates justified by misusing a
quote from a respected German parliamentarian.
Friends of the Earth believes this is a disingenuous misuse of Hans-Josef Fell to justify tariffs
in an entirely different context from Germany. Firstly Germany is a mature market with
investors who are used to renewables, second the German tariff covers the entire scale of
renewable electricity while the UK scheme just covers that below 5MW (which will require a
different rate of return). Thirdly this totally ignores the fact that in Germany the state
provides low interest loans to businesses and households to invest in renewable so the
returns can be much lower. Poyry/Element Energy suggest such a scheme (which would
reduce hurdle rates) but the UK government is proposing no such scheme to accompany the
UK tariff so finance will have to found at commercial rates necessitating higher rates of
return (which due to the fact the UK scheme will be a premium tariff will have to be higher
than the rates for an equivalent fixed tariff scheme).
The impact assessment shows that a tariff based on an ROI of 8% would deliver 10TWh by
2020 instead of 8TWh for the Government’s chosen scheme but it would cost proportionally
more. As the hurdle rates above show 8% doesn’t exceed the hurdles rates for many
investors (especially with a premium tariff).
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The Poyry/Element Energy research states: “At a rate of return of 8%, there is no investment
in technologies by developers or utilities since 8% is equal to the minimum point on the
hurdle rate distribution for these investors.”
However tariff levels set just slightly higher based on a 10% ROI absolutely transform the
prospects for small scale renewable generation (and are considerably more cost effective
than an 8% ROI because they bring in new groups of investors9). According to the
Poyry/Element Energy quantitative study tariffs set at this level of return could deliver
25TWh by 2020 (triple the proposed scheme).
That is the equivalent of the output of Drax power station (25.4TWh in 2008)10 or two and
a half times the output of Sizewell B (9.8TWh in 2008)11.
This level of deployment is stretching but achievable. The research states: “At a rate of
return of 10%, most technologies are being deployed at their maximum rate, given supply
and demand side constraints.”12
The modelling estimates that the annual cost to consumers would be £3.2bn in 2020.
However this is highly dependent on uncertain predictions of future energy prices.
Consumer cost reductions could also be achieved, while maintaining the level of ambition,
with the introduction of Government backed low-interest loans as are available in Germany.
It is also worth noting that while it is consumers who are paying for the scheme it would
also be consumers (businesses, households and communities) that would be getting paid
too. This contrasts with the Renewables Obligation where it is consumers who pay and
energy companies who get paid for generating renewable electricity.
Friends of the Earth would oppose setting tariffs any higher than 10% because the modelling
shows it would achieve little in deployment terms and offer excessive and unnecessary
returns, and risks creating an investment creating a bubble like that recently seen in the in
Spanish PV market (where the ROI reached 12%).
Friends of the Earth believes that the tariffs in the consultation have been set to limit the
scale of the scheme to 2% of electricity rather than by any serious analysis of what could be
achieved if tariffs were set according to the methodology recommended in DECC’s own
commissioned research. In effect the scheme has been designed to fall short of its potential.
We recommend that DECC revisit the tariff levels and set them to deliver approximately a
10% ROI and that this situation stay stable until the first review of the scheme in 2013. A
tariff scheme based on this approach will kickstart the UK small scale renewable industry
and set the UK strongly on the pathway to delivering 6% (or 25TWh) of the UK’s electricity
from decentralised renewable schemes by 2020. We accept that the precise ROI that is
9
141£/MWh for 10% ROI compared with 204£/MWh for 8% ROI. Design of Feed-in Tariffs for sub-5MW
Electricity in Great Britain, Quantitative analysis for DECC, Poyry and Element Energy, June 2009
10
http://www.draxpower.com/aboutus/ourbusiness/key_facts/
11
http://british-energy.com/pagetemplate.php?pid=96
12
Design of Feed-in Tariffs for sub-5MW Electricity in Great Britain, Quantitative analysis for DECC, Poyry
and Element Energy, June 2009
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Response to Renewable energy financial incentives consultation 2009
required by different investors for different technologies at different scales covers a range
and that at the first review specific tariff rates should be revised up or down to ensure that
investors receive an adequate return without excessive reward – while continuing to
maintain the overall level of ambition.
Friends of the Earth has not proposed specific tariff rates but directs DECC to the excellent
and exhaustive work done by the Renewable Energy Association in producing an alternative
set of tariffs.
In the longer term as the market matures we would expect it to be possible to drive mass
deployment with tariffs with a lower ROI (of 8% or perhaps lower). The provision of other
supportive policies such as zero interest loans for SMEs and households would mean a lower
ROI would be acceptable. Both these factors would reduce the impact on consumers bills
while maintaining a higher level of ambition that is essential to tackle climate change.
Points on specific technologies :
AD. A greater number of AD bands may be necessary to support the range of AD plant from
centralised municipal schemes to farm scale.
PV. As well as the low level of tariffs it is surprising not to see a bonus for building integrated
PV systems as many other countries provide.
Wind. The BWEA has made the case for the bands for the wind tariffs to be altered to
1.5KW-15KW, 15KW-100kw, 100KW-500KW and 500kw-5MW. This seems appropriate.
However we are very concerned about the astonishing drop in the tariff after 500KW and
believe this is a de facto limit of the wind tariff to 500KW.
The consultation sets out a requirement that tariff rates segway with ROC values at the
5MW threshold. However 500KW is nowhere near the 5MW threshold. The justification for
this is that if the FIT tariff at say 4MW is significantly higher than the ROC value at 6MW
then schemes will be down scaled to take advantage of the FIT. There is some logic in this if
the jump was significant, but DECC doesn’t seem to apply that logic to the massive cliff edge
at 500KW (16p/kWh down to 4.5p/kWh) and think that schemes which could have worked
at 1MW will downsize to less than 500KWh or simply not get built. Friends of the Earth has
repeatedly pointed out that the RO really doesn’t work for anything less than 10MW so with
a decent 500kw-5MW being set there is little risk of schemes near the threshold down-sizing
because there are so few. This marginal risk will be more than compensated for by the many
community scale schemes which would now become viable.
The obsession with steering clear of the RO (relentlessly driven home by energy company
lobbying) at any cost has meant that many schemes between 500kW and 5MW will simply
never get off the drawing board. This will be a severe blow to community wind projects
which ministers have said they want to support. The tariff for 500Kw-5MW should be
dramatically increased to allow these schemes to a fighting chance.
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Tariff degression:
Tariff degression is potentially a useful tool to encourage innovation and cost reduction,
deliver price certainty, encourage early uptake and first mover advantage. However Friends
of the Earth believes its use for the first period of the tariff up to the first review is not
appropriate. The use of tariff degression is not universal in FITs in other countries. However
the Poyry/Element Energy report recommends a combination of regular reviews and tariff
degression. Friends of the Earth agrees that this is to model which should be eventually
adopted but opposes setting any degression rates until the first review when there is real
rather than theoretic market data on which to base them. The UK is a very small and
uncertain market for small scale renewables which will undergo dramatic shifts if a good
scheme is introduced. It needs stability for the first few years.
Under normal circumstances prices would be expected to fall as economies of scale were
exploited however prices for many technologies may rise dramatically as demand rises
when economies emerge from the current recession.
The high degression rates in the consultation are not justified with evidence from
Poyry/Element Energy report (which contains lower degression rates). The rates for PV are
particularly punitive.
Tax treatment
While the consultation document is silent on the tax treatment of FIT revenues to
generators – pushing decisions to HMT - our understanding is that DECC officials are
assuming tax will be payable on the revenue from FITS by all but domestic generators. This
is a position which Friends of the Earth strongly supports.
Extending the current tax treatment of ROC revenues for households to FIT revenues is a
logic step. Forcing households to complete a tax return would be a huge disincentive for
both the reduced final revenue and ‘hassle factor’ reasons.
Friends of the Earth wants onsite generation by businesses to be seen as a normal activity
and to provide a significant of UK businesses energy needs. If this is to happen a tax
exemption could not be sustained indefinitely. However it is vital that if non-domestic
generators are to pay tax on revenue that this should be included in tariff calculations to
ensure the ROI is high enough to support investment and pay tax.
We are very concerned that while DECC understands that tax will increase hurdle rates the
tariffs have been calculated without taking this into account but in the full knowledge that
HMT intend to make revenues taxable. The ROI are already far too low to encourage
investment. This sleight of hand means they are even lower than they appear.
Index linking for generation and export tariffs
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Response to Renewable energy financial incentives consultation 2009
The consultation does not propose to index link either the generation or export tariffs.
Friends of the Earth believes this is a fundamental flaw which will severely affect the success
of the scheme.
As set out above (Q36) we advocate index linking the export price to wholesale electricity
prices. Failure to do so will see the real value of the export tariff decline over time and its
effect as an incentive for energy saving disappear and will, as wholesale prices inevitably
rise, produce an entirely unearned windfall for energy supplier (ie they will pay 5p/KWh but
it will be worth much more on the wholesale market).
Generation tariffs must be index linked to inflation. Some countries index link and others
don’t (Germany doesn’t but France, Spain and Greece do). Index linking the generation tariff
is essential especially for those technologies which have any significant level of ongoing
maintenance and operating costs and which require a renewable fuel (eg biomass CHP).
These costs will rise with inflation and with increased demand so the generation tariff must
too if the installation is to remain viable. In the worst case it is possible to foresee
circumstances where with tariffs set too low and not index linked it simply becomes more
expensive to generate using a renewable electricity installation than to turn it off and return
to grid electricity.
One bank which potentially could finance huge numbers of schemes has signalled to Friends
of the Earth that without index linking they would find many more schemes impossible to
finance.
Q52. Do you agree with our proposed guaranteed minimum price for the exported
electricity? If not, what price would you propose and what is your proposal based on?
The price of 5p/KWh seems perfectly acceptable if it is set as a minimum which will rise
index linked to wholesale electricity prices.
Q53. Does the proposed review structure provide the right balance between providing
certainty and adapting FITs to the changing circumstances in which it operates?
Yes providing setting of degression rates is delayed until the first review and that new
technologies can enter the scheme at any time (provided they are appropriate and
sustainable).
Q54. Do you have any initial views on the relationship between FITs and those in fuel
poverty or on low incomes?
The level of fuel poverty in the UK - approximately 5m homes – is a national disgrace.
Friends of the Earth is campaigning for a permanent solution to fuel poverty through the
introduction of a transformational scheme to insulate to a high standard and provide
renewable energy for all those homes vulnerable to fuel poverty. The FIT and the RHI should
be an essential part of making this a reality especially in tackling hard-to-treat homes with
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renewable energy - providing energy security and reduced bills (as well as cutting carbon
emissions and generating jobs).
Friends of the Earth is particularly enthusiastic about the prospects of using the avoided
imports benefit and assigned rights aspects of the tariff to enable those in fuel poverty and
on low incomes to benefit from reduced bills and increased energy security but avoid the
upfront capital costs or even owning the technology. However the present low level of the
tariffs restricts the chances of social landlords, local authorities and ESCOs being able to
engage in the sort of arrangements (also see comments in response to Q37 about how the
tariff is calculated effects this).
However the cost of the scheme is intended to be borne on the electricity bills of
households and businesses. This will clearly have an impact on the fuel poor which must be
considered and addressed. However this impact will be marginal compared with the impact
of that from volatile fossil fuel prices.
The response by Government to this impact on the fuel poor has been entirely the wrong
one – the consultation seeks to minimise the scale of the scheme. In doing so DECC risks
creating a scheme where the low tariff rates mean it is only really accessible to those with
ready access to capital (ie the wealthy), shutting out the fuel poor and those on low
incomes. The mechanisms by which the fuel poor could access and benefit from scheme
(through say social landlords) rely on tariff rates being set higher.
Please find Annex 1, the text of a letter from fuel poverty, environment and renewable
energy organisations as part of the response to this question.
Friends of the Earth believes that in order to maximise the benefits for the fuel poor and
minimise the impact mandatory social tariffs and Government backed low-interest loans
should be introduced.
Obviously the introduction of FITs should be taking place alongside a massive programme
designed to eliminate fuel poverty which would include minimum standards for homes and
a street by street, whole house approach. This is not yet taking place.
Q55. Do you agree that the levelisation process described above provides the best system
for redistributing costs amongst suppliers? If not, what other ways can we levelise costs
across suppliers?
Yes.
Q56. How can the levelisation process facilitate participation in FITs for small suppliers?
See Q50 for comments on small suppliers.
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Response to Renewable energy financial incentives consultation 2009
Q57. Should suppliers be able to include an administration cost in the levelisation
process? If so, what should the level of that allowance be and how should it be
determined?
Yes. Friends of the Earth has no view on what the level of that allowance should be.
However it should only allow suppliers to cover costs and not make profit from
administering the scheme (as mentioned in the consultation the purchase of the export
tariff already provides them with an incentive to comply).
Q58. Should the levelisation process include consideration of large and unforeseen price
differences between prices paid to generators and the market value?
No comment
Q59. Do you agree with the proposed approach to auditing, assurance and enforcement?
If not, what alternative approach do you propose and why?
No comment.
Q60. Are there any issues regarding the role of suppliers that we have not foreseen here?
If so, how should we address them?
No comment.
Q61. What do you think is the best way of defining an installation for the purposes of
FITs?
Yes the definition proposed seems the only practicable one. However the concern with
gaming is overstated as the tariffs for 500kw-5MW wind are so poor that no one would ever
downscale from ROCs to access them. The side effect of this will be to kill off many potential
community scale schemes between 500kw and 5MW. The scheme is cutting off its nose to
spite its face.
Q62. Once an installation is defined, do you think further checks are required to verify
this? If so, what would these checks be?
No comment.
Q63. How could we deal with installations at a single site installed in different years?
No comment.
Q64. Do you agree with the proposed approach for the treatment of existing generating
stations?
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No. Early adopters should not be punished in this way. Those who have installed small-scale
decentralised electricity (above or below 50kW) have overwhelmingly done so out of an
altruistic desire to help avoid the disaster of climate change. Their pioneering should be
valued and they should be allowed to benefit from the FIT even though in many cases there
is no strong economic case for allowing them to do so (ie they have already installed their
technology). A suitable approach would be to allow access to the full FIT (regardless of
whether they have been receiving ROCs or not) but to reduce the length of tariff by the
number of years they have been generating. They should move onto the band and tariff
level appropriate for their installation.
This particular proposal is already causing huge concern among those already involved in
generating small-scale renewable electricity (an example is the petition that can be found at
http://www.yougen.co.uk/equal/).
Q65. Do you agree with the proposed approach for the treatment of generating stations
that completed installation during the interim period?
Yes.
Q66. Do you agree that, for non-household installations built during the interim period,
we should make access to FITs conditional upon repayment of any central Government
grant received for such installations?
No. The idea that a school, for example, should reply their grant in order to access FITs is
frankly astonishing. This is a measure which will save very little money (especially if the
recovery of the money has to be pursued through the courts) and will be counterproductive
and perceived as petty and vindictive by those involved.
The move would punish pioneers and those that may have undertaken schemes out of a
commitment to the environment despite the poor economics.
It is difficult of thinking of a worse way to launch the scheme than by demanding money
back for past grants.
Q67. Do you agree with the proposed approach for the treatment of new generating
stations once the FITs scheme becomes operational?
Yes.
Q68. Do you agree with the decoupling of support for heat and electricity for new
renewable CHP plants? What are the technical issues that need to be considered in
implementing transitional arrangements towards the introduction of FITs and RHI for CHP
installations?
No comment.
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Response to Renewable energy financial incentives consultation 2009
Q69. Do you agree that FITs should not restrict access for those projects covered by other
schemes?
FITs should not restrict access to other schemes. It is important that those large scale
organisations covered by the CRC are able to claim the benefits of their own renewable
generation.
ANNEX 1
Letter to Ed Miliband on the subject of feed-in tariffs and fuel poverty
Rt Hon Ed Miliband MP
Secretary of State for Energy and Climate Change
3 Whitehall Place
London, SW1A 2HD
6 July 2009
RE: fuel poverty and feed-in tariffs
Dear Secretary of State,
We are organisations that campaigned and lobbied for the introduction of a UK feed-in tariff
to support small scale renewable electricity and heat production. We were delighted when
you included legislation into what is now The Energy Act 2008, and in a short time your
department will issue its consultation on the detail of the Feed-in Tariff for renewable
electricity. There have been very many consultations on energy issues over the past few
years but rarely have they been awaited with such genuine excitement and optimism as this
one is.
The importance of renewables in tackling climate change and increasing the UK's security of
supply is beyond doubt but the importance of these technologies in tackling fuel poverty is
much less widely understood. Recent studies by National Energy Action and the Energy
Saving Trust have shown that renewable energy technologies can play a vital role in tackling
fuel poverty - especially in hard to treat homes.
Solving the crucial and urgent issue of fuel poverty requires the boosting of programmes to
tackle fuel poverty through energy efficiency and renewable energy measures. The feed-in
tariff and renewable heat incentive if ambitious and designed well will enable the
deployment of renewable energy technologies by households, private and social landlords,
businesses, local authorities, the public sector and communities at an unprecedented rate
and scale.
An ambitious tariff scheme that incorporates the following principles (these are further
explained in the attached document) which will maximise the opportunity for those on low
incomes and the fuel poor to benefit from the tariffs:
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Simple and accessible
Maximum security and predictability.
Set the tariff so it offers a sufficient incentive to invest.
Available for community and municipal scale projects.
Reward the widest range of sustainable technologies.
Reward export and own use, to reduce imports
It is also vital that an ambitious and well designed tariff is accompanied by, and integrated
with, policies to overcome the problem of upfront capital costs (and other barriers) of both
renewables and energy efficiency measures. This is especially important for those on lowincomes and living in fuel poverty. A well designed tariff (based on the principles above) will
not overcome these barriers by itself but it will maximise the impact of policies to do so.
Conversely a poorly designed and unambitious tariff will shut out the fuel poor.
The cost of the tariffs will be born (like many other schemes) by consumers as an addition to
fuel prices. This will have the most impact on those in, or at risk of, fuel poverty. However
rather than limiting the scope of the tariff to reduce their burden on the fuel poor many of
the signatories to this letter believe that mandatory social tariffs must be guaranteed to
offer a price lower than the supplier’s lowest open market price, with Government taking
responsibility for setting criteria defining which consumers should receive such tariffs.
In fact a sub-prime, scaled down or compromised tariff would, far from helping relieve the
burden on the fuel poor to any significant degree, limit their opportunity to benefit from the
income and reduced fuel bills that would come from local renewable energy generation. By
contrast an ambitious tariff based on the principles above, integrated with policies on
energy efficiency which address capital and other barriers offer the best prospect of
ensuring the fuel poor and low income households can gain access to renewable energy
systems.
We would welcome the opportunity to discuss these issues with your further during the
consultation period.
Yours sincerely,
Ed Matthew, Head of UK Climate, Friends of the Earth
Jenny Saunders, Chief Executive, National Energy Action
Rob Lewis, Renewables Strategy Manager, The Energy Saving Trust
Richard Capie, Director of Policy & Practice, Chartered Institute of Housing
Ed Mayo, Chief Executive, Consumer Focus
Gaynor Hartnell, Acting Executive Director, Renewable Energy Association
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Response to Renewable energy financial incentives consultation 2009
Principles for a fair feed-in tariff
An ambitious tariff scheme that incorporates the following principles will maximise the
opportunity for those on low incomes and the fuel poor to benefit from the renewable
energy tariffs:
Simple and accessible. A simple tariff design will maximise accessibility for those outside
the traditional energy sector and with little financial expertise. A link to energy efficiency
advice should be incorporated allowing a more integrated approach.
Maximum security and predictability. Stable and secure tariffs with longer contracts
represent lower risk and are therefore easier to finance (more 'bankable') leading to a lower
interest rate to finance the project. Tariff designs where a greater proportion of the return is
dependent on the market or with shorter contract lengths increase risk.
Lower interest rates means projects are viable at lower rates of return. This reduces the cost
of the scheme to the consumer, who would otherwise have to socialise the higher cost of
financing the risk of a less predictable tariff.
A more variable, shorter contract and less predictable tariff or one which lacked a rock solid
guarantee of being able to sell the generated capacity (i.e. a purchase obligation) would also
shut out less wealthy potential generators be they communities, social landlords or
individual households. These groups are often risk averse, would face difficulty raising
finance and seek a longer term guaranteed return.
However even with the most secure tariff design, many low-income and fuel poor
households will be unable to borrow. It is crucial that they are given additional help to do so
or are relieved of the capital costs entirely. The recent HESS consultation and a wide range
of stakeholder groups are considering various proposals of how that might happen.
Set the tariff so it offers a sufficient incentive to invest. A tariff rate set too low will
inevitably restrict take-up to wealthier households who have ready capital and are
motivated by a wish to increase the value of their property or to pay their part in tackling
climate change. Low income households are just as keen to play their part in cutting the
nation’s carbon emissions but need greater help to do so. Community scale schemes will
only be viable if the return is sufficient for the community to raise finance. Local authorities
will only be able to justify their investment to taxpayers if it is providing an adequate
reward.
Available for community and municipal scale projects. The legislation allows the Secretary
of State to make technologies eligible for the tariff up to a maximum threshold of 5MW
(beyond which installations would be covered by the Renewables Obligation). However the
law allows much lower thresholds to be set. We believe that to do so would be a mistake.
Larger installations offer greater opportunity for low income communities to come together
to raise finance and tackle projects which they would be simply unable to do as individuals
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or small groups. The larger the project the greater the number of households that can
benefit.
Reward the widest range of sustainable renewable technologies. The UK has a highly
diverse housing stock - flats and houses, rural and urban, on and off grid, different ages,
aspects and locations. Making all these homes fuel poverty proof means that different
renewable technologies will be needed in different situations. The scheme must support all
renewable heat and electricity technologies where they can be deployed sustainably.
Reward export and own use, to reduce imports. Designing the tariff so it gives a reward for
exporting power incentivises the generator to minimise their energy consumption through
behaviour change and energy efficiency measures. This reduces their fuel bills. Crucially the
tariff design should also allow electricity generated to reduce electricity imports directly by
ensuring that the generated capacity is used internally first and only the shortfall in demand
is made up by measured imports from the network. Not only would this mean that
consumers can reduce their exposure to future rising fossil fuel prices – something
especially important for the fuel poor - but also the burden on the network is minimised (a
key advantage of decentralised energy generally). This would reduce future network costs
to the consumer.
-----------------------------------------------------------The consultation response has been written by:
Dave Timms
UK Climate and Energy Campaigner
Friends of the Earth
26-28 Underwood Street
London N1 7JQ
Email: dave.timms@foe.co.uk
Tel: 020 7566 1615
October 2009
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