environmentalresearchweb blog

« Himalayan glaciers: there’s a mouse in the room | Main | The Chinese economics of renewable-energy supply »

The wrong FIT?

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

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

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

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

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

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

The UK FiT

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

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

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

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

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

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

Posted by Dave Elliott on January 30, 2010 1:09 PM | Permalink