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Survival of the FiTs - for now

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted by Dave Elliott on November 20, 2010 1:45 PM | Permalink