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Friday, 02 March 2012

Feed-in-Tariff – an Update

The Budget That Wasn’t One

Britain and a number of other countries, for example Germany and Italy, introduced incentives to encourage small-scale generation of electricity from renewable sources. The target were private individuals, small businesses and community organisations, such as schools, because they were deemed to be the perfect platform for spreading clean energy rather than relying on large utility companies alone.

That was, and is, not only laudable but ingenious. Many people are keen to take part in the development of a future with lower emissions given the chance. Of course, in the main that ‘chance’ means money. It was, therefore, not enough for governments to come up with audacious plans. They had to back them up with funding as well. Cue the Feed-in-Tariff scheme (FiTs).

At first it did not seem to matter that it was launched into a world where the structure of global finance had two wheels hanging over a cliff already. As I wrote in a previous article, the Department of Energy and Climate Change (DECC) that administered the scheme in Britain had a budget, and one it did not even have to pay for.

Let Me Introduce Myself, I’m Your Tax

To understand that we need to look at it through the eyes of a politician. Wherever government and money are mentioned in the same sentence Her Majesty’s Treasury, responsible for fiscal and economic policies, comes into play. Therefore, if the DECC wants to dish out money it cannot do so without its financial counterpart in the administration having some say. The Control framework for DECC levy-funded spending marks out guidelines for cases where the department first collects a tax to raise the capital it wants to hand out. In this case it is support for renewable energy – and that is where it becomes interesting (no, really!).

If for some inexplicable reason you knew every single way the British government has devised to pull pennies and pounds out of its citizens’ pockets you would furrow your forehead in wonderment, as there is no FiTs levy and never was. So how could the programme be financed by a budget with no money, fed by taxes that did not exist?

That’s simple, by letting someone else do it. The scheme offers three income streams:

  1. Saving because of the power that does not need to be bought
  2. Payment for every kW generated
  3. Additional payment for every surplus kW fed back into the grid

Instead of risking noisy protests by demanding further contributions from the taxpayer directly, the DECC dropped it into the lap of the large energy companies. They have to pay for 2.) and 3.) above plus cannot sell what people generate themselves. Because they have no choice and it is imposed by the government it is called a tax. Which is why the department can claim to have a budget and use its limits as reason for reducing payments under the FiTs, as it has just done.

There is only one little piece missing to complete the circle. The DECC fully expects the utility companies to pass on the costs to the customer – a tax by anything but name. Neat, isn’t it?!

The Future of Feed-in-Tariffs

To be fair, no matter which way one turns it the FiTs was a great idea. In fact, it was so good it became a victim of its own success. Although a range of technologies were included under the scheme, photovoltaic solar panels (PV) had the largest uptake by miles. Conscious that the bill for the tariff was paid for ultimately by the taxpayer ministers at the department called for a review in 2011. The central argument was that costs for solar panels, on which the first phase of the assessment concentrated, had fallen by as much as a third and yields for owners had risen as a consequence because they were still receiving the same subsidies. There was a real risk that this became to be seen as a money-making scheme for a ‘green’ minority.

The DECC proposed new, reduced payments for installations backdated from 12th December onwards. These and a cut in tariffs by 50% caused an outcry among manufacturers, installers and environmental organisations. Fears were voiced that this could lead to the collapse of the industry and dire consequences for Britain’s ambitions to cut greenhouse gas emissions. The department was challenged in court even, a process that has gone to the Supreme Court now after the second appeal by the DECC.

Inevitable Changes

Make no mistake, that a legal dispute in this matter resulted in some success for solar interest groups does not mean the proposed adjustments will be reversed. From 1ST April 2012 all eligible PV solar panel installations fitted on or after 3rd March will receive the lower rates as proposed (see list below). The court case is solely about how those projects will be treated that were started between the 12 December 2011 and 3rd March 2012. The outcome is significant because owners affected by the decision might receive only half of what they expected during the entire 25 year period for which the payments are guaranteed.

FiTs_New rates_April 2012

A new element is the link to energy performance certificates (EPCs). These are like efficiency labels for British buildings. A is best (high efficiency, lowest CO2 emissions), G is worst (basically, like putting a boiler with ten radiators into your garden to heat the hedge). Initially, the department wanted properties to achieve a C-rating to receive the full rates. However, critical voices in the consultation responses warned that this would leave too much of the existing housing stock without a chance. The government heeded those comments and lowered the requirement to a D-rating. Many surveyors and specialists provide EPCs. If a property falls below the D-category the tariff an owner receives drops to a universal 9p/kWh.


Another point where the DECC seems to have listened is the case of multi-installations. The boom in solar panels on the back of the FiTs also saw projects where one person or company owned several systems. Obviously, the department did not want to be seen to be supporting money-grabbing schemes and intended to set the limit at one installation. The most prominent examples were installers who made it their business model. They offered to fit panels for free, gave the owner of the property free electricity but then pocketed the feed-in-tariff payments for generating as well as exporting energy as their income.

Respondents to the consultation paper warned, however, that this could disadvantage proprietors that were operating a number of systems without necessarily reaching a level where they could enjoy economies of scale. The subsequent raise of the threshold to 25 was surprisingly large but probably motivated by the danger of organisations like the National Health Service or councils being affected negatively by the initial proposal. Up to that number the full rates will be paid. 25 and more will receive a lower tariff, set at 80% of the full rate.

A word of warning, though, if you own several installations and then add more that will push you over the limit there is no way back! As soon as multi-installation status has been reached, ALL parts will receive the lower tariff for the duration of the guaranteed period (see below). Splitting the collection of systems will not see individual parts going back to the full rate.

FiTs_Multiinstallation rates_April 2012

The Beginning of the End?

The experience with the FiTs has demonstrated a number of things. First of all, it has proven right all those who call for public money in order to bring renewable energy to the masses. While the success surprised everyone, even its instigators, the systems operating now would not be there to that extend without the incentives. Instead they have created the entrance to a low-carbon future. It has also shown by how much costs drop once a new technology enters the mainstream. This is encouraging for other ways to generate electricity, like ground source heat pumps.

But there are warning signs among the jubilations. While governments might continue to offer financial support in an effort to reduce carbon emissions and promote renewables, these motivators are by no means cast in stone. The DECC has expressed its intention to come to a point sooner rather than later where clean energy technologies won’t receive any kind of support whatsoever but stand on their own viable feet. This will be no different in other parts of the world.

Anyone even remotely involved with renewable energy generation will be well advised to heed that warning and in their own interest push forward down that same route towards independence from subsidies.


See you next week


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