27 April 2011
In April 2010, the UK government introduced a feed-in tariffs (FiTs) scheme as part of a drive to stimulate the development of renewable energy in the United Kingdom by incentivising businesses to invest in renewable technology. The FiTs scheme forms part of a wider government strategy designed to ensure that the United Kingdom meets its commitment to produce 15 percent of its energy supply from renewable sources by 2020, an obligation arising under the EU Renewable Energy Directive.
Tariff-based schemes have been around for some time, with countries including Germany, France, Australia and the United States using tariffs as financial incentives to encourage development of low-carbon electricity generation. In 2002, the United Kingdom followed suit, introducing the market-based Renewables Obligation Scheme (RO), which was designed to encourage deployment of large-scale renewable electricity generation.
Since its introduction almost a decade ago, the RO has trebled certain types of renewable electricity generation in the United Kingdom, from 1.8 percent to 5.3 percent. However, the complex system of financial support available under the RO has caused it to become a tool utilised only by large-scale generators. Its failings eventually brought pressure on the government to introduce a separate, simpler incentive system capable of broader application.
The FiTs scheme, which focuses on encouraging the installation of small-scale renewable energy technology, represents a change in the United Kingdom's approach to tariff-based incentives. It is aimed at organisations, businesses, communities and individuals who are not traditionally engaged in the electricity market and is similar in design to schemes successfully implemented in a number of continental EU Member States.
Under the FiTs scheme, operators of accredited small-scale installations that generate electricity using certain low-carbon energy sources are entitled to a guaranteed payment for each kilowatt hour (kWh) of electricity generated. The payment varies in line with a guaranteed minimum price, indexed at the retail prices index (RPI) for between 20 and 25 years, depending on the type of technology used.
Between April 1, 2010, and December 31, 2010, 18,464 installations, representing 68 megawatts (MW) of total installed capacity, had been registered with the Office of the Gas and Electricity Markets (Ofgem), the administrator of the FiTs scheme. The first quarter of 2011 has seen a rapid increase in the number of registrations, with over 30,000 installations now eligible to receive payments under the FiTs scheme.
In this article, we consider how FiTs work and identify the steps that should be taken by businesses seeking to benefit from participation in the FiTs scheme.
FiTs in Operation
Electricity suppliers in England, Wales and Scotland that have a minimum of 50,000 domestic customers are required to offer FiTs to all Ofgem-accredited small-scale installations (i.e., those with a generating capacity of up to five MW) generating electricity from specified renewable sources. Relevant sources of renewable energy include solar photovoltaic (PV), wind, hydro and anaerobic digestion. In addition, 30,000 installations (with up to two kW capacity) utilising non-renewable micro Combined Heat and Power (mCHP) technologies are included as a trial.
Types of FiTs Payments
Generators operating installations accredited under the scheme are eligible to receive two different types of FiTs payments:
- A fixed payment for every kilowatt hour (kWh) of electricity generated (the "Generation Tariff")
- A guaranteed minimum payment for every kWh of electricity exported to the national electricity grid (the "Export Tariff")
The Generation Tariff
The Generation Tariff is payable for all electricity produced by accredited installations from renewable sources. The tariff applies whether the electricity is used on-site or exported to the wider electricity market.
The applicable Generation Tariff differs depending on which renewable source is utilised. For example, the Generation Tariff paid for electricity generated in the second scheme year from solar PV is set between 29.3p per kWh and 41.3p per kWh, depending on the size of the installation. The Generation Tariff on electricity generated during the same period from anaerobic digestion is between 9p and 11.5p per kWh.
The Export Tariff
Unlike the Generation Tariff, the Export Tariff rate is not dependent on the type of renewable source utilised or on the size of the accredited installation. The Export Tariff is currently set at 3p per kWh (which represents a reduction from the initial proposed rate of 5p per kWh). The Export Tariff is intended to incentivise energy-efficient behaviour in the use of electricity generated from renewable sources by providing financial rewards to those who export electricity from accredited installations to the wider grid.
Tariff Levels Going Forward
As increased development occurs, the costs associated with renewable technologies are falling. As a result, the FiTs scheme makes provision for applicable tariff levels to be adjusted downwards through a process of degression. It is currently proposed that degression for many solar PV projects will begin in April 2012.
Implementing FiTs Across a Business Portfolio
FiTs were initially seen as a mechanism to encourage development of renewable energy technologies on a small scale by organisations, communities and individuals. A great deal of interest in FiTs, however, has been shown by large businesses in the United Kingdom that see the opportunity to install small-scale installations across multiple sites as a means of scaling-up their green investment and boosting their low-carbon credentials.
Businesses seeking to maximise benefits through development of installations across a portfolio must go through the following three distinct stages to achieve accreditation under the FiTs scheme:
Businesses that wish to leverage the FiTs scheme should start by investigating the feasibility of developing accredited installations. Their investigations should incorporate technical, legal and planning/zoning assessments in order to identify the best opportunities in a portfolio. Technical investigations should include, for example, identification of suitable roof space on which to install solar PV, as well as consideration of appropriate geographical locations for development to ensure maximum benefit from weather-dependent sources.
Businesses will also need to determine whether there are any legal restrictions in place that would prevent them from installing renewable technology. Relevant restrictions might include, for example, planning/zoning issues that may restrict the development of installations on a particular site. In addition, the practicalities of connecting installations to the wider grid and the need to undertake structural surveys to ensure building feasibility are important considerations. These and other issues may have cost implications that influence the decision of whether or not to proceed with a development on a particular site.
If a feasibility study indicates that development of accredited installations is viable, the business will need to take steps to obtain any consents that may be required to proceed. In the United Kingdom, planning/zoning permissions may be required from the local authority. Before relevant permissions are granted, the local authority may require the business to undertake an assessment of the visual or ecological impact an installation may have on the surrounding area, as well as an assessment of the likely effect the development may have on local heritage.
In addition to regulatory consents, legal documentation, including real estate, connection and off-take agreements, will need to be put in place. This will ensure that any consents required from third parties such as landlords and suppliers are documented appropriately.
The final stage in the FiTs-accreditation process is the development of the installation itself. To qualify for FiTs, a business must engage a contractor with accreditation under the Microgeneration Certification Scheme (MCS) to install the necessary technology.
Once installation is complete, the accredited contractor will complete an MCS certificate for the installation that serves as proof of the installation's eligibility for FiTs.
As part of the 2010 Spending Review setting out the British government's deficit reduction framework, the government announced its commitment to improving the efficiency of the FiTs scheme. In the context of this commitment, the government commenced the first comprehensive review of the FiTs scheme, a process that was originally scheduled to take place in 2012. The review will include a government consultation and is designed to cover all aspects of the scheme, including:
- Tariff rates
- Degression rates and methods
- Eligible technologies
- Arrangements for exports
- Administrative and regulatory arrangements
- Interaction with other climate change policies
- Accreditation and certification issues
The government has indicated its belief that implementing this review a year earlier than planned will help to provide certainty for the industry. This is especially critical in terms of clarifying how the planned savings set out in the Spending Review (which amount to around 10 percent of FiTs costs in the 2014–2015 financial year) are to be achieved.
The government also recently announced proposed reforms to tariff payments for installations over 50kW. These reforms, if implemented, will lead to the following new tariff bands and associated tariff rates being introduced for solar PV projects on August 1, 2011:
- 19p per kW hour for 50kW to 150kW projects
- 15p per kW hour for 150kW to 250kW projects
- 8.5p per kW hour for 250kW to 5MW and stand-alone projects
The Future of FiTs in the United Kingdom
The government's plans to reduce public spending have meant that reductions in FiTs rates were somewhat inevitable. However, the level of reductions for large installations was greater than many commentators had predicted, leading to an angry reaction from the renewable energy industry and the possibility of future litigation should the proposed reforms be approved by Parliament.
Undoubtedly, these reforms are aimed at curbing large solar farms. However, businesses willing to invest in smaller-scale retrofit projects, perhaps across a large number of sites, will continue to benefit from the generous tariff rates afforded to those installations. The guaranteed payment available through the Generation Tariff and the guaranteed price for electricity conveyed onto the electricity grid through the Export Tariff are expected to continue to incentivise development of eligible installations in the United Kingdom.
These rewards, set against the backdrop of higher energy bills resulting from ever-increasing oil and gas prices, mean that the financial incentive to invest in renewables technologies remains high. This is particularly true when businesses invest in the development of small-scale installations across large property portfolios.