RESPONSE TO CONSULTATION ON RENEWABLE ELECTRICITY FINANCIAL INCENTIVES

Lynne Jones MP

October 2009

I have confined this response to the proposals for Feed-in Tariffs

Climate change is the most important challenge we face, requiring urgent and radical action and we will have to work extremely hard if we are going to reach our EU target of producing 15% of the Country's energy from renewable sources by 2020.

I have been advocating the introduction of a feed-in tariff (FIT) for a long time and strongly believe such a mechanism will play a vital part in reducing our carbon emissions and meeting our renewable energy targets.  

In my response to the Consultation on the UK Renewable Energy Strategy in September 2008, I urged the Government to commit to a feed-in tariff for as a matter of urgency and, while I am glad that the Government has finally realised the importance of FITs in stimulating investment in domestic and community renewable energy generation and other developments up to a maximum limit of 5 megawatts, it is frustrating that it has taken so long.

Many European countries have already adopted a feed-in tariff system with considerable success.  Germany, in particular, has led the way on the FIT scheme and has sparked a revolution in its renewable industry.  The German Renewable Energy Association (BEE) reported recently that the country produces 15.3% of its electricity and almost 10% of its total energy needs from renewables.  In the process it saves more carbon dioxide than all its cars emit in a year and in 2008 saved the economy €17bn in imported energy and related costs.

The expansion of renewable technology also has the potential to create thousands of new jobs and so it is extremely disappointing that Vestas, one of Britain’s only major wind turbine manufacturing plant and one of our biggest employers in the green energy industry, was allowed to close with the loss of 425 jobs.  It is important that the decision to introduce a feed-in tariff is supported by tariff levels that will stimulate investment in renewables at a level sufficient to stimulate investment in UK manufacturing so that the majority of our renewable technology is not, as at present, manufactured overseas.

The exception to this is that the vast majority of small wind systems deployed within the UK are manufactured here and that small wind is the only microgeneration technology in which the UK holds global leadership.  It is therefore important when setting tariff rates to have regard to the need to support British industry, particularly where there is scope to deliver a dominant position in fast expanding international markets.  The tariff structure should reflect the importance of encouraging UK expertise, jobs, skills and new product development.

Proposed tariff levels

I am concerned that the tariff levels currently proposed will not be sufficient to meet the Government’s target return on investment of 5-8%that is so essential to help drive the investment we need in renewable technologies.

The Government said initially that its starting point in setting the tariffs was achieving an 8% return on investment and this seemed reasonable, taking into account our current economic circumstances and low yield of other investments.  In the final consultation document, the target has been watered down to 5-8% and so it is important that the tariff levels are set at a rate that does achieve this return and are reviewed within 5 years to ensure that the price received by small generators has regard to expected increases in prices in the rest of the industry.

A figure less than 5% return would be too low to ensure the proposed FIT scheme really does give individuals, companies and organisations the incentive to invest in renewables.  Germany, for example, typically offers around a 10% return which saw renewables take off rapidly.  While I am not suggesting that the UK simply emulate other countries and appreciate the necessity of finding the right balance and deciding what's right for us, it also seems clear that we will miss an important opportunity if the tariff levels are set too low.

I am not qualified to assess the appropriate rates but would make the following comments based on information received from the industry.

UK PV in its submission has warned that the tariff pence per kWh proposed in the consultation document for photovoltaics (PV) coupled with an immediate 7% year on year degression rate, would fail to meet the Government's consultation target of a 5-8% return on investment for commercial properties. They state that adding 10p to the proposed levels gets the PV rate of return up to 3-7%, depending on size of installation.

The British Wind Energy Association has argued that when the Government calculated the rates of return for wind generation, the wind speeds it estimated for smaller wind turbines were unrealistic.  They point out that the Government has applied the rate of return approach to a generic site with wind speeds of 6.5 mps for all scales of wind technology.  However, a site modelled with a 6.5mps wind speed is applicable for larger machines and is not appropriate for small wind systems.  To compensate for this, BWEA advocate an increase in the “rate of return” to 8-10% be applied to small turbines.

In view of these concerns it would seem appropriate to review the tariffs to ensure that the 5-8% target rate of return is actually achievable.  Furthermore, I would advocate that the current exemption that applies to domestic income generated from ROCs should be extended to income from FITs, at least for domestic and community investors.   This is in line with recommendations from the EFRA Select Committee in its 2007 report, Climate Change: Citizen’s Agenda, that tax incentives should be provided to encourage private investment at this level.

When setting rates the Government needs to have regard to perverse incentives, such as deploying multiple smaller units rather than a single instillation of significant scale.

Degression rates

It is imperative that degression rates are not set too high, especially in the early stages of the scheme. Government proposals on degression are currently too steep and should be held off for a few years.

Both UK PV and BWEA make the point that the proposed degression rates from the start of year 2 should be removed and that degression needs to take into account the timescale for manufacturers to gear up to the new system.

Limited Scope

The Government has chosen to limit the scope of its small-scale renewable electricity ambition to no more than 2% of UK electricity by 2020.

The FIT scheme has the potential to deliver more than 2% of UK electricity by 2020.  Although the Government have said that the 2% number is not an upper limit cap, the tariff levels proposed from 2010 reflects the modest 2% target for the overall scheme and have been calculated to ensure that growth in demand for small-scale technologies is restricted to this level.   

The projected contribution from PV by 2020 is just 0.5% of all UK electricity, with most of this uptake modelled to take place post 2014.  This is barely 10% of the 21TWh that the European PV Industry Association (EPIA) has projected could be delivered in the UK by 2020 under its SET for 2020 plan.  EPIA project that solar PV alone could deliver 5% of UK electricity by 2020 with the right FIT and regulatory framework.

The Government should be more ambitious.

Appropriately Sited Technologies

I agree with point 3.82 in the consultation document that tariffs need to be set so that a reasonable return can be expected for appropriately sited technologies but I also agree that the expectation of a guaranteed return on investment should not apply for all technologies at all scales and in all environments.  It is important to encourage wind turbines at sites with good wind profiles and encourage orientation of solar PV panels to maximise their generation potential.

Complexity of the system

The FIT system should be as simple as possible in order that it will appeal to a large cross-section of the public.  It should be aimed at attracting "non-experts" to invest in renewable energy, rather than being designed for energy professionals.

The scheme also needs to be fit for purpose at all levels, from small scale generators such as households, community groups and businesses, as well as larger-scale renewable energy developments.

Renewable Heat

I welcome the proposal to implement a new Renewable Heat Incentive for renewable heat installations of all sizes but I am disappointed that the consultation on support for renewable heat will not be issued until the end of 2009 and not be implemented until April 2011.

Response to Specific Questions

Question 36: Do you agree that the best way of delivering security for the investor is to set a long-term guaranteed price for exports?

Yes, I strongly agree and think the tariff should maintain its value.  I also agree that degression rates should be in line with the technical cost reductions and the scheme needs to be clear to investors. 

Question 38: Do you have any other views on the basic structure of the FITs?

Registration for the scheme must be simple and quick.

Question 41: 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?

I declare an interest in this point.  As the owner of an off-grid property with a wind generator and solar photovoltaics, I would agree that there should be some recognition of our contribution to the UK’s renewable energy effort but would agree with BWEA that it would be more efficient to support off-grid generation with a simple system of grants.

Question 46: 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, I agree.   If the FIT is set at a rate that will give a good return on investment, it should not be necessary to offer up-front capital support but the Government should encourage financial institutions to make loans available at reasonable interest rates, particularly to people/groups on low incomes for example by means of a Government-backed Green Loans Scheme.

Question 50: What are your views on regulating which suppliers should be required to offer FITs, and in what circumstances?

All major suppliers should be required to offer FITs to any existing and prospective customers who are generating or wish to generate renewable energy.

Question 49 Do you agree with the principle that all generation should be metered to qualify for FITs?  Do you foresee any issues with that approach?

 

I agree with this principle but there should be a requirement for energy suppliers to fit smart meters if requested to do so by generators.

LYNNE JONES MP

October 2009

 

Previous related postings:

October 2008
Latest news on "feed-in tariffs"

September 2008
Response to the Consultation on the UK Renewable Energy Strategy

October 2007
Press release: "MP gets Prime Minister to take another look at feed-in tariffs for renewable energy"

October 2007
Letter to the Prime Minister about feed-in tarrifs

 

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