April 2010 saw the introduction of a system of feed in tariffs (FITs) in England, Scotland and Wales to encourage the small-scale development of low carbon electricity generation facilities by providing revenue.
A “Clean energy cashback” is what the UK Government sees it as, and it applies to generators of electricity of up to 5MW capacity. The FITs scheme set out in the Feed-in Tariffs (Specified Maximum Capacity and Functions) Order 2010, now operates alongside the Renewables Obligation, under which large scale renewable energy facilities including Anaerobic Digestion Plants have for a number of years been incentivised for the deployment of large-scale renewable electricity generation.
The concept embodied within the FiTs is that the UK shall now have a comprehensive mechanism, to provide a predictable level of return on renewable power installations. This they hope will maintain and increase interest from investors in the potentially now, relatively secure profitability, of generating electricity in the small scale and by by non-traditional methods.
Fresh stakeholders should now appear on the scene and deploy and incentivise smaller scale technologies. This, the government clearly hopes, will produce innovation, create jobs, increase manufacturing and provide installation opportunities, through which the public will become more aware of renewables and their ability to provide electricity for the nation’s use.
The Climate Change Act 2008 sets out targets for the UK for the reduction in greenhouse gases (GHG) by 2020 and 2050. The European Union has also committed to generating 20 percent of energy from renewable sources by 2020 and to reduce GHG by 20 percent in the same period. In order to meet those targets, among other actions, a significant proportion of electricity needs to be produced without fossil fuels (known as being “de-carbonised”) and treated differently.
This all adds up to a mini revolution in the way that power is generated and distributed around the nation, and it will be duplicated in very many other countries as well.
With unrest in the Arab world this year, in particular, it cannot also have escaped many people that the supply of electricity is rapidly becoming a big security issue.
So, behind the scene the UK Government clearly has identified that the Renewables Obligation (RO) which was not designed with small-scale projects in mind, was failing to bring forward small scale renewables technologies. Most of the public and that goes for investors as well have little understanding of how the RO works, and those that did considered that the balance of potential profit was negatively balanced against risk for small-scale projects, and that they were not “sufficient to justify investment”.
Hence, the FITs scheme was born. It is one of the schemes enabled by the Energy Act 2008 and is a part of the UK’s overall Renewable Energy Strategy.
There is also something else which is known as the Renewable Heat Incentive (RHI) which is a separate scheme in the wings relating to renewable heat generation. The RHI has been out to consultation which ended on 26 April 2010, but action is awaited at time of writing.
What are the UK Feed-in Tariffs Scheme Components?
The FITs scheme comprises of two financial instruments through which payments will be made to generators and paid for by the UK’s licensed electricity suppliers. The largest suppliers, those with more than 50,000 domestic customers, are obliged to offer FITs, whereas participation by smaller suppliers is optional.
Elements of the Feed-In Tariff
- The first part is a generation tariff differing by technology and scale and is paid per kilowatt hour (kWh) of electricity generated and metered by a generator. This generation tariff is paid if the electricity is used on site or exported to the electricity network.
- The second element of the FIT is an export tariff that is metered and paid as a guaranteed amount or, in the case of very small-scale electricity generation, as a proportion of the generation in any period.
For exported electricity the generator may opt to receive a guaranteed payment of 3p/kWh exported or may sell their electricity on the open market. Off-grid generators, not connected to the national electricity supply system are also eligible for FITs. The cost of the payments will be shared between electricity suppliers by “levisation” whereby each supplier pays an amount proportional to their share in the electricity market in Great Britain.
Which Technologies Does the Feed-In Tariff Apply To?
The UK Government has limited the scheme to technologies that it considers which are market ready and can therefore be realistically deployed in the short-term without excessive risk.
Within that category the following technologies have been included in the scheme:
New Projects, up to the 5MW limit, in:
- Anaerobic digestion
- Hydro power
- Solar-photovoltaic, and
- Wind projects.
- Domestic scale microCHP (combined heat and power) with a capacity of 2kW or less will be allowed into the scheme on a pilot basis for up to 30000 units. The latter will be reviewed as soon as 12,000 installations are reached, anticipated to be in mid-2012.
- Biomass, biomass CHP and non-renewable microCHP are not included at present.
Further reviews, timed to coincide with a planned RO review, will consider the inclusion of technologies not currently supported through FITs. Technologies costs, electricity price forecasts and the target level of return will all have a bearing on how these subsidies will be carried through into the future. 2013 has been seen as the likely date of implementation of any changes following the review.
The Generation Tariff Rates
The value of the generation tariffs applicable for each technology technology is viewable online. (See them at the DECC website here. )
All generation and export tariffs are linked to the retail price index (RPI). The tariffs are meant to deliver an approximate rate of return of between 5% and 8% for optimally-sited installations. Tariffs available for new installations will reduce each year to reflect predicted technology cost reductions to ensure that new installations receive the same approximate rates of return as those already supported through FITs.
This process is known as “degression”. Following degression consultation underway, it will not start until April 2012.
The government expects quite rapid technology improvement resulting in lower cost in respect of photovoltaic technology, and to encourage further cost efficiencies the degression rate will be increased by a further 0.5 percent from 2015. Once an installation has been allocated a generation tariff it remains fixed (subject to RPI) for the life of the installation or the life of the tariff, whichever is shorter.
FITs income for domestic properties generating electricity mainly for their own use will not be taxable income for the purposes of income tax. In the expense of providing export meters for small scale generators has been factored into the scheme and therefore the intended roll-out of smart meters, for the first year of operation of the scheme gets help.
As an interim measure only, where export meters do not exist or have not been provided at the generator’s expense, payments of export tariffs to generators of 30kW or less of total installed capacity will be made on the basis of deemed or estimated exports.
The percentage of exported electricity generation to be deemed is 50 percent of exports for solar PV, wind and microCHP and 75 percent of exports for hydro and AD installations. The generator will be expected to install a generation meter for each technology in order to measure output separately. However, the export tariff is uniform regardless of technology adopted.
The manner in which the FIT is implemented for installations completed prior to FITs is not covered here. Visit the government website for further guidance.
The long-term certainty for payments should make the deployment of such technology more attractive to communities and individuals, but the Waste Industry has in particular been disappointed as they consider the level of tariffs for larger scale systems to be inadequate to prompt wide uptake by business.
Given current depressed bank lending the overriding issue for many will be finding the cost of paying up-front for installing such technology. Local authorities will be expected to play their part and will be encouraged to develop a roll-out to social housing and there are ways that public procurement could be made to assist.
Those that have been involved in the discussions suggest that further developments in this scheme, and many other areas, including financing for renewables, can be expected to be brought forward by the UK government over the next few years.
Industry experts expect that Anaerobic Digestion Plant operators who produce between 50KW and 5MW of power will be eligible for the simpler feed-in tariffs.
These new contract arrangements will encourage uptake of the technology as they should be much simpler to use for smaller producers and it is hoped that they will be an important “boost to the sector”.
ROCs or Renewable Obligation Certificates, are part of the Renewables Obligation, which in turn is an important part of the UK governments plan to (in common with the rest of the EU nations) to achieve a 20% reduction in carbon emissions from 1990, by the year 2020.
The Renewables Obligation (RO) is the larger twin of the Feed-in Tariff, and is designed to incentivise the generation of electricity from eligible renewable sources in the United Kingdom. It was introduced in England and Wales and in a different form (as the Renewables Obligation (Scotland)) in Scotland in April 2002 and in Northern Ireland in April 2005.
The RO places an obligation on licensed electricity suppliers in the United Kingdom to source an increasing proportion of electricity from renewable sources. In 2006/07 it was 6.7% (2.6% in Northern Ireland).
This figure was initially set at 3% for the period 2002/03 .
How Suppliers Meet their Obligations by Presenting Renewables Obligation Certificates (ROCs).
When electricity suppliers do not have sufficient ROCs to cover their obligation, they must make a payment into a buy-out fund. The buy-out price is a fixed price per MWh shortfall and is adjusted in line with the Retail Price Index each year.
The proceeds of the buy-out fund are paid back to suppliers in proportion to how many ROCs they have presented. For example, if they were to submit 5% of the total number of ROCs submitted they would receive 5% of the total funds that defaulting supply companies pay into the buy-out fund.
Obligation periods run for one year, beginning on 1 April and running to March 31st. Supply companies have until the 31 September following the period to submit sufficient ROCs to cover their obligation, or to submit sufficient payment to the buy-out fund to cover the shortfall.