Our response to the consultation on fast-track review of FiTs

Hi All,

We’ve just submitted our response to the government’s ‘emergency FIT consultation‘ – the one that aims to kill off big solar for reasons as yet unfathomed.

I thought we’d publish it here in the interests of debate and in case it’s interesting or useful to anyone.

Cheers.

Ecotricity is a green energy company, we were in fact the first company in the world to offer green electricity. We were founded, as the UK energy market de regulated, in 1996 and are the largest and oldest (and most successful) independent energy company in the UK. We supply around 50,000 customers, homes and business, large and small. Ecotricity shares the Government’s vision of a Green Britain – green energy and green jobs – and is a market leader in Green innovation. Currently around 50% of the electricity Ecotricity supplies comes from renewable sources that it built itself. It is a ‘not-for-dividend’ company and reinvests its profits into new renewable energy projects each year (£50million in wind over the past 7 years). Indeed Ecotricity has invested more per capita in new renewables build, over the last seven years, than any other energy company in the UK.

While it is essential that the Government provides a stable and predictable policy and regulatory environment, the task of greening UK energy should not purely be a government led initiative. As energy suppliers we have a key role to play in working with Government to empower individuals and communities to consume energy in a greener and more efficient manner.

Ecotricity has built 52 wind turbines throughout the UK and will open the UK’s first solar park this summer. The company had plans to build enough solar parks to achieve a 50/50 wind and sun renewable energy mix in as little as two years time, but the proposed change in FiTs would make these plans financially unviable.

Ecotricity introduced the UK’s first Green Gas tariff last year and now supplies its green gas to some 9,000 customers. The income from these green gas bills is being used to build Britain’s first dedicated ‘gas to grid’ plant. Currently 1.4 per cent of our gas supply is green from a sugar beet factory in Holland. This may sound relatively small but still much more than any other company and next year Ecotricity expects to double the amount of green gas it supplies.

Would you like this response to remain confidential? Yes/No (Delete as appropriate)

If yes, please state your reasons: No

CHAPTER 1: FAST-TRACK CONSIDERATION OF SOLAR PV GREATER THAN 50 KW

Executive Summary

1. The UK should have a large scale solar industry, whether this is supported by the current FiT scheme or by another mechanism, such as the RO. Many countries in Europe have successful large scale solar industries and the economic benefits that flow from that – all underpinned by robust FiT mechanisms. It’s not just about green jobs and green industry, we need large scale solar as part of the UK’s energy mix, to make the UK more energy independent and as part of our carbon reduction program.

2. If the current FiT structure cannot be maintained in respect of large solar, we suggest that rather than ‘remove’ large solar altogether (which the proposed 8.5p tariff price will do), the government considers restricting its size, so that some large scale projects can still go forwards. Such restrictions could be to reduce the 5MW limit for example – perhaps to 2MW. At least this way the UK would still have some form of large scale solar activity and the benefits that will accrue from that. If part of the government’s concerns are over land use competition with food, it would also be possible to restrict the grade of land that large scale solar projects would be supported on. The UK has sufficient land, suitable for solar but not for food crops, to power the whole country from this source of energy. Such a restriction on land use has already been introduced into the German FiT scheme.

3. If proposed FiT changes are to be undertaken, it is important that proper transitional arrangements are made to reflect the time and money invested in good faith by the industry – in response to the publication of the FiTs last year. This will prevent unnecessary damage to the industry and to government energy policy objectives and its reputation.

• We suggest that, if the proposed change to the tariff is to go ahead, it should not be brought forward to the 1st of August. It should be possible to maintain April 2012 as the cut off date. This would avoid an unseemly rush to change the rules, provide some consistency for the industry and the opportunity to deliver those early projects in the pipeline, while avoiding unnecessary pressure from the solar lobby. It should also improve the government’s standing in any legal action. We believe that there will not be so many large scale solar projects commissioned before April 2012 – so that the worst of the impact the government fears (on small solar) will not occur.

• We further suggest that if the government chooses the early cut off date, it sets the criteria for inclusion in the current tariff scheme to be those schemes in construction – as this is a process which takes six months. And if it chooses the later date (April 2012) it sets the criteria to be those schemes that are commissioned by that date. This will require schemes to be under construction by the end of this summer. It will limit uptake but provide a fair window for those with work in progress.

Q1: Do you agree or disagree that there is a need to limit access to FITs for large scale solar PV installations in order to meet spending review targets? Please give reasons for your answer. If you agree, what do you think is the best way of doing this?

Disagree

Comments:

1.1 While we understand the fiscal constraints placed on the Department by the Spending Review, limiting access to FiTs for large scale solar is unlikely to be of value in the long term. On the contrary, support for large scale solar PV installations is better value for money than micro installations and is more likely to deliver enough renewable energy to meet carbon reduction and climate change targets. As confirmed by Ofgem, support for large solar PV would not be to the detriment of any other renewable technology because there isn’t a limited pot of money under FiT legislation.

• The tariffs for large and small scale solar (within FiT legislation) clearly show (they mandate in fact) that large scale solar delivers three units of green electricity and three units of carbon are saved for every two produced by small scale solar – we get three for the price of two. Large scale solar is 50% more economical, a far better use of money.

Only large scale solar installations are able to generate enough electricity to make solar a serious player in the UK energy mix and provide the long term economic benefits which are evident in Germany where 133,000 people are employed in its solar sector and 17,000MW capacity is already installed in a 10 billion Euro a year industry.

1.2 The introduction of a fixed cap is inconsistent with a price-based mechanism and has not been introduced by any other country that has a FiTs scheme (and there are 50 worldwide). It fatally undermines the efficacy of the FiT scheme as it removes certainty for investors, large and small.

The proposed limit on FiT spending, which it is claimed will ‘save’ £40 million when compared to DECC’s original estimates of the cost of FiTs in 2014/15 – will only save each household in the UK about 50p per year. This figure is based on the fact that the cost of the FiT scheme is spread across all electricity consumption in the UK (domestic and business) and the split of consumption (and therefore costs borne) in the UK is roughly two thirds business and one third domestic. Therefore one third of the 40 million – say £13 million, is ‘saved’ by 24 million homes – making roughly 50p per home.

The costs of the FiT itself, capped at 360 million, is a small sum to spend on something as vital as renewable energy. Using the same approach as above, households will bear one third of this cost, £120 million – which is a bit less than £5 per household per year. This is 1% of a current typical electricity bill, it will be less than that by 2014/15 when the cap bites.

It is perhaps worth contrasting this 1% additional cost, or investment, in renewables – against the costs incurred from movements in global oil markets. When the price of oil doubles, as it has in the last few years, the impact this has on a typical electricity bill is a 30% increase. This far bigger sum is not used to invest in infrastructure, it is a price paid to the speculators of the global energy market. Oil prices will surely double again, it is only a matter of when. It is far better in our opinion to invest now in renewable energy sources, than simply waste money due to the inexorable rise of commodity prices.

It might also be considered that investment in renewables via FiT schemes, or any other method, is analogous to the use of Contracts for Difference – because the price of renewable energy is fixed within such schemes. In contrast to the price of conventional energy which will rise in the future. CfDs appear to be one of the government’s preferred measures to be brought within the proposed EMR. FiTs are a form of CfD. As well as a way of promoting renewable energy development and UK energy independence (and of course climate targets). They represent value for money and will do far more so in the future.

1.3 As the UK solar PV industry is in the nascent phase, tariffs must be retained at the current rate to ensure that there is continued confidence and security for investment in solar. A fast track reduction in tariffs ahead of April 2012 would undermine confidence in the FiTs scheme (and the government) as potential and existing participants cannot be sure that further changes won’t be made to FiTs and other renewable (and non renewable) energy schemes in the future.

1.4 Solar has huge potential as an energy source but if the Government believes that it is inappropriate for large scale solar to receive support through FiTs then it should seek to provide an alternative framework that allows big solar to succeed , through the ROCs scheme for example. Offshore wind already benefits from multiple ROC allocations, it would seem relatively straightforward to introduce a scheme of multiple ROCs for large solar. However the level of support will need to be similar to that of the FiT at this time.

1.5 It has been suggested that a reason for withdrawing support for large scale solar PV is that it runs the risk of arable land being used for ground based solar farms, making it harder for our country to feed itself. However, research undertaken by Ecotricity (the results of which are in the table below) shows that there is enough grade 4 land that could be used to deploy large solar PV installations which could potentially supply enough electricity to meet UK energy demand twice over without having to build on arable land.

Data source:

* Agricultural Land Classification (ALC) Statistics. Natural England 2011

Q2: Do you agree or disagree with the proposed new tariff bands and the accompanying proposed reduction of tariffs for PV installations in these bands? Please give reasons for your answer. If you disagree, please provide evidence to support an alternative.

Disagree

The ideal scenario is for retention of the tariff at the current rate so as to provide a real contribution from solar to our national energy mix and climate change targets as well as security to the industry and potential new investors in the energy sector.

Comments:

2.1 The reduction in tariff for solar PV installations between 250KW and 5MW to 8.5p per KW will effectively kill off investment in large scale solar PV. The Government’s aim of reducing project rates of return to just 5% is misguided, as this level is so low that no projects will proceed. Government should be aware that no renewable energy projects in the UK are built with such a low rate of return, and it is therefore entirely unrealistic to expect this will happen with solar PV. Because of our unique nature, Ecotricity builds projects in the UK at lower rates of return than probably any other developer – we are not in this for the money. If we cannot build projects at a 5% rate of return then we are certain that nobody else can or will.

We suggest that the government might find it instructive to ask DECC what rate of return offshore wind energy projects are expected to provide under the current RO system. We believe you will find they are rates of return in double figures, ie over 10%. A rate similar to that provided under the current FIT scheme for large scale solar.

2.2 The Government has referred to the success of FiTs for solar PV in other European countries, particularly Germany. It has also claimed that the proposed recution in FiT support to 8.5p a unit would merely bring the UK into line with countries such as Germany. This is untrue. As the table below demonstrates, none of Germany, France or Spain has reduced tariffs to 8.5p per KW for installations above 250KW despite all three having more mature markets than the UK. More mature markets of course lead to lower costs.

The table below shows that Germany provides over twice as much financial support to large scale solar PV compared to the proposed 8.5p – the government’s claim to be reducing to German levels is simply untenable. (adjustments for sunlight levels are made in column D, although the difference between UK and Germany is marginal)

Data Source:

†France – http://www.renewablesinternational.net/new-pv-feed-in-tariffs-in-france-and-negotiations-in-italy/150/452/30408/

Germany – http://www.germanenergyblog.de/?page_id=2740

Spain –  Royal Decree 1565/2010

††European Commission Joint Research Centre

2.3 Current tariffs for solar PV provide sufficient income for companies such as Ecotricity to build them. We planned to build ten new installations over the next two to three years which would have generated 50MW of electricity for our customers that otherwise would have come from brown sources. However, under the proposed changes, it will not be financially viable for Ecotricity and other companies to build any new large solar schemes at all and hence the installed capacity of solar will be significantly reduced from what it could have been.

2.4 Cutting the tariff to align with decreases in equipment costs has not been implemented appropriately. The consultation document states that the cost of solar PV hardware has fallen by 30% over the past year, something we would not disagree with, though we feel this was anticipated by the last government in the current FiT tariff rates. However, the proposed 75% cut in tariff for large solar is more than twice the level of the cost reduction which the government says it is addressing. It is hard to understand something so clearly out of step as a claim to be reflecting a 30% cost reduction with a 75% payment reduction.

2.5 The alternatives to the Government’s proposed changes are:
i) Adjust the 250KW -> 5MW tariff band down to a maximum of 1MW or 2MW to reflect the big difference in economies of scale. With the current tariff the rates of return of 1 or 2MW projects are much less than at the 5MW scale. Ecotricity is currently building a 1MW project and would be prepared to share the economic model for that with the government to illustrate this point.

Q3: Do you agree or disagree with the proposed timing of the change in tariffs including the implementation date of 1 August 2011 and that the tariff change will apply to all installations with an eligibility date on or after that date? Please give reasons for your answer. If you disagree, please provide evidence to support an alternative.

Disagree

Comments:

3.1 If the proposed change to the tariff is to go ahead, it should not be brought forward. Leaving April 2012 as the cut off date is unlikely to see much further uptake from large scale solar installations, will ensure consistency in the industry and avoid campaign and legal pressures from the solar lobby.

3.2 If there is a determination to reduce tariffs for large scale solar PV, proper transitional arrangements are required to ensure that damage to the industry’s confidence is kept to a minimum.

3.3 The consultation document notes that changes to the tariff will only impact new entrants and not retrospectively affect existing schemes. However, there is still uncertainty about which installations will be included or excluded – does this refer to those installations that are commissioned or those that are under construction or at the planning stage?

Of course all solar PV installations that have already been commissioned should be allowed to benefit from existing tariffs. However, it takes some six months from start to finish to build, and commission a large solar project, it would be unjust of the government not to reflect this lead time when implementing such a dramatic and sudden rule change. Much of the industry would no doubt wish to see all projects which are at the planning stage allowed to proceed at the current tariff. Although Ecotricity shares that desire, we do not believe this is remotely attractive to the government. We also believe that to draw the line so that projects commissioned or under construction (before the August date) are allowed to proceed on the original basis – would be fair enough. These are the projects for which the greatest commitment and investment (and risk) has been made. If the April 2012 date were chosen then it would be fair enough to choose commissioning as the entry criteria for the original tariff rates.

Q4: Can you provide any further information or evidence on predicted uptake of installations or other insights that you think DECC should be aware of about how the market for PV is evolving in the light of FITs?

Comments:

Our own research informs us that the potential for large scale solar projects coming forwards in the next 12 months has been greatly exaggerated by the media, and to some extent by developers themselves. As we write this we are the only developer in the UK that has started work on a large scale solar project. We have talked to most, if not all, of the other developers that have planning consent – they number only 14 – and without exception none of them have finance in place and the other project essentials, such as grid connections and EPC contracts (for the supply and build of the project). The Government’s widely announced intention to reduce PV tariffs and do so very quickly has undoubtedly had an impact – but this situation (set out above) existed before that announcement was first made. Large scale PV is a new technology to the UK and potential developers of it are finding for themselves that it is considerably harder to deliver then it may appear. Banks in particular are wary of the technology risks.
We believe the government has been misled as to the extent of the uptake of large scale solar tariffs.

CHAPTER 2: STUDY IN THE UPTAKE OF FITS FOR FARM-SCALE ANAEROBIC DIGESTION (AD)

Q5: Do you agree or disagree with the proposed new tariff bands and tariffs for farm-scale AD? Please provide evidence to support your view. We would be particularly interested in quantitative evidence of the capital and operating costs of farm-scale AD schemes.

Disagree

Comments:

Ecotricity’s view is that waste plant matter is better used on farms as fertiliser. By over stimulating the economics of farm scale AD the government risks diverting waste streams that would naturally be used for composting and then as fertilisers (natural ones as opposed those that are made using fossil fuels) to the production of electricity – in effect turning plant matter into electricity on the one hand and therefore having to use more fossil fuel to make fertilisers on the other hand. It also risks stimulating a market for energy crops which would compete with food production. Farm scale AD plants to make electricity are not something that should be promoted, in our opinion.
It is perhaps worth noting that under the government’s view of FiT arrangements, any uptake of AD tariff monies by the farming community will be at the expense of small scale solar.
If the government seeks to provide financial support to the farming community (via enhanced AD support), this is something that large scale solar does very effectively.

Q6: Do you have any other views and associated evidence on the slow uptake of farm-scale AD under FITs to date?

Comments:

The uptake of farm scale AD is entirely comensurate with its contribution to UK energy and climate targets. We do not believe that this uptake is slow.

Q7. Do you consider that controls are necessary to prevent the wholesale expansion of energy crops for AD? If so what do you consider to be the best way to implement these controls to be considered in the comprehensive FITs review?

Agree

Comments:

The way to prevent this is to leave farm scale AD support where it is.