Briefing by CSE on DECC Proposals

Newsflash: Changes to the Feed in Tariff
You have probably seen lots of news headlines by now about the significant proposed changes to the Feed in Tariff. DECC initially released a consultation proposing to end pre-accreditation and pre-registration, and then subsequently released a much larger review of the whole FiT scheme. To help you piece together exactly what’s going on and how it may affect your projects, here’s a brief summary of the proposals:
1. Removal of pre-accreditation
The consultation on the removal of pre-accreditation and pre-registration was released on 22 July 2015 and closed on 19 August 2015. The results were released on 9 September 2015 with an announcement that pre-accreditation will be closed from 1 October 2015.
This decision is linked to the overall FIT review, which was announced shortly after the pre-accreditation consultation closed. Because DECC are now reviewing the cost effectiveness of the whole FiT scheme (based on evidence that it currently doesn’t offer value for money) it would be inappropriate to continue to offer to allow projects to lock in to the current higher tariffs through pre-accreditation.
However it is unknown how long term the decision to close pre-accreditation will be. It all hinges on the outcome of the overall FIT review. DECC have stated that they may consider reintroducing pre-accreditation at a later date, and recognise that community groups (as well as some specific technologies) particularly benefit from this service being offered.
Read the results of the consultation here: http://www.gov.uk/government/uploads/system/uploads/attachment_data/file/459286/Government_response_to_FIT_pre-accreditation_consultation.pdf
2. The FIT review
On 27 August 2015 DECC announced that they are carrying out a review of the Feed in Tariff scheme, based on the need to make it more cost effective and within the limits of the Levy Control Framework (LCF) i.e. to ensure it doesn’t impact too much on people’s energy bills. The success of the FiT so far has exceeded all expectations and resulted in significant reductions in costs of deployment across the technologies, thus demonstrating that there is not so great a need now for large public subsidies.
Although many would argue that the success of the scheme should lead to more funding being put behind it rather than taken away, the fact is that DECC need to stick to a certain budget. Their hope is that making a few changes to the scheme will make it better value for money and will ensure its long term viability, which is far better than spending too much on it now and having it taken away completely when the budget is blown.
So here’s a summary of some of the proposed changes:
– Lower generation tariffs – new generation tariffs have been proposed that are lower than the current tariffs, particularly impacted solar projects (87% lower at the lowest band)
– New tariff bands – the tariff bands have been altered to better reflect technology costs and to stop projects from downgrading their size to get a better tariff rate.
– Quarterly degression – to better keep up to date with changing technology costs
– Deployment caps – each quarter each technology will have a deployment cap. Once reached then no more installations will be able to register for that particular tariff rate. This is to enable DECC to better budget, and to create a more even spread of installations across the technologies.
– Extensions to existing installations will not be able to claim the FIT
– The energy efficiency requirement will be raised from band D to band C – though community installations will be exempt from this rule.
If you are currently undertaking a project (using UCEF or RCEF funding, or otherwise) you will need to ensure that you have looked at the economic feasibility of the project using the proposed reduced rates in the consultation as well as any financial modelling you have already done using the current rates.
We hope that if you use the rates proposed in the consultation, this will effectively allow you to model the worst case scenario. It may be that the consultation results in slightly increased rates than those currently being proposed, but there seems to be no likelihood at all that they will remain as high as they are now, so unless you can act quickly to pre-accredit your project before the 1st of October, using the current rates is likely to give you an artificially optimistic financial model.
Other proposals relate to the rollout of smart meters and the need to change the way export tariffs are paid as a result, as well as changes to administration and grid management processes.
One of the key things that many reports have picked up on is that one of the consultation options could be to end generation tariffs for new applicants completely from January 2016. However, the consultation makes clear that this is a last resort and it is hoped that the deployment cap system will enable DECC to stick within the set budget and avoid this.
The proposed rates are based on a model developed by the consultancy firm Parsons Brinkerhoff. The consultation states that, according to the PB study, the proposed new rates will still deliver the same return on investment (on suitable sites) that the Feed in Tariff was always designed to achieve – that is about 4%-9%. In effect, the message is that costs have fallen so much, particularly for small scale solar, that this return on investment can now be generated with almost no extra tariff. Interested parties are therefore recommended to look closely at the PB model if they wish to understand how the new rates have been arrived at, and to include any critique of the model itself in their consultation responses.
Consultation on the review is open until 23 October 2015 so do consider reading through the proposals and submitting a response if you think these changes will impact your projects. In particular, there are questions about whether you think that FiTs should be retained only for certain
types of project (e.g. community led) or only for certain technologies. You will need to justify your responses with as much evidence as you can give.
Read the full consultation document here: http://www.gov.uk/government/uploads/system/uploads/attachment_data/file/458660/Consultation_on_a_review_of_the_Feed-in_Tariffs_scheme.pdf
Conclusion
There is no doubt that this news will be unsettling to many from across all sectors, and the impact is likely to be that many projects will stall, at least for a few months, due to lack of certainty over tariff levels.
However the reality is that DECC’s FiT team have a budget within the Levy Control Framework that they need to stick to, and it is highly unlikely that more money will be added to this budget because of a clear political commitment to reduce added costs on consumers’ bills (which is how the FiT is currently funded). The proposals suggested are an attempt to show that the scheme can be made cost effective enough (within the narrow confines of the Levy Control Framework) to continue to support renewable energy deployment. While solar will probably take the biggest hit, it is also the technology which has benefitted the most from FITs so far and installation prices have dropped significantly. Many solar projects will therefore still be viable anyway and the new proposals are aimed towards giving other technologies a chance to catch up.
In addition, though it might seem counter-intuitive, it’s worth noting that evidence suggests that when subsidy levels are cut, costs can often come down as well. This is because, to some degree, the price at which materials and components are sold into the market reflects the price that people are willing to pay; when the final value in a project is high (and particularly when it is kept artificially high but poor subsidy design), then the market responds to that by pricing components to suit. If the final value in a project is lower, then the market cannot support such high prices and they tend to reduce. It remains to be seen whether this will be one of the results of this proposed cut in FiT rates, especially since solar costs have been dropping considerably in any case.

CSE – Centre for Sustainable Energy,  Bristol

 

 

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