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What is the aim of the feed-in tariff? And what do you think it should be?

Posted by Cathy Debenham on 24 June 2011 at 12:20 pm

Ask 10 people what the aim of the feed-in tariff is, and you'll probably get 10 different answers, at least that's the impression I got at this week's MicrogenerationUK conference.

DECC officials were speaking about the renewable heat incentive and the feed-in tariff at a session on financing change. When asked about the aims of their respective incentives, the reason for this confusion became a bit clearer.

The purpose of the renewable heat incentive is simple. It's about delivering the heat section of the EU renewable energy targets for 2020. However, Rachel Solomon-Williams, the DECC official leading on the feed-in tariff couldn't give such a succinct answer:

"I hope through the comprehensive review we can clarify its aims more clearly. Greg Barker has a very strong vision that it's for decentralising energy and engaging people with energy."

She was a bit clearer on what it's not for: "It's not its point to incubate new technologies ... it's not fully clear whether it's about bringing technologies to scale."

What was clear was the emphasis on managing the money. The budget for the feed-in tariff going forward is around £80m a year for the next four years. Rachel Solomon-Williams said: "It always comes down to is this affordable, can we justify it? We are focusing on ways of predicting demand and managing it. ... Cost control is key."

Co-founder of HomeSun Bill Sneyd didn't agree with either the aims, or the methodology of the feed-in tariff plans. He thought the aim should be to build an industry of scale as quickly as possible. "I worry that you're asking what we can do to dribble out the money as slowly as possible. As a result growth will grind to a halt. That won't help us to reach the scale we need to reduce costs."

To illustrate his point Bill Sneyd referred to the difference in installation cost between the UK and Germany. At £600, the installation costs in Germany are half the UK domestic average of £1,200. He also pointed out that global PV prices are 1 Euro per wP. Yet in the UK we can't reach those prices as we can't buy in enough bulk.

Erich Scherer, who is on secondment to the corporate finance team at BDO from DECC, said that DECC must give much longer notice of changes to incentive schemes if it wants to build investor's confidence in the market. He said that as government incentives are going to be offering low reward, they must also be low risk. The fast track review of feed-in tariffs upset people because they had projects on the go that couldn't be completed by the 1 August 2011 cut off date. "As long as you give enough notice, funders won't be that upset," he said.

However, it looks as though there's due to be more turbulence in the microgeneration market as Rachel Solomon-Williams laid out the schedule for the planned comprehensive review of the feed-in tariff:

July: framework document announced and discussed with key industry figures.
September: public consultation
End 2011/Early 2012: Proposals published
April 2012: new regime starts

Pretty much everything is up for grabs in the review: tariff levels, degression rates and methods, eligible technologies, export arrangements, and more. The DECC website says "tariffs remain[ing] unchanged until April 2012 (unless the review indicates the need for greater urgency)". Maybe they will even come up with a clear aim. What do you think it should be? Let us know in the comment section below.

Just for interest, I looked up what the last Labour government has in mind when it introduced the feed-in tariff. Here's what they said:

"The scheme is intended to encourage deployment of additional small scale low carbon electricity generation, particularly by individuals, householders, organisations, businesses and communities who have not traditionally engaged in the electricity market. For these investors, delivering a mechanism which is easier to understand and more predictable than the Renewables Obligation, as well as delivering additional support required to incentivise smaller scale and more expensive technologies were the main drivers behind the development of this policy."

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Comments

9 comments - read them below or add one

mattgreen

mattgreenComment left on: 27 June 2011 at 11:45 am

" Thank you for those interesting thought Matt. Is that you're interpretation of what you think DECC's trying to do, or what you think they should do? " - Cathy

Hi,

The first half is my interpretation of what they are doing, why they created the FIT and how it will achieve it's objectives. It's my interpretation in economic terms of what a FIT is.

(As an engineer I interpret something's objectives by looking at what it does).

The creation of FITs, in my opinion, is a tactic whose goal is to support the longer term strategies. The Renewable Heat Incentive and Renewables Obligation are the other tactics employed towards the same overall strategic goal.

The longer term strategies seem to be about decentralisation of production, engaging with people at grass-roots level, reducing climate change effects and reducing dependency on energy imports.

I guess the 2nd half of my comment is aimed more at those using FITs - they need to bear in mind the nature of price-fixed and guaranteed markets and do their business planning accordingly - as all sensible business people (should) do. Homeowners installing generating capacity are also stepping into the role of being 'in business' so should also be thinking accordingly.

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Cathy Debenham

Cathy DebenhamComment left on: 27 June 2011 at 10:03 am

Thank you for those interesting thought Matt. Is that you're interpretation of what you think DECC's trying to do, or what you think they should do? 

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mattgreen

mattgreenComment left on: 27 June 2011 at 9:48 am

Interpreting the government's statements on the purpose of FITs and looking at it from an economic perspective I'd say the tactical aim of the FIT is:-

A) to provide a guaranteed place (a market) to sell surplus generated energy - in order to reduce the risk to new entrants in the market finding they can't sell their energy.

B) to provide a guaranteed price (price fixing) in that market to again reduce the risk to new entrants - in order to stimulate supply.

So on face value the FIT provides some stability for the budding new market to grow.

Economists will tell you that price fixing is a Bad Thing™ as ultimately it removes efficiency from the market, eventually stalls innovation and discourages new entrants. Of course when they say this they refer to markets once they have become established.

A fixed price and a guaranteed market only exist until the government decides to change or curtail the agreement. It is imperative that all suppliers and producers don't loose sight of the fact that the FIT is there to stimulate the creation of the market in small-scale, locally produced renewable energy -  NOT to maintain that market forever and make the participants wealthy.

Maintaining a market for renewable energy and long term profitability is the responsibility of the individuals, companies and communities participating.

I suspect the reason the 50kW+ PV tariff was cut was due to that segment of the market  starting to look more like an established market and thus not not really needing the same level of price protection that the smaller scale installations still need.

Should a 50kW+ installation owner be in a position to look after their own market? Don't forget, energy producers don't have to sell their energy via the FIT if they can negotiate contracts themselves! 

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Eco Andrew

Eco AndrewComment left on: 26 June 2011 at 10:55 pm

The ultimate aims of the FITs must be to minimise the effect of Climate Chaos for our children and future generations and to reduce our rate of consumption of the precious fossil fuel resources we have left on the planet, preserving it for sensible, beneficial uses rather than the profligate wasteful uses much of the world currently burns it for.

The steps that the FITs should be taking us along to achieve the above should, in my humble opinion, be:

1. To make renewable electricity generation more affordable, and so boost demand

2. thereby establishing a stable, long-term installer base in the UK, increasing competition and squeezing out the charlatons and profiteers

3. also thereby introducing economies of scale (making it even more affordable - hopefully without need for subsidies), resulting in more funding for research and development, leading to increased efficiency, leading to greater cost-effectivess

4. changing attitudes from viewing renewables as only interesting for long-haired, sandal-wearing eco-fanatics, to something that any sensible person would want to install (if their roof pointed in the right directions or they lived somewhere very windy)

5. incentivising building practices so that renewables are built-in to every new house, office, factory (pre-designed so that the roof always faces south) and they become seen as the norm. 

Although these are what I see as the aims, I must add a caveat that some commentators/experts in the field believe that solar PV is a bad idea at UK latitudes, and that they should be sited much further south (eg. Sahara Desert) where they would be much more efficient and the electricity transmitted via cables to northern latitudes.  They believe that in the UK we should be focusing subsidies on electricity generation from wind, waves, tides and solar thermal. Take a look at UK company www.isentropic.co.uk if you want an example of how solar thermal can be used to produce electricity.

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G Reiss

G ReissComment left on: 24 June 2011 at 5:50 pm

It may be helpful to think of Government policies as having both primary aims and secondary aims (which are desirable by-products).

The primary aims of the FIT should be:

1) to help the UK population unhook from its present dependency on fossil fuels by encouraging as many as practicable to engage with renewable energies, and

2) to develop a long term industrial base in renewables in the UK

The secondary aims should be (3) to reduce the UK's overall carbon emissions, (4) to improve energy security by cutting imports, and (5) to create jobs e.g. in design, sales, production and installation.

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Cathy Debenham

Cathy DebenhamComment left on: 24 June 2011 at 4:56 pm

Thank you all for excellent comments. G Reiss, I couldn't agree more. mattgreen, I recommend reading this article in today's Telegraph. It predicts that the cost of generating solar PV will reach equality with buying from the grid before the end of this decade.

rippa700, you're so right, once you engage with it, you value energy more, and engage with it more. I'm sure, that despite his quite understandable disgruntlement with FiTs, MicroNick will probably agree.

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mattgreen

mattgreenComment left on: 24 June 2011 at 4:46 pm

" He thought the aim should be to build an industry of scale as quickly as possible."

Do any of the current suppliers in the industry believe that an extensive, micro-generation approach can be commercially successful without government subsidies in the first place or sustainable after those subsidies have gone? 

If the installation prices are too high in the UK is it not time for a commercial organisation to step in, raise the investment needed to create a sustainable market by either providing the bulk purchasing power needed to drive down costs in the first place or accept that profits will be low during the first few years until there is sufficient capacity on-stream? This is how our Victorian fore-fathers funded the massive railway infrastructure they had to build.

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MicroNick

MicroNickComment left on: 24 June 2011 at 3:40 pm

As a pioneer microgenerator, my attitude to FiT is a bit biased - having been positively discriminated against in the last round, it's a bit of a sore point..!!

It's all very well earning money in this way, and I don't begrudge anyone who can, but shouldn't at least a portion of FiT payments be withheld in order that the poorest in society can also benefit from solar PV? After all, it's the most vulnerable who are always the hardest hit from price rises and inflation.

The FiT system is getting a bad name - some have described it as "rich people getting richer off the backs of poor people'.

I know this is altogether too simplistic a statement, but the FiT is widely seen as money/subsidy coming from the energy companies (rather than a Govt. subsidy) emanating from the quarterly bills of those who don't have or can't afford PV.

I know  climate change denier lobby groups have been active in spreading misinformation and confusion on this very subject in mainland Europe, and it wouldn't surprise me one bit if they're not at the bottom of this particularly murky puddle somewhere..!!

This myths should be nipped in the bud as it is contributing to the 'them and us' mentality all too prevalent and increasing by the day in the UK today...

There is a danger here of the scheme being seen as elitist, and paid for by those who can't afford it, so more comprehensive information is required to dispell this myth..

 

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rippa700

rippa700Comment left on: 24 June 2011 at 3:26 pm

I was mighty relieved when I heard DECC say that it is about decentralised and local energy production. We can't make enough renewable energy, but by getting people involved in energy production the first thing they do is value the stuff, watch the meter and use it less. I know from personal experience - we installed an 11Kw wind turbine - and friends who have solar PV - we all meter watch and compare. Unfortunately the key to tackling climate change is to use less - we all have to use less of just about everything. If we want mass renewables fast then there needs to be a commercial subsidy for big investors but that is a different story.

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