STA RESPONSE - FINAL DRAFT OF WEDNESDAY 21 OCTOBER 2015 Consultation on DECC’s Review of the Feed-in Tariffs scheme Response on behalf of the Solar Trade Association About us Since 1978, the Solar Trade Association (STA) has worked to promote the benefits of solar energy and to make its adoption easy and profitable for domestic and commercial users. A not-for-profit association, we are funded entirely by our membership, which includes installers, manufacturers, distributors, large scale developers, investors and law firms. Our mission is to empower the UK solar transformation. We are paving the way for solar to deliver the maximum possible share of UK energy by 2030 by enabling a bigger and better solar industry. We represent both solar heat and power, and have a proven track record of winning breakthroughs for solar PV and solar thermal. We welcome the opportunity to respond to DECC’s consultation on a review of the Feed-in Tariffs scheme , whose contents are of great concern to the solar industry. Respondent details Respondent Name: Mike Landy, Head of Policy Email Address: consultations@solar- trade.org.uk Contact Address: 53 Chandos Place, London WC2N 4HS Contact Telephone: 0203 637 2945 Organisation Name: Solar Trade Association Would you like this response to remain confidential? No 1
Transcript
STA RESPONSE - FINAL DRAFT OF WEDNESDAY 21 OCTOBER 2015
Consultation on DECC’s Review of the Feed-in Tariffs schemeResponse on behalf of the Solar Trade Association
About us
Since 1978, the Solar Trade Association (STA) has worked to promote the benefits of solar energy and to make its adoption easy and profitable for domestic and commercial users. A not-for-profit association, we are funded entirely by our membership, which includes installers, manufacturers, distributors, large scale developers, investors and law firms.
Our mission is to empower the UK solar transformation. We are paving the way for solar to deliver the maximum possible share of UK energy by 2030 by enabling a bigger and better solar industry. We represent both solar heat and power, and have a proven track record of winning breakthroughs for solar PV and solar thermal.
We welcome the opportunity to respond to DECC’s consultation on a review of the Feed-in Tariffs scheme, whose contents are of great concern to the solar industry.
Respondent detailsRespondent Name: Mike Landy, Head of PolicyEmail Address: [email protected] Address: 53 Chandos Place, London WC2N 4HSContact Telephone: 0203 637 2945Organisation Name: Solar Trade AssociationWould you like this response to remain confidential? No
Introduction and Background
The Feed-in Tariff Review consultation is the latest in a series of alarming policy proposals from government that, taken together, represent what appears to be a systematic dismantling of UK renewable energy policy. We understand the need for DECC to review the FiT scheme as a requirement under its state aid approval, however we disagree fundamentally with the proposal to dramatically constrain the scheme going forward. DECC presents its Option 1 as “Do nothing” but nobody was asking DECC to do nothing, so the comparison of the options presented is very misleading.
We believe that the government’s underlying justification for the dramatic cuts is flawed: it is counting the cost of renewable energy subsidy schemes towards the electricity bills of “hard-working families” through the Levy Control Framework (LCF) but it is failing to recognise and account for the bill reductions those very same technologies produce by reducing wholesale electricity costs. Analysis by
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one of our members (Good Energy) has demonstrated that every GW of solar PV produces savings of £35million/year which should feed through directly to consumer bills1. For the 3.2GW of solar PV already accredited under FiTs that represents a saving to consumers of £112 million which should be used by DECC to offset the support costs but this saving is not even acknowledged.
In addition the LCF itself should have been increased by up to £100 million (in 2020) following the Chancellor’s decision in Budget 2014 to freeze the Carbon Floor Price, which directly increases support costs under the CfD mechanism2. We therefore believe that the increased LCF spend projection announced by the government as part of the Chancellor’s Budget of 8th July 2015, which has yet to be fully justified or broken down, cannot be used as a justification to cut back support for renewables, and solar power in particular. Furthermore the LCF is essentially an artificial budget negotiated between Treasury and DECC for which no modelling justification has ever been supplied and which has never been subject to proper public scrutiny or parliamentary debate.
DECC’s assertion on Page 13 of the consultation that solar deployment is in line with its expectations as set out in the final Impact Assessment following the 2011/12 FiT Review is not borne out by the facts3. The graph below plots the DECC projections to 2014/15 compared with what has actually happened. It is clear that actual deployment is in line with DECC’s “low” projection, which is why degression triggers have rarely been exceeded since their introduction. If anything solar is under-deploying compared with expectations.
1 http://www.goodenergy.co.uk/press/releases/2015/10/19/renewables-bring-down-the-wholesale-cost-of-energy-finds-new-study 2 Private communication from the Committee on Climate Change following publication of its technical note on the LCF on 14 September 2015 - https://www.theccc.org.uk/publication/technical-note-budget-management-and-funding-for-low-carbon-electricity-generation/ 3 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/43080/5391-impact-assessment-government-response-to-consulta.pdf
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One can only conclude from this that the draconian FiT spend cuts proposed by DECC under this consultation are motivated by a desire to curtail renewables deployment for reasons other than their cost. This is particularly true of solar PV which stands out amongst renewable energy technologies as the one that has achieved the most dramatic cost reductions in recent years and which is the only FiT technology that can realistically reach grid parity by 2020 (with the exception of large wind), so long as continuing stable support is provided. Yet extraordinarily it is solar PV that is allocated the lowest budget under DECC’s proposals, thereby greatly undermining the prospects of further progress.
The STA is most frustrated by the fact that we have been in discussion with DECC for well over a year on an alternative approach to reforming the FiT scheme to improve value for money and speed up progress towards grid parity. Our Solar Independence Plan 4 (SIP) published in early June 2015 (but discussed with DECC since 2014) proposed adjustments to the existing degression mechanism to accelerate deployment whilst speeding up tariff degression, thereby avoiding an increase in overall spend. Crucially it would have avoided the deployment boom that inevitably follows the announcement of dramatic cuts as now proposed by DECC and which greatly increases the probability of overspend and possible scheme closure.
Our primary recommendation to DECC would therefore be to retain, but review and revise, the current degression mechanism in order to provide it with better cost control than the current triggers. However we realise that the government is seeking watertight cost control, which is not possible to achieve with the current mechanism.
Let’s be clear about what DECC is proposing for solar PV in this consultation. The tariffs proposed by DECC to take effect in January 2016 represent cuts of up to 87% on the current tariffs. However of even greater concern to our members are the very low quarterly PV deployment caps designed to provide an upper limit to spend. When these are combined the totally unacceptable result is a 98% reduction on current solar expenditure under FiTs, from the current ~£70m per year to under £2m. Why is DECC moving solar spend from the current 70% under FiTs to only 7%? Essentially this combination of low tariffs and low caps will put the majority of the solar industry active under FiTs out of business – we estimate the loss of up to 27,000 jobs. Combined with the curtailment of solar deployment under the Renewables Obligation and uncertainties over CfDs, there won’t be much of a solar industry left – quite an extraordinary outcome for the energy technology that consistently tops DECC’s public opinion surveys and allows consumers to most easily generate their own power. Surely this is not what the Secretary of State meant by a ‘solar revolution’.
We believe there is a very clear justification for DECC to significantly increase the proposed level of support for solar PV under FiTs over 2016-2019. The most significant element of our consultation response is therefore an alternative scenario that increases quarterly solar deployment to a level sufficient to maintain a viable UK industry, albeit much reduced compared with the current one (see Appendix 1). We believe that the methodology that DECC has used to calculate the PV tariffs has a number of serious flaws, resulting in unacceptably low tariffs. We are therefore proposing a set of higher starting tariffs based on more justifiable assumptions. Our membership understand DECC’s desire to reduce tariffs, but have huge reservations over deployment caps. However, we understand
4 The Solar Independence Plan for Britain http://www.solar-trade.org.uk/the-solar-independence-plan-for-britain/
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the need for a mechanism to provide DECC its required cost control and have suggested a number of modifications to enhance flexibility and predictability.
Combining the higher tariffs and deployment caps, we calculate that the maximum spend liability on new PV installations under our scenario would be £100m over 2016-19, compared with the £7m proposed by DECC. This figure is therefore additional to the cost of the installations engendered by the “rush” caused by DECC’s announcements of huge tariff reductions and the ending of FiT pre-accreditation. It is significantly less than what we think is justified to accelerate progress to grid parity, however we believe it would be an acceptable compromise given DECC’s desire to reduce and control spend. It would only add £1 to consumers’ bills via the LCF in 2019 which we believe provides excellent value for money for a programme that adds 2.7GW of solar capacity. Given that this capacity is projected to reduce wholesale costs by almost £100 million/year it could justifiably be seen as cost neutral. We must also stress that the extra budget we seek should not replace support for other technologies, but should supplement it.
We would welcome the opportunity to meet with DECC and Treasury ministers and officials to present the details of our plan. We emphasise strongly that we consider this to be the minimum scenario acceptable to our members, with no scope for further reductions. Compared with DECC’s “do nothing” option, it still represents a considerable saving of £150 million for PV. It also represents a significant saving of 67% compared with the ‘Minimum Ambition’ scenario presented in our Solar Independence Plan.
We see our alternative scenario as a way to taper down support under FiTs whilst alternative mechanisms are worked up to transition to the subsidy free framework we anticipate post-2020. These could include tax breaks such as enhanced capital allowances or investment incentives (e.g. EIS) that reflect the capital intensive nature of the technology, in particular for the commercial sector, and/or net metering. We would love to see their early introduction but we think it will take time to work up a viable set of proposals; in the meanwhile the reducing tariffs we propose under FiTs will prevent the complete run-down of the industry.
Our members feel very strongly that, if DECC is intent on implementing the consultation as proposed, it might be better to operate without the caps and generation tariffs, but only if a viable export tariff is available along the lines of the current system, and mandatory requirements such as MCS, minimum EPC levels and other regulatory measures are removed. In other words the industry would want to operate on a level playing field, unencumbered by costly red tape. There are sufficient safeguards through Building Regulations and Trading Standards to ensure minimum standards are adhered to, and the STA would seek to develop a strong suite of voluntary standards that would provide clear quality benchmarks to consumers (as we already do). It’s the direction we will need to move in anyway post FiTs, just one that we were hoping we would have years rather than months to adapt to.
An additional argument is about avoiding waste. The cumulative cost of the support for solar over the last five years under FiTs is around £640m/year, which adds about £7 to consumer bills. This support has helped an industrious solar supply chain to develop, recently employing almost 35,000 people. Reducing equipment costs combined with ever increasing installation efficiency have allowed the domestic tariff to fall from 42p/kWh in 2010 to 12p/kWh today. By adding another ~£100m to the
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figure over the next three years we believe that DECC can remove the generation tariffs by 2020, at which point the industry will be subsidy free. If DECC cuts the subsidy as proposed now, a majority of the businesses will not be able to operate and deployment of solar will decrease drastically, setting back the process of reaching grid parity by years and effectively wasting much of the investment to date. With the more gradual tariff reduction we propose the additional capacity is obtained at increasingly lower subsidy cost. We believe that this is a very compelling argument to complete the job for solar – we ask only for one final push from government to help us reach grid parity.
Finally we have mentioned above the ~35,000 people employed in solar power and the 27,000 that are at risk as a result of DECC’s actions. The STA commissioned TBR, the consultants who performed the analysis for BIS/DECC in March 2015 entitled “The Size and Performance of the UK Low Carbon Economy” , to refine and analyse the data further and break the employment estimates down to regional and parliamentary constituency level. The STA then in turn analysed that data, assuming an 80% drop in deployment would have an equivalent impact on jobs, and thereby estimating numbers of jobs at risk in each region and parliamentary constituency. The breakdown of data at regional level is presented in Appendix 2.
Answers to Consultation questions
Chapter 2: Securing value for money
1. Do you agree or disagree with the proposed generation tariff rates set out above? Please provide reasons to support your answer.
We strongly disagree with DECC’s proposed solar tariffs; they simply won’t work. We disagree with many of the underlying assumptions used to calculate the tariffs, including the load factor, the value of bill savings, the inclusion of the export tariff for years 21-30 and the fact that panel degradation over time is not taken into account. Basing returns on installations in the South-West rules out anything outside the highest insolation regions. This may have been DECC’s intention but we believe that it is very important for consumers throughout Britain to have access to tariffs that are realistic. For the domestic tariff, using our realistic assumptions for these variables reduces the rate of return from 4% to 0%, so virtually no deployment would take place.
We have provided a detailed critique of the tariffs in Appendix 1 (the STA’s counter/alternative proposal). Our alternative proposal uses more realistic assumptions to propose higher tariffs and more ambitious deployment across specific market sectors, designed to maintain a viable, albeit reduced, solar industry. We propose that social housing be supported under FiTs through either a separate tariff and degression band or a separate competitive process, into which social landlords can bid on a six monthly basis. We also think that the standalone tariff should be reserved for community energy projects.
We must emphasise our fundamental disagreement that choosing a 4% hurdle rate, equivalent to a 17 year payback, is viable. A homeowner can buy a 5 year pension bond yielding a risk free 3.5% APR and have their money back after the 5 years. Conversely, a 25 year investment in an illiquid asset on your roof will not sell at 4%: the hurdle rate must be set a realistic risk/reward level to compensate the
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homeowner. The position is even more stark if the homeowner needs to borrow to finance the installation – the proposed tariff and hurdle rate effectively rule financing out.
This is more dramatic with commercial investment as a hurdle rate must be compared with other investments, opportunity costs, funded models vs proprietary (self funded) models. Current real hurdle rates must be set at the upper end of the previous 5-8% hurdle rate, with the caveat that commercial rooftop installations will often need more. Ofgem has published a study by London Economics which estimates that the WACC for commercial IGT projects lie in the range 6.9-8.2%5. The challenge for industry will be to reduce costs below the Parsons Brinkerhoff figures sufficiently to increase customer returns and thereby achieve sales.
Our proposed tariffs and default degression trajectories are shown in the table below. The quarterly reductions are designed to maintain a broadly constant rate of return over the period.
DECC must consider the impact of changes to MIP and VAT that are likely to occur over the period 2016-2019. We believe that it is desirable to avoid abrupt changes to returns when these kinds of step changes in cost occur, so we recommend that DECC builds in a mechanism to adjust the tariffs in line with these two market adjustments, based on maintaining a broadly constant return. Our tariffs above have assumed that MIP is removed during the course of 2017 but leave VAT for domestic installations at 5%.
We believe that DECC should give consideration to PVT technology, which it has supported through R&D and demonstration via its innovation programmes, but which has yet to achieve volumes that allow it to compete with conventional PV and solar thermal technologies, especially as it does not yet qualify for the domestic RHI. We believe that to allow the currently small PVT market to develop to the point of competitiveness with conventional PV, the current PV tariffs should be retained for PVT from January 2016. Due to the relatively small volumes involved, this will have a very small impact on overall spend but it will allow a technology that DECC has encouraged through its innovation funding to build a market presence through limited but increasing market uptake to 2019.
5 Small Business Cost of Capital - https://www.ofgem.gov.uk/ofgem-publications/48900/london-economicscost-capital-report-aigt.pdf
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2. Do you agree or disagree that the updated assumptions produced by Parsons Brinckerhoff are reflective of the current costs of deployment for UK projects in your sector? If you disagree, please set out how they differ and provide documented evidence, such as invoices and/or contractual agreements to support this evidence. Please also mark this evidence as commercially sensitive where appropriate.
As the STA is a trade association and not an installer, we are not able to provide invoices or contractual agreements but have asked our members to provide this confidential information within their own responses. We helped provide DECC the domestic install costs via RECC and feel that this cost data is currently representative of real costs. We have less clarity on commercial costs, but hope that members have provided sufficient evidence to support the data, and the feedback from members is that they are broadly in line. We would like to emphasise that the tariffs we have proposed will work if costs drop below the existing data sets, and the challenge for the industry is to do this within the next 12 months to maintain volumes.
The Parsons Brinckerhoff data are further discussed in Appendix 1 (the STA’s counter/alternative proposal).
As per our answer to Question 1, it is important for DECC to prepare responses to two likely changes to PV costs that are likely to occur over the implementation period. The European Commission currently imposes a Minimum Import Price on imported modules from certain Chinese manufacturers and this adds 7-15% to the cost of the vast majority of PV installations. The UK solar industry is working hard with other stakeholders to have this removed as soon as possible, but the timing is unpredictable at present (our proposed tariffs have assumed this will happen during 2017). Conversely costs for solar installations will increase by ~15% if and when the UK government implements the ECJ’s ruling that the lower 5% rate of VAT should no longer apply to domestic installation of energy saving measures, including PV. In this case we would recommend that the domestic tariffs are adjusted upwards in order to maintain the rate of return at the previous level.
3. Do you consider the proposed default degression pathways fairly reflect future cost and bill savings assumptions in your sector? Please provide your reasoning, supported by appropriate evidence where possible.
No, given the very low starting tariffs proposed by DECC and expected cost reductions to 2019, we believe that DECC’s proposed default degression, rising potentially by an additional 10% per quarter if the deployment cap is reached, is too harsh.
The table we’ve presented in our answer to Question 1 shows our proposed default degression pathway. Please refer to Appendix 1, in which we present the STA’s alternative proposal, including higher starting tariffs, larger quarterly deployment caps and a default degression pathway to 2019 based on our estimates of future cost reductions and the aim of maintaining a broadly constant rate of return. Our alternative also includes additional flexibility mechanisms that provide a limit on spend without resulting in the ‘stop-start’ effect that our members find so damaging.
4. Do you consider it appropriate to harmonise the triggers for contingent degression across all technologies, and do you consider the proposed triggers will ensure tariffs reflect falling
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deployment costs? Please provide your reasoning, supported by appropriate evidence where possible.
We are content for contingent degression to remain quarterly for solar, however we believe that the ‘maximum deployment caps’ for solar are woefully inadequate to maintain a viable UK solar industry. They will result in excessive quarterly tariff drops, especially taking into account the low proposed tariff starting points.
We discuss this matter more fully in Appendix 1, in which we present the STA’s counter/alternative proposal, including more realistic quarterly caps and flexibility mechanisms to allow unused capacity to roll forward to the following quarter and to allow capacity to be borrowed from following quarters (at the reduced tariff rates). Together these mechanisms guarantee the cost control required by DECC but also reduce the likelihood of stop/start that industry finds so damaging.
5. Which of the options for changing the export tariff outlined above would best incentivise renewable electricity deployment while controlling costs and enabling the development of the PPA market? How should we account for the additional and avoided costs to suppliers associated with exports in setting the export tariff? Please provide reasons to support your answer.
We believe that all FiT generators should continue to have access to the export tariff, as it is not appropriate for small to mid-sized generators to have to negotiate a PPA with their FiT licensee. The proposed generation tariffs and implied level of returns are extremely low. Anything that further reduces the certainty of the income that small-scale generators receive further increases project risk and hurdle rate and thereby reduces the attractiveness of solar, so we believe that the export tariff should remain at its current level for the time being.
We agree with the principle that the price paid for exported electricity should reflect its value to the system, so long as this is accurate and transparent. We accept that the wholesale electricity price has reduced in recent years (in part as a result of the increasing share of renewable electricity being generated) but it is to be expected that the export price should be higher than wholesale. The wholesale price is not therefore a reliable indicator of the value of distributed generation. Any proposed changes to the export tariff need to look at the wider economic benefits of exported PV generated electricity and not just the wholesale market price. Before implementing any change DECC needs to undertake a thorough assessment of the value of distributed generation along the lines of the study undertaken by Mott MacDonald for DECC’s predecessor (DTI) in 2004 – the System Integration of Additional Microgeneration 6 .
In many countries a system of ‘net metering’ is used to reward solar rooftop generators for the generation they ‘spill’ onto the distribution grid, effectively at the retail price they pay. Whilst we are not advocating that approach now, we think it is very important for small-scale generators to know in advance what their exported power will be worth (especially as generation tariffs fall) and it does not seem unreasonable for suppliers to support the uptake of distributed generation by offering a fixed tariff at the level currently offered. One option for DECC to consider as generation tariffs fall towards zero is to replace them with a form of net metering that encompasses the export tariff.
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In conclusion we do not see a need to modify the current approach to setting the export tariff and its 20 year lifetime until and unless robust evidence from the assessment mentioned above demonstrates a need to do so.
6. Do you agree or disagree with the proposed changes to the indexation link under the FITs scheme? Please provide reasons to support your answer.
We disagree with the proposal to change indexation from RPI to CPI. RPI is well known and understood by investors and is the inflation benchmark by which investments are compared.
7. Do you agree or disagree with the proposal not to include any additional technologies in the FITs scheme? Please provide reasons for your response.
We agree not to include any additional technologies in the FITs scheme. However in our answer to Question 1 we have suggested that consideration needs to be given to PVT technology, which is at an earlier stage of commercialisation and market penetration.
Chapter 3: Cost control measures
8. Do you agree or disagree with the proposal to introduce deployment caps under the FITs scheme? Please provide your reasoning.
We profoundly disagree with deployment caps at the levels proposed by DECC, as they would not allow the survival of a viable UK solar industry. Deployment caps have been used in many government support schemes in the past and almost invariably result in a highly disruptive ‘stop-start’ market which makes any kind of efficient planning by the industry virtually impossible. Our members are therefore strongly opposed to the imposition of deployment caps. They are particularly problematic for the domestic sector, where customers need certainty about the tariff they will receive.
However we understand the benefits of deployment caps from the government’s cost control perspective so we have very reluctantly included a broadly equivalent mechanism in our STA alternative scenario presented in Appendix 1, albeit at considerably higher and more realistic quarterly levels than those proposed by DECC.
In addition our scenario includes flexibility mechanisms to allow unused capacity to roll forward to the following quarter and to allow capacity to be borrowed from the following quarter (at the reduced tariff rate). Together these mechanisms guarantee the cost control required by DECC but also reduce the likelihood of the stop-start that industry finds so damaging.
Several of our members will be suggesting alternative cost control mechanisms as part of their consultation responses. We have discussed different approaches at some length and have concluded that there is no single approach that removes the need for caps while providing DECC with its desired cost control. We would welcome the opportunity to meet with DECC officials to discuss how to achieve the most acceptable compromise between these diverging objectives.
One aspect that is absolutely crucial if the system of deployment caps is going to work is for DECC and Ofgem to ensure the public availability of accurate and timely information about deployment (i.e.
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progress towards quarterly caps). This needs to be virtually ‘real time’ if installers and developers are to be able to have meaningful discussions with prospective customers or financiers. Without that the sales or project development process becomes very difficult to manage. Other countries such as Spain, Portugal and Italy have attempted to introduce such real-time systems together with caps and been unsuccessful, so it is really important to focus on this requirement.
9. Do you agree or disagree with the proposed design of the system of caps (i.e. quarterly deployment caps broken down by technology and degression band)? If you disagree, are there any alternative approaches? Please provide your reasoning, making clear if your answer is different for different technologies or sectors.
Our response focuses on a system that works for solar PV. Please see Appendix 1 for our alternative scenario and a description of the mechanism that we foresee. As stated in our response to Question 8 our members have huge reservations concerning the imposition of deployment caps, so we believe they can only work in the following circumstances.
The aim must be for the balance between tariff and cap to be set at such a level to ensure that it is rare for the cap to be breached, without resulting in significant under-deployment. In other words the cap should be seen more as a realistic deployment objective than a limit. That is a difficult balance to achieve when a major reset of tariffs occurs, as proposed, since it is difficult to predict demand until a new market equilibrium is established.
We have used feedback from our members and the modelling described in Appendix 1 to set deployment caps that we believe are commensurate with our proposed starting tariffs in January 2016. We have then imposed default degression on tariffs in line with anticipated cost reductions to 2019 to achieve a fairly constant rate of return. We believe that with more predictable tariffs market demand will increase with time so we are proposing small quarterly cap increases to 2019. As stated in our reply to Questions 1 and 2 we think that tariffs should be adjusted if step changes to MIP or VAT occur, to prevent large changes to demand.
We understand that DECC is concerned that there should be a mechanism to avoid overcompensation of installations. Given the large reduction in tariffs that we propose (albeit smaller reductions than proposed by DECC) and the fact that deployment has rarely reached even the first degression trigger at the much higher tariffs in place since 2012 (with the exception of standalone solar), it seems very unlikely that overcompensation will occur going forward to 2019. Nevertheless we recognise that DECC wishes to have a safety mechanism in case costs come down faster than anticipated, so we have included contingent degression in our alternative scenario, imposed if monitoring shows that deployment caps are breached.
What we propose preserves DECC’s ability to cap spend but reduces the likelihood of stop-start occurring and means that under-deployment in any quarter boosts the cap in the following quarter.
If a quarterly deployment cap is reached then:
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The tariff in the next quarter would revert (or ‘leapfrog’) to that of the following quarter. However no other tariffs would be affected – this is an important point as future tariffs are already subject to default degression and customers must have forward visibility.
Projects would continue to be able to accredit, however they would receive the reduced tariff that applies in the next available quarter (i.e. the ‘leapfrogged’ tariff reduced by both default and contingent degression).
Installations would be eligible for payments from the latter of their commissioning date, application date, or the start date of the relevant cap under which they qualify.
If very high demand breached the next quarter’s cap, the process would repeat for the following quarter and subsequent quarters, with diminishing tariffs.
If demand remains high despite the falling tariffs and later tariff start dates then future capacity will simply be booked early (at falling overall cost to the LCF).
However if the deployment cap is not reached in any quarter, then any unused capacity would automatically be rolled forward and added to the cap in the following quarter. This guarantees that, if it is used in that next quarter, it will be at a lower cost to the LCF than originally budgeted, whilst also making it less likely that the quarter’s cap will in turn be breached. This would happen on a rolling basis such that any unused capacity is not lost but supplements future caps at a lower cost to the FiT budget. Our members have emphasised that this flexible cap mechanism where underutilised volume is rolled forward is a pre-requisite to accepting any form of caps, especially as DECC’s overall spend limit would still be maintained.
Furthermore if deployment in any quarter fails to reach 50% of the cap, then the default degression planned for the subsequent quarter should be cancelled, i.e. the tariff will not drop. This would preserve customer returns whilst ensuring again that spend could not exceed the original budget cap and, at the same time, allow the market to catch up with tariffs.
10. Do you agree or disagree with the proposed approach to implementing caps? If you disagree, are there any alternative approaches that you’d suggest? Please provide your reasoning, making clear if your answer is different for different technologies or sectors and provide any views on what should happen to applications for FITs for installations which miss out on a cap.
We believe that our answer to this question is covered by our response to Question 9 and by the alternative scenario we have presented in Appendix 1. However we would like to use this question to repeat our previous opposition to the removal by DECC of pre-accreditation. We believe that pre-accreditation should be reinstated above 50kW for solar, in particular for community projects. The interaction between pre-accreditation and the cost control mechanism needs very careful consideration, and we would welcome discussion with DECC officials on this.
11. If it is not possible to sufficiently control costs of the scheme at a level that Government considers affordable and sustainable, what would be the impact of ending the provision of a generation tariff for new entrants to the scheme from January 2016, ahead of the 2018-19 timeframe or, alternatively, further reducing the size of the scheme’s remaining budget available for the cap? Please consider the immediate and broader economic impacts and provide your reasoning.
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The impact for the solar industry of ending generation tariffs for new entrants would in all likelihood be devastating, as deployment of solar PV under the scheme would be severely reduced. We certainly anticipate cost reductions at the tariffs and deployment caps we’ve proposed in Appendix 1, but not sufficient for installations to be viable without generation tariffs (i.e. essentially at grid parity) for several years. We do not agree with others who state that this will occur within two years.
It should be remembered that since August 2015 renewable generators have had a tax imposed on them in the form of the Climate Change Levy.
Given that the consultation’s proposed budget and deployment caps are already much too small to ensure a viable solar industry, reducing them further would only exacerbate the position. We consider that the additional investment we propose in Appendix 1 to reach grid parity by 2020 is strongly justified from a broader economic perspective, in particular given the beneficial impact solar has on the electricity wholesale price (see introduction).
As discussed at the end of the introduction, our members believe that, if generation tariffs are removed, it is even more important to maintain a predictable, stable export tariff and to remove much of the red tape that currently applies (MCS, EPC minimum, etc).
12. What would be the impact of pausing applications to FITs for new generators for a short specified period to allow the full implementation of the cost control mechanisms? Please consider the immediate and broader economic impacts and provide your reasoning.
The cashflow consequences of pausing applications for the SMEs that make up the solar industry would be very damaging, so we caution strongly against doing this.
If the new system cannot be implemented by January 2016, we suggest rolling implementation of our Appendix 1 proposals forward by one quarter to April 2016, the start of FiT Year 7, maintaining the current system of tariffs and degression until then.
If insufficient funds are made available, closing the scheme by setting a zero generation tariff but maintaining the existing export tariff is perceived by our members as a better outcome than what is on offer, taking on board the comments at the end of our introduction about removing much of the red tape that currently applies.
13. What would be the impact if FITs continued as an export-only tariff for new generators on reaching the cap of £75-100m additional expenditure? Please provide your reasoning.
If the £75-100m spend cap and proposed share for solar is retained, the impact for solar of moving to an export-only tariff would be to essentially put out of business the majority of whatever remained of the industry following the draconian tariff reductions and deployment caps imposed in January 2016.
The position would be even starker if the export tariff is made less secure than the current one, as mooted earlier in the consultation, and the red tape associated with the scheme maintained.
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There will always be some very limited residual ‘subsidy-free’ activity before grid parity is truly achieved, but it will be a pale shadow of current deployment or of that foreseen under our alternative scenario in Appendix 1.
14. Do you have any views on the use of competition to prioritise applications within a system of caps? What do you think are the advantages and disadvantages of this approach? What forms of competition may be appropriate and is this different for different sorts of installations? Please provide your reasoning.
We believe that introducing competition would be inappropriate for solar at the smaller scale, say below 1MW. The vast majority of small-scale generators cannot be expected to bid into a competitive system. However we would like to see the Contract for Difference mechanism widened to accommodate projects in the 1-5MW size range, which would then allow them to be removed from FiTs. This would require at least six monthly auctions and projects at this scale could not be expected to compete with much larger projects under CfDs, so a separate auction would be required.
There may be one solar PV sector for which competition would work, which is the provision of PV to social housing. We suggest that support for social housing be provided through either a separate tariff and degression band (starting at the equivalent multi-installation tariff) or six monthly competitions along the lines of the procedure implemented by DECC under the Renewable Heat Premium Payment scheme in 2013-147. Social housing would be allocated its own budget under FiTs and the competitions run separately from the main scheme.
15. Should FITs be focussed on either particular technologies or particular groups (e.g. householders)? Please provide your reasoning.
No, we believe that FiTs should remain open for all current technologies and sectors. We must reiterate here that the £100m that our alternative scenario presented in Appendix 1 requires is additional to the funds proposed by DECC and does not include the projects caused by the rush that inevitably followed DECC’s draconian proposals.
In our response to Question 14 we have suggested that support for social housing could be provided through either a separate degression band (starting at the equivalent multi-installation tariff) or six monthly competitions. We also think that the standalone band should now be reserved for community schemes.
We think that there is a particularly strong case for maintaining FiTs for solar PV, compared with some of the other technologies. This is because solar is the only technology (with the exception of larger-scale wind) that, with support from FiTs, has a realistic prospect of reaching grid parity by 2020, whereas for the other technologies the support is mainly buying short-term deployment, with much lower scope for cost reduction and creation of a subsidy-free market post-FiTs.
We believe that with the alternative scenario we have put forward in Appendix 1 there is a realistic prospect that solar will continue to deploy once support under FiTs is no longer available post-2020. That would be a very major achievement for the FiT scheme.
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16. Do you agree or disagree with the proposal to remove the ability of new installations to extend their capacity under the FITs scheme? Please provide your reasoning
DECC confirmed on 9th October that the proposal to exclude extensions applies to both new and existing installations. Applied to existing installations this would amount to retrospective action as some installations have been implemented on the strength of their ability to extend in due course. Hence we disagree with the proposal. In any case we believe that the ability to extend installations should be maintained, as this is often the most cost-effective way of adding new capacity and should therefore not be discouraged.
Chapter 4: Metering export and generation
17. Given our intention to move to fully metered exports for all generators, do you agree with the proposal that new and existing generators should be obliged to accept the offer of a smart meter (or advanced meter) when it is made by their supplier? Please provide reasoning for your response.
We understand the desirability of moving away from deeming towards the use of smart meters for new entrants. However requiring existing generators to accept a smart meter ahead of roll-out by their supplier would amount to retrospective action so we would disagree with that requirement. If this is to be implemented, it must be at no cost to the consumer.
18. Do you agree or disagree with the alternative proposal that new applicants must have a smart meter (or advanced meter) installed before applying to the FITs scheme, with existing generators being obliged to accept the offer of a smart meter (or advanced meter) when it is made by their supplier? Please provide reasoning for your response.
We understand the desirability of moving away from deeming towards the use of smart meters for new entrants however it must be at no cost to the consumer. Therefore it should not be seen as part of the cost of installing a solar system, given that suppliers were scheduled to install smart meters at their cost in due course anyway.
Requiring existing generators to accept a smart meter ahead of roll-out by their supplier would amount to retrospective action so we would disagree with that requirement.
19. Do you have any views on possible approaches to introducing remote reading for generation meters? Please provide reasoning for your response.
The STA has no comment on this question.
Chapter 5: Effects of the Feed-in Tariffs scheme on grid management and costs
20. Do you agree or disagree that recipients of FITs should be required to notify the relevant DNO of new installations as a condition of the scheme?
Installers are already required to notify DNOs for larger installations, so we are happy to agree with this question so long as it does not introduce any additional onerous bureaucracy to the accreditation
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process. Ofgem already has this information, so it should not require the recipients to notify the DNO – it should be provided to the DNOs by Ofgem.
21. Do you agree or disagree the FITs scheme should be amended to include requirements that help mitigate and limit the impact on grids such as requiring generation to be co-located with demand or storage?
We disagree that any requirement be introduced for installations supported under FiTs to mitigate and limit their impact on grids such as requiring generation to be co-located with demand or storage. For solar there is already a very strong incentive to co-locate with demand due to the significant financial benefit of self-consumption compared with export.
We consider that storage will play an increasingly important role for solar in due course but it is not currently economic at prevailing costs. We think that more work is required by DECC before any decisions are made on how to incentivise the uptake of storage in conjunction with solar, so it would be premature to introduce a regulatory requirement.
However it is very important to build up market experience of storage and we believe that early adopters should be provided with a financial incentive to do so, e.g. by using some of the funding available under DECC’s innovation support schemes for energy storage to support the installation of energy storage systems in the form of a one off grant payment. This should only be applicable to new installations and only when used in combination with PV.
22. Do you agree or disagree that the FITs scheme or wider networks regime should be amended to ensure generators pick-up the costs they impose on the network?
We strongly disagree that the FITs scheme should be amended to ensure generators pick-up the costs they impose on the network. In many instances adding solar capacity as distributed generation can alleviate the need for network reinforcement and thereby save money, so it is very difficult to generalise.
The move towards greater distributed generation should be a strategic goal of the government and we believe that the costs of adapting distribution networks to accommodate increasing distributed generation should be socialised separately from the FiTs mechanism. If the costs were to be imposed on generators then DECC would need to increase FiT tariffs to maintain the returns, or face a yet further drop in deployment.
As explained in the Introduction, solar reduces wholesale energy costs. In the future solar will be implemented in combination with batteries, thereby reducing costs at the distribution network level.
Chapter 6: Ensuring sustainability for anaerobic digestion
23. Do you agree or disagree that payments to newly accredited AD installations, at all scales, are conditional on meeting the proposed sustainability criteria? Please provide your reasoning.
The STA has no comment to this question
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24. Do you agree or disagree that the proposed criteria and GHG trajectories set out above would set the necessary bar to meet our objective to incentivise the multiple benefits from waste-fed AD? Can you suggest alternative criteria which would help to achieve this goal? Please provide reasoning and evidence for your answer.
The STA has no comment to this question
25. Do you agree or disagree with the proposed reporting system to underpin sustainability criteria? Please provide your reasoning.
The STA has no comment to this question
Chapter 7: Administrative changes to the Feed-in Tariff scheme
26. Do you agree or disagree that only imported renewable electricity produced by generators in other EU Member States that are under 5MW and commission on or after 1 April 2010 should be used to offset levelisation costs? Please provide your reasoning.
We agree that only imported renewable electricity produced by generators in other EU Member States that are under 5MW and commission on or after 1 April 2010 should be used to offset levelisation costs.
27. Do you agree or disagree that we should introduce a cap on the amount of overseas generated renewable electricity that can be exempt from the costs of the scheme? Do you agree that the cap for 2016/17 should be calculated based on the number of GoOs recognised in 2013/14, increased by 10% twice to match the cap under the CFD Supplier Obligation?
We agree that DECC should introduce a cap on the amount of overseas generated renewable electricity that can be exempt from the costs of the scheme but leave it to DECC to adopt the best mechanism for doing so.
28. Do you agree or disagree with the proposed change to the FITs legislation to refer to specific versions of relevant MCS standards? Please provide your reasoning?
We disagree with the proposal as we believe that the most important factor is flexibility to adopt the most suitable certification standards. Tying the legislation to particular versions of MCS standards limits the market’s ability to adapt to a changing certification landscape, such as could be provided by the new IET Code of Practice. We would therefore suggest simply referring to the most current version of the MCS standards.
29. Do you agree or disagree with the Government’s proposal to use interest accrued on the FITs Levelisation Fund to part-fund administrative changes to the scheme which would otherwise be borne through public funding? Please provide your reasoning.
The STA has no comment to this question
Chapter 6: Energy efficiency criteria
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The consultation proposes in Paragraph 170 that “the Energy Performance Certificate must be obtained before the commissioning date of the PV installation.” However the consultation does not actually ask a question on this policy change, so we assume that it will be consulted on at some later stage.
30. Do you agree or disagree with the revision being considered to increase the energy efficiency threshold to EPC band C for anyone with an installation to which the criteria apply? Please provide your reasoning.
The STA has major concerns over the energy efficiency proposals in the FiT consultation. To begin with the consultation presents the requirement for the EPC to be obtained before the commissioning date of the PV installation as a ‘fait accompli’. Despite the fact this would be a very significant policy change, as stated above, the consultation does not ask a question on this.
Although we recognise the benefits of improving the energy performance of buildings, we do not think that the FiT scheme should be used as a tool to implement energy efficiency policy. The government needs to have effective policy measures in this area but these have been going backwards in recent months, with the abandonment of zero carbon homes policy and the Green Deal. It is inappropriate to expect renewables policy to pick up the mantle (and cost).
In specific reply to this question, we strongly disagree with the revision being considered to increase the energy efficiency threshold to EPC band C, which seems to us to be motivated more by a desire to restrict the available solar market than anything else. The char 8 t overleaf demonstrates very clearly what the impact of the move to EPC C would have for the housing stock. Only 20-25% of properties fall into EPC bands A to C and around 50% fall into band D. Therefore changing the EPC requirement from D to C changes the properties available to PV under FiTs (without refurbishment) from around 75% of properties to less than 25%. We believe this is too great a contraction of the market, especially as many of the higher rated properties will already have PV installed under FiTs.
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Added to that, the addition of PV to a dwelling can contribute up to 20 points towards its EPC rating, meaning that under the current rules around 90% of properties are available without the need for further refurbishment9.
Taken together these two proposals would therefore restrict the number of properties available under FiTs without the need for further refurbishment by a factor of four, which we deem totally unacceptable. Given that the solar tariffs have been set to achieve a return of only 4%, if property owners are to be required to additionally make significant investments to upgrade the energy efficiency of their property at their own cost, it is clear that the market would become insignificant.
We have been calling for some time for the removal of the EPC requirement, especially for commercial properties. We therefore suggest that the domestic energy efficiency requirement should revert to the one that currently operates under the domestic RHI, namely minimum levels of loft and cavity wall insulation. For the non-domestic sector the government is currently consulting on reforming the business energy efficiency landscape and we would suggest that any requirement under FiTs be limited to a requirement to undertake an energy audit along the lines of the ESOS scheme.
At the minimum, the energy efficiency threshold under FiTs should remain at EPC D. If DECC goes for the export tariff only then the EPC requirement should be removed entirely, as mentioned earlier.
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31. Do you agree or disagree with the revision being considered to remove FITs eligibility from anyone with an installation to which the criteria apply who does not have at least an EPC band C? Please provide your reasoning.
We disagree with this proposal as it would excessively restrict the property market available for solar PV under FiTs, especially if the EPC C threshold is implemented. There are situations where it is not feasible or economic to raise the EPC to the threshold value and it seems unfair to restrict these completely from the FiTs scheme if they are willing to accept a lower FiT tariff. At the very minimum installations should be eligible for accreditation with the export tariff only (i.e. a zero generation tariff).
32. Do you agree or disagree with the exceptions for community groups, schools and fuel poor households to the revision to the energy efficiency criteria being considered? Please provide your reasoning
We agree with the proposal to provide exceptions for community groups, schools and fuel poor households as these should be target sectors for Feed-in Tariffs and it would be inappropriate to restrict their access to solar power through the tightening energy efficiency requirement.
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Appendix 1: The STA £1 PlanThe Solar Trade Association’s alternative proposal for supporting solar PV under the Feed-in Tariff scheme over the period 2016 - 2019
Introduction
BackgroundIntroduction
BackgroundThe STA released the Solar Independence Plan in June 201510, which set out a number of measures the government could take to continue the solar revolution in the UK. This includes, among other things, adjusting the Feed in Tariff to use the same amount of budget to deliver an additional 3.1GW of solar. We believe the Solar Independence Plan to be a credible plan to reach zero subsidy in a timely manner (in 5 years) while retaining a market that is of interest to investors, both from the UK and abroad.
In the Feed in Tariff consultation document in August 201511, it was made clear that there is very little budget available for the feed in tariff scheme going forward from January 2016: just £100m for the entire scheme. Although we do not accept the narrative of the LCF overspend, this argument means that the goal is no longer to do more with the same amount of budget, but to survive with less. Therefore, a different approach is required.
For example, in the Solar Independence Plan we advocated for no tariff cuts, as this would avoid a boom and bust scenario. In this document we have put together an alternative proposal, to form part of our consultation response. It by no means replaces the Solar Independence Plan, but supplements it.
STA overview of disagreements with DECC proposalsThe solar industry and government are aligned with the goal to achieve zero subsidy solar: from the government perspective, to limit government subsidy, and from the industry perspective, to enable more stability in the market.
However, zero subsidy cannot be achieved in a day; a smooth path is required for a successful transition. Unfortunately, the UK government has a history of sudden and unexpected changes to subsidy schemes, leading to a series of booms and busts.
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The problem with DECC’s proposals as they stand is that they repeat this pattern. However such dramatic reductions to tariffs risk long term damage to the UK solar industry. In addition, it is not an effective use of resources, either government subsidies or industry investment, to have a series of booms and busts.
Our alternative proposal softens this drop, while still keeping the industry on a path to zero subsidy by 2020, albeit with lower volumes than proposed under the Solar Independence Plan. It does use additional budget compared to the DECC proposal. It is important to note that we do not advocate supporting solar instead of other technologies, but in addition to. Solar and perhaps wind are uniquely placed as the only technologies that can viably reach zero subsidy within the next 5 years.
Critique of Parsons Brinckerhoff and DECC assumptions
The assumptions in the Parsons Brinckerhoff report that underpins DECC’s assumptions for solar is flawed. In this section we discuss each of these in turn, replacing these with realistic evidence-based figures from industry. Using realistic assumptions, the implied hurdle rate falls from 4% to 0% for domestic, and 2% for commercial installations. This falls below the 4% target rate of return DECC seeks, and is well below the minimum 6-8% hurdle rate required by industry.
Yield 990 890 Based on DECC, Sheffield and MCS analysis
Panel degradation 0% 0.5%/year Based on NREL analysisExport tariff life 30 20 Only guaranteed for 20 yearsBill savings life 30 25 Panel warranties for 25 yearsStarting electricity price £0.174 £0.137 Using variable unit cost of electricity
(i.e. not including standing charge)
Small commercial (10-50kW) assumptions summaryAssumption DECC Realistic
AssumptionsNotes
Yield 990 890 Based on DECC, Sheffield and MCS analysis
Panel degradation 0% 0.5%/year Based on NREL analysisExport tariff life 30 20 Only guaranteed for 20 yearsBill savings life 30 20 Usage not bankable beyond 20 yearsStarting electricity price £0.109 £0.100 Based on member evidenceSelf consumption 47% 75% Based on member evidence
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Yield 990 890 Based on DECC, Sheffield and MCS analysis
Panel degradation 0% 0.5%/year Based on NREL analysisExport tariff life 30 20 Only guaranteed for 20 yearsBill savings life 30 20 Usage not bankable beyond 20 yearsStarting electricity price £0.109 £0.090 Based on member evidenceSelf consumption 47% 80% Based on member evidence
Hurdle RateFirstly, and most importantly, we fundamentally disagree with the 4% target rate of return that DECC uses as the basis for its tariff setting. There are four issues we have with this.
Firstly, DECC assumes that there is a viable market at the 4% rate of return level. However, many of the innovators and early adopters in the early part of the S-curve have already installed solar in the early days of the Feed in Tariff or even before. Therefore, there is not necessarily a significant market remaining at that hurdle rate.
Secondly, market confidence in the domestic sector has already been damaged by the events of the 2011/12 solar rush, with many consumers not aware that the Feed in Tariff even exists any more. Installers have to sell the concept of solar to customers. Solar is an illiquid asset and differs from other forms of investment. For example, a homeowner can buy a 5 year pension bond yielding a risk free 3.5% APR and have their money back after the 5 years. Thirdly, in the commercial space, higher rates of return are required as solar needs to compete with a range of investment opportunities available to commercial businesses, including those more closely associated than energy use with the core business. This, along with the many barriers to commercial rooftop that the STA has been raising to DECC for almost 2 years means that the hurdle rate is much higher than for domestic.
Finally, hurdle rates must be set at a level higher a homeowner can borrow money. Green Deal finance, for example, was at a much higher rate than 4%.
Yield (Load Factor)The energy yield that DECC use is 990kWh/kWp, based on an 11.3% load factor. This is based on the high limit of the highest irradiation region in the country – the South West.
This load factor is based on a theoretical weighting by region, then an interquartile ranging – based on 11 responses. This is not statistically robust. Additionally, the selection of the high end of the South West region is potentially discriminatory to other regions of the UK e.g. Scotland/the North. This is counter to the Feed in Tariff goal to “help develop local supply chains”. The high load factor also overinflates all revenue streams (generation, export and self-consumption) leading to a decrease in the required tariff.
The STA has used three pieces of evidence for our yield of 890kWh/kWp. This, we believe, corresponds both to a number that is more representative of the country as a whole and also to a number which is more representative of the real world. As our evidence is based on real data, other factors such as availability are built into the load factor.
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Firstly, DECC’s own Feed-in Tariff load factor analysis from December 201412. Using all the data from this report, the load factor from 275,000 real installations is 9.89%, corresponding to 866kWh/kWp.
Secondly, a research paper by the Taylor et al13 used 2,500 real installations monitored for up to 7 years to obtain a long-term mean yield of 886kWh/kWp
Thirdly, the MCS installation guide provides load factors per region, which are legally required to be used by domestic installations when quoting to customers. Zone 11, the centre of the country (Sheffield) has a figure of 893 kWh/kWp14.
Panel DegradationDECC assumes no panel degradation - i.e. energy yield loss over time. This has the effect of overinflating the performance of the system, decreasing the tariff that would be required for a given rate of return. However, this is a real and documented effect.
Panel manufacturers guarantee performance of 80% after 25 years, which would imply a degradation factor per year of roughly 0.8%. However, this is a minimum guaranteed performance, so not necessarily indicative of expected real-world performance,. The STA has used a figure of 0.5% per year, based on the median reported value by NREL15 and others16. This corresponds to performance of 91% after 20 years and 88% after 25 years.
System lifetimeDECC use a figure of 30 years lifetime for both export and system operation. However, for the export tariff the guarantee is only for 20 years. There is no way of knowing what value that electricity will have after then, so we cannot assume a continuation of the export tariff value beyond 20 years. This figure cannot therefore be used in financial calculations (such as ROI) as it is not bankable. We have therefore matched the export lifetime with the generation tariff lifetime as 20 years, as this is the only lifetime that can be guaranteed.
For the system operation lifetime, this differs between domestic and commercial systems. For domestic installations, the panels are typically warrantied for 25 years, making this an acceptable assumed lifetime. For commercial installation, commercial entities cannot guarantee the project beyond the 20 year tariff lifetime so 20 years is appropriate. It is important to note that these lifetimes do not necessarily correspond to the expected lifetime of a system, but the lifetime that can be used for a financial calculation i.e. a discounted cashflow.
12 DECC, Feed-in Tariff load factor analysis Dec 2014, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/386897/FiT_load_factor.pdf 13 "Monitoring thousands of distributed PV systems in the UK: Energy production and performance", University of Sheffield, April 2015.14 http://www.solar-trade.org.uk/wp-content/uploads/2015/10/MCS-Sheet.pdf 15 http://www.nrel.gov/docs/fy12osti/51664.pdf 16 J. Taylor, J. Leloux, L. Hall, A. Everard, J. Briggs and A. Buckley, "Performance of Distributed PV in the UK: a Statistical Analysis of Over 7000 systems" in 31st Eur. PV Solar Energy Conf., Hamburg, September 2015.
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Electricity pricesDECC is using the electricity price for domestic of 17.4p/kWh. This excludes the reality that energy bills are made up from a fixed and variable component. The DECC figures include both the fixed and variable component. As solar is unlikely to remove the need for an energy supply on its own, the standing charge will always remain – therefore including the fixed portion of the price artificially inflates the saving that can be made. A more accurate figure would be the unit cost of electricity, rather than the overall retail cost. We have used a value for domestic of 14.4p/kWh unit cost for electricity as published by DECC.17
The starting electricity price for commercial that DECC uses is 10.9p/kWh for all sizes. However, this does not reflect the real market dynamics of commercial energy bills: in general, larger users pay less per kWh. Following evidence submitted to us by our members, we have used figures of 10p/kWh for 10-50kW and 9p/kWh for >50 kW. We have attached this evidence with our response.
Self-consumptionEvidence by the Energy Savings Trust, among others, has shown that self-consumption rates at the domestic level are not at the 47% level that DECC is using: typical rates are more like 16-35%. However as a “best case” we have kept the 47% as DECC suggest, although in actuality this number (and therefore the bill savings) are likely to be exaggerated.
It should be noted that a 3kW system installed today that has a more typical 30% self-consumption has a hurdle rate of <7% at current tariffs which is well within the state aid 5-8% range. This demonstrates that most domestic systems are not overcompensated and there is a strong argument that existing tariffs are appropriate.
For commercial installations, current deployment is targeting higher self-consumption installations so the assumed 47% is not appropriate: more realistic targeted values are in the range of 75% for 10-50kW and 80% for 50-250kW, which we have used in our modelling.
The STA’s Alternative Proposal
OverviewThe STA proposal works roughly within the framework that has been presented by DECC in the consultation document. We recognise that DECC wants to have a tighter control on costs, and therefore within our proposal we reluctantly keep a deployment cap and default degression for each quarter, leading to an overall maximum spending cap. Additionally, we keep a degression mechanism linked to the deployment cap that would reduce the tariff in the next quarter only if costs come down more quickly than expected leading to higher deployment. Finally, we calculated tariffs based on our assumptions for Jan 2016, allowing more companies to continue trading and contribute to a healthy, competitive market: this will allow costs to drop more quickly, as volume is critical for cost reduction.
17 DECC, Quarterly Energy Prices: September 2015, table 2.2.4. 14p in 2014 £, inflated to 2016 £ and removed VAT.
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Costing the STA proposalThe STA proposal provides a clear maximum cost limit implemented through the combination of a deployment and tariff cap.
Scenarios (2016-2019) Additional Deployment MW
Additional cost £m Additional cost to bills £
DECC option 1(Do nothing)
3,240 £250m £2.85
Solar Independence Plan 4,642 £268m £3.06
DECC Option 2(current proposals)
569 £7m £0.08
The STA £1 Plan 2,745 £95m £1.09
Tariffs and degression
Tariffs in January 2016The tariffs that are set for January 2016 are crucial. This tariff rate must be attractive enough for companies to continue trading. The rates that we propose are higher than those that in DECC’s consultation, and are based on our evidence-based assumptions in the above section, combined with a rate of return that will prevent a significant drop in deployment.
p/kWh STA £1 Plan DECC Proposal<10kW social 7.20 N/A
<10kW 8.00 1.63
10 - 50kW 6.50 3.69
50 - 250kW 5.00 2.64
250-1000kW 4.50 2.28
> 1000kW 4.00 1.03
Stand alone 4.00 1.03
Note that we have kept tariffs at the same level for 2Q2016 as we anticipate that changes would not be implemented until February 2016.
Default DegressionDefault degression is included in our proposals. This is given below. These are designed to drop in line with predicted cost reductions, keeping a broadly constant rate of return over the period to 2019.
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Contingent degressionIn addition to the default degression shown above, if the deployment cap is reached in a quarter then the following quarter’s tariff is “leapfrogged” – i.e. set to the value for the quarter after it. This affects the tariff for one quarter only, giving forward visibility of tariffs that is not provided in the DECC proposals.
Step change events: MIP and VATThe impact of increasing VAT from the 5% rate up to 20%, as recently ruled by the European Court of Justice18, has not been modelled. We would suggest that, in this event, domestic tariffs be raised by 15%.
However, the impact of the EU-China Minimum Import Price (MIP)19 on the cost reductions matching the tariffs given above in default degression is significant, and the MIP is assumed to end at some point in 2017. This has been modelled within our analysis.
Typical installation costs for a 4kWpThe STA has analysed the changes on install costs for a typical 4kWp solar system from 2008 through to 2015 and provided estimates on where we project costs will be, and need to be in order to reach a zero generation tariff in 2020. Significant points to note:
• Panel prices in the UK have fallen by 80-85% from 2008 to 2015, which accounts for £8,500 of the reduction in the install price
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• Panel prices are forecast to drop by 35% from 2015 to 2020, which accounts for £500 to the cost of an install
• Balance of system equipment costs are forecast to fall by £300 over this period
• 55% of the anticipated cost reductions from 2015 to 2020 will need to come from the UK supply chain
In order to achieve a zero generation tariff in 2020, forecast reductions in equipment costs will only account for 45% of the install price. The remaining 55% must come from savings based on increased deployment and economies of scale such as sales and marketing, overheads and profit margins. This is why maintaining volume deployment and growth for installers is so essential in bringing down costs.
Deployment CapsOur members have stated that the deployment caps in their current form and at their proposed volumes are unworkable. Effectively capping the market at a level 85% lower than the current run rate will cause an inevitable boom and bust each quarter, as has been evidenced by other capped policies in the UK and the world.
However, we recognise the government’s desire to have an absolute spending cap, and we cannot see how do this without both a tariff and deployment cap. Therefore, we have modelled two aspects of a deployment cap:
1. Caps based on progressing back to current deployment rates, thereby allowing for growth in the market
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2. Flexibility, allowing the market to “borrow” both backwards and forwards from past or future caps.
Effectively this means that in any one quarter under DECC’s proposal, there can only be a limited amount of new capacity that is accredited through the Feed in Tariff scheme. However, due to our flexible cap proposal (see next section), this will not mean that deployment stops in that quarter: i.e. there is a cap of new deployment accrediting in that quarter, not commissioning.
The proposed deployment caps are shown below. These are based on a reduced starting market based on the impact of DECC’s proposals, growing to the levels currently seen in the market in 2017.
Cap (MW)
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
<10kW Social
8 14 21 24 27 28 30 31 33 34 36 38 40
<10kW 18 32 49 56 63 66 69 73 77 80 84 89 93
10 - 50kW
10 20 30 35 40 42 44 46 49 51 54 56 59
>50kW 10 20 40 45 50 53 55 58 61 64 67 70 74
Stand alone
10 10 15 20 25 26 28 29 30 32 34 35 37
Whereas DECC’s proposed deployment caps rise only slightly to 2019, our caps increase more dramatically. This is as we believe the industry should be rewarded for bringing costs down, enabling subsidies to be reduced, by an increasing market. This will lead to momentum towards zero subsidy, meaning that the transition to zero subsidy is reached with a healthy and vibrant market full of SMEs, rather than a stunted one dominated by a small number of larger firms.
Cap FlexibilityFlexibility is extremely important and a pre-requisite in accepting our cap proposals, as they prevent a rush and then a hiatus in installations. There are three scenarios that can occur in any quarter:
1. When the cap is reached Any additional projects are still eligible for the Feed in Tariff. However, the project accreditation date will be the first day of the next available
quarter. The tariff received is “leapfrogged” i.e. the project receives the tariff of the quarter
after it accredits. The project counts towards that quarter’s deployment cap.
2. If the cap isn’t reached Any spare capacity from one quarter is rolled into the next quarter.
3. If less than 50% of the cap is reached
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In this scenario, default degression is removed and the tariff for that quarter continues to the next quarter.
This flexibility will allow the market to know that there is capacity to deploy, rather than having to reapply on the first day of the next quarter as in DECC’s proposals.
We do not propose to set a limit on the number of quarters ahead that can be “booked up”: as solar is a fast deploying technology, we do not expect a significant number of projects to be able to work under these circumstances. That said, if this does happen, there is no impact on the overall spending cap.
Other Feed in Tariff proposalsOur other proposals for the Feed in Tariff are as follows:
Standalone becomes community-onlyCommunity energy is an important part of the feed in tariff, and should continue to be promoted. The FiT works well for these bodies, and we believe that community solar farms should continue to be supported by these scheme.
Social HousingSocial housing is an important and highly socially beneficial market. We believe that this market should be protected by having its own deployment band, and a tariff set at the 90% aggregation rate of the domestic <10kW tariff. This will allow both sectors to deploy independently, as they are very different in terms of scale and business model. We proposed that 30% of the volume is within this band, but more work is required with the social housing sector to determine the correct volume or tariff allocated. Alternatively we have suggested that social housing be supported through a 6-monthly competitive process.
Other Policy Asks
The Feed-in Tariff is only part of the picture. We would like to see industry and government work together to prepare for solar without subsidy. In our Solar Independence Plan we have suggested that the Government establishes a Zero Subsidy Task Force to look at how to transition away from Feed-in Tariffs towards a long-term sustainable solar industry and market. This is likely to require the kinds of additional measures listed below.
Additional measures
Fiscal measuresThere are other fiscal measures other than a direct Feed in Tariff that would strengthen the business case for solar. These include tax incentives such as ECA and EIS, as well as energy efficiency taxes currently being reviewed by the Treasury.
Net meteringMany countries operate net metering for rooftop solar. There needs to be a dialogue as to whether there is scope to introduce such a measure in the UK, possibly on a partial basis. The opportunity
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exists to increase the FiT export tariff while reducing the generation tariff, which would represent partial movement towards net metering whilst maintaining stable returns to users.
Regulatory measuresThe STA believes that new build provides a fantastic opportunity to include solar among other technologies to enable truly zero carbon homes. We therefore would welcome strong regulation on new build, along the lines of the recently cancelled Zero Carbon Homes policy.
Allow free trade of solar panelsAs discussed earlier in this annex, the MIP is an important part of the cost reductions the industry needs to achieve along the path to zero subsidy. We therefore request that the UK helps to lobby the EU for removal of the MIP to enable costs to come down.
Storage grantsWe support the use of a grant for the installation of energy storage systems, only for new installations and only in combination with PV. This grant would be funded by the budget allocated to the DECC Innovation Support Schemes for Energy Storage.
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Appendix 2: Regional breakdown of solar power jobs data
The STA issued the following press release on 1st October 2015:
Cut to solar energy feed-in tariff puts up to 27,000 jobs at risk across the UK
New analysis unveiled today by the Solar Trade Association which was commissioned from the Government’s research partner on low-carbon jobs data, TBR Economic Research [1], has shown for the first time how the 35,000 jobs in the solar industry and its supply chain are distributed across the regions of the UK.
The Solar Trade Association has estimated that the jobs of up to 27,000 people in the solar energy sector could be at risk due to the proposed 87% cut to the domestic feed-in tariff for solar energy.
The South East is set to be the worst affected with over 4,000 solar jobs at risk. The North West is also heavily affected with 3,500 of its 4,300 solar jobs threatened by the cuts, says the Solar Trade Association.
The Department of Energy and Climate Change proposed at the end of August to cut the tariff paid for electricity generated by solar rooftop panels from 12.4p to 1.6p as of January 2016.
Strikingly, the Government’s proposal favours solar in the South West and the south coast of England and discriminates against much of the rest of the country [2].
Solar has been praised for the way it allows households and communities to take charge of their energy bills and act on climate change. An alliance of organisations ranging from the National Farmers Union, the Confederation of British Industry, social housing providers and local authorities recently urged the government to “urgently reconsider” its proposed cuts [3].
Across the UK there are currently just under 700,000 solar homes.
Please find overleaf a regional breakdown of the data.
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Region Solar PV employment – direct and indirect (TBR)
Employment at risk due to Feed-in Tariff cut (STA)20
North East 1,530 1224Wales 2,010 1,608East of England 2,340 1,872East Midlands 2,630 2,104London 2,740 2,192Scotland 2,990 2,392Yorkshire and the Humber 3,230 2,584West Midlands 3,310 2,648South West 3,800 3,040North West 4,370 3,496South East 5,310 4,248Total (including NI and Channel Islands) 34,850 27,880
Notes to Editors
[1] TBR Economic Research undertook an analysis for the Department for Business, Innovation & Skills in March 2015 entitled “The Size and Performance of the UK Low Carbon Economy”. TBR has since undertaken more detailed analysis to break down jobs data for the solar PV industry at a granular (regional and local) level.
[2] Up until now the Government’s calculations have been based on the average sunlight levels you find in Sheffield, roughly the middle of the country. The sunlight level you assume determines the amount of electricity you are going to get out of a solar installation, which in turn determines how quickly a system will pay back the investment and the rate of return on that investment. Within the Feed-in Tariff review consultation published last month however the Government are assuming sunlight or ‘solar irradiation’ levels, you might usually find in the South West of England such as in Exeter, Devon. The South West has the highest level of solar irradiation across the country. The Solar Trade Association believes that the Government should revert to using Sheffield as its basis for calculations on solar PV.
[3] An alliance of stakeholders published a statement on 17 September urging the Government to ‘reconsider’ extreme proposals http://www.solar-trade.org.uk/solar-industry-welcomes-growing-call-for-government-to-reconsider-extreme-feed-in-tariff-proposals/
[4] The official petition to the Government on solar can be found here: https://petition.parliament.uk/petitions/106791
[5] The Friends of the Earth write to your MP platform can be accessed here: https://www.foe.co.uk/news/save-our-solar-government-cuts-would-cost-1000s-jobs
20 The STA analysed the jobs data, assuming an 80% drop in deployment would have an equivalent impact on jobs, and thereby estimating numbers of jobs at risk in each region and parliamentary constituency.
