Feed-In Tariff Scheme – The Rise Of Renewables

[Derek_Parkinson]

Resolving questions on whether a company should invest in renewable sources of energy should be simpler now that the Government has confirmed the details of its Feed-in Tariff scheme (FiT), a system of subsidies designed to encourage companies to install the technologies and boost the industry that supplies them.

The FiT scheme covers installations with a generating capacity of up to 5MW, and will operate for a period of 20 years, or 25 in the case of photovoltaic technologies. The other technologies eligible for FiTs are anaerobic digestion, hydro, wind and a certain number of combined heat and power installations. Payments for the energy generated will be made by a company's normal electricity supplier, at a rate depending on whether it is used by the generator or exported back to the grid.

Setting aside for a moment any other benefits of setting out on this route, companies will need to satisfy themselves that the return on investment makes sense. According to the Department of Energy & Climate Change (DECC), all generation and export tariffs will be linked to the Retail Price Index, and have been set by considering technology costs and expected generation capacity for installations over a range of sizes. The overall aim is to deliver an approximate rate of return of 5 to 8% for well sited installations, says DECC.

It has been decided that tariffs for new installations will “degress” each year to take account of expected cost reductions for the technology. But once an installation has been allocated a tariff, this remains fixed – in line with inflation – for the life of that installation or the life of the tariff, whichever is shorter.

Securing the right ROI

Although some observers expressed disappointment with the proposed tariff levels, DECC remains confident that we will see a significant increase in take-up of the technologies.

“The section of our consultation document on this received a strong response, with many arguing for higher rates of return. However, given the commitment to maintain tariff levels until April 2012 thus postponing degression, combined with the indexation of those levels over the entire life of the tariff , the guaranteed long term revenue stream resulting from rates of return of 5 to 8% should deliver a step change in the deployment of small scale and microgeneration low carbon electricity generation technologies,” a spokesperson told Low Carbon Board Report.

The British Wind Energy Association (BWEA) agrees. “We think FiTs will stimulate wind energy a huge amount. What we are likely to see are multiple amounts of the smaller turbines, and for sites with high wind-speed this could be less than five years,” says Alex Murley.

Nevertheless, concerns remain, most obviously on the issue of how well, or not, the Government's policy on renewables works with the Carbon Reduction Commitment Energy Efficiency Scheme (CRCEES). “I have to say that a lot of people are now thinking more about CRCEES rather than renewables,” says Leonie Greene of the Renewable Energy Association. “Then there is the issue of how CRCEES doesn't distinguish between renewable energy and nasty old brown energy – why under CRCEES do you have to buy in credits for emissions you don't emit? It's odd that these seem to work against each other,” she says.

Then there is the question of whether FiTs shows a bias for or against any particular technology.
“With the technologies the levels of FiTs offer roughly the same return I think. But my expectation is that the technologies which are widely deployable will tend to win out,” according to Philip Wolfe, Managing Director of consultants Ownergy plc.

Others are less satisfied. “We're extremely unhappy about the low level of FiTs for anaerobic digesters – the smaller kind – and are hoping that DECC will make changes,” says Leonie Greene.

Opportunities for expansion

One company that has taken a keen interest in this area of government policy is storage company Big Yellow Group. “Solar PV definitely suites Big Yellow’s self storage operations as we need renewable energy during the day when we use internal lighting. Self storage has very few windows for security, and because of the potential for UV light to damage goods. Solar energy is proven, low maintenance, easy to monitor, reliable and meets planning application commitments better than micro-wind turbine in the urban environment,” says Paul Donnelly, the company's CSR manager.

“Some of the smaller installations will have an ROI of about 6 per cent but larger capacity installations will see ROI increase proportionally. Our future plans will now consider opportunities from our existing store portfolio – available roof space – in the south, and facing south – and larger capacity solar panels.”

According to Donnelly, the company was beginning to see benefits from renewables even before the introduction of the FiT scheme. “Ten of our stores have solar PV and 15 in total with combinations of wind turbines and ground source heat pumps...our recent renewable energy installations on new build stores in 2009 will be included in the Feed-in Tariff and this means that pay-back periods will be reduced from on average of 70 years to about 15 years – some as low as 12 years. However, we feel that some of our earlier installations will not benefit so much as they were commissioned in 2008. This seems to work against innovative or ‘first mover’ businesses,” he says.

And looking ahead, Big Yellow sees opportunities for a significant increase in the benefits of renewables. “Calculations indicate a reduced payback period of about nine years and an Internal Return on Revenue (IRR) of 10 per cent. With an opportunity for an annual renewable energy yield of 555,000 kWh per year – equivalent energy for about five stores out of sixty – this is a significant consideration to reduce energy costs and carbon emissions as electricity prices are predicted to rise over the next 10 years by anywhere from 5 to 40 per cent, and as we enter the Carbon Reduction Commitment.”

Companies such as Big Yellow had already begun work on renewables before FiTs, and so were already well aware of the potential benefits of the scheme. But there is a danger that not enough will be done to promote it to those companies that have yet to take the first step, says Leonie Greene. “All the indications are that the Government will leave most of the work of promoting FiTs to the industry. But it's a very small industry and we would like to see a more proactive approach,” she says.

Key questions:

 Should renewables play a significant role in our long-term energy strategy?
 Have we reviewed the technologies available?
 Do FiTs offer us new opportunities?