House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Further supplementary memorandum submitted by the Micropower Council (Cit 34b)

EXPORT REWARD AND FEED IN TARIFFS

EXPORT REWARD

1. The Committee has asked for clarification of the arrangements for "export reward".

2. As Dr MacLean noted, the Electricity Networks Strategy Group (which is co-chaired by the DTI and Ofgem) established a project to consider the issues associated with payment to domestic scale generators for electricity exported to the grid.

3. The project team was drawn from a wide spectrum of industry players including suppliers, generators, trade associations, the EST, Ofgem and DTI. The initial phase of this project, to understand the current arrangements for export reward and identify possible options for change that would improve suppliers' ability to offer a "fair reward", is now complete and the final report from the project has been published. The report can be found at: http://www.ensg.gov.uk/assets/dgdti0007701.pdf

4. The conclusions that the Micropower Council draws from the work of this project are given below.

5. In summary:

— most large suppliers and some small suppliers operating within the domestic market are offering to buy exported energy from customers with microgeneration but the structure and value of the tariffs vary considerably;

— the tariffs for exported electricity range from just under 4p/kWh up to the price charged for the import (roughly 9-11p/kWh depending on region);

— transaction costs mean that, in many cases, the direct commercial value to suppliers purchasing from domestic scale customers is much less than the tariff offered and can even be negative (particularly for the very smallest exports);

— arrangements where suppliers pay more for the electricity than it is worth are unlikely to be sustainable in the long term; and

6. In light of the above, the Micropower Council believe that further changes are required to minimise the transaction costs associated with processing exports. However even if these measures are fully implemented the commercial value, to a supplier, of electricity exported from microgeneration is likely to remain relatively low. Consequently, further Government intervention is required to promote the uptake of these technologies. A mechanism, which we support, is to extend our proposals for the treatment of renewable heat under the Energy Efficiency Commitment (which we have previously shared with the Committee and which is also described in further detail in the accompanying Appendix Two) to micro-electricity.

7. Further detail on the current treatment of exported electricity to support these high level conclusions is given below.

WHAT SUPPLIERS CURRENTLY OFFER

8. The export of electricity from domestic scale installations is still relatively new and the volumes of electricity being exported make up an extremely small amount of the total electricity mix; consequently purchase of export from these generators has not been a major element of all suppliers activities and not all suppliers systems are designed to easily accommodate customers that export as well as import power at the domestic level. In addition, the arrangements that would allow suppliers to gain any direct financial benefit from the electricity they purchase are quite complex with high associated transaction costs (relative to the value of the electricity produced).

9. Nevertheless, most of the large suppliers and a number of smaller suppliers already offer to purchase electricity exported from microgeneration.

10. Separately, generators that produce electricity from renewable sources are also able to claim Renewable Obligation Certificates (ROCs) for each MWh of electricity they produce[38] and these also have a financial value to suppliers. Most suppliers that offer to purchase the export from domestic scale generators also offer to purchase their ROCs; in some cases the price offered is included within the export tariff and in other cases an additional payment is made for the ROC.

11. The following table provides a summary of the type of tariffs that are available although please note it is not fully comprehensive and tariffs do change.

Comment Price per kWh

Bespoke price—depending on technology Varies

For renewable electricity only—price for ALL electricity produced (not just export) no separate payment for the ROC 4.5p/kWh

Exported electricity
ROCs (on total renewable electricity) 3.8p/kWh
4p/kWh

Exported electricity Export = import price (approx 9-11 p/kWh depending on region)

Separate additional payments may be made for ROCs (at least one of the suppliers offering this type of tariff will make an additional payment for ROCs)

Quarterly/annual payment independent of actual amount of electricity produced/exported £?/yr

COMMERCIAL VALUE OF EXPORT TO SUPPLIERS

12. The full commercial value of the export to the supplier is complex to analyse and assess. The ENSG project concluded that where a supplier registers the customer within the industry's settlement arrangements then the exported electricity is likely to be worth, very roughly, 4p/kWh.[39] However, this value has to be set against the costs suppliers incur when they register the customer. These costs include the costs of the agents they must use to process customer meter information (estimated to be somewhere between £10 and £20 per year) and suppliers' own processing costs (which are much harder to estimate but could be approximately £15 per year or even higher). The table below shows the net value of each unit of electricity exported as a function of the amount of electricity the customer exports, based on these indicative costs and values.

Estimated net commercial value of export to a supplier in p/kWh exported per year for different levels of export and cost assuming an energy value of 4p/kWh

Costs to be covered

Units exported
kWh/pa
Agent costs only (£15 pa) Agent costs and
supplier costs (£30 pa)

Net commercial value per unit in p/kWh

250 -2.0 -8.0

500 1.0 -2.0

1,000 2.5 1.0

2,000 3.3 2.5

3,000 3.5 3.0

13. As the table shows, the impact of the agent and supplier costs quickly absorbs most of the value of the exported electricity where export volumes are low. For comparison, 1kWp of PV produces approximately 800kWh of electricity not all of which would be exported.

14. In practice, for a variety of reasons, most suppliers do not to register their customers' export and so receive no direct financial value for the electricity they buy.[40] Any value they do receive is likely to be indirect via the error smearing arrangements in the industry's settlement arrangements, customer retention, and the value of information obtained under customer trials.

15. A similar problem exists under the RO and one supplier has advised us that only approximately 1% of its customers with eligible renewable technologies actually claim the ROCs they are entitled to.

GERMAN FEED-IN TARIFFS

16. The Committee has also asked for further information on the feed-in tariff arrangements in Germany. As the Micropower Council is not familiar with the detailed operation of the German arrangements we sought the advice of a Dutch colleague who has far greater expertise in this area and we would therefore like to acknowledge and thank Mr Michael Colijn for his assistance in helping us to prepare the following summary.

Legal basis of feed in tariffs

17. The payments that must be made for electricity from renewable and gas fired CHP are covered by two laws. The first (the Renewable Energy Law) covers payments to producers of renewable electricity and, at the householder level, covers electricity from PV and biomass fired CHP. The Act also covers wind connected at medium level voltages but, as yet there is no specific provision for electricity from domestic scale wind installations. The second (the CHP Law) covers electricity produced by gas fired CHP, including domestic scale micro CHP.

Description of mechanism

18. Both laws specify the amount that must be paid to the electricity producer and require suppliers to levy a charge on all consumers to cover this cost. The current charge is approximately 0.1€ cents/kWh, or roughly €10-€15/customer/year. This means that, as with the UK's Renewables Obligation, the cost falls on all customers rather than the tax payer.

Feed in Tariff

19. The tariffs are technology specific and are paid for each kWh of electricity EXPORTED to the grid system. The consequence of this is that where the feed in tariff is higher than the price the customer pays for imported electricity (PV and biomass fired CHP) the generators are connected so that all the output is exported to the grid. The tariff the customer receives is guaranteed for 10 years from the time at which the generator is connected, so that the customer/generator has a guaranteed income stream, per kWh, for the first 10 years. It is not clear what happens at the end of this 10 year period.

20. The domestic tariffs for the different technologies are summarised in the table below (with the price in p/kWh based on an exchange rate of £1 = €1.5).

Domestic scale
Technology €
cents/kWh p/kWh

PV 50 33 p/kWh

Biomass fired CHP 25 17 p/kWh

Gas fired CHP[41] Approx 10 7 p/kWh

Cost of imported electricity Approx 20 13 p/kWh

21. For comparison, the UK's Renewables Obligation subsidy (which is additional to any value obtained from the electricity produced) is worth something less than 5p/kWh for renewable electricity technologies.

Other European Feed-in tariffs

22. A number of other European countries also have similar arrangements in place including, for example:

— France which currently pays 53 € cents /kWh for PV (35p/kWh);

— Spain which currently pays 40 € cents /kWh for PV (27p/kWh);

— Switzerland (rate not known);

— Italy (although the administrative arrangements are very complex) ; and

— Netherlands which allows "net metering" up to 3000kWh/year for renewables.

SUPPLEMENTARY EVIDENCE FROM MR SOWDEN

23. When I gave evidence on 29 November to the committee under its "Climate Change: The Citizen's Agenda" inquiry, I undertook to follow up in writing on two specific points. With apologies for taking some time to do so, I hope the following helps.

Micropower Council proposal to promote renewable heat—clarification

24. The first of these related to the table in our submission whose purpose was to provide an indication for comparison purposes of the relative costs of different measures to reduce carbon. There was some confusion during the oral evidence session, including on my part, that the "cost" of our proposed mechanism to promote renewable heat was negative. On further examination, I can confirm this is not the case, but that the cost of our proposed heat measure is indeed a positive cost—we simply included the approximation symbol "~" to indicate this was the case. This was incorrectly read, including by me, during the evidence session, as a minus sign, "-".

25. Assessing that cost is quite difficult; a robust analysis would entail assessment of all the costs and benefits of the measure to determine the net cost of carbon saved. It is beyond the resources of the Micropower Council to undertake such assessments ourselves which is why, in part, we have relied on the analysis of others for the other support mechanisms.

26. Our own calculations are somewhat simpler and relate solely to the theoretical cost a supplier might incur in supporting a micro-heat technology under the EEC arrangements after application of the "weighting factors" we are proposing (see our second point of response below). Our analysis takes no account of the costs to the customer of installing such measures or the value of the benefits that they obtain from having installed them so the true cost of carbon after accounting for the cost and benefits to the consumer could be higher or lower than our quoted value. This uncertainty is why we were keen to ensure that our figures were shown as an approximation—in future we will write this in full to avoid this pitfall.

Micropower Council proposal on renewable heat—supplementary detail

27. The second follow-up relates to the chairman's request to follow up with a more detailed supplementary piece of evidence on the precise nature of our renewable heat proposal. I have appended to this Appendix a copy of the proposal, now formally submitted as a joint proposal from ourselves, the Renewable Energy Association, the Solar Trade Association, and the Combined Heat and Power Association, to Government—an earlier version of which was also provided with the Micropower Council's evidence to the Committee.

28. Based on our experience of other mechanisms, we believe that any effective support mechanism for domestic-scale renewable heat must:

be simple, transparent and cost effective

have a clearly defined future

provide an upfront cost reduction for customers.

deliver an appropriate level of support and alleviate current market distortions.

ensure there is a clear route to market for these products through installers and product suppliers

29. Our proposal on renewable heat for the domestic sector, we believe meets all these criteria and a brief overview is attached below, with the full proposal attached as a supplementary brief to this letter:

(a) The proposal is based on the Energy Efficiency Commitment (EEC) the current main programme for delivery of energy efficiency in the household sector.

(b) EEC operates by taking the annual energy savings from a measure (for example cavity wall insulation), and estimating a single value for them that takes account of the expected lifetime of the measure, the carbon intensity of the fuel they displace, and using a 3.5% discount rate. In this way, EEC is based on a "present value" of the expected, carbon-weighted, lifetime savings.

(c) DEFRA estimated when setting out the statutory instrument for the current EEC programme that the 2005-08 cost of the programme would be £1.25 billion, delivering 130TWh of "fuel standardized lifetime discounted" savings. This equates to approx £10 for each MWh of so-called "EEC credits".

(d) On its own, this level of support would not yield sufficient incentive to make a tangible difference to the uptake of renewable heat micropower technologies.

(e) The Micropower Council proposal is that weighting factors could be used within EEC in order to boost the level of support available to renewable heat micropower technologies to a level more likely to influence take-up (perhaps with current grant levels being a useful starting point).

EXTENSION OF THE ENERGY EFFICIENCY COMMITMENT TO CREATE AN EFFICIENT AND FAIR SUPPORT MECHANISM FOR RENEWABLE HEAT

30. Renewable Heat is a major component of the micropower portfolio and can be used to displace fossil fuels through domestic installations and/or via renewable fuel based CHP and community heating systems. Renewable heat technologies can play a major role in meeting all four of Government's White Paper objectives through, for example:

Reducing Emissions:

— 1 million domestic biomass-fired heating systems (1 in every 26 homes); or

— 7 million solar hot water systems (1 in every 3-4 homes); or

— 1 million heat pumps displacing electrical heating systems (1 in every 26 homes);

Supply Security:

— 1 million domestic biomass-fired heating systems (1 in every 26 homes); or

— 7 million solar hot water systems (1 in every 3-4 homes); or

— 1 million heat pumps displacing electrical heating systems (1 in every 26 homes);

Home Heating and reducing fuel poverty:

Competitiveness:

31. This analysis only considers the smaller end of the micropower market—the market for domestic scale appliances. The total potential contribution from renewable heat production which includes larger applications and community schemes is considerably greater.

32. The Micropower Council considers that it is essential that new measures, tailored to the needs of the renewable heat industry, are introduced to support its development for two critical reasons:

— first, the heat market in the UK is enormous and the potential for energy and carbon savings that can be delivered by tackling even a relatively small proportion of the heat market using renewable heat is a prize that must be won; and

— second, to enable the renewable heat market to evolve quickly into a mainstream industry delivering early access to the benefits of economies of scale and consumer choice that will make low energy/low carbon heating solutions a real, cost effective, alternative to conventional fuels.

33. Such measures could also be used to address some of the current disparities between the treatment of renewable heat and other renewable solutions—leading to more efficient long term outcomes and the removal of short term distortions.

34. Therefore the Government needs to act quickly to implement a support mechanism (or mechanisms[43]) for renewable heat to help catalyse the development of this important part of the energy industry. We are supportive of work by the Renewable Energy Association to try to find an appropriate mechanism for supporting larger scale renewable heat technologies.

35. Based on our experience of other mechanisms, the Micropower Council believes that to provide effective support for domestic-scale renewable heat any support mechanism must:

be simple, transparent and cost effective

have a clearly defined future

provide an upfront cost reduction for customers.

deliver an appropriate level of support and alleviate current market distortions.

ensure there is a clear route to market for these products through installers and product suppliers

A PROPOSAL FOR RENEWABLE HEAT

36. Working with our members, other industry players, and trade associations the Micropower Council has developed a model which meets these criteria based on the simple expedient of extending the current EEC arrangements to include additional provisions for renewable heat technologies that displace conventional fuels for heating in domestic premises. The key elements of this model are summarised below.

— Installation of new renewable heat to meet domestic heat demand will qualify for inclusion in the EEC based on an assessment of the net carbon saving over the expected life of the renewable heat system compared to the heating system being displaced. For premises that are currently unheated, the savings would be assessed against an assumed carbon burden for a typical heated household. All forms of renewable heat would be eligible, subject to meeting appropriate accreditation requirements and forming part of a "scheme" approved by the regulator.

— Renewable heat solutions are currently less cost effective, for suppliers, than other forms of action available to them under the Energy Efficiency Commitment. Therefore, to ensure that renewable heat can compete with other energy efficiency measures (or other carbon reduction actions available to suppliers under the EEC), renewable heat measures should automatically qualify as a specific form of innovative action—attracting a larger credit towards a supplier's EEC target than some other forms of action via use of some form of weighting factor(s). This approach is directly analogous to proposals being developed for "banding" under the RO and recognises that different technologies may need differing levels of support at different stages of their evolutionary cycle.

— Over time, as the cost of energy efficiency measures increase, and the market capability for renewable heat expands, bringing down costs, the weighting factors would be expected to decrease. In order to facilitate this we suggest there should be a regular review, say every five years, of the weighting factors. This review would also be used to ensure that the mechanism does not lead to an unnecessarily high reward for any technologies that are, or are almost, competitive without support.

— To give confidence to the market, Government should commit to a long term future for the scheme. We note Government commitment to extending the EEC to at least 2020.

— The mechanism could be introduced fairly easily using the provisions within the Climate Change and Sustainable Energy Act, together with appropriate changes to the EEC secondary legislation.

COST OF MECHANISM

37. The cost of the support to renewable heat will depend on the weighting factors that are set and the total energy savings delivered using heat rather than measures available to suppliers under EEC.

38. An indication of the relative costs[45] of different mechanisms for displacing carbon are shown in the table below; the figures are not directly comparable because of difference in the calculational methodologies.

Measure Cost of Carbon
(£/tonne C)[46]

Renewables Obligation (NAO/Oxera)[47] 180-510

Renewables Obligation (DEFRA)[48] includes assessment of benefits and costs 175

Renewable Heat displacing gas (EEC with weighting factor 3—cost to suppliers only, ignores benefits) approx £200

RTFO[49] (DfT) Slight -ve to 350

Social Cost of Carbon (Government Economic Service)[50] £35-£140

BENEFITS OF THE PROPOSAL

39. The move to mass market capability should deliver lower costs to consumers earlier than would otherwise occur and allow micro-renewable heat technologies to contribute to meeting Government energy and environmental policy objectives:

— It is simple, transparent and cost effective with minimal transaction costs. Use of an existing mechanism will allow early adoption and reduce the administrative costs of creating and maintaining a new scheme. Suppliers are expected to be keen to ensure that costs of providers and installers of equipment are maintained at a competitive level ensuring that the benefit of the scheme is shared with the consumer.

— It provides a stable long term funding framework independent of the stop start vagaries of Government funding requirements providing confidence to the market to invest to expand capacity and bring down costs in the longer term. The weighting and review mechanism ensure that the benefits of cost reductions can be passed through to customers over time.

— The use of a lifetime discounted energy saving delivers the value up front which can be used to mitigate the higher upfront cost of renewable heat technologies that currently act as a barrier to uptake.

— The use of appropriate weighting factors can be used to provide appropriate rewards to ensure the take up of renewable heat measures; weighting factors can also be used to deliver parity with the existing support mechanism for renewable electricity.

— It creates an incentive for gas and electricity suppliers to promote the installation of micro renewable heat which will help to deliver a route to market for these products through creating commercial alliances with installers and product suppliers.

WIDER ISSUES

40. Looking beyond renewable heat, if this proposal is adopted, it may be appropriate to consider expanding it to accommodate renewable electricity in a similar manner—with weighting factors designed to give an equivalent reward to that would have been available under the RO with substantially reduced transaction costs—and possibly allowing the EEC to evolve into an efficiency and microgeneration (heat and power) commitment.

The Micropower Council

February 2007