HC 1605 Energy and Climate Change and Environmental Audit CommitteesWritten evidence submitted by Myles Monaghan, Group Business Development Director, HiS Group
Letter to Gregory Barker MP, Minister of State, Department of Energy & Climate Change, dated 29 October 2011
HiS Group is one of the UK’s leading Energy Services Provider, operating in the Social Housing, Private Domestic and Environmental markets. With over 27 years experience HiS Group is an SME currently delivering Insulation, Heating and Renewable Energy measures within Strategic Partnerships and with Private Domestic Householders, Social Landlords, and Charities throughout the UK. Our directly employed workforce of over 350 Staff & Engineers provides a high quality, efficient service that delivers a best value “right first time” approach. Our success in social housing partnerships has been a direct result of our long-standing customer relationships, our track record of delivering value through innovation, within the communities in which we work.
HiS Group currently delivers improvement measures to over 100,000 domestic properties per annum, we have national delivery scale & capability and are well placed to contribute to the delivery of de-carbonising the UK housing stock, with a “Whole House” capability that would make a rapid & positive impact domestic carbon emissions. We have been working with Homeowners, Charities, Commercial Businesses and Landlords who have an appetite to “green” the existing housing to develop the current opportunity in Renewable Energy (FIT’s).
We believe that by partnering in a consultative and collaborative way with our broad client base (50% Private Domestic clients) organisations such as ours, can take advantage to make a major impact to stimulate the economy.
However we have noted with extreme dismay the media coverage concerning the proposed reduction in the domestic Feed In Tariffs (as leaked by the EST on 29 October) which as I will explain is a huge blow to the fledgling solar sector and is both ill considered and ill timed.
As over 80% of existing houses will still be here in 2050, the low carbon retrofitting of properties is a high priority and the use of renewable energy tariff schemes will be essential to meet the criteria that Green Deal will require, in particular the “Golden Rule”. We believe that a buoyant renewables sector will contribute to this.
Feed In Tariffs & Renewable Heat Incentive
The introduction of Feed In Tariffs (April 2010) and the introduction of the Renewable Heat Incentive (October 2011) have been welcome, as was the associated relaxation of the planning regime for microgeneration. It has been helpful that returns have been closer to the 10% available in other jurisdictions - thus making it more available to commercial business as well as affluent households to install Renewable Energy solutions.
10% was the original return proposed in the Element Energy report that was a precursor to the renewable strategy. The tariff levels in particular were originally regarded by many industry commentators as too low, given the potential for employment in the UK, but the development of the sector has driven down costs and whilst the Tariff is now slightly incoherent with the market, as it has remained static, this is due to an evolving industry and market forces.
To make a drastic change (as is now proposed) will create an obstruction to progress and potentially de-rail a successful scheme, with no further room for continued evolution. This is a very short sighted approach and is in reality quite incomprehensible as a sharp and severe change in any programme will only produce turbulence, stagnation and an abrupt death!
The Environment Agency (December 2009) stated that ground source heat pumps have the potential to satisfy 30% of the UK’s renewable heat needs. The Environment Agency stated that ground source heat pumps could be installed in 320,000 homes and businesses by 2020 if sufficiently attractive tariffs were set, however heat pumps and domestic installations have been excluded from the RHI until the start of 2013.
It can be no real surprise given these conditions that Photo Voltaics have become the dominant technology, Micro Wind Turbines require planning consents, which are time consuming and onerous and even the planned deployment of air source heat pumps (the most user friendly Renewable heating technology) will still require regulatory consents that will stifle the growth of the technology.
Microgeneration and Renewable Heat are particularly helpful to the fuel poor, and it is important that tariff structures enable the social housing sector and similar community related organisations to participate.
Longer term, a low carbon economy is untenable without the involvement of microgeneration in the built environment. Although microgeneration is at the higher end of the cost curve for renewable generation:
(a)
(b)
(c)
There has been obvious progress since April 2010, DECC reporting 100,000 installs (OFGEM recording 65,000 addresses), progress which would not have been made (in this timescale) without investor funds assisting and supporting the growth of the sector.It was not helpful that some organisations made statements to the effect of delivering 100,000+ Renewable Energy systems, which would have created a massive imbalance in the deployment of Photo Voltaics, however having spoken to other contractors and suppliers alike, it would appear that most of the deployment is coming from smaller SME’s and installers who have developed businesses on the back of the FIT—which was after all the original intention.
The Funding Landscape
The current funding provisions (CERT, CESP & Warmfront) do not lend themselves to straightforward access by householders, with a general lack of transparency for the energy bill paying public. A high proportion of CERT money has been directed towards “easy to secure” carbon measures (light bulbs, insulation, etc) rather than specifically targeting the homes of the fuel poor, currently estimated at circa 5 million households in the UK.
The current FIT has had the effect of broadening access to the funding streams from being exclusively “utility company” managed, to enabling common householders to benefit from private fully funded schemes, which has to a degree focused help on the fuel poor by the use of a transparent scheme, giving direct access to programmes for Social Landlords and Private Individual Householders.
At present the financing of schemes directed at the fuel poor is dependent on an amalgam of funding sources (Including Carbon Emissions Reduction Target “CERT”, Community Energy Savings Plan “CESP” Funding). Only 40% of CERT funding is directed towards the disadvantaged, and following the introduction of the renewable heat incentive and feed in tariffs, which benefit the general community, this proportion should be increased - with a focus on integrated renewable electricity and renewable heating schemes; which to date have accounted for a very low proportion of the CERT spend.
There is a concern that if the proposed changes are implemented the balance of power shifts back to the utility companies who do after all profit from this set of proposals. The average individual will now have a more uphill task to install and operate microgeneration technologies as the private equity funding will be eliminated and the returns will be much less attractive (estimated @4%). Bank finance will therefore be necessary and it is unlikely that people will invest at a rate lower than the cost of capital.
The threat of fuel poverty is increasing - Ernst and Young reported that the past five years have seen an 100% rise in electricity prices and 150% rise in gas prices, clearly on current trends and evidence these will have risen significantly further by 2020.
The Proposed Changes (As per EST)
A reduced rate of 21p/kWh for solar PV installations <4kW - tariffs will be introduced from 1 April 2012 and will affect all installations with an eligibility date on or after 8 December 2011. See definition of eligibility date below. This tariff rate is designed to provide householders with a rate of return of around 4%.
Having considered the system costs we are currently working with, a drop to 21p makes it impossible to finance the technology. Using a 7% cost of capital (which is what the general public can borrow at), the Net Present Value of a system is around 55% of the cost - there is no financial sense to invest in Renewable Energy.
New domestic energy efficiency requirements - from 1 April 2012, domestic installations must be accompanied by an Energy Performance Certificate (EPC) with a level C or above/which has completed all “Green Deal” measures. Where a domestic property does not meet these energy efficiency requirements, the Solar PV installation may receive a lower tariff.
This is yet another increase in regulation—with associated costs, which was not the expected modus operandii of the coalition government.
This year, the UK Government has been reviewing the FITs scheme in the comprehensive review process. FITs are a UK Government subsidy for small-scale low-carbon electricity generation. The costs of FITs are funded through energy bills.
The first phase of the UK Governments‟ Comprehensive review has found that, since the scheme started, the global costs of PV panels have fallen significantly. This, combined with other factors, has meant that the returns available from PV are now far higher than originally intended. Originally the plan was to provide generators with a rate of return of around 5–8%. Actual returns were much higher (around 10%). UK Government is now proposing a rate of return of 4%.
As an industry installer we would dispute this conclusion which appears to be mis-informed.
The UK Government said previously that “We’ve made clear that tariffs will remain unchanged until April 2012 unless the review indicates the need for greater urgency”. It was a combination of the rapid rise in solar PV installations, rapid decrease in solar PV costs and the need to provide value for money which lead to this fast track review. UK Government also said that “The FITs scheme is paid for by energy consumers through their bills and has a fixed budget. The scheme’s proving popular with households and we’re continually monitoring the take up of the scheme to make sure that we stick to budget.”
CERT funding costs each consumer more than the FIT but there is to be no let up in that particular levy!
The original target was for 750,000 homes to benefit from a tariff driven scheme (by 2020) but the coalition government now appears to be chronically adjusting the scheme with a stated 100,000 installations in two years—which at this rate would deliver a total of 500,000 by 2020.
Presumably the “Budget” should fit the task at hand and we should not be restricting deployment if the budget is mis-matched?
Speech of 27 October
Five years ago I wrote Power to the People. A pamphlet urging a radical shift to a far more decentralised local energy economy.
A shift away from the dominance of a few energy giants towards a diverse, innovation rich energy sector. A new vision of energy generation that empowers homes, businesses and communities.
Since then, all that I have seen and all that I have learned, first as an Opposition spokesman and now as a Minister in Government, has reinforced my strongly held belief that the successful energy models of the 21st Century will be far more decentralised, local and flexible.
Decentralised energy drives innovation. Decentralised energy fosters a wide range of low carbon technologies. Successful decentralised energy economies promote choice and competition.
Power to the people, I called my pamphlet in Opposition. Power to the people we are determined to deliver in Government.”
No-one would disagree with anything here, however the FIT has been very successful at giving householders the opportunity to really reduce the energy demand of the home and the tariff level has made this affordable. The proposals are a complete reversal of the progress towards a decentralised energy market and quite unbelievable in the context of 20% energy price rises recently.
This Government is walking the walk.
This appears a hollow sound bite in the context of these proposals
But this is just the start. I’m personally committed to ensuring that your industry can prosper in the longer term, sustaining green jobs at a critical time for our economy, jobs that people can build a career on. Jobs that can help drive the recovery and show that Britain can lead the way in low carbon innovation and small scale renewables.
Solar PV has delivered by far the most installations through FITs so far, and I hope that the other technologies can learn from the incredible growth your part of the industry has seen. I am a strong advocate of solar in the right locations but I also want to see a strong spread of UK renewable technologies benefiting from the FIT.
Planning issues and associated time & cost delays will affect the widespread deployment of other technologies—surely that would be an appropriate change to encourage other technologies rather than attempting to stifle the use of PV?
But let’s not kid ourselves. Much of the growth in PV has been as much about consumers accessing the Government backed tariff as accessing the technology. High net worth individuals chasing returns which are now easily reaching double figures at a time when interest rates for savers have collapsed to an historic low. That can’t be right. And I know responsible voices in the industry have been worried about this for some time.
However the Government is encouraging private individuals to spend more, in the teeth of a recession and Banks to lend more to individuals & businesses, but when Private Investors are putting up the finance, you are displaying some concern? The public outcry against bankers has been huge and yet we are encouraged to borrow and spend? Most of the investors are people like me, moving their savings into Solar investments and saving for their retirement!
It seems incomprehensible that private investors are being penalised in favour of banks!
The Green Economy does not exist in a bubble. Yet the subsidised returns we have seen on solar PV investments - funded from consumer energy bills - are unsustainable at a time when National Savings have pulled their index linked bonds, interest on savings accounts has plummeted and the stock market has dropped.
And of course, we will all be watching our energy bills this winter. This is the new reality, and it is in this light that we must consider the future for this industry. We have seen boom and bust in solar right across Europe. We have to make sure that UK solar has a steadier, clearer, sustainable growth path, that justifies the subsidy from all consumers, demonstrates clear value for money versus other low carbon forms of generation and can show a clear path to grid parity.
The cuts to the tariffs in other European countries have come after operation of the schemes for a much longer time period than that of the UK and also amidst the reduction of costs due to technological improvements. Ironically, the reduction of European tariffs have created a surplus of supply of PV hardware and this has also fuelled the cost reductions we are now seeing. However it is ridiculous to assume that this trend will be maintained—it has been a market correction, but supply and demand will stabilise and plateau. It would therefore be prudent and intelligent to make amendments to the tariff scheme against a backdrop of market stability and not whilst unique conditions are pre-eminent across Europe.
I know that that Solar PV is a transformative technology, easy to understand, quick to install and completely reliable. But critically, PV costs have plunged since the tariff levels were set, down by as much as 70% in two years according to Bloomberg.
There have been significant cost reductions since the scheme started, but as an organization intrinsically involved in delivery on the ground, we cannot see a 70% cost reduction anywhere. True, the hardware has reduced in cost, but this has in principal been due to the development of the UK Solar industry and the UK market gaining some momentum on the global stage. We are a very small importer, but as volumes have increased, prices have come down—but the proposed cut will not only stifle this progress, but will also deter the development of UK manufacturing
At rates like that, this sector should demonstrate clearly and openly that it is passing on these exciting and dramatic price reductions to consumers. So the tariff levels need to reflect these new prices. By using these incredible cost reductions, the most dramatic of any energy generating technology, you can build a compelling case for grid parity, not as a concept but as a reality. I believe solar is already well on the way to that destination.
I do not think that the majority of people would disagree with this assertion, but your proposed level of reduction is hugely in excess of the cost reductions and appears to be a deliberate policy to restrict the private individual.
The Coalition inherited a slow, unresponsive and misinformed scheme but I still believe passionately that Feed-in tariffs are essential.
The coalition government inherited a policy agenda that had been in place for a considerable period and schemes that had their birth in Labour politics. However at the first opportunity the coalition has reduced ROC’s and is now shaping up to kill off an emerging sector? This does not support the “Green Credentials” that are promoted by the government and appears to be designed to focus efforts from schemes that are working (arguably too well) into future schemes (Green Deal) which is still under development and at this time a totally unknown quantity.
We will consult later in the year on how we respond to market changes and assess PV costs and take up on a regular basis, and revise our tariffs accordingly. Industry is critical to this process. We want to work with you to agree the future path of tariff reduction, take politics out of the sector and deliver what I believe the industry needs and what the last Administration’s scheme failed to deliver: T.L.C. not tender loving care but transparency, longevity and certainty.
This appears to be completely hypocritical based on the leaked proposals from DECC. This is not a consultation, but a statement of intent.
We fought hard and won a good settlement of over £860 million in the spending review to subsidise small scale FITs, an extraordinary achievement as we grapple with the deficit and consumers struggle with rising energy bills.
The challenge now is to use that public investment to obtain the widest possible deployment. I don’t want a tariff that gives bumper returns to a lucky few but a tariff that incentivises sensible deployment, in the right place, on the right buildings in the greatest numbers.
You appear to suggest that this is not the case? Investors have achieved traction in mass domestic deployment—the people benefitting from energy cost reductions are predominantly those who cannot actually afford Renewable Energy systems on their properties, the older generation, Social Housing, amongst others. People who can afford this technology will still be able to afford it (post a 50%+ cut) but you are forcing out the finance providers who invest where individual householders. You are removing their opportunity to reduce their energy bills most likely amongst a segment of the population who are the most fuel poor in the UK!
This comes at a time when you, the government want expenditure to kick start the economy, and from every aspect this seems like madness!
The FITs Scheme has to live within the budget, so while I welcome the fantastic success of the scheme, with over 100,000 installations representing more than 305 MW of installed capacity you don’t have to be a Nobel prize winning economist to realise that solar is burning through the budget at an unsustainable rate.
Solar has accelerated from a standing start in April 2010, but the industry is still in its infancy and much less mature than comparable sectors in the rest of Europe. I think that few would disagree that a step change in the tariff is appropriate, but to slash any scheme by over 50% after less two years, once again throws a fledgling industry into disarray and in all likelihood will choke the sector by killing off the access to finance that has caused the positive and accelerated deployment of Solar Microgeneration at a domestic level.
Yes, the decisions we need to take are tough. I know that many of your businesses depend on the FITs levels for your success, at least in the short term. But we cannot escape reality: this is a different world to the one in which FITs were launched. In particular we must provide value for money to bill payers. I cannot preside over a scheme which allows a solar panel installation in some of the least sunny locations in Britain to generate returns of more than 12%.
To compare solar investment returns with normal returns is invalid because after 25 years you have no residual asset (or investment) value with free solar - with normal investments you get your money back.
Being sensible with tariffs means there will be more money to go round, to spread more widely and thus allow more people to benefit. In the long term this should mean more customers for your companies, not fewer. It should also mean more interest in your products and the solutions you provide and that are on show here today and more opportunities for diversification.
The removal of private equity finance, with such a severe cut in the tariff will obviously reduce the market size and customer base! To suggest the reverse is somewhat bizarre.
I am also keen that we should establish FITs as part of a whole-house approach which prioritises energy efficiency and supports the right low-carbon heat and electricity technologies, so the consultation will look at how we can use the scheme more smartly to drive this holistic approach.
The use of FIT’s will be essential to make Green Deal work—without an appropriate tariff level, this will not occur and Green Deal will be unworkable.
It cannot be right to encourage consumers to rush to install what are still expensive electricity generating systems in their homes before they have thoroughly explored all of the sensible options for reducing their energy consumption first.
I do not think anyone would disagree with this and we would support this process.
I also want to say a few words about solar thermal and the host of exciting heat technologies that will be supported by the world’s first Government programme to support renewable heat: the RHI. The fact is the UK is leading the world in renewable heat, completing the picture.
How can business have any confidence in the government with another tariff scheme, when you are proposing a catastrophic and unplanned implementation of changes to the first tariff scheme in the UK? Why would we invest in Jobs, training and equipment when we are left feeling let down by the government and in a position where we will be forcibly downsizing if these proposals are executed—and with an accelerated timescale!
There are opportunities for smart, agile companies to take advantage of a brand new market, creating green jobs and helping to drive forward the growth this country needs. Let me be absolutely clear, I haven’t come here to kill the tariff scheme, I want to fix it, enhance it and put the whole industry on a sustainable, credible economic path to a bright and exciting future.
This proposal is regressive and inconsistent with the stated objectives of the coalition government; I cannot see any possible way or recall any other case where an immediate, unplanned and severe change of any programme can produce anything other than negative results.
We have all invested in our businesses to service and support the Solar industry and it is hugely disappointing to see the proposals from DECC.
We would agree that a change is appropriate, costs have genuinely been reduced, but you cannot fix this with a drastic and sharp change to the scheme—rather a considered change and possibly a further review in another 12–24 months would achieve the same results, without the immediate turbulence and an unavoidable loss of jobs.
I would urge the DECC & the government to reconsider these proposals and to set upon a more reasoned course that maintains a healthy industry sector with planned and targeted tariff changes that accurately reflect the market conditions.
I am currently a member of NEA, the All Parliamentary FP & EEG, formerly a director of eaga and Energy Director of Connaught. I would welcome any opportunity to present the case from an industry perspective and I can be contacted as listed below.
29 October 2011