HC 1605 Energy and Climate Change and Environmental Audit CommitteesWritten evidence submitted by Shape Energy

Thank you for this opportunity to make a representation about the impact of the management, the date of change and the proposed changes to the Solar Feed in Tariff.

1.In summary, the Solar FIT was an excellent mechanism for distribution of energy company oligopolistic super-profits to increasing economic activity, distributed local generation and the alleviation of fuel poverty. The mechanism enabled the creation of real jobs for normal people and alleviated the national fuel burden and dependency on foreign and not-stable suppliers such as the Russia and the Arab States. The management of the FIT since inception has been marred by continual tacking by DECC and ministers linked heavily to a spurious linkage of FIT to UK PLC balance sheet and taxation and a CSR cap unrelated to real opportunity, cost and value. The issue seems political and ideological as opposed to economic or pragmatic. Solar FIT is creating jobs and tax receipts ahead of its cost; and its cost is marginal and potentially not even incremental to the inflationary impact of increasing fuel costs such as oil and gas, the cost of nuclear power etc. Finally, the manner of FIT management has damaged the UK sovereign reputation as a safe and predictable harbour, likening the UK to Italy and Greece as a sovereign risk and raising dark allegations of corruption and self interest. The effect of the change and the process of change is and will continue to prove detrimental to the General Economy as follows;

(a)Increased investor perception of sovereign risk; the UK has gone from pragmatic, practical and under the rule of law to a fiefdom based on inconsistency, ideology and retrospective actions; and

(b)Increased bank risk and therefore reticence to lend as demonstrated by a complete pull back by Lombard, Santander and others on debt for solar projects.

(c)An increased risk that the UK will suffer from energy “blackouts” or a pull back on decommissioning of “dirty” power stations

(d)A major set back on poverty alleviation; the aggregation led degression means that social investments and free to house solar which favoured those unable to afford the capital for their own solar investment is penalised and not sustainable; and

(e)The effect on poverty is exacerbated by the political nature of local government and their corporate organisation where investment and change decisions [as can be witnessed over the past two years since FIT introduction] can take a inordinately long time and regularly stutter to a premature end. The approach taken by DECC has forced Local Government back in to its enclosures.

(f)A set back in economic growth sorely needed today; the cost of Solar FIT is about 7p a day per household (the £26 DECC claim) and is negligible or potentially a positive step in relation to the increasing costs of Siberian Gas, Australian Coal and Arab oil. The real inflationary impacts are input raw materials costs, nuclear power commissioning and the Smart grid which will more than likely effect fuel prices by over 100% in the next 10 years.

(g)Destruction of real jobs for real people; electricians, surveyors, roofers etc. Unlike centralised energy that is specialised and automated, oft-times foreign, solar promotes local jobs; and

(h)A loss off taxation receipts of about £375 million pa in PAYE and NI contributions

(i)A major risk to meeting the 2020 carbon reduction targets due to points 1a, 1b, 1c and 1e above.

2.We have been working in the solar sector for three years. We have been born of experiences of our past and current team in European, Chinese and American solar. Our relationships cover international insurance and bonding, manufacturing and engineering and finance. Shape energy was a pre-FIT pioneer in green deal type of energy reduction thinking with proposals to local government. Our and our partner teams have experience in development of projects globally, central and local government in the UK.

3.Cause and effect are heavily inter-related. This submission is simplified as much as possible and discussions on inter-relations avoided. This submission refers to the manner and approach to FIT management by DECC and current ministers.

4.The date of change and the way it precedes the conclusion of the consultation process has had the following negative effects;

(a)The consequence of the retrospective change in tariffs (ahead of conclusion of consultation) affect are as follows;

(i)A loss of faith in UK sovereign processes and as such a detrimental recasting of risk of investment in the UK. We work with foreign investors and the UK’s sovereign risk being perceived as low is a major benefit. Our and our contemporaries’ foreign investors have lost faith due to the retrospective and regressive nature of the consultation and change; and withdrawn from negotiations and, in some cases, withdrawn funds.

(ii)UK and UK based bank branches have pulled lending from solar funds and solar installers due to the tightness of the change date and the previously stated retrospective (to consultation- conclusion) date of change. The government claims to want banks to lend to industry and for entrepreneurial/small business growth but have killed this.

(iii)There will be investment ramifications for other technologies as trust [based on a historical appreciation of the way the UK works] is lost.

5.The effect of multiple degressions over and beyond the initial cut in FIT linked to achievement of energy certificates and aggregation of installed [FIT] sites are as follows;

(a)The degression caused by aggregation of the FIT adversely effects Social schemes, community funded schemes and free to house offers; and are as such a regressive change where the lower income family will not benefit from solar capital investment, but instead bear the full brunt of expected energy inflation and pay for the wealthier parts of society who can afford the capital to benefit from solar energy.

(b)Creates greater complexity for investors and service providers. The carbon equations has two sides; reduction of consumption vs production of zero carbon energy. Both reduce carbon and scarce fuels consumption. Reduction in consumption takes time and there are existing [and proposed mechanisms] to incentivise change. Confusing the two sides of the equation as the proposition has complicates change and creates greater opportunity for laggard-ly people and organisations to avoid change for longer.

6.The linking of Utility and consumer funded FIT to the Government CSR and the setting of this at a low level is detrimental; the FIT is not tax funded but an alternative charge on utility companies (high profit oligopolies) much like existing CERT and CESP monies. This is the same for all FIT payments.

(a)The tax receipts (PAYE and NI) is about £375m pa in the solar sector. This will be heavily compromised

(b)The sector is a rare pocket of growth in the UK economy and this will be reversed

(c)The treasury accounting for FIT smacks like an episode of “Yes, Prime Minister”; the argument is not how much is required but an extension of the treasury demand for how much it could raise. The treasury see FIT as a potential for taxation and therefore in the UK balance sheet. However, even if this was the case, the cost benefit analysis between one form of taxation and investment vs the other is not revealed. The Solar FIT creates normal jobs, stimulates entrepreneurial activity, brings energy strategy to the individual household [and leads to crucial and democratic participation] and generates annual tax receipts over and above incremental costs [of Solar FIT]; for instance,

(i)The cost of Solar Fit is about 7p pday per household; whereas

(ii)The consumer cost of raw materials input inflation, investment in the SMART grid and nuclear power is significantly greater than solar FIT; and

(iii)The strategic cost of centralised energy is massive with national subservience to Arabs for oil, Russia for gas and the French for nuclear invest and build.

7.The debate between centralised and distributed energy production is false and seems to be a driving factor on FIT management. The demand for energy requires multiple strands of development and a blended approach of centralised and distributed generation will provide supply and grid security over time.

(a)The environmental cost of centralised energy is high e.g. cement and waste disposal for nuclear power and carbon for coal and oil transportation.

(b)Centralised energy strategy supports large companies and excludes small companies and entrepreneurs. This is counter to short and long term growth aspirations by devaluing the entrepreneur.

8.The approach to communication and market relations has been poor at best; investors and commentators are left with a corrupted view of government with the new joke being that this change is to ensure certain ministers and their advisors secure employment post-the-end to a coalition government. True or not, the effect on perceptions of UK sovereign risk for investors looking at the UK and the ambition of entrepreneurs is negative.

We hope that our submission is valuable and supports the debate that is crucially required by UK government. If any clarifications or ancillary questions arise, please do not hesitate to contact us.

22 November 2011

Prepared 22nd December 2011