HC 1605 Energy and Climate Change and Environmental Audit CommitteesWritten evidence submitted by Which?
Introduction
1. Which? is an independent, not-for-profit consumer organisation with around 1.3 million subscribers and is the largest consumer organisation in Europe. Which? is independent of Government and industry, and is funded through the sale of Which? consumer magazines, online services and books. Which?’s mission is to make individuals as powerful as the organisations they have to deal with in their daily lives by empowering them to make informed decisions and by campaigning to make people’s lives fairer, simpler and safer.
2. The cost of energy is consumers’ number one financial concern. As households face gas and electricity bill increases of 18% this winter, Which? launched the Affordable Energy Campaign in September to press for changes to the energy market so that consumers spend as little as possible on energy. The campaign aims to help people to buy the cheapest energy they can; to stop hidden or rip off energy costs; and to help people to use less energy.
Summary
Which? agrees with the need for tariff reductions
The high returns from small-scale solar have led to too rapid market expansion, with our investigation revealing problems with quality of advice.
The key issue for Which? is limiting the impact that solar PV will have on electricity bills. Our research has found that energy prices are consumers’ number one financial concern. And around six million UK households are already in fuel poverty.
Although the impact per electricity bill is believed to be low at present - £1.40 in 2011, the costs to consumers are escalating quickly.
Under the “do nothing” scenario this increases to around £12 in 2015 and £26 in 2020 (£135 over the period). Under DECC’s proposals that reduces to £2.50 to £2.90 in 2015 and £2.60 to £3.20 in 2020.
Payments are for 25 years therefore lifetime costs are significant – amounting under the “do nothing” scenario to the huge (and excessive) sum of £42 billion, reducing to £4.4 - £5.5 billion under the proposals.
Cutting the rates will reduce the subsidy from people who cannot afford solar panels or who cannot benefit from the scheme due to the type of property they live in, but we recognise that social housing and community schemes have benefitted from FIT. An analysis of its impact on fuel poverty is needed.
We recommend that DECC also consider reducing the tariff lifetime for solar PV from 25 years to 15 to 20 years to further reduce the lifetime cost.
But the tariff reductions must be carried out in a much fairer way
The 12 December deadline means people rushing to meet it could end up disappointed. It is especially unfair on households who had already signed contracts and paid deposits at the date of DECC’s announcement. They must be protected and given the higher rate which they were expecting.
At a minimum, DECC should reframe this “reference date” so that it excludes consumers who had already signed contracts at the date of the announcement.
The proposal is also unfair on consumers who have already started the process but not yet signed contracts. Putting back the reference date until February 2012 would help these households. It would also mean the reference date would be after the end of the consultation, as it should be. The current proposals also give businesses too little time to plan and adjust to the changes.
The proposed energy efficiency requirements go too far. Requiring an EPC Level C rating or the taking out of the Green Deal are both unreasonable and disproportionate.
Better evidence is needed on the impact of solar PV on behaviour change
In 2010 solar PV generated a fraction of one per cent of UK electricity from renewable sources, and even less of total UK electricity. It remains an expensive technology in terms of achieving carbon and energy saving too.
DECC needs to present evidence on the impact on energy behaviour by households who install microgeneration technologies to justify the often cited assertion that microgeneration encourages people to change their behaviour and use less energy. The current evidence we are aware of is insufficient.
Forty per cent of consumers who had installed microgen said they would not have gone ahead had FITs not been available. How motivated they would be to reduce energy usage is debatable.
Having two separate consultations is not helpful to assess the cost-effectiveness of FIT across all technologies. Which? considers that proportionately more support should be allocated to technologies that give most “bang for their buck”.
Which? consider it is appropriate that the FIT budget is capped, that costs are kept under tight control and that cost-effectiveness is closely reviewed, including through the Phase 2 consultation.
Theme (a): Impact to date of Solar PV Feed-in Tariffs and the state of the solar energy market
3. The Feed in Tariff has driven rapid (probably too rapid) market expansion in solar PV and has helped bring costs down for consumers installing solar panels. DECC’s consultation estimates that the capital cost of installing a typical 2.6 KW system has come down from £13,000 at the launch of the scheme to £9,000 now.
4. The Which? magazine undercover investigation earlier this year
Seven companies didn’t take into account the fact that part of the roof was in the shade, so putting solar panels there was questionable;
Using the government methodology, eight companies underestimated the time it would take for the system to pay for itself
Two companies offered discounts in a way that breached the industry code.
5. We cannot make firm, national conclusions on the basis of this single investigation. But, commenting for us, the Chief Executive of the Energy Saving Trust said that the worrying results from our investigation were not entirely unexpected.
6. Which supports microgeneration in principle but for installations to be worth the investment and worth subsidy from peoples’ energy bills, what is needed is better quality advice and information for consumers, robust accreditation and enforcement of standards and cost-effectiveness of the FIT and RHI.
Theme (b): The balance between affordability and delivering the objectives of the Solar PV Feed-in Tariffs, including factors to consider when setting the rate of small-scale Feed-in Tariffs including jobs created, emissions reductions and energy-saving behavioural change
The need for a cost-effective FIT
7. Microgeneration must not be supported through public subsidy at any cost. Subsidies through the FIT (energy bills) and RHI (taxation) must be reasonable and proportionate, and deliver on their objectives in a cost-effective way. Which? has argued for much greater clarity on what the objectives of FIT are, whether to contribute to EU renewable targets, to generate energy and improve security of supply, to save energy and carbon or to reduce energy bills.
8. Which? agrees with the objective of the FIT review to ensure value for money for consumers, taking a more responsible and efficient approach to public subsidy.
In April 2011 we responded to DECC’s call for evidence on the comprehensive review of FIT. We highlighted the need to measure and assess the impact of the FIT on energy bills and keep this under control.
In May 2011 we supported cuts to large scale solar schemes primarily because without them consumers would be facing much higher bills in the future.
A reduction in solar small-scale PV rates is reasonable
9. We agree with the principle of making reductions to the solar PV tariff rate for small-scale solar, although we are not in the position to say whether 21p per KWh is the appropriate rate. The financial rate of return is far in excess of the interest rates on savings accounts and bonds, for example. It has led to high cross-subsidy (in terms of the amount received per installation and in aggregate) from all consumers including those people who cannot afford to pay for solar panels. Which? is concerned at the future impact on bills and therefore supports the need for tariff cuts (see Theme (d) below). But this must be done in a fairer and more orderly way than DECC proposes (see Theme (c) below).
10. Another reason for reducing the tariff rate is that installation costs have come down significantly therefore this enables the rate of return originally aimed for to be maintained. DECC continues to aim for a 5% rate of return for well-sited installations (4.5% for small-scale solar).
Microgeneration technologies remain costly and subsidy must be tightly controlled
11. The Committee on Climate Change (CCC) stated in its report in May 2011
12. The CCC report did not give a view on what that contribution should be and nor has the Government set out what role microgeneration should play towards meeting the 2020 target. When launching the FIT the previous Government estimated the FIT would deliver around 1.6% of final electricity consumption in 2020.
The benefits of solar PV must be evaluated carefully and not overstated
13. The contribution of all renewables to UK electricity generation was 6.8% in 2010, and, of this renewable generation, solar PV (at all scales, not just domestic) generated only 33 out of the 25,734 GWh electricity from renewable sources,
14. Solar PV is also one of the most expensive energy generation technologies, even at the less costly non-domestic scale.
15. For consumers who install them, solar PV systems are still expensive, with a typical installation costing £9,000 according to DECC’s consultation. Most households cannot afford this sum of money, and many properties are unsuitable for solar PV, such as flats or houses with north-facing roofs. We recognise some fuel poor households have benefited from community and social housing schemes, and DECC should include an analysis and evaluation in the Review of how many such schemes have benefitted from the FIT. Many of these consumers have had solar panels installed through “rent a roof” or free solar schemes under which they get no benefit from the FIT because the company takes all the FIT income. Which? has been calling for these schemes to be required to be fairer, such as through sharing FIT income with the occupier.
16. Those who can afford the panels could save more on their energy bills by installing insulation. For example, cavity wall insulation can save up to £135 a year
17. Without FIT subsidy, the simple payback period on solar PV could be around 100 years (on current energy prices, assuming a typical cost of £9,000, and the £90 annual bill saving from above) although this will vary considerably. By contrast, loft or cavity wall insulation can often pay back in less than 3 years and even solid wall insulation can payback in around 12 to 27 years.
18. We recognise that some consumers, such as households off the gas grid, can get greater benefits from microgeneration. The FIT has benefited many social housing and community schemes too and can have fuel poverty benefits for those who have panels on their homes. We recognise that the FIT has created many jobs too, and the changes should have been made in a fairer way to give businesses more time to plan and adjust to them. Yet the inescapable fact remains that the FIT takes money from everyone’s bills, including the fuel poor. DECC must include an evaluation of the impact of the FIT on fuel poverty in its Review.
Better evidence is needed on the impact of solar PV on energy usage behaviour
19. Which? also believes that better evidence is needed to measure the impact on energy behaviour by households who install microgeneration technologies. A key justification for microgeneration that is often cited is that it is a way of engaging the public (households and communities) in their energy use and behaviour and encouraging them to reduce their energy consumption. The argument goes that solar panels may be very expensive and so cannot be justified on economic grounds but there are these wider engagement benefits.
20. However, the evidence for this appears to be largely anecdotal. Forty per cent of consumers who had installed microgen said they would not have gone ahead had FITs not been available,
Theme (c): The way in which the Government has managed the Solar PV Feed-in Tariff, the impact this has had to date, including the management of the Consultation
Lack of procedural fairness
21. Although we support the principle of reducing the tariff rates, we think that the proposed way of doing this is unfair to many consumers. Consumers and installers should have been given more notice of changes to enable them to plan for the change and to readjust. We appreciate that DECC is in a difficult position as the FIT budget is running out quickly due to much higher than anticipated demand. We have two main concerns.
22. First, that by rushing forward the effective cut-off date to 12 December at only six weeks’ notice, this creates a surge in demand which has many adverse impacts on consumers and businesses including:
To be eligible for the higher rate of tariff, installations do not just need to be installed, but they must be registered with the Microgeneration Certification Scheme (MCS) and the paperwork must have been sent to the electricity company by 12 December. Given the likely rush, bottlenecks in the system must be a concern with an increased risk that many systems do not get registered in time.
Which? is recommending to consumers that they must be very aware of this risk, and not rely on installer promises that may not be met. We recommend that people do their research and do not rush to panic buy.
Even if installers do their best to complete by then, there is the risk of bad winter weather that would put a stop to roof installation work.
As well as giving companies the opportunity to put up prices in this period it offers mis-selling opportunities to unscrupulous companies. There must be vigilant monitoring and enforcement of the rules in this period by REAL, MCS, the certification bodies and UKAS.
23. Second, rushing this through is particularly unfair on householders who have already signed contracts and paid deposits for solar PV panels. Applying DECC’s estimate of average cost of a typical system, a householder would have paid out the significant sum of £9,000 in the expectation of getting the current FIT rate. Any consumers who knew about the possibility of future cuts would have expected this to happen in April 2012, not December 2011.
24. Shortly before the announcement, Which? conducted a straw poll of solar installers on the Which? Local website (which helps Which? members find recommended traders in their area) on their level of activity. Nearly all reported a big increase in demand in recent months. Some had a waiting list and some were already booked up into January or February. Given the widely reported high levels of activity since the announcement there must be real difficulties for many consumers in meeting the 12 December date.
What needs to change to make the proposals fairer
25. Which? has urged DECC to change the proposals to ensure that all consumers who have already signed contracts or committed to installations at the time of the announcement are protected by getting the higher rate, regardless of whether their system is registered by 12 December. We have written to the Minister, Greg Barker, about this.
26. At a minimum, DECC should reframe this “reference date” so that it excludes consumers who had already signed contracts at the date of the announcement (or possibly even shortly thereafter). If they have signed contracts and are beyond the seven working day cooling off period they may well not be able to cancel the contract even though they could end up getting a return which is significantly less than they bargained for.
27. The proposal is also unfair on those consumers who have already started the installation process (but not yet committed to a contract or signed a deposit) or have started their research in planning to get a system installed before April 2012. Putting back the reference date until February 2012 (recognising DECC need to effect changes earlier than April 2012 due to budgetary reasons) would give these households more time. It would mean the reference date would be after the end of the consultation and give time to consider the consultation responses. Which? does not understand how a consultation can consult legitimately on a proposed date (12 December) which is before the end of the consultation (23 December) (see Theme (d) below).
28. Either of these changes would of course result in a higher level of FIT payments. Yet DECC’s Impact Assessment estimates there would be little difference in terms of impact on bills from bringing in the cuts in April 2012 compared to December 2011. It would reduce the impact per bill by £0.40 - £1.20 in 2012 and by £0.10 - £1.60 in 2020.
The proposed energy efficiency requirements go too far
29. Our advice to consumers looking to reduce their energy bills is energy efficiency first, then microgeneration. We support too the principle of linking of receipt of microgeneration subsidy with requirements for energy efficiency standards. However, we disagree with key aspects of DECC’s proposals.
30. It is proposed that from April 2012 people who install solar panels would have to demonstrate that their home meets a certain level of energy efficiency. If they are not able to demonstrate this, they will get a much lower tariff of 9p per Kwh (ie rather than 21 p per Kwh). There are two routes:
To show that their home’s energy rating is at least an Energy Performance Certificate (EPC) rating of band C. Only 9% of houses (excluding flats) in England are C or above
Or to undertake all the measures that are identified on an EPC as potentially eligible for Green Deal finance. DECC’s view is that the Green Deal will deal with the barrier of upfront costs.
31. Which? is considering the detail of these proposals and will respond to DECC with our considered views. It might be reasonable to require installation of cavity wall insulation if you live in a home with uninsulated cavity walls, or to install loft insulation (or top up loft insulation) if you do not have it already. But we think that going much beyond this, as the proposals do, is disproportionate.
32. We assume that part of DECC’s reason for proposing such high requirements is to dampen down FIT activity deliberately. But we think it is better to define the standards according to what is reasonable and proportionate to meet the objectives of FIT, including as regards the burden on consumers. There is much less need for stringent energy efficiency measures to ensure the FIT (electricity-generating measures) delivers value for money than there is for the Renewable Heat Incentive (heat-generating technologies). With the RHI, heat generated using public subsidy (taxation) will literally be disappearing out of the roof or walls if they are not insulated properly. This is not generally the case with the FIT. Insulation is essential to ensure the value of heat, it is not for electricity unless the householder is using electrical heating.
33. The EPC Level C proposal is unnecessarily and disproportionately stringent. A £5,600 cost for a typical house is clearly excessive. In many cases, it would be more. The Energy Saving Trust has estimated that expensive to treat homes in the EPC F and G bracket would cost £5,000 to £9,500 to bring up just to Level E.
34. Nor do we consider it appropriate that people should be required to take out the Green Deal. This is a complex, long-term finance product which may not be appropriate or attractive to many people. Forcing people to take this out to be able to benefit from the FIT is, again, disproportionate. It is market-based and consumers will need to pay a market rate of interest. The Green Deal is still in development and many questions remain unanswered over what it will look like, what measures it will cover and how much it will appeal to consumers. The voluminous Green Deal consultation has been issued today.
Theme (d): Affordability of Solar Photovoltaic energy versus other renewable energy (given the overall levy-funded cap for energy bills) and the impact of Feed-in Tariffs on energy bills
Which? agrees the impact on electricity bills must be reduced
35. This is the critical issue for Which? Our research has found that energy prices are consumers’ number one financial concern
36. The current impact on electricity bills of the FIT is currently believed by DECC to be small (although there is no mechanism to measure costs passed through to consumers, see below). However, this impact is escalating quickly and is projected to reach around £12 in 2015 and £26 in 2020 for the average domestic electricity bill. This would reduce to £2.50 to £2.90 in 2015 and £2.60 to £3.20 in 2020 under DECC’s proposals.
Source: DECC’s Impact Assessment, page 25.
37. Although the current impact is small, the cumulative cost per household to 2020 is £135. The total, committed liability households will have to bear is much greater because the FIT payments are guaranteed (and index-linked) for 25 years. Therefore there are significant benefits to consumers in taking action now to reduce the tariff:
The total cost to consumers in 2014/15 would be £790 million in the “do nothing” scenario, reducing to £200 to £230 million in the proposals (at discounted prices, £320 to £350 m at nominal, undiscounted prices);
The lifetime cost to consumers of the “do nothing” scenario would be £42 billion, reducing to £4.4 to £5.5 billion under the proposals.
38. £42 billion is a considerable sum and an excessive amount to support a technology that will have minimal impact on UK security of supply and which is a comparatively expensive way to generate energy, save carbon and reduce energy bills. Therefore we support cost reductions and for there to continue to be a tight cap on FIT spending.
39. Which? considers there are additional reasons for taking a more cautious and responsible approach to this consumer subsidy:
In the current economic climate even a small impact on energy bills needs to be scrutinised carefully.
It is not known what costs suppliers pass through nor how eg whether some categories of consumer pay more than others. Suppliers are currently free to choose how they do this. Which? continues to call for a mechanism to measure rather than estimate cost pass through.
Any projections of take-up and costs are uncertain.
It is not known how much domestic consumers are paying for the FIT as compared with business customers. This must be rectified.
Consider reducing the tariff lifetime
40. As well as reducing tariff rates, we also recommend that DECC consider reducing the tariff lifetime for solar PV from 25 years to say 15 to 20 years for solar PV. That would tie in more or less with the expected payback period (around 17-18 years, more or less depending on location and other factors). After the payback period generators would be getting the advantage of lower electricity bills but not the extra profit from the additional years.
41. This would mean that lifetime costs for all consumers subsidising the scheme would be much lower. This could considerably reduce the overall costs of the FIT and should make the FIT fairer in terms of reducing cross-subsidy from those who cannot afford solar panels. Given that few people remain in a property for anything like 25 years, and you cannot take the FIT with you, this should not have too much impact on consumer investment decisions. We recommend that DECC consider this in the wider Phase 2 consultation.
Cost-effectiveness of solar PV vs other renewable technologies
42. We consider that proportionately more support should be allocated to technologies that give most “bang for their buck” but it is impossible to assess this without seeing costs and benefits of technologies compared. We hope these issues will be covered in Phase 2 of DECC’s consultation but having two separate consultations makes it much more difficult to address the FIT holistically.
Theme (e): Experience of similar incentive mechanisms for renewables in other countries
43. We have no comment on this theme, other than to state that other European countries have also cut their feed in tariff subsidy rates.
23 November 2011