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

Summary Points

1. EDF Energy supports Government’s review of FIT and the need to reduce tariffs in line with falling costs of PV panels and to keep within the agreed budget cap set out by the comprehensive spending review. The rate of return should be adjusted so that it is commensurate with the originally intended 5% return to achieve the level of sustainable growth outlined in the FIT consultation of 2009.

2. In the interests of all consumers, we believe that subsidies should be applied to direct investment to the most cost-effective deployment of renewable technologies to bring them to market and to enable sustainable growth. Subsidies should be phased out over time as technologies mature and innovations bring costs down to create a level playing field for all low carbon technologies.

3. EDF Energy believes that while micro-electricity generation technologies can play a role as part of a diverse energy mix, in general they are an expensive way of reducing carbon emissions relative to large-scale renewables and other low carbon generation. There are cost effective deployment opportunities for renewable heat, for example, through heat pumps.

4. However, we have concerns over the way that the review has been instigated and, in particular, that changes are due to be brought in before the consultation period has ended. This sets an unwelcome precedent for policy and regulation, and brings uncertainty which is harmful for investment in all low carbon projects. However, the negative impacts of the current announcement are unlikely to be reversed and so, to provide clarity for all parties, we do not believe there is any merit in adjusting the date to bring in the proposed changes. Any future announcements should consider these wider impacts.

5. While we appreciate the urgent nature of the review, it is important that any changes to the scheme are managed effectively to provide a stable and transparent process for all scheme participants, particularly the consumer. As mandatory FIT licensees, we require clear visibility of changes, including dates for implementation and sufficient lead times to prepare resources to successfully manage customer enquiries and applications on what is already a complex scheme.

6. In the future, DECC should work with industry to develop a more stable method of cost control, for example, by using volume-based triggers for degression of tariff rates. To help this, there needs to be greater clarity on the rules of the scheme for registering installations and the correct documentation required to receive the FIT payments, and on the responsibilities of all parties involved to prevent bottlenecks. A more transparent and effective registration process would provide DECC with greater visibility of actual uptake to help prevent the need for emergency reviews when the budget is placed under pressure or is already oversubscribed.

Introduction

7. EDF Energy is one of the UK’s largest energy companies with activities throughout the energy chain. Our interests include nuclear, renewable, coal and gas-fired electricity generation, combined heat and power, electricity networks and energy supply to end users. We have over five million electricity and gas customer accounts in the UK, including both residential and business users.

8. EDF Energy has been offering solar PV products to residential customers as part of its EcoRenew range since 2008. Since the launch of EcoRenew EDF Energy has experienced a huge increase in the demand for solar PV, initially fuelled by the government’s Low Carbon Buildings Programme (LCBP), and more recently, due to the introduction of the FIT scheme.

9. EDF Energy is also a mandatory FIT licensee, managing applications and enquiries for registering installations up to 50kW and making FIT payments. We are also required to undertake site visits to validate claims, facilitate switching and to detect, report and prevent fraudulent activities.

Response to Specific Questions

(a) Impact to date of Solar PV Feed-in Tariffs and the state of the solar energy market

10. Since the scheme began in April 2010, the Feed-in Tariff has achieved a much greater than expected uptake of Solar PV, with over 250MW of PV installations registered for FIT as at September 2011. This growth has been coupled with a reduction in the costs of PV panels, both in the UK and globally. We agree with DECC’s estimate that there has been a reduction in costs of at least 30% since 2008 and that tariffs should be adjusted to achieve a rate of return of around 5% as originally set out in the Feed-In Tariff consultation in 2009.

11. Since August, as mandatory FIT licensees, we have experienced a high volume of applications for FIT (c 400-500 applications per week). The volume of applications and customer enquiries have risen considerably since the consultation on the review of solar PV tariffs was announced on 31 October. There have already been significant challenges in terms of managing applications, with delays caused due to incomplete information being provided on forms as a result of poor advice being given to customers at the point of installation, which is outside of our control as a mandatory FIT licensee.

12. As licensees, we are obliged to follow a prescribed process to deal with applications, and are not able to speed up or simplify procedures at the request of our customers. The process will be put under additional pressure due to the rush of applications from customers before the cut off date of 12 December and uncertainty over the final future scheme arrangements, which are subject to the outcomes of the consultation. This tight timescale also creates considerable constraints on our resources, with insufficient time to train and put in place extra staff with the relevant expertise to manage the additional enquiries.

(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

13. In terms of the costs of carbon abatement, micro-electricity generation technologies are in general a very expensive way of reducing carbon emissions relative to large-scale renewables and other low carbon generation. Nevertheless, we recognise a role for microgeneration and decentralised energy, particularly for renewable heat through heat pumps, to achieve the UK’s long term carbon reduction objectives.

14. Tariff levels should encourage growth in eligible technologies, to allow supply chains and industries to develop in a sustainable way. When setting tariffs levels and reviewing these, the Government must consider the overall costs of the scheme and impacts on bills. Therefore, in the wider interest of achieving a balance between affordability and climate change objectives, we support Government’s aims to reduce costs to keep within the budget envelope allocated for FITs and to adjust tariffs to provide a rate of return that is in line with the original expectations for the scheme of a return of 5%.

15. However, Government should also set out a more predictable approach to future changes in the scheme, that incorporates cost control and a clear approach to tariff degression reflecting falls in the requirements for subsidies as technologies develop and mature. In this way, industry would be provided with a clearer framework to build a sustainable industry, jobs and growth for the longer term, and avoid short term cycles of boom and bust.

16. In terms of energy efficiency, when we responded to the original FIT consultation in 2009, we agreed with Government that the structure of FIT should be designed to encourage the efficient use of electricity and that additional compliance on energy efficiency is not required. Nevertheless, we recognise the need to reduce costs and stabilise the roll out of FIT and believe that encouraging energy efficiency measures may be helpful in this regard.

17. However, it is important that this is applied in a simple way and should not add further complexity for customers or other parties involved in the scheme, especially licensees who face additional administration costs. There should be clarity on the dates for when energy efficiency measures are required to apply for FITs, ideally with one date, rather than phasing in requirements as it is currently proposed.

18. We believe the current proposals to require an Energy Performance Certificate (EPC) rating of C or that the householder installs all identified Green Deal measures before applying for a FIT is unlikely to work in practice. If a rating of C were to be applied, this would exclude c 80% of current homes from accessing the tariff. We therefore believe that it is more reasonable to propose a rating of D or E and a requirement that basic measures such as loft and cavity wall insulation have been installed, as is the case for the Renewable Heat Incentive Premium Payment (RHPP).

19. The Green Deal measures and the assessment procedures are subject to the outcomes of consultation, and so making this part of the FIT application process at this stage could be misleading for consumers. We therefore believe that the EPC rating would be a more workable solution, but this is dependent on whether FIT licensees will have access to centralised information on EPCs to perform this test or whether a customer declaration can be used to satisfy this requirement as is the case for the RHPP. It will not be possible or reasonable for suppliers to carry out onsite checks on EPCs at the householder level.

20. We agree with DECC that there should be a reduction in the rate received by those with multiple installations. However, we believe that in practice, this will be difficult to administer and it should not create additional compliance or administrative burdens on FIT licensees. Suppliers do not have information on FIT customers to accurately track those with multiple installations. In order to be workable, the Microgeneration Certification Scheme (MCS) and Ofgem should develop the means to record registration numbers for multiple installations in the central FIT database so that this data can simply be accessed by FIT licensees to process payments.

(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

21. EDF Energy supports the need to review the FIT and to reduce costs to keep within the budget envelope as set out in the comprehensive spending review. It is in the interest of fairness for all consumers that FIT tariffs remain in line with the original rates of return of 5%.

22. However, we have concerns over the way that the review has been instigated and that changes are due to be bought into effect before the consultation period has ended. This sets an unwelcome precedent for policy and regulation, and brings uncertainty which is harmful for investment in all low carbon projects. However, the negative impacts of the current announcement are unlikely to be reversed and so, to provide clarity for all parties, we do not believe there is any merit in adjusting the date to bring in the proposed changes. Any future announcements should consider these wider impacts.

23. While we appreciate the urgent nature of the review, it is important that any changes to the scheme are managed effectively to provide a stable and transparent process for all scheme participants, particularly the consumer. As mandatory FIT licensees, we require clear visibility of changes, and it is imperative that licensees understand timescales and have sufficient time to successfully prepare and test the necessary systems and processes, train staff and produce clear and accurate customer literature and advice.

24. FIT is a complex scheme to communicate to customers. Customers consider suppliers as FIT licensees as a point of contact on all aspects of the scheme, even the parts which are not within our control, such as checks and information provided on the point of installation and fraud prevention and detection. In terms of the proposals in the current consultation, we require clarity on the final scheme arrangements and the dates when final decisions will be announced in order to clearly communicate the facts to FIT customers.

25. In the future, DECC should work with industry to develop a more predictable method of cost control, for example, by using volume-based triggers for degression of tariff rates. To help this, there needs to be greater clarity on the rules of the scheme for registering installations and the correct documentation required to receive the FIT payments, and on the responsibilities of all parties involved. A more transparent and effective registration process would provide DECC with greater visibility of actual uptake to help prevent the need for emergency reviews when the budget is placed under pressure or is already oversubscribed.

(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

26. It is important that the review of FITs is part of a wider consideration of the proposals for supporting other renewable technologies, including large-scale technologies in the Renewables Obligation Banding Review. This will be key to ensuring the UK moves forward in achieving its climate change and renewables targets in a way that achieves the right balance between affordability and environmental objectives, while providing sustainable growth for UK jobs and industries involved.

27. EDF Energy supports the use of subsidies for emerging renewable technologies to meet climate change mitigation objectives. However, these subsidies should reduce as technologies develop and mature and there should be a clear date for phasing out subsidies. Subsidies for renewables should be structured in a way that does not disincentivise investment in other forms of lower cost low carbon generation. In the longer term, all low carbon technologies should compete on a level playing field without subsidy, underpinned by a firm-long term carbon price.

28. In the context of DECC’s recognition of the need to revisit costs of renewable subsidies in the RO Banding Review 2013-17, EDF Energy supports the proposals to keep the level of ROC support for Solar PV at 2ROC/MWh. We support DECC in its view that setting a band at anything above the level of RO support for the marginal technology (offshore wind) for meeting the UK’s 2020 target would not provide value for money for the consumer.

29. In terms of the emergency review of large-scale solar PV (250kW–5MW) conducted earlier in the year, the 8.5p/kWh generation tariff is broadly consistent with the RO banding proposals.

30. EDF Energy believes that subsidies should direct investment to the most cost effective renewable energy technologies and that costs should be compared across electricity, heat and transport. We believe that there are significant opportunities for the cost effective opportunities to deploy renewable heat through heat pumps.

31. In its response to the Renewable Heat Incentive (RHI) consultation in 2010, Ofgem stated the importance of cost effective subsidies and compared the relative lifetime carbon abatement costs of the FIT (£460/t CO2), RHI (£57 /t CO2 traded and £75 /t CO2 non-traded sector) and RO (£101/t CO2) schemes. These figures illustrate the favourability of supporting the development of renewable heat for carbon abatement in terms of comparative cost-effectiveness. We would welcome an updated assessment and analysis of these figures as renewable schemes are developed and reviewed to ensure value for money for consumers.

(e) Experience of similar incentive mechanisms for renewables in other countries

32. FIT schemes have been implemented in many European countries and have achieved considerable success in increasing the installed capacity of renewable technologies such as solar PV. In turn, we have also seen a significant step reduction in the costs of PV in recent years, with the expectation that costs will fall further.

33. However, while not arguing with the success of FIT as an instrument to drive the deployment of renewable technology capacity, particularly at the small scale, there have been questions over the cost effectiveness of this approach relative to adopting larger scale renewable and low carbon technologies and actual production of energy.

34. It is essential therefore that the UK develops a sustainable approach and learns from the experience of other FIT schemes. Countries such as Spain and the Czech Republic have experienced stop-starts and runaway costs, where the speed to adjust subsidies has not matched falls in installation costs. This is particularly noticeable where rates had initially been set at an unsustainably high level which has then led to subsequent need for dramatic cuts and retrospective changes to tariff levels, which can have a significant impact on consumer confidence. The German model where tariff degression is triggered by capacity levels appears to have some benefits of predictability, while being able to react rapidly to the falling costs and could be investigated further.

35. Government and industry should work together to create a more stable and transparent system of cost control to reflect falls in costs, for example by using volume based degression, and by providing greater visibility for all parties on the rules for applying for FIT to get a better grasp on accurate levels of uptake so that the budget available for these schemes can be managed more effectively.

24 November 2011

Prepared 22nd December 2011