HC 1605 Energy and Climate Change and Environmental Audit CommitteesWritten evidence submitted by Friends of the Earth England , Wales and Northern Ireland
Summary
The feed-in tariff has been a great success since it was introduced in April 2010 in delivering exactly as planned – uptake of small scale renewable technologies among non-traditional target groups including communities, non-energy generation businesses, individuals, farmers, councils, schools and hospitals; driving enthusiasm for renewable energy and a greater understanding of energy use and saving; contributing to renewable energy and carbon saving targets; and driving down costs as an industry is developed.
Towards the end of 2010/ beginning of 2011 it became clear that due to a number of factors, including significantly the fall in the cost of Solar PV globally, up-take was higher than the original intended ambition of the scheme, but cost savings were available to reflect falling technology costs. 300% more electricity can now be generated for only 75% more budget.
The crisis to which this success story has led to is almost unfathomable. The application of a rigorous but little understood and un-transparently applied spending cap to the FIT scheme has been a driver in this, as has a failure to understand the potential and costs of either Solar PV or Decentralised Energy as a whole – both of which are excluded from major Government Energy policies. However, an arbitrary and confused approach to reviewing the scheme where some Solar PV rates were cut drastically over the summer and others left uncut, with no evidence base or consistent rationale, has increased the problem.
The Government is now faced with a choice of forcing a major contraction (of 50-95%) of a growing green industry, with job losses of between 18,000 to 29,000, or taking a flexible approach to supporting the scheme. The 12th of December date should be immediately abandoned – there is no justification for it, even if one accepts the framing of the spending gap, and it is causing serious damage to the industry and wider.
The Government should take the opportunity to set support for the scheme to deliver significantly on the its original objectives - rather than attempt to change the objectives to further marginalise the role of Solar and DE – and set support for solar at a level in order that:
It plays a significant part in contributing to decarbonising the electricity system by 2030.
It opens up the energy market to new types of generator and investor
Those on low incomes, without access to capital or property are able to participate
Solar is supported to develop into a mature industry in the UK, capable of driving down costs to grid parity by the end of the decade.
Enquiry Theme 1: Impact to Date of Solar PV Feed-in Tariffs and the State of the Solar Energy Market
1. The feed-in tariff scheme has been a huge success since the short time since its introduction in April 2010 in scaling up Solar PV deployment and the requisite development of a Solar PV industry, primarily in installation and maintenance, but also according to the Renewable Energy Association (REA) with some 60 plus companies involved in supply chain manufacturing. More than 100,000 solar panels projects have been installed; the number of direct jobs in solar has risen from 3,000 in 2010 to 30,000 today; and the number of companies operating in solar has risen from 350 to 4,000. The cost of Solar PV has fallen by 30% in just over a year.
2. This has been driven by falling global prices but also a reduction in installation costs driven by the scale up of the installation industry in the UK. The REA also estimates that installation costs, which attribute for roughly half of the cost of a solar project, have fallen by 50% since the scheme’s introduction: solar PV is the only energy technology with such a cost reduction profile. Earlier this year Friends of the Earth, the Solar Trade Association and a host of other organisations wrote to the Government calling for planned moderate reductions in the tariffs of 25%. It was expected that 500MW of solar would have been installed in the year to April 2012 without the recent Government announcement (Element Energy analysis1). While this would have been a remarkable success compared to the previous level of deployment, it should be kept in context – in 2010 Germany deployed 8GW of Solar – deploying in one year more than the UK scheme plans to deliver in total to 2020.2
3. The feed-in tariff also plays a wider role in the energy market – opening up energy generation from beyond the traditional energy companies to diverse groups from farmers and businesses to hospitals and schools; reducing people’s energy bills; and leading to more energy efficient consumer behaviour and take up of home insulation through engagement of the public with energy. Some of these impacts are explored below.
4. The feed-in tariff has led to a take-off of both community energy and social housing retrofit projects. Scores of community-led energy groups and co-operatives have been established across the country involving local communities in clean energy projects. It is important to note that community scale projects take longer to deliver that domestic installations. Many such schemes were in the pipeline on the cusp of coming through at the time of the announcement. In some cases this has already taken longer than would have otherwise been the case due to community projects having to down-scale projects to under 50kW following the fast-track review over the summer and the Government’s requirement that they “adjust their aspirations”.3 The timing is therefore critical, and potentially devastating to the community energy sector - with at least six share offers open at the moment known to Friends of the Earth, encouraging local people to invest in their local energy futures. There are dozens of community energy projects across the country threatened by the review which are just getting off the ground. Overall £16 million has been invested in co-operatives alone according to Co-ops UK, and huge amounts of social and volunteer capital has been invested. Regaining this once it has been lost will be very difficult, including the confidence that taking this sort of activity and project forward will prove worthwhile in the long run. Impacts on these schemes is detailed in answers to theme three below.
5. Social housing and local authority projects are in a similar position. While not a great deal have yet been delivered – and where they have it is in small pilot phases such as those by South Yorkshire Housing Association and Birmingham City Council, there many were in the pipeline to be delivered by 31 March 2012: Element Energy’s recent report “Implications of the Comprehensive Review of the Feed-in Tariff for the UK PV Industry” commissioned by Friends of the Earth and Kingspan found that existing “individual social housing contracts cover more than 10,000 roofs and there is very strong interest from Local Authorities [and] Housing Authorities”4 This is part of the wider impact of the scheme, fulfilling an original objective of bringing in non-tradition players into energy generation and ownership, and encouraging new investment in energy, which has been successful with businesses such as Marks & Spencer installing PV on their shop roofs, local authorities, housing associations, farmers, schools (such as 10:10 solar school and Keep Britain Tidy eco schools), hospitals, football clubs and others participating. It has also had the effect of bringing in new sources of finance – for example South Yorkshire Housing Association secured financing from a pension fund as part of their project, which has now been withdrawn and many projects had secured matched investment from the ERDF.5
6. All political parties are concerned about the dominance of the Big 6 Energy companies, who own two thirds of generation in the UK (as appose to the “Big 4” in Germany who own 7%6. From the perspective of wanting more independent generation from diverse sources to increase energy resilience; stamping down on decentrailsed energy seems counter-productive 7
7. As the scheme is still in its infancy much work still needs to be done to understand the role that local renewable energy technologies, especially those with high visibility such as solar panels, have on public engagement and uptake. The anecdotal evidence is strong, and we would urge the Government to collect a stronger evidence base about the role of micro-generation and community-scale technologies in increasing participation in and uptake of local climate mitigation measures. This is crucial as the Department for Energy and Climate Change, the Local Government Group and the Committee on Climate Change have all stressed the pivotal importance of local action in helping to meet national carbon budgets. There is already some initial evidence about community energy schemes and domestic installations driving energy saving behaviour – see both the IPPR “Green Streets” report8 and the Good Energy Feed-in Tariff Report9 which noted their surveys of micro-generators found that two-thirds had changed their energy use behaviour.
Enquiry Theme 2: 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.
Definition of affordability
8. It is right to look at affordability in the context of delivering objectives of the Solar PV tariff. However, this has so far been missing from the Government analysis of the scheme in Parliament and the media, where “affordability” has been entirely dominated by the Comprehensive Spending review “cap” placed on the feed-in tariff of £867 million over the CSR period, not on whether the objectives of the scheme are being met, or being met cost-effectively or affordably.
9. It is not clear why the spending cap is the chosen limit of “affordability” of the scheme, being based solely on a projected uptake model rather than any analysis of costs and benefits. While affordability to consumers in terms of energy bills has been much talked about by Ministers, it is clear that the driving force of the review is to remain within this spending envelope, as set out at the beginning of every review document this year. According to the review Impact Assessment, t he cost to consumers so far of the scheme has been £1.40 a year and the cost of delaying the cutting of the feed-in tariff rates to April 2012 is only 90p per household. However, as we explore below, it is not even the case that the feed-in tariff must be all or part funded by energy bills. For example, the Renewable Heat Incentive - its sister scheme for heat, enacted also in the Energy Act 2008 is now to be funded from general taxation.
10. It is Friends of the Earth’s views that polices should be set in order to deliver their stated objectives – not on the basis of arbitrary resource constraints. The current framing excludes from the debate perhaps the most important question – what is the scheme supposed to be delivering, and what is the level of ambition? The issues then becomes how to deliver this in an affordable way.
Level of ambition of the feed-in tariff scheme
11. The original scheme was designed to deliver just under 2 % of electricity by 2020.10 Friends of the Earth has always believed the 2% figure to be too low, and campaigned alongside 50 other organisations for the level of ambition to be at least tripled to delivering 6% of electricity by 2020.11
12. Due to a number of factors, including the fall in cost of PV, the attractiveness of the FIT in a time of low national interest rates, cuts to funding (especially council funding) for energy efficiency measures, and the ease of use and popularity of the feed-in tariff scheme, this scheme has begun to deliver over expectations. This has led to the opportunity to deploy a much larger amount of PV at a proportionately lower cost than originally expected, as tariff rates can be brought down significantly. This is explored below.
13. However, it is not possible to sustain a growing solar industry within the current budget cap. Element Energy (November 2011) found that even a “zero growth” scenario where the industry remains at the same size would require an additional £667 million over the rest of the CSR period.
14. So the Government faces a choice – allow the original ambition (and therefore budget) of the feed-in tariff to be increased, or force the solar industry and rate of solar deployment to contract. Choosing to stay within the cap is the reason why the reason that the Government’s impact assessment has scenarios that range from a 50-95% reduction in the uptake of solar. However, it should be noted that some of these scenarios appear to lead to a significant underspend of the cap, which is discussed in detail below. Yet in the consultation there is no mention of delivering a set level of ambition - though analysis of the figures shows an apparent lowing of ambition, with Element Energy analysis showing the scenarios delivering annual electricity generation from PV reaches to between 0.21% and 0.65% of total electricity supplied in 2020.
15. Forcing the industry to contract to such a level would be a waste of the resources already spent building it, as well as contributing to increasing the cost of upgrading our energy system and decarbonizing supply by increasing policy risk and therefore the cost of capital. There is a question of whether we can “afford” to contract renewable energy production, economic activity, jobs and business opportunities, and confidence in the renewable energy sector at a time when growth and £200 billion of investment in energy is needed. The Element Energy research indicates that the impact would be a loss of between 18,000 and 29,000 jobs and between £150 million and £230 million in revenue to the Treasury from direct taxes alone. This is represented from the Element Energy graph from their report below:
Source: Element Energy Analysis, DECC Impact Assessment Data
Changes to objectives of the feed-in tariff scheme
16. Friends of the Earth believes setting the level of ambition of the scheme should correlate to the scheme’s objectives and affordability should be examined in this context. However, the objectives of the scheme have been modified in the consultation document and so it is worth examining what the objectives of the scheme were, what they are proposed to be, and what the case is for the change. appears the Government is re-consulting on the aims and objectives of the FITs scheme whilst proposing very specific changes to the scheme that could take effect during the consultation. Paragraph 17 of the consultation sets out the aims of FITs as the current administration sees them and paragraph 18 states that they are “broadly similar” to the aims when the FITs scheme began. Rather confusingly paragraph 22 states “we will be interested in hearing views on these aims and objectives through both the current consultation and the phase 2 consultation.” This is becomes even more confused when one reads paragraph 23 which states “Ensuring that the FITs scheme meets the aims and objectives set out above is the principle objective of the comprehensive review”.
17. The original objectives of the feed-in tariff scheme, designed to drive uptake of small-small renewable energy (under 5MW), have been variously listed in the original impact assessment (February 2010) as to:
(a)
(b)
(c)
(d)
(e)
18. Additionally, not listed as an objective but clear from the design of the scheme listed in the Impact Assessment is to drive costs down by increasing deployment. The 2010 Impact Assessment describes “degression rates which reduce tariff levels by a fixed percentage each year for new installations to reflect falls in technology costs over time and to drive innovation and cost reduction”. Both the degression and the inbuilt planned review system highlight this. The Conservative Green Paper that first advocated a Party position of supporting the introduction of feed-in tariffs noted:
“Moreover, as recent studies carried out for the Energy Saving Trust indicate, the need for costly feed-in tariffs to support nascent micro-generation technologies is likely to decrease sharply as time goes on and the costs of these technologies continue to decrease. It is precisely because of the fact that the costs of these technologies will continue to decrease as they mature that it is justifiable to subsidise them initially through feed-in tariffs, to the point where they become mass-market technologies which can compete on equal terms with centralised generating plant based on existing, mature technologies.”12
19. The current consultation makes two significant changes. Firstly, it suggests it is no longer an aim of the solar feed-in tariff to contribute to renewable energy targets. Secondly, it removes the aim of driving small scale deployment among the aforementioned non-traditional “target groups”.
20. The consultation does note that “The FITs scheme is designed to promote take up of small-scale low-carbon electricity technologies by the public and communities. This is part of a portfolio approach to meeting the UK’s renewable energy target “. It goes on to say:
“The analysis underpinning the Renewables Roadmap is based on a benchmark that the marginal cost (in terms of subsidy) that is currently considered necessary to deliver the UK’s renewable target is 9p/kWh. In other words, our analysis shows that if we offer this level of support (or lower) to a range of technologies, the UK target will be met, without the need for subsidy at higher levels. This 9p/kWh level is broadly equivalent to two Renewables Obligation Certificates (based on 2012-13 costs). Any additional support for renewable energy technologies above this benchmark therefore needs to be justified on other grounds. In the case of FITs, we consider that this justification is provided by the fact that the scheme’s aims include contribution to wider low carbon goals, as well as the renewable energy target. These wider aims include:
empowering people and giving them a direct stake in the transition to a low-carbon economy;
helping develop a supply chain that offers households a wide range of cost effective measures to lower their energy use and carbon emissions;
Assisting in public take-up of carbon reduction measures, particularly measures to improve the energy efficiency of buildings.
These are broadly similar to the aims set when the FITs scheme began.”
Friends of the Earth disagrees that these aims are broadly similar. To take the first, it is a fundamental change implying that the solar feed-in tariff is no longer required to contribute to renewable energy generation targets – a fundamental aim of the scheme. No mention is made as to whether carbon saving is proposed to still be a relevant goal under the review.
21. There are a number of reasons why we believe solar should contribute to renewable and carbon saving targets. Firstly, to take costs now rather than cost trajectories is to fundamentally misunderstand the value of the feed-in tariff scheme, the point of which is to drive down policy cost. Indeed, the feed-in tariff has been shown to be the most effective policy in driving down the cost of renewable energy worldwide, according to the IPCC’s fourth assessment report.13 While solar is currently more expensive than offshore wind, the most marginal cost technology, the cost is coming down faster than any other technology (30% this year) and it is expected to not require subsidy, if properly supported, by the end of the decade, according to Ernst and Young analysis.14 There are reports that at the largest scales (5MW) in the south west projects are already starting to come through at the 8.5kw/h level – although smaller schemes are a few years away from this. The speed of industry savings makes the recent Committee on Climate Change assessment that solar would not be competitive with offshore wind by 2040 out of date.15 This means that solar has a different support profile - more support is required now, but less overall.
22. Despite the focus on marginal cost in the FIT consultation in reference to renewable energy roadmap, the Renewable Energy Roadmap itself states that it “focuses in particular on the 8 technologies that have either the greatest potential to help the UK meet the 2020 target in a cost effective and sustainable way, or offer great potential for the decades that follow”17 [our emphasis] and rightly so. Cost curves are static snapshots of a certain year; they don’t tell you where a technology might be on the curve five or ten years later with support. Wave generation is currently expensive yet everyone rightly considers it worth supporting to encourage investment in innovation and to get it to commercial scale deployment – as set out in the Renewables Roadmap. Simply letting technologies fight it out based on their current cost is not a sensible strategy for ensuring we develop a diverse renewable energy mix and support emerging technologies. The below graph from the recent Element Energy Work highlights historic falls in the cost of Solar PV, and below that the price decline this year in installations in the UK.
23. The impact assessment suggests that the total “cost” in policy terms – as distinct to from the costs on bills - of delaying the cuts until April is £10 million a year. This is the net cost after the costed carbon savings of extra solar PV are subtracted from what is assumed to be higher “resource costs” - the macro financial costs to society of deploying more solar rather than other means of electricity (more solar is assumed to be more “expensive” to society than the alternative). The impact assessment provides no explanation of how these resource costs are calculated and the assumptions underneath them. Respondees to the consultation are apparently asked to take these figures on trust. Friends of the Earth has emailed officials at DECC asking for more explanation about how these figures have been arrived at but at the time of writing had not received a response; it is in our view unacceptable that a key document underpinning the consultation is not supported with the necessary facts and figures to allow full engagement from stakeholders.
24. The second is that it is likely that this estimate of resource costs places little or more likely no emphasis on the non-financial benefits that decentralised energy brings. Indeed £10 million per year – which amounts to less than 40p a year for every man, woman and child in the country – seems to us a small price to pay for the benefits brought.
25. The speed of deployment of solar is a significant benefit when many technologies will take years to deliver. The IEA warns we have five years to switch to low carbon energy or be locked into irreversible climate change.18
26. Additionally, the feed-in tariff, and within that the solar feed-in tariff, is critical for bringing forward small-scale renewable electricity generation at the local and regional level – it is the only mechanism that does so. This is essential for a number of reasons. Firstly, there is huge technical potential at this level. Research by Poyry and Element Energy for the Government identifies a technical potential of 131TWh available from sub 5MW renewable sources in the UK.19 A study by Dr Brenda Boardman of Oxford University’s Environmental Change Institute for Friends of the Earth and The Co-operative Bank on how to cut carbon emissions from the domestic sector by 80% while ending fuel poverty found that in addition to energy efficiency, every home will need renewable technologies installed to generate clean heat or electricity. That is approximately 25 million installations required in the next 42 years at a rate of 600,000 a year. Just over 100,000 solar projects have been installed since the start of the scheme. According to DCLG achieving even a 60% cut in carbon emissions from the UK’s housing stock by 2050 will require a significant take-up of micro-generation technologies.20
27. The second aim is also important – to drive take up by target non-traditional groups. The changing of this is consistent with recent ministerial claims that the scheme was designed primarily for householders, which is manifestly not the case from both the original impact assessment, and statements of Ministers and Shadow Ministers from both sides of the House at the time of the introduction of the scheme. For example, Charles Hendry said:
“The idea behind it is to allow the inclusion of non-commercial scale projects, such as those that will be installed by homeowners, small businesses, local authorities, community groups, farmers and others. That would help out hospitals and schools that want to facilitate greater use of renewables and ensure low emissions as part of our 2020 targets. It would also help households to reduce their reliance on the grid, ameliorating levels of fuel poverty.”21
This wider role has been understood by the Coalition parties, who both supported the introduction of the scheme, called for an increase in its ambition in April 2010, and committed in the Coalition Agreement to “encourage community owned energy where local people benefit from the energy produced.”22
28. Friends of the Earth believes that local people must be involved in and benefit from the transition to a low carbon future in order for the scale of transformation needed to take place, (by promoting engagement and take up, as noted in the “impacts” section above, and additionally so that this can take place in a more equitable way.
29. Solar PV is particularly important among the small-scale renewables in providing access to renewable energy to wide sections of society and engaging them with renewable energy. This is because solar is more easily deployed in a wider range of locations than other, both in terms of geographical locations and different types of build environments – such as urban and rural settings. This is recognised by Government who in the original impact assessment for the scheme (February 2010) recognised that “PV is easier to deploy than other technologies and carries less risk to the investor since it is a tried and tested technology.” This allows many groups – from businesses such as Marks and Spencer who have invested in solar roofs for some stores, to local landmarks with high visibility like football clubs, schools, hospitals, and churches.23 Typically it also enjoys more support from communities and fewer barriers in planning than other renewable technologies and therefore can be deployed at a much faster rate.
Setting the level of ambition in line with scheme objectives
30. The level of ambition the solar FIT should be seeking to reach, and tariff rates, should therefore be determined by what is needed to meet the scheme’s initial goals of contributing to carbon and renewable targets, involving target groups, and engaging the public. Additionally the scheme should continue to be designed to build up an industry and drive down prices, so that the FIT, as a transitional subsidy, can be removed promptly.
Objective 1: Meeting renewable and carbon targets
31. In addition to meeting the 2020 renewable energy target, we believe the scheme, and energy policy in general should also be set with a view to meeting the Committee on Climate Change’s recommendation of almost entirely decarbonising the electricity supply by 2030 in order to stay with carbon budgets set by the Committee under the Climate Change Act. Friends of the Earth believes should be done primarily through reducing energy demand and renewable energy. Delivering around 52TWh of solar PV by 2030 would require a similar build-up of the solar industry and rate of deployment to that delivered by the feed-in tariff in Germany, but following 10 years behind (see below graph). This level of solar deployment, alongside effective policies on demand reduction and on other renewables deployment, would give a balanced mix of energy technologies compatible with meeting the CCC’s decarbonisation target primarily through renewable energy and demand reduction.
32. In the feed-in tariff debate in parliament on the 23 November, both Greg Barker and Chris Huhne set much stock by delivering a feed-in tariff “like Germany”. Germany went from 0.08 GW installed solar in 2000, to 10 GW in 2009 (with 4 GW installed in 2009 alone),25 and then 17 GW in 2010 (7 GW installed in 2010).26 Their 2050 report implies 110 TWh and 110 GW is possible by 2050.27 Following German deployment rates (but 10 years behind them) would give the below deployment scenario, and is consistent with grid decarbonisation by 2030.
Source: Friends of the Earth graphic, DECC Impact assessment and German Installation data (referenced above) Red, green, purple lines are from DECC’s 2010 and March 2011 FIT Impact Assessment. Blue line is German solar installation 2000-10, ie from the start of their FIT].
33. What is surprising about this level of ambition is its affordability. Element Energy have modelled an alternative “moderate growth” scenario where the sector grows by 25% for the next two years towards 1GW/yr. Such a scenario would allow the sector to continue to create new jobs as the installation rate rises, and would lead to significantly higher electricity generation than the level in DECC’s Impact Assessment. According to the report, this delivers three times the amount of electricity than the Government’s proposals by 2014. It requires just an additional £867 million – or an average of £214 million over the remaining years of the CSR period (equivalent to a total of 60p a month on household bills by 2014, if it were to be bill-payer funded) – or 75% extra budget for 300% extra electricity.
34. This level of deployment is also consistent with that needed to build a mature industry capable of bringing costs down. The Solar Trade Association’s costed Solar Revolution Strategy concluded a mature 1GW pa market would reach competitiveness with retail electricity prices around 2017–19 and would cost households approximately £6.50–£9.00 per annum (consistent with the Element Energy model). This investment is to incubate a technology that can then go on, subsidy free, to deliver up to a significant proportion of electricity supply.
35. Support should also be set at a level that brings in the non-traditional target groups, firstly by setting tariffs to deliver appropriate hurdle rates for different investor types, taking into account the cost of financing.
36. Secondly it is critical to set tariff at such at levels to make split benefit schemes viable. The setting of the PV tariff at its current level has been important in allowing social landlords to take advantage of the scheme for the benefit of their communities: this is where, for example in housing association schemes, one party receives the FIT income and another the free electricity. Ensuring sufficient tariff rates for community-scale schemes to generate sufficient return on investment to enable them to borrow capital is crucial. Element Energy found that financing rates for schemes vary from 5.5% for the lower end of bond market financing to over 10% for venture capital financing. European Investment Bank financing can be available for 4.5% but only for a maximum of 50% of the project.
37. Additionally, local authorities need the ability to finance local renewables schemes and should be supported to develop and then replicate best practice models: soft loans should be made available for households (and businesses) without money in the bank. Ensuring local government, social housing and other public sector bodies are able to use to the scheme to the benefit of the communities they serve and removing barriers and creating incentives for them to do so is key. This is critical to meeting the scheme’s objectives of reaching out to target groups and public engagement, as well as a fundamental feature in delivering socially just outcomes and access to renewables. In Germany 51% of renewable energy is community owned.28
Enquiry Theme 3: How Scheme has been Managed so far, and the Impact of the Management of the Scheme
38. The scheme has not been well managed since the 2010 General Election. Firstly, the capping of the scheme and decision by Treasury (not the ONS) to classify the FIT as imputed tax and spend was not a transparent or understandable process – nor was it consulted on. The “fast-track review” for large-scale solar earlier this year was poorly conducted. Firstly, the primary objective of the consultation was to remain within the CSR spending envelope, and in doing so it merrily tore up the design of the scheme: in the original design tariff rates were set to deliver a specific rate of return designed to achieve a particular level of deployment. Arup found that at the time of setting the tariffs “For systems in the 250kW and above band, the Internal Rate of Return [IRR] would reduce to 0.5%, which is much too low to attract investment. For 200kW the IRR would reduce from 9% to around 3.5%. This would take it below the commercial hurdle rate and make it difficult to justify such a project on a commercial basis. This would imply that all interest in large scale PV would be ended with the new levels”.29
39. The current consultation is a step forward if only in the respect that tariff levels are now being set again to deliver a particular return on investment, however still not in order to meet any particular level of ambition as per the original “rate of return model”. Additionally the ministerial justification for the review was spurious. It rested on responding to the “solar farm threat” – yet cut projects right the way down to 50kW schemes – roughly the size of 15 domestic roofs, and including projects on schools, hospitals and football clubs. This was contradicted by the consultation’s own (very conservative) definition of a solar farm as being at the 250kW level. The consultation received over 500 responses, and over 81% disagreed with the proposals, yet nothing was changed from consultation to implementation.
40. The comprehensive review of the scheme was announced at the same time as the fast-track review, on 7 February 2011. The consultation was due to be released, according to DECC officials, in June, and then, “over the summer” and then in September. There was no update other than “soon” until the rumours of a sudden and drastic cut began to emerge in October, preceding the October 31 announcement.
41. The announcement that rates were proposed to be cut just six weeks after the consultation began, and before the consultation period closes, has had a profound impact which is explored below. However, continuing to insist the spending cap is stayed within for the spending review period, and contracting the industry from between 50-95% as proposed in the current reviews impact assessment, will have an even greater impact. The problem here is the arbitrary, Treasury-imposed, cap itself. It is likely that if the spending cap is not addressed, a further shambolic review will be needed to keep within it again as costs continue to fall. Such a framework would be threatened by constant review. The Government’s Control Framework for Levy-Funded Spending makes it clear that policies will be subject to repeated modification when the priority is keeping within a financial cap, rather than ensuring policy success and industry stability. In response to whether reviewed polices will be re-reviewed the document says that “regular review is a feature of all control framework polices.”30 This fundamentally undermines confidence of both the industry and investors that feed-in tariff rates, or indeed, that or other policies, will be un-tampered with for any given period of time – pushing up policy risk and therefore the cost of capital, and ultimately the cost to the consumer per tonne of carbon saved. Greg Barker in November of last year promised “TLC” for energy policy - transparency, longevity, and certainty.31 Constant re-reviews are the antithesis of this.
42. This repeated reviews this year has already led to repeated distribution to projects, such as Community Energy Warwickshire who had planned two 70kW schemes on local hospitals in advance of the fast-track review, which were then downscaled to 50kW and now risk not going ahead following the latest announcement.32 David Parsons, Chair of the Local Government Association Environment Board has said “Rushing through these cuts before the consultation has even finished is going to leave local authorities stuck between a rock and a hard place. Solar panel schemes that were commissioned based on the promise of the previous rate of subsidy will be jeopardised with many councils unable to meet the shortfall. ‘‘To expect councils and the solar industry to deliver projects and have them registered by OFGEM within six weeks is unrealistic and unacceptable. “Local authorities now face the difficult task of telling hard-up tenants that they will no longer be able to deliver on the promise of reducing their energy bills. “According to the LGA, Torbay Council’s plans for PV installations across 45 public buildings including schools are being put on hold, while Wrexham County Borough Council’s work on a 3,000 solar panel council housing scheme, expected for March 2012, could be derailed.33
43. The Church of England is also concerned about the impact and like many investors is taking the 12th December date proposed in the consultation as a foregone conclusion. Their e-petition reads: “The Government has announced proposed changes to the Feed in Tariffs scheme for small scale low-carbon electricity generation. The proposed cut-off date for the current rate of Fits has been set as the 12 December 2011, instead of previously announced 31 March 2012. Church and synagogue led schemes working to utilise Fits for Solar PV have been developed to generate further funds for sustainability, social action, and community projects. Significantly reducing the Fit ahead of schedule removes an opportunity for communities to reduce their carbon footprint and harms funding for further community work.”34
44. Additionally, as well as impacting community projects the 12 December date is having an effect on the solar industry as a whole. A survey conducted by the Renewable Energy Association and the Solar Trade Association reveals that:35
Initial impact may result in employment levels falling by 42%.
95% of social housing tenants may not get the PV panels they were expecting.
33% of companies fear they may be forced to close.
90% of companies say the proposed cuts are too deep and too fast.
98% of companies alarmed by Government’s treatment of the UK solar industry.
45. The CBI’s Executive Director John Cridland has noted the wider impact that this will have on Government’s green projects due to the destroying of investor confidence in the Government. He said: “Moving the goal posts doesn’t just destroy projects and jobs, it creates a mood of uncertainty that puts off investors and they wonder what’s coming next. Some companies have invested heavily in solar photovoltaic systems and in the supply chains needed to install them. That commitment has been undermined by the feed-in tariff decision - and so industry trust and confidence in the Government has evaporated. This bodes poorly for investment in future initiatives. A new industrial policy needs to recognise the real-time costs of these decisions, and should set out a clear path that investors understand and can believe in.”36
46. The below information on impacts on community schemes has been provided to Friends of the Earth.
(a) Brighton Energy Co-operative
Brighton Energy has cancelled its share offer as a result of the announcement of the 12 December eligibility date for solar PV schemes. It was impossible for the group to raise funds, install and commission solar arrays sooner than March 2012, and the proposed new tariffs make the scheme financially unviable. Brighton Energy Co-op had planned to install PV panels on two churches and at Shoreham Port. The surplus generated from the feed-in tariff would have allowed the group to create a low carbon fund to help people living in fuel poverty to insulate their homes.
(b) South Yorkshire Housing Association
South Yorkshire Housing Association is a Registered Social Landlord, and raised finance to launch its Power Roofs scheme, fitting solar panels to social housing in South Yorkshire. As a result of the feed-in tariff cuts, £1 million of planned PV installations have now been cancelled by the housing association. Craig Jackson: “The criticism of the feed-in tariff when it launched 18 months ago was that it was a scheme that was just for the rich. Now, it really is just a rich person’s plaything. At least with more generous rates we could do something that would help the fuel poor. We ploughed the surplus back into other services, such as providing dedicated energy efficiency advice to our tenants. Now, tenants will be paying for the feed-in tariff through their energy bills but will have no way of gaining any benefit from it.”
(c) Morecambe Bay Community Renewables (MORE Renewables)
MORE Renewables intended to invest £380,000 in community solar PV projects before 31 March 2012, with £20,000 already committed in start-up costs. However, the drastic cuts in the feed-in tariff have scuppered the project. The share offer which would have raised the money is on hold, and the project manager has had his contract terminated. As a result, seventeen community organisations have been denied the chance to generate their own renewable electricity and reduce their energy bills and carbon emissions.
(d) Gloucestershire Community Energy
Gloucestershire Community Energy was preparing to launch a community share offer to raise £400,000 to install solar PV on the roofs of schools, village halls and church and a community centre across the county when the feed-in tariff review was announced. As a result, the group has had to significantly scale down its ambitions, with the community centre likely to be the only recipient of solar panels now, meaning that many others will lose the opportunity to benefit from reduced electricity bills.
A huge number of other projects have either already been cancelled or are at risk including:
Brixton Solar – Bath and West Community Energy – OVESCO – Community Energy Warwickshire – ONCORE – Leominster Community Solar – Bristol Energy Co-operative – The Solar Coop – Wey Valley Solar Schools – Whittington and Fisherwick Environment Group – Low Carbon Chilterns Co-op – Luton Borough Council – Leeds City Council – Mid Wales Housing Association – City of York Council – Wrexham Council – Reading Borough Council – Waltham Forest Council – Torbay Council – Cambridge City Council – Westminster Council – Barnsley Council – Bournemouth Council – Bristol City Council – Crawley Borough Council – Eastbourne Council – Hampshire County Council – Peterborough City Council – Redditch Borough Council – Surrey County Council – Uckfield Council – Waverley Borough Council
Impact on business confidence
47. In response to the fast-track review Jerry Stokes, President of Suntech Europe, a leading supplier of photovoltaic modules in Europe said: “This very disturbing sudden and massive reduction from previous tariffs damages attractiveness for investment and sustainable job creation in the UK and jeopardizes significant investments and planned investments already undertaken. Fit reduction is healthy for the longevity of the market and when well-planned encourages both market growth and investment but also reduction in cost and rapid convergence to distributed energy costs – so called grid parity. Unfortunately, the proposals made in the consultation document have ignored European and global best practice which has been established in countries whose long term commitments to supporting renewable energy is well ahead of the UK. We should learn from the mistakes made elsewhere rather than creating another mistake from which others will benefit.”37 Amiram Roth-Deblon, Head of Business Development New Markets, juwi Solar said: “It certainly puts all our developments on hold until we know what the FiT is. Further our trust in the Government is knocked. We will not invest further into the UK market unless the FiT changes for the better.”38
48. There has been a wider impact on investor confidence in the Government’s commitment to renewable energy as a whole. Ernst and Young said in response to the fast-track review that “the whole investor market was totally disengaged as a result of the Fit being ripped up,”39 while Daniel Guttman, a Director, at PwC Renewables and Clean Tech, reports that “At a high level, a review of FiTs so soon after their introduction does not help the UK’s reputation as a location for cleantech investment…The other possible impact is that investors and businesses lose their trust in the UK’s intentions towards other renewables and clean technology.40
Inquiry Section 4: 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
49. In this section the impact of different proposed scenarios on the spending cap, the flexibility of the spending cap, and the rationale of the spending cap is examined. The costs of Solar PV specifically have been dealt with above.
Costs to consumers
50. The impact assessment suggests that the “costs to consumers” of sticking to the original date of April 2012 for the cuts to FIT tariffs, rather than the new December 2011 proposed date, would increase these costs by £60 million a year – which translates as less than £1 on the average domestic energy bill (<0.1% of a total bill).
51. On paper, the April scenario appears to break the “budget” set for the cap over the whole CSR period, but this is flawed for a number of reasons. Firstly, DECC is allowed to overshoot the budget by 20% without recourse to drastic action, and Government projections suggest that the April date scenarios could be accommodated under this overshoot headroom. Secondly, the cap itself is a flawed concept, the operation of which is shrouded in mystery, as described above. And thirdly, were Government genuinely committed to the objectives of the FITs programme and the creation of stable employment and industry in the solar sector, it could easily find alternative ways to fund the scheme, either in full (as with the RHI) or in part, to cope with any overshoot; the last year has shown examples of when the Government is perfectly able to find extra funding when it chooses – such as to freeze fuel duty, or encourage councils to return to weekly bin collections.
52. One of the two reasons given for the need to introduce the December date is that the fear of higher than predicted take-up will mean spending “very rapidly result in the spending envelope for the FITs scheme being breached” (consultation document). Yet despite the significant impact that the proposal to move to December tariffs would have – and is already having – the Impact Assessment does not paint a clear case for why the spending envelope will indeed be breached. Its “central” estimate for take-up under its chosen scenario comes in 17.2 per cent under budget – and that is to ignore the 20% headroom that DECC is permitted by Treasury to overshoot the budget by before the sort of urgent corrective action it is taking is actually required to happen. Even allowing for other FIT technologies it seems that the proposal to move to a December reference date, rather than new tariffs simply beginning in April, is an unnecessarily extreme response.
53. As the consultation document goes on to explain, the Government has put in place a “Levy Control Framework” which sets out this spending envelope: it is in effect a cap on the total amount of FITs payments for the four years of the current Spending Review period:
|
£m |
2011-12 |
2012-13 |
2013-14 |
2014-15 |
TOTAL |
|
Budget |
80 |
161 |
269 |
357 |
867 |
54. The Impact Assessment presents estimated costs for its three main scenarios. Its central estimates are summarized below.
|
2011–12 |
2012–13 |
2013–14 |
2014–15 |
TOTAL |
Over / under budget (£m) |
Over / under budget (%) |
||
|
Budget £m |
80 |
161 |
269 |
357 |
867 |
|||
|
Scenario 1: no changes to tariffs |
110 |
360 |
570 |
790 |
1,830 |
+963 |
+111% |
|
|
2: with December reference date |
Without energy efficiency requirement |
110 |
210 |
220 |
230 |
770 |
-97 |
-11.1% |
|
1. With energy efficiency requirement [lead option]* |
110 |
205 |
210 |
215 |
740 |
-127 |
-17.2% |
|
|
3: without December reference date |
Without energy efficiency requirement |
110 |
270 |
280 |
290 |
950 |
+83 |
+9.6% |
|
1. With energy efficiency requirement* |
110 |
265 |
270 |
275 |
920 |
+53 |
+6.11% |
|
55. Source: Impact Assessment. * DECC provides possible ranges for take-up – we use the central figure for a given range.
Source: Friends of the Earth graphic based on data in DECC Impact Assessment
56. These projections imply the following:
(a)
(b)
57. In any case, it is highly relevant – but not mentioned at any point in the consultation – that the conditions attached by Treasury to the Levy Control Framework is that DECC is permitted to exceed the Spending Envelope by up to 20% before it “has to develop urgently plans to bring policies in line with the cap”: “DECC and the Treasury will agree at the outset a range of acceptable headroom above the cap, which will represent the level of permissible variation before DECC has to develop urgently plans to bring policies in line with the cap… The acceptable headroom will initially be 20% of the total cap but will be reviewed during the Renewables Obligation Banding Review and the Feed-in Tariffs Comprehensive Review”.41 No mention is made in the current consultation of any review to this 20% headroom, it is reasonable to assume that it still stands.
58. Making allowance for the existence of a 20% overshoot before urgent action is needed, all of the proposed scenario budgets now appear to comfortably fit within the permissible headroom – appearing to leave ample room even under the most “expensive” scenario for other technologies. DECC has provided no data in the current Impact Assessment on the expected trajectories for the other technologies supported by the FIT, such as hydro, wind or anaerobic digestion, so it is impossible to judge how much “headroom” should be provided in the budget to allow for these other technologies. The Government’s proposed scenario would leave £300 million available for other technologies under the 20% headroom.
|
£m |
TOTAL |
Over / under budget with 20% headroom (£m) |
Over / under budget with 20% headroom (%) |
|
|
Budget |
867 |
|||
|
Budget with 20% headroom |
1,040 |
|||
|
2: with December reference date |
Without energy efficiency requirement |
770 |
-270 |
-26% |
|
1. With energy efficiency requirement [lead option] |
740 |
-300 |
-28.9% |
|
|
3: without December reference date |
Without energy efficiency requirement |
950 |
-90 |
-8.7% |
|
1. With energy efficiency requirement |
920 |
-120 |
-11.6% |
|
59. The point is not necessarily to state that straying into the 20% headroom territory is something over which the Government should have no qualms. However given the tremendous impacts that rushing for a December date will have on schemes and the implications for investor confidence in the Government’s green credentials, it seems clear that the imperative to make the cuts proposed as the lead option appears to be overstated.
60. In practice, the “budget” is itself something of an arbitrary construct, and the very concept of using it as justification for the earlier tariff cuts is questionable. At the macro level the “cost” of the FIT is zero: FIT is funded through levies on energy bills, with payments then recycled to FIT recipients from a central funding pot. The “budget’s relevance in terms of impacts on bills is found not in the “cost” of the scheme but in its breakdown of what the scheme costs for those households who do not receive the FIT. It is a distributional problem, not one of absolute “cost”: who pays, and who benefits?
61. Levies on bills are inherently regressive, because bills themselves are regressive – the structure of bill charging is such so that lower energy users do not get charged proportionately less than higher bill users. If the Government is concerned about the impact on poorer households of the FIT, it is proceeding in entirely the wrong direction: sweeping the rug from under schemes such as council-led or social housing providers will ruin access to FIT for many households on lower incomes. It should be working to reform the FIT levy so that it is charged more fairly – for example on the basis of units of consumption not levied as a flat rate – and ensuring that those in the lower income deciles disproportionately benefit.
62. Friends of the Earth disagrees with the contention that nothing can be done to change the cap on the feed-in tariff scheme. There are many options open to Government. First of all, simply to abandon the cap itself; as stated above the cap is arbitrary and is a fundamental change to the scheme brought in without consultation during the course of the Comprehensive Spending Review. Other European countries, such as Germany, do not operate with such a cap. Secondly, Friends of the Earth has been told that Treasury Minister Danny Alexander was asked why caps of the different policies that fall under the control levy framework cap could not be flexible, to allow for underspend in one to help with overspend in another; he said that nobody from the Department of Energy and Climate Change had asked him. This is confirmed by Chris Huhne’s statement to MPs that he had not asked the Treasury whether this was possible. 42 Mystery shrouds the operation of the cap, what flexibility there is, and whether spending between different policies under the cap can be traded – and Ministers themselves do not seem to know.43 On 3 November Friends of the Earth wrote to Treasury asking for clarification on how the cap works in practice; on 14 November we received a holding reply informing us that we would receive a response by 2 December; by this time over four weeks will have passed from our original enquiry.
63. Fourthly, the Government has other options than to pay for the feed-in tariff from levies on bills. The Renewable Heat Incentive is now to be funded from general taxation. There is no reason whatsoever why the same principle could not be adopted for the feed-in tariff – either in full or in part, to cope with any “overspend” against the cap. There appear to be available income streams from green programmes that could be used in this way, including the CRC, the carbon floor price, and the EU ETS – the latter of which the Conservative Party has previously said should be used to fund a feed-in tariff through a “Decentralised Energy Fund”. As spelled out above, the Treasury benefits from increased tax inflows generated by increased economic activity caused by the feed-in tariff scheme that could contribute towards.
References
1 Element Energy report for Friends of the Earth and Kingspan, “Implications of the Comprehensive Review of the Feed-in Tariff for the UK PV Industry”, November 2011
2 http://www.reuters.com/article/2010/12/06/us-germany-solar-idUSTRE6B53L220101206
3 Lord Marland in House of Lords responding in feed-in tariff debate, July 2011
4 Element Energy report for Friends of the Earth and Kingspan, “Implications of the Comprehensive Review of the Feed-in Tariff for the UK PV Industry”, November 2011
5 Presentation by Craig Jackson, South Yorkshire Housing Association at Friends of the Earth Councils, Communities and Climate Change Conference, 2 November 2011, London.
6 http://www.renewablesinternational.net/citizen-owned-green-power-in-germany/150/537/32311/
7 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/RMR_FINAL.pdf
8 IPPR, Green Streets, Strong Communities http://www.ippr.org/publications/55/7703/green-streets-strong-communities
9 Good Energy, Feed-in Tariff Report, 2011, http://www.goodenergy.co.uk/feedintariff/good-energy-feed-in-tariff-report
10 DECC, 1 February 2010 a. Impact Assessment of Feed-in Tariffs for Small-Scale, Low Carbon, Electricity Generation (URN10D/536 http://www.dekoepel.org/documenten/FITsImpactAssessmentaccompanyingGovernmentResponse[1].pdf
11 Friends of the Earth “Briefing: In defence of feed-in tariffs” March 2010 www.foe.co.uk/resource/briefings/monbiot_fits_response.pdf
12 Conservative Party Green Paper “Power to the People – the Decentralised energy revolution” 2007
13 IPCC’s fourth assessment report
14 STA, Solar Revolution Strategy, May 2011, http://www.solarpowerportal.co.uk/assets/attachments/Microsoft%20Word%20-%20Solar%20Revolution%20Strategy%20-%20REPORT%20-%20FINAL.pdf
15 CCC, Renewable Energy Review, May 2011, http://www.theccc.org.uk/reports/renewable-energy-review
16 DECC, Renewables Road Map, 2011 www.decc.gov.uk%2Fassets%2Fdecc%2F11%2Fmeeting-energy-demand%2Frenewable-energy%2F2167-uk-renewable-energy-roadmap.pdf&ei=cQbPTueEE8HL8QOGs_TADw&usg=AFQjCNECqDW5kwzAlOI4hoF7zv8xmSeGJw
17 CCC, Renewable Energy Review, May 2011, http://www.theccc.org.uk/reports/renewable-energy-review
18 http://www.guardian.co.uk/environment/2011/nov/09/fossil-fuel-infrastructure-climate-change
19 Qualitative issues in the design of the GB feed-in tariffs, Poyry and Element Energy, June 2009
20 Review of Sustainability of Existing Buildings: The Energy Efficiency of Dwellings – Initial Analysis, DCLG, 2006.
21 Charles Hendry, 18 Nov 2008 http://www.publications.parliament.uk/pa/cm200708/cmhansrd/cm081118/debtext/81118-0006.htm
22 Coalition Agreement for Government, May 2010
23 Friends of the Earth “Consultation Response: Fast track Review of Feed-in Tariffs” May 2011 www.foe.co.uk/resource/briefings/fits_fast_track_response.pdf
24 http://www.westminsterforumprojects.co.uk/forums/event.php?eid=373
25 http://www.bmu.de/files/english/pdf/application/pdf/broschuere_ee_zahlen_en_bf.pdf , p14
26 http://www.erneuerbare-energien.de/inhalt/47055/3860/
27 http://www.umweltrat.de/SharedDocs/Downloads/DE/02_Sondergutachten/2011_Sondergutachten_100Prozent_Erneuerbare.pdf?__blob=publicationFile
28 http://www.renewablesinternational.net/citizen-owned-green-power-in-germany/150/537/32311/
29 Analysis by Arup Consulting for Friends of the Earth
30 Control Framework for DECC levy-funded spending, Questions and Answers, DECC, 29 March 2011, p15
31 Greg Barker, November 2010, www.decc.gov.uk/en/content/cms/news/micro_council/micro_council.aspx
32 A list of known affected community projects is being updated here: https://docs.google.com/a/sharenergy.coop/spreadsheet/ccc?key=0Arm5tIWT6huTdDlUZUExVjlwcVYyOWxRaU5HZFRHcUE&hl=en_GB#gid=0
33 http://www.localgov.co.uk/index.cfm?method=news.detail&id=104023
34 http://www.churchcare.co.uk/news.php
35 http://www.solarpowerportal.co.uk/news/fit_cut_aftermath_11000_jobs_face_axe_33_companies_face_closure_says_rea_su/
36 http://www.google.com/hostednews/ukpress/article/ALeqM5iI8QLqZYN-TZG_zF5eAaAf2eqTeQ?docId=N0578421320936398883A
37 http://www.pv-tech.org/guest_blog/uk_fit_review_we_will_not_be_moved?utm_source=pvtechfeeds&utm_medium=rss&utm_campaign=guest-blog-rss-feed
38 http://www.pv-tech.org/guest_blog/uk_fit_review_we_will_not_be_moved?utm_source=pvtechfeeds&utm_medium=rss&utm_campaign=guest-blog-rss-feed
39 http://www.bbc.co.uk/news/business-12790613
40 PriceWaterhouseCoopers, 18 March 2011,
41 http://hm-treasury.gov.uk/d/control_framework_decc250311.pdf (March 2011)
42 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenergy/uc1623-i/uc162301.htm
43 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenergy/uc1623-i/uc162301.htm
25 November 2011