Electricity Market Reform - Energy and Climate Change Contents


Supplementary memorandum submitted by Low Carbon Group

This paper provides supplementary evidence to the Committee's inquiry on Electricity Market Reform, specifically in relation the Government's cap on Feed-in Tariff payments following the 2010 CSR and the announcement of a fast-track review of Feed-in Tariffs for large scale Solar PV in February 2011. This short paper demonstrates the impact of earlier than expected government intervention on investor confidence of this nascent industry and the wider consequences to the future renewable energy infrastructure.

Impact of the CSR cap and fast-track review of the FiT for large scale solar.

The following changes have taken place within the UK Solar market since the £360 million cap was,imposed during the 2010 CSR and the announcement of the fast-track review in February 2011:

BUSINESSES AND INVESTMENT IMPACT

  1. The following Independent Power Producers are being restricted from delivering their business plans of circa 100MW per company of renewable power this year to the energy mix of the UK. These are the new class of independent UK power producers who have a serious intent to deliver the low carbon energy mix the country requires: MO3 Power, Low Carbon Solar, Lumicity, Element Power, Cornwall Power, WRS, Alectron.[18]
  • No senior lender is currently willing to lend capital to UK solar power projects. This list includes West LB, Nord LB, RBS, the Cooperative Bank and Rabobank. Without senior lending it is virtually impossible to finance a renewable energy project.[19]
  • Banks such as the Coop have invested for over a year in getting up to speed with the solar market and can now not benefit from this preparation.[20]
  • Ingenious Ventures has suspended two solar energy VCT funds—equivalent of £30 million investment. They have lost six months of time and cost, but more importantly were introducing new investors to renewable energy for the first time via the IHT, VCT, EIS annual tax wrapper investment market.
  • Triplepoint has shelved its interest in solar projects, suspending the launch of its planned £100 million Solar Income fund and is now awaiting "greater clarity" on the future of the feed-in tariff scheme before moving forward with its renewable energy investment plans.[21]
  • Matrix has suspended its clean energy fund.[22]
  • Low Carbon Investors (LCI) shelved all investment plans for large solar photovoltaic projects until the fast-track review is finalised.[23]
  • Triodos Bank is reconsidering whether to continue with solar farm investments.[24]
  • County Council pension investors looking to invest in UK renewable energy infrastructure for the first time have had to re allocate their monies elsewhere and are temporarily / permanently lost to the industry—work that took three years to build them to a position of being willing to invest in the first place.[25]
  • Countless rooftop schemes, thought to amount to the creation of 5000 new permanent jobs in the UK, are now in limbo, unable to draw down funding.

Low Carbon Solar has invested £several million to date optioning potential brownfield and green field land, hiring 30 staff, building a design and survey capability and taking forward a series of planning applications. It now finds that it cannot get a return on its investment following the government's announcement of a premature review. Typical costs incurred to date per site are: £150,000 for design, planning application and land options, £150,000 for Grid connections.

COMMUNITY INVESTED PROJECTS HAVE BEEN SUSPENDED

It is proposed to build a community owned solar farm under the Westmill windfarm on the disused WW2 airfield in Oxfordshire. The planning decision is due on 23 March.

Energ4All, in collaboration with site owner Adam Twine and Low Carbon solar, will put in place the legal, organisational and financial basis for a local co-operative and will sponsor a public share offer approved by the FSA, to raise capital from individuals and organisations in the area. The share offer to raise capital for community ownership (of 75% of plant) will only happen if planning consent is granted.

Once the co-op has paid operating and finance costs, any surplus is distributed to the members as share interest and can be used to fund local environmental projects at the discretion of members. Anticipated share interest may be between 6-10% p.a.

This project requires a timeline of three months to seek FSA approval for a cooperative share offer once planning is achieved, a month to finalise the prospectus, three months to launch the share offer and reach financial close and then five months to build the site. All of this tightly time framed to meet the previous FiT March 2012 deadline; now impossible to achieve without tariff clarity from the government.

CONSEQUENCES FOR UK RENEWABLE ENERGY INFRASTRUCTURE

  • The FIT scheme could enable the renewable energy sector to reach a critical mass, allowing for a robust and mixed energy sector. The UK will lose 30GW of electricity capacity by 2016, which needs to be replaced with low-carbon generation if we are to avoid blackouts, brownouts & move toward a low to no carbon future. Investors now feel a premature change to the FIT puts doubts on all tariffs for all renewables.
  • The fast-track review also places in jeopardy the opportunity for reinvestment from Low Carbon Solar's development profits into high risk development of tidal and wind energy technologies, underpinning future evolution and growth of the entire renewable energy economy.
  • The current level of the FIT is acknowledged as requiring some level of review, however this must be undertaken with the future renewable energy market front of mind; making sure there is a tariff which continues to allow for new investment money from pension funds, community ownership and high net worth individuals, thus in time lowering the cost of capital to the industry.
  • To be able to deliver to our funders and to build confidence with pension funds, we need to be able to initially offer a certain 12% IRR to investors (8.6% unlevered) familiar with infrastructure assets. It will then be possible within a year, to bring in 10% return (7% unlevered) money, potentially digressing further in 2014 to 9% returns.

March 2011



18   Direct discussions between Low Carbon CEO and industry partners as detailed Back

19   Direct discussions by Low Carbon team Back

20   Direct discussions by Low Carbon team Back

21   GreenBusiness http://www.businessgreen.com/bg/news/2029359/investment-funds-shelve-solar-plans-following-feed-tariff-review Back

22   lbid Back

23   lbid Back

24   lbid Back

25   Direct discussions by Low Carbon team Back


 
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© Parliamentary copyright 2011
Prepared 16 May 2011