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

Carillion Energy ServicesBackground

Carillion Energy Services (CES) welcome the opportunity to respond to this joint inquiry from the Energy and Climate Change Committee and also the Environmental Audit Committee—Consultation—Solar Feed-in Tariff.

In order to put our comments into context, it may be helpful to outline briefly our role in the provision of energy services across the UK and Ireland.

Carillion Energy Services was formerly Eaga plc prior to its acquisition by Carillion in April 2011. Carillion is one of the UK’s leading support services companies with a substantial portfolio of Public Private Partnership projects and extensive construction capabilities. The Group has annual revenue of over £5 billion, employs around 46,000 people and operates across the UK, in the Middle East, Canada and the Caribbean.

Carillion Energy Services, a division of the group are a leading independent energy services provider and one of the largest installers of renewable technologies and domestic heating services in the UK. We currently manage Warm Front on behalf of Department of Energy and Climate Change and we also have experience of working for the Welsh Assembly Government on the Home Energy Efficiency Scheme, the Warm Homes initiative in Northern Ireland and the Central Heating and Warm Deal programme in Scotland. We also worked closely with Utilities and Local Authorities in managing the delivery of energy efficiency programmes.

Carillion Energy Services are committed to helping the environment and combating climate change; we provide renewable energy solutions to private housing, specifically through the installation of solar thermal panels and air/ground source heat pumps. Our Clean Energy Programme works in conjunction with the Government’s Feed-in-Tariff to install solar photovoltaic panels on social housing properties, we are working with a number of Housing Associations and Local Authorities to provide free electricity to social tenants and have completed over one thousand installs to date. Over 1,000 properties have benefited from the Clean Energy Programme due to our partnership with social housing properties.

Within our Carbon Services team, we support the largest number of area-based programmes in the UK, leveraging multiple funding sources to accelerate delivery against policy objectives and drive the Government’s climate change and carbon reduction agendas. Our work with the UK’s major utilities and energy suppliers allowed us to deliver a carbon saving of 11.9 million tonnes of Carbon Dioxide and 1.7 million innovative energy saving products in the financial year 2009–10.

For further information on our work please visit—http://www.carillionplc.com/

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

1. DECC’s Renewables Roadmap states clearly the impact that Solar PV Feed in Tariffs—“Solar photovoltaic (PV) technology has shown significant development in recent years, with ongoing technological improvements and capital costs falling. By the end of May 2011 nearly 38,000 Solar PV installations in Great Britain were receiving support through the Feed-in Tariff” A further measurement of the impact of the Solar PV Feed in Tariffs is outlined in unpublished correspondence, from the Minister of State at DECC who advised us that—“Since the Feed in Tariffs scheme started, it has been successful in encouraging people in Great Britain to get involved in local, clean green energy generation. Over 100,000 homes now generate their own electricity, which is the start of a positive move towards a more decentralised and local energy economy—an economy in which homes, businesses and communities are empowered to generate their own energy, and in which low carbon innovation helps sustain green jobs at a critical time for our economy.”

2. We believe that the proposed changes will have an impact upon individuals and communities. Our experience of working with Housing Associations and Local Authorities is that the Solar PV Feed in Tariffs have a real impact upon community engagement and raising awareness of issues around energy use. In our work on the Chale Community Project, we established “Community Contacts” to work with the local community and raise awareness. Residents reported a greater awareness on the impact of Solar and also the fact that they were actively monitoring their energy use and the Feed in Tariffs and more importantly—speaking with each other on energy use. “This project has also brought a lot of people out of their homes into the community. It’s provided a great opportunity for us all to look out for each other, and will make it easier to do this in years to come.”

3. Such projects also have real economic benefits at a community level by increasing local employment and therefore socially benefiting the community.

4. The impact upon individuals is summed up by one of the many tenants to have benefited from our Clean Energy Programme—Mrs Bray from Welwyn and Hatfield—“When Welwyn & Hatfield explained there was an opportunity to benefit from the solar panels I was interested in taking advantage, but I really didn’t know how much money it would help me save. My quarterly bills were typically around £70 but my latest bill has just come in at £38 and I’m over the moon. It’s been the same for my neighbours who have had the systems installed and we are all delighted we have these panels on our roofs.”

5. On the state of the solar energy market; we believe that this has been a thriving, developing industry and we accept the figures that have been quoted in parliament of 4,000 businesses and 25,000 jobs.

6. We acknowledge that installation volumes are exceeding expectations and accept that a degree of reduction to the Feed in Tariff is required to redress the balance, and avoid the potential to decrease the lifetime of the FiT scheme. However the level and speed of the cuts as proposed presents a number of negative impacts and Government needs to construct a proposal that works within appropriate budget restraints in an equitable manner.

7. In particular, for the investor funded models to survive, a practical rate of return is needed to allow the benefit to flow to those who could never afford to purchase a Solar PV installation. The proposed cut-off date of 12 December creates a further inequity to the social housing funded programmes as these programmes have required considerable long term investment to develop the model and have set up secure supply chains even though delivery is slowed by protracted procurement processes. Much investment has been made prior to the reduction in material prices but delivery has not been able to flow through due to following due process. The proposed cut off date allows insufficient time for extensive programmes that require tenant engagement and coordinated quality driven installations to adapt.

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

8. The objectives of the Solar PV Feed in Tariffs were primarily to encourage individual householders and communities to consider their energy use and also to stimulate the energy sector in terms of economic growth. Ed Miliband summed this up strongly at the initial launch-“The guarantee of getting an income on top of saving on energy will be a carrot to householders and communities across wanting to make the move to low carbon living.” “The feed in tariff will change the way householders and communities think about their future energy needs, making the payback for investment far shorter than in the past. It will also change the outlook for a range of industries, in particular those in the business of producing and installing small scale low carbon technology.”

9. We would suggest that jobs created, emissions reductions and energy-saving behavioural change are all matters that need to be taken into consideration in order to find the balance between affordability and delivering the objectives. We have real concerns that these issues have not been taken fully into consideration, particularly following the recent Energy and Climate Change Committee on 2 November, when it was suggested in the response from DECC that no impact study on jobs had taken place before the decision to cut the tariffs.

10. We have great concerns about the impact upon energy saving behavioural change. The suggested multi-installation tariff penalises those at the lower end of the economic spectrum who will not be able to invest the required sums. These householders such as Mrs Bray, quoted above, would benefit from the saving on energy bills that Solar Photovoltaic would bring through an investor funder programme.

11. The budget cap remains a key issue and we believe there needs to be further review into the 20% head room on the levy fund cap in relation to volume of installations over the period to 2020. We would also suggest further discussions should be held in relation to whether there is any room for movement between renewable budgets with the delays in the Renewable Heat Incentive being a potential area for review.

12. The impact that these proposed cuts are having on investor and business confidence in Green Deal also needs to be addressed. We are already receiving feedback from our investors questioning the Government’s published commitment to deliver in these areas. The issue of sustaining workforces through the period where, should the consultation go ahead as set out, the Solar PV market is considerably cut and Green Deal remains unconfirmed. Without a Solar PV market—or at best a severely reduced market—there will be job losses.

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

13. Like others in the industry, we have real concerns regarding DECC’s management of the announcements on the Solar PV Feed in Tariff and the impact this has had to date. In addition to this, like others, we have concerns regarding the management of the Consultation.

14. The management of this issue has left investors feeling unstable and reluctant to engage with the industry. The proposals to bring forward the reduction in FiTs from the date previously announced by the Government of 1 April 2012 has seriously undermined the confidence and trust in Government from our industry and also the confidence and trust of the financial investors who have supported our programmes to install Solar PV systems, particularly for homes in fuel poverty. The industry has invested heavily in establishing supply chains for delivering solar photovoltaic systems and in stocks of solar panels that are due to be fitted over the period to 31 March 2012. These commitments have been undermined by the bringing forward the date at which FiTs are reduced as we now need to stop processing new applications for Solar PV systems very quickly, given the time from enquiry to MCS accreditation is at least six weeks.

15. We accept that FiTs have to be reviewed and revised to reflect reductions in the costs of panels and efficiencies as the industry matures. However we question how attractive a tariff of 21 pence per kWh for single home installations of up to 4kW will be to individuals who can afford to pay the installation costs, given the timescale over which they must commit to this investment. Even more at threat is the attractiveness of a tariff of 16.8 pence for multiple installations, such as those we are carrying out for Housing Associations and Local Authorities that are being funded by Carillion and a number of banks under a private finance model. Whilst we support value for money and agree that some reduction is required, we feel the proposal creates and unfair level of damage on those models that support those most in need. These programmes, which are set to provide solar PV for many tens of thousands of homes in fuel poverty, will be stopped or at least severely curtailed. We would reiterate that as per our answer in paragraph seven, a practical rate of return is needed to allow the benefits of Solar PV to be passed to those who could never afford to purchase a installation, and that these models require long term investment in the supply chain that makes an eligibility date of 12 December too short for these extensive programmes.

16. Once again, we would re-iterate that we recognise that the cost of PV materials has dropped and energy prices have risen and therefore adjustments to the levels of FiTs were inevitable and necessary at some point. However the proposed cuts have come unexpectedly and created turmoil within the industry rather than a planned approach, engaging with the industry which would have allowed the PV sector to adjust and investors to prepare.

17. As a result, those who will suffer the most are tenants, Housing Associations and Local Authorities. “The cuts will have a significant impact on social housing projects underway in Scotland which have been designed to provide low-income tenants with free electricity to help tackle fuel poverty. For example, Glasgow Housing Association has signed a contract for installations on 500 homes and Dundee City Council has started a tender process for 1,000 homes. These projects could be stopped in their tracks.”

18. We accept that all bill payers shouldn’t pay for investors to make excessive returns, but these funded models are required to give access to those who can’t buy outright. Carillion Energy Services are not alone in operating in this area. However we are unique in having set up a £300 million special purpose vehicle dedicated to this initiative. This has previously been heralded by the Secretary of State as a financial and delivery model which could drive forward the Green Deal. This Special Purpose Vehicle (SPV) has allowed us to work with Housing Associations and Local Authorities and their tenants to bring far reaching benefits including reduced energy bills. This model, supported through a hybrid project financing structure, allows Solar PV units to be installed on domestic roofs at scale and at no cost to the tenant. The considerable advantages this fund would have brought through investing in improvements in social housing is in jeopardy.

19. In particular, Carillion Energy Services have signed contracts with a number of Housing Associations and Local Authorities and have others waiting on funder approval. The requirement for public bodies to test Best Value and value for money means that a number of these contracts have only been signed in the last few weeks. As a result work has not started at scale. There will be over 10,000 social housing Solar PV installations at immediate risk as a result of the comprehensive review and shortened timeframes.

20. In this context the proposed changes to the FiT regime are particularly problematic both in the timing and the steepness of the reduction. It is also true to say that social housing residents and providers will have missed out relative to private householders who have been able to pay for installation upfront. There is an obvious lack of equity in the outcome from the speed of change. Social housing schemes have just not got going. We believe that there is therefore a compelling case where contracts have been signed and tenant expectations raised for the current FiT rate to apply beyond 12 December and preferably up until 31 March 2012.

21. On the management of the consultation, it is argued in the consultation document that the timeframe given allows organisations sufficient time to complete their programmes and register with a FiT supplier. However DECC themselves acknowledge that OFGEM figures on competed installs are not accurate due to the time delays in registering with a FiT supplier, but programmes that have contracts planned through to the original review date of April 2012 are expected to achieve the same volumes within a remarkably short time frame. Greg Barker has recently responded to the Shadow Secretary of State confirming that up to 32,023 sites could be in a situation of not being able to meet the timescales laid down.

22. There is broad agreement that the proposed multi-installation tariff is not workable at 16.8p. We believe that this model of installation should not be unfairly penalised due to the benefit it brings to low income households who would not otherwise be able to access Solar PV, and the recognition that there are additional costs associated with this delivery model, as well as the need to keep investors involved.

23. In addition to this we would like to raise the issue of the Community Tariff. There are references to a community tariff being considered in Phase 2 of the consultation process, however, this will be too late to have any compensation effect or real impact. Opportunities and investment will be lost and supply chains broken. The procurement process in the public sector would need to be restated which would lead to more costs after a considerable investment would already have been wasted.

24. We fully support the concept of encouraging energy efficiency and the link to renewable energy. This is how we have modelled our business going forward and we have been working on the whole house and whole business approach for a considerable time.

25. While the concept is right we believe there are a number of questions which Government needs to answer before we close the parameters in a way that further penalises those on low incomes and causes further concern for businesses that will be find it difficult to make the equations add up.

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. We would support the Micropower Council response that identifies that by cutting tariffs now, rather than on 1 April, would lead to an estimated saving of just £0.60 on the average annual electricity bill (using figures from the DECC Impact Assessment) Longer term, the impact of even a “Do Nothing” approach would have been only around £22 on the average bill in 2020. In view of this, the action proposed in the consultation document would appear to be disproportionate to the scale of the threat, especially in terms of the wider repercussions of these proposals that are already affecting many in the sector.[60] We can see that in the current economic climate that the “Do nothing” approach would be seen to be adding to the burden on energy consumers, but would suggest that delaying the cut in tariffs to April would be a much more pragmatic option, with a minimal impact on bills payers.

Experience of similar incentive mechanisms for renewables in other countries

27. Carillion do not have experience of similar incentive mechanisms for renewables in other countries however we would refer to the recent answer provided by the Minister of State on FiTs in the European Union. “The structure of support for renewable energy varies considerably across European Union (EU) member states, so the schemes cannot be compared directly with each other. The Department collects information on the schemes in a number of member states, but not in the form requested. Tariffs have been reduced recently in Germany, France, Spain, Italy and Belgium in the face of global falling costs for solar photovoltaic (PV) technology. Our proposed tariff of 21p for domestic scale installations (=4 kW) is similar to the rate offered in Germany. Whilst we recognise that the tariff within many EU countries has been reduced recently, we would urge that DECC also take wider issues into consideration particularly the economic, employment and environmental status of Great Britain—in comparison to these EU countries. The economic, employment and environmental impact of making such a sudden decision on FiTs in the United Kingdom is not comparable with the overall FiTs levels in other countries.

23 November 2011

Prepared 22nd December 2011