HC 1605 Energy and Climate Change and Environmental Audit CommitteesSupplementary written evidence submitted by the Department of Energy and Climate Change

1. What is the basis of, and assumptions underpinning, the Department’s various estimates of the cost added to energy bills in 2020 as a result of Solar Feed-in Tariffs, including the following assessments that have been put forward: £26, £55, and £80?

Full details of how the Department estimates the impact of the Feed-in Tariffs (FITs) scheme on energy bills are in the attached note, which explains how estimates of bill impacts are derived from the projected estimates of subsidy costs (labelled “costs to consumers” in the Impact Assessment). In short, the starting point for all estimates is the solar photovoltaic (PV) installed capacity under FITs to date combined with modelled projections of the level of uptake of solar PV going forward.

Estimates of bill increases of (a) £26 (b) £55 and (c) £80 to average consumer energy bills in 2020 are all derived from the “no change” scenario. Under this scenario, which was as envisaged when the FITs policy was originally introduced, current generation tariffs for solar PV continue until April 2012 and are then degressed at 8.5% per annum from 2012-13 to 2014-15, and from 9% per annum from 2015-16 to 2020-21. All three estimates relate to the costs of solar PV only, not of other technologies supported by FITs. (a) and (b) are based on the modelling undertaken for the Impact Assessment supporting the current consultation on FITs for solar PV, while (c) is based on newer modelling that reflects the latest data as at the time of the hearing (13 November). (The rate of new installations continues to rise; weekly installation data is published on our website athttp://www.decc.gov.uk/en/content/cms/statistics/energy_stats/source/electricity/electricity.aspx,but for simplicity we quote the analysis prepared in advance of the hearing)

The estimates are based both on latest installation data and on modelled projections of how subsidy costs could increase in the future. Estimating future solar PV take-up and subsidy costs is challenging due to uncertainties over technology costs, demand and rates of return. In order to reflect this uncertainty, we projected different paths of future deployment to illustrate the range of impacts that could accrue under different circumstances.

The specific assumptions behind each estimate are as follows (all costs in 2010 prices, undiscounted):

(a)£26 (Table 17 of the published impact assessment). This is based on our central growth assumptions for solar PV. These use analysis of PV installation data up to the end of September 2011 to project PV growth and subsidy costs to April 2012. In order to estimate the increase in subsidy costs post April 2012 we used results from DECC’s FITs model, which estimated the rate of growth of subsidy costs under the current tariff structure, using market growth rates and cost assumptions from the research published alongside the consultation.

   Rates of growth derived from the FITs model are much lower than observed installation growth rates in PV over the last few months, and are restricted to market growth of 70% per annum (in contrast to rates of increase in installation growth of 25% to 35% per week seen recently – equivalent to annual growth rates of 1,300-1,820%). This leads to generation from PV of around 12,300 GWh by 2020 (equivalent to c .2-3 million installations), resulting in subsidy costs of around £2,790 million. This would add approximately £26 per annum to typical domestic consumer bills.

(b)£55. This is based on “high” growth rate assumptions for solar PV, and uses data from the same date as that used for the Impact Assessment (as well as similarly assuming no change to tariffs before April). Our central growth scenario assumes that PV growth rates are exceptionally high this year owing to the announcement of the comprehensive review in February 2011, and that the growth rate would slow post April 2012. The high growth rate scenario assumes that higher growth rates continue for another year, and return to the growth rates derived from the DECC FITs model from April 2013. This leads to generation from PV of 23,800 GWh (equivalent to around 4-6 million installations) and substantially higher subsidy costs of around £5,990 million by 2020, which result in an impact on domestic consumer bills of approximately £55 per annum.

(c)£80. Since the Impact Assessment was published, new installations data has indicated that the profile developed for the Impact Assessment is under-predicting current PV growth, with the number of installations in October significantly exceeding the predictions from the model. We therefore increased the baseline growth assumptions in both the central and high growth scenarios in order to take account of these higher growth rates. This increased our estimate of generation from PV and estimated subsidy costs to April 2012 by around 50%, and led to an updated estimate of the impact of solar PV on bills by 2020 to £40 per annum in the central case and £80 per annum in the high case (equivalent to around 34,600 GWh of generation, and 6-9 million installations; note that the latest weekly installation rate of over 20,000 <50kW PV installations is equivalent to an annual installation rate of over one million, demonstrating the technical potential of the industry).

It is important to stress that all estimates of a no change scenario are subject to a large amount of uncertainty, both as to the number and size of PV installations taking up FITs. They also imply that no action would be taken to curb FITs costs before 2020, even though costs would exceed the budget for the Spending Review period several times over. DECC will continue to monitor information as it emerges, and provide updated estimates in the response to the consultation.

2. What is the Department’s assessment of the difference in cost added to energy bills in 2015 and 2020 between a “reference date” of 12 December 2011 and of 1 April 2012 for the proposed changes to Feed-in Tariffs: (a) as at 31 October; and (b) now, in the light of recent take-up figures? (ie not compared with the “do nothing” scenario)

The estimated additional costs on typical domestic energy bills of FITs for solar PV resulting from implementing the proposed changes at a reference date of 12 December compared with 1 April are set out in the table below. Again, more recent data suggests costs for both these dates and the difference between them would be much higher than these forecasts.

Impact on domestic bills, £, 2010 prices, undiscounted

Year

12 December reference date

1 April reference date

Difference

Impact Assessment

2015

2.50-2.90

3.30-3.70

0.80

2020

2.60-3.20

3.30-4.20

0.70-1.00

Updated for data to end October

2015

3.30-3.70

4.80-5.50

1.50-1.80

2020

3.40-4.20

5.00-6.30

1.60-2.10

3. Industry witnesses referred to a DECC spreadsheet of projected FITs take-up used to set the levy-funded cap at the time of the Spending Review. To what extent were those projections scrutinised by the Treasury or others outside DECC? (Qq 11-12, 150-151)?

The spreadsheet that is referred to was made available by DECC around the time of the start of the scheme to assist suppliers in budgeting. It was also provided more broadly on request. This spreadsheet was based on the detailed modelling undertaken in February 2010 when the FITs scheme was developed. The headlines and methodology for this modelling were set out in the Impact Assessment and quantitative report published when the FITs scheme was first consulted on in summer 2009 and subsequently launched. This was subject to extensive discussion with industry and other stakeholders during the consultation period. As is normal practice, the Impact Assessment was also considered as part of the cross-Whitehall clearance process, which included HM Treasury as well as other Departments, for both the original FITs consultation and the final policy as confirmed in February 2010.

4. How much of the £446 million individual cap for Feed-in Tariffs up to 2014-15 has already been committed (for both schemes already accredited and schemes installed and awaiting accreditation)?

We estimate that FIT installations to the end of October 2011 will lead to cost to consumers of approximately £230 million in 2014-15. PV installations between the end of October and 27 November 2011 are estimated to lead to additional costs to consumers of £70 million in 2014-15, leading to total committed costs in 2014-15 of £300 million. Further data will continue to come in week by week. (Data for non-PV installations since 31 October are not yet available.)

The table below sets out the estimated total costs to consumers for each year of the Spending Review of all FIT installations to end October 2011, against the FITs budget. As this shows, PV installations to end October mean that the FITs budget for 2011-12 and 2012-13 is already likely to be overspent. For the Spending Review period as a whole, after factoring in the costs of PV installations to end October, around 30% of the budget is still for new installations.

Costs to consumers, £m, nominal undiscounted

2011-12

2012-13

2013-14

2014-15

Total

FITs costs to end Oct

110

215

220

230

775

FITs budget (revised)

94

196

328

446

1064

Costs as % of budget

120%

110%

65%

50%

70%

additional PV installations to 27 November

15

65

70

70

220

FITs costs including PV to 27 November

125

280

290

300

995

Costs as % of budget with PV to 27 November

130%

140%

90%

70%

90%

Note: the full costs of installations in 2011-12 are not experienced until the following year, since they will not have been generating for the entirety of the 2011-12 financial year. All figures are rounded to the nearest £5 million/5%.

5. (a) Were the financial projections in the Phase 1 Impact Assessment based on the original tariff rates when the scheme was introduced [ie 41.3p/kWh for <4kW schemes]? (b) Was the export tariff included in financial projections in the Phase 1 Impact Assessment? (Qq 127-135)

(a)Costs for existing installations have been calculated on the basis of the applicable generation tariff at the time the installation became eligible for FITs, taking into account inflation uplifts (all tariffs are index linked and adjusted annually in line with the Retail Price Index) and changes to tariffs made as a result of the Fast Track Review of large scale PV. For example, the costs for 4kW PV installations prior to April 2011 are based on a generation tariff of 41.3p/kWh in their first year and uprated thereafter, and for installations from April 2011 for a generation tariff of 43.3p/kWh in their first year and uprated thereafter.

   In the Do Nothing scenario, we assume that current tariffs are degressed for new PV installations from April 2012 at 8.5% from 2012-13 to 2014-15 and 9% from 2015-16 to 2020-21 (the original degression plan when the scheme was launched).

   For the 12 December and 1 April reference date scenarios, we assume that proposed tariffs are degressed in line with anticipated cost reductions, in order to maintain a rate of return on capital of approximately 4.5-5% for new installations.

(b)The cost projections in the Impact Assessment are of the net cost of the scheme to consumers. This includes the value of generation tariffs paid and the net cost of paying export tariffs. Payments made by electricity suppliers for exports are compensated by the value of that electricity. In the case of metered electricity, the suppliers can extract value from that electricity by selling it on or by offsetting purchases from the wholesale market or other sources. For deemed exports, the value of the exported electricity is shared among all suppliers. Because the export tariff is set at to be equivalent to the value of the electricity to suppliers, it does not impose a net cost on consumers. If the export tariff exceeded the value of the exported electricity, the additional costs would be considered a net cost to consumers, and come within the Levy Control Framework.

6. What, if any, input and analysis has DECC received from Defra or the Cabinet Office, in view of their responsibility for embedding sustainable development across government, in formulating the solar FITs proposals (Q152-154)? What input has there been from other departments on the possible impacts of proposed changes to the Feed-in Tariffs, including for jobs?

DECC holds cross-Whitehall meetings at official level on an approximately monthly basis to discuss the FITs scheme, including proposals for the review. There have been six such meetings since April 2011. Those meetings involve (among others) Defra, Cabinet Office, BIS and CLG. In addition, the proposals in the consultation on solar PV were subject to clearance by the Economic Affairs Committee on which both Defra and the Cabinet Office are represented.

The Select Committee expressed an interest in seeing copies of the correspondence from this process. However, in line with the constitutional convention of collective decision-making, and section 2 of the Ministerial Code, the Government does not disclose details of the internal process through which decisions are taken.

7. What appraisal was made of the likely impact specifically of introducing the energy efficiency requirement, in terms of the take-up rates and jobs? What is the Government’s assessment of the overall impact on energy efficiency levels as a result of the proposal to introduce an energy efficiency requirement for Solar PV Feed-in Tariffs?

The Impact Assessment modelled two options for the impact of energy efficiency requirements on solar PV uptake, reflecting the two options proposed in the consultation document. It is important to note that the modelling did not take into account either (a) potential increased uptake of energy efficiency measures by property owners in order to become eligible for FITs, or (b) potential impact on jobs from increased uptake of energy efficiency measures as a consequence of the proposals.

The first option is that eligibility for proposed standard tariffs would be dependent on uptake of measures that are potentially eligible for Green Deal finance. This requirement was assumed to have no impact on FITs uptake, because it does not require any upfront costs for potential generators.

The second option is that eligibility for proposed standard tariffs is conditional on a property achieving an EPC level C rating. We estimate that approximately 9% of houses currently meet EPC level C or above, and that this figure will rise by 1.5% a year as households take up Green Deal measures. We have applied this proportion to modelled uptake from April 2012 onwards – ie assuming that in 2012-13 uptake would be 9% of what would have occurred under the new tariffs without the level C energy efficiency requirement, 10.5% in 2013-14, etc. As noted above, this does not take into account any potential increased uptake of energy efficiency measures in order to receive the higher FIT rates.

The Impact Assessment estimated that the level of installations under the consultation proposals would support approximately 1,000 to 10,000 full time equivalent jobs in the sector from 2012-13 to 2014-15.

8. The Committees would like to have a copy of the Solar Trade Association submission to Government, referred to by Greg Barker, in which the STA sought a 25% reduction in FiT rates (Qq 74-75)

We attach three documents. The first is the Solar Trade Association’s (STA’s) “Solar Strategy”, which was produced on 3 June, after the fast track consultation had closed. It was not formally submitted as a consultation response. The second is the joint Renewable Energy Association (REA) and STA response to the consultation on the fast-track review of solar PV tariffs, which includes a suggestion of cutting all tariffs by 25%, but not until 1 January 2012 at the earliest. The third is the REA/STA’s comments on the Comprehensive Review of FITs, and does not suggest cutting any tariffs before April 2012. All these papers also sought to moderate the reductions in tariffs for large scale solar that DECC was proposing, which would have put further strain on the budget.

The Minister quoted the REA/STA response to the fast-track consultation. His quotation was accurate, but he inadvertently attributed it to the chairman of the STA, Howard Johns (who had not in fact personally signed the response).

9. Why is the Government delaying consulting on the “cost control mechanism” for Feed-in Tariffs to later this year?

Given the urgent need to take action to protect the FITs scheme budget for the rest of the Spending Review period, and the wide public reach of the phase 1 (solar PV) proposals, it was vital that the scope of the proposals should be limited to those that were absolutely necessary in order to minimise immediate budgetary risk.

The new cost control mechanism will of course be fundamental to the Government’s future approach to the FITs scheme, but urgent introduction was not necessary in order to ensure its effectiveness. This separation also allows time for fuller reflection across Government and consultation with stakeholders before publishing proposals.

10. By how much does the Department currently expect proposals will undershoot or exceed the individual cap for Feed-in Tariffs (£446 million to 2014-15)?

On our latest analysis (using 13 November data), we estimate that under a central uptake scenario the consultation proposals will lead to FITs costs to consumers in 2014-15 of £390–£430 million. Under a high uptake scenario, these costs would be £420–£810 million. The majority of these costs (c £300 million) result from FIT installations already installed (see question 4).

It should be noted that, as explained in detail above, these numbers are subject to significant uncertainties: the PV installation rate continues to exceed modelled projections leading to higher than expected costs, and the policy is still in development so projecting installation numbers post 1 April 2012 is uncertain.

11. Has the Department agreed with the Treasury whether any of the 20% headroom in the overall size of the levy-funded spending cap can be used?

No. The Levies Control Framework is clear that should spend or spend forecasts exceed the overall levies control framework (LCF) cap then DECC has to devise a policy proposal to bring spend back to within the cap. The headroom is therefore available to be used while such proposals are being developed, agreed with HMT, consulted on and implemented. The LCF does not give DECC the ability to plan to use headroom above the LCF cap as additional budget. DECC would need to apply to HMT for additional budget as set out under normal public spending framework rules.

The LCF does, however, enable DECC to manage its levy-funded policies (FITs, the Renewables Obligation, and the Warm Home Discount) as a portfolio and an overspend on one can be offset by an underspend on another as long as the total remains within the overall LCF cap. This flexibility does not override the need to ensure that policies continue to demonstrate good value for money.

12. What work has the Department done with FiT Licensees to ensure the “multi installation tariff rates” are workable?

Implementation of the multi-installation tariff rates is primarily an issue for Ofgem, who are content with the proposed approach. DECC officials have already met with FIT Licensees to discuss the consultation proposals. To date, no concerns have been raised specifically about the workability of the proposed multi-installation tariff rates. DECC will continue to work closely with suppliers and Ofgem, including to follow-up any implementation issues with the proposed multi-installation tariff rates raised through the current consultation process.

13. What assessment has the Department done of the non-financial benefits of having solar Feed-in Tariffs?

The Impact Assessment published alongside the current consultation includes an assessment of some non-financial benefits of FITs for solar PV, including:

(a)Empowering people and giving them a direct stake in the transition to a low-carbon economy.

(b)Helping develop a supply chain that offers households a wide range of cost effective measures to lower their energy use and carbon emissions.

(c)Assisting in public take-up on carbon reduction measures, particularly to improve the energy efficiency of buildings.

The Impact Assessment also considers environmental, distributional, economic, and sustainability impacts of FITs for solar PV.

14. The 12 December reference date comes before the end of the consultation period, and yet the consultation seems to indicate that government would consider moving this reference date (para 50 of consultation). When will the Department decide if the reference date should be moved? To what extent does leaving the reference date open create further uncertainty? How might people make an informed choice about cancelling their contracts because they cannot make the 12 December installation deadline (possibly losing their deposits in the process)?

All proposals in the consultation document necessarily remain as proposals until the consultation has concluded, the responses have been analysed and Ministers have reviewed the analysis and taken final decisions. It would be legally inappropriate for us to take decisions that pre-empt this process.

It is unavoidable that there will be some uncertainty until changes are actually implemented, due to the need to follow this process and the statutory requirement to lay an instrument containing tariff changes before Parliament in draft for 40 days before making it. We will endeavour to keep the period of uncertainty for consumers to a minimum by taking decisions and laying draft licence modifications before Parliament as quickly as reasonably possible, but the process is likely to take some time in view of the large number of consultation responses we are receiving.

The position is explained in a guide for consumers available on DECC’s website (http://www.decc.gov.uk/media/viewfile.ashx?filetype=4&filepath=11/meeting-energy-demand/renewable-energy/3373-solar-pv-consumer-guide.pdf), which states:

“How certain are these changes?

The Government is currently consulting on these proposals. This consultation will continue until 23 December. The Government may, following receipt and analysis of these consultation responses, change some or all of the detail of the proposals. But it will not bring forward the cut-off date any earlier than 12 December, or the date for reduction of tariffs to before 1 April 2012.”

15. The consultation document states that DECC has taken account of the possibility of hardship to persons as a result of the imposition of a 12 December reference date (para 49 of consultation). The Committees have received evidence of hardship because of lost deposits from cancelled contracts where it will not be possible to install and submit the necessary paperwork before 12 December, and in some cases where bank loans have been taken out to fund installations which will now not provide the same rates of return as when the loans were agreed. What scope is there for flexibility about what is meant by the “reference date” so that those with a signed contract before 31 October or financial commitment (eg a paid deposit) might be able to receive the full exiting tariffs?

Through the current consultation we are seeking views about the proposed reference date, whether there should be any exemptions and if so how they should be defined. In coming to a final decision, Ministers will have to balance views on this against budgetary constraints and issues of fairness, for example bearing in mind the number of people who have already cancelled contracts and lost deposits.

16. Why is an energy efficiency requirement not also placed on the other technologies eligible for FiTs such as wind, hydro, anaerobic digestion or micro-combined heat and power?

The current consultation concerns FITs for solar PV only. We will be publishing a consultation on Phase 2 of the comprehensive review around the end of the year, which will consider tariffs for other technologies and whether or not an energy efficiency link would be appropriate.

Annex A

CALCULATION OF BILL IMPACTS OF FEED-IN TARIFFS

The impact of Feed-in-Tariffs (FITs) on average consumer bills is calculated by applying the projected impact on electricity prices resulting from the FITs subsidy cost (labelled cost to consumers in the Impact Assessment) to the average projected domestic consumption. The costs in 2020 are calculated from 2020 subsidy costs (2010 prices, undiscounted).

Here is an example to demonstrate the calculation, for the “no change” scenario, against a “No FITs” baseline, under the central impact assessment assumptions:

FITs subsidy cost in 2020 (real undiscounted 2010 prices): £2,700million.

Total UK electricity consumption in 2020 from DECC projections: 317 million MWh (317 TWh).

VAT = 5%.

FITs price impact: (2700/317) x 1.05 = £9/MWh.

Average household electricity consumption in 2020 after average efficiency savings = 2.9MWh.

FITs bill impact: 9 x 2.9 = £26.

Note

(i)figures do not exactly match due to rounding.

(ii)subsidy cost estimates above do not match the impact assessment because they are in 2010 undiscounted prices, and in calendar years rather than financial years.

The tables overleaf show the estimated bill impacts against a “No FITs” baseline under central growth assumptions for three scenarios: “Do nothing”, 12 December reference date, and 1 April reference date.

Two tables are provided. The first shows the estimated bill impacts included in the Impact Assessment supporting the current consultation on FITs for solar PV. The growth scenarios underpinning these estimates were based on PV deployment up to the end of September 2011.

The second table is based on new analysis carried out since the Impact Assessment was published, to reflect new installations data that indicated that the profile developed for the Impact Assessment was under-predicting current PV growth. We therefore increased the baseline growth assumptions in the model to take account of the observed higher growth rates.

Table 1

IMPACT OF FITS FOR SOLAR PV ON TYPICAL DOMESTIC BILLS –IMPACT ASSESSMENT ESTIMATE, CENTRAL GROWTH SCENARIO

(£/year), 2010 £ undiscounted

Do Nothing

12 Decemberreference date

1 April reference date

2011

1.40

1.40

1.40

2012

3.90

2.30

2.90

2013

6.70

2.60 to 2.70

3.30 to 3.50

2014

9.30

2.60 to 2.80

3.30 to 3.70

2015

11.90

2.50 to 2.90

3.30 to 3.70

2016

14.70

2.50 to 3.00

3.30 to 3.80

2017

17.50

2.50 to 3.00

3.30 to 3.90

2018

20.30

2.60 to 3.10

3.30 to 4.00

2019

23.20

2.60 to 3.20

3.30 to 4.10

2020

25.80

2.60 to 3.20

3.30 to 4.20

Table 2

IMPACT OF FITS FOR SOLAR PV ON TYPICAL DOMESTIC BILLS – LATEST ESTIMATE, CENTRAL GROWTH SCENARIO

(£/year), 2010 £ undiscounted

Do Nothing

12 December reference date

1 April reference date

2011

1.60

1.50

1.70

2012

5.60

2.90

4.10-4.20

2013

9.80

3.30-3.50

4.90-5.20

2014

13.70

3.30-3.60

4.90-5.40

2015

17.70

3.30-3.70

4.80-5.50

2016

21.80

3.30-3.80

4.80-5.70

2017

26.00

3.30-3.90

4.90-5.80

2018

30.00

3.30-4.00

4.90-6.00

2019

34.60

3.30-4.10

4.90-6.10

2020

38.80

3.40-4.20

5.00-6.30

Notes:

1. Lower end of range represents uptake under an EPC Level C Energy Efficiency requirement from April 2012. Upper end of range is for a Green-Deal related Energy Efficiency requirement.

2. These impacts are measured against estimated bills in the absence of FITs. They account for solar PV costs only. For 12 December and 1 April reference date scenarios lower end of the range is for an EPC Level C energy efficiency requirement, and the upper end is for a Green Deal-related requirement

3. To assess the impact of FITs against a “No FITs” baseline as followed in the individual policy impact assessment we have followed a different approach to the one followed in assessing the overall impact of all policies on energy bills in the analytical document published alongside the AES. Therefore the estimated impacts of FITs in the IA and the AES document will differ. In the AES, we have considered the impact of all policies against a “no policy” scenario. In contrast, individual policy impact assessments analyse the impact against a baseline which includes other policies in order to identify the additional impact of their introduction. The underlying assumptions on energy savings are consistent between the two documents. However the AES document considers the total costs of all technologies that are eligible under FITs whereas the IA, as explained above, only presented solar PV costs.

8 December 2011

Prepared 21st December 2011