Response to DECC consultation on a review of the FiTs scheme

Introduction

This is the consultation response of Wiltshire Wildlife Community Energy. We have read the Government consultation document and associated impact assessment with interest. We have a number of comments to make on the consultation document.

The future level of FiTs

The proposed profile for FiTs over time is shown in Figure 1.

Figure 1: Typical FiT – historic and proposed

FiTs UK

 

We can see that the current DECC proposal, labelled Option 2 in the consultation document, produces a major discontinuity from 2016. DECC claims that this discontinuity is justified on the basis that:

  • The costs of buying and installing solar technology have fallen significantly since the last review in 2012
  • The proposed reduction in FiTs are required in order to avoid over compensating solar generators at the expense of consumers
  • The proposed new FiTs will “provide a rate of return of 4 to 9% for different [renewable] technologies”.

We would like to question these conclusions. We have used the assumptions set out in DECCs impact assessment [1] to calculate the levelised cost of solar supply for a variety of different sizes of project – ranging from 4 kW to 2.5 MW. We find that, in each case, the new FiTs proposed by DECC would not allow an investor to make even a 4% per annum return on investment. We set out our calculations for a 2.5 MW project in Figure 2. This calculates the levelised cost of generating a kWh of electricity at 9.7p [2], while the revenue which the project can expect to receive under the DECC proposals is the export tariff of just under 5p per kWh plus a revised FiT of around 1p per kWh.

Figure 2: The levelised cost of solar generation

Figure 2

If our analysis is correct then the effect of the proposed FiTs would be to stop the UK solar industry in its tracks – with a rapid reduction in demand for solar arrays and substantial loss of jobs. We estimate, based on Community Energy England sources and study from the International Renewable Energy Agency [3], that 15,000 to 20,000 jobs in the UK might be at risk.

We agree with DECC that the costs of both solar panels and the installation are falling steadily. It should be possible for subsidy to be phased out by 2020 or 2021. But there is a need for a more gradual reduction in the FiTs than those proposed by DECC under Option 2 [4] if the supply industry is not to be severely disrupted.

Are the DECC proposals in the economic interests of the UK?

The impact assessment associated with the DECC consultation indicates that its proposals (Option 2) have a positive net present value (of around £2 billion) relative to Option 1. But this cost benefit analysis ignores the economic effects of the near destruction of the UK solar supply industry which implementation of Option 2 would produce. There are two main effects:

  • Jobs would be (temporarily) lost. If 15,000 jobs worth £20,000 per annum each were lost for a one year period then this would represent a loss of GDP of £300 million
  • Solar generation would plateau at 2016 levels for (perhaps) five years, before starting to grow again once solar became cost competitive with other generation technologies in the 2020s. We estimate that there is a significant economic cost in ramping up solar generation from scratch (Option 2) rather maintaining the existing solar industry for the next five years and then allowing it to expand to meet demand once solar has becomes cost competitive with other generation technologies. We note here that solar is becoming one of the most cost-effective ways of generating electricity. Figure 3 illustrates by tabulating DECCs 2013 central estimates for the levelised cost of production per MWh for key technologies in 2030 [5].

Figure 3: The levelised cost of generation for the main technologies in 2030

Figure 3

We have modelled these effects by comparing Option 2 with an additional option, Option 4, in which:

  • Solar FiTs are reduced on a straight line basis from current levels to zero in 2020.
  • Solar subsidies are controlled through this reduction in FiTs and there are no expenditure caps.

We find that the NPV of Option 4 is, under a range of reasonable assumptions, greater than that of Option 2. For example Option 4 has an NPV which is £1 billion greater than Option 2 [6] if we assume that:

  • The levelised cost of new solar generation falls at 8% per annum until 2020 and then 4%
  • The levelised cost of other generating technologies rises by 1.1% per annum from current levels
  • Overall demand for electricity remains at 300 TWh
  • Solar generation remained at 3 TWh up to 2021 under Option 2 but grows to 8 TWh under Option 4
  • Solar generation accounts for 25% of total generation by 2055 under Option 4 (and a little less under Option 2).

Breaching the levy control framework

Clearly our proposed Option 4 would lead to a breach of the cap on the levy control framework. But how material is this in public policy terms? We note here that:

  • Implementing Option 2 would reduce the electricity bills of end-users by less than 1% relative to Option 1 [7]. The reduction would be even smaller if we measured the impact of Option 2 relative to Option 4
  • The government has recently announced its commitment to guarantee a minimum price for electricity generation for a new nuclear plant at Hinckley Point of 9.2p per kilowatt hour at a time (2030) when solar projects will be generating electricity at well under 7p per kilowatt hour. 

Community Energy Initiatives

We are a Community Energy company. Our investors are largely local people who have a commitment to renewable energy. They choose to put their savings into projects which they see will benefit the community and reduce carbon. Any surplus from our community energy initiatives are used to fund local projects which attempt to improve energy efficiency and general sustainability.

This raised level of participation helps change the political climate in favour of renewables and makes future policy measures which shift the UK towards renewables easier to implement from a political perspective. It is a good way to develop grassroots innovation and to test models of clean energy production which might then be used at national scale.   The immediate reduction of the FiT will reduce an incentive to promote community interest and involvement.

Conclusions

In the long term solar energy offers a cheap form of mainstream electricity generation in the UK – whether renewable or not.

The DECC proposals, set out in Option 2 of the consultation document, would bring the (currently) thriving solar supply industry to a halt

There are substantial economic costs to restarting this industry in the 2020s when solar is viable without subsidy. These economic costs mean that there are other options which are more likely to be in the long-term economic interests of the UK.

If the UK is to meet long term carbon reduction targets the wider population needs to be involved with, understand and support renewable energy. FiTs enable wider support and spread understanding through Community Energy initiatives .

We would suggest that DECC should consider a new option in which:

  • FiTs for solar generation are reduced to zero by 2020 using a straight line basis from current levels
  • The levy control framework is not capped as currently proposed.

 

 

[1] Periodic Review of FITs 2015 – IA No: DECC0196

[2] Assuming a 4% discount rate and using the assumptions set out in the Parsons Brinkerhoff report

[3] Renewable Energy and Jobs – Annual Review 2014, Irena, May 2014

[4] The proposals set out in the consultation document

[5] Electricity Generation Costs, DECC, December 2013, using technology specific hurdle rates

[6] Applying the social discount rate of 3.5% per annum to likely levelised costs through to 2055

[7] See Impact Assessment Table 33 and associated comments