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Feed-in tariffs - fit for purpose?

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As part of the Coalition Government’s review of spending in this recessionary climate, the levels of fiscal support for renewable energy deployment have come under scrutiny. The prey of choice has been the solar photovoltaics (PV) industry as the government feels that rates of return for developers and investors have gone well beyond the levels first envisaged and which are no longer affordable.

We now have the Government’s proposals for the levels of feed-in tariffs (FITs) for not just solar PV but other micro-generation technologies going forward.

We set out what the proposals hold for renewable technologies.

Feed-in tariffs - fit for purpose?

On 9 February, the Department of Energy and Climate Change (DECC) announced its far reaching proposals to reform the feed-in tariff incentive scheme with the commitment to deliver, amongst other green power generation targets, 22GW of solar PV capacity by 2020.

Under the new proposals, which will be open for consultation until April 3, DECC proposes a range of possible cuts to incentives for standard installations depending on the rate of installation between now and then.

If deployment between March 3 and the end of April exceeds 200MW, there will be a cut in support, from July 1, to 13.6p/kWh; if deployment is between 150MW and 200MW, the new tariff level will be 15.7p/kWh; and if take-up reaches less than 150MW, the tariff will be cut to 16.5p/kWh.

Installations with more than 4kW of capacity could endure even deeper cuts with the government suggesting support levels between 4.7p/kWh and 13.2p/kWh from July 1. This level of support would come in significantly below the level provided to other forms of renewable energy such as wind power.

There is also the potential of more solar PV pain as the consultation also raises the prospect of deeper cuts in the autumn. In October, there will be a tariff of 5%, followed by a 10% decrease on a six monthly cycle. The rationale for the six monthly decrease is to keep pace with cost reductions which will be achieved in the supply chain.

Significantly, DECC has stepped back from its controversial plans to limit feed-in tariff eligibility to those buildings that have the highest energy efficiency ratings. It had indicated that only properties with an energy performance rating of 'C' or above on the Energy Performance Certificate (EPC) would be allowed to install solar panels – potentially limiting the benefit to only 14 per cent of homes. The new proposal is that buildings with a 'D' rating on the EPC would now be eligible, widening the net to take in some 50 per cent of homes.

There was a similar relaxation of rules governing community or corporate solar projects with DECC confirming that individuals or businesses installing 25 or fewer solar PV installations do not qualify as "multi-installation" and therefore will enjoy the standard tariff rate, avoiding an additional 20% cut that will be imposed on larger group installations. There is also to be further consultation on whether larger community and social housing schemes should also be exempt from deeper cuts.

The changes will be made to the generation tariff levels for all installations with an eligibility date on or after 3 March 2012. In practice, this will mean that from 1 April 2012, solar PV generators with an eligibility date on or after 3 March 2012 will receive the lower tariff. Generators with an eligibility date between and including 3 March 2012 and 31 March 2012 will be eligible for the current for power generated in this period only (i.e. for less than a month), before moving onto the lower tariffs from 1 April 2012.

DECC will apply the new tariffs for solar PV from 1 April 2012 to all new installations with an eligibility date on or after the earlier “reference date” of 12 December 2011- which is the issue going to the Supreme Court following a successful challenge in the English High Court. DECC has made it clear however, that if it wins its case, it will stand by the original proposal: to reduce the generation tariffs from the date any further licence modifications are made, for some or all installations, with an eligibility date on or after 12 December 2011 and before 3 March 2012.

FITs for other technologies

DECC released details of wide ranging reforms to feed-in tariffs for other eligible technologies, such as small scale wind, hydro, and combined heat and power.

The proposals for the various technologies are set out below:

Anaerobic Digestion

The FIT for anaerobic digestion (AD) of up to 500kW will be frozen at current levels. They will however rise in line with retail price index (RPI) from 1 April 2012. Tariffs for AD above 500kW will continue to be set at the x 2 Renewables Obligations Certificates (ROC) equivalent level i.e. 9.0p/kWh.

Wind

For wind installations up to 100 kW, the tariff level will be capped at 21p/kWh, the rate proposed for smallest scale PV from 1 April 2012. Tariffs for wind installations above 1.5 MW will continue to be set at the 1 ROC equivalent (4.5p/kWh). However, the current renewables obligation (RO) banding review proposes reducing support for wind to 0.9 ROCs. This equates to, approximately 4.1p/kWh from April 2013 and, pending the outcome of the RO banding review, DECC propose to adjust the tariffs to that level.

Hydro

The only proposal for hydro in the short term is to apply the 21p cap and to continue the tapering of tariffs to RO levels. Hydro installations in the range of 2–5 MW will continue to receive the equivalent of 1 ROC/MWh i.e. 4.5p/kWh. The RO banding review proposes reducing support for hydro stations to 0.5 ROCs, which equates to approximately 2.3p/kWh from April 2013 and hydro tariffs will be reduced to that level following the RO banding review.

MicroCHP

Costs of technology and take-up to date of the MicroCHP proposal is to raise the support level to 12.5p but the existing cap of 30,000 installations will be retained to protect the budget envelope for FITs.

Full details of the consultation proposals for solar PV can be accessed on DECC’s website accessible here and for the wider renewables technologies here.

Further information

Please get in touch with Bruce Farquhar, Head of Renewables, or Martin Whiteford, associate if have any queries or need advice on renewables matters.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.