Renewable Energy Strategy
The UK has committed to producing 15% of energy from renewable sources by 2020. Less than 5% of UK electricity comes from renewable sources, but the UK strategy says that 30% of electricity could be produced from renewable sources. Two per cent of this is to come from small-scale electricity generation, it says.
Such 'microgeneration' is designed to bring the generation of electricity (or heat) closer to where it is to be used. This will increase energy efficiency by minimising the energy lost as heat when electricity is distributed across the national grid.
The Energy Act 2008 introduced a system of feed-in tariffs (FITs) to incentivise small scale (ie less than 5MW), low carbon electricity generation. The FIT scheme commenced on 1 April 2010 and was introduced under the Feed-in Tariff (Specified Maximum Capacity and Functions) Order 2010.
Until the implementation of DECC's proposals from the Energy Markets Review, the Renewable Obligation (RO) will continue to be the mechanism promoting development of large-scale renewable electricity generation. The Renewable Heat Incentive (RHI) will encourage generation of heat from renewable sources.
The technologies eligible for the FIT scheme, or installation, are:
- solar photovoltaics;
- anaerobic digestion; and
- domestic scale microCHP (combined heat and power) (with a capacity of 2kW or less).
Generally, any installation subject to a public authority grant is not eligible for the FIT scheme until that grant is repaid.
Grants awarded prior to the 1 April 2010 introduction of FIT for installations commissioned before 15 July 2009 (and domestic installations commissioned by 31 March 2010) are, however, permitted. The same is true of installations commissioned (and domestic installations commissioned by 31 March 2010). Ultimately discretion lies with Ofgem as to whether such installation can be eligible for FIT.
Registration of installations
The electricity provider connected to each installation is referred to as the FIT Licensee and will be a utilities company. Each installation must be registered on the Central FIT Register (administered by Ofgem) by the utilities company. Generators have the choice between receiving the guaranteed Export Tariff and selling the generated electricity on the open market. The decision must be recorded on the Central Register at the time of licencing.
Projects of 50KW or less must be installed by a technician certified by the Microgeneration Certification Scheme (MCS). The MCS is an internationally recognised quality assurance scheme for installation and products, and is a prerequisite for the registration of the installation.
The tariff and payment
The FIT provides payment for the electricity generated by the installation (the generation tariff) and pays for any unused electricity sent to the National Grid (the export tariff). Each of this is a 'FIT payment' . Any electricity used which is generated by the installation is free to the 'host' of the technology (the generator).
Any demand for electricity which is in excess of that generated by the generator from the installation is simply purchased from the National Grid as normal.
The 'site' to which the FIT will be applied is determined by reference to metering points, a postal address or and Ordnance Survey grid reference. This is important because a maximum declared capacity of 5MW applies to each site in order to be eligible to claim FIT.
Multiple installations of the same technology type on a site will be viewed as one development regardless of whether any particular part of the installations is eligible under the FIT Scheme, or if they have different owners. The tariff codes will be assessed based on this combined capacity for each site.
It is the utilities company which will pay the FIT payments to the generator. Often the installations company will be elected by the generator as a 'nominated recipient' for the FIT payments on the sites they have installed. Generators are able to assign FIT payments to a nominated recipient who will be eligible to receive FIT payments in respect of an accredited installation owned by that generator. This is the origin of the incentive for those many companies offering to install solar pv panels on domestic properties for free or a minimal fee.
Such an assignment of FIT payments must be documented and the relevant utilities company must be notified. The utilities company will then record the assignment on the Central FIT Register.
Only the generator may inform the utilities company that the assignment has taken place.
The utilities companies are not obliged to make FIT payments to a generator or nominated recipient until:
- the information given by the generator or third party is accurate and the installation meets the necessary FIT criteria;
- the installation has the necessary meters in place;
- the generator and installation are registered on the Central FIT Register; and
- terms and conditions setting out the relationship between the utilities company and generator (including standard provisions required by Ofgem) have been agreed (the 'Statement of FIT Terms).
Output calculations will be reassessed when an extension is added to an installation, and payments adjusted accordingly, always subject to the 5MW cap on declared generating capacity.
The length of period during which a generator or nominated recipient will benefit from FIT payments (the eligibility period) depends on the commission date and the technology installed. Ofgem will verify this from the information provided on the Central FIT Register. installations commissioned from 1 April 2010 will benefit from an eligibility period of:
- 25 years, for solar;
- 20 years, for wind, hydro and anaerobic digestion; or
- 10 years, for domestic fossil fuel Micro-CHP.
The actual amount of export tariff paid to the generator for the production of energy varies according to the chosen technology installed, but a floor price has been set at 3 pence per kilowatt hour (p/kWh). It is these rates which have been subject to media and legal attention.
Taking the example of solar FITs, the tariff was originally set at 43p/kWh generated. Prior to the end of its consultation on the subject DECC declared that the FIT tariff would be reduced to 21p/kWh from 12 December 2011. Subsequently the Court of Appeal held that this was unlawful so DECC proposed that the higher rate of 43p/kWh will apply for all projects commissioned by 3 March 2012.
Those projects commissioned after this date will benefit from the higher rate until 1 April 2012 at which point the lower rate of 21p/kWh will take effect. DECC intends to appeal the Court of Appeal decision, but essentially it is safe to presume the FIT is going to be reduced, in light of the £31 million overspend the FIT fund has encountered. It is possible for the generator to opt out of the fixed rates and negotiate independently with the utilities vompany, but this decision can only be made on an annual basis.
All utilities companies have a duty to facilitate the switching to and from other utilities companies and ensure FITs is appropriately managed during this process. The Department of Energy and Climate Change and industry stakeholders are developing the framework for such a process, but the switchover is likely to be similar to that in place when changing energy suppliers, where meter readings are taken by both sides.
Ownership, maintenance and insurance
FIT eligibility remains with the installation, even if the ownership of the premises or installation changes.
Ownership of the installation is linked to the site and therefore, in the case where a building ownership changes, the benefit of the technology would also transfer to the new owner.
Where they are funding the installations the installer (often the nominated recipient) will often retain ownership of the installation until the end of the eligibility period. Commonly for solar pv projects the installer may agree to leave the solar pv panels on the property so that the generator (the owner of the property) can continue to benefit from them without having to purchase the installation. In such circumstances, the installer will be responsible for maintenance and repair of the installation throughout the eligibility period.
The solar market suggests that solar pv panels are covered firstly for product liability by the manufacturers. Where the installer has funded the installation and subsequently retains ownership of the installation, they will insure the installation for public liability and other risks, which will be stated in the Statement of FIT Terms with the generator. The generator will then be required to purchase any separate insurances.
The FIT payments are exempt from income tax for individuals, but are liable to corporation tax for businesses. The cost of the installation and equipment, however, can be offset against the income before corporation tax is calculated.
The future of FIT?
As some financial incentives to generate electricity from renewable energy sources remain (albeit reduced in the case of solar), it may be that FIT continues to be an attractive 'green investment'. Developers will, however, have to move fast to benefit from the higher FIT rates for solar projects.
The result of the Government's Energy Market Reform may drive capital investment towards larger scale renewable projects, nuclear, or even clean coal and gas plants. The tax implications are also likely to mean solar pv installations are taken on only for small domestic use, rather than the larger scale themes such as social housing projects.