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BRIEFING PAPER

Number 6200, 1 March 2016

Feed-in Tariffs By Elena Ares

Inside: 1. Background 2. Scheme Operation 3. The Levy Control Framework 4. Government Announcements 5. Pre-accreditation – removed

and reinstated 6. Review of Feed-in Tariffs

Number 6200, 1 March 2016 2

Contents Summary 3

1. Background 4

2. Scheme Operation 4

3. The Levy Control Framework 5 3.1 Reviewing the Levy Control Framework 5 3.2 Levy Control Framework Projected Overspend 6 3.3 How has FITs changed over time? 6

4. Government Announcements 7

5. Pre-accreditation – removed and reinstated 7

6. Review of Feed-in Tariffs 9 6.1 Reactions to the Proposals 10 6.2 Impact on Jobs 11 6.3 Government Response 12 6.4 Oversubscription 13

Contributing Authors: Author, Subject, Section of document

Cover page image copyright: Click & browse to copyright info for stock image

3 Feed-in Tariffs

Summary To address the low uptake of small scale renewables the Government put in place a feed-in tariff schema (FITs) shortly after the creation of the new Department of Energy and Climate Change in 2008. The Secretary of State, Ed Miliband, introduced an enabling clause at a late stage of the Energy Act 2008 to allow the introduction of tariffs for small-scale generators up to 5MW output.

Individuals and businesses eligible for the scheme are paid a set amount per kilowatt hour (kWh) they generate and use themselves, which will vary according to the type of generation and the size of the scheme. In addition they are paid a smaller amount per kWh for any surplus exported to the grid. The cost of Feed-in Tariffs, which is passed onto consumers, is capped by the Government through the Levy Control Framework, which has been revised several times since being introduced.

The high uptake through FITs, particularly for Solar PV, has resulted in the Feed-in Tariffs being cut several times since their introduction. The Government also attempted to cut tariffs for Solar PV retrospectively but this was ruled unlawful in court.

Most recently the Government carried out a Review of Feed-in Tariffs to ensure compliance with EU state aid requirement and to set out proposals aimed at controlling the cost of the scheme to limit the impact on consumer bills following higher than projected levels of deployment.

Following the Review, tariffs for all technologies were reduced, although not to the level proposed in the original consultation and quarterly caps on deployment introduced. Pre-accreditation for Feed-in tariffs, which had been removed in a previous consultation was re-introduced

The reductions came into force in January 2016. The accreditation for the first quarter opened on 8 February 2016 and was oversubscribed within less than an hour for several categories.

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1. Background The first scheme developed to encouraging the deployment of renewables in the UK was the Renewables Obligation (RO) in 2002. As a fairly complicated system, primarily aimed at large scale projects, it was not successful in encouraging small scale domestic generators.

To address this the Government put in place a feed-in tariff schema (FITs) FITs - for smaller schemes only - shortly after the creation of the new Department of Energy and Climate Change. The Secretary of State, Ed Miliband, introduced an enabling clause at a late stage of the Energy Act 2008 to allow the introduction of tariffs for small-scale generators up to 5MW output.

2. Scheme Operation Individuals and businesses eligible for the scheme are paid a set amount per kilowatt hour (kWh) they generate and use themselves, which will vary according to the type of generation and the size of the scheme. In addition they are paid a smaller amount per kWh for any surplus exported to the grid.

To qualify for the scheme generators must use a system and an installer approved by the Microgeneration Certification Scheme. Once commissioned the generator has to submit an application to their chosen supplier. The supplier will then confirm the generator’s details and the installation will be entered on the Central FITs Register. The Register will include the relevant details of the installation and assign a tariff code – which will identify the generation tariff which the generator must be paid.1

On an annual basis, suppliers must provide information to Ofgem on FITs payments they have made and other relevant information. Ofgem then uses this information and other sources to calculate the total cost of the scheme, and to divide that cost among all the suppliers according to their share of the electricity market (excluding any imports of green electricity from outside GB). Suppliers who have paid out less than their calculated share – including those that are not offering FITs – have to pay into a fund administered by Ofgem. This is then redistributed to those that have paid out more than their share.2

In addition to this annual reconciliation there are also periodic redistributions within the year in order to minimise the financial exposure of suppliers – particularly small suppliers with large FIT contributions. More information is available from the Ofgem website.

1 Department of Energy and Climate Change, Feed-in Tariffs Government’s Response

to the Summer 2009 Consultation, February 2010, p35 2 Department of Energy and Climate Change, Feed-in Tariffs Government’s Response

to the Summer 2009 Consultation, February 2010, p40

5 Feed-in Tariffs

3. The Levy Control Framework In April 2011 Treasury published a Control framework for DECC levy-funded spending, which set a cap on the cost of the renewable obligations, feed-in tariffs and warm homes, as part of the decision to introduce a cap on so called levy-funded spending. This is because levy funded spending is treated like a tax. The Treasury provided the following information on why this was the case when it introduced the framework in A quick guide to levy-funded subsidies - Tax and Spend, deposited in the House of Commons Library in 2010:

Levy funded subsidies count as both tax and spend in the National Accounts drawn up by Office of National Statistics. This is because they involve Government-mandated transfers of value between individuals or entities. A payment (such as a levy) is a tax if it is:

Compulsory – relevant individuals/entities have no choice but to pay; and

Unrequited – those paying receive no direct commensurate benefit in return.

In addition, even where a scheme is obligation based, these entail a payment to other parties that is mandated by Government and so represents a tax. So levies count as tax even if no funds are actually received, or paid out by, the Exchequer and even if there is no option to pay a charge rather than meeting an obligation (a buy-out option).3

The NAO summarised the position as follows in its report on the LCF published in November 2013:

Levy-funded expenditure is analogous to government spending. Levy schemes are approved by Parliament and require electricity suppliers to meet their costs. Electricity suppliers seek to recover these costs from consumers through bills rather than the government funding the schemes directly through general taxation.4

Further explanation can be found in the Control framework for DECC levy-funded spending and in a Questions and Answers document published by DECC in December 2011.5

3.1 Reviewing the Levy Control Framework The initial guidance on the levy published by the treasury set out how the cap would be reviewed, expressed the intention being that it would only be reviewed as part of the spending review. However, difficulties in forecasting spending under each levy has resulted in several changes being made to caps since 2011

Although the Framework is seen as useful tool for limiting energy costs for consumers there have been concerns, expressed by the NAO and the Energy and Climate Change Select Committee amongst others, at the 3 HM Treasury, A quick guide to Levy-funded subsidies—Tax and Spend, 21 December

2010 4 NAP, The Levy Control Framework, 27 November 2013 5 DECC, Control Framework for DECC levy-funded spending: Q&A, December 2011

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limited oversight of levy spending. This is because due to accounting rules it is not reported by the Treasury, as the revenue does not flow through the Exchequer. The NAO was also critical of the effectiveness of forecast models used.

In response the Government committed to reporting forecasts and expenditure on a yearly basis to Parliament, and included information on LCF spend in the and an appendix of the 2014 Annual Energy Statement on DECC consumer funded policies.6 No Annual Energy Statement was published in 2015.

3.2 Levy Control Framework Projected Overspend

The Government announced in July 2015, as the same time as announcing several measures to reduce spending on renewables, that the Office of Budge Responsibility had concluded that forecast spend under the LCF would he higher than expected at £9.1 billion, rather than the originally forecast of £7.6 billion :

The Office for Budget Responsibility’s latest projections show that subsidies raised from bills are currently set to be higher than expected when the schemes under the LCF were set up. This is due to a number of uncontrollable factors such as lower wholesale electricity prices, higher than expected uptake of the demand-led Feed in Tariffs and the Renewables Obligation (such as solar panels on roofs) and a faster than expected advancement in the efficiency of the technology, meaning renewables are projected to generate more electricity than previously projected.

However, there has been no detail of how these figures where arrived at as set out by Carbon brief in its analysis of the announcement:

It remains hard to interrogate the assumptions behind the new forecasts, and even if they were completely transparent they would remain forecasts. FITs and the RO are demand-led, in other words spending depends on uptake, giving government limited ability to control costs.

CfD spending is, in theory, more tightly controlled through the budget assigned in annual auctions, but the eventual costs depend on unpredictable future wholesale electricity prices. So we won’t know for sure if the 2020/21 cap and headroom will be breached until nearer the time.7

3.3 How has FITs changed over time? When originally introduced in February 2010 before the first major review of FITs as intended to be 2013, when all aspects of the scheme would be reviewed

However the unforeseen rise in uptake by larger generators, and the cost implications of this resulted in the Government announcing a fast track review of larger solar projects which was completed in June 2011,

6 DECC, Annual Energy Statements 2014. October 2014 7 Carbon Brief, Q&A: Has the UK blown its green power budget?, 13 July 2015

7 Feed-in Tariffs

The main change was the introduced of a degression rate for the scheme, with new levels of tariffs dependent on the level of uptake in previous months. The stepped degression resulted in reduced return to investors, but also resulted in the tendency of developers to rush to complete projects before the dates rates are reduced.

The Government also attempted to reduce rates retrospectively for solar PV, but this was ruled inadmissible by the courts.

4. Government Announcements The Secretary of State for Energy and Climate Change, Amber Rudd, set out the Government’s intention to carry out a review of Feed-Tariff in a Written Statement on 18 June 2015, at the same time it announced the closure of the Renewables Obligation to onshore wind generators a year early in April 2016:

I will also shortly be considering options for continued support for community onshore wind projects through the feed-in tariff (FITs) as part of the review that my Department is conducting this year.

This was one of announcement that took place as a number of changes with impact on the low carbon and renewables sector. These included changes to planning guidance on onshore wind, removal of grandfathering of support rates for biomass conversion under the RO, cessation of finance for the Green Deal scheme which was aimed at improving energy efficiency, the proposed sale of the Green Investment Bank, the abandonment of the 2016 zero carbon homes target and the removal of the Climate Change Levy exemption for renewable electricity.

5. Pre-accreditation – removed and reinstated

The Government announced a consultation on pre-accreditation of Feed-in Tariffs in July 2015, at the same time it announced changes reducing support for biomass and solar photovoltaic projects through the Renewables Obligation.

The consultation summarised how the pre-accreditation system worked, allowing a guaranteed FIT rats before completion of a project:

Pre-accreditation gives generators a guaranteed tariff level in advance of commissioning their installation, provided a project is commissioned and full accreditation applied for within a specified window.

To qualify for pre-accreditation, a project must have planning consent and a grid connection agreement (and, for hydro installations, environmental permits). The duration of the pre-accreditation validity window for each technology reflects expected construction times: six months for solar PV, twelve months for wind and AD and two years for hydro. Since 1 April 2015, community projects have been eligible for an additional six months on top of the validity window for the technology in

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question, to reflect the extra time it takes for a community organisation to raise finance for renewable electricity projects

For community groups and schools with solar PV installations not exceeding 50kW, a version of pre-accreditation is available called pre-registration.

The consultation explained that both deployment and spend under the scheme have outstripped expectations. The Government proposal to remove pre-accreditation and pre-registration, would mean that projects would only receive the tariff available when they submit their accreditation to Ofgem.

This has an impact in two ways. Firstly, as tariffs degress regularly, pre-accreditation allows a scheme to receive a higher rate than it otherwise would have. Also importantly for developers, pre-accreditation provides certainty as to what rate of support a project will receive and reduces risk to investors, therefore increasing the viability of project.

DECC’s view was that the proposals would reduce deployment levels:

In our assessment of the impact of these measures, the decrease in certainty would therefore be represented by an increase in the rate of return required for a project to go ahead. In turn this is likely to lead to a decrease in deployment levels, as some projects which would have previously gone ahead will now be considered marginal – or not economically viable – at these revised hurdle rates.

The majority of respondents to the consultation were opposed to the proposed changes, with a significant number unhappy about the short (4 week) consultation and the lack of any accompanying Impact Assessment.

Following consultation, the Government announced that it would be removing pre-accreditation from 1 October 2015.

However, according to the consultation this could be a temporary measure, which could be reversed once the Review of Feed in Tariffs was concluded. Once the FIT Review consultation response was announced 17 December 2015, this was the case with pre-accreditation re-introduced for solar PV and wind generators over 50kW and all hydro and anaerobic digestion generators:

Government therefore considers that the re-introduction of pre-accreditation is appropriate. Pre-accreditation will be re-introduced from 8 February 2016. As before, it will be available for solar and wind projects over 50kW and for all anaerobic digestion and hydro projects. Validity periods of pre-accreditation will be six months for PV; one year for wind and AD; and two years for hydro. Government will also reintroduce the additional six month period for community energy projects on top of the relevant period per technology. Applications for pre-accreditation will be subject to the new deployment caps in the same way as applications for full accreditation.

Government confirms maintaining the relaxation of energy efficiency. criteria for qualifying communities and schools under the pre-registration system. However, we will not reintroduce the tariff guarantee element of pre-registration at this time. We have not re-introduced the tariff guarantee at this stage as we do not

9 Feed-in Tariffs

feel the current system is compatible with our cost control measures, and cost control must take priority in this Review. However, we intend to reintroduce the pre-registration tariff guarantee if we can devise an implementable system which delivers robust cost control and avoids gaming. We will issue an update early next year.

Qualifying non-domestic community and school installations with a Total Installed Capacity up to 250kW can be eligible for higher solar PV tariffs at EPC Band G rather than EPC Band D. Qualifying community solar PV installations up to a Total Installed Capacity of 50kW were formally able to receive a tariff guarantee for up to a year from the date of their application.

6. Review of Feed-in Tariffs The Government announced a Review of Feed in tariffs, aimed at ensuring compliance with EU state aid requirement and to set out proposals aimed at controlling the cost of the scheme to limit the impact on consumer bills following higher than projected levels of deployment. It published a Consultation on 27 August 2015. This included a range of proposals to change the FIT’s scheme for solar PV, wind and hydro power. It did not cover anaerobic digestion, which would be consulted on at a later date.

Included in the proposals was the option of removing the generation tariff completely, if there was a surge of applications before the changes come into force in January 2016, and retaining the export tariff only. If this was not implemented the following tariff changes are proposed.

Solar - the range of support would be reduced from of 4.28 -12.47 p/Kwh to 1.03 to 3.69 p/kWh. Smaller installations of 4kW or less would see the biggest cut, with a reduction of 87%. Standalone installations would receive a cut of 76%, with medium sized and larger fixed installations falling somewhere in between. The 87% cut to solar is one that was widely quoted in the press when the consultation was published.

Wind – wind generation support was reduced from four bands to two 50-1500kW, or smaller than 50kW. Support would be reduced from 13.37- 2.43 p/kWh to 8.61-0 p/kWh. Installations between 1500kW and 5000kW would no longer receive support. If implemented it would mean that all subsidies for onshore wind through FITs or the Renewables Obligation would be removed for installations larger than 1.5MW from 2016.

Hydro – Bands reduced from five to four. Support reduced from 15.45-2.43p/Kwh to 10.66-2.18p/kWh

There were no proposed changes to the export tariff of 4.85p/kWh although the consultation called for views on how to increase stability of the tariff, by either reducing the tariff or linking it to wholesale prices,

The Government is proposed a range of other measures including:

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• Quarterly degression of either 10, 5 or 0% for all technologies • New installations to be CPI index-linked rather than RPI index-

linked • Scheme not extended to any new technologies • New expenditure under FITs is limited to an overall budget of £75-

100m to 2018/19.

Proposals that could be considered in the future included an obligation for all new FIT generators to inform their Distribution Network Operator (DNO) of their installations and increasing energy efficiency criteria of buildings for new FIT applications to qualify for support in the future.

The consultation also included a table of proposed default degression quarterly until 2019, together with tables setting out the total generation and number of installations projected to 2108/19 per quarter.

The Government also published an Impact Assessment and a Feed-in Tariff Scheme: Review of Evidence

6.1 Reactions to the Proposals The proposals for changes to FITs, were meet with great concern by the renewable energy sector. The solar PV sector would suffer the most severe cuts under the proposed changes. Many were of the view that with the right support the sector could become subsidy free by 2020, but that the proposed cuts could make this unachievable. The Solar Trade Association reaction reflected this:

The Government’s own Impact Analysis [2] shows their proposals will reduce the UK solar industry to a shadow of its former self, with insufficient business to sustain solar installers and the wider UK supply chain. STA modelling, which has been verified by experts from Imperial College, shows that it will add only £1.70 to household bills in 2020 to deliver well over a million more solar homes. The modelling showed that it is growth and political stability which will drive the sector off subsidy through economies of scale. DECC’s proposals are the complete opposite.

And:

It is quite wrong to suggest we cannot afford to go solar. The truth is we cannot afford not to. It’s hard to think of a greater waste of public money than building up a strong British solar industry, hailed by the Prime Minister as a success, and then pushing it over a cliff before it is ready to fly.8

The Renewables UK, which represents the wind energy sector, response to the removal of pre-accreditation welcomed the Government decision that it may only a temporary measure stating that “for the Government’s proposed deployment caps to work under the reformed Feed-in Tariff, the re-introduction of pre-accreditation is a vital measure to ensure sufficient projects go ahead”.9

8 Solar Trade Association, Solar Industry welcomes growing call for Government to

reconsider ‘extreme’ Feed-In Tariff proposals, 17 September 9 Renewables UK, RenewableUK statement on the removal of pre-accreditation for the

Feed-in Tariff, 9 September 2015

11 Feed-in Tariffs

In response to the Review it warned that complex rules would in the long term scare away many of the people who could most benefit from this scheme, and in the short term create market chaos, warning that “The next four months will turn the British energy market into a wild-west market with energy consumers stuck in the middle”,

6.2 Impact on Jobs The IA referred to the impact on jobs, which was not quantified, and which the Government was seeking information through the consultation, but acknowledged there would be negative impact:

The scheme has certainly seen a significant amount of jobs transfer from other parts of the economy to support renewables installation. The proposed changes will see the current high rate of deployment decrease, likely leading to a rebalancing of jobs in this sector. There is therefore likely to be a negative impact on existing jobs in the renewable electricity generation sector, though DECC has not been able to quantify it.

However there were reports in the press of leaked conversations with Ministers that suggested the impacts on jobs in the renewables sector was not a consideration of the Review:

In a highly unusual move, British Photovoltaic Association chair Reza Shaybani has published an account of the meeting in which he says Rudd told him the impact on jobs was not part of the consultation on the solar subsidy cuts. An analysis, based on government data, by Friends of the Earth estimates that 22,000 jobs could be lost by the proposed 87% cut in support for domestic solar electricity.

A spokesman for the Department of Energy and Climate Change said: “This was a private meeting, of which no verbatim minutes or transcripts were taken. We do not recognise this document or the quotes it contains.”

The Decc spokesman said the focus of its proposal was to find the right level of “feed in tariff” subsidy for solar: “This consultation is about doing what is best for hard working bill-payers and protecting them from the impact of further uncontrolled subsidies on their energy bills.10

The 22,000 job losses figure was echoed in open letter from a large group of organisations including trade associations, NGOs., the NFU, and manufacturers such as DuPont and Panasonic, calling on the Government to reconsider the proposals and emphasising the widespread public support for renewables:

If the current proposals are implemented, analysis based on your Department’s figures shows more than 20,000 people could lose their jobs in pioneering renewable energy companies. Your own analysis shows nearly a million fewer homeowners, social housing providers, businesses, community groups, local authorities and farmers will be able to join the “solar revolution” you called for just four months ago.

While we accept that subsidies for technologies cannot go on indefinitely, it is absolutely essential that changes to Government policy are taken with appropriate consultation with stakeholders

10 The Guardian, Government plan on solar subsidy cuts 'ignored job losses', 4

September 2015

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in order to retain investor confidence and to allow for a smooth, stable transition towards grid-parity.

78% of the British public want Government to enable investment in local renewables. The published proposals do the opposite.

6.3 Government Response The decisions following the consultation were set out in the Government Response published on 17 December 2015, together with an Impact Assessment. This included the decision that tariffs would be higher than originally proposed:

Most of the new tariffs provide for a higher rate of return than previously consulted on and, in most cases, the level of support has increased beyond levels proposed. In determining these tariffs, Government believes that the level of incentive offered reflects the cost of deployment whilst remaining within the boundaries of EU State Aid approval. Under new tariffs, Government is targeting a 4.8% rate of return for solar, 5.9% for wind, and 9.2% for hydro.

Details can be found in the response but did include a solar PV tariff for domestic installations of 4.39p/kWh rather than the 1.63/kWh originally suggested. The following were also announced:

• Deployment caps will be set to limit new spending on the scheme to £100m up to the end of 2018/19

• The reintroduction of pre-accreditation for solar PV and wind generators over 50kW and all hydro and anaerobic digestion generators

• Measures to pause new applications to the FIT scheme from 15 January to 8 February, to allow time for the implementation of cost control measures

The Response documents set out the new tariffs as follows, which have been applied since 8 February 2016:

Tariffs (p/kWh)

Installed capacity

Consultation tariffs

New tariffs (Jan 2016)

PV

<10kW 1.63 4.39 10 - 50kW 3.69 4.59 50 - 250kW 2.64 2.70 250-1000kW 2.28 2.27 > 1000kW 1.03 0.87 Stand alone 1.03 0.87

Wind <50kW 8.61 8.54 50-100kW 4.52 8.54 100–1500kW 4.52 5.46 >1500kW 0.00 0.86

Hydro <100kW 10.66 8.54 100-500 kW 9.78 6.14 500-2000kW 6.56 6.14 >2000kW 2.18 4.43

13 Feed-in Tariffs

The Response also included tables setting a maximum quarterly deployments caps in MW to 2019 and also estimates the number of expected installations for each tariff and technology per quarter as a result.The decisions were welcomed by the renewables industry within the context of what had been originally suggested:

Paul Barwell, chief executive of the Solar Trade Association, offered a cautious welcome the changes. "Government has partially listened. It's not what we needed, but it's better than the original proposals, and we will continue to push for a better deal for what will inevitably be a more consolidated industry with fewer companies," he said in a statement.

He said the new tariff levels were "challenging" but added that solar still could prove a good investment for some home owners.

"Our initial analysis shows solar is still worth considering if you consider the wider benefits such as the increased value to your home," he said. "Homeowners can also benefit by changing the way they use their generated electricity through higher day-time usage or via storage which is now a rapidly developing market."11

6.4 Oversubscription The result of the introduction of a quarterly cap was a rush by developers to register for accreditation as soon as the new tariffs were available. Data on the number of applications and how long it took for the cap to be reached – a matter of minutes – was published by Ofgem and summarised as follows by Business Green:

Many developers hoping to secure accreditation under the revamped feed-in-tariff incentive scheme had their hopes dashed this month, after multiple technology categories spanning wind, solar and anaerobic digestion, reached their quarterly subsidy cap limit within minutes of the scheme opening for applications.

For some unlucky developers, the decision may have come down to the millisecond. Feed-in tariff accreditations for wind projects between 50kW and 100kW in capacity reached their 0.3MW cap limit 15 minutes, 14 seconds and 43 milliseconds after the scheme opened for applications at midnight on February 8, according to new data released late last week by Ofgem.Similarly, wind projects with between 100-1500kW of capacity hit their 6.8MW limit in 18 minutes, 34 seconds and 297 milliseconds, leaving more than 15MW of planned new capacity without accreditation.Meanwhile, standalone PV projects - installations not connected to the power system of a building - filled their 5MW budget in just over one hour and 15 minutes, and anaerobic digestion bumped up against its 5.8MW capacity limit in just over 15 minutes12

11 BusinessGreen, Government softens feed-in tariff blow to solar and wind industries,

17 December 2015 12 BusinessGreen, How the feed-in tariff caps for wind, solar and green gas projects

were hit within minutes of opening 29 February 2016

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The table published by Ofgem is copied below. Installers who submitted the applications after the qualifying date and time will be queued for entry in the next quarter:

Deployment band Cap

limit (MW)

Cap reached?

Date and time of final installation to qualify for the cap

Total Capacity (MW)

PV < 10kW 48.

No N/A 7.604 PV 10-50kW 16.

No N/A 2.023

PV >50kW 14.

No N/A 6.818 PV Standalone 5 Yes 08/02/2016

01:15:11.460

8.777 Wind <50kW 5.6 No N/A - Wind 50-100kW 0.3 Yes 08/02/2016

00:15:14.430

0.933 Wind 100-1500kW 6.8 Yes 08/02/2016

00:18:34.297

22.230 Wind 1500kW-

5 No N/A

- Hydro 0-100kW 1.1 No N/A 0.952 Hydro 100kW-

6.1 No N/A

1.175 AD (All) 5.8 Yes 08/02/2016

00:15:28.153

17.623 Accurate as at 00:00:00.000* on 23 February 2016

BRIEFING PAPER Number 6200, 1 March 2016

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