T863 Environmental decision making: a systems approach – Project Report

Name: Andrew Turner

Personal identifier: M4321071

Title of project: FiT for Purpose? Investigating the UK Government's

Domestic Solar PV Feed-in-Tariff Mechanism

Date: April 2011

Number of words: 4391

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Table of Contents

1 Summary................................................................................................................................................................ 4

2 Introduction............................................................................................................................................................ 5

2.1 Background....................................................................................................................................................5

2.2 Aim................................................................................................................................................................ 5

2.3 Personal Stake-holding.................................................................................................................................. 6

3 Exploring the existing situation..............................................................................................................................7

3.1 Motivation: underlying interests and values..................................................................................................7

3.2 Scheme Aims................................................................................................................................................. 7

3.3 Stakeholder Analysis..................................................................................................................................... 8

3.4 System of Interest.......................................................................................................................................... 9

3.5 Identifying changes........................................................................................................................................9

3.6 Taking Action...............................................................................................................................................10

3.7 Government evaluation & revision..............................................................................................................10

3.8 Re-evaluation: fitness for purpose............................................................................................................... 11

3.9 Government audit review............................................................................................................................ 13

4 Re-exploring the situation systemically.............................................................................................................. 14

4.1 Stakeholder perspectives and interests........................................................................................................ 15

4.2 Modelling.....................................................................................................................................................17

4.3 Exploring with diagrams............................................................................................................................. 18

5 Developing understanding and formulating interests...........................................................................................21

6 Identifying feasible and desirable changes...........................................................................................................25

6.1 Exploring Changes...................................................................................................................................... 25

6.2 Negotiating outcomes.................................................................................................................................. 25

6.3 Mechanisms in other jurisdictions............................................................................................................... 25

6.4 Feasible and Desirable Changes.................................................................................................................. 26

7 Taking action........................................................................................................................................................ 28

7.1 Limitations...................................................................................................................................................28

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7.2 Implementation............................................................................................................................................ 28

7.3 Evaluation and monitoring.......................................................................................................................... 29

8 Critical Appraisal..................................................................................................................................................30

8.1 Framework...................................................................................................................................................30

8.2 Diagramming Techniques............................................................................................................................ 31

9 Conclusions.......................................................................................................................................................... 33

9.1 Existing mechanism.....................................................................................................................................33

9.2 Recommendations....................................................................................................................................... 33

9.3 Limitations...................................................................................................................................................34

10 Acknowledgements........................................................................................................................................... 35

11 References......................................................................................................................................................... 36

12 Glossary..............................................................................................................................................................39

13 Appendices........................................................................................................................................................ 40

13.1 Appendix A – Criticism of government review......................................................................................... 40

13.2 Appendix B – PV installation case study...................................................................................................43

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1 Summary

In early 2010 the UK government introduced a scheme to encourage photovoltaic roof panel

installations through a generous tariff paid for the electricity they generate.

It has been a victim of its own success: failing to monitor falling installation prices and rapid

scheme uptake caused costs to rise out of control. A clumsy budgetary cap was introduced.

The government attempted hastily and belatedly to dampen demand by suddenly slashing the tariff

paid and linking eligibility to energy efficiency. This has created boom and bust conditions and

undermined the programme as well as the government's credibility to deliver on its legislative

environmental responsibilities and election promises to be the “greenest government ever”. 1

This report investigates the scheme and discovers it is far from best practice. The government

should consider removing the budgetary cap and inappropriate energy efficiency eligibility linkage

and create an effective, timely system to monitor unit-cost and installations. It should convene a

forum to define and manage a new, open, predictable tariff-setting mechanism with the

collaborative participation of stakeholders such as solar PV industries and NGOs that will allow the

scheme to continue fostering a growing green economy and support its carbon-reduction goals in a

sustainable manner.

[200 words]

1 http://www.number10.gov.uk/news/pms-speech-at-decc/

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2 Introduction

2.1 Background

Climate change caused by greenhouse gas emissions is seen by many as the greatest threat to the

planet's biophysical environment2 and so decisions that reduce these are important. This report

investigates one UK example: a government-set tariff which encourages householders to install

solar photovoltaic panels to generate CO2-free electricity. The effectiveness of such schemes

globally has great potential to limit climate-change.

This report focuses on small-scale domestic PV installations (although the scheme itself extends to

other technologies and sectors3).

The scheme take-up from April 2010 was much greater than expected4 and as a result the UK

government suddenly announced in October 2011 drastic tariff rate reductions of around 50% with

almost immediate effect. This has shocked solar PV stakeholders and been the subject of significant

criticism.5

2.2 Aim

This project aims to define an effective and sustainable ongoing tariff price-setting mechanism. The

existing situation will be reviewed and critiqued and then the situation systemically re-explored for

improvements.

The decisions this project aims to make are therefore:

1. Is the current FiT-setting system fit for purpose and if not, to identify its shortcomings

◦ T863 techniques are used to explore and evaluate the existing situation

2. Devising a better mechanism

2 E.g.: US Agriculture Secretary Vilsack: “Climate Change is ‘One of the Greatest Threats Facing Our Planet”, UN global warming conference, Cancun, December 2010

3 Interestingly, solar PV is not one of the key eight C02-saving technologies as defined by the government – see http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/renewable-energy/2167-uk-renewable-energy-roadmap.pdf, p.14

4 UK NAO FiT Briefing, p. 125 http://www.bbc.co.uk/news/uk-15687873

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◦ The T863 framework is used to re-explore systemically; analyse the system of

interest; identify changes; and propose action

2.3 Personal Stake-holding

My personal stake-holding in this project is three-fold:

1. As a part-time domestic solar PV consultant, the FiT is central to the recommendations I

make to clients;

2. As a customer considering installing solar PV on my own roof;

3. As a citizen having a stake in the global biophysical environment.

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3 Exploring the existing situation

3.1 Motivation: underlying interests and values

Precautionary Principle

The exact consequences of climate change caused by greenhouse gases are unknown but thought by

experts to be potentially catastrophic6. It is sensible therefore to limit them by adopting the

precautionary principle7.

Initial Review

A spray diagram was used initially to explore what may be wrong with the existing system.

6 E.g.: US Agriculture Secretary Vilsack: “Climate Change is ‘One of the Greatest Threats Facing Our Planet”, UN global warming conference, Cancun, December 2010

7 T863 Book 3, p.78

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Figure 1: Spray Diagram : Initial analysis - what's wrong with the Feed-In-Tariff?

Legislation

Under the Climate Change Act 2008, the UK has a legally binding target of reducing greenhouse

gas emissions by 34% by 2020 compared with 1990 levels8. As part of reaching this commitment,

the UK Government's Renewable Energy roadmap9 states that 15% of UK energy demand is to be

met from renewable sources by 2020 and identifies solar PV as providing an important

contribution.10

To facilitate this, the government in April 2010 introduced under the 2008 Energy Act a Feed-In-

Tariff11 that pays for energy generated from installed renewable technology such as solar PV, at a

guaranteed rate index-linked over 25 years. These payments are funded by the energy companies

who recoup these costs through energy bills to all their customers.

3.2 Scheme Aims

DECC defines the motivation for the introduction of the FiT:

“DECC hopes to encourage deployment of additional small-scale (less than

5MW) low-carbon electricity generation...This will allow many people to

invest in small-scale low-carbon electricity, in return for a guaranteed

payment.”12

DECC commissioned an extensive report in June 200913 to recommend a tariff mechanism. The

report defined these aims:

1. Encourage uptake of small-scale solar PV;

2. Reducing C02 emissions;

8 http://www.decc.gov.uk/en/content/cms/legislation/cc_act_08/cc_act_08.aspx 9 http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/renewable-energy/2167-uk-renewable-energy-roadmap.pdf , p.910 http://www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/re_roadmap/re_roadmap.aspx , p.111 Energy Act 2008, Sections 41 and 4312 http://www.decc.gov.uk/en/content/cms/meeting_energy/Renewable_ener/feedin_tariff/feedin_tariff.aspx 13 From Pöyry Energy Consulting and Element Energy: http://www.decc.gov.uk/assets/decc/consultations/renewable%20electricity%20financial

%20incentives/1_20090714182339_e_@@_relateddocelementpoyryfinalreportonqualitativeissuesinfitsdesign.pdf

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3. Security of energy supply;

4. Job creation from a green economy.

The tariff analysis was largely undertaken using mathematical modelling based on predicted ROI

sufficiently attractive to encourage uptake by small-scale domestic customers.

3.3 Stakeholder Analysis

The report considered only government and (by proxy) consumer stakeholders as shown in the

systems map14 in Figure 2.

14 T863 Techniques Book, p. 36

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Figure 2: Systems Map for DECC FiT decision-making system

3.4 System of Interest

The system of interest in setting the FiT appears to be defined as:

A system to define a tariff so as to encourage small-scale PV and thereby

help meet climate-change and energy supply security requirements and

encourage job creation from a green economy.

This definition will subsequently be used to evaluate subsequently selected actions.

3.5 Identifying changes

The report recommended:

1. A fixed tariff set at a level to attract householders (ROI around 5%);

2. Against setting a capacity cap;

“Capacity caps should be avoided unless set sufficiently high so as not to

artificially constrain uptake...if poorly designed could lead to a boom and

bust scenario as the example of solar PV deployment in Spain.”15

3. Fixing the guaranteed payment period for at least 15 years;

4. Reviewing the tariff every three years, and after the first year initially.

3.6 Taking Action

The DECC received this report and launched the following scheme in April 2010:

• 43.3p / kWh feed-in-tariff (for retro-fit schemes under 4kW);

• fixed for 25 years;

• paid for out of all consumers' energy bills;

• no budgetary cap.

15 http://www.decc.gov.uk/assets/decc/consultations/renewable%20electricity%20financial %20incentives/1_20090714182339_e_@@_relateddocelementpoyryfinalreportonqualitativeissuesinfitsdesign.pdf, p.5

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3.7 Government evaluation & revision

Cap Introduced

Despite this, in October 2010 the new UK coalition government introduced a budgetary cap of

£867m for all FiT schemes.16 Almost immediately, commentators warned this cap was being spent

too quickly17 causing industry uncertainty.

However, it was not until October 2011 that the government published Phase I of its review18 and

summarily announced a massive cut in the small-scale domestic PV tariff of around 50% (to

21p/kWh19) effective from 12 Dec 201120 in order to keep tariff spending within the budget cap.

This sudden cut shocked industry and consumer, threatening to jeopardise a successful new

business sector.21 Many industry stakeholders felt this policy change unreasonable and Friends of

the Earth successfully took the government to court22 over its decision, citing a “botched review”23.

The review also linked eligibility for the tariff with the energy efficiency of the home, despite

serious reservations from industry24 and an inability to demonstrate meaningful linkage between this

and the aims of the FiT scheme: it seems that this may simply have been an attempt at dampening

uptake.

3.8 Re-evaluation: fitness for purpose

It was always envisaged that the tariff would taper in value as installation prices fell, but knee-jerk

responses are very unhelpful as John Cridland, director general of the CBI, states:

16 http://www.decc.gov.uk/en/content/cms/news/gb_sol_article/gb_sol_article.aspx 17 http://www.guardian.co.uk/commentisfree/2011/oct/31/britain-solar-energy-unsustainable-foundations (and, curiously given its inaction, reposted

on http://www.decc.gov.uk/en/content/cms/news/gb_sol_article/gb_sol_article.aspx) 18 http://www.decc.gov.uk/en/content/cms/consultations/fits_comp_rev1/fits_comp_rev1.aspx 19 http://www.decc.gov.uk/assets/decc/11/consultation/fits-comp-review-p1/3364-fits-scheme-consultation-doc.pdf , p.1820 Despite the 'consultation' officially running until 23 Dec 201121 “Solar tariff cuts risk jobs”, http://www.bbc.co.uk/news/business-15507750 22 http://www.guardian.co.uk/environment/2011/dec/21/solar-subsidy-cuts-legally-flawed 23 http://www.foe.co.uk/resource/press_releases/solar_fits_victory_21122011.html 24 Which? Magazine, amongst others: http://www.which.co.uk/documents/pdf/review-of-the-feed-in-tariffs-scheme-tariffs-for-solar-pv-which-

response-275825.pdf

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"moving the goal posts doesn't just destroy projects and jobs, it creates a

mood of uncertainty that puts off investors... Industry trust and confidence

in the Government has evaporated.".25

Table 1 examines in simple terms (a cut-down 'is-vs-ought' analysis26) whether the scheme has met

its aims as defined in the system definition in Section 3.4 .

It seems not - and this view is reflected in the outcry from consumers, NGOs and the solar industry

(see Appendix A). This is due to failing to take systemically into account stakeholder perspectives

and to implement effective monitoring.

Monitoring

DECC only realised in June 2011 that it could take up to three months for small-scale installations

to be recorded on Ofgem’s central FiTs register27 (see Figure 328) – and even then these data were

not being actioned.

25 http://www.cbi.org.uk/media/1156796/john_cridland_cbi_east_midlands_annual_dinner_speech_101111.pdf 26 T863 Book 3, p.18527 NAO FiT Briefing, p.1128 http://www.decc.gov.uk/assets/decc/11/consultation/fits-comp-review-p1/3364-fits-scheme-consultation-doc.pdf , p.16

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Aim Result

Small-scale PV encouraged? Too much so and unsustainably.

Pricing not monitored and adjusted often enough.

Meet climate-change and energy

supply security requirements

Partially, inasmuch as this scheme is able to do so, but this

progress under threat as unpredictable landscape makes uptake

unattractive for future customers.

Encourage job creation from a

green economy.

Knee-jerk changes to tariff and scheme parameters make it

difficult for green businesses to plan, invest and grow a green

economy.

Table 1: Existing scheme meeting its objectives?

This led to the belated, knee-jerk tariff change which shook industry confidence. DECC's approach

was purposive29 with actions dictated by a simple need - to encourage small-scale PV – based on

static, predictive, mathematical models with limited stakeholder involvement.

3.9 Government audit review

The relevant government audit committees commissioned their own report30 which heavily

criticised the management of the FiT system, in particular:

• Insufficient monitoring mechanisms for:

◦ scheme uptake;

◦ installation costs;

◦ budgetary cap depletion.

• Knee-jerk tariff changes risking the fledgeling industry;

• Government failure to consult with industry;

29 T863 Book 3, p.33 & T863 Book 2, p. 7530 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/160502.htm

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Figure 3: Under-reported PV installations: actual (MCS) and reported (CFR)

• Criticism of the sudden decision to link home energy efficiency to scheme eligibility, fearing

the cancellation of most future installations from what appears simply to be an unjustifiable

braking mechanism;

A purposeful31 reiterative investigation of the system considering broader stakeholder input is

investigated in the next sections.

31 T863 Book 2, p.74

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4 Re-exploring the situation systemically

Stakeholder Analysis

The importance of including multiple stakeholders and their perspectives is key to successful

systemic analysis32. Figure 4 shows a systems map33 which explores stakeholders more completely

than DECC's original analysis (compare Figure 2).

System of Interest

The diagram helps define the system of interest. Each stakeholder relates to the situation by having

a material interest within it and this determines the system boundary. The boundary-setting criteria 34

considered, over several iterations, which are actors, beneficiaries or victims of the tariff-setting

mechanism.

32 T863 Book 2, p.71 (and many others)33 T863 Techniques Book, p.3634 T863 Techniques Book, p.8

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Figure 4: Systems map showing the decision-making stakeholders in the FiT system

The sub-systems then indicate the customers, actors and owners35. The customers are domestic solar

PV customers although the Renewables Sector set members are potential 'clients, beneficiaries,

victims'36 and so these are grouped together. The actors lie in the Regulatory Stakeholder sub-

system, which includes not only the government and immediate decision-making support

stakeholders but also NGOs and trade associations who act together to drive the system. The owner

of the system is the government, specifically DECC, which has the authority to set tariff levels.

4.1 Stakeholder perspectives and interests

Government

The UK government's perspective is one of managing the FiT and, latterly, keeping it within the

spending cap37. Stepping back, this cap limitation may be re-assessed, although the government

review declared this “firm and fixed”38.

Its intention is to be “the greenest government ever”39 which indicates encouraging renewable

technologies. However, its “most urgent priority”40 is to tackle the budget deficit and therefore their

bias is to reduce costs in public spending wherever possible. By removing a budget cap - or no

longer considering FiT payments as public expenditure as postulated by the audit review41- these

constraints could be removed.

NGO

The perspective of an NGO, such as FoE, is that of advocate for the regional, national and global

biophysical environment. It supports the increasing use of renewable over fossil-derived energy to

reduce C02 emissions. Its bias tends towards environmental improvement over financial or party

political objectives and in social fairness42.

35 T863 Techniques Book, p.7336 T863 Techniques Book, p.7337 http://cdn.hm-treasury.gov.uk/sr2010_completereport.pdf 38 http://www.hm-treasury.gov.uk/spend_spendingreview_introduction.htm 39 http://www.number10.gov.uk/news/pms-speech-at-decc/ 40 http://www.hm-treasury.gov.uk/psr_reducing_government_deficit.htm 41 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/160506.htm , points 18 & 1942 http://www.foe.co.uk/what_we_do/about_us/friends_earth_values_beliefs.html

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It has criticised “the Government’s constant and disastrous tinkering with the feed-in tariff”43 and

urged for “industry certainty and stability and bring back a level of investor confidence.”43

Customer

The perspective of the small-scale PV customer (including myself) is concern for the biophysical

environment, specifically global warming reduction via lower carbon emissions; and/or someone

interested in financial return from solar PV panels on their roof. This is reinforced by my experience

of small-scale domestic customers: see Appendix B – PV installation case study.

Trade Associations

Solar trade associations are generally not-for-profit organisations which represent and promote the

interests of its members and their employees who operate in the solar industry as manufacturers,

installers, consultants, etc. employing around 25,000 people.44 Their bias is towards legislation

which encourages the deployment of renewable technologies and “to grow sustainably solar’s

share of the UK’s energy mix”45. The Solar Trade Association has “serious concerns about the

remaining FIT budget”46, and believes changes mean “the market could be cut 92% next year”47.

Installers and Suppliers

Suppliers want a tariff that makes their product attractive to consumers and a predictable tariff-

setting mechanism to let them plan their business. In response to the government's October 2011

review, Jerry Stokes, President of Suntech Europe, says:

“This very disturbing sudden and massive reduction from previous tariffs

damages attractiveness for investment and sustainable job creation in the

UK... FiT reduction is healthy for the longevity of the market … when well-

planned.”48

43 http://www.foe.co.uk/resource/briefing_notes/eac_green_economy.pdf , p.1144 http://www.r-e-a.net/news/rea-sta-solar-survey-details-industry-distress 45 http://www.solar-trade.org.uk/ 46 http://www.solar-trade.org.uk//media/Solar%20Trade%20Association-%2023%20March%202012.pdf 47 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/1605we05.htm 48 http://www.pv-tech.org/guest_blog/uk_fit_review_we_will_not_be_moved?utm_source=pvtechfeeds&utm_medium=rss&utm_campaign=guest-

blog-rss-feed

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Solar PV Consultants

Their perspective (and mine as one) is to encourage a predictable, sustainable domestic renewable

energy environment in which they can advise customers on effective utilisation of solar PV.

Perspective Summary

See also Appendix A for stakeholder responses.

4.2 Modelling

Whilst the drawbacks and uncertainties of purely economic modelling are well documented, there is

no evidence that any stakeholders object to the core principle of setting the FiT based upon a

mathematical model which provides a minimal hurdle ROI above which customers are prepared to

invest.

The drawback with this positivist approach in isolation is its potential trap49 of implying

unwarranted accuracy through the use of numerical techniques which produce precise results but

are based on imprecise or out-of-date data.

49 T863 Book 2, p.58

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Stake holder Headline perspective

Government Encourage PV uptake via FiT and boost solar economy within budgets

NGO Encourage PV uptake sustainably & progressively via FiT to reduce C02 emissions

Customer Help environment and get good ROI through FiT

Trade Associations Sustainably grow solar economy through FiT & open, progressive legislation

Installers and Suppliers

Encourage affordable PV via FiT & provide predictable, sustainable business conditions

Solar PV Consultants

Use FiT & open mechanisms to develop sustainable PV business sector & predictable business conditions

Table 2: Summary of stakeholder perspectives

By incorporating assessments of risk and uncertainty into this model50, its likely impact can be

explored more reliably by quantifying the level of subjectivity and uncertainty.51

However, numerical models alone fail to acknowledge the less tangible factors that have a systemic

impact, such as fostering a stable and predictable business landscape. These factors are therefore

explored next to develop understanding and identify changes.

4.3 Exploring with diagrams

The MCD52 in Figure 5 explores the various causes, states and events that influence the FiT level

and the sustainability and viability of the scheme, which are at the system of interest's core. This

was refined into a Sign Graph53 in Figure 6 which focuses on the level factors which affect the

number of new installations.

50 T863 Book 3, p.7451 See Decision Analysis inter alia; Book 3, p. 7752 T863 Techniques Book, pp. 26-2853 T863 Techniques Book, pp. 30-32

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Figure 5: Multiple cause diagram showing factors affecting FiT level

Together they indicate the dynamic causal aspects of the system and indicate runaway feedback

loops, such as the number of new installations decreasing average unit cost which in turn increases

new installations. The sign graph explores how this unmonitored increase has led to regulating

feedback via (unexpected) tariff reductions which undermines public trust levels in the scheme and

thus reduces new installations.

These diagrams reveal the significance of the budgetary cap imposed by the government and

suggests that this may not be compatible with an ongoing sustainable mechanism. Indeed, the

original DECC review and best practice overseas54 recommend no cap.

To explore this aspect further, a systems dynamics diagram55 was drawn (Figure 7) to see if the

budget cap worked as a tariff-regulating mechanism. The diagram shows how scheme uptake is

54 See Mechanisms in other jurisdictions55 T863 Techniques Book, p. 33

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Figure 6: Sign graph showing cause and effect relationships around number of new domestic solar PV installations within the system of consumers, suppliers and the government FiT scheme.

regulated but struggles to explain how a budgetary cap properly regulates the tariff level.

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Figure 7: Figure 2: System dynamics diagram depicting factors affecting Tariff Level and Solar PV Uptake - Tariff Level setting mechanism is not clear with the use of a budgetary cap

5 Developing understanding and formulating interests

Legislation

The legislation which provides the framework for the FiT has been explored in section 3.1 .

Moderating these is the October 2010 Spending Review56 which introduced a budgetary cap for FiT

payments. A fully systemic reappraisal of the situation must reconsider this legislation - although

this may prove unacceptable to the system's owner, the UK government.57

By considering the scheme's aims from the government's perspective (section 3.2 ) and those of the

major stakeholders (Section 4 ) a system of interest is defined which is used to reveal suitable tariff-

setting mechanisms.

Defining the system of interest

The CATWOE mechanism of SSM58 is used here (modified to BATWOVE to identify separately

beneficiaries and victims59) to formulate a root definition of the system of interest60 and then a

conceptual model61 is generated to reveal insights, actions and to compare with the current situation.

The results are shown in Table 3.

56 http://cdn.hm-treasury.gov.uk/sr2010_completereport.pdf 57 http://www.hm-treasury.gov.uk/spend_spendingreview_introduction.htm 58 Soft Systems Methodology (SSM) (Checkland, 1981; Checkland and Scholes, 1990).59 T863 Techniques Book, p. 7460 T863 Techniques Book, pp. 73-7561 T863 Techniques Book, p. 56

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BATWOVE Elements

Beneficiary B

Small-scale domestic PV customers; PV manufacturers; PV suppliers and installers; PV consultants

Actors A

Government: DECC (ultimately Secretary of State for Energy & Climate Change, Gregory Barker), the Treasury; NGOs; solar

industry; solar trade associations

Transformation T

1. Unsustainably high total solar PV Feed-In-Tariff costs → Feed-In-Tariff reviewed and adjusted *

2. Uncertain business landscape from inconsistent tariff-setting → landscape made predictable, sustainable

2. Poor public awareness and uptake of domestic renewable technologies → awareness raised

3. Boom and bust domestic renewable energy sector → sector made sustainable, predictable

* The first is taken as the primary transformation and used to generate the system of interest. Were time and report

space available, the others could be considered in depth also and are any event be incorporated later into the

system thinking.

World View W

Within the context of reducing national CO2 emissions and conforming with emissions targets agreed by UK government at

international summits to reduce global warming, the total uptake and therefore cost of the feed-in-Tariff for small-scale solar

PV has been much greater than that originally envisaged and must therefore be reviewed and regulated whilst also maintaining

support for the fledgeling PV industry and individual public engagement in renewable energy as planned in the original

legislation.

Owners O

The UK Government, more specifically DECC and ultimately its minister Gregory Barker.

Victim V

Electricity users (everyone, via their bills which fund the scheme)

Environment E

The UK government regulatory and budgetary framework which controls public spending and the tariff scheme.

Root Definition

A system to review and adjust the small-scale solar PV Feed-in-Tariff by comparing current and originally predicted

costs and assessing the impact of reducing the tariff in order to make the current scheme sustainable and affordable

whilst maintaining public engagement and the fledgeling solar PV industry.

Table 3: BATWOVE analysis

Conceptual Model

Following T863 guidelines62, a number of ordered, imperative actions were derived to generate a

conceptual model63 from the selected root definition above, and checked using BATWOVE.

The model reveals actions missing from the current system of:

• timely collection and monitoring of installation and unit-costs data;

62 T863 Techniques Book, pp. 56-58 & suggestions from T863 Book 2, p. 23663 T863 Techniques Book, p. 56

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Figure 8: Conceptual model : unsustainably high total solar PV Feed-In-Tariff costs → Feed-In-Tariff reviewed and adjusted

• informing installers of predicted tariff changes;

• providing open, stable tariff environment.

These changes are required to meet the transformation defined in the root and are explored in the

next section.

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6 Identifying feasible and desirable changes

6.1 Exploring Changes

The understanding gained indicates an approach that sets the FiT openly and dynamically whilst

accounting for:

• monitoring uptake and unit costs;

• budgetary cap allowances;

• ongoing input from stakeholders;

• to provide a sustainable, predictable business landscape.

6.2 Negotiating outcomes

Government regulations generated in isolation may fail to account for the interests of stakeholders

whose expertise and action is required to implement them. Failure to negotiate outcomes risks

system failure, as the introduction of the FiT has shown: a generous tariff introduced without broad

stakeholder negotiation and without sufficient ongoing evaluation resulted in a gold-rush for solar

followed within 18 months by a drastic cut which risked the viability of the industry.

Negotiation should be bilateral and open. Various studies have shown the inherent flaws in

traditional positional-based negotiation64 where both sides consider only their interests, and the

benefits of interest-based negotiation where all openly explore everyone's interests and co-

operatively work together to see how both sides' needs can be met.65 The report recommends this

approach.

6.3 Mechanisms in other jurisdictions

It is worth leveraging experience from other countries66. Deutsche Bank produced a detailed report

64 Priscoli, 200365 Susskind et al, 2000; Siddaway, 200566 This is a kind of expert support: see T863 Book 2, p.153 and T863 Book 4, p.121 for its evaluation

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of FiT schemes in several other jurisdictions67 and evaluated Germany's highly successful scheme as

best in class. The key successful elements were:

1. Integrated energy and climate policy;

2. Lack of budgetary cap;

3. Periodic, planned tariff monitoring and setting;

4. Transparent, predictable tariff price reduction policy enabling industry to plan.

6.4 Feasible and Desirable Changes

The considerations above suggest:

◦ Utilising social-learning and participation68, the owner, DECC, convene forums to

agree and maintain open mechanisms for monitoring installation costs and uptake

and criteria for setting the tariff to avoid knee-jerk responses and foster predictable

business conditions;

▪ This could involve the use of multi-criteria analysis69 techniques to weight

priorities;

◦ An initial broad consultation would allow for systemic, purposeful decision-making

and have the power to consider systemic changes such as removing the budget cap;

▪ Regular forums would maintain this;

◦ A flexible, transparent numeric model devised collaboratively to set and maintain the

FiT, generated using a spreadsheet or similar utilising variables identified

previously, such as installation cost, hurdle ROI, etc);

▪ Backcasting70 used to reach the desired future uptake levels and keep the

67 http://www.dbcca.com/dbcca/EN/_media/German_FIT_for_PV.pdf 68 T863 Book 3, pp. 118-11969 T863 Techniques Book, pp. 64-6670 T863 Techniques Book, pp. 6-7

Andrew Turner M4321071 Page 27 of 43

scheme sustainable and desirable.

◦ Decision analysis tables are quantitative models which combine outcome probability

with a subjective value to generate a measure of desirability of change.71 These could

be used to analyse the desirability of alternative incentives to the existing FiT, such

as guaranteed FiT payment period lengths or time-variant FiT levels.

71 Book 3, p.75

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7 Taking action

7.1 Limitations

A limitation of this report is the inability of the author directly to affect policy or take action.

However, the report investigates the situation from multiple perspectives and recommends actions

that incorporate both the author's perspective and by proxy (possibly unreliably72) via analysis of

publicly stated positions those of the other key stakeholders.

7.2 Implementation

The owner and key actor is the UK Government which has the power to control the tariff and other

mechanisms. It should host transparent, participatory positional-based negotiation forums but its

authority to deliberate is not absolute: it must recognise the value of systemic, holistic thinking and

formative evaluation73, valuing all perspectives and permitting systemic change.

Suggested items for forum consideration:

• The current level of the tariff and its attractiveness to new customers;

• What other factors are influencing scheme uptake? How have they changed?

• As the budgetary cap is constraining the system, how should it be removed?

• How are installation and other data gathered and reported back in a timely fashion?

• Changes in technologies and other opportunities: how they will affect future uptake?

• How to learn from global best practice, such as Germany's scheme.

72 T863 Book 4, p. 11573 T863 Book 3, p. 191

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7.3 Evaluation and monitoring

CSH in ongoing evaluation ('is vs ought') mode could be used to evaluate action taken74 but its

complexity places it outside the scope75 of this report.

The original CATWOE/BATWOVE definition are used to evaluate the action as follows:

• E1 = efficacy, e.g.:

◦ Scheme uptake;

◦ Health of PV industry;

◦ CO2 reduced.

• E2 = efficiency, e.g.:

◦ Appropriate scheme interest;

◦ Monitoring data collected in accurately and timely.

• E3 = effectiveness, e.g.:

◦ Tariff sustainably managed.

These continuing action evaluation mechanisms allow the scheme to run sustainably.

74 T863 Book 3, p. 19875 By which I mean, 'word count'

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8 Critical Appraisal

8.1 Framework

The framework's strength for me lay in breaking the decision-making process into four stages of

exploration, interests definition, considering changes and taking actions; providing a coherent,

logical flow for decision-making. Iteration over these and modelling and diagramming techniques

refined my understanding. Taking action and evaluation was problematic given my negligible

influence over government policy as consultant and I am unsatisfied with the vague

recommendations made here.

Creating Space and valuing stakeholders

Good decisions are made with better understanding and that comes from clearer perspective. The

framework suggests making space around a situation76 and I found it useful first to explore the

existing situation, defined by purely economic and legislative factors, and then re-explore from a

greater distance by widening the set of stakeholders, considering their perspectives and other causal

elements with the use of diagrams. Considering as many stakeholder perspective as early as

possible in the exploration is central to the framework. In this way I developed my practice by

learning and applying these techniques, my understanding by analysing their output, and ultimately

recommended improvements in the situation.

Expert Support

Analysing these data developed my practice in exploiting expert support77 and reminded me of the

benefit of stepping back and seeing what relevant analysis has been produced elsewhere. For

example, the first-order evaluations provided by the Deutsche Bank78 and UK government audit

review79 reports provide extensive information surrounding the system of interest. My evaluation of

76 T863 Book 4, p.1177 T863 Book 4, p.12178 http://www.dbcca.com/dbcca/EN/_media/German_FIT_for_PV.pdf 79 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/160502.htm

Andrew Turner M4321071 Page 31 of 43

these reports, acknowledging them as techno-centric and ego-centric80 respectively, is a second-

order81 process that allowed me to step outside their framework and consider how their exploration

aids understanding.

My own role and stake-holding

My own role and perspective changed whilst writing this report. I recognise better the conflicts and

opportunities in representing multiple stake-holding perspectives, e.g. my concern for the

biophysical environment is different but does not exclude my interest in a good ROI as a customer;

recognising and evaluating this develops my expertise as does considering the situation from

alternative perspectives, such as DECC's limited worldview.

8.2 Diagramming Techniques

Systems Map

Initial brainstorming helped identify potential stakeholders and CATWOE's82 Customers, Actors and

Owners helped me define sub-systems. I realised that both PV customer and industry are

'beneficiaries and victims' of the system and switched to BATWOVE83 to value these distinct

perspectives. Iteratively exploring stakeholders and their relationships aided a systemic analysis by

considering as many perspectives as possible early on and helped define system boundaries.

Considering the role and interests of each stakeholder helped formulate problems, opportunities and

systems of interest and in this way I developed practice and understanding.

Multiple-Cause Diagram

I used this diagram technique to establish relationships between FiT level and other factors in the

system of interest. Iterative role-playing identified these interdependent elements which aided

understanding and exploration of the dynamic factors affecting the setting mechanism and which

influence the Government who ultimately sets the tariff. Whilst drawing the causes I discovered an

80 T863 Book 4, p.9781 T863 Book 4, pp.103-10482 T863 Techniques Book, p.7383 Soft Systems Methodology (SSM) (Checkland, 1981; Checkland and Scholes, 1990).

Andrew Turner M4321071 Page 32 of 43

ongoing review and trigger process is required to achieve sustainability and added this. I changed

'Price of tariff' to 'Tariff price reduction', revealing that the system seeks not to set an absolute tariff

level but define its moderating mechanism.

Systems Dynamic Diagram

I found this diagram hard to use, specifically translating system elements into rates and flows - but

this may reflect subject choice. However, I developed my practice by considering the system from a

difference perspective and it improved my understanding that the cap mechanism is not a good way

to throttle scheme uptake.

Andrew Turner M4321071 Page 33 of 43

9 Conclusions

9.1 Existing mechanism

• Lack of monitoring and openness in the present tariff scheme causes knee-jerk changes,

boom and bust conditions and threatens fledgeling PV industries and scheme aims.

• Opaque and unpredictable tariff-setting exacerbates this.

• The basic principle of a tariff price set at a level to stimulate uptake is acceptable but it is

not monitored and adjusted regularly enough.

• Mechanisms that stifle unacceptably high demand, such as a budgetary cap and linking

scheme eligibility to domestic energy-efficiency measures, are not justified.

9.2 Recommendations

DECC should convene a consultation forum of stakeholders to explore and collaboratively consider:

1. Removal of budgetary cap and energy-efficiency eligibility criteria

◦ These appear inappropriate mechanisms for regulating the tariff. This should be

explored and if confirmed they should be dropped to an agreed open timetable.

2. Monitor PV installation costs and scheme uptake

◦ Devise an open, efficient mechanism regularly to monitor and report number and

unit cost of PV installations.

3. Determine transparent tariff-setting mechanism

◦ Stakeholders collaboratively devise an open, predictable model using timely data to

regulate tariff levels providing acceptable customer ROI and maintain this regularly,

allowing industry time to adapt.

4. Collaborative framework to determine future policy thus providing predictable business

Andrew Turner M4321071 Page 34 of 43

landscape landscape.

◦ DECC should host regular stakeholder consultation forums to review mechanism.

9.3 Limitations

An over-abundance of available data and opinion dictated care in order to avoid information

overload. The scope of the project was limited to exploring small-scale domestic PV and primarily

only the poorly managed initial government review.

A more comprehensive report (less constrained by word count) could explore underlying aims

systemically by considering alternatives to PV and house energy efficiency measures.

The report provides neither a definitive tariff price nor mechanism for setting it as this, as stated,

should be decided collaboratively by stakeholders.

Andrew Turner M4321071 Page 35 of 43

10 References

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http://www.bbc.co.uk/news/uk-15687873 [accessed: 19 March, 2012].

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Checkland, P. (1981) Systems Thinking, Systems Practice, London, Wiley.

Checkland, P. and Scholes, J. (1990) Soft Systems Methodology in Action, London, Wiley.

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[accessed: 15 March 2012]

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review-p1/3364-fits-scheme-consultation-doc.pdf. [accessed April 1st, 2012]

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DECC (2011), UK Renewable Energy Roadmap, HM Government [online]. Available from:

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[online], UNESCO http://webworl.unesco.org/water/wwap/pccp/cd/ us_army.html (accessed

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http://www.germanenergyblog.de/?page_id=513 [accessed March 23, 2012].

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High Court [online]. Available from

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15, 2012]

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jobs [online]. Available from

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April 1st, 2012]

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Success with Price Response [online]. Available from

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Milton Keynes, The Open University

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Milton Keynes, The Open University

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OFGEM (2012), Feed-in Tariff Payment Rate Table [online]. Available from

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%20Tariff%20Table%201%20April%202012.pdf [accessed April 1st, 2012]

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[for DECC] [online]. Available from http://www.decc.gov.uk/assets/decc/consultations/renewable

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Earthscan.

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at Supreme Court: STA response [online]. Available from http://www.solar-

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which-response-275825.pdf [accessed March 18, 2012]

Andrew Turner M4321071 Page 38 of 43

11 Glossary

CO2 – Carbon dioxide, a 'greenhouse gas' whose presence in the atmosphere contributes to global

warming and threatens all life on earth.

DECC – Department of Energy and Climate Change

FiT – Feed-In-Tariff, i.e. the amount of money per unit of electricity generated by the solar panel

system the householder or bill-payer is paid, as set by the government and as paid for by the utility

company and paid for out of its general revenues. It is paid regardless of whether the electricity is

used within the household or exported out to the grid and is typically in addition to the smaller

amount paid per unit of surplus electricity that the solar panel system exports to the grid.

kWp – Watt-peak (Wp) or kWp is a measure of the nominal power of a photovoltaic solar energy

device under laboratory illumination conditions.

NGO – Non-governmental Organisation is a legally constituted organization created by natural or

legal persons that operates independently from any government and in the context of this report

refer to national and international environmental advocacy organisations such as Friends of the

Earth.84

ROI – Rate of return on investment, for example: a solar PV system that costs £10,000 and returns

through FiT and other payments an income to the householder of £800 has a ROI of £800 / £10,000

= 0.08 or 8%.

SSM - Soft Systems Methodology, (Checkland, 1981; Checkland and Scholes, 1990).

84 http://www.foe.co.uk

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12 Appendices

12.1 Appendix A – Criticism of government review

This appendix records the predominantly negative reaction from stakeholders to the government's

review of the FiT mechanism for solar PV in October 2011:

Trade Associations & Industry

• The Renewable Energy Association and the Solar Trade Association

“...the solar industry has arrived at a point of crisis in the UK just 18

months since the start of a successful scheme”

“Many [installation] companies will now be faced with an extreme Tariff

adjustment at just 6 weeks notice. This is an entirely avoidable and very

damaging situation.”85

• John Cridland, CBI Director General

“Industry trust and confidence in the government has evaporated...If you

keep moving the goal posts around and make changes in haste, then the

danger is that people don't have confidence and they don't invest.”86

• David Frise, Building & Engineering Services Association

“B&ES felt that the level of decrease was justified on the basis that the

original FIT was set at too high at an unsustainable level, particularly

given that solar PV product prices have decreased significantly (by about

30%) since the introduction of FIT in April 2010.

What is particularly controversial, and unreasonable for B&ES members

85 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/1605we05.htm , Evidence to government review, November 201186 http://www.bbc.co.uk/news/uk-15687873 , 11 November 2011

Andrew Turner M4321071 Page 40 of 43

involved in the scheme, is the proposed timing for when the revised FIT

would come into force.”87

NGO

• Andy Atkins, Director, Friends of the Earth:

"Government plans to slash solar incentives will devastate a thriving

industry and pull the plug on thousands of jobs. In a time of economic

gloom, the solar industry has been one of the UK's brightest success

stories, enabling homes and communities across the country to free

themselves from expensive fossil fuels. We believe the Government's

proposals are not only wrong, they're also illegal - which is why we are

taking Ministers to court."88

Installers and Suppliers

• Solar Century Ltd

“the Government asserts that: 'EPC level C [house energy efficiency]

requirement reduces uptake by up to 92% 2012-13 onwards compared to

uptake under proposed tariffs.'

It is no exaggeration to state that the proposed link to EPC level C

threatens literally all of the jobs that have been delivered since the feed-in

tariff was confirmed.”89

Solar PV Consultants

• BECL, Renewable Energy & Environmental Consultants

“Again we are in limbo with uncertainty and confusion.”90

87 http://www.b-es.org/about/key-issues/crc-efficiency-scheme/ 88 http://www.foe.co.uk/resource/press_releases/solar_cuts_cost_millions_23112011.html 89 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/1605we10.htm , Evidence to government review, Nov 201190 http://www.becl.co.uk/news/solar-pv-feed-in-tariffs/

Andrew Turner M4321071 Page 41 of 43

• Alex Hagen, Energy Consultant, Strutt & Parker

“These tariff changes are going to have a significant impact upon the

financial viability of Solar PV project”

“The way that the FIT review has been announced and handled will reduce

confidence in property owners exploring the RHI and Green Deal91 as they

become available in 2012.”92

91 A proposed UK government domestic energy efficiency promotion programme, to which eligibility for the FiT is proposed.92 http://www.struttandparker.com/media/291423/research_fit_consultation_october_31st_2011.pdf

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12.2 Appendix B – PV installation case study

Client Location Rugby, Warwickshire

Installation Date 24th March 2011

Installation Cost £9,308.00 (inc. 5% VAT)

Installation Size 15.72 m2 panels producing 2.22 kWp

Performance over 1st twelve months

Electricity generated 2,337 Units

Feed-in-Tariff 2,337 * £0.433/unit ................................£1,011.92

Export Tariff 1,169 * £0.031/unit.................................£36.24 ('deemed 50%')

Electricity saved Approx 2400 units @ avg. £0.12/unit....£288.00 (based on previous 6 years)

Year 1 total return ...............................£1,336.00

Year 1 return on Investment................14.3%

Additional Information

The client already had thermal solar panels for hot water and this PV installation was in addition to this on a

separate roof. The clients principal motivator was doing “something green”, i.e. reducing personal carbon

footprint in aid of limiting climate change. They said they would not have installed PV prior to solar thermal,

despite far better returns, as their research had told them solar thermal is much more effective at reducing

carbon output in terms of C02 saved and net installation impacts.

Had the system been installed under the new reduced tariff (March 2012) of £0.21/unit, total return on

investment would still be around 9% and possibly higher given decreasing unit installation costs. The client

said they “most definitely” would still install under these conditions today.

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