Author: Keith Baker

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Wednesday, April 28th, 2010 at 4:47 pm
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Will Feed In Tariffs Leave You Hungry?

As of April, the UK has finally introduced feed in tariffs (FiTs) for small-scale renewable energy systems. The use of these tariffs to grow the market for microgeneration systems is commonly associated with their successes in Germany and Spain, but even Iran beat the UK to it by implementing its own version in 2009. So how quickly is the UK Government catching up, and how effective will the new tariffs be?

The idea behind them is simple – anyone installing a new microgeneration system is guaranteed a price for generating and exporting electricity that is higher than the current market rate. This is meant to boost the number of households and communities investing in renewables by reducing their payback periods, which have been one of the biggest barriers for potential investors.

In the UK the scheme works like this. Any system capable of generating up to 50kW must be approved by the Microgeneration Certification Scheme (MCS) and those capable of generating between 50kW and 5MW, as well as all anaerobic digestion systems, must go through the Renewables Obligation Order feed-in tariff (ROO-FiT) process. The UK scheme offers a Generation Tariff for each unit of electricity generated, which is set according to the technology, and fixed for 20 years (or 25 years in the case of solar photovoltaics). In addition to this, there is an Export Tariff of 3p/kWh for any electricity exported to the grid. Generation tariffs are fixed for the first two years of the scheme but will be adjusted annually thereafter.

The tariffs can be claimed for the following technologies:
• Solar photovoltaics (roof mounted or stand alone)
• Wind turbines (building mounted or free standing)
• Hydropower
• Anaerobic digestion
• Micro Combined Heat and Power (mCHP) (although currently limited to a pilot scheme)

Once a system and the FiT agreement are set up, they stay with the installation, so if you move home or pass on ownership of a community project the costs and benefits are passed on to the buyer, which may one day add value to a home as the market for greener properties grows.

But how likely is it that FiTs will lead to the much-needed rapid expansion of microgeneration in the UK?

A typical domestic roof-mounted solar photovoltaic system rated at 3kW and generating around 2,300kWh per year, is currently eligible for a generation tariff of 36.5p/kWh of electricity. In the absence of a smart meter being included in the system the scheme assumes that approximately 50% of electricity generated is exported back to the grid, which in this case means the system will earn around £1,000 a year. This equates to around £600 per year more than from the previous incentives offered under the Renewables Obligation (RO). However, with photovoltaic systems costing around £5,000 to £8,000 per kW, the payback period is still likely to be in excess of 15 years, even when allowing for any additional grants or subsidies it may be eligible for.

The picture does look better for small scale free standing wind turbines though. A typical turbine capable of generating 11kW will be eligible for a generation tariff of 23.0p/kWh, and if installed on a moderately windy site will earn around £6,000 – £9,000 per year (around £3,000 more than under the RO). This is the type of system that lends itself well to community projects and social enterprises, and generally sell for around £50,000, however various grants and subsidies of up to 50% are available for the public sector, not-for-profit organisations and farmers. This is critical as it means a well-planned project could bring its payback period down below 5 years – which is often considered a psychological limit for potential investors.

However the potential return on smaller building-mounted domestic systems is lower, with a typical system earning around £2,000 – £3,000 a year against an installation cost of £20,000 – £30,000 (minus any subsidies, but these are smaller for domestic systems).

So, whilst the FiT is clearly a step in the right direction let’s not get too excited. The UK Government has set a target of achieving 2% of electricity generated by micro-renewables by 2020. This is embarrassingly low and the lack of ambition displayed in setting the FiT rates reflects this.

Whilst they may well prove to be deal-makers for community groups, householders considering installing solar photovoltaics or micro wind turbines are still facing payback periods of at least 10 years, and most likely 15 or more when the full costs of an installation are accounted for. Yet there is little evidence that house buyers are currently willing to pay a premium for properties fitted with microgeneration systems, so it will be a while before most estate agents begin recommending them as a means to add value to a property. As before the FiT, the most likely investors will be those who plan to stay in their properties for the long term and are motivated by the environmental benefits of microgeneration.

Furthermore, in the current economic climate, the up-front costs of a solar photovoltaic array or a micro wind turbine are likely to deter many potential investors, especially given the cheaper option of installing a solar thermal system. Solar thermal is still a highly under-used technology, but one which may be the gateway drug for a renewable energy addiction. Even a high-end system should cost no more than about £3,000, and although that excludes an installation cost, many are sold as DIY kits. You can even make a very basic system out of an old radiator, black paint and a bit of piping – although do not try fitting this to your home! A typical system will only save around £50 to £85 a year on energy bills so the payback period is much longer, but the much smaller up-front cost is likely to be attractive to first-time investors and DIY enthusiasts.

So despite the fanfare that heralded the arrival of the FiT the real news story is not that the Government has demonstrated a real commitment to renewable energy, but that it has finally got round to doing something that other countries have been doing for years, and it’s still not doing it well enough. Aside from community-level projects, the benefits will only be felt by those who own their own homes and have both the motivation and the capital to invest in microgeneration.

When you consider the cost of the scheme against the billions of pounds of public money that have been invested in fossil fuel generation and the shoring up of the nuclear industry, it amounts to a drop in the ocean. The Government is still light years away from rectifying that imbalance, leaving the renewables industry still suffering from policies brought in under the last Conservative government.

If they were to concentrate on feeding the National Grid through renewables, we would not be seeing well meaning individuals having to fork out to do their bit, because as usual, the main beneficiaries of this scheme will be the major energy suppliers who are jumping on the bandwagon to sell you your installation whilst continuing to invest in fossil fuel generation.

And speaking of Governments, when you cast your vote on 6th May, don’t forget to check out your prospective candidate’s record on and/or commitments to Green Energy!

So will the FiT leave you hungry? Imagine being invited to a free banquet only to discover that there was a £100 supplement for the suckling pig. For the vast majority of us, the main dish will still be unaffordable.

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