Feed-in tariffs are coming to the UK in two weeks and look set to kick-start a massive surge in the installation of small-scale renewables, says Rory Tait.

The introduction of the feed-in tariffs scheme has generally received a positive response, with many people predicting that it will revolutionise the smaller end of the renewable generation sector. But is the scheme the right way of delivering this green spur? And will the financial benefits outweigh the effort of having renewable energy systems installed?

There is no doubt that the introduction of the feed-in tariff has been swift. The government's first consultation was in July 2009 and the finished proposals were published on 1 February 2010. For the first time, there will be an incentive for renewables development that is guaranteed for a fixed period. The government also issued a consultation on 1 February relating to the introduction of a Renewable Heat Incentive (RHI) in April 2011. The feed-in tariffs scheme, the existing Renewables Obligation and the RHI will sit alongside each other as a "trinity" of measures to encourage the implementation of renewable energy projects in the UK.

Feed-in proposal

The proposed feed-in tariff will support the development of small-scale (up to 5MW) low-carbon generation by providing "clean energy cash back" payments. The aim is to encourage householders, businesses and communities to become generators of electricity rather than just being consumers. Under the scheme, generators using qualifying renewable technologies (essentially anaerobic digestion, hydro, photovoltaics, micro-combined heat and power, and wind) will receive payments for their output. These payments will be made up of two elements:

• The generation tariff. This is paid to all generators for their output irrespective of whether the electricity is used on-site or exported to the local grid. The payments will be on a p/kWh basis with the amount depending on the technology being used and the capacity of the installation in question. The prices to be paid range from 41.3p for the smallest photovoltaic installation down to 4.5p for large wind and hydro projects. These payments are guaranteed for 20 years (25 years for photovoltaic and ten years for pilot micro-CHP). The government has also confirmed that the tariffs will increase annually by reference to increases in the retail price index.
  
• The export tariff. This payment will be either a guaranteed fixed payment of 3p/kWh for all electricity exported to the local grid or a payment under contracts negotiated in the open market.

Payments will be made by licensed electricity suppliers, the largest of whom will be required under their electricity supply licences to offer feed-in tariffs to all qualifying generators. The government will be publishing shortly an Order on feed-in tariffs together with draft modifications to electricity supply licences.

Definitions matter

There has been much debate about how an "installation" will be defined. The government has decided that, to avoid perverse incentives - for example, splitting larger installations into two or more separate installations - where there are multiple installations of the same technology on the same site, the generator will be treated as having a single installation for determination of the appropriate tariff. Where there are different technologies on a single site, they will be classed as different installations.

There are also detailed rules dealing with projects that are eligible for both the Renewables Obligation and the feed-in tariff, and in certain cases developers can choose which support scheme they favour.

So who will benefit and what is the cost? The technologies chosen for support under the scheme are clearly targeted at the smaller end of the market, with small wind, solar photovoltaic, small hydro and domestic scale micro-CHP in particular being the focus. Support for biomass (except for anaerobic digestion projects) has been removed because government believes most biomass-fuelled schemes will be in the heat sector.

Positive response

Generally, the response to the proposals appears to be positive, with many respondents predicting that the introduction of a feed-in tariff will revolutionise the smaller end of the renewable generation sector. The knock-on effect of this could be the creation of many more jobs in the green economy to service this expected demand. Many believe we should concentrate on filling a potential skills gap and lack of a developed supply chain, which could put a brake on development.

However, the scheme will necessarily pass a further cost on to the consumer, particularly if take up is as successful as the government believes it could be. The government has to balance its low-carbon economy aspirations with the question of fuel poverty, and for this very reason the tariffs for the various different technologies were not increased to levels suggested by many respondents to the consultation.

With interest rates currently at record low levels, returns of between 5 and 8 per cent are felt to be reasonably generous. Consumers will also benefit through generating their own electricity rather than paying for it.

Upfront costs

One of the key issues for investors in renewables is the up-front cost. It is to be hoped that, given the guaranteed nature of prices to be paid under the scheme for output, new funding mechanisms will be put in place.

In particular, lending institutions could come forward with innovative products whereby householders and smaller businesses and communities could take advantage of commercially-acceptable loan terms to cover capital costs. Proposals for some form of Green Investment Bank would also assist in this area.

The right signals seem to have been given to make investment in installations look attractive to would-be investors of all sizes. It is highly likely that a number of the larger utilities will see this as an opportunity to provide further services to the customer base. They are likely to put together integrated packages for installation and operation, probably including some form of loan structure to the property owner with an assignment to the utility of the owner's rights to payments under the scheme.

The jury is still out on tariff levels. However, overall there appears to be optimism across the board that this is the right thing to do to stimulate development of low-carbon generation at the smaller end. A successful implementation looks likely, particularly in the early years before the rates of certain of the tariffs start degressing.

Rory Tait is a consultant for law firm Martineau and honorary secretary of the REA.
Email: rory.tait@Martineau-uk.com.

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