2015-12-23   facebook twitter rss

Long Awaited Government Response to Review of FiT's Scheme

When the Department of Energy & Climate Change (DECC) launched a full scale review of the Feed-in Tariff (FIT) in August, many leading experts in the renewable energy industry feared it was the beginning of the end.

However, following months of grave concern, DECC has published its response outlining a commitment to continue offering generation tariffs until April 2019. This reflects the Government’s determination “to deliver a low-carbon future that meets both the UK’s international obligations and domestic ambitions”. International obligations were brought into focus again last week by the Paris Agreement, which saw 195 countries agree to a global warming limiting target of 1.5 degrees Celsius by 2100.

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The 115-page consultation outcome acknowledges receipt of nearly 55,000 written separate responses, backed up by multiple campaign orchestrated petitions with over 100,000 signatories. The level of industry reaction to DECC’s proposals is understood to be the principal reason for the response not emerging until today, which coincides with Parliament’s Christmas recess.

So, what are the Government’s key decisions?

‘Ensuring better value for money’ – the Government will be implementing new generation tariffs from 8 February 2016. The new tariffs have not been cut as severely as suggested in DECC’s consultation document (see table below) and target a 4.8% rate of return for solar, 5.9% for wind, and 9.2% for hydro.

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‘Controlling spend’ – the Government will widen its current system of quarterly deployment caps with both default and contingent degression, driven by a maximum £100 million annual budget to be available from January 2016. Deployment levels will be tracked by Ofgem.

‘Degression’ – default and contingent degression of up to 10% may be implemented on a 3-monthly basis if deployment caps are hit. Deployment caps are stipulated within DECC’s response.

‘Pre-accreditation’ – previously ended by the Government on 1 October 2015 following separate consultation, it will be re-introduced on 8 February 2016 for solar and wind projects over 50kW and all hyrdro and AD projects. The eligibility periods for hydro and AD have been changed to 2 years.

‘Extensions’ – from 15 January 2016, the Government has confirmed installations will not be able to extend their capacity under the FIT scheme. There will be no grace period available for extensions.

The Government is not proposing to make any change to the export tariff at this stage although acknowledges its current legislation on this specific element is in need of reform to ensure future sustainability. A further DECC consultation on this matter can be expected.

In addition to the FIT review outcome, the Government has also confirmed that it will end Renewables Obligation (RO) support for all new solar parks from 1 April 2016, including sub-5MW schemes. The importance of this announcement has been somewhat shrouded by the more expansive FIT review results.

Darren Edwards says “this is an important day for the UK’s renewable energy industry – providing much needed certainty to a market which, post-Election, has been anything but. The FIT review outcome demonstrates the Government is capable of listening, with the re-introduction of pre-accreditation and less severe cuts for higher risk technologies, although target returns of 4.8% for solar, 5.9% for wind, and 9.2% for hydro are hardly palpable for setting the pulse racing. Many solar developers view the Government’s decision for their sector to be a stark betrayal of the Paris Agreement.

“I remain sceptical that the announcement will mean investors now look away from renewable energy toward other less challenging diversification opportunities, but I would urge them not to be too hasty as it is still likely to be possible to improve on the target returns, particularly at locations with high onsite electricity usage. The amended tariffs place greater emphasis on matching supply with demand, something that has often been overlooked when the tariffs have been generous. Factor in continued improvements in technology efficiency, further manufacturer cost reductions as demand falls, and the emergence of battery storage technology in the UK and the impact this will have on the viability of renewable energy schemes, and the future can remain green”.

“Finally, another important consideration for projects affected by the announcement is the payment of FIT generation and export rates, which will not occur until Ofgem have fully ROO-FIT accredited the installation. Given this is currently taking anywhere from 6-12 months post-application, this could mean serious knock-on cash flow implications which need to be accounted for through the project development”.

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