2016-02-24   facebook twitter rss

Is the Future Green for On-Farm Renewable Energy?

When the Department of Energy & Climate Change (DECC) launched a full scale review of the Feed-in Tariff (FIT) in August 2015, proposing new stringent cost control measures ahead of a possible phased closure of the scheme in January 2016, you could have been forgiven for thinking it was the beginning of the end.

However, following an inevitable period of grave uncertainty for those within the industry, on 17 December 2015 and less than a week after the Paris Agreement [which saw 195 countries agree to a global warming limiting target of 1.5 degrees Celsius by 2100], DECC published its response outlining a commitment to continue offering generation tariffs until April 2019. Self-billed as a reflection of the Government’s determination “to deliver a low-carbon future that meets both the UK’s international obligations and domestic ambitions”, the 115-page consultation outcome acknowledged receipt of nearly 55,000 written separate responses, backed up by multiple campaign orchestrated petitions with over 100,000 signatories. So, what opportunities and challenges does it present for on-farm renewable energy investments in 2016?

Fisher German

One of the Government’s key objectives was ‘ensuring better value for money’, involving revised generation tariffs to kick-in from 8 February 2015. However, the FIT scheme will be ‘paused’ from 15 January 2016 in order for the changes to be implemented and in the intervening period only those projects with pre-accreditation granted before 1 October 2015 will be able to accredit. The not unexpected but nevertheless abrupt implementation of legislative changes brought an immediate end to many planned and part-progressed farm based renewable energy schemes, in turn proving hugely frustrating for stakeholders and investors. The Government’s record of ‘moving the goalposts’ at short notice is a lingering risk and ongoing concern. It also arguably presents the greatest challenge to further on-farm investment in renewable energy going forward.

New tariffs

For those with projects well advanced but perhaps not pre-accredited, some recompense came in the form of new tariffs less severely cut than outlined in DECC’s consultation document. Solar PV tariffs will range from 0.87p/kW for stand-alone and 1MW+ schemes to 4.39p/kWh for sub-10kW schemes, wind tariffs will range from 0.86p/kW for 1.5MW+ schemes to 8.54p/kWh for sub-100kW schemes, and hydro tariffs will range from 4.43p/kW for 2MW+ schemes to 8.54p/kWh for sub-100kW schemes. Whilst these revised tariff rates retain or present an opportunity for some projects (notably those with high on-farm electricity demand that can utilise the generation), the Government’s target rates of return of 4.8% rate for solar, 5.9% for wind, and 9.2% for hydro will prove insufficiently attractive to warrant the planning and development challenges for others (notably those proposing 100% export).

Control on spending

In ‘controlling spend’, the Government has widened the pre-review system of quarterly deployment caps with both default and contingent degression. This is driven by a new maximum £100 million annual FIT budget to be available from January 2016. Deployment levels will be tracked by Ofgem going forward, but represent a challenge for some technologies with low caps, notably AD which has a deployment cap of 5.8MW in Q1 2016 and then 5MW per quarter thereafter until 2019. This will restrict support to relatively few AD plants which, when coupled with unclear tariff rates and a review of interaction between the FIT and Renewable Heat Incentive (RHI) on combined heat and power (CHP) projects, makes for a challenging time for on-farm AD schemes in the short-medium term. The continuance of the RHI still offers hope for biomethane plants whilst some reduction in capital costs will mean there remains opportunities in 2016 for well-planned projects.

One of the key outcomes of DECC’s consultation response was the reintroduction of preliminary accreditation – previously ended by the Government on 1 October 2015. Due to recommence on 8 February 2016 for solar and wind projects over 50kW and all hydro and AD projects, it should ensure finance is available for demonstrably viable projects. The eligibility periods for hydro and AD have been changed to 2 years which offers good assurance for schemes that can obtain planning permission in 2016.

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. This will prove a blow to some farm based schemes who hoped to expand existing renewable energy schemes in 2016.

Finally, another important consideration for projects affected by DECC’s 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.

Challenging times ahead

It is without question that 2016 will be a challenging year for all forms of renewable energy, both at farm and commercial scale. That said, I would urge investors not to dismiss renewable energy as it will be possible to improve on the Government target return rates, 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.

Fisher German

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