The UK has recently announced feed-in tariffs for electricity from renewable sources. See http://www.ownergy.co.uk/tariffs/FIT/ , thus abandoning its quota system with ROCs (Renewable Obligation Certificates) for installations of less than 5MW. Will it be enough or is it going too far?
The tariff guarantees a fixed price for each kWh generated from renewable sources. The level depends on the technology and size or type of installation and is adjusted annually for inflation. Furthermore, the tariff is guaranteed for 20 years and in the case of photovoltaics even 25 years.
Given that the size of a typical single wind turbine is 2.5MW, this new feed-in tariff is probably largely irrelevant for wind energy.
So far, the UK has attracted very little investment in photovoltaics. Will this change now? Here, the under 5MW segment is hugely relevant, as it covers all roof-top installations up to small free-standing solar parks. Only larger free-standing installations will have to succumb to ROC- trading.
Comparison with German Feed-in Tariff
As Germany has by far the largest installed capacity of PV modules worldwide, having experienced an increase of more than 3GW in 2009 alone, we have compared German feed-in tariffs with the UK’s. With the exception of Northern Scotland, the UK is no less sunny than Germany – one would therefore expect feed-in tariffs to be comparable.
To compare, we have assumed an exchange rate of €/£1.15. Note that we have not taken into account inflation adjustment of the UK tariff or differences in the length of the tariff (25 years in UK vs. 20 in Germany). Even so, the UK- tariffs appear to be very favourable. But let’s look at more details.
In the UK, electricity that is fed back into the grid attracts an additional 3p/kWh.
From this, it appears that the UK pays a premium of between 5-20% over the feed-in tariff in Germany in 2010, a gap that is set to widen by 2012, as German feed-in tariffs a reduced by ~9% annually while UK degression rate is just 4% annually. The differences in the category of free-standing parks are also in excess of 20%
2. Own Use
To ease the pressure on the national grid, householders are encouraged to use as much solar electricity they produce themselves.
||Tariff for own use
||Premium over feed-in
The financial benefits from direct use come from two sources: First, the tariff for own use. Second, the saving from not having to pay for electricity. Note that electricity in Germany is much higher than in the UK. At current, average, retail electricity prices, the UK pays a high premium for direct use over electricity fed back into the grid.
Note that the discrepancy will most likely be even more pronounced from July 2010 if the German Government passes a law to reduce feed-in tariffs by as much as 25%!
Who will benefit and how much?
This question very much depends on who you’re asking. Let’s have a look at the potential stakeholders.
The UK government’s motivation for introducing the feed-in tariffs is clear. It needs to close the gap in renewables to hit the country’s EU- target of 15% by 2020, which will not be reached unless significant new capacity is built.
Our research into incentive schemes has found that
• There is no significant installed capacity or growth in jurisdictions without feed-in tariff.
• There is no correlation between the level of the tariff and the annual energy yield from the sun or the prevailing electricity prices. Instead, countries that have a larger gap to their 2020-target tend to set higher levels. The UK feed-in tariff is consistent with that empirical result.
• While the existence of a feed-in tariff is essential, there is no correlation between the level of the tariff and the resulting growth, provided the level is set above a certain minimum level.
In conclusion, while the UK feed-in tariff will certainly attract growth in photovoltaics in the UK, the premium that the UK pays over the German feed-in tariff will most likely not result in additional growth. It will also not result in growth in home-grown PV industry, as it attracts too much influx. South Korea for instance, cut its feed-in tariffs sharply in 2009 so that the country can build its own industry.
Private Investors of Rooftop Installations
The good news for investors is: Thanks to feed-in tariffs, investment in photovoltaics is economically viable with an annual return of investment of 8 – 10%. In addition, for householders the income is exempt from income tax. It’s a bit like an ISA with a low risk profile. However, it is unlikely that investors will benefit from the particularly high level of the feed-in tariff, as the equipment (i.e. modules) are target-priced.
The previous years have shown that prevailing feed-in tariffs are priced into the equipment for renewable energy installations (PV modules or wind turbines). As a result, the premium paid by governments over a minimum feed-in tariff is captured by the equipment manufacturers. No doubt this will be the case in the UK too, especially since the UK does not have a significant manufacturing base for PV modules and other manufacturers will want to maintain their profitability even after the proposed tariff melt-down in Germany.
The feed-in tariffs may have little impact on the project developers in the UK, as limited to 5MW. The degree of attraction will also very much depend on the availability of bank finance.
Motivated by fear of not hitting the country’s EU renewables target by 2020, the UK has introduced attractive feed-in tariffs for renewable energies. While there is no doubt that the announced feed-in tariffs will trigger growth in solar in the UK, it is evident that the UK will be paying a sharp premium over comparable tariffs for no additional impact. Moreover, the tariff is too high to foster growth in a UK home-grown PV industry. The UK government appears to prefer growth in installed capacity over growth in its own industry, but may end up with neither. For small investors and equipment manufacturers however, it’s all good news.
Visit Green Rhino Energy for more details on the subject.