Andrew Watkin, Head of the Energy and Marine team at national property consultancy Carter Jonas, responds to the Department for Energy & Climate Change’s (DECC) consultation on the review of the Feed-in-Tariff (FiT) from January 2016 as released yesterday, on an "industry which is already stretched to breaking point".
The DECC’s consultation stated that:
- There are insufficient funds to continue with the FiT scheme as it is currently managed.
- The rates paid under the FiT therefore need to be reduced or removed.
- The method and scale of this reduction is justified by a third party report from Parsons Brinckerhoff.
The reductions proposed by the DECC to the FiT are crushing in terms of the technologies being developed under this tariff mechanism, and the scale and rapidity of the proposed changes was unexpected. For example, the DECC propose to reduce the rates for domestic solar PV (sub 10kW) by 87% and by 83% for large commercial scale solar PV (over 1MW). It is surprising to learn that wind energy (1.5MW and above in terms of installed capacity) will receive a zero generation tariff banding. As is evident, generation tariffs across the range of technologies and installed capacities vary. Rates for anaerobic digestion have not yet been released, but the proposed budget caps mean that only approximately 17 plants will receive support next year.
Based on the outcome of the consultation process, the DECC state that they may even consider the early closure of the FiT scheme from as early as January 2016 to new projects.
The proposed reductions are based on “industry evidence” according to the DECC, in the form of a report undertaken by Parsons Brinckerhoff (PB). The report estimates current and projected capital and operational costs of systems to assess the financial viability of renewable technologies. However:
- The PB report has unclear and undefined material sources, so we cannot determine who was consulted or where the evidence has come from.
- The number of case studies and examples used in the report appears very small. Furthermore, the response to their questionnaire was extremely limited and they had no information from larger scale commercial projects or developers on several key issues and technologies.
- Consequently it is not clear what information is real and what is fabricated, based on unknown assumptions.
- The project cost assumptions utilised (aside from the above concerns) do not include major costs such as development costs, site rental or land assembly costs, or business rates and differ significantly from industry knowledge in many cases.
- We do not agree with the PB report - especially in terms of CAPEX levels or for that matter hurdle rates that they suggest are acceptable, i.e. 4%-5%.
Overall, we consider that this report reflects an unbalanced picture of the renewable energy sector and has not presented the findings of the report from an informed evidence base or demonstrated a robust methodology. What we feel it has demonstrated is a clear lack of understanding of the risks of development by PB and the DECC. It is a major concern that the Government are pushing forward with the proposed changes without undertaking proper due diligence.
One of the key factors overlooked within both the PB report and by the DECC are the development costs that any investor has to speculate (pure risk) in terms of securing planning permission and relevant consents, also having the necessary site or land rights and a viable grid connection offer, before any project can be taken forward and a suitable technology deployed. A high proportion of projects often fail in the development process, therefore returns from those that do come to fruition need to show attractive returns for any homeowner, landowner or developer to speculate the significant development costs required to bring a project forward and to become an operational asset.
Based on PB’s findings, the DECC have set the revised FiT rates on the basis that investors should accept returns as low as 4% for solar and 5% for wind. These in no way reflect the current appetite in the market based on the prevailing development risks and it is difficult to comprehend why any investor would progress with a project based on these projected returns going forward. It begs the question of whether shareholders of companies would happily accept 4-5% as a level of return for a high risk venture; in our view that is unlikely.
The proposed FiT changes come in addition to a number of recent blows to the industry, including:
- The proposed removal of pre-accreditation for the FiT (i.e. so installations will not be guaranteed a rate until they are installed, which for larger projects makes them incredibly high risk).
- The removal of the Renewable Obligation (RO) for wind and solar.
- The poor management of the Contract for Difference scheme intended to replace the RO. This October’s auction round was postponed and may be held in Spring 2016, but the timings are currently unknown.
The summary of the above is that, from 2016, the solar and onshore wind industries could be effectively killed off. Grid parity (where subsidies are no longer required as costs of installation are justified by energy savings alone) is unlikely to be reached as capital costs will not reduce in a sector where there is no investment. This will bring significant detriment to the environment and economy.
We recently published our 2015 Energy Index research document prior to these proposals by the DECC. In this we noted that large scale solar and wind had become financially challenging as a result of changes made by the Government to financial mechanisms. The Energy Index suggested that small scale solar PV and wind were still attractive. However, on the basis of these current proposals from the DECC:
- Depending upon the stage of renewable energy projects and their development, each will need careful evaluation as to whether they can be sensibly taken forward or shelved.
- Solar 50kWp (which led the way in our Energy Index) will suffer a 68% reduction in generation tariff and will no longer be attractive for the majority of sites.
- Heat technologies will therefore become the most attractive investments with electrical generation projects falling away.
In summary, the proposed changes by the DECC come as a crushing blow to the industry. Whilst many technology costs continue to reduce, the industry cannot withstand proposed cuts of this magnitude.
It is frustrating that the data supporting these proposed cuts is unsubstantiated with very limited consultation in the industry or evidence of real projects. It is difficult to see how the energy requirements of the future can be met by removing support for renewable energy; unless the plans are to replace this by more expensive fossil fuel technology.
These proposals are likely to deter investors from the sector and push them to invest elsewhere, and consequentially many involved in the sector will be forced out of business. The proposals by the DECC risk the destruction of this industry at a time when the UK is showing a growing demand for renewable energy, yet there has been little comment in the report in terms of the significant impact on employment nor the job losses which are undoubtedly already occurring.
The Levy Control Framework limit (which restricts the impact of support for low carbon energy on consumer’s bills) is one of the key factors influencing this review. However, as energy demands in the UK continue to increase, it is questionable why the Government is seeking to curtail what was an expanding sector striving to reduce energy generation costs, yet the Government seem to favour more expensive energy generation options. At a cost of approximately £7 per household per annum, it makes no sense to remove support under the FiT and then redirect this towards more expensive options which will ultimately be reflected through consumer’s bills.
For homeowners, landowners and investors with potential development opportunities, it is vital to evaluate the project(s) depending upon their stage in the development process and considered against such risks as outlined above and then formulate a strategy, which will see some projects pushed forward (if they can comply with timescales) and no doubt many others shelved and their sunk costs lost.
The Consultation is now open for two months until 23 October and it is vital that the industry responds accordingly.