Early FiT review threatens sector confidence
Date of Article
Feb 07 2011

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Andrew Watkin, head of the Carter Jonas energy team, responds to the Government’s announcement today of a review of arrangements for the Feed in Tariff (FiT).

“The major problem that the Government is likely to create by the Minister’s (Chris Huhne – Energy Secretary) comments could be a complete lack of trust in the UK FiT system.

“If we consider solar parks, it’s plain to see that not all landowners who have a suitable site for, say, a 5MW solar park, are comfortable in taking a project through the development process including securing planning consent and grid connection offer, before construction commences.

“Planning application costs alone are probably in the region of circa £40-50,000 for a park. If planning permission and a grid connection offer can be secured, you are looking at a project capital expenditure of circa £2.2 - £2.6M per MW - say £11M - £13M for a 5 MW park.

“With returns in the region of 10-12%, such high levels of seed capital and project finance are not for the faint hearted, let alone if there’s a jumpy Minister in the background.

“It may have been simpler for the Department for Energy & Climate Change (DECC) to have set the maximum size of installation under the FiT at around 1MW rather than 5MW. Although the Government would then have found that there would be no benefit from economies of scale and that would have had the net affect of stymieing the technologies’ deployment  but is that really what the Government is seeking to achieve?

“If we are really honest, do UK weather conditions lend themselves to successful solar deployment even if we look at the southern half of the country? Without the tariff levels being pitched where they are currently, then the answer has to be no.

“That said, we do have one of the best wind resources in Europe, although there are many hurdles to jump through in that development process too - such as radar, planning and grid connection - before a successful project can be developed. It is by no means straightforward.
 
“In terms of Anaerobic Digestion (AD), which is a complex operational process and a business venture in itself, the Minister should not be surprised about the lack of AD plants being developed with the current tariff levels.  An acceptable return is just not there for what is a demanding process. With commodity prices - i.e. wheat at circa £200/Ton - feedstock procurement will continue to be an issue in terms of energy crops. So successful AD plants are likely to be taken forward where feedstock can be procured from suitable waste sources, although not everyone is keen to have the end product (digestate) spread on their land, especially with the buoyant nature of the agricultural land market and values increasing at present.”