The UK Government has introduced two key financial support measures to drive forward the microgeneration market and to help the UK make a successful transition to a low carbon economy and meet its legally binding carbon targets.
Almost two years on we look back at the impact of the incentives on UK microgeneration and ask if investors should still be considering these technologies for their facilities. But first, what exactly is microgeneration?Small-scale
Microgeneration is the collective term used to describe a wide range of small-scale renewable energy systems that produce electricity and heat. Microgeneration technologies include:
- Small and medium sized wind turbines
- Solar photovoltaic (PV) systems
- Biomass boilers
- Heat pumps
- Anaerobic digestion (AD) systems
- Micro combined heat and power (CHP) devices
- Hydro technologies
The scale of microgeneration can range from very small systems for use in homes, through to larger systems designed for use in commercial buildings and farms. The diverse range of technologies and scale of systems means that microgeneration offers attractive options for businesses and homes across the UK to invest in renewable energy generation.The growth of microgeneration
Just as the larger scale renewable generation technologies benefitted from Renewable Obligation (RO) incentives a decade ago, the use of microgeneration systems has seen rapid growth due to the introduction of the Feed-in Tariff (FIT) and the Renewable Heat incentive (RHI).
The FIT applies to electricity produced from wind, solar PV, hydro, anaerobic digestion and micro CHP systems and was introduced in April 2010. Under the scheme, installations are rewarded with an attractive ‘cash back' payment for every kWh of electricity generated. The tariff level (size of reward) depends on the type of technology and the size of the system installed. The design of the FIT scheme was to set tariffs at a level that would provide a return on investment for businesses and homeowners of between five per cent and eight per cent.
Introduced in November 2011 the RHI scheme is the first of its kind in the world. It is designed to provide support for renewable heat technologies such as biomass, heat pumps, solar thermal and biogas. The Government estimates that it will help drive a seven-fold increase in renewable heat over the coming decade and move the supported technologies into the mainstream choice set of homeowners and business.
Incentives have changed the renewable’s business case
The FIT and RHI reward investors with incentive payments for each kWh of energy produced. The reward is in addition to the avoided purchase of electricity or fuel
in the first place. For the electricity generating technologies there are also additional payments for electricity generated that is not used on the property –in the form of payments when surplus electricity is exported and sold to an electricity supplier.
The payments are inflated over a set period: 25 years for solar PV, ten or 20 years for other technologies. They are also exempt from income tax. The incentives are set at the highest level at the start of each scheme – and are progressively reduced as the market matures and the cost of installation falls. However once registered for the incentive, the investor retains the rate paid in the year of installation (plus inflation).
Figure 1 shows the income for a typical 4 kW domestic scale solar PV system – with and without the current FIT incentive payment of 21p per unit of electricity produced.
The impact is clear – the total income and the payback on investment are transformed by the FIT. For an investment of £9300 (incl VAT) the FIT reduces the payback from 41 years to nine years. Hence, the level of the FIT is critical to the case for investment and drives the market. The FIT is set at different levels for each technology and different levels apply to different sizes of installation - with the highest values for the smaller systems.Substantial market uptake
As the FIT has been in place for almost two years, it is possible to track the uptake. Overall it has made a very substantial impact, the headline figures from Ofgem data, are shown below:
Solar PV is clearly the dominant technology. Prior to the FIT, UK solar PV capacity was around 29 MW. Now, in less than two years, capacity has increased almost 30 times. Of these solar systems 98 per cent are on homes; largely on the sunny south coast but also in well-developed local-markets elsewhere in the UK. The revisions of FITs and its market impact
The Department of Energy and Climate Change (DECC) set the FIT payment levels in order to offer investors a rate of return between five per cent and eight per cent. For the solar PV sector the aim was a rate of return of five per cent and the initial tariff was set at 43.3p for each unit of electricity generated. This was set at a time when the costs of installing solar PV were much higher than they are now. As installation costs have fallen, a much higher rate of return has been enjoyed by investors - and the rapid growth of solar PV capacity shown above ensued.
Because DECC has a budget for the FIT payments agreed with HM Treasury, the rapid growth of solar PV risked the budget available. This led DECC to conduct a series of consultations on reductions to the incentives, which resulted in new tariffs for residential scale solar PV systems. At the present time for solar PV for homes this is 21p per unit of electricity produced.
With the initial tariff of 43.3p in 2011, the payback for a 4 kW solar PV system would have been around five years. As we have seen above, at the new 21p tariff level, this payback period has now lengthened to around nine years. As such, when DECC announced the reduction to a 21p rate in Oct 2011, there was a surge in the rate of installations so that they were eligible for the higher rate of FIT. Figure 2 shows this surge and the low level of installations that followed.
This surge and then famine has created significant problems for many solar PV installers, with many reporting redundancies.
For the renewable heat market, the RHI has not been in place for long enough to judge the level of uptake. However it is hoped that the experience of the feast then famine of the FIT will have been incorporated into future thinking.Predictions
The initial surge in uptake of solar PV systems in the last two years may now have come to end but that does not mean that microgeneration technologies no longer offer benefit to homeowners and business investors.
The recent changes and realignment of payment levels have been designed to bring the incentives back in line with the original rate of return of five per cent to eight per cent. For businesses, this is of course in addition to the many secondary benefits that a reduced carbon footprint brings.
To provide installers and customers with greater clarity and stability, DECC has now also proposed a mechanism for future reviews of the FIT payment levels and deadlines. These reviews will cover technologies supported by the FIT and will be linked to the amount of capacity installed. These proposals do give a useful forward view and the market is likely to see a series of small surges, as investors act to catch the most preferential rates around the deadlines.Key deadlines to consider:
3rd March 2012 – From this data the rate for solar was fixed at 21p
1st April 2012 – From this date the FIT will require buildings to meet a level D energy efficiency standard.
July 2012 – FIT rates due to be revised downwards
October 2012 – FIT rates due to be revised downwards
For those considering investing in microgeneration technologies, understanding DECC’s mechanisms and deadlines is a must if technology choices, and the timing of new installations are to maximise long-term return on investment.
Colin McNaught is a Renewable Energy Knowledge Leader at AEA. He has over 20 years of experience in the energy field covering economic, technical and policy studies across a wide range of technologies and techniques. His recent work includes assessments of carbon saving potential for a number of businesses and local authorities, identifying microgeneration and energy efficiency opportunities.
AEA is a global sustainability consultancy that combines world-leading energy, climate change and environmental expertise with powerful IT, knowledge management and economics capability. It has a long track record of working successfully with international agencies and governments to help define and develop policy and with the private sector to produce strategies to respond to regulatory demands and improve efficiencies.
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