UK: Thinking of installing renewable energy? What you need to know about the Smart Export Guarantee

Last Updated: 16 January 2019
Article by James Haikney

The Government is consulting on the way small generators are paid for electricity they export to the grid –what is proposed, and what does this mean?

Small-scale renewable generation (being generation below 5MW) has, since 2010, largely been supported through the Feed-in Tariff (FiT); a direct payment made to the generator from their energy supplier for both the energy they generate (Generation Tariff) and the energy they export back to the grid (Export Tariff).

1. What is the future of the FiT?

The FiT has undergone a number of adaptations and changes over the years as deployment increased, and in recent years in particular the government has moved to reduce the support available to generators under the FiT in line with decreasing technology costs and increasing focus on reducing energy costs for consumers.

This resulted in the government closing the Generation Tariff to new installations from the end of March 2019 and recently announcing (just in time for Christmas) that the Export Tariff would close from the same date, meaning that anybody who installs renewable energy after that date would, seemingly, be expected to give away any generated electricity they could not use themselves back to the grid for free.

2. How will generators be supported once FiTs end?

To offer some comfort to generators that they will be paid for the electricity they transfer to suppliers, the government has, this week, announced that a new system will be introduced to provide a guaranteed route-to-market for new small scale generation, termed the Smart Export Guarantee (SEG).

The SEG is intended to give small generators (including homes with domestic solar power) access to a guaranteed market so that they can receive a return for the electricity they generate.

Here's what we know:

  • The SEG appears to be a liberalised and rebranded FiT regime, requiring energy suppliers to purchase the electricity exported by generators, but giving the suppliers flexibility over the price that they will pay;
  • large electricity suppliers will be required to offer new renewable generators a price for their surplus electricity. The price that they pay for the energy will be determined by the suppliers, as will the length of contract that they will offer;
  • the SEG is being designed to work in parallel with the general transition towards smart grids. In particular, with a focus on the upcoming roll-out of domestic smart meters (which will enable half-hourly export readings to be calculated), with the intention of more accurately measuring the energy that is being put back into the grid.

And perhaps more importantly, here's what we don't know:

  • when will the SEG be put in place? and
  • what price will suppliers offer?

The short-term success of the SEG will depend on it being put in place quickly enough to ensure that the momentum behind the UK's renewables revolution is not lost – any delay could affect smaller installers of renewables, who are sure to see a reduction in demand should there be a lengthy gap between the closure of the Export Tariff and the beginning of the SEG.

The long-term success of the SEG will fundamentally come down to pricing and in particular whether the price offered by suppliers will be enough to convince generators (both domestic and commercial) that they will see a return on their investment over the life of their assets.

3. What does the change to the SEG mean?

Existing installations

Installations which are able to accredit to receive a FiT should not be affected. FiT support is grandfathered, meaning that the support continues notwithstanding later changes in law, which will only affect new installations.

Pricing

The indications are that the government will offer the supplier flexibility in its pricing including, importantly, permitting different prices to apply at different periods of the day. The consultation also seeks views on permitting the price to be tied to the wholesale market price.

Although this reflects the costs suppliers incur, there is a serious risk that wholesale price risk is passed on to generators, making revenue over the life of the installation much harder to predict (and, consequently, making it much harder for a generator to determine whether installing renewable energy represents value for money) which could significantly hurt uptake, particularly in the domestic market.

For developments towards the top end of the small-scale bracket, the likelihood is that the "off-the-shelf" SEG tariffs may not be sufficient to support a larger export-based project. I expect the market for short-to-medium-term power purchase agreements (PPAs) would continue to be the primary route to market for generators towards the top end of the 5MW cap.

Accessing the SEG

We can expect that the system for registering a small-scale generator will remain similar to that for accreditation to receive a FiT, and it would certainly benefit domestic installations to have uniformity of terms and conditions in most respect, since this would allow generator selection on the basis of price alone.

4. What's next?

The consultation on the SEG closes on 5 March, and you can have your say by following this link.

Once the consultation is closed, the government will be under pressure to publish its plans as soon as possible to minimise any gap between the Export Tariff and the SEG.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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