UK: Clean Energy Cash-Back

Last Updated: 24 February 2010
Article by Munir Hassan, Vivek Gambhir, Robert Lane and Juliet Stradling

Feed-in Tariffs and Renewable Heat Incentive

There has been a mixed reaction from the renewables industry to the release by the Department of Energy and Climate Change ("DECC") of the final details of the feed-in tariffs ("FITs") scheme due to take effect from 1 April 2010. While many who have lobbied for a scheme to incentivise small-scale renewable electricity generation are happy to see one finally being introduced, some are disappointed at the tariff levels announced. Of course, even positive commentators will be keeping a close watch over the coming year to see whether FITs deliver on the promise of large numbers of households, community organisations and businesses generating their own renewable electricity.

The complex matrix of tariffs means that it is possible they could encourage the deployment of particular technologies over others. Under some feed in tariff regimes this has not always lead to the right results, with technologies being selected that may not be the most suitable for the site, as economic drivers can override practical or technical considerations. However, DECC has taken into account the significant learning, experience and mistakes elsewhere in Europe in setting the tariff levels (such as the recent reductions that were required in solar feed in tariffs in France and Germany).

DECC has also published a new consultation on the Renewable Heat Incentive ("RHI"), which sets out the details of the Government's proposals for incentivising the production of heat from renewable sources for the first time in advance of the scheme's intended introduction on 1 April 2011. The structure of the RHI is similar to that of the FITs scheme and we therefore provide an overview of the two schemes and highlight the main differences between the two.

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Feed-in Tariffs and Renewable Heat Incentive

There has been a mixed reaction from the renewables industry to the release by the Department of Energy and Climate Change ("DECC") of the final details of the feed-in tariffs ("FITs") scheme due to take effect from 1 April 2010. While many who have lobbied for a scheme to incentivise small-scale renewable electricity generation are happy to see one finally being introduced, some are disappointed at the tariff levels announced. Of course, even positive commentators will be keeping a close watch over the coming year to see whether FITs deliver on the promise of large numbers of households, community organisations and businesses generating their own renewable electricity.

The complex matrix of tariffs means that it is possible they could encourage the deployment of particular technologies over others. Under some feed in tariff regimes this has not always lead to the right results, with technologies being selected that may not be the most suitable for the site, as economic drivers can override practical or technical considerations. However, DECC has taken into account the significant learning, experience and mistakes elsewhere in Europe in setting the tariff levels (such as the recent reductions that were required in solar feed in tariffs in France and Germany).

DECC has also published a new consultation on the Renewable Heat Incentive ("RHI"), which sets out the details of the Government's proposals for incentivising the production of heat from renewable sources for the first time in advance of the scheme's intended introduction on 1 April 2011. The structure of the RHI is similar to that of the FITs scheme and we therefore provide an overview of the two schemes and highlight the main differences between the two.

1. Feed-in Tariffs

FITs are intended to incentivise small-scale low carbon electricity generation with effect from 1 April 2010, working alongside the Renewables Obligation (the "RO"), which will remain the primary mechanism to incentivise large-scale renewable electricity generation. FITs are aimed at people working outside the energy industry and accordingly have been designed to offer simple and certain support to participants.

Eligibility

FITs will be available for anaerobic digestion, hydro, solar photovoltaic and wind projects (but notably not biomass projects) with a maximum capacity of 5 MW. Up to 30,000 micro CHP installations with an electricity capacity of 2 kW will also be entitled to benefit from the scheme under a pilot project.

For technologies where there is a viable Microgeneration Certification Scheme (MCS) process (wind, solar PV and hydro up to 50 kW, and domestic scale micro CHP), generators will need to ensure that the installation is recognised by MCS; for other technologies, generators will need to approach Ofgem and seek accreditation under a process that is similar to the one that currently exists for the RO.

Any installation completed before 15 July 2009 (the date of the publication of the Renewable Energy Strategy and the consultation on FITs) that does not apply for accreditation under the RO before 31 March 2010 will not be eligible for financial support through FITs.

Payments

Generators participating in the scheme will receive payments pursuant to a generation tariff for every kWh of electricity they produce and, unless they choose to opt-out in favour of negotiating a price on the open market, additional payments pursuant to an export tariff for every kWh of electricity they export. They will also benefit from reduced electricity bills and the Chancellor's announcement that, where renewable technology is used to generate electricity mainly for a household's own use, tariff payments will not be subject to income tax.

In general, payments will be made on the basis of generation metered in accordance with existing legal requirements, but the Government is proposing, as an interim measure pending the finalisation of specifications for smart metering, that at the very small scale the amount of exports can be deemed subject to certain conditions being satisfied.

The tariffs have been set to provide an approximate rate of return of 5-8%, in real terms, for well-sited installations and, to reflect this, the generation tariff payable depends on the technology used and the size on the installation. The export tariff is however the same irrespective of technology and size and has been set initially at 3 pence per kWh for all participating generators.

Tariffs will be paid for 25 years in respect of photovoltaic generators, for 20 years in respect of anaerobic digestion, hydro and wind generators and for 10 years in respect of projects within the micro CHP pilot scheme. Tariffs for installations in place before 15 July 2009 and transferred from the RO will be paid until 2027.

Subject to adjustment in accordance with RPI, tariffs for individual projects will remain fixed throughout their lifetime; however, in order both to reflect and encourage cost reductions, tariffs for new projects will be subject to "degression" (i.e. a reduction by a certain percentage each year) from April 2012 and regular reviews.

Scheme Framework

Licensed electricity suppliers will provide the FITs and Ofgem will administer the scheme. Large suppliers will be obliged under their electricity licences to offer FITs, while suppliers with fewer than 50,000 domestic customers will be entitled to decline prospective generators over 50kW due to the potentially disproportionate effect of cash flow issues on them. All electricity suppliers will be obliged to participate in a levelisation mechanism pursuant to which there will be redistribution payments between suppliers to ensure that each supplier bears its proportionate share (based on its share of the electricity supply market) of the costs of the scheme.

2. Renewable Heat Incentive

The RHI is intended to incentivise the generation of heat from renewable sources at all levels and is the main policy measure being taken by the Government to meet its aim of obtaining 12% of heat consumption from renewable sources by 2020. The Government had considered introducing a market-based mechanism similar to the RO to support renewable heat generation but, following feedback on the difficulties involved in introducing such a scheme into the heat market, decided to introduce a mechanism similar to the FITs scheme. This decision may also reflect the view that the FITs scheme has many advantages over the RO, albeit that the Government has reaffirmed its commitment to the RO for larger-scale projects to ensure investor confidence is maintained and to avoid a hiatus in investment.

The deadline for responding to the consultation on the RHI is 26 April 2010.

Eligibility

It is proposed that the RHI will support a range of technologies, including air or ground source heat pumps, solar thermal, biomass boilers, biogas, combined heat and power and biomethane injected into the gas grid. The government also intends to amend definitions in the Energy Act 2008 to enable the RHI to extend to bioliquids and regasification technologies. Unlike FITs, there will be no upper limit on eligibility for the scheme, although the tariffs available will depend on the size of the installation.

As with FITs, the Government is proposing to use the Microgeneration Certification Scheme (MCS) process where it is available and in other cases to require owners of installations to seek accreditation by Ofgem under a process similar to the one that currently exists for the RO.

Installations completed on or after 15 July 2009 will be eligible for support under the RHI.

Payments

Participants in the scheme will receive payments for every kWh of heat they produce (or are deemed to produce). Participants will be free to negotiate the sale of heat to third parties, but unlike FITs, the RHI will not provide additional payments for any such sale. This is because, unlike in the case of small-scale electricity generation, those selling renewable heat to third parties are likely to be professionals for whom negotiating the terms of sale is unlikely to be an obstacle. Participants will also benefit from reduced heating bills, but the Chancellor has not yet confirmed how RHI payments will be treated for income tax purposes.

The Government has proposed that payments for installations at the small and medium scale will be made on the basis of a deemed reasonable heat requirement rather than on the basis of metered generation. This is to avoid the perverse incentive that would otherwise exist for owners of installations with low unit costs to generate more heat than they need and to avoid taking energy efficiency measures. The issue does not arise in the same way in respect of electricity generation due to the ability to export electricity to the grid and due to the greater impact of energy efficiency measures on heat demand. Deeming will not however apply to large installations, process heating at all levels, biomethane injected into the grid or district heating, as the issue should also not arise to the same degree in these cases.

The payments have in general been set to provide a rate of return of 12%. Exceptions include solar thermal for which a 6% rate of return is proposed due to the Government's desire to keep costs under control and its view that solar thermal is a relatively well-known technology that presents few installation challenges. Another exception is biomethane injected into the grid for which the Government proposes to set payments on a parity with those available under the FITs scheme. This is due to the desire to avoid choices being made on the use of biomethane on the grounds of its differential treatment under the support schemes. The higher rates of return overall compared to FITs are due to very low level of renewable heat currently used and the huge growth that is required in order to meet the Government's 2020 targets.

As with FITs, payments will be made over the deemed useful life of the installation, which ranges from 10 to 23 years depending on the technology used.

Again, as with FITs, subject to adjustment in accordance with RPI, tariffs for individual projects will remain fixed throughout their lifetime; however, in order both to reflect and encourage cost reductions, tariffs will be subject to reviews and the Government proposes to consider introducing "degression" at the first review of the RHI.

Scheme Framework

Ofgem will administer and make payments under the scheme. It is not however yet clear how the scheme will be funded. The Energy Act 2008 enables the introduction of a new levy on fossil fuel suppliers who supply fossil fuel to consumers for the purpose of generating heat, but following informal consultation with stakeholders, the Government is now reviewing these provisions and considering what would be the most effective way to fund the RHI. It plans to make a further announcement in the 2010 Budget.

Further information

  • To view the response to the FITs section of the consultation paper on Renewable Electricity Financial Incentives, please click here (www.decc.gov.uk/en/content/cms/consultations/elec_financial/elec_financial.aspx)
  • To view the consultation paper on the Renewable Heat Incentive, please click here (www.decc.gov.uk/en/content/cms/consultations/rhi/rhi.aspx)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 16/02/2010.

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