FiT for Purpose

10 September 2010

A radical change in the way Government incentivises small scale renewable energy generating technologies and the Feed in Tariff (FiT), marks a move away from capital incentives and towards offering long term revenue streams for willing investors. Ben Smith and Giorgia Franco explain

THE FIT WAS INTRODUCED in April for technologies which generate renewable electricity. Similar proposals are being discussed for heat generating renewable technologies (the Renewable Heat Incentive or RHI). Both schemes are based on the principle that the owner of the renewable energy system gets paid a high rate (considerably higher than the standard unit price) for every unit of renewable energy generated. This provides a bankable long term revenue stream and reduces the payback times for renewable installations.
For technologies that generate renewable electricity, such as solar photovoltaics (PV) there is a threefold financial incentive under the FiT:
● A payment for each unit of renewable electricity generated (the generation tariff);
● A reduction in utility bills, as electricity is being generated and used on site;
● A revenue stream from selling excess electricity back to the National Grid (the export tariff).
This combination of benefits can result in internal rates of return in excess of 10 percent (over 25 years) and payback periods of less than 10 years. This is such a good financial proposition that third party investors are showing an interest in financing the capital cost for the installation in exchange for a long term return on their investment through the FiT.
The solar PV FiT is attracting considerable interest thanks to the versatility of the technology and the high generation tariff rates (e.g. 31.4p/kWh for systems of 10-100kW capacity). AECOM is currently helping organisations with large property portfolios, such as large retailers and asset managers, to assess the technical and financial viability of installing PV across their buildings.
Recent announcements from the Climate Change Secretary, Chris Huhne, outlining Government intentions to overturn current legislation and allow local authorities to export electricity to the Grid mean that Local Authorities are also well placed to take advantage of the FiT.
Installing PV on their estate would allow them to reduce their CO2 emissions, but also obtain a long term return on the capital investment. Paybacks would be improved for local authorities who can also take advantage of prudential borrowing. In terms of organisational sustainability policy, the installation of PV across their estate could be an effective way of meeting its carbon reduction targets and be a visible demonstration of its commitment to reducing its impact on climate change.
AECOM has reported a small number of enquiries from local authorities grappling with the relationship between the FiT and the CRC Energy Efficiency Scheme. Applicable to large public and private organisations, which are accountable for 10 percent of the UK’s emissions, the CRC requires:
● Each participant to buy carbon allowances to cover their regulated carbon emissions. If the organisation emits more than it has allowances for, it must buy more to cover the shortfall; if the organisation emits less, it can sell the excess allowances.
● Each year the organisation is ranked in a league table based upon its energy and carbon management performance. A bonus or penalty is then applied depending on performance. PV installations claiming FiTs would have to be reported as part of the CRC, but would not influence the position in the CRC league table.
Furthermore the CO2 savings associated with the installation would not be taken into account when calculating CRC allowances.
Claiming the FiT provides a far greater financial benefit to local authorities than the loss of benefit in the CRC allowances calculation, therefore it seems unlikely that any would opt out of the FiT in favour of the CRC.
There is a significant interest in the FiT with many organisations already considering how they can leverage cost savings through the supply chain, procure the installation and maintenance services and arrange financing. At this stage it looks as if the FiT will achieve a significant upsurge in renewable technology installations …but does the renewables industry have the capacity to deal with the expected demand over the next few years?
● Ben Smith is and Giorgia Franco are sustainability consultants at AECOM