This Departmental Note informs the House of two developments aimed at providing greater certainty to Industry and investors and delivering financial sustainability through greater budgetary control for the Government:
- the publication of a consultation on enhancements to the Renewable Heat Incentive (RHI)
- Government’s decisions following consultation on Phase 2B of the comprehensive review of the Feed-in Tariffs scheme
The Renewable Heat Incentive: Providing certainty, improving performance
On 11 June 2012, I informed the House of progress on the delivery of RHI. I am now pleased to provide a further update, which reinforces our commitment to delivering our renewable heat agenda and confirms that we are on track to meet the RHI delivery timetable. In March we consulted on a mechanism for managing the RHI budget in the short term and a stand-by budget management mechanism will be in place this summer. This will ensure the sustainability of the scheme by allowing us to keep within the budgetary limits set by the Comprehensive Spending Review (CSR). Further to this, today I am pleased to confirm that, as planned, we have met another of our milestones, the longer term proposals for cost control, with the publication of our consultation on providing certainty and improving performance in the RHI.
As a first of its kind scheme, we have gained invaluable experience since the launch of the non-domestic strand in November 2011. We have learned from the first wave of applications and have therefore also included in this consultation proposals to improve the scheme, making the regulations clearer, more practical and, in some cases, reducing the administrative burden on applicants. We are also now in a position to introduce proposals to meet earlier commitments on biomass sustainability and air quality.
The RHI is a first of its kind in the world, providing long term support for renewable heat technologies like heat pumps, biomass boilers and solar thermal panels. The non-domestic strand of the RHI was launched in November 2011, primarily to help meet the UK’s target of 15% of our energy coming from renewables by 2020. Renewable heat will contribute approximately a third of this overall energy target, and, in order to make that contribution, around 12% of our total heat demand in 2020 will have to come from renewables, increasing from less than 2% currently.
Our key proposal for budget management of the non-domestic scheme is to use a flexible degression-based system. Under this system tariff reductions for new applications would occur if deployment was approaching pre-determined triggers, with a reduction occurring only if triggers were hit. This is a no surprises approach that sets out the conditions under which tariffs could be decreased for new RHI applicants. If triggers were hit tariffs would be reduced by a fixed amount. Tests to see whether degression is needed would take place quarterly, and if a tariff reduction is needed, one month’s notice would be given. Progress towards those triggers will be monitored and made available monthly.
Triggers for each technology and for the RHI overall are proposed to be set in financial terms and be based on the level of deployment required to keep us on a trajectory to deliver the 2020 renewables target. Degression responding to deployment levels will ensure value for money while supporting the renewable heat industry to grow sustainably. It will also provide for continuity in the scheme by controlling budgets and removing the need for sudden or unexpected policy changes or suspensions.
The proposals would be extended to other technologies brought into the non-domestic scheme, on which we plan to consult in September 2012. At the same time in September we will be setting out proposals for a domestic RHI scheme, and will include a budget management approach for the domestic scheme as part of that consultation.
In addition, we are proposing to carry out periodic reviews of the RHI, starting in 2014, which will provide an opportunity to recalibrate tariffs and if necessary, make changes to the tariff structure for new applicants. Any changes would require legislative change and we will involve stakeholders in the review process.
In an environment where tariffs can decrease, it may be that reduced certainty will discourage deployment. As there is little market data we are seeking greater understanding of the effect of tariff uncertainty. We are also seeking views on whether an enhanced preliminary accreditation process, which guarantees the tariff the installation will receive once it is complete could deliver this without incentivising speculative applications and other strategic behaviour by applicants, or reducing the effectiveness of degression in managing budgets.
Feed In Tariffs Scheme: Government response to Consultation on Comprehensive Review Phase 2B: Tariffs for non-PV technologies and scheme administration issues
Today I am announcing the Government’s decisions following consultation on Phase 2B of the comprehensive review of the Feed-in Tariffs scheme. This announcement represents the final stage in a review of the scheme, begun in February 2011, that has reformed the FITs scheme to provide both greater certainty for investors and greater budgetary control for the Government . Today’s decisions cover levels of support for anaerobic digestion (AD), hydro, wind and micro combined heat and power (microCHP), provisions for community projects, and the administration of the scheme.
This follows on from reductions in solar PV tariffs and an associated cost control mechanism, which we announced in May and which will take effect from 1 August 2012, subject to the completion of Parliamentary processes.
The Phase 2B Government Response, published today and available at www.decc.co.uk, sets out our final decisions under this first comprehensive review of the FITs scheme. Changes will take effect on 1 December 2012 rather than 1 October as originally proposed, subject to the completion of Parliamentary processes.
For AD, hydro, microCHP and wind, we consulted on tariffs that reflected our understanding of the costs and characteristics of each technology as well as the need for fiscal restraint and cost-effectiveness. Having reviewed the consultation responses and further industry data, the final tariffs will in most cases be implemented as proposed in the consultation. These include reductions in wind tariffs and a small increase for microCHP, reflecting its very low uptake to date, with other tariffs largely stable and will continue the link to RO support levels for the largest installations. The only change to the consultation proposals is to introduce a new 100-500 kW hydro band with a tariff of 15.5p/kWh to address widespread concern about perverse incentives to undersize projects because of the steep drop in tariffs between the existing bands. A full table is set out on the following page.
Current generation tariffs (p/kWh)
Consultation tariffs from Oct 2012 (p/kWh, 2012 prices)
Final tariffs from 1 Dec 2012 (p/kWh, 2012 prices)2
Community energy tariff (see explanation in paragraphs 148-151)
4.5(2.2 from April 2013)
4.5 (4.1 from April 2013)
1 2012-13 tariffs in consultation calculated using previous RPI inflator to that used by Ofgem in determining final tariffs, hence slight discrepancies
2 Current and consultation tariffs are shown to one decimal place as published. Final tariffs from December 2012 are shown to two decimal places for consistency with tariffs published in ‘Government Response to consultation on Comprehensive Review Phase 2A: Solar PV cost control’
3 Tariffs for the largest wind and hydro bands may be adjusted from April 2013 to reflect changes to level of RO support as a result of RO Banding Review.
The cost control mechanism we are introducing for these technologies, as with the mechanism for solar PV, is designed to deliver greater budgetary certainty and value for money. Degression will be at fixed annual time points from April 2014, with a baseline (i.e. expected) degression of 5% each year. The actual amount of degression will be adjusted according to deployment in the previous year, with a minimum reduction of 2.5% annually in the event of very low deployment, and a maximum of 20% for very high deployment. The only exception is for some wind bands that will have a minimum reduction of 5%. There will also be provision for half-yearly reductions in tariffs if there is very high deployment early in a year.
These measures reinforce our position that, given resource pressures, tariffs above the marginal cost of meeting the UK’s renewables target can only be justified as a transitional policy to allow those technologies time to improve cost efficiency.
In addition to changing tariffs, we are introducing a package of changes that demonstrates this Government’s commitment to supporting community energy projects and addresses the genuine difficulties faced by such projects, especially in financing and project development.
Most importantly, we are creating a definition of “community energy projects” that will include those run by Community Interest Companies (CICs), co-operative societies or community benefit societies. This will be further limited by size, so that only relatively small companies are included. Although we do not believe it is justifiable to offer a separate tariff level to such projects at the moment, we are clarifying that this would be technically possible in future, if we find that to be justified.
Meanwhile, solar PV on schools and on community energy projects on non-domestic buildings will be exempt from the current energy efficiency requirements as long as they produce a valid Energy Performance Certificate (at any level). This exemption for schools is in recognition of the role that the microgeneration can play in educating young people about climate change and energy issues. To allow for the additional time needed by community organisations in setting up projects, we will also introduce a tariff guarantee system for community solar PV projects under 50kW on non-domestic buildings (as well as a similar provision for all ROO-FIT projects, as explained below). More broadly, we will continue to work closely with the community energy sector where possible to support improvements in the availability of finance and other barriers that are separate from FITs.
We will not be implementing the proposal for the solar PV multi-installation tariff to be reduced to the stand-alone level for commercial aggregators. There is no evidence to support any financial difference between social housing PV projects and commercial “rent-a-roof” projects. This does not diminish my resolve to tackle fuel poverty by the most effective means we can.
I am pleased to announce that a new system of preliminary accreditation will be available to PV and wind installations greater than 50 kW capacity, and all AD and hydro installations. Depending on the technology, this will provide a tariff guarantee for six months to two years. The tariff guarantee will apply only to the capacity that is included in the preliminary accreditation application; and the capacity receiving preliminary accreditation will be included in the figures that decide the level of degression.
In order to make sure that the scheme runs as smoothly as intended, we are making some administrative clarifications and changes. These include: clarifying the definition of “site” to prevent gaming and to ensure that installations that necessarily share network connections e.g. park homes and remote hydro installations can access FITs on an individual basis; and amending the definition of “commissioned” to clarify that installations have to be producing electricity that is being used.
We are also extending the definition of hydro generating station to include small tidal projects such as tidal mills and tidal locks that use a mixture of fluvial and tidal power; and extending indefinitely the application of Ofgem-administered accreditation for micro-hydro installations in the FITs scheme.
Today’s announcement also confirms various points where we do not intend to make any change, or where we are making changes to directly match phase 2A provisions for solar PV. These include:
- no change to the 5MW upper limit for FITs;
- no changes to the system of index linking, consistent with our approach on PV;
- a voluntary approach in the first instance to ensuring sustainable use of purpose grown crops in AD plants;
- no changes to the administration of the frequency of payments and levelisation;
- raising the export tariff to 4.5p/kWh for new installations from the time of the tariff changes;
- no energy efficiency requirements for technologies other than solar PV, although we will consider the introduction of minimum energy efficiency standards for buildings with other technologies;
- to keep open discussions with the small wind manufacturing industry regarding their concerns on deliberately under-sizing wind installations;
- clarifying that the 30,000 point for micro CHP installations is simply a cost control measure, not an indication of our ambition for that technology more widely.
Finally, the consultation raised a number of issues that deal mainly with the administration of the scheme by Ofgem and their powers to deal with generators and suppliers . Because these will involve considerable technical detail we will be consulting further with Ofgem and licensees over summer 2012.