In July 2009 the Government published its Consultation on Renewable Electricity Financial Incentives, which sought responses to the proposed design and tariff levels for the Feed-In Tariff scheme (the FIT Scheme). This consultation closed on 15 October 2009 and the government published its formal response on 1 February 2010. This article provides a brief summary of the FIT Scheme.
BASIS OF THE FIT SCHEME
Objective
The Renewables Obligation (RO) is currently the main financial support scheme within the UK for increasing renewable electricity generation by awarding renewable generators with RO Certificates (ROCs). However, the form of incentive for small-scale, low-carbon electricity generation (ie up to and including 5MW) will change in April 2010 with the introduction of the FIT Scheme. The RO will remain the primary mechanism to promote large-scale renewable generation (ie above 5MW), while the Renewable Heat Incentive (RHI) (when introduced in April 2011) will apply to the generation of heat from renewable sources at all scales. A wide range of businesses and householders potentially stand to gain from the FIT Scheme and its effect should not be underestimated.
Scope
The FIT Scheme will apply to new anaerobic digestion, hydro, solar photovoltaic and wind projects, with a generation capacity of 5MW or less. The scheme will also support the first 30,000 micro-combined heat and power installations (those with an electrical capacity of 2kW or less). The FIT Scheme will not apply to solid or liquid biomass, to which the RO will continue to apply at all scales.
KEY POINTS OF THE FIT SCHEME
Tariff structure
The FIT Scheme will consist of two tariff payments, which have been calculated to provide an expected rate of return of 5%-8%. Both tariffs will be adjusted for inflation (in accordance with RPI):
- A generation tariff will be paid for each kWh of electricity generated and metered by a FIT generator. The level of tariff and the lifetime during which payment will be made varies depending on:
- technology type; and
- generator capacity (the initial generation tariffs are set out in the table on p15).
- The tariff will be paid regardless of whether the electricity is used on-site or exported to the local electricity network. However, a degression rate will be applied to certain technologies, whereby the generation tariff for projects will, from April 2012, decrease year on year. The reduced rate will only apply to new installations applying for FITs and therefore installations will continue to receive the relevant tariff at the time of application.
- An export tariff. All FIT generators will be entitled to opt to receive a guaranteed market and price for any electricity generated and exported to the local electricity network. This tariff has initially been set at 3p per kWh, with payment lifetime tracking the generation tariff. It is the intention that the level of tariff will remain uniform across the technology types. However, the government has reserved the right to change the future level, therefore no guarantee can be provided that the export tariff will not subsequently change for individual installations. In contrast, any change made to the level of generation tariffs will not be retrospective. A generator will be entitled to opt in or opt out (ie sell their electricity on the open market) of the export tariff regime on an annual basis.
Ability to assign
A generator may assign the benefit of its FIT payments to a third party (subject to certain controls to ensure that the risk of fraud and abuse is minimised). This is of obvious benefit if a generator is seeking debt financing of a FIT project.
Implementation and interaction with the RO
From 1 April 2010:
- all new FIT microgenerators (projects of 50kW or below) will be entitled to apply for FITs (the RO will not apply); and
- all new FIT small generators (projects above 50kW, up to and including 5MW) will be entitled to opt for RO or FIT support for the lifetime of the project.
With respect to any existing generators that have applied for RO accreditation before 1 April 2010, the guidelines outlined in the table below shall apply.
Definition of an ‘installation’
The maximum generation capacity of an installation capable of applying for FITs is 5MW. Careful consideration therefore needs to be given to what constitutes an installation. No strict definition is provided. However, the government’s formal response supplies the following guidelines:
- If a generator installs two different technologies on one site, they will be classed as two different installations and the relevant generation tariffs will apply.
- If a generator fits multiple installations of the same technology on one site, they will be classed as one installation and therefore a total capacity across all installations will be calculated to assess FIT eligibility.
- Any capacity expansion of an installation within 12 months of the installation’s registration in the central FIT register will be treated as an increase in capacity of the installation and if this expansion results in a capacity greater than 5MW, the installation will no longer be eligible for FITs (and, instead, will need to revert to the RO).
- Any capacity expansion of an installation after 12 months of the installation’s registration in the central FIT register will be treated as a separate installation. However, the original installation will be treated as having continued in the same tariff band, while the new installation will be rated at the aggregated capacity of the two installations (meaning a lower tariff may apply as, for certain technologies, rates decrease as generation capacity increases).
- A ‘site’ shall be defined by reference to several factors, including address, map reference and electricity meter identification. This may open up the possibility of arranging individual metering to separate projects and installations.
Role of the supplier
The FIT Scheme is to be primarily implemented via modification to electricity supply licences, which will require electricity suppliers to make FIT payments to eligible generators. The overall costs of the FIT Scheme will be shared by all suppliers in proportion to their share of the electricity supply market (via a process of ‘levelisation’, which will be undertaken by Ofgem on an annual basis). Note, an ‘opt out’ is available for suppliers with less than 50,000 customers, which enables such suppliers to decline provision of FITs to generators.
Conclusion
The FIT Scheme has the potential to open up the deployment of small, renewable projects, and to provide the support needed for many technologies that are and have been struggling under the RO regime. The burden remains, however, on the small generator to decide whether to opt in or opt out. It is also interesting to note that the Conservatives support the FIT Scheme, and the future may even see a Tory government expanding FITs to larger plants and wider technologies.
By James Phillips, senior associate,Ross Fairley, partner andMichael Barlow, partner, Burges Salmon LLP.
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