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Early Rooftop Solar PV Adopters Get Lion’s Share of the FiT Subsidy

As is well known, the generous subsidies given initially to small scale solar PV under the UK Feed-in Tariff resulted in unexpectedly high levels of adoption. Government quickly reduced subsidies for new installations, but did not feel able to retrospectively cut the arguably excessive support for early adopters. Consequently, even today, in 2017, nearly one quarter of the total annual cost of the scheme is being paid to the small-scale rooftop panels erected in the first two years of the scheme, 2010–2012.

In 2010 the Labour government under Gordon Brown responded to Conservative party interest in Feed-in Tariffs, driven by Greg Barker MP (now Lord Barker, and president of the British Photovoltaic Association, BPVA) by rapidly implementing a Feed-in Tariff program of their own.

This policy offered extremely, and almost certainly needlessly high tariffs of £400/MWh to small-scale (≦ 4 kW) domestic rooftop solar PV. This was approximately ten times the wholesale price of £40/MWh, and was index linked for twenty-five years.

Even though panel costs were higher then than they are today, this made solar PV extremely attractive to private individuals seeking secure and high returns, which the Department of Energy and Climate Change (DECC) estimated, perhaps conservatively, to be 7-10% per annum [1]. Unsurprisingly, there was very rapid and broad-scale adoption as can be seen in Figure 1, which charts capacity installed (MW) in each year of the FiT scheme per technology up to Year 6 (April 2015 – March 2016).

Fig 1. Capacity (MW) installed in each year of the FiT scheme per technology up to Year 6 (April 2015 – March 2016). Note that Year 1 ran from April 2010 to March 2011, Year 2 from April 2011 to March 2012, and so on. Source: Ofgem, data analysis and chart by REF.

Nearly 1.2 GW of capacity was added in the second year alone. It is worth noting that this level was not exceeded until Year 6, when the impending introduction of deployment caps to reduce subsidy costs resulted in a stampede to beat the deadline.

The government quickly recognized its initial error, and for Year 3 reduced both the tariffs offered to new installations as well as the tariff lifetime, which was reduced to twenty years on 1 August 2012. However, these reforms did not affect the subsidy rights of the large number of sites accredited in the first two years, and this has had an ongoing distorting influence on FiT costs, as is shown in the following figure.

 

Fig 2. The total cost of subsidy in FiT Year 6 (April 2015 – March 2016) by technology, broken down by the installation year. Year 1 covers April 2010 to March 2011, Year 2 April 2011 to March 2012, and so on. Source: Ofgem, data analysis and chart by REF.

The total annual cost of FiT generation payments to accredited generators for the latest complete Ofgem accounting year (April 2015 to March 2016) is £1.09 billion [2]. One third of that total subsidy is paid to solar PV installed in the second year of the scheme and £261 million a year, or nearly one quarter of the total, is paid to the ≦ 4kW rooftop panels erected in the first two years of the FiT scheme.

The productivity of solar PV per kW installed is significantly lower than the other supported renewable technologies, as can be seen by comparing Figure 2 with Figure 3, which plots the output of electrical energy in FiT Year 6, broken down by technology and year of installation.

Fig 3. Estimated energy generation (GWh) in FiT Year 6 (April 2015 – March 2016) of FiT-supported technologies, broken down by the installation year. Year 1 covers April 2010 to March 2011, Year 2 April 2011 to March 2012, and so on. Source: Ofgem, data analysis and chart by REF.

The current subsidy cost per unit of electrical energy generated by the first tranche of rooftop PV installations is £488 per MWh, implying a carbon dioxide abatement cost of about £1,500 per tonne, which is many times greater than even high estimates of the Social Cost of Carbon [3]. In other words the economic harm of these subsidies exceeds by a large margin the avoided harm of the emissions abated.

This remarkable episode provides a sobering lesson in the practical difficulties and hazards of micro-managing uptake of specific energy technologies. Faced with obvious overheating in the small-scale solar sector, government was driven into a phase of distressed policy correction that has resulted in a system of a staggering complexity. There were 516 separate tariffs in 2015/16, and it is difficult to believe that such a scheme can be administered reliably or at reasonable cost. Nevertheless, the changes made to the scheme were limited to prospective changes affecting new registrants, and as a result the Feed-In Tariff is still dominated by the ongoing consequences of government’s initial mistakes. It is to government’s credit that it learned from the experience, but this was a lesson very dearly bought.

It must be emphasized that the explosive adoption of the first two years took the UK government all but completely by surprise, with the result that they were quite unprepared and thus unable to control costs. The Impact Assessment published in 2010 predicted that subsidies would only reach £440 million per annum (2008 prices) in 2020. In fact, annual costs reached £1.1 billion as early as 2016. The implications for cumulative cost and overspending under the Levy Control Framework, intended to limit impacts on consumers, are obvious.

Government cannot address this problem without retrospective cuts that would incur the understandable anger of householders and probably result in very costly legal action. In all probability government will do nothing. However, one would hope that this sorry episode is being taught to civil servants in all departments.

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Footnotes

1.^  Feed-in Tariffs Government’s Response to the Summer 2009 Consultation, February 2010,  Para 63

2. ^  Note that the total cost of the FiT scheme for the 2015/16 year is £1.10 billion.  This sum includes administration costs and export payment costs above the wholesale market price.

3. ^  The cost of a tonne of CO2 abated is based on REF's estimate of the UK grid emissions factor for April 2015 to March 2016 of 0.317 tonnes CO2 equivalent per MWh electricity. See The Increasing Cost of CO2 Emissions Reductions in the United Kingdom for values of the Social Cost of Carbon

 

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The Total Cost of Subsidies to Renewable Electricity in the United Kingdom: 2002–2016

REF is often asked about the total cost of public support to renewable electricity generators, both annually and since the subsidies began.

The following table gives aggregate figures for the administrative years 2002–2003 to 2015–2016. Administrative years run from the 1 April to 31 March the following year.

Year RO (£m) FiT (£m) Total (£m)
2002-2003 278 278
2003-2004 416 416
2004-2005 495 495
2005-2006 583 583
2006-2007 719 719
2007-2008 876 876
2008-2009 1,036 1,036
2009-2010 1,119 1,119
2010-2011 1,285 14 1,300
2011-2012 1,458 151 1,608
2012-2013 1,991 506 2,498
2013-2014 2,599 691 3,290
2014-2015 3,114 866 3,980
2015-2016 3,743 1,110 4,853
Total (£m) 19,818 3,338 23,156

These consumer subsidies are derived from levies added to consumer’s electricity bills, and are therefore regressive in effect. That is to say, they have a disproportionate impact on lower income households compared with those with higher incomes.

The following chart represents the annual data, and adds onward cost projections from the Office of Budget Responsibility:

SubsidyCosts

Figure 1. Renewable electricity subsidy costs 2002 to 2016, solid lines (Source: REF calculations from Ofgem data), and onward costs, dotted lines, as projected by the Office for Budget Responsibility

As can readily be seen extremely rapid growth has occurred since 2010. Since this coincides with the Coalition government of Mr Cameron and Mr Clegg, it should be noted that the Feed-in Tariff was the creation of the previous government under Gordon Brown, when Ed Miliband was Secretary of State for the Department of Energy and Climate Change (DECC).

Subsidies are in principle capped at £7.6 billion (2011-2012 prices) per year in 2020 by the Levy Control Framework, though the framework has a generous 20% headroom. In fact, current oversupply of renewable capacity consented in the planning system suggests that this headroom could easily be overshot , and the OBR’s projections seem entirely plausible, indeed if anything an underestimate.

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Santa's Christmas present for wind farms

Over the Christmas period, high winds accompanying Storms Barbara and Conor combined with low demand for electricity to deliver a £7 million gift to the owners of wind farms in the form of constraint payments. Constraint payments occur when wind farms are paid not to generate, usually in periods when wind generation is surplus to demand. The bulk of these payments are made when wind generation cannot be used in Scotland, and there is insufficient grid capacity to export the energy to England. The cost of these payments is borne by electricity bill payers throughout the United Kingdom.

The peak payments over the current holiday season were made on Christmas Day, as summarised in the following table drawn from the REF datasets:

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Renewables planning activity in the last six months

As regular users of the REF datasets will know, our EU Target Tracker is updated monthly and based on the government’s Renewable Energy Planning Database (REPD). This month’s update has just been released, and merits a general comment.

As a rule, the totals change little month on month, with the major trends only being visible over longer timescales. Focus on the short term and net changes is a mistake. It is only by studying the changes at the individual planning application level over 6 months or longer that we can see the major trends and the impacts of changes in government policy.

To that end, we have compared the detailed planning data released for April 2016 with that released this week for November 2016. We looked at how many new applications have been submitted in the last half year, how many abandoned, how many were granted or refused planning permission, how many appealed by the developers, and how many have begun construction and operation. Predictably, 80-90% of the activity involves onshore wind, solar photovoltaic and offshore wind.

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New wind farm constrained off grid within days of opening

UPDATED 22 November 2016: SEE POSTSCRIPT BELOW

On the 28th of October, Falk Renewables announced that its newest wind power station, Assell Valley Wind Farm in Ayrshire, had begun generating

Two weeks later, on the 11th of November, Assell Valley wind farm had to reduce output on instruction from National Grid in order to cope with the on-going problem of Scottish wind farms generating surplus electricity which can neither be used in Scotland, because of low demand, nor exported to England because of the limited interconnector capacity between the two countries.

Assell Valley wind farm charged £76/MWh to reduce output, which is approximately twice the subsidy income foregone when the wind farm is constrained off. Further constraint bids from this wind farm were accepted on the 12th and 16th of November at the same price. At the time of this blog (21 November 2016) the total income from constraints to stop generating for this new wind farm amounted to just under £10,000.

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Government Data on Renewable Energy Development is Inconsistent and Unreliable

There are significant inconsistencies between the various sources of Government data on renewable energy deployment which undermine confidence in claims regarding progress towards 2020 targets and firm control of subsidy costs to the consumer. For example, the government’s Renewable Energy Planning Database (REPD) is the principal source for estimates of progress and probable future cost, but is inconsistent with five other data sources published by government, and also with estimates made by National Grid. What cannot be measured accurately cannot be managed adequately. Government needs to get a grip.

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The Increasing Cost of CO2 Emissions Reductions in the United Kingdom

A reduction in the use of coal and a rise of gas for generating electricity has slashed the UK grid emissions factor to around 0.26 tonnes of CO2 per MWh.  This has the economic consequence of increasing the subsidy cost of saving emissions through increased use of renewables.  It now costs around £169 to save a tonne of CO2 through use of onshore wind, and £267 for offshore wind. This is 6-10 times the estimated cost of environmental damage caused by a tonne of emitted CO2 and demonstrates how expensive and ineffective the UK renewables policy is in abating greenhouse gas emissions.

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UK Coal Benefits from Exceptionally High Wholesale Electricity Prices

The unusually hot September weather, and a resulting higher demand from air-conditioning and refrigeration units, over the past week has contributed to very high wholesale electricity prices, with coal stations being the main beneficiary.

Coal appears to have been called upon because several gigawatts of gas generation were offline. Furthermore, generation from the UK’s 14 GW of wind turbines during the period was, as is likely during a hot spell, modest, ranging from a high of 4GW to less than 1 GW, or from 29% to less than 7% of its capacity.

The prices charged by the coal generators during this period were exceptionally high. West Burton coal-fired power station, owned by EdF, charged up to £1,237 per MWh for providing an extra 1.5 GWh of electricity on Wednesday 14th September. This is approximately 30 times the usual wholesale price. Ratcliffe-on-Soar coal-fired power station, owned by E.On, charged up to £1,484 per MWh for providing extra power, earning an extra £6 million for the day.

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Wind Farm Constraint Payments over Easter 2016

Windy bank holidays, when wind power output is high but demand is low, can force National Grid to make significant constraint payments to wind farms, plus related payments to conventional generators, to cope with the surplus, unusable electricity generated by wind farms, usually because the windfarms are located behind a grid bottleneck.

2016 has proved to be the most expensive Easter holiday period to date for wind farm constraint payments, with a total of £3.7 million being shared between 39 wind farms.

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REF Interim Statement on DECC Announcement of CfD Auction Prices

The Department of Energy and Climate Change (DECC) has today published the results of the first round of competition for Feed-in Tariffs with Contracts for Difference (FiTs CfDs, hereafter CfDs), a subsidy mechanism that will run alongside the Renewables Obligation (RO) until the latter closes to new entrants in early 2017, when CfDs will become the sole subsidy mechanism for large scale renewable electricity generators.

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