Tag Archives: Government

Chop off the tail?

The cost of installing a PV system has fallen dramatically since the introduction of the Feed-in Tariff for the UK three years ago. With some very serious wobbles, the FIT rates are now low but crucially relatively predictable and still high enough to give a good rate of return.

Still, with the FIT rate for a domestic (<4kW) system now down to 13.9 p/kWh (effectively 16.2 p/kWh including the 4.64 p/kWh export payment on 50% of generated electricity) the annual FIT payment is no longer such a head-turning amount for what is quite an intrusive installation. If you were to install a 3 kW system now, you would get back on the order of £500 per year for 20 years.

Given that you might be dead in 20 years (let’s hope not) or more likely you’ve moved house, you really don’t care about the money in the last 5 years. Economists call the time-value of money the discount rate,  basically ‘a bird in the hand…’ which for most people shakes out at around 10% per year. So what if we change the game? Let’s still give you the same amount of money (net present value or NPV – everything in the future is translated back into ‘today money’) but let’s do it over a shorter period so you get a bigger annual payment.

As an aside, The Stern Review on the Economics of Climate Change was a ground breaking work and argues that the rationale for higher discount rates is the expectation that things can only get better. If you take climate science as a given (for the purposes of the review, Stern took the prevailing scientific view, mostly from the IPCC at face value), this presumption may not hold and so a much smaller discount rate is necessary. Of course, the effect of this is to raise the significance of long-term elements in your economic model so that, for example a climate-induced London flood in the 2050-2060 period actually has does some economic damage instead of being discounted away to almost nothing. Besides ‘Climate change is a scienco-communist hoax perpetrated on the world’, this is one of the main criticisms of Stern from the laissez-faire types at the GWPF etc.

So anyhow, the reason for this front loading of the FIT scheme idea is to make it more attractive to consumers and drive uptake. All well and good, more solar, lovely stuff but playing devil’s advocate for a moment let’s look at it from the point of view of the Treasury or the Daily Mail. Here’s where things get trickier.

Germany has started to get into quite large problems with the scale of the payments they are making over the odds for the electricity delivered through their FIT which got underway just over ten years ago. By some estimates, the cost of FIT electricity is around 20 billion euros where wholesale electricity would have been down around the 3 billion euro level. This is causing quite a lot of carping about paying over the odds for energy, having some of the highest prices in Europe etc etc. What this doesn’t acknowledge is that once the FITs expire and systems are still running (PV will certainly outlast the FIT in many cases) the cost of this electricity will drop to almost zero giving Germany a tremendous competitive advantage over rival countries still doing the burning old dead things game.

Now what we want is to have similar levels of renewable power to the Germans, but for less money. Well, we will get it for less money automatically because we’ve delayed for around a decade during which prices fell sharply, allowing us to introduce FITs at lower levels of support from the outset. Using a 10% discount rate and a few other assumptions – 3% inflation, a fixed 15p/kWh for grid electricity and a 30% annual reduction in PV costs (reflected in falling FIT rates), the peak in the total annual cost of a PV FIT scheme comes in around year 5-6. after that it starts to fall away with a reasonably long tail until the year zero systems reach the end of their payment period when there is a second, sharper drop off in FIT payments. Looking at this keeping the NPV steady and changing from 25 years (the original scheme length in the UK) to 15 years, the peak in the total costs for a single year increased by around 25% which, given 2 GW of installed PV per year would mean that every household would be paying £45 instead of £33 per year for PV electricity. I played around with these figures in an Excel spreadsheet, trying to find a way to make my idea of bringing forward the payments into a shorter window work, both for the consumer and for the scheme as a whole. Needless to say, this was a futile venture, no matter how you cut it, front loading the tariffs is always a winner for the consumer and a loser (in terms of peak payments) for society.

It was only after going away and thinking about it some more did I realise that I was thinking along the right lines but wasn’t quite there. My first postulate was that nobody cares about the final years of their FIT installation. I stand by this. My second was that by paying out the same amount of money over a shorter period to sustain higher annual payments would make the scheme more desirable. It would; if you are the one getting the payments. If you are making the payments, you might prefer not to raise the maximum outlay for a single year which this approach undoubtedly would. Which brings us back to the original postulate which I believe is correct…

Nobody cares about the last few years FIT money, it probably won’t go to them anyhow. So why not do away with them. The FIT will still drive interest, you could even put a small bump on the FIT rates though not enough to cover the loss of the money from the final years, lowering the NPV of the FIT scheme while maintaining the attractiveness of the scheme overall. It means that we can get to the nirvana of FIT-free PV faster and steal a march on the Germans who are still going through the FIT time-bomb.

We can chop off the tail. We’re apes after all, we don’t need it.

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Feed in tariff review review Part 2

At the end of October came the real bombshell. We all knew that tariffs would come down in April  2012 and, given the cost reductions achieved, we would be looking at at least a third off the tariff levels as they were. As it turned out, they went even lower dropping by just over fifty percent. This on its own wasn’t too bad. We can make that work for a lot of systems, particularly in southern areas.

What it did mean was basically an end to free PV schemes where an installer would provide a PV system in exchange for FIT income. With the right financing in place this was an economically viable prospect. It also meant that those without ten grand lying around could get solar power and was increasingly being adopted by social housing providers to help cut the bills of some of the poorest in our society. Now that won’t work any more and the accusation that solar power is a toy for rich greens holds truer that ever.

The other big change coming in is a double edged sword, households wanting to install solar and claim the FIT need to meet a ‘C’ grade for energy efficiency which rules out about 90% of homes. Nobody disputes that as a carbon saving measure, PV is quite expensive and energy efficiency measures are much more cost-effective. Now encouraging energy efficiency, particularly in the domestic sector is like trying to make water flow uphill. Nobody finds it very interesting, not many will brag to their friends about the foot-deep insulation they’ve put in the loft because it’s not exciting enough. Even the relatively easy things like loft insulation fall victims to our inertia (Where will I put the Christmas decorations while I got the insulation put in? Will I end up setting fire to the insulation around my recessed halogen lights?). And most household energy efficiency measures are to save heat not electricity. The comparison I read today by Erica Robb of Spirit Solar was that to make heat saving home improvements a requirement of the solar FIT would be the same as making it a requirement for road tax reduction for low CO2 cars, it might sound a bit silly but it’s basically correct.

Interestingly, one of the latest lines to emerge from the Government is that for every PV system getting a tariff of 43 p/kWh, two will be unable to get a system installed at 21 p/kWh. Now by my maths, if one system is installed at 42 p/kWh then that’s the same cost to the FIT scheme of two at 21 p/kWh. So for every system that gets 43 p/kWh a whisker over one will not get the 21 p/kWh rate (assuming the overall cost of the scheme is fixed).

There now follows a short list of things the Government did wrong on this FIT review:

  1. They should have looked at reducing all PV tariffs when they reviewed the 50+ kW tariffs back in March 2011.
  2. They tried to make the changes come into effect before the end of the consultation period. This was the key mistake. We all know consultations are largely an exercise in lip service but this was actually pre-empting the consultation and threatened to set a dangerous precedent about retrospective action by government not just for the FIT but for changes to any secondary legislation.
  3. They should have switched to the MCS registrations data sooner (the Ofgem FIT register necessarily lags the MCS register usually be about a month)
  4. Once the consultation had opened, Greg Barker said that he couldn’t prejudice an open consultation by commenting on the 12th December cut-off date before the end of the consultation period. Probably true but on this occasion Greg, two wrongs would definitely have made a right.
  5. Having had their dodgy dates found “legally flawed” just before Christmas rather than moving on and giving the industry the certainty it urgently needs and moving to cut the tariffs as soon as legally possible they have forced further delays and uncertainty by appealing the judge’s decision. So far this has led to a further week of uncertainty and a further week until the earliest possible date the new tariff levels can be introduced.

Randomly, I’ve seen a few things lately about the positive value of acknowledging failure (This TED talk by a guy from Engineers without Borders is great). Basically the message is that we learn better from mistakes than from successes which seems intuitively true. “Why didn’t that work?” is a much easier question to answer than “Why did that work?”. Dwelling on mistakes and trying resolutely to deny that they’re mistakes when deep down you know otherwise doesn’t help anybody. Recognising mistakes and fixing them quickly and without histrionics is almost always far more successful and likely to lead to more respect than clinging hopelessly to an obviously flawed plan.

My faith in politicians has really nosedived over the FIT review. This is a subject where in all probability I know at least as much about the scheme as they do. Almost every statement that Huhne and Barker have come out with has been so warped, so twisted and so totally fantastically disingenuous about what the implications of their proposals and what the industry wants from them that it makes me assume that this is what is happening in every area of government from defence and crime to education and health.

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