Wednesday, 10 February 2010

FiT for purpose?

The Department for Energy and Climate Change (DECC) last week ended years of lobbying, months of anticipation and a few weeks of anxiety for the micro-generation sector by announcing the rules and tarriffs for a new system of supporting small and micro-scale renewables, the Feed-in Tarriff (FiT).

FiT's work by offering a Government-backed and guaranteed price for electricity generated from power producers, a system which has been successfully used for at least a decade in other countries to stimulate growth in renewable energy development.

In the UK, commercial scale renewable energy has been supported by the Renewables Obligation (RO) since 2001, a 'carrot & stick' approach which requires electricity supply companies (ie. the folk who send you the bill!) to supply a set percentage of electricity from renewable sources to consumers. As such it is in the supply companies' interest to contract to buy electricty from renewable generators or develop their own green capacity, which is why the big utilities are the major developers in the market.

Small projects (typically less than 5MW installed but down to domestic solar panels and wind turbines) have also been supported under the RO alongside a mish-mash of capital grant schemes, but neither have really provided sufficient market stimulus or caught the public's attention at a scale beyond dedicated early adopters and self builders. The FiT is therefore game-changing for this sector, being ultimately designed to yield a ca. 5-8% tax-free return across the various technologies supported - a relatively low risk investment which many a financial adviser might struggle to match in the current market.

Take solar PV. A retrofitted 4kW system might cost £20k to install, yet produce around 3,200kWh of electricity per year - not far short of the UK average domestic electricity consumption. For this the FiT would pay 41.3p for each kWh generated, giving a 'FiT' annual income of £1,322. About 60% of the electricity generated would by used within the property, avoiding the use of 'imported' electricty at 10p/kWh, so this is worth £192 annully. The remaining 40% is exported at guaranteed price of 3p/kWh, worth £38. So the annual total is £1,552; not bad for a £20k investment, plus an uplift in the value of the house.

Expect your local electricity supplier to offer to install solar PV panels alongside a new electric shower and a house re-wire in your next bill...!

Details of the FiT can be found here on DECC's website.