Tariff proposals threaten to dampen firms' renewables ambitions

The economic viability of plans to increase installations of renewable energy technologies at commercial properties are hanging in the balance, as the government prepares to rubberstamp a package of incentives that critics say is insufficient to kick start interest in technologies such as small-scale wind turbines or rooftop solar panels.

Under the government's proposed Clean Energy Cashback feed in tariff (FIT) scheme, businesses or households investing in onsite renewable energy technologies capable of generating up to 5MW of power are to be paid by their energy provider for the energy produced at an above market rate set by the government.

The scheme, which is to come into effect from next April, initially sparked considerable excitement within the renewables industry. Many observers compared the government's decision to drop its long-standing opposition to FIT mechanisms and introduce an incentive scheme with steps taken by the German government that have helped to make that country one of the world's leading generators of renewable energy. Experts predicted that, just as happened in Germany, businesses keen to cut carbon emissions and generate an additional revenue stream would rush to erect wind turbines in their car parks or put solar panels on their warehouse roofs.

However, fears are now mounting that the government is poised to set the tariffs at a level so low that it will lead to only a marginal increase in the installation of domestic renewable energy technologies and provide next to no boost to businesses' plans to install large-scale renewable energy systems.

According to figures contained in the Department of Energy and Climate Change's official consultation document, larger scale onsite projects such as those likely to be implemented by businesses will receive tariffs considerably lower than those on offer for domestic installations.

For example, solar PV installations with a capacity of between 4kW and 10kW will receive payments of 31 pence per kWh (p/kWh), while larger installations generating between 100kW and 5MW, such as those installed on office buildings or factories, will receive just 26p/kWh. Similarly, a household installing a micro wind turbine with a capacity of less than 1.5kW will receive 30.5p/kWh, but a company looking to install two large wind turbines on an industrial estate with sufficient capacity to power hundreds of local homes will enjoy incentives of just 4.5p/kWh.

"The proposed tariffs are poor for domestic, but they are truly awful for larger scale installations, and are particularly bad for community-scale wind projects," says Dave Timms, UK climate and energy campaigner at Friends of the Earth, adding that the environmental group believes the proposed tariffs are too low for almost every technology at every scale. "Basically, the government has set itself a ridiculously unambitious target of generating just two per cent of UK electricity from onsite renewables by 2020 and worked its way backwards to get the tariffs to hit that target."

He adds that the most cost-effective way to meet even that unambitious target would be to target larger installations such as community-scale wind or biomass projects. But the government has positioned the Clean Energy Cash Back scheme as a primarily domestic initiative designed to help households generate money from renewable energy, and as a result the tariffs have been tailored accordingly, effectively excluding businesses from the scheme.

The prospects for businesses interested in installing renewable energy technologies look even worse when you consider the return on investment (ROI) that the government's feed in tariff promises.

According to the government's own consultation, the feed in tariffs should provide a ROI of between five and eight per cent, although PV is singled out for ROI of less than four per cent on the ground it is "tried and tested" in the UK.

However, according to a government-commissioned study into feed in tariffs undertaken earlier this year by energy consultancy Poyry/Element Energy, ROIs would have to range from three to 20 per cent to attract interest from households, six to 15 per cent to drive investment from commercial firms and eight to 14 per cent to encourage commercial investors to back renewable energy projects.

The report states unequivocally that even the most generous tariffs proposed by the government will fail to spark interest in the kind of larger scale installations that would prove most effective at curbing carbon emissions.

"Setting tariffs to provide an eight per cent rate of return for all technologies encourages uptake of small-scale, higher cost technologies but does not stimulate deployment of large-scale systems," it concludes. "This is because there is a significant proportion of domestic investors who are willing to accept returns of eight per cent or less, but the majority of large-scale investors have hurdle rates above eight per cent."

The government's justification for ROI rates of five to eight per cent appears to be based on comments attributed to the German MP Hans-Josef Fell in which he said return on investments should be set at five to seven per cent as "significantly higher returns were not desired because the extra costs to be passed on would push up the price of power too far".

However, many within the renewable energy industry are adamant that Fell's comments have been wilfully misinterpreted, arguing that the German renewable energy market is now significantly more mature than the UK and as a result it can cope with potentially lower tariffs.

Moreover, the experience on the ground in Germany is that projects routinely breach the seven per cent ROI mark. Speaking following a fact-finding trip to Germany earlier this week, the Labour back bench MP Alan Simpson who has campai gned for the introduction of a feed in tariff and was recently appointed as Ed Miliband's Clean Energy Cashback adviser, said many German projects were clearly enjoying rates of return in excess of 10 per cent.

He also dismissed objections within Whitehall that higher feed in tariffs were unfeasible as they would lead to higher energy bills, arguing that any increases would be minimal, that the government was already poised to announce a levy on energy bills to help pay for carbon capture and storage projects, and that feed in tariffs presented an equitable means of boosting renewable energy capacity as any money raised through increased energy bills is redistributed to those businesses, individuals and communities that are generating energy.

According to Timms, without an overhaul of the proposed tariffs many businesses will simply continue to ignore the potential for onsite renewable energy systems. "Some householders will be interested in an ROI of eight per cent of less because they are committed to fighting climate change and want to cut their emissions, and likewise some businesses will continue to invest in renewables to drive their climate change agenda," he observes. "But if you talk to businesses most of them admit they will not get out of bed for an ROI of less than 10 per cent."

These fears are already being realised, according to Paul Donnelly, CSR manager at storage group Big Yellow. He says that just prior to the release of the consultation the company was approached by a number of solar energy firms proposing deals whereby they would rent space on the roof of Big Yellow's warehouses and then sell solar energy back to the company. But since the tariffs were proposed, he says, the phone has gone quiet.

"That option may still exist, but its viability is hugely diminished with the tariffs at the proposed level," he says. "We were being approached by companies that were expecting tariffs of 50p/kWh, but when the tariffs were announced many of them simply disappeared because they don't think they can make projects pay at the rates being proposed."

Those businesses keen to bolster their onsite renewable energy capacity are now being urged to lend their voice to a growing campaign calling on the government to increase the proposed tariffs. The We Support Solar campaign is backed by leading industry players such as Solar Century, Sharp, and the Federation of Master Builders, as well as a raft of businesses, housing associations, and green NGOs, and is calling for an increase in the proposed tariffs for solar PV of 10p/kWh.

Simpson urged firms to sign up to the campaign, warning that there was just a month left to ensure the UK gets a feed in tariff that genuinely drives an increase in renewable energy capacity and lay the foundations for a more decentralised and sustainable energy system.

It is a call echoed by Seb Berry of the UK PV Association, who warns that businesses interested in curbing their carbon emissions through the use of renewable energy could see their chances of success crushed without them even realising. "There's a concern that large numbers of businesses and public sector organisations that would like to deploy renewable energy systems in the future simply did not know about the feed in taariff consultation," he said. "But the government's final decision will have a huge impact on whether or not they will be able to move forward with their plans - it is in their interests to get involved now and call for better tariffs."

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