Yesterday I had the pleasure of reading through the two documents that the Department of Energy and Climate Change put on their website on Monday (Feb 1st). The first was the government's response to the Feed-in Tariffs consultation, which sets the rates for the tariffs for electricity generating technologies, principally PV, wind, hydro and micro-CHP. These feed-in tariffs are due to come into effect this April, but will apply to anyone who has fitted one of these technologies since July 2009, when the decision to switch to feed-in tariffs was made. There are no major changes to be found in the finished document, though the rates have been adjusted a little.
What these feed-in tariffs essentially do is strip away the initial capital subsidies which have existed up till now and replace them with annual payments based on how much electricity you have produced. The amount depends on the technology. PV is very expensive to install and therefore gets a high rate of return, as much as 41.3p per kWh for 25 years for small retrofit installations. MicroCHP is much cheaper and therefore attracts a smaller subsidy — 10p per kWh for just ten years. The payments will be index linked. The amount you get paid will depend on what your meter says you have produced. You don't have to export all or any of this electricity to the grid, but if you do, you will get an additional 3p per kWh for your pains.
You'll have to sign a contract to say that you will keep the plant in good repair, and if you sell up and move house, the new owner collects the Feed-in Tariff. The rates paid are guaranteed for the duration of the contract, so in some respects this is a bit like buying index-linked gilts. How does it compare as an investment?
There is a worked example on page 33 showing how it might work with a small PV unit retrofitted onto a detached house. It assumes production of 2,000kWh per annum from the PV array on a house consuming 4,500kWh per annum. The income comes in via three different methods
1. The 2,000kWh produced by the PV attracts 41.3p/kWh or £826 per annum
2. It is assumed that half this amount is exported to the grid, which attracts an additional 3p/kWh or £30 per annum
3. The other half is consumed in the house which saves having to buy 1,000kWh at 13p/kWh from the electricity supplier, a saving of £130.
Combine these and the total income is £986 per annum. The question is, how much would this all cost to install? You'd probably need at 3kW system in order to generate 2,000kWh/annum - depends of course on your location and orientation. That's around 24m2, and the cost would be around £20,000 to install. So that's a return of around 5% for your investment (i.e. £1,000 a year for a £20,000 investment). With index linked gilts currently yielding just over 2%, that leaves three/fifths of the payment/savings to cover writing off the capital cost of the installation. That's £600 a year for 25 years = £15,000. That's not incredibly attractive, but it should be relatively safe. In theory, these contracts should be as safe as gilts (which are said to be the safest of all investments because they are government guaranteed), but in practice a future government might renege on the contract if it became politically expedient. An in addition, there would be added costs not factored into the equation. Servicing for one, insurance for another. With PV costing rather more than lead, there must be a risk that the arrays would get stolen, or may get damaged by hail or vandalism. There is also the issue of whether or not installing renewable technologies in the home really will add to the capital value of the house when you come to sell.
So the feed-in tariffs are an improvement on the lacklustre capital subsidies that have existed in the UK up till now, but they are still not the sort of eye watering investment opportunity that will get the City Boys throwing up PV on their roofs to make a quick buck. In reality, this is still only going to appeal to enthusiasts.
Having said that, I met one in Switzerland last week who had bought 800m2 of PV and installed it himself on the roof of a cattle shed belonging to a nearby farmer. 800m2! That'll be nearly a million quid's worth. And all because of their feed-in tariff.
Renewable Heat Incentive
The second document is the consultation for the Renewable Heat Incentive, which is similar to the feed-in tariff but for heat producing technologies, principally solar thermal, heat pumps and biomass boilers. It once again comes with a table of tariffs:
• Solar thermal to get 18p/kWh for 20 years
• Air source heat pumps to get 7.5p/kWh for 18 years
• Ground source heat pumps to get 7p/kWh for 23 years
• Solid biomass to get 9p/kWh for 15 years
There are some major differences between these subsidies and the Feed-in Tariffs. Firstly, the output of the units will be assumed rather than metered. Their word for it is deemed. This to me immediately presents a major problem, because it will be assumed that the installations will be working as designed. A lot of cheap and inadequate systems may end up being installed in order to harvest the subsidy. And, in particular, heat pumps may get installed into poorly insulated homes where they will not really be up to the job in hand.
More on this soon, but if this incentive scheme comes into effect (on the projected date of April 2011) it will effectively sound the death knell for conventional oil fired boilers which are already struggling to compete with heat pumps. This scheme will grant you around £1,000 a year for installing a heat pump. There is one ray of hope for the oil fired boiler makers and that is called FAME, which stands for fatty acid methyl ester. It's a biofuel produced from vegetable oil which can be blended with heating oil for use in domestic boilers. The paper suggests that an oil boiler could be converted to burn FAME and therefore obtain a subsidy, but details here are sketchy.