3 Feb 2010

More on Feed-in Tariffs

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.

Feed-in Tariffs
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.


  1. Being a bit slow here, but what is the point of all this?

    seems to be making other people pay for someone to be able to have cheaper leccy.

  2. Dave HoworthFebruary 03, 2010

    "bought 800m2 of PV and installed it himself ... all because of their feed-in tariff"

    Can't do it here! Our wonderful government insists on an MCS installer.

  3. Anonymous, the point is to provide a financial incentive for people to produce less CO₂. Well, strictly, the point is for the government to appear to be providing a financial incentive for people to produce less CO₂.

    They have to do it in this back-to-front way (subsidising production which produces less CO₂ rather than penalising production which produces more) because systems which produce no CO₂ in operation are such a small proportion of the market that they'll have little noticable effect whereas energy systems which produce a lot of CO₂ are a large proportion. Any financial interference with their operation might actually change things and we can't have governments doing that.

    In theory cap-and-trade should be complementary to this sort of scheme in penalizing continued production of CO₂. However, it'll probably just entrench the current energy producers and allow a few city fat cats to skim of a percentage on any changes which do take place so that's all right.

    We'll now have the situation where a person is actually motivated to use more energy. For example, if the choice is between buying an energy efficient but expensive appliance and buying a less efficient but cheaper appliance and spending the difference on more PV the FIT could swing the decision in favour of the less efficient + PV solution even if the net CO₂ output, and even the financial cost, is higher.

    The fundamental problem is that the approximately 13p/kWh price of non-organic electricity does not reflect the real cost of the environmental effects of its generation. Until it does any other attempts at a solution will distort the market and have perverse consequences.

  4. When China & US is producing so much doesnt it out way the UK's CO₂ effort?

  5. "Anonymous, the point is to provide a financial incentive for people to produce less CO₂."

    But new build is a small portion of the total housing stock, and how many existing properties are practially going to see any benifit, but bear the burden in higher energy costs to pay for these subsidies.

    If the goverment is going to subsidise clean energy, it shouldnt do it on an individual scale, it makes no finicial sense nor is it fair.

  6. But new build is a small portion of the total housing stock, and how many existing properties are practially going to see any benifit,...

    FITs apply to installations on existing building just as much as to those on new builds. I don't think that's one of the many flaws in the scheme.

  7. I think this longish thread gives some idea of the sort of mess FITs are:


  8. Just to confirm that Fits and RHI will apply to all buildings, not just new ones.

  9. "FITs apply to installations on existing building just as much as to those on new builds. I don't think that's one of the many flaws in the scheme."

    Yes but the point is, how many of exesting homes will use them, or can use them without major refurbishment, and are worth using.

    Most of us only have the option of sticking a turbine on our roof or some solar cells, both of which are eco bling.

  10. Hi, I assume that the Renewable Heat Incentive wont be back-dated when it comes into effect (unlike the FITs). Will it only apply to those of us who wait until the April 2011 nominal date before bunging in a Pump or Bio-lump?
    Or perhaps there is a hint in the docs that we could install today?

  11. Miles HemberFebruary 16, 2010

    Mark, as context for your assessments of building-related energy issues, I can very highly recommend David MacKay's book Without Hot Air as fuel for common sense bonfires of Government vanities. A physicist's review of actual renewables potential carefully compared against energy use in the UK, it puts numbers in place of posturing.

    It's depressing reading from one POV but if only the zero-BS approach were taken to its logical conclusion, we'd end up with policy actually based on evidence and calculation for once.


    Keep up the good work!



  12. The really bizarre thing about the incentives is that the biggest subsidies are offered for the least cost-effective measures. Why should big incentives be offered for people to install PV panels in the mostly unsunny UK? Surely, on the principle of "biggest bang per buck" the incentives should be focussed on the technologies which give the best return. And it is irrelevant whether it is private money, or "goverment" money, or money extracted from other people's electricity bills. The principle should be to get the best return in terms of CO2 reductions per pound sterling spent!

  13. Mike MenziesFebruary 25, 2010

    Buying into FITS is a bit like pension planning,you need to carefully factor in inflation against the other investment/spending options.
    We are looking over a 20 year period and the conclusions(subject to some arithmetic checks) are revealing.
    If you forget about buying PV, invest your cash at 3% compound and carry on paying grid suppliers rates suitably inflated above RPI, after 10 to 12 years you will be losing money,year on year.
    On the other hand if you took the annual FIT cash only (no import/export savings)and put it in a Cash ISA(tax free) your money is paid back in under 13 years. After 20 years you would have over 22k.
    Have an image of the sixtysomethings sitting under their PV roofs, reliving a Ten Years After gig, saving the planet and doing a bit of tax free saving.
    I am of course, excluding any VAT and future tax impacts, costs of replacing inverters and cleaning dust and bird droppings off the panels,once or twice a year.Will keep you posted on our calcs.

  14. Can anyone explain why gas will be taxed to pay for the RHI but LPG, oil and electricity won't be taxed?
    DECC has come up with an estimate that 70% of UK heat is from gas, not 100%, so logically other forms of energy would be taxed too.

    Miles Hember's comment makes me laugh as McKay is the "brains" that came out loudly in favour of air source heat pumps. These typically

    1. save no CO2 versus gas, LPG or oil condensing boilers (compared to gas, they definitely tend to emit more)
    2. risk giving us power cuts by 2020 if DECC bribes us to install several million of them (due to the peak load added).

    He is "scientific adviser" to DECC. £104 k/yr for a 4 day week.