The long-awaited Energy Bill was finally presented to parliament today. The bill included a number of factors that are set to significantly impact on the UK solar market.
The most obvious new policy that will have the greatest effect on solar deployment in the UK is the introduction of Feed-in Tariff Contracts for Difference (FiT CfD). CfD’s are long-term instruments designed to provide stable and predictable incentives for companies to invest in low-carbon generation (including nuclear). CfD will be replacing the current Renewable Obligation mechanism for incentivising the development of large-scale low-carbon generation plants.
FiT CfD works by offering stable revenue for generators at a fixed price level called the ‘strike price’. Under FiT CfD, generators will generate revenue from selling electricity to the market as normal but when the market reference point is below the stated strike price, the supplier will receive a ‘top-up’ payment from suppliers. Conversely, if the market reference price is higher than the strike price then the generator must refund the difference.
The most important aspect of the FiT CfD for solar is how the strike price will be set and the level it will be set at. The government’s position remains that the best way to determine strike prices in the long term is through competitive price setting, but until market conditions can support such processes, prices for all low-carbon technologies will be set administratively or through negotiation. For renewable technologies the initial process will be similar to that used for the most recent Renewables Obligation banding review, giving visibility of prices for a five-year period to enable long-term planning.
Commenting on the setting of a suitable strike price for solar, Jeremy Leggett, Chairman of Solarcentury told Solar Power Portal: “In practice, it's now vital that the strike price for PV is set at a level that really drives forward investment in the technology. Ministers now have a golden opportunity to make good their 22GWp by 2020 ambition.
“We need to avoid a repeat of the ROC banding consultation situation, when DECC consulted on a ROC level that their own impact assessment told them may deliver zero large-scale PV to 2016. If the government are serious about promoting investor certainty, and we believe that they are, it's vital that they now engage with us and others in the PV sector properly to ensure that they get the PV strike price right.”
Leggett added: “With the cost of PV now falling below that of offshore wind, the policy proposals confirmed today should enable PV to make a significant contribution to the 2020 renewables target.”
Renewables versus gas
The build-up to the publication of the Energy Bill has been dominated by an apparent power struggle between the Conservative-led Treasury and the Liberal Democrat-led Department of Energy and Climate Change. The two departments have supposedly been unable to agree over the role that renewables and gas will have in the UK’s future energy mix. Addressing the House of Commons, the Energy Secretary Ed Davey defended the inclusion of a gas strategy in the Energy Bill, stating: “Often debate is characterised as gas versus renewables; we need gas and renewables.”
However, Ray Noble the PV specialist for the Solar Trade Association (STA) has called on government to introduce a dedicated solar power strategy as well. He said: “If the UK can have a gas strategy it must have a solar power strategy. That strategy should focus on removing unfair barriers to solar power, such as obstacles to grid access. It should also set out a pathway to grid parity to empower millions of people to take control of their energy bills.”
Noble added: “Solar could readily deliver a third of the UK’s power supply, using south-facing roofs and facades alone. This technology will be massive. Furthermore solar puts the power to generate directly in the hands of millions, not the few. DECC and its Electricity Market Reform agenda now need to fully recognise the major role that solar power will play in transforming our electricity markets.
“The approach so far has been top down. Solar power means a bottom-up energy revolution and any government serious about breaking open the electricity market to much greater consumer choice and competition should be right behind us.”
The Energy Bill introduced an emissions performance standard that would mean that new coal capacity could only be built with Carbon Capture and Storage. Some in the industry feel that the demise of coal will lead to a further ‘dash for gas’ in the energy market.
The role of on-site self-supply
A criticism that the solar industry has levelled at the new Electricity Market Reforms (EMR) finalised today is its lack of recognition of the potential role of on-site self-supply. There are concerns that the proposed CfDs will not contain any incentive for energy generated and consumed on site, for example through small-scale solar installations.
The feed-in tariff effectively incentivises smaller scale projects for installing renewables on-site. However, it is still unclear if larger scale installations can benefit from CfDs. This problem is exacerbated by the complete standstill of the 250kW-5MW solar market.
STA CEO Paul Barwell commented: “Solar has a major role to play in transforming our electricity market so we need to see the uncertainty for the non-domestic sectors of the solar industry resolved as quickly as possible. We also need to be confident that EMR will work for on-site generators and independent generators from 2017.”
In June 2012 DECC issued a call for evidence to address concerns that renewable developers will not be able to secure long-term power purchase agreements (PPA). According to DECC, developers are reporting a decline in the PPA market, both in the number of offers received and the terms being offered.
Many in the solar industry are concerned that the upcoming closure of the RO scheme in 2017 and the declination of the PPA market will damage independent generators’ abilities to sell low-carbon electricity on the market. The Renewable Energy Association (REA) has expressed concerns that, in order to be financially viable under the CfD, generators must achieve the reference price for their power sales. The REA is concerned that the UK’s "illiquid" power market will mean that this is unlikely to be achieved.
Speaking to Solar Power Portal, Paul McCartie, Lightsource Renewable Energy’s Finance Director, said it was too early to tell whether the CfD structure will be more beneficial to large-scale solar development than the outgoing RO scheme. He said: “The CfD should remove some of the volatility for investors and lenders into these projects and that is only a good thing when it comes to financing and buying or selling these assets.”
However, McCartie urged DECC to “put its shoulder behind solar” with its upcoming RO banding announcement for large-scale solar. He added: “The solar industry can deliver the scale of opportunity that government is looking for. We need a level of ROC that is sensible and offers some stability over the next four years before the CfDs come into effect.” McCartie also expressed his desire to see DECC introduce a higher RO rate for roof-mounted solar, he said: “One of my hopes is that DECC incentivises more rooftop solar.”
Alongside today’s Energy Bill, Energy Secretary Ed Davey launched a government consultation on proposals to promote energy efficiency and reduce the need for expensive investment in new electricity generation capacity.
Among the proposals is a financial incentive scheme that would pay companies for every kWh of electricity saved through energy saving measures. It is unclear at this point, whether electricity generated on-site by a solar installation would count as energy saved.
Commenting on the proposals, Reza Sheybani, Head of the British Photovoltaic Association (BPVA) told Solar Power Portal: “Electricity demand is set to increase due to population and economy growth. Investing in energy efficiency will reduce our overall wastage of energy but we must also insulate ourselves as a country first. The solar PV industry has shown its ability in delivering significant benefits to the UK energy mix and the economy. Creating jobs and export opportunities are additional benefits. We know that the government has to make some tough decisions now in order to keep the lights on in the future and we should be prepared to help the government in achieving this.
“Unfortunately we live at a difficult time [in which] the second biggest challenge we face after balancing the financial deficit is keeping the lights on. When it comes to energy sources, security of energy, affordability, decarbonisation and ascetics are important but no one source of energy can offer all four. As a nation we should cut our dependency to sources of energy which we have no or very little control over. Gas and oil are two good examples of such sources."
The devil is in the detail
Speaking to Solar Power Portal, Howard Johns, Managing Director of Southern Solar, said that the publication of the Energy Bill would be seen as a largely positive step for the UK solar market. However, he warned that: “As always the devil will be in the detail.” Johns said that it was too soon to determine whether the newly announced CfD mechanism will be more successful than the outgoing RO scheme in supporting large-scale solar deployment. However, he expressed concerns that CfDs could prove more complicated than the already very complicated RO scheme. Moving forward, Johns was hopeful that DECC will set out clear support for solar through a sensible strike price as well as a competitive RO support.
The solar industry cannot underestimate the significance of support for low-carbon generation under the Levy Control Framework being increased to £7.6 billion by 2020.
Industry must now wait for further specifics to be unveiled – the most significant of which is how the strike price for solar and other renewable technologies is set and how it will compare to other forms of low-carbon generation, namely, nuclear.
The solar industry can now focus on the imminent publication of the RO banding rate for large-scale solar. Once the RO rate is known, industry will be able to enjoy a period of unprecedented foresight and (hopefully) stability.