In depth: DECC’s RO closure risk assessment

This morning the Department for Energy and Climate Change confirmed rumours that the Renewables Obligation scheme for sub-5MW solar projects is to be cut as of 1 April 2016, with few exceptions.

Published alongside the consultation is the department’s risk assessment, containing the various workings and considerations DECC has undertaken in order to formulate the decision, and precisely what impacts the department expects.

The reasoning behind the decision is simple enough. Under the RO solar deployment has spiralled far beyond DECC’s initial expectations, resulting in a now well-documented overspend within the Levy Control Framework. DECC cites the CfD strike price for three solar projects of £79.23 as evidence that cost reductions have been “much faster than anticipated” and that solar projects have been receiving more support under the RO than is actually required.

For its workings DECC has established four scenarios using figures it has already compiled as well as industry analysis. Under the ‘low’ estimate just 800MW of solar capacity would be added each year, ‘medium’ would see 1.25GW added, ‘high’ 2GW and a ‘high-high’ scenario in which 3GW of solar capacity is added each year.

As a result of this faster-than-expected deployment, LCF costs have risen. The middle of the road estimates published by DECC this morning point towards a trebling in costs, rising from the £20 million per year previously forecasts to £60 million. This equates, DECC suggests, to an extra 80p on the average household electricity bill under the medium range, but even the high-high scenario would result in just £1.80 added to each consumer bill.

In order to counter this DECC put together three possible actions; do nothing, close the RO earlier than planned and remove grandfathered support as of today, or put into place a capacity or supplier cap on solar deployment. Doing nothing would result in costs of between £40 million and £150 million (depending on the scenario) per year by 2020/2021 for the lifetime of those projects, whereas option two – closure of the RO, which DECC is to proceed with – would roughly save that precise expenditure.

DECC has caveated this spend however by stating that precise savings cannot be forecasted. Some projects would still be eligible for feed-in tariff support which would have an obvious impact on expenditure elsewhere under the LCF, and the department has also claimed it to be “impossible” to accurately predict what proportion of the 2015/16 pipeline would be affected by the removal of grandfathering. As a result, the savings forecasted only relate to projects in the 2016/17 pipeline.

There are, however costs associated by effectively capping the deployment of solar PV. DECC states that an increased amount of CO2 would be emitted as the country is forced to rely on other sources of electricity – including fossil fuels – and that extra CO2 would amount to be between 2.9 million to 7.3 million tonnes over the projects’ lifetime. Under the European Union’s Emissions Trade Scheme (ETS), this would result in costs of between £75 million and £185 million, with a middle range of £115 million.

DECC also suggests there would be a small risk that the UK would miss its 2020 renewable energy targets by reducing solar deployment in such a fashion, but does not attach a monetary value to this because of the “minimal” risk. This option would also be expected to have a small effect on GDP due to the capping of a thriving industry, however DECC argues this will also be minimal due to the likelihood of resources being deployed elsewhere. The department has not discussed the effect on employment – the UK solar industry employs some 35,000 people – due to how “uncertain” the impact would be.

A number of administration costs would also be passed onto Ofgem, particularly related to decisions to be made on which projects would be eligible for grandfather rights however, once again, DECC has not placed a monetary value on them.

The department has continued to state that this is a purely financial decision. The final calculations of net present value provided by the department in the impact assessment state that capping deployment under the ~5MW RO would save lifetime resource costs – at present value – of between £115 million and £285 million. Minus the costs associated under the EU ETS, DECC’s closure of the RO as planned would result in approximate savings of between £40 million and £100 million per year.

But the impact assessment raises more questions than it does answers, and points towards what solar developers in the UK will want to know when the consultation finishes in September. Most will, predictably, focus on the contentious issue of removing grandfather rights and eligibility of certain projects. Where will the government draw the line as to what constitutes “significant spending” on a project? What will the government accept as a constraint in grid connection that’s outside of a developer’s control? Who will be expected to provide evidence in such a case?

But perhaps the most pertinent question of all is if this is all worth the trouble of saving consumers – at the absolute most according to DECC’s high-high scenario – £1.80 per year.