The old grudging attitude to renewable energy is being slowly transformed by a series of financial incentives

01 / Introduction

Renewable energy technologies have been a common component of building projects for a number of years. Typically, they have only been used when regulatory requirements (planning policy or funding compliance) have required it. Project teams would collectively groan when it became evident that a project would need to incorporate renewables.

Previously, renewables were rarely considered to present a palatable business case/pay back for either the funder or the end user. Investment in renewable technologies was particularly unpopular when money could otherwise have been invested in energy efficiency measures that would achieve better carbon savings for lower cost, but unfortunately did not tick a planning or “green bling” box.

The good news is that as renewables have become more mainstream, production rates have increased and efficiencies have been created. In many instances, capital and installation costs have been reduced. In addition, the tax breaks and new fiscal incentives (notably the feed-in tariff (FIT) and renewable heat incentive) also improve the pay back period of each of the technologies.

The details of the FIT electricity-generating scheme are published. However the renewable heat incentive is still subject to public consultation. This article discusses the financial paybacks presented by electricity-generating renewable energy technology that is broadly applicable to most buildings and locations, such as photovoltaic panels.

The FIT also applies to hydro-electric power generation, anaerobic digestion and micro CHP. However, these technologies are applicable to a more limited building typology/location and in the case of micro CHP are still not commercially available, and are therefore not discussed in this article.

02 / Who’s funding it?

The government’s own impact assessment openly stated that the FIT scheme would cost the UK £8.6bn, and generate only £420m of benefits. It has been speculated that the payments will be funded by the masses through increases in utility (power) bills and that only those able to fund the initial capital investment in renewable technologies will benefit. Consequently, the scheme has generated a fair amount of negative press surrounding the question of who pays for the scheme, and who benefits.

Whether or not the criticisms are valid, the government has clearly stated that the FIT scheme is part of a wider programme of works and incentives to ensure that the UK meets its carbon targets and reduces its reliance on fossil fuels.

It is also anticipated that the FIT will increase demand for renewable technologies and rapidly drive decreases in technology and installation costs. Consequently, the government believes that the high costs of the scheme are worthy of investment as the long-term benefits to UK industry will be significant.

The government is also heavily investing in macro energy efficiency schemes and large-scale low/zero-carbon energy generation as part of the UK Low Carbon Transition Plan.

03 / The fit offer: What’s in it for you?

The scheme targets owners (individuals, households, communities and businesses) of smaller installations with a maximum capacity of 5MW, and essentially pays generators money for every unit of energy generated by their renewable energy installation.

Generators are offered a single tariff for metered energy generation and are also guaranteed an export price of 3p/kWh for energy that is fed back (or assumed to be fed back) into the grid. The export price is lower than the cost of energy purchase from the grid, therefore the generator is incentivised to maximise the use of the energy they generate on site.

Generator benefits are anticipated to be:

  • A fixed price for each unit of electricity generated
  • An additional export tariff for exported electricity
  • Reduced imports of grid electricity.

A range of generation tariffs are proposed for different scales of each technology, over a range of time periods. The tariffs decrease over time, to encourage early adoption of small-scale renewable energy and have been fixed to last a number of years:

  • Anaerobic digestion (no maximum size): 20 years
  • Hydro power (maximum 5MW): 20 years
  • Micro-CHP (maximum 2kW electrical capacity): 10 years
  • Photovoltaics (maximum 5MW): 25 years
  • Wind (maximum 5MW): 20 years

The FIT payments are guaranteed over long time periods, so it is expected that in the event of a change in property ownership, the owner of the property will benefit from an increased sales value, equivalent to the remaining FIT income.

All tariff levels (including export tariffs) will be indexed by the retail price index to ensure that the target rates of return are maintained in real terms for the life of the FIT for each individual investor. Specifically, some of the tariffs for PV and wind are as listed below in table A.

04 / Size and cost of technology

So what sizes of technology does the FIT scheme target and how much do they cost?

Each of the technologies has a number of thresholds against which the various tariffs are applied. In simple terms, the larger the installed technology, the lower the associated tariff. The technology thresholds for PV and their approximate physical size are described below, together with typical capital costs for each.

Capital costs of installed technologies are current (first quarter of 2010) and represent new-build installation costs, rather than refurbishment.

Cyril Sweett would like to thank Segen for its provision of capital cost data and assistance in the preparation of this article.

05 / Calculation method

Indicative income streams, return on investment (IRR) and carbon savings are given for the various scales of PV and for the following options:

1. Grid electricity tariffs

  • a. 12p/kWh - domestic consumer, small PV array
  • b. 6p or 9p/kWh - non-domestic consumers, i.e. 4kW+ arrays

2. Grid export of PV generated electricity:

  • a. 0% of total generated
  • b. 25% of total generated
  • c. 50% of total generated
  • d. 75% of total generated

Paybacks are presented per installed technology and calculations assume the following:

1. Inflation rate of 2%

2. Inverter replacement at years 10 and 20

3. Carbon emission factors are current (2010) taken from DECC (evaluation of energy use and greenhouse gas emissions for appraisal and evaluation).

06 / Conclusions

The FIT significantly improves the business case for investment in PV panels. As such it can only be seen as positive by those already committed to investing in PV, such as registered social landlords who need to achieve levels 4-6 of the Code for Sustainable Homes or Building Schools for the Future contractors who are targeting additional low-carbon funding.

Whether or not it will attract significant additional interest from commercial landlords, retailers or existing home owners will rapidly become evident over the coming years. Hopefully FIT uptake will be higher than for previous financial incentive schemes such as the zero stamp duty for zero carbon homes initiative.