Feed into the grid and gain

The UK is undertaking a major transformation of its energy generating system underpinned by ambitious targets to reduce carbon emissions and re-emerge with a low-carbon economy. Central to this is shifting our energy supply away from fossil fuels to low carbon and renewable sources, such as solar, heat pumps, and wind.

The UK has committed to legally-binding targets to generate 15 percent of its energy from renewable sources by 2020. By sector, the government estimates that this means over 30 percent of electricity will need to come from renewable energy sources – a major leap up from the 5.5 percent generated today. While large scale renewable projects will play a part, more and more it appears that the battle will be won or lost by individuals and businesses getting into the mindset of and adopting small scale micro-generation technology.

Relying on conscience alone to stimulate demand would be a naïve approach to this project. As such the government and industry have been working closely together to devise incentives which encourage businesses to be more energy efficient and consider becoming energy generators rather than mere consumers. Put simply, the financial case for ‘going green’ has to stack up for businesses.

Enter the Feed in Tariff (FIT) – a government backed guarantee for investors of a fixed, premium tariff for the electricity that they generate from the adoption of low carbon energy sources.

The return on investment
The tariff levels have been set to deliver a rate of return of seven to 10 percent on a green technology investment. This is linked to Index linked (RPI) to safeguard and provide long-term security for the investment.

Currently, FITs are offered on technologies ranging from wind power through to anaerobic digesters. Of the technology supported by the FIT, solar photovolatics (PV) offer the greatest opportunity and rate of return to commercial investors. Investors in solar PV are receiving up to 41.3p/kilowatt hour for the electricity they generate providing a return on investment of up to 10 percent in some cases. The introduction of the FIT means that the payback time for installing solar PV panels has effectively been slashed from around 50 years to just 10.

The Feed in Tariff (FIT) system is a proven incentivisation model, and has worked very well for businesses across Europe to encourage greater uptake of micro-generation technology. Germany, for example, now produces over 14 percent of its energy from renewable sources as a result of a strong FIT scheme. According to the latest German Government figures, the adoption of such a scheme will have saved more than 52m tones of carbon dioxide by this year and as a result moved the country closer to meeting the crucial targets set by the EU.

The FIT system in the UK is administered by the official regulator Ofgem and uses money from a levy on all electricity sales, collected and distributed by licensed electricity suppliers.

Generators of renewable energy are paid via two elements; one is the generation tariff and the second is the export tariff. The generation tariff differs by technology type and scale and is paid according to every kilowatt hour (kWh) of electricity generated and metered by a generator. This is paid regardless of whether the electricity is used onsite or exported to the local electricity network. The export tariff is the amount that is paid for exporting electricity to the national grid and the generator can either opt to receive a guaranteed minimum payment of 3p/kWh for electricity, or may opt out of the export tariff and sell their electricity on the open market.

The generator benefits by saving money from using the electricity it generates for its own use, thus avoiding having to purchase that electricity from their supplier and makes money by getting paid for exporting electricity to the national grid.

The FIT will be paid for a period of 20 years from the date the system is first registered, except for solar photovoltaic systems where the period is 25 years. After the first two years the rates start to decrease to reflect predicted technology cost reductions and therefore to ensure that new installations received the same approximate rates of return as installations already supported through FITs.

A new perspective
The FIT scheme will play a big part in transforming the way individuals and businesses think about energy. The incentive is there to reduce energy consumption and save money, as well as create a new income stream from generating and selling electricity.

The future cost of energy and carbon is only going to go up and the FIT provides businesses with a viable option to mitigate these increases which works on both an environmental and economic level.

Incentives such as the FIT won’t be around forever though. Their job is to stimulate the market rather than to sustain it. The government has created the right market conditions but ultimately it must now be promoted and delivered. And the benefits and application of the FIT have to be widely communicated and significantly, the results need to be measured and publicised.

This is key not only for the public to decide which technology to adopt but also for the most profitable low carbon technology route for the country to be found. While currently solar power receives the greatest slice of the tariff, its profitability in Britain is limited by the nature of our limited days of sunshine. For the scheme to really generate the greatest amount of green electricity possible, data would need to be publicly available to show which technology offered the best return. Arguably when this is found by the initial participants in FIT more will follow along these line.

When it is proven that businesses overheads are decreasing and profits are going up, the case for the FIT will of course be cemented. Though green technology will not replace conventional energy supplies in the UK in the near future, FIT will certainly help to move things in the right direction.