House of Commons Energy and Climate Change and Environmental Audit Committees
Solar Power Feed–in Tariffs
Ninth Report of Session 2010–12 of the Energy and Climate Change Committee and Tenth Report of Session 2010–12 of the Environmental Audit Committees
Volume I: Report, together with formal minutes, oral and written evidence
Additional written evidence is contained in Volume II, and will be available on the Committee websites at www.parliament.uk/eacom and www.parliament.uk/eccom
Ordered by the House of Commons to be printed 14 December 2011
HC 1605 Published on 22 December 2011 by authority of the House of Commons London: The Stationery Office Limited £15.50
The Energy and Climate Change Committee
The Energy and Climate Change Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Energy and Climate Change and associated public bodies.
Current membership Mr Tim Yeo MP (Conservative, South Suffolk) (Chair) Dan Byles MP (Conservative, North Warwickshire) Barry Gardiner MP (Labour, Brent North) Ian Lavery MP (Labour, Wansbeck) Dr Phillip Lee MP (Conservative, Bracknell) Albert Owen MP (Labour, Ynys Môn) Christopher Pincher MP (Conservative, Tamworth) John Robertson MP (Labour, Glasgow North West) Laura Sandys MP (Conservative, South Thanet) Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine) Dr Alan Whitehead MP (Labour, Southampton Test)
The following members were also members of the committee during the parliament:
Gemma Doyle MP (Labour/Co-operative, West Dunbartonshire) Tom Greatrex MP (Labour, Rutherglen and Hamilton West)
Environmental Audit Committee
The Environmental Audit Committee is appointed by the House of Commons to consider to what extent the policies and programmes of government departments and non-departmental public bodies contribute to environmental protection and sustainable development; to audit their performance against such targets as may be set for them by Her Majesty’s Ministers; and to report thereon to the House.
Current membership Joan Walley MP (Labour, Stoke-on-Trent North) (Chair) Peter Aldous MP (Conservative, Waveney) Richard Benyon MP (Conservative, Newbury) [ex-officio] Neil Carmichael MP (Conservative, Stroud) Martin Caton MP (Labour, Gower) Katy Clark MP (Labour, North Ayrshire and Arran) Zac Goldsmith MP (Conservative, Richmond Park) Mark Lazarowicz MP (Labour/Co-operative, Edinburgh North and Leith) Caroline Lucas MP (Green, Brighton Pavilion) Ian Murray MP (Labour, Edinburgh South) Sheryll Murray MP (Conservative, South East Cornwall) Caroline Nokes MP (Conservative, Romsey and Southampton North) Mr Mark Spencer MP (Conservative, Sherwood) Paul Uppal MP (Conservative, Wolverhampton South West) Dr Alan Whitehead MP (Labour, Southampton Test) Simon Wright MP (Liberal Democrat, Norwich South)
The following members were also members of the committee during the parliament:
Simon Kirby MP (Brighton, Kemp Town)
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Committee staff
The current staff of the Energy and Climate Change Committee are Sarah Hartwell-Naguib (Clerk), Richard Benwell (Second Clerk), Dr Michael H. O’Brien (Committee Specialist), Jenny Bird (Committee Specialist), Francene Graham (Senior Committee Assistant), Jonathan Olivier Wright (Committee Assistant) and Nick Davies (Media Officer).
The current staff of the Environmental Audit Committee are Simon Fiander (Clerk), Edward White (Second Clerk), Lee Nicholson (Committee Specialist), Andrew Wallace (Senior Committee Assistant), Jill Herring (Committee Assistant), Edward Bolton (Committee Support Assistant) and Nicholas Davies (Media Officer).
Contacts
All correspondence to the Energy and Climate Change Committee should be addressed to the Clerk of the Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2569; the Committee’s email address is [email protected]
All correspondence to the Environmental Audit Committee should be addressed to the Clerk of the Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6150; the Committee’s email address is [email protected]
Solar Power Feed-in Tariffs 1
Contents
Report Page
1 Introduction 3 Background 3 Our inquiry 4
2 The proposed changes to the solar PV feed-in tariffs 5 The ‘comprehensive review’ 5 Impact on bill payers 10 The impact on prospective FiTs customers 13 The impact on community schemes 14 Energy efficiency 16
3 The management of the review 20 Spotting the problem 20 The need for better cost control 22 The status of the spending cap mechanism 26 Coordination between departments 28 The utility of the impact assessment 28
Conclusions and recommendations 30
Formal Minutes 34
Witnesses 37
List of printed written evidence 37
List of additional written evidence 37
List of Reports from the Committee during the current Parliament 40
List of Reports from the Committee during the current Parliament 41
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1 Introduction
Background 1. Under the Climate Change Act 2008, the UK has a target of reducing greenhouse gas emissions by 34% by 2020 compared with 1990 levels. The Government’s strategy for meeting that target was recently updated in the Carbon Plan. It also has a target of 15% renewable energy by 2020, to assist in delivering that commitment. The Government’s Renewable Energy Roadmap set out its assessment of the technologies required to help the UK meet that renewable target. Although solar photo-voltaic (PV) is not one of the eight technologies listed in the Roadmap with “the greatest potential” to help meet that target cost-effectively,1 it is nevertheless identified as providing an important contribution. The Government considers that subsidy for renewable energy technologies above a 9p/kWh marginal cost benchmark needs to be justified on non-financial grounds. In the case of solar PV Feed in Tariffs (FiTs), where the majority of tariffs are in excess of this subsidy benchmark, this justification is provided by the fact that the scheme’s aims include a contribution to wider low-carbon goals including allowing individuals an opportunity to engage in the drive for more renewable energy.
2. There is room for debate, therefore, about the role that solar PV should play in the future, to meet our carbon and renewables commitments in the most cost-effective way, particularly at a time of economic difficulty. In this inquiry, however, we have focussed our examination on the reasons and justification for proposed changes in solar PV FiTs announced in October 2011.
3. Feed-in Tariffs (FiTs) were introduced on 1 April 2010, under the Energy Act 2008.2 They provide a payment for the electricity generated from installed renewable energy technology, and a further payment is made for any electricity generated but not used and ‘exported’ to the grid. They provide a guaranteed indexed-linked income for the life of the contract (20 years, or 25 years for solar PV). The amount paid depends on the scale and type of generation: Wind, solar PV, hydro, anaerobic digestion and micro-combined heat and power are all eligible for FiTs. FiTs work alongside the Renewables Obligation, which supports the deployment of large-scale renewable energy generation. Feed-in Tariffs for large-scale renewables are proposed as part of the Electricity Market Reform process.
4. FiTs are not funded by general taxation. Instead, energy companies pay out the tariffs, and recover the cost through their customers’ energy bills. In October 2010 the Spending Review introduced for the first time a budgetary cap for FiTs and other policies funded through consumer energy bills. This levy-funded spending cap reflected the original projections of expenditure on the tariffs, less a further £40 million reduction (about 10%) in 2014-15.
1 DECC, UK Renewable Energy Roadmap, July 2011. This states that the eight technologies (offshore wind, onshore wind, biomass electricity, marine, biomass heat, ground source and air course heat pumps, renewable transport) are capable of delivering more than 90% of the renewable energy needed to meet the 2020 target in a cost-effective and sustainable way. Solar PV, along with hydropower and deep geothermal heat and power are expected to provide the remaining 10%. 2 Energy Act 2008, Sections 41 and 43.
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5. In February 2011, the Government announced a comprehensive review of the FiTs in order to deliver these savings.3 The Government gave ‘fast-track’ consideration in early Summer 2011 to tariffs for larger-than-domestic installations (between 50kW and 5MW) and stand-alone solar PV projects (which would be reduced) and anaerobic digestion projects (which would be increased).
6. On 31 October 2011 the Government announced that the comprehensive review would be organised into two phases, and launched a consultation on Phase 1 which would focus on smaller scale solar PV. The consultation document from the Department of Energy and Climate Change (DECC) set out the Government’s grounds for possible changes to the smaller-scale solar PV FiTs scheme, including an unsustainably rapid increase in the rate of solar installations, a 30% reduction in installations costs (with more reductions likely), rising electricity prices and, consequently, a rate of return from the scheme much higher than the 5% return envisaged at the outset.4 The consultation stated that given these developments, the Government “considers that it is imperative that ... a correction to the tariffs for solar PV [is introduced]”.5 It set out proposals in three areas:
• Reducing the tariffs for small-scale solar PV (with a total installed capacity of 250kW or less);
• Introducing an energy efficiency requirement for solar PV tariffs from 1 April 2012; and
• Introducing new tariff rates for ‘aggregated’ solar PV schemes from April 2012.
Our inquiry 7. The Energy and Climate Change and the Environmental Audit Committees decided to examine concurrently the Government’s proposals for the solar FiTs. We commissioned the National Audit Office to examine the modelling that Government used to set both the original tariffs and those proposed in the recent consultation.6 We are grateful for their very helpful input.
8. We received a large volume of written evidence, including from the solar industry, community projects and individuals affected by the proposals, and from DECC and the Treasury. We took oral evidence from the solar industry and those supporting community schemes; Gregory Barker MP, the Minister of State for Climate Change, and DECC officials; and Chloe Smith MP, the Economic Secretary to the Treasury and her officials. We are grateful to them all.
3 Written statement, HC Deb, 7 February 2011, col 3WS. 4 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 3. 5 ibid. 6 NAO, The modelling used to set Feed-in Tariffs for solar photovoltaics, November 2011. See: http://www.nao.org.uk/publications/1012/fits_briefing.aspx.
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2 The proposed changes to the solar PV feed-in tariffs
The ‘comprehensive review’ 9. On 7 February 2011, the Government announced a comprehensive review of the Feed-in Tariff scheme with the principal aim of delivering the savings on the programme announced in the Government’s Spending Review 2010.7 The Review was to be completed by the end of 2011, and would cover all aspects of the scheme including tariff levels, administration and eligible technologies. Tariff levels would remain unchanged until April 2012, unless the review revealed a need for greater urgency.8
10. Previously, the Spending Review had introduced a financial cap on levy-funded energy schemes, including feed-in tariffs, which placed a limit on how much solar PV capacity could be installed to benefit from the tariffs. This presented a challenge for Government when, in 2011, the rate of solar installations exceeded what had been budgeted for. As part of the comprehensive review, the Government therefore gave ‘fast-track’ consideration in early Summer 2011 to tariffs for larger scale installations (between 50kW and 5MW) and stand-alone solar PV projects,9 in response to a far higher than expected rate of take up for the larger schemes. A “number of larger schemes, including installations on rooftops as well as so called ‘solar farms’, threatened to alter the use of the scheme to such an extent that the full range of intended beneficiaries (individuals, householders, organisations, businesses and communities) would have lost out”.10
11. However, the take-up of smaller-scale solar schemes also expanded significantly in 2011. As at the end of September 2011, Feed-in Tariffs had enabled 316MW of additional generation capacity to be added to the grid, 82% of which being from solar PV (equivalent to 78,000 solar panels).11 At that stage, 255MW of solar power capacity had been registered for FiTs; more than double the 94MW originally projected for that point in time.12 As a result, on 31 October 2011, the Government announced that the remainder of the comprehensive review would be organised into two phases. Phase 1 would consider:
• Small-scale solar PV (with a total installed capacity of 250kW or less); • Prioritising energy efficiency by linking Solar PV tariffs to specified minimum energy efficiency requirements from 1 April 2012; and
7 Spending Review 2010 identified Feed-in Tariffs savings of £40 million, around 10% of the originally projected spend in the 2014-15 financial year. 8 Secretary of State’s written statement to the House announcing comprehensive review of FiTs. See HC Deb, 7 February 2011, col 3WS. 9 Anaerobic digestion projects were also within the scope of the fast track review. 10 DECC, Feed-in Tariffs Scheme: Summary of Responses to the Fast-Track Consultation and Government Response, June 2011. 11 DECC, Energy Statistics, Table ET 5.6. See : http://www.decc.gov.uk/en/content/cms/statistics/energy_stats/source/electricity/electricity.aspx, accessed on 7 December 2011. 12 DECC, Impact Assessment for Comprehensive Review Phase 1 – Consultation on Feed-in Tariffs for Solar PV, 2 November 2011, para 12.
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• Introducing new tariff rates for ‘aggregated’ solar PV schemes from April 2012.
12. A consultation on Phase 1 of the review was launched on 31 October and will end on 23 December 2011, less than eight weeks later. However, the consultation proposes that reductions to the tariff would occur with reference to a date of 12 December 2011, before the end of the consultation. Those households and businesses with solar panels installed and eligible for the Feed-in Tariff scheme before the 12 December ‘reference date’ would receive the existing tariff rates for the duration of their Feed-in Tariff contract. Those not installed and registered, or not having applied for registration, before the 12 December would be eligible for the existing rates only until April 2012, at which point they would received the proposed new tariff rates.
13. DECC published an Impact Assessment of the proposed changes to the Feed-in Tariffs set out in the consultation document. It assessed two options—‘low tariffs early’ (its preferred solution with a 12 December reference date) and ‘low tariffs April 2012’—against a ‘do nothing’ scenario of reducing (‘degressing’) the tariffs by 8.5% from April 2012 as previously planned when the FiTs were introduced. The Impact Assessment showed that the Government’s preferred changes (‘low tariffs early’) to the scheme would have a net benefit to the economy of £9.2 billion over the next 35 years, relative to the ‘do nothing’ scenario. The positive impact on the economy is slightly less for the later April 2012 reference date, where the net benefit is £8.7 billion.
14. DECC could have reduced confusion in the debate on the proposals by not referring to the planned April 2012 reduction of 9% as a ‘do nothing’ option. This was clear in the Impact Assessment, but when taken out of that context has served only to confuse. We have seen no evidence of any dissent from the view that the tariffs needed to be reduced, only about the scale and speed of the reduction now proposed. The Government was wrong to use the ‘do nothing’ term in wider debate without making it clear that it referred to a proposed cut in the tariffs.
15. The 12 December reference date, six weeks from the publication of the consultation document, was proposed by the Government to allow prospective generators who had made a financial commitment to install solar panels (for example, paying a deposit) to complete their installations. It recognised however that some who had incurred or committed expenditure before the consultation was published might not be able to complete the process before 12 December.13 On balance, the Government considered this to be reasonable given the impact on the scheme’s budget of continuing high levels of up- take.14 However, no financial analysis was provided to support this in DECC’s impact assessment.
16. The Department’s original designs for the scheme made take-up rates particularly sensitive to the minimum rate of return needed to attract investors.15 The previous Government planned to ensure tariff rates reflected cost reductions in the price of solar panels by reducing tariffs rates (‘degression’) by 8.5% per year from 2012, and not before
13 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 20. 14 ibid. 15 NAO, The modelling used to set Feed-in Tariffs for solar photovoltaics, op cit.
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2012, as a result of representations from the industry.16 However this planned rate of reduction was not sufficient to reflect the rate at which the cost of solar panels was falling. The cost of panels had fallen 30% since the start of the scheme17 and therefore the current tariff rates were providing a “significantly higher” financial return than the 5% return intended when the scheme was introduced.18 DECC set up the solar FiTs scheme without a mechanism to review and adjust degression rates in an orderly and timely way. It urgently needs to develop a system which allows for more regular and predictable review, as we describe in paragraph 76.
17. The Government re-calibrated its model to come up with revised tariff rates, with the primary aim of ensuring that the scheme overall would deliver a 4.5% rate of return.19 The model was also re-calibrated to reflect new data on installation costs which were on average 40% lower than used in the original model and were predicted to fall by as much as a further 41% by 2015.
18. The Government considered that the levy-funded spending framework, which sets the parameters governing expenditure on FiTs over the Spending Review period, helps “ensure that the policies within its scope achieve their objectives cost-effectively and affordably and without leading to a disproportionate increase in energy bills”.20 The Economic Secretary told us that affordability had a meaning for Government in terms both of the overall economic impact (money that could be spent elsewhere in the economy) and for electricity bill-payers.21
19. When the Minister announced the consultation on 31 October, he told the House that the Government was acting to secure “the FiT budget in the interests of all eligible technologies and to bring greater coherence to the Government’s ambitious policies to green Britain’s homes”.22 As the scheme is cumulative (because it must cover the costs of paying for projects accredited in previous years of the scheme as well as new projects that year), rapid take-up in the early years of the scheme significantly reduces the budget available for later years. We tried in our evidence sessions, without success, to establish how much of the overall budget had been already committed. DECC subsequently provided its estimate that, as at 27 November 2011, even taking account of only
16 The original design of the scheme included a 9% ‘degression’ in tariff rates to reflect falling solar panel manufacture and installation costs. ‘Degression’ is where tariffs for new installations are set at a lower level than tariffs for existing installations. Degression would start after the second year of the scheme to enable the solar industry to establish itself. [Q 76] 17 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 3. 18 ibid. 19 A 5% return, except for installations with installed capacity of 4kW or less (usual size of domestic sized installation), where the proposed tariff is intended to deliver a 4.5% rate of return. This exception is deemed by the Government to be more appropriate for domestic installations given that alternatives, such as savings and bonds will ‘typically provide lower rates of return now than in 2009/10 when the FiT scheme was originally designed’. DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 19]. 20 Ev 54 21 Qq 169–177 22 HC Deb, 31 October 2011, col 605.
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installations already made, 90% of the four-year solar PV cap has already been committed.23
20. As we describe below, there is some uncertainty about the impact of the proposals on electricity bills (paragraph 34) because the take-up of the scheme has continued to grow since the impact assessment was published. That uncertainty produces similar uncertainty about the impact on the levy-funded spending cap. Gregory Barker told us that “...shifting the eligibility date to 1 April [from 12 December] would be absolutely catastrophic”.24 The Permanent Secretary told us that DECC calculated in its impact assessment that delaying changing the tariff rates to April would cost an additional £60-70 million a year for 25 years.25 The Economic Secretary told us that at the moment each week of delay has a lifetime cost of around £275 million,26 although this reflected at the margin the very high rate of installations in late November and early December 2011.27
21. Although the proposed cut to the Feed-in Tariff was announced by Ministers on 31 October, two days before the impact assessment was signed off, due to the continuing increase in take up-rates since it was published, calculations in the Impact Assessment are already out of date. Consequently, the effect on the total spending cap is uncertain and has not been made publicly available so that it could be properly scrutinised (we discuss this further in paragraphs 34, 73 and 74). When publishing its conclusions from its consultation exercise, the Government should also publish an up to date assessment of the impact of the proposals on the overall budget for solar FiTs, differentiating between the costs under the two options for change considered in the consultation.
The impact on the industry and on jobs
22. At the start of the comprehensive review, the Energy Secretary told the House that “industry needs a long-term plan for investment in which it can have full confidence”.28 However, John Cridland, director general of the CBI, has said that “moving the goal posts doesn’t just destroy projects and jobs, it creates a mood of uncertainty that puts off investors and they wonder what’s coming next ... Industry trust and confidence in the Government has evaporated. This bodes poorly for investment in future initiatives”.29
23. Our solar industry witnesses were concerned that changing tariff rates before the end of the consultation had damaged investor confidence in the sector. HomeSun told us that between 12 December and the announcement of the results of the consultation there would be a “solar dead zone” where “no-one can buy/invest in solar”.30 Solar businesses were having to cancel orders and carry or shed under-utilised staff. The Renewable Energy Association and Solar Trade Association believed “it will be impossible to run a solar
23 Ev 70 24 Q 119 25 Q 88 26 Q 162 27 Ev 76 28 HC Dec, 7 February 2011, col 3WS. 29 John Cridland’s speech on 10 November 2011. See: http://www.cbi.org.uk/media/1156796/john_cridland_cbi_east_midlands_annual_dinner_speech_101111.pdf 30 Ev 35
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business beyond 12 December unless clarity and confidence over the next 3 years is provided urgently”.31 Daniel Green from HomeSun told us that a large renewables company had reported that its cost of borrowing had increased by 5% because of investors’ perception of higher risk for the industry as a result of the Government’s proposals.32
24. The net number of jobs that have been created by the solar Feed-in Tariff is uncertain because it must take into account the number of jobs transferred from elsewhere in the economy, the size of the supporting supply chain and how many jobs existed in the sector prior to FiTs being introduced. DECC estimates that 8,000 to 14,000 gross full time equivalent jobs have been supported in solar PV since the introduction of the Feed-in Tariffs.33 Research commissioned for BIS estimates that the industry employs 39,000 people, across 2,000 companies.34 The solar industry estimates that 25,000 people are employed in the sector, across 3,000 businesses.35 There is no breakdown of the types of jobs in the sector, and the Government does not hold information on where solar panels installed in the UK are manufactured.36
25. The impact of the proposed changes to the FiTs on employment is uncertain. The Impact Assessment, published alongside the consultation document, estimates that there will be around 1,000 to 10,000 ‘gross additional jobs’ in the solar energy sector in the three years to 2014-15 under the Government proposals, compared with there being no industry.37 The Impact Assessment does not attempt to quantify the number of new jobs that would be created without any changes to the tariff, and therefore does not make an assessment of the number of job losses that would result from the proposed changes. Indeed, the Treasury consider that jobs supported through the FiTs “do not increase overall employment in the short to medium term because of the off-setting effects on the rest of the economy where activity, and so jobs, are reduced”.38
26. We are particularly concerned about the impact these tariff cuts will have on the manufacturing part of the sector. We received evidence that major construction companies had been considering manufacturing solar components in this country.39 This could help to rectify the huge trade imbalance in this industry, as the UK currently imports the majority of components. We urge DECC and BIS to collaborate on how to create an environment conducive to a domestic manufacturing sector as part of the FiTs scheme.
27. The solar industry argued that the proposed cut to the tariffs will result in reduced demand for solar panels and therefore the number of jobs in the industry will fall. The Renewable Energy Association and Solar Trade Association conducted a survey of the industry, from which it concluded that the proposed changes may result in employment
31 Ev 43 32 Qq 27 -29; Ev 35; Ev 66; Ev 68 33 HC Deb, 15 November 2011, col 796W. 34 BIS, Low Carbon Environmental Goods and Services 2009/10, July 2011. 35 Ev 35; Ev 59; Ev 60; Ev 66 36 HC Deb, 15 November 2011, col 798W. 37 Ev 70 38 Ev 76 39 Ev 59
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levels falling by 42%, and that 33% of companies may close.40 John Cridland, the director general of the CBI, has warned that plans to reduce the FiTs “risks derailing the UK’s nascent green economy and resulting in thousands of redundancies”.41 On 30 November Carillion launched a statutory 90-day consultation process on how it might restructure its business and warned that 4,500 UK staff could lose their jobs as a result of the proposed reduction in tariff rates.42 However claims about the impact of the cut in FiTs are hard to evaluate because of the extraordinarily rapid expansion of the installation rate in the weeks before the consultation was announced.
28. To facilitate the investment in renewables that the country needs, investors need to have confidence in a stable and predictable commercial environment for those investments. The scale and pace of the changes now proposed was a ‘shock’43 for the industry and the suddenness of their introduction has damaged investor confidence across the whole energy sector. This damage would not have occurred if the Government had recognised the unsustainable rate of the expansion of solar installations at an earlier date, something which ought to have been identified by Ministers and officials sooner than it appears to have been. The analysis of the impact on jobs in the Impact Assessment is also seriously inadequate.
Impact on bill payers 29. Feed-in Tariffs are not funded by general taxation. Instead the cost is borne initially by the energy companies who ultimately pass on the cost (along with their costs of administering the FiT scheme44) to electricity consumers in their energy bills.45 Ofgem estimated in January 2011 that 10% of an electricity bill and 4% of a gas bill was made up of environmental costs,46 although these are not itemised on energy bills.47 The Government publishes an annual assessment, Annual Energy Statement, of the estimated cumulative impact of energy and climate change policies on energy prices and bills for households and businesses. It is up to electricity suppliers to choose how they pass on the costs to different types of consumer.48 DECC estimated that for every pound that domestic consumers pay
40 Survey of 139 companies, employing 4,055 people. 41 John Cridland’s speech on 10 November 2011. See: http://www.cbi.org.uk/media/1156796/john_cridland_cbi_east_midlands_annual_dinner_speech_101111.pdf 42 Financial Times, ‘Jobs pressure heats up on solar sector’, 30 November 2011. 43 Q10 44 The Government determines annually how much additional costs an electricity supplier incurs as a result of the scheme, see : http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/renewable-energy/1319-schedule-of- qualifying-fits-cost-year-2.pdf 45 A quarterly ‘levelisation process’ is completed whereby all licensed electricity suppliersare required to make payments into Ofgem’s levelisation fund, based on their market share of the Great Britain electricity supply market and any FIT payments made to accredited installations under the FIT scheme. The fund is then redistributed to FIT licensees that have made more payments to accredited installations than they would be required to by their market share contribution. See Ofgem website: http://www.ofgem.gov.uk/Sustainability/Environment/fits/Levelisation/Pages/Levelisation.aspx. The Government expects these costs to be ultimately passed on to energy consumers, see: http://www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/feedin_tariff/implementation/implementat ion.aspx 46 Carbon Emissions Reduction Target (CERT), Community Energy Saving Programme (CESP), the Renewables Obligation (RO), and Feed-in Tariff Scheme (FITs). 47 Volume II [Ofgem] 48 Volume II [Which?]
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on their energy bill to cover the cost of feed-in tariffs, a medium-sized business pays £3,000 on their bill and an energy-intensive user pays £30,000.49 The Government must require electricity suppliers to provide annual returns on how much they have added to annual energy bills to recover the costs of Feed-in Tariffs from customers, and it should collate and publish this information annually, possibly as part of the Annual Energy Statement process.
30. DECC estimated in its impact assessment for the Phase 1 consultation that continuing with existing tariffs and reducing these by 8.5% per year, as planned when the scheme started50 (the so called ‘do nothing’ scenario) would add £26 a year on average to each annual energy bill in 2020 under central-estimate take-up scenarios, or £55 under higher take-up scenarios.51 This ‘do nothing’ scenario is theoretical to the extent that it ignores the need to curtail tariffs more aggressively, if not now then later once the spending cap is breached. The 2 November 2011 Impact Assessment also showed that the proposed changes to the scheme would reduce the average increase in domestic energy bills to about £3 in 2020.52 Therefore, the Government estimated that its proposed changes would deliver domestic electricity bills (under the central take-up scenario) £23 less than they would otherwise be in 2020.53 On 23 November, the Energy Secretary told the House that take-up was increasing swiftly and that the estimates of the additional cost on energy bills in 2020 from FiTs had increased from £26 to £80.54 This was repeated by the Minister when he gave evidence to us.55
31. While the Government calculate that take-up levels require the halving of the solar FiTs rates, there remains a separate question about the financial imperative for applying the new tariffs on installations from 12 December 2011 rather than from 1 April 2012. The 2 November Impact Assessment reports that the estimated difference in energy bills in 2020, as a result of waiting to April 2012 to change the tariffs would be an additional £0.70 to £1.00 (on top of the £3 increase under DECC’s preferred 12 December option).56 The Department’s Permanent Secretary put it at 80p for 2014-15.57
32. It is regrettable that the Government did not consider other reference dates between December 2011 and April 2012, the costs of which DECC has now quantified.58 We urge the Department to consider these alternatives.
49 Q 88 [Moira Wallace] 50 Qq 76-78 51 Ev 54; Q 88 [Moira Wallace] 52 Undiscounted 2010 prices. 53 DECC Press Release announcing consultation: http://www.decc.gov.uk/en/content/cms/news/pn11_091/pn11_091.aspx 54 HC Deb, 23 November 2011, col 376. 55 Q88 56 Q 88 [Moira Wallace] 57 Ibid. 58 In a recent written answer to a Parliamentary Question Gregory Barker stated that the additional impact on the average domestic bill in 2014 would be £0.36 per Bill for a reference date of 31 January 2012, £0.57 pert bill for a reference date of 29 February and £0.79 per bill for a reference date of 31 March 2012. HC Deb, 21 November 2011, col 44w
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33. DECC’s Permanent Secretary told us that the estimates made were on “very, very uncertain figures” and reflected “a judgment about the difference between two unknowable numbers”: the difference between take-up levels when six weeks’ notice is given for the changes and what would have happened if the Department had allowed a longer period.59 She also cautioned that it was a fast moving situation and that “any estimate we make is rapidly being overtaken by events” and that DECC believed the impact on bills will be “considerably more” than that estimated in the Impact Assessment.60 The Minister told us that the “Impact Assessment was basically out of date the moment it was printed, because we are dealing with a very dynamic situation”.61
34. We asked the Department for an up to date assessment of the impact on energy bills for both reference dates. These are included in Figure 1 below. From the results it is clear that while the additional cost for individual bill-payers of deferring the ‘reference date’ from 12 December to 1 April is small (about £1-£2 a year), that earlier reference date makes it feasible for the overall cost to be contained within the spending cap. Allowing installations up to 1 April to retain the current tariffs would, according to DECC’s calculations, cost bill- payers between £570m and £630m overall, depending on what option for an energy efficiency requirement is pursued, and potentially up to £600m or more, which would mean breaching the FiTs levy cap. We obtained evidence, late on in our inquiry, which indicates that, following the introduction of an energy efficiency requirement, the total FiTs budget would not be breached over the four year period to 2014-15, even if the reference date remained at 1 April. We discuss this further in paragraph 74.
Figure 1: The costs for the options under consideration, and the Government’s ‘do nothing’ benchmark (costs per bill are for 2020A; total costs are for 2014-15B)
‘Do nothing’ 12 December 2011 1 April 2012 change, with reference date no earlier reference date
In the Impact ‘central estimate’ £25.20 per bill £2.60-£3.20 per bill £3.30-£4.20 per bill Assessment
‘high estimate’ £55 per bill
Latest ‘central estimate’ £38.80 per bill £3.40-£4.20 per bill. £5.00-£6.30 per bill. assessment Total cost in 2014- Total cost in 2014-15c: 15B: £390m-£430m £570m-£630m
‘high estimate’ £80 per bill Total cost2014-15B: Implied total cost2014-15c: £420m-£810m c£610m-£1,200m
[The spending [£446m in 2014-15D] [£446m in 2014-15D] cap]
Note: first figure in cost ranges are for EPC C-rated energy efficiency requirement, and second figure for Green Deal related requirement.
A from DECC supplementary written evidence, Annex A., (Ev 70).
59 Qq 83, 91 60 Q 92 61 Q 123
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B from DECC supplementary written evidence, Q 10 response, (Ev 70).
C figures calculated by the Committees, as implied by other data in the table.62
D figure from DECC supplementary written evidence, Qq 4 and 10 response, (Ev 70).
The impact on prospective FiTs customers
35. The Department reduced its assessment of the minimum rate of return at which households would invest from 3%-20% in the original modelling in 2009 to 1%-12%, based on updated consultants’ advice.63 We heard a mix of views on the impact of reducing the financial return from the scheme. Some, mainly individuals, told us that the revised tariff rates made their planned solar panels uneconomical, or uncompetitive against other investments.64 On the other hand, a larger scheme found the revised tariffs would still be sufficient to go ahead.65
36. We have received submissions from individuals who had committed to installing solar panels and paid deposits, but since the consultation was launched feared not being eligible for the scheme before the reference date. Concerns were raised that the consultation had created a rush and suppliers were unable to commit to installing the panels before the reference date.66 A survey by Consumer Focus found that 86% of consumers purchasing a solar panel system were asked to pay a deposit before installation, typically between 1% and 25% of the contract price.67 Howard Johns of the Solar Trade Association agreed that there could be some lost deposits but this would depend on the wording of individual contracts.68
37. Consumer Focus believed that the main barriers to the solar FiTs scheme were financial—“the up-front costs, inability to afford the installation costs, a lack of finance and a payback period of over five years”. It noted that consumers who had installed renewable technologies were likely to be “older or retired professionals living in large detached homes, often in rural areas, who demonstrate a high level of environmental concern” and further noted that as renewable technologies were a long-term investment, consumers could not change their plans in as little as six weeks.69
38. Which? argued that the 12 December deadline was “especially unfair” on households who had already signed contracts and paid deposits before the 31 October consultation began, and wanted DECC to exclude such consumers from the reference date condition.70
62 Calculation by the Committees: (£420m/£320m) x £570m = c£610m. (£810m/£430m) x £630m = c£1,200m 63 NAO, The modelling used to set Feed-in Tariffs for solar photovoltaics, November 2011. See: http://www.nao.org.uk/publications/1012/fits_briefing.aspx 64 Volume II [Nightingale Farm, David Robertson, David Holmes, David Husk] 65 Volume II [Caplor] 66 Volume II [Nightingale farm, Greg Roger, Mary Ross, David Robertson, David Holmes] 67 Volume II [Consumer Focus] 68 Q 35 69 Volume II [Consumer Focus] 70 Volume II [Which?]
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However, as indicated in our written evidence, some households may have already cancelled their installations and lost their deposits.71 EDF was concerned that the damage may already be done: “the negative impacts of the current announcement are unlikely to be reversed and so, to provide clarity for all parties, we do not believe there is any merit in adjusting the date to bring in the proposed changes”.72
39. The use of a reference date for new installations to qualify for the existing tariffs that precedes the end of the consultation smacks of retrospective regulation, which undermines confidence in the Government’s management of other energy policies. Some households are cancelling their planned solar panels and face losing their deposits. Others may have arranged loans on the basis that the interest could be covered from the current level of the tariff income. This is unfair. The Government should allow those who can prove that they had already made a contractual financial commitment to install solar panels, before the 31 October start of the consultation process, to receive the existing tariffs.
The impact on community schemes 40. Nearly 20% of installations are associated with generators who have more than one solar panel system registered for FiTs. These include arrangements where solar companies provide ‘rent a roof’ contracts (where the company rather than the homeowner receives the tariff income), as well as local authority, social housing and community energy schemes. The Government estimates that there are economies of scale available on such multiple installation models and consequently proposes a new lower tariff (80% of the full tariff) for ‘aggregate schemes’ after April 2012.73
41. Community solar power schemes face specific problems because of the Government’s proposals: they depend more acutely on the tariff income to finance the installations; they need longer to organise their projects; and they will be hit by even lower tariffs for ‘aggregators’. Community schemes typically take longer to complete because securing the necessary funding and planning permissions can take time. Many are run by volunteers and so can take longer to organise.74 Under the current proposals, these schemes would probably be classified as ‘aggregated schemes’ and therefore receive 80% of the proposed tariffs. Friends of the Earth argued that the current tariff rates have been important in ensuring community schemes generate a sufficient financial return to enable them to borrow capital, typically costing them between 4.5% and 10%.75
42. The Government has not assessed the impact of the changes on community projects.76 Solarcentury told us that “contracts worth millions of pounds including major projects for housing associations and community groups, who now have no hope of completing
71 Volume II [Nightingale Farm, Greg Roger, Mary Ross, David Robertson, David Holmes] 72 Volume II [EDF Energy] 73 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 3, page 5. 74 Volume II [Carroll Reeve] 75 Volume II [Friends of the Earth] 76 HC Deb, 14 November 2011, col 587W.
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schemes by midnight on 11 December, have been cancelled”.77 We were provided with details of specific community projects that, we were told, have been put on hold, reduced in scale or cancelled.78 A survey conducted by the Community and Climate Act Alliance, which received 240 responses, found that 85% had planned projects for the next 12 months and that over 80% of those felt that the projects would now collapse.79 Peter Capener, of Bath and West Community Energy, told us that:
The devastation for those community projects is huge ... We are undermining the whole community thrust behind coming together and collaborating ...The task of reinvigorating communities after being undermined in that way is huge and should not be underestimated. It goes beyond just the capacity on the ground, which in itself is significant, because if you get those community projects started you then have the opportunity to build the Green Deal on top ...You take away one foundation for that and all these other projects that could add on value get lost. The behavioural change benefits that can be seen to be generated as a result of having solar systems on schools or community buildings, you lose.80
43. The Solar Trade Association believed that 80,000 of 100,000 previously planned social housing installations in the next year would no longer go ahead because of the proposed changes.81 The Local Government Association told us that a majority of councils were axing their schemes:
The pace of the change has put councils at financial risk. Collectively this is in the order of hundreds of millions of pounds ... The additional 20% reduction for multiple [‘aggregator’] schemes will make any social housing schemes very unlikely ... The Government has not considered the costs that councils take on.82
44. HomeSun, the largest provider of ‘rent a roof’ schemes, believed that the Government did not understand the way they operated, and argued that a clear distinction should be made between ‘aggregators’ who support social housing projects (where the installations are tightly clustered geographically and undertaken as a single ‘project’), and those who install panels on disparate individual private homes.83
45. The Government said that it was considering whether more could be done to enable “genuine” community projects to be able to benefit fully from the FiTs and that this would form part of the Phase 2 consultation to be launched by the end of the year.84
46. The impact on community schemes of the proposed changes will generally be greater than for individual homeowners, and could undermine the finances needed to support the other environmental activities of such groups. The lower ‘aggregator’ tariff,
77 Ev 35 78 Volume II [Friends of the Earth]; Ev 63 79 Q 36 80 ibid. 81 Q 34; Ev 63 82 Volume II [Local Government Association] 83 Ev 35 84 HC Deb, November 2011, col 587W.
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if not tempered for the particular circumstances of community and social housing projects, will affect them greatly. As with reducing the viability of ‘rent a roof’ schemes, which have allowed participation by those without access to finance, the likely adverse impact of the proposals on community schemes will disproportionately be felt by disadvantaged and poorer communities. The Government has made a commitment to embed sustainable development in policy making, but the proposed changes to solar FiTs suggest that its social justice pillar is not being given sufficient weight. We recommend that DECC designs a ‘community tariff’ immediately that takes into account the wider impacts on community groups, including lost capacity which could be built on to ensure other Government policies such as the Green Deal are effective.
Energy efficiency 47. When designing the Feed-in Tariffs scheme, the previous Government considered introducing an energy efficiency requirement, but after consultation decided against doing so because it would further complicate the scheme and be difficult to monitor and enforce. However, it stated that it might revisit the issue at future reviews.85 DECC is now consulting on proposals to make energy efficiency a condition for receiving solar PV Feed- in Tariffs from April 2012.86 The intention is to ensure that “energy efficiency measures are prioritised as the first step to improving a building’s energy performance”.87 The Minister told us that there are “huge opportunities for the solar industry to join up more coherently with the whole Green Deal effort and the massive push that there is going to be there for the greening of our housing stock”.88
48. At present the Government has proposed an energy efficiency requirement only for solar PV, not other technologies eligible for Feed-in Tariffs.89 The Government’s plans for the Renewable Heat Incentive, for example, do not include an energy efficiency requirement. 90 The National Housing Federation believed that there was “a clear logic for linking energy efficiency and the installation of renewable heating, but no direct link with energy efficiency and the potential for solar PV to reduce carbon emissions and electricity bills”.91 Similarly, Which? believed that there was much less need for an energy efficiency requirement for Feed-in Tariffs than for the Renewable Heat Incentive (RHI):
With the RHI, heat generated using public subsidy will literally be disappearing out of the roof or walls if they are not insulated properly. This is not generally the case with the FiT. Insulation is essential to ensure the value of heat; it is not for electricity
85 DECC, Feed-in Tariffs: Government’s response to the summer 2009 consultation, February 2010. 86 This new requirement would apply to all new solar PV installations with an eligibility date on or after 1 April 2012 which are attached to, or wired to, provide electricity to a building. As a transition arrangement the Government is proposing that those installations with an eligibility date between 1 April 2012 and 31 March 2013 would have 12 months to install energy efficiency measures needed. 87 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 25. 88 Q 144 89 Wind, hydro, anaerobic digestion and micro-combined heat and power. 90 At present DECC estimates that around 80 per cent of domestic heating is provided by 18-20 million gas boilers. [DECC, Renewable Heat Incentive policy document, March 2011] 91 Volume II [National Housing Federation]
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unless the householder is using electrical heating ... We assume that part of DECC's reason for proposing such high [energy efficiency] requirements is to dampen down FIT activity deliberately.92
49. The Phase 1 consultation, currently underway, sets out two possible ways for introducing a minimum energy efficiency requirement: requiring the homeowner to bring the property up to an Energy Performance Certificate (EPC) rating of level ‘C’ or above, or to undertake all measures assessed under an EPC that are eligible for Green Deal finance. If the homeowner cannot meet the minimum energy efficiency requirement, the solar panels would be eligible for a lower tariff of only 9p/kWh.93 This would reduce the financial return below the 4.5% that the Government envisages to be provided by the scheme (because that rate of return is intended to be possible with a higher tariff of 21p/KWh).
50. The impact of the energy efficiency requirement on future take-up of the tariffs depends on the option chosen by the Government. The ‘C’ level EPC rating is the more onerous of the two options, requiring action on energy efficiency for 86% of homes before they would be eligible for the standard tariff.94 The Government estimates that in most cases this could cost £5,600, but could be up to £14,000 (for a semi-detached house with solid walls). With an average solar panel installation cost of £9,000, this requirement would raise the capital outlay needed to between £14,600 and £23,000.95
51. Submissions to this inquiry favoured each of the energy efficiency options under consideration. The Association for the Conservation of Energy believed that the Green Deal finance option brought more closely together the incentives for renewable energy and the mechanism through which energy efficiency improvements could be financed into a package that would “make more sense to building owners and occupants” and removed the “cost barriers to take up”.96 Whereas EDF energy favoured the EPC rating option as the Green Deal was still subject to consultation.97
52. The likely impact on take-up rates, perhaps reflecting the costs of the energy efficiency requirement, is striking. DECC estimates that the EPC ‘C’ rating requirement could reduce take-up of the scheme by 92% from 2012-13, on top of reduced up-take expected under the proposed much lower new tariffs. Consequently, industry stakeholders told us that the requirement would be a ‘brake’ on the scheme and would have a greater impact on the industry than the proposed tariff rates.98 Howard Johns of the Solar Trade Association told us that the introduction of the EPC requirement would lead to the “destruction of the industry”.99 Similarly, Daniel Green of HomeSun told us that “the 21p [proposed tariff
92 Volume II [Which?] 93 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 25. 94 Solarcentury believed that ‘virtually no school, public building, factory or office meets EPC“C” [Ev 66] 95 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 16. Also, the Government estimate that an EPC can cost between £50 and £100. 96 Volume II [Association for the Conservation of Energy] 97 Volume II [Edf Energy] 98 Qq 48 - 55 99 Q 32
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rate] is difficult but do-able; the other criteria are impossible”.100 DECC estimates there would be no impact on take-up rates under the ‘Green Deal finance’ option on the basis that the Green Deal involves no initial financial outlay.101
53. The Government‘s economic appraisal does not differentiate the impact on jobs of, specifically, the energy efficiency requirement. As this is a different mechanism, not linked to the wider FiTs scheme, separate impact analysis is essential. Furthermore, and perhaps unsurprisingly, the Impact Assessment does not consider how an energy efficiency requirement would improve overall levels of energy efficiency. In terms of increased carbon savings as a result of greater take up of energy efficiency measures, the overall impact “is too uncertain”.102
54. DECC re-affirmed the aims of Feed-in Tariffs in the consultation document, which included amongst others “[assisting] in public take-up of carbon reduction measures, particularly measures to improve the energy efficiency of buildings”.103 The Department considered these aims to be part of the justification for supporting the scheme at a subsidy level above the Department’s cost-effectiveness benchmark.104 The Government’s July 2011 UK Renewable Energy Roadmap, which set out its assessment of the technologies required to help the UK meet its target of 15% renewable energy by 2020 excluded solar PV from the eight technologies with ‘the greatest potential’ to help meet EU renewable energy targets cost-effectively. The Government considers therefore that any additional support for renewable energy technologies, above a 9p/kWh marginal cost benchmark (in terms of subsidy), ‘needs to be justified on other grounds’.105 In the case of solar FiTs, where the majority of tariffs are in excess of this benchmark, this justification is provided by the fact that the scheme’s aims include a contribution to wider low-carbon goals, such as energy efficiency.106
55. Under an energy efficiency requirement, those with older properties may face costs of up to £23,000 to install a typical domestic solar power system. The more stringent option of requiring homes to meet an Energy Performance Certificate ‘C’ rating would, according to DECC estimates, cut take up by 92%, reflecting the significant additional costs this option would require, effectively ending new solar PV installations in homes. Even if this were not the case, it seems to us that properties already meeting the ‘C’ rated EPC standard will be owned disproportionately by wealthier families, and applying that standard to solar FiTs eligibility could distort the take up of this incentive.
100 Q 54 101 DECC, Impact Assessment for Comprehensive Review Phase 1 – Consultation on Feed-in Tariffs for Solar PV, 2 November 2011, page 2; Ev 70 102 DECC, Impact Assessment, op cit, para 69. 103 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 10. 104 ibid. Paras 15-22. 105 DECC, UK Renewable Energy Roadmap, July 2011; The Government estimates that 9p/kWh is ‘broadly equivalent to two Renewables Obligation Certificates (based on 2012-13 costs). This is the level of support available under the Renewables Obligation to offshore wind, which is currently considered to be the marginal cost effective technology required to deliver the UK’s 15% renewable target’. [DECC, Feed-in Tariff scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 10.] 106 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 10.
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56. The Government believes that boosting energy efficiency is part of the rationale for providing a level of subsidy for solar energy in excess of what the Renewable Energy Roadmap otherwise considered to be cost effective. But it has not demonstrated the logic of linking technologies used to generate electricity in homes to energy efficiency, which focuses on reducing heating and hot water costs, nor whether in practice solar PV contributes to greater energy efficiency. The Government has failed to make the case for why it is proposing to set a pre-qualifying absolute standard of energy efficiency to this technology, instead of all technologies.
57. The choice of energy efficiency requirement option by the Government could have a fatal impact on the take-up of the scheme after 2012. Access to FiTs should not be closed-off by the need to improve take-up of Green Deal measures. Requiring the ‘C’ rated EPC energy efficiency standard could limit access to wealthier households. The Government must consider alternative energy efficiency options and publish alternative impact assessments. These options might include (a) offering a range of tariff levels based on energy efficiency; (b) linking eligibility to a specific improvement in efficiency rather than an absolute standard; and (c) linking eligibility to the completion of certain Green Deal measures.
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3 The management of the review
Spotting the problem 58. In launching its comprehensive review of Feed-in Tariffs in February 2011, the Government said that it would leave the rates unchanged until April 2012, unless the review revealed a need for greater urgency.107 The Government’s method for monitoring take-up on the scheme was deficient and had to be changed mid-year. The NAO told us that the Department discovered in June 2011 that its monitoring of the central FiTs register (operated by Ofgem) had not accurately identified increases in the rate of take-up for smaller scale solar schemes because completed installations could take three months to be registered once recorded on the industry’s Micro-generation Certification Scheme database.108 DECC therefore started monitoring the industry database of solar schemes installed on a month by month basis. It announced a consultation on revised tariff rates for solar PV on 31 October 2011. The Minister told us that it was regrettable that an “emergency review” of the solar sector was needed but he felt that, given the lack of levers by which to control the scheme, he was left with no choice if the budget and long-term interests of the industry and the consumer were to be protected.109
59. When they gave evidence to us on 29 November, DECC provided graphs showing a spike in uptake from August 2011.110 It is difficult to establish precisely how much of this spike was as a result of the consultation being published. However, the Permanent Secretary told us that “... before our consultation document was issued in October we saw a very high rate of deployment ... and there were lots of reason to suppose that would continue”.111 Also, at that point DECC was reliant on “Ofgem information, which was typically up to three months out of date”.112 The Minister told us that DECC “has consistently under-estimated the potential demand in the system, both in the near term and in history”.113
60. DECC identified in July/August 2011 that a substantial increase in the number of smaller-scale installations meant that take-up by the end of 2011-12 would be double that predicted by the original model. The Permanent Secretary told us that it was known in September that uptake on the scheme was greatly exceeding projections, at which point Ministers were informed:
In September, when we saw the figures for the latest number of registrations on the database, they were a lot higher than the month before. The first thing we did was
107 HC Deb, 7 February 2011, Col 2WS. 108 NAO, The modelling used to set Feed-in Tariffs for solar photovoltaics, op cit. 109 Q 72 110 Ev 59 111 Q 88 [Moira Wallace] 112 Q 101 [Greg Barker] 113 Q 88 [Greg Barker]
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investigate that because we had seen a similar seasonal peak that had then fallen back in 2010.114
61. However, there is evidence that DECC should have identified the possibility of a surge in demand as early as March 2011. The Department attributed the increased uptake of the scheme to significantly higher rates of return being available to FiTs customers as a result of the falling costs of solar panels and rising energy costs.115 The cost of a typical domestic- sized installation had dropped from £13,000 in June 2009 to £9,000 in October 2011.116 This cost reduction had been driven by global demand, stimulated by FITs schemes in a number of countries.117 However, in the March 2011 Impact Assessment for the ‘fast track’ review DECC noted that there was “emerging evidence of a steep drop in solar PV capital costs of around 30% from levels assumed in the original FiTs modelling from both industry sources and from preliminary research undertaken [by consultants]”.118 The Renewable Energy Association and Solar Trade Association believed that there had been a steady trend, over two decades, of price reductions of solar panels as global capacity increased and production costs decreased, and noted that solar panel costs “have fallen fast internationally in the years since the UK FiT was developed”.119
62. The Renewable Energy Association and Solar Trade Association had identified a lag in the Central FiT register and advised their membership to “avoid making any significant investment as [they] were increasingly concerned about DECC taking knee-jerk action”.120 Furthermore, Howard Johns from the Solar Trade Association told us that the industry had published a report six months ago [June 2011] recommending that Government reduce tariffs rates because prices had fallen.121 Gregory Barker told us;
Effectively what [the STA] was suggesting was a 25% reduction across the board, in large-scale and smaller-scale, to kick in from the end of this financial year ... It would be quite wrong to suggest ... that they suggested an immediate 25% cut. Also, he was suggesting a smaller cut, only 25%, in the large-scale projects ... I have no doubt that if we had heeded Mr Johns’ advice the scheme would be bust.122
63. The Renewable Energy Association and Solar Trade Association believes that the Department’s “normal modus operandi in relation to renewable—commissioning 6- month consultants reports every couple of years—is totally inappropriate for solar, which has an exceptionally dynamic cost reduction profile; in-house expertise is urgently
114 Q 82 115 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, page 4. 116 DECC, Impact Assessment for Comprehensive Review Phase 1 – Consultation on Feed-in Tariffs for Solar PV, 2 November 2011, table 3. 117 DECC, Feed-in Tariffs scheme: Consultation on Comprehensive Review Phase 1 – Tariffs for solar PV, October 2011, para 34. 118 DECC, Impact Assessment for Fast-track review of Feed-in Tariffs for small scale low carbon electricity, March 2011, para 36. 119 Ev 43 120 ibid. 121 Q 4 122 Q 74
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needed”.123 Daniel Green of HomeSun told us that the Department should have engaged better with industry.124
64. It appears that only in September did DECC realise that a take-up of solar PV Feed- in Tariffs exceeded expectations to a degree that went beyond a summer surge pattern seen the previous year. The Department had evidence that solar panel prices were falling significantly as early as March 2011, and it should have acted sooner to reduce unsustainable rates of solar Feed-in Tariffs. Also, the Government’s method for monitoring take-up on the scheme was clearly deficient and only after a year of the scheme’s operation did DECC identify a critical time-lag in the information it was using. Prompter action would have given the Department greater flexibility in deciding at which point tariffs should be amended, and by how much.
The need for better cost control 65. In October 2010, the Spending Review introduced a budgetary cap, known as the ‘levy- funded spending cap’ for Feed-in Tariffs, and all policies funded through ‘levies’ on energy bills, see Figure 2. The Spending Review also made a commitment to reduce the annual cost of the scheme in 2014-15 by £40 million (already reflected in Figure 2).
Figure 2: DECC levy-funded spending cap Policy 2011-12 2012-13 2013-14 2014-15 (£m) (£m) (£m) (£m)
Renewables Obligation 1,764 2,191 2,615 3,203 (originally announced) Renewables Obligation (revised) 1,750 2,156 2,556 3,114
Feed-in Tariffs 80 161 269 357 Feed-in Tariffs (revised) 94 196 328 446 Warm Home Discount 250 275 300 310
NOTE 1: The figure for each year is cumulative, and must cover the costs of paying for projects accredited in previous years of the scheme as well as new projects. NOTE 2: The revised figures reflect a reclassification of those larger-scale schemes that have a chose to elect to receive Feed-in Tariff rather the Renewables Obligation which as not factored into the original levy-funded spending caps.125
66. Gregory Barker in a speech in November said he sought ‘TLC’ for energy policy— transparency, longevity, and certainty.126 Friends of the Earth argued, however, that the levy-funded spending cap framework would make it more likely that policies would be amended which would in turn “fundamentally undermine confidence of both the industry
123 Ev 43 124 Q 13 125 Ev 54; Q 226 126 Greg Barker’s speech to the Micropower council, November 2011. See: http://www.decc.gov.uk/en/content/cms/news/micro_council/micro_council.aspx
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and investors that feed-in tariff rates ... will be un-tampered with for any given period of time, pushing up policy risk and therefore the cost of capital”.127
67. The introduction of the levy-funded spending cap for FiTs, means that cost control is vital if DECC is to manage a smooth rate of installations and provide a stable commercial environment for the industry. A ‘cost control mechanism’ for the scheme is not being considered in Phase 1 of the comprehensive review because of the “urgent need to take action”.128 This, and tariffs for non-PV technologies, will be considered as part of Phase 2 of the review, which will be announced before the end of the year, with changes expected to be implemented in the first half of 2012.129 DECC told us that it had been considering different types of cost control mechanisms,130 and expects that regular cuts in tariffs, particularly tariffs for solar PV, will be a central feature of the FiTs scheme to encourage decreases in technology and installation costs.131 In November 2010, DECC informed the Energy and Climate Change Committee that it would publish a ‘trigger mechanism’ for bringing forward FiTs reviews to address up-takes exceeding expectations.132 In our two Committees’ current inquiry, DECC told us that it had had “strong pushback from the industry” and so had not taken that forward.133 DECC’s failure to identify the need to control FiTs commitments until too late means that the Government now has to rush to amend the scheme. It is disappointing that a year after DECC floated a ‘trigger mechanism’ for addressing rising take-up of FiTs, it has not materialised. The current panicky response to the upsurge in solar installations in 2011 might not have been needed if DECC had actually developed such a trigger mechanism. Instead orderly reductions in the level of incentives could have been introduced and the damage to both investor confidence and to some consumers could have been avoided.
68. Cost control requires a clear understanding of any budget constraints. In that regard, the cap suffers from being somewhat imprecise. The Minister told us that DECC was already anticipating, based on current information since the Impact Assessment, that some degree of flexibility between the FiTs budget and Renewables Obligation budget would be required.134 DECC had already reclassified £197 million (or 2% of overall Renewables Obligation funding) to reflect the fact that some larger scale solar schemes can collect either the Renewables Obligation or the Feed-in Tariffs (Figure 2). This was not reflected in the budget setting process.135
69. The Treasury’s control framework for managing the levy-funded spending cap allows some headroom, which will “represent the level of permissible variation before DECC has
127 Volume II [Friends of the Earth] 128 Ev 70 129 See: http://www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/feedin_tariff/fits_review/fits_review.aspx 130 Including contingent degression (where tariffs are adjusted automatically in responses to deployment or expenditure triggers); more frequent/rolling reviews; and rationing/quotas. 131 Ev 54 132 Energy and Climate Change Committee, Session 2010-12, The Comprehensive Spending Review and DECC, corrected evidence 24 November 2011, HC 641-i, Q30. 133 Q 125 134 Q 115 135 Ev 54
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to develop urgently plans for bringing policies back into line with the cap”. The headroom initially is 20% of the total cap, but this will be reviewed during the Renewables Obligation Banding Review and the Feed-in Tariffs comprehensive review.136 We questioned both the Treasury and DECC about how this flexibility would work in practice. Jonathan Mills told us that the 20% margin was:
temporary headroom for external factors that are causing the spending overall or in one area to be different from that which was forecast ... where movement in one line of spending was containable within the 20% flexibility in one year, but still posed a structural risk in the longer term because there was an underlying trend that was not going to go away, the cap would suggest that action was needed at that point.137
70. We explored whether the permitted headroom provided the Government with scope for adjusting when the reduction in tariffs could be implemented. However, the Impact Assessment did not provide data on the cap in a form that would allow comparison of the costs of setting a 12 December reference date, against the costs of retaining the 1 April reference date. Jonathan Mills explained the technical considerations:
The numbers in the budget, in line with the reporting to Parliament, are nominal terms and undiscounted numbers ... They deflate over time. Secondly, the numbers in the impact assessment only refer to spending on the solar PV part of the feed-in tariff scheme. They don’t refer to the costs of other technologies. Thirdly, as DECC officials said on Tuesday about the data that they have been receiving since the impact assessment was formulated, which show that the deployment rates, even before their announcement, were escalating faster than some of the data in the impact assessment.138
Installations already made up to 27 November 2011 would absorb 90% of the four-year solar PV cap (paragraph 19).
71. We also questioned Ministers and officials about the elements of the Feed-in Tariff that could be regarded as being outside the levy control mechanism for the purposes of reporting expenditure on FiTs to the Treasury. Simon Virley told us that the export tariff was considered outside the levy-funded cap because it was below the price of electricity and 139 therefore did not constitute an involuntary imputed cost to consumers. Gregory Barker confirmed that the marginal cost of electricity for generators was currently around double the export tariff of 3p/kWh.140 It appears, therefore, that there would be room to increase the export tariff to anything up to 6p/kWh without affecting the budget for FITs. This could provide a way of maintaining the incentive to deploy solar PV without breaching the levy-funded spending cap. We are encouraged that the Minister indicated to the Committee that he was “actively exploring” the potential for raising the export tariff.141 We
136 HM Treasury, Control framework for DECC levy-funded spending, March 2011. 137 Q 214 138 Q 167 139 Q 127 140 Q 128 141 ibid
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consider that a further and better analysis of how an increased export tariff might contribute to a future Feed-in Tariff scheme without affecting the levy-funded spending cap would be beneficial for the establishment of a stable support regime.
72. The Government considers that only subsidy for renewable energy above a 9p/kWh marginal cost benchmark needs to be justified on non-financial grounds. The element of the FiT generation tariff up to the value of that 9p/kWh benchmark should not be deemed as an imputed tax. Only spending above this value can be considered as an additional subsidy. Therefore it should not be counted as spending under the levy-funded spending cap. Taken with an increased export tariff, this could constitute a significant support outside the levy-funded cap and help to make solar PV viable without breaching the Treasury’s agreed budget.
73. Subsequent to the evidence we heard from the Treasury’s Jonathan Mills, we received a table from DECC (Figure 3) which did indeed set out the relative costs of different tariff reduction options on a nominal, unadjusted basis. Comparison of this table with DECC’s revised levy cap budget (paragraph 65) shows that, overall, taking into account the 20% headroom allowed for such imputed expenditure in the terms of the Treasury cap, it is likely that expenditure would fall within the cap over the total period up to 2012-13, for either a December or April reference date, although the budget would be exceeded in 2011- 12 and 2012-13. We heard from the Treasury that the cap is to be read, in terms of sanctions that may be applied by the Treasury where the cap is breached, as comprising the total of programmes counted as imputed “tax and spend” and falling in the levy cap for each year. We note that the estimates in Figure 3 are based on the introduction of an energy efficiency requirement which may in itself kill the industry, and that while it is possible that the overall FiTs budget may not be breached, the issue of the distribution of the FiTs budget between different technologies remains.
Figure 3: Table obtained from DECC, 14 December 2011 Costs to consumers, £m, nominal, 2011-12 2012-13 2013-14 2014-15 Total undiscounted
Total Green Deal energy efficiency 120 260 300 350 1040 commitment
Total PV Level C energy efficiency 120 260 290 320 990 commitment
Total Green Deal energy efficiency 130 330 380 430 1270 commitment April Start
Total PV Level C energy efficiency 130 320 350 390 1200 commitment April Start
130 430 720 1050 2320 No change
74. We would welcome publication by DECC of accurate estimates of all elements of expenditure under the terms of the cap, and an the introduction of a running public estimation of how the terms of the cap might be adhered to on a year-by-year basis. Furthermore, DECC should make the case that the Treasury should consider spending on FITs over a four-year budgetary period in this instance. It is unacceptable that DECC was not able to share estimates for FITs spending with the Committees that
26 Solar Power Feed-in Tariffs
could be compared with the revised FITs budgets. It is even more unacceptable that we should subsequently learn from other sources that DECC did hold this information. This raises the question, in light of evidence received from the Treasury, of whether the Treasury had been informed about these figures at all.
75. DECC is not considering the cost control mechanism for Feed-in Tariffs at the same time as setting new tariff rates for solar panels because of the “urgency” of the need to make the proposed changes. This approach may result in further revisions to solar tariff rates. Such tinkering undermines confidence in the tariffs, and runs contrary to the Minister’s ambition to provide transparency, longevity and certainty for energy policy. The Government should ensure that it develops a cost control mechanism which minimises the possibility of further sudden reviews of the tariff rates simply in order to keep the scheme within budget.
76. In future, there should be much more regular and predictable adjustment of Feed- in Tariffs, based on a transparent assessment of cost changes, signalled well in advance. This should be based on timely data collection to allow a more considered appraisal of possible tariff changes to be implemented after adequate notice has been given. DECC needs to resurrect its plans for developing a trigger mechanism to respond to unforeseen surges in take-up.
The status of the spending cap mechanism 77. Another uncertainty that has surrounded the review of the solar FiTs is whether the FiTs will be classified by the Office for National Statistics as public expenditure and thereby fall within the levy-funding control framework, and more fundamentally how closely the levy-funded spending cap is enforced.
78. Some submissions to our inquiry questioned the suitability of an absolute cap to manage the costs of the scheme. The Renewable Energy Association and Solar Trade Association believed it was an inappropriate framework in which to manage any Feed-In Tariff scheme “because of its inflexibility...[and] has resulted in DECC being prevented from responding intelligently to major developments in the solar power sector, including major cost reductions, and building on a popular and successful scheme”.142 Friends of the Earth similarly believed that the ‘budget’ was an arbitrary construct not reflecting the cost of the scheme: “the ‘budget’s relevance in terms of impacts on bills is found not in the ‘cost’ of the scheme but in its breakdown of what the scheme costs for those households who do not receive the FIT. It is a distributional problem, not one of absolute ‘cost’”.143 Friends of the Earth also argued that levies on bills are inherently regressive and that the Government should be working to reform the FIT levy so that it is charged more fairly, for example on the basis of units of consumption rather than as a flat rate levy.144
79. Research by Which? had found that energy prices are consumers’ principal financial concern, a finding that predated the recent round of price rises by all the big energy
142 Ev 43 143 Volume II [Friends of the Earth] 144 ibid.
Solar Power Feed-in Tariffs 27
suppliers.145 However the Treasury were not able to quantify what level of energy bill supplement they considered that consumers would regard to be sustainable and appropriate for FiTs. The question of affordability for electricity customers was essentially a political judgement.146
80. DECC told us that the specific cap for Feed-in Tariffs was based on the previous Government’s forecast take-up figures.147 The Treasury told us that spending on policies included in the levy-funded spending cap does not have a direct impact on the deficit because revenues match spending. However:
it does add to the overall tax burden and limit the ability to direct resources most efficiently to meet the Government's priorities. The Government's fiscal judgment in setting the Spending Review reflected an overall assessment of the sustainable and appropriate level of tax and spending. Within this constraint, an increase in taxation and expenditure in this area implies a reduction elsewhere.148
81. The Office for National Statistics (ONS) is yet to decide whether for National Accounts purposes the Feed-in Tariffs are deemed to be imputed ‘tax and spend’ and therefore included within the public finances. ONS is awaiting the results of a more general decision on the treatment of levy-funded subsidy schemes at the European Union level that would allow ONS to classify such schemes.149 In the absence of such a decision, DECC told us that:
Ministers took the view that they needed to make a judgment about where they thought that classification was likely to come out ... based on information from decisions that the ONS has already made and its description of the factors that it takes into account in determining whether something counts as tax and spending.150
In Germany, the equivalent Feed-in Tariff scheme is not included within public spending.151 This was challenged in the German case and the European Court of Justice ruled that it did not have to be regarded as subsidy.152
82. There is a fundamental conflict between the Government aims of, on the one hand, encouraging the deployment of solar PV to contribute to emissions reductions and, on the other hand, steering the deployment of renewables technologies in a way that is most cost effective through the spending cap framework. This means that it is unable to present a clear message about the case for solar PV.
83. The Government’s decision to include Feed-in Tariffs within its spending framework should have been preceded by a thorough environmental appraisal, to
145 Volume II [Which?] 146 Q182 [Chloe Smith] 147 Qq 93, 94 148 Ev 42 149 Volume II [Office for National Statistics] 150 Q 174 [Jonathan Mills] 151 Volume II [Alan Simpson and Gerard Read] 152 European Court of Justice, C-379-98, Preussen Elektra AG v. Scheleswag AG, March 2001.
28 Solar Power Feed-in Tariffs
assess the potential consequences for renewable energy generation, for the then fledgling solar industry and for consumers, who need consistent policy from Government to engender long-term low-carbon behaviour change. The introduction of the spending cap has brought scrutiny to bear on the scheme’s impact on the economy. It is not clear, however, how the Treasury can decide the limits of the scheme’s affordability for energy consumers or the wider economy because it has produced no analysis on this.
84. The Government’s decision may also be pre-emptive. The Office for National Statistics is due to classify levy-funded schemes after considering the outcome of decisions at a European level. The Government should set out how a decision by the ONS not to classify Feed-in Tariffs within public spending would impact on the case for its proposed FiTs changes, and whether this would allow a loosening of the overall levy- spending cap.
Coordination between departments 85. Our inquiry exposed a lack of coordination between the Treasury and DECC. Although DECC is primarily responsible for managing the FiTs schemes within the spending cap, we found it surprising that the Treasury did not appear to be aware, for example, of the re-classification of some of levy-funded outturns from the Renewables Obligation to the Feed-in Tariff scheme.153 The Renewable Energy Association and Solar Trade Association told us that:
The absence of inter-departmental co-operation or perspective is a key contributor to the disaster now unfolding in this sector. The Coalition Government has not been pulling in one direction on renewables, with all areas subject to delays and reported wrangles. Solar is the starkest illustration of a wider failure to set out a clear programme for the role of renewables in the economy holistically, from an industrial policy and growth, not just an energy perspective. The UK is missing out on clear opportunities to benefit from the growing green economy.154
The utility of the impact assessment 86. The Minister told us that the Impact Assessment, supposedly providing the financial rationale for the Government’s proposals, was out of date the moment it was printed because of the speed at which installations were increasing: “you must understand that the impact assessment is only as good as the information it was based on at that particular date in time.”155
87. However the Impact Assessment also did not include the full range of pertinent factors that should have been taken into account in deciding the policy. It did not address the consequences for the industry in terms of their cost of capital resulting from any reduction in investor confidence. As we described in paragraphs 24 and 25, the assessment also did
153 Q 179 154 Ev 43 155 Qq 106 - 125
Solar Power Feed-in Tariffs 29
not seek to factor in the financial impacts of possible changes in employment levels in the sector. Similarly, the impact assessment did not address consequential changes in Government revenues from the likely lower volume of activity that there is now likely to be in the sector. The solar industry estimates that through employment taxes and VAT, the current FiT scheme generates £276 million of net income to the Treasury each year.156 Gregory Barker told us that DECC did look at the “whole, wider green economy”, but the Department had not been “engaged on a day-to-day basis with the Treasury”.157 The Treasury told us “...the impact assessment [states] that there will be lower bills as a result of [the Government proposals], lower energy bills for households and industry, that then feed through into economic activity elsewhere”.158
88. It appears that the Impact Assessment was produced and subsequently used to justify a policy decision that had already been made. A retrospective snapshot Impact Assessment cannot take the place of systematic, timely data gathering which should have alerted DECC to this problem much earlier. If Government takes consultation seriously it needs inputs that are well-founded on the latest information available to it. The Government must consider how the impact assessment process can continue to be relevant and timely in informing consultations, as well as decision-making, in fast- changing situations like that surrounding the solar FiTs market.
89. When the Government publishes its response to the current consultation, it should also publish a full analysis of the impact on (a) jobs, (b) future investment in renewables, (c) tax receipts, (d) energy efficiency, and (e) wider economic impacts.
156 Ev 35 157 Qq 140 - 142 158 Q 137
30 Solar Power Feed-in Tariffs
Conclusions and recommendations
The proposed changes to the solar PV feed-in tariffs 1. DECC set up the solar FiTs scheme without a mechanism to review and adjust degression rates in an orderly and timely way. It urgently needs to develop a system which allows for more regular and predictable review. (Paragraph 16)
2. Although the proposed cut to the Feed-in Tariff was announced by Ministers on 31 October, two days before the impact assessment was signed off, due to the continuing increase in take up-rates since it was published, calculations in the Impact Assessment are already out of date. Consequently, the effect on the total spending cap is uncertain and has not been made publicly available so that it could be properly scrutinised. When publishing its conclusions from its consultation exercise, the Government should also publish an up to date assessment of the impact of the proposals on the overall budget for solar FiTs, differentiating between the costs under the two options for change considered in the consultation. (Paragraph 21)
3. We urge DECC and BIS to collaborate on how to create an environment conducive to a domestic manufacturing sector as part of the FiTs scheme. (Paragraph 26)
4. To facilitate the investment in renewables that the country needs, investors need to have confidence in a stable and predictable commercial environment for those investments. The scale and pace of the changes now proposed was a ‘shock’ for the industry and the suddenness of their introduction has damaged investor confidence across the whole energy sector. This damage would not have occurred if the Government had recognised the unsustainable rate of the expansion of solar installations at an earlier date, something which ought to have been identified by Ministers and officials sooner than it appears to have been. The analysis of the impact on jobs in the Impact Assessment is also seriously inadequate. (Paragraph 28)
5. The Government must require electricity suppliers to provide annual returns on how much they have added to annual energy bills to recover the costs of Feed-in Tariffs from customers, and it should collate and publish this information annually, possibly as part of the Annual Energy Statement process. (Paragraph 29)
6. It is regrettable that the Government did not consider other reference dates between December 2011 and April 2012, the costs of which DECC has now quantified. We urge the Department to consider these alternatives. (Paragraph 32)
7. The use of a reference date for new installations to qualify for the existing tariffs that precedes the end of the consultation smacks of retrospective regulation, which undermines confidence in the Government’s management of other energy policies. Some households are cancelling their planned solar panels and face losing their deposits. Others may have arranged loans on the basis that the interest could be covered from the current level of the tariff income. This is unfair. The Government should allow those who can prove that they had already made a contractual financial
Solar Power Feed-in Tariffs 31
commitment to install solar panels before the 31 October start of the consultation process to receive the existing tariffs. (Paragraph 39)
8. The impact on community schemes of the proposed changes will generally be greater than for individual homeowners, and could undermine the finances needed to support the other environmental activities of such groups. The lower ‘aggregator’ tariff, if not tempered for the particular circumstances of community and social housing projects, will affect them greatly. As with reducing the viability of ‘rent a roof’ schemes, which have allowed participation by those without access to finance, the likely adverse impact of the proposals on community schemes will disproportionately be felt by disadvantaged and poorer communities. The Government has made a commitment to embed sustainable development in policy making, but the proposed changes to solar FiTs suggest that its social justice pillar is not being given sufficient weight. We recommend that DECC designs a ‘community tariff’ immediately that takes into account the wider impacts on community groups, including lost capacity which could be built on to ensure other Government policies such as the Green Deal are effective. (Paragraph 46)
9. The Government believes that boosting energy efficiency is part of the rationale for providing a level of subsidy for solar energy in excess of what the Renewable Energy Roadmap otherwise considered to be cost effective. But it has not demonstrated the logic of linking technologies used to generate electricity in homes to energy efficiency, which focuses on reducing heating and hot water costs, nor whether in practice solar PV contributes to greater energy efficiency. The Government has failed to make the case for why it is proposing to set a pre-qualifying absolute standard of energy efficiency to this technology, instead of all technologies. (Paragraph 56)
10. The choice of energy efficiency requirement option by the Government could have a fatal impact on the take-up of the scheme after 2012. Access to FiTs should not be closed-off by the need to improve take-up of Green Deal measures. Requiring the ‘C’ rated EPC energy efficiency standard could limit access to wealthier households. The Government must consider alternative energy efficiency options and publish alternative impact assessments. These options might include (a) offering a range of tariff levels based on energy efficiency; (b) linking eligibility to a specific improvement in efficiency rather than an absolute standard; and (c) linking eligibility to the completion of certain Green Deal measures. (Paragraph 57)
The management of the review 11. It appears that only in September did DECC realise that a take-up of solar PV Feed- in Tariffs exceeded expectations to a degree that went beyond a summer surge pattern seen the previous year. The Department had evidence that solar panel prices were falling significantly as early as March 2011, and it should have acted sooner to reduce unsustainable rates of solar Feed-in Tariffs. Also, the Government’s method for monitoring take-up on the scheme was clearly deficient and only after a year of the scheme’s operation did DECC identify a critical time-lag in the information it was using. Prompter action would have given the Department greater flexibility in deciding at which point tariffs should be amended, and by how much. (Paragraph 64)
32 Solar Power Feed-in Tariffs
12. DECC’s failure to identify the need to control FiTs commitments until too late means that the Government now has to rush to amend the scheme. It is disappointing that a year after DECC floated a ‘trigger mechanism’ for addressing rising take-up of FiTs, it has not materialised. The current panicky response to the upsurge in solar installations in 2011 might not have been needed if DECC had actually developed such a trigger mechanism. (Paragraph 67)
13. We consider that a further and better analysis of how an increased export tariff might contribute to a future Feed-in Tariff scheme without affecting the levy-funded spending cap would be beneficial for the establishment of a stable support regime. (Paragraph 71)
14. We would welcome publication by DECC of accurate estimates of all elements of expenditure under the terms of the cap, and an the introduction of a running public estimation of how the terms of the cap might be adhered to on a year-by-year basis. Furthermore, DECC should make the case that the Treasury should consider spending on FITs over a four-year budgetary period in this instance. It is unacceptable that DECC was not able to share estimates for FITs spending with the Committees that could be compared with the revised FITs budgets. It is even more unacceptable that we should subsequently learn from other sources that DECC did hold this information. This raises the question, in light of evidence received from the Treasury, of whether the Treasury had been informed about these figures at all. (Paragraph 74)
15. DECC is not considering the cost control mechanism for Feed-in Tariffs at the same time as setting new tariff rates for solar panels because of the “urgency” of the need to make the proposed changes. This approach may result in further revisions to solar tariff rates. Such tinkering undermines confidence in the tariffs, and runs contrary to the Minister’s ambition to provide transparency, longevity and certainty for energy policy. The Government should ensure that it develops a cost control mechanism which minimises the possibility of further sudden reviews of the tariff rates simply in order to keep the scheme within budget. (Paragraph 75)
16. In future, there should be much more regular and predictable adjustment of Feed-in Tariffs, based on a transparent assessment of cost changes, signalled well in advance. This should be based on timely data collection to allow a more considered appraisal of possible tariff changes to be implemented after adequate notice has been given. DECC needs to resurrect its plans for developing a trigger mechanism to respond to unforeseen surges in take-up. (Paragraph 76)
17. There is a fundamental conflict between the Government aims of, on the one hand, encouraging the deployment of solar PV to contribute to emissions reductions and, on the other hand, steering the deployment of renewables technologies in a way that is most cost effective through the spending cap framework. This means that it is unable to present a clear message about the case for solar PV. (Paragraph 82)
18. The Government’s decision to include Feed-in Tariffs within its spending framework should have been preceded by a thorough environmental appraisal, to assess the potential consequences for renewable energy generation, for the then fledgling solar
Solar Power Feed-in Tariffs 33
industry and for consumers, who need consistent policy from Government to engender long-term low-carbon behaviour change. The introduction of the spending cap has brought scrutiny to bear on the scheme’s impact on the economy. It is not clear, however, how the Treasury can decide the limits of the scheme’s affordability for energy consumers or the wider economy because it has produced no analysis on this. (Paragraph 83)
19. The Government’s decision may also be pre-emptive. The Office for National Statistics is due to classify levy-funded schemes after considering the outcome of decisions at a European level. The Government should set out how a decision by the ONS not to classify Feed-in Tariffs within public spending would impact on the case for its proposed FiTs changes, and whether this would allow a loosening of the overall levy-spending cap. (Paragraph 84)
20. It appears that the Impact Assessment was produced and subsequently used to justify a policy decision that had already been made. A retrospective snapshot Impact Assessment cannot take the place of systematic, timely data gathering which should have alerted DECC to this problem much earlier. If Government takes consultation seriously it needs inputs that are well-founded on the latest information available to it. The Government must consider how the impact assessment process can continue to be relevant and timely in informing consultations, as well as decision-making, in fast-changing situations like that surrounding the solar FiTs market. (Paragraph 88)
21. When the Government publishes its response to the current consultation, it should also publish a full analysis of the impact on (a) jobs, (b) future investment in renewables, (c) tax receipts, (d) energy efficiency, and (e) wider economic impacts. (Paragraph 89)
34 Solar Power Feed-in Tariffs
Formal Minutes
Wednesday 14 December 2011
The Energy and Climate Change and Environmental Audit Committees met concurrently, pursuant to Standing Order No. 137A.
Members present:
Energy and Climate Change Committee Environmental Audit Committee
Dan Byles Peter Aldous Barry Gardiner Neil Carmichael Dr Phillip Lee Martin Caton Christopher Pincher Katy Clark John Robertson Zac Goldsmith Laura Sandys Mark Lazarowicz Sir Robert Smith Caroline Lucas Dr Alan Whitehead Sheryll Murray Mr Tim Yeo Paul Uppal Joan Walley Dr Alan Whitehead
Mr Tim Yeo was called to the Chair, in accordance with the provisions of Standing Order No. 137A (1) (d).
The Committees deliberated, in accordance with Standing Order No. 137A (1) (b). Mark Lazarowicz declared an interest as an unpaid board member of Leith Museum Company Limited and Edinburgh Community Energy Co-operative Limited. Sir Robert Smith declared an interest as Shareholder of Shell Transport and Trading, and vice-chair of the all-party group on the offshore oil and gas industry. Mr Tim Yeo declared an interest as Chair of AFC Energy Plc.
Draft Report (Solar power feed-in tariffs), proposed by the Chair, brought up and read. Ordered, That the Chair’s draft Report be considered concurrently, in accordance with Standing Order No. 137A (1) (c). Ordered, That the Chair’s draft Report be read a second time, paragraph by paragraph. Paragraphs 1 to 89 read and agreed to.
Solar Power Feed-in Tariffs 35
ENERGY AND CLIMATE CHANGE COMMITTEE The Environmental Audit Committee withdrew. Mr Tim Yeo, in the Chair Dan Byles John Robertson Barry Gardiner Laura Sandys Dr Phillip Lee Sir Robert Smith Christopher Pincher Dr Alan Whitehead
Draft Report (Solar power feed-in tariffs), proposed by the Chair, brought up and read. Resolved, That the draft Report prepared by the Energy and Climate Change and Environmental Audit Committees, be the Ninth Report of the Committee to the House. Ordered, That the provisions of Standing Order No. 137A (2) be applied to the Report. Ordered, That Mr Tim Yeo make the Report to the House. Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134. Written evidence was ordered to be reported to the House for printing with the Report, together with written evidence reported and ordered to be published on 29 November and 1 December 2011.
[Adjourned till Tuesday 20 December at 10.00 a.m.
36 Solar Power Feed-in Tariffs
ENVIRONMENTAL AUDIT COMMITTEE The Energy and Climate Change Committee withdrew. Joan Walley, in the Chair Peter Aldous Mark Lazarowicz Neil Carmichael Caroline Lucas Martin Caton Sheryll Murray Katy Clark Paul Uppal Zac Goldsmith Dr Alan Whitehead
Draft Report (Solar power feed-in tariffs), proposed by the Chair, brought up and read. Resolved, That the draft Report prepared by the Energy and Climate Change and Environmental Audit Committees, be the Tenth Report of the Committee to the House. Ordered, That the provisions of Standing Order No. 137A (2) be applied to the Report. Ordered, That Mr Tim Yeo make the Report to the House. Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134. Written evidence was ordered to be reported to the House for printing with the Report, together with written evidence reported and ordered to be published on 23, 24 and 29 November and 1 December 2011.
[Adjourned till Wednesday 11 January at 2.00 p.m.
Solar Power Feed-in Tariffs 37
Witnesses
Wednesday 29 November 2011 Page
Daniel Green, Chief Executive Officer, HomeSun, Howard Johns, Chairman, Solar Trade Association, Peter Capener, Chair, Bath and West Community Energy, Jeremy Leggett, Chairman, Solarcentury Ev 1
Gregory Barker MP, Minister of State for Climate Change, Moira Wallace, Permanent Secretary, and Simon Virley, Director General, Department of Energy and Climate Change Ev 13
Thursday 1 December 2011
Chloe Smith MP, Economic Secretary to the Treasury, and Jonathan Mills, Ev 23 Deputy Director, Energy, Environment and Agriculture, H M Treasury
List of printed written evidence
1 Solarcentury Ev 35, 66 2 Homesun Ev 35, 68 3 H M Treasury Ev 42, 76 4 Renewable Energy Association/ Solar Trade Association Ev 43, 63 5 DECC Ev 54, 70 6 Bath and West Community Energy Ev 67
List of additional written evidence
(published in Volume II on the Committees’ website www.parliament.uk/eacom and www.parliament.uk/eccom)
1 Edward Burt
2 Niko Miaoulis
3 Simon Davidson
4 Greg Rodger
5 Nicholas Ndhlovu
6 Helen Keith
7 Mary Ross
8 Kevin Hawes
38 Solar Power Feed-in Tariffs
9 Catherine Cannon
10 David Robertson
11 HiS Group
12 Nick Pascoe
13 Sunergy UK
14 Keep Britain Tidy
15 Transition Lavenham CIC
16 National Federation of Roofing Contractors
17 Patrick Whitty
18 Gareth Williams
19 SHAPE Energy
20 David Holmes
21 London Rebuilding Society
22 Local Government Association
23 Ofgem
24 Freetricity
25 Which
26 Micropower Council
27 Llangattock Green Valleys
28 EDF Energy
29 Regen SW
30 Alan Simpson and Gerard Read
31 Consumer Focus
32 Office for National Statistics
33 Friends of the Earth
34 G-CEL
35 Electrical Contractors’ Association
36 National Housing Federation
37 Association for Conservation of Energy
Solar Power Feed-in Tariffs 39
38 British Retail Consortium
39 Peter Morgenroth
40 Leeds Solar
41 Good Energy
42 Lark Energy
43 Carillion Energy Services
44 Bath & North East Somerset Council
45 E.on
46 Low Carbon Developers
47 Society of Motor Manufacturers and Traders
48 Energy Technologies Institute
49 Colchester Borough Council
50 Reading Borough Council
51 John Husk
52 SSE
53 Imperial College, London
54 A M Borrill & Son
55 Transition Town Letchworth
56 Sudbury Market Town Partnership
40 Solar Power Feed-in Tariffs
List of Reports from the Committee during the current Parliament
The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.
Session 2010–12 First report Emissions Performance Standards HC 523 (807) Second report UK Deepwater Drilling–Implications of the Gulf of HC 450 (882) Mexico Oil Spill Third report The revised draft National Policy Statements on HC 648 energy Fourth report Electricity Market Reform HC 742 (1448) Fifth report Shale Gas HC 795 (1449) Sixth report Ofgem's Retail Market Review HC 1046 (1544) Seventh report A European Supergrid HC 1040 (1684) Eighth report The UK’s Energy Supply: Security or HC 1065 Independence? First Special Report Low carbon technologies in a green economy: HC 455 Government Response to the Committee's Fourth Report of Session 2009-10 Second Special Report Fuel Poverty: Government Response to the HC 541 Committee's Fifth Report of Session 2009-10 Third Special Report The future of Britain’s electricity networks: HC 629 Government Response to the Committee’s Second Report of Session 2009–10
Solar Power Feed-in Tariffs 41
List of Reports from the Committee during the current Parliament
The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.
Session 2010–11 First Report Embedding sustainable development across HC 504 (HC 877) Government, after the Secretary of State’s announcement on the future of the Sustainable Development Commission Second Report The Green Investment Bank HC 505, (HC 1437) Third Report Sustainable Development in the Localism Bill HC 799, (HC 1481) Fourth Report Embedding sustainable development: the HC 877 Government’s response Fifth Report The impact of UK overseas aid on environmental HC 710 (HC 1500) protection and climate change adaptation and mitigation Sixth Report Budget 2011 and environmental taxes HC 878 Seventh Report Carbon Budgets HC 1080 (HC 1720) Eighth Report Preparations for the Rio +20 Summit HC 1026 Ninth Report Air Quality: A follow-up Report HC 1024
cobber Pack: U PL: COE1 [SO] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 1
Oral evidence
Taken before the Energy & Climate Change and Environmental Audit Committees on Tuesday 29 November 2011
Members present: Tim Yeo (Chair)
Peter Aldous Caroline Nokes Martin Caton Albert Owen Katy Clark John Robertson Barry Gardiner Laura Sandys Zac Goldsmith Sir Robert Smith Simon Kirby Mr Mark Spencer Mark Lazarowicz Joan Walley Dr Phillip Lee Dr Alan Whitehead Caroline Lucas Simon Wright Sheryll Murray ______
Examination of Witnesses
Witnesses: Daniel Green, Chief Executive Officer, HomeSun, Howard Johns, Chairman, Solar Trade Association, Peter Capener, Chair, Bath and West Community Energy, and Jeremy Leggett, Chairman, Solarcentury, gave evidence.
Q1 Chair: Good afternoon and welcome to this joint Jeremy Leggett: Jeremy Leggett, Solarcentury. meeting between the Environmental Audit Committee Absolutely, our prices have come down 30% to 40%. and the Energy and Climate Change Committee. We Of course, we knew that there was a cut coming, have quite a lot of ground we want to cover, and you hopefully of roughly the same sort of size, but, as have probably quite a lot you want to say to us, so if the Committee must know, there are more than 40 you are agreeable we will skip any kind of formal Governments that have chosen the feed-in tariff as the introductions. We know who you are and who you market enablement process of choice around the represent and I think you know who we are. This is a world. Many of them have been doing it for a lot subject which has generated a great deal of heat in the longer than us, of course; Germany for more than 10 last few weeks and rather less light. I wonder if I years. So the lessons are there as to how effective could ask each of you, to begin with, whether, in your this has been in creating one of the fastest growing view, the rates of feed-in tariffs that were operating industries in the world, and we have been playing until now were sustainable? catch-up with it here in the UK. Howard Johns: Perhaps to kick off, Howard Johns, For me, the lessons are clear. You derogate the tariff Chairman of the Solar Trade Association. We asked for rates. It was suggested that rates could be brought down where it works; you do it smoothly; you do it, down six months ago, an assertion that Chris Huhne crucially, on a timetable that gives investors in the recent debate denied. We are happy for it to be confidence. This is the thing that I think we are most brought down, but not in a knee-jerk way. We are after puzzled about. Why have we been ambushed with this a sustainable industry that protects the 30,000 jobs very rapid cut? It is the sort of thing you would do if that have been created, many of them in the last six you wanted to actively kill an industry. I think the months.1 Director General of the CBI made the most telling point on this the other day in a speech when he said, Q2 Chair: Anybody else want to comment? “It’s not about the thousands of jobs that we’re Daniel Green: Daniel Green here from HomeSun. needlessly losing, for no net saving to the economy, Howard is absolutely right. I personally spoke to Chris because we know now that the tax and the VAT on Huhne myself, and we went into DECC ourselves in the products is way higher than any saving”. We may June and July and made proposals. This is one of the argue about the prices and have differences with very few technologies where the industry itself asks DECC on that, but there is no net saving being made for the subsidy to be cut. It is not a dream. Our to UK plc or the British economy. Therefore, why has aspiration and our business plans were based on not this been done so precipitately, in a way that maims requiring any subsidy at all in four or five years’ time, an industry, kills many companies, creates thousands which obviously is the ideal investment for a of job losses in core themes of supposed concern to Government—where they can invest in an industry, the Government? You know, the big society—we will see it grow, gradually remove the subsidy and then the be hearing from the local communities that were industry can stand on its own two feet. gearing up to do this—and green industrial revolution 1 Clarification by the witness is printed as supplementary as a way of countervailing the job losses that are written evidence happening because of this. cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 2 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett
Q3 Chair: We are going a bit wide of the question Peter Capener: I do not have much to add on that here. The question was, were the rates sustainable? I point, other than saying, yes, the current rates are think the answer is no, they were not. Is that what you unsustainable, but the speed and depth with which the are trying to say? cut has been made undermines huge numbers of Jeremy Leggett: We knew they were going to come community projects. The question is, are the proposed down, if that is what you are going to say, yes, but rates sustainable in terms of the community model the 50% cut is excessive. The real killer, the bottom that we and many others are looking at? The answer line, is the speed with which this has been done. is no to that, too. Daniel Green: Chairman, I think that the Government Q4 Chair: Okay. We will come back to that in a wants to suggest that they are operating a “Do moment. Mr Johns, you said some months ago you nothing, then panic” policy and I think perhaps, when were asking for— you see the Minister later, you will see that they will Howard Johns: Six months ago, we published a say they did nothing and now they would like to report, A Revolution for Solar in the UK, talking about panic. We, as an industry, have been working or trying when we will get to grid parity. With the right support to work with the Department, trying to get a phased we would get there in the next four to five years, that landing so that we can plan to hit the budget. is subsidy-free within the next four to five years. In Unfortunately, whatever we presented hasn’t taken that report, at the very start of it, we said, “We place. As you know, investment likes, and any business likes some clarity and certainty, and the one recommend you bring tariff rates down 25% now, thing that it doesn’t like is shocks. Now it has had no because prices have fallen”.2 certainty and a shock. For a short while profits have grown, but now that businesses have to close—that, Q5 Chair: So the period of delay before there was perhaps, was not in any of our business plans. any reduction is a period in which the industry might be argued to have made excess profits through the Q11 Caroline Lucas: The Government argues that benefit of the feed-in tariff? through the current consultation it has acted fast to Howard Johns: Unlikely when you are a growing ensure that solar does not consume the entire budget small business. 3,000 new companies have been set for the feed-in tariff scheme. You have argued up in the last 18 months. I think excess profits are 3 eloquently that you made the case six months ago to highly unlikely in this scenario. the Government that they should have seen this Chair: I was just trying to tease out what your answer coming. If they hadn’t heard you or if they hadn’t seen meant. If you said, “Six months ago there should have that report, should they still have known that the take- been a cut of 25% in the tariff,” does that not imply— up of solar was happening far faster than they had expected to see? Q6 Joan Walley: Chair, could I just come in and say, Howard Johns: There was a spreadsheet that went in, isn’t this the point that you were making about the from what we understand, to the budget-setting phased increase and the upfront information in order process, that was never seen by anyone in industry, that you could plan for that? that forecast delivery of PV over this Budget period. Howard Johns: Very much so. This is the third No one ever saw it. It was completely and utterly review this year for this technology and we are faced unrealistic and yet we ended up with a Budget set on with a fourth one about to be published. I mean, how that basis. So we are in a position of being beholden anyone can run a business in that environment and to a Budget that was never, ever discussed, as it were, invest in that environment is simply ludicrous. and relates to something that was completely unrealistic when you consider what has happened in Q7 Sir Robert Smith: In your report, when did you solar markets around the world. want the cut of 25% to start? Howard Johns: We said it could happen Q12 Caroline Lucas: When was that spreadsheet immediately.4 around? Howard Johns: Apparently around the time of the 5 Q8 Sir Robert Smith: Not phased? spending review, just prior to that. Howard Johns: But obviously we are not facing a cut of 25%. We are facing a cut in two weeks’ time of Q13 Caroline Lucas: How engaged do you say the 52%, along with a whole load of other measures. Government has been in general, and DECC in particular, with the solar industry? I mean, are you in Q9 Sir Robert Smith: But you think you could have close contact with one another? Would they know sustained that 25% cut six months ago? what was happening in your industry? Howard Johns: Well, there have been two ministerial Howard Johns: Yes. round table meetings. The first one was around the fast-track review, when we were ushered into a room Q10 Chair: Did you want to come in, Peter? and told, “Go into groups, because you have 15 2 Clarification by the witness is printed as supplementary minutes to work out what we do. Do we kill off field written evidence scale or do we kill the whole industry?” Literally, 3 Clarification by the witness is printed as supplementary there have been two meetings with the Ministers. The written evidence 4 Clarification by the witness is printed as supplementary 5 Clarification by the witness is printed as supplementary written evidence written evidence cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 3
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett
STA has written and requested meetings with Chris Howard Johns: As we haven’t even been granted a Huhne and we have not had one. meeting, it is unlikely that we would be able to get Daniel Green: We as an industry have solutions for that message across.7 the Government and we have solutions for them to absolutely hit their budget. On visibility, we have been Q19 John Robertson: So you have asked for all prepared to talk at length and to look at ways in meetings but the Government has refused to give which any sort of haziness can be removed. Bear in you them? mind that the Government itself runs the register for Howard Johns: We have not had a meeting with the certification and so it is their own database that Chris Huhne, correct. can see the MCS certification. Therefore, they should John Robertson: That is not what I asked. have firstly engaged with industry to find ways for Howard Johns: These things have been handled more clarity and, secondly, it is their own database with officials.8 that they are looking at. So in answer to your question, I think there is a lot that could have been done and Q20 John Robertson: Have you requested a should be done going forward in terms of making sure meeting? that the budget hits the runway. Daniel Green: Sorry, John, in answer to your question, the answer is yes, HomeSun at least have Q14 John Robertson: You have maybe answered met regularly with the Government and have put in this, but some clarification for me. Am I right in proposals to remain within the cap and have a phased assuming here that six months ago the price had been degression, and that is why we—I can’t talk for reduced by roughly 25%? Is that correct? Okay, could everybody, but ourselves—have been most shocked you tell me, six months on, how much of it has been by what has happened. Everything that we have reduced by today’s date? suggested has been ignored. Daniel Green: We think that a 30% cut—you see, there are two elements— Q21 John Robertson: Okay. One short question. The 25% six months, did you pass it on to the consumer? Q15 John Robertson: No, hang on a second. I Howard Johns: Of course, yes. To clarify a point, we understand what you want. What you would like is have written to the Minister requesting meetings. We one thing, but on what the actual figures are, I want have had meetings with Greg Barker, and the 25% to know exactly how much there has been a reduction was in our formal response to the consultation in your costs to date. document—the consultation earlier in the year, the Howard Johns: First, it depends what sector you are first one. So we have fed this back in to Government working in, it depends what your business model is. on a number of different levels. If you are a community group, it is going to be slightly different to if you are someone who is running a PV- Q22 John Robertson: Yes. I may be wrong, but you for-free scheme, and it is different if you are just have been making 25% extra profit for six months, is selling straight systems. that right? Howard Johns: No, because the market has moved Q16 John Robertson: But would it be fair to say it on. Prices have come down across the board. would be a lot less or a lot more than the 25%? Daniel Green: Sorry, can I just take this question? Howard Johns: Well, it is certainly not 55%, put it Just very simply, what happens is this, one invests in that way. an industry. We as a company— John Robertson: Okay. No, no, I appreciate that. I John Robertson: No, no, I appreciate that. mean, I am trying to be sympathetic towards you, but Daniel Green:—have invested £23 million. That I think that it is important that we get the right money is obviously at risk. Our company, the way that answers. we operate, gives it to the consumer for nothing. So Howard Johns: I think— it is not a question of making it less than nothing, and we invest because we know that, over the cycle, Q17 John Robertson: Hang on a second. You between when we start our business plan and April, approached the Government six months ago and told which is when the tariff comes down, there will be a period at the beginning where it will not be viable, them, “Look, you will need to reduce your subsidy”. but there will be a period at the end where it Is that right? potentially could be viable, and that is a balance. Then Howard Johns: We went to them and said, “Look, in April, we would expect the tariff to be reset again, here is the path for grid parity for PV in the UK. If and the business has clarity. In this case, what has we have a one gigawatt market a year, it is 2014Ð15 happened is that we have made our investment. We potentially and, to get there, we think you can reduce have taken the Government and the Coalition’s the rates of the tariff at this point, and the market will 6 promises all the way down the line. I would like to cope with it.” read you a quote from Greg Barker, who I know you are seeing shortly. This was during the week of 14 Q18 John Robertson: Okay. You have been back February in a written response to a parliamentary subsequently to tell them, you haven’t done anything yet? 7 Clarification by the witness is printed as supplementary written evidence 6 Clarification by the witness is printed as supplementary 8 Clarification by the witness is printed as supplementary written evidence written evidence cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 4 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett question and he says, “The Government fully supports would happen had the tariff remained in place, the rent-a-roof models, third-party ownership, financial British solar market would have been smaller than packages especially in the context of opening up the Belgium’s last year. The notion that this is a gold rush benefits of this to those living in social housing.” That and we are racing ahead of the rest of the world is the is why we have been particularly shocked that Chris stuff of the Daily Mail. Huhne said, the day after the announcement of the Chair: I think just arithmetically, an industry where review, in Parliament, to the Select Committee, that, the number of installations doubles in three months is “The people that were benefiting, which we do not experiencing exceptional rates of growth. like, were the rent-a-roof schemes, which were going to the fuel-poor households and giving them the Q24 Barry Gardiner: Mr Leggett, you have very electricity”. eloquently outlined the impact of regulatory Jeremy Leggett: Could I respond quickly from a uncertainty on your industry. Perhaps some of your different type of solar company’s perspective? I colleagues might wish to say something about the suspect the undercurrent of your question is this impact that that will have on investor confidence in notion that there has been a gold rush; that people the future, as far as you see it. have been profiteering. My own company, Jeremy Leggett: I had lunch with one of the few Solarcentury, has been operating in the British market investors in this area yesterday. I had probably better for 12 years now. In only two of those years have we not say who—I don’t have his permission so to do— been profitable. We have invested £28 million in total, but this is someone who has invested many, many mostly in this country, as a result of which we millions in renewables and wants to continue, with manufacture in South Wales, we have employed a one of the major banks in this country. He echoed large number of young people to work in this industry, what the Director General of the CBI said. He is an and the accounts, including from the first six months active investor, not just in solar but in wind and of the feed-in tariff, you can see in Companies biomass and everything else, and he knows what we House, sir. have to do with the £200 billion that we have to invest If you ask our investors whether they are pleased with in electricity infrastructure, whatever we do. I am sure that progress, I will tell you the answer would not be this can be checked out. I will write to him and ask if positive. Somehow it feels very strange to be sitting he minds having his opinion on record. He says, “This here as though we are committing some sort of almost isn’t about solar. This isn’t about renewables. This is crime in seeking profitability. Let me tell the undermining the confidence of the investment Committee an illustration of how shocked and amazed community to invest the £200 billion that we need to I feel about this. To be fair to the Government, they keep the lights on in this country”. have had more contact, at least from where I’m sitting, than the previous Government did. I have had Q25 Barry Gardiner: Yes, I absolutely accept that personal conversations with Ministers—I can’t speak argument. What I want to now try and elicit from you for others—so they have been open to this and I had is this. In the period since the announcement was thought they were supportive. made that the Government were moving the goalposts I went to a breakfast in No. 10 with the Prime Minister to 12 December, have the number of requests for and the Chancellor with 18 other founders of fast- installation, as it were, to beat that deadline exceeded growing SMEs where we were told, and I paraphrase the profile that you had of installations? Have they but paraphrase accurately and fairly, “People like you gone down or have they stayed the same? are the flipside of austerity. We need you to succeed Daniel Green: Could I take that question? It reminds and employ people so that we can countervail the job me a little— losses that are happening”. I was able to talk about Barry Gardiner: With you, Mr Green, is it not the the feed-in tariff and the effectiveness of the feed-in case that because you are in a particular sector, which tariff then with the Prime Minister and the Chancellor. is what the Chairman I think referred to as the rent- So imagine our shock. a-roof— I went on the trade delegation to India with eight Daniel Green: Yes. Ministers and 28 captains of industry—or rather 27 Barry Gardiner:—It might be different for the rest captains of industry and me—and there I saw the of them? Government exposed to how keen the Indians are to Jeremy Leggett: It has gone down for all of us, but— catch up with the Chinese on solar. This is going to Daniel Green: Yes. The example that I would give is be a vast market. There are big stakes for UK plc, and that Concorde wasn’t viable for quite a while and in now they have launched what can only be interpreted the end it was shut down, but the last flight was as a lethal attack, for whatever combination of completely overbooked and one could then, if one reasons, on the underpinnings of this embryonic wanted to, extrapolate and say, “Well, if the last flight British industry, creating thousands of jobs, as they was overbooked, perhaps it will be overbooked have in the 18 months, many of which are now going ongoing for ever.” In our case, what has happened is to have to be lost. twofold. In our case—I mean the whole industry—in order to get the prices which the Chairman referred Q23 Chair: Well, accepting all that, nevertheless the to, one has to order panels from the far east. They rate of growth of installations has been explosive in take at least 35 days to deliver. The ordering cycle is the last 18 months, hasn’t it? 12 weeks. So suddenly we are given six weeks to try Jeremy Leggett: Sir, this year, if we had completed and deal with our commitments that we have made. what the Government said in their forecast of what That is part one. cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 5
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett
Part two is the consumer themselves. The consumer the world, and we have lost all of this for 60 pence, themselves had a plan to be installed over a long 80 pence. So the question is this. Were we saving the period of time, when it suited them. Not everybody 80 pence? The answer is, if I refer you to the Sunday would like to be installed, for example, in December. Times, which many of you will have seen, that there It is a whole day usually and lots of scaffolds and has been no guarantee from the Department that that those things. Therefore, suddenly everybody was 80 pence is going to come back to anybody. Rather, forced into a very small window. What was their profits will continue to rise. You have lost particularly depressing, I suppose, to hear and everything on the other side of the balance sheet, but surprising—and I am sure you will hear it again when you have gained nothing on this side of the balance the Minister comes to speak to you—is that then that sheet. A huge own goal. will be extrapolated to give you the number of £80 and £300— Q28 Chair: We need to move on, so I won’t ask for a verbal answer to this question, but you have made Q26 Barry Gardiner: Mr Green, I want to short- some statements just in the last minute that I think do circuit you, because I am conscious there are many need some scrutiny. You say that costs have risen by others on the Committee, but I take the point, and it 5%. That means something that was going to cost 5% is not a trick question. What I was trying to elicit from a year is going to cost 10% a year in future; you said you was what I think you have just said, that a lot of 5% of the £200 billion. So I would like you to just people then tried to cram into a very small space and write to us and explain how you support that figure. in fact, therefore, you had to not only use whatever Daniel Green: 5% cost of capital, sorry. stockpiles you had, but you had to order much more Chair: Yes, okay, but are you saying 5% per annum? and then install it. Daniel Green: The cost of us being able to borrow Daniel Green: We believe that, yes. money has risen by 5%, to the extent that— Chair: Per annum? Q27 Barry Gardiner: Can I, therefore, ask you the Daniel Green:—financial institutions would even question I want to ask you? want to now be involved in our sector. Daniel Green: Yes. Barry Gardiner: Do you believe then that the loss in Q29 Chair: So investors are saying they would investor confidence has been worth the saving that has previously have invested with a 5% return and they been achieved over whether they had extended the now require a 10% return? period to the original date in April, rather than rushing Daniel Green: Correct, either a premium or no it forward? Given that people have tried to compress investment at all. their orders into this smaller space of time, the Chair: I just want to close that point off. The second projected saving that was accounted for by the point was you referred to the nascent industry. Perhaps department has probably not been achieved, has it? you could also write and tell us how many of the jobs Howard Johns: The projected saving was only £10 supported by the industry so far were located in the million anyway. Let us get it right, it wasn’t— UK and how many were outside. Barry Gardiner: Absolutely. Daniel Green: I have a letter here, for example, from Q30 Zac Goldsmith: Just very, very quickly, I am one of the—again, echoing what Jeremy said, just interested in knowing what timetable you had unfortunately it has “confidential” written all over it, envisaged. So six months ago, you were calling for but from one of the— 25% cut. I think Jeremy or maybe Daniel has said Chair: We will keep it to ourselves then. already that you would have expected it to come down Daniel Green: Okay, lovely. It is from one of the to the 21p or thereabouts at some point in the future. largest renewables investing companies and was sent So that is a number that you are familiar with and to me on 9 November, shortly after the Government comfortable with. When would the next cut have been made their announcement about their consultation. I and roughly when would the 21p have been met? will read it to you. It says, “Our valuation reflects When would you have expected that? a change in the regulatory landscape for renewable Daniel Green: Our plan, Zac, was always that technologies in the UK. Following the FiTS review whatever change was to be made was to be made in announced on 31 October, even in respect of installed April. There is a precedent for a fast-track review. assets, nervousness in the lending markets—” I won’t Bear in mind that we, the industry, have been made bore you with the detail, but basically it represents a lots of promises, but at least we knew if there was to 5% extra cost in capital. The £200 billion which be a fast-track review and the Coalition did the reserve Jeremy referred to, that would be a £10 billion extra the right to do that, that there was a precedent for it, cost to the UK purse to hit its renewable obligation which happened previously in large-scale solar. targets, which we are legally bound to. The “own goal” which was referred to by the CBI is Q31 Zac Goldsmith: I think we would benefit from therefore as follows. The cost of capital has gone up. an explanation or I certainly would. If you think the That is going to come out of our pockets. We have industry would have been sustainable at that level in lost the revenue. This is £1.1 billion over four years April, which is only four months later than what the of revenue, of NI, of VAT, of tax. That has been lost. Government is proposing, how can that four-month We have lost an industry that we of course in the UK, time shortening be as catastrophic as all of you I think as you know, would have been very shortly—it is a are saying it would be? It is just hard to reconcile nascent industry, but we would have been leaders in the two. cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 6 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett
Daniel Green: I shall answer one piece of the Q34 Sir Robert Smith: On the timing and the question, perhaps. Rather than the quantum of the consequences for people, what is the normal practice amount of pence, I will just explain the catastrophe, in the industry in terms of—what worries me is and that is this. When you have, for example, £10 constituents who have paid a deposit on the million worth of panels on the water that now won’t understanding of one return and then, if they are not arrive in time to be installed, I still have commitments installed by 12 December because the panels haven’t that I have to make. Quite rightly, people have made arrived or there is just too much of a queue to get commitments and signed contracts and we have to them installed, they will be on the new terms. Does deliver on that. the industry hold them to that? What kind of contracts do people tend to be signing when they make— Q32 Zac Goldsmith: But are you saying that you Howard Johns: It depends on the type of client, would not have placed those orders for those panels basically, but there are lots and lots of legal had you known that it would be 21p and, if that is the wranglings going on between solar companies and case, then how is the industry going to be sustainable suppliers right now over this very issue; hundreds of through April, because you are going to be working them across the UK, both in domestic and on the same thing. commercial, social housing. Let us face it, we believe Daniel Green: I will just finish that one question. The there is 100,000 social homes that won’t have PV in way that the order cycle works is in quarters. So what the next year because of this change. Now, all of those happens is that you buy panels at a price in a quarter. contracts are under scrutiny, in legal challenges and Everybody had planned that the panels will come in that sort of stuff. So it is a huge, huge issue. over the last quarter of the year to be installed over the last quarter of the year and for the next quarter of Q35 Sir Robert Smith: But for the individual the year. Then, by the time April comes, there is then householder who has forked out their own— another degression of price that one would expect and Howard Johns: There could well be some lost one can anticipate. Bear in mind that, had the deposits. It depends on the wording of the individual consultation been a proper consultation, we would contracts. have known about that well before April and, therefore, one can plan with the supplier and with Q36 Katy Clark: I would like to come in on this other costs to gradually manage your business in issue about proposals as they will affect community accordance with that. groups. You say that it is about 100,000—that is your Howard Johns: There is two other points that haven’t estimate—of how many homes that will be affected— been mentioned here. Bringing something in on 12 Howard Johns: Social homes, yes. December, when this thing is still open to Katy Clark: Social homes that will be affected in the consultation, means that no business can trade in this next year. Do you have figures about the overall sector because we will effectively be mis-selling. We impact that this is likely to have on community can’t sell our product because we don’t know what organisations of all types? tariff rate people are going to be getting. That is the Peter Capener: The Community and Climate Action first show-stopper. According to the Government’s Alliance did a very brief survey, because they did not own scheme that we all have to sign up to, we should have a great deal of time, and within a couple of days be giving people a fair indication of the rates of return they had nearly 200 responses from community they are making. We can’t do that, because it is a groups. Nearly 90% of those were planning on doing consultation. So that is one of the reasons why this projects over the next 12 months and over 80% of is catastrophic. them felt that the projects would collapse with the sort The second one is the energy performance certificate of level of cuts that are under discussion here—so a criteria that they brought in. If we go ahead with that, huge impact—and bear in mind that was a snapshot according to DECC’s own figures, the market will survey. It is difficult to tell the total scale of the reduce to 8% of what it is this year. This isn’t community sector, which I think would go far sustainable growth. This is destruction of the industry beyond that. because only one in 10 homes currently have an EPC I think the devastation for those community projects level 3. is huge. It goes beyond just the solar panels themselves and the capacity that we are talking about Q33 Zac Goldsmith: I think that is an issue which is losing. We are undermining the whole community going to be covered in some depth later. thrust behind coming together and collaborating. It is Howard Johns: I am aware we have 20 minutes left a bit like saying to you and your constituencies, “You and I wanted to make sure that you understand that. have spent two years with all your people going out Personally, I feel we need a body that works with and door-knocking and building up support”, and then industry and Government to set the rates. We maybe six weeks before the general election saying, shouldn’t be negotiating this sort of stuff in a Select “Oh, well, we’re going to move the general election Committee hearing. We need something independent to six months’ time”. You are then faced with having that looks at the costs and comes up with a sensible to bring all your workers back up to speed again, plan here; not, “Oh, do you think you can survive?”, generate the enthusiasm, the commitment, after they or the cat and mouse game that we have had of the have been let down once. That is what we are facing last reviews. We need an independent body that is at a community level. working to make this thing work; that does not bring The task of reinvigorating communities after being in knee-jerk changes like this. undermined in that way is huge and should not be cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 7
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett underestimated. It goes beyond just the kW capacity feed-in tariff you get your 4%. In our case, we only on the ground, which in itself is significant. Because get the feed-in tariff. So in some way the rest of the if you get those community projects started you then costs are basically the same. It should be at least parity have the opportunity to build the Green Deal on top on the 21p. What they said is they kind of accept that of community enterprise that is able to take up energy the modelling is wrong but it is a political decision efficiency measures and, renewable heat incentive and needs to be discussed with the Minister. We, as projects. You take away one foundation for that and an industry, do not know what that means. all these other projects that could add on value get Peter Capener: Can I just add another point around lost. The behavioural change benefits that can be seen the community side? There has been some discussion to be generated as a result of having solar systems on around investor and our investors, to a large extent, schools or community buildings, you lose. are local people. They are investing in our community So I think the community dimension needs to be enterprise, in Bath and West Community Energy. We costed in or quantified or valued in a way that goes have a share offer open at the moment. We were lucky beyond the pure financial analysis that the enough to be able to install, hopefully, 350 kilowatts Government has done around the impact on the feed- before the deadline, but another 400 kilowatts is in tariff. An economic analysis should be taking in far seriously questioned because we won’t be able to more than just the sorts of things that the Government install it before the deadline. We will be able to attract has looked at within its current analysis, I would some finance in the order of around £400,000 to suggest. £500,000 from local investors through our share offer that is currently open. We were very lucky. Most of Q37 Katy Clark: Do you think the 100,000 figure the other community enterprises that we are aware for homes is that a figure that you all buy in to? of—Brighton, Lewes, Gloucester—have had to cancel Howard Johns: Yes, that’s social housing. their share offers because they weren’t able to fit in Jeremy Leggett: Yes. We could get you the very latest within the timescale. Their prospective investors are social housing figure. Just to add to that, you have just going to seriously think twice about investing in a heard a sense of what is happening in the communities start-up in a very uncertain regulatory framework. with the big community projects. It is a classic I think the investment, on a community point of view, embryonic big society shot down, but it is also our is questionable now from that local point of view. That fuel poverty and I would urge the Panel to talk to the was a very exciting element of creating a new market Social Housing Association. Our industry has gone, for investing in renewable energy, from local people within a few years, from talking to these folk—in my investing in local projects, generating that front-of- own experience, the most difficult sell in the world mind awareness of renewable energy that had so many where they say, “This is very expensive; why on earth other spin-off benefits. That is now under threat. So I would we do it”—to now we have clients doing repeat think this call for clarity, whatever that clarity is, is business, or we did, with thousands of roofs and in pressing at a community level, both from the some cases saying, “This is our single biggest tool in consumer perspective in terms of when we start the fight against fuel poverty”. talking to schools—we need to know what the offer It has gone that far now and the reason is because they is to the school and community buildings—and also know what is coming from EDF and all the others in to the potential investors, our members. We need that the Big 6 and the inevitability of their soaring clarity and need it fairly soon. conventional electricity costs. They know what is happening to the fundamental cost structure in our Q38 Katy Clark: As far as I am aware, the industry and they know what that means for taking Government has not done the work on the impact of out a hedge against price inflation for their fuel-poor the proposed changes on community groups. So if you customers. are able to give us anything after today that details the Daniel Green: In our business we deal with the number of schemes that have been cancelled or are private home owners who are on low income. The likely to be cancelled that would be appreciated. The average household has around about £1,680 of Government’s consultation document speaks of a savings. To go out and spend £10,000 on solar panels second stage of the consultation later in the year that is not possible but, to be honest, they are the people will address how to deal with the community schemes. who probably most need the free energy. So the rent- Do you think that community schemes will be able a-roof model, which the Chairman mentioned, that we to mark time while they wait these proposals from are involved in, we receive the feed-in tariff and so the Government? we take the benefit of the very long-term and they Howard Johns: From my experience of social receive the free energy. What the Government has housing, most of the projects have been cancelled at done as part of its consultation is introduce something this point. So effectively this policy or this change called an aggregator tariff which, first of all, is lower in policy is just simply denying the poor access to and cuts through social projects but also cuts through this technology. private projects as well. Peter Capener: In terms of the community projects, Howard Johns: As well as community projects. the community enterprises marking time, in theory Daniel Green: Also communities. A group went in, there is that possibility. But, as I have just outlined in the last couple of days, and presented to DECC to previously, you are in the position of having to re- show them that their modelling was not correct and energise communities that got enthused about a the costs were greater because when they work out project and then, in most cases, were let down. So we their 4% they are saying that with the energy and the have a real challenge ahead of us to get that body of cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 8 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett enthusiasm back up again. In terms of the projects, we needs to be explained to people. It is complicated and are effectively having to say, “We are not going to be you need the people like Stephen to be involved in doing anything for three or four months”. In the that business. All they have done is created a pier and situation that we are in now, the value of solar PV we are all falling off the edge of it, only to be renewed was that it was a quick win, relatively, as far as in a year’s time when they are going to— renewable energy is concerned. As a community Chair: I think we have that point and we have very enterprise we are looking at wind, we are looking at little time left. I have a lot of colleagues who want to hydro, we are looking at renewable heat and we are get in. I want to stay on jobs for a bit. looking at energy efficient, but the value of solar PV was that it was a quick win. It could build profile, Q39 Zac Goldsmith: We are going to have the build awareness in our local communities and get Minister here shortly and a lot of this is going to come people bought in to something that had real value at a down to money and I just would be interested, one local level. The opportunity could now be taken away. more time for clarity’s sake, what do you believe So marking time could have serious impact on the would be the additional cost of sticking to the April viability of those community projects. deadline? How much extra will that cost consumers Daniel Green: I think that is an excellent point about on an accumulated basis? marking time. Our company is a solar business. I have Daniel Green: That is 80 pence on people’s bills to explained a little bit about how it works. You have 2020. It is not my figures. It is the figures in the heard today that no business can continue in all impact— honesty with the customers until DECC come out with its appraisal of its consultation perhaps the end of Q40 Zac Goldsmith: Eighty pence per year until January. Your point about hibernation is correct. From 2020 in addition to the— our point of view, on top of that we have this energy Daniel Green: That is correct. It is 0.06% of their efficiency level criteria, which effectively brings the energy bill. universe available to 9%. Nobody is going to pay £6,000 to £7,000 extra to get Q41 Zac Goldsmith: Can you analyse for us, very potentially 4% in 18 years’ time. In the Government’s briefly, the £80 figure that the Government is quoting? own assessment, which I think you have, it talks about Daniel Green: Yes. What they have done is they have the efficiency measure being a break on installation. multiplied out the last few weeks of installations, The second thing is we also have the aggregator tariff, which I gave my Concorde example, and they have which I referred to earlier, that we understand DECC put that against the “do nothing”. now agree the modelling is incorrect and, at this stage, Howard Johns: That is to run the scheme forward as are not prepared to make a change. From our it was originally designed.9 perspective, to retain all of 1,000 people, directly or indirectly, and sit quietly with those on our books Q42 Zac Goldsmith: But are they saying £80 a year? until, let us say, February, then to find out at the end Is that what the Government is saying, as compared of February that it is not long viable, is not possible with your 80p per year? for us. Daniel Green: Of their 80p. This industry has some fantastic people. We have a young guy, 22 years old, called Stephen. He says he Q43 Zac Goldsmith: So they are out by a factor of has a brother and sister all at home. All of them are 100 as compared with your figures? unemployed, based in Wembley. He came out of Howard Johns: Their impact assessment says— unemployment and was the first person from his Zac Goldsmith: Is that correct? family to get a job for quite a while, certainly the Howard Johns: The “do nothing scenario” says £26 first job that he has had. With us, he has performed not £80. Now, no one is proposing that they do fantastically. He now has four people who work nothing. “Do nothing”, according to their definition, underneath him and he has a lot of pride and is giving, means leaving the tariffs as they are until 2013 and he feels, a lot back. He is trying to make savings to degressing them 9% per annum until 2020. That own his own flat and leave his family house. means we end up with a tariff rate of 21p in 2020. No In the next few days I am left with the job of making one is proposing that. Stephen redundant and many more like him. He has that long walk before Christmas back to his home and Q44 Zac Goldsmith: I just want to get this point has to look his family in the eyes again. This is exactly because we are going to finish this session in a second. the sort of person that I know the Chancellor is trying How is it possible that you can be out by—even at to put roughly £2,300 into getting work for in the £1 that reduced figure, it is still 30 times more expensive billion scheme that I understand was just announced. than what— From our perspective, this is hundreds of people, real Howard Johns: These are not our figures. These are people, who are going to lose their jobs before the figures from the impact assessment. Christmas. Daniel Green: Zac, this is what I think is colloquially I might say, finally, there are thousands of people who known as a “spin” and basically— will lose their jobs here. Unlike what the Minister will Zac Goldsmith: That’s one hell of a spin. tell you, I am sure, when he meets you, as he has told Daniel Green: It is not only one hell of a spin but I us, these were unsustainable jobs, these were not. We think it is, in some ways, when you take the examples were building a bridge to the Green Deal. You can’t 9 Clarification by the witness is printed as supplementary hang the Green Deal up in Tescos. The Green Deal written evidence cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 9
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett and look at the industry that is being built, immoral. community enterprises who, in fact, want to move The question that you will be left with, as we are left away from grant dependency. with, is, why is this happening? What we want to do is create a financially sustainable community-owned business but, in order to do that, Q45 Zac Goldsmith: I am going to interrupt you. we have to get the cost of capital down significantly. I wasn’t asking for polemic. I would like the Joint Underwriting loans to enable slightly cheaper cost to Committee to know is it possible for us to work out, capital would mean, on the input side, the cost burden as a matter of certainty, where that figure should be? was lower; therefore, it would be easier to run the Where is it between your 80 pence and the £27 that community projects. The aggregation point has been the Government is quoting? Does that data exist in a made before, but I think, from a community way that we can be confident as a Committee that we perspective, this has no logic whatsoever. You’re know where that figure should be? talking about two, three, four projects and slapping a Joan Walley: Chair, if I can just come in there. Could 20% cut on them. Any logic there was for you also suggest who could provide some verification aggregation—and obviously we have heard the logic of that figure on which so much rests? for that—is questionable anyway, but any logic for Howard Johns: It is in the Government’s own aggregation cannot kick in at two projects, three document here. projects, four projects or even 10 projects. To cut Daniel Green: Can I quote table 17, “Domestic community tariffs at that rate for those sorts of impact on domestic bills”. This is their impact schemes makes no economic sense at all. assessment that came out with their consultation. In terms of the EIS point, in terms of creating a Option 2, which is the energy efficient requirement, climate or an environment where cost of capital can that is £2.60. Option 2 is where it doesn’t go to April. be providing tax breaks, ensuring tax breaks continue It gets cut off on 12 December. Option 3 is £3.30, for investment in community enterprises, is again which is where it does run until April. The difference another very valuable opportunity. So it is not looking between £2.60 and £3.30 is 70 pence. We are saying for handouts. It is trying to create a market in which 80 pence is probably a bit more— community enterprises can operate on a level playing field. Q46 Mark Lazarowicz: On that point, I also want to Daniel Green: Chairman, could I ask just one draw attention to the Register of Members’ Interests. question? I understand you are seeing Treasury at I am involved in a community energy group that some point in this process. encourages a move to solar PV. It is not a pecuniary Chair: On Thursday. interest, of course. It would also be useful to know Daniel Green: I just wonder, Chairman, whether it not just what you expect will happen next year for would be possible to ask them whether they modelled solar but also your trajectory over a number of years, the impact of the loss of revenue from the job losses how you see the phasing of the support for solar, and from this industry. Again on the Treasury, I would just also what you would see happening in other renewables. I think you accepted there was a case for finally like to add I spoke to the Chief Secretary of shifting from solar to other renewable energy. So, the Treasury and I explained that the feed-in tariff is again, we are not asking you to give us the figures part of the levy-funded cap. The feed-in tariff is a now but if you could submit a clear statement of how relatively small part there. The renewable obligations you see the trajectory of support for solar in the future. is much bigger. The renewable obligations is under- Howard Johns: The recent analysis we have just done spent. The feed-in tariff is slightly under-spent. I is to have a market of the size that it is this year asked, “Is it possible to move some money around moving forward to 2020, so a 700 megawatt market within the levy-funded cap; that is not break the cap which—grid parity will arrive in 2015Ð17, would cost but just to move some money around?” He said, about £5.50.10 “Absolutely. Somebody from DECC should just come and see me”. I wonder whether you would ask Q47 Mark Lazarowicz: I would like documentation whether anybody from DECC did go and see the so we could look at it. Treasury and what response they got. Howard Johns: That is fine, but it would cost about Chair: I think we will ask the questions and you can £5.50 on bills by 2020, not £26 even.11 answer them, I think might be a better way of doing Peter Capener: Could I just make a couple of brief it. Laura, I would just like to go on to the questions points about what could be done to improve the of jobs, if we may. situation for communities in terms of moving forward. Clearly there is the community benefit tariff that is the Q48 Laura Sandys: I understand the passion that subject for the next review, but beyond that I think you have for the industry sector but there was bandied if the Government was able to underwrite loans to around, when the shock of the consultation came out, community enterprises in the way that Mr Osborne that there were 25,000 jobs involved in this industry has been talking about underwriting to small and they were all going to be lost was the message businesses, that would make a huge difference. What that came out. Firstly, it is quite difficult to assess we are talking about is the cost of capital for which jobs are directly in the solar sector or who are in some ways suppliers to the solar sector and it would 10 Clarification by the witness is printed as supplementary written evidence be interesting to get that breakdown. I would also like 11 Clarification by the witness is printed as supplementary to know what you had as projections of growth in jobs written evidence over the next couple of years. cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 10 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett
I know that Mr Green was saying that very Laura Sandys:—and that your business modelling unfortunately he is going to be making people without the EPC, which would have changed the feed- redundant. Can we get some understanding of what in tariff in April—so our four or five month the impact will be on the sector? The problem that I differential—you would have been looking at job have is we are talking about the difference between losses in April as a result of that or not? December and April and the sector is saying that it is Howard Johns: No, not at all. going to make thousands of people redundant because Daniel Green: It is a very good question, I think. of that period. In April you have already admitted that you would be adopting a new business model because Q54 Laura Sandys: All of the job losses are related of a different feed-in tariff. So were you going to to the EPC? You might not be taking on new jobs. make some of these people redundant anyway? Daniel Green: There are three points. Basically, the Daniel Green: Could I answer the first question? EPC—Howard is absolutely right—is simply just Howard Johns: No, I am going to take this one. We cutting the universe for solar down to a microcosm. did a survey of our members, both the REA and the The second thing is the aggregator tariff means that STA. This is where the 20,000 jobs figure comes from. this is now only available for the very wealthy and I Prior to the feed-in tariffs introduction there were am sure that is not what this was intended for. They about 3,000 to 5,000 people working in the sector. So are not the people who particularly will be affected by in the last 18 months 20,000 jobs have been created. energy bills. Now, it is not so much to do with the rates. Again, With regard to April, April has two problems. Given you have missed the point about EPCs perhaps, that time, and not much time—we are very entrepreneurial if they bring in the full package of this measure—if in the UK—we can adjust our business models, but they bring in the energy performance criteria we will given no time it is very difficult. Worse than that, not be able to sell this stuff anymore because only one given a hiatus—as Howard pointed out, from 12 April in 10 homes will be eligible for have it. That is what we literally have to cease until some unknown with will cause the sector to reduce, according to DECC’s everybody sitting on our books—with the other two own figures, to 8% of what it is this year. That is what measures that I mentioned, makes things impossible. would cause the jobs losses.12 In answer to your question, which I thought was an excellent question, the 21p is difficult but doable. The other criteria are impossible. Q49 Laura Sandys: You would say that, from a jobs Jeremy Leggett: If I could make a point on the jobs perspective, the EPC has a much bigger impact than as well. The latest figure, just to get it out there, the the feed-in tariff? DBIS figure that we have, is 39,000 jobs. So it is Howard Johns: It is all bundled together in this higher than 25,000. proposal. That is the whole point. Q55 Laura Sandys: We would like to have a Q50 Laura Sandys: I understand, but if we common view on this. disaggregate the proposal— Jeremy Leggett: We can follow up afterwards. But, Howard Johns: If we disaggregate the impact would please, I would appeal to the Committee not to view be a lot less, definitely. this as a kind of minimal cost-cutting exercise and it is okay if there is some fraction of the industry left; Q51 Laura Sandys: If I may say, Chair, I think it you know, 10%, 20%. I do not know what it is going would be quite useful for the Committee to have an to be. What we have lost in Britain as a result of this, understanding of the jobs that you think are associated if it goes through as intended, is a wonderful success with the introduction of the EPC measure and— story in a desert, where there are very, very few. Howard Johns: All 20,000 are at risk because of that However many jobs have been created, it is tens of measure, basically; because of the introduction of that. thousands in an 18-month period. These are good, green jobs in exactly the area that the Prime Minister Q52 Laura Sandys: Do you say that the industry is said initially were going to be used—the green just going to totally close? industrial revolution in Britain—to countervail the job Howard Johns: Probably quite likely, yes. losses from austerity, creating revenues for the Treasury, taxes, all the rest of it. Massively Daniel Green: This year we will do 120,000 countervail losses on the tariff. installations. The Government are predicting 30,000 Daniel Green: The public have voted with their feet, next year, if that. That is obviously a three-quarters— basically, that this is the most popular measure in the Howard Johns: They are predicting that we go from last 20 years in energy efficiency, in micro-generation. 500 megawatts down to 10 next year if this goes This is what the public want. That is why it is ahead. So the chance of keeping a fraction of those successful. people employed— Q56 Laura Sandys: It is very incentivised to be Q53 Laura Sandys: If there were two issues that you successful, too. were looking at, you would say the EPC had a greater Daniel Green: But not long. If you have scale you impact on jobs than the change in feed-in tariff— could get your costs down. Howard Johns: Yes. Peter Capener: Can I just make a point on the jobs? 12 Clarification by the witness is printed as supplementary Also, a lot of the jobs are in small SMEs, people who written evidence have diversified from electricians into taking on solar cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 11
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett
PV. These are exactly the sort of people that you are Q59 Dr Lee: Just to be clear, these fantastic state-of- wanting to see diversify to build the low carbon the-art factories that have been built in China have economy and the sort of diversification, again, that is been based upon producing a product that has been going to be required in insulation. If, again, we are subsidised by the western taxpayer— going to undermine that in one area, how confident Daniel Green: No, a lot of the subsidy has come from are small businesses going to be to diversify again the Chinese Government and the thing to note— around a Government scheme like the Green Deal Dr Lee:—because they knew that there was a when it is going to be threatened in previous cases? market— Howard Johns: China has a feed-in tariff itself. Q57 Chair: What proportion of the panels installed Dr Lee:—that was being provided by a tax subsidy this year were manufactured in the UK? in this country and elsewhere. Jeremy Leggett: This is a point that we would Daniel Green: caution people— No, let us get it right. Germany had a Chair: I don’t want a caution. Is it 10%, 90%? feed-in tariff for 10 years. If anyone is going to claim Jeremy Leggett: We’re coming from a long way the lion’s share of building this market it has to be behind. I see the drift your question. Germany. Chair: It is a factual question. There is no drift to it. I just want to know. Q60 Dr Lee: Yes, after an outlay of €6 billion they Jeremy Leggett: It is small. It is very small and the are getting a 9.5% return on their panels. I am not so reason for that is we’re playing catch-up. sure the German’s are feeling particularly grateful. Daniel Green: We are piggy-backing on the Germans. Q58 Chair: So the huge numbers of jobs that have The Germans had 10 to 15 years of feed-in tariff. You been created at the expense of British electricity are right; they started a long time ago. They built a consumers are being created outside the UK? Is that huge industry. We are coming in right at the end, a good use of— getting these fantastic price discounts; allowing us, in Jeremy Leggett: No, because most of the jobs are five years’ time, to not require a subsidy at all. It is downstream. Most of the jobs are in the area where fantastic. I totally agree with you. It is fantastic for our companies work and if we are giving a fair head the British people that we are now benefiting from, if of steam and allowed to try and play catch-up with you like, their investment and what is going— the Germans, the Japanese and Chinese in the way that the Indians are intending to do, as we saw in that trade mission to India, then we will have a chance to Q61 Dr Lee: Yes, but we have created a have a vertically integrated—none of this is rocket manufacturing plant in China— science—value chain in this country. It would be Daniel Green: We haven’t. massively in our energy security interests, if you Dr Lee:—with British taxpayers’ money. believe some of the things that have— Daniel Green: No, we haven’t. We are— Howard Johns: 80% of the value of these projects stays locally.13 Q62 Dr Lee: You shake your head. Where has the Daniel Green: Chairman, I’m not sure if you have subsidy gone, sir? had a chance to go to or to see one of these factories in operation. There are very, very few people who Jeremy Leggett: The subsidies are going to build you work there. They are most incredibly automated. I and us a viable British industry with clean, green jobs. mean they are literally state of the art. Not because of Exactly what you are going to need to countervail all cheap workforce, just rather huge investment. As the the millions that are being made unemployed as a Panel has pointed out, the majority of people result of— absolutely are the installers, the electricians, the people who monitor and maintain, the people who Q63 Dr Lee: Yes, but it is installing product that is work in the offices, the legal work and so on. being produced elsewhere. Jeremy Leggett: Also, the designers and Jeremy Leggett: At the moment. If you imagine the manufacturers of British secondary products. trajectory and how investors, had they any confidence Daniel Green: Correct. left in UK PLC, would have viewed this, then we Jeremy Leggett: My own products, for which my could have exactly expected to see population of the company won the Queen’s Award for Industry this whole value chain across Britain, arguably, or at least year, are designed in Britain and designed in Britain. in western Europe and, in terms of that particular They are secondary products. They are roof tiles, roofing slates and the rest. None of this would have investment— happened without some market enablement behind this industry. That is the kind of thing we would have Q64 Dr Lee: I can understand the concept of there been building on if the feed-in tariff had kept in place being value in an installation industry of solar panels and not been shot down because some of the Big 6 in Britain but the reality is, if I am sitting with my have argued that that is what they want to see happen. accounts in front of me and I am thinking, “Right, Chair: We are a bit over time—just two final where am I going to put taxpayers’ money to develop questions. a manufacturing base in this country”—something we 13 Clarification by the witness is printed as supplementary desperately need—I am not going to put it in solar, written evidence am I? cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 12 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Daniel Green, Howard Johns, Peter Capener and Jeremy Leggett
Howard Johns: We have two manufacturers in the Jeremy Leggett: Yes, with reluctance we have. I UK already, one of which is Sharp in Wrexham and it believe there are three separate cases and the advice employs something like 500 people.14 is that there are grounds to be concerned that the Daniel Green: Solar installation, certainly on the Government has not been consistent with its own private scale, it used to be almost 70% was the panels legislation. So it is all in the hands of the lawyers at and, therefore, the point that you raise is very, very the moment. relevant. In other words, of the whole cost 70% was going on that part of the installation. Now it is around Q68 Albert Owen: Am I summarising what you said about 40% and falling and, therefore, the panels as a about the rates of tariffs correctly, that they are not part of the whole installation cost are becoming more sustainable at the current level but that six months ago of a fraction. Therefore, any contribution that we in you went to see Government and you proposed a 25% Britain are now making is just going on British people reduction in April of next year that would make it and British companies. sustainable and that the subsidy—there were different I take you back to the point that we raised first, which answers—would only be required for a further four to I know the Chairman mentioned in terms of asking five years at that rate, sliding down? the Treasury. The overall balance sheet that you talked Howard Johns: We went to them and put a picture in about, the money coming in from all the PAYE, the front of them about reaching grid parity by 2017 if we taxes and so on—forget the panels from China—far had a gigawatt market in the UK where, yes, we out-sees the whole feed-in tariff; which, by the way, reduced the subsidy by 25% at that point, not in April we are not sure if we are ever going to get back from next year. the energy companies anyway. Q69 Albert Owen: At this point now? Q65 Dr Lee: The boarder picture of this is we are Howard Johns: Well, in May it was. trying to reduce our carbon footprint. That is why you guys are in business. I am just suggesting to you that Q70 Albert Owen: Okay, fine. That is a slight if I was going to subsidise anything, I would subsidise disagreement. If it went down to 25% it would be people using energy less not subsidising a generation sustainable— of energy by products imported from China. Howard Johns: Not “to 25%”, “by 25%”. Jeremy Leggett: That is the single most important Albert Owen: By 25%, it would be sustainable for thing you would do, yes. Energy efficiency is vitally four to five years, then the industry would stand on important, but you can’t play golf with one club in its— your bag. You need to have a green economy. Daniel Green: 25%, by the way, is sort of mid-30s—
Q66 Dr Lee: If you are going to draw the golfing Q71 Albert Owen: No, I just want the second part analogy, I would rather just use the best club I have. to be complete as well. But in four to five years’ time Jeremy Leggett: But you would never get around in it would not require a subsidy, in your opinion? par, sir. Howard Johns: Yes, obviously with further Dr Lee: If I only have one club I am going to use degressions along the way.15 energy efficiency. Daniel Green: You need scale for that. Once you have scale you can deliver greater savings. Q67 John Robertson: Going back to earlier on when Albert Owen: I am clear now. I was not clear earlier you talked about customers, which would be my on. constituents, and they are the ones I am representing Chair: There is lots more we could have talked about, here, these people, you said, might face legal action obviously. I expect there are other things you want to against them for breaking a contract. Have you taken say and there were certainly other questions that my legal action to find out if what the Government is legal colleagues wanted to ask, but we have had the concerned with the consultation, knowing what has Minister waiting outside for 20 minutes now. So I happened in other consultations particularly to do with think, in fairness now to courtesy, we had better call energy in the past? this a day. Thank you very much indeed for coming in. 14 Clarification by the witness is printed as supplementary 15 Clarification by the witness is printed as supplementary written evidence written evidence cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 13
Examination of Witnesses
Witnesses: Gregory Barker MP, Minister of State for Climate Change, Moira Wallace OBE, Permanent Secretary, and Simon Virley, Director General for Energy & Infrastructure, Department of Energy and Climate Change, gave evidence.
Q72 Chair: Good afternoon, and our apologies for Q74 Chair: One of our previous witnesses said that keeping you. You will not be surprised to know that six months ago he came into the Department and the previous witnesses had a few things that they suggested a cut, I think, of 25 or 30% in the tariffs wanted to say to us but, of course, we are looking then being paid for solar. Why didn’t the Ministers of forward to what you are going to say as well. Could I the Department grasp that offer eagerly and say, “Yes, ask, just generally, whether you would say the thank you very much”? Government’s handling of feed-in tariffs for the solar Gregory Barker: Could you be more specific, Mr sector during 2011 has been conducted in an orderly Yeo? and rational way? Chair: Howard Johns told us about an hour ago that Gregory Barker: I think the way in which we have he had come and talked to—who did he say he talked had to institute an emergency review of the solar to? He presented a paper to DECC which suggested I sector, particularly in the second half of the year, has think it was a 25 or 30% cut in the then prevailing been regrettable but we were left with no choice if we level of— were going to protect the budget and the long-term Gregory Barker: Indeed. Is he STA, Mr Johns, or interests of the industry and the consumer. I think it REA? It is STA. Mr Johns did indeed suggest a 25% is regrettable that the previous Government didn’t cut and I will read, if I may, from the specific construct the feed-in tariff scheme in a way that learnt document that he handed to DECC. This was in from the experience in Germany and other countries, response to my then proposed reduction in the large- where there is a lot of learning on good and bad feed- scale feed-in tariff, “We, therefore, suggest that to tariff schemes, and left us with very few levers by qualify for transition arrangement projects which which to control the scheme. Given the extraordinary apply for planning permission before 1 August and surge that had, that was unanticipated and I think is commission before the end of calendar 2011 should only predictable with the benefit of hindsight to that receive current rates. If they commission after 31 degree, we have handled a very difficult situation to December but before 1 April 2012, their tariff is the best of our abilities. But it is, by no means, perfect reduced by the suggested 25% if they have not and I realise that this will be very difficult for a lot of commissioned by 1 April.” Effectively what Mr Johns people in the industry, trying to cope with the was suggesting was a 25% reduction across the board, in large-scale and smaller-scale, to kick in from the consequences of an early review. end of this financial year. It would be quite wrong to suggest—and I am sure he will recall because it is in Q73 Chair: What effect do you think that is going to paper—that they suggested an immediate 25% cut. have on the attitudes of investors in future, the amount Also, he was suggesting a smaller cut, only 25%, in of trust they place Government policies and the risk the large-scale project. Had we heeded Mr Johns’ that they may get changed, in this case, at very, very advice, the result would have been that we would still short notice? be carrying on not just for smaller-scale projects at Gregory Barker: I think you have to see this, Mr Yeo, the current time but for the very large-scale field solar in the broader international context. Because we have and large arrays as well at the old rates. I have no stepped in when we have, we are preserving the doubt that if we had heeded Mr Johns’ advice the budget. The worst possible thing that we could have scheme would be bust and the action we would be done would be to have closed our eyes to what was taking at the end of the financial year would be to happening in the sector, allowed the budget to be close it. exhausted and then had to close the scheme. We know, from the experience of the last Government when Q75 Chair: That is very helpful. His comments will, Government Departments have opened schemes and of course, be on the record. Is it possible for the then had to close them completely, that that has a Committee to have sight of that document? shattering effect. Gregory Barker: Absolutely. Rather than just quote I think what, in the long-term, investors expect from selectively, I will ensure that you have the whole the Government is ability to manage the budget of any document. given project over the lifetime of that project correctly Chair: That would be extremely helpful. and any smart investor will recognise that what we have done is stepped in to ensure the integrity of the Q76 Zac Goldsmith: This may precede the Minister, budget, not just for solar PV but also for the other so it might be relevant for Moira Wallace. I am range of technologies that benefit from the feed-in interested in why this package was signed off without tariff. This is not just a solar PV scheme. It is true that any plan for degression despite the fact that DECC over 90% of the scheme to date has gone towards predicted an annual 10% reduction in the unit costs, I that technology but it is there to promote a range of believe, of the panels. technologies, a range of distributed energy solutions. I Moira Wallace: It is not the case that it was signed want the scheme to run the whole course and believe, off without a plan for degression. The plan was for a because of the actions that we have taken, that will degression after a period of two years and indeed the happen and we certainly do not have to take anything impact assessment that you’ve been discussing, the that could be deemed retrospective. “do nothing” option, is to allow that planned cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 14 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Gregory Barket MP, Moira Wallace OBE AND Simon Virley degression to take place. The Department consulted Q81 Zac Goldsmith: This was enthusiastically taken on a proposal that started degression after one year up by DECC at the time? and it received a very large number of representations Moira Wallace: Yes. It was a very clear steer for from the industry saying that that was not enough and Ministers and, having had a position where the that a period of two years was required to allow the Government had opposed it and had been subject to industry to find its feet. So we are now in the second very strong pressure in the House, the Government of those two years. In order to constrain the cost of changed its position and officials moved to establish the scheme what we did was deferred degression—so a scheme, consulted on it in the summer of 2009 and that there was a two-year degression holiday—and produced the final document we’re referring to in made the degression steeper than we had originally February 2010. proposed. In retrospect, where I think we went wrong is that we didn’t have a more flexible scheme of Q82 Zac Goldsmith: I have just one more question. degression. It didn’t allow us to act faster and it didn’t When did the Department first become aware that allow us to respond to costs falling faster than take-up of the scheme was greatly exceeding anybody predicted and we have been caught out like expectations and what was the panic moment? some other countries. It is fair to say that Germany Moira Wallace: September. We received monthly had a more flexible system. I think I am right in saying information from Ofgem, who managed the scheme that they were just instituting over the time we were for us, and in September when we saw the figures for developing our proposals, but what I am trying to say the latest number of registrations on the database they is we did have degression and we did listen to were a lot higher than the month before. The first representations that said, “Please give us longer before thing we did was investigate that because we had seen you start cutting the rates”. a similar seasonal peak that had then fallen back in 2010. So that was what started the ball rolling for us and there was a certain amount of investigation Q77 Zac Goldsmith: You just mentioned Germany. to understand was this seasonal; was it going to be They had years of experience, obviously, on us. Did replicated in September. In fact, what we discovered DECC send anyone out to Germany to study their was it was worse than we thought. There was quite a scheme and learn the lessons that they could have lot in the pipeline that we had not known about. provided? Zac Goldsmith: Chair, I don’t know whether I am Moira Wallace: I believe we did. I don’t know if we stepping on somebody’s toes. I would be interested in learnt enough and that is obviously one of the things looking at this huge discrepancy in the estimations of we are looking at as we try and learn the lessons, but the costs but I don’t know whether that is something I do want to get across that the Department tried very that somebody else is going to be picking up on. hard to listen to the representations we received in the Chair: Certainly, by all means. consultation, which started in the summer of 2009, and we received far more representations saying, Q83 Zac Goldsmith: We were trying to get to the “Give the industry longer, increase the rates, more of bottom of what the cost would be to consumers were a time period before you start reducing them”. We did you to stick to the April deadline and the figure that try and listen to that and maybe we made a mistake. we had—I think there was a consensus on the panels—was that it was about 80 pence. The Q78 Zac Goldsmith: Just back to the plan for additional cost was about 80 pence per bill per year. degression, is that printed anywhere? Is that a matter 60 pence? Call it 60, 70 or 80 pence. That compares of public record? to a DECC figure somewhere in the region, we are Moira Wallace: Yes. I think it is in legislation. told, around £27. Is that correct or could you take us through those figures? Gregory Barker: With your permission, Mr Yeo, to Q79 Zac Goldsmith: When the scheme was help the Committee, we have brought along two established, the original agreed plan of degression, graphs that illustrate the nature of the spike in that is published somewhere? demand. I will pass one that way and one that way.16 Simon Virley: Yes, it is, in terms of the then Moira Wallace: Shall I just talk through the graph? Government’s response to the consultation that Sorry, this is a little bit Blue Peter-ish; so I do ask you announced that we would have a two-year holiday on to forgive it, but just so people can see what we are degression and then have a 9% year-on-year talking about. This is what we’re just passing around. degression thereafter. So this is a graph of how deployment has accelerated and, just so as not to spoil it for people behind me, it Q80 Zac Goldsmith: I know I am going slightly off, is graph that goes on the vertical. That is causing us but at the time of the birth of this scheme the mood some difficulty because any estimate we make is music surrounding it was that there was there was real rapidly being overtaken by events. Just to start with conflict in the Department and even within the what is in the impact assessment, the impact Government. Where do you believe the opposition to assessment made a judgment about the difference the feed-in tariff was at the time? between two unknowable numbers. Moira Wallace: It was the Government’s policy to Unknowable number 1 is, what would the take-up be have a feed-in tariff. That was a decision made within between our issuing that consultation document with weeks of the formation of the Department; so that 16 These graphs are printed at the end of the Department of would have been in the autumn of 2008. Energy and Climate Change written evidence cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 15
29 November 2011 Gregory Barket MP, Moira Wallace OBE AND Simon Virley a six-week period for action, and what would have and I pay on our domestic bill to cover the cost of happened if we had allowed a longer period, which feed-in tariffs a medium-sized business pays £3,000 would obviously have given more latitude for people on their bill and an energy-intensive user pays to finish what they are engaged but we believe would £30,000. also have allowed more latitude for new people who There are there are different figures for people with weren’t on the scene to decide, “I would like to get different levels of electricity use, but in terms of how involved in this. I hadn’t thought of it but it’s my last that grosses up, the difference in a full year’s opportunity”. At that point we made an estimate that budget—so next year’s subsidy for these extra this would add 80p to the average household bill. installations this year—on the figures in our impact assessment, the difference we calculated, a few weeks Q84 John Robertson: Chair, can I interrupt here? ago, would be £60Ð70 million a year. By waiting we This graph here is obviously rubbish because, going would pay £60Ð70 million a year and we would pay by the shape of the graph, if it continued the way it it for 25 years. So we have £1.5 billion there because was it would be four to five times that within the space this subsidy is not all paid in one year. It is a 25-year of about a week. Obviously it is not correct and it right to subsidy, which is why the lifetime costs of is inaccurate. this scheme are rather large. Gregory Barker: With respect, that is what happened In fact, because of the very rapid deployment shown in Spain, and that is what has happened elsewhere, on this graph, already our guess of how much would and that is why these schemes went completely be done by 12 December, the first unknowable bankrupt. number, looks implausibly low and we will never know what would have been done by April if we had Q85 John Robertson: Minister, you will have to allowed the scheme to stay open until April and we appreciate that if this was correct then you and I can probably argue about this for the rest of our lives. would not be having this discussion because Ministers’ concern was that there was clear scope for everybody who has been short-changed with what you lots of other people who—never have thought of this, are doing would have received everything in time and never been involved, were not in any way on the glide well before December, going by this graph. path to do this—would have had time to join in this, Moira Wallace: That is not the case. which would have been great for them but would have John Robertson: Of course it’s not the case. seen the costs escalate. In support of that view I need Everybody knows it’s not the case, but the graph is to tell you that before our consultation document was in error. issued in October we saw a very high rate of Chair: Let the witness answer the question. deployment, which suggested this is not just people Moira Wallace: We are now on several different booking their seat on the last flight of Concorde but tracks. Shall I just try and follow the 80p through for we were seeing very strong deployment and there was you? Would you like me to do that or would you like lots of reason to suppose that would continue. me to talk about the graph? The figures, I think, we are confusing this with, that Joan Walley: Can you say whether or not this relates the Secretary of State has quoted, are the figures if we to Spain? had done nothing; so if we had not reduced or had not proposed to reduce the 43p tariff, as we are proposing Q86 Chair: We just have a query about this graph. to reduce it, to 21p but had just introduced the planned This graph is a factual representation of the number degression I was telling you about a few minutes ago. of installations in the UK each week? The cost of that in our impact assessment—again it is Moira Wallace: Per week. We decided to stabilise an unknowable number because it depends on what the— happens. What we said in that was that we expected the costs in 2020 on a central gross scenario to be £26 Q87 Albert Owen: Is that applications or actions? a year if we had not taken the dramatic action we had Chair: Installations. even in April. If we had made small cuts of, I think, Moira Wallace: Installations that have happened. 9%. If there had been a higher growth rate that would have been £55 and the figure that you’re quoting, the Q88 Albert Owen: Not applications, as you said higher that the Secretary of State mentioned, is taking before? our estimate of, “What if we had done nothing and Moira Wallace: I am so sorry—it is installations that stuck to the previous degression”, and adding into that have happened. the higher starting point that we already know about Chair: You have clarified that point now. because we have seen it and it has happened. I think Moira Wallace: At the time of the impact assessment, that is the difference. I realise it is rather complicated. which is some weeks ago now and it is a fast-moving Gregory Barker: Basically this is a moving feast in position, our estimate of the difference between these that the estimates of the bill impacts are continually two unknowable numbers, in terms of impact on a being revised upwards. I think it is fair to say that household bill, was it would be an extra 80p in DECC has consistently under-estimated the potential 2014Ð15, if we delayed action, on top of the cost of demand in the system, both in the near term and in our proposal, which was £2.60 or £2.80 in that year. history. Obviously when you are dealing with impact In terms of how that grosses up to other numbers, first documents you invariably take prudent assessments of all you need to recognise that it is not only and cautious forecasts, but the sort of forecasts that I households who pay for this. Industrial users pay for would be comfortable with are at the higher range of this. Order of magnitude, for every pound that you the official estimates and they currently now suggest cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 16 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Gregory Barket MP, Moira Wallace OBE AND Simon Virley that if we did the “do nothing” scenario, that is do Moira Wallace: Can I clarify this because there are nothing until April, that would add up to £80, distinct figures. If we were to stick to the old planned potentially more, to every single electricity bill by degression path and degress only by 9%, then that is 2020. It is quite true to look at the current year is the source of the highest figures we are quoting and meaningless, not least because a lot of the people there are different assumptions. But, as the letter that coming on to the system now will only be claiming Mr Gardiner is quoting makes very clear, our for a few months. So it is the long-term impact that assessment of the cost of not acting in December and you need to look at because of the nature of the instead waiting to make this change until April, scheme. depends on very, very uncertain predictions. They are certainly the numbers I quoted you some time ago and Q89 Caroline Lucas: On that point, if I might, would I am very happy to set them out in a note so that we you not agree though that citing those “do nothing” can all get them straight. Those are very significant scenarios is completely disingenuous because no one costs. was ever suggesting doing nothing. So you are able to pluck out these very high figures from the ether and Q92 Barry Gardiner: Sorry, Ms Wallace. You were scare people silly with them, but in actual fact there asked to set them out in a note last time. What you was never any intention to do nothing at all. did was you provided this letter,17 which is four Gregory Barker: Absolutely not. No, the industry paragraphs of sheer confusion; one of which talks consensus was “do nothing until April”. It is quite about central uptake scenarios, one of which talks disingenuous to suggest it is not the case. There are about higher uptake scenarios and one that accepts numerous, I would probably go so far as to say that installation rates are running much higher than hundreds, of consultation replies that we are receiving forecast. You say that, in that light, the reference date that are suggesting that we do nothing until April. will be substantially higher than originally estimated. That is a matter of record and you will be very What you have done is you have taken one middle welcome to share in the consultation receipts that we scenario up to April. You have taken other different have when they are published. scenarios. If you come back to what you and Mr Virley said last Q90 Barry Gardiner: Sorry, you are mixing up two time, Mr Virley answered the question by saying, “It sets of “do nothing” scenarios. Your Secretary of State is correct to say that by the end of this Parliament the talked about a “do nothing” scenario into the future— effect on household bills of the scheme would have that is do nothing at all, not just up until April—and been of the order of £6 per household bills”. The that was the one that was quantified by Ms Wallace question that I asked was the difference between doing as costing up to £1 billion. You’re now talking about it now and doing it in April and that was the answer a “do nothing” scenario up to April. This is just that Mr Virley gave. It is on the record. Now, that confusion. All you are trying to do is to confuse this does not conform with what the industry themselves Committee. Let’s get back down to the detail. We have told us. If you disagree with those figures, please have a clear figure that has been given to us by the can you provide us with a note that sets out precisely industry that talks about a 60p increase in costs why the industry is wrong and you are right? through the four-month switch that you have Moira Wallace: We are very happy to do that but the perpetrated. In the response that you gave to this figures I have just quoted are completely consistent Committee— with the letter that the Secretary of State sent you Gregory Barker: Over what timeline, Mr Gardiner? yesterday. Be clear what timeline we are talking. This is a 25- Barry Gardiner: But they are different baselines. year scheme. You talk about a central uptake scenario. You talk Barry Gardiner: We’re talking about the question about a higher uptake scenario. that I asked the Secretary of State when he came Chair: Allow the witness a chance to answer the before the DECC Committee just a couple of weeks question. ago, to which he responded in his letter. Moira Wallace: I think you are assuming we are Gregory Barker: Sorry, just so we can give you a trying to mislead you and what we are trying— clear answer, what timeline are we talking about? Are Barry Gardiner: That is not hard. we talking about the cost of the next few months or Moira Wallace: I know that. What we are trying to are we talking about the proper cost, which is the explain and history demonstrates, whether any of us proper— likes it or not, that this is very hard to forecast. What Barry Gardiner: The timeline given by Mr Virley at I am telling you—and it stands on the record because the session when the Secretary of State was sat where I told it to you five minutes ago—is that already you’re now sat was by the end of this Parliament. You deployment is different from what we assumed it to should read the minutes, Minister. be in the impact assessment and in the consultation document that we published at the end of October. We are saying that, therefore, there is an uncertainty, all Q91 Chair: This is what we are asking, just picking of it on the upside, as to whether the impact on up your answer, that if nothing was done until April, household bills, which is only one of the bills affected, which you have told us a lot of the consultation will be 80p, 70p, £1 or considerably more. We believe responses are recommending, what would that cost be it will be considerably more and I am sure that the or is that different from a “do nothing” further out into the future? 17 The letter is published in HC 1623-i cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 17
29 November 2011 Gregory Barket MP, Moira Wallace OBE AND Simon Virley outturn on installations will demonstrate that that is Gregory Barker: Lead time from what, Mr Yeo? right. Chair: Well, from the moment at which a householder says, “I am definitely going ahead with the scheme” Q93 Barry Gardiner: You say that it is hard to and when it gets installed. forecast and yet you have provided this Committee Gregory Barker: Yes, absolutely. today with a graph that takes advantage of the fact that people have rushed now to beat this deadline, Q99 Chair: Four weeks? Five weeks? which means that the graph goes vertical in the latter Gregory Barker: It varies on the provider obviously. part of it— Some are much quicker. It depends whether or not Moira Wallace: Yes, indeed it does. you need planning permission or whether or not it’s a Barry Gardiner:—when you know full well that the standalone scheme. It would vary but, Simon, you— reason for that is your own precipitated action in Simon Virley: It does vary on the individual bringing the deadline forward. circumstances. This data you have in front of you is Gregory Barker: Mr Gardiner, you are quite capable from the Microgeneration Certification Scheme, of looking at the graph. We agree that the sharpest rise which is when the installation has happened. is at the point at which the review was announced, but if you look at the other graph here you will see—this Q100 Chair: There reason I ask that is this goes up is the marvellous forecast that was prepared by the to 20 November, I think. The date at the bottom there. previous Secretary of State, now the leader of the That was, I think, three weeks after the announcement Opposition, which was heroically wrong; which did of the change. So, in fact, most of that increase in the not forecast any deployment of large-scale solar at all right-hand end of this graph was due to decisions until 2014. made by householders before even the change was announced. Is that correct? Q94 Barry Gardiner: You have a degression in Gregory Barker: Yes. If you want to understand the April 2012. You are comparing totally different things information we based our decision to call a review on yet again. I would draw your attention not to this, which is the Gregory Barker: This is the graph that shows the— most recent graph, but to this one, which basically this is the projection and that was the projection on which the Chancellor based his levy-control goes up to the point at which the review was called, framework. That is consistent with the April— the bar chart. You can see the very, very substantial growth, particularly in September and October. Q95 Barry Gardiner: He won’t be the first Chancellor that has his predictions wrong, will he? Q101 Sheryll Murray: I would just like to ask a Let’s be honest. couple of questions on behalf of the Member for Gregory Barker: Maybe we will consult him next Romsey who had to leave, I am sorry. The first thing time. was, Minister, could you tell us what advice civil servants gave you about the budgetary constraints and Q96 Chair: That is widening the issue a little bit. at what point did they make you aware that there was Can I just ask for one point of clarification? a problem? Was there a delay in you knowing that Gregory Barker: Sorry, Mr Yeo, it’s a very important there was a problem? point, if I may just make that. You can see that Gregory Barker: Are we talking about the first review basically from August this year suddenly we began to last or the problem that we had last year with the go substantially above trend. That figure then grew larger scale, the second review? substantially more than that in September and it grew Sheryll Murray: I think the small-scale one. even more strongly in October. We did not announce Gregory Barker: The smaller scale. Well, I think we the review until October but I don’t think any Member all became aware over the summer period as the of your Committee could possibly say that growth had August figures came through. We switched over the not become completely out of sync with forecast, summer to a better system of informing. It was a fault upon which the budget was based, by the end of of the scheme as originally established that we were October. reliant on Ofgem information, which was typically up Barry Gardiner: 60 pence. to three months out of date. The scheme was Gregory Barker: That is what I am saying. I think if improved over the summer so that we then received you look at the veracity of these figures it is better information from the MCS. absolutely right. Moira Wallace: I can tell you we informed you in the second week of September, I think it was, which was Q97 Chair: On this point about this graph, the one when we got the data. We informed Ministers with the almost vertical line there, are these instantly. They asked a number of questions, including installations? since it looked as if there had been a very strong Gregory Barker: Yes. seasonal summer pattern the year before. That was Moira Wallace: Yes. the first thing we investigated. But we told you pretty much instantly. Q98 Chair: Now, I think I saw something in the preparation for this that said there was a lead time Q102 Sheryll Murray: Can I also ask, was it the before an installation takes place of several weeks. Is same for the large-scale scheme and also when did that correct? you inform the Treasury? cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 18 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Gregory Barket MP, Moira Wallace OBE AND Simon Virley
Gregory Barker: With the large-scale scheme I think Gregory Barker: Yes, although I would hazard it is fair to say that Ministers were just as on top of it already out of date given the speed at which the as the Department because there was a lot of anecdotal industry is travelling currently. evidence on large-scale. The thing about the large- scale schemes, they have a much longer gestation Q107 Dr Whitehead: How out of date do you think period because inevitably they require planning it was? permission and other approvals. The Department was Gregory Barker: Well, it is several weeks out of date only working off information as and when they because that impact assessment is obviously signed connected and what I was getting was information and off on the 14th of— intelligence from the market of people who were largely anecdotally but nevertheless saying, “Do you Q108 Dr Whitehead: The impact assessment of 2 appreciate how much money is going into these large November? schemes, albeit very few of them have yet come to Gregory Barker: 2 November. It is obviously based fruition?” So it was a lot of that sort of anecdotal, on historic data, at that point. informal intelligence that began to raise alarm bells significantly before formal registrations began to click in. Sorry, what was the second part of the question? Q109 Dr Whitehead: Would you have been up to date at that point? Q103 Sheryll Murray: Did you first inform the Gregory Barker: No, by definition it wouldn’t be Treasury? based on information that had been collated that Gregory Barker: We have an ongoing dialogue with morning. the Treasury. The Treasury gave us the budget. We won a very good settlement in the tightest spending Q110 Dr Whitehead: So you signed off something round since the war. I called the industry together after you had no confidence in? the spending round to tell them that we had managed Gregory Barker: No, I don’t think I said that. I said to capture all of the funding required for the previous that it was based on the most up to date information Government’s projection of the growth in feed-in available, which was not to say that that represents an tariffs deployment. The only request from the accurate snapshot of the industry on 2 November. It Treasury was that we try and reduce costs by 10% in represents a snapshot based on the most available the final year of the spending round, which was very gathered data at that time, which is rather different modest. I have to say the industry broadly welcomed from— that. I put it to the industry at DECC, a large number of Q111 Dr Whitehead: That’s what impact stakeholders, that this did change the dynamics of the assessments are supposed to do, aren’t they; provide scheme; that for the first time we were bringing proper the most accurate information you can get? budgetary controls; we were placing a limit on the Gregory Barker: Available, yes. Available. We can’t amount that could be put on consumers’ bills and that gather information that— this budget framework was a very real framework. It was not just notional. We would have to live within Q112 Dr Whitehead: Stuff that isn’t available is that. We discussed the ideas for a capacity mechanism sooner rather than later, but the industry weren’t keen mystical, isn’t it? on specific capacity triggers and they recommended Gregory Barker: Sorry, what point are you trying to that we leave that for the comprehensive review that make? would be designed to coincide with April 2012. Q113 Dr Whitehead: Impact assessments, as far as I Q104 Dr Whitehead: In the submission that you understand, try and give you indeed the most up to made to this inquiry you set out a revised FiTS budget date information available. for future tax and spend over the period 2011Ð12, Gregory Barker: That what it endeavoured to do. 2014–15— Moira Wallace: Yes. Q114 Dr Whitehead: Table 14 of this impact Dr Whitehead:—which takes account of those people assessment sets out the spend. Should the lower tariffs who might have gone for RO, might have gone for come in on 1 April and not 12 December, a total spend FiTS and you have re-allocated the funds slightly in over the period of £950 million. Is that right? order to accommodate that. Is that right? Moira Wallace: I think that is roughly right, yes. Moira Wallace: Yes. Gregory Barker: Yes, that’s correct. Q115 Dr Whitehead: So on the basis of your revised levy spending envelope, that is £100 million below Q105 Dr Whitehead: That total, I think, comes to that total. Is that right? just over £1 billion over the period, 2014Ð15? Gregory Barker: I don’t think we’re quite comparing Gregory Barker: Correct. apples with apples. What I can tell you is currently we are already anticipating, in real time—not on Q106 Dr Whitehead: In table 14 of the impact historic data gathered in October, but I can tell you assessment which, I think, Minister, you signed off on the real time now—all of our information indicates 2 November—so it is a pretty recent impact that we are already going to be requiring some degree assessment, isn’t it? of flexibility between the FiTS budget and RO budget. cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 19
29 November 2011 Gregory Barket MP, Moira Wallace OBE AND Simon Virley
Q116 Dr Whitehead: Indeed, and indeed over the Q121 Dr Whitehead: Forgive me, but my period you have received, according to the Treasury understanding of how policy decisions are made is agreement, a 20% headroom to adjust budgets within, that they are based, among other things, on impact haven’t you? assessments rather than anecdotes. Gregory Barker: Yes. Gregory Barker: Dr Whitehead, you must understand that that impact assessment is only as good as the Q117 Dr Whitehead: So the best available information it was based on at that particular date in information, the available apple as opposed to the time. Since that— possible apple, compared with the actual apple that Dr Whitehead: But you signed it off. you have submitted to us appears to be below that spend line over the period up to 2015. Would that be Q122 Barry Gardiner: That is what you based your a reasonable conclusion? decision on. Simon Virley: This table relates to solar PV only in Gregory Barker: No, it is not what I based my the impact assessment, not all technologies. decision on. The impact assessment is the best Dr Whitehead: Yes. estimate. You think, dear Mr Gardiner, that we base Simon Virley: So there will be spend on other our decision only on our historic impact assessment technologies not captured— and not on a political decision based on a whole range of other indicators, based on what colleagues tell us, Q118 Dr Whitehead: So there would be an even based on market information— lower spend on solar PV then, wouldn’t there? Simon Virley: No. The point is that the FiTs budget— Q123 Barry Gardiner: But it is not about what Moira Wallace: The spend will be higher. happened in history. It is about the impact of the Gregory Barker: The cost of the other technologies policy that you are considering. that are supported by the feed-in tariff should be Gregory Barker: The impact assessment is a very added to the numbers in that table to get the total draw reliable, so far as you can be, economic document. It down from the FiTs budget/RO. is an extremely important tool of policy, but it is not the only tool available to you, particularly when you Q119 Dr Whitehead: As a general proposition, if are having to take decisions that are based on factors you submit a budget line, revised, which comes to £1 that are changing every single day. The impact billion and in the Treasury agreement you have a 20% assessment was basically out of date the moment it headroom in order to deal with that budget over the was printed, because we are dealing with a very period and the impact assessment is assessing what dynamic situation. More and more information is that spend would be over the period and comes to less coming in every single day. Had you published the than that total, would you agree that it does appear impact assessment a month before, it would have said that going with a 1 April eligibility date, as the impact something different. Had you published the impact assessment suggests, would not be ruinous as far as assessment a month later, it would have said the overall budgets are concerned? something different. Gregory Barker: One thing I am absolutely sure, Dr Whitehead, is that shifting the eligibility date to 1 Q124 Dr Whitehead: Yes, and that is why you have April would be absolutely catastrophic and all of an impact assessment. the— Gregory Barker: Had you published it a week later, it would have said something different. The impact Q120 Dr Whitehead: Forgive me, but this is not assessment gives you an as accurate as possible a what the impact assessment says, nor do your revised picture of what was happening at that particular point figures say that. in time. If you are not dealing with a very dynamic Gregory Barker: That is not what it said at the situation, that can be extremely helpful; but when you beginning of the month. Since then, we have had the are dealing with a situation where you have an benefit of more data from MCS and it is coming on a industry that is seeing an unprecedented level of daily basis. This is what I’m trying to get across to the growth, you have to take a whole range of factors into Committee. Since then, I have learned of numerous account in formulating policy, not least the evidence schemes that have had to be cancelled as a result of that has been presented by colleagues. the review. Some of them are very, very large schemes indeed, not just domestic schemes, but very large Q125 Chair: This very point was presciently schemes run by Social Housing; new funds that were anticipated, when your officials appeared before my planned to be deployed before April and schemes that Committee a year ago, by Laura Sandys when she are sort of rent-a-roof schemes. The level of demand asked a question about whether you were going to be that was out there was absolutely mind-blowing. reviewing the feed-in tariffs. This was in November There is absolutely no way that this scheme could last year, “When might that be? What sort of criteria have coped with the volume of demand out there, only would you use?” The answer from Mr Virley was this: some of which is captured in that rather alarming “FiTs will be reviewed in 2012 with any changes graphic. If you are asking me what I take from this, taking effect from April 2013, unless there is a higher my only regret is that we didn’t do this earlier. Had than expected take-up in advance of that. So we are we had a better system and been better informed, we going to be publishing details about what we are should have degressed earlier. The notion that we calling a ‘trigger mechanism’ so that, if we have a should have degressed later is absolutely bonkers. very rapid take-up way above our expectations, then cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 20 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Gregory Barket MP, Moira Wallace OBE AND Simon Virley we will pull forward that review.” Can you tell me export tariff from those totals or did you include them whether you made that trigger mechanism, and, if so, within the totals? was it published? Simon Virley: The export tariff, as I said, is outside Simon Virley: No. As the Minister indicated earlier, the budget totals. So it is not normally considered part we had strong pushback from the industry about the of the levy control framework totals that you were trigger mechanism towards the end of last year, so that referring to earlier. wasn’t taken forward in that form. Indeed, concern Dr Whitehead: Did you put them in the revised then focused on large-scale solar, the so-called solar budget or outside the revised budget, then? farms, which we then brought forward the review of Simon Virley: They are outside. the large-scale tariffs. That was the way that the policy evolved post that hearing that you refer to there. Q130 Dr Whitehead: They always have been, with the original agreement with Treasury? Q126 Chair: What were the objections of the Simon Virley: Yes. That has always been the position industry to bringing forward a trigger mechanism? in terms of the export tariff. Simon Virley: A range of issues: about its design, about its timing, about whether the industry was Q131 Dr Whitehead: So why were the original sufficiently robust at this stage. This was November figures deemed to be 43p, in that case? last year. We had a number of meetings and a number Simon Virley: The original decision about 43p was of consultations with the industry at that point about taken back in 2009 on the basis of what was bringing forward such a mechanism and it was considered to be an appropriate rate of return in order deemed that that wasn’t the right way forward at that to get to— time; but that the main issue we had to address was the issue of large-scale solar, the issue of solar farms, Q132 Dr Whitehead: No. I mean, why, in your which then meant that we accelerated the cuts that budget calculations originally and in the impact have now taken effect. assessment document are the figures always shown as Gregory Barker: However, we did announce that it 43.3p and not as 41.3p, which they would have been was our intention to introduce such a mechanism and if indeed the export-deemed tariff would be seen as I announced earlier in the year my intention to consult outside the levy mechanism? Is that a mistake or is on the creation of a new model that would be much that deliberate? more predictable, more scientific, that would learn the Simon Virley: The point remains that the export tariff lessons from Germany and would have such a is considered to be outside, for the reason I have capacity-related element to it. We expect to publish given. that shortly. Q133 Dr Whitehead: I am asking you a different question, forgive me, which is, were they calculated Q127 Dr Whitehead: I have just a minor point as inside the overall levy mechanism? If they were relating to your understanding of the composition of not, why were the figures for the levy mechanism what was in the budget over the period. Did you shown as 43.3p? understand that the export tariff element of the overall Simon Virley: The 43.3p was deemed to be the right tariff, as it has originally stood, was inside the levy rate at that time to get— cap mechanism or outside the levy cap mechanism? Simon Virley: It is outside. The export tariff is outside Q134 Dr Whitehead: Yes, but it included the because the export tariff is set at a rate that is below export tariff. the electricity price and, therefore, not deemed to be Moira Wallace: I wonder if there is a shorthand in the the additional costs of subsiding solar PV. impact assessment that is confusing us here, but I think we had better just look at it and check that it is, Q128 Dr Whitehead: Have you done any work on as we say, outside the budget. what the actual benefits of the export tariff is, deemed, to the electricity industry? Q135 Dr Whitehead: Is it possible to write to me Gregory Barker: I think it is fair to say that it is on that— higher than 3p, and one of the things— Moira Wallace: Yes. Dr Whitehead: It is double, in fact, is it not? Dr Whitehead:—because the 43.3p appears to Gregory Barker: It could be double. There are some include the deemed export tariff. that even say it is higher than double. It is one of the Simon Virley: No. The 43.3p is just the generation factors that I am looking at as a range of ways in tariff and the export tariff is separate and additional which—I am discussing informally with industry to that. participants the number of ideas of how we can support the solar industry in the longer-term without Q136 Joan Walley: Just as far as this impact drawing on consumers’ bills unnecessarily. The idea assessment is concerned, it is obviously done hand in that we could look at the potential for raising the hand with the Treasury; but if you are going to look export tariff is an interesting one and one that I am at the whole impact of everything that is happening, actively exploring. surely there should be some accounting for the other costs of this? For example, the previous witnesses Q129 Dr Whitehead: When you did your revised talked about the numbers of jobs lost. They talked budget, did you deduct the deemed benefit to the about the amount of money that was lost to the cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 21
29 November 2011 Gregory Barket MP, Moira Wallace OBE AND Simon Virley revenue. What I would like to know is how this BIS, for example, and other Departments have made impact assessment gets constructed and what the their views known. specification is for how these figures are costed in Joan Walley: I think it might be very helpful, in the terms of then you have the decision as to how or interests of transparency, if our Committee could have whether to go ahead with the different tariffs or not. sight of that correspondence. It is the greenest Government ever. We keep on being told this. Q140 Albert Owen: Yes, this is a very important Simon Virley: The critical assumption underlying the point, Minister. You said in an earlier response to impact assessment is to look at the rate of return we Sheryll Murray that you have ongoing dialogue with think is necessary to ensure continued deployment of Treasury. Although you are not a member of the this industry and make sure we have a viable solar Cabinet, are you aware of an impact study done on industry going forward. As you will see, the rate of jobs and on revenue, as Mr Virley said, of VAT? Has return that underpins the impact assessment is that been taken into consideration in any of the effectively a 4.5Ð5% real rate of return, post-tax, for discussions that you had with Treasury? Cynics like 25 years. We consider that to be a healthy rate of myself think that this is Treasury-led. return, and it should provide for a viable industry over Gregory Barker: There obviously is a wider issue, but the medium term. In terms of the impacts on jobs, of we haven’t been engaged on a day-to-day basis with course there will be some impacts on the solar Treasury. The key issue— industry but we have to, as the impact assessment Albert Owen: Not day-to-day basis. We are talking says— about an industry that feels—you are impacting on the industry. There are jobs in that industry and VAT Q137 Joan Walley: Is the impact on jobs costed into receipts— the impact assessment? Gregory Barker: Of course there are jobs, but they Simon Virley: I was going on to say that, as you think are highly subsidised jobs. Our key mission from the about the impact on jobs, you can’t just think about Treasury is to manage our budget for the duration of the impact on the solar industry. You have to think the spending review period. about the impact for the whole economy and the point that the impact assessment makes is that there will be Q141 Albert Owen: So there is no cost-cutting with lower bills as a result of this, lower energy bills for the Treasury with the extra revenue that it could get? households and industry, that then feed through into Gregory Barker: I don’t think the Chancellor is going economic activity elsewhere. So we have to make a to unpick the spending review in response to— judgement about the cost-effectiveness of different policies and obviously this is trying to improve that. Q142 Albert Owen: So that is a no, then? This was not taken into consideration? Q138 Joan Walley: In that case, I would like to ask Gregory Barker: No, I am not saying it wasn’t taken the Minister, if I may, Mr Barker, in terms of the into consideration. I am saying that our overarching Cabinet Committee and the cost-cutting agenda—you mission from the Treasury is to manage the budget, know this agenda, as the former member of the but we do look at the whole, wider green economy, Environmental Audit Select Committee, better than absolutely. anyone around this table—where there is an issue where it is not just about one aspect of the economics Q143 Chair: There are several other questions I of it but it is about the wider cost-cutting agenda, has know colleagues wanted to ask, but I appreciate that this whole debate been discussed in detail in terms of by the time we finish voting it will be past your what the impact assessment should be? Has that been deadline. One of the questions I was going to ask was discussed in detail at Cabinet? how much of the £446 million allocation, the revised Gregory Barker: I am not a member of Cabinet, I am figure, has been spent already? Perhaps we could put afraid, but I do see Cabinet papers. those questions in writing, and two or three others. Joan Walley: No, but you are a Secretary of State. Gregory Barker: Absolutely. Could I just conclude, Gregory Barker: I do not believe that the nature of Mr Yeo, by saying I am a strong supporter of the solar what constitutes an impact assessment has been industry, and we have to manage it, through a difficult discussed, although I would be prepared to stand period, within the constraints of a budget? But I am corrected on that. pleased at the way in which my officials are working constructively with the industry, and we are looking Q139 Joan Walley: If you were still a member of for solutions to sustain the industry in way that this Committee or the Environmental Audit Select doesn’t put unsustainable burdens on consumer bills. Committee, rather than speaking to us now as a Joan Walley: I think we just have one final question Minister, would you have hoped that this cost-cutting before we have to bring it to a close, Chairman. aspect of it would at least have been addressed by the Secretary State in order that the picture could have Q144 Caroline Lucas: We haven’t had a chance yet been looked at in the round? to talk about the linkage between the reduction of the Gregory Barker: It wasn’t discussed at Cabinet, I tariffs and the Green Deal, and the energy efficiency believe, in such a way. Obviously there has been component of the Green Deal. According to your own communication around Whitehall through the usual impact assessment, that means that we could be way, through colleagues writing to each other and looking at a reduction in take-up of about 92%. It is officials discussing, so we have had discussions with phenomenal. Why has that linkage been made? What cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 14:35] Job: 017157 Unit: PG01 Source: /MILES/PKU/INPUT/017157/017157_o001_db_HC 1605-i.xml
Ev 22 Energy and Climate Change and Environmental Audit Committees: Evidence
29 November 2011 Gregory Barket MP, Moira Wallace OBE AND Simon Virley assessment was made of the impact that that would Q145 Caroline Lucas: But why just with solar? Why have? not with a whole range of other things? Why are we Gregory Barker: The linkage is only a proposal in the looking at one part of the— consultation. I think there are huge opportunities for Gregory Barker: We are looking at the wider piece, the solar industry to join up more coherently with the but it is a consultation and we are talking to industry. whole Green Deal effort and the massive push that there is going to be there for the greening of our Q146 Caroline Lucas: Do I read that as a suggestion housing stock, but— that you may be very open to the proposals to Caroline Lucas: But why is that the major address that? requirement— Gregory Barker: Certainly. Absolutely. We haven’t Gregory Barker: I am talking to the industry, but as closed our minds on any of this. a principle it is absolutely right that we should link Chair: We have lost our quorum. Thank you very energy efficiency with subsidy for renewable energy. much indeed for your time this afternoon. cobber Pack: U PL: COE1 [SO] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 23
Thursday 1 December 2011
Members present: Mr Tim Yeo (Chair)
Peter Aldous Sheryll Murray Dan Byles John Robertson Katy Clark Laura Sandys Barry Gardiner Joan Walley Zac Goldsmith Dr Alan Whitehead Mark Lazarowicz Simon Wright Caroline Lucas ______
Examination of Witnesses
Witnesses: Chloe Smith MP, Economic Secretary to the Treasury, and Jonathan Mills, Deputy Director, Energy, Environment and Agriculture, HM Treasury gave evidence.
Q147 Chair: Good morning. Thank you very much Certainly the impression of some people in the for making yourselves available for this joint meeting industry is that it is, effectively, Treasury oversight. of the two Select Committees. You will be aware that Whether that is the case or not, one of the areas of there is considerable interest in the energy industry in criticism is that DECC has perhaps reacted rather late the decision to consult on revisions to the feed-in in the day to what was clearly an unsustainable level tariffs, so there is a lot of interest in what you have to of feed-in tariff for small-scale solar power. The say. We had the opportunity of questioning Greg problem of this rushed consultation that we are now Barker on Tuesday afternoon, so you are very in would have been averted if that trend, which, on the welcome here. basis of the figures that we were shown, was certainly To begin, can I ask what role the Treasury has in apparent by July and August time, had been picked setting feed-in tariffs and how you work with DECC up earlier. In light of that, has the Treasury been when they come to be reviewed? involved in any of the modelling work that DECC has Miss Smith: Certainly. If I may, I will take a few done to look at new rates for solar feed-in tariffs? seconds to give an introductory statement as well. I Miss Smith: If I may, first of all, I emphasise that it very much welcome the Committee’s inquiry. As you was, of course, a slip of the tongue. I fully intended have said, the Committee has heard from Greg Barker to say the word “overall”, rather than “oversee”, as I and DECC officials as well. did on the record there. In answer to your question, DECC is, of course, the In broad terms, your point is correct. It would have lead Department on this policy. Treasury’s role is to been very desirable to have acted sooner on this. Mr work with it to oversee and agree overall parameters Barker said earlier in the week, on reducing the for the work in a financial sense, including the overall generosity of the scheme and slowing roll-out to more budget available in the levy-control framework. It is sustainable levels, “My only regret is that we didn’t do then the Department’s responsibility to design and this earlier.” On specific modelling, I should introduce implement policy within those parameters, and I am Jonathan Mills, who is sitting next to me and who sure you had a chance to put questions of detailed may be better able to answer that question. If you will policy design to DECC earlier in the week, rather than forgive me, I have only been involved for six weeks. necessarily putting them to the Treasury. Jonathan Mills: In terms of the modelling data that The only other introductory point that I would like to the DECC Minister and officials presented on make is to echo some of what Mr Barker said earlier Tuesday, the pattern of increase above expected levels this week. The Government are acting to ensure that became apparent over the latter part of the summer. policies are sustainable, affordable and good value for As I think the permanent secretary pointed out, one money. Of course, there are a number of factors going of the questions that they then sought to address was into the consultation at present. whether that was a product of a seasonal variation or To go further into your question, Chair, I think that as an ongoing trend; it turned out to be the latter. They in any area of public spending the Treasury has are seeking to improve their forecasting data, and we worked closely with DECC to set overall limits on, will work closely with them on that. In fairness, some first, spending in the spending review process in this of the most difficult things to forecast are policies that case and, secondly, more recently and over time, on are in a very early stage, where the market is the levy-control framework as those policies have developing fast and where both cost data and progressed. There has, of course, been interaction at behavioural responses make it particularly difficult to official level at various points in this episode, as well predict. as ministerial interaction. Q149 Caroline Lucas: I wanted to follow up on what Q148 Chair: The verbal transcript will pick up what the Minister just said, quoting the DECC Minister, I am sure was not a Freudian slip on your part, when who last time, as the Minister has rightly said, said, you said that the Treasury’s role was to oversee. You “My only regret is that we didn’t do this earlier.” One then changed that to a different interpretation. of the real mysteries for the Committee is precisely cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Ev 24 Energy and Climate Change and Environmental Audit Committees: Evidence
1 December 2011 Chloe Smith MP and Jonathan Mills why the Government did not act sooner. When I put Q154 Joan Walley: Right. It would be very that as a question to one of the witnesses on Tuesday, interesting for us actually to have details of the input we were told that the whole of the FiTs cap was based from the Secretary of State at DEFRA on this specific on a spreadsheet that nobody in the solar industry was issue. Could we have that as well, please? ever consulted on. I have the spreadsheet here. It is Miss Smith: I don’t know whether I am able to four sides long. It does not look like a comprehensive promise that to you, as I am neither in the Cabinet nor piece of work, and it also came with massive health in that Department, but I am sure that I could look warnings. It kept saying, “This is a spreadsheet on into whether it is possible to get that for you. which we are going to set the FiTs cap, but we really don’t know how it will be taken up in the next few Q155 Laura Sandys: We have had evidence from years.” Can she confirm whether the Treasury had any the solar industry itself and there have been lots of input into this spreadsheet? Was it really the case that figures bandied around about job losses. When one is the FiTs cap was fixed on the basis of, more or less, a looking at a policy change and a policy decision, to four-page or five-page spreadsheet? what extent has the Treasury actually made what I call Miss Smith: First, I repeat that DECC’s responsibility a proper balance-sheet assessment, or impact is the detailed delivery. As I have said, the Treasury assessment, of the changes in the FiTs in terms of job is responsible for working with DECC on the overall losses or in terms of VAT, which is obviously a good spending envelope. Again, if you will excuse me, I revenue stream for the Treasury, when signing off this will refer to my officials to help answer the question. change—I suppose the Treasury does that, in many Jonathan Mills: The discussions at the spending ways—in renewable subsidies? review were informed by official-level discussion of Miss Smith: I would refer to the DECC impact the modelling. The numbers that are agreed for analysis, which I believe these Committees have seen forecasting are also subject to scrutiny by the Office and spoken about earlier in the week. I understand for Budget Responsibility, because they are reflected that that analysis assessed the impact of these changes, in its overall forecast numbers. consistent with the usual agreed approaches to both economic and fiscal factors. I would also cite the Q150 Caroline Lucas: Did the Treasury itself have figure from that analysis, which is that the change in any input, scrutiny or comment on the spreadsheet? tariff is expected to have a net benefit to the economy Miss Smith: Personally, I am not aware of that. As I of £9.3 billion. have said, I have been in this role for six weeks, so I am unable to answer in that context. Q156 Laura Sandys: Right. What is the assessment of job losses that the Treasury has made on that basis? Q151 Caroline Lucas: Can you find out, because it is quite important? If a decision was genuinely taken, Miss Smith: Industry has cited some fairly large as the solar industry is telling us that it believes that figures, such as 25,000, I believe. DECC’s figures it was, on the basis of an inadequate, highly caveated suggest that only 14,000 full-time equivalents are and speculative spreadsheet, it is very important to currently employed in the sector, so I feel that the know what scrutiny the Treasury made of that 25,000 figure looks slightly unfeasible compared spreadsheet. I appreciate that the Minister has only with that. been in place for six weeks, but if we could get an answer on that as soon as possible it would be Q157 Laura Sandys: But we are talking about the immensely helpful. losses and not just the current employment. Miss Smith: Chair, I will be happy to do that. Miss Smith: Indeed, but you can’t lose 25,000 jobs if you only have 14,000 jobs to start with. I think that is Q152 Joan Walley: Just to add to that, we have had the point. assurances, following the Government’s decision to The Treasury’s interest in this is to try to get to an get rid of the Sustainable Development Commission understanding of the difference between what you and in terms of decision making that involved the might call net and gross jobs. That is to say that, if Treasury, that DEFRA and the Secretary of State at you take action to control an unsustainable stream of DEFRA would have an input into these cross-cutting spending, yes, by all means there are jobs and decisions. I just wonder whether or not you could set economic activity connected with that stream, but out for us, from the Treasury’s perspective, what input there are other areas of the economy which you then at that high level has come from the Secretary of State expect to benefit. In this case, we believe that will be at DEFRA. greater than that stream that we are stopping, so Miss Smith: My understanding, in terms of the therefore we expect this change, as I have cited from decisions that were taken that have led to this the DECC impact analysis, to have an overall net consultation, is that there were Cabinet Committee- benefit to the economy. level write-arounds involved, in which, no doubt, DEFRA would have— Q158 Laura Sandys: That is obviously not what the solar sector itself feels. Have you looked at the overall Q153 Joan Walley: Sorry, Cabinet Committee— effect on the economy from the proposed lower tariffs, Miss Smith: Cabinet Committee-level write-arounds, perhaps taking account of those lost revenues in so specifically the Economic Affairs Committee, in addition to that. Has the Treasury done any of its own which Cabinet colleagues of the Secretary of State for assessment, or has it merely taken up the DECC DECC would no doubt have views. impact assessment? cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 25
1 December 2011 Chloe Smith MP and Jonathan Mills
Miss Smith: As I have said, the Treasury has an put that a couple of other ways, that would equate to overall responsibility for discussing the spending £9 on bills in 2015 or £26 on— framework with DECC, but DECC will be responsible for the detailed implementation, which in this case Q162 Zac Goldsmith: Can I interrupt you for one would include the impact analysis. second? I think there is also consensus that the choice is not between this and doing nothing; the choice is Q159 Laura Sandys: Did it question the impact between holding out until April at current rates and assessment, input any other data or add to the then reducing to 21p, which I think the industry assessment that was put into this, or did it just accept accepts, or bringing it forward to December. So, if it, sign it off and say, “Fine, whatever the Department there is a choice between the two, what would be the has come up with is totally acceptable”? In other cost of introducing the 21p rate in April? That is the words, is that oversight or input? figure I am looking for. Miss Smith: Can I ask Jonathan to answer that? Miss Smith: Can I give that as a weekly figure, which Jonathan Mills: The DECC impact assessment was I think is rather interesting? I understand that each conducted on the basis of agreed procedures and week of delay has a lifetime cost of around £275 agreed guidelines across Government, which include million. This being a consultation, both the rates and how economic impacts are assessed. So, for example, the dates are not yet set, although reference dates are in relation to assessing jobs impacts, differentiating given. The arithmetic will be done on that figure of between the gross jobs impact—the DECC impact £275 million. assessment cites a figure for gross jobs impact—and the net impact on the economy as a whole, the latter takes into account the effect on jobs outside the solar Q163 Zac Goldsmith: For the record, I am not in a sector of the energy costs being lower than they position to contest those figures, but it would be really otherwise would have been and so an increased level useful if, in the shortest possible time, we could have of economic activity and an increased number of jobs a grid provided by the Treasury explaining how you outside the solar sector. The same argument applies to reached those figures, again on the acceptance that tax revenues. On that basis, the DECC impact there is consensus on the need to come down to assessment is consistent with the agreed approach around 21p by April. It would be really useful to have across Government. the Treasury’s accepted figures on that, because without them it is quite hard for us to take a view. Q160 Laura Sandys: So it would be best to get rid Miss Smith: As I have said, the Treasury has an of FiTs altogether? If you took the feed-in tariffs away overall interest in the framework of this, but it is altogether, would you get more jobs? That is the DECC’s impact assessment, so I suspect that that extrapolation of it. question should be directed there. Miss Smith: The political commitment to feed-in Chair: There is a degree of collective responsibility tariffs overall is clear. This programme has overall here. If you are saying that the lifetime cost of delay benefits, which have been laid out along the line here is £275 million for every week at the present rate of and by the previous Government. This is not new as of feed-in tariffs’ extent—I think that is what you said— 2010. So, yes, we believe that proceeding with feed-in whether that is based on data generated in DECC or tariffs overall is of benefit, and we would hope that it the Treasury is not of any concern to us. What we assists not only at a household level but towards the would like to see is the basis of the calculation. I growth in the green economy that we wish for this happen to think it is also in the Government’s interest country. to publish that, because it would restore confidence in their arguments. We are not taking a view at this stage Q161 Zac Goldsmith: I am interested in the £9.3 either way, but we would like to understand the basis billion net figure that you have cited. I assume that in on which the figure is calculated. We are quite happy order to reach that figure you would have had to have if you want to pass that on when you walk back to the had agreement between the Treasury and DECC on Treasury today and get the Department to answer it. the extra costs to consumers of sticking to the April Whichever Department does so, I genuinely think it is deadline, so I would like to know, just for the sake of in your interest to have that published in detail. clarity, what you think that cost would be. Somehow you would have to subtract from that an estimate of what would be lost in revenue, jobs, and so on, and, Q164 John Robertson: Can I ask for clarification? leading on from the question that Laura has just asked, That works out at roughly £3.5 billion, which cannot I wonder whether you can put a figure to that. I be right, between now and April. If it is £275 million assume that in order to reach that £9.3 billion figure a week extra cost, that works out at just over £3.5 there must be consensus on those two figures. That billion between now and April. Surely that cannot be was an issue of some contention in our previous right. session, where certainly I was unable to reach any Miss Smith: Those are lifetime costs; does that help? kind of clarity on the figures, so I hope that you can Laura Sandys: It is the lifetime, because it is 25 help us with that. years. Every contract that is signed has a liability of Miss Smith: I shall do my best. My understanding is 25 years. that the DECC impact assessment estimates that doing John Robertson: So it is even more? If it is £3.6 nothing would lead to additional lifetime costs of £37 billion for five months— billion—no doubt that is already known to you. To Sheryll Murray: No, over 25 years. cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Ev 26 Energy and Climate Change and Environmental Audit Committees: Evidence
1 December 2011 Chloe Smith MP and Jonathan Mills
Q165 Zac Goldsmith: I want to explore that a little tariff scheme. They don’t refer to the costs of other bit, because I agree with John Robertson that I do not technologies. think that is possible. We have been told, and I think Thirdly, I should probably mention what the DECC DECC agreed, that the extra cost of delaying until officials said on Tuesday about the data that they have April was between 60p and £1 per consumer. I think been receiving since the impact assessment was that was the figure that was raised, although I am formulated, which show that the deployment rates, willing to be corrected. If that is the case, you would even before their announcement, were escalating be looking at between £12 million and £20 million faster than some of the data in the impact assessment. additional cost on the back of this delay per year. If you multiply that by 25 you are nowhere near the Q168 Chair: In the light of that, it would be helpful figure that has been cited. I think it is impossible for if you got together with your colleagues at DECC and us to take a view on this without absolute clarity on gave us an updated estimate of what you think the those figures. It seems that the more we delve into the difference in cost is between a line scheme to run on figures, the more confusion there is. I hope there is until April and cutting it off the week after next, clarity at the Government level and I hope you can which is the proposal in the consultation, rather than commit, from whichever Department, to providing using up the rest of our session on this point. You that clarity, because our job is a lot more difficult know what information we want. I am sure that without it. between you and DECC, you can produce it in the Miss Smith: May I direct members of the Committee, next day or two. It would be helpful to us and, I think, if they have not already seen them, to the tables on to the Government’s own argument. pages 19, 20 and 21 in the impact assessment? Barry Gardiner: I heartily endorse that. Perhaps those figures should not include any spiking that has Q166 Dr Whitehead: Table 14 on page 21 of the occurred as a result of the anticipation of the scheme impact assessment, which was signed off on 2 closing, because that would, of course, be illegitimate November so it was presumably reasonably accurate on the Treasury’s part, as I am sure you appreciate. at that point, sets out the cost to consumers of lower Minister, have you seen the letter from Stephen Wiles tariffs with the 1 April eligibility date. It puts those at the Treasury to Lee Nicholson of the EAC dated costs at £110 million in 2011–12, £270 million in 23 November? 2012–13, £280 million in 2013–14 and £290 million Miss Smith: Yes, I have. in 2014–15. By the end of the present spending period, therefore, that cost would be £950 million, Q169 Barry Gardiner: Good. I did not want to ask compared with the levy cap budget revised total of you about something that you might not have had just more than £1 billion for the same period. That sight of. It says that you will be coming to discuss information was supplied to the Committee by DECC the issue on 1 December and will answer our further immediately before the Committee’s last meeting. At questions then. Here you are, and here they are. first sight, it appears that the cost to customers is less In the answer to the first question, on the words “the than the total levy cap over the period to 2015. It may agreed totals within the levy control framework reflect be that the figures that you have been suggesting are a judgment on affordability”, can I get clarity from the entire lifetime of the cumulative commitments you as to affordability for whom? Is it Government entered into as far as tariff payments are concerned, affordability that we are talking about? I just want to but they certainly do not appear to accord with what be clear. I do not want to put a meaning on those is in the impact assessment or indeed the material that words that they do not actually possess. DECC has supplied to the Committee. Are you able Miss Smith: Affordability in that sense clearly has a to shed any light on that? meaning for the Government—it would be wrong of Miss Smith: I note that the levy control framework me to deny that—but also, by nature of their being line item for the FiTs budget is £357 million in levies on bills and the way in which these policies 2014–15, which I do not believe I heard you mention. impact on consumers, of course the phrase has a meaning there as well. Q167 Dr Whitehead: I was talking about table 14, not the budget. Table 14 shows the estimated costs Q170 Barry Gardiner: Absolutely. It is good that and benefits of lower tariffs with the 1 April you have teased that out, but you believe that in this eligibility rate. context, particularly given that Mr Wiles goes on to Jonathan Mills: To clarify, the numbers in the impact say “value-for-money in this area and in relation to assessment are calculated on a standardised basis for other areas of public spending”, are we talking about all impact assessments. That includes deflating the affordability from a public spending point of view? costs for future years to take inflation into account, so Miss Smith: Yes. they are in real terms rather than nominal terms, and also discounting in line with the general guidance on Q171 Barry Gardiner: Good. Can you tell me why? applying discount rates. The numbers in the budget, Miss Smith: I beg your pardon. in line with the reporting to Parliament, are nominal terms and undiscounted numbers. That is the first Q172 Barry Gardiner: Can you tell me why it is reason why the numbers in the impact assessment are about affordability for public spending? You rightly reporting on a lower basis. They deflate over time. pointed out that the people paying for this are not Secondly, the numbers in the impact assessment only taxpayers and the Government; it is actually the refer to spending on the solar PV part of the feed-in consumer, on their energy bills. cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 27
1 December 2011 Chloe Smith MP and Jonathan Mills
Miss Smith: Certainly. If I may, I will answer this in apply to households as well. Our cost decisions, to two halves. One is to ask Jonathan to go into the more which I referred, are relevant to our previous technical definition of the ONS categories used in discussion. So there is a household impact, which I this case. think comes under the heading of affordability. I think that is valid. There is also the very important point Q173 Barry Gardiner: Can I just caution you before that none of this is free money, wherever it comes you do? The written evidence submitted by the from. It is all money that, by consumers’ or others’ ONS—excuse me for quoting it—says: “The Feed-in choices, can be spent elsewhere in the economy. In Tariff Scheme is one of eight regulatory schemes that that sense, the Treasury of course takes an interest. the National Accounts Classification Committee have May I now ask my official to go further on the two been asked to give a formal decision on. In order to specific points that were raised? maintain consistent treatment across member states in Jonathan Mills: In terms of the time line and the the National Accounts individual schemes have been process here, Ministers agreed, at the time of the discussed in Eurostat, the Feed-in Tariff scheme has spending review, the scope that the levy-control not been discussed. ONS has requested that a more framework would cover. That decision was consistent general decision on treatment of levy-funded subsidy with the purposes that are set out for the framework schemes is agreed by member states, which will allow in the document that is available on the DECC and ONS to classify all such schemes.” At the moment, Treasury websites. In terms of the specific question however—this is not a quote, rather I am paraphrasing around ONS classification, the ONS has not yet taken the last part—they have not given a ruling on this, so a view on this. Ministers took the view that they I do not think that you can pray the ONS in aid of needed to make a judgment about where they thought your position, because it has said very clearly that it that classification was likely to come out. That does not have a position on it yet. Indeed, you will be judgment was made based on information from aware—at least, I am sure that Mr Mills will be decisions that the ONS has already made and its aware—that the European Court has ruled on a similar description of the factors that it takes into account situation in Germany and found that these climate- in determining whether something counts as tax and levy funds do not have to be considered as part of the spending, which, in its terminology, it talks about as Government balance sheet. something being compulsory and unrequited and a Given those cautions—I am trying to be generous to transfer of resources, which are conditions that seem you and not allow you to stray into areas that you may to be fulfilled by the feed-in tariff scheme. regret later—can you then explain why? Miss Smith: I am aware of the ONS position and have Q175 Barry Gardiner: Grand. Thank you, that no disagreement with it here in front of the makes things clearer. Mr Mills, you have established Committee. It is the case that it is yet to proclaim in that the Treasury at least regards this quite clearly as that area, and we are aware of that. public spending in advance of a ruling by the ONS, The more general point that I would make about this and in defiance of a ruling by the European Court. category of expenditure is that there is clearly a That is helpful. broader economic impact—perhaps some of the What I am less clear about is why you should find that elements that Mrs Sandys was discussing—which I there are concerns about the judgment on affordability, think rightly means that the Treasury would have an because, of course, Mr Wiles goes on to say in his interest in the overall level. response to question 2: “The spending on policies included in the levy-funded spending cap does not Q174 Barry Gardiner: Sorry, Minister. The issues have a direct impact on the deficit to the extent that that Mrs Sandys was quite rightly discussing were revenues match spending.” Even though I would about wider jobs and growth and of course that affects disagree with you about whether it should be regarded the Treasury, but this is not what Mr Wiles said here as public expenditure, you have taken that decision in response to question one, is it? What it talks about and that’s fine; you have then to operate within it. is a judgment on affordability. Have you got the However, given that you said it is public spending, money? You talk about it as public spending. Why why are you concerned about its affordability, given are you talking about it as public spending when the that the income matches the outgoing? European Court has ruled that it need not be public Miss Smith: Because, as I say, of the other half of the spending and when the ONS has yet to give any ruling question of affordability, which is that on the to you on it? You are still considering this as public consumer— spending. At any stage before this scheme went for review, did Q176 Barry Gardiner: No, no, no. I’m sorry, any of your officials say to DECC that you were Minister. That really won’t do, because the concerned about affordability from a public spending affordability, you have agreed, is in the context of point of view? Was that what precipitated this bogus public spending. I’m sorry, but you cannot just switch consultation and the decision to end the scheme at the tracks like that and jump across. current tariffs on 12 December? Miss Smith: With respect, I thought my earlier answer Miss Smith: I shall ask Jonathan to answer that, as he acknowledged that there were two sides to that coin. is one of the officials engaged in this area, with a few further points from me to answer your previous Q177 Barry Gardiner: For my own part, I would question on affordability specifically. First, it is fair to ask you why poor people who cannot afford to put say, as I already have done, that affordability has to these things on the roof should be subsidising rich cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Ev 28 Energy and Climate Change and Environmental Audit Committees: Evidence
1 December 2011 Chloe Smith MP and Jonathan Mills people to do it. However, that is not the issue here; Jonathan Mills: I thought I heard in your initial that is a fundamental philosophical issue with the question— whole scheme. The question here is, why is the Treasury feigning Q181 Dan Byles: My understanding is that some of concern about affordability of public spending, first, the individual levy-funded spending cap for in defiance of the European Court’s ruling that it will renewables obligations has been transferred to the cap not be public spending, and secondly, when it knows for feed-in tariffs. full well that the money it gets in is the same as the Jonathan Mills: And my understanding of that point money it gets out, and therefore the issue of is that DECC has been considering changing how affordability does not arise? some of the activity is recorded, but that is not a Miss Smith: I am afraid I simply disagree. There is change in the actual underlying activity—the actual the need to act for those consumers who, in what you installations on the ground—in being under one have just termed, I believe, as the principals of the programme rather than another. It is merely a scheme, have to bear the cost of all the decisions that correction of how they are being picked up in the are taken to install. statistics; it is not a change. Barry Gardiner: Okay. I accept your argument then that this is simply a matter in which the Treasury was Q182 Dan Byles: Thank you—that is helpful. not concerned about the money that was coming out Touching briefly on the point made by Mr Gardiner of public spending. The Treasury, in this one instance, about affordability for consumers, your submission was simply concerned about the effects on the poor tells us that the tax and spend limits in the spending consumer, or the poor bill payer, through the costs of review are designed to reflect what are sustainable and this scheme. Thank you. appropriate levels—in this case, I believe, specifically referring to consumer bills rather than Government Q178 Dan Byles: There are separate caps for the spending levels—but has the Treasury done any feed-in tariffs, for the renewables obligation, and the research into what level of energy bill supplements warm homes scheme. How do you decide the customers would regard to be sustainable and appropriate level of those individual levy-funded appropriate for FiTs? How are you making the spending caps? decision that this is suddenly less sustainable, less Miss Smith: I return to the point I have been making appropriate or less affordable for customers? in various places. The detail of that would be for Miss Smith: In my role as a new Minister, I have not DECC to do, and my understanding is that officials, seen such research in detail, so I shall ask Jonathan if at an official level between DECC and the Treasury, there is previous work on that. In part, the answer to discuss such things, but that would be a question for your question is there for all to see—if you are talking DECC. about £9 on a bill or £26 on a bill, you know as well as I do and as well as our struggling constituents do Q179 Dan Byles: DECC has now transferred some whether that is affordable or not. I am not sure of the of the renewables obligation cap to the FiTs cap. In need for a fuller analysis. your understanding, given that you said this is a DECC decision and not a Treasury decision—but is a Q183 Dan Byles: So it is a wet finger in the air? decision that I believe the Treasury needs to Miss Smith: No, the numbers will have been arrived approve—was that done as part of a fundamental at in a robust manner, but I think you were asking analysis of the requirements for both the renewables about whether those numbers are too high or too low, obligation cap and the FiTs cap, or was it done simply or costly or cheap. Of course, the cheapness of to stop the overall FiTs cap from being breached? something is for the individual to have an opinion Miss Smith: If I may, I will answer that briefly, then upon. offer Jonathan a chance to contribute. No formal request has been received by the Treasury to do so. Q184 Dan Byles: But the Treasury has Jonathan Mills: To clarify how the framework fundamentally changed the way the feed-in tariffs are operates here, the levy cap operates at an aggregate working—to a great outcry from the industry—on the level. There are forecasts within that for expected basis that this is going to be now unaffordable for expenditure on the different schemes. If the consumers. There has to have been some sort of expenditure increases in one scheme and decreases in research into what is and is not unaffordable for another, that is not necessarily something in itself that consumers and over what time frame. You cannot just would need approval by Treasury Ministers, because be looking at one figure and saying that it is bigger it does not affect the overall cap level. I think you than another one. are asking about potential switches from the numbers Jonathan Mills: DECC has published, I think last recorded under the renewables obligation and those in week, its analysis of the impact of policies on bills, the feed-in tariffs scheme. My understanding is that which gives an overview assessment and then, that is merely a classification change. It is not a underneath those headline data, breaks down the change in the resources available for different impact of policies on bills. That provides the activities; it is merely a correction of how some of Government’s best assessment of the state of play. that activity has been recorded. In terms of the overall judgment about affordability, I come back to the arguments for why Ministers agreed Q180 Dan Byles: It is not a cap going forward; it is that it was appropriate to cover these schemes in the a recording of activity taking place? spending review, which was because it informs an cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 29
1 December 2011 Chloe Smith MP and Jonathan Mills overall judgment about the fiscal affordability of the Q189 John Robertson: It is not be relied on then? Government’s tax and spending plans. The money that Miss Smith: It is snapshot and, as such, it has its uses. is being spent through these schemes, paid for through I also note that what is going ahead now is a genuine energy bills, is economically equivalent to consultation, so there is an openness to good-quality hypothecated tax and spending schemes, so the overall data coming into that. judgment on affordability would be one that was made as part of the fiscal judgment, in the form of the Q190 John Robertson: How did the autumn spending review. statement affect things? Miss Smith: If I may further reinforce a point that Miss Smith: I do not believe that it did. was made earlier, a consumer who has not installed a solar panel on their roof—let us deal with a domestic Q191 John Robertson: According to what is here, case, although there are other examples—while the autumn statement included further measures to somebody else has chosen to do so under this scheme, help encourage growth. With FiTs, tax and spend not still runs some risk of exposure to that other being part of the deficit reduction framework, is there consumer’s decisions. That is why there is this wider not an opportunity to relax the cap—my first question consideration of affordability and why it is not just to you—and give the economy a boost at a time when a question of the choices made by consumers with it really needs it? solar panels. Miss Smith: Certainly, the autumn statement was One of the key points in the definitions used by the committed across many policy areas to giving the ONS is that of whether we can choose to have that economy a boost but, in this case, I return to the point spending or not. I underline the fact that, if we do not that DECC’s policy around feed-in tariffs is subject to take control of the costs of the scheme, third parties a number of consultations at present, which is the are affected. In other words, those consumers who do guiding line of them. not have the solar panel on their roofs may, through their connection to the same energy company as Q192 John Robertson: My last question to you: will consumers who do choose to have them, have an there be a new impact assessment? impact on a third party. That is a realistic point, and Miss Smith: No doubt you would wish to ask DECC that is why we take an interest in the overall that question. affordability of the scheme. Q193 John Robertson: You wouldn’t suggest it to Q185 John Robertson: Would the Treasury consider them? special dispensation for feed-in tariffs to take them out Miss Smith: It would be a matter for DECC. of the spending framework, thus removing the rigid levy-funded spending cap? Q194 John Robertson: You have already said that Miss Smith: That is not something that, in my short you are really happy with this, and that you are happy time as Minister, I have yet have the chance to to use it as evidence. I personally think that you don’t consider, but I am sure that facts and figures relating talk to each other. to it can be considered. Miss Smith: We talk to each other, but it would be matter for DECC for an impact assessment. Q186 John Robertson: Are you happy with the impact assessment, when you are dealing with it and Q195 Joan Walley: Before we move on from Mr reading it? Robertson’s question, you just said that what is going Miss Smith: Personally, yes. ahead is a consultation. How would you, as a Treasury Minister, square that with the fact that decisions are Q187 John Robertson: Would you be surprised to being made in the industry that are making sure that hear that your colleague, Gregory Barker, was not? there are certain outcomes ahead of the outcome of Miss Smith: You may have to fill me in on what he the consultation? said earlier to Committee. Miss Smith: I reiterate that it is a consultation, so in terms of the Government’s responsibility for these Q188 John Robertson: Funnily enough, I can. He areas, they cannot control every single aspect of the was asked about various things, and his answer was economy. In this case, clear dates have been set out. that the things were time dated and were only correct There have also been clear questions proposed about at the time, so they could not be used as up to date. the dates and the rates, and we hope for a mature My question has to be why are you happy with it, yet response from industry. he is not? It is probably a rhetorical question. Perhaps you can discuss it with him. He said that the impact Q196 Joan Walley: Do you not accept that it cannot assessment is very reliable so far as it can be an actually be a consultation, because it is economic document. He goes on later to say that it predetermining decisions about employment, and was right at the time. I am not sure whether something undermining investment decisions, which have that was right at the time, given that we have moved already been made simply because contracts have on and had an autumn statement, can be relied on. already been honoured? Can it? Miss Smith: I reiterate that a clear timeline has been Miss Smith: I certainly agree with his view that it is given that enabled decisions to be made both by a snapshot and, as such— industry and by consumers. cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Ev 30 Energy and Climate Change and Environmental Audit Committees: Evidence
1 December 2011 Chloe Smith MP and Jonathan Mills
Q197 Joan Walley: When contracts had already been Q204 Dr Whitehead: So those people making that entered into? decision would have been informed by the imminent Miss Smith: My understanding is that many of those publication of an impact assessment, which contracts are possible to fulfil. For example, in my presumably would have been updated prior to its constituency, I am well aware of fitters who are publication to make sure that the most accurate and working six or seven days a week to do that. No up-to-date information was informing that decision? doubt, you will be aware of such examples in your Miss Smith: I beg your pardon, I am slightly unclear constituency. about the question you are asking. I assume you are asking me to comment on what appears to be a Q198 Dr Whitehead: On the question of the impact mismatch in date. Is that your line? assessment—as I think you are aware, it came out on 2 November and was signed off by the Minister Q205 Dr Whitehead: That’s about right, yes. then—you are clearly happy that that is an accurate Miss Smith: As I have said, the work done to inform picture of where matters were at that point. Can you an impact assessment is clearly known beforehand. I remember the date that DECC informed you that it think it is the case that, within a consultation period, was taking the immediate decision that it did take to data will be published in the sense of an impact reduce the tariff in advance of the 12 April date, assessment. I do not think it is unusual to have that which would have been the case had the consultations follow what I would call very shortly after a run their course? consultation period and, as I have already said to the Miss Smith: If you will excuse me for just a moment, Committee, in this case, that impact assessment I am looking up that date because I would not have certainly forms a snapshot. Is there any further been the Minister due to the change-over time. I detail, Jonathan? believe that, on 13 October, Chris Huhne wrote to the Jonathan Mills: No. Economic Affairs Committee asking for agreement to publish the consultation on the first phase of the FiTs Q206 Dr Whitehead: Okay, thank you. The levy cap comprehensive review. After that, of course, there was that we have already talked about has within it what a discussion, to which I have already referred, both at one might call a little wriggle room. The agreement Cabinet level and official level. that was drawn up with DECC states: “The acceptable headroom will initially be 20 per cent of the total Q199 Dr Whitehead: The date on the consultation cap.” was set. As far as I recall, the date for the Miss Smith: Yes. That’s correct. announcement to be made by the Department—I assume you were aware of that—that it was going to Q207 Dr Whitehead: What is your understanding of reduce the tariffs in advance of the consultation was how that headroom might work in terms of the 29 October. Does that ring a bell? operation of the levy cap? Miss Smith: 31 October is the date I believe is Miss Smith: My understanding is as has been relevant. published within the levy control framework available on the Treasury website, which without a doubt is known here as well. Q200 Dr Whitehead: Okay. That was the date when you understood that that process was to be Q208 Dr Whitehead: For example, is it your undertaken? Is that right? understanding that if over the period of the spending Miss Smith: 31 October was the date of the cycle, any one horizontal line is exceeded by more consultation. than 20%, DECC has to take measures to put that back into line with its original agreement under the levy Q201 Dr Whitehead: So, three days before the cap? Alternatively, is it your understanding that, in impact assessment came out. Is that right? any one year, horizontally, DECC would, for example, Miss Smith: As I have said, 31 October is the date of have to bring its spending on a particular horizontal the consultation and, indeed, the date of the impact line into line with the 20% headroom? assessment is printed on the front. Jonathan Mills: The levy cap operates on an annual basis. It is an annual figure. Q202 Dr Whitehead: So, one might have thought the impact assessment would therefore be accurate at Q209 Dr Whitehead: So it’s the latter. Is that right? the time that that announcement was made, Jonathan Mills: It refers to spending in any given considering it was made before the impact assessment year, not to multiple-year periods. came out. Would that be fair? Miss Smith: As I have already said, the impact Q210 Dr Whitehead: So overall spending on the assessment is certainly a snapshot. If that is the various things in the levy cap, in any one particular question you are asking? year, would be within that 20% headroom? Jonathan Mills: The 20% sets headroom for Q203 Dr Whitehead: A snapshot that served to temporary deviations from forecast, and the levy make a decision before it was published. framework distinguishes between those sorts of Miss Smith: No. Clearly, the work done to inform effects and trends or factors that have a potential impact assessments is known to those doing the work impact on the overall long-term sustainability of the before it is published. cap. cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 31
1 December 2011 Chloe Smith MP and Jonathan Mills
Q211 Dr Whitehead: You would presumably judge ways to bring spending back within containable limits that by, as it were, the bottom line in each year as for the longer term. against the levy cap set out in the agreement, to see whether that 20% headroom had been exceeded or Q217 Dr Whitehead: So, for example, if a budget not? line of about £100 million had such an overwhelming Jonathan Mills: Does your question apply to the effect on an overall budget line within a year of £2 aggregate or the individual schemes? billion, you would worry? Jonathan Mills: DECC would worry if it were in a Q212 Dr Whitehead: That’s what I was attempting position where one or more lines of spending were to find out. Does it apply to the vertical line within behaving in a way that led it to think that it was a year? unsustainable in the longer term—that it either posed Jonathan Mills: Yes. That’s correct. a threat to the cap as a whole or would mean that it had to make savings in other programmes that it did Q213 Dr Whitehead: Therefore, the relevant figure not think were appropriate. would be the bottom figure within the cap matrix in each year? That is the total of the various items that Q218 Dr Whitehead: If DECC goes over that 20% are in the levy cap in that year. It should not exceed headroom and does not do anything about it, you fine 20% of what has been agreed in that cap. it, don’t you? Jonathan Mills: The 20% allows for temporary Jonathan Mills: The levy control framework contains variations up to the scale of 20% of the total cap for a provision whereby deductions might be made from a year. DECC’s resources, were that to be the case.
Q214 Dr Whitehead: But you wouldn’t, for Q219 Dr Whitehead: How does that help with example, regard that 20% excess as applicable to any deficit reduction? one item within one year of that levy cap total? Miss Smith: Clearly, at a political level, it is intended Jonathan Mills: I think there are two slightly separate as an incentive. issues here. The 20% provides some temporary headroom for external factors that are causing the Q220 Dr Whitehead: Could you explain that to me? spending overall or in one area to be different from How might it be an incentive? that which was forecast. DECC would also pay Miss Smith: An incentive towards sensible attention to the forecast trends in particular lines of management of a budget before such a situation were spending to see whether they are sustainable and reached. posing a threat to the integrity of the cap overall. If there were a circumstance where movement in one Q221 Dr Whitehead: So to pay the fine for going line of spending was containable within the 20% over in that area, they would have to cut other projects flexibility in one year, but still posed a structural risk in the Department. in the longer term because there was an underlying Miss Smith: Well, no. As I say, if one were taking trend that was not going to go away, the cap would what you would hope to be a sensible management suggest that action was needed at that point. approach, you would identify these problems early, which is what I believe has happened in this case, Q215 Dr Whitehead: But how would it judge, in the and take action before the hard consequences in the context of the requirement, as you have said, that the framework were reached. 20% is applicable to the bottom line within each year of the overall levy cap? It presumably has to set Q222 Dr Whitehead: But if they did not, you would everything against everything else and then decide. take some of its projects away, basically? Jonathan Mills: It would look at all its forecast data Miss Smith: The framework sets that out, certainly, together. but as I say, the full intention on all sides would be to manage budgets sensibly before such an occasion Q216 Dr Whitehead: But if, for example, in any one were reached. year, it was within 20% of that bottom line overall, you wouldn’t worry about that, from the point of view Q223 Caroline Lucas: Following on from that, the of the Treasury agreement? levy-funded spending cap covers a four-year period, Jonathan Mills: It’s important to distinguish between and we are not even one year in. How much of the temporary, exogenous factors, which might lead to revised £446 million cap is left in the pot for future spend being slightly above profile in one year, and solar PV schemes? underlying structural issues that mean that, on an Miss Smith: Just a moment. enduring basis, spending is going to be above the Jonathan Mills: Just to clarify one point, as I said at forecast, or that there is a trend that means that the the beginning, the levy cap operates on an annual cap is unsustainable. As the framework document basis, so the critical thing is the trend, rather than the sets out— spending overall. We have talked about the impact Dr Whitehead: The overall plan. assessment numbers and committed to provide a sort Jonathan Mills: In situations where spending in one of reconciliation of the numbers therein, but that area or overall poses a threat to the integrity of the would show what the current trend would spend in the cap overall, we would expect DECC to work to find last year, as opposed to what is budgeted for. cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Ev 32 Energy and Climate Change and Environmental Audit Committees: Evidence
1 December 2011 Chloe Smith MP and Jonathan Mills
Q224 Caroline Lucas: Does that mean that you are spending being as much as £700 million above the unable to let me know what that figure is at the £350 million. moment, looking at those current trends? Miss Smith: I am sorry, but I am also slightly unsure Q230 Caroline Lucas: We have had a long which figures you were referring to in your original discussion about this do-nothing scenario, and we question. tried in the last hearing to put that aside, because no one is talking about a do-nothing scenario. People are Q225 Caroline Lucas: As I understand it, the talking about a scenario that comes into effect on 12 decision was taken on 25 November by DECC, which December, or one that comes into effect on 1 April. announced that the Department had reallocated 25% What I am tying to ascertain is, irrespective of of the individual cap for the renewables obligation to whether the overall figure is £357 million or £446 the feed-in tariff scheme instead. The individual FiT million—or whatever it is—how much of that will be cap is £446 million by 2014–15. If that is what we are left after 12 December? If you cannot tell us that, I do looking at spending by 2014–15, I want to know how not know how you can tell us that we will be much of that has already been spent, on current trends, overspent, or not overspent, or what the figures mean. to see whether we will be on track to come in under Jonathan Mills: The impact assessment sets out that amount. those numbers. Miss Smith: I beg your pardon for my initial misunderstanding; I was expecting you to have quoted Q231 Caroline Lucas: Would you just remind us and £357 million, which is, of course, the published FiT point us to the right table, because it is quite budget. As I said on an earlier question, there has been complicated? no such formal transfer requested. Jonathan Mills: Page 19 onwards sets out the likely difference in cost of the different options in each of Q226 Caroline Lucas: If we do not yet have the the years of the spending review and over a longer additional 25% from the renewables obligation put period. As we pointed out in answer to an earlier over to make that figure up to £446 million, we can question, these are not calculated on the same basis as use the £357 million, and my question remains, in a the budget cap, and we committed to provide sense. Looking at current trends, how much of that clarification of those numbers. pot is left for the remaining period? Jonathan Mills: To clarify two points, the difference Q232 Caroline Lucas: Every time one feels one is between the £357 million and the £446 million is the in reach of finding a figure that is going to illuminate issue that we talked about a little earlier in terms of this discussion, it then clouds over, and you realise the reclassification of some spending, so it has no that you are chasing a rabbit down a hole again. impact on the amount of money available. It does not Leaving those figures aside, because time is getting create any additional headroom. on, maybe I could just ask you the question that I started off by asking, in a sense, right at the beginning Q227 Chair: It does for this particular technology, of the meeting, which is why you did not look at doesn’t it? action from DECC sooner, in order to be able to Jonathan Mills: The reclassification means that an ensure that whatever the cap was it was phased in a amount of activity and an amount of budget have been more sensible way. This comes back to that very transferred at the same time. earliest question: given that the biggest regret of the Secretary of State or, indeed, of his Minister, was that Q228 Chair: But what we are talking about is the they did not act sooner, why did the Treasury not give amount available for solar projects here, and that has some indication that sooner action would mean that been increased—I am not quite sure what the status meeting the cap would have been easier or less of that proposal is, but it might move from £357 painful? million to £446 million—at the expense of some other Miss Smith: I think the response there takes in some technologies, for which ROCs were available. of what I have been saying to the Committee Jonathan Mills: My understanding of the numbers is throughout, which is that, certainly, DECC has that, if you like, the difference between the £357 operational responsibility for such a decision. The million and the £446 million is already spoken for Treasury responded appropriately to its in the Government’s plans for renewables. We should responsibilities through the write-around, which I clarify that in the note that comes back to you. have already referred to, and through official level dialogue. My understanding is that DECC acted as Q229 Chair: Either way, I think that the question soon as data began to feed through to it, including, Caroline asked remains. for example, data that come in from Ofgem on the Jonathan Mills: The question was how much money registration of these installations. There may be a is left in the pot, if you like. What I was trying to small lag in that, but it acted as soon as the situation clarify was that the key figure to look at is the forecast became clear to it and we were made aware spending in 2014–15, as opposed to the budgeted accordingly. spending in 2014–15. My understanding from the impact assessment numbers, if they are unpacked into Q233 Caroline Lucas: The trouble is, we have had the same format as the budget caps, so we take away an awful lot of evidence from the solar industry to the deflator effect and things I talked about earlier, is suggest that in fact it should have known and indeed that the do-nothing scenario would lead to the was advised at least six months ago that the tariffs cobber Pack: U PL: COE1 [O] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 33
1 December 2011 Chloe Smith MP and Jonathan Mills were being gobbled up far more quickly than any of Q238 Katy Clark: So have you been involved or are these impact assessments suggested would be the you aware of any discussions that have either been case. Were you not aware six months ago, or six about when it should be included in the consultation months before the decision was taken? Was the or, indeed, what it is going to look like? Is it Treasury not aware that that was becoming a something that you have been involved in already? problem—and if you were not, should you have been? Miss Smith: I have not myself. Jonathan, would you Miss Smith: For myself, as I have said, I have come assist? in part way through this process. I fully believe that Jonathan Mills: We have ongoing discussions with we have been appropriately informed all the way DECC about all aspects of the review, of course, but through. Perhaps Jonathan would confirm any further they have taken the judgment that they needed to details, if he is aware of them. prioritise this element of the first phase and so, Jonathan Mills: I think that the data that we had were similarly, our discussions with them have been focused on that element too. the same data that DECC provided. It provided them to us in a very timely fashion. There was obviously Q239 Katy Clark: So have there been any a distinction here between the small-scale solar FiT discussions so far about these cost-control measures? discussion that we are talking about now, and the Jonathan Mills: Cost-control measures have clearly large-scale solar issue which was somewhat earlier in been among the policy considerations that have been the year. No, I do not have anything further to add to discussed throughout the development of this policy. the Minister’s view. Q240 Katy Clark: Could you give us any detail Q234 Caroline Lucas: Are you satisfied that the whatever today? proposals to change the feed-in tariff will now bring Miss Smith: It would on the whole be for DECC to the scheme back in on budget and will now mean that do so. it can come within the spending cap? Are you confident about that now? Q241 Laura Sandys: Very quickly, does the Miss Smith: Yes, with the caveat that this is under Treasury take any responsibility for or have any input consultation so I look forward to any further data that into the Department’s regulation and how that impacts come in during the course of that. the economy? I ask that in relation to the evidence that we have been given by the solar industry itself. It Q235 Katy Clark: The Government’s second stated that energy performance certificate C was going consultation on the feed-in tariff scheme is due at the to have a much bigger impact on its industry than the end of this year and is going to consider cost-control change in feed-in tariffs. It said that that was going to be absolutely critical in how the business developed measures for this scheme. Why haven’t these cost- and possibly how many jobs might be lost. Does the control measures been included in this current Treasury expect the Department to come forward with consultation and what role do you see the Treasury a cost-benefit analysis on regulations, and if this having in adopting and devising these cost-control regulation is going to go into the system, what measures? regulation are you going to demand back out of the Miss Smith: I presume that you are referring to system from DECC? volume-related degression and such like in that Miss Smith: In line with the points made already instance. about how, for example, DECC manages its own head room— Q236 Katy Clark: Could you maybe explain what you consider the appropriate cost-control measures for Q242 Laura Sandys: It is not financial; this is about the scheme should be from your perspective? regulation and the impact on business. I thought that Miss Smith: In relation to the second consultation or the Treasury had a very clear responsibility to look at the first? the impact that regulation across all Departments had on the success of the economy. Miss Smith: I hate to be technical, but that would be Q237 Katy Clark: The first question is why is it not BIS in terms of business regulation. For example, BIS included in the first consultation. If you were able to is the Department with responsibility for the one in, answer that, perhaps you could deal with it now, and one out system at present, which is governing how then perhaps go on to what role you see the Treasury other Government Departments assess regulation. having and how you see those cost-control measures looking. Q243 Laura Sandys: But you would be interested in Miss Smith: Okay. The answer to both, to be honest, the economic impact of a regulation? is the same, which is that the Treasury would be very Miss Smith: Of course we would be interested in it. happy to engage in discussion of any such measures As I have said, technical responsibility would lie with brought forward. It would be for DECC to make BIS. The only point I was going to make was that, as detailed proposals including under the heading of cost I have said in response to other questions, we would control because they have operational and detailed expect DECC to come forward with worked proposals responsibility for the policy area and both officials and in relation to this area and energy performance Ministers would be happy to discuss such things. certificates, too. cobber Pack: U PL: COE1 [E] Processed: [19-12-2011 13:52] Job: 017157 Unit: PG02 Source: /MILES/PKU/INPUT/017157/017157_o002_db_HC 1605-ii.xml
Ev 34 Energy and Climate Change and Environmental Audit Committees: Evidence
1 December 2011 Chloe Smith MP and Jonathan Mills
Q244 Joan Walley: Further to Ms Sandys’s point, of being able properly to predict the take-up and this is not just about the regulation, is it? It is about demand for the feed-in tariff, because it seems to be the Green Book and how it determines and guides, in a shambles? an informed way, overall investment. How is that Miss Smith: I invite Jonathan to add any comments being taken into account? that he wishes, but I point to the importance of the Miss Smith: Indeed, the Treasury takes a broad series of consultations. Obviously a number of short- interest in— term measures have been required, and we have gone into detail about why it has been necessary to propose Q245 Joan Walley: How? that changes take place in the very short term, but the Miss Smith: I feel that we have already covered that, quality of the consultation process that goes on from if I might say so. Treasury has overall responsibility here will determine the confidence that industry can for assisting DECC with its public spending. Indeed, have. the Green Book rules are clear for all to know. Q251 Chair: Finally, because we are almost at 1 Q246 Laura Sandys: Could we see the Treasury’s o’clock, in some other countries, there is a regular, analysis on this particular energy performance at C incremental review of tariffs, which tries to take level? What analysis or review and consultation has it account of production costs and may allow a longer done on this proposal? What submission will it be period of notice before changes are introduced. In the making to DECC on that? light of what has happened in relation to this process, Miss Smith: I would be happy to go and look to see is that an approach that might offer more predictability whether such work has been done, but, as I have said, for businesses that are affected and, perhaps, even the work should come from DECC to Treasury, not help the Treasury with its budgeting? Treasury to DECC. Miss Smith: I’m certainly aware of the work that other countries—notably France—are doing. I am sure Q247 Joan Walley: Maybe we could urge the there could be merit in receiving such data. I have Treasury to do that work. tried to strike the tone throughout answers to the Miss Smith: It would be case of understanding what questions that data are extremely important, not least DECC has done and shared with Treasury. in a consultation period. Indeed, there might well be merit in what you have suggested, Chair. Q248 Joan Walley: So the Treasury has no overall interest in this. Q252 Mark Lazarowicz: On that point, I draw Miss Smith: I’m sorry, but that is twisting my words. attention to my entry in the Register of Members’ No, as I have said, clearly, the Treasury has an interest Financial Interests. Would it not be fair to conclude in the overall operation of the economy. Clearly, BIS that a lot more comparison with other countries’ also has an interest in the overall operation of business experience, both in the establishment of a scheme and regulation. In this case, talking about the policies that a review, would have been worth while. Are you I believe Ms Sandys is driving at, it would be for satisfied that there was enough analysis of experience DECC to come forward with detailed proposals. of other countries when you carried out the review? Miss Smith: If I may, I will ask Jonathan to confirm Q249 Chair: I’m sure that if DECC has that work what other countries’ arrangements are. available, it will make it available to you even more quickly than it will to this Committee, so perhaps you Q253 Mark Lazarowicz: What have you learned could just call them up this afternoon and ask for it. from it? It strikes me it wasn’t much. I am sure plenty If it were then available to us, it would certainly throw of people visited places. Were lessons learned? some light on what is a new area of concern in relation Jonathan Mills: In terms of the decisions set out in to the consultation. the consultation document, I know that DECC considered comparative evidence and some of the Q250 Zac Goldsmith: I was going to ask more or changes that a number of other European countries are less the same question that Laura asked, but I shall having to make to their schemes in assessing the take the opportunity to point out that we would not be options. In the terms of the options for phase 2 of the having this discussion and it would not be the case review and things such as cost control and so forth, I that a change was being brought in before the end of know that DECC draws widely on comparative a consultation had DECC got its maths right at the evidence, and I expect it to do so again in this start. I know that you are probably required, through instance. your position, to defend DECC’s mathematics, but it Chair: Thank you very much for your time this is almost impossible to do so. It is very hard for us to morning. You have given us some illuminating see how that might be done. What assurance can the insights into the relationship between the Treasury and Treasury provide to the industry that DECC will get the Department of Energy and Climate Change, which its maths in order and that we will not find ourselves will be a subject of further discussion in due course. having to repeat this kind of inquiry every six months? We are grateful to you for coming, particularly so How can we be sure that DECC really is in a position early in your ministerial stint at the Treasury. cobber Pack: U PL: CWE1 [SO] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 35
Written evidence
Written evidence submitted by Solarcentury
1. As committee members will be aware, a number of Solar companies, community groups and Friends of the Earth have announced that they are taking legal action against the Department for Energy and Climate Change as a result of the 31 October feed-in tariff announcement. Specifically, the injunctions will seek to ensure that cuts to tariff levels cannot be made retrospectively to installations completed before the revised scheme has completed its consultative and legislative process including the statutory instrument in full.
2. Since publication of the announcement on 31 October, contracts worth millions of pounds including major projects for Housing Associations and community groups who now have no hope of completing schemes by midnight on 11 December, have been cancelled. The Government’s action penalises those who have invested and incurred significant project costs in good faith and for whom the shock 12 December announcement was clearly not predictable or even a legitimate risk on the basis of the feed-in tariff legislation or the Commons written statement made by Chris Huhne MP on 7th February announcing the scope of the “comprehensive” review.
3. Chris Huhne’s 7 February written statement reassured the industry and its customers that “I recognise that industry needs a long term plan for investment in which it can have full confidence” and crucially in the current context that “The Government will not act retrospectively and any changes to generation tariffs implemented as a result of the review will only affect new entrants into the FITs scheme. Installations which are already accredited for FITs at the time will not be affected.” (our italics and bold).
4. Since the General Election, Greg Barker has repeatedly promised this sector “TLC” ie transparency, longevity and certainty. As the Minister himself recognizes “TLC” ought to be a fundamental principle in energy policy, precisely to reassure investors and companies that any future changes to Government policy will not be implemented in such a way as to penalise those who have invested in good faith on the basis of existing policy established by law. That fundamental principle will be left in tatters if the Government continues to cling to the absurd argument that the 12 December announcement is immaterial now to decisions on whether to proceed with projects scheduled for completion from the 12 December ie before the formal consultation and Parliamentary process has even ended.
5. If the Government were to get away with this the consequences will go way beyond the PV sector, its investors and customers, a point made with clarity last week by CBI Director-General John Cridland CBE. What low carbon industry investor or company will ever be able to trust the Department for Energy and Climate Change not to move the goalposts again? Given the urgency of this aspect of the comprehensive review we are asking the committees to consider the negative impacts and political legitimacy of the 12/12 announcement as quickly as possible, pending more detailed input and discussions on tariff levels. 17 November 2011
Written evidence submitted by HomeSun
Summary: — HomeSun is the UK’s leading provider of free solar to individual private homeowners. We are pleased that the EAC and ECC Committees have issued this call for evidence in order to shed light onto the coalition Government’s incredibly poor treatment of the solar industry and mishandling of the Feed in Tariff scheme in recent months. — 12 December is disastrous for the solar industry. For some time, our industry has advocated a reduction in tariffs for solar systems at all scales and delivery models to reflect falls in installed costs over the past two years. We expected a cut in tariff levels from 1 April, or even before if as was often stated by DECC Ministers “the review of feed in tariffs called for greater urgency”. However the imposition, without consultation, of a 12 December cut to tariff rates will lead to thousands of job losses and bankruptcies within one of the few growth industries currently in the UK. The fact that 12 December is itself subject to consultation which doesn’t end until 23 December adds another market complication. There are currently 3 legal challenges to the consultation process. — Solar will not be socially inclusive. We also have substantial concerns that the new tariffs available from April 1 will mean renewable energy is once more an aspiration only the rich can afford. The rates of return available on solar installations ensure that only those with a spare £10,000 will be able or willing to wait 14 years or longer to breakeven, and to invest in solar. This is a tiny fraction of the population. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
Ev 36 Energy and Climate Change and Environmental Audit Committees: Evidence
— Rent-a-roof for private housing may be penalised by being confused it with “aggregator” social housing models. In a further blow to industry and consumers, a misreading of the economics of free solar business models for private homes means that those without savings or in fuel poverty will no longer benefit from free, clean renewable energy as the “Free Solar” business model that we have pioneered for private homes disappears. The so called “aggregator” companies dealing with Free Solar offers for social housing work on different economics. — Through employment tax and VAT, the FIT scheme generates £276 million of net income to Treasury each year at no direct cost to the public purse. HomeSun is concerned that if the FIT scheme were to be changed in the way that is proposed that a large part of this income would be lost and that additional costs would be imposed on the state (e.g. through additional unemployment benefit payments) or on the consumer through taxation. We are not convinced that the consumer will genuinely be net better off as a result of the amendment. — We hope the Committee will agree that Ministers must amend their proposals to ensure: (a) Customers, Installers and Suppliers do not lose out through the imposition of an unlawful deadline of 12 December to qualify for current tariff rates (b) Sufficient budget is allocated to the solar industry and that solar is properly integrated into the Green Deal to allow it to grow in 2012 and beyond and drive further cost reduction. Our modelling suggests that this would allow the industry to prosper under no more than the marginal subsidy required to hit the UK’s 2020 renewable energy target by the end of the current spending review period. (c) Tariff changes are made to the proposals for 1 April onwards, so that free solar offerings targeted at individual private homeowners are not penalised by even deeper tariff cuts.
Response on Specific Areas of Interest to the Committee: Impact to date of Solar PV Feed-in Tariffs and the state of the solar energy market; 1. During the first eighteen months of the FiT scheme, over 3,000 companies have been registered to deliver FiT eligible technologies to the UK’s homes, streets and communities. 25,000 jobs have also been created, despite the current economic situation. These jobs include high-tech manufacturing jobs but also significant numbers of survey, design and installation jobs spread right across the country to get the systems onto buildings. New entry level jobs have been created for young people, who are otherwise finding it difficult to join the jobs market. It is the new skills and knowledge that this industry is providing that will act as a bridge to enable the success of next year’s Green Deal. 2. Innovative business models including Free Solar have also helped to bring distributed energy and green lifestyles to the full range of homes, incomes and almost every part of society. As news has spread in streets, villages, towns and other communities, so the interest in solar has increased. 3. This story of growth is demonstrated in Figure 1 below which shows month by month total installations for PV systems up to August 2011. The government should be very pleased with this success story and be seeking to build on it rather than strangling the industry at birth. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
Energy and Climate Change and Environmental Audit Committees: Evidence Ev 37
Figure 1 TOTAL NUMBER OF INSTALLED SYSTEMS BY MONTH:1
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0 Oct 2010 Apr 2010 Apr 2011 Jun 2010 Jun 2011 Feb 2011 Dec 2010 Aug 2010 Aug 2011
Market for Aggregation Models: 4. One area where DECC appear to have completely misread the economics is in the delivery of free solar for private homes. The research by DECC consultants into ‘‘Aggregators’’ estimates that the costs of aggregated models are much lower than those for private individual installations. DECC is therefore proposing an ‘‘Aggregator Tariff’’ set at 80% of the tariff for individual installations from 1 April 2012. It appears that free solar for private homeowners, is being viewed in the same way as volume delivery of free solar to social housing. The economics of these two categories are very different. 5. As the largest provider of Free Solar to private homeowners, we do not agree that our cost-base is substantially lower than that of the individual householder. We believe a very clear distinction must be drawn between Aggregators who deliver large volumes through social housing projects (where the installations are tightly clustered geographically and undertaken as a single “project”), and those who find and install with thousands of individual private householders. 6. Unlike social housing providers, at HomeSun (and other free solar providers targeted at the individual homeowner) we must locate, identify and work with potential customers on an individual basis for each installation—each installation is its own “project”. This work inevitably includes multiple contacts with the customer, site specific assessment, geographic dispersal and property-specific legal checks such as ensuring the customer actually has rights over the property. Alongside these costs, we must also access capital at commercial rates—another factor that DECC appear to have missed in their modelling. 7. In addition and importantly, in the Free Solar model, the benefit to the homeowner or tenant is the free electricity generated by the system—which does not accrue to the system owner (e.g. HomeSun). In the situation where the generation tariff is 16.8p as proposed, the value of the free electricity represents 27% of the total value of the scheme—i.e. HomeSun’s income would be 27% lower than if the homeowner owned and benefitted from the same system. 8. Finally, aggregators pay corporation tax while the income to individual consumers is tax-free—a further disadvantage to the aggregator.
Factors supporting historical and future cost reductions 9. DECC Ministers have noted that the fall in component prices has led to substantial price reductions for the delivery of solar installations. Global module and inverter prices are a strong driver of system costs, 1 Data taken from Ofgem FiT Register. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
Ev 38 Energy and Climate Change and Environmental Audit Committees: Evidence
however it would be wrong to attribute the success of solar growth and price reduction in the UK solely to global market conditions. 10. A proportion of the cost of PV in the UK relates to the maturity of the domestic market itself. The European Photovoltaic Industry Association (EPIA) recently concluded an extensive study of PV competitiveness across Europe and made the following statements on market maturity: Failure to reach market maturity in some countries, would result in non-optimal prices, keeping the generation cost higher. 11. Market maturity is defined by a range of conditions, including development of: — An experienced network of installers, developers and retailers — Fair competition between players 12. The UK is already behind EU neighbours where scale economies and market learning have led to installed system costs at least 20% lower today in mature markets across Europe.2 13. DECC’s proposals for the Feed in Tariff scheme risk bankrupting the very companies and projects that have developed sustainable business plans and represent the future of the UK solar industry. At the same time, the 12 December deadline has created a scramble to the finish line likely to threaten quality of installation, benefit only a small number of installers, and leave a legacy of unhappy consumers. 14. The UK needs a sustainable Feed in Tariff beyond 2012 to enable these market maturity conditions to occur alongside anticipated reduction in global component prices. These conditions will enable further cost reductions in the industry so that PV can become cost effective on an unsubsidised, levelised cost basis. Without growth, new entrants and new investment will be constrained, experience will be lost and prospects for a competitive market severely reduced. 15. It should be recognised that electricity bill payers have already committed to paying 25 years of FIT from installations completed to date. This money—like that planned over the next few years—was envisaged as an investment to kick-start the renewables industry, to move it from small scale to volume. This would bring down prices, and enable the solar industry at some point to stand on its own without subsidy. To stop everything now is to waste the money already invested.
The balance between affordability and delivering the objectives of the Solar PV Feed-in Tariffs 16. We recognise the need to ensure that the Feed in Tariff scheme is affordable and that tariffs are set at the right level to incentivise take-up, but not so high that excessive returns are achieved. With this in mind, we entered into a constructive dialogue with DECC in mid 2011 and put forward specific proposals to Government in October 2011 for tariff cuts of around 30% and a cap on overall market size designed to bring the Feed in Tariff scheme in on budget. 17. We have been disappointed with repeated reference to the cost of energy bills by DECC Ministers in Parliament and to the media—and particularly with the implication that the only alternative to the current proposal is to do nothing and that doing nothing is unaffordable. It is understandable that Ministers want to limit the impact of environmental policies on energy bills at a time of economic hardship for many, however it does feel as if the solar industry is being used as something of a sacrificial lamb to avoid the harder task of actually making the case for levy funded policies to support growth of renewable energy technologies. 18. The fallacy of hiding behind the need to “protect consumer bills” is highlighted by the absence of a cost per average household energy bill for each of the three policy options considered. We have therefore reviewed DECC’s numbers and included them in the tables below.
Figure 2 COST TO THE AVERAGE HOUSEHOLD BILL FOR DECC FITS POLICY OPTIONS Option 1—Do Nothing 2011–12 2012–13 2013–14 2014–15 2020–21 Solar PV Uptake GWh3 290 970 1650 2480 12300 Costs to consumers £m4 110 360 570 790 2140 Cost on average household bill 1.10 3.61 5.72 7.93 21.48 (£)5
2 UK Q3 Average residential system installed cost = £3.27/Wp (Source, EUPD Research) compared to pan European Mature Market costs of £2.63/Wp (Source EPIA—September 2011) 3 Sourced from DECC Impact Assessment 4 Sourced from DECC Impact Assessment 5 HomeSun Calculation—Assumes UK electricity consumption of 328 TWh (Dukes 2010) and average household annual consumption of 3,300 kWh cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Option 2—Lower tariffs early with energy efficiency (Lead Scenario) 2011–12 2012–13 2013–14 2014–15 2020–21 Solar PV Uptake GWh 270 560Ð620 570Ð740 590Ð890 800Ð2100 Costs to consumers £m 110 205 210 215 235 Cost on average household bill 1.10 2.06 2.11 2.16 2.36 (£)
Option 3—Lower tariffs from April 1 with energy efficiency 2011–12 2012–13 2013–14 2014–15 2020–21 Solar PV Uptake GWh 290 710 790 885 1750 Costs to consumers £m 110 265 270 275 305 Cost on average household bill 1.10 2.66 2.71 2.76 3.06 (£)
19. As the above analysis demonstrates, by cutting tariffs now, rather than on April 1, DECC estimates a saving that would equate to £0.60 on the average annual electricity bill. Longer term the impact of even a “Do Nothing” approach, which is an unrealistic scenario, would have been only around £22 on the average bill in 2020. 20. We are concerned that the changes to the FIT could actually have a worse impact on the consumer. Through employment tax and VAT, the FIT scheme generates £276 million of net income to Treasury each year at no direct cost to the public purse. If the FIT scheme were to be changed in the way that is proposed, a large part of this income would be lost and that additional costs would be imposed on the state (e.g. through additional unemployment benefit payments). We wonder what guarantees there could be to ensure that consumer will not be affected through taxation ie so that consumer will be net better off as a result of the amendment.
Impact of changes on delivering objectives of the FiT 21. Solar needs to be socially inclusive; the changes proposed are socially regressive: (a) At 16.8p and even at 21p, Free Solar will disappear for private homeowners including pensioners and also for “aggregator” type social housing. These groups will lose this clean, green way of saving one third on their energy bills. (b) For the “buy” market, the impact is equally dramatic. The cost of a solar system is around £10,000. Median savings for an ordinary UK adult are £1,684; the median length of time in a house is 8 years. Only the super wealthy with an eco-conscience will be able to wait for a breakeven of 14 years on a solar investment. Not only will people stop wanting solar, but in the immediate term local business will go bankrupt because they have 3 months of stock which they will never get installed by 12 December. 22. Between 12 December and the announcement of the results of the consultation (mid/late January) there is a “solar dead zone”. No-one can buy/invest in solar because the FiT is completely unknown: 21p as well as the date 12 December are “under consultation”. With everything held in “limbo”, businesses that were enabled by the FiT are put in an impossible situation, having to cancel orders and potentially to “carry” expensive staff costs or shed them; consumers and institutional investment take fright—throwing up the spectre of sovereign risk.
23. Considering that 27% of UK CO2 emissions come from our homes, it is imperative to pursue new and innovative ways to connect people to power, encourage energy conscious behaviour and help transition the UK to a low carbon economy. Using the FiT, companies across the UK have removed the barriers to entry for solar, inventing a new wave of free and low cost solar schemes, democratising solar and making it available to all who have a roof appropriate for solar. 24. Solar available for all in turn contributes to a wider low carbon transition; encouraging everyone to adopt a greener lifestyle by providing high impact, visible evidence within communities that others are doing their bit. No other renewable or energy saving technology is able to provide quite the same positive impact. There is evidence from all the solar businesses that local communities are actively and positively talking about energy and engaging with it in a way never before seen. 25. Key benefits of small scale free solar beyond carbon saving and renewable energy generation include: (a) Socially inclusive—the different models available mean solar is now accessible to many communities and to all freehold owners (including landlords, RSLs etc), regardless of wealth, and delivers instant electricity savings. (b) Professionalism and efficiency—Solar companies and investors only make their money back if the systems work with no place for cowboy style installations, installed on poorly-located/orientated roofs. (c) Behavioural change—through solar energy, consumers are more aware of energy usage levels thereby effecting behavioural change and thus improving energy efficiency cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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(d) Community cohesion—the visual impact of solar that spurs copycat behaviour imbues a sense of community spirit, working together for a common outcome. (eg. free solar company, HomeSun, has 50+ Solar Streets). “Greener Streets” research by British Gas showed that these visual badges catalysed energy efficient behaviour even amongst homes without solar. 26. Not only has the FiT kick started (and is now stopping) solar enterprise, it has also begun the skilling, re-skilling and upskilling of 1000s of people which will help provide the resource base for the Green Deal energy retrofit programme designed to provide householders with access to low-cost finance for energy improvements. It is true too that popularity and groundswell of engagement in solar and other microgeneration technologies could provide a vital hook to interest customers if they are included in the Green Deal. Such inclusion could also enable the FiT to be cut dramatically within the next few years to a level that is similar to offshore wind (the marginal technology needed to achieve UK renewable targets) and sustain growth of the solar industry. 27. Solar customers are already saving up to £300 each year (based on 4kW system) on their electricity bills. Provided the solar industry is not stopped in its tracks by the current proposal, as installed system costs fall in the next few years, these savings could enable homeowners to part-finance their installation through the Green Deal. 28. The Government has also proposed requiring either (A) minimum energy efficiency levels (currently EPC Level C) or (B) for all Green Deal measures to be installed for householders to be eligible for FiT payments at the 21p rate starting from April 2012. We support the linking of FiTs to other energy efficiency measures but these “higher level” barriers will have a significant negative impact (A) demand for solar PV will dramatically collapse, as it would restrict the maxiumum size of the market to the 9% of houses in the UK that are currently at EPC Level C or require households to spend £2,000-£14,000 to bring their homes up to this level. We believe that proposal (B) could work in principle, but believe that in practice this should only be applicable at the earliest after the Green Deal has actually started functioning, as most customers would not be willing to install a solar PV system when there is a risk their investment return could fall to just 9p. Imposing either of these measures before the Green Deal is fully up and running will cause the solar PV market to collapse and is contrary to the Government’s stated aim of maintaining a solar PV industry in the UK
Affordability of Solar Photovoltaic energy versus other renewable energy (given the overall levy-funded cap for energy bills) and the impact of Feed-in Tariffs on energy bills; 29. The level of demand for Solar PV is closely related to the rate of return that investors can achieve on their capital outlay. This is effectively a price elasticity curve based on two key factors; installed cost (CAPEX) and returns to the customer/investor through generation (the largest proportion) and export tariffs, plus substitution of electricity imports. 30. The association between CAPEX costs, tariff rates and demand is evidenced at least in part by the acceleration in installation rates over the past six months as costs in the UK have fallen—thereby increasing the rate of return available to consumers and investors to upwards of 11%. Figure 3 below demonstrates analysis provided by EuPD research, illustrating the relationship between real installation cost over the past 3 years and IRR using the current <4kW tariff of 41.3p/kWh (inflated to 43.3p/kWh).
Figure 3 RESIDENTIAL INSTALLATION COST VS PROJECT IRR (SOURCE EUPD RESEARCH)
6,000 EuPD Research 2011 14.00% 5,000 12.00%
4,000 10.00%
8.00% 3,000 £/kW 6.00% 2,000 4.00% 1,000 2.00%
0 0.00% Q1’09 Q2’09 Q3’09 Q4’09 Q1’10 Q2’10 Q3’10 Q4’10 Q1’11 Q2’11 Q3’11 Installation Cost IRR cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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31. A reduction in feed in tariffs from April next year, with further degression scheduled to reflect anticipated cost reductions makes sense. Set appropriately, this would have the effect of improving scheme value for money and creating a natural inhibitor of demand to avoid unsustainable growth, but bring growth levels to more sustainable, albeit still respectably ambitious levels. Arguably, DECC could have avoided the current “emergency” measures by taking action earlier—it has been clear for many months that equipment costs were dropping faster than anticipated and therefore that the sector could have been sustained on a lower tariff. 32. Using the relationship between worldwide, European and UK forecasted new capacity for installation and patterns observed in the more mature German market, EuPD has forecast UK cost reductions up to 2016. The conclusions of this research are highlighted in the figure below.
Figure 4 Cost Reduction Potential for PV Systems—EuPD Research Optimistic Cost Cost in 2016 (£/kW) Pessimistic Cost Cost in 2016 (£kW) Reduction (from Q3 Reduction (from Q3 2011 to 2016) 2011 to 2016) <4kW 28% £2,117 18% £2,425 <10kW 26% £2,075 16% £2,356 10kW- 25% £2,003 14% £2,296 300kW
33. At these price levels, PV will become competitive by 2015Ð16 with other technologies supported within the levy funded cap and ever closer to the critical point set by DECC as the marginal cost of meeting the 2020 Renewable Energy target, 8.5p/kWh 34. Controlled growth in the volume of systems installed each year is essential to ensure recent trends in installation costs (downward), and consumer interest (upward) continue. We believe an appropriate target to be around 20% year on year growth per annum for <4kW systems, slower than growth during the past 12 months, but sufficient enough to continue to drive new investment. The annual market size relating to this growth is shown below in figure 6.
HomeSun’s view of the Government’s handling of the consultation 35. There is confusion: (a) That the position on rent roof “aggregators” has been confused and that the sort of scheme that HomeSun runs (for private homeowners) could mistakenly be included in this category which is more obviously used to describe schemes run for social housing (b) That prior to the consultation, the solar market understood government to be supportive of rent roof propositions. Answering a parliamentary question asked by Zac Goldsmith on 10 February 2011, Gregory Barker said “the government fully supports ‘rent roof’ models”. After the consultation announcement, on 2 November Chris Huhne said in oral evidence taken before the Energy and Climate Change Committee “… I do not like [were] the people doing a sort of ‘rent a roof’ schemes”. 36. HomeSun believes that the consultation process started by DECC on 31 October is unlawful and has been handled in an incredibly short-sighted way. As a result it has submitted an application for Judicial Review. We understand that at least two other similar applications for JR have been submitted by other interested parties. The grounds on which HomeSun’s claim is based are : (a) The consultation outcome (with respect to the 12 December Reference Date) has been predetermined. (b) Legitimate Expectations with regard to decisions not being taken retrospectively have been breached. (c) That there is an unfairly short period of time between announcement of the consultation and its effective implementation date (12 December) (d) HomeSun’s rights under Article 1 of the 1st Protocol European Convention on Human Rights have been breached. 37. The consultation document suggests that the 12 December date is open to amendment, but the Minister responsible (Greg Barker MP) has stated in parliament that it cannot be moved. The position was restated at a meeting on 10 November. It appears clear therefore that this aspect of the consultation at least has been predetermined. 38. The Effective Date for changes to the rate of FIT payable is 12 December—which occurs prior to the end of the consultation period. It is therefore clear that by the time the consultation reports back and changes are formalised (mid-late January at the earliest) the decision will be retrospective for any installation completed from 12 December until that point. The government has repeatedly stated that no decisions would be taken which had retrospective effect. 39. The 6 week timeframe from consultation announcement to implementation is unreasonably short when industry has a supply chain lead time and customer journey of at least 12 weeks. This means that stock will cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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be left unused after 12 December, investments in marketing, sales and fundraising costs will all have been wasted. These will inevitably lead to bankruptcies and redundancies. 40. HomeSun has an enforceable legal right to receive FITs under the statutory scheme of which the FIT is a part, at such rate as may be lawfully decided from time to time by the Secretary of State. This legal right falls within Article 1 of the First Protocol of the ECHR. As set out above, HomeSun believes that the consultation process is unlawful and therefore denying payment of FITs at the current rate for installations from 12 December is also unlawful and therefore that rights under the ECHR have been breached. 22 November 2011
Written evidence submitted from HM Treasury Thank-you for your letter of the 3 November, asking for information in relation to the Solar PV Feed- in Tariff, Feed-in Tariffs policy aim to promote the take-up of small scale renewables by ensuring a fair return for the electricity they generate. However solar PV costs have fallen rapidly in recent months meaning that under the existing tariff regime new installations would be compensated at a much higher level than originally intended. This in turn has led to much higher than anticipated take-up of solar PV putting the allocated budget for the programme under pressure. As a result the Government has developed revised tariff levels for solar PV installations, which they are currently consulting on. In answer to the specific questions in your letter:
1. The Treasury’s policy aims in considering the appropriate level of the levy-funded spending cap, including what factors it seeks to balance (cost increases in energy bills, supporting growth and jobs in the solar industry, emissions reductions, etc) The purpose of the control framework for DECC levy-funded spending is to make sure that the Government achieves its fuel poverty, energy and climate change goals in a way that is affordable and value for money, including reflecting the impact on consumer bills. The decisions taken by the Government in the Spending Review, and the agreed totals within the levy control framework, reflect a judgment on affordability and value-for-money in this area and in relation to other areas of public spending. As in any aspect of public spending the Government sought to ensure that it was achieving all its objectives—including carbon reduction, economic recovery and fiscal consolidation—in the best value- for-money way possible.
2. The impact of increasing or decreasing the levy-funded spending cap on the Fiscal Mandate and the supplementary debt target. Theoretically speaking, if the Treasury increased the levy-spending cap by say £100 million, would this mean that Government spending by Departments in other areas would need to decrease by £100 million to have a nil effect on the Fiscal Mandate and supplementary debt target? The spending on policies included in the levy-funded spending cap does not have a direct impact on the deficit to the extent that revenues match spending. However, it does add to the overall tax burden and limit the ability to direct resources most efficiently to meet the Government’s priorities. The Government’s fiscal judgment in setting the Spending Review reflected an overall assessment of the sustainable and appropriate level of tax and spending. Within this constraint an increase in taxation and expenditure in this area implies a reduction elsewhere.
3. The rationale for seeking to save £40 million from the Feed-in Tariffs announced in the Spending Review In the Spending Review the Government looked to identify savings in all areas of spending, including policies which are implicit tax and spend, as part of the Government’s deficit reduction plan. The reductions in this area reflected an agreed assessment, on the basis of information available at that time, of what was affordable and value for money. As set out at Spending Review, the Government is using its Feed-in Tariff reviews to improve the efficiency of the scheme and to rebalance it in favour of more cost-effective technologies.
4. The Government’s target for renewable energy costs, as a proportion of all costs, in electricity bills. And how this compares to other European Countries The Government does not have a target for renewable energy costs, as a proportion of all costs, in electricity bills, It publishes estimates of the likely impacts of its policies regularly, most recently alongside the Annual Energy Statement on 23 November. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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As you are aware, the Economic Secretary to the Treasury will be discussing this issue with the Environmental Audit Committee on 1 December, and will answer any further questions that the Committee may have then. 24 November 2011
Written evidence submitted by the Renewable Energy Association and the Solar Trade Association The situation for the solar industry is live and urgent. There is no forward clarity for investors or industry. Many companies have read the policy proposals in detail & are aware the market could be cut 92% next year. It will be impossible to run a solar business beyond 12 December unless clarity and confidence over the next three years is provided urgently. STA and REA welcome urgently needed parliamentary attention on solar technology, solar costs and the UK solar industry. REA initiated and led the successful campaign for the FITs with Friends of the Earth and was closely involved with the scheme’s design. REA represents all renewable technologies. STA affiliated to REA earlier this year, giving a combined membership of around 450 solar PV and solar thermal members. Both REA and STA are now working on solar PV given urgent resource needs. This is therefore a combined submission. REA and STA’s position development process in response to the latest consultation is currently underway in consultation with our respective memberships. Solar PV has the potential to be a game-changing technology yet it could hardly be more misrepresented and misunderstood in the UK. It has the fastest dropping costs of any energy generation technology, it is actually cheaper than many other renewables, and it is the only renewable that can achieve widespread subsidy- free deployment within the decade. Achieving this will cost less than current support for wind. For want of a basic strategic analysis by DECC this has not been understood. Solar is a technology that integrates seamlessly into the built environment and insulates consumers against future energy price rises. It can supply power where it is needed thereby avoiding the need for major new transmission infrastructure. This technology’s time has come, but it urgently needs the right strategic framework, budget and careful management. It should be actively championed by DECC, not subject to apparently deliberate misrepresentation (see costs section below). This response presents an overview of how and why the solar industry has arrived at a point of crisis in the UK just 18 months since the start of a successful scheme. It then goes on to answer specific questions posed by the Committees, with reference to supplementary evidence listed below. Supplementary Supporting Evidence Submitted:6 — REA/STA submission to first Fast-Track Review. — Ernst & Young Solar Outlook report for non-domestic solar. — STA Solar Revolution Strategy. — REA analysis of recent cost assessments of solar. — EPIA: Competing in the Energy Sector report. — REA/STA Industry Survey November 2011. We urge the DECC and EAC Committee to recognise that the speed and scale of Tariff cuts for solar, while immensely destructive, are the least of the current problems. We are extremely concerned about the remaining budget given the expected level of deployment this year. Of far greater concern is the basic viability of the industry for the rest of this Parliament. The IA to Phase 1 of the current Comprehensive Review proposals anticipates reducing the market 92% through inappropriate and unfair eligibility criteria, presumably with a view to fitting within a nigh impossible CSR-imposed budget which was based on poor initial data. This will effectively destroy the UK industry. We can submit more information on this crucial future budget issue if requested to do so.
Overview of how and why the UK Solar Industry is now in Crisis The difficulties faced by the UK solar power industry are largely predictable given the early capping of the FIT scheme by HMT during the CSR. This is an inappropriate framework in which to manage any Feed-In Tariff scheme because of its inflexibility and this was widely commented on at the time. Indeed in Powering the Green Economy: The Feed-In Tariff Handbook7 under the “Bad FIT Design” chapter we refer you to the section on caps. We understand that friction between Treasury and DECC on FIT schemes pre-dated this Government. It is unclear what has actually occurred to produce the predictably difficult capped parameters for the UK FIT scheme (see Alan Whitehead MP’s blog on the ONS/Treasury/Decc wrangle over FIT classifications). What is clear is that in practice it has resulted in DECC being prevented from responding intelligently to major developments in the solar power sector, including major cost reductions, and building on a popular and successful scheme. That is the case even where the Minister in charge appeared to recognise that a bigger role for solar was appropriate (although DECC compounded the problem in key respects—see below). 6 Not printed 7 Powering the Green Economy, The Feed-In Tariff Handbook, Mendonca M, Jacobs D and Sovacool B, Earthscan, 2010 cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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The breaching of a capped budget that would, even with better management, have been nigh on impossible to hit has resulted in a myopic political response that has failed to recognise and support a stunning good news story. The policy response to the anticipated breaching of the budget is illogical. Free from the debilitating cap context the scheme would have been lauded as the success it has been and built upon in rational fashion. From an international perspective, the amount of solar installed in the UK over the past 12 months and its associated impact on energy bills is very small indeed. Perspective is needed. And a reminder that there will be no greater waste of public investment than allowing the industry the UK public has funded into existence to collapse. The absence of interdepartmental co-operation or perspective is a key contributor to the disaster now unfolding in this sector. The Coalition Government has not been pulling in one direction on renewables, with all areas subject to delays and reported wrangles. Solar is the starkest illustration of a wider failure to set out a clear programme for the role of renewables in the economy holistically, from an industrial policy and growth, not just an energy perspective. The UK is missing out on clear opportunities to benefit from the growing green economy. FITs are the major international industrial policy mechanism deployed in over 50 countries for developing the renewable power sector. Their success and proven cost-effectiveness is such that both parties committed to FITs in their election manifestos and the Coalition Agreement committed to introducing a “full FIT”, as well as specifically to increase opportunities for communities to generate their own renewable power. In Government the commitment to the fixed FIT model was dropped for the CfD, for reasons which the DECC committee has already set out in detail. Following the CSR cap, the second layer of difficulty for the UK solar industry was that fixed FITs were recast as a minor policy instrument and viewed solely through a DECC lens. They were not viewed as an industrial policy mechanism by BIS, nor as a driver of economic growth, employment and tax revenue by HMT. There has been no effort by Government to quantify the benefits of the UK solar industry. It is for this reason that REA urged the EAC and BIS committees to carry out a joint enquiry; the disinterest in even major new industrial opportunities in solar power has been perplexing for the industry given top level political rhetoric on the vital importance of stimulating green tech growth. The PM and DPM have been saying one thing— Whitehall has been doing the opposite in its treatment of the solar power industry. Ironically the DPM pointed out in his LSE speech Whitehall’s propensity for doing this. The difficulties for the solar industry go deeper still given the marginalisation of mass-market renewables at DECC. The department remains oriented towards central power generation both conceptually and in terms of resource allocation. The EMR consultation was based on modelling by RedPoint that did not include solar power in any scenario assessments. The EMR White Paper made some progress in acknowledging the potential benefits of distributed power, but DECC appears routinely behind the curve. DECC still produces tables comparing LCOE of solar with a range of centralised power generation, like nuclear and offshore wind. This is comparing apples with pears because solar power competes (for the most part) with retail electricity prices because the generation equipment is located at the point of demand. It does not compete with wholesale prices, except in utility applications, so LCOE is a particularly limited tool for solar. DECC, along with some of its advisors such as the CCC, has not understood the competitive interface of solar in the electricity market and therefore has failed to understand how close the technology is to competitiveness. There is widespread concern in the renewables industry that current complex EMR proposals risk alienating a very wide range of important new investors in renewable technologies who need an accessible investment framework and appropriate technologies. Under the fixed FIT in Germany the great majority of investment in all forms of renewable power has come from individuals, project developers, municipal government and farmers. This is why small/medium REA members, far from wanting to see the current fixed FIT reduced, want to see it actively extended. The department appears particularly ill-informed on solar. Minister Greg Barker has ventured in public (The Guardian) that his department does not understand solar giving some indication of the frustrations encountered working against the grain. DECC is advised by a scientific adviser who has not responded to requests to meet and who has produced inaccurate and unhelpful assessments of solar’s land take (he omitted that the UK has 4000km2 of roof space). DECC is also advised by the Committee on Climate Change which produced cost assessments of solar power technology that were staggeringly wrong (see below and enclosure). ARUP’s assessment of solar for DECC’s RO Banding Review and the 2020 Roadmap was clear that its data on solar was thin—yet this data was still used, despite REA setting out its objections. The department’s normal modus operandi in relation to renewables—commissioning six-monthly consultants reports every couple of years—is totally inappropriate for solar, which has an exceptionally dynamic cost reduction profile. In house expertise is urgently needed. To some extent this is now developing but good market intelligence is clearly essential for good scheme management. There is obvious anger about how Minister Barker and his officials managed the two unscheduled Tariff adjustment processes. It is difficult to know what happened within the department but clearly there was significant internal friction given the change of officials. It is also clear that there was a major delay in Ofgem registrations and therefore volume data that was totally at odds with the micro-management the Treasury- imposed cap demanded. However, the key question is why the Comprehensive Review was published so late. See answer to your specific question below. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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While Minister Barker has been widely criticised for his handling of the FIT scheme, sadly he remains the only Minister who was willing to engage with the industry and receptive to new information and who appeared to understand the broader implications of mass-market/decentralised technologies. That isn’t only at DECC, but including all other Ministers in all other departments that we repeatedly requested to meet with (DECC, HMT, BIS & DfT). He therefore appeared surprisingly isolated in supporting an agenda that the Government had explicitly committed itself to in the Coalition Agreement. This leaves us very concerned about securing a satisfactory resolution to the current budget/industry crisis. Since March we have requested to meet with: DECC Secretary of State Chris Huhne many times in relation to the overall ambition on solar (we wrote several times with major construction giant Kingspan given their key manufacturing opportunity); Minister Charles Hendry several times in relation to strategic join-up with EMR and RO Banding; Chief Scientist David McKay; Treasury Ministers Justine Greening & Danny Alexander twice and Chancellor George Osborne; a Treasury official identified as being key on FITs policy; DfT Minister Norman Baker; BIS Secretary of State Vince Cable and his SPAD. To the best of my knowledge we received one reply from Vince Cable’s office regretting he was not able to meet and a referral on to OLEV by DfT. We did meet with BIS officials and UKTI who seemed very interested in the inward investment and UK industrial opportunities. This experience of beating our heads against a brick wall for an industry specifically related to Coalition Agreement commitments and cited as important in top level speeches has created bad feeling and left us with the impression that not only does DECC not understand solar, it does not want to understand solar. Minister Greg Barker appeared very isolated in his efforts to secure better understanding. DECC has a negative internal narrative on solar that is not justified by the facts—but we were given no chance to relay those facts to the appropriate people. It is not in the public interest for the department to not be in possession of the facts or to not seek to be in the possession of the facts. More generally, we regret that political debate and comment on solar has often been ill-informed and routinely based on out-dated perceptions and old cost figures. Solar is not the most expensive renewable technology—at the very largest scale in the SW it is now competitive with offshore wind. Solar is the second largest renewables resource in the UK and it has a major contribution to make to the UK energy mix. Technically it could meet UK electricity demand twice over. The UK boasts the 5th biggest potential solar market in Europe according to EPIA and not, as claimed by a DECC Minister, a market that will always be smaller than other markets. More solar was installed than any other renewable generation technology across Europe last year and the industry is the fastest growing energy sector in the world. It was, therefore, always inappropriate to attempt to characterise such a popular dynamic and powerful technology as marginal.
Enquiry Theme (a): Impact to date of Solar PV Feed-in Tariffs and the state of the solar energy market The solar PV FIT has stimulated levels of innovation that exceeded expectations with local councils, co- operatives, “free” schemes, NGOs (eg 10:10 solar schools) and social housing providers developing a wide range of ownership and installation models. Solar has always proved the most popular technology under previous grant schemes, and it is usually the most suitable technology for a wide range of locations. The UK solar industry has performed as expected given the establishment of a serious support framework. We know from international experience high levels of growth are very common at the start of FIT schemes and usually this is welcomed. While the solar industry can appear volatile, the commercial volatility takes place against a very steady trend, established over 2 decades, of consistent price reduction as global capacity increases and production costs decrease. IEA estimate a 22% price drop with every doubling of capacity. Module costs have fallen fast internationally in the years since the UK FIT was developed. This is as a result of new Asian 3GW factories coming on stream, international reductions in poly silicon prices, resolution of a supply glitch in the inverter market, and surplus product given short-term reductions in international demand. UK assembly/manufacture plant produce modules which are increasingly competitive with Asian modules (the price difference is less than commonly assumed). 60+ UKcompanies are involved in the manufacturing supply chain including Crystalox, near Oxford, a major international exporter of crystalline wafers to Japan and China showing clearly that the UK can compete in manufacturing. There are 6/7 UK manufacture/assembly plants (Sharp, Sony, Romag/Gentoo, GB Solar, Corus, G24i, Pure Wafer).8 Further innovation in manufacturing is underway, for example, solar Electric Vehicle canopy manufacture (one of several examples uses all UK components; Tata Steel, Gentoo solar, Screwfast fittings). Enecsys, a UK company, has developed and now manufactures an award-winning 25 year-life micro inverter. There was expansion and innovation in the domestic manufacturing sector—expansion of Gentoo/Romag BIPV production capacity and staff. Roofing companies like Monier developed a BIPV9 (solar tile) system. Sharp expanded production at its Wrexham factory. Welsh Gov, with Pure Wafer and Swansea University claim to have developed a solar module using nano-lenses to intensify daylight and therefore power output, with a 8 Difference in price between UK and Chinese modules is far less than people think eg September prices UK module product was 15% higher in price than Chinese product. 9 Building Integrated PV. Typically solar tiles, but where the roofing fabric is integrated with PV. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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production line under development. Both Oxford and Cambridge University have important centres of research on solar, with commercial arms developing thin-film solar. The thriving market was leading to major investments in UK commercial innovations. For example, construction cladding giant Kingspan invested millions in developing its “insulate and generate” commercial roofing system. Kingspan have 80% of the UK commercial building envelope market and 30Ð50% of the EU market, thus this represented a major opportunity for the UK to strengthen its position in the EU market. Kingspan anticipated employing over 1,000 people by the end of this Parliament manufacturing its new solar roofing system. Kingspan’s proposals were derailed by the first Fast Track review of FITs as the majority of its business relates to large public/commercial building roofs. A great frustration for both REA and STA was getting join-up with DECC policy and key industrial opportunities. For example, slashing the solar Tariffs for the non-domestic sector cost the Kingspan opportunity. Failing to have a BIPV Tariff risks the UK losing existing and future manufacturing, as well as important integration with the construction industry where installation costs could be reduced in future. The great majority of solar jobs are in installation providing a classic SME opportunity. REA (Feb 2011) survey of industry anticipated 17,000 jobs (up from 3,000 April 2010) by end of 2011. This survey was then updated by REA in October using REAL Assurance data to estimate that 25,000 people are now employed directly in solar companies. A recent BIS PQ estimated total employment at 39,000 across the supply chain. Furthermore over 250 people are now employed in training and assessments alone (Electrical Contractors Association). Installed costs have also fallen as a direct result of investment by UK companies in skills, training and efficient installation processes. Prices are available in the market now that show installation costs have fallen up to 50% which is a tremendous achievement in a very short space of time against a very unstable background. In most domestic installations the solar modules/inverter makes up around 50% of installed costs today with labour/installation making up the remaining 50%. The module cost portion will decline over time as module prices are expected to drop considerably to 2020. Therefore installation will increasingly make up a higher proportion of installed costs. It is therefore essential, to deliver lowest cost solar in the UK, to invest in a mature installation industry. This is what has been happening and to destroy this would be a huge waste of public investment and a major opportunity cost for the UK. The high proportion of installation costs illustrates why solar is such a jobs-rich industry. Many broadband/satellite companies recognise the potential for the solar industry to expand their current business model and ensure future employment complementary to the current skills set of their employees. It is likely in the near future these companies will be highly competitive both with each other and with centralised electricity provision. There was a large increase in installation companies with REAL Assurance membership growing from 2000 in 2010 to 5,500 in 2011 of which around 4,000 are solar. Companies range from international and established, to sole traders.
Enquiry Theme (b): The balance between affordability and delivering the objectives of the Solar PV Feed-in Tariffs, including factors to consider when setting the rate of small-scale Feed-in Tariffs including jobs created, emissions reductions and energy-saving behavioural change Determining Ambition/Investment Level (Balance Between Affordability and Objectives) The objectives of the solar FIT are a point of tension with DECC, and DECC note this issue is often raised in consultation responses. DECC’s objectives for the FIT scheme appear to have been increasingly reduced to a public-engagement tool. FITs can fulfil multiple objectives, but they are principally an industrial policy mechanism designed to pump-prime an industry while driving costs down. They are designed to drive cost- breakthough in new power generation technologies by applying the now proven principle that unit prices reduce in relation to volume of manufacture and deployment. Applied to a mass market technology like solar, they also become an important vehicle for diversifying ownership and investment in the energy sector. This is very evident in Germany where individuals, farmers, project developers and municipal government are the major investors in renewables—TNCs make up just 14% of all investment. REA campaigned for FITs with FoE and a very wide range of supporting organisations representing diverse UK investors eg NFU, BRC, CLA, RIBA, HBF, Co-ops UK, Consumer Focus etc. There is a danger if the focus becomes other objectives, like community engagement or, as recently mooted, a lever for driving thermal energy efficiency, that a stable industry development trajectory is sorely neglected. A stable trajectory, with high future visibility, secures the best results for consumers in terms of cost reduction because industry can invest for growth with confidence and secure good rates of finance. And it secures the best results for the UK economy in terms of optimising industrial opportunities and creating a sector ready for future international competition in a subsidy free world. In our view no care was taken to orientate the FIT policy to key UK industrial opportunities. The lack of any BIPV-specific Tariff, and the marginalisation of commercial investors meant that key UK manufacturing opportunities were not supported, or indeed were lost or risk being lost. Furthermore, one of the reasons we opposed restricting solar to the domestic sector, was it meant opportunities to drive cost reductions through volume and purchase power associated with larger schemes cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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were lost. We do not know of any other solar market in the world that has developed only through domestic sector deployment. To be clear it is the UK Government’s specific aim to support the most expensive application of solar almost exclusively, so it is bizarre to then complain about costs. Taking a strategic analysis, given solar’s exceptional cost reduction trajectory, investment in solar can present a cheaper option than other power generation options. This is because the FIT scheme is designed to drive the technology to grid parity, after which the technology will thrive without subsidy. Critical analyses of solar power costs (eg Policy Exchange/George Monbiot) ignore the end objective and its associated deployment (which is effectively limitless) and seek to cost CO2 or costs/MWh purely on the investment stage. This is akin to costing the development of a vaccine based on the costs per human guinea pig—and ignoring the value of the eradication of the disease thereafter. DECC have not undertaken any strategic analysis of solar investment themselves despite our consistent requests that they do so. Solar is not included in any EMR analysis. Under the 2050 Roadmap, figures for solar were used which were described by the consultants themselves as based on thin data. As a result of massive investment by NASA, Japan and then Germany, solar is now on the home stretch in terms of achieving competitiveness with grid electricity. At this stage of the solar industry’s development, we are confident that UK solar does not require more investment than other low-carbon energy generation options; it simply needs its support profile structured differently to reflect its unique technological characteristics. It is hard to understand why DECC have refused to countenance this and we urge the Committee to get to the bottom of this. Minister Greg Barker’s prompts for this to happen do not appear to have been followed through by civil servants for reasons which are not clear. STA therefore sought to do this in its costed Solar Revolution Strategy enclosed. This concluded a mature 1GW pa market would reach competitiveness with retail electricity prices around 2017Ð19 and would cost households approx £6.50У9;00 per annum. This investment is to incubate a technology that can then go on, subsidy free, to deliver up to a third of UK electricity supply. Far from being extremely expensive, this is a very cheap green energy revolution indeed. Our study was supported by Ernst and Young’s analysis [enclosed] which likewise concluded non-domestic solar would hit parity in the UK in 2017. EPIA’s “Competing In the Electricity Sector Report” [enclosed] likewise concluded that non-domestic solar would hit parity in the UK in 2017. All of these analyses were undertaken before the 11% increase in UK electricity bills this summer suggesting parity may be reached even earlier. It is squarely in the interests of consumers to take a strategic perspective over the coming decade, not a perspective dictated by short political CSR or election cycles or indeed, other agendas. Solar can offer not only a more affordable option compared to other generation options, it offers the potential to transform ownership and competitive dynamics in the electricity by exerting positive pressure on prices and empowering consumers. Given the strong political rhetoric from DECC on the importance of increasing competition in the electricity sector, it is very surprising that solar’s potential for achieving this was not proactively investigated. The Ernst and Young report said that non-domestic solar was providing an important new point of entry into the electricity sector. Not only were Government’s objectives for FITs poorly defined, or insufficiently sensitive to industrial policy objectives, but benefits were never examined, yet alone quantified. This means it is very difficult to determine the most sensible level of investment in the scheme. In our view a very wide range of benefits should have been considered: employment; manufacturing & export opportunities; rate of cost reduction; Treasury tax revenue; increasing consumer choice; increasing market competition; broadening the investor pool to ensure UK energy investment targets can be met; network costs and benefits including peak shaving; fuel poverty alleviation potential in social housing sectors; local government and community empowerment; behavioural change; meeting renewables targets; and carbon reductions. If care had been taken to understand and quantify these benefits we are very confident a much more ambitious approach to solar in the UK would have been viewed as strongly in the public interest. A recent report by Element Energy for Kingspan and Friends of the Earth assesses the tax revenue from the FITs at £230 million per annum, which will exceed, or be close to scheme costs. We understand this has been submitted as evidence. Taking into account this staggeringly wide range of benefits it is difficult to see why DECC has not proactively developed a more ambitious programme of support.
Setting the Tariff Rates A wide range of factors need to be taken into account when determining Tariff rates. Solar competes directly with the retail price of electricity, except where it is being deployed at utility scale (where it is still set for competitiveness even with new gas CCGT this decade). Solar’s attractiveness from the investor perspective, is a function of: — Capital and O&M costs. — Avoided imported grid retail electricity costs. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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— FIT or other subsidy payment. — The export to onsite consumption ratio. — The value of surplus power exported to grid. — Other factors, eg tax relief, insurance costs, geographic location, etc. Competitiveness is reached when subsidy is no longer required to make solar economic. These factors vary according to different investor types, therefore competitiveness is likely to be reached at different times for different types of investor. The best categories for understanding the solar industry are domestic, community scale, commercial and utility, as these different categories will reach competitiveness at different rates given the variability of inputs listed above and different usage behaviours. However, even within these categories there is significant variation. For example, the social housing sector has higher day-time occupancy rate, and therefore a higher proportion of onsite consumption. The UK is very late to adopt solar and in our view a certain amount of over-reward should be tolerated in the start-up years to ensure that new UK SMEs have the opportunity to develop in an internationally important sector. There has been wide variation in module pricing, reflecting immature supply chains and wide variation in purchasing power. If Tariffs are priced to the most competitive module pricing, this risks sidelining SMEs start-ups. However, UK companies need to be taken on a relatively fast journey if they are to compete in future markets. There is a balance to be struck and it is something of an art for Trade Associations to try to strike that balance in the best interests of their membership. However, even considering this, we believe the sector could and should have taken a 25% Tariff cut earlier this year. This would have controlled investment returns, limited the recent overheating of the PV market and avoided the inefficient use of the FiT budget. Many companies will now be faced with an extreme Tariff adjustment at just 6 weeks notice. This is an entirely avoidable and very damaging situation. In responses to our industry survey (enclosed), of those who ventured an estimate of potential losses, the average loss figure was estimated at £400,000. It is important to articulate Tariffs around key sub-sectors; domestic, community, commercial and utility. That is because these different sub-sectors face different costs of displaced electricity, different approximated usage patterns and different costs of PV system. Therefore the economics of each sub-sector is distinct and needs Tariffs set accordingly. In addition different investor types have different hurdles to investment—the commercial sector is typically looking at 10%+ IRR to justify investment while the domestic, community and public sector can be lower. Utility scale solar obviously has a very different economic pay-back model from onsite solar, typically securing a Power Purchase Agreement for exported power from a nearby power consumer. Thus again, different sub-sectors of solar will reach parity with grid electricity at different times. Tariffs should also consider the cost of finance. Cost of finance is not included in DECC modelling, which means that investors requiring finance may now be out of pocket investing in solar given Tariffs are modelled on a 5% IRR. DECC argue that for the domestic sector the 5% IRR is more attractive than most current investment opportunities. However, there is an issue of access with people or organisations without upfront capital potentially left out of pocket, eg social housing providers. That is not something the industry wants to see and we would welcome initiatives to help these investors overcome investment/finance hurdles. It is also important to take into account is wider investor confidence. The more instability within a scheme, or perceived to be within a scheme, the higher the cost of finance as investor risk perception increases. This can have wider costs for renewables across the board, so retaining investor confidence also needs to be kept in mind when adjusting Tariffs.
Enquiry Theme (c): The way in which the Government has managed the Solar PV Feed-in Tariff, the impact this has had to date, including the management of the Consultation The UK situation needs keeping in perspective. UK deployment is still very small by international standards. There is a level of hysteria in the UK about solar deployment that is perplexing, perhaps reflecting the UK’s very poor position on renewable energy generally in Europe and generally low levels of ambition. Most countries would have considered the rapid growth achieved and high levels of innovation and cost reduction a notable success. For DECC, mass market renewable technologies are not something they are used to dealing with. Their price movement is more dynamic than large-scale central generation, deployment is much faster and there is wide variability in module prices in an immature market. It was predictable there would be teething problems, but these have been greatly magnified by the budget restrictions. DECC also failed to put in place a mechanism to monitor the uptake of deployment in a timely and reliable manner, thus having to rely on deployment data that is generally months out of date. The inflexible capped approach was always likely to create major difficulties for the sector sooner or later. FITs are a fluid and highly sensitive policy instrument, controlled through degression, in order to bring a technology down to grid parity. They are an instrument for achieving sufficient volume of mass production and deployment to bring the unit price down to competitiveness. As such it is vital to avoid cliff edges, which cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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risk derailing the sector and defeat the very object of the exercise. They represent a long-term commitment to the establishment of new industries and driving affordable low-carbon energy. The UK scheme has been characterised by a series of crises. Firstly the CSR process made for an extremely difficult start, with rumours the scheme could be axed or Tariffs cut immediately. The industry had no point of contact for this process and early industry growth tailed off as panic grew. DECC reached a good CSR settlement, but it was a settlement against a budget that was later revealed to be based on very poor analysis of the sector. And the settlement imposed a cap that has hindered the flexibility FIT schemes require. We also did not know at this point how sharply prices for solar would fall, and how strong the case for a reassessment of the scheme would be. Evidence began to mount towards the end of 2010 that volume was going to be higher than expected. For example, individual companies in contact with DECC explained, or press released, very ambitious installation plans that individually would have taxed the budget. DECC appeared particularly aggrieved by field arrays reported in the Daily Mail (not one having been built) despite having set out a clear Tariff for them. Negative comments were made by Ministers in an attempt to deter investors. The Minister organised a meeting with the industry recognising relatively early on that growth was going to exceed the budget. It is unclear what happened to the process. Initially the process was good albeit painful, led by the Minister. At the DECC meeting with industry end of 2010 the Minister directly challenged industry to help resolve the anticipated problem and made clear that any excess deployment in any given year would be clawed back from the allocated budget. It was also suggested that an industry-DECC roundtable would be set up to manage the scheme—this was widely welcomed and on two occasions we recommended key participants. At this DECC-industry meeting, for the first time, we were given access to the original DECC modelling which was shockingly wrong and which had formed the basis for the CSR settlement. For example, the modelling showed no deployment of ground-mounted systems until later in the decade, and even then only a small amount. It is very hard to understand, given a price was published, why such a scenario was modelled. However, we do not accept this left the Coalition Government as a victim of a previous government’s scheme. 98% of respondents to our industry survey said the new Government have now had plenty of time to sort any issues out. We awaited further engagement but a sudden announcement was made in February 2011 that all Tariffs for solar over 50kW would be cut to uncommercial rates under a fast-track review. A “Fast Track” consultation was published weeks later with the industry now destabilised. STA and REA both advised cutting all Tariffs by 25% given module reduction price drops. We did not agree with attempting to limit the market to microgen because this excluded the better value solar, it excluded important public-realm/community schemes, and it meant that the industry’s ability to achieve volume price cuts for the benefit of all consumers would be more limited. It also meant that major industrial opportunities for new manufacturing would be lost. 81% of respondents to the approx 500 consultation responses disagreed with DECC’s proposals. We were particularly aggrieved by DECC’s public messaging which demonised field arrays and suggested that only the market for “super size” solar had been stymied. In fact the market for all solar over 50kW (enough to power 15 homes) was cut. REA and STA were relatively relaxed about field arrays as international experience shows these make up a small proportion of solar markets even when there are no limits on size. We were also impressed by the efforts of Cornwall Council to develop a regional growth strategy around their solar potential. We felt this could be controlled by a sensible Tariff and planning restrictions to brownfield land. DECC seemed of the view that excess returns were acceptable or could be tolerated for the domestic sector. While we had clearly advised cuts [see enclosed first review response], other trade associations were arguing that the Tariff should now be left alone until the scheduled April 2012 adjustment to avoid any further instability in the scheme. Our view was that excess returns not only meant the budget could come under strain, but that the industry risked losing strong public support if the returns were too high. We were also concerned excess returns would create damaging media coverage and attract speculative firms/cowboys into the industry—that has been the case. There is genuinely wide variation in the prices being paid for solar modules and that is to be expected for an infant industry where new enterprises of different scale and purchase power are seeking to establish supply chains. As above, a level of over-reward should be tolerated at the outset of the scheme to ensure that UK SMEs can establish a foothold. However, we also have to be conscious that we are trying to establish a strong UK sector which will need to compete with international firms, subsidy free, before the end of the decade. Since summer 2011 REA/STA staff consistently advised DECC officials that deployment was higher than scheduled and returns were too high for all solar except BIPV. We expected the Comprehensive FIT review to be published over the summer. It seemed obvious that this was what was needed to ensure effective management of the scheme and value for money. However, all renewables policies were now subject to delay (RO Banding and RHI), so REA staff were extensively deployed elsewhere and not overly surprised by the delay. However, the key question is why the Comprehensive Review was published so late, as this is the crux of the current crisis and the large overspend this year. We regret the excess rewards the Government have chosen to offer. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Even during the summer, Ofgem registrations were not showing excess deployment. In fairness to DECC, they were accused of acting pre-emptively, without evidence under the first Fast Track FIT review.10 It wasn’t until September/October that the Ofgem register showed clear evidence that deployment was racing ahead of schedule. Ofgem figures for deployment in recent months are as follows: AprilÐAugust 2011—72MWp AprilÐSeptember 2011—108MWp AprilÐOctober 2011—186MWp AprilÐNovember 2011—257MWp Today 22 Nov—310MWp excluding around 110MWp of Fields / Large Projects still to register. However it must be noted that if you had looked at the Ofgem register in August or September the figures would have been lower. In September 2011 the figure showing on the Ofgem website was around 80MWp but that has now has climbed to 108MWp today. In September, based on the 80MWp figure others in the industry predicted 31 March 2012 figure would be 120MWp to 150MWp. They suggested that the 80MWp figure was distorted by some large initial projects but now that large projects had been stopped this would relax the take- up. STA and REA have consistently advised deployment would be higher and at times took a lot of flak for doing so. In our view it was absolutely in the best interests of the industry to avoid the predictable situation we are now in. By this stage speculation was growing in the industry about the lag time between the commissioning of new solar schemes and Ofgem registrations, ie there was significantly more deployment than was showing on the Ofgem register. REA wrote to advise the Minister there would be a problem sticking to the budget in October after an analysis by Feed-In Tariffs Ltd on the lag on Ofgem registrations estimated a three month average delay and a likely underestimate of current deployment figures of around 100MW. This concurred with our own estimate of 70Ð100MW. REA and STA advised our own membership to avoid making any significant investment as we were increasingly concerned about DECC taking knee-jerk action. Shortly after DECC published its own analysis of MCS data estimating additional deployment not yet on the Ofgem register at 86MW. It was now clear the problem was recognised and it wasn’t long after this that damaging speculation appeared in the press that all solar Tariffs would be cut to 9p, which would destroy the domestic/community UK industry. However, we were surprised that the Comprehensive Review had still not materialised. Phase 1 of the Comprehensive Review was largely anticipated by us but even we were taken aback by the six week timetable, and the setting of an implementation date ahead of consultation closure. This has left the industry in an incredibly difficult double bind. The Tariff correction date is very damaging and has led to widespread litigation within the industry and by clients. However, the later the new Tariff date is left the less money is left in the budget and the more endangered the industry’s future is. Government should take responsibility for its mishandling of this scheme, for its decision to over-reward householders investing in solar—they certainly should not penalise the industry with possible destruction and waste public investment to date.
Enquiry Theme 4: Affordability of Solar Photovoltaic energy versus other renewable energy (given the overall levy-funded cap for energy bills) and the impact of Feed-in Tariffs on energy bills Purely on cost grounds solar PV may well become the marginal cost technology by the end of the decade. This no doubt is particularly uncomfortable for officials whom have constantly portrayed solar PV as expensive. We accept these cost assessments would need DECC’s Roadmap to be revisited and most likely the profile of technology deployment changed—putting additional pressure on an already overstretched department. However, this does not mean that it is in the public interest not to do so. The impact on energy bills has been greatly overstated—we have had to counter ludicrous press coverage eg Daily Mail claiming wind and solar add 9% to household energy bills. The Daily Mail is one thing, however DECC are now citing figures of £26 and £50 added to bills if we do not follow their current proposed course of action—this is deliberate scaremongering because it is based on run-away scenarios that nobody is advocating. The £26 figure is Option 1 in the IA, which assumes the old timetable of Tariff adjustments and Tariff degression levels for current deployment levels. This is extremely unhelpful at a time when a sensible solution needs to be found. It is creating widespread anger and damaging prospects of resolving the situation sensibly as it appears the Department and Ministers are deliberately misrepresenting solar to damage its public support. This is not how we expect the Department for Energy and Climate Change to behave, particularly not in the face of a serious crisis and when we have made clear in a letter to the Secretary of State our determination to work constructively with him and his Ministers to find a solution. 10 There had been, for example, very little actual deployment when action was taken under the First Fast Track Review and many argued therefore such strong intervention was not evidence-based. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Ofgem have provided us with their analysis that FITs will add £1 to household bills this year, which is completely dwarfed by rises in fossil fuel prices this year alone. The average cost per household over the lifetime of the scheme was estimated at £8 for all FIT technologies in the original IA for the FIT scheme. This is likely to reduce significantly given the unforeseen scale of reductions in solar module prices and grid electricity prices, even given the budget overspend this year. REA and STA are undertaking modelling analysis to show supporting the sector beyond this year is surprisingly affordable. We are not able to share this modelling at this time. The current FIT Tariff rates show that smallest hydro receives 21p, anaerobic digestion receives 14p at the smallest scale and wind 36p. If solar is to receive 21p for domestic scale (although this is obviously not ideal) to 13p for 50Ð250kW scale it should now be crystal clear that solar is not the most expensive renewable technology. Therefore going forward finding a solution to the current solar crisis to secure the industry and avoid massive job losses will be much more affordable than is commonly portrayed and than is currently being portrayed by DECC Ministers themselves. Wind currently claims £10 levies on energy bills. Solar can be driven below grid parity, for a decent size of industry deployment for less than this. The cost of driving a UK solar revolution has been greatly and widely overstated for want of a very basic strategic analysis by DECC. See STA analysis enclosed. At this point in solar’s development it is therefore incorrect to characterise solar as the most expensive UK technology choice. At the very largest scale, and given foreign vertically integrated companies with excellent terms of finance, we are now just starting to see schemes in the South West for large field arrays for 2 ROCs— the same subsidy as offshore wind and without the grid costs. The same as advanced gasification and pyrolysis, same as AD, as energy crops, and as dedicated biomass with CHP. Wave and tidal will in future receive 5 ROCs. Deep Geothermal needs 4 ROCs but it receives 2 ROCs today. This exposes how astonishingly inaccurate official cost assessments of solar have been. The Committee on Climate Change analysis showed solar at the same price of offshore wind in 2040. This level of misinformation by credible groups has been extremely damaging and no doubt contributed to DECC’s marginalisation of the technology. Solar is further misrepresented in economic analyses partly because its lifespan is taken as 20Ð25 years. In fact nobody is quite sure how long solar lasts—schemes from the 1970s are still going. Manufacturers’ warranties are anticipated to increase to 35 years by 2020. Solar is an exceptionally durable and long-lasting technology because it has no moving parts and is not subject to wear and tear. This lifespan is not reflected in mainstream analyses—if it were solar would already appear significantly more competitive. For domestic solar, which is the most expensive application for solar, please see our analysis enclosed. It is of course DECC’s specific choice to focus resources on this most expensive application of solar almost exclusively. This enclosure explains why LCOE is a particularly poor tool for assessing solar’s potential. Prices have reduced further since we undertook this analysis. However, we have undertaken some further analysis of LCOE for this inquiry to show again that even under these terms solar is much more competitive than is commonly realised. Taking a very competitive cost kW(p) for a commercial array—eg large warehouse roof in South of England our model calculates an LCOE over 25 years at 5% discount rate at just 10p kWh in 2015. In 2020 under the same assumptions the LCOE is 7p kWh. Even taking a 12% discount rate in 2020 we estimate a solar scheme in the South will have an LCOE of 12p kWh. Taking a more accurate 35 year life span for an average UK solar panel (not in the South) we calculate the LCOE at a 5% discount rate for a large commercial scheme at under 9p kW/h in 2014. We calculate it to be 6p kWh in 2020. Please compare these figures with the LCOE for offshore wind of 10Ð15p/kWh in 2020 by Committee on Climate Change or the very optimistic 5.5Ð10p/kWh for nuclear in 2020 (not including waste and other costs). The marginalisation of solar on costs grounds is totally unjustified. The figure in the Option 1 in the current IA for a baseline scenario is based on run-away growth and the previously proposed degression rates/timetable. This estimates solar will add £26 to household energy bills in the year 2020. Nobody is advocating such a scenario. We urge the development of a sensible scenario between this extreme, and the other policy proposals set out which may well terminate the industry. This sensible scenario needs to clearly set out how the sector will be supported until the end of this Parliament. It needs to quantify benefits, as well as costs. The REA and STA are working with our members to develop such a scenario, which we believe to be affordable.
Enquiry Theme (e): Experience of similar incentive mechanisms for renewables in other countries: (with thanks to Paul Gipe) Germany is often cited as the best comparator given it pioneered Feed-In Tariffs and has successfully created a major industry anticipated to rival their car industry by 2020. Last year Germany deployed 8GW of solar power—dwarfing our UK cumulative target to 2020. Germany currently aim to deliver 52GW of solar in 2020 or 9% of their total electricity supply (taking into account efficiency targets). They are taking care to engineer cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
Ev 52 Energy and Climate Change and Environmental Audit Committees: Evidence
the complementary annual generation profiles of wind and solar together. Indeed, the twin engineering of wind and solar is now common—Japan are doing the same. China, is now seeking to double its solar capacity by increasing its solar FITs deliberately to boost profits and investment. Since 2004 Germany’s solar FITs have dropped by over 57% proving the success of this scheme and explaining why it has been widely copied. In 2012 Tariffs for solar PV will rival those for its offshore wind industry. Germany pays offshore wind €0.15/kWh. Offshore projects installed by 2018 also receive a “sprinter” bonus bringing total payment to €0.19/kWh. Solar PV installed on brownfield sites in Germany will receive about the same payment as those for offshore wind with the sprinter bonus next year. Germany has a capacity trigger so that if deployment exceeds desired levels Tariffs automatically reduce. If capacity falls under they will increase. We understand they have a red, amber, green website traffic light system to show how close to trigger points the scheme is so investors can assess and account for their risk. This seemed to play will with our members and is certainly preferable to the current debacle. However Deutsche Bank below argue for time triggers. We recommend the relatively short Deutsche Bank Report: The German Feed-in Tariff for PV: Managing Volume Success with Price Response. It describes the German system as “best in class”. http://www.dbcca.com/ dbcca/EN/_media/German_FIT_for_PV.pdf Over 50 countries now use FIT schemes to drive renewable power deployment. There are many analyses of international FITs schemes. However, the IPCC recent report on renewables summarises the overwhelming weight of evidence that FITs outperform all other financial mechanisms for renewables. Please see extracts below with our thanks to Paul Gipe, an international experts on FITs, who selected these excerpts for Renewable Energy World. Full report at http://srren.ipcc-wg3.de/report
Page 5 Several studies have concluded that some feed-in tariffs have been effective and efficient at promoting RE electricity, mainly due to the combination of long-term fixed price or premium payments, network connections, and guaranteed purchase of all RE electricity generated. Quota policies can be effective and efficient if designed to reduce risk; for example, with long-term contracts.
Page 53 Although they have not succeeded in every country that has enacted them, price-driven policies have resulted in rapid renewable electric capacity growth and strong domestic industries in several countries—most notably Germany (See Box 11.6) and Spain (See Box 11.8) but more recently in China and other countries as well—and have spread rapidly across Europe and around the world (REN21, 2006, 2009b; Mendonça, 2007; Rickerson et al, 2007; Girardet and Mendonca, 2009). (See Boxes 11.7, 11.11 and 11.12.) The success of FIT policies depends on the details. The most effective and efficient policies have included most or all of the following elements (Sawin, 2004; Mendonça, 2007; Klein et al, 2008a; Couture, 2009): — Utility purchase obligation; — Priority access and dispatch; — Tariffs based on cost of generation and differentiated by technology type and project size, with carefully calculated starting values; — Regular long-term design evaluations and short-term payment level adjustments, with incremental adjustments built into law in order to reflect changes in technologies and the marketplace, to encourage innovation and technological change, and to control costs; — Tariffs for all potential generators, including utilities; — Tariffs guaranteed for a long enough time period to ensure adequate rate of return; — Integration of costs into the rate base and shared equally across country or region; — Clear connection standards and procedures to allocate costs for transmission and distribution; — Streamlined administrative and application processes; and — Attention to preferred exempted groups, for example, major users on competitiveness grounds or low-income and other vulnerable customers.
Page 55 The IEA argues that the key for countries like Germany, Spain and Denmark has been high investment security coupled with low administrative and regulatory barriers (IEA, 2008c). The IPCC’s Fourth Assessment Report, in comparing quantity-based mechanisms and FITs, noted that: “In theory, this difference should not exist as bidding prices that are set at the same level as feed-in tariffs should logically give rise to comparable capacities being installed. The discrepancy can be explained by the higher certainty of current feed-in tariff schemes and the stronger incentive effect of guaranteed prices.” (Sims et al, 2007). cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Likewise, Stern (2007) concluded that “feed-in mechanisms achieve larger [RE] deployment at lower cost. Central to this is the assurance of longterm price guarantees [that come with FITs]…. Uncertainty discourages investment and increases the cost of capital as the risks associated with the uncertain rewards require greater rewards.”. Bürer and Wüstenhagen (2009) found that, because FITs effectively reduce risk, venture capital and private equity investors perceive FITs to be the most effective policy to stimulate investment in RE technologies (Bürer and Wüstenhagen, 2009).
Page 55 FITs have encouraged both technological (Huber et al, 2004) and geographic diversity (Sawin, 2004), and have been found to be more suitable for promoting projects of varying sizes (Mitchell and Connor, 2004; van Alphen et al, 2008). . . . A number of studies have concluded that FITs have consistently delivered new supply, from a variety of technologies, more effectively and at lower cost than alternative mechanisms, including quotas, although they have not succeeded in every country that has enacted them (Ragwitz et al, 2005; Stern, 2007; de Jager and Rathmann, 2008).
Page 56 Recent studies (Resch et al, 2009; de Jager et al, 2010) of quota systems in Europe found that Italy, the UK, Poland and Belgium had experienced high producer profits resulting from high investment risks and low growth rates. Other studies have reached similar conclusions (D Fouquet et al, 2005; New Energy Finance Limited, 2007; Jacobsson et al, 2009; Verbruggen and Lauber, 2009). Such profits primarily benefit incumbent actors and relatively mature, low-cost technologies, and can be costly for consumers (Jacobsson et al, 2009). The exception among European countries using a quota obligation is Sweden, which has experienced a high rate of RE growth coupled with relatively low producer profits. This was because quota systems tend to favour least-cost RE and Sweden has an abundance of biomass.
Page 58 With respect to competitiveness, another element of efficiency, a 2008 analysis found that market competition (number of players) was stronger among wind turbine producers and constructors under the German FIT than under the quota scheme used in the UK (Butler and Neuhoff, 2008). Except in the case of Spain, where the premium option attracts mostly incumbent power generators, FITs have been more successful at bringing new players into the market (Verbruggen and Lauber, 2009). FITs encourage competition among manufacturers rather than investors (Held et al, 2007). FITs have been found to encourage development of domestic manufacturing industries, which leads to a large number of companies and thereby creates competition (Sawin, 2004). FITs shift competition from electricity price to equipment price, which some analysts have argued is more appropriate competition for capital-intensive RE technologies (Wagner, 1999; Hvelplund, 2001). Verbruggen and Lauber (2009) demonstrate that well-designed FITs provide dynamic incentives to reduce long-run marginal costs of a variety of RE technologies because investment money is assigned to investors accordingly; more efficient producers obtain greater rents by lowering costs, and the FIT payment rates are regularly adjusted to avoid excessive rents. . . . At the same time, detailed analysis of which companies gain from quota systems suggest that it is primarily incumbent actors that continue to benefit from the new market (Girardet and Mendonca, 2009; Jacobsson et al, 2009; Verbruggen and Lauber, 2009). The transaction and administrative costs of a TGC system are higher than with FIT, making participation of small-scale new entrants cumbersome, and therefore limited (C. Mitchell et al, 2006). In contrast, FITs tend to favour ease of entry, local ownership and control of RE systems (Sawin, 2004; Lipp, 2007; Farrell, 2009), and thus can result in wider public support for RE (Damborg and Krohn, 1998; Sawin, 2001, 2004; Hvelplund, 2006; Mendonça et al, 2009). Such ease of entry has also proved a powerful means for unleashing capital towards the deployment of RE projects (Couture et al, 2010).
Page 59 FITs generally have lower administrative costs than quota policies (Haas et al., 2011) and are considered easier to implement (van der Linden et al, 2005), though tariff setting can be challenging, particularly if there are very dynamic cost developments (as with PV in recent years). Quotas, particularly those operating with tradable certificates, appear to be more complex because of the need to set both penalty prices and quantities. Transaction costs are also generally higher for such quota systems. Complexities also arise from the need for trading platforms under quotas with tradable certificates, and tendering schemes require administrative capacity to deal with the bidding process (Sawin, 2004; de Jager et al, 2010). 24 November 2011 cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Written evidence submitted by the Department for Energy and Climate Change Summary — The Feed-in Tariffs (FITs) scheme has driven rapid take-up by households, businesses and communities of small-scale low-carbon electricity, so far primarily through installation of solar photovoltaics (PV). — Global uptake of solar PV has been growing at a rapid pace, prompting (and prompted by) significant reductions in the price of PV modules. — Other countries with FITs schemes have been prompted by the same developments to reduce support levels for solar PV. In some cases, FITs schemes have been suspended altogether for a period, or have applied retrospective caps. — The rapid decline in solar PV costs has increased significantly the returns available under the Great Britain solar PV tariffs, which in turn has prompted a huge acceleration in take-up over the summer of 2011. This has called into question the affordability of the scheme at current rates given the fixed spending envelope set under the Levies Control Framework and the 25 year lifetime of solar PV tariffs. The scheme cannot continue at current rates within the current budget; a substantial correction is needed to those rates if the scheme is to be sustainable, without a disproportionate burden placed on consumers’ energy bills. — The scheme as designed envisaged a system of periodic reviews involving analysis, public consultation and parliamentary scrutiny. This has limited the speed with which it is possible to make regular adjustments to tariffs which track falling PV costs and increased uptake. The dramatic recent developments in the global solar PV market have exposed the limitations with this system. The consultation on Phase 1 of the Comprehensive Review sets out these issues and makes proposals for changes, some of which may be required on a fast timescale, in order to bring the scheme back within its original targets for affordability and providing reasonable incentives.
Introduction 1. The FITs scheme was introduced in April 2010 under powers set out in Sections 41 to 43 of the Energy Act 2008. The FITs scheme provides subsidised support to small-scale low-carbon electricity generation with a total installed capacity of up to 5 megawatts (MW). The FITs scheme applies across England, Scotland and Wales; it does not apply in Northern Ireland, where the administration would need to develop their own legislation if required. 2. Currently, the FITs scheme provides support for new solar PV, wind, hydro and anaerobic digestion (AD) projects. It also provides support for the first 30,000 micro combined heat and power (µCHP) installations with an electrical capacity of 2 kilowatts (kW) or less, as a pilot programme. Tariffs are paid for 25 years in the case of solar PV installations, and for 20 years for AD, hydro and wind generators. Projects within the µCHP pilot are paid for 10 years. 3. FITs are paid by licensed electricity suppliers who then pass on the costs to consumers through their electricity bills. Because of this, FITs are treated for Government accounting purposes in a similar way to taxation and are subject to a control framework for DECC levy-funded spending agreed with HM Treasury as part of the 2010 Spending Review. This framework sets parameters governing spend on FITs and the overall affordability of the scheme. This framework is designed to help ensure that the policies within its scope achieve their objectives cost effectively and affordably and without leading to a disproportionate increase in energy bills. 4. Since the first comprehensive review of FITs was announced in February 2011 there has been a fast-track review of tariffs for large scale solar PV and farm-scale AD. This review resulted in changes to tariffs which took effect from 1 August 2011 in the case of large-scale solar PV and from 30 September 2011 (following European state aid clearance) in the case of farm-scale AD. 5. More recently, on 31 October the Government published the first of two consultations on the comprehensive review of FITs. This first document focused on proposed changes to the tariffs for solar PV in the light of the recent rapid acceleration in take-up of solar PV and the subsequent risks to the FITs spending envelope. The proposals for significant reductions in tariffs for solar PV are consistent with a wider international pattern which has seen recent reductions in support for solar PV provided by FITs schemes elsewhere in Europe and the world, in line with significant reductions in the costs of PV and concerns about the impact of over generous subsidies on consumer energy bills. 6. A second consultation on the comprehensive review will be published around the end of the year. This will consider the tariffs for non-PV technologies and administrative aspects of the FITs scheme. It will also include proposals for introducing new cost control mechanisms for FITs to ensure that the scheme’s aims are met in a manner which is affordable within the control framework set for DECC levy-funded spending. 7. Solar PV is the dominant technology under FITs. As at 31 October 2011, solar PV accounted for 97% of the total installations (and 85% of the total installed capacity) registered for FITs. The focus of the current inquiry on FITs for solar PV is reflected in this paper. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Objectives of the Great Britain FITs Scheme 8. The Explanatory Notes supporting the Energy Act 2008 describe the following broad objectives of the FITs scheme:- — to incentivise households, businesses, and community groups to generate low-carbon electricity; — to reduce transmission and distribution losses because the electricity is generated close to where it is used; — to promote behaviour change such as increased energy efficiency and reduced energy demand, through moving businesses, communities and households from being passive users of electricity to active users who are more aware of energy generation and usage; and — to harness the potential of the built environment for the deployment of renewables, such as rooftops and brown field sites. 9. Three years on from the Energy Act 2008, the current review of FITs provides an opportunity to revisit the aims of the FITs scheme and to provide greater clarity on this—a recurring request in stakeholder feedback received during the review. The original objectives remain valid, but with a new emphasis on assisting in public take-up of carbon reduction measures in general, particularly measures to improve the energy efficiency of buildings. This reflects the Government’s aim of ensuring that solar PV is considered as part of a holistic approach to carbon reductions and energy efficiency.
Impact to Date of FITs 10. The FITs scheme has driven rapid take-up by households, businesses and communities of small-scale, low-carbon electricity, primarily through installation of solar PV. Deployment of solar PV in particular has increased rapidly, particularly over summer 2011. The current consultation document on FITs for solar PV refers to data from September which showed that the level of take-up was already significantly above original projections, with 255MW of solar PV registered for FITs (compared with the 94MW originally projected for this time). Since publishing the consultation, the installation rate has accelerated further. For example, current figures show that there were more than 11,500 new solar PV installations in the week ending 20 November 2011, 122% more than the week ending 30 October 2011. 11. The scheme has also encouraged the emergence of arrangements under which certain entities and organisations receive FITs payments from multiple PV installations. Nearly 20% of PV installations currently registered for FITs are associated with such multi-installation schemes, sometimes called “rent a roof” arrangements, under which the host benefits from the electricity generated by the PV panels (and associated bill savings) while a third party benefits from the FITs income. 12. It is too early to be able to assess the impact of the scheme on behavioural change. However, now that we have 18 months of experience with the scheme, and a critical mass of installations, we are considering how such an assessment might be conducted.
State of Solar PV Market 13. Analysis undertaken as part of the comprehensive review of FITs suggests that there has been at least a 30% reduction in the capital costs of installing solar PV in 2011 as compared to 2010 when the FITs scheme started. These and other developments, including an increase of 13% in retail electricity prices, mean that the current tariffs are resulting in significantly higher returns than the 5% returns originally envisaged when the FITs scheme started. This analysis underpins the proposed new tariffs for solar PV that the Government is currently consulting on. 14. The cost reductions have been driven primarily by global PV module price reductions. There is a global market for solar PV in which the main driver for cost reductions is the very significant increase in supply of modules (predominantly from China and Germany) driven by the global uptake of FITs schemes, predominantly in Europe and the US but increasingly in Brazil, India and China. In this context, the UK is a price taker on solar PV modules, with little potential to influence the global market. 15. Given this global context, it is challenging to attribute any significant PV market developments to the Great Britain FITs scheme. Its impact is most likely to be in relation to learning effects in the installation sector, although these impacts tend to be more variable and the consequent associated cost reductions less pronounced than for technology costs.
Balancing Objectives of FITs with Affordability 16. As at 31 October 2011, solar PV accounted for 97% of the total installations (and 85% of the total installed capacity) registered for FITs. Because of this, and the relative speed with which solar PV can be deployed compared with the other technologies supported by FITs, uptake of solar PV is the key factor in relation to the overall affordability of FITs. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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17. The Levies Control Framework11 provides parameters intended to control the overall affordability of FITs and the associated impact of the scheme on bills. Under the Levies Control Framework, there is an agreed spending envelope for the FITs scheme. The published envelope for FITs amounts to a total of £867 million over the current Spending Review period. This figure takes into account the commitment made as part of last year’s Spending Review to save £40 million from FITs in 2014Ð15. It provides a short-term snapshot of the expected costs of FITs (bearing in mind the length of time for which tariffs are paid, 25 years in the case of solar PV). It is based on the modelling undertaken prior to the start of the scheme. 18. It is important to note that our original cost estimates of FITs were modelled in a different way to the current cost estimates. Originally, we took as a baseline the number of renewable installations that would have come forward under the Renewables Obligation (RO) if FITs did not exist. We then modelled the renewable installations under FITs that were additional to that baseline. During the 2010 spending review, the FITs spending limit was based on the modelled costs difference between the baseline and the installations that were additional to that baseline, with an additional efficiency saving of 10% in 2014Ð15. These numbers were published previously as part of our aim to be transparent about how the Levies Control Framework operates. However, some generators have a one-off choice and can only accredit under either the RO or the FITs scheme. This affects the spend recorded against each of these schemes. As this choice was not reflected in the levies budget-setting process, we have estimated the overlap amount (based on an estimate of total sub-5MW expenditure) and adjusted the FITs budget upwards and the RO budget downwards by a corresponding amount in order to provide a more accurate assessment of whether our spend is over- or under- the spending limit for each policy. The resulting envelope profile is set out below. This is purely a technical adjustment and makes no difference to the actual amount of subsidy available for these levies schemes. LEVIES SPENDING ENVELOPES, £m 11/12 12/13 13/14 14/15 RO (revised) 1,750 2,156 2,556 3,114 FITs (revised) 94 196 328 446 Warm Home discount (unchanged) 250 275 300 310 Total 2,094 2,627 3,184 3,870
19. If DECC thinks that spend might be on course to exceed its spending envelope, it has to put in place a robust, agreed plan to bring spend back down to within the envelope. Ensuring that spend on FITs remains within the agreed spending envelope is one of the principal objectives of the first review of the FITs scheme which was announced by the Secretary of State for Energy and Climate Change on 7 February 2011. At the time, the Secretary of State said that the review would “Be completed by the end of the year, with tariffs remaining unchanged until April 2012 (unless the review reveals a need for greater urgency)”. 20. Deployment of solar PV has accelerated rapidly, particularly over summer 2011, resulting in a level of uptake that is significantly above the original projections. The current consultation on FITs notes that, as at the end of September 2011, 255MW of solar PV had been registered for FITs. This compares to the 94MW that was originally projected for this point in time, and is nearly double the projection for the first two years of the scheme. The consultation document also notes a significant pipeline of PV installations that have been installed but are not yet registered for FITs. Since publishing the consultation, the number of installations has continued to accelerate. For example, there were 11,500 new solar PV installations in the week ending 20 November, 122% more than the week ending 30 October. 21. Indications are that, without action along the lines proposed in the Government’s current consultation on FITs, this trend of uptake will continue, with a corresponding impact on the cost of FITs on energy bills (especially in view of the current high tariffs for solar PV). 22. Concerns about the impact of these developments on the overall affordability of the FITs scheme (in the context of the Levies Control Framework), were a key factor in the Government’s decision to publish the 31 October consultation setting out proposed changes to FITs for solar PV. 23. The Government’s current consultation on FITs for solar PV intends to rebalance the scheme so that it continues to be affordable within the context of the Levies Control Framework; its impacts on consumer energy bills are controlled; and it can deliver the objectives set out above. 24. In taking the scheme forward, the Government also aims to develop a supply chain that offers households a wide range of cost effective measures to lower their energy use and carbon emissions. As part of this, the Government wants to see a sustainable solar PV industry. Our view is that continuing the current deployment boom driven by unsustainably high tariffs is not compatible with the wider affordability aims and concerns, and is simply not sustainable. This is because failing to act now would result in the entire FITs budget for the four year spending review being committed within the next few months. 25. In that context, the Government recognises that, if implemented, the current proposals on FITs for solar PV could have an impact on jobs in the solar PV industry. However, we must also consider the wider impacts on the whole economy and value for money of continuing with tariffs, paid for from energy bills, which provide excess returns in the light of the falling costs of solar PV and other factors. The tariffs that we are 11 Further details on the Control Framework for DECC levy-funded spending is available at www.hm-treasury.gov.uk/psr_ controlframework_decc.htm. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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currently consulting on are intended to provide around 4.5%-5% real rate of return, consistent with the original aims of the FITs scheme. We consider that these should still provide the basis for a viable PV industry in the UK. 26. The original aims of the FITs scheme (set out above) underpinned the overall approach to setting tariffs when the scheme began. This was based on delivering a target return of 5Ð8% for well located installations (5% for solar PV).12 The Government believes that an approach that takes into account rates of return remains appropriate. Therefore, as foreshadowed when the FITs scheme began, one of the main areas that the comprehensive review has been considering is whether the current tariffs are delivering more than these target returns, and whether these returns themselves are appropriate in supporting delivery of the scheme’s aims.
Impact of FITs on Energy Bills 27. The cost of FITs is born by consumers through their energy bills. When the scheme started, it was estimated that the impact on the average annual domestic bill by 2015 would be about £6.50 (undiscounted 2009 prices). The higher than projected number of solar PV installations mean that, if the current arrangements were to remain in place, the impact on the average annual domestic bill from solar PV would reach about £12 in 2015, and about £26 by 2020 (undiscounted 2010 prices). This assumes central scenarios of expected uptake; under a high uptake scenario this cost could be £55 per year by 2020.13 28. The changes we are proposing in the current consultation would reduce the average annual impact of solar PV on domestic bills in 2015 to £2.50-£2.90 (undiscounted 2010 prices), and £2.60 to £3.20 in 2020. Please note that these estimates do not take into account the impacts of other technologies on bills.
Affordability of Solar Photovoltaic Energy compared with other Renewable Energy Technologies 29. Chapter 1 of the Government’s consultation on FITs and solar PV, published on 31 October 2011, focuses on considering the aims of the scheme and the link between these aims and the level of subsidy that can be justified as representing value for money under FITs. It points to the wider context for this, specifically the important developments in the Government’s policy and strategy for renewables delivery since the FITs scheme started. A key development has been the publication of the Renewables Roadmap this summer. This roadmap sets out the Government’s understanding of actual and potential deployment and the actions required to help the UK meet its target of 15% renewable energy by 2020 in a cost effective and sustainable way. 30. The analysis underpinning the Renewables Roadmap is based on a benchmark that the marginal cost (in terms of subsidy) that is currently considered necessary to deliver the UK’s renewable target is 9p/kWh. In other words, our analysis shows that if we offer this level of support (or lower) to a range of technologies, the UK target will be met without the need for subsidy at higher levels. This 9p/kWh level is broadly equivalent to two Renewables Obligation Certificates (based on 2012Ð13 costs). This is the level of support available under the Renewables Obligation to offshore wind, which is currently considered to be the marginal cost effective technology required to deliver the UK’s 15% renewable target. 31. Any additional support for renewable energy technologies above this benchmark therefore needs to be justified on other grounds. In the case of FITs, the Government considers that this justification is provided by the fact that the scheme’s aims include contribution to wider low carbon goals, as well as the renewable energy target. These wider aims include:- — empowering people and giving them a direct stake in the transition to a low-carbon economy; — helping develop a supply chain that offers households a wide range of cost effective measures to lower their energy use and carbon emissions; and — assisting in public take-up of carbon reduction measures, particularly measures to improve the energy efficiency of buildings. 32. Due account has also been taken of the value of employment in the sector, using standard Government benchmarks for employment support. 33. The Committee on Climate Change (CCC) categorised solar PV as a low priority technology for deployment in the UK prior to 2020. The CCC did acknowledge that solar PV could contribute to the UK’s low carbon electricity supply post-2020, but suggested the best strategy would be to rely on international deployment to drive cost reduction.
How the FITs Scheme has been managed (including Management of Review/Consultation) 34. Management of FITs can be divided into two areas, day to day management and budgetary management. The day to day management and administration of the FITs scheme is the responsibility of Ofgem, with a key role for electricity suppliers. The remainder of this section focuses on budgetary management. 12 See the Impact Assessment supporting the introduction of the FITs scheme (published in February 2010) and available at http://www.decc.gov.uk/assets/decc/Consultations/Renewable%20Electricity%20Financial%20Incentives/2710-final-ia-feed-in- tariffs-small-scale.pdf. 13 Ibid. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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35. The dramatic recent developments in the global solar PV market have exposed some of the limitations with the systems originally put in place for managing the FITs scheme and its ongoing affordability. In particular, the reliance on periodic reviews involving analysis, public consultation and parliamentary scrutiny has limited the ability to make more regular adjustments to tariffs which track falling PV costs. 36. That is why a priority for the Government through the current review is putting in place new cost control mechanisms which enable the scheme to be run in a way that is more responsive to market developments. We have been considering different types of cost control mechanisms including contingent degression (where tariffs are adjusted automatically in responses to deployment or expenditure triggers); more frequent/rolling reviews; and rationing/quotas. We expect that regular degression of tariffs, particularly tariffs for solar PV, will be a central feature of the FITs scheme under all of these options to reflect, and also to encourage and drive, decreases in technology and installation costs. We will publish a second consultation around the end of the year which set out more detailed proposals on this. The second phase of the comprehensive review (as well as future reviews) will also consider the ongoing level of FITs tariffs, together with the target rate of return and whether this, and other features of tariff design, remain appropriate. 37. In the absence of cost control mechanisms, the Government has operated within the existing review framework for taking forward the comprehensive review that was announced in February this year. Throughout this process, the Department has sought to improve the flow of data to monitor the pipeline (e.g. by using data on installations from the Microgeneration Certification Scheme database as well as Ofgem data on installations registered for FITs) and to improve insights into the industry and commercial structures underpinning it. This activity led to the initial fast-track review of large scale solar PV in the spring, which focused on addressing the significant budgetary risk posed by unforeseen large scale solar PV. Similarly, it led to the current consultation on FITs for solar PV. 38. However, even with improved monitoring, it has proved challenging to secure robust evidence of installations in the pipeline before they actually happen. This, together with the review process for FITs and the spending parameters set by the Levy Control Framework, has limited the scope for taking early, pre- emptive action (i.e. outside standard policy review timelines). This in turn has driven both the need for a fast- track review earlier this year, and the urgency of the current FITs consultation. We have learned important lessons which only go to strengthen the case for new cost control mechanisms for FITs as the scheme goes forward.
International Examples of FITs 39. Falling PV costs have prompted similar surges in uptake of solar PV elsewhere in the world, and in turn significant changes to other FIT regimes. In the past year, Germany has reduced tariffs for solar PV and introduced a system that enables future, regular tariff reductions to track deployment. In the last month, the German Government confirmed that there would be a further reduction to tariffs from the beginning of 2012. The resulting tariffs for domestic PV installations are broadly comparable with those proposed in the UK Government’s current consultation on FITs for solar PV. 40. At the end of 2010, the French Government suspended its FITs scheme for three months for all PV installations with a capacity greater than 3kW, while the Government established a new regulatory framework with provision for reductions in tariffs and quarterly reviews. 41. Following discussions in the latter part of 2010, in early 2011, the Spanish Government also introduced reductions to their tariffs for solar PV. At the same time, they introduced a new cap limiting the electricity generation that could be paid for any solar PV installation (applying this retrospectively to existing solar PV installations). 42. Further afield, in New South Wales, Australia, a decision was taken last autumn to reduce tariffs for solar PV by two thirds (from 60 cents per kilowatt hour, to 20 cents). 25 November 2011 cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Graphs referred to by DECC in their oral evidence to the Committees on 29 November 2011 CUMULATIVE INSTALLED PV CAPACITY (MW)—APRIL 2010—OCTOBER 2011 450 Stand alone 400 350 >100kW-5MW 300 >10-100kW 250 >4-10kW (additional on 200 MCS) 150 >4-10 kW (Ofgem)
100 <=4Kw (additional on MCS) 50 <=4kw (Ofgem)
Cumulative installed capacity (MW) - Original projection (linear) Oct- 10 Oct- 11 Apr- 10 Apr- 11
Jun- 10 Jun- 11 Source: Feb- 11 Dec- 10 Aug- 10 Aug- 11 Ofgem and MCS
12000 Number of <4kW installations added each week 10000
8000
6000
4000
2000
0
20-Jul 09 20-Jul 10 20-Jul 11 20-Sep 0920-Nov 0920-Jan 1020-Mar 1020-May 10 20-Sep 1020-Nov 1020-Jan 1120-Mar 1120-May 11 20-Sep 1120-Nov 11 Source: Microgeneration Certification Scheme database
Supplementary written evidence submitted by the Renewable Energy Association and Solar Trade Association LETTER FROM THE RENEWABLE ENERGY ASSOCIATION TO DR PHILLIP LEE MP DATED 6 DECEMBER 2011 You asked an important question at the EAC/ECCC Solar Inquiry last week on the value appropriating to the UK from the FIT scheme, including manufacturing. I wanted to follow up with further information on this since we have tried repeatedly to align the UK FIT scheme to key UK manufacturing opportunities. We understood from PM/DPM speeches that rebalancing the economy and seizing new green tech manufacturing opportunities were a top priority. As was made clear in the evidence, the majority of the value of installed solar is now in Balance of System costs, ie labour, electrical fittings, scaffolding etc. The module will become an increasingly small part of installed costs as module prices will fall faster than Balance of System costs. The second largest equipment cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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cost is the inverter and we have Enecsys here which has commercialised the award-winning 25-year life micro- inverter based on developments by Cambridge University. The manufacturing cycle is somewhat more complex than suggested last week, as we have over 60 companies in the UK involved in the manufacturing supply chain, including Crysalox near Oxford which at one point was manufacturing around 10% of the world crystaline ingots. They turn over £ hundreds of millions and export to the East. This is a very high tech process: http://www.pvcrystalox.com/home/ 80% of jobs in solar are in installation, rather than manufacturing. It is critical to deliver lowest cost solar to have an efficient distribution and installation network. That has been developing in the UK. The later the UK leaves this, the smaller the stake that will be owned by UK companies paying tax to HMT. However, we were very keen to align FIT support to key manufacturing opportunities. That’s why we wrote repeatedly since May to meet the Sec of State with UK construction giant Kingspan, who have spent millions developing an integrated “insulate and generate” solar pv roofing system. They wanted to manufacture this here—see attached presentation.14 Given they have 80% of the UK building envelope market and 30Ð50% of the EU market this was an astonishing opportunity for the UK to strengthen its position in the massive EU/ global solar market. Kingspan’s plans were destroyed by the first fast-track review which wiped out much of the commercial sector market (where solar is significantly cheaper). We were therefore trying to get something done under the RO Banding Review. Unfortunately neither Secretary of State Chris Huhne nor Minister Hendry would meet us. Minister Barker met Kingspan with MPs from their regions with manufacturing plant and seemed keen to pursue this. However, as was made clear in our written evidence, we have a wider problem of distributed renewables being marginalised at DECC despite the potential for Kingspan to have been an important new entrant in the UK’s consolidated electricity market. This is not the only great manufacturing opportunity we were chasing. For example there are several solar canopies for electric vehicle charging in the UK. One is manufactured using all UK products—Gentoo solar, Screwfast fittings and Tata steel. Again, we were trying to get DfT interested in this—their electric vehicle agenda is not attracting sufficient private sector investment and there has been considerable interest in these canopies which make great use of generally unattractive car parking space. Given huge EU growth in EV’s, this was another great opportunity. We did meet with OLEV and were amazed to see such a joined-up cross- departmental approach to this technology—this is exactly what we need for renewables. Generally we were keen to see a BIPV Tariff (building integrated) as this allows the remanufacture here of the active part of solar into construction products that also provide roofing. France has a specific BIPV Tariff to encourage this. The advantage of this is an integrated product can go in quickly and save on roofing + module as well as labour. Obviously we have existing UK assembly and manufacturing plant—actually six or seven (see our written evidence). Two of these are large—Romag/Gentoo and Sharp. The great majority of their output is exported. It has been very frustrating that there has been no Government assessment of benefits, leaving the onus on us to develop that. To then not be given access to present key benefits or opportunities is immensely frustrating—particularly given top level rhetoric on the importance of building a green high-tech industry here and rebalancing the economy. We have tried repeatedly to join up DECC and BIS on this. Please don’t hesitate to contact me if you would like more info. I have copied in Kingspan Director Tom Paul who is now looking at EU bases for their major manufacturing plans where there is a more supportive environment 6 December 2011
Further supplementary written evidence submitted by the Solar Trade Association STA CORRECTIONS AND CLARIFICATIONS ON HOWARD JOHN’S ORAL EVIDENCE TO EAC AND ECCC INQUIRY ON SOLAR POWER Transcript Q1 Re “30,000 jobs created, many in the last six months” This is based on REA’s assessment of REAL membership data, which concluded 25,000 current jobs in November. REAL members are categorised by numbers of employee so the figure was arrived at by taking the average number of employees in each band and multiplying by the relevant number of companies. At the start of the FIT scheme in April 2010 there were 3,000 jobs. An REA job assessment in early 2011 with over 30% sector coverage anticipated 17,000 jobs. However, there are further jobs in manufacturing, the supply chain, ancillary services and research. Therefore we estimated 25,000Ð30,000 jobs. A recent BIS PQ estimated 39,000 jobs. 14 Not printed. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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An industry survey (November) conducted by REA and STA was answered by 140 companies who together employed over 4,000 people. This suggests the 25,000Ð30,000 jobs estimate may be an underestimate.
Transcript Q4 This question relates to when we were asking for 25% cuts. As was made clear later in the evidence this was set out clearly in our formal response to DECC in the first Fast Track Review consultation over six months ago, which has already been supplied as supplementary evidence. The recommendations for 25% cuts for all Tariffs were also made in the formal consultation response by REA and the NFU—also supplied in supplementary evidence. This was reinforced by the Ernst and Young report we commissioned and supplied to DECC (See below). The Solar Revolution Strategy, published in June Recommendation 1 was to build a mature market to drive down costs “(already 25% reduction within one year)”, but it did not say what it has been quoted as saying in the transcript answer. The aim of the strategy was to cost a solar revolution and 25% cost reductions were incorporated into STA’s analysis.
Transcript Q5 Re “excess profits highly unlikely” Reputable firms are likely to have invested profits in skills, training and growth. However, one of the reasons we wanted 25% Tariff cuts was to remove speculative and cowboy firms from the sector who were not in it for the long term and who may well have been making excess profit. It should be noted, however, that most module cost reductions are passed on to consumers so the surplus subsidy value would accrue not to the solar company, but to the householder, as was made clear later on. ie people claiming the Tariff get an excess subsidy.
Transcript Q7 We said it could happen immediately. We did not say in the Solar Revolution Strategy there should be immediate cuts of 25%. The 25% cuts was set out in our consultation response to DECC’s first Fast Track Review. “immediate” is appropriate in this context because we knew action was going to be taken imminently and this was our recommended action, although we obviously would advocate doing things in as structured a fashion as possible. From the STA consultation response: “In response to the 30% reduction in capital costs, we propose a 25% reduction in tariff levels. (the cost of panels only accounting for 50% of overall project costs)…. there is undoubtedly a case for adjusting the FIT”. “It is not in the UK PV industry’s interests to be associated with a gold-rush, we want a stable industry for the long term.”
Transcript Q12 The spreadsheet was not known about by the industry until the key DECC meeting in December 2011. The industry was then shocked to see how inaccurate this spreadsheet was. This presumably was the basis on which the budget had been set during the CSR period.
Transcript Q17 and Q18 We published our Solar Revolution Strategy which was commented on by the Minister in The Guardian, who were covering it, after an informal meeting and discussion between the Minister with a member of REA staff. However, we had a Chatham House meeting with the Minister at the end of May. We obviously cannot discuss what was said at that meeting and if this is what was meant above it should not have been said. However, the Minister clearly appeared to ask key officials in key teams (RO, EMR and Roadmap) to follow up with us. That never happened despite us chasing the officials several times. When staff relayed this to the Minister he, understandably, did not seem happy about that. However, STA also commissioned a study by Ernst and Young for the non-domestic market which set out a clear glide path to grid parity and this was provided to DECC officials as soon as it was published and as part of our submission for the Fast Track Review (albeit slightly late). This clearly was absorbed by officials because it is referenced on page six of DECC’s 2020 Roadmap published in early summer. So DECC officials clearly knew our view and had a very credible report showing how fast Tariffs could drop. This has already been supplied as evidence.
Transcript Q19 Meeting requests with Greg Barker were answered and the Minister is generally open which we welcome. However, it was clear to us at this point that solar and the Minister to some extent were in a silo in DECC and it was essential, if we were to have a strategic analysis of solar, that we needed to meet Charles Hendry on EMR/RO Banding and Chris Huhne on EMR/RO Banding/manufacturing opportunities. Our repeated requests cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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to meet Charles Hendry and Chris Huhne were not answered. Our attempts to meet officials were rebuffed as per above (we were told they were very busy with the RO Banding Review). The Minister himself appeared to be the only person willing to meet.
Transcript Q41 The £80 figure is not just to run the scheme forward as it was originally designed. It is to keep the previous Tariff degression figures as previously designed, eg 8% reductions from April 2012. This would mean paying 21p in 2019Ð20. However, the £80 figures is based on applying those over-rewards to ludicrous levels of annual capacity deployment (10GW pa), ie more than three times per annum what was originally expected to be deliver in total cumulatively by 2020.
Transcript Q46 and Q47 REA is undertaking detailed work which is being shared with DECC on the support trajectory. REA do not feel it is appropriate to share this with the Committee at this stage, as they do not want this to be in the public realm while they work to find constructive solutions and before consultation with members. The Minister referred to this work in his evidence. However, REA have felt compelled to use this modelling work to counter the ludicrous £26У80 figures used by DECC. That is the 700 MW per annum scenario referred to above. However, we refer you to previously submitted evidence which clearly sets out the support trajectory for solar in the UK; The Ernst and Young Solar Outlook Report commissioned by STA which sets out a clear support trajectory for non-domestic solar. We also refer you to the EPIA competitiveness report which sets out the point at which all sub-sectors of solar in the UK will not require subsidy. We are happy to meet Mark Lazarowicz MP to explain these if this is helpful. The Trajectory is likely to have improved given further cost reductions since the report was written and large increases in electricity prices over summer.
Transcript Q48 As explained Q1 above the 25,000 figure was calculated by REA from REAL Assurance membership data. This figure therefore relates to people employed directly by solar supply companies. There is additional employment in UK manufacturing throughout the supply chain. Please see our written evidence for details about this. However, as above, the REA/STA Industry Survey in November was answered by 140 companies who collectively employed over 4,000 staff members. Even accounting for some large companies within that, this suggests the 25,000 figure may be too low.
Transcript Q58 The great majority of jobs in solar are in installation rather than product manufacture, we estimate around 80%. However, even if a panel is purchased from eg China, the panel and inverter account for a proportion of the total installed costs, typically around 50%, but this proportion is falling dramatically (Daniel Green said 40%, but this figure will depend on module type). In future modules will make up a smaller fraction of installed costs. Therefore increasingly the subsidy is going, even for overseas panels, to UK enterprise and labour. This underlines why it is essential to invest in an efficient UK installation infrastructure to achieve lowest cost solar in the UK. We were keen to secure major UK manufacturing opportunities to increase UK value. That is why we advocated at BIPV Tariff as BIPV offers good UK manufacturing opportunities. We were frustrated that changes to the FITS were made with no reference to key UK manufacturing opportunities eg Kingspan who wanted to manufacture an integrated commercial roofing system “insulate and generate” here in the UK. Kingspan have 30Ð50% of the EU commercial building envelope market and 80% of the market here. They spent millions developing this innovative new system. This is therefore an exceptional opportunity for the UK to strengthen its position in the international solar market. We and Kingspan were astonished by the lack of interest and the lack of regard for how the first Fast Track review destroyed their business model and manufacture plans for employing over 1,000 people by the end of this Parliament. UKTI reported to us large levels of interest in inward investment in the UK from overseas companies. STA was particularly keen to attract Chinese manufacturers to the UK—we understand several are looking for EU sites. We would also point out the recent research by Element Energy showing tax revenues with match or exceed subsidy.
Transcript Q64 Please see our written evidence on this. The UK has six or seven module assembly and manufacture plant (one may not be running yet). two of these are large—Romag and Sharp and the rest are small. However, there are over 60 UK companies in the manufacturing supply chain including Crystolox which has a turnover of £100 millions and which exports to the East—we can compete! cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Transcript Q68 Please see answer to Q17and Q18 above. DECC officials clearly had the Ernst and Young study with a clear glide path which we commissioned because it is referenced in their own 2020 Renewable Energy Roadmap published early summer.
Transcript Q71 This depends on the sub-sector of solar. Domestic solar is likely to reach grid parity after commercial and utility scale solar. However, Ernst and Young and EPIA, and STA’s own Solar Revolution Strategy (all supplied in evidence) all conclude non-domestic solar in the UK could be subsidy free by 2017. As was made clear in the answer, achieving this depends entirely on a stable market where a mature sector is characterised by very efficient installation to deliver lowest installed costs. This date may have moved forward given recent electricity price increases and further module price reductions. 2 December 2011
Further supplementary written evidence submitted by the Renewable Energy Association and Solar Trade Association 1. Why have the financing costs to the industry increased since the Consultation was launched? [In the session it was stated that borrowing costs have increased by 5%] Risk perception is obviously a key factor in costs of finance. One of the reasons the Conservatives gave for supporting FITs was the stronger investor certainty provided by FITs and therefore lower cost of finance. There is very strong international analysis to support this—see previous written evidence. This was clearly understood by the Conservatives—see Action 1 in the Conservatives pre-election energy policy paper Rebuilding Security.
Action 1: Ensure that Britain has a Clear, Consistent and Stable Energy Policy Britain needs an energy policy that is clear, consistent and stable. Without one, investors will charge a premium to compensate for the risk of policy uncertainty. This increases the cost of capital and, in turn, the costs borne by consumers. Specifically on FITs they said: Feed-in tariffs—The Renewables Obligation (RO) is another risk-laden and expensive incentive mechanism for investment. Wherever feasible, we will replace the RO with feed-in tariffs, providing a more stable, certain and straightforward revenue stream for new energy developments—thereby reducing investor risk and lowering the cost of capital. Because unpredictable changes to regulations add to costs and uncertainty, any facilities already operating under the RO would be allowed to continue unaffected or, if they preferred, to transfer to a feed-in tariff. Minister Greg Barker said in a November article for the New Statesman published on the DECC website: Business is right to demand certainty and direction from government. And that’s what this coalition is determined to provide. My mantra is give business plenty of TLC -transparency, longevity and certainty. It’s what guides our policy making and is vital to establishing a successful prosperous green economy. As part of our wider growth effort and work to rebalance the economy, we want a successful green economy in the UK, moving away from our dependence on expensive fossil fuels to a future powered by low carbon energy and green technologies. This shift of course represents challenges but also a massive business opportunity with tens of billions of pounds of investment needed and green job opportunities up for grabs over the next decade. The green economy isn’t just an economy for big companies. Businesses of all shapes and sizes will be at the forefront of this drive. Success will require great innovation and technological progress— one of the key attributes of Britain’s SME sector. We have spoken to Co-op Bank about their experience which they were happy for us to report. The most pressing impact is they have stopped lending given the sheer scale of uncertainty—this has left 15 FIT projects, each worth over £1 million, in limbo (none solar). They did employ a whole team to look at funding solar PV, but with the rates pulled twice they have not actually loaned to any solar projects. They had planned around £100 million of loans to solar. These costs will have to be passed on. The cost of funds have gone up, but there is a more complex picture for banks with long-term rates generally going up because of the financial crisis and new rules on banks capital adequacy. We speak to people in the investment community and they often express frustration at the risk in the UK policy framework but are reluctant to go on the record. A senior executive heading up renewables at a major international investor we spoke to said the Government tends to focus on debt equity, but there is a cost of capital for the development stage which is fundamentally increasing in cost in the UK—not just FITs, but EMR and planning are major risk factors here. Their risk perception of the UK is now higher than other countries. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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2. What is your most recent estimate of the number of community projects that have been cancelled (or soon will be cancelled) as a result of Government’s proposals? In our Industry Survey of 140 companies in November (already submitted as evidence) 52 companies answered questions relating to social housing. In total the number of social housing properties that were likely to be cancelled was estimated at 31,552. This is likely to be an underestimate since there were several inadmissible responses eg answers given in %, rather than property numbers or qualitative statements eg “all of it”. The total number of social housing properties that were still deemed viable was 1,441. This is therefore a 95% reduction on planned social housing by companies answering this survey. Our Solar Adviser Ray Noble believes this is overly pessimistic. Generally, based on our industry intelligence, we believe there were 100,000 social housing installations planned, of which we estimate around 20,000 will still go ahead on the new rates, although there is fresh uncertainty over the eligibility criteria and aggregate Tariff rates. We have no specific estimate of other types of community scheme affected but have heard many anecdotes. Many were affected by the first fast-track review eg Kingspan had many school and public sector projects that were cancelled. We understand the Communities and Climate Action Alliance have undertaken quite a detailed survey of impacts on community schemes, but unfortunately we were not able to receive this by the deadline for these questions. If we receive this we will forward it on. Below are some examples of community projects affected provided by Friends of the Earth.
Brighton Energy Co-operative Brighton Energy has cancelled its share offer as a result of the announcement of the 12 December eligibility date for solar PV schemes. It was impossible for the group to raise funds, install and commission solar arrays sooner than March 2012, and the proposed new tariffs make the scheme financially unviable. Brighton Energy Co-op had planned to install PV panels on two churches and at Shoreham Port. The surplus generated from the feed-in tariff would have allowed the group to create a low carbon fund to help people living in fuel poverty to insulate their homes.
Morecambe Bay Community Renewables (MORE Renewables) MORE Renewables intended to invest £380,000 in community solar PV projects before 31 March 2012, with £20,000 already committed in start-up costs. However, the drastic cuts in the feed-in tariff have scuppered the project. The share offer which would have raised the money is on hold, and the project manager has had his contract terminated. As a result, seventeen community organisations have been denied the chance to generate their own renewable electricity and reduce their energy bills and carbon emissions.
Gloucestershire Community Energy Gloucestershire Community Energy was preparing to launch a community share offer to raise £400,000 to install solar PV on the roofs of schools, village halls and church and a community centre across the county when the feed-in tariff review was announced. As a result, the group has had to significantly scale down its ambitions, with the community centre likely to be the only recipient of solar panels now, meaning that many others will lose the opportunity to benefit from reduced electricity bills.
Peabody Housing Association Peabody, one of London’s largest and oldest housing associations, had planned to install up to six megawatts of solar panels on its homes across the city by March 2012. The panels would have generated valuable energy savings for residents at risk of fuel poverty. Peabody also planned to invest surplus income into its homes and services. However, the feed-in tariff cuts from 12 December will make the scheme financially unworkable, leaving thousands of homes without the scheme and drastically reducing the benefits of the project. Peabody are only likely to be able to install around half the solar plans that were originally planned. Brixton Solar were planning to install solar PV on the top of buildings on the Loughborough Estate in South London in March 2012. Bath and West Community Energy planned to install 300Ð400kW on schools and community buildings between January and March 2012. OVESCO planned to install PV on schools and a village hall in Lewes in early 2012. Community Energy Warwickshire planned to install PV on two hospitals in early 2012. Greg Barker said in the House of Commons that this “is exactly the sort of project we want to see more of.” Feed-in tariff money would have been recycled into energy efficiency schemes for people living in fuel poverty. Oxford North Community Renewables planned to install PV on a school in January 2012. Leominster Community Solar planned to install solar PV on a sports centre in February 2012. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Bristol Energy Cooperative planned to install solar PV on community buildings but have delayed their share-offer due to the uncertainty. The Solar Coop planned to installed solar PV on community buildings in East Berkshire in March 2012. Wey Valley Solar Schools planned to install PV on two schools in December 2011 and January 2012. These are at serious of risk of being dropped due to the early cut-off date. Whittington and Fisherwick Environment Group planned to install PV on a hospice and village hall at the end of February 2012. Low Carbon Chilterns Co-op planned to install solar PV in March 2012 on community buildings including schools. Brighton and Hove Council, which planned to install PV on 1,200 homes, said the new tariff would make this “very difficult”. Luton Borough Council has cancelled PV installations on 4,000 homes out of 4,300 that were planned. Leeds City Council had contacted 2,900 tenants with a view to installing solar PV, but these plans have now been put on hold indefinitely. Mid Wales Housing Association planned to install solar PV on 750 homes. City of York Council had plans for more than 1,000 tenants to benefit from solar PV. Empower Community social enterprise had plans to provide 22,000 tenants of social housing with PV, to help reduce their energy bills. Wrexham council launched a programme of installing solar panels on 3,000 of its homes by April 2012. Reading Borough Council planned to install solar panels on schools, council and community buildings by April 2012. Waltham Forest Council has put on hold plans to install solar panels on 1,090 homes in the area. Torbay Council was set to install solar panels on 45 public buildings including schools and council offices next year, but has now put the plans on hold. Cambridge City Council was set to install solar panels on council offices, swimming pools and sheltered housing. These are now unlikely to go ahead.
3. What is your assessment of the number of jobs directly employed in the sector, and number of jobs employed in wider supply chain in the UK?
A key frustration for the industry is there has been no attempt to estimate the benefits of the solar industry, including jobs. DECC have come forward with an (incorrect) figure only very recently—given there has been no interest in producing jobs figures until now, this appears designed to play-down the job impacts of recent announcements.
REA’s estimate of jobs figures was 25,000 in early October, but this is likely to be an underestimate because REAL is largely focussed on domestic schemes. In addition to employment in the non-domestic sector there are also over 60 companies involved in the manufacturing supply chain, including Romag and Sharp. The figure of 25,000 people employed in the sector is arrived at by what we believe is a credible analysis of the membership of the REAL scheme. There are over 4,500 companies signed up to the REAL Assurance Scheme consumer code. Around 4,000 work in solar. The REAL code asks companies to identify their size by employment size brackets. This includes self-employed individuals acting on behalf of a member company. Taking the mid-point of each employment band category, and multiplying that by the number of solar members active in that band gives a result of 25,000. The high end estimate is just under 50,000 and the low end just over 10,000.
However, we have further evidence to suggest 25,000 is likely to be an underestimate. Our November Industry Survey was answered by 140 companies. These companies provided very detailed data about employment and together these 140 companies employed over 4,000 people. Even if you take out the 10 or so companies in the survey employing over 100 people, these figures suggest the sector could be significantly bigger than 25,000 given there are around 4,000 solar firms.
Simple maths shows the new DECC figures are likely to be wide of the mark. There were 3,000 people employed in solar when the scheme began. From our industry survey we are sure 140 companies employed over 4,000 people. Carillion alone have announced laying off 1,500 solar staff. We know the key three manufacturers in the UK employ 1,500 people. That is 10,000 people already based on 144 companies and previous employment. There are thousands more companies. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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4. What is your assessment of the number of jobs at risk as a result specifically of the proposed energy efficiency requirement (“C” rating on the EPC)? DECC’s own Impact Assessment makes this clear anticipating reductions in the market of 92% under these proposals. This will reduce the sector to the cottage industry it was before the Feed-In Tariff scheme began and entirely waste public investment thus far in building an efficient installation infrastructure in the UK. These proposals are designed to reduce the industry to meet the constrained budget. While there will be a fraction of UK homes that can meet EPC C, these are likely to be affluent homes. There are whole regions with poor housing stock eg Cornwall, which have little hope of meeting such a target and which it would be a shame to exclude given it is a prime location for solar power generation. The proposals to apply something similar to the non-domestic sector are equally worrying. These proposals will result in a very unlevel playing field for the solar power generation industry in the UK, with strong discrimination against investment in decentralised renewable power and against ownership by everyday people and organisations. We fail to see why a renewable power generator should face such strong market discrimination because it sits on a roof—that is a good use of space that should be optimised. We had also understood creating new entrants into the electricity market was a priority for DECC (although DECC do not appear to have grasped solar’s exceptional potential to achieve this). Concerns about thermal efficiency and carbon footprint in relation to the power sector would be far more sensibly directed at the huge waste of thermal energy from power stations across the UK—equivalent to the thermal energy demand of UK homes. We are consulting in more detail with our membership but there is a clear flavour of the likely impact from the Industry Survey undertaken in November: 72.5% identified with the comment “energy efficiency is currently not something our domestic customers routinely address beforehand, therefore we anticipate this slowing the market”. 6.9% identified with the comment “the majority of our domestic customers already have an EPC of C or above, or if not we will be happy to assist or advise them how to achieve this”. 20.6% instead chose to answer in their own words. In total 48 respondents provided additional comments. A flavour of these is given below: “limited funds. Customers can’t afford to do both” “I agree in principle because I believe energy efficiency to be an important part of overall carbon reduction.” “For the vast majority of the 86% of properties with EPC below C, upgrading to a C rating will be impossible for practical reasons” “This is far more important than the cut in FITs” “Energy rating is more related to heat not electricity so this is an irrelevant requirement” “We always advise customer to look at cheaper energy saving options before fitting renewables” “Many older properties are not able to achieve C certification without significant investment, this discriminates against them” 7 December 2011
Supplementary written evidence submitted by Solarcentury 1. Why have the financing costs to the industry increased since the consultation was launched? Fundamentally this is about risk and the market’s perception of risk. What had been assumed to be a stable policy environment has just been turned on its head and at six weeks notice. The following comment shared with us by a prominent lender in this field illustrates the point perfectly: “If we move to the position post regulatory interventions by HMG, then the ‘story’ is clouded in controversy with the stable regulation being turned on its head and many of the developers left exposed which in turn has adjusted our view of the industry. It will take time for ‘normal service’ to resume but fundamentally our risk ratings will have been adjusted which will have moved pricing up higher.”
2. What is your most recent estimate of the number of community projects that have been cancelled (or soon will be cancelled) as a result of the Government’s proposals? I cannot speak for the entire industry but the immediate impact of the 31 October announcement and in particular 12 December “reference date” on Solarcentury’s planned community projects has been devastating. Within two weeks of the announcement, projects totalling 15 MWp had been cancelled including social housing schemes for over 3,000 homes, two major Council schemes for schools, community centres and other council buildings and a major multi-site programme of just under 1 MWp for a national NGO. In each case our customers will have incurred considerable scheme start-up costs which have been lost as a result of the Government’s announcement. All of these schemes had a planned end date before 1 April 2012. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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3. What is your assessment of the number of jobs directly employed in the sector, and number of jobs employed in wider supply chain in the UK? I would dispute DECCs claim in recent Parliamentary written answers that total employment in the UK PV industry stands at 8,000Ð14,000. This number contradicts the REA/STA October 2011 employment survey results which suggested that direct employment levels in REAL Assurance scheme accredited installers alone had reached 25,000 in 3,000 companies earlier this year. As the REA pointed out at the time, 25,000 is certainly an underestimate of the total number of people employed in the wider UK PV sector because REAL Assurance code members are primarily working in domestic PV ie the survey does not provide a complete snapshot of total employment including manufacturing, project management, and the wider UK supply chain including services. The bulk of UK PV jobs (95%) are “downstream” in UK design, project management and installation businesses but the UK also has several established PV manufacturing companies employing 1,500 staff. Most of the UKs manufacturing jobs are centred on three companies, Sharp’s European PV manufacturing headquarters at Wrexham, Romag Ltd in County Durham and PV Crystalox Solar PLC in Oxfordshire. Solarcentury is also a UK manufacturer. We were awarded the Queen’s Award for Enterprise in 2011, in part for our “excellence in innovation,” including UK product design and development and export of our solar electric tiles and slates.
4. What is your assessment of the number of jobs at risk as a result specifically of the proposed energy efficiency requirement (“C” rating on the EPC)? The negative impact of linking the feed-in tariffs to a new EPC level C requirement is actually spelled out in the Government’s Impact Assessment published 2 November 2011. Specifically the Government asserts that: “EPC level C requirement reduces uptake by up to 92% 2012Ð13 onwards compared to uptake under proposed tariffs.” (my italics) The Impact Assessment confirms that “for a typical home reaching level C could require an investment of up to £5,600 in energy efficiency measures—these costs are not included in this Impact Assessment.” The Impact Assessment does not mention however that virtually no school, public building, factory or office meets EPC “C” so the whole low energy building market is being destroyed which will just push solar onto farmland. The Government estimates that the impact of this proposal on PV uptake could be to lower the annual installation rate in 2013 to just 11 MWp. This would send the industry back to pre feed-in tariff levels of installation when employment in the UK sector including manufacturing and supply chain was no more than 3,000. It is no exaggeration to state that the proposed link to EPC level C threatens literally all of the jobs that have been delivered since the feed-in tariff was confirmed in February 2010. In the worst case scenario of the Government deciding to make the feed-in tariff dependent on achieving an EPC C rating, it will simply not be possible to sustain those new jobs in a market reduced by up to 92%. 7 December 2011
Supplementary written evidence submitted by Bath and West Community Energy 2. What is your most recent estimate of the number of community projects that have been cancelled (or soon will be cancelled) as a result of Government’s proposals? As there is no central record as yet of the number of community projects underway it is impossible to put an accurate figure on the full impact of the FIT proposals on the community sector. A recent snapshot survey carried out by Damian Tow of Brighton Energy Coop for the Community and Climate Action Alliance produced 240 responses. 85% of respondents said they were planning a community renewable project in the next 12 months. 60% of these projects were solar PV. 80% of respondents (all projects, not just solar PV) felt that 50% cuts in the feed in tariff would mean their project “would not cover costs and would collapse”. 60% of respondents (all projects, not just solar PV) felt that their projects could survive “on a shoe string” but would “cease to provide many benefits to the community” with a 30% cut in the Feed in Tariff. 85% of respondents (all projects, not just solar PV) felt that their projects could survive “on a shoe string” but would “cease to provide many benefits to the community” with a 20% cut in the Feed in Tariff. The impacts are likely to be significantly higher if the additional proposals around a further 20% reduction for aggregating projects and the EPC band C energy efficiency requirement are factored in. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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The band C energy efficiency requirement is particularly difficult when looking at non domestic buildings like schools and community buildings. Communities are keen to integrate energy efficiency into their work and are waiting with interest more information on how the Green Deal could support their activities. But schools are often more interested in energy efficiency after they have had their solar panels installed. With the stringent energy efficiency hurdle, many projects won’t get this far, thereby losing the opportunity to influence the school and the school community as a result. This may have a perverse impact in that the opportunity to reinvest the FiT income in additional energy efficiency improvements, which could raise the banding of the community building, may be lost. Whilst at the community level, aggregating more than one community project incurs a 20% reduction, which seems particularly unfair, with no economic foundation or evidence offered by way of justification.
Impact of Cancelled Projects When community projects are cancelled, the benefits that are lost do not just include the kW in the ground but also the returns to local investors, local employment opportunities and the recycling of surplus profits back into the community to fund further local projects. So community solar PV projects can play an important role in retaining economic benefits locally and strengthening local economies as a result. Community solar PV projects are relatively quick to establish (for renewable energy projects) and can therefore build local profile and awareness and provide a mechanism for moving more quickly towards a financially viable community enterprise. As a result community solar PV can play a vital role in building a sense of collective action on climate change. Supported by flourishing community enterprises, this sense of collective purpose can feed into and underpin future Government initiatives around the Green Deal and the Renewable Heat Incentive. 7 December 2011
Supplementary written evidence submitted by HomeSun Set out below is our response to the four additional areas of interest raised by the Committee. We have also provided further information on the Aggregator Tariff, an area where we feel DECC Ministers have failed to provide sufficient explanation and justification for the new proposals.
Response to Questions Question 1: Financing Costs to the Renewables Sector Prior to the announcement of the tariff changes, HomeSun started a tender process of its existing solar PV assets with the financial and corporate communities. The motivation for the sale of assets was to raise necessary funds to allow HomeSun to develop additional solar PV capacity, rolling out free solar to many more homes. It would also have enabled us to build additional renewable energy products and services. One bidder in the tender process is one of the UK’s largest renewable energy generators. This entity submitted a bid both before 30 September 2011 and after 9 November 2011, the date of publication of the FiT consultation by DECC. A reduced bid was submitted following the announcement that reflected a 5% increase in discount rate, even though this was for installed assets which are not subject to any tariff changes. Application of such a high increase in the discount rate would radically alter the value of these assets in today’s money. Moving the rate from around 7% to around 12% is equivalent to a virtual overnight shift of mortgage rate of that level. According to DECC Ministers, the proposed changes to FiT are focused only on tariffs for future installations and the impact on retrospective installs and/or investment elsewhere in the Renewables Sector is minimal. However, in changing the discount rate, the bidder specifically mentioned the Feed in Tariff consultation proposals, stating: — “This has undermined the strategic attractiveness and economics for acquisition of a pipeline of solar PV systems”. — “Our valuation reflects a change in the regulatory landscape for renewable technologies in the UK, especially solar PV, following the FIT review announced on 31 October, even in respect of installed assets”. The due diligence conducted between the two bid dates was expected to lead to an improved offer. However, the increased nervousness in the market as a result of the announcement consolidated the 5% increase in discount rate.
Question 2: Community Projects As a provider of solar to single householders only, we are unable to comment specifically on the impact of proposed changes on Community Projects. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Question 3: Jobs in the Solar Industry
We do not agree with DECC’s current estimate of the number of jobs in the solar industry. We note that in recent Parliamentary answers, they have claimed that total employment in the UK PV industry stands at 8,000Ð14,000. Instead, we would point to both the REA/STA 2011 employment survey results which indicate that direct employment levels in the solar industry had reached 25,000 in over 4,500 companies15 in Autumn 2011 and DBIS who estimate the total employment in the UK (both direct industry and supply chain) to be 39,00016.
UK manufacturing jobs are mainly with PV Crystalox Solar PLC in Oxfordshire, Romag Ltd in County Durham and Sharp in Wrexham and we estimate that these companies employ around 1,500 staff. However, the majority of jobs in the solar industry worldwide are “beyond” manufacturing eg in installation, design etc.
HomeSun has produced its own estimate of the number of jobs in the “downstream” industry. As a leading provider, we understand the resources required at each point of the supply chain. Applying equivalent level of resources to the wider market (using published figures on installation volumes) even in a relatively unsophisticated way—demonstrates how the numbers employed are likely to be much higher than that stated by DECC. Set out below is a detailed breakdown: Function Description Number of jobs Installers Installation rate in November 2011 is c 10,000/week; 8,000 installers approx 2,000/day. Typical PV crew is a team of three @ 75% capacity to allow for holidays/illness/slack Surveyors We estimate 20,000 surveys are undertaken each 1,100 surveyors week = 4,000 surveys/day @ five surveys per surveyor per day = 800 surveyors; 75% utilisation Sales We assume 5,000 sales/week and an average two sales/ 5,000 sales jobs salesperson/week = 2,500 salespeople FTE. Assume solar salespeople on average work 50% of the time Designers Assume one designer can do 2.5 designs/day; if there Estimate 750 jobs are 5,000 designs/week (1,000/day); this requires 400 designers full-time Scaffolders Team of two can set-up or break down four jobs/day; Estimate 2,500 jobs 2,000 installs/day = 4,000 set-ups/break-downs per day; requires 1,000 teams of two people = 2,000 FTEs Logistics Transporting kits from depot to site = two jobs/day Estimate 1,000 drivers for 2,000 installs/day Warehousing/kit pickers/ Team of two can put together 20 kits/day; 2,000 installs/ Estimate 250 jobs packers day requires 100 teams = 200 people Procurement Estimate 200 FTEs Quality/audit/Health & Estimate 5% of all field-based staff (install/survey/sales/ Estimate 1,000 jobs Safety scaffold) = 5% of 16,600 = 830 Back-office/order processing Use HS ratio of about 150 people for 500 “sales”/week; Estimate 2,000 jobs 5,000 sales/week would require 1,500 people Management (field and We estimate 5% of all field-based staff as per quality/ Estimate 1,000 jobs office) audit/HSE Planning/Building Regs/ We assume that any of these people can process 20 Estimate 250 jobs Land Registry/Mortgage customers/day and that any job requires an average of Lenders etc. two of these steps; 2,000 installs/day requires 200 FTEs Legal and Professional We assume 1% of industry size Estimate 250 jobs services (legal, accountancy, marketing) Corporate Finance/ Estimate 100 jobs Investment Total (Direct) 20,300 Total (Other UK supply 5,100 chain) Total 25,400
15 The Renewable Energy Association: http://www.r-e-a.net/news/solar-power-lights-up-economic-gloom 16 Mark Prisk, Minister of State (Business and Enterprise), Business, Innovation and Skills, Written Answers, 21 November 2001, Hansard: Search for 39,000—TheyWorkForYou. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Question 4: Impact of the EPC “C” Requirement According to government’s own figures; only 14% of properties are currently level C or above and cost of raising the other 86% would be between £2,000 and £7,000k. DECC’s own Impact Assessment17 for the FiT consultation makes the following observation: “EPC level C requirement reduces uptake by up to 92% 2012–13 onwards compared to uptake under proposed tariffs” HomeSun has many concerns over the tariff proposals for April 2012 onwards, not least the Aggregator tariff and the overall scale of the tariff cut. However, the EPC Level “C” requirement is likely to be the most limiting of all. Assuming a linear relationship between installations and job losses, a 92% reduction in uptake would lead to job losses of c23,000
Aggregator Tariff One final issue we would like to raise with the Committee is the proposed setting of an Aggregator tariff for organisations that install multiple PV systems. This tariff rate has been set at 80% of the rate for individual installations. HomeSun and other “Rent a Roof” models have written to DECC, urging them to reconsider the design of the aggregator policy on the basis that further work is required to improve the economic rationale. The Feed in Tariff consultation document states that research conducted on DECC’s behalf by private consultants concluded that “roof rental” schemes benefit from economies of scale, justifying lower tariffs. This analysis appears to lump two very different delivery models into one set of conclusions; social housing schemes which do benefit from a lower cost-base, and private roof rental schemes, which don’t. Roof rental schemes require an additional 7% of costs due to paperwork such as conveyancing, and investors miss out on 42% of the returns which go to owners of individual systems due to corporation tax and energy savings. Unlike social housing projects, each roof rental installation requires a separate customer relationship. Installations are rarely in geographic proximity, nor can they be installed as part of a planned work schedule that would see a whole street or area installed in a short space of time. Since most providers of roof-rental schemes also offer solar installations to buy, any economies of scale that do exist will also benefit individual owners who choose to purchase their systems. The current proposals will restrict investment in renewable energy and prevent open access to all sections of society to the benefits of solar energy. We are calling on the Government to revise the economic analysis underpinning the design of the aggregator tariff and consider amendment to the proposed policy to ensure that lower tariffs are set only for those installations that truly benefit from a lower cost operating model. 7 December 2011
Supplementary written evidence submitted by the Department of Energy and Climate Change 1. What is the basis of, and assumptions underpinning, the Department’s various estimates of the cost added to energy bills in 2020 as a result of Solar Feed-in Tariffs, including the following assessments that have been put forward: £26, £55, and £80? Full details of how the Department estimates the impact of the Feed-in Tariffs (FITs) scheme on energy bills are in the attached note, which explains how estimates of bill impacts are derived from the projected estimates of subsidy costs (labelled “costs to consumers” in the Impact Assessment). In short, the starting point for all estimates is the solar photovoltaic (PV) installed capacity under FITs to date combined with modelled projections of the level of uptake of solar PV going forward. Estimates of bill increases of (a) £26 (b) £55 and (c) £80 to average consumer energy bills in 2020 are all derived from the “no change” scenario. Under this scenario, which was as envisaged when the FITs policy was originally introduced, current generation tariffs for solar PV continue until April 2012 and are then degressed at 8.5% per annum from 2012Ð13 to 2014Ð15, and from 9% per annum from 2015Ð16 to 2020Ð21. All three estimates relate to the costs of solar PV only, not of other technologies supported by FITs. (a) and (b) are based on the modelling undertaken for the Impact Assessment supporting the current consultation on FITs for solar PV, while (c) is based on newer modelling that reflects the latest data as at the time of the hearing (13 November). (The rate of new installations continues to rise; weekly installation data is published on our website at http://www.decc.gov.uk/en/content/cms/statistics/energy_stats/source/electricity/electricity.aspx, but for simplicity we quote the analysis prepared in advance of the hearing) The estimates are based both on latest installation data and on modelled projections of how subsidy costs could increase in the future. Estimating future solar PV take-up and subsidy costs is challenging due to uncertainties over technology costs, demand and rates of return. In order to reflect this uncertainty, we projected 17 Feed in Tariff Consultation Phase One—Impact Assessment, DECC, November 2011. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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different paths of future deployment to illustrate the range of impacts that could accrue under different circumstances. The specific assumptions behind each estimate are as follows (all costs in 2010 prices, undiscounted): (a) £26 (Table 17 of the published impact assessment). This is based on our central growth assumptions for solar PV. These use analysis of PV installation data up to the end of September 2011 to project PV growth and subsidy costs to April 2012. In order to estimate the increase in subsidy costs post April 2012 we used results from DECC’s FITs model, which estimated the rate of growth of subsidy costs under the current tariff structure, using market growth rates and cost assumptions from the research published alongside the consultation. Rates of growth derived from the FITs model are much lower than observed installation growth rates in PV over the last few months, and are restricted to market growth of 70% per annum (in contrast to rates of increase in installation growth of 25% to 35% per week seen recently— equivalent to annual growth rates of 1,300Ð1,820%). This leads to generation from PV of around 12,300 GWh by 2020 (equivalent to c .2Ð3 million installations), resulting in subsidy costs of around £2,790 million. This would add approximately £26 per annum to typical domestic consumer bills. (b) £55. This is based on “high” growth rate assumptions for solar PV, and uses data from the same date as that used for the Impact Assessment (as well as similarly assuming no change to tariffs before April). Our central growth scenario assumes that PV growth rates are exceptionally high this year owing to the announcement of the comprehensive review in February 2011, and that the growth rate would slow post April 2012. The high growth rate scenario assumes that higher growth rates continue for another year, and return to the growth rates derived from the DECC FITs model from April 2013. This leads to generation from PV of 23,800 GWh (equivalent to around 4Ð6 million installations) and substantially higher subsidy costs of around £5,990 million by 2020, which result in an impact on domestic consumer bills of approximately £55 per annum. (c) £80. Since the Impact Assessment was published, new installations data has indicated that the profile developed for the Impact Assessment is under-predicting current PV growth, with the number of installations in October significantly exceeding the predictions from the model. We therefore increased the baseline growth assumptions in both the central and high growth scenarios in order to take account of these higher growth rates. This increased our estimate of generation from PV and estimated subsidy costs to April 2012 by around 50%, and led to an updated estimate of the impact of solar PV on bills by 2020 to £40 per annum in the central case and £80 per annum in the high case (equivalent to around 34,600 GWh of generation, and 6Ð9 million installations; note that the latest weekly installation rate of over 20,000 <50kW PV installations is equivalent to an annual installation rate of over one million, demonstrating the technical potential of the industry). It is important to stress that all estimates of a no change scenario are subject to a large amount of uncertainty, both as to the number and size of PV installations taking up FITs. They also imply that no action would be taken to curb FITs costs before 2020, even though costs would exceed the budget for the Spending Review period several times over. DECC will continue to monitor information as it emerges, and provide updated estimates in the response to the consultation.
2. What is the Department’s assessment of the difference in cost added to energy bills in 2015 and 2020 between a “reference date” of 12 December 2011 and of 1 April 2012 for the proposed changes to Feed-in Tariffs: (a) as at 31 October; and (b) now, in the light of recent take-up figures? (ie not compared with the “do nothing” scenario) The estimated additional costs on typical domestic energy bills of FITs for solar PV resulting from implementing the proposed changes at a reference date of 12 December compared with 1 April are set out in the table below. Again, more recent data suggests costs for both these dates and the difference between them would be much higher than these forecasts. Impact on domestic bills, Year 12 December 1 April Difference £, 2010 prices, undiscounted reference date reference date Impact Assessment 2015 2.50Ð2.90 3.30Ð3.70 0.80 2020 2.60Ð3.20 3.30Ð4.20 0.70–1.00 Updated for data to end October 2015 3.30Ð3.70 4.80Ð5.50 1.50–1.80 2020 3.40Ð4.20 5.00Ð6.30 1.60–2.10
3. Industry witnesses referred to a DECC spreadsheet of projected FITs take-up used to set the levy-funded cap at the time of the Spending Review. To what extent were those projections scrutinised by the Treasury or others outside DECC? (Qq 11–12, 150–151)? The spreadsheet that is referred to was made available by DECC around the time of the start of the scheme to assist suppliers in budgeting. It was also provided more broadly on request. This spreadsheet was based on cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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the detailed modelling undertaken in February 2010 when the FITs scheme was developed. The headlines and methodology for this modelling were set out in the Impact Assessment and quantitative report published when the FITs scheme was first consulted on in summer 2009 and subsequently launched. This was subject to extensive discussion with industry and other stakeholders during the consultation period. As is normal practice, the Impact Assessment was also considered as part of the cross-Whitehall clearance process, which included HM Treasury as well as other Departments, for both the original FITs consultation and the final policy as confirmed in February 2010.
4. How much of the £446 million individual cap for Feed-in Tariffs up to 2014–15 has already been committed (for both schemes already accredited and schemes installed and awaiting accreditation)?
We estimate that FIT installations to the end of October 2011 will lead to cost to consumers of approximately £230 million in 2014Ð15. PV installations between the end of October and 27 November 2011 are estimated to lead to additional costs to consumers of £70 million in 2014Ð15, leading to total committed costs in 2014Ð15 of £300 million. Further data will continue to come in week by week. (Data for non-PV installations since 31 October are not yet available.)
The table below sets out the estimated total costs to consumers for each year of the Spending Review of all FIT installations to end October 2011, against the FITs budget. As this shows, PV installations to end October mean that the FITs budget for 2011Ð12 and 2012Ð13 is already likely to be overspent. For the Spending Review period as a whole, after factoring in the costs of PV installations to end October, around 30% of the budget is still for new installations. Costs to consumers, £m, nominal undiscounted 2011–12 2012–13 2013–14 2014–15 Total FITs costs to end Oct 110 215 220 230 775 FITs budget (revised) 94 196 328 446 1064 Costs as % of budget 120% 110% 65% 50% 70% additional PV installations to 27 November 15 65 70 70 220 FITs costs including PV to 27 November 125 280 290 300 995 Costs as % of budget with PV to 27 November 130% 140% 90% 70% 90%
Note: the full costs of installations in 2011Ð12 are not experienced until the following year, since they will not have been generating for the entirety of the 2011Ð12 financial year. All figures are rounded to the nearest £5 million/5%.
5. (a) Were the financial projections in the Phase 1 Impact Assessment based on the original tariff rates when the scheme was introduced [ie 41.3p/kWh for <4kW schemes]? (b) Was the export tariff included in financial projections in the Phase 1 Impact Assessment? (Qq 127–135) (a) Costs for existing installations have been calculated on the basis of the applicable generation tariff at the time the installation became eligible for FITs, taking into account inflation uplifts (all tariffs are index linked and adjusted annually in line with the Retail Price Index) and changes to tariffs made as a result of the Fast Track Review of large scale PV. For example, the costs for ≤4kW PV installations prior to April 2011 are based on a generation tariff of 41.3p/kWh in their first year and uprated thereafter, and for installations from April 2011 for a generation tariff of 43.3p/kWh in their first year and uprated thereafter. In the Do Nothing scenario, we assume that current tariffs are degressed for new PV installations from April 2012 at 8.5% from 2012Ð13 to 2014Ð15 and 9% from 2015Ð16 to 2020Ð21 (the original degression plan when the scheme was launched). For the 12 December and 1 April reference date scenarios, we assume that proposed tariffs are degressed in line with anticipated cost reductions, in order to maintain a rate of return on capital of approximately 4.5Ð5% for new installations. (b) The cost projections in the Impact Assessment are of the net cost of the scheme to consumers. This includes the value of generation tariffs paid and the net cost of paying export tariffs. Payments made by electricity suppliers for exports are compensated by the value of that electricity. In the case of metered electricity, the suppliers can extract value from that electricity by selling it on or by offsetting purchases from the wholesale market or other sources. For deemed exports, the value of the exported electricity is shared among all suppliers. Because the export tariff is set at to be equivalent to the value of the electricity to suppliers, it does not impose a net cost on consumers. If the export tariff exceeded the value of the exported electricity, the additional costs would be considered a net cost to consumers, and come within the Levy Control Framework. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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6. What, if any, input and analysis has DECC received from Defra or the Cabinet Office, in view of their responsibility for embedding sustainable development across government, in formulating the solar FITs proposals (Q152–154)? What input has there been from other departments on the possible impacts of proposed changes to the Feed-in Tariffs, including for jobs? DECC holds cross-Whitehall meetings at official level on an approximately monthly basis to discuss the FITs scheme, including proposals for the review. There have been six such meetings since April 2011. Those meetings involve (among others) Defra, Cabinet Office, BIS and CLG. In addition, the proposals in the consultation on solar PV were subject to clearance by the Economic Affairs Committee on which both Defra and the Cabinet Office are represented. The Select Committee expressed an interest in seeing copies of the correspondence from this process. However, in line with the constitutional convention of collective decision-making, and section 2 of the Ministerial Code, the Government does not disclose details of the internal process through which decisions are taken.
7. What appraisal was made of the likely impact specifically of introducing the energy efficiency requirement, in terms of the take-up rates and jobs? What is the Government’s assessment of the overall impact on energy efficiency levels as a result of the proposal to introduce an energy efficiency requirement for Solar PV Feed- in Tariffs? The Impact Assessment modelled two options for the impact of energy efficiency requirements on solar PV uptake, reflecting the two options proposed in the consultation document. It is important to note that the modelling did not take into account either (a) potential increased uptake of energy efficiency measures by property owners in order to become eligible for FITs, or (b) potential impact on jobs from increased uptake of energy efficiency measures as a consequence of the proposals. The first option is that eligibility for proposed standard tariffs would be dependent on uptake of measures that are potentially eligible for Green Deal finance. This requirement was assumed to have no impact on FITs uptake, because it does not require any upfront costs for potential generators. The second option is that eligibility for proposed standard tariffs is conditional on a property achieving an EPC level C rating. We estimate that approximately 9% of houses currently meet EPC level C or above, and that this figure will rise by 1.5% a year as households take up Green Deal measures. We have applied this proportion to modelled uptake from April 2012 onwards—ie assuming that in 2012Ð13 uptake would be 9% of what would have occurred under the new tariffs without the level C energy efficiency requirement, 10.5% in 2013Ð14, etc. As noted above, this does not take into account any potential increased uptake of energy efficiency measures in order to receive the higher FIT rates. The Impact Assessment estimated that the level of installations under the consultation proposals would support approximately 1,000 to 10,000 full time equivalent jobs in the sector from 2012Ð13 to 2014Ð15.
8. The Committees would like to have a copy of the Solar Trade Association submission to Government, referred to by Greg Barker, in which the STA sought a 25% reduction in FiT rates (Qq 74–75) We attach three documents.18 The first is the Solar Trade Association’s (STA’s) “Solar Strategy”, which was produced on 3 June, after the fast track consultation had closed. It was not formally submitted as a consultation response. The second is the joint Renewable Energy Association (REA) and STA response to the consultation on the fast-track review of solar PV tariffs, which includes a suggestion of cutting all tariffs by 25%, but not until 1 January 2012 at the earliest. The third is the REA/STA’s comments on the Comprehensive Review of FITs, and does not suggest cutting any tariffs before April 2012. All these papers also sought to moderate the reductions in tariffs for large scale solar that DECC was proposing, which would have put further strain on the budget. The Minister quoted the REA/STA response to the fast-track consultation. His quotation was accurate, but he inadvertently attributed it to the chairman of the STA, Howard Johns (who had not in fact personally signed the response).
9. Why is the Government delaying consulting on the “cost control mechanism” for Feed-in Tariffs to later this year? Given the urgent need to take action to protect the FITs scheme budget for the rest of the Spending Review period, and the wide public reach of the phase 1 (solar PV) proposals, it was vital that the scope of the proposals should be limited to those that were absolutely necessary in order to minimise immediate budgetary risk. The new cost control mechanism will of course be fundamental to the Government’s future approach to the FITs scheme, but urgent introduction was not necessary in order to ensure its effectiveness. This separation also allows time for fuller reflection across Government and consultation with stakeholders before publishing proposals. 18 Not printed. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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10. By how much does the Department currently expect proposals will undershoot or exceed the individual cap for Feed-in Tariffs (£446 million to 2014–15)? On our latest analysis (using 13 November data), we estimate that under a central uptake scenario the consultation proposals will lead to FITs costs to consumers in 2014Ð15 of £390У430 million. Under a high uptake scenario, these costs would be £420У810 million. The majority of these costs (c £300 million) result from FIT installations already installed (see question 4). It should be noted that, as explained in detail above, these numbers are subject to significant uncertainties: the PV installation rate continues to exceed modelled projections leading to higher than expected costs, and the policy is still in development so projecting installation numbers post 1 April 2012 is uncertain.
11. Has the Department agreed with the Treasury whether any of the 20% headroom in the overall size of the levy-funded spending cap can be used? No. The Levies Control Framework is clear that should spend or spend forecasts exceed the overall levies control framework (LCF) cap then DECC has to devise a policy proposal to bring spend back to within the cap. The headroom is therefore available to be used while such proposals are being developed, agreed with HMT, consulted on and implemented. The LCF does not give DECC the ability to plan to use headroom above the LCF cap as additional budget. DECC would need to apply to HMT for additional budget as set out under normal public spending framework rules. The LCF does, however, enable DECC to manage its levy-funded policies (FITs, the Renewables Obligation, and the Warm Home Discount) as a portfolio and an overspend on one can be offset by an underspend on another as long as the total remains within the overall LCF cap. This flexibility does not override the need to ensure that policies continue to demonstrate good value for money.
12. What work has the Department done with FiT Licensees to ensure the “multi installation tariff rates” are workable? Implementation of the multi-installation tariff rates is primarily an issue for Ofgem, who are content with the proposed approach. DECC officials have already met with FIT Licensees to discuss the consultation proposals. To date, no concerns have been raised specifically about the workability of the proposed multi- installation tariff rates. DECC will continue to work closely with suppliers and Ofgem, including to follow-up any implementation issues with the proposed multi-installation tariff rates raised through the current consultation process.
13. What assessment has the Department done of the non-financial benefits of having solar Feed-in Tariffs? The Impact Assessment published alongside the current consultation includes an assessment of some non- financial benefits of FITs for solar PV, including: (a) Empowering people and giving them a direct stake in the transition to a low-carbon economy. (b) Helping develop a supply chain that offers households a wide range of cost effective measures to lower their energy use and carbon emissions. (c) Assisting in public take-up on carbon reduction measures, particularly to improve the energy efficiency of buildings. The Impact Assessment also considers environmental, distributional, economic, and sustainability impacts of FITs for solar PV.
14. The 12 December reference date comes before the end of the consultation period, and yet the consultation seems to indicate that government would consider moving this reference date (para 50 of consultation). When will the Department decide if the reference date should be moved? To what extent does leaving the reference date open create further uncertainty? How might people make an informed choice about cancelling their contracts because they cannot make the 12 December installation deadline (possibly losing their deposits in the process)? All proposals in the consultation document necessarily remain as proposals until the consultation has concluded, the responses have been analysed and Ministers have reviewed the analysis and taken final decisions. It would be legally inappropriate for us to take decisions that pre-empt this process. It is unavoidable that there will be some uncertainty until changes are actually implemented, due to the need to follow this process and the statutory requirement to lay an instrument containing tariff changes before Parliament in draft for 40 days before making it. We will endeavour to keep the period of uncertainty for consumers to a minimum by taking decisions and laying draft licence modifications before Parliament as quickly as reasonably possible, but the process is likely to take some time in view of the large number of consultation responses we are receiving. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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The position is explained in a guide for consumers available on DECC’s website (http://www.decc.gov.uk/ media/viewfile.ashx?filetype=4&filepath=11/meeting-energy-demand/renewable-energy/3373-solar-pv- consumer-guide.pdf), which states: “How certain are these changes? The Government is currently consulting on these proposals. This consultation will continue until 23 December. The Government may, following receipt and analysis of these consultation responses, change some or all of the detail of the proposals. But it will not bring forward the cut-off date any earlier than 12 December, or the date for reduction of tariffs to before 1 April 2012.”
15. The consultation document states that DECC has taken account of the possibility of hardship to persons as a result of the imposition of a 12 December reference date (para 49 of consultation). The Committees have received evidence of hardship because of lost deposits from cancelled contracts where it will not be possible to install and submit the necessary paperwork before 12 December, and in some cases where bank loans have been taken out to fund installations which will now not provide the same rates of return as when the loans were agreed. What scope is there for flexibility about what is meant by the “reference date” so that those with a signed contract before 31 October or financial commitment (eg a paid deposit) might be able to receive the full exiting tariffs?
Through the current consultation we are seeking views about the proposed reference date, whether there should be any exemptions and if so how they should be defined. In coming to a final decision, Ministers will have to balance views on this against budgetary constraints and issues of fairness, for example bearing in mind the number of people who have already cancelled contracts and lost deposits.
16. Why is an energy efficiency requirement not also placed on the other technologies eligible for FiTs such as wind, hydro, anaerobic digestion or micro-combined heat and power?
The current consultation concerns FITs for solar PV only. We will be publishing a consultation on Phase 2 of the comprehensive review around the end of the year, which will consider tariffs for other technologies and whether or not an energy efficiency link would be appropriate.
Annex A CALCULATION OF BILL IMPACTS OF FEED-IN TARIFFS
The impact of Feed-in-Tariffs (FITs) on average consumer bills is calculated by applying the projected impact on electricity prices resulting from the FITs subsidy cost (labelled cost to consumers in the Impact Assessment) to the average projected domestic consumption. The costs in 2020 are calculated from 2020 subsidy costs (2010 prices, undiscounted).
Here is an example to demonstrate the calculation, for the “no change” scenario, against a “No FITs” baseline, under the central impact assessment assumptions: — FITs subsidy cost in 2020 (real undiscounted 2010 prices): £2,700million. — Total UK electricity consumption in 2020 from DECC projections: 317 million MWh (317 TWh). — VAT = 5%. — FITs price impact: (2700/317) x 1.05 = £9/MWh. — Average household electricity consumption in 2020 after average efficiency savings = 2.9MWh. — FITs bill impact: 9 x 2.9 = £26. Note (i) figures do not exactly match due to rounding. (ii) subsidy cost estimates above do not match the impact assessment because they are in 2010 undiscounted prices, and in calendar years rather than financial years.
The tables overleaf show the estimated bill impacts against a “No FITs” baseline under central growth assumptions for three scenarios: “Do nothing”, 12 December reference date, and 1 April reference date.
Two tables are provided. The first shows the estimated bill impacts included in the Impact Assessment supporting the current consultation on FITs for solar PV. The growth scenarios underpinning these estimates were based on PV deployment up to the end of September 2011.
The second table is based on new analysis carried out since the Impact Assessment was published, to reflect new installations data that indicated that the profile developed for the Impact Assessment was under-predicting current PV growth. We therefore increased the baseline growth assumptions in the model to take account of the observed higher growth rates. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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Table 1 IMPACT OF FITS FOR SOLAR PV ON TYPICAL DOMESTIC BILLS— IMPACT ASSESSMENT ESTIMATE, CENTRAL GROWTH SCENARIO (£/year), 2010 £ 12 December 1 April undiscounted Do Nothing reference date reference date 2011 1.40 1.40 1.40 2012 3.90 2.30 2.90 2013 6.70 2.60 to 2.70 3.30 to 3.50 2014 9.30 2.60 to 2.80 3.30 to 3.70 2015 11.90 2.50 to 2.90 3.30 to 3.70 2016 14.70 2.50 to 3.00 3.30 to 3.80 2017 17.50 2.50 to 3.00 3.30 to 3.90 2018 20.30 2.60 to 3.10 3.30 to 4.00 2019 23.20 2.60 to 3.20 3.30 to 4.10 2020 25.80 2.60 to 3.20 3.30 to 4.20
Table 2 IMPACT OF FITS FOR SOLAR PV ON TYPICAL DOMESTIC BILLS— LATEST ESTIMATE, CENTRAL GROWTH SCENARIO (£/year), 2010 12 December 1 April £ undiscounted Do Nothing reference date reference date 2011 1.60 1.50 1.70 2012 5.60 2.90 4.10Ð4.20 2013 9.80 3.30Ð3.50 4.90Ð5.20 2014 13.70 3.30Ð3.60 4.90Ð5.40 2015 17.70 3.30Ð3.70 4.80Ð5.50 2016 21.80 3.30Ð3.80 4.80Ð5.70 2017 26.00 3.30Ð3.90 4.90Ð5.80 2018 30.00 3.30Ð4.00 4.90Ð6.00 2019 34.60 3.30Ð4.10 4.90Ð6.10 2020 38.80 3.40Ð4.20 5.00Ð6.30 Notes: 1. Lower end of range represents uptake under an EPC Level C Energy Efficiency requirement from April 2012. Upper end of range is for a Green-Deal related Energy Efficiency requirement. 2. These impacts are measured against estimated bills in the absence of FITs. They account for solar PV costs only. For 12 December and 1 April reference date scenarios lower end of the range is for an EPC Level C energy efficiency requirement, and the upper end is for a Green Deal-related requirement 3. To assess the impact of FITs against a “No FITs” baseline as followed in the individual policy impact assessment we have followed a different approach to the one followed in assessing the overall impact of all policies on energy bills in the analytical document published alongside the AES. Therefore the estimated impacts of FITs in the IA and the AES document will differ. In the AES, we have considered the impact of all policies against a “no policy” scenario. In contrast, individual policy impact assessments analyse the impact against a baseline which includes other policies in order to identify the additional impact of their introduction. The underlying assumptions on energy savings are consistent between the two documents. However the AES document considers the total costs of all technologies that are eligible under FITs whereas the IA, as explained above, only presented solar PV costs. 8 December 2011
Supplementary written evidence submitted by HM Treasury 1. Industry witnesses referred to a DECC spreadsheet ofFITs take-up used to set the levy-funded cap at the time of the Spending Review. What scrutiny did the Treasury do on the forecast FIT up-take figures used to determine the level of the F/T element of the levy-funded spending cap? (Qq 11–12, 150–151)? As the DECC note of 8 December explains, the headlines and methodology for the modelling underlying the spreadsheet were set out in the Impact Assessment and quantitative report published when the FITs scheme was first consulted on in summer 2009 and subsequently launched. As is normal practice, the Impact Assessment was considered as part of the cross-Whitehall clearance process, which included HM Treasury as well as other Departments, for both the original FITs consultation and the final policy as confirmed in February 2010. cobber Pack: U PL: CWE1 [O] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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2. What assessment has the Treasury made of potential job losses from the proposals (Qq 156–159)?
The Government considers the impact of its policies on the economy as a whole, taking into account not only the impact on jobs within the solar sector but also the economic impact of higher energy prices as a result of the costs of Feed-ln-Tariffs, including for example on household and business energy bills. In general, jobs supported through schemes such as Feed-in-Tariffs do not increase overall employment in the short to medium term, because of the offsetting effects on the rest of the economy, where activity and so jobs are reduced.
By setting the scheme on a sustainable footing the proposed changes should improve the longer-term prospects for the sector. The impact assessment estimates that the net benefit of Government’s proposed changes to the feed-in tariff available to solar PV installations to be £9.2 billion.
3. What is the basis of the £275 m figure for the lifetime cost of the weekly delay? How is it calculated (Q163)?
The £275 million figure provides a simple estimate of the lifetime cost of a one week delay in reducing the tariff. At the time of the Select Committee hearing, new PV installations were being installed at a rate of around 11,500 installations a week (this has now increased to over 21,000 installations in the week ending 4 December). At the current tariff rate available for solar PV, this adds approximately £11 million to the annual costs of the programme. Over a 25 year period this equates to around £275 million.
4. What is the Treasury’s assessment of the difference in cost added to energy bills in 2015 and2020 between a ‘reference date’ of 12 December 2011 and of 1 April 2012 for the proposed changes to Feed-in Tariffs: (a) as at 31 October; and (b) now, in the light of recent take-up figures? [ie not compared with the ‘do nothing’ scenario] (Q168)
DECC’s response to the committees’ questions sets out the Government’s estimate of the impact of the various reference dates on domestic bills using both the information available at the time of the impact assessment and the latest available data.
5. What is the basis for the difference between the figures of £357 million and £446 million for the FiT element of the cap?
The difference between the figures of £357 million and £446 million for the FiT element of the levy control cap simply represent the way in which the Renewables Obligation (RO) and Feed-in Tariff policies were originally modelled by DECC.
Under DECC’s modelling approach, small scale renewable electricity generation that was assumed would have come forward under the RO if FITs did not exist was originally allocated to the RO budget, with the FITs budget only applying to costs above this “baseline”. However, some generators have a one-off choice to accredit under either the Renewables Obligation or the FITs scheme, and this choice affects the spend recorded against each of these schemes, but was not reflected in the levies budget-setting process. DECC have now estimated the impact of this overlap and adjusted the FITs budget upwards and the Renewables Obligation budget downwards by a corresponding amount in order to provide a more accurate reflection of the budget for each scheme.
This is purely a technical adjustment in order to provide a more accurate picture of the spending limits for each policy, and is not a transfer of funds from the RO to FiTs.
6. What is the Treasury’s assessment of how much of the £446 million individual cap for Feed-in Tariffs up to 2014–15 has already been committed [for both schemes already accredited and schemes installed and awaiting accreditation] (Qq 228, 231)?
The Government’s estimate of the total cost to consumers for each year of the Spending Review of all FIT installations against the FITs budget is set out in DECC’s response to the committees.
7. Was the export tariff factored into the original calculations for the total budget of the levy-funded spending cap?
As DECC officials explained in oral evidence on 29 November the export tariff is not scored as tax-and- spend. It is not covered by the levy control framework cap, although were it to be in excess of the value of the electricity generated to suppliers, this would be likely to change. cobber Pack: U PL: CWE1 [E] Processed: [19-12-2011 14:08] Job: 017157 Unit: PG03
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8. (a) What analysis has the Treasury done on the impact on the wider economy of the energy efficiency requirement proposed for Solar Feed-in Tariff eligibility (Q246–249)? (b) What is the Treasury’s view on how such an energy efficiency requirement would fit within the Government’s aim of minimising regulatory burdens, and in particular whether the “one in, one out” rule for new regulations would apply (Qq 241–242)? The Government’s assessment of the wider impact to the economy of changes to both the proposed tariff level and energy efficiency requirement for solar PV feed-in tariffs is set out in the impact assessment published alongside the consultation. The energy efficiency requirement is not a regulation but a proposed eligibility criterion for the receipt of the higher tariff level. As such it is out of scope of the Government’s One-in, One-out policy as shown on the first page of the impact assessment.
Additional information: the Levy Control Framework and classification issues. The Committee also asked a number of questions relating to the classification of Feed-ln-Tariffs as public spending, and the relationship with state aid cases considering FITs in other countries. Responsibility for classification decisions rests with independent national statistical authorities who must interpret international guidance to reach decisions. Since these decisions take some time the Government must, in advance, make a provisional assessment based on the ONS’s previous interpretation of international guidance and informal discussions on their likely view. This has been the case in relation to Feed-In-Tariffs. Questions of the nature of resources involved are also considered in some other contexts—for example in the field of competition law, where the European Court of Justice has considered a number of state aid cases covering FIT-style schemes in other EU countries. However, it is important to note that judgments in these fields use different definitions and consider different factors from those relevant to a decision for national accounts purposes. A decision in the field of competition law does not determine whether national authorities should or should not make a classification decision in one direction or the other. It would not be correct, therefore, to draw implications from such cases for whether or not the ONS will, or should, classify particular schemes as public spending. Finally, while these questions of classification are clearly important it is not the case that the Government is only concerned about the cost of policies funded through energy bills because they may score as public spending. The Levy Control Framework19 states that its objective is to ensure that policies achieve: “... fuel poverty, energy and climate change goals in a way that is consistent with economic recovery and minimising the impact on consumer bills.” The economic impact of such policies, through higher energy prices, would be relevant regardless of their classification. 8 December 2011
Supplementary information from the Department of Energy and Climate Change Costs to consumers, £m, nominal, 2011 -12 2012 -13 2013 -14 2014 -15 Total undiscounted
Total Green Deal energy efficiency 120 260 300 350 1040 commitment
Total PV Level C energy efficiency 120 260 290 320 990 commitment
Total Green Deal energy efficiency 130 330 380 430 1270 commitment April Start
Total PV Level C energy efficiency 130 320 350 390 1200 commitment April Start
130 430 720 1050 2320 No change
14 December 2011
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19 http://www.hm-treasury.gov.ukyd/control_framework_decc250311.pdf