Uncharted Territory

December 4, 2011

Fixing FITs some more

Filed under: Electricity, Energy, Energy policy, Feed-in tariffs, Global warming, Solar PV — Tim Joslin @ 1:40 pm

I noted yesterday that the UK’s expensive feed-in tariff (FIT) is not structured to support the development of the highly efficient technologies (turning 30%+ of the energy in incident sunlight to useful electricity) that the country will need in the future.

Here’s a more concrete example of what is happening. If we look at the web-site of one reputable supplier, Spirit Solar, we see that they offer several types of panel. The stand-outs are Sanyo’s “Hybrid Mono” products, with the HIT-N240SE10 achieving 19% efficiency. These are still just silicon based (I understand that best results will eventually be obtained with layered panels, each layer using a different technology to capture light of particular wavelengths), but optimised for efficiency. The Sanyos are just a tad more expensive than the bog-standard panels at 14-15% efficiency. But here’s what Spirit Solar say:

“The Sanyo are the most expensive per Watt of power generated. Their one big advantage is that by using a different ‘hybrid’ technology they give approximately 25% more power per square metre than any other panel. …the Sanyo gives 190 Watts per square metre, compared to between 134 [actually none are this low – the figure is presumably out of date and the text should read “141”] and 149 Watts per square metre for the other panels. The downside is that they currently cost around 50p more per Watt – so for a 2 kWp system you will pay around £1000 more if you choose Sanyo. So if you are wondering whether to buy Sanyo or not, ask yourself what are you trying to maximise – the total power you can squeeze out of your roof or your financial return? If your objective is simply to maximise the power output from your available roof space without regard to budget, then you should choose the Sanyo hybrids. Don’t choose the hybrids if you want to maximise your financial return.” [my stress]

You have to email for a quote, and PV prices are currently all over the place, but that extra £1000 is on a system costing at least £5000, probably somewhat more. That is, for 20% more, tops, you get 25% more power for a given area. No-brainer.

But, as discussed yesterday, the FIT scheme does not provide an incentive to maximise output per unit area.

In fact, the FIT scheme seems to have been devised with no thought as to the behaviour it will encourage. The sole goal seems to have been to “bung up a few solar PV panels”.

Another page on Spirit Solar’s rather informative site illustrates another problem. Scroll through some of the pictures of the company’s installations. There are a number of examples of roofs where far more area could have been covered with panels.

Why wouldn’t customers want to cover their whole roof? Because there’s no incentive to do so, of course. Many installations will be of 4kW capacity (4kWp, where p stands for “peak”) or slightly under. Why? Because larger schemes receive a lower tariff. In fact, as I understand it, and using the tariffs to be put in place from now on, there’s no point at all in putting up a scheme of 4-4.8kWp. That’s right – you get less for a 4.8kWp system than for one of 4kWp. (The generating tariff for a scheme up to 4kWp is 21p/kWh, whereas for 4-10kWp it’s only 16.8p/kWh, so schemes of 4-4.88kWp will earn less revenue than those of 4kWp or just less!).

Of course, this problem could be simply fixed by qualifying the first 4kWp for the higher tariff and only additional capacity for the lower rate. This would at least mean that solar PV generators have an incentive to cover the whole available roof area.

Another solution would be simply to have more bands. The worst thing about the whole scheme is that you need a large unshaded roof area to reach the optimal 4kWp (about 25m^2 for standard panels, 20m^2 for the Sanyos), so there should be bands for smaller roofs (say 1kWp and 2kWp, but this should be done on installation area as discussed yesterday) and to ensure larger roofs were fully utilized (say 6kWp, 8kWp as well as 10kWp, and more subdivisions up to 50kWp).

There is another problem, though, which is that the export tariff is only 3p/kWh. That is, if you use the electricity, you displace electricity (or gas) you would otherwise have had to buy for around 10p/kWh (or 5p/kWh for gas). Since most households would be hard pushed to make use of more than 4kW for any length of time (though I don’t see why solar PV generators don’t invest in a 20kW battery to store energy for the hours of darkness), this means the drop-off in revenue above 4kWp is even worse.

Surely the policy is eventually to generate electricity for sale to the grid. If this is the case, then shouldn’t the export tariff be somewhat higher? I gather the 3p/kWh is based on the wholesale price for electricity. But solar PV electricity is more useful than bog-standard electricity. It’s renewable for a start, so should qualify for ROCs (renewable obligation certificates) which otherwise cost money. And it’s at a peak time (except perhaps at weekends). One problem is that you don’t want the export tariff to exceed the retail gas price, because then solar PV generators have an incentive to use gas rather than electricity (since they can sell the electricity to pay for the gas and still be quids in), but there’s still scope for an increase to, say, 4.5p/kWh. This would make it a little more worthwhile for people to cover their whole roof with panels.

It may be worth DECC thinking through the FIT scheme a little more thoroughly, since these panels are going to last for decades – they’re typically guaranteed to provide at least 80% of their original output in 25 years. Once they’re up, it’s not going to be worth taking panels down – especially those qualifying for FITs – to replace them with more efficient technology.

Why don’t we try to get something right first time for once?

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December 3, 2011

Fixing FITs

Filed under: Electricity, Energy, Energy policy, Feed-in tariffs, Global warming, Solar PV — Tim Joslin @ 6:46 pm

Regular readers will be well aware of my long-standing scepticism as to the value of a policy of generous Feed-in Tariffs (FITs) to support small-scale solar PV installations. I see that my blog category on the topic of FITs now has no fewer than 10 posts (11 with this one), dating back to February 2008 – and that first entry included a letter sent to the Guardian in December 2007. So I’ve been documenting this fiasco for 4 years – so far.

DECC have launched yet another review of FITs. It seems like just yesterday I responded to their fast-track review. Don’t try and read this in DECC’s amazing non-scrolling spreadsheet (downloadable from their FIT fast-track consultation page) but I see I ended my answer to their question 2 (which mostly consisted of expressions of astonishment that they had no effective mechanism for controlling the cost of FITs) by saying:

“If the intention is to exclude investors altogether and encourage only those pursuing a low-carbon lifestyle or self-sufficiency, then the domestic PV tariff should be reduced by at least 50% immediately.”

which is only what they’ve gone and done!

Subsequent to sending off my response to the fast-track consultation back in May, I realised that the most efficient way of setting FIT rates would be by auction (it seems some people made this point in their responses back then). The latest consultation is another opportunity for me to make this point.

But there are even bigger (fitter?) fish to fry. Just in time (normally abbreviated to JIT, so maybe I can say “JIT for FIT policy…”!), the Royal Society held a two-day discussion meeting on solar power in mid-November. As you’d expect there was a lot of discussion of new whizzy technologies. But a couple of more prosaic points struck me:

  1. Solar power generation in the UK is limited by the available space, David MacKay emphasising this point in particular.
  2. New solar PV technologies – that might convert a greater proportion of sunlight into electricity – are finding it difficult to get to market. As costs are lowered for these technologies, “traditional” silicon-wafer based PV continues to build scale economies.

In other words, FIT policies and other government subsidies around the world are driving prices down for the wrong technology for Britain. We don’t want 10% efficient panels, we want to turn 30-40% of the energy in sunlight into electricity.

Now, if you have a roof of a limited size, then, once there are no subsidies and the cost of solar PV is competitive with other forms of energy, you’ll choose the most efficient technology that continues to yield cost savings compared to buying electricity. That is, you’ll consider panels of 10% efficiency, 15%, 20% and so on until the cost per additional kWh over the lifetime of the panel exceeds the value of the electricity generated.

But subsidies screw things up.

As usual.

Specifically, in the UK FIT scheme, you’re limited by the banding to a certain size of installation. For example, the tariff for an installation of up to 4kW capacity is 21p/kWh. For 4-10kW it’s only 16.8p/kWh. So installations are typically of just under 4kW capacity. If your roof can accomodate a cheap 4kW panel there’s no incentive to instal a more efficient panel. Or even to use the whole roof. The UK’s solar resource is being squandered.

There are many ways to address the problem. You could devise all kinds of rules and regulations to ensure people used more efficient panels to drive down the costs of the best technologies.

One simple approach, though, might be to base the banding on installation area, not capacity. That is, the highest tariffs would be for installations that used just a few square metres. This would provide an incentive to squeeze as much energy out of the space as possible. It would also be more equitable as it would favour the owners of large roofs much less than does the present system. Most important, though, such a scheme would provide a market to help bring down the cost of the technologies we need for the future.

The present system ensures that all the available FIT income will go to owners of large roofs. Because more efficient panels cost more per Watt, the Government will keep lowering the tariff in response to a surge of installations of less efficient panels as their price comes down because of scale economies.  The FIT will never be high enough to justify installations of more expensive, more efficient panels on smaller roofs.

Tariffs for installations starting at (say) just 5m^2 roof space (compared to around 25m^2 for typical panels in a 4kW installation today) would ensure there is a market for the more efficient panels.

The approach of FIT banding by installation area rather than capacity could be simply combined with auctions – that is, prospective PV generators would bid the lowest FIT they were prepared to accept for one of a quota of solar PV installations of a given area – up to 5m^2, up to 10m^2 and so on.

May 20, 2011

A Better FIT

Filed under: Energy, Energy policy, Feed-in tariffs, Global warming, Solar PV — Tim Joslin @ 11:43 am

I’ve started, so I’ll finish. My previous post on the topic of the UK’s expensive feed-in tariffs (FITs) for solar PV suggested that it would have been easier to control the budget for the scheme if a quota system rather than a pricing system had been used.

I mentioned in the first of this series of posts on the FIT that I’d written to DECC to check they are not in fact operating a behind the scenes quota system. They aren’t. They referred me to section 6 of the government’s response to the 2009 consultation (pdf).

I have to say that I am rather surprised that the scheme is apparently specified in a consultation response document. I would have thought there would somewhere be a publicly available, formal, amendable document specifying how the scheme will operate and detailing the various responsibilities for its operation. How do I know, for example, that any given section of the 2009 response has not been superseded by some memo or ministerial statement? There I go thinking all private sector again!

Anyway, section 6 includes the following paragraphs, with some of my comments in italics in squared brackets:

“161. An objective of FITs is to provide long-term certainty for investors but we recognise that it will be important to review and adapt it as circumstances change including technology costs and supply chains and other policy developments. Therefore, we will be putting in place a programme of reviews after which it will be possible to make changes to FITs.

162. We will undertake periodic reviews of FITs with their timing to coincide with the Renewables Obligation reviews. Therefore, any changes to the scheme resulting from the first major review of FITs would be implemented in 2013 [already superseded],…

163. If necessary, early reviews will be set up to consider any significant changes to the fundamentals affecting the operation of the scheme outside of the periodic review timetable. … [So much for para 162 – we’ve already been told the “comprehensive review” will take effect from April 2012, or even earlier, not “in 2013”; so so much also for para 161 since there is clearly no “long-term certainty” at all, the whole thing is conditional on the vagaries of the political climate.]

164. All aspects of the FITs scheme will be subject to review including:
• tariff levels
• degression rates and methods
• eligible technologies
• arrangements for exports
• administrative and regulatory arrangements
• interaction with other policies
• accreditation and certification issues including the MCS.165. Reviews will focus on whether the tariffs offered deliver the target returns, and whether those returns are appropriate in continuing to ensure a real [“continuing”?, “real” – meaning what exactly? – small scale renewables will produce trivial amounts of electricity for many years] contribution from small scale generation to our renewables and other targets, and that the scheme continues to deliver value for money [clearly they must mean “political value” rather than monetary value].

166. In order to ensure that existing investors may proceed with certainty, any changes to future levels of support will apply only to investments following the review; generation tariffs the installations existing at the time of the review will be maintained. …”

Now, “investors” in paragraph 161 could have been taken to include the stakeholders in the companies supplying renewable energy generation equipment, such as solar panels, but by paragraph 166 “investors” clearly means just the lucky owners (in the case of solar PV) of large flat roofs (a.k.a. “generators”). See why it might have been better to have a had a formal description of the FIT scheme, with the various parties rigorously defined? The whole point of the FIT scheme is to build scale economies in the country’s renewables deployment capability. The likely outcome of a boom and bust (as discussed before) is unlikely to be to a healthily growing industry including competing reliable solar PV suppliers operating to a high standard.

I am unconvinced that a system of periodic reviews is sufficient to keep the scheme within 10% of its targets for expenditure (from our electricity bills), as the Chancellor has demanded.

Let’s consider why we’re in this situation. What if we had a quota system instead? What if we gave FITs to only a predetermined number of generators each year?

I’ll tell you what would happen. The quota would be used up very quickly and the papers would be full of stories about a “fiasco” as deserving home-owners missed out. Even if they bothered to try, it would be very difficult for the government to get across the message that the policy doesn’t exist to give a benefit to the lucky few who are able to take advantage of the FIT subsidy. The goal is to bring down costs so that there doesn’t have to be a subsidy.

So instead of an explicit quota, what we actually have is a soft quota. Everyone who gets in before the door is slammed will be allowed to sign up for FITs. This is not ideal as, first, we (the electricity consumer) are overpaying and, second, as I keep on saying, when the guillotine does fall most of the solar PV suppliers are going to go bust. Moreover, since the companies know this, we’re seeing the usual fly-by-nights trying to cash in while the going’s good. In this case the cowboys are, for example, knocking on old ladies’ doors to try to get them to sign over leases on their roofs for solar panels. If the subsidy were less attractive we might get what we want – efficient, quality suppliers.

So how could we inject some price-discovery into the scheme, control the budget and at the same time avoid what I might term “quota-envy”?

Well, why don’t we do what is being suggested for larger scale renewable energy purchases? That is, why don’t we simply auction the right to install solar panels (or other specified renewable energy microgeneration system)? Here’s how such a scheme would work (described for solar PV, but similar for any other technology):

  • Instead of just registering a deployment to qualify for FITs, the solar PV electricity generator would first need a permit, i.e. besides the current auditing at registration to confirm what’s installed is what the generator says has been installed, a valid permit would also be needed.
  • Permits would be auctioned for each FIT band (i.e. small-scale, <4kW capacity through to, say, 250kW-5MW), a specific number of permits being allocated to each band.
  • It needs to be taken into account that planning permission is needed for some solar PV installations (generally the larger ones, but there may also be issues with listed buildings, conservation areas and so on).  Most likely it would be best to specify that where planning permission is required, outline planning permission must be obtained prior to applying for a permit, since otherwise there may be a significant number of unused permits, making management of the overall scheme more difficult.
  • Permits would have a limited lifetime, say a year, so that the auction for permits for calendar year 2012, for example, took place in autumn 2011. Permits would be issued late in 2011 and would have to be used for registration dates during 2012. A calendar year is suggested because fewer installations are likely to take place in winter so a last minute rush might be avoided, but to smooth out demand for installation and registration, auctions could be held more than once a year.
  • There would be a charge for permits (say £100 for domestic solar PV) to cover the costs of the auctions and also to minimise the number of unused permits.
  • The administrators would set an upper limit price. Initially this would be the current FIT for the given band and technology (e.g. domestic solar PV), but subsequently it might be the price set in the previous auction to ensure continual price declines (it may be necessary to adjust for inflation).
  • The administrators would also set a limit for the number – or maybe better total cost – of generators they are prepared to accept in each auction.
  • Applications for permits would simply specify the generation price (in p/kWh) they were prepared to accept.
  • Applications would be accompanied by the fee (£100, say), refundable in the case of failed bids, perhaps less a small charge for administration (say £10), to deter time-wasters.
  • Once the deadline for bids had been reached, the administrators would simply calculate a strike price. Note that if the auction is conducted on a total subsidy cost basis, the number of generation proposals accepted will be more the lower the strike price.
  • Obviously, if there are insufficient bids to reach the predetermined quota for the auction, the strike price will be the predetermined upper limit price (in fact bids above this price would be invalid).

Such auctions would be very easy to implement, especially given the magic of the internet. The fees levied would make the process self-funding.

The advantages over the present system are obvious, but I’ll spell them out anyway:

  • Price-discovery: the cost to electricity consumers per kWh is the minimum necessary.
  • It becomes no longer necessary for government to try to guess how scale economies will drive down the price of small-scale renewable energy generation.
  • Cost control: the total cost to electricty consumers can be kept within tight constraints.
  • An end to boom and bust (to coin a phrase!): the overall FIT scheme will not run out of money prematurely, since funds can be spread out over time (probably more would be allocated each year as time goes on to avoid over-investment in high-cost generation – as is happening at present – but, even if the cost is spread evenly, this would lead to more supply in later years as per kWh unit prices come down).
  • Fairness: “quota envy” is eliminated. There need be no rush for permits (the same could be achieved with a simple ballot, of course, like the Olympic ticket sale, but that doesn’t have the advantages if this scheme – come to think of it, why aren’t at least the most expensive Olympic tickets being auctioned off?). Everyone bidding at the strike price or below will obtain the right to FITs.

As has been totally predictable from the outset, the current FIT arrangements are unfit for purpose. But we can fix FITs!

May 17, 2011

FIT Policy Revisited: On Quandaries and Rebound Effects

Filed under: Energy, Energy policy, Feed-in tariffs, Gas, Global warming, Solar PV — Tim Joslin @ 5:18 pm

I like a good paradox, but, being also somewhat pedantic, I reluctantly have to class aspects of the UK’s FIT (feed-in tariff) scheme as the result of trying to resolve a quandary, and not, strictly speaking, paradoxical.

Of course, there’s a quandary involved in all renewable energy incentive schemes. In fact, they are subject to a special case of quandary, which, due to the physics precedent (the boffins keep telling us that you can’t simultaneously measure a particle’s position and momentum), should perhaps be known as a quantum quandary.

The renewable energy policy quantum quandary is this: should the incentive for renewable energy generation be in terms of quota or price? If a quota system is chosen, such as the UK’s Renewables Obligation scheme, then the cost of acquiring the renewable energy is indeterminate; if the price is set, as for FITs, then it becomes very difficult to manage the quantity generated, as discussed yesterday.

By imposing a budget on the UK’s FIT scheme, a price-based system has in effect been turned into a quota system. This is perhaps the worst of all possible worlds, since, if a rational entity only wanted to buy a fixed value (or quantity) of renewable energy, she, he or it would probably devise some method of discovering the true market price, for example (in the absence of a mature, liquid market), auctions. This, I understand, is what the UK now intends to do in the proper, grown-up energy market, as opposed to the play market for small-scale and domestic renewable generation covered by the current FIT scheme.

More about the new rules for the UK’s electricity market another time. The quandary other than the quantum quandary which I want to explain relates to the detailed operation of the UK’s FITs for domestic electricity generation.

Now, you’d expect that the feed-in tariffs involve the operator (in this case the homeowner) being paid a set tariff for supplying electricity to the grid. If so, you’d be wrong, as least for the UK’s scheme [I’d be interested in the detail of how FITs operate in other jurisdictions, if anyone cares to add a comment].

If you stick a solar panel on your roof in the UK and jump through some bureaucratic hurdles, you qualify for two types of payments:

  • a generation tariff, of 41.3p at 2010-11 prices (adjusted by inflation so already around 44p) per kWh.
  • an export tariff of 3p/kWh.

The key point is that the price of electricity you use yourself (but don’t generate) is around 12p/kWh. So there is an incentive built into the scheme to use rather than export the electricity you generate. This is a deliberate feature.

But how might you use this elecrtricity?

Let’s consider a few possibilities:

1. You would have used the electricity anyway – great, the FIT is actually worth 53.3p/kWh to you (41.3p generation tariff + the 12p it would have cost you to buy the electricity). As far as the rest of us are concerned, we’ve paid 41.3p to avoid having to generate a kWh of electricity by other means. Everybody’s happy. Ish – this is already extortionately expensive electricity.

2. You can change your behaviour to use electricity you’ve generated rather than other electricity. For example, you may use storage (for heating) or immersion (for hot water) heaters to shift your electricity consumption from the evening or night to the day when, clouds permitting, you are generating electricity. It seems to me it would even be feasible to use batteries to store the electricity – remember, it’s only worth 3p/kWh if you export it, it’s worth 12p/kWh if you manage to displace electricity you would otherwise have had to buy. Everybody’s happy (ish), although the rest of us are probably not quite as happyish as in case 1, as inefficiencies are likely to be involved. That is, you’ll likely have used more electricity by shifting your consumption in time – the storage and immersion heaters will have lost some of their heat by the time you actually want it. So there’s a small rebound effect already – you’re using more electricity in total than before, so, for every 41.3p the rest of us are paying, we’re avoiding having to generate not 1kWh, but less than 1kWh, of electricity.

3. You could change your behaviour to use electricity you’ve generated rather than another form of energy. For example, you could charge an electric or hybrid car. Or you could switch from gas to electricity, for cooking or heating. Again, there are inefficiencies involved. Now, you’re using more energy (not just electricity) than before, and, for every 41.3p the rest of are paying, we avoiding having to find, not 1kWh, but less than 1kWh, of energy.

It’s this last point, case 3, that is crucial to the quandary. The export tariff was originally planned to be 5p/kWh, not 3p. This change is significant, because gas also costs around 3p/kWh. Reducing the opportunity cost (i.e. the income foregone by using rather than exporting your electricity) to a mere 3p makes it irrational for domestic generators to switch from gas to electricity. It would be sensibe to charge car batteries, rather than use petrol or diesel, but it wouldn’t be sensible to use electricity rather than gas for cooking or heating (unless you prefer to use electricity for one or other of these activities, as some people do).

But, in rewarding actual export of the electricity so poorly, policy-makers must – or should – have been wrestling with a quandary. Because there’s one other thing you might do with this 3p electricity:

4. You could afford to use the electricity for things you couldn’t afford before (or didn’t want to pay for). For example, you might install air-conditioning.

The quandary policy-makers must have been wrestling with was that the higher they make the incentive for using home-generated electricity to displace other forms of energy consumption, the higher they also make the incentive for simply increasing electricity consumption. If they’d made the export tariff much higher, of course, then they would have introduced an incentive for increasing the consumption of gas, for example, by ceasing to use electric immersion water heating and using a gas boiler instead (or even by installing a gas-based domestic CHP system, which itself qualifies for FITs! – I can’t get my head around the full implications of this).

But this leads to a problem with the UK’s scheme. It might simply result in a rebound effect, whereby FIT suppliers simply use much of the subsidised electricity themselves.

Unfortunately, it gets even worse, because householders benefiting from generous FITs will increase their income significantly (beyond what they could have otherwise earnt with the funds that paid the upfront installation cost), so:

5. Because of the FIT income, you could afford forms of energy consumption you couldn’t afford before. For example, you might fly away for an extra weekend break every year, happy in the knowledge that while you’re away your solar panels are steadily earning money for you! Or you might buy more goods, which required energy to produce. This is another rebound effect. The subsidy may result in less extra energy available for other consumers than is generated. In fact, it’s possible that the benefit could be negative, that is, domestic FIT suppliers’ energy consumption might increase by more than they actually generate!

In the worst case, then, the money spent on domestic FITs might make no contribution whatsoever to reducing the consumption of other forms of energy in the UK economy. The FIT subsidy might simply involve a transfer of wealth to FIT suppliers of around £400m a year by 2015 (increasing every year as the number of installations increases).

In less worse cases, we can work out the cost to electricity consumers per kWh of FIT electricity generated net of increased consumption. Remember, electricity consumption by households with solar panels may increase by a proportion – beyond displacing other forms of energy use – reducing the net increase in the nation’s electricity supply achieved the ludicrously high FIT cost. If the rebound effect is, say, 50%, that is, if FIT providers increase their overall electricity (or strictly speaking energy) consumption by half of what they generate, then the cost to electricity consumers of the extra electricity made available by domestic FITs would be not the already extortionate 41.3p, but 82.6p/kWh.

As I said, I’d be interested to learn how other jurisdictions have structured their FIT schemes. It seems to me that it’s very difficult to avoid incentive problems of one sort or another. Perhaps the whole business is misconceived.

May 16, 2011

FIT to Bust

Filed under: Energy, Energy policy, Feed-in tariffs, Global warming, Solar PV — Tim Joslin @ 1:57 pm

As I mentioned yesterday, I responded a week or so ago to DECC’s “fast-track” consultation on feed-in tariffs. In fact, here’s my response (paragraphication unfortunately deleted by DECC’s software).

The reason for the fast-track review is that DECC hadn’t anticipated the number of large-scale schemes that would apply for the subsidy, which first became evident late last year, although my warnings about the scheme in general date back over three years. They therefore propose to drastically lower the tariffs for the largest schemes from 1st August. I presume this means that none of the large schemes are viable, since there isn’t time for those that have recently received planning permission to be constructed and registered. Needless to say, those who’ve invested time and money in drawing up proposals and seeking planning permission are none too pleased.

The thrust of my response to the DECC consultation is that the FIT mechanism is bound to lead to boom and bust in the renewable industries concerned, especially PV. Or rather, exacerbate the boom and bust cycle that is endemic to industries (such as silicon chip manufacture) with high up-front capital costs and low marginal costs. In the end I can see no alternative to annual quotas for FIT schemes of different types.

Specifically, I can see two main problems with the scheme, a underlying problem of lack of clarity of objectives and a, perhaps consequential, budget-control problem:

1. Unclear Objectives
It’s unclear which part of the product supply chain FITs are intended to stimulate. Some (such as Jeremy Leggett) seem to imply the prize is the development of a UK solar PV manufacturing industry. This is surely unlikely. The horse has bolted to China, who also have a domestic market for PV, and are just one of the countries with a cost advantage in manufacturing. The question then becomes one of whether we are trying to bring down the cost of solar panels in the UK, by increasing market power and simple scale economies in importing the things, or to gain expertise in installing them on people’s roofs, or both.

For some reason the government acts as if small-scale PV is a virtuous end in itself. I find this simply bizarre. For a given budget, the FIT scheme would support at least twice as much solar PV production in large-scale schemes as on domestic roofs. Permitting a mix of schemes would bring down the cost of panels for everyone more than just allowing households to benefit (as pointed out in the fast-track review consultation document, paragraph 42). And larger schemes will achieve the holy grail of “grid parity” before smaller ones, allowing us to produce electricity at reasonable cost.

2. Control of Budget
With the scheme set up as it is, there seems to be no rigorous control of the budget. What appears to have happened is that the scheme was originally formulated with cost estimates. The proponents didn’t much care if there was an overshoot. They’d adjust the scheme in periodic reviews. George Osborne has now said (in the 2010 Spending Review, pdf) that he’s going to hold the scheme to £400m a year as of 2014-15 (the cost increases each year as more long-term commitments are made), and what’s more reduce it by 10%:

“The efficiency of Feed-In Tariffs will be improved at the next formal review, rebalancing them in favour of more cost effective carbon abatement technologies. This will save £40 million in 2014-15.”

But the only mechanism for limiting the cost is to adjust the tariffs at periodic reviews, the first of which has been brought forward from 2012 (changes effective April 2013), to this year (timetable unclear, but changes to take effect April 2012, “unless the review reveals a need for greater urgency” – fast-track review consultation document, paragraph 16).

I emailed DECC week before last asking if perhaps I’ve missed something and there is some mechanism I’m unaware of for managing the FIT scheme. So far I’ve received only a boilerplate reply, so will write back. I’ll provide an update on here.

The immediate problem is that the solar PV FITs are absurdly generous. The return on the one deployment I’ve been able to audit looks like it’ll be about 15%. You only need to look at Google or pick up a newspaper to see adverts for suppliers proposing to help you take advantage of the scheme. I predict a surge in installations over the remainder of this year. Ofgem provides a list of schemes (see the bottom of their web page) which can be analysed. So far there are around 30,000 of them (mostly small-scale), increasing at 2,500+ per month. If this rate increases dramatically (as I expect), the lead time for a policy response will likely lead to a budget overshoot. At present there is insufficient data to make any kind of projection. For instance, seasonal factors are likely to be important, but their magnitude is entirely uncertain.

What might also happen is that schemes just below the cut-off for the revised tariffs (50kW) remain highly profitable and we see a surge of these. Then another “fast-track” adjustment to the tariff levels will be needed. And, of course, the wholly predictable surge of solar PV schemes is likely to take the lion’s share of the available budget and squeeze out the other technologies the FITs are supposed to support. It’s farcical.

If the comprehensive review slams on the brakes by lowering PV FITs dramatically, then, as we’ve already seen for large-scale schemes, boom turns to bust, and numerous small solar PV installation companies around the country will go to the wall.

What’s most astonishing is that solar PV supported by FITs has seen a boom and bust in several other European countries, most notably Spain. You’d think the UK would have learnt. I suggested the use of a system of quotas (for different scales of deployment of each of the various technologies) in my response to the consultation, but remain fundamentally suspicious of the whole FIT concept. Renewables Obligations make more sense, since they force suppliers to deploy a gradually increasing quantity of renewables, and don’t try to second-guess market-prices.

May 15, 2011

Sorry, Nuclear Power is Not Expensive

Filed under: Energy, Energy policy, Feed-in tariffs, Global warming, Nuclear, Solar PV, Wind — Tim Joslin @ 7:44 pm

I’ve been looking at energy policy in somewhat more depth than usual over the last week or so.

I responded to the panic, sorry “fast-track” consultation on feed-in tariffs (FITs), which I mentioned earlier in the year (maybe more about this later); I attended a Climate Change Campaign (CCC) debate on nuclear power; and, today, masochist as I am, I downloaded the Climate Change Committee’s (also CCC, damn, can’t use that one!) 4th Carbon Budget (let’s call it “the 4CB”), for 2023-7, which apparently we’re all now committed to.

I have to say that participating in debates on energy policy is to enter a parallel universe where the veracity of statements seems to be entirely optional. Especially if numbers are involved. I find it physically painful. Blood vessels in my head threaten to burst.

Just as one example, here’s what the 4CB says on p.254 (Joslin’s 25th Law: the accuracy of the content of a report is inversely proportional to its length):

“Solar PV could play an important role in global power sector decarbonisation, with the IEA estimating that this could generate around 11% of global electricity by 2050. However, the importance of this technology in the UK is unclear given relatively high costs:
• Solar PV is expected to cost around 28 p/kWh in 2020 for large applications (around 5MW) and 45 p/kWh for small residential-scale deployment, compared to around 7 p/kWh for nuclear and between 11-13 p/kWh for offshore wind.”

It’s usual to quote such figures in today’s prices, ignoring the uncertainties of inflation, and this is what appears to have been done here for nuclear power. But the figures for solar PV are bizarre. They are of the order of the current UK FITs, which could probably be halved to something approaching the level in other European countries and still give the intended 5-8% return. And the whole point of the FITs is to build economies of scale to bring PV costs down in the future. 2020 was in the future last time I checked.

I believe the cost of PV is too high now. That’s why I object to subsidising home-owners installing solar panels with absurdly expensive FITs. Nevertheless, I appreciate the whole point of the FIT scheme is to build up economies of scale in order to rapidly bring unit costs down. Presumably whoever buried the above paragraph on p.254 of the report is also sceptical. But few observers of the industry would doubt that the cost will be much less by 2020. Jeremy Leggett is claiming (though somewhat implausibly) that “grid parity” will be reached by 2013.

The reason I’m sceptical about FITs is that, for a relatively small amount of electricity – maybe 1GW peak output – the FITs scheme will cost around £8bn (and that’s just up until 2030), according to the impact statement (PDF) on DECC’s page for the 2009 consultation on the proposal. That makes sense. There’s been talk of a “budget” of £400m, which Osborne wants to cut by 10% (it’s not really his budget as the costs of the FIT subsidy are added to electricity bills). If the £400m is the annual subsidy (it’s none too clear what it is), that would be the equivalent of about 400,000 PV schemes of around 2kW capacity (let’s be generous and call it 1GW in total), each subsidised by around £1000 a year (that is, at 40p/kWh for an average of (1,000/0.4 = 2,500/365 or around 7kWh/day). £400m over 20 years is around £8bn.

£8bn. Interesting figure that.

Coincidentally it’s the same figure I heard from Darren Johnson (Green Party, anti) at the nuclear power debate. He noted that £8bn is the cost of disposing of the waste from 8 nuclear reactors. I spoke briefly to Darren after the meeting, querying the figure. He said he’d heard it from Caroline Lucas and sure enough it’s all over the internet. I was surprised, because £8bn is peanuts. The output of a single commercial nuclear reactor is typically around 1GW (potentially quite a bit more in some of the latest models). And, unlike solar PV, nuclear power is 24×7. So, to decommission 8 nuclear reactors will cost a similar amount to the FIT scheme, which will provide peak power output equivalent only to that of 1 reactor! And the sun don’t shine all the time!

Let’s look at the £1bn waste disposal cost for each nuclear reactor in a slightly different way. How much electricity does it represent? Let’s say we sell it for 7p/kWh wholesale (10p/kWh for consumers would be easier, but I don’t want to be accused of being optimistic – hell, let’s be pessimistic and say 5p/kWh). Now, we’re producing 1 million kWh of electricity every hour (that’s what 1GW means). At 5p each, that’s £50,000 of kerr-chang each and every hour. Still, £1bn is a lot. In fact, it’ll take our reactor 20,000 hours to earn £1bn. Call it 1,000 days, or 3 years to allow for a bit of downtime. But nuclear reactors last 40-60 years. So the waste disposal cost is less than 10% of the value of the output of the reactor. Or to put it another way, less than 0.5p/kWh, according to Caroline Lucas’ figures.

Another number was thrown into the air at the CCC debate. Someone said the Fukushima accident would cost “hundreds of billions of pounds”. Sorry, it’s in the tens of billions (like the Deepwater Horizon oil-spill). It’s a disaster, sure, but – even if we call it £10bn per reactor (there are 6 in total, 4 badly damaged) and take account of the less than 1GW output of most of the reactors (they’re quite old) – call them 500MW units – the clean-up cost is still only of the same order as the value of the electricity produced over the lifetime of the reactors (0.5bn kW * 0.5p/kWh is £25,000 per hour, so earning £10bn takes 400,000 hours or around 20,000 days or about 60 years, allowing for some downtime). And there are 100s of nuclear reactors around the world. It turns out that the cost of a Fukushima or a Chernobyl every couple of decades is in fact insignificant compared to the value of the electricity produced. Sorry, that’s just how it is.

I’m not trying to make an argument for nuclear power here. There are clearly potential grounds for objection other than the cost.

All I’m saying is that the facts do not support the claims that nuclear power is expensive that you hear so often.

And unfortunately most forms of renewable energy are more expensive at the moment. Possibly excepting onshore wind, but no-one seems to want that.

February 16, 2011

Quick, FIT Farmers!

I once asked a careers adviser about the possibilities of becoming a journalist. I was told it was a difficult profession to get into. Clearly the reasons for that have nothing to do with competence to actually do the job.

Following my post back in October pointing out that the feed-in tariff (FIT) subsidy for large installations is so generous that there’s no longer an incentive to use sunlight to grow food, or, as the Guardian put it on Monday 7th Feb, “[a]fter a Guardian report on Sunday” – that would be 6th Feb – DECC have decided to bring forward their review of the scheme.

So anyone planning to take advantage of the current tariffs better move fast. But make sure you understand because the papers seem to labour under one or two misconceptions.

For example, yesterday the Independent wrote that:

“…including projects of more than 50 megawatts (MW) in the review will catch out community solar schemes from schools, hospitals and housing associations, as well as truly large-scale farm installations.”

That should have read 50kW, and soon did after the error was pointed out. The point is that the schemes being subsidised by FITs will generate relatively piffling amounts of energy.

As the predictable farce continues, it’s becoming less and less clear to me what the rationale for the FIT scheme actually is, at least for solar PV. The fundamental problem is that government made the a priori assumption that microgeneration is economically efficient. Wrong, wrong, wrong. FIT farms are much more efficient than sticking solar panels on people’s roofs. As ever, scale economies are critical.

So we keep hearing statements accusing farmers of taking up a subsidy which was “intended for” even smaller-scale producers (I say “even smaller-scale” because what’s really needed is industrial-scale production of solar electricity in the Sahara). It’s a no-brainer what DECC will actually do: they’ll reduce the FIT rates for larger installations and/or reduce the size limit for which FITs apply and/or allocate different pots of subsidy for different size schemes – fortunately Osborne has capped the amount that can be committed (from our future electricity bills). Basically they’ll defend the micro micro-generators. But why?

If the future isn’t microgeneration, why would we want to subsidise it? Why not do the reverse of what the government is about to do and allow relatively large-scale solar PV installations to use the subsidy? Surely that would achieve the objective of building up scale economies (that term again – what mental contortions to recognise one form of scale economy and not another in the same initiative!) for the supply of solar panels in the UK?

There’s misconception about another aspect of the scheme, too, extending even to a picture caption serving as the subtitle to a Guardian article supposedly answering all your solar PV FIT questions. They write that:

“Homeowners can make money from their solar panels by selling the energy produced to electricity companies”

More wrongness, journos!

You make most of the money – 41.3p/kWh – by generating the electricity. That’s what you’ll get a meter for on day one.

In fact, the last thing you want to do is sell it to your electricity company! For that you only get an additional 3p/kWh. Last time I looked I was paying around 12p/kWh for electricity and 5p/kWh for gas. So what you want to do is use the solar PV generated electricity yourself rather than buying electricity or even gas. Arrange to use the electricity during the day (perhaps by using storage heaters) or even store it in a bank of batteries to cook in the evening.

There’s a wrinkle that favours the home microgenerator even more. Until smart meters roll out it will be assumed that you export half the electricity you produce and use the rest. So anything over half you use is totally free!

As I expected was inevitable all along, we are now well into the realm of perverse incentives. If you’re a home microgenerator the opportunity cost of your own electricity is only at most 3p/kWh. So you might be able to afford to use it up when you wouldn’t have previously spent the money buying electricity. Air-conditioning springs to mind.

It seems the 3p/kWh export tariff has been set at the price electricity distributors normally pay suppliers. But that seems a bit daft, since they (or we) are subsidising generation of the same electricity. Clearly, the export tariff should be approximately the same as the consumer price for electricity and the generation tariff somewhat lower than it is now to compensate.

It might be worth pointing out that with the scheme as it is, electricity consumers should favour larger-scale solar PV installations – FIT farms – since they have no choice but to export their electricity at 3p/kWh (on top of a lower generation tariff of as low as 29.3p/kWh compared to the domestic tariff of 41.3p/kWh).

It’s obvious why home microgenerators would support FITs. It’s not so obvious why electricity consumers would be so enthusiastic. From the detached point of view of decarbonising the UK’s electricity supply, it seems to me there’s a problem looming a decade or two down the line. Current policies should deliver the 15% renewables by 2020 the UK is commited to, though not much will be solar PV, by the way – offshore wind will dominate. But sometime after 2020 we’ll need to start getting domestic consumers to switch from gas central heating and cooking to electricity. At present, the gas price is a fraction of that for electricity. The gap can only widen, especially as we add expensive renewables to the supply. Better start thinking now, I suggest, how we’re going to manage – politically – to tax domestic gas at around the level we do petrol.

And best to think too about how to keep the domestic electricity price down. Generous FITs are probably not the way. And a much larger proportion of onshore wind at about half the cost of offshore might be a good idea as well.

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