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UK: Government consultation announced for the replacement of FIT export tariffs

  • United Kingdom
  • Energy and infrastructure

15-01-2019

On 8 January 2019, the Department for Business, Energy and Industrial Strategy (“BEIS”) published a consultation on a replacement for the Feed-in Tariff (“FIT”), in particular for the FIT export tariff. A link to the full consultation, “The Future for small-scale low-carbon generation - A consultation on a Smart Export Guarantee”, can be accessed here (“SEG Consultation”). The FIT scheme will be closing to all new projects commissioning after 31 March 2019, with some limited grace periods available.

The replacement proposed by BEIS is the introduction of a mandatory supplier-led route to market, the Smart Export Guarantee (“SEG”). This consultation closes 5 March 2019.

Some of the key aspects of the proposal that have attracted early attention are:

• lack of assurance that the supplier-driven tariffs will be represent fair market value;

• lack of assurance regarding the tariff/term of support that will be offered once an installation is commissioned (compare pre-accreditation or assurance of accreditation, albeit subject to degression and deployment caps, under the FIT scheme);

• issues with the roll-out of domestic smart meters potentially affecting the implementation of the SEG for domestic installations (as the SEG will be based on actual metered output); and

• a hiatus period between the closure of the FIT scheme in March 2019 and the implementation of the SEG scheme, during which new installations may not receive compensation for their export.

Background

As part of the UK’s industrial strategy, a large focus of the Government is on maximising the advantages for UK industry from the global shift to clean growth through the use of a low-carbon economy. It is their view that small-scale low-carbon electricity generation should be put in place within a system that is both competitive and market-based. To that end, the Government confirmed on 18 December 2018 closure of the current FIT flat rate export tariff and generation tariff to new applications from 31 March 2019 in order to minimise the financial burdens on consumers and to progress towards increasingly cost-reflective pricing.

In July 2018, the Government published a call for evidence in order to identify the role that small-scale low-carbon generation can play in contributing to its objectives for clean, affordable and secure energy. Based on the evidence provided as a result of that call for evidence, the Government confirmed that it would explore possible arrangements for small-scale low-carbon generation after the closure of the FIT scheme.

It has now published the SEG Consultation, in which the Government proposes to legislate for suppliers to remunerate small-scale low-carbon generators for the electricity they export to the grid. It is BEIS’s view that the SEG will be cost-reflective and market-led to help level the playing field for small-scale low-carbon generation whilst also supporting the Government’s smart agenda and ensuring that generators are not expected to give away electricity generated for the grid for free.

A summary of a number of the key proposals of the consultation in respect of the SEG scheme put forward by BEIS are set out below.

Key proposals of the consultation

The proposals set out how the SEG would work in practice confirming that all technologies that are currently eligible for the FIT scheme (up to 5MW capacity) would be able to apply to the SEG scheme on the following basis:

1. BEIS is proposing to mandate via new secondary legislation and modifications to the Electricity Supply Licence Conditions that large electricity suppliers (those with more than 250,000 domestic electricity supply customers) would be obliged to offer small-scale generators, be that homeowners or small businesses, a price per kWh for the electricity that they export to the grid. Smaller suppliers can opt to voluntarily provide a SEG tariff but they must also adhere to the rules and guidance associated with the SEG and would be held against the same operational requirements as large suppliers.

2. Suppliers would determine the SEG tariff per kWh of exported electricity they are prepared to offer to generators, as well as the length of the contract with the generator. This is one of the key areas which industry and commentators have focused on – that there is no assurance that the price will reflect a fair market price.

3. Suppliers would be required to provide at least one export tariff. BEIS expects that in due course suppliers will offer smarter, flexible tariffs – “the smarter the better”. This could for instance take the form of ‘time-of-day’ tariffs, paying more during peak demand periods. The consultation discusses several different tariff design proposals, but the actual tariff structures would be left to the suppliers to decide upon.

4. The tariff offered must be greater than zero and at times of negative pricing, generators would not be required to remunerate suppliers for electricity exported to the grid.

5. Electricity exported to the grid from generators must be metered. Unlike the FIT scheme, no separate payments will be made for generation and the payments for electricity exported to the grid will be based on actual metered output not a deemed output. For domestic installations, BEIS expects that smart meters will provide this so only homes with smart meters installed would be eligible. Another key area of focus for industry and commentators is that the troubled roll-out of smart meters could have negative knock-on effects for the implementation of the SEG.

6. There is no proposed levelisation of costs, on the basis that the purchase of such electricity at market rates is a potential benefit to suppliers. Further, suppliers providing the SEG should be able to account for their administration costs in the setting of the tariff levels.

7. Minimum safety standards for consumer protection for generators with solar PV, wind and mCHP installations up to and including 50kW would be required (eg, there would be a requirement to use Microgeneration Certification Scheme (MSC) registered installers).

8. Administration of the SEG scheme would be carried out by Ofgem and the electricity suppliers and any failure of the suppliers to comply with the requirements of the SEG scheme would be an enforcement matter for the Gas and Electricity Markets Authority.

BEIS also set out in the consultation its proposals for stimulating the deployment of storage technologies and their possible co-location of renewables with the SEG. They are consulting on whether exports from a battery storage system should be paid the SEG tariff only on ‘green’ power (which would require more complex metering and settlement arrangements, which are potentially unsuitable and unduly prohibitive in the small-scale generation market) or on both ‘green’ and ‘brown’ power (ie, power import by the battery from the grid).

BEIS poses various questions as part of this consultation to gain industry feedback and suggestions on the following matters:

• the proposed SEG scheme and its eligibility requirements;

• the costs and implications of the scheme;

• the suggested tariff structure and factors affecting tariff design as well as the most appropriate initial design for the SEG tariff considering the push for suppliers to use ‘smarter’ tariffs as they become available;

• the proposed approach to negative pricing;

• possible guidance and market condition reporting to Ofgem;

• operational and administration arrangements of the scheme;

• the potential eligibility of storage and co-located renewables with the SEG;

• the requirements for generators and the registration of installations for the SEG; and

• the settlement basis under the SEG.

Industry feedback to the above proposals will then be considered by BEIS in deciding on how or whether to proceed with the SEG scheme.

What happens next?

The consultation closes on 5 March 2019 and the evidence provided by this consultation will allow the Government to decide on whether and how to proceed with the SEG scheme.

It is currently unclear how long the Government will take to consider the results of the consultation and, if appropriate, implement the SEG scheme, which will also include parliamentary time in passing legislation for the launch of this scheme. Once launched, it is foreseeable that there will also be a period of downtime whilst suppliers prepare their market offering.

Hiatus

Another key issue with the closure of the FIT scheme and the time it will take to implement the new SEG scheme, is the period in which new installations may be exporting surplus to the grid without getting paid for such export. BEIS has admitted in the consultation that there will be a hiatus of a considerable period of time where the FIT scheme and the SEG scheme, if implemented, will not be in place so generators will not be paid for some of the electricity that they export to the grid during this time. They have at this stage ruled out the possibility of payments being backdated.

Conclusion and reactions

So far, the proposals set out in this consultation have been met with a cautious welcome from the industry for setting out unequivocally the Government’s view that generators should be compensated for the power they export. This system could create a new market with different suppliers bidding competitively for the electricity generated in order to provide generators with the best price possible whilst also providing more ‘green’ power to the grid.

James Court, director of policy and external affairs at the Renewable Energy Association, has also stated that the proposals “could usher in a new era” for small-scale renewables.

However, concerns have been raised that the remuneration offered under the SEG scheme must be at a fair market rate and that supplier obligations must be applied consistently across the market. The consultation acknowledges a number of market barriers and associated costs raised and there is also concern that these barriers may cause suppliers difficulty in offering fair rates to generators that are freely able to switch suppliers in a competitive market where the costs fall is vital to developing meaningful offers.

The details around the transition from the former FIT subsidy scheme will also be very important and challenges are potentially set to arise from the expected hiatus between the FIT and SEG schemes. It is hoped that these challenges will in part be compensated for by the extension to some of the accreditation conversion timings and grace periods already won for the scheme in the closure period.

Rebecca Long Bailey, Labour’s shadow business secretary, has described the proposals as “a new mountain for small scale renewable energy to climb” with the introduction of a complex market mechanism that large energy companies can use to offer whatever sums they deem fit to generators and participation by domestic generators reliant on the possession of a smart meter that many households may not have for some time given the high profile technical challenges and delays facing the Government’s national smart meter roll out.

This proposal however does demonstrate a shift of the Government towards a smarter energy system encouraging the wider use of smart meters, energy storage systems and smart grid technologies with the ability for potential generators to sell electricity to the grid when demand is high, cutting bills and balancing supplies whilst also reducing the strain on energy networks through a more decentralised network unlocking innovation and increasing cost efficiencies.

A detailed description of the consultation is beyond the scope of this article but the full consultation can be accessed here. We eagerly await the details of the SEG scheme and responses to this consultation.

If you wish to discuss the potential impact of these proposals on your business or any possible opportunities arising from the announcement of this consultation, please contact our specialist team below.