Comprehensive spending review analysis 20 October 2010, UK Microgeneration strategy news, Renewable energy and power, Solar panels, PV photovoltaics, Solar thermal hot water heating, Consumer, environmental and market impact potential. FIT and RHI announcements.

Briefing on the UK government’s new comprehensive spending review (CSR) of 20 October 2010.

This news review covers the profound (and net positive) impact of today’s100 page CSR on the renewable industry and in particular on consumers of solar technologies, both solar heating and solar electricity panels.

Executive Summary.

1/ Solar Electric PV Panels. Reprieve given for FIT renewable electric subsidy: “Feed In Tariffs” for PV – but for how long?

Great news for green energy consumers from Wednesday’s Spending Review is that Feed in Tariffs will in fact continue in their current form, at least for the time being. Despite loud rumours of a cut in funding, which were vigorously addressed by a campaign signed by 63 green energy company CEO’s (us included), the FIT payment (“tariffs”) are in fact completely unchanged and remain at 41.3 pence per kilowatt hour of energy delivered. Phew! There may be a sting in the tail, however.

If ever Feed in Tariffs for solar electric PV installations look like they are becoming a runaway success, the government has specifically said they may cut them early to prevent overspending – ie ahead the scheduled date of 2014. (So and here is my commercial pitch!, it may make economic sense to install PV’s now, before today’s very attractive subsidy rates are cut. Feel free call me for a quick, no-obligation telephone / roof aerial photography survey and quote.)

2/ Solar Water Heating Panels. “Renewable Heat Incentive” (RHI) subsidy scheme announced – but will solar water heating get a fair and level playing field?
The long-trailed Renewable Heat Incentive will start off later than planned with 80% of its original planned funding. Given the level of cuts landing elsewhere, this is, on balance great news. But where will the 20% cut come from?

Perhaps the subsidy level will be cut. 18 pence per kilowatt hour of energy had been the “consultation figure”. Or perhaps initially only homes which use high carbon fuels might be eligible, meaning that homes using mains gas or wood heating might be excluded. (Note: Initial fears that solar thermal might be cut out completely have been dispelled by a DECC official at a trade body meeting on Monday 24 October.)

So what will the market balance position? Will solar thermal get a level playing field in terms of RHI subsidy? This important matter is not fixed yet. It is highly likely that its subsidy level will be ONLY HALF that of other renewable energy heating technologies in terms of “return on investment”.

So I would ask you please to lobby your MP today.

My colleagues, myself and the solar heating industry would be very grateful indeed if you could send them a simple one line request to “ask Government to admit solar thermal as an equal renewable energy / microgeneration technology market player under the Renewable Heat Incentive, in terms of its return on investment, in recognition of its excellent environmental costs benefits which include having a low carbon (and for some technologies even a zero carbon) operating footprint“. If you have a moment to lobby your MP right away, their details and a “send them an email now” form can be found very quickly right here. Thank you very much!

A wider analysis of the impact of CSR on green energy uptake follows:

Funding reallocation and cuts. Funding for the main department involved, the Department for Energy and Climate Change to fall by “an average 5% a year” is a bigger worry than it actually looks. DECC is the main UK government department which funds green energy. Much of its funding (ie the 30-40% nuclear clean-up costs) is ring-fenced, so the actual cuts elsewhere will be higher than 5%. Indeed DECC says in real terms it will cut resource spending by 18%, and increase capital spending by 41%. Its admin budget will fall by 33%.

Renewable Heat Incentive announced. The biggest news: this long-awaited announcement will be welcome to UK’s green energy consumers, however it will smaller and start later than originally planned. But, in principle any subsidy for renewable heat looks good. The devil is in the detail, much of which is conspicuously absent.

I have yet to find out whether the RHI includes solar thermal (eg solar water heating) as being eligible, and if so at what funding level. DECC’s reference to “prioritising the most cost effective technologies” is not very encouraging on this front. What do they mean by cost-effective?   they prioritise (a) just money in terms of cost efficiency, then solar thermal is not that great: just a bit better than PV (solar electricity). But if DECC instead prioritise (b) environmental efficiency then solar thermal is streets ahead of almost every renewable heat technology! The government talks about “increased incentives for low carbon energy generation through the Renewable Heat Incentive”. Low carbon? What about the ideal, zero carbon? It would be rather ironic if zero carbon operation technologies (ie better then low carbon!), such as Solartwin’s PV pumped solar heating systems were excluded from RHI support.

RHI funding 20% less than planned. There is a commitment to £860 million of RHI funding (not a bad sum at 20% less than originally planned) for the long awaited RHI to be introduced from 2011-12 “aimed to drive a more-than-tenfold increase of renewable heat over the coming decade”. I hope that DECC’s claim of “shifting renewable heat from a fringe industry firmly into the mainstream” will indeed apply to solar thermal technology such as solar water heating because this technology has one of the lowest carbon footprints of any green energy technologies around and can displace 30-70% of a home’s hot water fuel requirement.

How late will the RHI start? According to trade body sources, that the level of support per technology (eg x pence per kilowatt-hour for x years) is still under debate. And there are no laws in place to make it happen either. Industry is hopeful that the actual levels will be announced in early December 2010. This should give consumers a nice green Christmas boost! However that the RHI programme will cost 20% less than planned and it must not have “runaway potential” either. So the government may start off gradually perhaps by targeting off-gas-grid areas first (sensibly, such homes offer the best value for money in carbon saving terms) or perhaps (and much worse) put some kind of capping mechanism in place which would bring the whole industry to its knees if it were ever implemented. The actual start date for eligibility for funding will not happen until perhaps June 2011,once the extensive legalities (such as getting a bill through parliament and approved by competition wonks in Europe) are complete.

How will the RHI be funded? Interestingly, the RHI will be funded from Annually Managed Expenditure (AME), and not from a (controversial) levy on fuel bills, as was originally planned, something which DECC diplomatically describe as “complex”. So what other funding mechanism could / should it have used? Will 17.5% VAT be applied to on dirty domestic fuel – to fund the RHI (and fuel poverty alleviation) and to deliver general energy market rebalancing. At this stage, it appears not. This issue-dodging either shows a lack of vision or political timidity. Perhaps fuel VAT will go up to 10% in January 2011 at the same time as general VAT goes up to 20%. Will there be a generally new carbon tax – gradually increased over time? Again, apparently not. Also disappointing, suggesting again a limited strategic vision of the UK government. Both represent potential green taxation losses.

Green DIY gets sidelined again. Will there be support for DIY energy saving measures such as DIY loft insulation and DIY solar – via VAT reduction to 5%. Apparently not. Again suggesting blinkered environmental vision.

Restated CO2 and Renewables targets. It is valuable that DECC commits to and restates its 2020 targets for a 34% reduction in greenhouse gas emissions and for 15% of energy to be from renewable sources, while “improving efficiency, supporting growth and facilitating a private sector led transition to a green economy”. This “transition” phrasing is excellent!

Stable feed in tariffs (FIT’s) for PV’s? Hmm. Only if they don’t become a runaway success story. I fact it looks as if there may in fact be some microgeneration market rebalancing on the way: even as if some technologies will soon be cut out of eligibility subsidy. DECC say that feed-In Tariffs will be refocused and rebalanced on “more cost-effective carbon abatement technologies” saving £40 million in 2014-15. On the upside, this date is a year or so later than the industry had expected, which is encouraging. Hopefully any FIT funding / scope changes will only be implemented “at the first scheduled review of tariffs” unless higher than expected deployment (ie runaway success!) requires an early review. That’s the downside. This “unless” is significant. I suspect that Feed in Tariffs for PV’s at their current level may not last for the full three years they were initially planned to last for.<

Good for innovation? Is green slash and burn on the agenda? Not sure yet regarding the green energy sector. Will innovation suffer?   20% good news comes from the announcement that low carbon investment will be promoted and a “green” investment bank will be set up with £1bn. However about £5bn had been hoped for. Hence the 20% good news thingy. I hope it does not pick winners! Large wind and nuclear and “Clean coal” (a funny contradiction like “military intelligence”) are supported: DECC commits up to £1 billion of investment to create one of the world’s first commercial-scale carbon capture and storage demonstration plants – supposedly strengthening the UK’s global position here. The clean coal lobby are, however bleating that this sum, a mere billion is much to small. But the clean coal commitment of a billion is 20% larger than the RHI budget and it is enormous in comparison to DECC committing “200 million for low-carbon technologies including offshore wind technology and manufacturing infrastructure at port sites”.   Funding for “lower value innovation and technology projects” will be cut, saving a budget of £70 million a year.

DECC will also “refocus” (ie cut or reallocate) spending. For example, there will be cuts to the Warm Front (home insulation etc) programme for the next two years to make it “smaller and more targeted” with a budget of £110 million in 11/12 and £100 million in 12/13. What does “smaller and more targeted” really mean? DECC also says that Revenue raised from the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme will be used to support the public finances, including spending on the environment, rather than recycled to participants. What this seemingly coded statement means is a bit unclear. It is a net raid on green tax income? Or the reverse?

There will be a “green new deal” from 2013, funding heating and insulation for the most vulnerable will be delivered through the Green Deal for energy efficiency and a new obligation on energy companies. This “green new deal” sounds fantastic – enabling households to improve the energy efficiency of their homes at no upfront cost, repaying the investment later through the savings they make on their energy bills. From April 2011, energy suppliers will provide greater help with the financial costs of energy bills to more of the most vulnerable fuel poor households, through Social Price Support – with total support of £250 million in 11/12 rising to £310 million in 14/15. The Taxpayers Alliance will probably scream blue murder at both of these!

Nuclear cleanup trimmed & “nuclear excellence” centre dumped.. DECC say that the Nuclear Decommissioning Authority (NDA) will “continue to improve efficiency” in order to increase investment in decommissioning the highest hazards across its estate. Capital funding for the NDA will increase over the Spending Review Period. DECC also say they will also make cuts by not providing Government funding for the National Nuclear Centre of Excellence, and refocusing contributions to international institutions. Administration costs will be reduced by 33% through increased use of shared services across Government, a refocusing on critical workstreams and further reductions to travel, accommodation and IT expenditure.

Unfortunately, fuel poverty “gaming” is now on the agenda. Currently defined as where over 10% of household income is spend on fuel, it seems that the government plans to “redefine” it downwards very soon! They say “To ensure the available resources are focused most effectively in tackling the problems underlying fuel poverty, the Government intends to initiate an independent review of the fuel poverty target and definition before the end of the year.” How do honest governments solve particularly tricky problems? Simple – they just redefine them to be smaller! Could do better, guys!

Sleepy matey quangos kicked up backside. It is good to hear that the Government will review the work delivered at arm’s length by bodies such as the Carbon Trust, Energy Saving Trust, the Coal Authority and the delivery arm of Ofgem. The Carbon Trust are not delivering the suitable incentive schemes for zero carbon solar water heating and the Energy Saving Trust are also short of clear thinking in this sector. One failure attributable to the Carbon Trusts’ famous matey opacity is that business users of Solartwin are not eligible for tax breaks because old fashioned component efficiency rules for “enhanced Capital Allowances” do not support the installation of superior low and of zero carbon solar water heating systems, such as ours, into businesses. (The ECA rules specify, in effect, single glazed panels so in fact our doubled glazed ones (which lose less heat when heat is actually needed) are overlooked.

Buy why on earth will DECC implement new and apparently needless duplication? In addition to the above, the Department will be adopting the following idea, suggested through the Spending Challenge process: That DECC will issue guidance to re-emphasise best practice on heating, cooling and lighting Government buildings. This guidance will encourage departments to reduce waste on energy costs, helping to reduce the Government’s £95 million annual energy bill, whilst saving carbon emissions at the same time. This sounds like wasteful duplication in at least some areas. Already the building Regulations offer compliance guides for heating etc, even if some are backward looking and technically flawed. An example of one such issue is plumbing safety. Even though actual level of risk increase is hotly debated at present, it is clear that the Microgeneration Certficiation Scheme which is owned by DECC is flagrantly flouting Health and Safety Executive Guidance on Legionella safety by exempting tens of thousands of state subsidised renewable energy systems from UK health and safety guidance by their promotion of “twin coil solar cylinders” ahead of much safer hot water storage methods. Many green energy consumers are currently not even being asked for their consent to what may be substantially higher Legionella risks.

Energy Minister Chris Huhne of DECC claims: “Like the rest of the public sector we have taken some tough decisions, but we remain on course to deliver on our promise to be the greenest government ever.” This overt green emphasis is supported by DEFRA who, despite cuts of over 30%, say “DEFRA will reprioritise its spending, focusing tax payer’s money on British farming and food production; enhancing the environment and biodiversity; and supporting a green economy resilient to climate change.” looks like some joined-up government at last!

Sunny regards from Barry.