HC 1605 Energy and Climate Change and Environmental Audit CommitteesWritten evidence submitted by E.ON
Summary of Key Points
We support cuts, but timescales are unmanageable: We recognise the need to make reductions in the solar PV tariff, but the timescale to which cuts will be made is unreasonably short. The timescales have left installers with little opportunity to mitigate losses.
Contracts committed to should be honoured at current rates: Contracts already in place and agreed before the consultation was published should be allowed to be completed at the current solar PV rate to limit installers’ financial exposure and customer disappointment.
Suppliers’ CESP obligation is negatively impacted by changes: The proposals reduce our ability to manage effectively our supplier obligation where solar PV contracts are no longer economically viable. This could result in higher obligation costs being passed on in consumer bills.
A much smaller market will result: We would like to see a market for solar PV, but agree this should be better managed along with the development of other microgeneration markets. Our view is that the newly proposed 21p tariff will result in a much smaller market, predominately based in the south, but the 16.8p for multi-site generators is too low and is likely to close this market, thereby losing the benefits it has brought in community schemes.
Energy efficiency first, but targets must be realistic: We support the concept of introducing energy efficiency measures in the future, but believe both proposals (linking eligibility criteria to either the EPC rating or Green Deal) are unworkable and instead customers should be asked to complete basic energy efficiency measures such as loft and cavity wall insulation and heating controls.
Consumer and investor confidence dented: We are concerned that, given the number of consumers who have had to be let down due to the severity and timing of the tariff cuts, consumers will be less confident about participating in other Government schemes in the future, such as the Green Deal and the RHI. Investor confidence will also have been adversely affected by sudden changes, which may harm the ability of Government to attract finance to other schemes.
1. E.ON is one of the leading installers of solar panels in the UK. The solar PV market has continued to come under close scrutiny by Government in recent months and the inconsistent approach taken with the Feed-in-Tariff (FiT) towards solar PV is creating great uncertainty, not only in this market, but its impact is likely to be felt in other Government incentives affected by the Treasury’s Control Framework for DECC Levy-Funded Spending.
Why do we support the continuation of the FiT?
2. Helping customers reduce their energy consumption is a fundamental part of E.ON’s business model. We are focused on helping customers to “insulate, moderate and generate” by offering a diverse and complementary portfolio of low carbon technologies, advice and monitoring equipment which improve the energy efficiency of the property and provide better information to customers about their consumption and how they can manage it. Through a number of initiatives, E.ON is working with homeowners, businesses and social housing providers to market, sell, design, fund, install, operate and maintain microgeneration technologies, including solar electricity.
3. The FiT has played a very positive role in opening up the microgeneration market. To date we have found that most of the market interest centres on solar PV. This is because solar PV is relatively easy to install, with a low visual impact compared to some alternative technologies, and it is likely to be one of the principal ways in which the public can generate their own electricity from renewable technologies. In addition, due to the attractive tariff, it has enabled industry to bring forward innovative business models, opening up the accessibility of the solar market.
4. We recognise the need to reduce the level of the FiT to make it sustainable. We have seen some declining costs and it is right to reflect this in a tariff change. It is also important to manage PV support along with support for all microgeneration technologies. We want a range of technologies installed across the UK in the optimum locations, which helps us meet our 2020 renewable targets in a cost efficient manner, but in a way that also engages consumers on the issues.
5. We note that DECC has proposed that the marginal cost of meeting the UK’s renewable energy target in technologies supported by the RO should be set at the cost of offshore wind and it would be sensible and consistent to adopt a similar approach to smaller scale technologies covered by the FIT and RHI, while allowing time for the supply chain to become sufficiently established to deliver at scale. Exceptions to this might be where technologies are still in the development phase and need higher levels of support to achieve commercial maturity.
6. It is however unreasonable to set a cut-off date which is before the end of the consultation period—six weeks’ notice of such a significant change leaves companies severely exposed and risks letting down many customers. We need longer to allow existing commitments to be honoured.
The effect of the proposed changes
7. As a result of the consultation we, along with the rest of the industry, have had to take swift action to mitigate our losses and customer disappointment. For E.ON this has meant significantly scaling back our PV propositions and we expect the solar PV market ultimately to become much smaller, with fewer installations.
8. As a result of the unusual approach taken by Government with respect to the enforcement date under the consultation, the only rational option for developers to take is to treat 12 December as the cut-off date for PV installations no longer receiving the current tariff. The Government may have anticipated that prudent developers would have included appropriate change in law provisions in their contracts. However, the consequence of the exceptional approach of the consultation (where the decision on the tariff changes will occur after the 12 December reference date) has been that those change in law provisions may have been rendered ineffective where they require the change in law to have come into force before the affected party can take action. We are currently in negotiations with one local authority who is unwilling to vary the agreement to recognise the particular circumstances and, as a result, we may be forced to continue to install post-12 December (which is unviable on this particular project) in order to avoid breach and termination.
9. The timescale provides no time to complete all of our existing schemes in respect of which we already have contracts in place. As a result of the swift changes, we have had to reorganise our supply chain and that has required us, in some instances, to re-open agreements to negotiate new terms. Many of our suppliers and subcontractors, due to the spike in demand, are now requesting significant premiums to deliver and this threatens to exacerbate our losses.
10. There are a number of external factors beyond our control such as DNO approval timescales, stock lead times, mortgage lenders consent, legal cooling off periods and resourcing to complete programmes originally designed in some cases to take five months, which are constraining our ability to respond quickly to the changes proposed. As a result of these changes many of our social housing customers and domestic customer installations will not be completed. In the domestic, bought PV sales market, we have already been forced to take the decision to stop proceeding with a number of enquiries to manage customer expectations. This sort of action will have a negative impact on trying to engage consumers in the future to undertake other renewable energy and low carbon measures and is likely to lead to an increase in customer complaints as we have no choice but to stop customers progressing further through the application process due to time constraints.
11. We believe the action taken by Government to cut the tariff only six weeks after their announcement will leave us with a very significant stock liability, estimated to be approximately £3 million. This is likely to affect our view of investment risk associated with other Government incentive schemes operating within defined budgets, so it is important that Government both manages the current FiT review in a way which is sensitive to business and customer perceptions and learns the lessons for other schemes. Many customers will feel let down by this withdrawal of funding levels in such a swift manner and this may affect confidence for other similar schemes eg RHI or the Green Deal.
Timescale and existing contracts
12. We believe that DECC set a precedent in spring/summer 2011 with the fast track review for large scale PV. The consultation period ran from 18 March until 6 May (seven weeks) with changes implemented on 1 August (19 weeks from the start of the consultation). As much as we understand DECC’s decision to cut the tariff rates, it is unreasonable to let customers down and leave installers open to such liabilities due to poor management of the FiT budget.
13. We understand the need to reduce the support, but would urge Government to consider allowing contracts agreed and in place on the day the consultation was published to continue at the current rate, ie grandfather existing contracts. Whilst we hope to complete some installations within the six week window, it will be impossible to deliver against all of our commitments. These contracts are typically committed to procurement lead times of two to three months. We understand that Government is likely to be concerned about fraudulent claims. One solution could be to require the company Director of the organisation in question making the claim to sign an affidavit that the PV order (contract) was committed to and in the pipeline before the consultation publication date (31 October 2011). In addition the property owner could verify that they were also in the pipeline prior to the consultation publication.
Effect on Supplier Obligations
14. Changes to the tariff will also have an impact on the likelihood of suppliers being successful in the delivery of their other obligations. Specifically there is a risk with the “Community Energy Saving Programme” (CESP), which is currently coming to towards the end of a three year programme.
15. Under this programme the installation of solar PV panels is an approved method of carbon reduction and as such many local authorities and registered social landlords have agreed programmes with suppliers to install by March 2012, with a business plan constructed around the FiT. In many cases these programmes are now being cancelled, leaving suppliers with a shortfall in their plans to discharge the obligations. With this change coming late in the programme and at short notice this will make completion of the Obligation within the previous timescale increasingly difficult to achieve.
Q1. Impact to date of Solar PV Feed-in Tariffs and the state of the solar energy market
1. The solar market in the UK has been very successful with uptake significantly exceeding Government expectations. Solar PV is an accessible technology, and for a large proportion of domestic properties planning permission does not need to be sought. There has also been significant financial innovation in the market, opening solar PV up to the wider public with rent a roof schemes, as a result of an attractive solar tariff. Businesses were keen to invest in the solar industry because of the attractive returns it provided. Given how attractive the solar industry became, it was only a matter of time before cuts were needed. It was widely recognised within the industry that the attractive tariff would absorb too much of the FiT budget and needed to be reduced. We had hoped such cuts could have been introduced earlier in a more managed way.
2. Solar PV was also able to have a role in reducing the energy cost of customers on low incomes including those defined as fuel poor.
3. Through rent-a-roof schemes, domestic customers are able to take advantage of savings on their energy bills over a substantial period of time, increasing customer engagement with their energy consumption. Through E.ON’s private domestic rent-a-roof scheme, customers see on average a saving of £150 on their annual energy bills. In addition, customers potentially benefit from an increase in the value of their home through the addition of solar. This has been proven in international markets such as Australia and the United States, and has been backed by recent findings of the Energy Savings Trust. We receive very positive feedback from both our private domestic rent-a-roof sales and the social housing rent-a-roof schemes we operate.
4. We have a number of case-studies which provide insight into the wider impact and role of the solar PV market:
Mr Hobster who had solar PV installed as a result of a partnership between E.ON, Nottingham City Council and Nottingham City Homes said, “We were hoping to save around £120 a year on our electricity bills, but we may save much more. I think this month our bill has been cut my half because we’ve had some great weather—I hope it continues! It sounds too good to be true but I’d encourage other families in the area to snap up the chance to have solar panels fitted if their house is suitable. My wife and I were a bit worried about it at first but the installation was really quick and hassle-free.”
Other residents in the same project have been prompted by the solar install to pay closer attention to their energy consumption. Mr Andrew said: “The electricity used when my wife and I were at home yesterday cost us nothing until I turned on the TV in the evening.”
The scheme, which was recently completed, saw solar panels installed on almost 600 homes in the Apsley area of Nottingham. The project also meant that E.ON could work with Nottingham City Council to put 10 electricians through courses on working at heights and manual handling so that they are equipped with the knowledge they need to install and maintain solar panels.
Q2. 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
5. Solar PV is a relatively costly low carbon technology to support in the UK, but it has been successful in engaging consumers and increasing interest in both generation of renewable electricity in customers’ homes and in energy efficiency and otherwise reducing their energy consumption. The technology has also shown significant development in recent years, with ongoing technological improvements and capital costs falling. Companies have geared up to take advantage of the FiT tariff offered by Government and this wide uptake is playing a major part in driving down costs.
6. Solar PV has the potential to play a larger role in the UK renewables deployment, but a key factor of this would be to bring the cost of the technology down to a sufficient level that means it is no longer dependent on a high level of subsidy. The tariff stimulates the market to reduce costs and allow a technology that is not market ready, to become established at scale, create jobs and stimulate behavioural changes, ultimately allowing technology adoption to increase and subsidy to reduce.
7. The PV tariff does need to be reduced as costs have fallen and the affordability of the scheme is under threat. Through different targeting and messaging, we believe a smaller solar market can exist. If a small market is to continue, then projects in the south of the UK should just remain economically viable at 21p, but 16.8p for multi-site generators (MSG) is too low and does not reflect all the relevant cost factors. We believe the MSG tariff should also be 21p.
8. There are two quite different emerging propositions within the domestic solar PV market, “bought PV” (where the consumer buys the panels and receives the FIT payment), and “rent a roof” (where an MSG buys the panels and receives the FIT payment—a market created by tailoring the FiT regulations to allow re-allocation of the tariff). There are also examples of cases in the market where the FiT value and upfront capital outlay are split between an MSG and the end-consumer.
9. We strongly believe that there is a necessity to preserve both markets, each of which offers unique benefits. Ultimately, both “rent-a-roof” and “bought PV” contribute towards the UK’s 2020 renewable and carbon reduction targets, and Government’s aim to connect consumers with their energy consumption. Rent a roof can be very relevant to different customer segments, who cannot afford the capital outlay.
10. The current structure of the FiT allowed companies like E.ON to provide “rent a roof” packages to enable customers to access energy savings which they otherwise would be unable to access. In the social housing sector this extends to some of the most deprived areas, helping to reduce tenants’ energy bills, provide energy efficiency advice and to fund training for locally unemployed people.
11. We particularly believe that the “rent-a-roof” model has a substantial role to play in engendering customer engagement, making solar PV visible and accessible to the wider mass market, including those customers who otherwise could not afford a system.
12. The rent a roof mechanism operating in the social housing sector means that the rent a roof payment is offered to the registered social landlord and the energy savings are passed onto the tenant. This is vital in a sector which otherwise would not be served due to the lack of affordability of the technology for the tenant.
13. The level of additional cost incurred in setting up a rent-a-roof scheme and effectively servicing the end-customer is significant. Whilst overall in the solar PV market we have seen substantial improvements in prices of panels over the last 12 months, it must be noted that panels make up just one of a number of elements of the market price of a solar PV installation. Other considerations include inverter cost, labour cost, scaffolding, cost of sale, survey, design and conversion rates. Whilst MSGs may experience some economies of scale in comparison with an individual consumer, there are additional costs to be considered for MSGs, including financing costs, metering and monitoring and portfolio insurance. In addition MSGs do not benefit from the reduction in energy costs. All these factors should be a consideration when setting the tariff rate.
14. Further, when reviewing how to set the appropriate tariff, consideration should be given to the effect this indecisive action is having on the industry and impact to existing jobs. The solar industry employs thousands of people and a number of these will now be in jeopardy. If the tariff is set at the proposed low rate, Government could consider offer training grants or support to allow people to be retrained for what is coming under RHI and Green Deal to help the people they are forcing into redundancy now, and to mitigate the concerns of companies wanting to participate in the Green Deal on an ongoing basis.
Q3. 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
15. As noted above, we support the need for change, but we are disappointed this did not happen sooner and in a more manageable and controlled way. The timescale for the changes is unreasonable and leaves insufficient time to unwind from existing contracts, leaving companies open to significant liabilities with no or limited ability to manage this risk.
16. This new tariff level will have a significant impact on the economics of our products and project proposals, and as discussed in response to question 2 we have already had to close down our domestic offering. We have also invested heavily in our own recruitment and supply chain to support what we viewed as a growing market.
17. We have committed to installing solar panels on up to 10,000 social houses (18MW generation) in the pipeline and contracts were placed three months ago for the solar panels for 8MW of this when panel costs were higher than the prices we are starting to see in the market today. If the FiT cut were to progress to the timetable proposed, we estimate that we would lose between £2–£3 million in inventory costs as well as jeopardising some 425 local jobs and letting many customers down.
18. As noted above, in the domestic, bought PV sales market, we have already been forced to stop proceeding with a number of enquiries to manage customer expectations. This will have a negative impact on engaging consumers to undertake other renewable energy and low carbon measures.
19. It is unacceptable to set a cut-off date which is before the end of the consultation period. We believe sufficient time should be provided for companies to unwind from existing contacts.
20. Government could consider grandfathering existing contracts at the current FiT rate, using the 31 October consultation publication date as the cut off point. We ask that Government provides this exemption for individuals and organisations that can demonstrate that they contracted for their PV panels before the consultation was announced, but are unable to have them installed before the rates change.
21. We also ask that Government commit to consult more closely with business on timelines as well as policy content for future changes.
Q4. 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
22. Whilst solar PV is a relatively costly technology for application in the UK given the limited levels of solar radiation, it has a potentially useful role to play in meeting the UK’s renewable energy target, given the potential for reducing PV generation costs and its relative ease of deployment compared to some alternative renewable technologies. As noted in response to Question 2 above, it also reduces customers’ exposure to rising electricity bills and goes someway to making them more energy aware. However, it is evident that a reduction in the tariff was needed both in the light of declining costs and to ensure the available budget agreed between HM Treasury and DECC was also available for other technologies eligible for FITs with potentially lower costs.
Q5. Experience of similar incentive mechanisms for renewables in other countries
23. Experience in Australia is relevant and similar to the UK. The Australian Government reduced the solar PV FiT from $0.60/kWh to $0.25 because the 100 MW cap for scheme was reached earlier than planned date of 2024. The impact of this was consistent in all Australian states, with a reduction in residential sales of 80% because organisations were not given sufficient notice on Premium FiT closure, with each state managing the closure differently. A number of major manufacturers went into receivership and solar retailers are struggling, with reports of businesses downsizing. One of the major solar retailers, Solar Shop, also went into receivership. The lessons from this are that, as far as possible, the available budget or cap on take-up should be consistent with the level of incentive provided by the FIT set, and that the transition to a lower level of support needs to be managed in a way which provides sufficient time for suppliers to adjust.
24. In Germany they have a system of predetermined annual tariff degression for renewables in an effort to reflect falling costs. Given the risk that the predetermined degression rates may depart from actual costs, Germany has more recently introduced “responsive degression” schemes for solar PV. In this design, the rate of degression is adjusted according to the rate of market growth. One of the reasons for the success of the policy in bringing forward investments is that the German framework has fostered a high level of investor certainty by framing its FIT policy as a central part of a long-term strategy to meet its overall objective of progressively increasing the proportion of renewables in the total energy mix. Long-term continuity of policy objectives will also be important in supporting investment in a UK context.
23 November 2011