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2016 Renewable Energy Subsidy Outlook
Posted 25/01/2015

2016 Renewable Energy Subsidy Outlook

2015 was another year of upheaval for the renewable energy industry and 2016 will bring a raft of policy changes that will shape the future of renewable energy deployment in the UK.

Many will bemoan the cuts in tariffs and it is certain that the manor of the announcements throughout the second half of 2015 caused, the now usual, groundswell of projects trying to get in before cut off dates.But those of us who have been around since the inception of Feed in Tariffs(an a few of us before that) will know that the renewables industry, for all of its failings, is a resilient and innovative beast that has a canny knack for finding a way of bouncing back.

With the policy landscape maturing and, inevitably, becoming more complex as Government tries to learn from past mistakes, close of loopholes and avoid perverse incentives, I thought it might be useful to lay out what changes have been announced thus far in a simple format with some thoughts on the likely impact on projects and the industry.

Whilst Ecosource is a renewable energy finance business, we are also developers and renewable energy asset managers which gives us a unique perspective on the renewable energy industry.I hope the following information is useful to developers and financiers alike.

2015 in review

A Conservative election victory was always going to result in a concern for the renewables industry(regardless of one’s individual political persuasion).Their prospectus outlined a desire to eliminate onshore wind and land based solar and it wasn’t long before they held true on their promise and started to make a series of policy announcements.

First on the chopping block was Renewable Obligation Credits(ROCs) with announcements that the scheme would be closed a year early for onshore wind a larger ground based solar projects.This was quickly followed by a cut in FIT for medium scale solar and the withdrawal of pre - accreditation(although this was the cause of some confusion)

Early autumn brought the news that the industry had been dreading, with the release of a consultation proposing the decimation of the Feed in Tariff(FIT) rates to come into effect in January 2016.This was followed by the closing of pre - accreditation for FIT projects across the board from the end of September, resulting in 1500 pre - accreditation applications being made in September alone(according to OFGEM).

The response to the FIT consultation was substantial and the Government’s own response wasn’t released until well into December and, although the cuts were to be scathing is some areas(solar particularly), the policy decisions did take several steps back from the proposed low rates(a small victory for people who do make the effort to respond to consultations).

2016 Feed in Tariff

Thanks to some clever legal thinking, the Feed in Tariff will be paused from 15th January 2016 for 4 weeks whereupon, on the 8th February, the new scheme policies shall take effect.

FIT Rates

The headline FIT rates have been set as follows

Tariffs
(p/kWh)
Installed
capa
New tariffsOld tariffs
PV<10kW4.3910.90 - 12.03
10 - 50kW4.5910.90
50 - 250kW2.708.89 - 9.29
250 - 1000kW2.275.75
> 1000kW0.875.73
Standalone0.873.08
Wind<50kW8.5413.73
50 - 100kW8.5413.73
100 - 1500kW5.465.89 - 10.85
>1500kW0.862.49
Hydro<100kW8.5414.43 - 15.54
100 - 500kW6.1411.40
500-2000kW6.148.91
>2000kW4.432.43

The FIT rates have fallen by roughly half across the board, with particularly aggressive cuts to solar and certain bands of wind but a surprising increase in support for larger scale hydro.But these headline numbers hide a number of nuances by virtue of the revised bandings.

This is particularly relevant to 250-500kW wind sector which had been thriving thanks to a sustained period of FIT banding, availability of quality supply chain, physical size being acceptable to planning authorities and relatively good value.

Anaerobic Digestion rates have remained unchanged for the time being, although watch out for a new consultation setting out proposals for FIT rates and sustainability criteria for AD from March 2016.

FIT Tariff Bandings

The following sets out how the revised bandings compare to historical bandings

TechnologyOld BrandingNew Branding
PV<4<10
4-10
10-5010-50
50-10050-250
100-150
150-250
250 >250-1000
> 1000
StandaloneStandalone
Wind<1.5<50
1.5-15
15-100
50-100
100-500100-1500
500-1500
>1500>1500
Hydro< 15< 100
15-100
100-500100-500
500-2000500-2000
>2000>2000

FIT Deployment caps

In order to control the overall cost of the FIT scheme(as is the current Government soundbite of ensuring affordability of energy for all – no quips about the costs of nuclear required), each technology banding will now have a cap on the total installed capacity per quarter.

Therefore, if the capacity quota is met for a given technology banding in a given quarter, no more accreditations(or pre-accreditations (see below)) will be allowed in that quarter.

Instead, any applications (or pre-applications) will be held in a queue for the next quarter at the new FIT rate(see degression below).

Quarterly Deployment Caps by Technology Banding:

2016201720182019
Maximum Deployment (MW)Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1
PV<10kW48.449.650.651.752.853.854.255.957.058.059.160.161.1
10-50kW16.517.017.417.818.218.618.719.419.820.320.721.121.5
>50kW14.114.514.915.415.816.216.417.117.618.018.519.019.4
Standalone5.05.05.05.05.05.05.05.05.05.05.05.05.0
Wind<50kW5.65.65.55.55.65.55.55.45.55.45.45.35.4
50-100kW0.30.30.30.30.30.30.30.30.30.30.30.30.3
100-1500kW6.86.76.66.56.46.36.26.16.15.95.85.75.7
1500kW-5000kw5.05.05.05.05.05.05.05.05.05.05.05.05.0
Hydro0-100kW1.11.11.21.21.21.31.31.31.31.31.41.41.4
100-5000kW6.16.26.36.36.46.46.46.46.46.46.46.36.3
ADAll5.85.05.05.05.05.05.05.05.05.05.05.05.0

FIT Degression

Since the debacle that was the first big cut in FIT rates back in 2011(a point at which many in the solar sector claimed the end of the industry, yet here we are 4 years on) a policy of regular degression of FIT rates based on deployment levels has been adopted.This has been augmented with metrics for technology costs and others, but the basic principal has been to give fair notice to the industry of future FIT rates and, therefore, the ability to make an informed decision on whether to invest the time, effort and money in developing a renewable energy project whilst ensuring that the overall cost of the FIT scheme remain controlled.

For 2016, this concept is being taken to a new level with a fixed default degression being introduced for each technology banding

Default Degression Rates by Technology Banding:

2016
prices
p/kWh
Q1
2016
Q2
2016
Q3
2016
Q4
2016
Q1
2017
Q2
2017
Q3
2017
Q4
2017
Q1
2018
Q2
2018
Q3
2018
Q4
2018
Q1
2019
Solar PV
<10kW4.394.324.254.184.114.043.973.903.833.763.693.623.55
10 - 50kW4.594.534.464.394.324.254.194.124.053.983.913.853.78
50 -
250kW
2.702.642.582.512.452.392.332.272.202.142.082.021.96
250 -
1000kW
2.272.212.152.092.031.971.911.851.781.721.661.601.54
1000 -
5000kW
0.870.820.780.700.640.580.520.460.410.350.290.230.17
Stand
alone
0.870.820.780.700.640.580.520.460.410.350.290.23017
Hydro
<100kW8.548.538.518.508.488.468.458.438.428.408.398.378.35
100 -
500 kW
6.146.146.136.126.116.116.106.096.096.086.076.066.06
500 -
2000 kW
6.146.166.136.126.116.116.106.096.096.086.076.066.06
2000 -
5000 kW
4.434.434.434.434.434.434.434.434.434.434.434.434.43
Wind
0 - 50kW8.538.468.398.338.268.198.138.067.997.937.867.797.73
50 -
100 kW
8.538.468.398.338.268.198.138.067.997.937.867.797.73
100 -
1500 kW
5.465.435.405.375.345.325.295.265.235.205.175.145.12
1500 -
5000 kW
0.860.850.840.830.820.810.790.780.770.760.750.740.73

However, in the event that any technology banding should reach the installation cap in any given quarter, there will be a further degression(the contingent degression) of 10% in the following quarter.This could give rise to some nasty surprises is, for example one was to apply for a 100kW wind accreditation at the end of Q1 2016 on a tariff of 8.53, but found that the quota had already been met, the Q2 tariff would automatically become 7.61.

FIT Pre-accreditation

Some good news at last; pre-accreditation is back.Developers will once again be able to lock into a guaranteed FIT rate for a fixed period by completing pre - accreditation because the Government has decided, rightly, that if the total cost is being capped per quarter, there is no risk of registration bubbles being created.

On first glance the policy seems quite sensible and self regulating, and it probably will be at the macro level, however, it will be interesting to see how the developer community respond to this.It would be nice to think that developer will act in the best interest of the overall FIT scheme, but the reality, of course, is that developers will act in their own best interest, or perceived best interest, which will result in some bands being oversubscribed in given quarters and the FIT rates reducing(by virtue of the contingent degression) for everyone thereafter.

It is difficult to plan for which technology bands might be most affected by this, however, it would appear that the policy has been designed as a safeguard against policy failure, if certain technology band deployment costs fall more quickly than the policy landscape can adapt.

The fact remains that pre - accreditation and accreditation applications will be taken on a first come first serve basis and, provided the quarterly cap in the technology band has sufficient capacity(and all other pre - requisites are met) a grace period for raising funding, procurement, installation and commissioning will be granted as follows.

Technology GroupValidity Period
Solar >50kWp6 months
Wind >50kW12 Months
Anaerobic Digestion12 Months
Hydro12 Months

FIT Summary

It would be easy to dismiss the renewables industry as a dog that has had its day, however, as mentioned at the outset, there is a great deal of ingenuity and entrepreneurship in this sector and it would be foolish to write it off yet.

The flexing chasm between the optimism of the developer community and the inherent scepticism of the finance community will, doubtless, cause a few deals to be delayed as everyone finds their feet under the new regime, but there are plenty of projects(with pre-accreditations finally starting to come through from September) to fund and build in the interim and by the time these are underway, it is highly likely that the developers will have worked out the economic pathway and financiers will surely follow.

At a technology level, it is difficult to see how investor led solar (the engine of this sector to date) can continue. Whilst there may be a case for building smaller portfolios of 250-1000kW assets with solid PPAs, but even this, with the continued inflated costs created by the Chinese import tariffs looks difficult in the short term.

Wind may have some interesting plays in the medium sector, where once a developer might have chosen a 500kW to meet the FIT banding, often these turbines were down-rated versions of higher output models. Therefore, it is reasonable to imagine that the same, unrestricted, turbine could yield substantially more energy without too much increase in CAPEX.

Generally, there is a focus on disincentivising the smaller scale developments which, at the pure value for money to the general populous level, are less efficient than larger schemes. This policy direction change is most likely due to the realisation that the vast majority of small sale installations, particularly in solar, are aggregated investment assets rather than private individuals investing in their own future energy security.

Anaerobic Digestion seems to have sidestepped the scathing cuts in this review, but as previously mentioned, there will be a new consultation to deal with the support levels for AD from April 2016 onwards.Also, the long awaited announcement of RHI(which currently makes the difference between a viable and non-viable development in many cases) should be released soon.

With energy prices falling and subsidy levels being cut, 2016 will undoubtedly be a tough year. But until the back log of September 2015 pre-accreditations feeds through and gets built out, I don’t think there will be a noticeable drop in activity.

In the finance markets, there is already a swell of re-financing of constructed assets as construction funding vehicles mature and people look to exit or settle into a longer term hold position.The secondary market is buoyant with aggregators and long term holders looking for good assets and, in AD particularly, there appears to be some interesting plays for proven operators to take on underperforming plants to increase efficiencies.

My bet is that by the end of the summer 2016, when the financiers are starting to look at Q4 funding deployment, the developers will have worked out new ways of ensuring returns and the industry will live to fight another day.