The FIT Review and Community Energy

Jim Watson writes: I have just submitted some initial views to DECC’s review of Feed-in Tariffs (FITs) on behalf of the CISE project team. The submission looks in particular at the impact on community energy schemes, and the additional benefits of such schemes that we think the review should take into account. The key points from our submission are reproduced here.

The Feed-in Tariff Review

We recognise the case for reducing the FIT rate for solar PV projects due to recent falls in the cost of solar PV panels. However, there are important caveats to this support:

  • The process of reducing solar PV tariffs has not been transparent. It will be implemented nine days before stage 1 of the statutory consultation closes, which is creating unnecessary cynicism amongst stakeholders about the government’s approach. It has generated additional risks for the householders and communities who are investing in solar and other renewable technologies. Indeed, our recent survey of community energy projects indicates that a major barrier to the implementation of such projects has been inconsistent government policies.
  • These are precisely the kinds of risks that government is very keen to minimise for larger investors through Electricity Market Reform. This inconsistent approach to investor risk could undermine trust – particularly among energy consumers who are being asked to pay for the costs of both large- and small-scale low carbon technologies.
  • The ‘cap’ on FITs and other levies on consumer bills that has been agreed between DECC and HM Treasury under the levy control framework is problematic. This is because it treats such levies as if they are taxes (they are not). It also exacerbates political risk for installers and homeowners since they could legitimately be concerned that the cap may be re-adjusted in future at short notice. In Germany, the rationale for paying for FITs through bills is that this reduces the risk of political interference when compared to paying for FITs via general taxation.
  • The size of the reduction in FIT rates for solar PV is draconian, and is out of proportion to the cost falls for installations. Installed costs have not fallen as far as solar PV module costs because installed costs also include the costs of labour and balance of plant equipment (e.g. inverters). Moreover, as we argue below, the FIT helps to underpin revenues for community energy organisations. In some cases, these revenues are being used to fund further sustainable energy activities, and therefore have local multiplier effects.

Community Energy Benefits and Feed-in Tariffs

Our recent survey of community energy projects shows that solar PV is by far the most popularly deployed renewable technology. Furthermore, grant funding was cited by 63% respondents as their most important source of income – with others citing sources such as donations, loans and sponsorship. Since many capital grant schemes have stopped due to government policy changes, the FIT has become particularly important for many of the community energy projects that are now under development. It has acted as a key driver to help these projects move from the planning stage to implementation. The change in tariff rates has had an almost instant effect, with many groups postponing or cancelling solar PV projects. The recent Low Carbon Communities Network survey of 169 community projects indicates that the significant reductions in FIT rates that are being implemented are likely to make many projects unviable.

Community energy projects, particularly those that allow local citizens to invest in them (e.g. via energy co-operatives), are one route for people to support sustainable energy in a tangible, concrete way. This is particularly important for citizens who are unable to invest in their own home system, e.g. for reasons of income, the orientation of their home, or because they live in buildings of multiple occupation. In some cases, they can also get a financial return from such projects, but for many investors it is because it allows them to be part of a project that generates revenue for wider community energy activities. Our research indicates that FIT-supported projects are an important underpinning for low carbon energy citizenship at the local level (see below).

The announcement on 7th Dec 2011 of a £10m fund to help communities develop new energy projects is welcome. But it is odd to have this announcement at the same time as other financial incentives (especially the FIT) are being significantly weakened. There are already large numbers of projects at an advanced stage of development that have been through significant processes of feasibility study and constitution.

There a number of community benefits that our research has already highlighted. These benefits mean that it is not sufficient to only evaluate the economics of community energy schemes – and the benefits of government support programmes such as FITs – using standard cost-benefit economic calculations. Cost-benefit studies often miss out community benefits that are harder to evaluate in straightforward quantitative terms. These can include:

  • More legitimacy for the government’s climate change ambitions, and potentially more support, since the FIT and other policy support mechanisms facilitate local actions and financial benefits. This means that the low carbon agenda is less likely to be seen as something abstract or an imposition on local communities. Community projects enable citizens to play their part and act in a complementary ‘bottom up’ way to more ‘top down’ government-led strategies.
  • FITs are one route to strengthen the rationale for local action more generally. In our research, we have found a range of rationales for community energy groups and projects – many of which are much broader than energy or low carbon agendas. Funding via FITs and other mechanisms can help to underpin concrete actions and investments by community groups, and can help to foster new social enterprises with remits well beyond energy and climate change.
  • Community projects are generating significant knowledge about local energy behaviours and attitudes, as well as cultivating awareness in neighbourhoods. Many intermediary organisations, such as energy agencies, are codifying this information, but it will only become effective social learning when the ability to act on it in subsequent projects in other localities is supported through policy incentives such as FITs. Some energy utilities are also finding this knowledge useful for their business strategies.
  • Groups are innovating new business models, out-reach processes, and ways of configuring a variety of sustainable energy generating and demand-reducing measures. Grants, FITs and other forms of support have facilitated the spread of these ‘grassroots’ energy innovations that are organisational and social in nature.

In recognition of these additional benefits of community schemes, there is a strong case for a separate community energy feed-in tariff that is higher than the ‘standard’ tariff.