Adjusting to the new reality

7th July 2016

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Cuts to subsidies have made some question the business case for onsite renewables. But are they speaking too soon? Alex Marshall reports

At the start of the year, the final nail seemed to have been hammered into the coffin of onsite renewables when the government slashed feed-in tariffs (FITs) yet again. The subsidy available for solar PV projects – the overwhelming renewable of choice for businesses and public sector bodies hoping to generate their own power – dropped some 60%, to just a few pence per kW/hr.

At the same time, the energy and climate change department (Decc) introduced a system of quarterly caps to limit the cost of the scheme. This would limit the number of PV installations 10–50 kW in size to 500 a quarter. If a business put PV on its roof, but missed the cap, it would be put in the queue for the next quarter. There was no guarantee subsidies would not change – or be stopped, altogether – in the meantime.

Own two feet

The message from government seemed clear: it is time for solar to stand on its own. The changes appeared to have had an immediate impact. ‘We have observed a distinct drop in demand for our solar modelling services,’ Chris Jennings, strategic development manager at Sustain, told the environmentalist in January after one of the energy consultancy’s largest clients had shelved all its solar plans.

The business case for other types of onsite electricity generation such as hydro and wind was scarcely better, while heating projects have been caught in a downward spiral. In March, Decc launched a consultation on ‘reforming and refocusing’ the renewable heat incentive (RHI). This revealed an intention to cut subsidies for small-scale biomass projects in order to force businesses to invest in larger, more efficient onsite schemes. The department also plans to halt subsidies to solar thermal, citing value for money. And it is proposing to add in cost control measures to the RHI, including caps, despite admitting these might not be needed and would ‘potentially decrease levels of investor certainty’.

The consultation closed at the end of April. Decc insists the proposed changes will increase development of onsite projects. Only 13,600 businesses had installed heat-generating renewables by the end of 2015, the consultation document stated, equivalent to just 277 a month. However, Decc failed to point out that its own modelling suggested the changes would lead to just 3,381 renewables being installed each year by 2021 – around 281 a month.

Bouncing back

The changes already made and the ongoing proposals have dented confidence in onsite renewables. But there is a question that is more important than the immediate shock: is the business case for investment now obsolete?

Onsite renewables seem to have been in perpetual crisis since the FITs and RHI regimes were introduced, with every policy alteration apparently threatening disaster for both industry and the UK’s renewables targets. Yet developers seem able to adjust and companies keep on investing. Has that happened again this time? The answer appears to be a tentative yes. In the first three months of the year, 254 solar projects between 10kW and 50 kW capacity were installed, totalling almost 8 MW peak capacity; in addition 58 above 50 kW were installed, totalling 16.8 MW and exceeding the 14.1 MW cap. That is less than half the number of installations as last year, but some businesses are clearly making things happen.

‘It’s not been a question of, “Does this work or not?”,’ says David Pickup, business analyst at the Solar Trade Association. ‘It’s been “How can you make it work?” That’s been the challenge for everyone.’ The revised solar FITs are intended to produce a 4.8% rate of return – not high enough for most investors, Pickup says. As a result, developers have had to find ways to improve this.

In some cases, this has involved job cuts, but many developers have changed their business model so they now target only those business customers with high daytime electricity use all year. Decc’s modelling assumes half the power generated is used onsite. If that proportion can be increased, the rate of return goes up, Pickup says.

Jordan Mawbey, marketing manager at solar provider EvoEnergy, agrees. ‘The FITs cuts hit the market hard, but the market’s had to evolve. Before, everyone would put as many panels on a roof as possible. The aim was to make money. Now they’re looking at saving money from electricity bills. That’s become the business case. It’s now a matter of educating customers to think about those savings.’

There have been other adjustments too, Mawbey says, especially by firms that offer to install panels on buildings free and then provide the property’s owner with discounted electricity. ‘Before the cuts, the asset manager normally offered to sell electricity to companies at half what they were paying – say, 5p per kW/hr. Now that won’t happen. It’s more 8p, a penny or two below the retail price. But that still makes a massive difference if you use a lot.’

Large corporations

The organisations that do not seem to have lost their appetite for solar are the big corporates whose carbon and energy targets and high profile almost require them to continually increase onsite generation. Supermarket chain Aldi, for example, says it will install panels on 100 of its stores this year. After the FITs cuts, it reassessed project costs and decided to switch from monocrystalline panels to cheaper, if less efficient, polycrystalline ones, a spokesman says. But it did not decide to scrap any schemes.

Similarly, Thames Water’s energy manager, Angus Berry, says the cuts have not stopped the company installing solar or investing in other onsite projects. ‘The key for a business case is location and site demand – using the electricity on site does avoid grid costs and help matters.’ As testimony of this, Thames Water is installing a 1.5 MW solar array at its Littleton water pumping station in south-west London, all electricity from which will be used onsite.

Property company British Land, meanwhile, told the environmentalist it will soon announce it will be raising levels of onsite generation. A spokesperson says onsite generation had become a material issue in ensuring it was the landlord of choice.

Perhaps the company that best shows the ongoing business case for onsite renewables is Kingfisher, the retail giant behind B&Q and Screwfix. ‘It was a lot easier last year,’ says Jeremy Parsons, the firm’s head of energy and renewables. ‘You could put PV on every site in the country. With the cuts, I didn’t think we’d be investing in the first six months of this year at all – I thought it would take that long for the market to respond, find efficiencies or accept lower margins. But it took only a couple of months.’

Kingfisher has 12 projects lined up with grid and planning consent that will receive 2.7p per kW/hr of electricity generated thanks to being pre-accredited for FITs. Parsons describes the payback as ‘better than nothing’. The business case for those schemes has improved since the cuts by putting them into one rolling programme to save on labour costs and by changing suppliers of both the panels and inverters, which has reduced equipment costs by one-third. However, those reductions are still too little for some projects. ‘I’m struggling to make things work for small systems in places like Warrington where there isn’t as much sun,’ Parsons says, but he is optimistic even those may be worth revisiting by the end of the year.

The advantage Kingfisher and other large corporates have, of course, is boards that want to be seen to be responsible and are willing to back that desire with finance – in Kingfisher’s case last December it announced a £50m fund for onsite renewables. Parsons admits that for some companies corporate social responsibility goals may be a sufficient business case in themselves, but he insists that Kingfisher has taken this line only once so far. ‘I think [that might happen] where we have stores with strong eco-credentials,’ he says. ‘Our flagship store in Antibes in the south of France is made from locally sourced timber and is very energy efficient and we put panels on there, which didn’t meet our hurdle rate [the minimum rate a company expects to earn when investing in a project]. It just seemed the right thing to do to also install solar panels.’

Capital allowances

Despite Kingfisher’s continued investment, Parsons says some policy changes would help to improve the business case for schemes. His main wish is that the government allows solar PV to be eligible for enhanced capital allowances (ECAs) so investments can be written off against tax. Eligibility was removed in 2012 to avoid double subsidising projects. (Some technologies, including solar thermal, can still claim ECAs because they are deemed to be energy-saving.)

ECAs would be far more helpful than FITs, Parsons says, and would ‘help businesses that would invest only if they could get a three-to-five-year payback’. ‘It would also make a lot more sense to finance departments as renewables become just another capital investment.’

However, it is unclear whether this call is realistic. Economic modelling for the Renewable Energy Association found an ECA would be equivalent to paying a feed-in tariff of 1.3p per kW/hr over 20 years. Although that is below current subsidy rates, the government is unlikely to want to commit to it when it wants to remove all support.

Parsons also wants the European Commission to remove the minimum import price imposed on solar panels of €0.56 (44p) per watt peak capacity. This was introduced in 2013 to stop China dumping panels and damaging German manufacturers, but many argue it is now keeping prices artificially high. Amber Rudd, the energy secretary, wrote to the commission in December asking it to remove the price at the earliest opportunity, claiming the change would ‘hasten the day when solar PV is able to operate without subsidy across the EU’. The commission has launched a review, but it is unlikely to conclude before March 2017. It has also extended the minimum price to a raft of Malaysian and Taiwanese companies it believes are fronts for Chinese firms.

Renewables trade bodies are leading a call for electricity generated by onsite technologies to be exempt from the climate change levy. At the same time Decc is being urged to provide more support for electricity storage systems, something that could be used with solar PV to avoid paying for electricity at peak times. However, Parsons says most storage technologies are still too expensive to invest in.

Outside the big corporates, projects are harder to fund, but some are up and running. Chris Wood-Gee, team leader for sustainable development at Dumfries and Galloway Council, says it is still a matter of doing the sums and seeing whether projects can ‘can wash their faces’. Last December, the council rushed to put 290 kW of peak capacity solar on four schools and a storage building before the cuts came into force, yet it still intends to tender for a new framework contract so it can do more. The biggest issue for the council now is not the reduction in subsidy, but in grid access, Wood-Gee says.

Low heat

Although there does seem to be a good business case for some electricity generating renewables, it is more difficult to ascertain whether the same applies for renewable heat projects. These schemes have always been more complicated. Biomass boilers, for example, require space to store the biomass and a guaranteed supply of fuel. Policy uncertainty has compounded that difficulty, but a bigger issue is the gas price.

‘It’s very attractive for companies to upgrade their gas boilers – the price of fuel is so low,’ says Jennings. ‘Our clients won’t look at biomass boilers or heat pumps.’ One problem for heat pumps in particular is the spark gap – the difference between the price of electricity and the price of gas needed to generate the same amount of power. The ratio is now so great (3:1) that people do not consider heat pumps, which work by converting electricity to heat, even with the RHI, Jennings says.

These points are echoed by Richard Warren, senior energy and environment policy adviser at EEF, the manufacturers’ association. ‘At the moment, the business case just doesn’t stack up due to the gas price. A few years ago, off-grid projects were viable, especially when our members were factoring in assumptions about a higher carbon price. But that’s not the case now.’

However, there does seem to be one type of renewable heat project that has the potential to flourish – those fed by waste, in which businesses can invest to save on waste disposal as well as energy costs. Macclesfield-based recycling firm Tidy Planet is installing two of its Dragon food waste-to-energy systems at Heathrow and Gatwick airports for logistics business DHL.

At Heathrow, the plant will take five tonnes of food waste a day from flights operated by British Airways, dry it and then burn it to generate 3,500 MW/hr of heat a year. Some of this will be used to dry the incoming waste fuel – a practice Decc intends to make ineligible for RHI subsidies – but the rest will heat DHL’s dishwashing system. At Gatwick, the plant will be double the size and will largely process food waste from the airport terminal.

‘It would certainly reduce the business case [for our systems] if we didn’t get a subsidy for the heat,’ says Simon Webb, Tidy Planet’s managing director. ‘But in most cases it wouldn’t extend the payback period beyond the point where people would stop investing. At the moment, it is a no-brainer due to the waste savings.’

Webb’s company is small – its airport projects are its 10th and 11th systems – but it is finding potential markets daily. One is a chicken processor that requires a system to process feather-contaminated waste. Another is a casino operator, which already sorts its food waste when searching bins to make sure no one is smuggling out gambling chips but cannot send it for anaerobic digestion of composting because it is normally kept in packaging. Webb has sympathy for biomass developers that are being hit by subsidy cuts and the low gas price, but points out that Tidy Planet uses waste, which is more resilient to such vagaries.

Lower bills

The fact companies like DHL, Kingfisher and Aldi are going ahead with onsite renewables could be easily dismissed. These are only a handful of schemes, not a revolution. But their examples do seem to illustrate a truism – that no matter what Decc has done to onsite renewables policies over the past six years, businesses seem to adjust and innovate to ensure projects work. Policy changes may deter some from investing for a few months, especially those in the cash-strapped public sector, but others will always see a business case in lowering their fuel bill. That seems to be the case with this round of subsidy cuts, but with future ones too.

‘In my darker moments after the recent cuts, I thought we’d only now be able to do [solar] projects in places like Penzance and St Austell,’ says Parsons. ‘But things are never quite that binary and the market has found efficiencies – and quickly.’


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