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SEC Industrial Battery Company - SEC Industrial Battery Co. Ltd

06 Apr 2010 09:04:27

The UK Feed-In Tariffs (FITs) – An Introduction, Explanation, Rates & FAQ



By Matthew Easter, SEC Industrial Battery Company

What are feed-in tariffs and why have they been introduced?
In the broadest sense, the UK Feed-in Tariff (or FITs as they have become known) are a financial incentive being introduced by the UK government to encourage home owners and businesses to fit renewable energy systems to their properties and generate electricity on a local scale. There are a number of reasons why they have been introduced but, at the most basic level, like many other countries we urgently need to address the fact that our energy consumption requirements continue to increase, whilst in contrast our ability to generate electricity using traditional methods will decrease in the years ahead, as fossil fuel and nuclear power stations are decommissioned but not replaced. The other key objective of this scheme is to facilitate a significant increase in the amount of power we generate nationally from renewable methods, with the aim of meeting the EU target set for the UK of 15% through renewable energy by 2020.

How does the Feed-in Tariff actually work?
Since April 1st 2010, the UK Feed-in Tariff scheme offers homeowners or commercial businesses/property owners the chance to receive money for every kilowatt hour (kWH) of energy generated using approved renewable energy systems that they buy and have installed on their property. There are several different types of renewable energy system included within the FIT scheme, as follows:

• Solar photovoltaic panels: typically installed on roofs or as free standing ground mounted systems, solar PV involves the conversion of sunlight into electricity via a solar panel containing photovoltaic cells typically made from crystalline silicon or amorphous thin film. Given that the sun is such a huge source of energy and we are guaranteed to receive solar energy every day to a greater or lesser degree, free clean solar-powered electricity is likely to be a very popular choice for those wishing to take advantage of the Feed-in Tariff.

• Wind turbines: the UK enjoys five times more wind than the rest of Europe combined, so using this natural source of energy to turn a turbine and generate electricity is also a logical choice.

• Hydro: a similar principle to wind turbines, but instead of air driving the turbine, water flow provides the energy source that generates the electricity.

• Anaerobic digestion: producing methane gas from the breaking down of biodegradable materials using microorganisms. Typically, it is anticipated that such systems will be installed in agricultural areas or where there is a regular and large supply of food/industrial biodegradable waste.

Having selected the preferred system from the approved list, the homeowner/business would then purchase approved equipment and engage the services of an approved installer. Both the equipment and installer must be approved under the UK MCS scheme (www.microgenerationcertification.org) for the final installation to qualify for the Feed-in Tariff.

Once installed, however, the system owner will have the opportunity to sign a contract to receive the Feed-in Tariff, typically with their local electricity provider, although the market will open and it is anticipated there will be more than one choice depending on preference. The contract will run for the Tariff lifetime of 20–25 years (see table on page 2) and will stay with installation/property rather than individual who signs the original agreement. The system cannot be moved and reinstalled at another property, but it is likely that having an existing Feed-In Tariff arrangement fitted will become a valuable asset in the same way as other home/property improvements that positively affect the market value.

Why is it worth looking at the Feed-in Tariff?
Aside from the knowledge that you are contributing towards the increased use of renewable energy and reducing the amount of polluting fossil fuels that are a major factor in global climate change, there is also a good economic argument for taking advantage of the Feed-in Tariff! Whilst it is true to say that it is your responsibility to buy and arrange installation of your renewable energy system in the first place, the contract that is signed once installation is completed/approved guarantees a set income for every kWH of electricity produced over its lifetime. Furthermore, this income is index linked to the Retail Price Index, so will increase throughout the contract period broadly in line with UK inflation.

In fact, there are three elements to the income offered under the Feed-in Tariff, which are summarised as below:

• Generation: as stated above, the system owner will receive income for every kWH of electricity that is produced for the life of the contract. As shown in the Tariff table on page 2, the highest per kWH generation figure is for retrofitted solar PV systems up to 4 Kilowatts in size. In this case, the system owner will receive 41.3p for every kWH of electricity generated from their installation.

• Personal use: in addition to the tariff given for generating electricity, there is also an offset under the Feed-in Tariff for using the energy that you generate. In practicable terms, this means that if you install (for example) a 2kW solar PV system onto your home and this generates 4.5kWH of electricity per day on average, you can use this energy yourself for free, rather than buying it from the grid. Of course, you can only use the energy at the time it is generated (unless you also install a method of storing it locally for use at another time) so this is less relevant if for example you install a solar PV system but are not at home during the day when it will be working. However, if it is possible to use the energy generated, then this effectively increases the tariff benefit by the cost of buying from the grid (currently around 12p per kWH).

• Exporting back to the grid: the third aspect of the Feed-in Tariff benefit is exporting the electricity generated back to the grid. This is likely to be relevant to a greater or lesser degree for most system owners and effectively means that the energy you generate is fed directly back into the National Grid rather than used personally. In this case, however, any electricity exported is also subject to an additional guaranteed 3p per kWH generated, which can be added to the basic tariff rate.

Forget the rhetoric, what are the real financial benefits of the feed-in tariffs?
The answer to this question depends on a number of factors, including the system type, size, local conditions and the product and installation cost. As far as the tariff levels are concerned, these have been confirmed by the Department of Energy as below:

Technology ------------ scale ----------- Year 1 ------ Year 2 ------ Year 3 ------ Lifetime

Anaerobic digestion ---- ≤500kW ----------- 11.5 ------ 11.5 ------ 11.5 ------ 20
Anaerobic digestion ---- >500kW ----------- 9.0 -------- 9.0 ------- 9.0 ------- 20
Hydro ------------------ ≤15 kW ----------- 19.9 ------- 19.9 ------ 19.9 ----- 20
Hydro ------------------ >15 - 100kW ------ 17.8 ------ 17.8 ------ 17.8 ----- 20
Hydro ------------------ >100kW - 2MW --- 11.0 ------ 11.0 ------ 11.0 ----- 20
Hydro ------------------ >2MW - 5MW ----- 4.5 ------ 4.5 -------- 4.5 ------ 20
MicroCHP pilot* ------ ≤2 kW* ------------- 10* ------ 10* ------- 10* ----- 10*
PV --------------------- ≤4 kW (new build) -- 36.1 ------ 36.1 ------ 33.0 ---- 25
PV --------------------- ≤4 kW (retrofit) ----- 41.3 ------ 41.3 ------ 37.8 ---- 25
PV --------------------- >4-10kW ------------ 36.1 ------ 36.1 ------ 33.0 ---- 25
PV --------------------- >10 - 100kW ------- 31.4 ------ 31.4 ------ 28.7 ---- 25
PV --------------------- >100kW - 5MW ---- 29.3 ------ 29.3 ------ 26.8 ---- 25
PV --------------------- Standalone system ----29.3 ------ 29.3 ------ 26.8 ---- 25
Wind ------------------ ≤1.5kW -------------- 34.5 ------ 34.5 ------ 32.6 ---- 20
Wind ------------------ >1.5 - 15kW --------- 26.7 ------ 26.7 ------ 25.5 ---- 20
Wind ------------------ >15 - 100kW --------- 24.1 ------ 24.1 ------ 23.0 ---- 20
Wind ------------------ >100 - 500kW ------- 18.8 ------ 18.8 ------ 18.8 ----- 20
Wind ------------------ >500kW - 1.5MW ---- 9.4 ------- 9.4 ------- 9.4 ------ 20
Wind ------------------ >1.5MW - 5MW ------ 4.5 ------- 4.5 ------- 4.5 ------ 20


Source: Department of Energy & Climate Change – Press release 1st February 2010

As outlined above though, these tariffs do not tell the full story as there are a number of other aspects to consider when considering the Feed-In Tariffs. Therefore, to give a real idea of the cost and benefits, the following is a typical example of a Solar PV system that would be retrofitted to the average UK home:

Retrofitted solar PV home system example:

System size = 2kW (based on the maximum power output of the panels)
Total system cost with installation = £6,000

Energy generation estimate per year = 1700 kWh (depends on location, roof orientation, etc)

Basic Feed-in tariff benefit per year = 41.3p x 1700 = £707.20 per year

Plus:
Offset of using 50% of the energy generated = 12p x 850 = £102.00 per year
Export 50% of generated energy to the grid = 3p x 850 = £25.50 per year

Total income per year (guaranteed) = £834.70

Therefore, the system payback time will be around 7 years (not taking into tariff and energy cost rises) meaning that the owner will benefit from 18 years of income at approx. £850.00 per year = £15,300 total. Furthermore, for homeowners at least, this income is tax free.

Degression: what is it and why?

Anyone investigating feed-in tariffs in more detail may come across the word "degression" in the information they read. This refers to the rate at which the tariffs will be reduced over the lifetime of the scheme (at the point of entry) and is a feature for the following reasons:

• To help the Department of Energy manage the Feed-in tariff take up to the desired level. For example, if the scheme is not growing as much as required, the degression level could be reduced to encourage more applicants in a given year.

• To maintain the balance between cost and benefit in the face of changing market conditions: although the level of renewable energy take up in the UK is currently the lowest in Europe, the aim of the Feed-In Tariffs is to incentivise their rapid growth over the next few years. With this increase, however, it is also anticipated that market forces and competition will reduce the product and installation costs, so a level of reduction in the tariff rates will be required to keep the cost/benefit level in line with the original calculations.

The level of degression may be change throughout the scheme life depending on the above, but it is forecasted to be 6-8% per year from 2012 onwards. However, as mentioned above, it is only relevant at the point of entry to the scheme, so if you have signed up in the first year when the tariffs are at their highest, this rate is guaranteed throughout the life of the contract.

Conclusions
The UK feed-in tariffs are a significant proposition by the UK government to drive the growth of energy generation by renewable methods and start the transition to a low carbon economy. The reasons behind this scheme are also significant though, and in one respect, it has to succeed to avoid major energy supply issues in the UK by the middle of the decade. However, on the positive side, there is good data to back up the success of feed-in tariff schemes from other countries who introduced similar incentives several years ago (such as Germany). Furthermore, as discussed above, there is a solid economic argument in addition to the environment benefits that should make the feed-in tariffs a compelling proposition for most UK home and business owners.


Matthew Easter is the solar products manager at SEC Solar Energy Centre, a UK supplier of solar PV, batteries and innovative low energy solar-powered lighting solutions.


Discussion Thread  

06 May 2010

Retrofitted Solar PV home system example:

If you can get a 2kw system fitted for £6000.00 do not touch it with a barge pole. The average cost of each 1 kw installed, approved with MCS products, is £6000.00. I think whoever posted the figures in the example has got a little confused and they have also got their figures completly wrong. The avetrage pay back time is 12 years. Come on lets not mess this up with massive wide claims

Michael Orr
The Big Green Energy Company Limited
www.biggreenenergy.co.uk


Toddington wrote:

05 Jun 2010

Hi Michael,

If you are only able to fit a 1kW MCS accredited system for £6000 I think you should speak to SEC Industrial Batter Company who wrote the article!

With the substantial reduction in panel costs over the last 5 years this is now very possible, and I am sure they would be very happy in helping you out!

Also as their systems are MCS Accredited you will not be sacrificing quality...

All the best

Toddington


30 Jul 2010

How is the metering carried out. Do you need three meters? One for total power generated, one for amount used personally and the conventional one for power drawn from the grid.

IT seems a little hard to believe they are going to pay you for the power you generate and then let you use it as well. Someone suggested to me that you could have a wind generator and use the power generated to shine bright lamps onto PVs after dark. Then you would get all the money from your wind and use the power generated to make more money by the PVs. Surely this can't be right. Hardly environmentally friendly!


orcadia wrote:

16 Oct 2010

I am in the process of installing a 6kW wind turbine which will be grid connected. I am eligible to get a grant of roughly 30% of the capital costs. I have been told informally that if I accept grant funding, I will not be eligible to claim FIT. On the DECC website it clearly states that this is not the case unless the grant funding and FIT is less than 200000 euros over 3 years. I will not get this over the lifetime of the turbine. I am not sure which route I should take.


Sean Davis wrote:

10 Dec 2010

Hi

If I have a system that is 4.1kw in size. Given the fact that the efficiency of the panels is 98% can i claim FIT still as its over the 4kw?


04 Oct 2011

I note the word "guaranteed" used a lot re the FIT rate (currently 43.3ppKW) and RPI adjustment, but I am told that the 25 year contract actually says that the FIT rate may be altered by the Secretary of State at any time. That is a world away from being a guarantee! What is going on here - sounds like mis-selling to me. Any views? Where can I read the full contract (it must be standard wording)?




Discussion Thread  

 


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