REA Response the Energy Technology List (ETL): Call for Evidence

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1 REA Response the Energy Technology List (ETL): Call for Evidence The Renewable Energy Association (REA) is pleased to submit this response to the above inquiry. The REA represents a wide variety of organisations, including generators, project developers, fuel and power suppliers, investors, equipment producers and service providers. The REA is also the parent organisation to the Wood Heat Association (WHA), the UK trade association for the modern biomass heating industry. Members range in size from major multinationals to sole traders. There are around 750 corporate members of the REA, making it the largest renewable energy trade association in the UK and the only body to cover all forms of energy. General Comments As the REA are not direct suppliers, or consumers, of Energy Technology List (ETL) products we have only briefly answered the set consultation questions in the second half of this response. However, as a pan-technology renewable trade association we are well placed to provide comment on how the industry would like to see the ETL develop in the future, within the context of the government s new energy policy framework. The speed and severity of the cuts to both the RHI and FiTs over the last six months have made businesses weary of large scale investments in onsite generation, renewable heat or energy efficiency projects. However, while these cuts have been damaging for the industry, both investors and developers share the government s ambition for developing a renewables industry which requires little direct subsidy and sees consumers protected from high energy bills. The industry is working hard to reach a level of maturity where it can operate with low subsidy support. With this in mind, non-subsidy tax relief mechanisms, such as Enhanced Capital Allowances (ECAs), have an important role to play in facilitating this transition to a subsidy free renewable energy market. The REA argue that this ETL review should be used by government, and the Carbon Trust, to broaden the purpose of the list beyond just supporting energy saving technologies. It should be recognised that a comprehensive business energy efficiency scheme should include helping companies to install onsite generation projects, like solar PV, and provide better control over their consumption by using energy storage technologies. This will encourage more low carbon behaviours across a business. If used appropriately, The ETL can help reduce the reliance on subsidies while continuing to push forward development of the energy efficiency and renewables industries. Utilising Existing Tax Support Mechanisms The main subsidy mechanisms supporting the installations of onsite generation technologies in businesses have been the FiT and RHI payments. With some notable exceptions, such as biomass boilers and heat pumps, such technologies have to date been excluded from the ETL due to concerns over technologies receiving double subsidies. With FiT and RHI having been significantly reduced, it is appropriate that support for renewables should be shifted towards tax incentives in order to maintain investors interest in the market and keep the cost to consumers low. Within the REA s response to HM Treasury s consultation on Reforming the Business Energy Efficiency Tax Landscape 1 we highlighted a number of existing tax 1 REA Response to HM Treasury Consultation Reforming the Business Energy Efficiency Tax Landscape Available online at 25 Eccleston Place Tel: Victoria, London SW1 9NF

2 support mechanisms which could now be adapted to support commercial renewable projects, without impacting on the Levy Control Framework. In particular, we highlighted how broadening of the purpose of the ETL, could allow it to support lower subsidy renewable generation. This has the advantage of being an existing tax mechanism which financial managers are already accustomed to building into a project s financial plan. The ETL, and subsequent ECAs, are already operationally stable and are considered well designed. The extension of the ETL can therefore be seen as logistically preferable for both the industry and government as it avoids the need to design yet another support mechanism within an already complicated policy environment. Renewables and Energy Storage as part of Energy Saving We appreciate the inclusion of on-site renewables and storage technologies would expand the ETL s purpose beyond that of simply supporting energy saving technologies. However, we believe that support for broader low carbon energy behaviours will be hugely beneficial in making business more energy efficient. Solar PV, for example, works well alongside other energy efficient products such as LED lighting and smart appliances, while the deployment of storage will also allow businesses to use the electricity generated in the most efficient way possible. It is often cheaper to install solar and storage during a buildings energy efficiency renovation; as businesses can take advantage of existing scaffolding and contractor s onsite. Furthermore, the installation of generation and storage technologies encourages a business to better understand their consumption habits and reinforces energy efficient behaviours. Therefore ECA support for on-site generation solar and storage should be considered an essential part of any attempt to improve the energy saving potential of a business. Support for Onsite Generation Technologies Within the REA s response to DECC s FIT consultation 2 we argued that, as solar PV grid parity approaches, tax incentives may be an appropriate form of support for commercial solar projects where there is significantly reduced subsidy. The new Feed-in Tariff levels, as announced following the FiT review in December 2015, have left developers facing a 67% cut in the tariff rates they had available to make solar projects commercially viable. This is combined with a steep degression mechanism and low deployment caps, which has made commercially solar installations challenging, forcing some developers out of the market. The new FiT Tariffs are now considered by many developers to be too risky and too low to be commercially worthwhile. As such, the extension of the ETL to include solar technologies, and facilitate their qualification for Enhanced Capital Allowances, could play an important role in encouraging more commercial projects to go ahead with a small level of public fiscal support. The extension of the ETL has the advantage of providing a one-off up-front benefit to developers, rather than an ongoing liability for Government over years. Similarly, the cost of such support would also automatically reduce in real terms as system prices continue to fall; reducing the risk of overcompensation in the future. Initial modelling by KPMG, commissioned by the REA, in advance of our FiT response, indicates a benefit of 1.3p/kWh for commercial solar rooftop project and around 0.6p/kWh for ground mounted solar when considered over an equivalent 20 year period and assuming a 100% ECA tariff rate in the first year (The modelling behind these calculations is available on request). While not large, such rates, in conjunction with the new FiT regime could ensure an attractive headline for investors bringing the tax relief on their asset purchase forward to their first year. This could prove to be a valuable incentive for ensuring the continued development of the solar industry. 2 REA Response to DECC s 2015 FiT Review available online: Page 2 of 7

3 Similar to the recent solar experience, Anaerobic Digestion (AD) developers are expecting to see Feed-in Tariff rates to be cut following further consultation from DECC, which are to be combined with the already implemented tight deployment caps. With such withdrawal of fiscal support, the ETL should now also be used to help continue the development of the AD sector which has the potential to play a significant role in both the decarbonisation of the entire energy economy. AD is one of the most versatile renewable technologies, with its ability to provide competitive base load dispatchable power when combined with biogas storage facilities, and help decarbonise the agricultural sector through better slurry/manure management, stopping the release of methane into the atmosphere. Similarly it has the potential to contribute to the decarbonising of the heat and transport sectors when the biogas is upgraded to Biomethane and injected into the gas grid. A recent study published by the REA and Bangor University 3, highlighted that AD represents one of the most cost effective forms of carbon saving showing that a small scale farm AD < 100 kwe, primarily using slurry/manure and waste residues, would only cost 60 per tonne of CO2 saved, which compares very favourably to GHG reduction costs accepted for other renewable energy technologies, which are up to 180/t CO2e saved. Overall, the report concludes that if slurry from all UK medium and large dairy farms was treated in AD plants, 1.8 Mt CO2e could be saved each year across the UK, equivalent of taking almost 900,000 cars off the road. Such carbon abatement could be supported through the inclusion of AD technologies onto the ETL, helping the industry to move towards a lower reliance on subsidies. Supporting Energy Storage Technologies with Renewables This review of the ETL should also now consider the inclusion of a new group of technologies, categorised as Energy Storage. While it is recognised that some battery technologies are already included within the list under uninterruptible power supplies there is a need to support the broader benefits that new storage technologies are bringing to business energy users, especially when combined with renewable onsite generation technology. A business utilising storage technology in conjunction with onsite generation, is able to generate zero carbon energy in place of using predominantly fossil fuel generated electricity from the grid. The storage facility then offers the businesses a hedge against rising energy prices and increases certainty over energy costs, by reducing the amount consumed from their supplier. Benefits also go beyond energy displacement as such projects further promote energy efficiency as they gain a greater awareness of their energy consumption profile, reinforcing energy efficient behaviours. This is also positive for the grid where decentralised systems help to reduce peak demand for electricity. This results in a more energy efficient, and therefore low carbon, energy system with the added benefit of reducing demandbased network charges. The benefits in terms of costs and efficiencies are highlighted within the Imperial College London 2015 Flexibility Report 4 which was commissioned by the Committee on Climate Change to inform their 5 th Carbon Budget recommendations. Here they show that storage technologies help create flexibility on the grid, which in turn facilitates greater volumes of wind and PV integration at lower costs, reducing our requirements for nuclear power. Their analysis suggests that this replacement results in a net benefit of between 5.23bn and 5.99bn per year in a power sector scenario producing 50g of CO2/kWh. Overall, the most affordable way of ensuring a low carbon secure energy future is 3 REA and Bagnor University (2015) Evaluating the cost-effective greenhouse gas abatement by small-scale anaerobic digestion, Available online: 4 Imperial College London (2015) Value of Flexibility in a Decarbonised Grid and System Externalities of Low-carbon Generation Technologies Available online: Page 3 of 7

4 by supporting the growth of storage and encouraging businesses and domestic consumers to buy into the decentralised energy system. In January 2016 the REA and KPMG launched their report on Decentralised Energy and Energy Storage 5 which provides a comprehensive review of the status of and potential for storage technologies within a decentralised system. It makes clear that both domestic and commercial energy storage are becoming a commercially viable investment. Like solar before it, the cost of storage technologies is falling rapidly with Lithium batteries (amongst other technologies) predicted to see a steady cost decline of 12% per annum through to Furthermore, projects are being developed without subsidy support as the value of auxiliary services to both the grid and consumers is expected to provide a viable revenue streams and an attractive return on investment. Our members are already demonstrating real world pioneering examples such as British Solar Renewables (BSR) and Renewable Energy Systems (RES), in conjunction with Western Power Grid, commencing a 1 million investment on a new battery storage facility in Somerset. Overall the REA s research indicates there are 27 major energy storage projects planned and operational in the UK at the end of This growth needs to be supported through the inclusion of energy storage within the ETL allowing them to be eligible for Enhanced Capital Allowances and attracting more investors into the sector. This point was put to the Commons Energy and Climate Change Committee in December 2015 by Chris Morrison, Centrica s Head of Energy Construction Services for Distributed Energy and Power (and REA Member), where he told MP s that the one year tax relief of 100% of the corporate tax rate would bring a big boost for investment, by increasing returns for companies looking to invest in the storage market. He added that we believe we will start to see battery storage as a commercial option for our customers in the next year. The ETL and ECA therefore can provide a firm market mechanism for the industry; where the majority of participants are not requesting a fiscal subsidy but should be supported by a favourable investment environment. This will bring new investor into the sector, generate demand and help the UK realise the benefits of decentralisation energy system. Defining storage within the Energy Technology Criteria List (ETCL) As storage covers a large range of different technologies the REA suggests that the sector would be best assisted by creating qualifying criteria for storage technologies in the Energy Technology Criteria List (ETCL), rather than also specifying specific products within the Energy Technology Product List (ETPL). It is feared that, while storage will benefit from being on the ETPL, this could prove restrictive for such a young technology, where rapid efficiency improvements and technological developments are expected on an annual basis. Furthermore, storage technologies could also be made bespoke to commercial projects, taking into account specific requirements and making it impractical for inclusion on a prescriptive product list. We believe that the development of a concise set of criteria for the ETCL, without the need for inclusion on the ETPL, would be of greater benefit to both developers and businesses that choose to install storage technologies. If appropriate, a certification scheme could be created to ensure the 5 REA-KPMG (2016) Report on Decentralised Energy and Energy Storage, available online at 6 REA (2015) Energy Storage in the UK: An Overview, available online at Page 4 of 7

5 criteria are met by new technologies so that project investors can ensure a technology is eligibility for ECAs, without having to wait to be included as part of the product list. Once the storage industry is firmly established, it may then be appropriate to consider how the list could be used to encourage specific low carbon storage projects which are connected to some form of renewable onsite generation. This could be done through either higher ECA tariffs for such projects or by ensuring that both technologies within the one system are applicable for the tax incentive. The REA would be happy to assist the Carbon Trust and DECC in defining the relevant Criteria list, and certification scheme, in order to support storage technologies qualifying for ECAs. Case Study California Self Generation Incentive Program (SGIP) California is currently a global leader in the development of energy storage, providing support through the SGIP and legislatively by AB 2514 (2013). The SGIP is a ratepayer-funded rebate programme, not too dissimilar to ECAs, which is available to retail electric and gas customers of Californian utility companies. The support goes beyond energy storage, providing participants with technical and financial assistance to install wind, waste energy recovery, pressure reduction turbines, fuel cells, advanced energy storage and CHP technologies. It also has a legislated state-wide budget of $83 million per annum up to 2019, which has been guaranteed beyond its original deadline of At the same time legislation AB 2514 puts in place biannual energy storage procurement targets on the three largest utility companies to contract gigawatts of energy storage by To date these measures have secured 20.8 MW of storage capacity, with a further 87.4 MW reserved and soon to be built. It is support mechanisms like this which has provided the strong market signals to allow our member AES to invest in building a 100 MW 4 hour duration storage array that is able to compete head to head in terms of cost with all technologies, including gas generation. REA Answers to Consultation Questions 1 What is your role in relation to the Energy Technology List? The REA is a pan-technology trade association for the renewables industry. The Wood Heat Association is also a trade association for the biomass heat sector and a completely owned subsidiary of the REA. Some of our members are suppliers of products currently on the ETL, such as biomass boilers installers. Other members are interested in seeing the ETL extended to include other on-site renewable generation and storage technologies, especially given the reduction in support the sector has experienced as a result of governments cuts to subsidy schemes. 2. Does your organisation use the ETL? If so, how? The REA and WHA does not use the ETL directly although a number of our members do. To date the ETL, while very valuable, has been of secondary importance for biomass installers, as their main support came from RHI payments. However, they have found the ETL useful for market distinction, providing certification of a products energy efficiency standard. Now that subsidy support has been reduced and the government are progressing their agenda for creating a subsidy free industry, it is appropriate that the tax incentives like the ECA are used to facilitate the deployment of further energy saving and renewable Page 5 of 7

6 technologies. This could help to provide investor confidence and, in the case of energy storage, promote strong standards for technological development and deployment. 3. What do you see as the main impacts of the ETL, both positive and negative? We see the future of the ETL as now having the potential to support broader low carbon behaviours, beyond just energy saving materials. The inclusion of Solar PV, AD and Energy Storage technologies in particular could allow for the deployment of a more comprehensive energy efficiency program and encourage the development of a decentralised energy system. As the REA are not ETL product purchasers or suppliers we are not in a position to provide evidence for questions 4 to Do you have any ideas for improvement of the operation of the ETL? In our above notes we have mentioned that the ETL maybe of greater benefit to some technologies if required only to meet the ETCL, rather then also being placed in the ETPL. This may require the development of some form of certification scheme to allow such technology categories to be able to receive ECAs. Furthermore, we believe that the inclusion of criteria information on lifetime energy costs would be a useful addition, enabling businesses to identify upgrades and make informed decisions on future investments. As the REA are not ETL product purchasers or suppliers we are not in a position to provide evidence for questions 11 and How can the ETL stimulate innovation in energy saving technology? The ETL has the potential to play an extremely important role in the innovation of decentralised energy systems. Energy storage is now coming to the fore and is on the cusp of being commercially viable. Importantly, the majority of the storage industry is not calling for a government subsidy, but it does require a stable and favourable market environment to attract investors into the sector. The ETL can therefore firstly play an essential role in setting bench mark criteria for new technologies to conform to, while also providing a useful tax incentive to generate demand and kick stat the industry so that the benefits of a decentralised system can be realised. As the REA are not ETL product Purchasers or Suppliers we are not in a position to provide evidence for questions To what extent do you feel your use/involvement with ETL is dependent on the tax incentive available under the ECA? The primary motivator of getting a technology associated with the ETL is the ECA tax incentive, as this helps generate demand and attracts investment into the industry. However, the further benefits of the ETL are not to be underestimated as it assures standards and promotes a comprehensive energy efficiency solution for business wanting to improve their energy performance rating. 16. Are there other policy measures which might be more effective in facilitating the market in innovating or implementing energy efficiency solutions? Page 6 of 7

7 In conjunction with the broadening of the ETL the REA has also called for the reinstating of Zero Carbon Homes legislation, which was also to be extended to commercial properties. The withdrawal of this legislation constituted a watering down of the government s energy efficiency objectives and has greatly hurt investor confidence in the sector. Furthermore, we believe the promotion of the use of the Merton Rule by local authorities would also be a beneficial way of encouraging the implementation of energy efficiency solutions in new builds. 17. Do you have any other comments? See General comments provided before the questions. 18. Details Name: Mark Sommerfeld msommerfeld@r-e-a.net Telephone: Job title: Policy Analyst 19. What is the name of your organisation (if applicable)? Renewable Energy Association 20. What sector do you work in? Renewable Energy 21. What size is your organisation? Employees. Over 750 Members. Page 7 of 7