REA response to DECC Consultation on changes to financial support for solar PV

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1 REA response to DECC Consultation on changes to financial support for solar PV Part A: Controlling spending on large-scale solar PV within the Renewables Obligation Part B: Promoting the deployment of midscale building-mounted solar PV in the Feed-in Tariff scheme The Renewable Energy Association (REA) is pleased to submit this response to the above consultation. The REA represents a wide variety of organisations, including generators, project developers, fuel and power suppliers, investors, equipment producers and service providers. Members range in size from major multinationals to sole traders. There are over 1000 corporate members of the REA, making it the largest renewable energy trade association in the UK. This consultation is running in parallel with DECC s consultation on support for community energy projects under the FiT scheme, to which we are also responding. Introduction Solar PV has made enormous progress in recent years, both in rooftop applications and through large-scale solar farms, and has the potential to make a significant contribution to UK electricity supplies if the conditions are right. Costs have fallen sharply since 2010 (the only renewable that can make that claim) and a British supply chain has grown rapidly, formed mostly of SMEs. Falling costs can be attributed in part to decreasing international prices of PV modules, though for the last year the prices of panels have stabilised through a price undertaking reached between the EU and Chinese manufacturers, which applies until December The most significant factor in achieving ongoing cost reductions is the increasing efficiency with which the technology is being installed in the UK. As a result solar PV looks set to be the first major renewable generating technology to compete in the electricity market subsidy free, a landmark achievement for renewables. Exactly when this will happen depends on many factors, including the industry s ability to continue to reduce costs. Timing will depend on which market sector it is competing in the first is likely to be large commercial and industrial rooftops, where self-generation can offset costly retail electricity. However, despite the UK s relatively northerly location, there are very good prospects for large-scale ground mounted solar farms to reach grid parity with central generation in the early 2020s. For this to be achieved, however, requires a robust and dynamic UK supply chain, able to capitalise on the momentum achieved since This in turn requires continuing interim support from DECC through its FiTs, RO and CfD mechanisms. The prize for UK plc is a significant one, as once grid parity is achieved, solar (and other renewables) will have a stabilising effect on electricity prices, in addition to providing low-carbon power. In this respect solar PV occupies a unique position in the renewables portfolio, a position that few would have thought possible a decade ago. 25 Eccleston Place Tel: Victoria, London SW1 9NF

2 Ministers have expressed reservations about the role that large-scale solar PV should play, preferring the industry to focus on the rooftop market. We agree completely that rooftops should be a primary focus and we have worked very hard with our colleagues in the Solar Trade Association, as well as DECC itself, to identify ways of increasing uptake in that market, in particular in the commercial and industrial sector. There are significant barriers and these need to be addressed. However we disagree that that there should be any less of a focus on the potential for large-scale solar PV, which is the most cost-effective and quickest way of achieving volume solar deployment. Nor do we agree that deployment should be restricted to brownfield sites there is a plentiful supply of low-grade agricultural land suitable for largescale solar PV. Solar farms can co-exist with agricultural practices and the industry has received strong support from NGOs who appreciate the environmental benefits that can result from the creation of large enclosed areas that can almost be called nature reserves. Solar farms can provide the agricultural community with a much needed form of diversification, using land that is often otherwise unproductive. The environmental impacts of suitably sited solar farms are very low. Site screening means that panels can be virtually invisible from outside (at ground level) and the generation equipment operates silently. It is partly for this reason that solar farm planning applications have had a very high success rate with local authorities. Construction times are relatively short and adjacent communities often receive significant economic benefit. It is inevitable that, as for all forms of development, a minority of the local population will campaign against but this must be viewed in perspective such opposition is generally very small and solar consistently achieves the highest public support ratings in DECC s own surveys. All of these factors contribute to our view that large-scale solar provides a huge opportunity to UK plc, a unique opportunity for industry to work with government to achieve subsidy-free renewable electricity in less than a decade. Unfortunately the dynamic nature of solar PV, one of its very strengths, has created considerable administrative difficulties for DECC to incentivise the technology through its support schemes. The industry craves policy certainty and predictability but experience since 2011 has been anything but that. This consultation is the latest example and the solar industry is reeling from what feels like another body blow. The REA prides itself in being a responsible trade association whose goal is to fairly represent all interests within the renewables sector. We recognise that public funding to support renewable deployment is necessarily limited and that DECC s challenge in supporting a rather disparate range of technologies is considerable. Given the limited budget available within the LCF and the need to achieve the UK s 15% renewable energy deployment target by 2020, it is clear that value for money must be a primary consideration. Within this context we do not believe that the 2.7GW assigned to large-scale solar in the EMR delivery plan is anywhere near sufficient. Large-scale solar is deploying at support levels well below those of the marginal technology and these can continue to decrease until grid parity is achieved in less than a decade. The promise of support from CfDs is not sufficient to replace the certainty of the ROC regime, especially as crucial aspects of the new scheme have yet to be announced. CfDs have been designed for major players putting forward large projects and the prospects for solar within CfDs remain very uncertain. 2

3 We therefore support the STA s call for the RO regime for large-scale solar to remain unchanged in line with the treatment of other technologies, until its planned closure to new projects in April If DECC believes that falling costs justifies a further banding review then we would support such a move. With regard to this particular consultation, we think that the grace period provisions are particularly unfair, amounting almost to retrospective action. Our response goes into further detail in this area. As for the Part B proposals to split the large PV degression band in order to isolate the effect of stand-alone deployment from that in the rooftop sector, we agree with the principle of protecting the rooftop sector but we are concerned that this will simply result in multiple degression of the stand-alone band. We have worked with the STA to put forward to DECC a wide range of barriers that need addressing in the larger rooftop sector and we see this as a higher priority. We support the recommendations made by the STA in this area though it is clear that resources in the LCF are insufficient to meet the aspirations of every technology, so DECC has a tough job in balancing needs across sectors. Answers to Consultation Questions Part A: Consultation questions relating to the RO Question 1: Do you agree with our projections for the amount of new solar PV capacity likely to deploy under the RO by 1 April 2015, and our deployment assumptions for 2015/16 and 2016/17? Please give reasons and provide evidence to support your answer. We do not have any PV deployment data ourselves but there is plenty of evidence that large-scale solar PV deployment is on course to exceed the trajectory implied by DECC s EMR delivery plan. It is important for DECC to work with the industry to improve its market intelligence, given the speed with which large-scale solar can deploy and the need of the RO to predict likely generation. However it should be remembered that PV has a low load factor (~11%) so the figures must be kept in perspective, given that it s the generation that actually counts when it comes to spend. Deployment is accelerating due to learning within the supply chain and falling cost of capital as financial markets become more familiar with the technology. The consultation document attributes PV s cost reductions to global factors. The opening paragraph states that growth in UK is due to "costs coming down rapidly as a result of global development and deployment in large markets like Germany and China". However large-scale solar capacity in the UK is currently growing mainly because industry has been successful in driving efficiencies throughout the supply chain. This is exactly in line with DECC s aspirations, but it can only take place within the context of a stable policy framework. Question 2: Do you agree with the proposal to close the RO early to solar PV projects above 5MW in scale? Please give reasons for your answer. No we do not agree. The transition to CfDs is too uncertain for that to provide a viable alternative. The industry has taken DECC at its word that the RO would remain open until 2017 and has invested heavily in developing a project pipeline. Most of the organisations involved in >5MW project development are SMEs and will be hit very heavily by closure, especially the grace period terms outlined by DECC. 3

4 If DECC believes that evidence on the falling cost of large-scale solar PV justifies a further banding review then we would support such a move. Question 3: Do you agree with the proposal not to close the RO to solar PV projects of 5MW and below? Please give reasons and provide evidence to support your answer. Yes, we argued hard in 2012 for the RO to remain open to all technologies in the 50kW to 5MW size range. The capacity triggers for the FiTs PV 50kW+ degression band are insufficient to maintain the level of deployment we believe is required without triggering multiple degression (when tariffs are already inadequate) so the availability of support under the RO provides an extremely important alternative. However we note DECC s statement that further action may be taken if the current proposals prove insufficient to control spend and view this with great concern. Question 4: Do you agree with the proposed grace periods and the date from which eligibility would apply, i.e. 13 May 2014? Please give reasons and provide evidence to support your answer. No, we think the terms are ill judged and could be seen as DECC taking retrospective action. They are punitive and would cause major losses within the industry if implemented. We understand that the intention of the grace period is to protect developers who have made significant investment with the legitimate expectation of deploying projects prior to 31 st March However feedback from the industry is that only those projects currently in construction will be eligible. In addition the prospect that ROC income would disappear entirely if the project fails to commission by 31 March 2015 is making it increasingly difficult for all projects to secure finance. Our colleagues in the STA are assessing the impact that the proposals will have on its members and we agree with their view that eligibility for the grace period should be from the date that Parliament approves any changes, or a fixed date such as 31 December Question 5: Do you agree with the proposed forms of evidence to demonstrate eligibility for the grace period? Please give reasons and provide evidence to support your answer, specifying the form(s) of evidence to which each comment relates. No, very few projects will be able to meet the grace period conditions proposed, despite having made significant financial commitment. We believe that the evidence required to qualify for a grace period should be amended as follows: In relation to evidence of a grid connection and planning consent, the date of 13 May 2014 should be amended to 31 December The need to provide evidence of ownership of the land forming the project site or a lease of said land should be replaced with evidence of ownership or a legallyenforceable option and the date of 13 May 2014 should be amended to 31 December Power projects (including conventional generators) typically conclude their land purchase/lease immediately prior to commencement of 4

5 construction, and given the short build periods of solar PV projects, an earlier date is unreasonably restrictive. The need to provide evidence that at least 100,000 per MW of costs have been incurred should be removed. It should be considered that a reasonable financial commitment has been made by demonstrating a grid offer, planning permission and legal fees. We would also like to highlight the difference between this consultation and one just issued by Ofgem Administering the RO enabling financial decisions, whose RO grace period (which applies for a 12 or 18 month period for biomass CHP, ACT and offshore wind projects reaching FID before 31 October 2014), proposes the following: - A developer can use an Option Agreement as proof of land use rights (and therefore does not need to have a signed lease agreement): 3. Declaration of land use rights The person submitting the notice of intent must provide a declaration which states that the person submitting the notice10 either owns, or has entered into an agreement to lease, or has an option to purchase or to lease the land on which the station is, or is to be, situated. The declaration should be signed by an appropriate individual and made to best of that individual's knowledge and belief. The same Ofgem consultation also does not require compulsory expenditure per MW capacity. To demonstrate financial decision has been made, the only proof required is: a Director s certificate confirming the generator will have access to sufficient funds to commission the station before scheme closure on 31 March 2017, alongside proof of planning permission and grid connection offer, for which the DNO or TNO has estimated or set a date for completion before 31 March Therefore the requirements proposed for a similar grace period under the same scheme represent a significantly lower hurdle to developers (albeit for technologies that take longer to deploy), than those proposed for the solar PV RO consultation, for which a signed lease agreement is required. In addition, although the grace period is to support those who have taken final investment decisions, there is no requirement to have spent a proportion of project costs or set amount per MW of installed capacity. Question 6: Do you agree with the proposals not to introduce a capacity or supplier cap in the RO on solar PV projects above 5MW in scale? If you think that either a capacity or supplier cap would be a more effective means of controlling costs from this technology, or whether you would prefer a cap, please indicate which along with your rational and any supporting evidence. Yes. Our view is that the RO should remain open to large-scale solar on the basis announced in December A capacity or supplier cap for >5MW solar would be more attractive than complete closure. However if DECC s intention is to use those mechanisms to limit deployment to that modelled in the 2012 EMR delivery plan then they would offer little benefit. 5

6 Whether based on supplier obligations or capacity, a cap will constrain the market some distance before it is breached. This is due to uncertainty in the industry over whether sufficient support will be available once the project is completed. Unless the cap is set a good margin higher than likely deployment, then it is extremely difficult to reach financial close on this basis as a project developer s chance of success depends not on published government policy or his own expertise but on progress made by others. One fairly extreme example of this is the notification register for new-build dedicated biomass in the RO. A cap was set at 400MW and only 73.5MW have come forward, nearly a year later. If there had to be a cap then a supplier cap is considerably worse than a capacity cap as the uncertainties around the levels of support that will be available are greatly increased. A cap expressed in terms of a proportion of a supplier s total obligation does not translate into a set number of ROCs as this will only be known once the size of the obligation is set each Autumn. Further, if one supplier chooses not to use its full allowance up to the cap then volume is lost forever other suppliers will not be able to exceed their cap by the equivalent amount. The size of the cap in reality is therefore not the sum of the individual supplier caps. As a result, this creates further uncertainty by feeding into suppliers trading strategies on ROCs. These were serious concerns when a supplier cap was introduced for bioliquids and it is likely these would be exacerbated as the RO nears closure. Finally, it is unclear how a supplier cap would be operated once the RO moves to a fixed price certificate model in That might suggest that a capacity cap set significantly above likely deployment would be the least bad outcome, although it is unclear to us whether the legal powers are available to do so. Question 7: Do you agree with the proposal not to undertake a banding review on the solar PV bands with respect to projects above 5MW in scale? If you think that a banding review would be a more effective means of controlling costs from this technology, please give reasons and provide evidence to support your answer. Our preferred position is that the RO should remain open to large-scale solar on the basis announced in December However a banding review would be a least worst option if DECC decides that is not possible. As before we are sure that the solar industry is ready to open its books to DECC. However DECC should note the likely consequence of driving down the support available to large-scale solar through the RO: economies of scale will encourage developers to propose larger solar farms and seek economies that could undermine quality and local benefits, something DECC should be keen to avoid. Whilst we understand DECC s desire to drive down costs we do not believe that this should be at the expense of quality or community benefit. Question 8: Do you agree with the proposals not to change the conditions for a banding review and not to exclude new large-scale solar PV from our grandfathering policy? Please give reasons and provide evidence to support your answer, specifying to which proposal your comment relates. We take this to relate to the fact that higher-than-expected deployment is not a sufficient condition for a review under the current legislation. Costs of generating electricity being significantly different is a valid condition, but higher deployment is not in itself evidence 6

7 that costs have reduced significantly. In addition, the legal tests for meeting these conditions are fairly high: the legislation requires the Secretary of State to be satisfied that one of the conditions has been met before launching a review the change in costs must be compared to those costs to which the Secretary of State had regard when making the banding provisions. Technically, the Secretary of State, will have had regard to every consultation response. Therefore, if only one response to a consultation argued that costs were, in reality, far lower than the consensus and future costs came in line with those views then this test would, arguably, not have been met even if average costs seen by the industry had fallen over the time period. We believe that these conditions are deliberately stringent so as to give confidence to project developers that the risk of arbitrary changes is manageably low. This question was asked in the consultation of 7 September 2012 and we repeat our view that we do not see the argument in favour of changing these conditions. In addition, there would be little benefit to solar PV policy in so doing, as this would take some time. A new RO Order would have to be put in place to enable a review to be launched, followed by a consultation on proposed changes to ROC rates and a new RO Order. This question is not academic for other technologies as there remains the theoretical possibility of banding reviews even after the RO has closed to new entrants as not all generators are grandfathered. Part B: Consultation questions relating to FiTs Question 9: Do you agree that creating new degression bands as suggested will encourage more building-mounted solar PV deployment and allow continued steady deployment of stand-alone solar PV installations? Please provide evidence to support your answer. No. Creating new degression bands will not in itself encourage more building mounted solar. Current building-mounted solar deployed in the >50kW size range is insufficient to match the solar strategy targets of 12GW solar by 2020 let alone the Minister s ambition of 20GW. DECC must find an effective way of increasing deployment in the 50kW-5MW sector, and simply breaking the degression band into 2 parts will not achieve this. DECC s main objective should be to overcome the barriers to uptake of PV under FiTs in the commercial and industrial building-mounted sectors, such as the EPC D requirement that is unachievable for some of the most suitable buildings. The industry has provided DECC with evidence of what these are and stands ready to work with DECC in pursuit of suitable solutions. Nevertheless DECC must find a way of preventing a shift of stand-alone deployment from the RO to FiTs from causing multiple degression of the building-mounted tariff, so splitting the degression band may also be required. Question 10: Do you agree that using the stand-alone / other than stand-alone descriptions as the basis for the new degression bands will achieve the aim of increasing deployment of building-mounted solar PV? Please provide evidence to support your answer. 7

8 If the degression band must be split, then that would seem to be the logical and most simple approach. However building-mounted projects that end up being classified as stand-alone need to be protected from the multiple degression that is likely to affect the stand-alone band at the capacities proposed. Question 11: Do you agree that the proposed split for the degression triggers for the standalone and >50kW other than stand-alone bands is appropriate? Please provide evidence to support your answer. No. Analysis of recent projects classified as stand-alone in Ofgem s March 2014 Installation Report indicates that the vast majority of the capacity classified as stand-alone is for projects >500kW, and is therefore likely to represent solar fields. It would seem reasonable to isolate these from all other forms of install. However creating a small degression band for this category will result in multiple degression, impacting all categories of projects in the stand-alone band. Once the RO is no longer available, DECC must find a way to provide support for stand-alone at the sub-5mw scale, as this is an important option for e.g. farmers and community groups. Question 12: Do you agree with the proposed dates from which the new degression bands could apply (for both October 2014 and January 2015)? Please give reasons and provide evidence to support your answer. No. The proposed split as suggested is not sufficient and we recommend a more detailed understanding of policy changes with industry. The industry can help to model the impact of various scenarios. If industry and DECC can agree with a proposed set of changes, then to make these changes sooner rather later would be recommended, but we should allow a reasonable period of time for the market to understand how to adjust their businesses. Renewable Energy Association 25 Eccleston Place Victoria London SW1W 9NF 7 July