Letter to the Prime Minister about feed-in tarrifs
Rt Hon Gordon Brown MP
Chancellor of the Exchequer
Our ref: MIN/ID
Date: 26 October 2007
PMQ answer 24 Oct 2007 : Column 289
I am writing regarding the Hansard report of your answer to my question on renewable energy generation on Wednesday. I note that you are reported as referring to ‘the fees and tariff’ proposal rather than ‘feed-in tariff’ system. I am writing to ask whether this was an accurate report of your answer or if you will be querying it with Hansard:
Lynne Jones (Birmingham, Selly Oak) (Lab): Will my right hon. Friend consider adopting the feed-in tariff system for renewable energy generation, which has been so much more successful in stimulating investment in renewable energy in other European countries, such as Germany? Given this country’s vast resources of renewable energy, does he agree that it should be taking the lead in meeting the European 20 per cent. target, rather than leaving it to other countries to do more?
24 Oct 2007 : Column 289
The Prime Minister: I think that my hon. Friend will agree that we have led the way on climate change and will continue to lead the way. Yes, we will review the fees and tariff proposal that she puts forward, but I must say that our decision to have a renewable obligation on the companies has been one that is yielding results and that will continue to yield results in the future. I do not hide from the House the difficult decisions that will have to be made about how we reach our targets on renewables. People will have to face up, as she has said, to the need to use wind turbines both on land and on sea.
To provide you with some brief background on the feed-in tariff proposal, may I refer you to the recent report from the Environment, Food and Rural Affairs Committee on Climate Change: Citizen’s Agenda? For ease of reference, I enclose a copy of the relevant section of the Report. The feed-in tariff system is particularly beneficial for (though not exclusive to) small scale and community generation and also provides a mechanism for giving some support for co-generation of heat (through slightly higher tariffs than power only generation).
I should be grateful for your response to this letter.
LYNNE JONES MP
126. As well as placing a duty upon the Secretary of State to report annually on the level of emissions of greenhouse gases in the United Kingdom and on the steps taken to reduce emissions, the Climate Change and Sustainable Energy Act 2006 places an obligation on energy suppliers to develop a scheme by October 2007 for paying for exports of electricity to the national grid, for example from domestic microgeneration.
The Renewables Obligation (RO) was introduced by the Government in 2002 and defines the amount of electricity energy suppliers must provide from renewable sources of energy. The original target was 10.4% by 2010/11. The Energy White Paper confirms the Government's aim to double this to 20% by 2020. Compliance with the RO is demonstrated by suppliers presenting Renewables Obligation Certificates (ROCs) to Ofgem or by paying into a 'buyout' fund. ROCs were issued to accredited generators for eligible renewable electricity generated within the UK and supplied to customers in Great Britain. They can be traded to allow electricity suppliers to meet their targets at the lowest cost.
127. B&Q expressed concern about the "reluctance of energy suppliers" to engage in 'reverse selling', i.e. to offer a fair price for any electricity exported back to the grid by householders. According to figures provided by Alan Simpson MP, there is currently a large degree of disparity between suppliers in terms of the price paid back to customers for any surplus energy they wish to sell back to the grid. Only npower currently buys energy back at the same price at which it sells it for. Ofgem said that it is "supporting and participating in a project under the auspices of the Electricity Networks Strategy Group" to address this issue, which, it says, is "one of the key pre-requisites for the greater penetration of microgeneration in the market".  Ofgem told us that "we have warned the companies that if they do not sort out selling back we will basically put on the regulatory hobnails and sort it out for them". According to the Energy White Paper 2007 "All six major energy suppliers have now committed to publishing easily accessible export tariffs." During our visit to Wales, Ian Draisey, Marketing Director at Dulas Ltd. told us that feed-in tariffs were needed to make renewable technologies commercially viable for large numbers of households. At present between 10 and 100 times the current number of customers wanted to install microgeneration technology but couldn't justify the cost.
128. During our visit to Germany we heard about the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, or EEG), through which a premium "feed-in tariff" is paid to microgenerators for electricity generated from renewable energy sources. The level of premium depends on the year of installation, but once determined remains constant, and is guaranteed for 20 years. For example, photovoltaics generate between 38-54 €cents per kWh depending on their location. All the electricity generated is fed back into the grid, so the householder is paid for every kWh of renewable energy generated, and purchases all electricity used at a lower rate (approximately 18.6 €cents/kWh in 2005) from the energy supplier. The German Renewable Energy Act is funded through 3% of the price per kWh paid by the consumer to the electricity supplier—loosely equivalent to €1.55 per month (about £12 per year) for an average household consuming 3,500 kWh per year. By comparison, the Renewables Obligation cost the average UK household £7.35 per year in 2006-07. Projections by Ofgem predict that this will increase to £11.41 by 2010-11 based on 2006 prices. Although there is no public subsidy required for the German 'feed in tariff' system, this scheme is still paid for by electricity customers since the costs borne by energy suppliers are simply passed on—in 2005, the net cost to consumers was 2.3 billion Euros (approx £1.6bn). According to German Government figures, the total emissions saved by renewables in Germany was 84 million tonnes of CO2 in 2005.
129. A clear majority of European Member States operate a feed-in tariff support system for renewable technologies, as opposed to the tradable certificate system such as the Renewables Obligation that operates in the UK. The German feed-in tariff structure has stimulated demand for microgeneration technologies to the extent that at least 170,000 jobs have been created (2005 figures), an increase of 10% on the previous year. Germany is increasing its renewable energy output faster than expected, and in July 2007 announced that it has already met its 2010 indicative target to supply 12.5% of electricity from renewables. During our visit to Germany we heard that the feed-in tariff system had been so successful in Denmark that it had already met its 2010 target for renewable energy generation. By comparison, renewables only contributed 4% to the UK's electricity supply in 2005, against a target of 10% by 2010. According to data from Ofgem, only 57 of the 975 generators accredited to receive Renewables Obligation Certificates (ROCs) were small generators (below 50kW), and were accredited to individuals as opposed to businesses.
130. The UK Government is committed to the Renewables Obligation, and ruled out fixing the price paid for renewable generation from its recent review of this policy. Feed-in tariffs were not mentioned in the review's consultation document. However, the then Minister of State, Ian Pearson MP, observed that: "[t]he point about selling energy back into the grid and making it easier for people to be able to do that I think is a very important one, it has a symbolic importance as well as a financial one and we need to get this sorted out." In May 2007, the Government conceded that the Renewables Obligation was "designed to support large scale deployment of renewables and we do not feel that it is the best way to deliver the incentives that the microgeneration industry require".
131. The current system of Renewable Obligation Certificates (ROCs) for individual householders is too unwieldy for microgeneration, and risks losing citizen engagement. We recommend the Government replace ROCs and export payments with a feed-in tariff with a single fixed rate per kWh, varying according to the type of generation.