A Better FIT

I’ve started, so I’ll finish. My previous post on the topic of the UK’s expensive feed-in tariffs (FITs) for solar PV suggested that it would have been easier to control the budget for the scheme if a quota system rather than a pricing system had been used.

I mentioned in the first of this series of posts on the FIT that I’d written to DECC to check they are not in fact operating a behind the scenes quota system. They aren’t. They referred me to section 6 of the government’s response to the 2009 consultation (pdf).

I have to say that I am rather surprised that the scheme is apparently specified in a consultation response document. I would have thought there would somewhere be a publicly available, formal, amendable document specifying how the scheme will operate and detailing the various responsibilities for its operation. How do I know, for example, that any given section of the 2009 response has not been superseded by some memo or ministerial statement? There I go thinking all private sector again!

Anyway, section 6 includes the following paragraphs, with some of my comments in italics in squared brackets:

“161. An objective of FITs is to provide long-term certainty for investors but we recognise that it will be important to review and adapt it as circumstances change including technology costs and supply chains and other policy developments. Therefore, we will be putting in place a programme of reviews after which it will be possible to make changes to FITs.

162. We will undertake periodic reviews of FITs with their timing to coincide with the Renewables Obligation reviews. Therefore, any changes to the scheme resulting from the first major review of FITs would be implemented in 2013 [already superseded],…

163. If necessary, early reviews will be set up to consider any significant changes to the fundamentals affecting the operation of the scheme outside of the periodic review timetable. … [So much for para 162 – we’ve already been told the “comprehensive review” will take effect from April 2012, or even earlier, not “in 2013”; so so much also for para 161 since there is clearly no “long-term certainty” at all, the whole thing is conditional on the vagaries of the political climate.]

164. All aspects of the FITs scheme will be subject to review including:
• tariff levels
• degression rates and methods
• eligible technologies
• arrangements for exports
• administrative and regulatory arrangements
• interaction with other policies
• accreditation and certification issues including the MCS.165. Reviews will focus on whether the tariffs offered deliver the target returns, and whether those returns are appropriate in continuing to ensure a real [“continuing”?, “real” – meaning what exactly? – small scale renewables will produce trivial amounts of electricity for many years] contribution from small scale generation to our renewables and other targets, and that the scheme continues to deliver value for money [clearly they must mean “political value” rather than monetary value].

166. In order to ensure that existing investors may proceed with certainty, any changes to future levels of support will apply only to investments following the review; generation tariffs the installations existing at the time of the review will be maintained. …”

Now, “investors” in paragraph 161 could have been taken to include the stakeholders in the companies supplying renewable energy generation equipment, such as solar panels, but by paragraph 166 “investors” clearly means just the lucky owners (in the case of solar PV) of large flat roofs (a.k.a. “generators”). See why it might have been better to have a had a formal description of the FIT scheme, with the various parties rigorously defined? The whole point of the FIT scheme is to build scale economies in the country’s renewables deployment capability. The likely outcome of a boom and bust (as discussed before) is unlikely to be to a healthily growing industry including competing reliable solar PV suppliers operating to a high standard.

I am unconvinced that a system of periodic reviews is sufficient to keep the scheme within 10% of its targets for expenditure (from our electricity bills), as the Chancellor has demanded.

Let’s consider why we’re in this situation. What if we had a quota system instead? What if we gave FITs to only a predetermined number of generators each year?

I’ll tell you what would happen. The quota would be used up very quickly and the papers would be full of stories about a “fiasco” as deserving home-owners missed out. Even if they bothered to try, it would be very difficult for the government to get across the message that the policy doesn’t exist to give a benefit to the lucky few who are able to take advantage of the FIT subsidy. The goal is to bring down costs so that there doesn’t have to be a subsidy.

So instead of an explicit quota, what we actually have is a soft quota. Everyone who gets in before the door is slammed will be allowed to sign up for FITs. This is not ideal as, first, we (the electricity consumer) are overpaying and, second, as I keep on saying, when the guillotine does fall most of the solar PV suppliers are going to go bust. Moreover, since the companies know this, we’re seeing the usual fly-by-nights trying to cash in while the going’s good. In this case the cowboys are, for example, knocking on old ladies’ doors to try to get them to sign over leases on their roofs for solar panels. If the subsidy were less attractive we might get what we want – efficient, quality suppliers.

So how could we inject some price-discovery into the scheme, control the budget and at the same time avoid what I might term “quota-envy”?

Well, why don’t we do what is being suggested for larger scale renewable energy purchases? That is, why don’t we simply auction the right to install solar panels (or other specified renewable energy microgeneration system)? Here’s how such a scheme would work (described for solar PV, but similar for any other technology):

• Instead of just registering a deployment to qualify for FITs, the solar PV electricity generator would first need a permit, i.e. besides the current auditing at registration to confirm what’s installed is what the generator says has been installed, a valid permit would also be needed.
• Permits would be auctioned for each FIT band (i.e. small-scale, <4kW capacity through to, say, 250kW-5MW), a specific number of permits being allocated to each band.
• It needs to be taken into account that planning permission is needed for some solar PV installations (generally the larger ones, but there may also be issues with listed buildings, conservation areas and so on).  Most likely it would be best to specify that where planning permission is required, outline planning permission must be obtained prior to applying for a permit, since otherwise there may be a significant number of unused permits, making management of the overall scheme more difficult.
• Permits would have a limited lifetime, say a year, so that the auction for permits for calendar year 2012, for example, took place in autumn 2011. Permits would be issued late in 2011 and would have to be used for registration dates during 2012. A calendar year is suggested because fewer installations are likely to take place in winter so a last minute rush might be avoided, but to smooth out demand for installation and registration, auctions could be held more than once a year.
• There would be a charge for permits (say £100 for domestic solar PV) to cover the costs of the auctions and also to minimise the number of unused permits.
• The administrators would set an upper limit price. Initially this would be the current FIT for the given band and technology (e.g. domestic solar PV), but subsequently it might be the price set in the previous auction to ensure continual price declines (it may be necessary to adjust for inflation).
• The administrators would also set a limit for the number – or maybe better total cost – of generators they are prepared to accept in each auction.
• Applications for permits would simply specify the generation price (in p/kWh) they were prepared to accept.
• Applications would be accompanied by the fee (£100, say), refundable in the case of failed bids, perhaps less a small charge for administration (say £10), to deter time-wasters.
• Once the deadline for bids had been reached, the administrators would simply calculate a strike price. Note that if the auction is conducted on a total subsidy cost basis, the number of generation proposals accepted will be more the lower the strike price.
• Obviously, if there are insufficient bids to reach the predetermined quota for the auction, the strike price will be the predetermined upper limit price (in fact bids above this price would be invalid).

Such auctions would be very easy to implement, especially given the magic of the internet. The fees levied would make the process self-funding.

The advantages over the present system are obvious, but I’ll spell them out anyway:

• Price-discovery: the cost to electricity consumers per kWh is the minimum necessary.
• It becomes no longer necessary for government to try to guess how scale economies will drive down the price of small-scale renewable energy generation.
• Cost control: the total cost to electricty consumers can be kept within tight constraints.
• An end to boom and bust (to coin a phrase!): the overall FIT scheme will not run out of money prematurely, since funds can be spread out over time (probably more would be allocated each year as time goes on to avoid over-investment in high-cost generation – as is happening at present – but, even if the cost is spread evenly, this would lead to more supply in later years as per kWh unit prices come down).
• Fairness: “quota envy” is eliminated. There need be no rush for permits (the same could be achieved with a simple ballot, of course, like the Olympic ticket sale, but that doesn’t have the advantages if this scheme – come to think of it, why aren’t at least the most expensive Olympic tickets being auctioned off?). Everyone bidding at the strike price or below will obtain the right to FITs.

As has been totally predictable from the outset, the current FIT arrangements are unfit for purpose. But we can fix FITs!