Feed-in Tariffs Explained

ABOVE: Wind 26.7p/kWh*; CHP 10p/kWh*; Hydro 19.9p/kWh*; Solar (PV) 41.3p/kWh* (retrofit). *Price paid per kWh of energy produced. Extra 3p per kWh paid for energy exported to grid. Several technologies have different rates paid depending on the size of the system. These prices are based on the most common system size.

Feed-in Tariffs (FiTs) are a wonderful way of getting paid for electricity (and heat — but we will come on to that) generated from renewable sources. On 1st February 2010, the Government set rates of payment for electricity generated and exported to the grid, as an incentive for the installation of microgeneration schemes. These tariffs are set to come into force from 1st April 2010 for electricity and 1st April 2011 for heat.

For small-scale schemes, FiTs are available for hydro, solar and wind technologies. In addition, the first 30,000 micro CHP (combined heat and power) systems will also qualify as a pilot scheme.

The way it works is that the homeowner installs, say, a wind turbine and applies to the electricity supplier (npower, British Gas, E.ON, whoever they buy their electricity from) to be included in the FiTs scheme. The energy supplier is obliged to accept a qualifying technology so long as it is Microgeneration Certification Scheme (MCS) approved equipment, installed by an MCS-approved installer.

The Export Tariff

In addition to the payment received for generating electricity, the homeowner will receive 3p per kWh of electricity exported to the grid. This export tariff is also fixed and linked to the RPI (Retail Prices Index).

The homeowner can opt in or out of the export tariff each year. If electricity wholesale prices rise significantly, then the homeowner can opt out and perhaps get a better price on the open market. The export tariff is, in effect, a guaranteed minimum to allow calculation of returns on the system installed.

Tariff Degression

In the table below, solar PV installed in a new build in 2010 gets a rate of 36.1p per kWh. If you install in 2012, the rate drops to 33p per kWh and continues to drop so that in 2021 the rate is just 15.7p per kWh. The same applies to wind turbines, although the degression is less — machines up to 15kW will get 26.7p in 2010, reducing to 17.6p by 2021. Hydro systems have a lower headline rate but there is no degression and the rate remains the same for 20 years.

It’s important to clarify that when tariffs are degressed, they are degressed only for new installations. So tariffs paid to existing generators at that time are not affected — only tariffs allocated to new installations from that date. A solar PV installation in 2010 will receive 36.1p for its lifetime (varying each year depending on the RPI rate). A solar PV system installed in 2012 will receive 33p for its lifetime (again varying with Indexation).

The purpose of this is said to be to reduce the financial incentive over time and thereby drive down the price of solar PV and wind turbines. There is thought to be little opportunity to reduce the price of a hydro installation as it is much more labour intensive, so the rationale is that the tariff should be the same whenever the system is installed.

Taxation

To quote from the Government’s paper: “In the 2009 Pre-Budget Report, the Chancellor confirmed that households who use renewable technology to generate electricity mainly for their own use will not be subject to Income Tax on Feed-in Tariffs.”

“Mainly for their own use” is the expression used and it is likely there will be some jiggery-pokery around what this means. So far it is being taken to mean more than 50%. We have to assume that this is a comparison of the annual production of the system and the annual consumption of the household. But this needs to be clarified as the reality could be different.

It is also being suggested that the capital cost of the system can be off-set against income for Income Tax calculations under the Enhanced Capital Allowance scheme. This could make a huge difference to the potential take-up, especially for higher-rate tax payers, but this is still to be confirmed by the Treasury.

Those rates in full:

The figures in the table are the rate the homeowner gets for each kWh of electricity generated. Add an extra 3p/kWh for each unit exported to the grid. Smart metering will be used to measure exactly what is produced and to calculate the payment due. The tariff is fixed for the period of the scheme — 20 years for wind and hydro, 25 years for solar PV, but linked to the Retail Price Index, to take account of inflation.

Tough luck, early adopters

Early adopters are defined as those that installed systems prior to July 2009. And the simple fact is that these people, who took the risk and kept the industries going while the Government prevaricated, are being penalised. They will receive only 9p per kWh generation tariff and 3p export tariff, irrespective of the technology.

Visit the Homebuilding Discussion Forum to leave your comments on Feed-in Tariffs and read other's views

Find ecological products and services in the Homebuilding Directory

More information on Feed-in Tariffs:

• Feed-in Tariffs: How They Work
• Feed-in Tariffs: Expert Views
• Renewable Heat Incentive

Further reading:

• Self Sufficiency: A Green Dream or a Reality?
• Saving Energy
• A Guide to Hydro Power
• An Introduction to CHP (Combined Heat and Power)