Pioneers Post
social investment

Green power subsidies – FIT for purpose?

16 June 2011

Aquila Green is an environmental consultancy working with public, private and voluntary organisations to reduce their impact on the environment. Find out more by visiting www.aquila-green.co.uk

by Jo Lacey, director of environmental consultancy Aquila Green.

Last week the government announced drastic cuts to subsidies designed to incentivise investment into renewable energy. The decision to cut what are known as Feed in Tariffs (or FITs) was met with inevitable fury from the solar industry.
 
The industry claimed the cuts would slow down the uptake of solar energy and even kill off the growth of the industry completely. But as trigger happy as this government may be when it comes to making cuts, the industry is, at best, missing the point and, at worse, demonstrating an ugly self-interest.  
 
It is worth looking at what has actually been cut and then consider what they mean for the savvy investor looking for returns with a positive environmental impact. 
FITs were originally introduced to encourage the take up of small scale electricity generation (mainly solar, wind, hydro and micro CHP) by individuals, organisations, businesses and communities. The idea was that small scale generators would be paid a tariff to generate electricity and export any surplus back to the national grid.  
 
However, with returns of between 8% and 10%, it did not take long for investors to see the potential for securing mouth-watering returns over a 25 year period. And with no limit to the large scale projects, it was not a surprise that energy watchdog Ofgem was inundated with applications to build huge solar farms. 
 
The overly high rates set by the previous government skewed the market and created an industry focused on short term profits, rather than creating long term growth through new markets, such as manufacturing our own solar panels rather than importing them from Germany or China.
 
The current government moved quickly to limit the number of these applications getting off the drawing board. It slashed tariffs for any project above 50kw, with the largest cuts of 72% on projects between 250kw and 5MW. To put this into perspective an average household solar installation is around 3kw.
 
But before decrying the government as ‘anti-green’, the savvy social investor must ask who would be losing out in order to pay for these returns. These solar farms would have quickly gobbled up the limited cash available to encourage investment into small-scale electricity generation.
 
Which brings me on to my next point. The FIT was never a government subsidy paid for directly from Treasury coffers. Instead, it is drawn from a levy put on the utility bills of every business and home in the country. Is it not right that it should be the same businesses, homes and community groups that get a share of the spoils? It is their investment after all.
 
Even the growing number of households facing fuel poverty would have been lining the pockets of an industry that has already had around £50m of government subsidy under different schemes over the last 10 years.
 
If you are an investor hungry for both financial and environmental returns, the truth of the matter is that renewables remain an exciting sector. Even if your primary motivation is simply a quick buck, the ROI in the solar market, in spite of last week’s cuts, still looks incredibly healthy.  
 
For example, a solar PV system with a 250kW capacity would still provide enough panels to cover half a football pitch (or approximately 80 houses), and with a guaranteed repayment of 15p per kWh fixed for 25 years, smaller scale projects still stack up. In other words, even with the FITs cuts, an investment into a 250kW project (an approximate cost of £700k) would generate in income and savings an impressive £2 million over the 25 years.
 
So the smart businesses and investors will be the ones to get new projects off the ground before the rates potentially get cut further next year. However, perhaps the even more savvy investor will start to put faith in the UK’s ability to compete internationally in manufacturing the hardware that you’ll undoubtedly be seeing in a street near you very soon.
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Community initiatives

It's been a great shame that so few community schemes have evolved. In my own efforts, the generation of local energy from a variety of sources including PV would have been a revenue positive contribution to a local hub for community cohesion and economic development. As ever the problem is finance. From when we began in 1996, we'd drawn attention to the need for a 'social investment' fund and taken that forward to a business plan in 2004, to invest surplus into CDFIs.

The problem then was finance, as it was 5 years later when setting out a proposal to apply it. The proposed Big Society Bank, still not available, Regional development agencies not interested and a certain amount of apathy, leaves us pitching at Big Lottery, with little outcome.

http://www.box.net/shared/uzirp4gu73

Jeff Mowatt
People-Centered Economic Development

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