First published in the Quoted Cleantech newsletter - March 2010

by Andrew Hore

The UK Government is encouraging investment in renewables through feed-in-tariffs (FITs) for small scale low carbon electricity generated from the likes of solar and wind power. However, the UK’s initiative comes at a time when the German Government is reducing its FITs for solar, demonstrating that it can be dangerous to rely on government incentives to make a business commercially viable.

Adrian Hutchings, chief executive of AIM-quoted clean technology developer Energetix, describes the FITs as “icing on top of the cake”, saying he would not create a business purely on the back of government subsidies. One of Energetix’s businesses, Genlec, has developed technology that can be integrated with a normal boiler to turn it into a microCHP (combined heat and power) boiler: Hutchings emphasises that the FITs are “not fundamental to our business”.

Low Carbon Accelerator (LCA) is a major investor in wind turbine manufacturer Proven Energy, which should be a beneficiary of the FIT scheme. Dr Steve Mahon, LCA’s chief investment officer, is upbeat about FITs. He expects to see “a steady flow of finance into renewable project developers as investors look for strong returns from the long term nature of this policy”.

The Department of Energy and Climate Change revealed details of the FITs during February: the scheme begins on 1 April 2010. Householders who install solar panels or wind turbines up to 5MW will be paid for electricity generated, even if they use it themselves – a generation tariff. An additional payment will be received if the electricity is fed into the grid – an export tariff. According to the Government, a typical 2.5kW well-sited solar photovoltaic installation could offer a homeowner an income of up to £900 and save £140 a year on electricity bills. That suggests a payback period of around ten years.

The tariffs also cover hydro, anaerobic digestion and microCHP, although the latter is initially a pilot scheme which will cover 30,000 installations, with a review after 12,000 microCHP boilers have been installed. To put this in context, 1.7 million boilers are installed each year.

There was also news of a renewable heat incentive scheme, due to commence in April 2011, which will encourage investment in technologies such as ground source heat pumps, biomass boilers and air source heat pumps. The consultation process has commenced on these proposals.
 
The guaranteed tariffs vary (a complete list can be found at http://www.decc.gov.uk/en/content/cms/news/pn10_010/pn10_010.aspx) and have been set for the next three years, although they will be adjusted for inflation. Government models suggest that, by 2020, 2% of the UK’s energy requirement could be generated by these small scale projects, which will be eligible for the scheme even if they have already commenced.

The attraction of the tariffs is that they provide a predictable, index-linked (RPI) income in return for investment in renewables technology, with no income tax payable on this income. The wind tariff lasts for 20 years and the solar one for 25 years.

The tariffs have been set to provide a return on initial investment of 5-8%. Broker KBC Peel Hunt argues this ignores that they are depreciating assets, and suggests that the underlying IRR will be nearer 4.7%. That implies it could take 16 years to cover the initial investment, which should still be enough to attract many householders.
 
KBC Peel Hunt believes that the FITs’ impact on AIM companies will be limited, but it could help to speed up their entry to the market. Fuel cell-based microCHP boiler developer Ceres Power’s link with British Gas places it in a strong position, while Ceramic Fuel Cells is developing microCHP products for homes in conjunction with E.on. CFC has also developed BlueGen, which is the size of a dishwasher and can work with an existing or new boiler to produce up to 17,000 kilowatt hours of power a year. BlueGen will be available in the UK by April 2010.

These Government subsidies are helpful, but companies still need to be assessed on their underlying merits.

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