Almost anyone working in, or considering deploying, renewables will be aware of the importance of the Feed-In Tariff and, more recently, the government’s decision to end the scheme from March 31st. On January 8th this year, the Department for Business, Energy and Industrial Strategy (BEIS) announced a consultation on a proposed successor scheme to the FIT, the Smart Export Guarantee (SEG).
BEIS visited Glasgow on 7 February as part of this consultation to give a presentation entitled “Smart Export Guarantee – The future of small-scale low-carbon generation”.
Locogen’s Logan Black went along and here he gives us his take on the SEG and how it could impact the industry.
Background – what happened to the FiT?
The Feed in Tariff (FiT), the UK government incentive for supporting renewable energy generation up to 5MW, is closing at the end of March. This incentive provided a fixed rate per kWh of energy generated dependant on type of technology, size of technology and time of commissioning. In addition to this there was a guaranteed export tariff, which ensured that generators exporting to the grid were compensated. This supported the deployment of distributed renewable energy, helping to meet climate change targets and decarbonise energy generation. The FiT is coming to an end because the Department for Business, Energy and Industrial Strategy (BEIS) identified that the scheme had largely achieved its goal and renewables could be deployed without financial support, due to a reduction in capital, operational and financial costs.
BEIS faced much criticism for their handling of the FiT closure. The consultation on support mechanisms for small-scale renewables was originally promised to be published by the end of 2017, and, in the shape of the consultation on the SEG, did not actually appear until January 2019.
This has led to a great deal of uncertainty in the industry, undoubtedly impacting deployment rates. It has also resulted in a policy gap, between the end of the FiT and implementation of the SEG, when no support mechanism will be available.
This is extremely unhelpful and was entirely avoidable, but we must now concentrate on what lies ahead and assess the pros and cons of the SEG.
The Smart Export Guarantee: what is it, who qualifies, how will it work?
BEIS has been clear that the Smart Export Guarantee (SEG) is not a direct replacement for the FiT. It is a mechanism that will be utilised to ensure that renewable energy generators receive a fair price for the power they export to the grid. The SEG is applicable to the same range of technologies that were eligible for the FiT: onshore wind, solar, anaerobic digestion and hydropower up to 5MW, along with micro CHP. Electricity suppliers with a base of over 250,000 customers will be required to offer a SEG tariff, while companies with less than 250,000 customers will be exempt but able to opt in to SEG.
The value of the SEG and the contract length will also be determined by the energy companies. The only constraint is that the value offered must be more than zero. This protects small scale generators from potential negative pricing. There are several options for the SEG tariff under consideration, all of which will require a meter capable of half hourly reading. These options are as follows:
Simple variable tariff
Different values of export at day/night and week days/weekends
Advanced variable tariff
Value determined by market conditions. This can either be daily or even potentially linked/benchmarked to half hourly market prices.
BEIS believes that the second option, a simple variable tariff is the most likely option to be utilised in the first instance.
What are the objectives of the Smart Export Guarantee?
The broad aims of SEG is to allow small scale renewables to be compensated for the energy they export to the grid, therefore allowing a route to market. Additional aims include challenging the market to innovate, lower costs to energy consumers and transition to a smart, flexible electricity system.
And what are the challenges / limitations of the scheme?
For the Smart Export Guarantee to work there is a requirement for the energy supply companies to be able to utilise the energy generated via SEG without significant administration overheads, thus allowing them to offer a fair price for energy exported. With the only constraint on the SEG’s value being that it must be greater than zero, it is not known how competitive the market will be for the energy exported under SEG. Companies can effectively opt out of SEG by offering a rate of 0.01p/kWh.
The SEG is only really a consideration for small scale projects, up to approximately 100kW. Projects above this size are likely to receive a better compensation through a Power Purchase Agreement.
A potential issue with SEG, on a domestic scale, is the requirement for all export to be metered on a half hourly basis. BEIS believes that this will be achievable trough the current smart meter programme. As the delivery of this programme is significantly behind schedule there may be potential problems. BEIS does not believe that this will be an issue and a meter could be quickly arranged for a SEG project.
The impact assessment completed by BEIS predicts that the deployment of renewable energy projects up to 5MW between 2019 and 2026 will be a fraction of what was commissioned in the previous seven years.
What is Locogen’s view of the scheme?
The drivers behind the Smart Export Guarantee are clear and understandable, and the principles of it move the UK electricity market towards a more innovative, smart system. It does not, however, incentivise renewable energy projects.
We would like to see a market where low carbon generation can thrive and allow the electricity sector to further decarbonise and help us meet the challenging carbon reduction targets we have set. To do so we need:
A consistent approach to the energy system where all forms of generation are valued equally.
Certainty on project revenue streams – ideally long-term contracts should be offered. The SEG contracts are to be offered by suppliers and lengths can vary. This will increase risk and could cause problems developing financial models and securing project finance.
The consultation does not set out an implementation period. Clear guidance from BEIS is needed to understand the timescales required for SEG. Also, projects commissioned after the FiT deadline, but before the implementation of SEG, will receive no payment for the energy exported to the grid for this period.
This is an important issue for our industry and for the future of small-scale renewables. Locogen has responded to the consultation, which closes on 5 March 2019. You can access the consultation here.