Policy and financial support for CHP in the UK

A feed-in tariff (FiT, feed-in law, advanced renewable tariff or renewable energy payments) is a policy mechanism designed to encourage the adoption of renewable energy sources. It typically includes three key provisions:

1) guaranteed grid access

2) long-term contracts for the electricity produced

3) purchase prices that are methodologically based on the cost of renewable energy generation.

Under a feed-in tariff, an obligation is imposed on regional or national electricity utilities to buy renewable electricity (electricity generated from renewable sources, such as solar thermal power, wind power, wave and tidal power, biomass, hydropower and geothermal power), from all eligible participants.

The cost-based prices therefore enable a diversity of projects (wind, solar, etc.) to be developed, and for investors to obtain a reasonable return on renewable energy investments. This principle was first explained in Germany's 2000 RES Act:

“The compensation rates…have been determined by means of scientific studies, subject to the proviso that the rates identified should make it possible for an installation – when managed efficiently – to be operated cost-effectively, based on the use of state-of-the-art technology and depending on the renewable energy sources naturally available in a given geographical environment.” (RES Act 2000, Explanatory Memorandum A)

As a result, the rate may differ among various forms of power generation, and for projects of different sizes.

In addition, FITs typically offer a guaranteed purchase for electricity generated from renewable energy sources within long-term (15–25 year) contracts. These contracts are typically offered in a non-discriminatory way to all interested producers of renewable electricity.

As of 2009, feed-in tariff policies have been enacted in 63 jurisdictions around the world, including in Australia, Austria, Belgium, Brazil, Canada, China, Cyprus, the Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Iran, Ireland, Israel, Italy, the Republic of Korea, Lithuania, Luxembourg, the Netherlands, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, and in some states in the United States.

In 2008, a detailed analysis by the European Commission concluded that "well-adapted feed-in tariff regimes are generally the most efficient and effective support schemes for promoting renewable electricity". This conclusion has been supported by a number of recent analyses, including by the International Energy Agency the European Federation for Renewable Energy, as well as by Deutsche Bank.

 

The Feed-tariff scheme in the United Kingdom

In October 2008, the UK Secretary of State for Energy and Climate Change, Ed Miliband, announced that Britain would implement a feed-in tariff by 2010, in addition to its current renewable energy quota scheme (see ROCS). In July 2009, he presented UK's new Feed-in Tariff Programme, expected to begin in early April, 2010.  Miliband has given a new name, "clean energy cash back", to this policy which falls fully within the framework of Feed-in Tariffs and is based on a few, extensively discussed, key elements:

a) only 2% of Britain's electricity consumption, by 2020, will be provided by renewable energy sources. The 2% target requires the "green generation" of only 8 billion kWh (that is 8 TWh) per year. France, thanks to its system of Feed-in Tariffs, in 2008 generated already nearly 6 TWh, and only from wind energy; in the same year Germany generated more than 4 TWh from solar PV (photovoltaic), and reached 40 TWh from wind energy.

b) The project involves only renewables sources which can produce less than 5 MW energy; so, UK's new FiT's project cap is 5 MW. Depending on law, only renewable energy sources and generators within this cap can benefit from tariffs: the government still prefers resorting to the Renewable Obligation Certificates mechanism for developing larger projects.
To prevent companies from moving large scale (for example big wind) projects from the ROCs to the Feed-in Tariff programme, a number of anti-gaming provisions has been inserted in the policy design; this should avoid the breaking up of bigger projects into several small ones, to fit within the 5 MW energy size cap.

c) The contract term is 20 years, 25 years for solar photovoltaic projects: this means that, starting from 2010, British providers of Wind Energy, Hydropower, Energy from Biomass and Anaerobic Digestion falling within the Renewable Sources eligible in accordance with the provisions of the proposed FiT scheme will be rewarded with a tariff rate guaranteed for the next 20 years - 25 years for Solar PV generators. In this way UK's renewable energy industry has a somehow long-term certainty, and can advantage of the FiT over other policy options.

d) Costs for the programme will be borne by all British ratepayers proportionally: all electricity consumers will bear a slight increase in their annual rate, thus allowing electricity utilities to buy renewable energy generated from green sources at above-market rates set by the government.

e) Generators can be green fields (they do not have to be metered customers).

f) The new UK's Feed-in Tariff Programme review is scheduled for 2013.

In the 2009 Budget The Government has announced that it will extend the Climate Change Levy exemption for indirect sales of CHP electricity to 2023, subject to State aid approval.

The Government has also committed to continuing other existing levy exemptions for CHP. The Government is looking to this incentive to bring forward future investment in CHP of around £2.5 billion, which will increase capacity by 3 GWe by 2015, and promote employment opportunities in the sector. By 2020, the Government expect that these measures have the potential to deliver around 7 GWe of new CHP generation capacity, and reduce emissions by 3.2 million tones of carbon dioxide (MtCO2). Budget 2009 has also announced that CCL rates will remain at the current levels in 2010-11.

The Government has also announced £25 million in funding for low-carbon community heating schemes, allowing at least 10 communities to benefit from cleaner, locally produced heat energy. This will help deliver savings of 20,000 tCO2 and support employment.

 

Eligible technologies and proposed tariff levels:

Technology

Scale

2010-11 Tariff p/kWh

Annual change3

AD1 (electricity)

<5MW

9.0

0

AD1 (CHP1)

<5MW

11.5

0

Biomass

<50kW

9.0

0

Biomass

50kW-5MW

4.5

0

Biomass (CHP1)

<5MW

9.0

0

Hydro

<10kW

17.0

0

Hydro

10–100kW

12.0

0

Hydro

100kW–1MW

8.5

0

Hydro

1-5MW

4.5

0

Micro-CHP1

<50KW

[T.B.A in Autumn]

PV1 (New build2)

<4kW

31.0

- 7 %

PV1 (Retrofit2)

<4kW  

36.5

- 7 %

PV1

4-10kW

31.0

- 7 %

PV1

10–100kW

28.0

- 7 %

PV1

100kW–5MW

26.0

- 7 %

PV1 (stand alone2)

<5MW

26.0

- 7 %

Wind

<1.5kW

30.5

- 4 %

Wind

1.5–15kW

23.0

- 3 %

Wind

15–50kW

20.5

- 3 %

Wind

50–250kW

18.0

0

Wind

250–500kW

16.0

0

Wind

500kW–5MW

4.5

0

Existing RO1 sites

<50kW

9.0

0

  Abbreviations: AD=Anaerobic Digestion, PV=Photovoltaic (solar), CHP=Combined heat and power, RO=Renewables Obligation

2   The consultation document doesn’t define these

3   The annual 'degression'

 

Other schemes can be utilised when establishing larger plant or in conjunction with existing installations.  Some administration must be expected and registration with various bodies, namely Ofgem in the UK.


Climate Change Levy (CCL Exemption)
The Climate Change Levy (CCL) came into force on 1 April 2001 and included an exemption for Good Quality CHP. The exemption was originally limited only to CHP fuel inputs, however, this was extended in the 2002 Budget when the Government announced that Good Quality CHP electricity sold via licensed suppliers will also be exempt from the CCL. Following a successful State Aid application to the European Commission, this exemption came into effect on 1 April 2003. (See the Association’s Note on CCL Exemption timelines).

The levy is chargeable on the industrial and commercial supply of taxable commodities for lighting, heating and power by consumers in Industry, Commerce; Agriculture; Public administration; and Other services. The levy does to domestic consumers, or by charities for non-business use. The CCL rates have been fixed since 2001, however, the Government announced in Budget 2006 that they will now increase in line with inflation (more information on HMRC news release here).

More information on the CCL is given in HMRC Reference:Notice CCL1 (August 2005) A general guide to Climate Change Levy

The latest information on the CHP exemption is outlined in HMRC Reference:Notice CCL1/2 (August 2005) Combined heat and power schemes

Additional information is also available via the Government’s CHPQA programme – see: Guidance Note 41: Use of CHPQA to Obtain CCL Exemption and HMRC presentation CHP Arrangements for CCL: Key Aspects

Exporting CHP schemes are awarded Levy Exempt Certificates (LECs) through a system administered by OFGEM. Full details of this scheme in document Guidance for exporting ‘good quality’ CHP generators & suppliers
Issue 4 (December 2005) on OFGEM’s CHP CCL exemption section of their website.

 

Enhanced Capital Allowances

Enhanced Capital Allowances (ECAs) were introduced as part of the CCL package in April 2001. They are 100% first-year capital allowances on investments in certain energy-saving equipment. Businesses are able to write-off the whole cost of their investment against their taxable profits during the period in which they make the investment. Good Quality CHP is one of the technologies eligible for support under the ECA scheme, as it qualifies as “energy-saving plant and machinery”. The CHP plant and machinery covered by the ECA scheme is detailed on the Energy Technology Criteria List.

Further information on CHPQA Guidance Note 42: Use of CHPQA to Obtain Enhanced Capital Allowances and also through the ECA website and HMRC Guidance Note ECA - 100% Enhanced Capital Allowances for Energy-Saving Investments.

Preferential Treatment of Business Rates for CHP Plant
CHP plants are not fully exempt from paying business rates, however, the Government has introduced preferential treatment under the business rates regime for Good Quality CHP plant. More information can be obtained from the CHPQA programme – Guidance Note 43: Use of CHPQA to Obtain Exemption from Business Rating of CHP Plant and Machinery.

MicroCHP
MicroCHP schemes benefit from a reduced rate for their installation, from the standard level of VAT payable from the normal level of 17.5% to 5%.This was announced by the Chancellor in his Budget 2005.  Further details are outlined in the HMRC Regulatory Impact Analysis document.  Reduced rate of VAT on air source heat pumps and micro CHP units March 2005.

MicroCHP schemes also benefit from an ‘uplift’ factor applied to their energy savings under the Government’s Energy Efficiency Commitment (EEC) programme.  Under EEC, electricity and gas suppliers are required to achieve targets for the promotion of improvements in domestic energy efficiency. The second phase of the EEC runs from 1 April 2005 to 31 March 2008.  More details on EEC can be found at Defra’s and Ofgem’s websites: 

http://www.defra.gov.uk/Environment/energy/eec/
http://www.ofgem.gov.uk/ofgem/work/index.jsp?section=/areasofwork/energyefficiency

 

ECAs for Biofuel Plant utilising CHP

It was announced in the Chancellor’s Pre-Budget Report 2005 that, subject to State Aid clearance, that Enhanced Capital Allowances (ECAs) will be granted for future biofuels plant construction providing certain processes are used. Good Quality CHP has been recognised as such a qualifying process.
Further details can be found on the following HMRC note Enhanced Capital Allowance for Biofuels Production Plant

District Energy (Community Heating)
The main programme for promoting the use of District Energy schemes – the Community Energy Programme (CEP) – was unfortunately brought to a close by Government in March 2006. The programme was administered by the Energy Saving Trust and information on the CEP can be found on their website.

Community Heating with CHP has been identified as an ‘innovative action’ under the Energy Efficiency Programme (EEC) and, similar to the treatment of MicroCHP, also benefit from an ‘uplift’ in energy savings to encourage suppliers to invest in such projects. More information on Ofgem document Energy Efficiency Commitment 2005-2008 Innovative Action - Decisions document November 2005

Renewable CHP
CHP schemes that utilise a renewable energy fuel (such as biogas, in most instances, or biomass as many developers are currently looking to introduce, and, from January 2006, also on the biomass-content of Refuse Derived Fuel (RDF) in energy from waste plant) are rewarded with a premium on each MWh of electricity produced under the Renewables Obligation (RO) mechanism. There is currently no benefit provided to the production of low-carbon or renewable heat.
More information on the RO can be found on the DTI’s website.