Why solar power makes good financial sense

The rewards for self-sufficiency and reduced reliance on the national electricity grid have grown with the introduction of the Feed in Tariff. Hadyn Scholes explains how businesses and communities can benefit

Suddenly, the rewards for generating electricity from low-carbon sources are within the reach of far more people than ever before. The financial incentives to encourage the generation of renewable energy, both for use and for export back to the grid, are starting to look very attractive.

There’s a viable range of small-scale domestic options such as solar PV and small wind turbines, as well as larger technologies which will be more attractive to industrial and other users. Commercial developers and utility companies are starting to take an active interest. Community projects that previously might have struggled to raise capital should now find it easier to get funding from the banks because of the higher returns available. The profitability of on-farm or private estate projects will also be vastly improved.

So what’s brought about this very welcome democratisation of small- and medium-scale renewable energy development? The answer is the Feed in Tariff (FIT). One of two new energy policy mechanisms announced by the Government in February, the FIT came into force on 1 April as part of the Low Carbon Transition Plan to meet the targets of the Climate Change Act, respond to Copenhagen commitments, reduce carbon emissions and stimulate growth in low-carbon electricity.

One of the key aspects of FIT is that the financial support for small-scale renewable energy generation is two-fold, in that people producing green electricity receive a generation tariff (paid by an electricity company) for everything they generate plus an export tariff for everything they feed back to the grid.

In the case of small scale solar PV, for example, the generation tariff is as high as 41.3p/kWh and the export tariff 3p/kWh – so the rewards of self-sufficiency and reduced reliance on the grid are very clear. While the export tariff is fixed, the generation tariff for other forms of renewable energy (up to 5MW) varies according to the type and scale of the technology that’s installed.

Although all the technologies covered under the FiT (including anaerobic digestion, hydro and micro CHP) will give returns that stack up very well against other forms of investment, it seems likely that medium scale wind and solar PV will be particularly attractive.

While developers in the past have generally not been that interested in wind projects of less than 5MW, those with an installed capacity of between 100-500kW are now likely to provide optimal investment opportunity thanks to the level of tariff and the economies of scale of this size of turbine. With lower noise levels, easier transport and access and less visual impact, they should incur fewer development constraints and planning difficulties thus avoiding the complexities and associated costs of a full environmental impact statement.

Solar PV installations benefit from the highest tariff and offer a good return on investment, especially for early adopters. Large-scale solar arrays between 1MW and 5MW are now feasible throughout the South of England and are attracting strong interest from commercial developers. Achieving planning consent for these is likely to be easier than wind developments thanks to the minimal environmental impacts. Small-scale hydro developments will also benefit from the FIT. All of these technologies are ideal for enterprises and developments on industrial estates.

However, there is some need for caution. Smaller scale projects won’t bear the costs of appealing a failed planning application – so choosing the right ones and the right sites at the outset is of paramount importance.

Developers may also face a dilemma in that the FIT rewards arise when you own the building but stop when you sell – so some may look to find ways to retain equipment installed on the roof and use the services of an Energy Services Company to manage these assets.

With advancing legislation favouring the generation of small scale and sustainable generation of renewable energy, more people stand to gain financially, as well as making a personal contribution to reducing emissions. Equally, as carbon reduction targets grow tougher, developers will have to look at new options for meeting them in ways that make financial sense. With the Renewable Heat Incentive due to be implemented next April, a wave of investment opportunities in medium scale biomass and building integrated heating seems the likely next step.

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