This article will be of interest to major businesses (particularly those occupying multiple sites); and investors (particularly those interested in renewable energy solutions) These businesses will be interested in the new Feed-In Tariff which we discuss below because, despite its pretentions to incentivise only small scale generation, there is something for each one of these businesses in the scheme. On top of that, the Feed-In Tariff should arouse the interest of anyone who buys electricity for their own home – and who doesn't?

Before looking at the Feed-In Tariff in depth, let us find its rightful place in the hierarchy of Sustainable District Infrastructure. That term applies to the complete range of services, rather than just electricity alone, all of which can be generated and distributed in a less centralised way, thereby saving the carbon consumption (not to mention costs) associated with the effort of distribution itself. The components of district infrastructure include heat and cooling supply; electricity (supply and generation); water (supply and disposal); waste (disposal or re-use); and communications. A fully integrated Sustainable District Infrastructure scheme would include all of these and the UK is developing a number of these schemes around the country. The Feed-In Tariff plays its part in addressing electricity and it provides a new incentive for generation and supply. According to the hopes of the Government (the last one and probably the Coalition) the Feed-In Tariff will provide great impetus to carbon reduction.

Under the Feed-In Tariff, a generator of electricity receives a payment for every kilowatt hour (kWh) of electricity generated by them. This is known as the Generation Tariff and it ranges from just under 10p to just over 40p per kWh depending on the method of generation. It is more generous than the Renewable Obligation but it only applies to installations that are capable of producing 5 megawatts (MW) or less. The payment is based on generation alone, irrespective of whether the electricity itself is consumed on site or exported to the grid but, if the electricity is exported to the grid, the generator receives a further tariff which is known as the Export Tariff.

The funding for all of this apparent largesse is from the major electricity generating companies. In the UK, this comprises the big six household names. They have no choice but to pay the tariff to eligible applicants but there are some protections in that the costs are spread fairly amongst them all under a process known as "levelisation".

Whereas, in Europe, Feed-In Tariffs have long been a major incentive to renewable energy generation on a very grand scale, the UK has, until now, relied on the Renewable Obligation. The significant difference between the two is that, whereas the Renewable Obligation is linked to the price of carbon (which is currently relatively low) the tariff is fixed and is considerably higher.

For businesses

Although the Feed-In Tariff is more generous than the Renewable Obligation (on current carbon prices) businesses may not wish to become part of it or to transfer existing installations into it. A business which is already well set up with Renewable Obligation schemes which, by their size, are ineligible for the Feed-In Tariff, may prefer to keep all of its installations under one incentive. However, there is a "once only" opportunity to switch if desired. Businesses can combine the two so that some installations are accredited under the Renewable Obligations scheme and others are in the Feed-In Tariff scheme. This provides a certain amount of flexibility and should assist businesses in making the most of the incentives and also to dovetail them, if required, with the CRC Energy Efficiency Scheme.

Bearing in mind that the Feed-In Tariff is only available for installations of 5 MW or less, there would be an obvious loophole if a business could build multiple 5 MW installations on the same site. Accordingly, that loophole is severely restricted; though it is not entirely closed. Multiple installations of the same technology will be classed as a single installation and will, therefore, be above the Feed-In Tariff threshold if they exceed 5 MW. However, two installations using different technologies (e.g a PV panel and a wind turbine) will be classed as separate installations and, provided they are both under 5 MW, will each attract the tariff. That gives potential for 10 MW of capacity, an amount which many businesses would find useful. If an installation is expanded within 12 months of completion, that is treated as an increase in the capacity of the installation. After 12 months, an expansion is treated as separate from the original installation and attracts the tariff, albeit under a different method of calculation. The limitation of 5 MW relates to each site. "Site" is a defined term but, despite this, the parameters of sites could be difficult to define, particularly in large industrial or rural locations. In borderline cases, there could be much debate over the definition of a "site" and, therefore, the administrators of the scheme have a residual discretion to determine what is a site.

For investors

Crucial to the Feed-In Tariff's attraction to investors is the right of generators (i.e, the owners of an installation) to assign their tariff receipts. Moreover, there appears to be no restriction on geographical boundary, as a result of which, funds and other investment vehicles may wish to consider providing the equipment on commercial terms that benefit the owner and the fund. For example, the site owner might take the benefit of the electricity (thereby reducing its need to purchase it from the grid) and the investor might fund the installation by taking the benefit of the tariff. Moreover, although tariffs are capable of being altered over the years, these alterations will not apply to existing installations. They will apply only to installations built after the change in tariff. Consequently, once an installation has been accredited and built, its tariff will remain at that level until the end of the scheme or the decommissioning of the installation. With some exceptions, the lifetime of the scheme will be 25 years for photovoltaic technology and 20 years for other forms of eligible technology. Consequently, investors can look forward to a fixed rate of return (fluctuating only in accordance with the Retail Price Index) for a fixed period of at least 20 years on an asset which has relatively low running costs.

Interestingly, photovoltaic generators attract a longer scheme than others. The thinking here is that the costs of photovoltaic are (relatively speaking) high at present but photovoltaic energy is quite likely to be one of the main solutions adopted by Feed-In Tariff installations.

Not only can the tariffs be reviewed as the years go by, but they are also subject to "degression". This works as follows. The Government has published the tariffs that will be available for some years to come. An installation accredited in the scheme year to 31 March 2011 will attract a higher tariff than an identical scheme accredited in the year to 31 March 2012 and so on as the degression continues over the years. The policy makers have introduced this in recognition of the fact that technology costs will probably reduce over the years and, therefore, the incentive should not need to be as strong in later years.

For home owners

One attraction has to be the guaranteed investment return over 20 or more years. The return is estimated at between 5% and 8% depending on the quality of the site. In addition, there is the added benefit of tax relief which is available (subject to some qualifications) to individuals but not to businesses. In consequence, a home owner can obtain the Generation Tariff as well as the Export Tariff if they sell the electricity to the grid. If they do not sell to the grid, they save the cost of buying the equivalent amount of electricity and they may not pay income tax on the tariff payments.

Different technologies

Only five technologies are included in the scheme so far: wind, solar PV, hydro, micro combined heat and power and anaerobic digestion. They are not all treated equally. Others, notably biomass, are not eligible. There was an initial desire to include biomass but it was found there were too many complex considerations surrounding the monitoring of compliance, particularly regarding the eligible biomass fuels, together with the wider question of the desirability of diverting non-waste biomass from other more beneficial uses. Sooner or later biomass should be included in the scheme but, for the time being, its involvement is only as a constituent part of anaerobic digestion.

One notable technology is Micro CHP which is really only included as a pilot. The Feed-In Tariff applies only to very small installations (with a capacity of 2 kW or less) and, when 12,000 installations have been completed (expected by mid 2012) there will be a review of the technology's eligibility.

Photovoltaic technology is also singled out. It starts with a relatively high tariff in 2010/11 compared to the other technologies but its rate of degression is proportionately faster than for the other technologies. The policy makers believe that photovoltaic costs will reduce the most rapidly over the years and the degression is intended to be commensurate with that expectation.

Another notable distinction is the treatment of wind and hydro. Whereas, a 5 MW photovoltaic installation will attract a tariff rate of 29.3p per kWh in 2010/11, an equivalent wind or hydro installation will attract only 4.5p per kWh. This is policy driven in that wind and hydro technologies are already proving themselves capable of providing effective climate change solutions at much larger scales than 5MW and the policy makers do not want the boundary between the tariff (at 5 MW) and the Renewable Obligation (for anything over 5 MW) to be too steep for fear that investors would deliberately downsize projects to fit within the threshold for the better tariffs.

Scheme review

The scheme will be reviewed at the same dates as the reviews of the Renewable Obligation. The first review will therefore be in 2013. Although the prospect of a review creates unwelcome uncertainty (particularly for investors), the Generation Tariff cannot be changed for installations that exist at the time of the review thereby preserving most of the rationale for entering the scheme.