The review is to be completed by the end of 2011, with tariffs remaining unchanged until April 2012 (unless the review reveals a need for greater urgency). Reaction from those involved in the solar industry has been well publicised but those involved in the AD sector are waiting with baited breadth as obviously everything hinges on the detail. Organisations such as ADBA, the NFU and REA had been lobbying the government on behalf of this sector for a substantial increase in tariff levels.
The Coalition Government has obviously listened and justified the fast track review on the grounds that only two farm AD projects have been accredited whereas they were expecting at least six projects to be accredited by now. Over 15,000 installations were registered on Ofgem’s Central FiTs register by November 2010 and the vast majority is solar PV installations.
When looking at the current tariffs levels there is considerable difference in the rates offered depending upon the size and type of technology used to generate the electricity. The FiT tariff for AD is divided into two bands – 11.5p/kWh for projects producing less than 500kW of electricity and only 9p/kWh for projects producing 500kW-5 MW of electricity. The same tariff applies to all types of AD projects and is intended to be paid over a 20 year period.
These rates are very low when compared with equivalent rates available for electricity generation by other technologies. It is understood that the tariff level was set at a low level in the (mistaken) belief that the only feedstock required for this operation would be slurry and that would be supplied at no cost.
In order to increase the energy output, the slurry needs be supplemented by an energy crop to generate sufficient levels of biogas. Nor was the cost of obtaining other types of feedstock such as food waste used in other types of AD projects taken into account when the tariff was set. Compare this against the other technologies – wind, solar and hydro which attract higher tariffs but no issue with charges for feedstock.
The financial sector have been consulted on what the level of tariff increase they are looking for in order to attract an adequate internal rate of return for farm AD projects which is much higher than the 5 – 8% currently offered. Higher tariff levels have been suggested to DECC as part of the ongoing consultation in response to their advice.
What is not clear from the announcement whether DECC will consider offering different tariffs for farm AD projects from other AD projects (e.g. food waste and sewage sludge AD projects) and whether the 500kW band will remain the determining factor when considering what is a large or small AD project within the overall FiT scheme. (This division reflects the approach adopted in Germany for example.)
Obviously the level of banding and tariff offered will influence the market and size of farm projects AD projects that will go ahead. Discussions are ongoing to clarify whether DECC is seeking to promote certain sized farm AD projects and what impact that might have on the carbon reduction targets and efficiency levels.
Of course this also overlaps with the work of another government department – Defra is consulting on the AD Framework Document or "AD Action Plan". In relation to farm AD projects, Defra is considering how to commercialise the markets for input feedstock and digestate use in order to facilitate commercialisation of the technology and attract more investment. Certainly the lack of adequate markets for digestate produced is a concern of funders.
Defra makes it clear in the AD Action Plan that although some energy crop may be required in combination with slurries to increase the calorific value of the feedstock, it expects such crops to be grown as part of the normal agricultural rotation and does not support the loss of good agricultural land to supply energy crops for AD plants to the exclusion of food producing crops. The OFT recently announced it was undertaking a study into the market for the treatment of organic waste (eg AD) and whether there are appropriate incentives in place for the efficient use of technologies to deliver the best outcome for consumers.
Let us hope that with all this attention and recognition of the importance of this market that the results of the FiTs review provides sufficient financial incentive to stimulate investment in this market. The positives (reduction in waste going to landfill, reduction in carbon emissions, creation of new jobs/industry, contribution to meeting our renewable energy targets and contributing to security of energy supply issues) outweigh the negatives.
— By Jacqui O’Keeffe, Partner, Howard Kennedy
