In the first of a series of articles, Francis Clark’s Energy and Renewables specialist, Bob Meier, reviews the financial environment for the emerging sector.  Here he looks at current incentives.

The range of ‘renewable’ electricity generation facilities that are eligible for financial incentives includes:

• Anaerobic digesters (producing biogas – methane - from organic waste, that fuels an electricity generator)
• Hydro-electric facilities
• Solar photo-voltaic panels
• Wind, etc.

These incentives currently mainly focus on electricity generating capabilities of up to 5 Megawatts and will also be extended to cover most space and water heating systems with a new incentive.  The main, direct financial incentive for electricity generation (up to 5 MW) is the ‘Feed-In Tariff’ (FIT).  This scheme covers installations at a wide range of domestic, business and community buildings and sites; including: schools, hospitals, farms, care homes, churches, supermarkets, shopping centres and rental properties (e.g. flats operated by a social landlord) etc. 

While the FIT is currently being reviewed by the Department of Energy and Climate Change and some aspects – particularly for large solar PV projects and anaerobic digesters – may be subject to change, the majority of the regime is expected to remain intact. Even if there are changes, the government has indicated that they will not apply retrospectively.

The FIT comprises of two elements – the ‘generation tariff’ which is paid to the generator for every kilowatt-hour of power actually produced by the renewable power source, and the additional ‘export tariff’ which is paid for every kilowatt-hour of power that is not used by the generator but which is ‘exported’ to the electricity grid.  FITs are paid by electricity supply companies that enter into contracts with individual ‘renewable’ generators.

The “export” tariff is not mandatory and some generators, particularly larger generators, may seek to enter into bi-lateral contracts to sell surplus electricity in the marketplace rather than rely on the “export” element of the FIT. The tax treatment of “export” tariff received and any amounts received under such arrangements are not expected to differ.

The level of ‘generation’ and ‘export’ FITs are guaranteed and are payable over 20 years (25 years for solar PV systems, 10 years for some CHP technologies).  However as it is anticipated that some of the technologies will become cheaper in the future, the amounts payable will be progressively scaled back (‘tariff degression’) for systems installed after March 2012 – this mainly affects solar PV and wind turbine systems.

For those generators who either do not qualify for FITs (by virtue of their size or nature) or who choose to do so, an alternative regime to the Feed-in Tariff regime is available. Under that scheme generators become entitled to Renewable Obligation Certificates (ROCs) proportionate to their production of electricity. A market for such ROCs is created by the large electricity suppliers (British Gas, EDF etc.) having a condition placed on their electricity supply license obligating them to buy a certain number of ROCs relative to their annual electricity supply volumes. Generators receive value for the ROCs by selling to the big suppliers either directly or through market intermediaries.

It is intended that a further scheme will be introduced for certain types of heating systems installed from the middle of 2011. The ‘Renewable Heat Incentive’ (RHI) will provide tariff payments for domestic and business-related heating installations such as solar thermal heating systems (typically roof-mounted), wood and other bio-mass burning heaters, air-source heat pumps, anaerobic digesters (producing biogas for heating), combined heat & power systems, etc.  RHI tariffs are likely, if the scheme proceeds as originally envisaged, to be payable for between 10 and 23 years, depending on the type of installation.  The amount paid will be based on an estimate of the likely output of the system for most installations if the final scheme is as anticipated.

For further information:

Bob Meier, Energy & Renewables Senior Manager at Francis Clark LLP
Telephone: 07969 000 003

Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. Francis Clark is the winner of the ‘Auditor of the Year - Mid Tier’ in the National Financial Directors’ Excellence Awards 2011, and LexisNexis Best General Tax Practice Award 2009. More information is available by logging on at our Online Information Centre