FITs and Sparks

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This is the second instalment of a four part series.

Wind-Turbine-on-Fire

We saw in the first post how the cost of electricity has been artificially elevated by the policies of our government. In fact we only saw the reasons for part of the increase, and this post will hopefully explain at least some of the rest.

To summarise the last post: a generator of non-carbon-based electricity will be paid an ever-increasing amount of money by generators of carbon-based electricity. This money will have come from their customers as a direct levy on their bills. So far this amounts to at least £273M and will increase rapidly as the renewables obligation becomes more onerous and inflation ramps up the buy-out price.


But these payments only cover the generation of electricity: there are further riches in store once we start to consider its consumption.

 

The only saving grace here is that this extra money is only available to smaller generators who can’t get their mitts on any ROCs. So this extra gelt can’t be grabbed by large installations like wind farms (unless it can – see later).

We’ll continue to concentrate on wind power, for simplicity (and because I detest it so much). The table below is DECC’s summary of the “Feed In Tariffs” (FITs) available to wind power generators, covering the period from 1st April 2010 to 31st March 2013. For convenience I have shaded the tariffs relevant to the immediate future in pale blue.

You will notice that it seems to be slanted heavily towards smaller installations. At first glance this would appear to be fair enough as the ratio of capital cost of a small installation to its expected output is much higher than an industrial installation, and the installer is less likely to have access to the ready money necessary. The maximum single installation that qualifies for FIT is 5MW. This is still quite big – imagine two industrial turbines. And who’s to say that 10 turbines all sited near each other on the same hill are not a wind farm but five individual installations?

Description

Period in which Tariff Date falls

Tariff (p/kWh)

Wind with total installed capacity of 1.5kW or less

1 April 2010 to 31 March 2012

37.90

1 April 2012 to 30 November 2012

35.80

1 December 2012 to 31 March 2013

21.00

Wind with total installed capacity greater than 1.5kW but not exceeding 15kW

1 April 2010 to 31 March 2012

29.30

1 April 2012 to 30 November 2012

28.00

1 December 2012 to 31 March 2013

21.00

Wind with total installed capacity greater than 15kW but not exceeding 100kW

1 April 2010 to 31 March 2012

26.50

1 April 2012 to 30 November 2012

25.40

1 December 2012 to 31 March 2013

21.00

Wind with total installed capacity greater than 100kW but not exceeding 500kW

1 April 2010 to 30 November 2012

20.60

1 December 2012 to 31 March 2013

17.50

Wind with total installed capacity greater than 500kW but not exceeding 1.5MW

1 April 2010 to 30 November 2012

10.40

1 December 2012 to 31 March 2013

9.50

Wind with total installed capacity greater than 1.5MW

1 April 2010 to 30 November 2012

4.90

1 December 2012 to 31 March 2013

4.48

A quick summary of the table is that you will be paid a sum of between 4.48p and 21p per unit of electricity that you generate, depending on the size of your installation.

And the time now comes to clear up a little misunderstanding. The name “Feed In Tariffs” has led many people to think that this payment comes from providing electricity to the grid. In fact, the electrons never even need to leave your premises. If you generate and use all the electricity yourself you will still be paid the enhanced rate. Amazing, isn’t it? You make something yourself, use it yourself, and someone else gives you money for doing that!

And making your own power of course also means that you won’t have to pay your normal supplier for the power that you have displaced, so you gain to the tune of the FIT plus your normal charge: here in the Republic this is 13.2p/unit from EdF (by the way, you do know that EdF is a contraction of Électricité de France, don’t you?) giving a total benefit of up to 34.2p/unit to use something you made yourself.

Who pays you all this free money? That’s an interesting question, and the surprising answer is: you choose. You are free to select someone not to supply you with electricity, who then has to give you money for all the power you generate and use yourself. As far as I can see, none of the big six suppliers (British Gas, EdF, E.ON, Npower, ScottishPower and SSE) are allowed to decline this honour. What they can do, though, is what many big companies do to small suppliers worldwide, and that is bugger you about.

Because there is another complication. I haven’t yet mentioned all of the sources of money involved in this scheme. If you don’t use all of your shiny new sparks yourself you are encouraged to send them up the line to your supplier, who is compelled to buy them from you, and pay you 4.5p/unit (from 1st December) on top of the up to 21p/unit they have already paid. This means that they are obliged by law to purchase something for over 25p that they can only sell for 13.2p and could have made for themselves for about 8p. What a wonderful business model! Who could possibly have thought that one up?

Well politicians did, of course, encouraged by the green lobby. That is, a bunch of people who have generally had no experience of real business have forced commercial enterprises to buy at high prices and sell at low ones. And because this is a political scheme administered by unenthusiastic businesses they perhaps haven’t given the scheme the thought or emphasis that they might have done. One only has to trawl the various websites devoted to consumers wanting to pull money from thin air to quickly see the myriad problems they are having in setting up FITs or getting paid for power they think they had fed back.

Although this payment - called the “export” tariff – is small compared to the “generation” tariff, it causes much more expense and trouble. Most of us have a relationship with a power company whereby they send us some leccy through a meter: the meter measures how much comes in and we get a bill for it. When power is instead flowing up into the grid, normal meters cannot cope. This means that either an extra meter – the export meter – has to be fitted, or the original one is swapped for a “smart” meter.

Both solutions are expensive and all of the power companies seem to deal with them in their own way. Some charge for the meters, some don’t, some apply an annual rental, most usually about £70 or so. However the most common route seems to be that the export meter isn’t fitted at all, and 50% of all the locally generated electricity is simply deemed to be exported. Given that the annual payment to the generator (householder) is probably of the order of £100 or so that would seem to be a sensible compromise.

Let’s work out what the impact of this may be for a commercial generator (E.ON, ScottishPower, etc.) based on a household that has splurged granny’s bequest on a 5kW wind turbine in the back garden. Whereas before the generator sent some electricity closely followed by a bill, now they send less or may even get some back, pay an enhanced rate for what they don’t send and, even more for what they receive.

We’ll look at a worked example now to see what the difference is. Average annual household consumption of electricity in the UK is 3,300kWh and EdF charges 13.2p/kWh. The 5kW turbine, assuming they get planning permission for it, could theoretically provide up to 43,920 kWh each year, but won’t. The wind doesn’t blow all the time, so vendors usually quote a “load factor” of 30%. No-one ever achieves 30% over a year, some go as low as 9%, but let’s be generous and take the vendor’s word. Also, we’ll assume that sufficient power can be exported to make the fitting of an export meter worthwhile to gain the maximum benefit from the export tariff. We’ll ignore any costs associated with the rental of extra metering or transmission equipment or the supplier’s extra administration costs.

So we’ll suck 13,176kWh out of the air via the turbine. As much as before – 3,300kWh - will go to running the household and 9,876 can be exported. All of the 3,300kWh qualifies for FIT and 9,876kWh qualifies for FIT and Export. This gives our green householder an income from his power supplier of £3,211.38, and added to the saving on his previous power bill means that he is £3,646.98 better off every year.

Which of course means that his reluctant supplier is £3,382.98 worse off (factoring in the saving of unused generation). Through no fault of their own, the thick end of three and half thousand quid has just been wiped off the generator’s bottom line. That’s money that is no longer available to pay for the transmission lines or generating plant, staff or return on investment. They can’t afford to forego this revenue so need to replace it from somewhere.

That somewhere is my electricity bill, and probably yours too, unless your granny died recently as well. So all our electricity bills go up to pay for some rich person’s secondary income. Then because the price of electricity is a major component of the RPI calculations, inflation rises, the value of a ROC (remember them?) increases with RPI, our industrial wind generated electricity becomes even more expensive and round we go again.

If you would like to play with the numbers yourself, just click here (soon, I promise) to visit an unpublished page to download a spreadsheet.

So we’re all losers except for the rich folk with a big wind turbine in their back garden? The sad fact is that even they may not have won as much as they think. Firstly, they have to pay for the turbine and they are not cheap – a decent 5kW turbine will cost about £30,000 fully installed, including planning, groundworks, installation and grid connection. If they have the money available that’s great, they will make about 11% on capital, more than can be had from savings accounts just now. If they have to borrow to invest, that will cost about 7%, so their £3,650 annual windfall (geddit?) will be reduced by £2,100. From the remaining £1,400 needs to come the cost of public liability insurance in case bits fly off (£100?), also regular maintenance (£200) and occasional repairs (£5,000 every 7 years, say, equal to £700/year). This brings us down to about £550 a year.

Which is fine in a good windy spot where 30% capacity can be reliably achieved. But this is the wind we are talking about and it is neither reliable nor, in most places, blowing at the right speeds for 30% of the time. A more realistic figure is probably 20% and at this point our hapless householder is likely to be in a loss-making situation. If you have a house big enough to accommodate a wind turbine it’s probably bigger than average so its electricity consumption is likely to be higher than average. At 5,000kWh domestic consumption and 25% load factor the finances are marginal at best.

Oh, the irony: our putative power baron has annoyed all his neighbours by installing a noisy, whirring machine that helps to raise the effective price of electricity to 24p/unit and then has to pay for the privilege!

So who does win?

We don’t win, because our power costs more. The power companies don’t win because they have to pay for all the hassle involved in managing hundred or thousands of small-scale generators on behalf of a bullying government. The National Grid doesn’t win because it has to develop new strategies to cope with sudden surges of power in specific geographic areas. Carbon dioxide emissions don’t reduce because it makes no difference whatsoever to the thermal generation needed to back up the unreliable wind.

Rich people do win because they can gain 11% return on a spare £30,000. The banks do win because they can make 7%pa lending £30,000 to someone that is not as rich. Generator installers do win because they have a whole new market, selling to people who think that someone else will be paying for a new income stream for them. The Chinese generator manufacturers do win because they sell lots of small turbines to the installers. And then there’s… emmm….

PS

There’s a wonderful paradox in the way that these payments work and you can play with this if you download the spreadsheet. As long as the householder can usefully consume larger quantities of home-grown electricity, and as long as the wind blows for 30% of the time, his benefit and our cost both increase with increasing consumption, as a result of displacing imported power.

 

In the example above, 3.3kWh generated £547 In payments and savings, but cost us 27.7 p/unit. If the household uses 5kWh they will benefit by £695 and we will pay 28.8 p/unit. At 10kWh the benefit is £1,130 and our cost is 32.1 p/unit. The more that is used, the better it is for the consumer, and the more it costs us.

This does assume that the generated power displaces imported power but for a policy that is at least partly intended to reduce the overall consumption of electricity it does seem to have a rather perverse effect.

PPS

Seems I'm not the only one to notice this...  and here...

The instalments of this series are:

Rocking All Over The Land (Part 1)

FITs And Sparks (This post)

An ETSy-bitsy Problem (How to sell air for fun and profit)

Crime In High Places (The clue is in the title)

These links will become live as posts are made.

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