The UK government announcement on incentives for small scale renewables has three unexpected features:
- The payments for renewable heat, such as the home burning of wood to replace gas or rooftop solar hot water, are much higher than predicted.
- The figures for wind have risen since the autumn consultation document. This means that well-located wind turbines of the 6-15 kW size are likely to produce returns above 13% per year.
- The payments for solar PV have been increased slightly, but do not offer returns as good as wind. Importantly, the government has also signalled that it will allow PV installed at any time over the next 28 months to capture the full feed-in tariff. Previously, the tariff declined for installations made after March 2011.
An earlier article on this topic which looks in more detail on the incentives to take up the new 'feed-in tariffs' is here.
Renewable heat incentive Full details are not yet on the DECC website, but the payments for heat look surprisingly large. A wood-burning boiler will attract payments of 9p per kilowatt hour generated, or almost three times the current price of mains gas. Let's put this another way. A tonne of very dry wood generates about 5,000 kWh of heat. So the payment for burning this tonne in an efficient stove would, we assume, be £450. Since the price of wood on the ground in southern England is no more than £60 a tonne, this incentive will transform the economics of forestry. Virtually no wood is harvested across much of Britain but landlords will now find it far more attractive to manage their holdings. My recommendation – buy woodland now. Timber is going to be worth a lot more in ten years' time.
Payments for solar hot water installations are also much higher than expected and will undoubtedly spark a rush to put up rooftop panels. Combined with the boiler scrappage scheme, the solar hot water incentive will encourage many hundreds of thousands of homes to upgrade their heating systems.
Domestic combined heat and power systems are also heavily incentivized, as are heat pumps.
Wind A 15 kW wind turbine – the sort of size that might sit on a small hill at the back of a village – costs about £50,000 to buy and install. (Installation costs will vary substantially, depending on the proximity of the electricity network.) The draft figures suggested a payment of about 23p per kWh but the final announcement today has increased this to over 26p. My previous calculation suggested a return of about 12% per year, but these new figures take this figure to above 13%. Confusingly, the government's announcement suggests a figure of '5-8%' for the financial returns under its proposals but I believe the figures for community wind are actually much higher and will kick mutual ownership of turbines into life. A turbine of 15 kW should be an easily financeable proposition across much of the UK.
Solar The payments for PV have been increased from the earlier proposals. The solar installation industry had been sweating nervously about the possibility of a large reduction. Today's figures suggest that a good south-facing roof location in the English south-west will achieve financial returns of above 8%. The government may correctly have felt that the likely continued decline in the cost of solar panels will gradually improve this figure over the next few years. Surprisingly, the announcement says that the solar PV feed-in rates will last for more than two years. Previously they were slated to fall gently from April 2011. This may produce a perverse incentive. The fall in the price of solar panels – as a result of improved manufacturing techniques and the entry of huge amounts of Chinese capacity – may mean that parsimonious householders wait until 2012 to put up the panels. The government wants us to invest today.