The Government has issued its response on the level of support anaerobic digestion ("AD") and micro-combined heat and power ("mCHP") generators can access under the Feed-in Tariff scheme ("FITs"), providing policy certainty for the AD and mCHP industry on a number of issues relating to FITs payments – including whether feedstock sustainability criteria are to apply to FITs (as they do for the Renewable Heat Incentive ("RHI")).
In May 2016, the Government published its consultation on the support tariffs for AD and mCHP – other technologies having been considered as a part of a wider review of FIT support in August 2015. The consultation closed in July 2016 with responses having been received from a broad range of stakeholders, including AD and mCHP trade associations, developers, consultants, local authorities, manufacturers and individuals. The Government issued its response on RHI in December 2016 and so the response on the FITs consultation now concludes a period of uncertainty for the AD industry in particular.
A copy of the Government's Response document can be accessed here.
Tariff policy for mCHP - The Government has concluded that there should be no change to the tariff levels at the current time, with certain structural changes to be implemented from April 2017.
Tariff policy for AD - As expected, the Government has decided to revise the tariffs available for AD generators downwards. For the 0-250 kW and 250-500 kW output bands, the support available maintains the current trajectory and will be reduced to between 6 and 7 pence per kWh. Yet in contrast to its initial proposal to reduce the applicable tariff to zero, the Government has decided to retain support for generators in the 500kW-5MW output band.
Feedstock sustainability for AD - The Government has agreed with the majority of respondents and resolved to apply sustainability criteria to AD installations. These criteria, including land criteria and greenhouse gas ("GHG") emissions limit components, will apply to all new AD installations from 1 May 2017. The sustainability criteria broadly matches with those imposed under the Renewables Obligation ("RO") and Renewables Heat Incentive (RHI) schemes.
The detail: tariffs for mCHP
There will be no change to the mCHP tariff rate, but the following structural changes will be implemented:
- mCHP will be brought within the FITs £100m cap on 1 April 2017 with an allocated cap of £9.8m;
- There will be 6 monthly deployment caps of 5MW on mCHP to begin on 1 April 2017; and
- A 10% contingent degression to mCHP will be implemented should a cap be met.
The new policy will apply to mCHP plants where the MCS certificate issued on or after 1 April 2017.
The detail: tariffs for AD
The revised AD generation tariffs will be implemented from 1 April 2017 as shown below:
|Generation Tariffs p/kWh
(2017 prices) - AD
*Indexation for 2016 and 2017 has been included in these rates, which are subject to change should contingent degression occur.
The installations to which the changes will apply are set out in the table at paragraph 18 of the consultation.
The detail: feedstock sustainability for AD
The key features of the Government's decision on feedstock sustainability are set out below.
- Broadly, the sustainability criteria and feedstock restrictions will apply to all new AD installations from 1 May 2017 (paragraph 27 of the consultation sets out the full details).
- Every feedstock consignment must meet: (a) the "minimum GHG threshold" (currently 66.7gCO2e/MJ of electricity generated); and (b) the "land criteria". Feedstock that is made up wholly of waste will not have to comply with the applicable GHG emissions limit.
- The "land criteria" will allow the use of material from a protected area (including wetlands), where the production of the material does not interfere with the nature protection of the area.
- Payments in relation to electricity generated through the AD of feedstocks not derived from wastes and residues will be limited to 50% of the total biogas yield (calculated on an annual basis to account for seasonal availability of feedstocks).
- Export payments will not be deducted from a generator in the event of non- compliance with any of the above criteria.
- Provisions will be introduced to ensure that generators are given a "fair hearing" before tariff payments are withheld permanently.
Impact of changes
Few expected there to be a significant upturn in Government subsidy provided to AD and mCHP projects through the FITs and from that perspective the Government's response provides little in terms of surprise: overall Government support for AD has reduced just as it has already reduced for other renewables technologies. Consequently it is unlikely these changes will alter the outlook for those looking to invest in these technologies in the medium term. That said, now that the response to the consultation has been issued, it should enable final decisions to be made on the viability of projects which are currently in the pipeline. There may yet be one "last flurry" of activity before institutional investors conclude that the risks of financially sponsoring an AD project outweigh the gains to be made by investing in such a project.
The Government's response also has the potential to affect prospective medium-scale AD projects around the 500kW capacity figure, where there may be a notable incentive to remain below the 500kW cut-off to access the higher level of tariff support. If there does prove to be a last flurry of activity from the institutional investors, one might expect the plants they are funding to be at the more modest end of the scale.
If a project remains bankable under the new FITs, the response is most likely to impact small-scale projects relying on both non-waste feedstocks and FITs payments. Generators will be required to report their compliance with the sustainability criteria to Ofgem on a quarterly basis. If a generator submits information which shows that the sustainability criteria have not been met, the generator will not be eligible for any FITs generation payments for electricity generated from that consignment. Late information will also result in a suspension of payments. These reporting requirements may add a level of compliance burden for small-scale projects generally, in addition to revenue risk for those projects also utilising non-waste feedstocks.
The market for waste feedstocks is likely to become more competitive and one would expect there to be a period of instability in the market: existing plants will arguably have a greater purchasing power (as they receive greater FITs) but the new plants will be keen to secure the waste feedstock so as to secure the continuing viability of the plant. It is difficult to predict where the equilibrium will lie, but the risk of price and supply volatility will not be a problem only for new plants: it may be that existing plants wean themselves off waste as a feedstock, whilst some existing plants may seek to secure waste on longer term contracts to at a fixed price.
An amended FITS Order and Licence Conditions modifications will now be laid in Parliament with the intention that (subject to their respective praying periods) the revised AD tariffs and mCHP caps will come into effect on 1 April 2017, and the AD sustainability criteria and feedstock restrictions will be implemented on 1 May 2017.