Smart Export Guarantee – Part 1: Not so smart or much of a guarantee!
Our Senior Consultant, Richard Palmer, looks at the new Smart Export Guarantee and explains, how as financial returns are no longer guaranteed, it forces a mindset switch for those looking to invest in renewable energy schemes.
The Department for Business, Energy and Industrial Strategy (BEIS) introduced the Feed-In Tariff (FiT) scheme in 2010 to encourage business and domestic investment in small-scale renewable energy generation.
Since its launch, the FiT reduced significantly, in line with the capital cost of installations. But it was so successful, particularly in encouraging solar PV deployment, that BEIS decided to close it from 31 March 2019. They deemed the scheme had achieved its goal and, with the reduction in technology and operational costs, renewables could now be deployed without market support.
There was widespread industry concern that, in the absence of the FiT, most new small-scale generators would not receive any income for the electricity they would be exporting to the network. So, after industry consultation, BEIS introduced the Smart Export Guarantee (SEG).
What the SEG is…
The SEG ensures that eligible small-scale, clean electricity generators will, under law, receive a route to market and payments from electricity suppliers for each unit of electricity they export to the grid (i.e. everything they don’t use). It takes effect from 1 January 2020.
Whilst the SEG is likely to be of interest primarily to domestic scale solar projects, the SEG arrangements will apply to AD, hydro, micro CHP (with an electrical capacity of up to 50kW), onshore wind and solar exporters with up to 5MW capacity.
The SEG will apply to anyone installing a new renewable scheme or adding supplementary renewables to an existing FiT eligible scheme, subject to new eligibility requirements.
See the ‘Smart Export Guarantee in brief’ section below for more details on eligibility.
Schemes receiving the FiT can opt out of receiving export payments under the FiT scheme and sign up for an SEG tariff instead.
What the SEG isn’t…
1) Not a price guarantee
The FiT included an index-linked government incentive, payable over a 20 or 25-year period. As well as payments for all electricity generated, even if it was used on-site, there was a healthy, guaranteed floor price for energy exported. For example, a 49.5kW PV installation accredited in Q1 2014 would be receiving 14.15p/kWh today for every unit of generation and a guaranteed 5.38p/kWh floor price for export.
The industry hoped the SEG would give the market equivalent support to smaller-scale schemes, or a guaranteed floor price for exported electricity – but it doesn’t. The only guarantee is that the tariff must be greater than zero pence (0p/kWh) at all times of export. This is to avoid the impact of periods of negative pricing in the market. As such, the SEG offers a guaranteed access to market for new low carbon generation but not a guaranteed price for export.
It does not guarantee any contract length either, which would have given small-scale generators a level of certainty.
2) Not smart – just yet
When talking about ‘smart’ it generally means deploying smart meters and automatic meter reading (AMR) meters to measure half-hourly use, and introducing smart pricing tariffs for time-of-use import and export.
BEIS are leaving the design of SEG-compliant export tariffs up to the individual suppliers, who are encouraged to provide time-of-use ‘smart’ tariffs but it’s not compulsory.
There are two SEG compliant export tariffs available already from Octopus Energy; a Fixed and an Agile tariff. The former is a single rate that gives revenue certainty, whereas the latter tariff is a very smart tariff that matches the half-hourly prices for export with day-ahead wholesale rates.
There are also other offers available targeting the small-scale generation market – such as E.On’s Solar Reward, currently offering 5.24p/kWh, which is based on an assumed 50% exported to the grid. This is not a ‘smart’ solution but it does provide market access.
More suppliers will announce their tariffs over the coming months, and it is expected that tariffs will become smarter over time, particularly with energy storage playing a greater role in the future of the UK energy system.
The SEG success will be entirely dependent on the attractiveness of the prices and tariffs offered. BEIS will review and monitor, via an annual report from Ofgem, whether the market is delivering an effective range of options.
What does the SEG mean for new investment in renewables?
Those who installed a renewables scheme before the FiT closure on 1 April 2019 would have considered three different revenues and savings opportunities before making their investment:
- The FiT subsidy – for every unit of electricity produced on-site, the generator received an applicable p/kWh dependent on the timing of the accreditation and other factors
- An export payment – for every unit of electricity not used on site and exported to the grid, the generator received a floor price from their supplier. For installations at or below 30kW this is based on 50% of the total generation from solar and other renewables and 75% of total generated for hydro being deemed to be exported. For larger schemes, an export meter recording half-hourly data is required.
- Energy bill savings – cost savings achieved when generated electricity is consumed onsite, therefore reducing (offsetting) electricity imports through the site’s meter.
For many, the relatively reliable FiT subsidy and export payments stacked up well, providing index-linked investment returns from renewables. This made sense.
However, the SEG provides a far less attractive option and investors need to change their approach and mindset when considering renewables. This is shown in the table below.
Table 1 – Level of importance for return on investment
|With FiT subsidy||With SEG|
|FiT subsidy||High||Not applicable|
|Energy bill savings||Medium||High|
The three lines to consider before investing in renewables generation have now changed:
- The FiT subsidy – now removed.
- An export payment – now market reflective prices are offered and it is only guaranteed that there is a route to market.
- Energy bill savings – cost savings made from offsetting electricity imports.
It is not enough to make an investment in renewables just for the sake of the SEG export payment alone. The energy savings from offsetting the electricity used on site against the energy produced by the scheme is now the key point to consider.
This means any new scheme must be sized for the site’s energy demand with any surplus exported to the grid minimised. While this has always been important, the removal of the FiT makes this the key driver. An oversized scheme, and any export revenue from that, is not going to make the investment worthwhile.
The supply bill is the primary consideration
The SEG is arguably a secondary consideration, or even a distraction, to the primary consideration – a business’s retail supply bill. For every half hour a business must consider the use, the price and the corresponding cost to enable investment returns in low carbon generation and energy storage.
Therefore, how policy changes may affect electricity prices paid by end customers becomes an important part of modelling cash flows for new projects. For example, concern surrounds the current targeted charging review (TCR), the Electricity Network Access and Forward Looking Charges Significant Code Review. The outcome of these could potentially damage the value of flexible, low carbon generation and storage solutions.
Electricity market inflation driven by market and regulatory risk for both commodity (wholesale) and non-commodity (transmission, distribution, levies and taxes) will determine the real value of these investments in a post-subsidy era and must be examined more closely by any investor.
Many operators with existing installations opted out of the FiT export base price and instead achieved higher export prices through Power Purchase Agreements (PPAs). This will still be a good option for those schemes of a suitable scale.
But for small-scale operators on the SEG alone, the lack of a guaranteed price or contract length is a risk due to exposure to falling electricity wholesale markets and the potential lack of competition, leading to an under-valued export price.
There will still be opportunities to significantly reduce electricity bills through small-scale renewable projects. But there needs to be a change in mindset across the industry. There is no one-size FiTs all anymore! It’s vital to undertake a professional strategic review of a business’s energy demands and tailor the solution to fit.
I look in more detail of how investors should approach new renewable schemes under the new scheme in Smart Export Guarantee Part 2: What to do now if investing in renewables.
Smart Export Guarantee in brief
- What schemes are eligible? The SEG is for new generators of clean energy. It is most relevant for those not already benefitting from the Feed-in Tariff (FiT) scheme, unless you are adding additional generation to an existing FiT registered scheme in which case the new element won’t quality for FiT but could qualify for the SEG.
- What technologies are eligible? Technologies up to a capacity of 5MW including solar PV, onshore wind, anaerobic digestion, hydro and micro-combined heat and power (with an electrical capacity of 50kW or less) are eligible to receive payment for exported electricity under the SEG.
- Is storage eligible? Storage will be eligible to receive export payments, although suppliers will be allowed to exclude ‘brown’ electricity from those payments and require the generator to put metering in place that isolates ‘green’ exports.
- Metering arrangements: The exported power must be metered on a half-hourly basis and the meter must be registered for settlement under the Balancing and Settlement Code. This applies even if the tariff is not half-hourly (the SEG is flexible and doesn’t necessarily require half-hourly readings).
- Safety and MCS: Suppliers must be satisfied that export installations are suitably safe. This could mean exporters must show evidence that the installation is certified to the Microgeneration Certification Scheme (MCS), or equivalent, standards.
- AD feedstock: Suppliers must be satisfied that anaerobic digestion installations meet sustainability criteria and feedstock requirements as verified by Ofgem. There is no requirement for other schemes to meet any sustainability or energy efficiency standard.
- No guarantee: There is no specified minimum export floor price and suppliers can set their own rate. The only guarantee is that the export tariff must always be greater than zero pence.
- Suppliers affected: Licensed suppliers with 150,000 or more domestic customers must provide at least one export tariff. Other suppliers can join voluntarily.
- Start date: the law was passed on 10 June 2019 and energy suppliers affected must offer at least one tariff by 01 January 2020.