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Smart Export Guarantee - FiT for purpose?

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Business, Energy and Industrial Strategy (BEIS) has just issued a consultation paper for a new remuneration scheme for small scale low-carbon generators - the Smart Export Guarantee (SEG).

This follows the UK Government’s announcement that the Feed-In Tariffs (FiT) scheme would be brought to an end, with the closure of both the export tariff and the generation tariff to new applications from 31 March 2019.

At the time of this announcement, concerns were raised that the absence of a payment mechanism for small scale renewable generators would result in  households and small businesses being made to provide energy suppliers with their excess electricity for free.

The SEG is proposed to replace the old FiT export tariff as a new way for electricity suppliers to compensate small scale low-carbon generators for surplus electricity exported to the grid which, at first glance, might be seen to address these concerns. However, the laissez-faire approach of the consultation leaves open the possibility that generators will be paid a negligible amount for any such electricity.

How does the SEG work?

Remuneration would be available to all the technologies currently eligible for the existing FIT scheme up to 5MW in capacity. As with the FiT scheme, larger electricity suppliers with more than 250,000 domestic electricity supply customers will be obliged to offer small scale low-carbon generators a price per kWh for electricity they export to the grid.

However, unlike the existing export tariff:

  • Generators will be paid for the electricity they actually export to the grid;
  • There would not be a guaranteed price for generators for the electricity they export back to the grid;
  • Suppliers would determine the tariff per kWh and the length of the contract, subject to the fact that the price for exported electricity must be greater than zero. At times when electricity prices drop below zero, generators would not have to remunerate suppliers;
  • Large suppliers would be obliged to provide at least one export tariff, whilst smaller suppliers would have the option to offer a tariff to generators; and
  • Electricity exported to the grid from eligible generators must be metered rather than paid on a flat rate.

Aspirations

In its consultation document, BEIS stated, "Government's view is that small-scale low-carbon electricity generation, where it is beneficial to government's objectives and the electricity system, should deploy in a system where competitive, market-based solutions are brought forward."

It is not clear how, and whether, the SEG will work in practice with the central proposal being that it is for the market to decide the value, if any, of surplus electricity. It will be interesting to see whether there are any market participants that can develop a model that aggregates or otherwise deals in electricity in a way that gives it meaningful value. However, BEIS’ consultation paper does not offer much analysis in this respect.

Industry reaction

Existing generators are already concerned about the key financials of the new SEG scheme, in particular over the structure of proposed tariffs and the market's appetite or ability to provide a fair price. As the price of electricity could only ever be above zero, there may also be suppliers that would question the fairness and merits of entering into long term contracts.

In relation to this proposed tariff structure, Leonie Greene, director of advocacy and new markets at the Solar Trade Association, said that these “require metered and settled exports and there are a lot of barriers in terms of cost and complexity. The issue is ensuring the payments are fair for the consumer and viable for the supplier [...] There is currently no regulatory scaffolding in place [to do this]."

This proposed tariff structure essentially leaves it up to large energy companies to control how much they will pay households and small businesses. The lack of support and financial security for small scale generators is unlikely to create an environment that encourages the deployment of new small scale renewable generation.

Others have raised concerns over the timing of this consultation which is set to close on 5 March 2019, just a few weeks before the closure of the FiT scheme for new applications on 31 March 2019. According to BEIS, this will lead to a "short hiatus period" before a replacement programme can be implemented. This will mean that, during this period, small scale low-carbon generators will effectively have no way to sell their excess capacity.

A way forward…

By introducing this consultation paper, BEIS is showing that it has listened to some of the market concerns in 2018 regarding the closure of the FiT export tariff. However, it does not fully address those concerns and it is not obvious that the new proposals and tariff structure for the SEG are workable or sustainable for existing generators and suppliers, let alone for anyone considering investing in new generation.

Nevertheless, one aspect of the BEIS consultation paper which we see as being significant is the requirement for electricity exported to the grid from eligible generators to be metered. The deployment of smart meters across the UK is a necessary and important measure to help manage grid demand and electricity payments, and will be a feature of SEG and successor schemes going forward.

Simon Daniel, chief executive of smart home battery company Moixa, said: “The introduction of this scheme will help to ensure the continued success of domestic solar in the UK… The smart export guarantee will also boost the uptake of smart home energy storage systems, as they will enable users to maximise their financial returns by storing energy until they can get the best possible price.”

Claire Perry, the UK Energy Minister, said: “This new scheme could help us to build a bridge to the smart energy system of the future, with consumers firmly at its heart – not only buying electricity but being guaranteed payments for excess electricity they can supply to the grid.”

This may seem optimistic, but the use of technology to help stimulate market behaviour is likely to be a recurring theme. If the UK is going to meet its decarbonisation targets, the use of smart meters alongside other new and developing technologies such as battery storage and electric vehicles will be a key factor. For further discussion on these topics please see our Expert Insights.

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