Loophole could short-change billpayers by over £400m & damage Britain’s clean energy market.

A loophole in the government’s Feed-in Tariff (FiT) scheme is making billpayers pay subsidies to unnecessarily large wind turbines that are deliberate limit their output, according to a new report published by think tank IPPR today. The practice, which is known as ‘derating’, enables companies to take advantage of more generous subsidies available for small-scale wind farm projects. These ‘excess subsidies’ for de-rated turbines could commit billpayers to paying over £400m that would otherwise be spent generating more clean energy.

The report shows that if the loophole was closed, Britain would benefit from more clean energy. The Feed-In Tariff is supposed to deliver value for money by ensuring that investors in wind energy projects receive a reasonable rate of return of around 5-8 percent. IPPR modelling suggests investors in de-rated projects are receiving as much as 25 percent. This is denying support to other clean energy projects. The report shows that closing the loophole would be straightforward and recommends: In the short term: introducing a cap on the size of the rotor for any wind turbine looking to qualify for the more generous tariff band.In the medium term: A policy solution that incentivises the ‘best fit’ turbine for each site – allowing there to be an overall cap on subsidy available for each wind project. Introducing another band into the feed-in tariff for onshore wind projects.

Joss Garman, IPPR Senior Research Fellow, said:“This loophole is short-changing bill payers to the tune of millions of pounds a year. Ministers should act immediately to close down what is becoming a ‘feed-in frenzy’. It is distorting the energy market, lining the pockets of investors and undermining public confidence in Britain’s vital clean energy sector.” Charles Ogilvie, energy consultant and co-author, added:“The Feed-in Tariff should be driving innovation to create a sustainable, broad base of renewable energy for the UK. By leaving loopholes like this open for so long, the government is effectively squandering support for the innovators and entrepreneurs who play by the rules.”

How does the loophole work?

The amount of subsidy for a small wind project is determined by the maximum potential output of electricity from the turbines at the site in question. These ratings are not based on any independent scrutiny and are declared by the installer of the machinery. This lack of scrutiny means that wind turbine project developers are labelling their larger machines as being a lower capacity than they really are. This enables these projects to access a higher tariff so the developers are able to make significantly higher profits. (This is known as ‘excessive de-rating’). The feed-in tariff band for wind turbines that generate 100-500kW of electricity currently pays out 13.34p per kilowatt hour (kWh) of power generated. For the higher band of 500-1,500kW the owners receive a less generous tariff of 7.24p/kWh. The use of this loophole is now widespread among small wind energy projects involving one or two turbines.

How much is the loophole costing billpayers?

A derated turbine will receive around £100,000 in ‘excess subsidies’ each year* Over the 20year lifetime of a scheme billpayers are liable for around £2m in excess subsidy payments (in current prices) for each derated turbine. If the loophole was closed today billpayers would already be committed to £175m in excess subsidies over the lifetime of these projects for derated turbines deployed up to September 2014. A further £195.6m in excess subsidies could be committed to by the government in 2015. Including the cost of excess payments for turbines installed in the final quarter of 2014, this brings the total to £230m. This means if the loophole remains unchecked through to the end of 2015 the potential cost could total more than £400m over the lifetime of all derated turbine projects

*This figure is based on the likely income that would be generated from a derated wind project and compared it with the likely income from a correctly rated machine. Even taking account of the potential for the digression mechanism to lower the level of subsidy in the future the estimate is still £100,000.