How to take advantage of by Tom Vosper, CEN Consulting Ltd
O Two months ago I received a phone call from the Sustainability Director at one of our local councils. He was irate. “Why can’t I see vans with loud speakers on top, driving up and down the street announcing the benefits of the Feed In Tariff?” Chris Reid, at the London Borough of Sutton, is not known for his sense of calm and patience, but is one of those rare souls who seems not to have lost his sense of urgency at dealing with climate change, despite having spent the last 20 years working on environmental initiatives in the public sector. He wasn’t being entirely serious, of course, but I didn’t know him at the time. I patiently explained that although Feed In Tariffs (FITs) made renewable electricity more attractive than before, the scheme was designed to give between a 5% and 8% return on investment, which meant the payback would still only be between 12.5 and 20 years. This wasn’t something that most homeowners, businesses or communities were going to rush out onto the streets to sign up to. But it was still far better than any high street bank was offering and so we embarked upon a project to look at some of the details: Did the 5-8% include elements for maintenance and repair? How did the council investing in the panels compare with taking up one of the ‘Free PV’ deals? What are the financial and technical risks involved? What bulk discount could be achieved if the council put PV on the roof of every school? In consultation with LB Sutton, CEN Consulting developed a detailed financial model to look at these questions. Accounting for the replacement of inverters twice within the projected 25 year lifetime of the panel, assuming that the panel output would fall by 20% in that time, modelling installations at the top end of each Feed in Tariff bracket and assuming that around a 10% reduction in CAPEX could be achieved through a bulk buy discount, the return on investment was actually over 9%. With the appropriate cost of capital for Local Authorities standing at just 3.95% things were looking good. Perhaps we needed to get the loud speakers out. The next thing to do was convince the finance director that it was worth spending a cool million putting PV panels on the boroughs uninsulated roofs. And therein lay the next problem. Ignoring issues raised by representatives of the council’s property department about leaks, re-roofing and the like, finance wanted to know why they should fund PV on school roofs at 9% ROI when they could fund roof insulation, lighting controls and other basic energy efficiency measures and gain a higher return. Good question. The carbon saving, they added, from a million pounds worth of PV would be relatively slight compared to these efficiency measures. I was feeling less positive but Chris was irate again. “Why does it take the offer of a fixed 9% return to bring these measures out of the
woodwork? Why haven’t we done these things already if they give such a good return? And why must we choose whether to insulate or install PV – why not both?” We had reached the crux of the issue. It is about investment and risk. On the one hand, if an organisation has limited capital it must, of course, choose to invest in the project with the highest returns and the highest carbon savings. On the other hand, if an organisation can borrow a relatively uncapped amount to invest in specific projects then as long as each project returns a net income above the cost of that capital (and makes a carbon saving) why not? Put another way, how much does it cost to save each tonne of carbon? With any positive return, the answer is it doesn’t. The cost of carbon saving is negative because the project results in a net income. So if this is the case, what is to stop Local Authorities from making money through PV and the Feed in Tariff? Well, I said it was about investment and risk. The risk part of that comes back to Property’s roof replacement schedule so I’m afraid the loud speaker is still in Chris’ bottom drawer. R • Having developed our FIT model for PV, CEN Consulting Ltd is ideally placed to assist in the FIT decision making process. Please send any questions or queries surround the Feed in Tariff to firstname.lastname@example.org.
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