Is the clean energy cashback tariff high enough to stimulate investment?

After months of deliberation, the UK government has announced a range of illustrative figures for feed-in tariffs. From Carbon Commentary, part of the Guardian Environment Network

From Carbon Commentary, part of the Guardian Environment Network
guardian.co.uk, Thursday 16 July 2009 11.32 BST

After months of deliberation, the UK government has announced a range of illustrative figures for feed-in tariffs (FITs), which it's calling a Clean Energy Cashback scheme. FITs are fixed payments made to the owners of small generating stations for the electricity that they export to the grid. Micro-generators need high payments to justify their expensive investment in buying and installing green generation.
The proposed levels of FIT vary by the type of technology. The principal ones covered are biomass combustion (burning wood to generate electric power), hydro, solar photovoltaics, and wind turbines. Of these, the most appealing are likely to be wind and PV. If my estimates in the following paragraphs are correct, the government's proposal for payments to rooftop PV are too low to generate much new investment. On the other hand, the payments for rural wind are good enough to make decent returns. If the figures survive unchanged through (yet another) consultation process, we should see thousands of small wind turbines in windy British fields.
SolarThe proposal is for a FIT of 36.5 pence per kilowatt hour for a domestic rooftop system for installations in financial year 2010/2011. A typical UK installation is about '2 kilowatts peak', a figure for the maximum output in the middle of the day in mid-summer. Such an installation will generate about 1,800 kilowatt hours (kWh) a year in a sunny location in Devon or Cornwall on a south-facing roof. No more than half this electricity would be fed into the grid, the rest would be used in the home. In this case, the revenues are approximately as follows:
2 kilowatt peak installation in the English south-west:
Annual output
1800 kWh
FIT
36.5p per kWh
Total value of FIT
657 GBP
Used in the home
1200 kWh
Savings from not buying supplier electricity
12p per kWh
Money saved
144 GBP
Electricity exported
600 kWh
Export payment
5p per kWh
Value of export payment
30 GBP
Total value from all three sources
831 GBP
Annual service (estimate)
100 GBP
Total return
731 GBP
The cost of such an installation today would be about £10,000, meaning a running return of about 7% for the 20 years of the guaranteed life of the FIT scheme. A PV installation is likely to last 25 years or more, so the installation pays back its cost, but with only a little to spare. In the north of England, the figures would be even less good. PV is nice, but it isn't a money-spinner. To attract large-scale investment, the FIT might have had to be 50p or more.
Wind is betterA 15 kW turbine at the end of a large rural garden or on a village green would cost about £50,000 (source: Proven Turbines: £41,000 for the turbine and my estimate of £9,000 for installation and grid connection). This machine would generate perhaps 25,000 kilowatt hours on a windy and exposed site with minimal turbulence created by trees. All this would get pumped into the grid. (This is good – you get more cash from exporting the electricity than you would save by using it yourself.)
15 kilowatt wind turbine in a good location:
Annual output
25,000 kWh
FIT
23p per kWh
Total value of FIT
5750 GBP
Export payment
5p per kWh
Value of export payment
1250 GBP
Less: yearly maintenance cost (estimate)
750 GBP
Total value of installation
6250 GBP
If these estimates are correct, the return on a 15 kilowatt turbine would be 12% p.a. A machine should last twenty years or more. It isn't a return that would excite Goldman Sachs, but it isn't bad. Go for a wind turbine, not for the more glamorous solar panels.
It is conventional wisdom in Germany and elsewhere that a near-guaranteed return of 6% is sufficient to spark interest in renewables from ordinary families. At the proposed levels for FITs, this figure will be clearly achieved in the UK in good locations.