Renewables still good deal for farmers despite FiT cuts

With the reduction in Feed-in Tariffs rates looming, Richard Sowden, renewable energy consultant at ADAS, looks at how farmers should assess the potential return on investment before installing on-farm renewable energy technologies.

Feed-in Tariffs are about to be cut again, leading to renewed doubt about the future viability of the on-farm renewables sector. Indeed, some recent announcements have suggested the government’s overall commitment to renewable energy is wavering.

However, given the current focus on domestic energy bills, media speculation about winter powercuts and a target to produce 20% of our energy from renewables by 2020, the UK’s need for reliable, green energy is greater than ever.

Fortunately, a careful look at the figures suggests most on-farm renewables projects continue to make good sense – even under worst-case scenarios typical payback times are only increased by about a quarter.

Renewable paybacks
  • Feed-in Tariffs set for further cuts
  • Best-case scenario = 2.5% cut, worst-case = 20% cut
  • Projected worst-case scenario paybacks up by a quarter
  • Individual project costs and potential savings on energy bills dictate individual payback times
  • Good return on investment still achievable
  • Confidence in sector remains well founded

Small- and medium-scale generation has always been underpinned by the government’s Feed-in Tariffs and Renewable Heat Incentive, with different rates according to the scale and technology. Early adopters were well rewarded with rates as high as 43p/kWh for small solar arrays.

The government acted quickly to reduce subsidy levels once take-up grew and the market gained momentum, although the subsequent reduction in FiTs rates led to some criticism that the emerging supply sector was being undermined.

In 2012, it was announced that a capacity-driven degression mechanism would be introduced from April 2014. This means tariff reductions will be triggered automatically once generating capacity reaches set levels. As a result, we know there will be reductions in FiTs rates from 1 April next year.

In many cases, likely levels can be predicted based on current take-up, but at this stage, we don’t know exactly what those levels will be. The best-case scenario for anaerobic digestion, hydro and wind is a 2.5% reduction, while the worst-case (and perhaps more likely) scenario is 20%. The position on solar is less clear, although these FiTs rates will be reviewed quarterly. The RHI rates are not due to be reviewed until 2015.

With this in mind, how should farmers assess potential return on investment opportunities before installing on-farm renewable energy technologies? The table shows current and projected paybacks for typical farm-based renewable energy schemes. The figures are for illustration only and are based on average project costs.

The overall picture shows investors will only have to wait an additional 18 months to two years on a typical wind and solar project, and slightly less for AD, to see a positive return on their investment.

In practice, actual payback time depends on individual project costs such as grid connection, site access, feedstock availability and planning issues, as well as potential savings on energy bills.

Grid connection is a key cost for all types of renewables. A three-phase supply with spare capacity will be needed for medium-scale projects up to 500kW, and a 33kV supply for large ground-mounted solar schemes of 3-5MW and above.

However, on smaller projects potential savings on energy bills can significantly offset costs. For poultry and dairy farms, for example, where current energy bills are high, the value of on-site generation will reduce the payback and the value of these savings will increase with rising fossil-fuel prices.

A Farmers Weekly survey from June 2013 found 36% of respondents currently generate renewable energy and 76% believe renewable energy generation could play a greater role in the future of their business.

Given that projected worst-case scenario paybacks are still reasonable, there is every reason to conclude that this confidence is well founded – especially where farmers are careful to select the most appropriate solution for their farm.

Current and projected paybacks for typical farm-based renewable energy schemes

Technology Project cost   Current FiT rate + export tariff or RHI (Ofgem) Typical payback  Assumptions  Payback with 20% reduction (worst-case scenario)
5kW single turbine  £25k  26.29 p/kWh 6 years  6.5m/s wind speed  7.5 years 
50kW single turbine  £250k  26.29 p/kWh  7.5 years  6.5m/s wind speed  9 years 
500kW single turbine  £1.5m  22.68 p/kWh   6 years  6.5m/s wind speed  7.5 years 
250kW AD plant  £1.5m  19.8 p/kWh  4.5 years  Mixed feedstock. No on-site energy use 5.75 years
50kW roof -mounted  solar   £50k  17.17 p/kWh   8 years  No on-site energy use  10 years (unlesstake-up is very high)  
100kW biomass boiler (non-domestic) £100k  8.6 p/kWh (Tier 1) 
2.2 p/kWh (Tier 2)
6 years 1,314 hours at Tier 1
548 hours at Tier 2