Future FIT: SEGue to the future of embedded generation

The ghost of tariffs past

Following its announcement in December 2018 of the closure of the Feed-in Tariff scheme (FIT) to new applications after 31 March 2019, the Department of Business, Energy and Industrial Strategy (BEIS) launched a consultation on 8 January 2019 on the introduction of a mandatory supplier-led route to market for small-scale low-carbon generation, the so-called "Smart Export Guarantee" (SEG). The proposed SEG would replace the existing FIT scheme, with electricity suppliers paying new small-scale energy producers for electricity exported onto the grid from homes and businesses.

The ghost of tariffs present

The introduction of the new scheme sits in the wider context of an energy system in transition – one that is becoming smarter and cleaner, with new tools introduced at a rapid pace to facilitate greater control by customers of their energy usage. 

BEIS envisages that the new scheme could create a whole new market, encouraging suppliers to competitively bid for electricity, giving exporters the best market price while providing the local grid with more clean, green energy.  The aim is to unlock greater choice and control for household producers over how they buy and sell their electricity.

Expanding these themes, the SEG is designed to:

• ensure small-scale generators are compensated by the market for the value of their exported electricity;
• establish a framework for the sector which provides room for the market to develop options promoting innovation and competition, in particular the growth of aggregators and a digital marketplace;
• enhance the role small-scale generators play in driving a smarter energy system, using smart meters and time of use tariffs, which will allow more consumers to benefit from location and time specific electricity prices.

The ghost of tariffs yet to come

Under the SEG, BEIS would legislate for suppliers to pay small-scale low-carbon generators for the electricity they export to the grid.  Payments would be available to all the technologies currently eligible for FIT (up to 5MW capacity) and would be based on the following design:

• larger electricity suppliers (>250,000 domestic electricity supply customers) must offer small-scale generators a price per kWh for the electricity they export to the grid (a SEG tariff);
• smaller suppliers can opt to voluntarily offer a SEG tariff but must adhere to the rules and guidance associated with the SEG;
• suppliers would determine the tariff per kWh, and the length of the contract. This is in stark contrast to the FIT scheme, under which generators benefit from a guaranteed, index linked export tariff payable for a guaranteed period, generally 20 years;
• suppliers would be obliged to provide at least one export tariff;
• price must be greater than zero and at times of negative pricing, generators must not be required to pay suppliers for electricity exported to the grid;
• electricity exported to the grid from eligible generators must be metered – for domestic installations smart meters are expected to enable this;
• no levelisation of costs is proposed but suppliers providing the SEG should be able to account for their administration costs in setting of the tariff levels;
• suppliers must register eligible installations for the settlement process and settle in accordance with the requirements in the Balancing and Settlement Code (BSC);
• on the face of it, there will not be any mechanism equivalent to the existing "Continuity of FIT Payments Direction" process under which FIT generators can expect to be kept whole on their FIT payments by a replacement supplier if the existing supplier becomes insolvent.

What next?

BEIS is seeking responses from all interested parties, but in particular: consumers, trade associations, small-scale low-carbon electric generators, suppliers, and aggregators.

The introduction of the SEG will not happen in a vacuum – it will sit alongside many changes, including:

• the continued push from government to achieve full smart meter roll out by the end of 2020;
• the falling cost of battery storage, which will allow consumers to be more savvy about when they export power to the grid;
• the growth of community energy schemes;
• the increasing failure rate of energy suppliers, requiring Ofgem to step in and ensure continuity of service (and payments) to consumers – particularly topical in light of the failure on 23 November 2018 of Spark Energy Supply Limited, who served a number of FIT generators;
• the changing role of DNOs, moving from simple owners of the distribution network to pro-active operators of those networks.

The design of the SEG will need to cater for these parallel changes, ensuring that perverse incentives are avoided, and that all of the moving parts are moving in the same direction.

With the consultation open until 5 March 2019 and the design of the SEG still uncertain, it seems a safe bet that the new scheme will not be open for business as soon as FIT is closed on 31 March 2019.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.