T863 Environmental decision making: a systems approach Project Report

Name:

Andrew Turner

Personal identifier:

M4321071

Title of project:

FiT for Purpose? Investigating the UK Government's Domestic Solar PV Feed-in-Tariff Mechanism

Date:

April 2011

Number of words:

4391

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Table of Contents
1 Summary................................................................................................................................................................ 4 2 Introduction............................................................................................................................................................ 5 2.1 Background....................................................................................................................................................5 2.2 Aim................................................................................................................................................................ 5 2.3 Personal Stake-holding.................................................................................................................................. 6 3 Exploring the existing situation..............................................................................................................................7 3.1 Motivation: underlying interests and values..................................................................................................7 3.2 Scheme Aims................................................................................................................................................. 7 3.3 Stakeholder Analysis..................................................................................................................................... 8 3.4 System of Interest.......................................................................................................................................... 9 3.5 Identifying changes........................................................................................................................................9 3.6 Taking Action...............................................................................................................................................10 3.7 Government evaluation & revision..............................................................................................................10 3.8 Re-evaluation: fitness for purpose............................................................................................................... 11 3.9 Government audit review............................................................................................................................ 13 4 Re-exploring the situation systemically.............................................................................................................. 14 4.1 Stakeholder perspectives and interests........................................................................................................ 15 4.2 Modelling.....................................................................................................................................................17 4.3 Exploring with diagrams............................................................................................................................. 18 5 Developing understanding and formulating interests...........................................................................................21 6 Identifying feasible and desirable changes...........................................................................................................25 6.1 Exploring Changes...................................................................................................................................... 25 6.2 Negotiating outcomes.................................................................................................................................. 25 6.3 Mechanisms in other jurisdictions............................................................................................................... 25 6.4 Feasible and Desirable Changes.................................................................................................................. 26 7 Taking action........................................................................................................................................................ 28 7.1 Limitations...................................................................................................................................................28

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7.2 Implementation............................................................................................................................................ 28 7.3 Evaluation and monitoring.......................................................................................................................... 29 8 Critical Appraisal..................................................................................................................................................30 8.1 Framework...................................................................................................................................................30 8.2 Diagramming Techniques............................................................................................................................ 31 9 Conclusions.......................................................................................................................................................... 33 9.1 Existing mechanism.....................................................................................................................................33 9.2 Recommendations....................................................................................................................................... 33 9.3 Limitations...................................................................................................................................................34 10 Acknowledgements........................................................................................................................................... 35 11 References......................................................................................................................................................... 36 12 Glossary..............................................................................................................................................................39 13 Appendices........................................................................................................................................................ 40 13.1 Appendix A Criticism of government review......................................................................................... 40 13.2 Appendix B PV installation case study...................................................................................................43

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1 Summary

In early 2010 the UK government introduced a scheme to encourage photovoltaic roof panel installations through a generous tariff paid for the electricity they generate. It has been a victim of its own success: failing to monitor falling installation prices and rapid scheme uptake caused costs to rise out of control. A clumsy budgetary cap was introduced. The government attempted hastily and belatedly to dampen demand by suddenly slashing the tariff paid and linking eligibility to energy efficiency. This has created boom and bust conditions and undermined the programme as well as the government's credibility to deliver on its legislative environmental responsibilities and election promises to be the greenest government ever. 1 This report investigates the scheme and discovers it is far from best practice. The government should consider removing the budgetary cap and inappropriate energy efficiency eligibility linkage and create an effective, timely system to monitor unit-cost and installations. It should convene a forum to define and manage a new, open, predictable tariff-setting mechanism with the collaborative participation of stakeholders such as solar PV industries and NGOs that will allow the scheme to continue fostering a growing green economy and support its carbon-reduction goals in a sustainable manner. [200 words]

http://www.number10.gov.uk/news/pms-speech-at-decc/ Page 4 of 43

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2 Introduction
2.1 Background
Climate change caused by greenhouse gas emissions is seen by many as the greatest threat to the planet's biophysical environment 2 and so decisions that reduce these are important. This report investigates one UK example: a government-set tariff which encourages householders to install solar photovoltaic panels to generate CO 2-free electricity. The effectiveness of such schemes globally has great potential to limit climate-change. This report focuses on small-scale domestic PV installations (although the scheme itself extends to other technologies and sectors3). The scheme take-up from April 2010 was much greater than expected 4 and as a result the UK government suddenly announced in October 2011 drastic tariff rate reductions of around 50% with almost immediate effect. This has shocked solar PV stakeholders and been the subject of significant criticism.5

2.2 Aim
This project aims to define an effective and sustainable ongoing tariff price-setting mechanism. The existing situation will be reviewed and critiqued and then the situation systemically re-explored for improvements. The decisions this project aims to make are therefore: 1. Is the current FiT-setting system fit for purpose and if not, to identify its shortcomings T863 techniques are used to explore and evaluate the existing situation 2. Devising a better mechanism
2 3 4 5 E.g.: US Agriculture Secretary Vilsack: Climate Change is One of the Greatest Threats Facing Our Planet, UN global warming conference, Cancun, December 2010 Interestingly, solar PV is not one of the key eight C02-saving technologies as defined by the government see http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/renewable-energy/2167-uk-renewable-energy-roadmap.pdf, p.14 UK NAO FiT Briefing, p. 12 http://www.bbc.co.uk/news/uk-15687873 Page 5 of 43

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 The T863 framework is used to re-explore systemically; analyse the system of interest; identify changes; and propose action

2.3 Personal Stake-holding

My personal stake-holding in this project is three-fold: 1. As a part-time domestic solar PV consultant, the FiT is central to the recommendations I make to clients; 2. As a customer considering installing solar PV on my own roof; 3. As a citizen having a stake in the global biophysical environment.

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3 Exploring the existing situation

3.1 Motivation: underlying interests and values
Precautionary Principle The exact consequences of climate change caused by greenhouse gases are unknown but thought by experts to be potentially catastrophic 6. It is sensible therefore to limit them by adopting the precautionary principle7.

Initial Review

Figure 1: Spray Diagram : Initial analysis - what's wrong with the Feed-In-Tariff?

A spray diagram was used initially to explore what may be wrong with the existing system.

6 7

E.g.: US Agriculture Secretary Vilsack: Climate Change is One of the Greatest Threats Facing Our Planet, UN global warming conference, Cancun, December 2010 T863 Book 3, p.78 Page 7 of 43

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Legislation Under the Climate Change Act 2008, the UK has a legally binding target of reducing greenhouse gas emissions by 34% by 2020 compared with 1990 levels8. As part of reaching this commitment, the UK Government's Renewable Energy roadmap9 states that 15% of UK energy demand is to be met from renewable sources by 2020 and identifies solar PV as providing an important contribution.10 To facilitate this, the government in April 2010 introduced under the 2008 Energy Act a Feed-InTariff11 that pays for energy generated from installed renewable technology such as solar PV, at a guaranteed rate index-linked over 25 years. These payments are funded by the energy companies who recoup these costs through energy bills to all their customers.

3.2 Scheme Aims

DECC defines the motivation for the introduction of the FiT: DECC hopes to encourage deployment of additional small-scale (less than 5MW) low-carbon electricity generation...This will allow many people to invest in small-scale low-carbon electricity, in return for a guaranteed payment.12

DECC commissioned an extensive report in June 200913 to recommend a tariff mechanism. The report defined these aims: 1. Encourage uptake of small-scale solar PV; 2. Reducing C02 emissions;

8 9 10 11 12 13

http://www.decc.gov.uk/en/content/cms/legislation/cc_act_08/cc_act_08.aspx http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/renewable-energy/2167-uk-renewable-energy-roadmap.pdf, p.9 http://www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/re_roadmap/re_roadmap.aspx, p.1 Energy Act 2008, Sections 41 and 43 http://www.decc.gov.uk/en/content/cms/meeting_energy/Renewable_ener/feedin_tariff/feedin_tariff.aspx From Pyry Energy Consulting and Element Energy: http://www.decc.gov.uk/assets/decc/consultations/renewable%20electricity%20financial %20incentives/1_20090714182339_e_@@_relateddocelementpoyryfinalreportonqualitativeissuesinfitsdesign.pdf Page 8 of 43

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3. Security of energy supply; 4. Job creation from a green economy.

The tariff analysis was largely undertaken using mathematical modelling based on predicted ROI sufficiently attractive to encourage uptake by small-scale domestic customers.

3.3 Stakeholder Analysis

The report considered only government and (by proxy) consumer stakeholders as shown in the systems map14 in Figure 2.

Figure 2: Systems Map for DECC FiT decision-making system

14 T863 Techniques Book, p. 36 Andrew Turner M4321071 Page 9 of 43

3.4 System of Interest

The system of interest in setting the FiT appears to be defined as: A system to define a tariff so as to encourage small-scale PV and thereby help meet climate-change and energy supply security requirements and encourage job creation from a green economy. This definition will subsequently be used to evaluate subsequently selected actions.

3.5 Identifying changes

The report recommended: 1. A fixed tariff set at a level to attract householders (ROI around 5%); 2. Against setting a capacity cap; Capacity caps should be avoided unless set sufficiently high so as not to artificially constrain uptake...if poorly designed could lead to a boom and bust scenario as the example of solar PV deployment in Spain. 15 3. Fixing the guaranteed payment period for at least 15 years; 4. Reviewing the tariff every three years, and after the first year initially.

3.6 Taking Action

The DECC received this report and launched the following scheme in April 2010: 43.3p / kWh feed-in-tariff (for retro-fit schemes under 4kW); fixed for 25 years; paid for out of all consumers' energy bills; no budgetary cap.

15 http://www.decc.gov.uk/assets/decc/consultations/renewable%20electricity%20financial %20incentives/1_20090714182339_e_@@_relateddocelementpoyryfinalreportonqualitativeissuesinfitsdesign.pdf, p.5 Andrew Turner M4321071 Page 10 of 43

3.7 Government evaluation & revision

Cap Introduced Despite this, in October 2010 the new UK coalition government introduced a budgetary cap of 867m for all FiT schemes.16 Almost immediately, commentators warned this cap was being spent too quickly17 causing industry uncertainty. However, it was not until October 2011 that the government published Phase I of its review 18 and summarily announced a massive cut in the small-scale domestic PV tariff of around 50% (to 21p/kWh19) effective from 12 Dec 201120 in order to keep tariff spending within the budget cap. This sudden cut shocked industry and consumer, threatening to jeopardise a successful new business sector.21 Many industry stakeholders felt this policy change unreasonable and Friends of the Earth successfully took the government to court 22 over its decision, citing a botched review 23. The review also linked eligibility for the tariff with the energy efficiency of the home, despite serious reservations from industry24 and an inability to demonstrate meaningful linkage between this and the aims of the FiT scheme: it seems that this may simply have been an attempt at dampening uptake.

3.8 Re-evaluation: fitness for purpose

It was always envisaged that the tariff would taper in value as installation prices fell, but knee-jerk responses are very unhelpful as John Cridland, director general of the CBI, states:

16 http://www.decc.gov.uk/en/content/cms/news/gb_sol_article/gb_sol_article.aspx 17 http://www.guardian.co.uk/commentisfree/2011/oct/31/britain-solar-energy-unsustainable-foundations (and, curiously given its inaction, reposted on http://www.decc.gov.uk/en/content/cms/news/gb_sol_article/gb_sol_article.aspx) 18 http://www.decc.gov.uk/en/content/cms/consultations/fits_comp_rev1/fits_comp_rev1.aspx 19 http://www.decc.gov.uk/assets/decc/11/consultation/fits-comp-review-p1/3364-fits-scheme-consultation-doc.pdf, p.18 20 Despite the 'consultation' officially running until 23 Dec 2011 21 Solar tariff cuts risk jobs, http://www.bbc.co.uk/news/business-15507750 22 http://www.guardian.co.uk/environment/2011/dec/21/solar-subsidy-cuts-legally-flawed 23 http://www.foe.co.uk/resource/press_releases/solar_fits_victory_21122011.html 24 Which? Magazine, amongst others: http://www.which.co.uk/documents/pdf/review-of-the-feed-in-tariffs-scheme-tariffs-for-solar-pv-whichresponse-275825.pdf Andrew Turner M4321071 Page 11 of 43

"moving the goal posts doesn't just destroy projects and jobs, it creates a mood of uncertainty that puts off investors... Industry trust and confidence in the Government has evaporated.".25
Aim Small-scale PV encouraged? Result Too much so and unsustainably. Pricing not monitored and adjusted often enough. Meet climate-change and energy supply security requirements Partially, inasmuch as this scheme is able to do so, but this progress under threat as unpredictable landscape makes uptake unattractive for future customers. Encourage job creation from a green economy. Knee-jerk changes to tariff and scheme parameters make it difficult for green businesses to plan, invest and grow a green economy. Table 1: Existing scheme meeting its objectives?

Table 1 examines in simple terms (a cut-down 'is-vs-ought' analysis 26) whether the scheme has met its aims as defined in the system definition in Section 3.4 . It seems not - and this view is reflected in the outcry from consumers, NGOs and the solar industry (see Appendix A). This is due to failing to take systemically into account stakeholder perspectives and to implement effective monitoring.

Monitoring DECC only realised in June 2011 that it could take up to three months for small-scale installations to be recorded on Ofgems central FiTs register 27 (see Figure 328) and even then these data were not being actioned.

25 26 27 28

http://www.cbi.org.uk/media/1156796/john_cridland_cbi_east_midlands_annual_dinner_speech_101111.pdf T863 Book 3, p.185 NAO FiT Briefing, p.11 http://www.decc.gov.uk/assets/decc/11/consultation/fits-comp-review-p1/3364-fits-scheme-consultation-doc.pdf, p.16 Page 12 of 43

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Figure 3: Under-reported PV installations: actual (MCS) and reported (CFR)

This led to the belated, knee-jerk tariff change which shook industry confidence. DECC's approach was purposive29 with actions dictated by a simple need - to encourage small-scale PV based on static, predictive, mathematical models with limited stakeholder involvement.

3.9 Government audit review

The relevant government audit committees commissioned their own report 30 which heavily criticised the management of the FiT system, in particular: Insufficient monitoring mechanisms for: scheme uptake; installation costs; budgetary cap depletion. Knee-jerk tariff changes risking the fledgeling industry; Government failure to consult with industry;

29 T863 Book 3, p.33 & T863 Book 2, p. 75 30 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/160502.htm Andrew Turner M4321071 Page 13 of 43

Criticism of the sudden decision to link home energy efficiency to scheme eligibility, fearing the cancellation of most future installations from what appears simply to be an unjustifiable braking mechanism;

A purposeful31 reiterative investigation of the system considering broader stakeholder input is investigated in the next sections.

31 T863 Book 2, p.74 Andrew Turner M4321071 Page 14 of 43

Re-exploring the situation systemically

Stakeholder Analysis The importance of including multiple stakeholders and their perspectives is key to successful systemic analysis32. Figure 4 shows a systems map33 which explores stakeholders more completely than DECC's original analysis (compare Figure 2).

Figure 4: Systems map showing the decision-making stakeholders in the FiT system

System of Interest The diagram helps define the system of interest. Each stakeholder relates to the situation by having a material interest within it and this determines the system boundary. The boundary-setting criteria 34 considered, over several iterations, which are actors, beneficiaries or victims of the tariff-setting mechanism.
32 T863 Book 2, p.71 (and many others) 33 T863 Techniques Book, p.36 34 T863 Techniques Book, p.8 Andrew Turner M4321071 Page 15 of 43

The sub-systems then indicate the customers, actors and owners 35. The customers are domestic solar PV customers although the Renewables Sector set members are potential 'clients, beneficiaries, victims'36 and so these are grouped together. The actors lie in the Regulatory Stakeholder subsystem, which includes not only the government and immediate decision-making support stakeholders but also NGOs and trade associations who act together to drive the system. The owner of the system is the government, specifically DECC, which has the authority to set tariff levels.

4.1 Stakeholder perspectives and interests

Government The UK government's perspective is one of managing the FiT and, latterly, keeping it within the spending cap37. Stepping back, this cap limitation may be re-assessed, although the government review declared this firm and fixed38. Its intention is to be the greenest government ever39 which indicates encouraging renewable technologies. However, its most urgent priority40 is to tackle the budget deficit and therefore their bias is to reduce costs in public spending wherever possible. By removing a budget cap - or no longer considering FiT payments as public expenditure as postulated by the audit review 41- these constraints could be removed.

NGO The perspective of an NGO, such as FoE, is that of advocate for the regional, national and global biophysical environment. It supports the increasing use of renewable over fossil-derived energy to reduce C02 emissions. Its bias tends towards environmental improvement over financial or party political objectives and in social fairness 42.

35 36 37 38 39 40 41 42

T863 Techniques Book, p.73 T863 Techniques Book, p.73 http://cdn.hm-treasury.gov.uk/sr2010_completereport.pdf http://www.hm-treasury.gov.uk/spend_spendingreview_introduction.htm http://www.number10.gov.uk/news/pms-speech-at-decc/ http://www.hm-treasury.gov.uk/psr_reducing_government_deficit.htm http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/160506.htm, points 18 & 19 http://www.foe.co.uk/what_we_do/about_us/friends_earth_values_beliefs.html Page 16 of 43

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It has criticised the Governments constant and disastrous tinkering with the feed-in tariff43 and urged for industry certainty and stability and bring back a level of investor confidence.43

Customer The perspective of the small-scale PV customer (including myself) is concern for the biophysical environment, specifically global warming reduction via lower carbon emissions; and/or someone interested in financial return from solar PV panels on their roof. This is reinforced by my experience of small-scale domestic customers: see Appendix B PV installation case study.

Trade Associations Solar trade associations are generally not-for-profit organisations which represent and promote the interests of its members and their employees who operate in the solar industry as manufacturers, installers, consultants, etc. employing around 25,000 people. 44 Their bias is towards legislation which encourages the deployment of renewable technologies and to grow sustainably solars share of the UKs energy mix45. The Solar Trade Association has serious concerns about the remaining FIT budget46, and believes changes mean the market could be cut 92% next year47.

Installers and Suppliers Suppliers want a tariff that makes their product attractive to consumers and a predictable tariffsetting mechanism to let them plan their business. In response to the government's October 2011 review, Jerry Stokes, President of Suntech Europe, says: This very disturbing sudden and massive reduction from previous tariffs damages attractiveness for investment and sustainable job creation in the UK... FiT reduction is healthy for the longevity of the market when wellplanned.48
43 44 45 46 47 48 http://www.foe.co.uk/resource/briefing_notes/eac_green_economy.pdf, p.11 http://www.r-e-a.net/news/rea-sta-solar-survey-details-industry-distress http://www.solar-trade.org.uk/ http://www.solar-trade.org.uk//media/Solar%20Trade%20Association-%2023%20March%202012.pdf http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/1605we05.htm http://www.pv-tech.org/guest_blog/uk_fit_review_we_will_not_be_moved?utm_source=pvtechfeeds&utm_medium=rss&utm_campaign=guestblog-rss-feed Page 17 of 43

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Solar PV Consultants Their perspective (and mine as one) is to encourage a predictable, sustainable domestic renewable energy environment in which they can advise customers on effective utilisation of solar PV.

Perspective Summary

Stake holder Government NGO Customer Trade Associations Installers and Suppliers Solar PV Consultants

Headline perspective Encourage PV uptake via FiT and boost solar economy within budgets Encourage PV uptake sustainably & progressively via FiT to reduce C02 emissions Help environment and get good ROI through FiT Sustainably grow solar economy through FiT & open, progressive legislation Encourage affordable PV via FiT & provide predictable, sustainable business conditions Use FiT & open mechanisms to develop sustainable PV business sector & predictable business conditions

Table 2: Summary of stakeholder perspectives

See also Appendix A for stakeholder responses.

4.2 Modelling
Whilst the drawbacks and uncertainties of purely economic modelling are well documented, there is no evidence that any stakeholders object to the core principle of setting the FiT based upon a mathematical model which provides a minimal hurdle ROI above which customers are prepared to invest. The drawback with this positivist approach in isolation is its potential trap 49 of implying unwarranted accuracy through the use of numerical techniques which produce precise results but are based on imprecise or out-of-date data.

49 T863 Book 2, p.58 Andrew Turner M4321071 Page 18 of 43

By incorporating assessments of risk and uncertainty into this model 50, its likely impact can be explored more reliably by quantifying the level of subjectivity and uncertainty. 51 However, numerical models alone fail to acknowledge the less tangible factors that have a systemic impact, such as fostering a stable and predictable business landscape. These factors are therefore explored next to develop understanding and identify changes.

4.3 Exploring with diagrams

Figure 5: Multiple cause diagram showing factors affecting FiT level

The MCD52 in Figure 5 explores the various causes, states and events that influence the FiT level and the sustainability and viability of the scheme, which are at the system of interest's core. This was refined into a Sign Graph53 in Figure 6 which focuses on the level factors which affect the number of new installations.
50 51 52 53 T863 Book 3, p.74 See Decision Analysis inter alia; Book 3, p. 77 T863 Techniques Book, pp. 26-28 T863 Techniques Book, pp. 30-32 Page 19 of 43

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Figure 6: Sign graph showing cause and effect relationships around number of new domestic solar PV installations within the system of consumers, suppliers and the government FiT scheme.

Together they indicate the dynamic causal aspects of the system and indicate runaway feedback loops, such as the number of new installations decreasing average unit cost which in turn increases new installations. The sign graph explores how this unmonitored increase has led to regulating feedback via (unexpected) tariff reductions which undermines public trust levels in the scheme and thus reduces new installations. These diagrams reveal the significance of the budgetary cap imposed by the government and suggests that this may not be compatible with an ongoing sustainable mechanism. Indeed, the original DECC review and best practice overseas 54 recommend no cap. To explore this aspect further, a systems dynamics diagram 55 was drawn (Figure 7) to see if the budget cap worked as a tariff-regulating mechanism. The diagram shows how scheme uptake is

54 See Mechanisms in other jurisdictions 55 T863 Techniques Book, p. 33 Andrew Turner M4321071 Page 20 of 43

regulated but struggles to explain how a budgetary cap properly regulates the tariff level.

Figure 7: Figure 2: System dynamics diagram depicting factors affecting Tariff Level and Solar PV Uptake - Tariff Level setting mechanism is not clear with the use of a budgetary cap

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5 Developing understanding and formulating interests

Legislation The legislation which provides the framework for the FiT has been explored in section 3.1 . Moderating these is the October 2010 Spending Review 56 which introduced a budgetary cap for FiT payments. A fully systemic reappraisal of the situation must reconsider this legislation - although this may prove unacceptable to the system's owner, the UK government. 57 By considering the scheme's aims from the government's perspective (section 3.2 ) and those of the major stakeholders (Section 4 ) a system of interest is defined which is used to reveal suitable tariffsetting mechanisms.

Defining the system of interest The CATWOE mechanism of SSM58 is used here (modified to BATWOVE to identify separately beneficiaries and victims 59) to formulate a root definition of the system of interest 60 and then a conceptual model61 is generated to reveal insights, actions and to compare with the current situation. The results are shown in Table 3.

56 57 58 59 60 61

http://cdn.hm-treasury.gov.uk/sr2010_completereport.pdf http://www.hm-treasury.gov.uk/spend_spendingreview_introduction.htm Soft Systems Methodology (SSM) (Checkland, 1981; Checkland and Scholes, 1990). T863 Techniques Book, p. 74 T863 Techniques Book, pp. 73-75 T863 Techniques Book, p. 56 Page 22 of 43

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BATWOVE Elements Beneficiary B Small-scale domestic PV customers; PV manufacturers; PV suppliers and installers; PV consultants Actors A Government: DECC (ultimately Secretary of State for Energy & Climate Change, Gregory Barker), the Treasury; NGOs; solar industry; solar trade associations Transformation T 1. 2. 2. 3. Unsustainably high total solar PV Feed-In-Tariff costs Feed-In-Tariff reviewed and adjusted * Uncertain business landscape from inconsistent tariff-setting landscape made predictable, sustainable Poor public awareness and uptake of domestic renewable technologies awareness raised Boom and bust domestic renewable energy sector sector made sustainable, predictable * The first is taken as the primary transformation and used to generate the system of interest. Were time and report space available, the others could be considered in depth also and are any event be incorporated later into the system thinking. World View W Within the context of reducing national CO 2 emissions and conforming with emissions targets agreed by UK government at international summits to reduce global warming, the total uptake and therefore cost of the feed-in-Tariff for small-scale solar PV has been much greater than that originally envisaged and must therefore be reviewed and regulated whilst also maintaining support for the fledgeling PV industry and individual public engagement in renewable energy as planned in the original legislation. Owners O The UK Government, more specifically DECC and ultimately its minister Gregory Barker. Victim V Electricity users (everyone, via their bills which fund the scheme) Environment E The UK government regulatory and budgetary framework which controls public spending and the tariff scheme. Root Definition A system to review and adjust the small-scale solar PV Feed-in-Tariff by comparing current and originally predicted costs and assessing the impact of reducing the tariff in order to make the current scheme sustainable and affordable whilst maintaining public engagement and the fledgeling solar PV industry.

Table 3: BATWOVE analysis

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Conceptual Model Following T863 guidelines62, a number of ordered, imperative actions were derived to generate a conceptual model63 from the selected root definition above, and checked using BATWOVE.

Figure 8: Conceptual model : unsustainably high total solar PV Feed-In-Tariff costs Feed-In-Tariff reviewed and adjusted

The model reveals actions missing from the current system of: timely collection and monitoring of installation and unit-costs data;

62 T863 Techniques Book, pp. 56-58 & suggestions from T863 Book 2, p. 236 63 T863 Techniques Book, p. 56 Andrew Turner M4321071 Page 24 of 43

informing installers of predicted tariff changes; providing open, stable tariff environment.

These changes are required to meet the transformation defined in the root and are explored in the next section.

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6 Identifying feasible and desirable changes

6.1 Exploring Changes
The understanding gained indicates an approach that sets the FiT openly and dynamically whilst accounting for: monitoring uptake and unit costs; budgetary cap allowances; ongoing input from stakeholders; to provide a sustainable, predictable business landscape.

6.2 Negotiating outcomes

Government regulations generated in isolation may fail to account for the interests of stakeholders whose expertise and action is required to implement them. Failure to negotiate outcomes risks system failure, as the introduction of the FiT has shown: a generous tariff introduced without broad stakeholder negotiation and without sufficient ongoing evaluation resulted in a gold-rush for solar followed within 18 months by a drastic cut which risked the viability of the industry. Negotiation should be bilateral and open. Various studies have shown the inherent flaws in traditional positional-based negotiation 64 where both sides consider only their interests, and the benefits of interest-based negotiation where all openly explore everyone's interests and cooperatively work together to see how both sides' needs can be met. 65 The report recommends this approach.

6.3 Mechanisms in other jurisdictions

It is worth leveraging experience from other countries 66. Deutsche Bank produced a detailed report

64 Priscoli, 2003 65 Susskind et al, 2000; Siddaway, 2005 66 This is a kind of expert support: see T863 Book 2, p.153 and T863 Book 4, p.121 for its evaluation Andrew Turner M4321071 Page 26 of 43

of FiT schemes in several other jurisdictions 67 and evaluated Germany's highly successful scheme as best in class. The key successful elements were: 1. Integrated energy and climate policy; 2. Lack of budgetary cap; 3. Periodic, planned tariff monitoring and setting; 4. Transparent, predictable tariff price reduction policy enabling industry to plan.

6.4 Feasible and Desirable Changes

The considerations above suggest: Utilising social-learning and participation 68, the owner, DECC, convene forums to agree and maintain open mechanisms for monitoring installation costs and uptake and criteria for setting the tariff to avoid knee-jerk responses and foster predictable business conditions; This could involve the use of multi-criteria analysis 69 techniques to weight priorities; An initial broad consultation would allow for systemic, purposeful decision-making and have the power to consider systemic changes such as removing the budget cap; Regular forums would maintain this; A flexible, transparent numeric model devised collaboratively to set and maintain the FiT, generated using a spreadsheet or similar utilising variables identified previously, such as installation cost, hurdle ROI, etc); Backcasting70 used to reach the desired future uptake levels and keep the
67 68 69 70 http://www.dbcca.com/dbcca/EN/_media/German_FIT_for_PV.pdf T863 Book 3, pp. 118-119 T863 Techniques Book, pp. 64-66 T863 Techniques Book, pp. 6-7 Page 27 of 43

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scheme sustainable and desirable. Decision analysis tables are quantitative models which combine outcome probability with a subjective value to generate a measure of desirability of change. 71 These could be used to analyse the desirability of alternative incentives to the existing FiT, such as guaranteed FiT payment period lengths or time-variant FiT levels.

71 Book 3, p.75 Andrew Turner M4321071 Page 28 of 43

7 Taking action

7.1 Limitations
A limitation of this report is the inability of the author directly to affect policy or take action. However, the report investigates the situation from multiple perspectives and recommends actions that incorporate both the author's perspective and by proxy (possibly unreliably 72) via analysis of publicly stated positions those of the other key stakeholders.

7.2 Implementation
The owner and key actor is the UK Government which has the power to control the tariff and other mechanisms. It should host transparent, participatory positional-based negotiation forums but its authority to deliberate is not absolute: it must recognise the value of systemic, holistic thinking and formative evaluation 73, valuing all perspectives and permitting systemic change. Suggested items for forum consideration: The current level of the tariff and its attractiveness to new customers; What other factors are influencing scheme uptake? How have they changed? As the budgetary cap is constraining the system, how should it be removed? How are installation and other data gathered and reported back in a timely fashion? Changes in technologies and other opportunities: how they will affect future uptake? How to learn from global best practice, such as Germany's scheme.

72 T863 Book 4, p. 115 73 T863 Book 3, p. 191 Andrew Turner M4321071 Page 29 of 43

7.3 Evaluation and monitoring

CSH in ongoing evaluation ('is vs ought') mode could be used to evaluate action taken 74 but its complexity places it outside the scope 75 of this report. The original CATWOE/BATWOVE definition are used to evaluate the action as follows: E1 = efficacy, e.g.: Scheme uptake; Health of PV industry; CO2 reduced. E2 = efficiency, e.g.: Appropriate scheme interest; Monitoring data collected in accurately and timely. E3 = effectiveness, e.g.: Tariff sustainably managed.

These continuing action evaluation mechanisms allow the scheme to run sustainably.

74 T863 Book 3, p. 198 75 By which I mean, 'word count' Andrew Turner M4321071 Page 30 of 43

8 Critical Appraisal
8.1 Framework
The framework's strength for me lay in breaking the decision-making process into four stages of exploration, interests definition, considering changes and taking actions; providing a coherent, logical flow for decision-making. Iteration over these and modelling and diagramming techniques refined my understanding. Taking action and evaluation was problematic given my negligible influence over government policy as consultant and I am unsatisfied with the vague recommendations made here.

Creating Space and valuing stakeholders Good decisions are made with better understanding and that comes from clearer perspective. The framework suggests making space around a situation 76 and I found it useful first to explore the existing situation, defined by purely economic and legislative factors, and then re-explore from a greater distance by widening the set of stakeholders, considering their perspectives and other causal elements with the use of diagrams. Considering as many stakeholder perspective as early as possible in the exploration is central to the framework. In this way I developed my practice by learning and applying these techniques, my understanding by analysing their output, and ultimately recommended improvements in the situation.

Expert Support Analysing these data developed my practice in exploiting expert support 77 and reminded me of the benefit of stepping back and seeing what relevant analysis has been produced elsewhere. For example, the first-order evaluations provided by the Deutsche Bank 78 and UK government audit review79 reports provide extensive information surrounding the system of interest. My evaluation of
76 77 78 79 T863 Book 4, p.11 T863 Book 4, p.121 http://www.dbcca.com/dbcca/EN/_media/German_FIT_for_PV.pdf http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/160502.htm Page 31 of 43

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these reports, acknowledging them as techno-centric and ego-centric 80 respectively, is a secondorder81 process that allowed me to step outside their framework and consider how their exploration aids understanding.

My own role and stake-holding My own role and perspective changed whilst writing this report. I recognise better the conflicts and opportunities in representing multiple stake-holding perspectives, e.g. my concern for the biophysical environment is different but does not exclude my interest in a good ROI as a customer; recognising and evaluating this develops my expertise as does considering the situation from alternative perspectives, such as DECC's limited worldview.

8.2 Diagramming Techniques

Systems Map Initial brainstorming helped identify potential stakeholders and CATWOE's 82 Customers, Actors and Owners helped me define sub-systems. I realised that both PV customer and industry are 'beneficiaries and victims' of the system and switched to BATWOVE83 to value these distinct perspectives. Iteratively exploring stakeholders and their relationships aided a systemic analysis by considering as many perspectives as possible early on and helped define system boundaries. Considering the role and interests of each stakeholder helped formulate problems, opportunities and systems of interest and in this way I developed practice and understanding.

Multiple-Cause Diagram I used this diagram technique to establish relationships between FiT level and other factors in the system of interest. Iterative role-playing identified these interdependent elements which aided understanding and exploration of the dynamic factors affecting the setting mechanism and which influence the Government who ultimately sets the tariff. Whilst drawing the causes I discovered an
80 81 82 83 T863 Book 4, p.97 T863 Book 4, pp.103-104 T863 Techniques Book, p.73 Soft Systems Methodology (SSM) (Checkland, 1981; Checkland and Scholes, 1990). Page 32 of 43

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ongoing review and trigger process is required to achieve sustainability and added this. I changed 'Price of tariff' to 'Tariff price reduction', revealing that the system seeks not to set an absolute tariff level but define its moderating mechanism.

Systems Dynamic Diagram I found this diagram hard to use, specifically translating system elements into rates and flows - but this may reflect subject choice. However, I developed my practice by considering the system from a difference perspective and it improved my understanding that the cap mechanism is not a good way to throttle scheme uptake.

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9 Conclusions
9.1 Existing mechanism
Lack of monitoring and openness in the present tariff scheme causes knee-jerk changes, boom and bust conditions and threatens fledgeling PV industries and scheme aims. Opaque and unpredictable tariff-setting exacerbates this. The basic principle of a tariff price set at a level to stimulate uptake is acceptable but it is not monitored and adjusted regularly enough. Mechanisms that stifle unacceptably high demand, such as a budgetary cap and linking scheme eligibility to domestic energy-efficiency measures, are not justified.

9.2 Recommendations
DECC should convene a consultation forum of stakeholders to explore and collaboratively consider: 1. Removal of budgetary cap and energy-efficiency eligibility criteria These appear inappropriate mechanisms for regulating the tariff. This should be explored and if confirmed they should be dropped to an agreed open timetable. 2. Monitor PV installation costs and scheme uptake Devise an open, efficient mechanism regularly to monitor and report number and unit cost of PV installations. 3. Determine transparent tariff-setting mechanism Stakeholders collaboratively devise an open, predictable model using timely data to regulate tariff levels providing acceptable customer ROI and maintain this regularly, allowing industry time to adapt. 4. Collaborative framework to determine future policy thus providing predictable business

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landscape landscape. DECC should host regular stakeholder consultation forums to review mechanism.

9.3 Limitations
An over-abundance of available data and opinion dictated care in order to avoid information overload. The scope of the project was limited to exploring small-scale domestic PV and primarily only the poorly managed initial government review. A more comprehensive report (less constrained by word count) could explore underlying aims systemically by considering alternatives to PV and house energy efficiency measures. The report provides neither a definitive tariff price nor mechanism for setting it as this, as stated, should be decided collaboratively by stakeholders.

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10

References

BBC News (11 November 2011) CBI criticises solar subsidy cut [online]. Available from: http://www.bbc.co.uk/news/uk-15687873 [accessed: 19 March, 2012]. BBC News (31 October 2011), Solar tariff cuts risk jobs, industry warns [online]. Available from: http://www.bbc.co.uk/news/business-15507750 [accessed: 19 March, 2012]. Checkland, P. (1981) Systems Thinking, Systems Practice, London, Wiley. Checkland, P. and Scholes, J. (1990) Soft Systems Methodology in Action, London, Wiley. Commons Environmental Select Committee (2011), Environmental Audit and Energy and Climate Change Committees - Written Evidence [online]. Available from http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/writev/1605/contents.htm [accessed 15 March, 2012]. DECC (14 May 2010), A transcript of a speech given by the Prime Minister at the Department of Energy and Climate Change. [online]. Available from:http://www.number10.gov.uk/news/pmsspeech-at-decc/ [accessed 18 March, 2012] DECC (2008), Climate Change Act 2008, HM Government [online]. Available from: http://www.decc.gov.uk/en/content/cms/legislation/cc_act_08/cc_act_08.aspx [accessed: 15 March, 2012]. DECC (2008), Energy Act 2008, HM Government [online]. Available from http://www.legislation.gov.uk/ukpga/2008/32/contents [accessed: 15 March 2012] DECC (2011), Comprehensive Review Phase 1: Consultation On Feed-In Tariffs For Solar PV, HM Government [online]. Available from http://www.decc.gov.uk/en/content/cms/consultations/fits_comp_rev1/fits_comp_rev1.aspx [accessed: 15 March 2012] DECC (2011), Feed-in tariffs scheme: consultation on Comprehensive Review Phase 1 tariffs for solar PV [online]. Available from http://www.decc.gov.uk/assets/decc/11/consultation/fits-compreview-p1/3364-fits-scheme-consultation-doc.pdf. [accessed April 1st, 2012]

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DECC (2011), UK Renewable Energy Roadmap, HM Government [online]. Available from: http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/renewable-energy/2167-ukrenewable-energy-roadmap.pdf [accessed: 18 March, 2012] Delli Priscoli, J. (2003) Participation, consensus building and conflict management training course [online], UNESCO http://webworl.unesco.org/water/wwap/pccp/cd/ us_army.html (accessed November 2005). Dr. Matthias Lang, Prof. Dr. U. Mutschler, German Energy Blog (2012). Available from http://www.germanenergyblog.de/?page_id=513 [accessed March 23, 2012]. Friends of the Earth (21 December 2011), Press Release: Government solar cuts are illegal, says High Court [online]. Available from http://www.foe.co.uk/resource/press_releases/solar_fits_victory_21122011.html [accessed March 15, 2012] Friends of the Earth (23 Nov 2011), Solar cuts will cost Treasury millions and destroy up to 29,000 jobs [online]. Available from http://www.foe.co.uk/resource/press_releases/solar_cuts_cost_millions_23112011.html [accessed April 1st, 2012] Fulton, Mellquist (Deutsche Bank), (2011), The German Feed-In Tariff for PV: Managing Volume Success with Price Response [online]. Available from http://www.dbcca.com/dbcca/EN/_media/German_FIT_for_PV.pdf [accessed April 1st, 2012] Furniss, Morriss et al (2006), Book 3 Making environmental decisions and learning from them, Milton Keynes, The Open University Guardian Newspaper (Dec 21, 2011), Solar subsidy cuts legally flawed, high court rules [online]. Available from http://www.guardian.co.uk/environment/2011/dec/21/solar-subsidy-cuts-legallyflawed [accessed March 15, 2012] Ison, Blackmore et al (2006), Book 2 - Starting off systemically in environment decision-making, Milton Keynes, The Open University National Audit Office (Nov 2011), The modelling used to set Feed-in Tariffs for solar photovoltaics, November 2011. Available from: http://www.nao.org.uk/publications/1012/fits_briefing.aspx [accessed: 15 March 2012]
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OFGEM (2012), Feed-in Tariff Payment Rate Table [online]. Available from http://www.ofgem.gov.uk/SUSTAINABILITY/ENVIRONMENT/FITS/Documents1/Feed-in %20Tariff%20Table%201%20April%202012.pdf [accessed April 1st, 2012] Pyry Energy Consulting (June 2009), Qualitative Issues In The Design Of The GB Feed-In Tariffs [for DECC] [online]. Available from http://www.decc.gov.uk/assets/decc/consultations/renewable %20electricity%20financial %20incentives/1_20090714182339_e_@@_relateddocelementpoyryfinalreportonqualitativeissuesi nfitsdesign.pdf [accessed March 23, 2012] Sidaway, R. (2005) Resolving Environmental Disputes: from Conflict to Consensus, London, Earthscan. Solar Trade Association (22 March 2012), Press Release, DECC refused leave to appeal FITs case at Supreme Court: STA response [online]. Available from http://www.solartrade.org.uk//media/Solar%20Trade%20Association-%2023%20March%202012.pdf [accessed April 10, 2012] Susskind, L., Levy, P.F. and Thomas-Larmer, J. (2000) Negotiating Environmental Agreements, Washington, DC, Island Press. The T863 Course Team (2006), Techniques for environmental decision-making, Milton Keynes, The Open University UK Government (2011), Energy and Climate Change - Ninth Report Solar Power Feed-in Tariffs [online], Available from: http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/160502.htm [accessed March 25th 2012] Which? Consumer Association (23 December 2011), Consultation on Feed-in Tariffs scheme: Comprehensive Review Phase 1 tariffs for solar PV [online]. Available from http://www.which.co.uk/documents/pdf/review-of-the-feed-in-tariffs-scheme-tariffs-for-solar-pvwhich-response-275825.pdf [accessed March 18, 2012]

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11 Glossary
CO2 Carbon dioxide, a 'greenhouse gas' whose presence in the atmosphere contributes to global warming and threatens all life on earth. DECC Department of Energy and Climate Change FiT Feed-In-Tariff, i.e. the amount of money per unit of electricity generated by the solar panel system the householder or bill-payer is paid, as set by the government and as paid for by the utility company and paid for out of its general revenues. It is paid regardless of whether the electricity is used within the household or exported out to the grid and is typically in addition to the smaller amount paid per unit of surplus electricity that the solar panel system exports to the grid. kWp Watt-peak (Wp) or kWp is a measure of the nominal power of a photovoltaic solar energy device under laboratory illumination conditions. NGO Non-governmental Organisation is a legally constituted organization created by natural or legal persons that operates independently from any government and in the context of this report refer to national and international environmental advocacy organisations such as Friends of the Earth.84 ROI Rate of return on investment, for example: a solar PV system that costs 10,000 and returns through FiT and other payments an income to the householder of 800 has a ROI of 800 / 10,000 = 0.08 or 8%. SSM - Soft Systems Methodology, (Checkland, 1981; Checkland and Scholes, 1990).

84 http://www.foe.co.uk Andrew Turner M4321071 Page 39 of 43

12

Appendices

12.1 Appendix A Criticism of government review

This appendix records the predominantly negative reaction from stakeholders to the government's review of the FiT mechanism for solar PV in October 2011:

Trade Associations & Industry The Renewable Energy Association and the Solar Trade Association ...the solar industry has arrived at a point of crisis in the UK just 18 months since the start of a successful scheme Many [installation] companies will now be faced with an extreme Tariff adjustment at just 6 weeks notice. This is an entirely avoidable and very damaging situation.85 John Cridland, CBI Director General Industry trust and confidence in the government has evaporated...If you keep moving the goal posts around and make changes in haste, then the danger is that people don't have confidence and they don't invest. 86 David Frise, Building & Engineering Services Association B&ES felt that the level of decrease was justified on the basis that the original FIT was set at too high at an unsustainable level, particularly given that solar PV product prices have decreased significantly (by about 30%) since the introduction of FIT in April 2010. What is particularly controversial, and unreasonable for B&ES members
85 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/1605we05.htm, Evidence to government review, November 2011 86 http://www.bbc.co.uk/news/uk-15687873, 11 November 2011 Andrew Turner M4321071 Page 40 of 43

involved in the scheme, is the proposed timing for when the revised FIT would come into force.87

NGO Andy Atkins, Director, Friends of the Earth: "Government plans to slash solar incentives will devastate a thriving industry and pull the plug on thousands of jobs. In a time of economic gloom, the solar industry has been one of the UK's brightest success stories, enabling homes and communities across the country to free themselves from expensive fossil fuels. We believe the Government's proposals are not only wrong, they're also illegal - which is why we are taking Ministers to court."88

Installers and Suppliers Solar Century Ltd the Government asserts that: 'EPC level C [house energy efficiency] requirement reduces uptake by up to 92% 2012-13 onwards compared to uptake under proposed tariffs.' It is no exaggeration to state that the proposed link to EPC level C threatens literally all of the jobs that have been delivered since the feed-in tariff was confirmed.89

Solar PV Consultants BECL, Renewable Energy & Environmental Consultants Again we are in limbo with uncertainty and confusion. 90
87 88 89 90 http://www.b-es.org/about/key-issues/crc-efficiency-scheme/ http://www.foe.co.uk/resource/press_releases/solar_cuts_cost_millions_23112011.html http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenvaud/1605/1605we10.htm, Evidence to government review, Nov 2011 http://www.becl.co.uk/news/solar-pv-feed-in-tariffs/ Page 41 of 43

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Alex Hagen, Energy Consultant, Strutt & Parker These tariff changes are going to have a significant impact upon the financial viability of Solar PV project The way that the FIT review has been announced and handled will reduce confidence in property owners exploring the RHI and Green Deal 91 as they become available in 2012.92

91 A proposed UK government domestic energy efficiency promotion programme, to which eligibility for the FiT is proposed. 92 http://www.struttandparker.com/media/291423/research_fit_consultation_october_31st_2011.pdf Andrew Turner M4321071 Page 42 of 43

12.2 Appendix B PV installation case study

Client Location Installation Date Installation Cost Installation Size

Rugby, Warwickshire 24th March 2011 9,308.00 (inc. 5% VAT) 15.72 m2 panels producing 2.22 kWp

Performance over 1st twelve months Electricity generated Feed-in-Tariff Export Tariff Electricity saved 2,337 Units 2,337 * 0.433/unit ................................1,011.92 1,169 * 0.031/unit.................................36.24 Approx 2400 units @ avg. 0.12/unit....288.00 Year 1 total return ...............................1,336.00 Year 1 return on Investment................14.3% Additional Information The client already had thermal solar panels for hot water and this PV installation was in addition to this on a separate roof. The clients principal motivator was doing something green, i.e. reducing personal carbon footprint in aid of limiting climate change. They said they would not have installed PV prior to solar thermal, despite far better returns, as their research had told them solar thermal is much more effective at reducing carbon output in terms of C02 saved and net installation impacts. Had the system been installed under the new reduced tariff (March 2012) of 0.21/unit, total return on investment would still be around 9% and possibly higher given decreasing unit installation costs. The client said they most definitely would still install under these conditions today. ('deemed 50%') (based on previous 6 years)

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