Posted by: joachim in Policy,Renewable Energy,Solar on January 18th, 2012

End of October 2011, the UK announced an unexpected and severe cut of its feed-in tarff for small solar installations. The department of energy and climate change (DECC) called it a consultation. However, since the date the new tariffs were valid from (12/12/11) preceded the date of the end of the consultation, it can hardly be called such thing. In fact, there has been a court challenge regarding the legality of the process. While the outcome of this ongoing legal battle may change things slightly, it will most likely not change the conclusion of this article.

The new proposals

The proposal (Comprehensive review of feed-in tariffs for solar pv) slashed feed-in tariffs for solar for under 4kW from 43p/kWh to 21p/kWh, for 4-10kW to 16.8p/kWh and for under 250kW to 12.9p/kWh. As before, anything below 5MW (and free-standing) get 8.5p/kWh. Above the 5MW threshold for microgeneration, photovoltaic installations continue to generate 2 ROCs (renewable obligation certificates) per MWh. The department also proposes "prioritising energy efficiency by linking PV tariffs to specified minimum energy efficiency requirements from 1 April 2012". We are also proposing new multi-installation tariff rates for aggregated solar PV schemes, applying to new installations with an eligibility date after 1 April 2012.

Why is the government doing this?

Plain and simple, it boils down to money. The UK treasury has set a limit for the overall feed-in tariff program. Thanks to the combination of high tariff and decreasing panel prices, the up-take of solar has been phenomenal and much higher than the government expected. And hence, the FiT for solar had to be cut in order to have some money left for other technologies. The rationale for making solar tariffs subject to energy efficiency measures (e.g. wall insulation, double glazed windows) being in place is logical too: Energy efficiency measures are more cost effective measures to reduce carbon emissions.

What’s the issue?

A cut in the feed-in tariff is not contentious. We have long argued that the tariffs in the UK were too high and therefore vulnerable to sudden and harsh cuts due to political pressure (see article). However, there are three issues:

  • Exposing political risk: The way in they were cut exposes a high political risk in the UK for renewables.
  • Breaking promises: In June 2011, the government published their "Action Plan for Microgeneration", claiming "we want to help people who are enthusiastic to generate their own energy matched by an industry with the desire, creativity and tenacity to grow in a sustainable and responsible way". A roof-top solar system is exactly that microgeneration technology they were talking about.
  • Misjudging consumer behaviour: We doubt very much that the link to energy efficiency measures will trigger investment in energy efficiency. We believe people have a deep-seated psychological preference for revenues (as generated by solar panels) over savings (as in energy efficiency measures). For that reason, as an entry-level investment in home energy, a solar system looks more attractive. Once established, the second investment may well be in a new boiler or a wall insulation, but less likely the other way round. Plus, many people can not afford both investments in energy efficiency and solar.

What’s the effect on the UK solar industry?

Some of the feed-in tariff cuts will have to be borne by module manufacturers. This is already evident in lower prices for systems. Solar will remain viable for the most sunny parts of the country if wholly financed by the homeowner. The many "free solar" offers where a third party finances the purchase will most likely disappear, because there isn’t enough tariff to pay for the financing. However, most damaging will probably be the linking to energy efficiency measures.

In the end, the fledgling UK solar industry will be smaller – there are 30,000 jobs at stake, and it will favour big players that can offer both solar and energy efficiency. Independent installers will find it very tough.

Does it matter to the wider UK renewables market?

The political risk in the UK that has been exposed by this action may well deter investors from putting money into other renewables. It will therefore no doubt increase the cost of capital for all renewable projects in the UK, ultimately making it more expensive for the UK to achieve its climate change or renewables targets.

The UK government will have to work hard to prove that it is serious about being the "greenest government ever".