Posted by: joachim in Policy,Renewable Energy,Solar on June 15th, 2010

The UK recently introduced a feed-in tariff for solar electricity (and other renewable energy technologies). These tariffs apply from on to all newly installed solar generators up to 5MW.

How much is the tariff for solar?

The level of compensation for each generated kWh depends on the installed capacity. For the first 4kW the tariff is higher than for subsequent capacity. Here, the tariff takes into account higher specific costs for small installations. Most residential roofs will fall into the category of < 4kW.

  From 2010 From 2012
< 4kW £/kWh 0.361 £/kWh 0.361
4kW – 10kW £/kWh 0.361 £/kWh 0.33
10kW – 100kW £/kWh 0.314 £/kWh 0.287
100kW – 5MW £/kWh 0.293 £/kWh 0.268

This tariff is guaranteed for each kWh generated for 25 years. In addition, electricity that is fed back into the grid gets another 3p. And if this wasn’t enough, the tariff is index-linked. There is also a degression built into the systems: Solar generators that go online from 2012 onwards will get a lower feed-in tariff, though again guaranteed for 25 years. The degression is meant to reflect decreasing costs for panels.

For a reasonably sunny location in the UK, assuming installation costs of £4,000 per kW, a rooftop installation can achieve a rate of return of 10%, especially with inflation running at more than 2%.

To good to be true?

Let’s compare the feed-in tariff of the UK with the one in Germany. Germany has by far the largest installed capacity of PV modules in the world. It added more than 3GW in 2009 alone. Due to the success of solar in Germany, their tariff system is seen by many as the "gold standard". Comparisons are also valid, since annual solar irradiance in England is very comparable to most of Germany.

For the purpose of comparison, we have assumed an exchange rate of €/£1.18, a tariff length of 20 years and taken into account that UK customers can sell their electricity at an additional £0.03 per kWh to the grid.

The UK appears to be paying a premium of 30-40% over feed-in tariffs in Germany. In the diagram, the upper line of the range reflects 2010-levels, the lower line 2012. Degression in Germany is 9% annually, in the UK only 4%! And below 4kW there isn’t even a degression.

But not enough – the UK system is index-linked, while the German tariff is not. We have calculated the factor that index-linking provides for a choice a inflation rates and discount rates. If we pick a realistic inflation rate of 2% and a discount rate of 5%, the index-linking adds another 30% to the revenue stream (in today’s money).

Comparison of feed-in tariffs in Germany and UK 

 

 

Some will benefit more than others: Who are the winners?

Judging by the comparison to the German tariff, the UK tariff is very comfortable, and should lead to an explosion of solar installations in the UK, investment opportunities and a UK home-grown solar industry. Well – probably not. And here is why:

Government

The government has introduced the feed-in tariffs to attract investment in renewable energy, notably at micro level, which has so far eluded the UK. It needs to close the gap in renewables to hit the country’s EU- target of 15% by 2020, which will not be reached unless significant new capacity is built. Our research into incentive schemes has found that while the existence of a feed-in tariff is essential, there is no correlation between the level of the tariff and the resulting growth, provided the level is set above a certain minimum. As is clear from the comparison with Germany, the UK’s level is well above that minimum. Countries that are far away from their 2012 targets tend to set feed-in tariff levels higher.

While the UK feed-in tariff will certainly attract growth in photovoltaics in the UK, the premium will most likely not result in additional growth. It will also not result in growth in home-grown PV industry, as it attracts too much influx. South Korea for instance, cut its feed-in tariffs sharply in 2009 so that the country can build its own industry.

Private Investors of Rooftop Installations

The good news for investors is: Thanks to feed-in tariffs, investment in photovoltaics is economically viable. In addition, for householders the income is exempt from income tax. It’s a bit like an ISA with a low risk profile. However, it is unlikely that investors will benefit from the particularly high level of the feed-in tariff, as the equipment (i.e. modules) is target-priced.

And the winners are: Equipment Manufacturers

The previous years have shown that prevailing feed-in tariffs are priced into the equipment for renewable energy installations (PV modules or wind turbines). As a result, the premium paid by governments over a minimum feed-in tariff is captured by the equipment manufacturers. No doubt this will be the case in the UK too, especially since the UK does not have a significant manufacturing base for PV modules and other manufacturers will want to maintain their profitability even after the proposed tariff melt-down in Germany.

Visit Green Rhino Energy for more details on the subject.

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    While your blog has helped to highlight the investment of pv panels, you have not mentioned a crucial point that only pv panels and pv installers who have received the microgeneration certificate will get the feed in tariff, which is currently 41.3p per kwh until april 2012 when it reduces. suggest anyone interested to contact the energysavingtrust.co.uk and get details. Some people who had had pv panels installed by others, have not been able to get the investment value.

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