UK Still Reeling From Accelerated Feed-in-Tariff Cuts for Households

published: 2011-12-06 11:01 | editor: | category: Analysis

The United Kingdom solar industry still reels from the shock of the sudden decision in late October, by the U.K. Department of Energy & Climate Change (DECC) decision makers, to slash the feed-in-tariff (FiT) for solar subsidies from 43 p/kWh to 21p/kH before December 12. Originally scheduled to take place in April 2012, the decision to accelerate the effective date of the cuts, with only a six-week notice, has extracted furor and been labeled as highly unfair. The changes affect England, Scotland and Wales.

According to the statement released by the DECC, “Deployment of PV has, in recent months, accelerated rapidly. Combined with falling installed costs (by at least 30%) and a number of other factors including rising electricity prices, this means that returns available to new generators are higher than envisaged.”

With numerous installers scrabbling to complete their projects before the new deadline, projects not completed before the date, will receive the lower rate when they come on line. The reduction in subsidies has more of a discouraging influence because earlier in 2011, the DECC reduced the FiT for large-scale projects to ensure it could provide financing for smaller residential developments.

Grid-Tied Solar PV on Roof of UK Home

Some solar industry insiders see this as penalization for the industry doing such a good job at bringing down prices and making solar less expensive. The dramatic drop in prices has made the current payment scheme more profitable. As a result, the DECC says the budget for the program has depleted faster than expected. The UK FiT has a cap of £867m and comes from a charge on consumers’ electric bills.

When the DECC announced the cuts, it was explained that allowing the tariff to continue until April 2012, as originally planned, would add another £26 to the annual electricity bills of consumers by 2020. Since then, the department has adjusted its estimates of the potential increase-- to £55 a year, and then to £80. The reason given for the discrepancy in the numbers is that the department “underestimated” the number of planned deployments in the pipeline.

The United Kingdom has followed the lead of other nations that have reduced their FiT, including Spain, the Czech Republic and Republic of Germany. The UK’s reduction will bring its scheme in line with Germany.

The Proposal

The new proposal affects photovoltaic installations with a total installed capacity of four kilowatts or less. According to financial modeling performed by the DECC, developers should realize a return on investment of 4.5 percent. The reduction also affects PV installations above 4kW up to 250kW.

In addition, the DECC’s consultation solicits response on two other proposed changes for the photovoltaic tariff scheme. Starting April 1, 2012, the DECC seeks to lower tariff rates for individuals or companies that own or receives payment for multiple plants, installed on different sites.

The DECC also wants to also add an “energy efficiency” provision. This clause would link the feed-in-tariff to the energy efficiency of the PV system. The modifications will apply to all photovoltaic systems put in place on or after April 1, 2011. The system has to be connected and able to provide electricity to the structure. Failure to meet the energy efficiency requirement reduces the tariff to 9p/kW.

Possible Unspoken Reasons Behind the Subsidy Cut

Only the policy makers at the very top know the actual reason for the acceleration of the cuts in the FiT. Speculation has it that the real reasons behind the cuts have to do with an ongoing battle concerning the size of the program and objectives of green policies to deal with the problem of climate change. In addition, the same critics question the costs and benefit analysis.

Another area of friction involves the debate over centralized versus decentralized PV installations. The DECC public position advocates a balance approach—large-scale installation of biomass, wind, Carbon, Capture and Storage (CCS) facilities, nuclear reactors and marine energy arrays. It also includes small-scale developments of distributed solar energy plants, wind turbines and renewable heating plants.

Predictably, the most fervent support for a centralized approach comes from Centrica, EDF, E.ON, RWE npower, Scottish Power and Scottish and Southern Energy, which supplies most of electricity as well as gas to UK residential and commercial customers. Small-scale decentralized installations have the potential of reducing demand for centralized energy generated by these companies 30 to 70 percent.

The DECC plans to continue moving forward with its intentions to complete a second consultation, as promised in early 2011. It will examine the payment schemes for other FiT-related energy systems. The DECC intends to focus on making the feed-in-tariff scheme more flexible, transparent, long lasting and reliable. It also wants to look at methods to end the “start/stop reviews of payment schemes.

How Will Reductions Affect the U.K Solar Industry?

Solar firms and green organization have been putting resources together to fight the 52 percent cut in tariff with protests and legal actions. An interesting side note to the decision to cut tariffs has been the rumors that top officials in the Department of Energy and Climate Change had outwardly articulated their concerns as to whether the pursuit of solar energy represented an appropriate strategy for the United Kingdom.

Furthermore, the majority of the   jobs created by the industry are short term and even industry understands many jobs are not permanent. Well, they may have a point now that the decision has been made to reduce the FiT.

Expect the more establish companies, such as Engensa, Homesun and Solarcentury to survive the cuts by adjusting their business models. As demand sure to fall, companies will have a smaller market. However, many smaller companies, already operating on razor thin margins will have to close up shop. Ray Noble of the Renewable Energy Association said he spoke to some company owners who plan to shut down operations in a matter of weeks—eliminating 15,000 to 20,000 jobs.

Alyn Smith, ScottishMember of the European Parliament (MEP),stated in an interview,“This could have a devastating impact for households and businesses across Scotland. The market needs time to develop and this move would see the rug being pulled from under it, just as it was getting off the ground. There are thousands of jobs at stake in Scotland here, not to mention the lower energy bills and fewer climate emissions.”

Responsible Management of a Key Industry

Critics of the cuts say the draconian handling of the payment scheme for an industry just starting to blossom defies logic, and deserve to have been handled with more finesse. Government seems to be steeping in to put the brakes on this growing sector, with an explanation that the industry is “over-subsidized,” will exceed the cap and place a burden on electric ratepayers.

Some industry players acknowledge the case for supporting large-scale centralized system over small installations. Nonetheless,  it’s puzzling as to why the DECC cannot keep subsidies in place, at an optimal level, which allows the industry to continue its growth to drive down costs—something that other green energy options have not proven they are capable of achieving.

Many also raise questions about the wisdom of making such deep cuts in solar, when the technology can help propel the UK’s goal of reducing its carbon emissions.

Conclusion

Another interesting development has been the plans to increase investment in marine and offshore wind, which cost more to construct and maintain than any other form of renewable energy on the market. This move eliminates the ability of small companies to compete in the electricity market.

In addition, homeowners will have less of an opportunity to exercise control over this aspect of their life and budget, as larger companies –domestic and foreign will continue to control the electricity generation market to their benefit.

The repercussions from cuts in solar feed-in-tariff will continue to play out over the coming weeks as lawsuits and other actions to get the government to reassess its decision move forward.

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