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Thursday, 03 November 2011

From Shining Star to Solar Eclipse? - Feed-in-Tariff to Be Cut

It was on the cards ever since 7th February 2011. On that day the government announced a review of the Feed-in Tariff scheme (FiTs) little more than a year after its introduction. Before the background of economic crises, the Eurozone debacle, and the drive to reduce government debt apparent hand-outs were bound to be the perfect prey for the British chance llor (secretary of the treasury), George Osborne. Now suggested cuts of more than 50% for solar panel installations have been announced.

Solar Eclipse


He is not alone in wanting to reduce financial incentives for photovoltaic systems. Worldwide harvesting the energy of the sun for generating electricity has had several bumper years, with China being one of the most enthusiastic supporters of the technology. However, other frontrunners, such as Germany and Italy, where small-scale systems for households were subsidised generously, reduced the money they were making available.

Let’s look at the direct consequences of the proposals for you as an existing or prospective owner of a solar panel installation first. What is the situation now and what will it probably be like in the future? After that I will go further into the political and economic background of this affair.

Your Money

The FiTs was introduced in 2010. Its aim was an increase in small-scale production of renewable energy by individuals, businesses, organisations and communities. It is closely linked to the Microgeneration Certification Scheme (see also MCS - Does it Matter?).

While other technologies, like anaerobic digestion, were included from the start, solar power proved to be the most popular by far. If these incentives are being reduced now, one could say that photovoltaic systems have become victims of their own success.

The claimant benefits in three ways. First, there is a payment for every kilowatt produced. Then savings are enjoyed by using less or no commercially produced power and on top of all that comes a bonus for surplus energy that is fed into the grid, currently 3.1p/kWh. It is easy to see why the proposals with their potential impact are quite a concern for users and the industry.

The changes in the tariffs are:

  FiT_DECC_List of Tariffs_Oct 2011

If you have solar panels on your roof already there is some peace of mind in the government’s 25-year guarantee, which will be left untouched unless a future government decides otherwise. This is the period during which you will receive payments based on the original levels, although adjusted for inflation every year. The same goes for anyone who installed and registered a system before 12th December 2011.

As part of an interim arrangement, projects started on or after 13th December 2011 until 31st March 2012 will receive the old tariff for that period but then be put on the new FiTs rates. All projects after that will fall under the revised regulations anyway.

To show the difference in savings and amortisation here is an example for a three-bedroom semi-detached house, with a 35o roof, towards 210o south and a large installation (= about 3 kilowatts [kWs])

FiT_Before 12 Dec



FiT_After 12 Dec



 

 

 

 


The figures above include the generation tariff, the grid tariff and possible savings on energy bills. Of course, these are hypothetical calculations but still demonstrate the impact of the changes in FiTs. If you would like to know the figures for your own building, the Energy Savings Trust has a useful Solar Energy Calculator.

The Bill Please

Several established economies around the world have been shaken severely and repeatedly since 2007. Even China, India and Brazil, which seemed to steam ahead regardless, show signs of slowing down. In an ever more interrelated world what happens in America or Asia does affect us. Therefore, faced with a huge national debt and worrying conditions in other countries George Osborne might be forgiven for trying to reduce public expenditure wherever he can.

Every option has to be looked at and something like a solar power incentive cannot be spared. This becomes even clearer if one considers the fact the FiTs is designed to provide the owner with a return on investment. The financial benefit was supposed to provide a yield of roughly five per cent per year. That was certainly more than any bank would give. However, the tariffs were calculated on installation and running costs correct in 2009. Since then systems have become much cheaper, according to some sources by as much as 50 %. Logically, if I pay less but continue to receive the same income my yield goes up. With austerity measures on the agenda the government argues that it cannot reduce spending everywhere else while filling the pockets of the lucky few with solar panels on their roofs.

Thing is, though, they don’t! The tariff review is defended by stressing budgetary concerns but the treasury DOES NOT PAY for the FiTs. It is the utility companies that are obliged under the terms of their licenses to stump up the money. Now, before you start to celebrate that the common man finally has had his comeuppance and profited from the rich utilities you better grab the Kleenex and read the following excerpt from a document by the Department of Energy and Climate Change (DECC) on the implementation of the scheme.

‘The FITs Order provides for the total cost of the FITs scheme to be shared among electricity suppliers according to their market share (the “levelisation” process). We expect that the costs are ultimately passed on the electricity consumers.’

Yes, it is anyone who is not 100 % self-sufficient in generating his own energy who pays. In other words the government has no direct costs, which was confirmed when I spoke to the DECC, but claims to save money for the greater good.

The Wider Implications

Headlines such as ‘Government subsidy cut pulls plug on solar panels’ (The Independent) or ‘Feed-in tariff cuts 'will kill solar industry stone dead'’ (The Guardian) are certainly overdone. The industry will lose capacity, and not just in Britain, but such an increase in sales, as seen over the past few years, has the effect of manufacturers, installers and related services to emerge in droves in the hope to benefit from the momentum. It is a natural Darwinian consequence that a market consolidates after a period of strong growth, especially if that has been as fast this one, and a number of weaker players fail. For the solar industry it is just all the more painful because subsidies have created a fertile environment after many years of struggling. The good life was all too short.

Nevertheless, these rich years have fostered investment in research and development. It is these innovations that will be part of the future recovery. Costs will come down further and efficiency will improve. This in turn will help to maintain a modest return on investment and not mean solar panels will become the prerogative of the superrich. Those that are strong and adaptive have a good chance to survive and continue to grow more sustainably.

Must do better

So it is not all doom and gloom. Still, a bitter aftertaste remains. The cuts might not be as deep as some feared but sales and jobs will be lost at a time when economic success stories are on the list of endangered species. This is not about lining the pockets of the undeserving but maintaining a development that will ultimately help to rid us of our dependency on fossil fuels. Helping to get those on board who might not otherwise be able to afford it has proven to be effective beyond expectations. How often can a government say that?

Also, these relatively new industries promise to provide business opportunities with all the associated employment and investment in the wider community. At a time when the old orders of economic supremacy are being rewritten, seemingly in favour of countries previously regarded as the underdogs, that has to be welcomed.

Why then have treasury and DECC felt it necessary to take this step when it is not government money that they spent? I can only assume that it was the fear of the wrath of the voters, should they find out that they are footing the bill through the back door. Only, people working in renewable energy vote too, perhaps with their feet if their next wage comes from the benefit department.

Growth in Britain has been slightly better than expected, the country’s credit rating is as good as ever and The Economist even thinks the government has £5 billion to play with. An adjustment was unavoidable but it could have come in smaller steps and with a bit more honesty rather than under the umbrella of fiscal prudence. As I said in a previous post, we are at the lower end of the league table in terms of renewable energy investment. If all the ambitious targets for green energy are to be met, we will have to do better - and that includes government support.

The On-going Legal Saga

When these plans became public environmental pressure group Friends of the Earth and two solar companies, Solarcentury and Home Sun, won the right to challenge the government. They argued that the proposed cuts would seriously damage customers’ confidence and subsequently the industry and wanted a more gradual reduction in payments rather than the slash and burn policy the DECC seemed to pursue.

In December 2011 the government lost the first round but wouldn’t budge and appealed. On the 25th January 2012 it was announced the appeal had been thrown out as well. However, the supporters of an extended FiTs should not open the bubbly quite yet. The department has published immediately its resolve to take this matter further – to the Supreme Court.

Whether it will come to that or not will remain to be seen. Whatever the outcome all parties involved, from people wanting to install solar panels to manufacturers, are still in complete limbo. It is not clear which path will be followed and anyone who has had a system fitted after 12th December 2011 will not be certain which tariff they will be paid for some time. So much for a green future.

 

See you next week.

 

 

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