The Department of Energy and Climate Change (DECC) has officially announced the results of UK’s solar Feed-in-Tariff (FiT) consultations. The solar subsidy is being reduced as the government plans to give $0.25 per kWh, down from the current $0.33, in FiT to homeowners using photovoltaics. The change represents a decrease of 23.8%, but most in Britain would remember 2011 when they enjoyed a FiT of $0.67 per kWh; for them the tariffs have fallen by approximately 63%. With payment duration being reduced from 25 to 20 years, the homeowners will receive an overall financial return of 6-8% on solar installations, down from 7-10%. All homeowners who receive the FiT must first pass the energy efficiency standards. The changes will now be implemented from 1st August, as opposed to 1st July announced earlier.
Reduction in PV costs is cited as the primary reason for the decrease in subsidy. Furthermore, the government claims that the high FiT rates, such as $0.67 per kWh, were set up under the Labour party administration and were neither realistic nor sustainable in the long run.
The Climate Change Minister, Gregory Parker, understands that in the period of “sharply falling costs”, reduction in subsidy will adversely affect the demand, but he said “The reforms we are introducing today provide a strong, sustainable foundation for growth for the solar sector.”
The current rates will be fixed for up to a quarter, after which the government will analyze the newly installed capacity of the last quarter and will revise the rates accordingly. However, it is highly unlikely in the current economic environment that the tariffs will increase. In the future, as more solar panels are bought, the tariffs will be either lowered or at most, held constant.
The PV sales in UK are expected to fall following the new announcement. The last time the FiT was reduced from $0.67 to $0.33, solar panel installations fell by about 90% from an average of 18MW to 2.4MW per week, although at that time, the tariff reduction was greater and came as more of a surprise. This time around, the tariff reduction has come after consultations with industry stakeholders, including the Solar Trade Association (STA).
Although the decision seems harsh for Britain’s solar sector, the decision has largely been welcomed by the country’s solar industry. There was no argument regarding reduction in subsidies; rather the debate was about the process of implementing the subsidy cuts. The UK government and its solar industry do not have a very healthy relationship. Green groups and solar companies have taken the government to court three times in the past six months, over DECC’s abrupt and drastic cuts in FiT. The government lost each case, but the current policy is being appreciated because it brings clarity, which is vital for consumer and investor confidence, although the ‘quarterly review’ mechanism is being criticized in most circles. Jeremy Leggett, chairman of Solarcentury, believes that “investor confidence will remain uncertain given the proposed three-monthly digressions, the majority of the government's policies may herald a new seriousness of intent on solar.”
On the other hand, the STA has also welcomed the new policy and its ‘quarterly review’ clause. The organization’s Chief Executive, Paul Barwell, has said, “The STA is pleased to have won its ask for quarterly reviews with more responsiveness to market size, and less emphasis on automatic tariff cuts.”
The current reduction in subsidies comes just a few days after the UK passed its draft energy bill, which was criticized for its focus on nuclear energy while neglecting renewables. Germany’s E.ON and Norway’s Statkraft, two of the primary energy investors in the UK, have also joined in the criticism with Statkraft considering halting its plans on the $46B wind farm project. Under the new laws, the nuclear energy producers will be able to sell their output to the government at a fixed price, which will be higher than the one in the open market. Green energy groups accuse the government of backtracking on its promises that it won’t subsidize the nuclear industry. The government claims that it will buy energy at higher-than-market price from all producers, including renewables, who will reduce their carbon emissions.
The UK reached the 1GW solar installation capacity landmark earlier this year. Back then, Mr. Parker set out his ambitious 22GW PV capacity plan for 2020 and believes that if the industry keeps the costs down, the target will be achieved. The DECC thinks otherwise. In its ‘official impact assessment’ published a week ago, the DECC has reduced the 2020 target by almost 50%, from 22GW to 11.9GW. The former target was announced by the government after consultations with the engineering firm Parsons Brinckerhoff (PB) who predicted substantial capital cost reductions of PV technology in the coming years. At that time, the industry analysts had raised voices against PB’s estimates. In light of the current reduction in tariffs, it is now clear that PB and the government had ‘over-estimated’, therefore the 2020 target has now been revised.
All the confusion in the British solar market seems to be clearing. The revised 2020 target is more realistic and achievable. The government has, for the first time, announced a tariff in light of the demands of solar energy producers. Any change in government policy attracts a change in demand; the reduction of subsidies will cause a decrease in PV demand until the market readjusts to an equilibrium position.
Mr. Barwell thinks that the current readjustment process will be longer, as households will have to meet the new energy efficiency standards. The short-term solar outlook is, therefore, not very encouraging but in the long run, he believes that “financially solar remains a great prospect for UK homeowners so there is no good reason why the UK market should stagnate." Even with the decrease in subsidies, the return on investment on solar remains at 6% and with the frequent increase in the conventional energy billing rates, homeowners will continue to prefer solar energy in the future.
