Feed-in tariffs scheme: consultation on Comprehensive Review Phase 1 – tariffs for solar PV
On 31 October, the solar energy industry drew a sharp intake of breath on release of the details of the cuts to PV feed-in-tariffs. We consider the proposed changes announced in DECC's consultation.
Feed-in-Tariffs (FIT/s) came in some 18 months ago and, since then, they have proved to be a significant driver of investment in green energy generation. The Solar PV FIT has been laid as the kernel of that investment drive. But now the projected cost of its current and future popularity to HM Treasury has urged the UK Government to have a re-think. HMG’s view is that the attraction of the current PV FIT is fired more by the unsustainable level of return on investment now obtainable. For well located installations the return on investment can be between 8 to 9% whereas the support level was modelled on a rate of return of between 4.5 and 5%. Much of the increase in return is also put down to the reduction in the cost of PV technology since FITs came in. The Government estimates that the price of installing a Solar PV system has come down some 30% in the lifetime of the support regime.
Whatever the nudge for the rethink, it is clear from the terms of the current consultation that the budget envelope for FITs, following the March Comprehensive Spending Review, will be breached if the level of support for Solar PV continues at its current level.
To that end, the consultation proposes a reduction in the tariffs for solar PV to a level consistent with providing a reasonable rate of return. This will affect PV installations with a total installed capacity of up to 50kW. PV installations with a total installed capacity of between 50 kW and 250 kW were reduced from August 2011 after the fast track review earlier this year. A table showing the proposed changes to the level of support can be accessed here.
The proposed new tariffs will apply from 1 April 2012 to all new solar PV installations with an “eligibility date” on or after a set ‘reference date’. That date is set to be 12 December 2011. Installations with an eligibility date before 12 December 2011 will not be affected and will continue to be eligible for the current generation tariffs. Installations with an eligibility date between 12 December 2011 and 1 April 2012 will be eligible for the current generation tariffs for electricity generated before 1 April 2012, but would move to the new generation tariffs for electricity generated on or after 1 April 2012.
The consultation also proposes new multi-installation tariff rates for aggregated solar PV schemes i.e. where a single individual or organisation owns or receives FIT payments from more than one PV installation, located on different sites. The new tariffs are set to apply to all new PV installations that are part of an aggregated PV scheme which have an eligibility date on or after 1 April 2012.
Additionally, the government aims to firm up the link between FITs and energy efficiency by introducing a new energy efficiency requirement for Solar PV FITs. The new criteria will apply to all new solar PV installations with an eligibility date on or after 1 April 2012 which are attached to or wired to provide electricity to a building.
The reaction of both the nascent Solar PV industry and green energy analysts to the consultation has been one of shock and hostility. With a heralded cut in the FIT for industrial solar installations of 54 per cent, from 32.9p per kWh to 15.2p, and a 51 per cent cut, from 43.3p per kWh to 21p, in the domestic sector, within such a short timeframe, it is hardly surprising. What’s more, for 90% of UK households, the changes mean that they’ll have to spend more than £5,000 to make their homes more energy efficient before they can be eligible for solar panel subsidies under new rules. Indeed, the office of shadow energy minister believes that 86% of the UK's homes do not meet the 'C' energy rating standard that properties will need to qualify for the FIT as proposed. DECC itself is working on the basis that, to bring homes up to standard, a cost up to £5,600 will be the norm but the Renewable Energy Association holds that the actual cost would be higher, at around £7,000.
Already there is news of several solar projects being mothballed due to the proposed cuts. In particular, the social housing sector, which was seen to be a central driver in investment in green technologies for the benefit of both their clients and the renewables industry, is reappraising its planned investments. The problem being that the cost of financing schemes is somewhere in the region of 4.75% and the anticipated return on investment under the changes proposed sits at around 4.5%.
Solar PV companies are most threatened by the proposals and, in particular, the speed in which their fledgling businesses are being asked to adapt to the cuts. The industry had been preparing to adapt to changes but not at the speed and level set out in the current proposals.
The consultation is open for comment and responses until 23 December 2011. It has already been mooted that the extent and speed of the changes will be challenged on the grounds that implementation of measures on the industry before the closure date for the consultation is legally unsound. Full details and guidance on how to respond are available on DECC’s website accessible here.
Bruce Farquhar, Partner and Head of our Renewable Energy Team, is happy to discuss any issues arising from the consultation and, indeed, is well placed to take responses to the Scottish Government forward on your behalf.
This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.