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November 18th, 2011
Back in April 2010, the UK government introduced the feed-in tariff (FIT); a new scheme to incentivise uptake of distributed renewables throughout the country. A set tariff (different for each technology and size) is given to the generator. For example the smallest scale solar pv tariffs were set just above 40 pence per kilowatt. These are planned to gradually decrease over time, in line with a falling cost of technologies. Recent announcements indicate the cost of solar in the UK has fallen by 30% since 2010, in line with a global fall of 70% since 2008.
On an average home installation of 2.5 kW, this translates to around £1,000 untaxed, index linked income guaranteed for 25 years to the home owner. Installations of this type typically cost £10,000, so one would expect the average installations of this type to provide 15 years of income. An interesting proposition, no?
As in many other nations where FITs have been introduced, investment in and installations of solar pv have soared. By August 2010 there had been around 10,000 installations; a year later this figure had risen to almost 65,000. It now stands at over 90,000 with many more in planning. A huge increase with the vast majority of both installations and installed capacity being attributable to solar pv. A very successful policy, I hear you say.
There has unfortunately been a similar trend in the UK to that of other nations: a FIT that is ‘too generous’ and unsustainable, resulting in early cuts. In fact, they have been so successful that government is progressing with not one but two early tariff cuts, both in the first two years of the scheme. The first of which came earlier this summer, primarily cutting tariffs on large scale solar, with the most recent announced cut aimed at small scale solar.
The second came with Energy Minister, Chris Huhne stating “Since the FITs scheme started it has been successful in encouraging people up and down the country to get involved in local, clean green energy generation…However, the green economy does not exist in a vacuum and it is important, particularly in the current climate, that our approach to public subsidy is responsible and results in the widest possible deployment”.
Compare this to the Spanish collapse of solar investments during 2009, where the industry was crippled by drastic government subsidy cuts.
Nonetheless, FITs have been a successful policy; particularly in filling media inches and getting people outside of the ‘renewable world’ speaking about renewables and solar pv. FITs have generated great interest in renewables, which is a lasting positive to take from a policy that is currently treading an ominous path; for don’t they say any publicity is good publicity?
The FIT is a policy that requires clear and continued government support to guarantee future investment. The mixed signals generated by early tariff cuts clearly undermine confidence in renewable investment. There is danger that this could spread to other related, non-FIT markets; which could be catastrophic if they take hold.
What government needs to do over the coming months is manage these tariff cuts effectively and not mistakenly published details of an early consultation. I offer the following points of advice:
- Tariff levels: Getting the right tariff levels in the first place would avoid much unnecessary uncertainty in already wary investors!
- Intended outcome: Make sure the scheme is sufficiently controlled that it delivers the desired outcome and not one that means early changes are required. The UK FIT was originally designed to increase household uptake of renewables, but it instead led to some of the largest UK solar parks being created which have taken much of the available pot of money.
- Making announcements: How to announce a cut to a (too) successful policy is crucial and leaked papers only fuel rumours!
- Continued support: FITs have proved arguably too successful, especially for solar pv. In an industry that is being transformed by the scheme, government must continue support or risk undoing all its good work.
FITs are primarily a financial incentive and this alone is not sufficient to make lasting changes. It is but a mechanism, although a vital one; enabling lasting, wide spread change, moving the UK’s cleantech industry towards the ‘mainstream’ by building a lasting low carbon economy. By calling an early cut to the tariff, and only leaving industry six weeks to adjust can hardly be called sensitive. Neither is a date for changes to come into effect falling before the consultation period is over.
There has clearly been greater than expected investment in solar pv over the last 18 months, but this is sure not the most appropriate approach to manage ‘over-demand’; which indecently should not be a bad thing; should it?
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