Feature

UK progress towards subsidy-free solar and the impact of policy stability


BY ALASTAIR KAY, EDITOR, GREEN BUSINESS WATCH

Alastair Kay, editor of Green Business Watch, takes a look at small scale solar PV in the UK, highlighting the effects of the Feed in Tariff and progress towards making solar PV subsidy free.

Last year, solar capacity in the UK grew by 81% with the capacity added in 2014 more than double that in 2013. After such a successful year, it seems a good time to look back at lessons which may be learned from the experience of solar PV in the UK. It is pretty clear, even at a casual glance, that solar PV adoption has been largely driven by subsidy and strongly affected for both good and ill by public policy decisions.

In December 2014, Berlin based think tank Therma1 predicted that UK solar PV could be subsidy-free within the next decade. The message of the report was that subsidies for solar PV in the UK should be reduced, but reduced gradually. They also expressed concern over government plans to make large-scale solar compete for auction-based Contracts for Difference support.

Much of last year's capacity growth has come through the Renewables Obligation scheme which over the last 2 years has become the main support for installations over 50kW in size. On the other hand, the Feed in Tariff scheme is the main support for small-scale solar PV and its contribution is also significant. At the end of December 2014, FiT accounted for 55% of the UK's total solar PV capacity and just over 98% of all solar PV installations.

The Feed in Tariff has been in place since 2010. Over that time, tariffs have reduced from 41.3p/kWh at launch to 13.88p/kWh today. This progress has not been without its difficulties and the Feed in Tariff makes an interesting case study for solar PV tariff support and the importance of consistency and stability in policy.

What is the Feed in Tariff

The Feed in Tariff scheme (FiT) was launched in April 2010 to subsidize microgeneration of electricity in the UK. The scheme pays householders and businesses a tariff for every kilowatt hour (kWh) of renewable energy they generate, including energy that is used on site. An additional “export” tariff is paid for unused electricity that is exported back to the grid. The Feed in Tariff is available for solar PV, wind, hydro, micro CHP and anaerobic digestion under 5 MW of capacity but the dominant technology by far under the scheme is solar PV. Solar PV accounts for 98.8% of the installations under FiT since 2010 and 84.5% of capacity.

The challenges of 2012

At launch in 2010, the Feed in Tariff for solar PV (4kW or less) was 41.3p/kWh. Today it stands at 13.88 p/kWh and April will see it reduce further to 13.39 p/kWh. Despite subsidy reductions of this scale, solar PV had a strong year in 2014 with new installations under the Feed in Tariff up by 32%. The economic case for domestic solar PV in the UK remains strong despite huge reductions in the tariff. In fact, recent research by Green Business Watch has shown that rates of return are higher today than when the scheme launched.

Getting to this point has not been straightforward, however, and the bumps along the road are object lessons for any of us interested in renewable energy policy.

In March 2012 the FiT tariff for solar PV was reduced to 21p/kWh from 43.3p/kWh. The move had originally been announced for the end of 2011 but court action forced a delay until early 2012. This slashing of the tariff by more than 50% caused major disruption to the market. The tariff rate reduced further to 16p/kWh in August of 2012.

Effects of the tariff cliff

In March 2012, support for solar PV effectively fell off a cliff but only if purchasers didn't get in before the deadline. The Feed in Tariff guarantees rates for the period of the scheme (originally 25 years but later reduced to 20 years) so the rate that you get when you enter the scheme is locked in. The fall in rates was known well in advance and the result was a rush to install before the deadline and a fall off in interest when the rate was reduced.

The last quarter of 2011 and the first quarter of 2012 had seen an attempt by the government to more than half tariff rates and to enact those cuts before the consultation process concluded. This sparked a protracted court battle. On December 21st, 2011 the High Court ruled that it would be illegal for the cuts to have an "effective date" of the 12th of December, two weeks before the consultation officially ended. The UK government went on to appeal. The Supreme Court eventually ruled against the UK Government and drew a line under the whole mess but that ruling did not come until March 23rd, 2012.

The market was impacted by a frenzy of activity to get installs completed and accredited by the initial December deadline and a further frenzy as consumers got a second bite at completing installs before March 3rd 2012. The market was also impacted by 6 months where the news message revolved around court battles and a massive reduction in the subsidy. Come March/April of 2012 the obvious question given the coverage for the last 6 months was: “Is solar still worth it?”

The industry went to bat. Because of huge cost reductions, solar PV was about as good an investment in March of 2012 as it had been in March of 2011:

• Half price solar provides similar rates of return as in 2011 - Solar Power Portal, March 26th 2012
• Installers to shout "solar still pays" from the rooftops – Business Green, May 4th 2012

Six months coverage of a reduction from 43.3p/kWh to 21p/kWh is a powerful message to overcome, however. The industry found itself with a lot of installers and a marked reduction in demand. In August 2012, the tariff reduced further to 16p/kWh.

Not all the changes were negative. In August 2012 a more responsive approach to degression was introduced, which is still in place today. Solar PV tariff rates reduce each quarter, provided that deployment targets are met. If deployment levels in any given band are low, then the degression cuts can be skipped but not for more than 2 quarters in a row.

The August rate drop saw the last spike in installs for 2012. Solar PV had started the year at a tariff of 43.3p/kWh and by August was 16p/kWh. The installer market, geared up as it was for the activity levels of late 2011, was going through considerable hardship as demand plummeted.

The new degression mechanism, however, was to prove valuable in the long-run. The two and a half years since the new mechanism was introduced have seen tariff rates fall but without the shock of early 2012. Tariff rates reduce in steps of 3.5% and reductions are based on adoption so that if adoption is low then the rates remain. These smaller and more frequent reductions still produce spikes as installations are completed before tariff drops. You can see from the graph however that these peaks have been significantly less disruptive. Since Q4 of 2012, small scale solar in the UK has undergone a period of sustained and stable growth.

Falling installation costs, rising electricity bills and falling tariffs – a virtuous circle

The difficulty in the tariff reductions of 2012 was not that they weren't warranted. Solar PV had reduced in cost significantly since the launch of the scheme and the tariff had gone up slightly. The levels of tariff support in 2011 were an over-subsidy and there were plenty in the industry willing to accept the need for changes. The difficulty lay in the scale of the cut and the fact it happened in one stage rather than gradually.

Since August 2012, tariffs have continued to fall (see figure 1) but the slope is much more gentle. Installation costs have continued to fall (see figure 2); and consumer electricity costs have been on the rise (figure 3). The combination of these factors means that the rate of return for domestic solar PV in the UK is higher today than at the launch of the scheme in 2010 (see figure 4).

Small-scale solar PV installations have been on a gradual upward trend since stability was introduced in August 2012. Since 2010, the Feed in Tariff scheme has achieved reductions from 41.3p/kWh at launch to 13.88p/kWh today.

For those of us involved in the industry, it is clear that domestic solar is a better investment now than when the Feed in Tariff was launched. Returns from the Feed in Tariff scheme are not subject to tax and are index-linked so they compare very favorably with other investment options open to householders. It is still, however, not unusual to meet consumers either unaware of the subsidy or who have a vague perception that there used to be a subsidy but it was cut.

There is no telling where domestic solar PV in the UK would be had a stable degression mechanism been built into the scheme from its launch. Certainly a huge perception problem and considerable hardship for installers and their employees could have been avoided. Perhaps the story of PV in the UK would have been of a gradual and sustained increase in awareness.

In the context of progressing towards subsidy-free solar, the reductions in Feed in Tariff support must be seen as a success. Feed in Tariff support for solar PV in the UK is not a blind payout for a high cost energy source, it is a bridging mechanism that is sustaining a developing renewable energy technology as it moves towards cost competitiveness. Both the difficulties experienced by the scheme and the stable growth since 2012 hold lessons for policy makers. Solar PV can achieve growth and deliver energy capacity with reducing subsidy. This seems best achieved through gradual subsidy reductions within a consistent and stable framework of support.

As mentioned in the introduction, solar capacity in the UK grew by 81% last year. In December, Therma1 predicted that UK solar PV could be subsidy-free within the next decade but expressed concern over government plans to make large-scale solar compete for auction-based Contracts for Difference support.

On January 27th 2015, the Department of Energy and Climate Change laid the RO Closure (Amendment) Order 2015 which will close the Renewables Obligation to large-scale (>5MW) solar PV from 1 April 2015. They did so because large-scale solar PV is deploying faster than can be afforded.

Solar had a very successful year in 2014 but 57% of the added capacity came through the Renewables Obligation and most of it from large-scale installations that are now being removed from the scheme. We hope that the UK government has learned the lessons of the past and can see the potential of solar PV and its dependence on consistent and stable support with gradually reducing subsidies.

Time will tell.


SOURCES:

Solar Photovoltaics Deployment Statistics, DECC

UK Domestic Solar Panel Costs and Returns: 2010 – 2014, Green Business Watch

In Sight: Unsubsidised UK Solar, Therma1

Monthly feed-in tariff commissioned installations by month
 

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Energy efficiency  •  Energy infrastructure  •  Photovoltaics (PV)  •  Policy, investment and markets  •  Solar electricity

 

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