UK FIT Fires Up Solar, But Also Creates Uncertainty

The introduction of the Feed-in Tariff in the UK in April 2010 has sparked an explosive reaction in the UK renewable energy market, with the solar PV market seeing the largest growth

According to a recent report from the analysis firm Greenbang (of which I happen to be the lead author), in just a half-year since the tariff was introduced, more than 10,000 solar photovoltaic (PV) installations were recorded, with the majority consisting of domestic installations. This has led to an increase of twice the 2009 installed capacity in the first six months.

The overall installed capacity is also set to rapidly increase as larger-scale (5 MW) solar farms come into play in the next 12-18 months. These outcomes demonstrate the positive effect the feed-in tariff has had on the UK solar market, despite the poor economic conditions.

The only way for the UK renewable energy market to grow to a respectable size comparable with Germany is for it to have the full support of the incumbent government. The fact that large-scale solar PV farms are beginning to appear in the English countryside should be celebrated as a success of the government’s FIT policy.

Instead, the scheme is being portrayed as an enemy to micro-generation, with little regard for the fact that large-scale solar PV helps companies to achieve lower costs that can then be passed on to domestic installations.

This week, Chris Huhne, Britain’s Secretary of State for Energy and Climate Change, announced the government would start its first review of the FIT scheme for small-scale, low-carbon electricity generation. This news comes earlier than expected and will lead to uncertainty within the UK renewable market, in particular for solar PV.

Before we get into the changes, let’s have a brief explanation of the UK feed-in tariff.

The measure can be separated into two sections: one provides a fixed payment for electricity generated, called the “generation tariff,” and the other, which enables any unused electricity to be exported to the grid, is known as the “export tariff.”

Each type of technology (solar PV, wind, hydro, anaerobic digestion (AD) and micro-combined heat and power, or micro-CHP) is implemented differently, with contrasting prices for kWh of electricity produced by each system. This is to ensure a level playing field by encouraging the installation of the more expensive technologies, such as solar PV, which receives the highest rates.

For the FIT to be sustainable, the tariff rates are reduced annually after the first two years of implementation, in line with predicted price reductions for each of the technologies due to advancement of production techniques and related cost reductions.

Although they have been initially slow to react due to greater regulations and planning, wind and hydro are catching up in terms of installed capacity. The AD market has failed to really kick off due to the tariff rate of 9p/kWh (US $ 0.14 per kWh) being seen as too low in the industry.

As AD installations are generally much larger in installed capacity, they can be covered by ROCs (Renewable Obligation Certificates), which are another form of incentive for larger-scale renewable energies. The micro-CHP technology still needs developing to have an impact; however, there is a sizeable potential.

The benefits of the feed-in tariff have been found to spread across the whole renewable energy industry, with companies ploughing the extra profits generated back into R&D to make sure costs can be reduced when the tariff rate is reduced annually after 2013. Manufacturers can reduce costs through increased economies of scale, and thousands of jobs are created for installers who would otherwise be struggling within the construction industry.

A number of companies have been exploiting the generous tariff rate for solar PV (41.3 p/kWh for ≤4kW retrofit; US $0.66), providing “free solar panels for roofs” whereby the company benefits from the cash generated from electricity produced by the systems and the homeowner benefits from reduced electricity costs of up to £140 per year. This helps in cases where homeowners cannot afford the high initial costs of a PV system (typically £10,000-12,000 for a domestic 2.5kW system), thus meaning the FIT is accessible for everyone, as long as they have a good location.

Recently, the government decided to bring forward the review, originally set for 2012, as it has become increasingly concerned with the development of large-scale solar PV farms 5MW in size, which are taking advantage of a generous tariff rate that currently stands at 29.3p/kWh (US $0.47/kWh.) The review aims to:

  • Assess all aspects of the scheme, including tariff levels, administration and eligibility of technologies
  • Be completed by the end of the year, with tariffs remaining unchanged until April 2012 (unless the review reveals a need for greater urgency)
  • Fast-track consideration of large-scale solar projects (over 50kW) with a view to making any resulting changes to tariffs as soon as practical, subject to consultation and Parliamentary scrutiny as required by the Energy Act 2008.

We believe the problem with these aims, the last one in particular, is that investors in the UK renewable energy market will see an unsteady field on which to play and will look elsewhere to put their money. The budget review in November caused the first jitters in the market, and this will further enhance the view that the government is not strong enough to follow through, thick and thin, with the FIT policy.

The government has gone so far as to describe the larger-scale solar farms as “a threat” that was “not fully anticipated.” This seems rather strange considering that, when the rate was set, the government allowed solar PV installations of up to 5 MW to be included. Thus, it would be natural for companies to benefit from economies of scale and go for the largest installation.

In addition to examining large-scale solar, the review will also look at how to improve the uptake of anaerobic digestion (AD) for the agricultural industry, as only two such projects have been accredited so far.

As noted in the recent Greenbang report on the UK renewable energy market reaction to the FIT, the agricultural industry is able to benefit from the policy only if collaboration between farmers exists. Current technologies mean AD is not really viable on a small enough scale for one site. Combined heat and power (CHP) utilization of the AD biogas output also needs to be improved.

In light of this review, the UK renewable energy sector must take a lesson to heart: it needs to be able to stand on its own two feet and make sure it doesn’t rely too heavily on the FIT policy. Companies can do this by making sure the extra profits they’re generating through the FIT are put back into R&D to lower production, manufacturing and installation costs.

The market needs to be sustainable and prepared for the long term. It will benefit not from companies looking to make a quick buck, but from companies that wish to see the UK as a leader in renewable energies in 10 years’ time.

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