Wednesday, 25 April 2012

Feed-in Tariffs – The Story Continues
By Robin Whitlock

Some may think, now that the legal shenanigans over Feed-in Tariffs that have been filling the news over the earlier part of this year are now over, that everything is hunky dory and the government won’t be making any more cuts to FiTS for a while. If this is you, you couldn’t be more wrong.

The government, quite legitimately, is concerned about preserving the budget set aside for tariffs while simultaneously attempting to preserve a reasonable rate of return for investors. To this end it published guidelines in February, in the form of its 2A Consultation document, which sets out how tariffs will be administered from 1st July and the government’s objectives for the near future.

The proposed regulations will affect all those solar PV systems with an eligibility date of 1st July or after, setting out tariff rates and also a planned degression rate of around 10% every six months which will be implemented as a means of financial control. From October 2012 there will be further cuts every six months and there is a proposed mechanism by which this date could be brought forward, allowing two months notice, if the uptake of solar PV is in excess of 125% of what the government predicts it will be. Furthermore there is a consultation on whether to reduce the period over which subsidies for solar PV will be paid from 25 years to 20.

Consequently, the consultation document contains three alternative tariff tables. The choice of which table the government will eventually apply is dependent on the uptake of solar PV in March and April. The degression rate has been pitched at a level of 10% but the government is also considering whether it would be more realistic to aim for a lower degression rate of around 5%. Originally the government was trying to aim for a rates of return of 5% but various respondents to the consultation thus far have suggested this may be too low and so the government seems willing to aim instead for returns of between 4.5% and 8%, with a level of 6% being applied to domestic systems and 8% for commercial. The government’s thinking on this is motivated in part by an uncertainty about the likely future costs of PV.

Essentially therefore there are three ‘starting scenarios’, which are as follows:

  • Based on a rate of return of 5-8%, a tariff of 13.6p for installations below 4 kW producing an annual return on investment (ROI) of between 0.5% and 10%, depending on which scenario concerning future costs of solar PV predicted by Parsons Brinkerhoff (PB) turn out to be correct. If such costs fall within the high end of PB’s predictions, then it is more likely that an ROI of 0.5% will apply, and conversely if costs gravitate towards the low end, then an ROI of around 10% will be applicable.
  • A reduction of tariffs by 25% from April levels, by 1st July, producing ROI’s of 5-8% under PB’s central cost prediction for most bands with an ROI of over 8% for the two largest bands, and a tariff of 15.7p for systems of 4 kW or less.
  • A cut of 21% from April producing a tariff of 16.5p for installations of 4 kW or less and a mid-range ROI of 6.1%. Essentially the first option would apply if uptake of PV in March to April reached 200 MW, the second option would apply if that figure was lower at between 150 to 200 MW and the third option for an uptake of less than 150 MW. Tariffs for multiple installations, where the person receiving the tariff operates more than 25 installations, will be set at a lower rate to reflect economies of scale. Furthermore, the tariff for those installations not abiding by the energy efficiency requirements would be set at a ‘Stand Alone Rate’ of 8.9p per kW as of 1st April 2012.

The planned degression of 10% every six months would be automatic but there would be an annual review. The degression rate would be brought forward if PV installation exceeded predicted levels. Overall the government intends to ensure that FiTS for solar PV remains affordable through the Levies Control Framework (a system devised by the government last year to maintain spending on energy and climate change initiatives within agreed limits). It is this framework which maintains the central trajectory for spending on FiTS and against which spending is measured.

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