UK Cuts Feed-in Tariffs to Prevent Boom

By Aedan Kernan, Greenwell Consulting
January 2012

As the costs of solar panels and installation fall, governments across Europe are revising their solar feed-in tariffs (FITs) that helped to stimulate the market in its nascent stage. Germany established a system of long-term and predictable tariff reductions; the United Kingdom (UK) plans to take the opposite approach.

In November 2011, the UK government gave just six weeks’ notice that feed-in tariffs for domestic solar installations would be cut by 50%. The process is so accelerated that the new tariff rates will be in effect before the consultation period on them has closed. The government also shortened the closing date for applications to the feed-in tariff scheme from April 2012 to December 2011. The government opted for this dramatic approach because they hoped to avoid the kind of installation dash followed by a catastrophic drop in demand seen in other European markets when tariff reduction deadlines were more gradual.

“My priority is to put the solar industry on a firm footing so that it can remain a successful and prosperous part of the green economy, and so that it doesn’t fall victim to boom and bust,” said UK Climate Change and Energy Minister Greg Barker.

“The plummeting costs of solar mean we’ve got no option but to act so that we stay within budget and not threaten the whole viability of the FIT scheme.” According to Barker, the costs of the average PV installation dropped by over US$6,300 (about 30%) between April 2010 and November 2011. Barker noted that if the government took no action, solar feed-in tariffs could cost consumers more than US$1.5 billion by 2014-2015.

Cloudy Conditions

By global standards, the UK tariffs remain pretty generous. Installations of up to 4kW received a tariff of around 70 US cents per kWh under the old feed-in tariff scheme. Since the scheme's introduction in 2010, 100,000 households have installed panels, adding around 400 MW of generating capacity.

The new feed-in tariff will be 35 US cents per kWh. The financial return on the investment falls from around 12% to between 4.5% and 7%. The level of tariff required to provide UK domestic households with a good return from their investment in solar panels has led some to question whether solar is the best renewable energy investment for the UK government. London’s annual solar insolation rate averages 2.61 kWh/m2/day. Madrid, by contrast, has an average of 4.62 kWh/m2/day.

Another avenue the UK government is exploring would make eligibility for the feed-in tariff payments dependent on houses meeting new energy performance standards. Energy efficiency is arguably a better investment for emissions reduction in UK conditions than domestic solar installations. Should energy performance become a pre-qualification for the award of PV feed-in tariff , many households might have to spend up to US$8,000 on roof and wall insulation, boiler replacement and other measures before they qualify.