Don't Panic over Feed-in Tariff

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January 04, 2012

Time to keep your feet on the floor as the Government reviews the Feed-in Tariff

 

If there is one thing you can be sure of in this world, the law of unintended consequences follows the Government plans like Autumn follows Summer. If it launches an initiative then there will be a multitude of clever people trying to find ways to use that initiative to their own advantage. Often not in the way it was intended, and certainly not to benefit those to whom the initiative was aimed.

Have some sympathy, though, with Government. It cannot cover every eventuality, it cannot prescribe every scenario and it cannot read the future.

Feed In Tariffs are a wonderful case in point.

What began life as an initiative to stimulate interest in small-scale (Government’s words, not ours) renewable energy technology and energy awareness, arguably trying to catch up with our much more advanced European neighbours, has become a large-scale feeding frenzy.

Feed In Tariffs (FITs) provide the financial incentive to would-be renewable energy generators to make an investment look and feel more like any other financial investment by providing a regular, annual payment to offset the high upfront cost of investment. Large-scale commercial investments already had a scheme, called Renewable Obligation Certificates or ROCs, to provide a financial incentive. Small-scale investments and domestic systems did not.

However, because of the speed Government can and must move, prices of solar photovoltatic (solar PV) panels (the main technology benefiting from the FIT, although wind and hydro technology also benefit) have reduced significantly between conceiving the FIT scheme in 2009 and today. Today some larger scale investors can currently obtain returns on investment in solar panels of 20-30%.

So the Government, through the Department for Energy and Climate Change, is looking to level the playing field. FIT levels were set to deliver nominal returns of 5-8%. Now they do not, they deliver much more and in a market that has significantly more competition and significantly lower equipment prices. But their budget is not unlimited. Although the actual cost of FIT flows directly from a levy on all our utility bills to the beneficiaries of renewable energy, the Government has sought to put some constraints on the total cost to us all.

It has therefore announced (today) a consultation on how to level this playing field, with the results implemented between December 2011 and April 2012. There are three key proposals: firstly, reduce the financial return through the FIT back to circa 5% (most likely through a 40-50% reduction in the FIT); secondly, reduce the rate available to aggregators of systems (“free solar” or “rent a roof” schemes) by a further 20%; and thirdly, ensure all new systems are installed in conjunction with appropriate energy efficiency and insulation measures. These are not retrospective, and apply only to new systems after this period.

By and large, ReEnergise is entirely supportive of these proposed changes. An unbalanced incentive scheme only leads to bubbles and the mis-allocation of funding. Reducing the incentive to large aggregators, who already benefit from significant economies of scale, leaves more funding for individuals. Ensuring energy efficiency is part of any scheme should have always been in the regulations in the first place.

And how the industry reacts to this is a going to be a great test of its maturity. One element that is immediately obvious is that in order for the solar PV market to remain viable, it needs to be a little more transparent about pricing and for customers to pay the right price, not the sometimes arbitrary “quoted” price.

But most importantly, this is only a change in the return on an investment. It is NOT the end of a good return on capital. The returns on offer remains competitive with many other investment options, particularly when you consider it is still FIVE times more than an average bank interest rate. And an investment in solar PV has only ever been about the financial return, as we advise all our clients. The actual energy saving is often only a fraction of energy costs to the typical consumer.

So is it disappointing that we can no longer make super-profits (a classic, wonderfully understated, economics phrase) out of solar PV, courtesy of your neighbour who doesn’t have solar PV? Probably.

Is it sensible that the charge on our utility bills that pays for this FIT is more appropriately apportioned? Certainly.

Should we continue looking to install renewable energy and energy efficiency equipment to make sensible savings and earn a reasonable income? Definitely.

There will be an enormous amount of entirely self-serving hysteria and hyperbole from the solar PV industry over the next few weeks. But it is always useful to bear in mind who pays for the return that these people will claim is being unfairly torn from them.

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