Farmers planning to install solar panels will need to reassess the economics of doing so after the government announced plans to slash support for the technology from later this year.
Feed-in Tariffs for the smallest installations could be more than halved, while rates for systems up to and including 250kW will also be cut significantly if the proposals go ahead (see Table 1). Support for the largest systems (250kW-5MW) has been left untouched in the consultation, although these rates have already been dramatically reduced during the “fast-track” review earlier in the year.
Perhaps the biggest shock to the industry is the speed with which the cuts will be introduced. The government plans to apply the reduced tariffs to all new solar installations with an “eligibility date” on or after 12 December 2011. Such installations will receive the current tariff before moving to the lower rate on 1 April 2012. Those who already receive FiTs will see their existing payments unchanged, and those with an eligibility date before 12 December will receive the current rates for 25 years.
The proposals have sparked a fierce response from the solar industry, but climate change and energy minister Greg Barker insisted the cuts were urgently needed to avoid “boom and bust” and protect the wider Feed-in Tariff scheme, which faced budgetary pressure.
“Although I fully realise that adjusting to the new lower tariffs will be a big challenge for many firms, it won’t come as a surprise to many in the solar industry who themselves acknowledged the big fall in costs and the big increase in their rate of return over the past year,” he said.
“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 FiTs scheme.”
But NFU chief renewable energy adviser Jonathan Scurlock said the 12 December deadline was “excessively harsh” and many people with plans already underway would struggle to get systems up and running by then. “If you have an order in progress, you need to go back to the supplier and negotiate hard to get systems completed before 12 December in order to get the higher tariff,” he said.
He also suggested many free “rent a solar roof” investment deals would no longer be viable.
Phil McVan of Myriad CEG Power said the December deadline could decimate the solar industry. “The industry was expecting to be able to take advantage of the higher rate until next April, but a deadline of 12 December is an absolute shocker and will mean there isn’t enough time to get projects installed.
“It is worth noting that when something similar happened in Spain in 2009, the Spanish government panicked and stopped all FiTs, with the result that the industry crashed badly.”
Down but not out
While the support cuts are a blow to the sector, many experts believe there is still scope to invest in solar, provided close attention is given to the economics.
“This new tariff will still allow some solar development, though the margins are much smaller and projects will no longer be a solely financially-driven choice,” Miles Thomas, head of operations at Savills Energy, said. For installations under 4kW, he suggested halving support would lead to rates of return of about 5%.
Some investors could look to the Renewables Obligation support instead of FiTs for projects of 50kW to 5MW, he said. “If you aren’t about to install today, you probably need to reassess your reasons for pursuing the technology, particularly your target returns.”
Oliver Routledge from Knight Frank said that while returns looked less attractive under the proposed rates, a cut in the cost of panels and a significant potential rise in the cost of electricity could make the numbers more palatable in the near future.
As it stands at the moment, payback period for a typical roof-mounted solar PV system on an agricultural building in southern England would be increased from around seven years under the current FiT rate to nearer 12-13 years at the reduced rate (see Table 2).
“It is not inconceivable that solar PV will be viable without any subsidies during the course of the decade if electricity prices rise by as much as some are predicting. If that were to happen, anybody who was also claiming index-linked FIT payments would be in a very good position,” he said.
“Despite this, the government does need to bear in mind that conducting three different consultations in such a short period on a scheme that was only introduced last year does not send out encouraging signals to those looking to invest in renewable energy.
Dr Scurlock said anyone thinking about investing in solar PV should not abandon plans entirely, but be prepared to go out and negotiate hard for the lowest capital cost as soon as the new tariff came into effect.
Indeed, there could be some attractive solar panel deals in the future, if supply outstrips demand, according to Mark Newton, head of renewable energy at Fisher German.
“This [reduced FiT] has effectively killed off solar PV investment potential for many farmers and landowners in the short-term as the cost of borrowing is about 6%, so returns of 4.5-5% are simply not viable.
“That said, the price of solar PV has come down by 60-70% in the past two years and we expect with the abandonment of so many projects, solar PV installations could become viable again in the next 12-18 months as panel supply outstrips demand.”
The Department of Energy and Climate Change estimated that the average cost of a domestic solar PV installation had fallen by at least 30% since the start of the scheme, from around £13,000 in April 2010 to £9,000 now.
If no action was taken, DECC said FiTs for solar PV would cost consumers £980m a year by 2014-15, adding around £26 (at 2010 prices) to annual domestic electricity bills in 2020. The proposals would restrict FiTs PV costs to between £250-280m in 2014-15, reducing the impact on domestic electricity bills by around £23 (2010 prices) in 2020.
The consultation is the first of two on the comprehensive review of FiTs. DECC will publish a separate consultation towards the end of this year, which will consider other aspects of the scheme, including tariffs for other technologies. The consultation closes on 23 December 2011.
Find out more here.
“The incentives will not be as good as they are now, but there will still be returns of between 5-10% on investments, which is still a pretty good deal. Our advice would be to not disregard solar just yet, especially as the price of the panels is always decreasing.” Claire Tucker, JHS Solar Solutions
“The current FiT levels have been responsible for the huge growth in the number of solar panels we are seeing around the UK. However, I firmly believe now is the perfect time to stabilise the industry and ensure it doesn’t grow out of control.” Gabriel Wondrausch, SunGift Solar
“The drop in FiTs is going to cause a drop in the return and the payback period of a solar PV array, however, this may not be as bad as we first thought. After all, a 10% return on an investment is still better than cash in the bank earning 3.5%. The crucial point is ensuring you get a competitive price from a reputable installer, to maximise the return on the investment.” Julie Branfield, Natural Energy
“The government is using its powers in a very clumsy way. The biggest issue is the unwillingness of the treasury to support DECC’s ambitions to build a low-carbon economy.” Jonathan Scurlock
“The government has cast a dark shadow over our thriving solar industry – making such deep and sudden cuts to incentives could put tens of thousands out of work.” Donna Hume, Friends of the Earth