Published on April 13th, 2012 | by Zachary Shahan5
Renewable Instability — the UK and What Not to Do
April 13th, 2012 by Zachary Shahan
This special guest post is from James Hawkins, a UK solar energy industry employee, and gives us some more inside information on the recent changes,.. and challenges,.. and changes in the UK solar feed-in tariff policy. Enjoy!
In April 2010, the UK government launched a flagship feed-in tariff policy for solar panels. It meant that solar panels were no longer just a great ecological decision (the approximate figures are for 1,000kg of carbon dioxide reductions per set of installed panels) — homeowners were offered just under $0.70 for each kWh of electricity generated with their solar panels, with a couple of cents extra for selling back the electricity to the main grid. The returns were guaranteed for 25 years, and were linked to inflation, which made it a very attractive investment. The following is a report for the number of searches in Google.co.uk for the term “solar panels”, which shows how the level of interest has soared, and then fallen, since the start of this scheme in April 2010 (to enlarge, hold “ctrl” or “command” and click the “+” button):
As you can see, the scheme built in popularity over the course of 2010 — certainly a manageable level of growth was achieved. However, it was 2011 when the real growth was seen. But why was there such a large increase? In January 2012, the Department of the Environment and Climate Change stated that the cost of installed solar panels had fallen by 45% since the start of the scheme (as in this pdf – however, make sure to read Section 3.4 Data Sources). Since the feed-in tariff had remained constant at the $0.70/kWh rate, this represented a massive increase in the financial returns. The news and media picked up on this fact, and demand from households wanting to install solar panels sky-rocketed.
The feed-in tariff was initially given a budget of £867 million, and by the end of 2011, it became clear that it was going to overshoot this figure. The aim was for nominal (pre-inflation) returns of 7-10%, but most solar companies were quoting returns of 7-10% after inflation due to the falling prices.
On the 28th of October 2011, an official document was accidentally leaked online with the feed-in tariff at just $0.33/kWh. This change was quickly spotted and Chris Huhne, then the Energy and Climate Change secretary, released a statement that the feed-in tariff would be introduced from the 12th of December 2011 until the end of an official consultation over the rate — the date of which was at the end of December. Essentially, Huhne attempted to cut the rate without any public consultation. This change threw the solar industry into uproar, and several of the largest installers combined with Friends of the Earth and went to court over the issue. The solar panel companies won and the feed-in tariff was put back to its previous $0.70 rate.
An official consultation was then run and it was declared that the feed-in tariff would be reduced for new installations from the 3rd of March 2012, and this would include an energy efficiency requirement on the property from the 1st of April 2012 — just a few days ago. What has the impact on the industry been?
The metric ‘Clicks’ is how many people searched and then clicked on our adverts (we run a national solar power quotes service, dealing with approximately 800 customers a week), whereas ‘Conv.’ is the number of people who requested a quote through our website. The busy period in October was before the changes were announced and solar panels were very popular because of the attractive returns. The peak before the large dip was a sudden rush in households trying to install solar panels before the December 12th “deadline”, which was later over-ruled as illegal in court. The court case took until the 25th of January to resolve. Hence, there was enormous uncertainty in the industry up until this date, and there was a resulting significant drop in numbers through this period.
As solar installers breathed a collective sigh of relief, the DECC then went further and announced they’d challenge this verdict made in the High Court, taking their legal battle to the Supreme Court level — the most powerful legal court in the UK. This created further instability — households would be told that they would either receive the $0.70/kWh rate or the $0.33/kWh rate depending on the outcome of this second challenge. Hearing that an investment’s returns could possibly be about 50% lower depending on a technically-uncertain outcome in court decreases the value of the investment enormously, depressing solar demand in the UK until the Supreme Court case was rejected.
Why did the government go to court a second time? The likely answer is that they knew it’d maximize the uncertainty even if it wouldn’t have a successful outcome, thereby decreasing the number of installations regardless and making the feed-in tariff scheme more likely to stay within it’s allocated budget.
However, this decision for the government to make short-term gains is likely to have caused long-term harm to all renewable energy industries currently subsidized by government schemes. Sudden policy changes, and particularly those showing the DECC’s willingness to stunt an industry’s growth to maintain political harmony with other government departments, will not be forgotten by investors — whether at the commercial or domestic scale. Now, in order to encourage a similar uptake of solar panels, for example, a greater rate must be paid per kWh generated to compensate for this new perceived risk factor which comes with the investment.
How could the policy have been implemented differently? If the original implementation of the feed-in tariff had included a rate modeled on the average cost of solar panels (a figure which could be made publicly available), then the rate could have been adjusted much sooner and much more predictably based on this model. The statistic the DECC used in its report for the average price of installed solar panels was based on general quotes and information from a few random installers, and is unlikely to be accurate. Already, whenever solar panels are installed, the solar power system must be registered to receive the feed-in tariff. If the price of the installed system were registered at this point simultaneously, then real-time information could be collected with near-total accuracy. If the number of installations and the price of these installations can be followed instantaneously, then the rate of the feed-in tariff can be continuously adjusted to keep the total installed capacity within the affordable range. Hopefully, governments implementing solar feed-in tariffs in the future will use this approach.
Written by James Hawkins, head of marketing for a range of energy efficiency websites, dealing with boilers, solar panels, double glazing, and much more!
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