Navigant Research Blog

United Kingdom Throws a FIT over Solar

Richelle Elberg — November 5, 2013

In two recent blogs, I discussed the fervent debate taking place in the United States over the efforts of some utilities to change their net metering policies in ways that critics call a “tax” on solar, and provided details on how Germany’s aggressive promotion of renewables has resulted in dire financial consequences for German utilities and high rates for consumers.  Now, on to the United Kingdom, where sharp changes to the Feed-In Tariff (FIT) program during just 3 years have placed considerable stress on the marketplace.

The FIT went into effect in April 2010, offering 43.3 pence ($0.69) per kilowatt-hour (kWh) to individuals generating solar energy with less than 5 megawatts (MW) of capacity.  (Notably, those who had installed solar panels prior to the FIT program were ineligible, and continue, to this day, to receive just 9 pence per kWh.)  The new generation tariff was paid whether the homeowner used the electricity or not, and an additional 3.2 pence per kWh was paid for energy exported back to the grid (the export tariff).  The costs of the program are paid by the utilities, which spread them across the entire customer base for recovery.

Falling FIT

By late 2011, it was clear that solar take-up rates were greatly exceeding the plan’s original expectations, and the Department of Energy and Climate Change (DECC) announced that it would cut generation tariffs by more than half, to 21 pence.  Lawsuits ensued, but by March of the following year, the cut was made.  Further cuts came in August of 2012, bringing the base rate down to 16 pence; and in the time since, the Office of Gas and Electricity Markets (Ofgem) has periodically lowered payments by a predetermined (and complicated) degression formula based on the rate of PV system deployment and the actual costs of solar panels.  As a consolation for the falling generation tariff, solar owners now receive 4.5 pence for exported kWh, rather than 3.2 pence – but the lower generation tariff is only good for 20 years, rather than for 25 years under the original scheme.

Rates Up, Installations Down

Partly as a result of the volatile policies, U.K. solar installations have slowed dramatically.  According to Ofgem data, nearly 470,000 small PV systems have been installed through the program.  But in the June, the monthly installment rate fell to just more than 6,000 systems, down from 14,500 per month 1 year ago.  About 1.7 gigawatts (GWs) of solar capacity have been installed through the program since its inception.

Solar advocates note that the program is still lucrative for homeowners, because the costs of the systems have also fallen sharply.  At the time of the last FIT cut, the Solar Trade Association in the United Kingdom said that PV system buyers still earn about a 9% return on their investment, and pointed out that electric rates were still rising.  Indeed, according to a recent report by DECC, electric rates across the United Kingdom have risen by nearly 50% since 2005 in real terms.

The FIT program in the United Kingdom was controversial and the abrupt policy changes have led directly to business failures, like the one described in this Dragon’s Den article.  But where the grumbling appears to have tapered off in the United Kingdom , ire over net metering policies in the U.S. is just hitting its stride.

Policies meant to drive usage of renewable energy must be sustainable (pun intended) for both customers and utilities.  In my next blog, I’ll discuss some of the proposals designed to align the longer-term climate goals of renewable integration with the nearer-term financial needs of utilities and consumers.

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