Earlier this year, the Department of Energy and Climate Change (DECC) conducted a consultation on changes to the Feed-in Tariff (“FIT”) subsidy for renewable energy technologies. One of the Government’s key proposals was to cut the Feed-in Tariff rates for solar PV installations by as much as 87% and, through subsequent incremental cuts, reach a 98% reduction within 3 years.
The proposed FIT rate reductions will see the level of governmental support for solar PV deployment reduce from around £70m a year to £2m a year. In addition to cutting FIT support, the Government also announced plans to close the Renewables Obligation for solar PV farms smaller than 5MW in capacity.
The Government’s proposals have been strongly criticised by the UK solar industry and environmental campaigners as being a retrograde step which would bring solar deployments to a standstill and result in numerous business failures and job losses (n.b. the Government’s own Impact Assessment document admits that its proposed changes to the FIT rates could result in a drop of 6GW from the UK’s renewable generation capacity by 2020/21). In response to such criticism, DECC has stressed its commitment to meeting the UK's climate change commitments whilst keeping energy bills as low as possible for consumers. DECC claimed that the reductions in FIT subsidy rates were needed to address a £1.5bn projected overspend in the Government's budget for clean energy subsidies (the Levy Control Framework), partly resulting from the unexpectedly high number of solar PV installations and FIT take up across the UK, and that the risk of reduced deployment has to be seen in this context (to enable the FIT scheme to continue).
So far, Amber Rudd, the Secretary of State for Energy and Climate Change, has not publicly commented on the potentially adverse consequences of the Government’s proposed reductions in FIT rates to the UK’s solar industry. However, the UK Solar Trade Association has commented that as many as 27,000 jobs could be lost as a result of the cuts. The Secretary of State has announced that DECC is continuing to investigate ways in which it could support community energy projects and that more details of this will emerge in due course.
DECC’s consultation closed at the end of October and DECC’s official response to the consultation is expected to be published before the end of December but, in order to achieve that timetable, DECC will have to review and assess what is understood to be more than 55,000 consultation responses (of which over 2,500 are classed as “detailed responses”). As the changes to the FIT rates will require the enactment of secondary legislation, DECC was asked to clarify the extent of the standstill period that will apply before the new rates came into effect.
Assuming that DECC publishes its response to the consultation by mid-December, the reduced FIT rates would (making allowance for at least 40 Parliamentary days before the secondary legislation becomes effective) likely not come into effect until March 2016.
In October, Ofgem published the new FIT rates that will apply from 1 January to 1 April 2016 pending the new legislation coming into force. Ofgem’s new FIT rates for 2016 are compared against the Government’s proposed reduced rates in the following table:-
Click here to view table.
In addition to slashing the FIT rates, DECC also wishes (a) to implement a quarterly degression which would result in the FIT subsidy reducing to zero for some solar PV installations by 1 January 2019 and (b) to change the annual indexation of FIT rates from retail price index (RPI) to consumer price index (CPI).
Undoubtedly, the Government’s proposals have caused big shockwaves within the UK solar industry, which was expecting a slower and more gradual mechanism for weaning the industry off FIT subsidies, with the Government remaining committed to achieving renewable energy generation targets by 2020. However, whilst the costs of solar PV installations have reduced dramatically over the years, in the time until the Government’s proposals take effect, these costs will not drop to a level that will allow many scales of solar installation to remain attractive to investors due to the far greater number of years of operation that will be required in order to recoup their initial investment. Whilst these cuts were not specifically mentioned in the Government’s pre-election manifesto, FIT rate reductions were always “on the cards” in the context of the Government’s wider economic austerity measures and due to the actual level of solar deployment greatly outstripping the Government’s forecasts.