On 18 March 2011 the Government published its "Consultation on fast-track review of Feed-in Tariffs (FITs) for small scale low carbon electricity". As indicated in February, the consultation includes proposals to significantly reduce the tariff support available to all new solar photovoltaic (PV) installations over 50kW and stand-alone installations.

In the Government's view, the proposed tariff changes will bring the UK into line with changes being made elsewhere in Europe. It also believes they are necessary to ensure sufficient financial support remains available to encourage smaller solar PV installations and other FIT technologies.

The consultation has thrown the large-scale solar PV market into disarray with a number of projects effectively stalled pending the outcome of the fast-track review. It has also led some stakeholders to consider potential legal challenge should the proposals proceed.

As well as looking at the solar PV market, the consultation also seeks views on proposals to increase tariffs for farm-scale anaerobic digestion facilities of up to 500kW. The proposals are made on the basis that current tariffs are not felt to be high enough to make these schemes worthwhile. Views are also invited (by 12 April 2011) on the scope of the comprehensive review of FITs announced in February and due to be completed by the end of the year.

The consultation remains open until 6 May 2011 with the Government proposing that, subject to the outcome of the consultation, any tariff changes will be made in July 2011 and will apply to all new entrants to the FIT scheme from 1 August 2011 onwards.

Background to the feed-in tariff

On 1 April 2010 the Department of Energy and Climate Change (DECC) introduced a feed-in tariff regime to incentivise small-scale low carbon electricity generation (the FIT). The scheme applies to wind, solar photovoltaic (PV), hydro-electric, anaerobic digestion and micro-combined heat and power technologies.

As at 18 March 2011, more than 27,000 installations have been registered under the FIT scheme. The scheme guarantees an inflation-linked income for renewable electricity projects of up to five megawatts in size for as long as 25 years. The FIT works alongside the Renewables Obligation, currently the main mechanism to incentivise large-scale renewable electricity generation, and the Renewable Heat Incentive, which once introduced will incentivise the generation of heat from renewable sources.

Through the use of the FIT, DECC hopes to encourage deployment of additional low carbon electricity generation, particularly by organisations, businesses, communities and individuals not traditionally engaged in the electricity market. It is intended to allow many people to invest in small-scale low-carbon electricity in return for a guaranteed payment for the electricity they generate, as well as energy they export to the national grid.

Further background on the FIT can be found in our earlier analysis.

The story so far

The attractive rates offered by the FIT have led a number of companies to look for opportunities to develop solar projects based on roof and land space across the UK. These are typically at the larger end of the FIT range, with funding being sourced from a range of institutions including international investors.

However, alarm bells began to ring in the sector following a speech by Minister for Climate Change Greg Barker on 11 November 2010. At the same time as confirming to Parliament the Government's general commitment to solar PV, the Minister went on to say that the Government had inherited a FIT system that "simply failed to anticipate industrial-scale, stand-alone, greenfield solar, and, although we will not act retrospectively, large field-based developments should not be allowed to distort the available funding for roof-based PV, other PV and other types of renewables".

That was followed up by last month's announcement by Chris Huhne, Secretary of State for Energy and Climate Change, of a comprehensive review of the FIT scheme, including a fast-track review of large-scale solar PV projects. The Government's proposals are set out in its "Consultation on fast-track review of Feed-in Tariffs for small scale low carbon electricity" published on 18 March 2011.

Tariff reductions - a cut too far?

In its desire to ensure large-scale solar PV does not divert funding away from small-scale solar and other renewable schemes (particularly community and domestic schemes), the Government is proposing significant cuts in the generation tariff levels available to solar PV projects of greater than 50kW and stand alone installations.

The proposed new rates are 19p/kWh for projects with a capacity above 50kW and up to 150kW, 15p/kWh for projects above 150 kW and up to 250kW, and 8.5p/kWh for projects above 250kW and 5MW as well as stand-alone installations. These mark a dramatic reduction from the existing tariffs of 31.4p/kWh for projects between 10 kW and 100kW and 29.3p/kWh for projects between 100kW and 5MW, (including stand-alone installations).

The Government is at pains to confirm that it is not acting retrospectively and that the reduced tariffs will only apply to new schemes accredited after implementation of any tariff change. However, with a proposed implementation date of 1 August 2011 given the time taken to commission and accredit projects, few are likely to be in a position to take advantage of the "grandfathering" arrangements.

In addition, the generally held industry view is that the new rates will mean solar PV projects of more than 50kW will no longer be commercially viable and will have a significantly detrimental effect on the solar PV sector as a whole.

Gaynor Hartnell, Chief Executive of the Renewable Energy Association, has commented that "Larger PV projects are cheaper, and have a major role in driving down costs. We don't want boom and bust in this sector either, but pulling the rug out from under the feet of those that have ventured into this market was precisely the wrong response. The UK will return to the solar slow-lane. It's as good as a retrospective change and that does untold damage to investor confidence."

The impact on the solar PV sector if the changes are implemented remains to be seen; but it is likely to be significant. And, whatever the merits of the proposed changes, at least in one sense part of the damage has already been done. With the review coming less than 12 months after the introduction of the FIT and with severe rate cuts proposed, some parts of the renewables and finance sectors are likely to see the UK as a challenging place to be from a regulatory and risk perspective.