UK Government on solar back foot – Tariff confusion continues
The UK’s High Court today declared the Governments cuts to feed-in tariffs (FiTs) paid to owners of solar Photovoltaic (PV) systems illegal and reversed the cuts to payments to their original levels. This latest development is likely to cause further confusion amongst the industry and prevent homeowners and businesses from fully understanding the potential risks and rewards of installing their own solar PV systems.
When the UK’s FiT was first introduced in early 2010, it led to a slow, but steady increase in the number of PV systems being deployed in the country. The FiT payments effectively subsidise the several thousand pound investment, by paying owners a guaranteed, and inflating-linked payment for every unit of electricity generated by their systems. In 2011, however, the market quickly gathered pace, driven by rapidly falling PV system prices as a result of huge oversupply largely coming from Chinese solar panel manufacturers and also slowing demand in other major markets in countries like Germany. Factory-gate panel prices fell by more than 30% in 2011 according to latest data from IMS Research.
When DECC realized that deployment was growing at a rate much quicker than anticipated and that the budget set aside for FiT payments would quickly be used up, it announced in October that FiT payments would be more than halved for any PV system installed after 12th December. Crucially, however, the Government 12th December deadline was in fact before the end of the consultation process on the proposed cuts, which ended on December 23rd. It was for this reason that the High Court today ruled the cuts illegal.
Ironically, it was the Government’s decision to cut FiT payments that lead to further overheating of the UK market and a rapid acceleration of PV systems being built. The announcement in October was followed by a flurry of new applications as savvy homeowners and businesses sought to install systems and beat the deadline. This led to 800 MW of new PV capacity being added in the UK in 2011, according to IMS Research, up from just 50 MW in 2010. This propelled the UK to become the seventh largest market globally, despite being ranked just 20th in 2010. Given the UK’s new found importance in the global PV industry, any changes to the incentive mechanisms here are likely to have a profound effect on the global supply chain and could spark further oversupply, sending prices down further.
Whilst some in the industry may see today’s new positively, it will most likely spell more bad news and uncertainty. DECC has already indicated that it would seek to appeal to the Supreme Court which could then rule in its favour. This means that installers of PV systems currently offer any guarantees to homeowners looking to install solar PV systems how much money they will actually generate, and if it will actually provide a decent return on investment.
If the Government were to lose a further appeal and rates remain unchanged, this could spell further danger to the UK industry. Paying inflated prices (which would be double those offered in Germany currently) would undoubtedly lead to further market overheating with a second rush of installations. Whilst this may provide short-term gain, it would likely create a boom-bust cycle which has been seen in other solar PV markets such as Spain and destroy the industry when all available budget is spent providing huge returns to some investors, but then nothing left for further installations.
With further price declines expected in early 2012, it seems obvious that FiTs in the UK needed to be reduced, but today’s latest twist will likely cause on-going confusion, uncertainty and could spell the end of the UK solar PV industry.