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What’s FIT all about?

Richard Molloy, Sustainability Segment Manager for Eaton’s Electrical Sector, believes that uncertainties over the feed in tariff (FIT) are damaging to the renewable energy sector and, ultimately, to the environment.

Richard Molloy, Sustainability Segment Manager for Eaton’s Electrical Sector

When the FIT scheme was launched on 1 April 2010, it seemed to be an excellent way of encouraging interest in renewable energy and of propelling the nation toward its frighteningly ambitious target of reducing greenhouse gas emissions by at least 80%, compared with the 1990 baseline, before 2050. The FIT scheme was indeed received with enthusiasm, but the date chosen for its launch proved to be an unfortunate omen of a troubled future.

The problem, from the government point of view, was that the FIT scheme was too generous and therefore too popular. Although the money to finance the scheme comes not from taxes but from a levy on energy bills, there was much concern that the scheme was costing too much, and that it was being exploited by institutional investors as a very comfortable source of income.

Without doubt, these concerns had some basis in fact, but what happened next can only be described as a massive overreaction. Firstly, from 1 August 2011, the FIT for large schemes was slashed from 30.7p per kWh to 8.5p. This change was announced in advance, and created a huge gold rush of organisations trying to get their PV schemes up and running in time to beat the deadline.

Then a loophole was discovered. Schemes over 100kW could be extended after the date of first commissioning with the additional installed capacity also qualifying for the higher initial FIT rate. As a result, many such smaller systems, which could be installed quickly, were built and subsequently expanded. Exploiting this loophole, which was closed on 16 October 2011, created a second gold rush.

With the commercial sector hammered by dramatic FIT cuts, attention turned to the domestic sector and, in October 2011, the government started consultations on what actions should be taken. There was, in fact, agreement on all sides that the FIT should be reduced – after all, the price of PV hardware has fallen substantially since 2010 – and the general feeling was that a cut of around 30% would be reasonable.

But that’s not what happened. Not only did the government cut the FIT for domestic installations from 43.3p per kWh to 21p – a reduction of more than 50% – it also attempted to impose the cut retrospectively from 12th December, even though the consultation didn’t close until 24 December.

Friends of the Earth and leading suppliers of PV systems, including Eaton’s partner in the sector, Solarcentury, challenged the government’s decision in the courts and won their case. They won again when the government appealed the decision.

The current situation is that the government has appealed again, this time to the Supreme Court, and it is expected to be up to a year before the outcome of this appeal is known. In the meantime, no-one is certain whether the FIT applied to new domestic PV systems installed between 12 December 2011 and 3 March 2012 will be 43.3 p or 21 p. What we do know is that after 3 March, the lower rate will definitely apply, and the government is proposing significant further cuts in the FIT from July 2012, ranging from 21% to 35% for residential systems and up to 55% for some larger systems, with the level of cut dependent upon the amount of total capacity installed in the UK in March and April.

Clearly, the FIT scheme has, in recent months, turned into something of a disaster, but what are the implications of the government’s machination for the renewable energy industry and for the environment?

Some might argue that the industry has benefitted from the gold rushes created by each cut in tariff, but this is far from true. Repeated boom-and-bust cycles, especially over a comparatively short time scale, benefit no-one. Customers end up paying inflated prices to beat the deadlines, while suppliers struggle to source the materials and labour they need to meet a surge in demand that they know cannot be sustained.

The situation with regard to domestic installations is particularly interesting. At the peak when customers were trying to beat the December FIT deadline, well over 20,000 systems a week were being installed, but just one week later, this figure dropped to a mere 800. Unsurprisingly, many suppliers of PV equipment were caught out by such a huge change, and have been left greatly overstocked.

This has had the unfortunate effect of temporarily depressing prices, providing the government with extra ammunition with which to defend its next cut in FIT. The current low prices are simply a result of overcapacity in the supply chain for PV panels and the need for stockists to clear their shelves, and as such are unsustainable, so what is the real situation in relation to pricing?

The truth is that the PV panels themselves have already fallen considerably in price as demand and manufacturing expertise has increased, but they are relatively new technology, and it would not be unreasonable to expect further price reductions in the future, albeit at a reduced rate.

The PV panels are, however, only part of a solar power installation. Other key components that make up a substantial proportion of the overall cost include inverters, switches, isolators and protection devices. These are much more mature technologies and, for the most part, the components were already in volume production long before PV systems became popular. They therefore offer much less scope for future price reductions.

Hopefully the PV industry will be able to communicate insights like this to the government in such a way that they are properly taken into account in future FIT planning. If they are not, the PV industry will sustain even more damage than it has done over the last year of uncertainty.

That can only inhibit the transition to renewable energy, which the government claims it is so committed to promoting.

The effect of the uncertainties surrounding the FIT extends much further than the PV industry, however. Like it or not, the money to finance PV schemes initially comes from investors, whether that means banks and building societies who are lending money for individuals to install PV systems on their homes, or institutional investors that are lending money to public bodies and commercial organisations for larger scale PV schemes.

And, especially in the present economic climate, investors abhor uncertainty. There is, therefore, little attraction for them to provide funds for renewable energy schemes where the potential rate of return is at the whim of the government, and may even be attacked retrospectively. If there’s no investment money for PV schemes, however, they simply won’t go ahead, and we’ll fall even further behind our aspirations and goals for reducing carbon emissions, with potentially disastrous consequences for the environment.

What the industry needs, what the public needs and what the environment needs is for the government to provide a clear and comprehensive road map for the future of the FIT, with provision for tying any further cuts to the real reductions in the costs of installing systems. In short, what we need is certainty, so that we can maintain interest, investment and momentum in renewable energy.

Yes, the FIT scheme costs money and will always cost money, but destroying the scheme with ill-advised and ill-informed decisions may end up costing the Earth.

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