Since the launch of the Government’s Feed in Tariff (FIT) Scheme in April 2010, there have been more twists and turns than your average TV soap opera. Except with FIT, business owners do not have the option of switching the TV off. Instead, they have to pick up the pieces from the trail of changes and confront how it will affect their bottom line and future business plans.
With the series of changes to the scheme that took effect from April 1, 2012 and with even more expected in July and October this year (as a result of the rollout of Phase 2 of the FIT consultation) businesses could be forgiven for feeling confused.
Jackie Gray, a director in the Energy Practice at Dickinson Dees law firm, works through the myriad of changes and what businesses need to be aware of when trying to plan ahead.
The ever reducing FIT rates
Following Phase 1 of the FIT consultation last year; as of April 1, lower FIT generation rates now apply to all solar PV systems installed on or after March 3, 2012, instead of the December 12, 2011 cut-off date originally proposed. This is due to the judicial review challenge the Department of Energy and Climate Change (DECC) seems intent on fighting. If the Government’s appeal in the Supreme Court is successful, DECC has stated that it reserves the right to lower FIT rates in the future for systems installed on or after 12 December.
More reductions to FIT rates are also on the way from July 1 and October 1, 2012, as part of the proposals set out in the second phase of the FIT consultation. However, the extent of the reductions are not clear as the Government has proposed three possible options which depend on how much solar capacity is installed before the end of April. This could see rates for domestic solar PV drop to as low as 12.9p/kWh from October. It is also proposed that rates for other technologies such as wind will be reduced from October. Businesses, particularly developers, would therefore be wise to push ahead with projects as quickly as possible before the rates reduce again.
An ongoing mechanism for controlling the cost of the FIT Schemes could now see FIT rates for solar PV continue to reduce by 10% every six months from April 2013 (5 percent in the case of other technologies). Even though the reduced rates would be set in advance at each six month point, the rates could fall even more quickly, as the Government could also bring forward the next planned reduction point on two months notice if deployment of a particular technology is higher than projected.
All this makes it difficult to plan projects more than a few months ahead and businesses will need to monitor ongoing deployment figures to try and anticipate future rate cuts.
Energy Performance Certificates – what’s your level?
From April 1, buildings where solar PV is installed have needed an Energy Performance Certificate (EPC)
of Level D or more to qualify for standard FIT rates. According to Government figures, about 65 percent of non-domestic properties in the UK may be rated at Level D, so businesses planning to install solar PV on their own buildings need to look into their EPC level as soon as possible. If properties don’t meet Level D when solar PV is installed, the PV system is only entitled to the stand-alone FIT rate. This could make solar PV a more expensive and therefore less attractive option for some properties.
Multi-installation tariff and the future of roof rental schemes
The new multi-installation FIT tariff (which is 20 percent less than the standard FIT rate) has now also been implemented and applies to solar PV. The good news, particularly for businesses with small property portfolios, is that they can still benefit from the standard FIT rates, as the tariff only applies to 25 installations or more. Given the current low PV panel prices many roof rental schemes will still remain viable with the multi-installation tariff at current rates.
Only about half of domestic properties in the UK are at EPC Level D which may reduce the number of properties suitable for roof rental or “free solar” schemes. However, in the social housing sector the proportion is higher, with about three quarters of local authority and housing association properties already at that level. This may put a number of large scale social housing projects back on track – all good news for developers, social housing providers, tenants and businesses in the supply chain working on these projects.
However, businesses need to take note around what the future holds for roof rental schemes. Under the Phase 2B consultation which closes today (April 26, 2012) it is proposed that the multi-installation tariff for commercial roof rental schemes will be reduced to the equivalent of the stand-alone FIT rate from October. Depending on the extent of the cuts implemented in July and October, FIT rates could dive to as low as 4.7p/kWh for domestic projects with more than 25 installations. Even with low PV prices, developers could find it is no longer financially viable to fund commercial ‘free solar’ schemes after October. Home owners and businesses who don’t have their own funds to install solar PV would therefore also miss out on the opportunity to reduce their energy bills.
A brighter future for community-owned schemes
The future does, however, look brighter for 'community-owned’ schemes under the Phase 2B consultation. It is proposed these schemes will continue to benefit from a multi-installation tariff equivalent to 80 percent of standard FIT rates. The devil will be in the detail though as the Government is also consulting on the definition of 'community-owned' which could cover social enterprises, charities and social housing.
It is also proposed that community projects may be able to secure FIT rates in advance of installation. Given the longer lead in times in community projects, particularly in social housing and the risk of frequent rate cuts, this approach would significantly assist project planning and provide funders with much needed certainty to commit funds earlier in the project. This may be the assurance many businesses have been looking for whilst navigating through the rocky times of the green initiative.
If the FIT rates for commercial roof rental schemes drop to the stand-alone rates from October, developers offering 'free solar' may be able to re-focus their business models towards the community and public sector where more business opportunities could lie.
There will be many disappointed businesses who feel let down that the Government has not ‘walked the talk’ for ‘green entrepreneurs’. Constant changes to the FIT Scheme and the impact this has had on the UK’s emerging solar industry has been very damaging, particularly at a time when the Government is trying to stimulate the economy and encourage business growth.
From the summer, the landscape should become clearer. Despite the changes, the real winners will be businesses that are prepared to diversify their offering, revise their business model and look at new growth areas. It will just take that bit longer to get there.