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Government must provide alternative not just cut solar subsidies

Blog by Sam Matthews, 23 November 2011

Photo of Sam Matthews - Researcher at Best Foot Forward

‘Feed-in tariffs’ (FITs) are subsidies paid to low carbon electricity producers. FITs are intended to incentivise the development of renewable sources of electricity. The UK government proposes to reduce FITs for solar photovoltaic (PV) systems by 50%. The proposals target small-scale solar panels installed by the likes of you and me.    

The Cut Don’t Kill campaign held a rally yesterday, calling for the government to moderate the cuts to solar energy and collaborate with industry to plan future policy. Climate change minister Greg Barker defends the cuts by emphasising the need to avoid “boom and bust” in the solar industry. 

But what about the implications of the cuts for the UK’s renewable energy and carbon reduction targets?

Solar photovoltaics represented only 0.01% of total UK electricity production in 2010. Assuming high projections for PV uptake, the percentage of total UK electricity produced by solar is still less than 1% in 2020. To put this in perspective, the UK produced only 1.1 Watts of electricity per inhabitant through PV in 2010 which compares with 2.4 Watts for a country such as Bulgaria. Clearly then, a ‘low carbon transition’ demands a policy paradigm shift. The proposed cuts are an example of cost-driven decision-making; not radical enough to deliver legally binding renewables targets (15% electricity from renewables by 2020) or 80% GHG reductions by 2050. 

On the other hand, FITs are funded through higher electricity bills. A “do nothing” strategy would cost consumers £980 million a year by 2014-15, adding £26 to annual electricity bills in 2020 according to DECC. Financial benefits are distributed largely amongst wealthy private investors while electricity customers foot the bill. But rather than cut the tariff, wouldn’t it make more sense to  legislate for a fraction of FIT income to be channelled into the Renewable Heat Incentive or some other mechanism that would improve other aspects of the dwelling’s energy efficiency? For example, the FIT could fund a solar hot water system – were this not to be already installed. 

It is true that the costs of FIT payments are escalating. The UK PV market has boomed since April 2010 – success has a price. The installation rate is three times above government projections. Additionally, falling installation costs (at least 30%) and rising electricity prices have inflated investment returns. FITs were originally set to provide generators with a return of 5-8%, now they are delivering an 8-11% return. These highly profitable systems are eating into a finite budget.

Residential installations constitute 95-97% of the UK solar PV market. Unfortunately, small-scale solar is a financially inefficient way of reducing emissions. It costs €716 to abate 1 tonne of CO2 through solar PV in Germany (Ruhr University study). The Renewable Energy Foundation (REF) estimate that small-scale UK PV costs £800/tCO2 – although prices are tumbling.Supporters of drastic cuts to FITs say that the money could, in theory, free up resources for bigger projects (helping us move towards our renewables and GHG targets faster). But this will only happen if the government is prepared to re-invest in green technology, rather than just cost-cutting. Government could use the money saved from the FIT cuts to incentivise larger-scale community solar projects. Larger commercial and industrial scale projects need to be incentivised to add significantly to the renewables capacity. A greater proportion of the FIT budget could be channelled towards lower cost, more mature technologies such as onshore wind (installed in the right places) and anaerobic digestion. Moreover, the government should be pushing the Renewable Heat Incentive and Green Deal scheme and provide support for large-scale offshore wind and tidal power.