The comprehensive spending review of October 20th could have spelt a disaster for the UK solar industry if they had instantaneously cut the feed-in tariff. Thankfully no such cut was made and the industry can continue on as before, at least for now. All feed-in tariffs are designed be decreased on a regular basis. This is so that the return on investment from a given renewable energy technology stays the same over time. The great thing about feed-in tariffs is that they decrease and decrease until they reach the same value as retail electricity prices, at which point you’re at grid parity and you don’t need the feed-in tariff anymore. Its hard to predict exactly when this will happen but in the case of UK solar PV, costs decrease very rapidly and I think that in 5 years time grid parity will be very close.
Currently the UK feed-in tariff is not set to be reviewed until April 2012, with changes possibly not coming in until 2013. In most feed-in tariff markets, the tariff decreases annually, so not changing our feed-in tariff for two whole years is too long in my opinion. The feed-in tariff at today’s PV prices provides a fantastic return on investment. 9-12% annual return for 25 years beats nearly everything you could get in an ISA or other savings product. In two years time, with another two years of cost reduction, the investment return could be significantly higher than it is now. Frankly, as someone who works in the solar industry, I say that this would be a bad thing. What the industry needs to see is steady year on year growth, not a boom and bust. The tariff is fine where it is for now, but soon it needs to be decreased to ensure the returns don’t get too high. The returns are high enough to trigger major growth in the industry, if they are too high then we will see more and more people pile into the market in a way that is unsustainable. The tariff would then have to be cut very significantly to control the market, which would lead to a massive drop-off.
It is very important that the industry has visibility on what will happen to feed-in tariffs so businesses can plan ahead. To solve this Germany have announced what will happen to the feed-in tariff based on the results of the previous year. That means that if the market reaches a certain size, the egression the following year will be larger and vice-versa. The details of this are published so that everyone can see what the degression rates could be – we need this level of visibility in the UK.
Another big problem with feed-in tariffs is that they cause a surge of installations in the run-up to a feed-in tariff degression – which is not particularly healthy. What would be best is to decrease the feed-in tariff little and often, so there are no sudden jolts to the industry. Italy has just introduced quarterly feed-in tariff degression i.e. decreasing the feed-in tariff every 3 months instead of once a year. I think this is a great idea. As long as the degression each quarter is small and planned ahead, the industry will be able to continue to grow steadily without the need for big every year or every two years. France on the other hand are considering an annual cap to the PV market. This is absolutely terrible for the industry as it limits everybody’s growth and will cause redundancies across the industry in France if it goes ahead.
So now we are back on our feet in the UK, lets think about how to create a stable solar industry going forward by decreasing the FiT in a sensible way. It could be that we follow the Italians lead on this one.