The feed in tariff (FIT) was introduced on 1s April 2010 by the Labour Government to encourage us to install equipment in our homes and businesses which generates electricity using low or zero carbon producing “fuels” such as wind, sun or water. People who install energy generating equipment such as solar panels or wind turbines and register for the feed in tariff can receive a payment for each kilowatt hour of electricity they generate. They can then either use the electricity themselves (so saving on electricity bills) or sell it back to the National Grid in return for a slightly higher payment per kilowatt hour.
The real success story for the feed in tariff has been the number of solar panel installations, however as mentioned the feed in tariff scheme was a Labour project and inevitably the new government has its own views on how best to reduce the UK’s carbon footprint. As a result the tariff rates for solar panels have been sharply reduced, following an emergency review in 2011. This article looks at where we stand today in terms of FIT rates for solar panels and how they will be calculated in future.
Original 2010 FIT Rates for Solar Panels
Solar panels are the most accessible form of renewable energy generation for the general public. Wind turbines are largely ineffective in built up areas as there are too many buildings and other obstacles acting as wind breaks and very few of us have a river or stream, needed for hydro electricity generation, running through our land.
At the launch of the FIT scheme the tariff for solar panels was set at 43.1p per kilowatt hour, with payments guaranteed at that rate for 25 years. The aim was to achieve an 8% annual return on investment. It was always anticipated that as the popularity of solar panels increased the price would fall and it was intended that the rate should be reviewed, with a view to decreasing it, in April 2012.
Emergency Review 2011
In 2011 the coalition government announced that it would be holding an emergency review of the feed in tariff rates. It said that given the level of take up, the growth in the industry and the fall in solar panel installation costs the existing rates were not sustainable and threatened the scheme as a whole.
Following the review, rates were halved to 21p, initially from December 2011. The solar industry mounted a legal challenge however, claiming that the cut was illegal. They were successful, which meant that the starting date for the 21p rate was 3rd March 2012. Accordingly, installations registered before 3rd March qualified for the old, higher rate whereas those registered on or after the cut off date received the lower rate.
Comprehensive Review 2012
Following the emergency review and the drastic reduction in FIT rates the government embarked on a more comprehensive review, looking at how rates would be calculated going forward. As a result of that review, all installations registered on or before 31s 1 July 2012 will continue to receive the 21p rate but after that date properties will be split into two categories.
From 1s August 2012, properties with an energy rating in band D or higher will be eligible for a FIT rate of 16p whereas those with a rating of E or lower will receive just 7.1p. This represents a major step change as it encourages home owners to tackle the problem of energy wastage before looking at generation. This dovetails nicely with the current government’s aims make as many UK homes as possible more energy efficient. This may not be great news for the industry however the logical is compelling – it makes little sense to pay people to generate energy which will simply go to waste.
As well as reducing the payment rates, the government has reduced the tariff term from 25 to 20 years. There appears to be less justification for this move, which immediately makes any installation 20% less profitable of course. The one plus point for the industry and would be solar panel purchasers is that from 1s August 2012 the export tariff, the additional sum which the solar panel owner receives for every kilowatt hour of energy exported into the National Grid and not used in the home, has been increased to 4.5p for all installations.
Calculating the Feed In Tariff in Future
As well as the changes which are due to take effect from August, the government has announced that from 1st October 2012 responsibility for setting tariff rates will be handed over to OFGEM, the energy regulator. Rates will be reviewed quarterly based on energy prices, uptake of the scheme and installation costs at a point earlier in the year. The intention is to remove the requirement for emergency reviews and make future changes more predictable, so stabilising the industry. No doubt the government also hopes that putting the power in the hands of the regulator will increase public confidence in future rate cuts being in the interests of the scheme as opposed to simply saving money.