FiTs for what purpose?

Original

communities, energy, personal finances, sustainability

Author(s):  Reg Platt
Published date:  22 Nov 2011
Source:  IPPR

Why the government’s proposals to cut solar subsidies show a clear lack of purpose, and why measures to widen accessibility and support community energy are needed.

Today the solar industry will take to the streets to protest against cuts to solar subsidies proposed by the government. The cuts will cause devastation to the solar industry but this is not the only backward step – the cuts make an already expensive and regressive policy less effective and more unfair. A higher rate of subsidy for communities to by renewable technologies, as IPPR recently recommended, looks likely to be included in a government package of measures and offers some recompense, but ministers need to go further by introducing targeted support for lower income homes and by supporting community energy with other measures including a rolling investment fund under the Green Investment Bank.

The current system of feed-in tariffs (FiTs) was introduced with cross-party support as recently as April 2010. The FiTs guarantee small-scale generators of renewable electricity an income for every unit of energy they generate and sell back to the grid for up to 25 years. Energy companies pay generators the income and pass on these costs to consumers through higher energy bills.

Now the government is consulting on proposals to cut in half the money households receive if they install solar PV. They are doing this because the manufacturing costs for solar PV have fallen by 30 per cent since the FiT subsidy scheme was launched and as a result demand for solar panels has out-stripped all expectations. Government believes major cuts are necessary to ensure demand is reduced and overall spending on FiTs stays within a ‘cap’ that was set by the chancellor in the October 2010 spending review.

At a time of fiscal constraint, it is of course reasonable for the government to consider making savings, but there are strong arguments which suggest the Coalition’s plans in this area are misguided in a number of ways.  

Germany’s pioneering use of FiTs has made them a world leader in the manufacture of solar panels with a strong skill base and supply chains. In its arguments for retaining a healthy FiT rate the solar industry in the UK has produced evidence of impressive growth in the sector. Of course this growth is hardly surprising considering the level of subsidy the sector has received, but even so it is clear solar could play a significant part in an industrial strategy for energy in line with the German model. However, the government is prioritising cost-reduction above all other factors when it comes to decisions on energy policy.

From the outset the FITs have been criticised for being regressive. Not only are the costs of the policy borne by all energy bill payers, it is only homeowners with about £6,000–8,000 in capital who can afford to purchase their own solar panels.

The emergence of ‘free solar’ schemes have done something to improve accessibility (in these schemes a company leases a homeowner’s roof-space and installs solar panels from which it keeps the FiT and the homeowner keeps the generated energy) but the benefits of the subsidy are disproportionately weighted towards the solar company and not the homeowner. When applied to social housing developments these schemes have been particularly beneficial because having panels can save the occupier £200–300 off their annual energy bills, however, the government appears intent on putting an end to these schemes and has proposed they will only be eligible for 80 per cent of the rate for standard installations. Therefore the proposed cuts will reduce accessibility to the benefits of what is already a regressive policy

It is true that FiTs will help to reduce carbon emissions, which is of course a key priority for government policy. But solar PV remains a highly expensive way to achieve this end. The government’s new proposals will cut the subsidy rate for household scale solar PV from 43 pence per kilowatt-hour to 21p/kWh for every unit of energy generated, but this is still far higher than the 9p/kWh subsidy the Department for Energy and Climate Change (DECC) believes is sufficient to enable the UK to generate 15 per cent of its energy from renewable sources by 2020 and by doing so meet EU targets.

However, FiTs have another role in helping to reduce emissions which must be taken into account. My recent report for IPPR showed how community energy initiatives, based around FiTs eligible renewable installations on community buildings like schools or village halls, can be highly successful at changing the attitudes of local people to energy use. Other research has found that owning solar panels can significantly alter peoples’ energy behaviour in many ways. These impacts are important and are factored into the government’s thinking but valuing them at 13p/kWh (the difference between the base level of subsidy required for renewables deployment and the proposed FiT rate for solar) seems high.

Finally, FiTs can also help energy security by providing access to unlimited, UK-based energy resources and generation but other renewable technology options would be cheaper.

Taking all this into account, it seems clear that the government’s proposals come close to achieving the worst of all worlds: the cuts neither capitalise on the benefits of having a thriving solar industry nor counter the underlying, high expense of the scheme. Additionally, the cuts will make the scheme more unfair than it is currently.

Arguably it is wiser to abandon the policy of subsidising solar panel installations altogether if it is not to be used to create a thriving solar industry, although of course this would wreck an embryonic sector and all the jobs that go with it. It would also cause huge damage to the UK’s reputation as a country with a reliable and robust energy policy framework in which to invest and do business; in this respect major damage has already been done.

The solar industry and its supporters’ argue that the budgetary cap on the FiTs should be increased or removed. However, these ambitions will go nowhere without a firm evidence base showing not just the impact a pound spent on solar has, for example on jobs, but how that impact compares with the impact from a pound spent on wind, or nuclear, or indeed any non-energy aspect of government spending. This evidence base does not exist and, to avoid similar problems in the future, its creation must now become a priority concern for energy policymakers. It is on this evidence base that an ambitious industrial policy framework for energy can be developed.

So the likeliest outcome is that FiTs will continue in a much reduced state for solar and the best that can now be hoped for is to extract the maximum ‘social value’ from the spending. The government should do a number of things to achieve this:

Firstly, allocate a fixed proportion of the budget, say 30–50 per cent, to social housing and local authority schemes. This will ensure demand is controlled and that poorer people are not excluded. This is vital to ensure people from across society get an opportunity to have a stake in the low-carbon transition. A scheme whereby a local authority or social housing providers bids for a portion of the budget could be a way of administering this.

Secondly, support community-owned energy. The government appears willing to bring in a premium FiT rate for communities, which was a proposal in Green Streets, Strong Communities, but the rigidity of the budgetary cap means this may be very small. DECC could ask the Department for Communities and Local Government and the Cabinet Office for funds to increase the size of the premium in recognition of the non-energy benefits these schemes can bring to communities.

The government should also support community energy in other ways. As I argued in the Green Streets report, government should provide loans at concessional interest rates with which communities can purchase renewables, pay for technical feasibility studies and carry out planning applications. This could be carried out by a revolving investment fund situated under the Green Investment Bank, which would have the benefit of being revenue neutral.

The government also needs to improve how it helps communities to access information, advice and expertise about delivering energy projects.

The solar industry is right to be angry about the proposed cuts to solar subsidies: they have invested time and money in building the foundations for a thriving sector only for the rug to be pulled from their feet. If the government fails to implement the proposals listed above, all that will be left is an aimless, expensive and unfair policy.

 
 

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Reg Platt, Senior Research Fellow

 

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