As is well known, the generous subsidies given initially to small scale solar PV under the UK Feed-in Tariff resulted in unexpectedly high levels of adoption. Government quickly reduced subsidies for new installations, but did not feel able to retrospectively cut the arguably excessive support for early adopters. Consequently, even today, in 2017, nearly one quarter of the total annual cost of the scheme is being paid to the small-scale rooftop panels erected in the first two years of the scheme, 2010–2012.
In 2010 the Labour government under Gordon Brown responded to Conservative party interest in Feed-in Tariffs, driven by Greg Barker MP (now Lord Barker, and president of the British Photovoltaic Association, BPVA) by rapidly implementing a Feed-in Tariff program of their own.
This policy offered extremely, and almost certainly needlessly high tariffs of £400/MWh to small-scale (≦ 4 kW) domestic rooftop solar PV. This was approximately ten times the wholesale price of £40/MWh, and was index linked for twenty-five years.
Even though panel costs were higher then than they are today, this made solar PV extremely attractive to private individuals seeking secure and high returns, which the Department of Energy and Climate Change (DECC) estimated, perhaps conservatively, to be 7-10% per annum . Unsurprisingly, there was very rapid and broad-scale adoption as can be seen in Figure 1, which charts capacity installed (MW) in each year of the FiT scheme per technology up to Year 6 (April 2015 – March 2016).
Fig 1. Capacity (MW) installed in each year of the FiT scheme per technology up to Year 6 (April 2015 – March 2016). Note that Year 1 ran from April 2010 to March 2011, Year 2 from April 2011 to March 2012, and so on. Source: Ofgem, data analysis and chart by REF.
Nearly 1.2 GW of capacity was added in the second year alone. It is worth noting that this level was not exceeded until Year 6, when the impending introduction of deployment caps to reduce subsidy costs resulted in a stampede to beat the deadline.
The government quickly recognized its initial error, and for Year 3 reduced both the tariffs offered to new installations as well as the tariff lifetime, which was reduced to twenty years on 1 August 2012. However, these reforms did not affect the subsidy rights of the large number of sites accredited in the first two years, and this has had an ongoing distorting influence on FiT costs, as is shown in the following figure.
Fig 2. The total cost of subsidy in FiT Year 6 (April 2015 – March 2016) by technology, broken down by the installation year. Year 1 covers April 2010 to March 2011, Year 2 April 2011 to March 2012, and so on. Source: Ofgem, data analysis and chart by REF.
The total annual cost of FiT generation payments to accredited generators for the latest complete Ofgem accounting year (April 2015 to March 2016) is £1.09 billion . One third of that total subsidy is paid to solar PV installed in the second year of the scheme and £261 million a year, or nearly one quarter of the total, is paid to the ≦ 4kW rooftop panels erected in the first two years of the FiT scheme.
The productivity of solar PV per kW installed is significantly lower than the other supported renewable technologies, as can be seen by comparing Figure 2 with Figure 3, which plots the output of electrical energy in FiT Year 6, broken down by technology and year of installation.
Fig 3. Estimated energy generation (GWh) in FiT Year 6 (April 2015 – March 2016) of FiT-supported technologies, broken down by the installation year. Year 1 covers April 2010 to March 2011, Year 2 April 2011 to March 2012, and so on. Source: Ofgem, data analysis and chart by REF.
The current subsidy cost per unit of electrical energy generated by the first tranche of rooftop PV installations is £488 per MWh, implying a carbon dioxide abatement cost of about £1,500 per tonne, which is many times greater than even high estimates of the Social Cost of Carbon . In other words the economic harm of these subsidies exceeds by a large margin the avoided harm of the emissions abated.
This remarkable episode provides a sobering lesson in the practical difficulties and hazards of micro-managing uptake of specific energy technologies. Faced with obvious overheating in the small-scale solar sector, government was driven into a phase of distressed policy correction that has resulted in a system of a staggering complexity. There were 516 separate tariffs in 2015/16, and it is difficult to believe that such a scheme can be administered reliably or at reasonable cost. Nevertheless, the changes made to the scheme were limited to prospective changes affecting new registrants, and as a result the Feed-In Tariff is still dominated by the ongoing consequences of government’s initial mistakes. It is to government’s credit that it learned from the experience, but this was a lesson very dearly bought.
It must be emphasized that the explosive adoption of the first two years took the UK government all but completely by surprise, with the result that they were quite unprepared and thus unable to control costs. The Impact Assessment published in 2010 predicted that subsidies would only reach £440 million per annum (2008 prices) in 2020. In fact, annual costs reached £1.1 billion as early as 2016. The implications for cumulative cost and overspending under the Levy Control Framework, intended to limit impacts on consumers, are obvious.
Government cannot address this problem without retrospective cuts that would incur the understandable anger of householders and probably result in very costly legal action. In all probability government will do nothing. However, one would hope that this sorry episode is being taught to civil servants in all departments.
2. ^ Note that the total cost of the FiT scheme for the 2015/16 year is £1.10 billion. This sum includes administration costs and export payment costs above the wholesale market price.
3. ^ The cost of a tonne of CO2 abated is based on REF's estimate of the UK grid emissions factor for April 2015 to March 2016 of 0.317 tonnes CO2 equivalent per MWh electricity. See The Increasing Cost of CO2 Emissions Reductions in the United Kingdom for values of the Social Cost of Carbon