The UK government has cut solar PV feed-in tariffs further and faster than industry had anticipated

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19 March 2012, Nuclear, Solar, Wind

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While the export rate remains unchanged, changes to the generation feed-in tariff (FiT) for solar photovoltaic (PV) installations will become effective from April 1, 2012 with an eligibility date of March 3, 2012, subject to a Supreme Court ruling. The legality of the timing of these changes has been the topic of much consultation between industry and the government, with industry complaints being upheld in court and the first government appeal having been rejected. As a result, there will be a high cost to the government from the large surge of solar installations that has occurred since the tariff reductions were announced.

The UK government has further promoted energy efficiency ahead of renewable generation in stating that new solar PV installations will only qualify for the FiTs if the buildings on which the solar PV modules are installed meet a specified minimum energy efficiency requirement with an Energy Performance Certificate rating of band D or above. With this, the government is effectively prioritizing the reduction of energy demand as one of the most cost-effective ways of reducing carbon emissions.

The generation rate cut of 51.5% brings the solar PV FiT more in line with European payments. Germany currently pays E0.2443 for each kWh, which equates to GBP0.204. With the export rate still at GBP0.031/kWh on top of the GBP0.210/kWh for UK domestically sized generation, some might say that the UK government is still being generous.

A report by Parsons Brinckerhoff and Cambridge Economic Policy Associates in 2011 states that levelized costs of solar PV generation over the lifetime of the modules have reduced by at least 30% since the introduction of the FiTs in April 2010, providing a degree of justification for the level of FiT cuts.

There is no doubt that the cuts had to be made, but the solar PV industry has failed to sufficiently prepare for such drastic and sudden cuts. The Department of Energy and Climate Change set up the solar PV FiTs scheme in April 2010, but did so without an adequate mechanism to review and adjust rates in an orderly and timely way. Without adequate forewarning, recent changes have come as a shock to the industry, and in the UK, up to 25,000 newly created jobs are said to be at risk as a result of the sudden and deeper than expected changes.

The long-term government objectives are to improve the transparency and predictability of the scheme for the benefit of industry. Future tariffs will be index-linked and will be kept in line with costs to produce returns of around 5% on investments instead of climbing to a level in excess of 10% which would have burned a huge hole in the government FiT budget if sustained for any longer. As a result, industry must continue to drive innovation and efficiency further in order to achieve sufficient returns on investments.

Tighter margins will require cost-efficiencies to be improved and worries that cheaper Chinese imports will eradicate European manufacturing of solar cells have recently been countered by a proposal from the French government to raise FiTs by 10% if 60% of installations in France were to come from EU suppliers. However, the high level of manual labor in the manufacturing of solar PV cells which currently suits Chinese manufacturing is likely to be a short-term phenomenon as the future automation of the manufacturing process is likely to favor European manufacturing in the coming years.

Potential trade disputes between European and Chinese manufacturers and instability in the rate of return on investment will undoubtedly slow the uptake of solar PV in the UK but the industry must adjust to this with only a brief respite from the delays in the onset of the new pricing. Contrary to the industry's response to the changes, with a proven, bankable technology such as solar PV, a guaranteed 5% return on investment will not make the industry go bust.

Source: Datamonitor

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