DECC announces new cost-control mechanism

On February 9, DECC launched a consultation on its decision to move the FiT scheme towards a tariff structure that is able to respond directly to levels of deployment, replicating a successful model that has been deployed in Germany.

DECC proposes that such a scheme is necessary to allow the British solar industry to operate within the tightly constrained budget.

Instead of targeting a specific a specific rate of return, DECC has decided that, from July 1, tariff level should be set at a rate that “returns broadly within the range of 4.5-8 percent under central cost assumptions.”

DECC proposes that the starting tariff levels for July 1, should be set dependent on the levels of actual deployment of solar in March and April. As a result DECC has modelled for three different scenarios depending on the level of capacity installed in March and April.

DECC’s proposed July 1 tariff rates are outlined below:

The most conservative option released by DECC would see FiT rates slashed by over 20 percent in July, while Option A will see March tariff levels slashed by 35 percent. A 68.6 percent drop in just eight months. A further five percent reduction on the July level of tariff will be enacted in October, with 10 percent reductions being introduced every six months thereafter.

The graph to the right, provided by Gertjan van der Goot, Company Director of CompareMySolar, illustrates the severity of the proposed cuts.

Gertjan van der Goot, explained: “We believe that at current prices a 21p tariff can provide a good return for consumers. These additional cuts in July assume further price drops and make it really hard for solar installers to maintain a fair margin. Although these changes provide much-needed clarity for the rest of the year, the UK solar market will have to adapt to this new reality once again.”

DECC is also putting in place a contingency degression mechanism that will be put into action if actual deployment levels exceed 125 percent of expected levels before the planned degression. DECC will publish the planned trigger points in advance and Ofgem has been charged with monitoring the level of actual deployment, releasing a monthly report of installed capacity to the industry.

If deployment reaches one of DECC’s predetermined trigger levels then an immediate announcement will be made, enabling a two-month notice period before the lower tariff level is applied.

In the consultation DECC propose that Government would carry out an extensive annual review, in co-operation with industry to ensure that the mechanism “is controlling costs to an adequate extent and allowing the Scheme to achieve its statutory objectives.”

To complete the consultation, DECC published a table indicating how it foresees the baseline and contingent degression model working in the future. The table below has been modelled on central assumptions about costs reductions over the next three years and with a starting tariff of 13.6p in July.

Proposed generation tariffs for solar PV from 1.4.2012 to 1.4.2015

Source: DECC

While most in the industry will welcome the introduction of a mechanism that will put an end to emergency reviews and ensure that industry is never plunged back into the mess that it currently finds itself in, the severity of the cuts will concern industry greatly.