SPP investigates: is the FiT budget already blown?

Yesterday saw the solar feed-in tariff fiasco take another dramatic twist as the Government chose to appeal the High Court’s decision. The Court ruled that the Department of Energy and Climate Change (DECC) had acted illegally by enacting proposed changes to the feed-in tariff rate weeks before the consultation on the decision had closed.

The rhetoric spun by DECC and its Minister of State, Greg Barker, justified the six-week deadline, claiming that desperate intervention was needed to stop solar PV installs from consuming the entire feed-in tariff budget; if action was delayed any more then the whole scheme would be in jeopardy.

So what is the “budget”?

It’s not really a budget per se, it’s a spending envelope: a level agreed between Treasury and DECC to help minimise the impact feed-in tariff policies have on bill payers.

The budget was agreed by Treasury during last year’s Spending Review and stands as follows:

The figures set out above are also cumulative, meaning that previous feed-in tariff liabilities must be paid from within the current year’s budget.

How much solar PV capacity was installed in 2011?

According to DECC’s figures, the UK installed 849MW of solar PV capacity from 2011-12.

(N.B. DECC has not published installation figures for >50kW from December onwards, so the figure above, in practice, could be significantly higher.)

Broadly speaking, the breakdown of installed capacity during the period between April 1, 2010 and January 1, 2012 looks like this:

How much electricity will that generate?

In order to calculate the total output of the UK’s installed solar PV capacity we have to make an assumption about the average output of a solar PV system installed in the UK. For the basis of this analysis, I have used the SAP 2005 calculation method for a south-facing UK roof, which estimates that 1kWp of installed capacity will yield 800kWh of electricity per year.

How much of the budget will that consume?

In order to determine the total amount of feed-in tariff payments due, the different levels of feed-in tariff rate must be accounted for. The fast-track review of large-scale solar rates, inflation rate changes and a proposed review for sub-4kW systems have all led to a number of different feed-in tariff rates throughout the period of analysis. The table below illustrates the different periods of feed-in tariff rates and the level of liability that the Government must pay out for solar PV installations. For the purpose of the analysis, the proposed 21 pence rate has been used for any installation after December 12.

Therefore, total liability for solar PV installations to date stands at £89,633,932 which is a full 112 percent over the £80 million budget allocated for the entire feed-in tariff scheme for 2011-12.

To calculate what this means for the budget over the coming years, RPI is assumed to rise by 5 percent per annum.

As you can see from the table above, current solar PV deployment accounts for more than the budget allocated for the feed-in tariff in 2012-13.

Plainly speaking, if no more solar was installed until 2014, the feed-in tariff scheme would still be dangerously close to being over budget, even with the 21 pence rate taking effect from December 12.

Admittedly, assumptions have been made to get to the figures laid out above, but they do offer an insight into just how much solar PV has been installed and its effect on the whole feed-in tariff budget.

What does this mean for the industry?

Even if Government wins its appeal against the High Court’s decision and successfully reinstates a 21 pence rate effective from April 2012 for any system installed after December 12, the feed-in tariff scheme will still be over budget for the foreseeable future.

Barker has previously admitted that DECC has some flexibility over the levy control framework and can look to allocate spare capacity from other funds, such as the Renewable Obligation, to bolster the budget. However, the magnitude of the overspend would mean that such a solution would be improbable.

Therefore, the Government has two options: either increase the spending envelope within which the feed-in tariff scheme operates, or severely limit the demand for solar PV installs.

Option 1

Increasing the spending envelope would obviously solve this issue; however, Barker has already stated that the Chancellor is unlikely to allocate more funds to the scheme as he is wary of an unsustainable increase in energy bills during this time of unprecedented austerity measures. Furthermore, unless the ROI currently causing so much friction in the UK solar industry is brought down, there is no hope of gaining any more money for the FiT scheme.

Nevertheless, the Government’s decision to classify the feed-in tariff budget as ‘Public Expenditure’ may well be pre-emptive. The Office for National Statistics is yet to officially classify levy-funded schemes.

Option 2

Last month’s joint committee inquiry into the handling of the feed-in tariff warned of the “fatal impact” of enforcing an energy efficiency requirement option on the industry (as proposed in DECC’s consultation document), stating: “We assume that part of DECC's reason for proposing such high [energy efficiency] requirements is to dampen down FiT activity deliberately.”

DECC’s own Impact Assessment predicts that the solar market could be restricted by up to 95 percent – a sufficient slowing of the scheme to stay within budget.

Following the leader

In Germany, the feed-in tariff scheme is not included within public spending; a fact that was challenged in the European Court of Justice and upheld, ruling that it did not have to be regarded as subsidy. If the feed-in tariff budget is no longer considered Public Expenditure, then effectively the arbitrary budget imposed on the scheme would disappear, allowing a loosening of the overall levy-spending cap.

Clearly, the first option is the preferred path for the solar industry and all other technologies eligible for feed-in tariff payments.

For the time being, all the industry can do is sit and wait for the outcome of the Government’s appeal. If, as widely predicted, the Government loses its appeal then the High Court victory could prove to be Pyrrhic, as the old 43 pence rate would be reinstated, causing another stampede of installations before the rate is revised downward yet again, eating up more of the non-existent budget.

Update: As pointed out in the comments, DECC has revised the figures published for the FiT budget; increasing the spending envelope by £197 million over the next four years. According to DECC the revised figures reflect a reclassification of those larger-scale schemes that have elected to receive feed-in tariff rather than the Renewable Obligation which was not factored into the original spending caps. DECC explicitly state that: “We have not made more subsidy available for FITs or less for the RO.” The tables published above have been revised to reflect the changes.