This morning’s announcement that a feed-in tariff rates will be set at 4.39p/kWh, while higher than previously pledged, has caused consternation within the industry.
IPPR’s Jimmy Aldridge considers that those cuts are beyond what needs to be delivered – especially considering the hugely lucrative returns offered to dirty diesel generators under last week’s capacity market auction – and that the government will have a hard time squaring this with binding agreements made in Paris last weekend.
What are your initial thoughts on this morning's announcement?
I think it's positive that the cuts are not as significant as they first appeared. I think 87% was just far too much for the industry to deal with. A 65% cut on domestic solar is going to be easier for the industry to manage, but is still beyond the level that needs to be delivered. I understand the requirements for government to control costs, and I also understand a new government coming in wants to set out their own policy framework. I don't disagree that there are changes to tariffs, I think they were too high but I still think the 65% is further than it needs to go.
There's also been a shift in where the cuts are coming from. Although the reductions for the domestic level have reduced, the reductions are greater for 1MW to 5MW standalone systems. My view is that those commercial-scale systems are probably better able to deal with a lower tariff level because they have different, clever ways of doing financing to make it work. But it's still – if you look across the piece – the level of funding for the FiT is the same as it was before, it's just been slightly re-orientated to where it will be. Arguably you're going to end up with less solar deployment under the 100MW cap than you would've done anyway. We're looking at £10 million a year until the end of 2018 for solar deployment, which is pretty miniscule if you put it into the context of £175 million of subsidy going toward diesel generators in the capacity market.
My view is the cuts should've been less and that should've been paid for with a reorientation of subsidies away from your really filthy, dirty generation and towards cleaner technologies such as solar and others.
How dangerous an implication do you consider the deployment caps to be?
Quickly looking at the numbers you're expecting something like 64,000 installations at the domestic level in 2016 which, compared to deployment up until now, it's just a huge cut for the industry to have to deal with in the one technology that is showing the strongest cost reductions of all. Solar is a much bigger story than UK policy and so it will survive and will continue to do very well, but the danger here is that we impact on the industry so dramatically that we lose the potential to make use of those cost reductions in the near term. We'd then have to rebuild the industry in five or ten years' time having completely destroyed it unnecessarily.
How can the government square this decision against the agreement reached at COP21 last week?
I think within the context of the agreement reached in Paris what we need to see from government is a new level of ambition that resets their position for reaching those top-level commitments, and there are some concerns that towards the end of the 2020s it's going to be quite difficult to stay within carbon budgets if the existing policy framework carries forward. There needs to be somewhere in the policy framework a lot more ambition in terms of low carbon deployment. Solar and wind offer your lowest cost options for doing that and so our view is that it's not really a sensible approach to cut support for those two and to put greater support into more expensive technologies like nuclear and offshore wind. At the top level there needs to be a reassessment of how government is going to reach internationally-set goals for carbon reduction, because at the moment the policy framework doesn't look as if it's going to deliver that.
And this is just after the capacity market auction handed lucrative contracts to other generators.
A lot of the diesel generators were delivered through a tax relief scheme which means those could be getting 38% returns and that's in the context of government desperately trying to maintain a rate of return of 5% for solar PV. It seems a bit inconsistent to have 38% for dirty generation and 5% for clean.