The path to zero subsidy

When solar will reach zero subsidy and grid parity is an issue of critical importance. The levels of damaging political interference in the solar industry have only strengthened the desire for economic freedom as soon as possible. We all agree that solar will become subsidy-free, it is a question of how and when. ‘When’ particularly matters: we want to see local solar companies in as strong a position as possible, ready and able to compete in a global market. However talk of subsidy-free solar is hollow unless it’s accompanied by a plan of how to get there. Unfortunately DECC’s Solar Strategy did not deliver this.

Over the last year or so the STA has observed a worrying shift in energy policy, driven in part by the EU, but also within the UK. This year, the European Commission published its environmental and energy state aid guidelines for 2014-2020. The UK government has certainly interpreted them zealously in categorising the 18 month old large-scale solar sector as ‘mature’ and pushing solar into a premature auction with clearly established technologies such as onshore wind and hydro.

Closing the renewable obligation (RO) on >5MW underlines the risk our industry is up against – both political and budgetary. With the current inability of the commercial rooftop sector to take up the slack as well as the pending three year feed-in tariff (FiT) review taking place in the second half of 2015, the STA launched our Solar Independence Campaign, and as part of that our Solar Independence Plan: the path to zero subsidy by 2020. The plan is helping us to cut through what has become a highly complex and piecemeal policy framework for solar. What we are showing is that with intelligent policy design the government can deliver a much better result for the industry, even within resource constraints.

FiTs review

EU State Aid guidelines are designed to ensure governments cannot “overcompensate” technologies. There is also intense political pressure to stem the rise in energy bills and to provide value for money.

Whilst DECC has been very supportive of non-domestic rooftop solar in its rhetoric, industry has expressed its concern over the lack of available levy control framework (LCF) budget to support growth. The STA led the way highlighting the barriers to deployment and the need to fix the policy framework – our analysis was reflected in the Solar Strategy. But removing these barriers (such as commercial EPC D and the aggregation rule) would of course increase growth, yet the economists at DECC concluded that they can’t provide more resourcing – the budget is “bust”.

So we are caught in a perfect Catch 22. The industry works closely with DECC on several task forces to identify and remove barriers to growth. But if removed, the resulting growth risks breaching the budget. Back to square one.

This budgetary constraint was the justification for the >5MW RO closure (although we disagree, as solar was just 3.5% of the RO budget in 2013/2014). DECC has also announced that there is to be a full FiTs review in the second half of 2015 which could affect all solar sub-markets.

Under current State Aid guidelines, the Internal Rate of Return (IRR) should be within 5-8%, and therefore this opens up the possibility that tariffs could be cut. Sudden cuts to the tariff would be the worst possible outcome for a recovering domestic market and we definitely don’t want a repeat of the 2012 boom and bust FiTs fiasco – this must be avoided and so the STA is engaging early.

Budgetary modelling

Against this challenging policy background, the STA has modelled the entire solar budget under all schemes (FiT, RO and CfD) out to the financial year 2020/2021. This modelling is useful for many reasons. Firstly, it gives us a way to fully cost our plan to zero subsidy. Secondly, it allows us to test different deployment scenarios in order to compare the costs for these different levels of deployment. Thirdly, we can use this model to assess policy changes as part of the FiTs review, to see the impact they would have on cost to the LCF. Our overall aim is to seek the greatest level of stable growth for the solar industry within the constraints and to justify more resources where needed.

We took three different growth scenarios to 2020. The first is the “Solar Strategy”, our interpretation of DECC’s 10-12GW target from the Solar PV Strategy. The second is the (former) “Ministerial Ambition” of 20GW. Finally, we looked at a “Bold Scenario”, with a 60GW target by 2030 corresponding to 25GW by 2020. This lies between the Level 3 and 4 scenarios adopted by DECC’s 2050 Pathways analysis, and aligns to scenarios described by Bloomberg and others. These scenarios are discussed in more detail in the report on solar we recently commissioned from the Centre for Economics and Business Research (Cebr). These deployment scenarios are demonstrated below in the following graph.

Underutilised degression

We do not have access to DECC’s own model so we have had to make a series of assumptions based on policy statements in the Solar PV Strategy and our ongoing engagement with DECC. To reach only 11GW by 2020 (the middle of the 10-12GW), DECC’s models would trigger very little degression across FiTs. In particular, the domestic market would not degress each quarter, as the deployment is consistently just below the first degression trigger – but note in Q3 2014 domestic reached 103MW for the first time. See the table above which highlights the problem – under-deployment which prevents degression.

The plan

Through our modelling, we are proposing a series of amendments to FiTs as part of the 2015 review which will have the effect of stimulating growth, re-allocating underutilised banding capacity to prevent hyper-degression, setting a path for zero subsidy across all rooftop sectors by 2020/21 whilst ensuring that it is ‘cost neutral’ to the FiTs part of the LCF. These are the measures:

• Split the 250kW+ tariff band into two bands 250kW-1MW and 1MW-5MW

• Convert three degression bands to become five (add 250kW and stand-alone)

• Increase the new 250kW–1MW band from 6.38p to ~8.00p

• Amend the band limits:

•  Reduce 100MW/q 0-10kW to 70MW

•  Reduce 50MW/q 10-50kW to 40MW

•  Increase 50MW/q 50kW+ to 120MW

Note that these proposals are one of a number that can be modelled. To ensure we have growth above DECC’s rather paltry 11GW, we must establish better use of the constrained ‘FiT budget’. As noted above, achieving this growth requires accelerating the underutilised 0-50kW bands, in order to grow all the FiT segments including the 50kW+ market. The industry is aware that the returns for the 0-250kW market are healthy, but it is the non-financial and policy framework barriers which need fixing to stimulate the market. With the potential of a one off tariff price intervention from DECC stimulated by the 5-8% state aid requirement, an alternative scenario must be sought – imagine the tabloid headlines: “Government slashes FiT’s again: market reels”. I wouldn’t want to be the minister making that decision!

Under the 11GW scenario (6.9GW under FITs), the modest growth anticipated would only degress the 0-4kW tariff to 9.05p in Q2 2020. I simply can’t see that DECC would allow this, nor does the domestic market need tariffs of that level in 2020 under falling install costs and rising retail electricity prices. Better in our view to accelerate the degression, use the money saved to remove the non-financial barriers such as relaxing EPC D and the aggregation rule (amongst others) and reward the industry with greater volume and therefore economies of scale. Indeed our plan results in 600,000 additional domestic solar rooftops by 2020.

Our proposed new tariff bands and degression triggers are summarised below:

As can be seen below, we have no proposed tariff reductions, only the introduction of the 8p tariff for 250kW-1MW, and two new bands:

An extra 3.3GW at no extra cost

With these changes, we have modelled that the industry could deliver 3.3GW more solar under FiTs to 2020, with £10 million less in 2020 – an impressive proposition to Government. Under the Solar PV Strategy, which has none of our proposed changes modelled, the cost for 6.9GW of solar under FiTs (STA’s interpretation, excluding legacy) is £376 million. Under the Ministerial Ambition scenario of 10.2GW under FiTs, with our proposed changes, the cost is £366 million. Additionally, even if these changes are made and growth is not stimulated, the government still saves £50 million. In fact, under all of the scenarios, the cost to the LCF is reduced if we implement the proposed changes. DECC can now justify removing barriers and stimulating growth as the budget becomes available – 20GW by 2020 is once again economically realistic. See the table below  for further details.

As well as looking at the cost to the LCF, it’s also crucial to look at the resulting tariffs in our modelling. In Q2 2020 under our 20GW scenario, tariffs would have degressed to 1.6p which is the last year of the current LCF (ends in Q2 2021). At this point, there would be no further need for a rooftop tariff – solar becomes subsidy-free for new generation.

A key benefit for proposing an additional 70MW/q under the 50kW+ market is that it would give a reasonable financial support transition from the rooftop RO to FiTs. The larger band avoids the hyper-degression of the existing 250kW+ tariff (currently 6.61p) which would reduce to 5.7p/kWh in 2q 2017. This matches well with the estimated ROC value in April 2017 of 5.88p/kWh (1.4ROCs * 4.2p/kWh) under the rooftop RO, which ends in March 2017. A smooth transition from one tariff scheme to another is a key determinant to ensure stability and market confidence.

Can a domestic install sell for £4,500 in 2020?

Fundamentally, can we expect the cost reductions in the coming years to offset the reducing subsidies so that in 2020, a typical 4kWp system will have an IRR close to that of today, with no tariff? In real terms, an average 4kWp system will need to reduce from around £6,500 to £4,500 in 2020. We think this is achievable as most of the reduction will come from the cost of equipment (£1,225 – assuming the ADD’s are removed in 2016), with some also coming from other costs (£775) driven by the UK supply chain efficiencies and economies of scale allowing overheads to be spread across more installs.

The next edition of Solar Business Focus UK will go into more detail analysing the cost reductions across the domestic, commercial and solar farm sectors and the challenges facing a zero subsidy world.

Overall impact on the Levy Control Framework, consumer bills and electricity generation

We have calculated the cost to the LCF under the Solar Strategy scenario (our interpretation) to be £1.17 billion in year 2020, £1.32 billion for the Ministerial Ambition, and £1.45 billion for the Bold. This means that for an additional £150 million in 2020, the solar industry can deliver almost double the capacity by this point (20GW compared to 11GW). The Solar Strategy would cost approximately 15% of the LCF, but only 2% more under the Ministerial Ambition for the additional 9GW of solar. The cost to each household’s energy bill in 2020 would only be £11.40: an extra £1.30. These numbers include all the legacy costs from existing PV FiTs installations during the ‘gold rush’ period of 2011-2012.

Our modelling assumptions indicate there will be very little uptake on large-scale solar under the ground and rooftop RO, and under CfD’s using DECC’s 11GW projections in order to keep within the LCF. This is nonsensical and unrealistic. The large-scale sector is the most cost effective in terms of value for money. We therefore are making the case for £150 million more resourcing for larger roofs and utility scale solar which our modelling demonstrates is achievable. Intelligent policy can deliver value for money for consumers – with this extra budget the industry can build an extra 6GW. The budget should be given to the mature pot under CfD’s in addition to giving political and budgetary certainty around the <5MW ground and rooftop RO. The STA is lobbying hard to influence government on all these sectors.

In summary, with an extra £150 million in 2020, the solar industry could deliver 20GW of solar – 9GW more than current policy will deliver – producing 20TWh of clean, home-grown energy, with less than £11.50 on each household’s energy bill. Tariffs should be at zero by 2020/21, meaning that solar would be no further additional burden to the LCF beyond 2020/21. We believe that this could be a very cost effective, value for money investment by the UK government on behalf of consumers – and the planet. The next government in May, has the chance to deliver a solar revolution and prove that investing in renewables can really pay off. Let us hope they deliver.

We therefore are making the case for £150m more resourcing for larger roofs and utility scale solar which our modelling demonstrates is achievable.