UK vs. German feed-in tariff: where are we going wrong?

Just last week I saw the news that yet more changes are on the way this year for Germany’s feed-in tariff. However, in contrast with the usual ‘we’re cutting our rates’ scenario, the German Government has actually decided to increase the tariff should solar photovoltaic installations not reach expected heights. Since the UK Government seems intent on chopping the rates, despite the market’s infancy, I thought I should look into the differences between these two systems.

The German model

Germany’s solar market remains the most prominent in the world, its success forming the blueprint for fledgling countries such as the UK. The country now has over 17,000MW installed. One of the main reasons for the success of the German market is, of course, its generous feed-in tariff.

The FiT system certainly proved itself in Germany, yet all I read on the wires at the moment is how the country’s Government is planning on cutting the rates. Why would it want to do this?

In Germany, the Federal Network Agency, or Bundesnetzagentur, publishes the country's new tariffs for photovoltaic systems on an annual basis. Under the arrangements in the Renewable Energy Sources Act (EEG), the Bundesnetzagentur determines the tariffs and degression for the upcoming year based on the data supplied by the PV system operators on new installations. The EEG sets forth a range of threshold values for a higher or lower degression level.

Throughout last year there was much to-ing and fro-ing surrounding the amount by which the tariff would be cut, with figures as high as 16% being bandied about. But according to the rates published in November 2010, photovoltaic systems due to begin operation in 2011 face a 13% cut in subsidy compared with previous tariffs. This cut also took into consideration falling PV equipment prices.

Impact of the German cut

The threatened decrease in subsidy payments spurred a huge amount of growth at the end of last year as project developers rushed to get their systems installed under the higher FiT rate. The pressure caused by these reports also left a lot of uncertainty in the market, as some news sites with Government sources were reporting that additional cuts were possible during 2011.

Last week, however, the German Government announced that further aggressive cuts to the German feed-in tariff, which were expected to take place mid-year on the back of installations exceeding 6GW in 2010, have been averted as the industry and Government came up with a provisional agreement for a new tariff structure. Although yet to be ratified into law, the new FiT structure limits regression to a maximum of 12% in July, should installations reach 6.5GW from March-May (normalised annually).

Further, the new mechanism also allows for an FiT increase should installations not reach 2.5GW. No cut would be implemented should installations fail to reach 3.5GW on a normalised annual run-rate based on installations from March to May 2011.

Importantly, the standard annual FiT reduction is expected to be changed from the current 21% reduction to a more palatable 9%, reviving the previously long-standing annual tariff regression rates.

The proposed tariff changes are as follows:

< 2.5GWp: FiT would be increased by 2.5%

< 3.5GWp: no further cut

< 4.5GWp: 3% FiT cut

< 5.5GWp: 6% FiT cut

< 6.5GWp: 9% FiT cut

> 6.5GWp: 12% FiT cut

This is, of course, great news for the German market investors and industry players alike.

UK market overview

The UK solar feed-in tariff was introduced in April 2010, as you all know. This was a huge move forward for the country’s renewable energy industry, which was before then pretty non-existent. Due to its novelty it took a little while to get off the ground, yet once word spread that you can actually get paid for producing your own energy, solar power installations sprung up in their hundreds. 

These FiT rates were threatened just six months later.

Uncertainty central

At the time of the Comprehensive Spending Review (CSR), held on October 20th, the industry sat on the edge of its seat to hear whether or not the self-dubbed ‘greenest Government ever’ would adhere to rumours and cut the FiT off in its prime. Fortunately for the industry, the tariff was left alone – for the time being.

 

“The efficiency of feed-in tariffs will be improved at the next formal review, rebalancing them in favour of more cost-effective carbon abatement technologies. This will save £40 million in 2014-15.”

This means that unless the energy companies are absolutely bombarded with applications for solar installations, the review of tariffs will take place, as planned, in 2012. All changes made at this point will then take effect from 2013 onwards. The efforts made at this point are aimed at saving £40m, or 10% of the previous estimate of £400 million, in 2014 and 2015.

However, despite saying that changes could take place from 2013, the DECC did not say what these changes could be, or what the trigger that set the changes off would look like. At the time I asked a Department representative “just how much is too much in terms of bringing the date for change forward?” but was told that nothing would be announced until the end of the year.

I’m still waiting.

While this indecision surrounding a possible reduction to the FiT shook investor confidence to an extent, it was about to be compressed further in the form of a threatened cut to the support for large-scale installations.

“We inherited a system that failed to anticipate industrial field arrays. While we will not act retrospectively, large field arrays should not be allowed to distort the market for roof mounted and other PV or other renewables,” outlined Climate Minister, Greg Barker post CSR.

If we bear in mind that the feed-in tariff had only been in place a few months at this point, the UK solar market had had quite a few speculative ups and downs – which in my opinion are far worse than concrete decisions. By this point, no one really knew a) what was happening and b) what the future held for the country’s solar industry. UK investors were scratching their heads, pondering what the Government was up to, while foreign investors ran for the hills. Those who had already spent thousands – if not millions – on solar enterprises were just plain angry.

Things took a final nosedive when it was reported that the total amount spent on FiTs during the period 2014-15 could now not exceed £360 million, which is a 10% reduction on the previous estimate of £400 million. This effectively capped the system, putting a final kybosh on the future of widespread installations.

Now, before the usual comments wondering why I’m talking about the FiT payments as a pot of money ensue; let me clarify this once and for all: the FiT policy is treated as public expenditure for reporting purposes for the OECD (the Office of Budget Responsibility) and the Office of National Statistics. It is also subjected to the same value for money assessment methodologies as “normal” public expenditure, and requires a Regulatory Impact Assessment, as well as falling under the requirements for EU State Aid clearance. The Treasury therefore has considerable locus and influence over the policy, regardless of it being funded by electricity bills rather than general taxation. The CSR’s agreed spending envelope for this policy is therefore subject to the same accountability as any other item of public expenditure, and the DECC Permanent Secretary fully accountable for its delivery on budget.

The REA strongly disagrees with the Government’s position on capping, as it believes that this “goes against the whole principle of a tariff-based mechanism. The 1.6% contribution assumed from small-scale renewables had always been viewed as the estimated contribution; it was never originally intended to be a cap.” By placing a limit on the amount of money that could go into the FiT, the system is not an FiT at all.

Cuts confusion

It was at this point that I started wondering what on Earth was going on in the Government’s mind. By scaring investors and limiting the amount of money that can be spent on FiT payments, the UK solar market could surely not evolve into a long-term energy solution. Does the UK Government not care about generating renewable electricity? Is it just concerned with reaching targets and saving money? Was the implementation of the FiT just for appearance’s sake? I’d like to think not, but faced with the evidence set out here it’s hard to assume otherwise.

So, what’s going on?

Ashamed as I am to admit it, the UK has again got it wrong. We tried to learn from the ways of the Germans, following their glowing example of how the FiT policy can work, and work well, yet we screwed it up.

The German Government is clearly intent on making its renewable energy policy function in order to cut the country’s carbon footprint, thus increasing the amount of green jobs and promoting the industry to the best of its ability. The UK, however, seems intent on making threats left, right and centre, which is having a severely negative effect on the industry as a whole.

Germany carefully considers the feed-in tariff each year, making sure that any changes are in line with market developments, and even plans to increase the rates should installation figures begin to fall. In contrast, although the UK is yet to actually cut the tariff rates, the frequent suggestion that it will happen is enough to stop installations in their tracks, rather than spur them on before it occurs. For such a fledgling industry a cap is borderline preposterous.

While the UK Government has clearly looked to Germany for an example of how a feed-in tariff should be structured, it seems that only half of the research was done. The UK is not reacting to the market conditions; it is making rash decisions based on monetary values.

Will we meet our EU carbon reduction targets this way? No, we most certainly will not.