Uncharted Territory

May 16, 2011

FIT to Bust

Filed under: Energy, Energy policy, Feed-in tariffs, Global warming, Solar PV — Tim Joslin @ 1:57 pm

As I mentioned yesterday, I responded a week or so ago to DECC’s “fast-track” consultation on feed-in tariffs. In fact, here’s my response (paragraphication unfortunately deleted by DECC’s software).

The reason for the fast-track review is that DECC hadn’t anticipated the number of large-scale schemes that would apply for the subsidy, which first became evident late last year, although my warnings about the scheme in general date back over three years. They therefore propose to drastically lower the tariffs for the largest schemes from 1st August. I presume this means that none of the large schemes are viable, since there isn’t time for those that have recently received planning permission to be constructed and registered. Needless to say, those who’ve invested time and money in drawing up proposals and seeking planning permission are none too pleased.

The thrust of my response to the DECC consultation is that the FIT mechanism is bound to lead to boom and bust in the renewable industries concerned, especially PV. Or rather, exacerbate the boom and bust cycle that is endemic to industries (such as silicon chip manufacture) with high up-front capital costs and low marginal costs. In the end I can see no alternative to annual quotas for FIT schemes of different types.

Specifically, I can see two main problems with the scheme, a underlying problem of lack of clarity of objectives and a, perhaps consequential, budget-control problem:

1. Unclear Objectives
It’s unclear which part of the product supply chain FITs are intended to stimulate. Some (such as Jeremy Leggett) seem to imply the prize is the development of a UK solar PV manufacturing industry. This is surely unlikely. The horse has bolted to China, who also have a domestic market for PV, and are just one of the countries with a cost advantage in manufacturing. The question then becomes one of whether we are trying to bring down the cost of solar panels in the UK, by increasing market power and simple scale economies in importing the things, or to gain expertise in installing them on people’s roofs, or both.

For some reason the government acts as if small-scale PV is a virtuous end in itself. I find this simply bizarre. For a given budget, the FIT scheme would support at least twice as much solar PV production in large-scale schemes as on domestic roofs. Permitting a mix of schemes would bring down the cost of panels for everyone more than just allowing households to benefit (as pointed out in the fast-track review consultation document, paragraph 42). And larger schemes will achieve the holy grail of “grid parity” before smaller ones, allowing us to produce electricity at reasonable cost.

2. Control of Budget
With the scheme set up as it is, there seems to be no rigorous control of the budget. What appears to have happened is that the scheme was originally formulated with cost estimates. The proponents didn’t much care if there was an overshoot. They’d adjust the scheme in periodic reviews. George Osborne has now said (in the 2010 Spending Review, pdf) that he’s going to hold the scheme to £400m a year as of 2014-15 (the cost increases each year as more long-term commitments are made), and what’s more reduce it by 10%:

“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.”

But the only mechanism for limiting the cost is to adjust the tariffs at periodic reviews, the first of which has been brought forward from 2012 (changes effective April 2013), to this year (timetable unclear, but changes to take effect April 2012, “unless the review reveals a need for greater urgency” – fast-track review consultation document, paragraph 16).

I emailed DECC week before last asking if perhaps I’ve missed something and there is some mechanism I’m unaware of for managing the FIT scheme. So far I’ve received only a boilerplate reply, so will write back. I’ll provide an update on here.

The immediate problem is that the solar PV FITs are absurdly generous. The return on the one deployment I’ve been able to audit looks like it’ll be about 15%. You only need to look at Google or pick up a newspaper to see adverts for suppliers proposing to help you take advantage of the scheme. I predict a surge in installations over the remainder of this year. Ofgem provides a list of schemes (see the bottom of their web page) which can be analysed. So far there are around 30,000 of them (mostly small-scale), increasing at 2,500+ per month. If this rate increases dramatically (as I expect), the lead time for a policy response will likely lead to a budget overshoot. At present there is insufficient data to make any kind of projection. For instance, seasonal factors are likely to be important, but their magnitude is entirely uncertain.

What might also happen is that schemes just below the cut-off for the revised tariffs (50kW) remain highly profitable and we see a surge of these. Then another “fast-track” adjustment to the tariff levels will be needed. And, of course, the wholly predictable surge of solar PV schemes is likely to take the lion’s share of the available budget and squeeze out the other technologies the FITs are supposed to support. It’s farcical.

If the comprehensive review slams on the brakes by lowering PV FITs dramatically, then, as we’ve already seen for large-scale schemes, boom turns to bust, and numerous small solar PV installation companies around the country will go to the wall.

What’s most astonishing is that solar PV supported by FITs has seen a boom and bust in several other European countries, most notably Spain. You’d think the UK would have learnt. I suggested the use of a system of quotas (for different scales of deployment of each of the various technologies) in my response to the consultation, but remain fundamentally suspicious of the whole FIT concept. Renewables Obligations make more sense, since they force suppliers to deploy a gradually increasing quantity of renewables, and don’t try to second-guess market-prices.

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3 Comments »

  1. Tim Joslin

    You are absolutely right. We here in Canberra Australia just today got a quote for putting in solar panels on our roof for generating power for sale to the grid, at $0.45 per kWh, more than 3 times the cost of the conventional power we will continue to use.

    The magic formula is that for our outlay of A$15,500 (after government grant of $5,000), we will sell power for $0.45 per kWh while buying from the grid at $0.14. The NET RoR on that is huge.

    As my tennis + communist partner notes, this is a no-brainer, and if I had the space I should install 1000+ solar panels instead of the measly 14 panels my supplier proposes given our actual roof space.

    Meantime lesser mortals who do not own their roofs (those living in flats, town houses, and age care centres) will keep on voting for the Labor Party that bestows this largesse on me as a non-Labor roof owner. Halleluja!

    Comment by TRC Curtin — May 16, 2011 @ 2:59 pm

  2. [...] mentioned in the first of this series of posts on the FIT that I’d written to DECC to check they are not in fact operating a behind the scenes quota [...]

    Pingback by A Better FIT « Uncharted Territory — May 20, 2011 @ 11:43 am

  3. [...] have launched yet another review of FITs. It seems like just yesterday I responded to their fast-track review. Don’t try and read this in DECC’s amazing non-scrolling spreadsheet (downloadable from [...]

    Pingback by Fixing FITs « Uncharted Territory — December 3, 2011 @ 6:46 pm


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