The new UK FiT: how bad will it be?

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This blog first appeared on the Solar Power Portal.

It’s almost one year since the Comprehensive Spending Review (CSR) and rumours are beginning to fly around the UK solar industry as to what the upcoming Comprehensive Consultation on the feed-in tariff (FiT) holds. I decided it was time to investigate what people are actually saying, and to find out how much of what is being said matches the facts around budgets, pricing and deployment.

If I had £1 for every time I have been asked, “what will the new FiT look like?” in the past three months, then I would have, according to my calculations, £589. I am writing this blog in the hope that people will read it and reduce the wear and tear on my phone.

I do understand however, that we are at a seminal point in the PV industry’s development where drastic changes to the FiT could irrevocably harm the positive growth we have seen since April 2010.

Current size of the market

Let’s take stock. Ofgem’s register tells us that in this current FiT year there have been 197MW of PV installed to date. Still to be added are more than 75MW of large-scale projects already connected to the grid, which are outlined in Emma’s great piece on just how many solar projects beat the fast track review, while an estimated further 15MW in projects were extended under the FiT loophole.

Most in the industry assume that Ofgem is three months behind in logging registrations, but let’s forget that for the time being and focus on the numbers we know. By adding the latest installation figures with the confirmed large-scale projects, deployments in this current FiT year amount to around 287MW.

We can also add to this figure a number of large-scale social housing projects with as many as 5,000 homes at a time that have recently started deployment. This is likely to raise the run rate for domestic installs considerably and, as we are half way through the FiT year already, it looks likely that we will exceed 550MW by year end 31 March 2012.

Remember this is just PV installs, the other technologies, particularly AD are just starting to ramp.

So, what happens next?

Last year’s CSR imposed a budget cap on the FiT scheme (rightly or wrongly it is there) and if the 550MW projection is correct than that budget will be under severe pressure. Slides I have seen with the DECC original modelling of FiT deployments for PV was much lower at 86MW of new PV to be connected this year (see chart to the left).

The Renewable Energy Association (REA) had their own models (Feb 2011) which were provided to DECC before the Fast Track Feed-in Tariff Review when they called for a reduction to all tariff bands including the under 50kW sector. These estimations appear to be quite accurate given the current state of play, but were unfortunately ignored by those in power (see graph to the left).

Effect on the FiT

Looking at the cold hard facts, it is clear that something has got to give. The budget will not sustain another year of growth this strong. The DECC were planning to come out with their initial consultation on the Comprehensive Review of the FiT in September, that hasn’t happened. It seems that DECC have finally realised the magnitude of the potential budget overspend (little to do with large-scale PV it should be noted) and have rightly delayed the consultation as they asses their options and get their facts straight.

It is anticipated that the Comprehensive Review will now come out some time around or before October 19th, incidentally the week before the largest industry gathering at Solar Power UK in Birmingham. This late timing will at least allow the industry to digest the announcement in full and come together to assess the future.

Based on what I have heard, coupled with the deployment and budget conditions mentioned above, we should see at least a 30 to 50% decrease in the domestic feed-in tariff. Many companies are looking at their own costs and margins against the DECC target of 7 – 9% return for consumers and are coming up with figures much lower, at around the 15% mark.

What you should do

If you are basing your business plan on digression that low then my advice is re-assess now!

The good news is that owing to weak demand in global PV markets the price for solar components, especially modules, has dropped dramatically in the past six months. But with positive signs starting to emerge from Germany these prices will begin to plateau by the end of this calendar year.

If you are planning your installation or distribution business in the UK right now than you cannot afford to miss the upcoming Solar Power UK Conference in Birmingham from the 26th to the 28th of October. Get out of work for one or two days and ensure that you are aware of and prepared for drastic cuts in the tariff. Don’t leave your blinkers on and assume everything will continue at the current unsustainable pace. Industry experts and the biggest selection of component suppliers will be out in force to help you reduce the costs to your business for customer acquisition, product sourcing and quality to ensure you can stay competitive under a new FiT regime.

Interestingly, the conference is exploring the idea of a PV industry without a FiT in the UK and it could come sooner than you might think.

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